G--Damn Captialists - Full Speed Ahead-Go Change!

This was sent to me by an old friend and fellow memo reader who also reminded me Obama signed the stimulus bill on the same desk on which Clinton never had sex with that woman.

I proceeded to remind my friend we may actually need Obama's health care bill because, in due course, I believe more and more Americans might become sick of his efforts to correct all our nations ills in the first 90 days of his presidency - starting with killing capitalism. As I have written, even a large python cannot swallow a cow all at once.

Obama is on fire. He is moving pell mell, is hell bent set on 'changing' our nation and bailing us out of our misery. He keeps reminding us, we are a sinking ship and only his stewardship can save us. So to paraphrase his now forgotten preacher and a great American Admiral: 'g--damn capitalists - full speed ahead!'

If Obama can wipe out the nation's stockholders and substitute government ownership and management we will have the 'change' we need, right? After all Wall Street is nothing but 'greed and fear' and everyone who works in Wall Street are crooks and all the nation's industrialists are a bunch of paratroopers attached to golden parachutes! Certainly, that is the message our fearless and corrupt leaders in Congress have been conveying as they go through blame shifting hearings.

What Obama seems to have forgotten, maybe never learned, is that markets rest on a base called "confidence." Destroy confidence and you send markets lower. There are several ways to shake confidence and in just a few weeks Obama seems to have at least learned how to accomplish that. He has acheived the largest decline of any president ever in stock averages since the recording began some 90 years ago, Now that's change. (See 1, 1a and 1b below.)

No one ever told them it might be cheaper by the dozen and a little "Uncle Miltie" humor! (See 2 below)

Cap omissions by raising taxes but don't tell anyone. Just let consumers find out in their future utility bills. (See 3 below.)

Steve Forbes offers Obama some common sense advice but it is doubtful Obama is capable of understanding because he probably never studied accounting. probably never owned many stocks and certainly is too smart. (See 4 below.)

We are back to where we always get when our government runs out of money - can politicians, elected to do the nation's business, pass the required legislation that will continue to fund the cookie monster with its unending appetite for taxes? (See 5below.)

Has an Obama supporter and Nobel winner begun to lose confidence and question why the 'dithering?' (See 6 below.)

When fire fighters arrive at a fire, water pressure is important. Eventually Obama will buy our way out of the economic mess we are in with his spending and waste programs. Whether there will be anything left of the structure remains to be seen and whether we will recognize it also is questionable. It appears Francis Cianfrocca believes the experts have no clue how to fight this fire. If so, that just adds more fuel. (See 7 and 7a below.)

Obama went to Ohio today and congratulated some Columbus police rookies hired with one year government funding. By the time he arrived from D.C. more people became unemployed in the pirvate sector than were hired by Columbus. What happens next year when government money is no longer available to that city?

It would seem to me there are two logical solutions:

First, why not cut every American, including illegals, a check for $10,000 and demand they go out and spend it buying things they don't need which is what we have been doing for years and second, increase government employment by the 8 million unemployed.

That should get the economy rolling but it is not 'change' so I doubt Obama will consider it.

have a great weekend.

Dick


1) Obama Economy, Cont.

Recessions don't last forever, but bad policies can prolong the pain.

The Dow Jones Industrial Average fell another 281 points yesterday, or 4%, while President Obama began his political push for nationalizing health care and Barney Frank called upon state, local and federal officials to prosecute "those people whose irresponsible and, in some cases, criminal actions helped bring about this crisis." (In what must have been an oversight, Mr. Frank left himself off the target list.) Citigroup -- subject of three federal "rescues" so far -- closed at $1.02 a share.

Amid so much joy, we thought our readers might like to compare where we are so far in this recession compared to previous downturns. Economist John Cogan of the Hoover Institution has looked at the numbers, and you can see the trends in the nearby chart showing job losses over the months of recession.

So far at least, the current downturn, which officially began in December 2007, isn't much more severe than the average of all recessions since 1970. This month the downturn turns 15 months old, which is one month less than the recession of 1981-82, though job loss hasn't yet been as severe. (Today's jobs report for February could change that.) The recession of 1973-75 lasted 16 months and job loss was also worse. Many Americans may have forgotten those nasty recessions because the last two -- in 1990-91 and 2001 -- were only eight months long and shallow. But even in the worst modern downturns, after 15 months the sources of recovery were forming and the end was in sight.

The larger point is that economies don't spiral down forever without a reason and without policy encouragement. What's worrying about the plunge in equities since January 2, and especially in the last week since Mr. Obama released his radical budget, is that it has come amid the unveiling of the President's policy agenda. Equity prices have reacted to those proposals by signaling that they expect a much deeper and longer recession.

The optimistic message in Mr. Cogan's comparisons is that recessions eventually end. How long they last, and how severe they get, depends in part on the choices our leaders make. The choices that Mr. Obama and Congress are making so far are not contributing to confidence, much less to recovery.


1a) Stocks Should Matter to Obama
By GERALD F. SEIB

Any president, particularly the current one, has a lot of things to worry about. Should the level of the Dow Jones Industrial Average be one of them?

In a word: yes.

The question seems especially relevant after Thursday's stock selloff drove the Dow Jones Industrial Average down further to 6594.44. Presidents usually pretend they don't pay much attention to such stock-market gyrations. If it's been said once from a White House podium, it's been said a thousand times: "Markets rise, markets fall. We worry about the fundamentals of the economy instead."

President Barack Obama gave his own version of that response this week, declaring in response to a reporter's question: "You know, the stock market is sort of like a tracking poll in politics. It bobs up and down day to day, and if you spend all your time worrying about that, then you're probably going to get the long-term strategy wrong."

But amid today's economic wreckage, it isn't that simple, and Mr. Obama knows it. He illustrated as much by immediately following his "tracking poll" comment, which drew quick attacks from Republicans, with a more extraordinary statement: He delivered something between a plug and a plea for investors to return to the stock market:

"What you're now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it."

That suggests the president grasps a new reality. The level of the stock market matters a lot more now than before, for political as well as economic reasons. Economically, it is a producer (or destroyer) of wealth for far more Americans than ever before. Politically, it represents a far more important barometer of the nation's climate and psyche today than it does in normal times.

Which isn't to say the Dow Jones Industrial Average is, or should be, the most important economic indicator for the Obama team. In both economic and political terms, unemployment remains the most sensitive.

"Unemployment is always, always the trump card when it comes to the economy," says Peter Hart, a Democratic pollster who helps conduct the Wall Street Journal/NBC News poll. Unemployment's impact, he says, is "direct" and "devastating."

Still, the market and its health matter more on Main Street than ever before. On the psychological front, Republican pollster Bill McInturff, who conducts the Journal/NBC poll with Mr. Hart, says recent polling indicates that economic confidence began to plunge when housing prices and the stock market both dropped, suggesting that rebuilding consumer confidence will require both stable real-estate prices and a "decent" Dow Jones Industrial Average.

Indeed, Mr. McInturff notes that in a January Journal/NBC poll, equal percentages of Americans cited the decline in the stock market and the broader slowdown in the economy as a factor having "a great deal" of impact on them. In other words, people were as likely to feel hurt by the stock market's decline as by the overall economic decline.

There's an explanation for that finding, of course, which is that stocks have become steadily more important in the real economic condition of average Americans. The spread of 401(k)s and individual retirement accounts means market conditions penetrate tens of millions more homes now, which is one of the most significant changes in the structure of the economy in the past generation.

Figures compiled by the Investment Company Institute, the national association of investment firms, tell the tale. The institute conducts an annual survey of American households to gauge stock ownership. It found that the number of American households owning mutual funds -- the most common vehicle for holding stocks -- more than doubled between 1987 and 2007, to 55.3 million households from 22.5 million. The percentage of households owning mutual funds during that period rose to 47.7% from 25.1%.

Put another way, a drop in the stock market now has a real -- not just a psychological -- impact on the well-being of half of America's households.

The effects are demonstrable. A new Journal/NBC poll, released this week, found that the Americans most likely to have stock investments -- those with family incomes above $50,000 -- also are markedly more likely to say they are very dissatisfied with the economy. In other times, that distinction might have gone to those on the lowest income rungs.

On a purely political level, Mr. Obama surely has noticed that his ideological foes are starting to point to the stock market as an indicator of low faith in his economic policies. "If I were one of his advisers," says Mr. McInturff, "I would certainly see this as an additional rationale for trying to keep the market at least no worse than where it was when he became president -- and hopefully better."

All of which raises the question of what the president could actually do to get the stock market moving upward. That's not easy. Building confidence in his administration's bank-bailout plan is key, as is improving overall consumer and investor psychology.

And on that front there's at least some good news. In the new Journal/NBC News poll, 16% said they still consider stocks a generally safe investment -- not a great finding, but not much worse than the 21% who said that in flush times back in 2005. Amid today's carnage, the number could be a lot worse.


1b) Obama, the Budget and the “Un” Stimulus package
Published in Valuation Expectations

In January 2009, the S&P500 index lost 8.6%, the worst January in its history. In February 2009, the S&P500 index lost 11%, the second-worst on record following the 18.4% decline in 1933. On March 1, 2009, the S&P500 lost 4.66%, the worst first day of March in its history. We know it feels like a century ago, but it was just in December 2008, Bloomberg surveyed market strategists for their 2009 S&P 500 price targets. Collectively, strategists were looking for a gain of 21.8% from the index's level then, or for the S&P500 to end 2009 at a price range of 975 to 1300. Call them stupid, but didn’t we all kind of enter 2009 a bit concerned of missing a market rally? After all, the S&P500 climbed 20% to end 2008 at 903.25 from its November 2008 low of 752.44. Although we knew 2009 was going to be a very challenging year, we believed a recovery would happen sooner rather than later.

What has happened? There was certainly very bad news such as steadily rising unemployment, a disheartening GDP decrease of 6.2% in Q4 2008, the fastest pace since 1982, rising foreclosures, falling home sales and prices, rising credit card defaults, and continuing banking troubles. While all that news was bad, it was hardly surprising. The market had been waiting for the government to unveil a logical plan to deal with banks, given the build up for our new Treasury Secretary, and had hoped for a restoration of some fiscal discipline of the federal government. Those hopes turned out to be short lived. Starting with Geithner laying an egg during his first major address to the nation about the banking crisis, things only got worse as the month progressed.

Here are the various plans and proposals from the federal government that have been passed, or will likely be passed in the near future, which are largely responsible for the market slide, in our opinion.

1. (2/13/2009) The “Un” Stimulus package passed. The $787 billion stimulus package was pieced together in 4 weeks and quickly passed in the Senate and House, with the final bill not read by a single House member before its passing. Rather than serving the purpose of stimulating the economy, a big portion of the government spending, which accounts for 2/3 of the bill, is to significantly expand federal power, promising to give billions of dollars in grants to local schools, to replace lost state aid, and to increase the federal share of Medicaid payments. While it is very questionable whether this package creates any sustainable stimulus, the bill represents 2.5% of two years’ US GDP, dwarfing Franklin Roosevelt's New Deal which never increased the deficit by more than 1.5% of the nation's GDP even during its biggest-spending year of 1934.

2. (2/18/2009) The Irresponsible Homeowner Affordability and Stability Plan: This plan aims to provide several forms of assistance to as many as 7-9 million home owners who may be at risk of defaulting on their mortgages. By investing in failure, we worry this will fundamentally change average American people’s views on self reliance and financial responsibility. In addition, because this plan is focused on reducing mortgage rates, and investors/lenders will be forced to cover a portion of the mortgage rate reduction, it will deter private sector investment from entering the mortgage market in the future. In addition to the overall concept, from a capital market perspective there are also some particularly troubling provisions in the bill.

A) To provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight towards reducing the principal balance of the mortgage loan. As long as a borrower stays current on his/her loan, he/she can get up to $1,000 each year for five years.

B) It encourages the enactment of legislation allowing bankruptcy judges to alter the terms of certain mortgage loans, a practice that to date has been prohibited by federal law.

C) The program applies for loans made on Jan.1, 2009 or earlier and mortgages for single-family properties that are worth up to $729,750.

The formal endorsement by the President of a bankruptcy provision that allows judges to alter the terms of certain mortgages significantly increases the risk to lenders of all mortgages..........

2) HOW THE JEWS GOT THE 10 COMMANDMENTS

God went to the Arabs and said, "I have Commandments for you that will make your lives better."

And the Arabs asked, "What are Commandments?"

And the Lord said, "They are rules for living."

"Can you give us an example?"

"Thou shalt not kill."

"Not kill? We're not interested."

So he went to the Blacks and said, "I have Commandments."

And the Blacks wanted an example, and the Lord said, "Honor thy Father and Mother."

"Father? We don't know who our fathers are."

So He went to the Mexicans and said, "I have Commandments."

And the Mexicans wanted an example, and the Lord said, "Thou shalt not steal."

"Not steal? We're not interested."

He went to the French and said, "I have Commandments."

The French wanted an example and the Lord said, "Thou shalt not commit adultery."

"Not commit adultery? We're not interested.

So, he finally went to the Jews and said, "I have commandments."

"Commandments?" They said, "How much are they?"

"They're free."

"We'll take 10."

-0-

And rom Milton Berle:

Folks, this is a historic moment. The first woman being honored by a Friars' Club roast. And the first time we've invited women in here for one of our roasts. So guys, let's cut out the four-letter words. OK?



Good. We've got that settled. Now, it's my distinct pleasure to introduce the star of the evening -- the hysterical, the amazing, wonderful...



LUCILLE TESTICLE!

3)The Climate Change Lobby Has Regrets Cap and trade is going to cost them.By KIMBERLEY A. STRASSEL
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Jim Rogers is not happy with the Obama administration. Ever since the White House unveiled its costly climate program, the CEO of Duke Energy has been arguing the proposals amount to nothing more than a tax. Indeed.

Mr. Rogers belongs to the U.S. Climate Action Partnership, about 30 companies that decided they were going to dance with the U.S. government to the tune of global warming legislation. The group demanded a "cap-and-trade" system, figuring they'd craft the rules so as to obtain regulatory certainty, with little upfront cost. At the time, Mr. Rogers explained: "If you don't have a seat at the table, you'll wind up on the menu."


AP
Energy company executives testify on Capitol Hill, March 2007.
Duke sat, yet it and its compatriots are still shaping up to be Washington's breakfast, lunch and dinner. The Obama plan will cost plenty, upfront, which will be borne by Mr. Rogers's customers. The Duke CEO tells me that he still sees opportunity to change the proposal: "This is not my first rodeo, in terms of working with the legislative process." There nonetheless may be a lesson here for companies that invite the U.S. government to saddle them with huge, expensive regulations.

"People are learning," says William Kovacs, vice president of environment, technology and regulatory affairs at the U.S. Chamber of Commerce (which has been cautious about embracing a climate plan). "The Obama budget did more to help us consolidate and coalesce the business community than anything we could have done. It's opened eyes to the fact that this is about a social welfare transfer system, not about climate."

Truth is, any cap-and-trade system is a tax, even if Mr. Obama's plan has only started to force business proponents to admit it. The government sets a cap on how much greenhouse gas can be emitted annually. Companies buy and sell permits that allow them to emit. Customers bear the price of those permits.

But the political question was always how that first batch of permits would end up with companies. Corporate support rested on the belief they'd be "allocated," for free. This would allow them to delay the day when they'd have to pass costs on to consumers, and ignore, for now, the "tax" question.

It didn't take long for the pols to figure out they could auction off permits and spend the loot. President Obama's auction bonanza would earn the feds $650 billion in 10 years, according to the administration's budget estimate -- and that's a low, low, low estimate.

Thus Mr. Rogers's lament. No one can now pretend that this isn't going to cost, and Duke is going to be tagged as tax collector via higher electricity bills. If the customer outrage won't be enough, some utilities will also be forced into fights with state regulators, who have to approve the rate-hike requests.

Congress isn't sympathetic. Most Democrats want the money to spend, while many Republicans have written off companies asking for government freebies. "What you saw when [the Climate Action Partnership] was draping itself in the name of saving mankind, what they were really doing was trying to create the largest earmark in modern history," says Tennessee Republican Sen. Bob Corker of the "allocation" system.

Mr. Corker has been having fun exposing the self-dealing in recent climate bills. Companies aside, he blew an early whistle on Congress's ambitions to use an auction system to enrich itself. During last year's debate on Sen. Barbara Boxer's (D., Calif.) climate bill, he offered an amendment to require rebates of all auction funds to American families. It helped kill the bill, as did a growing awareness among Midwest and Southern Democrats that the legislation would disproportionately hammer their industries and constituents.

Mr. Obama is promising to return auction money to Americans, via a tax cut he proposed on the campaign trail. Mr. Corker calls this a "sleight of hand," since people were counting on a tax cut in any event. Nobody told them they'd have to fund it with higher energy costs. It's also a wealth transfer -- electricity users in coal-heavy Ohio, for instance, will be funding tax cuts for green Californians. Not that congressional spenders have any intention of using this money for tax cuts in the first place.

All this foreshadows the political battles to come. With the business community moving more uniformly against the bill, the administration will be looking to cut a deal. One way to buy support is to offer a certain percentage of the permits for free. Next comes the fight over how much money the government gets to keep versus how much goes to states or individuals. Expect a lot of political courting of Midwest and Southern members, on whom the fate of the Obama plan hinges.

Business leaders might do better to use this as an opportunity to kill the beast. They might get some credit for protecting their customers from what they are now, finally, admitting is a giant tax -- in the middle of a recession.

4) Obama Repeats Bush's Worst Market Mistakes
By STEVE FORBES

What is most astounding about President Barack Obama's radical economic recovery program isn't its breadth, but its continuation of the most destructive policies of the Bush administration. These Bush policies were in themselves repudiations of Franklin Delano Roosevelt, Mr. Obama's hero.

The most disastrous Bush policy that Mr. Obama is perpetuating is mark-to-market or "fair value" accounting for banks, insurance companies and other financial institutions. The idea seems harmless: Financial institutions should adjust their balance sheets and their capital accounts when the market value of the financial assets they hold goes up or down.

That works when you have very liquid securities, such as Treasurys, or the common stock of IBM or GE. But when the credit crisis hit in 2007, there was no market for subprime securities and other suspect assets. Yet regulators and auditors kept pressing banks and other financial firms to knock down the book value of this paper, even in cases where these obligations were being fully serviced in the payment of principal and interest. Thus, under mark-to-market, even non-suspect assets are being artificially knocked down in value for regulatory capital (the amount of capital required by regulators for industries like banks and life insurance).

Banks and life insurance companies that have positive cash flows now find themselves in a death spiral. Of the more than $700 billion that financial institutions have written off, almost all of it has been book write-downs, not actual cash losses. When banks or insurers write down the value of their assets they have to get new capital. And the need for new capital is a signal to ratings agencies that these outfits might deserve a credit-rating reduction.

So although banks have twice the amount of cash on hand that they did a year ago, they lend only under duress, or apply onerous conditions that would warm Tony Soprano's heart. This is because they know that every time they make a loan or an investment there is a risk of a book write-down, even if the loan is unimpaired.

If this rigid mark-to-market accounting had been in effect during the banking trouble in the early 1990s, almost every major commercial bank in the U.S. would have collapsed because of shaky Latin American and commercial real estate loans. We would have had a second Great Depression.

But put aside for a moment the absurdity of trying to price assets in a disrupted or non-existent market, of not distinguishing between distress prices and "normal" prices. Regulatory capital by its definition should take the long view when it comes to valuation; day-to-day fluctuations shouldn't matter. Assets should be kept on the books at the price they were obtained, as long as the assets haven't actually been impaired.

Mark-to-market accounting does just the opposite. When times are good, it artificially boosts banks' capital, thereby encouraging more investing and lending. In a downturn it sets off a devastating deflation.

Mark-to-market accounting is the principal reason why our financial system is in a meltdown. The destructiveness of mark-to-market -- which was in force before the Great Depression -- is why FDR suspended it in 1938. It was unnecessarily destroying banks.

But bad ideas never die. Mark-to-market was resurrected by the Financial Accounting Standards Board and became effective in the fall of 2007 (FASB rule 157) to the approval of the Bush administration, its Treasury Department, and the Securities and Exchange Commission. Even as FASB 157 began to take its toll on financial institutions last year, Mr. Bush refused to kill or suspend it. When Congress voiced displeasure last fall, the administration and regulatory authorities made some cosmetic changes, but the poisonous essence remained.

Another horrific Bush policy that Mr. Obama has left untouched concerns short selling. In 1938, the SEC, created by FDR, enacted the so-called uptick rule, which held that investors could not short a stock unless it went up in price. In July 2007, the SEC, whose commissioners were handpicked by the White House, got rid of the rule. Market volatility exploded.

Compounding this lunacy was the SEC's inexplicable failure to enforce the rule against "naked" short selling. Before an investor can short a stock, he is supposed to borrow the shares and pay a broker or stockholder a fee. What sellers soon realized was that the SEC was turning a blind eye to naked short-selling, thus adding even more pressure to beleaguered bank equities. Short sellers quickly saw how mark-to-market made seemingly invincible companies vulnerable to destruction. They picked their targets and relentlessly sold financial stocks short.

If the president really takes Roosevelt's legacy seriously, he should suspend mark-to-market accounting rules, restore the uptick rule, and enforce the prohibition against naked short selling. If he doesn't, historians will look back in utter amazement at Mr. Obama's preservation of Mr. Bush's worst economic policies.

5) Congress OKs Measure Temporarily Extending Government Funding
By PATRICK YOEST and COREY BOLES

The Senate approved a temporary measure to prevent the federal government from shutting down at midnight Friday.

Following the House's vote to approve the extension a short time ago, the measure will now be forwarded to the White House for President Barack Obama's signature.

The action would extend funding levels of the majority of federal government departments at fiscal year 2008 levels until midnight Wednesday.

The action was made necessary after a dispute in the Senate late Thursday night drew out consideration of a $410 billion spending bill until next week, with Democrats falling one vote short of ending debate on the bill.

With the failure of the Senate to approve the spending bill, a temporary extension of federal government funding would be necessary. Otherwise, the government would be forced to cease operating at midnight Friday.

Senate Majority Leader Harry Reid (D., Nev.) decided to delay a vote that would have ended debate on the measure and set up a final vote because Democrats "would be probably a vote short." According to Sen. Reid, several Republicans, including Sen. John Ensign (R., Nev.) still wanted to offer amendments to the bill.

Sen. Reid said he hopes to have a series of votes on amendments to the bill on Monday night, but it's unclear when a final vote will occur on the bill.

"We've had a significant number of amendments, but enough is in the eye of the beholder," he said.

Sen. Ensign's amendment would restore funding to the bill for a school voucher program for low-income students in Washington, D.C. The bill currently would end funding for the program -- which enjoys strong support among congressional Republicans -- after the 2009-10 school year.

Senate Democrats have argued that the bill, which essentially combines nine appropriations bill, sets higher funding levels across the board for domestic agencies and departments, and resolves the unfinished work of last year. Funding under current law, which maintains spending at 2008 levels, is set to expire Friday.

6) Dither
By PAUL KRUGMAN

Last month, in his big speech to Congress, President Obama argued for bold steps to fix America’s dysfunctional banks. “While the cost of action will be great,” he declared, “I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade.”

Many analysts agree. But among people I talk to there’s a growing sense of frustration, even panic, over Mr. Obama’s failure to match his words with deeds. The reality is that when it comes to dealing with the banks, the Obama administration is dithering. Policy is stuck in a holding pattern.

Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.

Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.

Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away.

Thus, in a recent interview Tim Geithner, the Treasury secretary, tried to make a distinction between the “basic inherent economic value” of troubled assets and the “artificially depressed value” that those assets command right now. In recent transactions, even AAA-rated mortgage-backed securities have sold for less than 40 cents on the dollar, but Mr. Geithner seems to think they’re worth much, much more.

And the government’s job, he declared, is to “provide the financing to help get those markets working,” pushing the price of toxic waste up to where it ought to be.

What’s more, officials seem to believe that getting toxic waste properly priced would cure the ills of all our major financial institutions. Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

Take the plan’s latest incarnation: a proposal to make low-interest loans to private investors willing to buy up troubled assets. This would certainly drive up the price of toxic waste because it would offer a heads-you-win, tails-we-lose proposition. As described, the plan would let investors profit if asset prices went up but just walk away if prices fell substantially.

But would it be enough to make the banking system healthy? No.

Think of it this way: by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued.

And this means that the government would have to lay out trillions of dollars to bring the financial system back to health, which would, in turn, both ensure a fierce public outcry and add to already serious concerns about the deficit. (Yes, even strong advocates of fiscal stimulus like yours truly worry about red ink.) Realistically, it’s just not going to happen.

So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.

7) The Search for an Economic Policy
By Francis Cianfrocca

It would be refreshing if someone big and important stood up to say that policymakers really haven't a clue how to improve the economic and banking crises. But no one in a position of political authority is apparently willing to do so, least of all the New Masters of the Universe in Washington. Therefore, the task falls to me.

In the US, there's a growing sense that President Barack Obama's Administration just doesn't know what to do about the worsening economic and financial picture. Consumer demand continues to fall, jobs continue to be lost at a rate of more than half a million a month, the credit crisis is still as bad as ever, and housing is still far overpriced.

The bright spot, if it is one, is that Fed Chairman Ben Bernanke has been doing more than anyone else in the world to get ahead of the deepening problems in the capital markets. The leaders of the world's other central banks are mostly watching him and waiting to see if anything works. So far, a lot has worked, but the economic problems that are of greatest concern haven't been touched.

Bernanke's academic specialty has been his studies of the Great Depression, particularly of the dynamics through which a long chain of bank runs and capital-market stresses turned into the worst episode of sustained high unemployment in our history. He also watched closely as Japanese authorities mismanaged their deflationary situation in the early Nineties.

What he concluded is that at a time like this, monetary authorities have to act as fast as possible, and in as much size as possible.

However, he concluded this not because he knows it will work, but rather because nothing else has been known to work. We're in totally uncharted territory, and so far nothing in the broad economy is looking any better.

The trouble began in mid-2007 as a liquidity crisis. Institutions like banks, Wall Street firms and hedge funds were suddenly unable to continue financing their holdings of illiquid assets like mortgage-backed securities. This forced them to de-leverage by selling off other assets that did have liquid markets, like stocks, high-quality corporate debt, and ultimately even commodities like crude oil. That's how markets started crashing.

The point rapidly came at which banks simply stopped lending to each other, even overnight, because of fears that anyone could default, even the biggest names, a fear that was borne out time after time.

Bernanke, followed by other policy makers, aggressively moved to fill this liquidity gap with a vast array of emergency lending facilities. After all, the first job of a central bank is to be a lender of last resort. The Fed has executed this role in gargantuan size, eventually guaranteeing the borrowings of entities across the whole spectrum of short-term capital markets.

In the process, they've printed more new money than I would have even thought possible just two years ago. The Fed nearly tripled the size of its balance sheet (the most basic driver of the money supply) last fall, as it tried (successfully) to prevent the total global meltdown that almost occurred after the collapse of Lehman Brothers. People who don't follow financial markets closely don't realize how narrowly we missed a terrible disaster.

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Today, the capital markets are more or less stable. Interbank borrowing is happening at historically high interest rate spreads, but it's happening. Corporate bond and mortgage issuance is still slow and expensive, but it's not near zero anymore. Commercial paper is rolling over reasonably well.
But the great disease that Ben Bernanke most feared has struck us and taken root. As in the early Great Depression, the waves of capital-market distress have washed over into the real economy, where people go to work and produce goods and services, and where they borrow to fund major purchases and business expansion.

You can see it in the stock markets, which are the financial markets most visible to ordinary people, and most reflective of the real economy (a stock price measures how much money a company is expected to make in the future). After a long lag, stock markets are finally showing major declines.

The hard part, in policy terms, is to figure out where we go from here. The liquidity problems that originally gripped the banking system have morphed into solvency problems, with banks too under-capitalized as a result of investment losses to make any new loans.

And the stock market declines are now causing major distress among public pension funds (the ones that pay retirement benefits to teachers, firefighters and local bureaucrats). They'll soon be needing huge bailouts, along with General Motors, the banks, state governors, millions of homeowners who can't afford their mortgages, and everyone else we're afraid to see fail.

But bailing out everyone means that precious capital is being redirected back to places that have failed. There are good reasons why we should do a certain amount of this (a systemic banking failure would be disastrous). But available private capital today is the rarest commodity in the world, and the continuing string of bailouts is sucking out the little that exists. That's why prices for US Treasury securities continue exceptionally high, while every other asset class in the world except gold is declining. The government is grabbing all the capital that might be used for private industry and consumer borrowing, and using it on bailouts and badly-designed fiscal stimulus to prop up people who have already failed and can't lead a recovery.

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You could well argue that if not for government borrowing, there would be little to no private credit formation and things would be even worse. That's true, in the near term at least. The world is in the process of readjusting its level of debt to a far more realistic one that matches the long-term stable rate of economic growth. Markets are like water flowing downhill. They always go where they want to, and the most you can do is slow them down a little.
What I'm saying is that the world economy got far ahead of itself in the last several years. Why that happened is a subject for a book (maybe a shelf full of books). But it's unwinding rapidly now, and this is the deflationary pressure we see everywhere. We don't need as many autoworkers or factories, because people won't be spending as much on new cars as they once did. And people still need to adjust to lower housing values in many parts of the country.

This process is plain, simple reality. The deleveraging and rebalancing simply has to happen. It's a fast, disruptive process but ultimately a very healthy one. To be blunt, it's like a big dog walking into your kitchen out of the rain. He plants his feet and shakes all the water off. It's smelly and disgusting and you have to clean off your kitchen and yourself, but then it's done and you move on. That's how we're shaking off the debt overhang caused by years of underpriced capital.

The government is flailing because they don't want to allow this process to proceed at its own pace. So they're doing a whole raft of desperate things, like the stimulus package, the desultory bank half-nationalizations, and the exceptionally dangerous attempts to prevent mortgage foreclosures.

Bernanke's approach is to try anything, as long as it's different from what was tried in the past. The Administration's approach is to assume that we can get back to partying like it was 2006 as long as we push enough extra money into the system. It would be far better for everyone if they stepped back, got out of the way, let everyone rebuild her personal balance sheet, and let the housing markets find their own level.

What could we be doing that would really have a positive effect? There's nothing we can do to stem the reduction of debt and the increase in personal savings. (Repeat: there's nothing we can, or should, do about that.)

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What we could be doing is to encourage the eventual return of business and consumer confidence. That's because a good shot of economic growth would provide the resources to make all the other problems less bad. But here, the Administration is doing its worst job of all.
The recently-announced budget would be radical and damaging to business confidence in the best of times. But these are the worst of times, and the budget is nothing short of disastrous. We're being told to expect tax increases on high earners, business income and capital, increases in business regulation, a new energy tax on the whole economy ("cap and trade"), and the biggest expansion in government spending since World War II.

If you're a businessperson, as I am, your reaction can only be to conclude that President Obama doesn't like you. The Administration's stated policies make it very uncertain and unattractive for businesses to try to expand and create new jobs, now and for years to come.

The damage that our young president has already caused to the economy is hard to overstate, because it has a very long tail. It's going to take years to rebuild business confidence now -- and in terms of economic growth, those will be lost years.

7a) Continuing Job Losses May Signal Broad Economic Shift
By PETER S. GOODMAN and JACK HEALY

Another 651,000 jobs disappeared from the American economy in February, the government reported Friday, as the unemployment rate soared to 8.1 percent — its highest level since 1983.

The latest grim scorecard of contraction in the American workplace largely destroyed what hopes remained for an economic recovery in the first half of this year, and added to a growing sense that 2009 is probably a lost cause.

Most economists now assume that the American fortunes will not improve before near the end of the year, as the Obama administration’s $787 billion emergency spending program begins to wash through the economy.

“The current pace of decline is breathtaking,” said Robert Barbera, chief economist at the research and trading firm ITG. “We are now falling at a near record rate in the postwar period and there’s been no change in the violent downward trajectory.”

Indeed, the monthly snapshot of the national employment picture worsened an already abysmal picture as the government revised upward the number of jobs lost in December and January. The economy has now lost at least 650,000 jobs for three consecutive months, the worst decline in percentage terms over that length of time since 1975.

Since the recession began, the economy has eliminated roughly 4.4 million jobs, and more than half of those positions — some 2.6 million — disappeared in the last four months.

The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business.

“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

For American policy makers, such a reality poses fundamental challenges to the traditional response to hard times. For decades, the government has reacted to economic downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to deliver needed jobs. This time, argues Mr. Silvia, the government needs to put a much greater emphasis on retraining workers for careers in other industries.

In the auto industry, for example annual American car sales have dropped from some 17million a year a few years ago to 9 million now. Even if sales increase to 10 or 12 million, that still leaves a lot of unneeded factories.

“That’s a lot of workers that are not coming back,” Mr. Silvia said. “That’s a lot of steel, a lot of rubber, a lot of suppliers that are not coming back. It’s really challenging to us as a society.”

President Obama responded to the figures by declaring that “this country has never responded to a crisis by sitting on the sidelines and hoping for the best” and asserting that government has a huge role to play in bringing out the best in the American people.

“I know that throughout our history we have met every great challenge with bold action and big ideas,” he told police academy graduates in Columbus, Ohio, on Friday. “That’s what’s fueled a shared and lasting prosperity.”

Mr. Obama cited the unemployment figures as further evidence that those who opposed “the very notion that government has a role in ending the cycle of job loss at the heart of this recession” are on the wrong side of history. (The president’s stimulus package was approved by the House with no support from minority Republicans, whose leader, Representative John A. Boehner, is from Ohio.)

In February, another 168,000 manufacturing jobs were eliminated, bringing losses over the last year to 1.2 million. In Michigan, where the troubles of the auto industry have been particularly traumatic, the unemployment rate is at 10.6 percent, the highest of any state.

“The people who do what I do in the Detroit area are a dime a dozen,” said Kim Allgeyer, 46, a machine toolmaker in Westland, Mich., who was laid off in January from a company that makes manufacturing assembly lines for the Detroit automakers. Since then, he has failed to find another full-time job, subsisting on day labor and one weeklong stint for contractors. He is thinking of moving to Louisiana or Mississippi to seek work as a shipbuilder.

“Who’s going to put me to work?” he asked. “Where’s the work at? It’s just a great big black hole.”

Much the same can be said for financial services, which gave up another 44,000 jobs in February. During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other exotic flavors of investments. That industry is unlikely to return to anything close to its former shape.

Retailers are shuttering stores as the era of easy money fueled by rising house prices and abundant credit gives way to a new period in which millions of households are being forced to confine their spending to their paychecks, limiting their trips to the mall. The economy lost 39,500 retail jobs in February, and has eliminated more than 500,000 in the last year.

The United States has been neglecting job training programs for decades, argues Andrew Stettner, deputy director of the National Employment Law Project in New York. In current dollars, the nation devoted the equivalent of $20 billion a year on job training in 1979, while spending only $6 billion last year.

The stimulus spending bill includes $4.5 billion in additional monies for job training. But under current programs, many of those eligible for training are given vouchers that cover only a semester or two at community colleges, while careers in growth industries like biotechnology and health care typically require two-year degree programs.

“We have to seriously look at fundamentally rebuilding the economy,” Mr. Stettner said. “You’ve got to use this moment to retrain for jobs.”

Friday’s report reinforced the degree to which the economy is being assailed at once by panic in the financial system, falling household spending power and plunging real estate prices, with growing numbers of companies resorting to wholesale layoffs after months of merely declining to hire.

“There’s been no place to hide,” said Stuart Hoffman, chief economist at PNC Financial in Pittsburgh. “Everybody in every industry has lost jobs or is feeling insecure about whether they’re going to keep their jobs or how their company’s going to do."

Some economists suggested the substantial increase in layoffs reflected the anxiety that has gripped the financial system since last fall when major Wall Street institutions failed, notably the giant investment bank Lehman Brothers. Borrowing costs have spiked for American companies, making even healthy businesses reluctant to expand and hire. Perhaps even more decisive, the collapse last fall has left many companies spooked.

“There was a huge increase in uncertainty and a huge hit to confidence which caused a large rethinking among businesses,” said Ethan Harris, co-head of United States economics research. “That caused a big downshift in employment.”

In similar crises, like the stock market crash of 1987 and the near collapse of the enormous hedge fund Long Term Capital Management in 1998, dysfunction continued to grip markets for about six months, Mr. Harris said, suggesting that this episode may be nearing its end.

But history also shows that when fear lifts, the economy returns not to normalcy but to wherever it was when the crisis began, Mr. Harris said. That means that even if order is restored to the financial system, the economy will still be staring at a recession.

And order cannot be restored, many economists say, until the Obama administration creates and executes a credible plan to remove the bad loans choking the balance sheets of financial institutions.

“The 800-pound gorilla is whether we face up to the bad loans in the financial system,” said Alan Levenson, chief economist at the trading firm T. Rowe Price in Baltimore.