Embrace the Bailout, Reduce the Federal Debt

Finally, the U.S. Treasury Department has figured out a way to reduce the federal debt – by giving money away.

That may not make sense, but keep in mind that we’re talking about the federal government.  And that means that money isn’t just given away; there are strings attached, unless you’re a preferred government contractor or an expert in Medicare fraud.

Bailouts

So consider this shocker.  Fannie Mae is scheduled to make a $7.2 billion payment to the U.S. Treasury next month and, when it does, the total payments from Fan and Fred will add up to $192.5 billion, exceeding the $187.5 billion they received from taxpayers.

Granted, a 3% profit over five years isn’t really a profit, but we’re talking about the “toxic twins” here.  And their payments are scheduled to continue, much to the chagrin of Fan and Fred shareholders.  They can just get in line, though.
That’s not the only government bailout that’s been profitable – the Troubled Asset Relief Program (TARP) required a $250 billion investment for troubled banks, but brought in more than $272 billion, a profit of about 9%.  AIG’s bailout was even more lucrative, bringing in $22 billion on an investment of $152 billion, for a 15% return.

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Mission Not-Quite Accomplished

Remember when the announced goal of quantitative easing (QE) was to reduce the unemployment rate to 6.5%?

It’s now 6.6% and heading down.  So can we expect QE to finally end?MW-BS355_CIVPAR_20140110090655_MG

Not really.  While new Fed Czar Janet Yellen talks about continuing tapering, many believe that tapering will stop and some believe she may reverse direction and increase the rate of bond buying.  Even if The Fed continues to cut back bond purchases by $10 billion a month, it will still take more than six months for QE to end.  Minutes of the Federal Open Market Committee’s January meeting, which were released this week, suggest that the final taper would take place in October 2014.

More specifically, the minutes say, “Several participants argued that, in the absence of appreciable change in the economic outlook, there should be a clear presumption in favor of continuing to reduce the pace of purchases by a total of $10 billion at each FOMC meeting.  That said, a number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases.”

Tapering aside, does anyone really think the unemployment rate is really decreasing?

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Economic Stagnation of Olympic Proportions

Russian President Vladimir Putin is a busy man.  He’s found time to prop up Syrian dictator Bashar Assad, negotiate a face-saving chemical weapons deal with President Obama and support violence against Ukrainians, all while overseeing the construction of the most expensive Olympic Village in the history of the games.

The Olympic Village at Sochi had a projected cost of $12 billion.  The actual cost was $50 billion.  So no more complaining about The Big Dig.  It could have been worst.

PutinAnd, like The Big Dig, all that money failed to buy quality construction.  Stories abound of shoddy construction and faulty work.  The Olympic Village is more like a Potemkin Village.

At the Olympics, color, pageantry and the world’s best athletes draw the television cameras, while a few hundred kilometers away, the Ukrainian government, with help from the Russian government, is killing its people.  This week, violence in Ukraine was the worst it’s been since the breakup of the Soviet Union.

As with Syria, the U.S. is leading from behind.  While the European Union has at least announced sanctions, the U.S. is only considering sanctions.  President Obama denounced Ukraine violence “in the strongest terms,” but talking is the weakest action.

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The Neverending Story

Why change?

It’s been more than five years since The Federal Reserve Board began its quantitative easing program.  We’ve had QE, QE 2, Operation Twist and the never-ending QE 3.  The Fed’s portfolio of bonds exceeds $4 trillion and it now owns more than a third of all bonds issued by the U.S. government.

The net result of this never-before attempted experiment in easy money policy has been a still slumping job market, growth around 2% vs. a non-QE average of 3.3% and a drop in personal income of 4.7% since the “recovery” began.  At least there hasn’t been any deflation.

Yet new Fed Chair Janet Yellen announced this week that she’s “staying the course,” continuing QE maybe forever.  Although she said she plans to continue tapering, too, she added that the bond buying program is “not on a preset course,” so perhaps The Fed may taper its tapering, creating an untapering by buying even more bonds.

After all, $65 billion a month doesn’t buy what it used to, even with today’s low rate of inflation.

The market reacted positively, with the Dow Jones Industrial Average jumping nearly 200 points.  Once again, just as it looked like the market was reacting to real business conditions, the Queen of QE proved that the market is still firmly under the Fed’s control.

What Ceiling?

Remember “The Neverending Story?”  The book, which was made into a movie, takes place in a fantasyland, in which a dark entity called “The Nothing” threatens to consume everything.  In the neverending story of QE, “The Nothing” could be The Fed itself, consuming every bond in sight, or the federal government, consuming everything and casting a pall of new regulations that threaten job growth and recovery.

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Goodbye, Middle Class

With all of the talk in Washington about equality, you have to wonder how the gap between rich and poor has widened to the point where even The New York Times is questioning the future survival of the middle class.

Disposable Income

Some have, indeed, made the transition from middle class to upper class and are enjoying a more comfortable lifestyle.  They may not be part of the 1%, but they’ve broken away from the middle.

The New York Times noted that, “In 2012, the top 5 percent of earners were responsible for 38 percent of domestic consumption, up from 28 percent in 1995 … Even more striking, the current recovery has been driven almost entirely by the upper crust … Since 2009, the year the recession ended, inflation-adjusted spending by this top echelon has risen 17 percent, compared with just 1 percent among the bottom 95 percent.”

Put aside your class envy for a minute, though, and recognize that consumer spending by the top 5 percent is keeping the economy out of a recession – albeit, the current recovery has been so weak we may as well be in a recession.

The Great Divide

And while some are moving up, many more are falling down, creating a greater divide than ever between rich and poor.  Consider a few statistics from a cheery blog called, The Economic Collapse (and republished on Zerohedge):

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