US Economy

[a_majoor]

The current unelmployment numbers (not the "official ones"):

http://blog.american.com/2011/12/november-jobs-report-7-reasons-why-its-better-but-still-terrible/

November jobs report: 7 reasons why it’s better but still terrible
By James Pethokoukis
December 2, 2011, 10:37 am
 
When the U.S. economy grows as slowly as this one has for the past year, history suggests there’s a 70 percent chance of recession happening in the upcoming year. But maybe we will be in the 30 percent group. The November jobs report out today is another data point showing the economy continues to grow, although not by very much. The U-3 unemployment rate fell to 8.6 percent (the lowest since March 2009), according to the Labor Department, as nonfarm payrolls rose 120,000 last month. Revisions to the employment numbers for September and October to show 72,000 more jobs created than first reported. A bit more of a drill down from Reuters:

    1. All the increase in nonfarm payrolls in November again came from the private sector, where employment rose 140,000 after increasing 117,000 in October.

    2. Government employment fell by 20,000. Public payrolls have dropped in 10 of the past 11 months as state and local governments have tightened their belts.

    3. Outside of government, job gains were almost across the board, with retail surging 49,800.

    4. Elsewhere, construction payrolls fell 12,000 after losing 15,000 jobs in October. Factory jobs edged up 2,000, with most of the gains coming from automakers.

    5. Health care and social assistance hiring rose 18,700 after adding 30,300 job in October. Temporary hiring — seen as a harbinger for future hiring – increased 22,300 after adding 15,800 jobs last month.

1. The red flag here is the sharp drop in the size of the labor force versus October. The participation rate fell from an already low 64.2 percent to 64.0 percent. In a strong jobs recovery, that number should be rising as more people look for work. If the labor force participation rate were back at its January 2009 level, the U-3 rate would be 11.0 percent.

2. As it is, the broader U-6 rate — which includes part timers who wish they were full timers — is still a sky-high 15.6 percent, down from 16.2 percent last month.

3.  The broadest measure of employment is the employment/population ratio and it rose to 58.5 percent from 58.4 percent. But as MKM Partners notes: “The employment/population ratio has averaged 58.4 since December 2009, meaning there has essentially been no real progress on employment in two years’ time. …  In other words, we are not growing fast enough to reduce the so-called output gap/labor market slack.”

4.  The workweek was flat, at 34.3 hours in November, but aggregate hours worked actually fell 0.1 percent  after two months of relatively strong gains. (MKM)

5. Nominal wages also slipped in November for the first time since August. MKM: “The product of hours worked and wages paid is a proxy for nominal income, and it has decelerated to a 2.6% annualized rate over the last six months from just over a 4% rate this summer (prior to the sharp tightening in financial conditions). … While the economic data have been better of late, we remain concerned that we are seeing a bounce back from a series of supply shocks earlier in the year that may not be sustained against the foliage of tighter financial conditions, a deep recession in Europe and a sharp slowdown in China and emerging-market countries.”

6. We  may not have seen the last of the unemployment 9-handle given a likely growth slowdown next year. As IHS Global Insight notes:

    Third-quarter GDP growth was revised down to 2.0% only because inventories fell. Very lean inventories will support future production growth, in order to keep pace with sales. We have upgraded our fourth-quarter growth forecast to 2.6%, from 2.0%. But we still expect growth to slip back into the 1.5–2.0% range in 2012. Domestic fiscal policy remains contractionary, slower global growth will weigh on exports, and the Eurozone financial crisis will mean at least some tightening of credit conditions in the United States. But the better recent domestic news means we have upgraded 2012 growth to 1.8%, from 1.6% (2011 growth now rounds down to 1.7%, instead of rounding up to 1.8%).

7. This chart from MKM illustrates how tightening financial condition may well drag on the labor market going forward:

 

[a_majoor]

Who is John Galt?

http://www.tri-cityherald.com/2011/12/03/1739803/kennewick-construction-company.html

Kennewick construction company auctions itself off
By John Trumbo, Tri-City Herald

KENNEWICK -- It took Bob Bertsch 25 years to build his construction business and just a day for it all to go away.

Bertsch's Kennewick-based Ashley-Bertsch Group went on the auction block Friday at 9 a.m. By 4 p.m., Booker Auctions had sold off almost two dozen vehicles and trailers, tons of power tools and supplies, even the gas-fired fireplace in the office.

Bertsch, 65, said he is down-sizing because the tax burden got too expensive to stay in business.

After a quarter of a century of building a successful enterprise at 5903 W. Metaline Ave., Bertsch sat back and watched as about 200 people bid on what was left of his company -- boxes of electrical parts, a drafting desk, high-end office furniture, TVs, computers and even the phone system.

Anything that could be carried away, was.

"I am tired of carrying all the tax load," Bertsch said. "I renew 13 licenses here every year just so I can spend money in this city."

Bertsch makes no attempt to conceal his frustration with the costs government imposes on small businesses like his.

"Government is killing small business. We used to have 24 employees at our peak. Now, all of those people who used to work here are in unemployment lines," he said.

Seeing all his life work and hard-earned gain sold off wasn't easy, Bertsch said, but the sale was successful enough to ease the hurt.

"I wasn't as emotionally attached as I thought I'd be," Bertsch said at the end of the day while sitting in what used to be the company's conference room in the 5,000-square-foot office building.

Most of the auction action took place inside and outside a 4,000-square-foot warehouse.

The buildings and 3.2 acres of property already had been sold. The Kennewick School District paid $960,000 and plans to expand the Tri-Tech campus on Kellogg Street to the site, Bertsch said.

Bertsch, who is a commissioner for the Benton Public Utility District, said selling off the company's assets doesn't mean he is retiring.

"I like what I do. All of my work has been relationship-based, with mostly referrals and negotiated jobs," said Bertsch, who expects he will be doing much of the same in his home-based, husband-and-wife operation.

Bertsch told a friend at the auction he is selling out because government was taking more out of his business than he was.

But auctioneer Merle Booker said Bertsch's wife put it differently.

"She said Bob told her he was shedding his skin," Booker said. "I'm not retiring. Just slowing down."

Read more: http://www.tri-cityherald.com/2011/12/03/1739803/kennewick-construction-company.html#ixzz1fbL4n44D

The thousands of other small business that are taking the same line (cancelling expansion, turning down work, selling the business) for much the same reasons are the real answer to why the "U6" unemployment rate is a horrendous 15.6% in the United States (see post above).

 

[a_majoor]

Who is John Galt (part x)

http://taxprof.typepad.com/taxprof_blog/2011/12/tax-cpa.html

Tax Practitioner Flees California for Nevada

Tax practitioner and blogger Russ Fox is fleeing California for Nevada:

    My tax bite is roughly 10% to California. For every dollar I make, ten cents goes to Sacramento. (Yes, I get a benefit from that in that state income tax is deductible on federal tax. However, because of the Alternative Minimum Tax even that benefit is capped.) For the past few years I’ve considered if I could move my business to a friendlier environment. Earlier this year, I decided to do so.

    I’ve sold my house in Irvine, and am in the process of purchasing a home in the Las Vegas area. I will be in a much friendlier business environment, with a lower cost of living. The home I’m purchasing is nearly double the size of my current home and costs almost 50% less than what I sold my current home for.

    There comes a point where decisions are forced on you. With the growth of my business, I looked at possibly hiring another tax accountant in 2010. When I ran the numbers, I found that I would lose money by hiring a productive tax accountant. That’s because of all the regulations and costs that I would immediately incur if I had an employee. I’m not stupid: If I lose money by hiring someone, I’m not going to do it.

    Yet my business was (and is) growing, and I had to do something. ... As of a week from now, I will have executed my own Escape from California.

Tax Update Blog:

    Russ doesn't say that taxes are the only reason he is leaving California. He is saying that high taxes are a significant part of why California is business-hostile. When things are bad enough to drive a growing business from the perfumed air and divine weather of Orange County to the desert wastes of Nevada, that's saying something.

The IRS today released updated statistics on the number of taxpayers moving to and from each of the fifty states.  Tax Foundation data is here. Here are California's net migration data:

 

[a_majoor]

The destruction of accumulated savings will cause many problems, perhaps the worst of which is ushering in political chaos and offering and opening for the "man on the white horse" who promises to restore stability...

http://finance.yahoo.com/blogs/breakout/fed-ruining-entire-class-investors-says-jim-rogers-153315477.html

Fed Is “Ruining an Entire Class of Investors” Says Jim Rogers
By Jeff Macke | Breakout – 22 hours ago

No matter what you've heard to the contrary, "there is QE3, the Fed is pumping money into the system," says legendary investor Jim Rogers, disregarding most every Federal Reserve statement over the last six months. In the attached video Rogers explains his lack of trust (read: contempt) for the Federal Reserve and Fed Chairman Ben Bernanke.

Rogers has been a critic of the Fed's quantitative easing programs and artificially low interest rates, pointing to the latter as something akin to QE3 in drag.

"They're lying to us," he says of the Fed. "One reason the markets are holding up so well is that they are printing money as fast as they can."

As asserted on Breakout regularly, the Federal Reserve is operating in an almost complete leadership void due to an unprecedented level of gridlock among the the elected politicians charged with setting fiscal policy. Unless and until the public acts on their many vows to "throw the bums out" of D.C. the Fed will be free, indeed forced, to act alone in regards to doing something to change our economic condition.

In a pyrrhic victory for America, Rogers believes things will eventually get so bad that Americans will finally vote for real change and economic progress. Alas, the measures he feels are needed to cure our economy are so harsh that those same officials will also get tossed out when voters realize just how harsh the road back to prosperity is.

Regardless of the necessary suffering, spending cuts are needed in order to save the most fiscally responsible citizens, those whose savings are funding this disaster.

"What the Federal Reserve is doing now is ruining an entire class of investors," says Rogers. By forcing rates down and keeping the economy on a flatline, he believes the Fed could cause another lost generation of investments. Suffice it to say, vaporizing those who faithfully accumulated savings over the years is no way to restore confidence in our financial markets.

Rogers isn't simply a disgruntled American patriot, he's an investor with a legendary record of success. That being the case, and having established what the depths of suffering the world is facing now, the obvious question is where Rogers is putting his money to avoid or even profit from the pain.

"I'm long commodities and currencies; I'm short emerging market stocks, U.S. technology stocks, and I'm short European stocks," Rogers tells me after pronouncing himself a terrible market timer (author's note: He's nothing of the sort). His logic behind the portfolio is that he wins if the economy turns up due to commodity scarcity. And if the economy remains weak, Rogers' short positions will more than offset his long positions.

As for gold, an investment he's been holding for years, Rogers has a mixed view.

"Gold has been up 11 years in a row," he says, adding it's "very unusual for any asset in world history and I'd expect the correction to continue." That said, he's not selling any of his gold and would look to buy weakness, depending on the global situation.

He's long select commodities and currencies, short Europe, tech and emerging markets. Is Rogers off base or is he underestimating the ability of the Fed to turn this thing around? Let us know what you think in the comment section below or visit our Facebook page.

 

[a_majoor]

Access to cheap and reliable energy is the underpinning of modern economies, so this development is applicable to lifting the US out of the current economic downturn. It is or should also be a key point in the upcoming elections; the current administration has been promoting policies which exclude development of domestic energy resources, killing jobs and reducing economic activity. (as a side bar, the royalties from all this oil could conceivably be enough to pay down a large chunk of the national debt).

http://www.timeslive.co.za/scitech/2011/12/08/us-shale-oil-seen-rising-fast

US shale oil seen rising fast
Reuters | 08 December, 2011 08:24

An aerial view of a shale oil drilling rig SAI-310 in the Patagonian province of Neuquen. File picture
Image by: ENRIQUE MARCARIAN / REUTERS
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The boom in North American shale oil could expand even faster than forecast if the crude is produced responsibly, energy experts say.

The National Petroleum Council recently forecast that some 3 million barrels per day of shale oil could be produced in North America by 2035 if regulations were favorable to the industry.   

The shale oil surge in Bakken, North Dakota and other areas of the country are estimated to be about five years behind the natural gas shale boom. Rapid advancements in hydraulic fracturing, or fracking, and directional drilling have boosted output of both fuels.   

“My personal feeling is it could be earlier than 2035 that we get to (3 million bpd) given the pace of development we are seeing in places like the Bakken and increasingly in other arenas,” Andrew Slaughter, a business adviser at Shell Exploration & Production Company, told a panel at the Center for Strategic and International Studies.   

The surge could threaten Saudi Arabia’s dominant role in world oil markets, and it also eases the urgency to develop the kingdom's own reserves, its state energy company said last month.     

The US Energy Information Administration on Tuesday raised its forecast for 2012 liquid fuel output by 37% on faster growth from shale oil.   

Bakken, which began producing in the early 2000s after being discovered in the 1950s, is yielding about 450000 barrels per day, or about 8% of US crude output.     

Another shale oil deposit, known as Eagle Ford in Texas, is potentially even more profitable, said Danny Brown, a general manager at Anadarko Petroleum Corp.     

There are also 14 or 16 other shale oil fields in North America that are in the early stages of development.   

Like fracking for natural gas, shale oil has raised the hackles of environmentalists.   

In the fracking process companies blast large amounts of water, mixed with chemicals and sand, deep underground to release the fuels.   

Environmentalists are concerned the process uses large amounts of water and employs potentially dangerous chemicals that could contaminate the ground water. In the shale oil, they also abhor companies flaring off large amounts of natural gas in the process, leading to excess emissions.     

James Sorensen, a research manager at the Energy & Environmental Research Center in North Dakota said companies could ease those concerns by recycling water and by stopping the flaring.   

The flaring issue can also be addressed by a development from BP (documented in the "No Oil" thread) which uses a fully developed version of the FT process to convert natural gas into a clean liquid fuel, increasing the amount of available petroleum products for domestic consumption.

 

[a_majoor]

Remember, these numbers are in addition to the US Federal debt...

http://finance.yahoo.com/news/public-retirement-ages-come-under-170328247.html

Public retirement ages come under greater scrutiny
With public workers eligible to retire at 55 or 60, governments look to boost retirement ages
APBy Don Thompson, Associated Press | AP – Mon, Dec 12, 2011 12:12 PM EST

 
    <p> Maureen Reedy, an elementary instructional specialist who is contemplating retirement in the face of collective bargaining changes, sits in a classroom Friday, Sept. 16, 2011, in Columbus, Ohio. The idea that people who work for the government can retire as early as age 50 and collect retirement benefits until death is fueling a national debate as states seek to control spending. (AP Photo/Jay LaPrete)

    Maureen Reedy, an elementary instructional specialist who is contemplating retirement in the face of collective bargaining changes, sits in a classroom Friday, Sept. 16, 2011, in Columbus, Ohio. The idea that people who work for the government can retire as early as age 50 and collect retirement benefits until death is fueling a national debate as states seek to control spending. (AP Photo/Jay LaPrete)

COLUMBUS, Ohio (AP) -- After nearly 40 years in public education, Patrick Godwin spends his retirement days running a horse farm east of Sacramento, Calif., with his daughter.

His departure from the workaday world is likely to be long and relatively free of financial concerns, after he retired last July at age 59 with a pension paying $174,308 a year for the rest of his life.

Such guaranteed pensions for relatively youthful government retirees — paid in similar fashion to millions nationwide — are contributing to nationwide friction with the public sector workers. They have access to attractive defined-benefit pensions and retiree health care coverage that most private sector workers no longer do.

Experts say eligible retirement ages have fallen over the past two decades for many reasons, including contract agreements between states and government labor unions that lowered retirement ages in lieu of raising pay.

With Americans increasingly likely to live well into their 80s, critics question whether paying lifetime pensions to retirees from age 55 or 60 is financially sustainable. An Associated Press survey earlier this year found the 50 states have a combined $690 billion in unfunded pension liabilities and $418 billion in retiree health care obligations.

Three-quarters of U.S. public retirement systems in 2008 offered some kind of early-retirement option paying partial benefits, according to a 2009 Wisconsin Legislative Council study. Most commonly, the minimum age for those programs was 55, but 15 percent allowed government workers to retire even earlier, the review found. The study is widely regarded as the most comprehensive assessment of the issue.

Police and firefighters often can retire starting even younger — at around age 50 — because of the physically demanding nature of some of those jobs.

Yet with cities, counties and states struggling to pay pension bills, changes are afoot.

In November, San Francisco voters supported a local ballot initiative to hike minimum retirement ages for some city workers. Since that time, laws increasing retirement ages for government workers were signed in Rhode Island and Massachusetts in efforts to address underfunded pension systems.

Earlier in New Jersey, part of a legislative deal struck between Democrats and Republicans raised the normal retirement age from 62 to 65.

An initiative circulating for California's 2012 state ballot seeks to increase the minimum retirement age to 65 for public employees and teachers, and to 58 for sworn public safety officers.

Godwin said all the antagonism toward public retirees is misplaced. His pension payout follows 36 years as an English teacher and school administrator in California, with two years' sick-leave credit added for never being absent.

He said lack of accountability on Wall Street and exorbitant corporate salaries are a more justified target of the public's anger.

"Those things I think are a much larger problem than what a public employee is making as a pension," he said. The AFL-CIO labor coalition's Executive PayWatch project estimates chief executives went from making 42 times the average blue collar worker's salary in 1980 to 343 times as much last year.

Overall, Americans are working to older ages — even with the expanded ability for some to collect partial pensions younger if they retire. Over the past 20 years, the average retirement age for men has edged up to 64, for women to 62, according to the Center for Retirement Research at Boston College.

Data compiled by the U.S. Bureau of Labor Statistics show 29 percent of people between 65 and 69 worked at least part-time last year, up from 24 percent a decade ago and 21 percent in 1994. Almost 7 percent of people 75 or older were employed in 2010, compared to less than 5 percent 15 years ago.

Experts say no reliable figures exist that could show whether public sector workers retire younger than their private-sector counterparts. That's because the Bureau of Labor Statistics has no way of defining "retirement," and nearly all analyses involving the American workforce begin with the bureau's data.

It is clear, though, that most private-sector workers no longer receive defined-benefit pensions that will pay them for life. Most must wait until age 65 or 67 to collect their full Social Security benefit or draw from 401(k) accounts that are invested in the stock market and, in many cases, have sustained significant losses during the recession.

It is this shift in the style of benefits, and not the age of retirement, that should be scrutinized, said Hank Kim, executive director of the Washington, D.C.-based National Conference on Public Employee Retirement Systems, which advocates for government pensions.

"I think the biggest difference between the private and the public sector is that, for whatever reason, the private sector has largely abandoned the pension system," he said.

Kim believes that shift has left a generation of private employees — who make up the bulk of the American labor force — unprepared for retirement. In 2010, there were 18 million government workers and 94 million private sector workers in the U.S.

Rising retirement ages and reduced pension payouts for many private-sector workers are emboldening those seeking to rein in the obligations of overextended public pension systems.

Former California state Assemblyman Roger Niello, a Republican, is backing the proposal to take the age issue to California voters next year.

"It's a huge concern, arguably maybe the biggest concern aside from things where the system is being abused, like pension-spiking," said Niello, referring to the practice of artificially inflating retirement benefits by boosting pay at the end of an employee's career.

Defenders say union-negotiated retirement packages help attract and keep people in jobs necessary to society, whether teaching, environmental protection, law enforcement or garbage collecting.

Maureen Reedy, a long-time elementary instructional specialist in Upper Arlington, Ohio, a Columbus suburb, said benefits form part of the financial equation workers use to decide whether to go into public service.

"After 20 years, most teachers are making $50,000 — woo-hoo," she said. "Our pension and our security are part of the long-range outlook of our profession."

Ohio, New Jersey and Wisconsin were among states this year that sought to limit the power of public employee unions, in part out of concern over rising pension costs. Reedy, 53, was considering retirement before Ohioans voted in November to repeal a new law making sweeping changes to the collective bargaining abilities of unions representing 350,000 public workers. Pension changes are still on the state's agenda.

Some states began raising retirement ages around five years ago, before the issue had garnered wide public attention. Illinois and Missouri, for example, increased the normal retirement age to 67. Before the change, Illinois workers could retire with full benefits at 60 after just eight years of service.

Matt Mayer, president of the Buckeye Institute for Public Policy Solutions, a conservative think tank in Ohio, believes states' pension woes could be remedied by having their public pension systems operate more like the federal Social Security system.

"Frankly, I don't have as much a concern about when they retire as I do about when they get access to the pension," he said. "I believe in the economic freedom of workers. If a teacher wants to retire at 55, fine. They just don't get their pension until 65."
___
Thompson reported from Sacramento, Calif.

 

[a_majoor]

And placing the blame where it is due. Amazing how quickly a dose of facts and figures destroys the leftist "narrative":

http://american.com/archive/2011/december/why-the-left-is-losing-the-argument-over-the-financial-crisis

Why the Left Is Losing the Argument over the Financial Crisis
By Peter J. Wallison and Edward Pinto
Tuesday, December 27, 2011
Filed under: Big Ideas, Economic Policy, Government & Politics

Fair-minded people are persuaded by facts, not invective.

The day before Christmas, Joe Nocera did it again—wasted a perfectly good column with another attack on us, Peter Wallison and Ed Pinto.

It’s worth reading for what it says about the Left’s current situation. According to Nocera, we “almost single-handedly” have created a “myth that Fannie Mae and Freddie Mac caused the financial crisis.” Those who have fallen for this myth, according to Nocera, include congressional Republicans and the Wall Street Journal’s editorial page.

It’s somewhat implausible that two guys at a Washington think-tank, arguing that the financial crisis was caused by government housing policy, could create a widely accepted alternative to the conventional liberal narrative that the financial crisis was caused by the greed and lack of regulation of Wall Street. After all, the conventional narrative was created by the government, propagated by the New York Times, and accepted without question by just about every other major newspaper and electronic mass media outlet, foreign and domestic. Apparently, however, in Noceraworld, threats to the accepted narrative can never be fully suppressed.

It’s somewhat implausible that two guys at a Washington think-tank could create a widely accepted alternative to the conventional liberal narrative that the financial crisis was caused by the greed and lack of regulation of Wall Street.

We doubt that we have been as successful as Nocera fears, but we believe that Nocera and his ilk are losing the argument about what caused the financial crisis. If in fact our views have received sufficient credence to warrant the alarm of the New York Times, a reading of his attack piece will tell you why. The article is fully representative of the Left’s approach—don’t bother with facts, just call your opposition liars or worse (racists) and leave it at that. This name-calling is then dutifully repeated throughout the leftwing echo-chamber.

To the extent that we have had any success in challenging the conventional narrative about the causes of the crisis, it is because fair-minded people are persuaded by facts, not invective. Our argument is and has been that the financial crisis would not have occurred but for government housing policy implemented principally through Fannie and Freddie and the Department of Housing and Urban Development (HUD). Although there were a number of such policies, the most important were the affordable housing requirements first imposed on Fannie and Freddie in 1992 and expanded and tightened by HUD through 2007.

Summarized below are the original numbers we relied on, taken from Fannie and Freddie’s own data and from the views of bank regulators—and now supplemented with additional data from the Securities and Exchange Commission’s recent complaints against certain officers of Fannie and Freddie. Of particular interest are Fannie and Freddie’s non-prosecution agreements with the SEC, in which they agree with facts that confirm—and in many cases go beyond—our original research concerning the scope of the GSEs’ subprime and Alt-A exposure. These are facts, and Nocera and others who might wish it otherwise should become familiar with them.

For example, in its non-prosecution agreement Freddie agreed that as of June 30, 2008, it had $244 billion in subprime loans, comprising 14 percent of its credit guaranty portfolio, rather than the $6 billion it had previously disclosed. Freddie also agreed that it had $541 billion in reduced documentation loans alone, vastly more than the $190 billion in previously disclosed Alt-A loans which Freddie had said included loans with reduced documentation. 

While the SEC documents about $1.03 trillion in previously undisclosed subprime and Alt-A loans in Fannie and Freddie’s credit guaranty portfolios, an estimated $812.8 billion, or about 80 percent, were already accounted for in the totals of Fannie and Freddie subprime and Alt-A exposures included in Pinto’s Forensic Study and Wallison’s Dissent from the majority report of the Financial Crisis Inquiry Commission.

The SEC findings add $219 billion and 1.43 million loans to our original Fannie and Freddie subprime and Alt-A totals, bringing the combined subprime and Alt-A total to $2.041 trillion and 13.37 million loans.

All told, after adding the SEC’s new data to our original estimates, there were approximately 28 million subprime and Alt-A loans outstanding on June 30, 2008, before the financial crisis, with a value of approximately $4.8 trillion. This was half of all mortgages in the United States. Of these loans, over 74 percent were on the books of U.S. government agencies and firms subject to government housing finance policies. This shows where the demand for these low quality loans came from. Fannie and Freddie were themselves exposed to more than 13 million subprime or Alt-A loans, or 65 percent of the government total.

The table below shows the values of the subprime and Alt-A loans originally included in Pinto’s Forensic Study and Wallison’s Dissent, supplemented by the data included in the SEC’s complaints and the non-prosecution agreements.

Fannie and Freddie subprime and Alt-A totals as of June 30, 2008

(All numbers de-duped to eliminate inclusion in more than one category.)

Table in billions of dollars

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies and Edward Pinto is a resident fellow at the American Enterprise Institute.

FURTHER READING: Wallison also writes “Where No Mortgage News Is Fit to Print,” “A Guaranteed Disaster,” and “The Financial Crisis on Trial.” Pinto contributes “Cleaning House: The Financial Crisis and the GSEs,” “Senate Undermines Obama—and the Country—on Housing,” and “New Bubble May be Building in 30-Year Mortgages.”
Footnotes

1 In 2001, federal regulators determined that a FICO score of less than 660 can be used to identify a subprime mortgage. http://www.federalreserve.gov/Boarddocs/SRletters/2001/sr0104a1.pdf

2 The GSEs published credit supplements at the time of their SEC filings. These supplements set forth loan characteristics with high risk. These included negative amortization, interest pnly, original LTV>90% (effectively >=95%), and Alt-A as disclosed by Fannie and Freddie.

3 In the case of both original LTV>90% and combined LTV>90%, the effective LTV is >=95%. In the case of original LTV>90%, this is confirmed by the fact that the LTV average for such loans was 97.4%. In the case of combined LTV, the 80/20 and 80/15 combinations would have resulted in a combined LTV>=95%.

4 These differ slightly from the Forensic Study/Dissent subtotals due to rounding and the need to change the de-duping hierarchy to incorporate the SEC additions.

5 $101.7 billion prior to de-duping.

6 $238 billion prior to de-duping.

7 $341 billion prior to de-duping.

8 $351 billion prior to de-duping.

Image by Bergman Group

 

[a_majoor]

Some baby steps. Ending ethanol subsidies will also have a huge impact on the global food market since lots of corn was being diverted from human and animal consumption due to the subsidy. $6 billion a year is only a baby step (especially compared to the vast sums being spent on US "entitlement" programs where the real reform has to take place), but at least it is a step in the right direction. Perhaps the Congress needs to follow the Harper government's program of "boutique" targeted reductions tomake things politically palatable:

http://www.washingtonpost.com/opinions/overcharged/2011/12/30/gIQAzQ0yUP_print.html

Overcharged

By Editorial Board, Published: January 1

THERE MAY NOT have been a party in Times Square to celebrate, but two of the most wasteful subsidies ever to clutter the Internal Revenue Code went out with the old year. Congress declined to renew either the 45-cent-per-gallon tax credit for corn-based ethanol or the 54-cent-per-gallon tariff on imported ethanol, so both expired Dec. 31.

Taxpayers will no longer have shell out roughly $6 billion per year for a program that badly distorted the global grain market, artificially raised the cost of agricultural land and did almost nothing to curb greenhouse gas emissions. A federal law requiring the use of 36 billion gallons of ethanol for fuel by 2022 still props up the industry, but the tax credit’s expiration is a victory for common sense just the same.

Meanwhile, a lesser-known but equally dubious energy tax break also expired when the year ended Saturday: the credit that gave electric-car owners up to $1,000 to defray the cost of installing a 220-volt charging device in their homes — or up to $30,000 to install one in a commercial location. As a means of reducing carbon emissions, electric cars and plug-in hybrid electrics are no more cost-effective than ethanol. What’s more, only upper-income consumers can afford to buy an electric vehicle (EV); so the charger subsidy is a giveaway to the well-to-do.

The same goes for the $7,500 tax credit that the government offers purchasers of electric vehicles, a subsidy that, alas, did not expire at year’s end. The Obama administration says that the credit helps build a market for EVs, which helps create jobs. Given the price of eligible models, like the $100,000 Fisker Karma, that rationale sounds an awful lot like trickle-down economics. (Interpolation: No it doesn't. It is straight crony capitalism)

Backers of the charger tax credit may lobby Congress to renew it when lawmakers tackle the payroll tax extension issue again in the new year. We hope that Congress says no. Not only is it a case study in upward income redistribution, it also would represent a deepening of the taxpayers’ commitment to what looks increasingly like an industry not ready for prime time.

Sales of electric vehicles were disappointing in 2011, with the Volt coming in below the 10,000 units forecast. In addition to its high price, the Volt brand is suffering from news that some of its batteries burst into flames after government road tests. Meanwhile, Fisker, the recipient of more than half a billion dollars in low-interest Energy Department loans, repeatedly delayed the introduction of its ballyhooed Karma — while repeatedly raising the sticker price. And now Fisker has announced a recall of the cars because of a potential defect in its batteries — made by A123 Systems, another large recipient of Energy Department support.

Evidence is mounting that President Obama was overly optimistic to pledge that there would be 1 million EVs on the road by 2015. Electric cars are not likely to form a significant part of the solution to America’s dependence on foreign oil, or to global warming, in the near future. They simply pose too many issues of price and practicality to attract a large segment of the car-buying public. More prosaic fuel-economy innovations such as conventional hybrids, clean-diesel cars and advanced gasoline engines all show much more promise than electrics.

The ethanol credit was on the books for 30 years before it finally died. Let’s hope Congress can start unwinding the federal government’s bad investment in electric vehicles faster than that.

 

[Redeye]

Not sure what the impact will be, given how heavily subsidized the corn industry is to begin with, in all accounts. Farmers grow tremendous amounts of born that's forced the price well below any sort of "living wage" without massive subsidies that mainly benefit agribusiness that processes all that corn, turning it mostly into mostly unhealthy foods. It'd be nice if there was some way to tackle that, but I suspect that would never happen.

Some baby steps. Ending ethanol subsidies will also have a huge impact on the global food market since lots of corn was being diverted from human and animal consumption due to the subsidy. $6 billion a year is only a baby step (especially compared to the vast sums being spent on US "entitlement" programs where the real reform has to take place), but at least it is a step in the right direction. Perhaps the Congress needs to follow the Harper government's program of "boutique" targeted reductions tomake things politically palatable:

http://www.washingtonpost.com/opinions/overcharged/2011/12/30/gIQAzQ0yUP_print.html

 

[Kirkhill]

Not sure what the impact will be, given how heavily subsidized the corn industry is to begin with, in all accounts. Farmers grow tremendous amounts of born that's forced the price well below any sort of "living wage" without massive subsidies that mainly benefit agribusiness that processes all that corn, turning it mostly into mostly unhealthy foods. It'd be nice if there was some way to tackle that, but I suspect that would never happen.

Confused, me.

Corn subsidized.  Agreed.
Corn grown efficiently.  Agreed.
Corn grown so efficiently that the price per bushel is very low.  Agreed - sounds like straight supply/demand economics.

Consequence of low value corn.....farmers need to grow many bushels to make a living.
Only so many bushels can be grown per acre. 
Therefore farmers must seed many acres to grow many bushels to make many dollars.
Therefore market pressures drive farmers to acquire many acres. 
As there are only a limited number of arable acres then those acres come from other farmers.
Some farmers decide to go big.  Others decide to go home.

Consequence, in continuation of a pattern in evidence since the agricultural revolutions of Cluny, fewer and fewer people produce more and more food.  In Saskatchewan successful farmers don't farm Quarters or even Sections.  They are headed for Townships. These are successful "Family" operations that have decided to go big. 

When does a successful family farm become an evil Agribusiness?

If subsidies aren't benefitting the farmers, where are ADM and Cargill getting their supplies?  It is true that not all farmers benefit.  But it is also true that some farmers are benefitting greatly.

Does agriculture need subsidizing at all? Probably not.... but that won't change the dynamic that results in fewer people producing more food.

And what is this BS about Agribusinesses producing "unhealthy foods"?  You may not like Corn Flakes, White bread and Vanilla ice cream but judging from what people buy when given a choice, and they are not short of choices these days, they vote with their dollars and buy Corn Flakes, White bread and Vanilla ice cream.

Here's a tip.  Processors sell fat and salt because people like fat and salt.  Fat and salt reduce profit margins.  Fat and salt traditionally have been the most expensive ingredients in food.

Fat was valued as a source of calories, and flavour.  Salt was valued as a preservative, and flavour.

The foods produced by the food supply chain that you deride are the cheapest, cleanest, freshest, most varied and healthiest foods that the planet has ever seen and contribute markedly to the increase in life expectancy from less than 60 in the 1880s to over 80 today.

You know the way you make money in the food industry?

You sell air (as in ice cream).
You sell water (as in everything)
You sell carbohydrates (and fibre is great because it is indigestible, adds no food value - and thus has been traditionally a waste product - and binds tons of water, which see above).

Proteins, fats (to include corn oil, sunflower oil, canola and olive oil) and preservatives all cost money and are used as sparingly  as circumstances permit.

 

[Redeye]

Family farmers are mostly broke, even with subsidies, which mainly benefit agribusinesses like ADM and Cargill and consumers of things like Coke that are filled with high fructose corn syrup and the like - and cheap beef fattened on corn.  Efficiency is a relative term when you actually consider the massive amount of energy that is put into corn production. And when subsidies have to be involved, it's not "straight supply and demand" at all.

Rather than me do a second rate job of explaining it, go read The Omnivore's Dilemma - just the first section on corn in particular. It's absolutely fascinating. Food, Inc is also good, but the Omnivore's Dilemma is really a great way to get an understanding of how food works.

Your "argument" about people voting with their dollars doesn't in any way change the fact that the foods are unhealthy, and a fair chunk of people would be rather horrifying about what goes into producing the food they eat. The business of feeding people has some ugly aspects. What's notable as that the much vaunted "family farm" which only exists because of policies to support them is no longer practicing what used to be relatively sustainable agriculture. The thing is, they really can't anymore. But again, read the book. It's amazing, and I can't do it justice.

Confused, me.

Corn subsidized.  Agreed.
Corn grown efficiently.  Agreed.
Corn grown so efficiently that the price per bushel is very low.  Agreed - sounds like straight supply/demand economics.

Consequence of low value corn.....farmers need to grow many bushels to make a living.
Only so many bushels can be grown per acre. 
Therefore farmers must seed many acres to grow many bushels to make many dollars.
Therefore market pressures drive farmers to acquire many acres. 
As there are only a limited number of arable acres then those acres come from other farmers.
Some farmers decide to go big.  Others decide to go home.

Consequence, in continuation of a pattern in evidence since the agricultural revolutions of Cluny, fewer and fewer people produce more and more food.  In Saskatchewan successful farmers don't farm Quarters or even Sections.  They are headed for Townships. These are successful "Family" operations that have decided to go big. 

When does a successful family farm become an evil Agribusiness?

If subsidies aren't benefitting the farmers, where are ADM and Cargill getting their supplies?  It is true that not all farmers benefit.  But it is also true that some farmers are benefitting greatly.

Does agriculture need subsidizing at all? Probably not.... but that won't change the dynamic that results in fewer people producing more food.

And what is this BS about Agribusinesses producing "unhealthy foods"?  You may not like Corn Flakes, White bread and Vanilla ice cream but judging from what people buy when given a choice, and they are not short of choices these days, they vote with their dollars and buy Corn Flakes, White bread and Vanilla ice cream.

Here's a tip.  Processors sell fat and salt because people like fat and salt.  Fat and salt reduce profit margins.  Fat and salt traditionally have been the most expensive ingredients in food.

Fat was valued as a source of calories, and flavour.  Salt was valued as a preservative, and flavour.

The foods produced by the food supply chain that you deride are the cheapest, cleanest, freshest, most varied and healthiest foods that the planet has ever seen and contribute markedly to the increase in life expectancy from less than 60 in the 1880s to over 80 today.

You know the way you make money in the food industry?

You sell air (as in ice cream).
You sell water (as in everything)
You sell carbohydrates (and fibre is great because it is indigestible, adds no food value - and thus has been traditionally a waste product - and binds tons of water, which see above).

Proteins, fats (to include corn oil, sunflower oil, canola and olive oil) and preservatives all cost money and are used as sparingly  as circumstances permit.

 

[Bruce Monkhouse]

Family farmers are mostly broke, even with subsidies,

A quote I never forgot, [seconded by a farmer I befriended a few years ago]
My father-in-law said there are 2 types of farmers,..stupid and very well off.

No business that can wangle subsidies is EVER going to say that we're doing alright, that would just be stupid.

 

[a_majoor]

Since Kirkhill has made his career in the food industry, it would do well to pay attention to his observations.

The practice of consolodation of small farms to ever larger farms (owned and operated by ever smaller numbers of people) isn't anything new; the astute historian can see the same economic drivers leading to the same results in the late Res Publica Roma, or even earlier in the Hellenistic period between the death of Alexander III and the rise of the Res Publica Roma. The only "subsidies" that work to reverse the trend is to break up the estates and distribute the land to smallholders. Since this historically happens after revolutions or dark ages, or in conquered territories as a reward to the soldiers of the invading armies, this isn't perhaps the best approach.

As for eating healthy foods, growing your own garden isn't very difficult (even window box gardens are possible for apartment dwellers), and greenhouse agriculture and "combined cycles" like intercropping different plants at the same time are possible for people willing to take the effort and pay the extra price.

 

[ModlrMike]

I recollect at the start of the biofuel craze warnings that it would push up the price of grains. One can easily see that using arable land for non food product farming may not be the wisest approach. The ensuing rise in everything grain derived from bread to beer should be evidence enough. There's plenty of plants that grow in marginal conditions that can be used for biofuels, but they never got the same attention from the environmental and agribusiness lobbies. Another example of cronyism?

 

[Kirkhill]

Redeye:

In Four Decades in the food industry, meeting, at a guess, over 10,000 people engaged in all aspects of the food industry, from feed lot and farm gate, through processor and distributor, and up to the board rooms of those evil Agribusinesses, in Europe, the US and Canada, I can honestly say that I have never met anyone, anywhere, that I felt was not committed to producing wholesome, healthy food.

And I say that without reservation.
Dead customers are bad for business.

 

[a_majoor]

I recollect at the start of the biofuel craze warnings that it would push up the price of grains. One can easily see that using arable land for non food product farming may not be the wisest approach. The ensuing rise in everything grain derived from bread to beer should be evidence enough. There's plenty of plants that grow in marginal conditions that can be used for biofuels, but they never got the same attention from the environmental and agribusiness lobbies. Another example of cronyism?

Crony capitalism is part of it (Corn farmers and producers have good lobbyists) but making ethanol requires high sugar inputs. Sugar cane and corn are the easiest inputs to process, while things like switchgrass and wood chips require energy intensive processing to break the cellulose down into sugars, making an already expensive and marginal enterprise totally uncompetative (it takes something like four units of energy to get three units of energy out of corn ethanol, so just imagine the ratio with cellulose).

Sadly, alternatives like biodiesel from algae also requires lots of expensive processing (see the "No oil" thread), which explains why the US Navy ended up paying $16/gallon for biofuel (although the compay which produced the fuel also has links with the current Administration, so crony capitalism is a big factor as well).

 

[Redeye]

Redeye:

In Four Decades in the food industry, meeting, at a guess, over 10,000 people engaged in all aspects of the food industry, from feed lot and farm gate, through processor and distributor, and up to the board rooms of those evil Agribusinesses, in Europe, the US and Canada, I can honestly say that I have never met anyone, anywhere, that I felt was not committed to producing wholesome, healthy food.

And I say that without reservation.
Dead customers are bad for business.

I don't ever recall saying that agribusiness is "evil". Because I didn't.

That said, industrial agriculture has produced food that in the long run is indeed less healthy for myriad reason. I have no issue with what you said based on your experience, it makes only perfect sense to me as a rational position anyone in the industry would make. It doesn't change the fact, however, that lobbyists have worked had to protect their ability to patent seeds, to keep things like rBST/BGH fed to dairy cattle (though it's illegal in Canada it's still done in the USA), to fill food with processed sugars etc. That isn't to say that anyone involved in the industry is manifestly evil, they're following the market imperative to make themselves the best returns they can. But we're getting into the weeds here. I will again emphatically suggest you check out The Omnivore's Dilemma. It's a really, really fascinating read.

 

[Brad Sallows]

There is also the oft overlooked point that industrial agricultural products are more healthy than starvation.

 

[GAP]

There is also the oft overlooked point that industrial agricultural products are more healthy than starvation.

See!! there you go again dragging out useless, trivial truths when there is a whole industry worth billions, Billions, I say, that has a central theme of starving yourself until you reach an appropriate skeletal level..... ;D

 

[Fishbone Jones]

I know a little about this genetic stuff, from dealing with my clients.

Most genetic mods make the food the same. Colour, size, shape, etc. It doesn't do much to alter the nutritional value. Other than try make it taste better.

They do this because the Food Chain Supermarkets demand x number of 'tomatoes' per carton. All the same size, colour, and shape. They don't get it, they reject it.

I can show anyone that wants to come and look, tons of perfectly good tomatoes, that are put out onto fields because they don't meet supermarket specs.

They can't sell them elsewhere. They can't give them to foodbanks or anyone else, because the provincial health and food standards won't allow it.

The other mod that's made is in germanation. The fruit\ vegetable that is growing produces sterile seeds. This ensures that the supplier has return business, the producer has increased yield and the consumer gets the best value by getting the newest and 'bestest' thing on the market.