U.S. Economy: It's Up to Us to Make It Better

Thursday night there were several additional developments on stories I have ran over the week and I will spend time on them. I will close with a more philosophical musing inspired by one of my favorite authors.

How Do You Write Anything After This?
In what is perhaps the ultimate summation of all things finance, I submit this take from Jesse's Cafe Americain:

The US financial crisis is always and everywhere caused by the triumph of short term greed in support of Ponzi schemes and frauds, perpetrated by a handful of Wall Street bankers and their accomplices in the political process and the media, facilitated by the wholesale weakening of the American mind and character and European and Asian greed and gullibility.
Everything else is commentary.

How do you write anything after that? I agree 100%.

Still, I will write, that's why they pay me the big bucks after all. Oh, I do not get paid? Well, whatever.

Rumors Are All the Rage

A late day spike across the board lifted stocks out of a multi day semi slide. What was the catalyst? Nothing is for sure, but rumor was a frontrunning of the extension of the homebuyer tax credit. Home builders across the board (KBH, TOL, etc) jumped late day and other stocks followed for reasons known only to the privileged few. Why homebuilder stocks would rally when the vast bulk of sales generated by this credit is at the LOW end of housing (not McMansions) is lost on this writer, but then again I miss all kinds of things.

About that Tax Credit

I am shocked, shocked to find out fraud and cheating is running rampant in the housing tax credit program. Who would do such a thing? What kind of people are these anyway? (link from The Golden Truth):

Home buyer tax credit fraud called 'disturbing'
WASHINGTON (Reuters) — Thousands of individuals claiming the first-time home buyer's $8,000 tax credit may have been trying to scam the system, including purported 4-year-olds and illegal immigrants, according to a watchdog report released Thursday.
Treasury Inspector General for Tax Administration J. Russell George told a House panel that more than 19,000 people filed 2008 tax returns claiming the credit for homes they had not yet purchased. George said his office had identified another $500 million in claims, by some 74,000 taxpayers, where there were indications of prior home ownership.

He told a House Ways and Means oversight subcommittee that they also found 580 taxpayers under the age of 18 who claimed $4 million in first-time home buyer credit. One was 4 years old.

"Some of our findings, while preliminary, are somewhat disturbing," George said. Among the most striking instances of fraud include 4-year-olds, non-U.S. citizens and IRS employees inappropriately claiming the benefit, he said.

The only thing I want to add to this train wreck is that there is a provision that one must stay in the house for 3 years otherwise the tax credit has to be paid back. Here is a simple equation that even Keynesians can follow:

NO IMMEDIATE FLIP GAIN = DELAYED BUT GUARANTEED FORECLOSURES + MORE WORK FOR THE IRS

Heck of a job, Stimulus.

Credit Cards: The Street Offers Better Rates

With Citi (C) making the move to 30% rates on credit cards, you knew the whole crew was going to get in on this as well (via Clusterstock):

Now Chase Is Jacking Up Credit Card Fees (JPM)

Now Economic Disconnect grew up in a big city, and maybe possibly heard through 3rd party sources (of course all hearsay mind you) about loan sharks. In 1992 a street rate was 25% on a 3 month loan. While far above the rates by the credit card companies (and with a much stiffer penalty for non performance) the rates are rapidly converging.

Not to worry. As all the proponents of more government oversight tell us, Big Brother has your back and your best interests at heart. Want proof? Here is the headline (via Clusterstock again; those guys write a lot):

Bernanke Says There's No Rush On Regulating Credit Cards
Despite the fact that some banks are charging as much as 79% yearly interest rates, Federal Reserve Chairman Ben Bernanke insists that Congress must use caution when the it comes to future credit card regulation:

Boston Herald: Federal Reserve Chairman Ben S. Bernanke warned Congress this week about efforts to move up the effective date of tough new rules for credit card companies, saying such action could hurt consumers as much or more than help them.
"Creditors must make extensive changes to their systems and business models in order to comply" with the new rules, Mr. Bernanke said.
Opponents of moving the date to Dec. 1 fear that credit card companies would push the costs of complying the laws earlier than expected on to consumers.
Mr. Bernanke said that the Federal Reserve can’t predict how speeding up the effective date would affect the availability of credit and rates on credit cards.

For all you optimists out there that continually tell me I am crazy because I think the Fed is no smarter than your average 6th grader, allow me to replay that this line:

-"Mr. Bernanke said that the Federal Reserve can’t predict how speeding up the effective date would affect the availability of credit and rates on credit cards."

Now I am not an expert, but I think "predict" means to know beforehand, while all Bernanke has to do is pick up a newspaper. Or read my blog. Glad we are all protected.

Oh, the Humanity.

Baloney is Just a Really Big Hot Dog

My two baloney submissions for today are:

-Via Naked Capitalism

The Problem is not "Too Big to Fail" but "Too Difficult to Resolve"

In fairness this submission is not entirely the author's, Yves Smith, final take but the presentation implies she agrees.

I will not recount the details, you can read them. Now kindly explain to me how we can land little robot rovers within 3 meters of target on the planet Mars (the equivalent of making a "nothing but net" basketball shot from Bangor Maine to San Diego California) and nobody in the world, not even the fools that made the problem, can figure out how to resolve the issue. No Way. Period.

Besides, Goldman Sachs (GS) was so happy to tell the world that they are fully hedged no matter what happens, even if a New Stone Age should occur. If every entity in the financial world is hedged so perfectly so that no problem can harm them, than let's call the bluff. I think you can see something does not quite fit here.

In the spirit of all the "Exit Strategies" that supposedly the Fed and the government have to extricate themselves form all things financial, let us see how that is going:

-First up, another adherent to the organic growth without jobs club, the least popular club in high school:

The growing case for a jobless recovery

Ok. So what if the 2-3% GDP growth is entirely from government spending?:

Christina Romer on Impact of Stimulus on GDP

Who needs jobs when the government can make up the difference. What was that? You said the government revenues, which should pay for this stuff, is obtained from taxes on the working, who have no jobs?

You are naive. Stand in the corner.

Not to worry, whether it is CASH FOR ....toasters, refrigerators, washing machines, boilers, DVD players, dental floss, car batteries, cell phones, underwear, your wife, or cookware the government will spend what is necessary and avoid any large votes so nobody gets upset. It is death by a million small spending plans (and no, no cash for your wife, I made that up):

Like it or not, here comes more stimulus

Stimulus, the Never Ending Story.

Philosophy, is the Talk on A Cereal Box

Thanks for the lyrics Edie.

One of my favorite writers, Ilargi, of The Automatic Earth has an expansive introduction that I think should be required reading for anyone of voting age, and a forced read for any elected politician in the nation. Here is the link.

While I hate to excerpt such a fine piece, I have too. First up:

Back to where Paul (Ron Paul) misses the truth about the end of the economic system. Sure, not bailing out the broke banks would have been a start. It would, however, not have solved the problem, not even close. The libertarian class, of which Paul poses as a great defender, and to which Mike Shedlock is a proud subscriber, claims that the issue is not capitalism or the free market. (After all, these are their deities.) For them the trouble all starts -and ends- with government and its rules and regulations.

As a Libertarian I really wanted to see if I have been missing something. More:

In other words, the free market system has failed America miserably. Well, at least in this instance, and that by itself should raise very grave doubts about that system.
And it's not all that hard either to see why that is. If you let market participants free to pursue what is in their best interests, without forcing them to give priority to society's best interests, they will eventually figure out that the best single investment they can possible make is to buy the government. That allows them to make the laws. Which is detrimental to the rest of society, and leads to the sort of mess we're in right now, which even libertarians concede is not desirable.

I concede this point. The buying of government is the single most powerful argument against Libertarianism.

The next segment is key:

So you would have to prevent that from happening. For which you need laws and regulations to keep those market participants out of the government. Since free market guys and dolls don't want regulations, they have no solution to offer. Exit left, center stage....

...Capitalism might or might not work only if and when you could keep corporations out of the government. If you can't, disaster is assured for everyone but the corporations.

Truly insightful writing. I wonder where we would be with writers like Ilargi around for the last 20 years.

I agree here, but with a caveat.

There is a poker saying, which sadly has had so much repeating it has become another cliche:

"If you can't spot the fish (poor player) at the table, you are the fish"

So in the game of life in the USA, who is to blame for the crisis?:

-The Capitalist Ideals?

-The Government?

As always the answer is right in front of us all, but ignoring it is much easier.

The fish at the table is YOU.

(By YOU I do not mean the many readers here or at TAE, or many other fine sites, I mean the general public).

Ilargi captures the very essence of the problem:

"Capitalism might or might not work only if and when you could keep corporations out of the government."

And whose responsibility is it to do that? Corporate America? The Government? Are you on drugs?

The responsibility is yours, the voter. Amazed by the government money that pays your salary, astounded by the public works money that builds a park on your block, mesmerized by the never ending unemployment benefits that make not working less upsetting (you think that is out of concern, man you are naive) you allow the same crop of politicians to sit at the houses on Congress for years never ending.

We, the voters are to blame. We accept the corporate world's influence on our government as if it is natural. This is because, given the same circumstance, most regular folks would do the same. This is disgusting.

Every other year there is this thing called an election. Whether you are Democrat, Republican, Libertarian, Green, Martian, or from Canada you at some point will have to place your bias aside and start removing those that stand in the way of progress. Take Ben Bernanke's testimony about credit cards Thursday. He should be gone. Nobody can reasonably argue otherwise. Any party, any man or woman, that stands behind Bernanke after Thursday deserves whatever he/she gets down the road.

The corruption, the fraud, the utter failure that is the US Capitalist system will end when voters stop allowing for people to be "human" and demand that they be "public servants". I have laid it out. Want to lay odds on it happening? I do not.

Comments

[Steve in Gr...:]

Thanks, ED, for another interesting post.

"....The buying of government is the single most powerful argument against Libertarianism...."

I disagree. The buying of government is a certainty. The buying of government is the single most powerful argument against letting government get big. The buying of government is the single most powerful argument in favor of government being limited to its Constitutionally-presc... functions.

Make government small enough so it is not worth buying.

Oct 23 10:16 AM

[Economic Di...:]

Steve,
Great point. I had wanted to include that but was running low on time.

All, call me EconDisc or just Econ, ED is not how I want to be thought of!
Friday Humor.

Oct 23 10:32 AM

[Leftfield:]

To follow Steve in Greensboro: The government is so large that it determines most outcomes, at least beyond subsistence. I also don't believe our bought-out government is an argument against libertarianism since our bloated government is now a ubiquitous, unconstitutional participant in our lives only a fascist could love. Within constitutional bounds, it could do much less harm and coerce far fewer votes to bend to power and bribes. Rationality could return.
This system is falling apart, the result of endless compromise with enduring truth. To call this the land of the free would be an obscenity. It is as sound as the dollar, however. Voters should have awakened last fall after TARP, instead, the usual suspects were swept back into office. A housecleaning is mandatory to avoid far worse than we're already in for. The results of every signpost warning of danger ahead passed by in favor of government promises, brings us lower and makes the cost far higher to bring back change. Or worse, follow our present path to complete serfdom.

Oct 23 10:42 AM

[Steve in Gr...:]

Got it, Econ. Me, neither. :)

On Oct 23 10:32 AM Economic Disconnect wrote:"...ED is not how I want to be thought..."

Oct 23 10:54 AM

[Jason722:]

The root cause of the current decline of the US is not in capitalism at all. It is in democracy. The next truly great (free) culture will contain the elements of liberty and freedom set forth by the Founding Fathers PLUS two key protections:
1) Fair taxation (flat tax, national sales tax, something neither progressive or regressive) that congress can not adjust and limitations that the government can not spend more than X% of last year's revenue (x being < 100!).
2) Service limits. No more than 10 years for any individual across positions. Period.

This is the only way to avoid the damage that voters inevitably do to themselves as a society because EVERYONE ALWAYS VOTES FOR FREE MONEY FOR THEMSELVES REGARDLESS OF THE COST TO ANYONE ELSE AND I AM SO SICK OF IT!!!!!

Sorry for yelling. Thanks for the great post today, EconDist

Oct 23 11:20 AM

[Economic Di...:]

Jason,
yell all you like, this is an important core issue.

Oct 23 11:54 AM

[manya05:]

Today you brought up the importance of separation of Corporate Interests and State, a bedrock principle, widely ignored in the US (there truly IS a revolving door between Washington and the Corporate boardroom).

By the way, separation of Church and State should be a bedrock principle too...but it is also widely ignored in the US.

To me the core principles of American Democracy are very solid and can last a few more centuries, the problem is they have been perverted by a two-party system that offers no real choice to voters. Americans understand the importance of competition as a tool for continuous improvement, yet this principle is not used in self-regulating the quality of politicians that represent us. The tweaks needed to save American Democracy are not a big deal, but their effect on breaking the monopoly on power that the few have over the many are so profound, that these changes will not come easy. All we would need is to abolish the winner-take-all approach on a district-by-district basis, and go to a proportional representation system allowing other minor parties to grow and prosper. It is only through a true competition in a multi-party system that we will be able to keep the political process clean. If a given party gets in bed with corporate interests, it will not matter how much money gets poured into the party, people will vote with their feet and go to the party that is perceived as clean and on the side of the people (no matter what ideology is being espoused). People are yearning for honesty and cleanliness in politics and governance, and they are not getting it right now.

Will we ever see a more honest, more inclusive and representative multi-party system in the US? I doubt it.

Oct 23 12:36 PM

[Jason722:]

Manya05, an interesting approach. +1

I agree 100% that the 'two' party system has failed us. And I agree that abolishing the winner-take-all approach would offer more choice and create a more diverse government. But I don't think that will solve the problems at hand.

Government's side of the social contract is to preserve order and protect the citizenry. If you really want to stretch it, you can argue that the government should promote growth and well-being (I don't wholly share that view, but I can leave it in for now). The government can not fulfill its side of the social contract as long as one group (the majority) can legally steal from others. There will always be a way to cobble together a majority by promising the majority something for nothing. Government is made up of humans, and as such, suffers the same failings as the electorate. Regulation and curbs need to be applied at least as liberally to those to which we hand over power...as they propose to govern us.
On Oct 23 12:36 PM manya05 wrote:

>
> Today you brought up the importance of separation of Corporate Interests
> and State, a bedrock principle, widely ignored in the US (there truly
> IS a revolving door between Washington and the Corporate boardroom).
>
>
> By the way, separation of Church and State should be a bedrock principle
> too...but it is also widely ignored in the US.
>
> To me the core principles of American Democracy are very solid and
> can last a few more centuries, the problem is they have been perverted
> by a two-party system that offers no real choice to voters. Americans
> understand the importance of competition as a tool for continuous
> improvement, yet this principle is not used in self-regulating the
> quality of politicians that represent us. The tweaks needed to save
> American Democracy are not a big deal, but their effect on breaking
> the monopoly on power that the few have over the many are so profound,
> that these changes will not come easy. All we would need is to abolish
> the winner-take-all approach on a district-by-district basis, and
> go to a proportional representation system allowing other minor parties
> to grow and prosper. It is only through a true competition in a multi-party
> system that we will be able to keep the political process clean.
> If a given party gets in bed with corporate interests, it will not
> matter how much money gets poured into the party, people will vote
> with their feet and go to the party that is perceived as clean and
> on the side of the people (no matter what ideology is being espoused).
> People are yearning for honesty and cleanliness in politics and governance,
> and they are not getting it right now.
>
> Will we ever see a more honest, more inclusive and representative
> multi-party system in the US? I doubt it.

Oct 23 12:59 PM

[Economic Di...:]

Manya05,
Good recommendations, I would add term limits as well.

Oct 23 12:59 PM

[ewing:]

It doesn't matter if there are two parties or ten. The few with the money will corrupt them all.

Oct 23 01:34 PM

[Radardoc:]

manya,

I challenge you to show me where "separation of Church and State" came from in our constitution, or anywhere else other than an activist judicial interpretation of the requirement of goverment not establishing a religion.

Can you explain why such a "bedrock principle" would help in this economic catastrophe?

Did Christianity cause the colapse in housing? Perhaps Judaism is fueling the pseudo bull market? Taoism driving CRE in the dirt?

On Oct 23 12:36 PM manya05 wrote:

>
> Today you brought up the importance of separation of Corporate Interests
> and State, a bedrock principle, widely ignored in the US (there truly
> IS a revolving door between Washington and the Corporate boardroom).
>
>
> By the way, separation of Church and State should be a bedrock principle
> too...but it is also widely ignored in the US.
>
> To me the core principles of American Democracy are very solid and
> can last a few more centuries, the problem is they have been perverted
> by a two-party system that offers no real choice to voters. Americans
> understand the importance of competition as a tool for continuous
> improvement, yet this principle is not used in self-regulating the
> quality of politicians that represent us. The tweaks needed to save
> American Democracy are not a big deal, but their effect on breaking
> the monopoly on power that the few have over the many are so profound,
> that these changes will not come easy. All we would need is to abolish
> the winner-take-all approach on a district-by-district basis, and
> go to a proportional representation system allowing other minor parties
> to grow and prosper. It is only through a true competition in a multi-party
> system that we will be able to keep the political process clean.
> If a given party gets in bed with corporate interests, it will not
> matter how much money gets poured into the party, people will vote
> with their feet and go to the party that is perceived as clean and
> on the side of the people (no matter what ideology is being espoused).
> People are yearning for honesty and cleanliness in politics and governance,
> and they are not getting it right now.
>
> Will we ever see a more honest, more inclusive and representative
> multi-party system in the US? I doubt it.

Oct 23 01:43 PM

[Jason722:]

The Separation of Church and State is a slogan, not a constitutional right. The point was that the government was not to make laws favoring one religion and was not to adopt a state religion. These ARE bedrock principles of freedom and liberty.

Unfortunately, in the hands of idiots everywhere, that slogan (probably invented as a simple way to teach the constitution to children!) is now so universally misunderstood that it does more harm than good.


On Oct 23 01:43 PM Radardoc wrote:

>
> manya,
>
> I challenge you to show me where "separation of Church and State"
> came from in our constitution, or anywhere else other than an activist
> judicial interpretation of the requirement of goverment not establishing
> a religion.
>
> Can you explain why such a "bedrock principle" would help in this
> economic catastrophe?
>
> Did Christianity cause the colapse in housing? Perhaps Judaism is
> fueling the pseudo bull market? Taoism driving CRE in the dirt?

Oct 23 01:56 PM

[SeekingTruth:]

Depending on our fellow voters to lead us out of this swamp is a most optimistic and tentative position to presume.
When the British press asked the rhetorical question after Bush was elected,
"How could 81 million Americans have been so stupid?"
I gave them a non rhetorical answer:
" The reason is completely obvious and comes totally naturally:
"THEY WERE BORN THAT WAY. "
As this will doubtless rankle tens of millions (81 million of them) of my fellow Americans, I have something to say about our Corporations that may add to the upset:
When PRODUCTIVITY is used as a weapon by our corporations against our breadwinners, instead of as an opportunity and process to improve the quality, reliability, safety, and ultimate value of the products, and thus improve their corporate overall competitive positions ,as well as maintain higher employment, and secure our American Revenue base, etc,etc. the case histories of GM, and the rest of our automotive and major industries shall continue to result until they solve this "mystery" for themselves.
For health reasons , please do not hold your breath until your next voting opportunity.

Oct 23 02:31 PM

[dragonpaw:]

To ED; I don't know whether to laugh or cry when I read your stuff; ergo I do a little of both. My wife thinks I'm becoming schizoid. It's a sign of the times.
To Steve in Gr.; gov't can't be made "small enough not to buy"; the citizenry must be made smart enough not to buy the bullsh-t.
To Jason 722; 1)Some type of simpler and fairer tax, yes 2) term limits, yes (8 years max.!) 3) no lobbying in any of its perperverted forms; lobbying= bribery=conspiracy; lobbying does not equal free speech; this can be structured through the courts and legislatures.
4)phase out most entitlements over 20-30 year period. Working, retired, and near-retired must all suck this up. The SS is a failing Ponzi scheme.5)The gov't has no right or obligaiton either constitutionally or from the Bill of Rights to promote "growth or personal well-being". Gov't option healthcare gone!
Freedom must have limits, sorry libertarians. Freedom without bounds=(choose one or all of the three )1)Repression eg. criminal behavior 2) Tyranny eg. rule by the few (monopolies,Wall Streeters,
banksters, the present Demo-gogueic party,etc.) 3)Chaos (no rule at all, eg. libertarian nirvana ,again Wall Street, again banksters.)
Finally to Seeking Truth; We weren't born stupid; we've become entitled stupid. See point 4) two paragraphs above. Once 50+% of the voters are entitled, all is lost.

Oct 24 03:19 PM