Mark Bern

Cash for Clunkers May Cost Up to $45,354 Per Vehicle

The actual cost, terms of cash, to the taxpayer on each car is only the amount paid out, or on average about $4,000. However, the cost to the economy can only be calculated by estimating the actual benefit. This is the cost that the author is trying to use. It's not really the direct cost to the government, but is rather the measure of benefit purchased by the government investment to the econoomy as a whole. What the author contends is that the government added only the incremental sales to the economy and that the cost of those car sales that would have been made without the program were not the result of the program and, therefore, should not be counted. The result is that the government added maybe 50,000 incremental, or new, sales at a cost of $1 billion.

He is not wrong in terms of how many additional or incremental sales resulted from this program. Taking the example of the average cost of $4,000 per vehicle to the government, there would be 250,000 cars sold under this program ($1,000,000,000 / $4,000). If 200,000 of those were going to be traded in for more efficient cars anyway, the incremental sales equals only 50,000. That 50,000 additional sales is the true benefit of the program because those are the sales that would not have happened during the current timeframe otherwise. Of course, they would have happened at some point in the future anyway, so we are only, as the author points out, moving future sales into the current period.

So, what the author is asking is: Is this an appropriate way to use taxpayer money? Or are there other programs that would benefits more of us and the economy overall more effectively?

On this issue, considering the manner in which the program has been managed thus far, I would have to say that it has not been money well spent. If, however, the government were to spend more over a shorter period of time the net effect to the economy would be greater at far less cost per vehicle sold. And that may provide greater short-term benefit to the broader economy.

Let's take a new example: Assuming that over the same period, the government made available $4 billion for such a program. If the average cost per vehcile were still $4,000 the number of incremental sales would jump to 800,000 new vehicles. Now the cost per vehicle to the taxpayers is only $5,000. Could that number of sales be achieved? I don't know. Would the program create a long-term benefit to the economy? No. Once you clean out all the clunkers available owned by people who are willing to sell them the cost of the program increases again and no jobs are saved or created beyond that point.

That said, I can't see any real justification for the program when alternatives are needed far more by society. While the impact on the environment would be miniscule, even that admirable goal does not justify the cost relative the benefits. Municipalities have put off replacing water and sewar systems that are over 100 years old. These systems are held together with patches and are inhabited by bacteria built up over many decades. Yes. We use chemicals to kill as many bacteria in our drinking water as possible, but it is not enough and the system does not provide an optimal health environment for the citizenry.

Local governments, such as NYC, Philadelphia, etc. are not managing their funds efficiently enough and will never have the fiscal ability to make the necessary infrastructure investments. These projects would take years to complete and would employ thousands of people who need jobs. And they are projects that need to be done for health reasons.

Obviously, there are many other investment in public infrastructure such as bridges that are desparately needed and would support future economic growth. These investments need to be made at some point in the near future. Why not now?

Wells Fargo 'Profit' - People Have Short Memories

According to the Wells Fargo report, the change in MTM accounting rules had very little effect on their 1st Qtr results. Let me interpret what that means: WF did not have to take the write downs on assets that they otherwise would have and so the effect was minimal.

Write downs were in the range of $3 Billion this quarter instead of $6 Billion in the previous quarter. Had the rules not changed the number may have been higher that $6 Billion. That would have wiped out their profits for the entire quarter. But since profits were not wiped out, there was very little impact on results.

Also, WF probably received payments from AIG, as did other major U.S. banks, in the unwinding of CDOs by AIG. Those payments would have included significant profits that would have boosted earnings, possibly in the $ Billions. Those results will undoubtedly be lumped in with other operating results so as to appear as ongoing. Take those profits out and we may have a loss.

Add the lower write downs and subtract the one-time profits from AIG transactions and you'll get the real operating results.

WF and other banks are all going to report profits and surprise to the upside, boost their stock prices, then do secondary offerings to raise additional capital. After that the Treasury will report aggregated findings from the stress tests so that we can't tell which banks are healthy and which ones are not. Then WF and others will accept additional capital infusions from Treasury.

After that, the big banks will "invest" in the PPIP funds using their toxic assets (FDIC head has indicated that she would consider this option), sell their toxic assets to the PPIF at above market rates because their own PPIF will bid up the price using government money. They will pocket the proceeds and let the PPIF fail.

This is called recapitalizing our financial institutions. It's really a transfer of wealth - from the poor and middle class back to the wealthy. We won't get the bill for all this until about 2011 or so. But the installments will go on forever.

25 Reasons We Will Not Have a Depression

Yes. There are some areas of hope, if....

But that's the problem. The if. If the government gets its act together, things might get better. I hope they do, but confidence is somewhat shaken.

On the other hand, I suppose that sound politics would require the Administration to hold back so this long so that the majority of spending would hit in 2010. That would be prudent for a self serving leadership wanting to have an improving economy during the election season. After all, we can't start to early, keeping people from losing their jobs, if it might not help them get re-elected. We citizens need to get our priorities straight.

"Our debt-to-GDP ratio is not at all bad, contrary to popular belief"

For the moment, you are right. The last I heard from government is that the 2010 budget deficit is going to be $2 Trillion. Will that make any difference? And it appears that the 2011 deficit will likely exceed $1 Trillion. Will we still be okay then?

Look. I want the economy to recovery just as much as the next guy. And I have no idea if we are heading for another depression. I hope not. I can't imagine wanting a depression. But my opinion (and it is only an opinion) is that things look like they could either get worse or stay relatively bad for quite some time unless our leadership changes directions soon.

When Insolvent Banks Are Worth Billions

I think I'll start a bank! Is there any better opportunity on earth? I mean, if I just lever up my assets to 40:1, I can report that I'm making all kinds of money, even if I'm really losing. For every $100,000 of my own money I put up, I can lend $4,000,000 and earn the interest spread over today's low rates that the Fed says aren't going anywhere anytime soon. And even if some of the loans go sour or the payments are late, I don't have to write these assets down because they're worth whatever I say they are. And even though my auditors know that I'm insolvent, there isn't anything they can say or do about it because Congress has told them to shut up!

Wow! It just doesn't get any better than this. Or does it? Wait. What if I want to raise more capital? I can sell stock at a price that values the bank at a level many times that for which I could liquidate my assets, thereby not really diluting myself. Then I could leverage that up, too! Hey, this is so cool. I bet just about any idiot could make money in banking. So that's where they all work!

Celebrating the 'Recovery': I'm Disgusted

An Obituary reported to have been printed in the London Times. Interesting and sadly true:

"Today we mourn the passing of a beloved old friend, "Common Sense", who has been with us for many years. No one knows for sure how old he was, since his birth records were long ago lost in bureaucratic red tape. He will be remembered as having cultivated such valuable lessons as: Knowing when to come in out of the rain; why the early bird gets the worm; Life isn't always fair; and maybe it was my fault.

Common Sense lived by simple, sound financial policies (don't spend more than you can earn) and reliable strategies (adults, not children, are in charge). His health began to deteriorate rapidly when well-intentioned but overbearing regulations were set in place. Reports of a 6-year-old boy charged with sexual harassment for kissing a classmate; teens suspended from school for using mouth wash after lunch; and a teacher fired for reprimanding an unruly student, only worsened his condition.

Common Sense lost ground when parents attacked teachers for doing the job that they themselves had failed to do in disciplining their unruly children. It declined even further when schools were required to get parental consent to administer sun lotion or an Aspirin to a student; but could not inform parents when a student became pregnant and wanted to have an abortion.
Common Sense lost the will to live as the churches became businesses; and criminals received better treatment than their victims. Common Sense took a beating when you couldn't defend yourself from a burglar in your own home and the burglar could sue you for assault. Common Sense finally gave up the will to live, after a woman failed to realize that a steaming cup of coffee was hot. She spilled a little in her lap, and was promptly awarded a huge settlement.
Common Sense was preceded in death, by his parents, Truth and Trust. His wife, Discretion, his daughter, Responsibility, his son, Reason. He is survived by his 4 stepbrothers; I Know My Rights; I Want It Now; Someone Else Is To Blame; I’m A Victim.
Not many attended his funeral because so few realized he was gone. If you still remember him, pass this on. If not, join the majority and do nothing.

American Austerity Is About to Begin

I also agree with the theme of the article. We are headed down the wrong path; a path that will culminate in a long and painful economic stagnation for the masses.

Isn't it funny, though, that the party now in power has always positioned itself as the protectors of the poor and middle class? The evidence that we are witnessing currently would indicate that they are really the party of helping the rich get richer and the expansion of the number of poor people in this country.

The poor are being assisted by government. They don't pay any taxes. So they look to the government to bail them out. What it's going to take to get to the necessary pain is for the poor and middle class to realize that things just keep getting worse regardless of the promises that keep emanating from their leaders in Washington. They don't have a clue about who's making the money on Wall Street or how, so it doesn't matter. They listen to MSM for all their "input.."

I am sorry to say that I suspect it will take a prolonged period of failed attempts by government to right the ship, with the average wage earner getting hammered by rising prices (due to a decline dollar increasing imports of oil and consumer goods), increased costs for health care in spite of "reform," a cap and trade system that also increases the cost of energy for every family, and the addition of a VAT that will increase the cost of everything before reality will sink into their heads. We may have to endure several more years of things getting worse before enough voters will actually understand that it is "their representative" that needs to be voted out of office, not just the other guy.

I am not trying to be pessimistic. I don't like the answer I am offering. It's just human nature, and the track record of this nation supports the assumption, that we won't do anything about the real problem until it is completely out of control. Today, we are merely in the denial stage. As a nation, too many people still believe that all the problems we are living through were brought about by the past administration. We blame Bush for everything! It isn't just Bush, it's the system of career politicians on both sides of the aisle! They won't make the necessary, difficult decisions because it would mean political suicide for them personally. And their own career comes before country, before constituents, before everything. That is the foundation of our problem.

Until we get back to the basics of the Constitution and reinvent our government to one that creates an environment conducive to productive growth. creativity, and the entrepreneurial spirit we will continue to flounder.

While Peter Schiff is on the right track, it will take far more than one elected official to change the course of this great nation.

10 Reasons to Believe That We're in a Depression

j-dub - You've got a healthy sense of humor, buddy. We're all going to need it for as long as it takes to get the politics of this great nation heading back in the right direction. I don't mean that the correct direction is to the right. I mean, simply put, that we need to head more toward the moorings of our Constitution.

To the Author: Excellent article! All points well articulated. It is the existence of people like you that give us all hope! Keep up the good work.

Pinning the Blame on the House Republicans

Sorry, Felix, this is one area where we part company. I don't think that the bailout has "saved" anything. I also don't think that having "saved" AIG was a good thing for the American public. While I do believe that steps were necessary to prop up the banking system and regenerate public confidence, I don't believe that companies should be rewarded for bringing about disaster through bad investments and management decisions.

If Lehman made major mistakes, they should have gone through the bankruptcy courts. If AIG made major mistakes, they should have gone through the bankruptcy courts. We tend to forget that during bankruptcy the good parts of a business are sold off to healthier companies and live to prosper. It is only the bad assets that get buried.

In the case of large banks, the biggest concerns revolve around deposits. If deposits are safe, we can avoid a total melt down. Mortgages will be sold to other banks, investors and processors. The shareholders and bondholders take the hit for having faith in management that made bad decisions and lost their money for them.

I believe that we, as a nation, would be much better off today if the bankruptcy process were allowed to work. We, the people, would not be $Trillions more in debt. Yes, we needed a stimulus package to keep the country from coming apart. Yes, we probably needed to save large portions of major banks intact (while allowing the poorly managed portions to die or be sold off for pennies on the dollar), instead of trying to save the whole enchilada. Bad decisions were made in the financial industry and more bad decisions were made by government. The biggest problem now is that those bad decision-makers are still in charge and continue to make more bad decisions that will eventually need to be corrected. We are just making the problems bigger and putting off until tomorrow the pain we deserve to tollerate today.

That is all we have done so far: put off the pain until sometime in the future. We haven't solved anything.

10.2%

It's a good things the Administration took all those steps to create so many jobs! Otherwise we would have gotten here, and probably worse, sooner and the economy might have already been on the mend by now. (note: if you think you noticed a tinge of sarcasm, you're right)

Yeah. Yeah. I know. The Administration says everything is okay and that the economy is beginning to recover just as they planned. They also said we wouldn't see unemployment rise above 8% or 8.5%, didn't they. They also said they had lots of projects that were turn-key ready and those projects would employ millions of people. So, here we are in November on the verge of a very important holiday shopping season. The last official report on consumer spending showed a decrease of 1/2% m-o-m. But what did I just hear reported from MSM? Consumer spending is on the rise! The President says the economy is in recovery, the recession is over!

Okay, I know that employment is a lagging indicator. But, think for yourself just a moment, please: seasonally, we usually see hirings rise going into Christmas to handle the expected deluge of customers. I'm not saying that it should have happened yet. That rise should be coming in November, because the deluge begins the day after Thanksgiving and those people need to be trained before their first day of work. So, what I am saying is watch the employment numbers reported next month. If there isn't a significant increase, the economy is still in trouble (no matter what anyone else tells you).

The next thing to watch is the retail sales for Black Friday. This is usually a good indicator to give us a reading on expected sales for Christmas. If retail sales go down or stay flat compared to last year, it's not a positive sign no matter how it gets spun. A "recovery" would be indicated by an increase in holiday sales. If we are still where we were at this point a year ago, more stores will need to be closed, more people will lose their jobs, more commercial space will be vacated. If we are still where we were at this point last year, try to remember where we went from this place back then. Then ask yourself: Does this really feel like a recovery?

Recession Is Over: Long Live Depression

Good article! The "Cash for Clunker" program is just moving future sales into the current period and will reduce future demand for autos when it runs out. It is just like every other short-term program employed by this administration. Bandaids and bailing wire will only hold this economy together for so long - then watch out!

Right now is probably as good as it will get for quite some time. At some point soon we will most likely continue to slide until the weak, poorly managed businesses finally succumb to their inevitable demise because government will have exhausted its ability to bail them out. Then we will experience just how bad things can get. And the whole world will go down there with us. because the world economy is still so very dependent upon the US consumer. Assuming we have another major dip in economic activity, even China and India will feel the force since if they continue to add capacity they will find themselves in over-capcity structures that will require time and world growth to refill. Only after the cleansing can we, as a nation, begin to climb out of this mess and becuase we will be buried in debt, the climb will be harder and slower than ever before.

But remember: even when times are difficult (or maybe especially so) those who make the right moves at the bottom will find great opportunities from within the ashes. Good luck to all!

V-Shaped Revenue Recovery + L-Shaped CapEx Growth = Unstable Economy

The interesting thing about the top chart on revenues is that if one were to have looked at estimated earnings for Q2 09 back last fall and then compared those estimates to the revised estimates on July 1st one would realize that the estimates had gone from expected growth to expected declines. The same thing ocurred in estimated earnings. This charade allowed companies to beat estimates handily this last quarter. And Wall Street will try to continue the game as long as they can. If the economy does not improve adequately over the next quarter, estimates will be lowered by enough for the fourth quarter to allow them to be beaten once again, even if revenue and earnings are actually declining (not likely for the 4th quarter due to such abysmal results in 2008), and this will prove that the recovery has begun.

The current reporting by WS & the Administration is more like a shell game than reality, IMHO.

The Market Bubble Is About to Pop

I'm sorry, but we haven't amputated toxic assets in the US. All we've done thus far is "hide" the toxic assets. Financial institutions are no longer required to report these assets at market value; they simply carry them at whatever value they want. The true amputation will never happen in terms of making them disappear from the US since the strategy is to transfer them to "investors" funded by taxpayer dollars under PPIP. The banks will be healthier as a result, however you and I will be paying for their largess for the next few decades.


On Aug 11 12:06 PM Donald Ingram wrote:

> The world does not revolve around the US, we are not the center of
> the universe. There is decoupling occuring. It started with the amputation
> of toxic assets made in the US of A and has been continuing as can
> be seen when the Treasury sales are shunned.
> The USD is no longer seen as a safe haven, indeed it is now seen
> as a dangerous place to have your money.
> To think that as the US goes - so goes the world, is to put yourself
> at a disadvantage. As Peter Shiff has stated "we are not the engine.
> We are the caboose and we are being cut loose".
> Japan will have company on their road of stagnant deflation with
> little or no economic growth for years, as the rest of the world
> moves on.

Jobless in August

"The change in total nonfarm payroll employment for June was revised from -443,000 to -463,000, and the change for July was revised from -247,000 to -276,000.

So June was better but July was worse, "

Sorry to be picky, but according to the statement above June was not better, but worse, as was July. It seems that most, if not all, unemployment reports have been revised upward at a later date recently. Does this mean that the government is trying to make to initial reports look better than they really are by reporting low, hoping that nobody really pays attention to revisions? I don't know. But I did notice that when the initial claims report came out yesterday at exactly the same number initially reported in the prior week, the headline read something like, "Initial claims dip!" The dip was caused by the upward revision for prior week numbers. I call that "spin," not reporting. Always trying to put lipstick on this pig will only fool some people for so long. I won't speak for those who want to be fooled forever.

Reality Is at Odds with Policymakers' Optimism

Once again, a good article by Mr. Schiff. However, at great risk I take issue with one point made by the author.

"The rebound in global stocks reflects the global economic train decoupling from the American caboose, which the “experts” said was impossible."

I really don't think that the global economic train has decoupled from America yet and I don't believe that we are the caboose. This isn't nationalism talking. The current growth in China, for example, is due primarily to their huge stimulus package that is actually being spent on large multi-year infrastructure projects and easing lending for capital formation. Their stimulus is much larger than what is beginning to be deployed in the US relative to GDP. A goodly portion of their stimulus is aimed at making their industries more efficient to become even more competitive. But, when the current Chinese stimulus package runs out, they will still need consumers in the US and Europe to restart their spending habits of the past couple decades in order to keep their growth engine going. Exports may account for only 20% of China's economy but the surpluses it creates also funds much of the investment in domestic infrastructure and growth.

American consumers are unlikely to resume their hedonistic borrow and buy habits anytime soon. We have been the enhine that pulled the global economy along its upwardly spiraling growth curve. With this significant change, I believe America will more resemble a caboose in the future. But the world is anxiously awaiting our return. This time, they'll just have to keep waiting. So, in the end, I think that is the US that is decoupling and forfieting its role in global trade. As we make our adjustments, the world will just have to deal with it.

John Fund Warns About America's Perilous Future

CautiousInvestor - The divine intervention you mention is coming but not in the form for which is hoped. It may be divine or it may not be, but we are in for some very negative shocks to our economy over the next months and years. Some are economic in source others are from Mother Nature, or divine.

There is, of course, the potential economic disruption of the H1N1 "swine flu" virus, or some other variant strain (viruses do mutate, then the vaccines don't work, and a new solution must be found), is expected to inject globally. Potential costs range dramatically (as well they should) because we won't know what sort of damage is done until it actually hits.

I realize that scientists in Spain have uncovered what they claim to be the source of Colony Collapse Disorder (CCD) that has already led to the deaths of billions of the world's honey bee population (over 35% of total bee population as of last spring). But, what if the Spanish answer is not the real answer or is only the answer for the local problem? What if (and this is not a huge stretch due to the variety of symptoms recorded) there are other causes that spread? In three years (since 2006) we lost 35% of the bee population. In another three years a similar loss could be catastrophic, leading to widespread shortages of food, even in the U.S. I think that would qualify as divine intervention.

The point is that there is much that we do not control. It is also curious to me that such a major potential problem such as the dying of bees (needed to pollinate most agricultural crops around the world) has gone almost unnoticed by our society. I guess we are not on the brink, yet. Therefore, it must not really be news. Thank you, MSM, for keeping us informed about the potential names for babies of the stars (obviously, far more important that a potential for global starvation).

And I don't think that raising taxes while including loop holes for certain segments of society is the answer. It leaves too many behind and becomes regressive. We really need to rethink the entire tax system and come up with something that really works for everyone, not just the super-rich or well-informed (sorry, that should read: well-connected). A system that provides incentives to start new businesses rather than regulating and taxing them out of existence would be a good start. A system that allows our businesses to become more competitive in the global economy rather than encouraging them to ship jobs and production overseas would create a better, more lasting foundation for our economy. A system that exempts the poor from taxation and encourages people to move up the economic ladder instead of encouraging the poor to stay put would be refreshing.

In short, we need a whole new Congress that can think outside of the established system that they created (and likely will defend to the bitter end). We need real reform. We need real vision. We need real representation of the values that made our country great. We need to return to honesty, integrity, hard work, and transparency in government and business (especially banks).