Loose Items from a Tight-Leaf Notebook

Bruce Keidan, the former sports editor of the Pittsburgh Post-Gazette, would occasionally produce a column consisting entirely of snippets of future story ideas, rather than a fully-formed essay.  These compilations became quite popular with his readership. When asked about their popularity, he said he didn’t know whether to credit the failing attention spans of his readers, or his own laziness. In honor of the (now deceased) Mr. Keidan, we present “Loose Items from a Tight-Leaf Notebook”:

The Kids are NOT Alright  In 2010 the typical U.S. college graduate left school $24,000 in debt, and student loans surpassed credit cards on the great American liability tote-board.  Delinquency rates are rising, and student loans remain the only category of indebtedness not discharged by bankruptcy. How are these kids going to move out of Mom and Dad’s basement when they already have a mortgage? Moral:  There’s a serious storm coming to the world of academia.

Neither a Borrower or a Lender Be  Bank stock investors may be getting ahead of themselves in their zeal for renewed dividends. Many of the nation’s largest banks cut their dividends to the bone after the financial crisis in late 2008. Now that the process of balance sheet repair is moving along, most have requested and received permission from the Federal Reserve to begin raising them again. This has many analysts waxing enthusiastic about bank shares. We say think again. By our calculations, the nation’s top five banks will take an average of 9 years to bring their dividends back to pre-crash levels.

The 4% Solution   Dan Henninger summarized the Federal deficit problem quite succinctly in a recent Wall Street Journal column. He said the goal of the Republican budget plan is a simple one:  pare Federal spending as a percentage of Gross Domestic Product (GDP) to 20%. President Obama, on the other hand, wishes to keep spending at 24% of GDP. Henninger says the nation’s future lies within those four points of GDP, and he’s right. History shows that no matter the tax rate, the IRS manages to pull about 18% of annual GDP into Federal coffers each year. If spending falls back to 20%, the deficit is manageable over the long term. If it stays at 24%, fiscal ruin lies ahead. End of story.

What’s Wrong with This Picture?  The popular press, the Fed and the Obama administration would have you believe that the U.S. economy is steadily recovering from the economic mess of 2008-2009, sort of like Lance Armstrong valiantly powering his way up a mountain in the Pyrenees. We have another image for you, however. Imagine a 5-year-old child on her bicycle for the first time, hands frozen to the handlebars as her kindly grandfather gives her one swift push after another. Training wheels scrape along the ground as she alternates between budding confidence and sheer terror.  Now, substitute free money (courtesy of the Fed) for the training wheels and Ben Bernanke and steady bouts of Quantitative Easing for the old man. Any questions?

Gasland   Oil prices recently crept back over the $100 mark. One obvious solution to the problems of high prices and crippling imports is domestic natural gas. U.S. gas reserves have increased 50% in the past decade, and new drilling and fracking techniques continue to drive this number upward. Large energy firms like Exxon-Mobil and Chevron recognize the opportunity, and have spent billions acquiring proven reserves right here in Pennsylvania. Thorny environmental and regulatory issues need to be resolved before production can move ahead full bore, however. The state of Pennsylvania in particular needs to create a tax regime which is fair to all parties involved, including local municipalities bearing the brunt of drilling-related disruptions. Prediction: If newly-elected Governor Tom Corbett does not enact some sort of natural gas extraction tax during his first term, he will not be reelected.

One Potato-Two Potato   We’ve said for 3 years that the Great Recession of 2008 – 20?? would be known as the Couch Potato Recession. Now we have the numbers to prove it. USA Today reports that only 45.4% of Americans had jobs in 2010, the lowest rate since 1983, and down from a peak of 49.3% in 2000. Last year just 66.8% of men had jobs, the lowest fraction on record. Labor force participation is scraping along at all-time lows as well. These facts beg the question:  Is it a problem if half the population is not working and depending on those who are? What is the purpose of a job? Most people would say the purpose of a job is to provide an income, but this is backwards. The purpose of a job is to add value as part of a manufacturing or service process. One can work for one’s self or for another, but if labor adds no value, the job cannot last. Value added is determined by the employer, and, ultimately, by the customer. Politicians can take resources from the productive economy to employ people in jobs which politicians deem socially worthy. There is a limit, however, to the resources productive individuals will provide to politicians before refusing to produce or hire others.

Great Gig if You Can Get It   A recent issue of Rolling Stone magazine featured a report on emergency lending by the Federal Reserve during the financial crisis. It turns out the very well-to-do wives of two Morgan Stanley executives received $220 million from the Fed to invest in packages of student loans and commercial mortgages. These “non-recourse” loans were structured such that the borrowers had very little to lose and much to gain, and vice-versa for the Fed.  What was the public policy rationale for this? One could argue that the economic inequality bemoaned in the popular press is a direct result of this sort of behavior. Inequality is actually very easy to fix; all you have to do is let rich people fail.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.