Goldman’s Back, and Why We Should Be Worried

Goldman’s Back, and Why We Should Be Worried

Courtesy of Robert Reich, Robert Reich’s Blog

Should we breath a sigh of relief that Goldman Sachs has posted record earnings as revenue from trading and stock underwriting reached all-time highs (second quarter net income was $3.44 billion) — less than a year after the firm took $10 billion directly from taxpayers and $13 billion indirectly through AIG?

In some ways, yes. That Goldman is back signals that the worst of Wall Street’s recent meltdown is over. And at least New York City’s economy will again benefit from the trickle-down effects of the multi-million dollar bonuses of Goldman’s executives and traders.

But in another respect, Goldman’s resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs. Why? Because Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street. Goldman is still wagering its capital and fueling giant bets with lots of borrowed money. While its rivals have pared back risks, Goldman has increased them. And its renewed success at this old game will only encourage other big banks to go back into it.
 

“Our model really never changed, we’ve said very consistently that our business model remained the same,” Goldman’s chief financial officer tells Bloomberg News. Value-at-risk — a statistical measure of how much the firm’s trading operations could lose in a day — rose to an average of $245 million in the second quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman’s high-risk operations.

Goldman is skillful at playing the market. Now that most of its major competitors are out of the action or still under the strict control of the Treasury and the Fed, it has the market mostly to itself. Expect the others to jump back in to high-risk deals as soon as they can. But Goldman is also skillful at playing politics — something its rivals aren’t nearly as good at. Recall that last fall, at a closed meeting between Treasury Secretary Hank Paulson (formerly Goldman’s CEO), Tim Geithner (then at the New York Fed), and a handful of others to decide on the fate of giant insurer AIG, Goldman’s cheif executive, Lloyd Blankfein, was at the table. The decision to bail out AIG resulted in a $13 billion giveaway to Goldman because Goldman was an AIG counterparty. Indeed, Goldman executives and alumni have played crucial roles in guiding the Wall Street bailout from the start.

So the fact that Goldman has reverted to its old ways in the market suggests it has every reason to believe it can revert to its old ways in politics, should its market strategies backfire once again — leaving the rest of us once again to pick up the pieces.

Dr. Doom Has Some Good News

Here’s some good news from Dr. Doom, in fact, that’s the title.

Dr. Doom Has Some Good News

By James Fallows writing in The Atlantic

Nouriel Roubini, the New York University economist who accurately forecast the bursting of the housing bubble and the resulting economic contraction, has become famous for his pessimism—he has been the gloomiest of the doomsayers. Which is what makes his current outlook surprising: Roubini believes that the Obama administration’s policy makers—and especially the much-maligned Tim Geithner—have gotten a lot right. Pitfalls may still abound, but he is now projecting an end to the recession, and he sees growth ahead.

Read the article here >>

Photo:  Nouriel Roubini 02, by Kjetil Ree, photo and license at Wikipedia.

 

Thomas Schelling on Climate Change

Mark Thoma at Economist’s View presents and comments on the following article in The Atlantic which looks at global warming from a rather different perspective than the more common ones. 

Thomas Schelling on Climate Change

Conor Clarke interviews Thomas Schelling on the implementation of climate change policy (the excerpts run across several questions):

An Interview With Thomas Schelling, Part Two, by Conor Clarke: This is the second part of my interview with Nobel Prize-winning economist Thomas Schelling. Part one is here. In this part we talk very generally about climate change…

…It’s not obvious that averting global climate change is in the rational self-interest of anyone … alive today. The serious consequences probably won’t occur until 2080 or 2100 or thereafter…, [and] those consequences are going to be distributed in a radically uneven way. The northwest of the United States might actually benefit. So how does a negotiation process work? How does a generation today negotiate on behalf of future generations? And how do we negotiate when the costs are distributed so unevenly?

Well I do think that one of the difficulties is that most of the beneficiaries aren’t yet born. More than that: Most of the beneficiaries will be born in … the developing world. By 2080 or 2100 five-sixths of the population, at least, will be in places like China, India, Indonesia, Africa and so forth. And what I don’t know is whether Americans are really willing to understand that and do anything for the benefit of the unborn Chinese.

It’s a tough sell. And probably you have to find ways to exaggerate the threat. And you can in fact find ways to make the threat serious. I think there’s a significant likelihood of a kind of a runaway release of carbon and methane … that will create a huge multiplier effect, and it could become very serious. …

If I were to come clean to the American public I would say that, except for a very low probability of a very bad result — which is the disintegration of the West Antarctic ice sheet, which would put Washington DC under water — we are probably going to outgrow any vulnerability we have to climate change. … You know, very little of the US economy is susceptible to climate. All of agriculture is less than 3% of our gross product. Forestry may be endangered. Fisheries may be endangered. But recreation might actually benefit!

So if we can double our GDP in the next 70 or 80 years,… — even if we lose 10% of our GDP from climate change — we’re still ahead so much that the effect of climate change wouldn’t be noticed. But it would be pretty disastrous in a lot of the less developed parts of the world. And that’s why I think it’s crucially important not to demand anything of China, India and so forth that will significantly impede their economic progress. …

[I]f the developed countries … are really serious, they’ll tell India and China and Brazil, "we’re going to provide enormous assistance to help reduce your dependence on fossil fuels. And we don’t expect you to pay for it yourselves. We will pay for it because we’re rich and you’re not." …

But while people talk about this…, nobody that I know of is thinking about how in the world you organize so that the rich countries can agree what you do with the poor. You need to know who divides the money, and who the monitors is. We’re going to need a whole new set of institutions…

It’s very hard to get Americans to engage in what they think will be suffering not just for the polar bears but for the poor around the world who will indeed suffer if they can’t outgrow their vulnerability to climate change. …

I think you have to realize that most people have very strong moral feelings. I think in a lot of cases they’re misdirected. I wish moral feelings about a two-month old fetus were attached to hungry children in Africa. But I think people have very strong moral feelings. In fact, I’m always amazed by the number of people who at least pretend they’re worried about the polar bears.

And one thing that I think ought to help but doesn’t is that — and my impression is that maybe this is slightly changing — the organized churches in America don’t take seriously preserving the heritage that God gave us. … I get no impression that Protestants and Catholics are sermonizing on the importance of preserving the bounty of the earth, the richness of the species, or preserving the planet as we would like to know it. … I think the churches don’t realize that they could have a potent effect in not letting so much of gods legacy — in terms of flora and fauna — be destroyed by climate change.

But I tend to be rather pessimistic. I sometimes wish that we could have, over the next five or ten years, a lot of horrid things happening — you know, like tornadoes in the Midwest and so forth — that would get people very concerned about climate change. But I don’t think that’s going to happen.

Exaggerating the threat won’t help. When people find out that you are doing that — and they will at some point — you lose credibility and end up further behind than when you started. Also, though this is a bit picky — this qualification is often omitted to simplify the discussion — the costs are not fully captured by the loss of GDP. If, for example, some species become extinct due to climate change, that is only included in the costs to the extent that it lowers the output of goods and services. But our concerns are broader than that. Finally, I don’t think we should, even just sometimes, wish that horrid things would happen to people no matter how much good might come of it. There are better ways to get there.

*****

Thomas Schelling is an Nobel Prize-winning economist.  He is a professor of foreign affairs, national security, nuclear strategy, and arms control at the School of Public Policy at University of Maryland, College Park. He is also co-faculty at the New England Complex Systems Institute. He was awarded the 2005 Nobel Memorial Prize in Economic Sciences (shared with Robert Aumann) for "having enhanced our understanding of conflict and cooperation through game-theory analysis."

Photo:  Thomas Schelling, by Hessam Armandehi, photo and license at Wikipedia. 

 

WSJ: The Bernanke Market

Andy Kessler may have the answer to why the market keeps going up, even in the face of enduring economic pain (if you look beyond the ever rising indexes). 

WSJ: The Bernanke Market

Courtesy of Andy Kessler

 
http://online.wsj.com/article/SB124762005061042587.html

I remember once buying the stock of a small company and I couldn’t believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn’t translated into growth.

At the end of the day, only one thing has worked — flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn’t put money directly into the stock market but he didn’t have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can’t sustain growth.

The dollars he cranked out didn’t go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It’s the ultimate Enforcer.

In mid-May, Mr. Bernanke’s outlook seemed to change. Maybe he didn’t approve of the sharp housing rebound — like we need more houses! Maybe he saw inflation in commodity prices — oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over — the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke’s magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner’s loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn’t get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He’ll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn’t believe they’ll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won’t turn bullish until it sees that type of economy.

Again, when it’s clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

 

Intel: Too Much, Too Far, Too Fast

In this second article by Karl, he examines Intel’s quarterly results and is not as excited as the market. Why? Layoffs. Intel excels at cost management – good for Intel, but not a sign of healthy economic recovery. – Ilene

Intel: Too Much, Too Far, Too Fast

Courtesy of Karl Denninger at The Market Ticker

And too euphoric:

SAN FRANCISCO (Reuters) – Intel Corp’s quarterly results and outlook blew past Wall Street forecasts on better-than-expected consumer demand for PCs, especially in Asia, setting an auspicious tone for the technology sector.

Uh, well….

Sure, if you just read the PR on the earnings.

Someone filed that story before the conference call, or simply ignored it.

The strong growth came in Asia, specifically China, which blew out a huge stimulus program.  Ok.

But it was specifically stated on the conference call that US consumer sales were weak, and repeating what DELL said earlier, so are enterprise sales.

The quote that was chosen is rather humorous:

Smith told Reuters that computer markets were strengthening and there were "pockets of relative strength" in consumer PC markets, as well as in the Asia Pacific and in China.

Pockets of relative strength.

Yes, there are.  Netbooks in particular are relatively strong – a new, very-low-cost alternative to laptops.  $300, 400, 500 machines – not the $1,000+ machines previously sold, and they’re replacing the demand that used to be filled by those $1,000 machines!  That’s not so good.

Neither is this:

Executives warned that the corporate market remained weak, and Intel does not expect much change in the second half.

Heh wait a second – I thought this was a bullish report for capital spending and the chip sector?  No?  IBM’s primary market is to enterprise customers, not consumers.

The bigger problem for Intel is its P/E – now well over 20, its just too high – unless we get a very strong economic recovery.

If you’re in the Dennis Kneale camp on that, have at it.  I’m going to pay close attention to the reaction in the real market tomorrow when the stock opens for trading by the pros – not the aftermarket daytrader games of the evening, with most of that volume happening before the conference call began.

I admit to being surprised by my first glance through the earnings release.   I sure couldn’t figure out how those numbers got hit, with the exception of margin expansion – that was easy: layoffs.  It was only when I went through the full PDF, all 10 pages, that it became clear.

Sequential revenue was up $879 million dollars.  But compared to a year ago it was down $1.4 billion – and remember, the recession began in December 2007!

So no, Dennis and the rest, this earnings report does not tell us that we "turned the corner."  Quite to the contrary; it tells us that the recession is deeper now (for Intel) than it was in the second quarter of last year. 

Additionally, selling price, even excluding the Atom, was down slightly on a per-piece basis, telling us that customers are "shifting down" the price scale.

Also important was guidance: The firm intends to continue to spend heavily on R&D (good), up slightly.  It expects a "seasonal" expansion in demand and revenue (in other words they believe people will still buy computers to go back to school, etc.)  But capital spending is expected to be down by 10% or $500 million, which does not bode well for expansion of output capacity (nor for semiconductor fab equipment suppliers!)

Some of the improvement in results also appears to be a fairly normal inventory shift – about $240 million of it, in fact.  Not exactly small potatoes, and backed out of the results the luster dims a bit.

One thing cannot be argued with – enterprise efficiency.  Gross margin expansion may not be good for the fired employees (when that’s how it happens) but one cannot argue with the impact on the balance sheet – it is clearly and without exception positive.  Let’s give credit where due; this is one place that Intel excels, and they’re not losing their touch in cost management.

The other interesting split is the business mix – Asia went from 51% to 55% of revenue from last year, while Japan and the Americas remained the same.  Who lost ground?  Europe.  Do we have a little problem brewing over in Euroland perhaps?  Hmmmmm…. some of this may be related to the EU fine, but I’d love some more color on that.

Near the bottom of the report is, in fact, where that margin expansion came from in stark relief – the company went from 82,500 employees last quarter to 80,500 this quarter – they laid off 2,000 people, or about 2-1/2% of their staff.  This isn’t a big number, but its real, and it certainly contributed to gross operating margins.  Yes, even mighty Intel is not immune to the layoff monster.

Finally, on the last page, we find the y/o/y scoresheet, and the basis of my call: from Intel’s perspective, the recession is simply not over.

In what they call the "Digital Enterprise Group" (PCs, servers, etc) revenue is down 17% from Q2/2008 for CPUs and 30% for chipsets and motherboards (more on this in a second.)

In the mobile processor segment revenue declined 7%, with chipsets and subassemblies down 12%.

The chipset and motherboard revenue decline in the "primary" group is, in my opinion, quite significant.  Intel is known as a premium board and chipset; I own several.  They tend to be toward the high end of the price spectrum, but are high-quality as well.

These are the boards that go into servers and enterprise-class machines – most home users don’t wind up with them simply because there are much less-expensive products from other manufacturers that will work with Intel’s processors.  Assuming Intel hasn’t abandoned that market (I doubt it!) this would imply a very significant deterioration in server and enterprise system sales – far more than the topline decline from 2008 to 2009 would otherwise suggest.

In fact, it implies rather strongly that there may be as much as a thirty percent decline in enterprise-class shipments compared to 2008.

"Green shoots" eh?

Uh, no.

Without CapEx coming back any believed "recovery" will be fleeting at best. 

This is not a bad report, but the embedded reality on business-class sales, which was born out in comments on the conference call and echoes what DELL said earlier in the day, paints a rather dark picture.

Bottom line: Intel knocked the cover off the ball with superior business management, not on the prospect or hint of economic recovery.

Invest accordingly.

Disclosure: Took a small front-month lottery play on PUT options prior to the close and, it appears, lost the bet.  C’est la vie.

Top Photo:  2007Computex NYNY Intel Umbrellas, by Rico Shen, photo and license at Wikipedia.

 

Dell Is Well-Capitalized?

Courtesy of Karl Denninger at The Market Ticker

Dell Is Well-Capitalized?

What’s this about?

July 14 (Bloomberg) — Dell Inc., after cutting spending, raising money in the debt market and temporarily suspending its share-buyback program, says it is reviewing alternative sources of capital as customers continue to curb technology purchases.

Wait a second – I thought these technology companies didn’t have any material amount of debt and were doing ok, even with a slower economy?

The world’s second-largest maker of personal computers has to fund some of the growth in its financial-services unit and will likely need to provide more capital to the business later in the year, Chief Financial Officer Brian Gladden said today. The unit provides financing to customers who buy Dell products and services.

Ooooooohhhhhh… as in "oh oh."

Lucent anyone?

Hmmm….. how’s the credit quality in that portfolio Michael?  Lates?  No-pays?  Charge-offs?

One nasty for a tech company – if you wind up foreclosing on a client with a lease or purchase deal, the "collateral" is lucky to fetch 50 cents on the dollar – even as little as six months to a year after delivery.  Beyond two years its generally scrap.

One has to wonder how much of DELL’s "growth" was really growth and how much of it was driven by financing – you know, levering up your customers by internally covering their debt, issuing cheap debt on your own balance sheet to fund your financing activities?

The health of such a strategy and its impact on you is entirely dependent on your credit underwriting.  If it bites (or is non-existent) then when the economy turns their "boom" becomes your "boom".

It will be interesting when DELL reports earnings – hopefully we’ll both get some color on this and the so-called "analysts" will grill the company on this point, as problems in the customer financing unit can literally sink you.

Think not? 

Talk to Lucent.

Oh wait – you can’t – they’re gone, folded into Alcatel which is itself trading around $2.

Disclosure: No position; if I’d seen this one coming I would have been short up to my eyeballs.

 

 

Calpers Sues The Rating Agencies For Bad Investment Advice

Tom Lindmark discusses the lawsuits resulting from losses due in part to rating agencies’ seemingly negligent advice. I don’t fully agree with his conclusion, though do in part – there’s plenty of responsibility to spread around, and a "day in court" is one way to divide it up. – Ilene

Courtesy of Tom Lindmark, BUT THEN WHAT?

Calpers Sues The Rating Agencies For Bad Investment Advice

Just the first of many lawsuits of this type that will be coming down the pike but this one has some rich irony to it.

Calpers, the California retirement system manager, has filed suit against Moody’s, Standard & Poors and Fitch claiming that they are responsible for over $1 billion of losses it incurred in investments in structured investment vehicles which owned exotic financial assets.

From the NYT:

The suit from the California Public Employees Retirement System, or Calpers, a public fund known for its shareholder activism, is the latest sign of renewed scrutiny over the role that credit ratings agencies played in providing positive reports about risky securities issued during the subprime boom that have lost nearly all of their value.

The lawsuit, filed late last week in California Superior Court in San Francisco, is focused on a form of debt called structured investment vehicles, highly complex packages of securities made up of a variety of assets, including subprime mortgages. Calpers bought $1.3 billion of them in 2006; they collapsed in 2007 and 2008.

Calpers maintains that in giving these packages of securities the agencies’ highest credit rating, the three top ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch — “made negligent misrepresentation” to the pension fund, which provides retirement benefits to 1.6 million public employees in California.

The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied.”

OK, that’s standard stuff and we will see a lot more of it. Who prevails is an open question, however, I think that if the tide does turn against the rating agencies then the legal actions are most likely money down a dry hole. There’s no way that the agencies have the funds to cover a wave of negative judgements. But here’s the most intriguing part of this article:

While the lawsuit is not the first against the credit rating agencies, some of which face litigation not only from investors in the securities they rated but from their own shareholders, too, it does lay out how an investor as sophisticated as Calpers, which has $173 billion in assets, could be led astray.

The security packages were so opaque that only the hedge funds that put them together — Sigma S.I.V. and Cheyne Capital Management in London, and Stanfield Capital Partners in New York — and the ratings agencies knew what the packages contained. Information about the securities in these packages was considered proprietary and not provided to the investors who bought them.

I’m sorry but I don’t buy that load of bullshit. If Calpers couldn’t figure out what the risks were and if , indeed, the securities were so opaque as to defeat its attempts at due diligence then they shouldn’t have bought them. If, failing an attempt to justify their investment, they proceeded to dump $1 billion into the SIV on the hope and prayer that the ratings were correct then they were totally derelict in carrying out their fiduciary responsibilities and every man jack needs to join Bernie Madoff in the slammer.

I make no apologies for the rating agencies but an agency the size of Calpers should have been able to guage the risk it assumed.

 

Will Obama’s Job Retraining Programs Save The Day?

Mish is blunt, the situation is nearly hopeless for many people over 40 who have recently lost a high paying job. You don’t need to go back to college for a degree in economics to see that job re-training when there are few available jobs has its limitations.  But no matter, let’s do it. – Ilene

Will Obama’s Job Retraining Programs Save The Day?

Courtesy of Mish

President Obama is mulling rental options for foreclosed homeowners. Furthermore Obama seeks job training for the unemployed, concedes unemployment is getting worse, says auto jobs are not coming back, yet magically assumes job retraining will save the day.

In short, Obamaitis is setting in. Please consider the following news stories.

Obama Says ‘Give It To Me’

On the burden of fixing the economy Obama Says ‘Give It To Me’ 

Conceding unemployment will get worse before it shrinks, President Barack Obama on Tuesday unveiled a $12 billion plan to help community colleges prepare millions of people for a new generation of jobs. Challenging critics, he said he welcomed the task of turning around the economy.

"The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won’t be coming back," Obama said. "They are the casualties of a changing economy."

To that end, he proposed an "American Graduation Initiative" to bolster the two-year community college field that serves millions of students as a launching point for careers or a step toward expanded higher education. The idea is to train people for jobs, such as those expected in the clean energy industry, when the economy turns around and begins to create jobs again instead of shedding them.

Under the plan, competitive grants would be offered to schools to try new programs or expand training and counseling.

The White House says the cost would be $12 billion over 10 years; Obama says it would be paid for by ending wasteful subsidies to banks and private lenders of student loans.

Meanwhile, former Federal Reserve Chairman Alan Greenspan told Republican senators on Tuesday at their private weekly luncheon at the Capitol that the government’s $1 trillion deficit was the single biggest hurdle to economic recovery.

Question of the Day

Why is that Greenspan is ignored on the few occasions where he makes any sense, yet people fawn all over him the vast majority of the time when he makes no sense at all?

Obama Mulls Rental Option For Homeowners

Inquiring minds are reading Obama mulls rental option for homeowners. 

U.S. officials are weighing a plan to let borrowers who have fallen behind on mortgage payments avoid eviction by renting their home instead, sources familiar with the administration’s thinking said on Tuesday.

Under one idea being discussed, delinquent homeowners would surrender ownership of their homes, but would continue to live in the property for several years, the sources told Reuters.

A U.S. Treasury spokeswoman said late on Tuesday that "we are constantly reviewing new ways to help struggling homeowners and stabilize the housing market. This is just one idea among many that has been considered, but no decisions are imminent on the matter."

Officials have been frustrated as red tape and rising interest rates have slowed a housing rescue plan announced in February that was meant to refinance the mortgages of 5 million borrowers and lower monthly payments for 4 million more.

Since one in five homeowners owe more than their property is worth, they have little cushion if they lose their job or face another crisis, said Jay Brinkmann, the chief economist for the Mortgage Bankers Association.

"Foreclosure is a double trigger — does someone have a job and do they owe more than a home is worth?" Brinkmann asked.

Obama Says New Jobs Will Require Training

BusinessWeek is reporting Obama says new jobs will require greater training. 

President Barack Obama says lost auto industry jobs in states such as Michigan will not come back and new jobs will require greater training and post-high school education to achieve a higher skilled work force.

Under Obama’s college initiative, schools could qualify for "challenge grants" so they’ll have money to try new programs, or expand training and counseling. Dropout rates would be addressed by designing programs to help students who want to earn an associate’s degree or transfer to a four-year institution do so.

Money would be spent to renovate outdated facilities or build new ones, and to develop online courses and make them freely available to students and others who want to use them.

The total federal cost is $12 billion over a decade. Of that, $9 billion would go toward challenge grants and addressing dropout rates. Half a billion, or $500 million, would go toward online education. The remaining $2.5 billion would be used to spark $10 billion in renovation and construction nationwide, said James Kvaal, an Obama economic policy adviser.

Federal Job-Training Programs Have Record Of Failure

Some of what Obama says sounds good on paper. However, inquiring minds are not satisfied with what sounds good. It has to feel good as well. The sad reality of the matter is Federal Job-Training Programs Have a Record of Failure.

The above study dates back to 2004, but little has changed except increasing competition for jobs. Here are a few snips.
 

The history of federally funded job-training programs strongly suggests that [the Workforce Investment Act] WIA will not substantially raise participants’ incomes. Similar programs funded under the Job Training Partnership Act (JTPA) of 1982 were found to be largely ineffective.

Three types of JTPA activities were evaluated: classroom training, on-the-job training and job-search assistance, and "other services" tailored to participants on the basis of their age.

Over several decades, Congress has "reformed" federal job-training programs numerous times. Each of these reforms promised to fix federal job-training programs–to no effect.

According to Professor Gordon Lafer at the University of Oregon Labor Education and Research Center, "As successive generations of job training programs fail to produce the hoped-for results, policy makers have cycled through a stock repertoire of procedural fixes that promise to solve the problem."

For WIA, these procedural fixes fall under the mantra of "increased flexibility" and "One-Stop Career Centers." However, none of these fixes are likely to improve the effectiveness of job-training programs. Professor Lafer reasonably concludes that the "lesson of the National JTPA Study is that there is no managerial fix which can create dramatically more effective training programs."

The dismal failure of federal job-training programs should lead Congress to abolish WIA–along with other federal jobs-training programs.

Job Retraining Cannot Possibly Work

It should not take a genius to conclude job training cannot possibly work. There are so many qualified, experienced, out of work individuals that few if anyone would hire a GM welder retrained in JAVA programming for a programming position. Moreover, no one would hire a banker as a welder. Nonetheless, president Obama and colleges are both touting such retraining as a way to get a job.

Bear in mind, I am all in favor of education, but the idea that 40-50 year old assembly line workers, home builders, mortgage brokers, etc etc can be retrained and compete against those with 20 years experience and still out of a job is absurd.

President Obama is bright enough to understand this. Yet, instead of telling the truth, Obama is willing to waste billions of taxpayer dollars spreading false hope.

Under guise of political expediency, Obama simply cannot tell the truth to those out of a job. The sad truth is the situation is hopeless for many if not most of those who are over 40 and recently lost a high paying job.

Mike "Mish" Shedlock
 

 

Wobble Time

Wobble Time

Courtesy of James Howard Kunstler

     The cat coming out of the bag this week — a frazzled, flaming, rabid, death-dealing cat — is the news that Goldman Sachs will announce impressive second-quarter profits, and set aside $18 billion or so for employee bonuses averaging $600,000 per head (though, of course, not evenly distributed among them).  There probably are not fifty-three people in the USA who can explain how this development figures in with last fall’s bailout gift from the US treasury, or the $13 billion GS received on the backside of US gift payments to the failed AIG insurance company, plus the reams of necrotic securitized debt paper rotting in the back of the GS vaults. This is a company playing with the fire of world history. 

     It brings back the question, which has loomed dimly at the margins of America’s collective consciousness, as to whether we can get through the long emergency ahead without going through a wringer of domestic political convulsion. At this rate, sooner or later, anything identified with wealth could become a target for the wrath of the unemployed and foreclosed. The first rock that flies through an East Hampton window, or the first firebomb tossed into the lobby of Goldman Sachs Manhattan headquarters could ignite a chain of events that shoves all economic policy out of the political arena and quickly divides everyone at the center of power into armies out for blood.  

    What the nation — including President Obama — can’t seem to get through its head is that the USA has entered a period of epochal economic contraction.  Instead of growth, as measured in conventional econometrics, we can only expect (in the best case) transformation to a different economy within the limits of real contraction. The president has got to stop promising renewed growth.  While this would affect the perceived "standard-of-living" as measured in things like shopping mall sales and vehicle miles driven, it would not necessarily mean diminished "quality-of-life."  It would mean different ways-of-life for a lot of people — for instance, young adults who had expected lifetime employment as corporate executives but who, instead, find themselves ten years from now working at farming. We have an awful lot to get real about.  

      A genuine reorganization of the US economy seems beyond the ken not just of all US politicians but of the entire US news media and business leadership. A wonderful example last week was the idiotic press conference by General Motors marketing chief, Bob Lutz, who thinks he can revive the American Dream with electric cars. (By the way, this is pretty much the same thinking I encountered at the Aspen Environmental Forum among the Green celebrities.)

     From a purely practical standpoint, the electric car is absurd.  If they were produced on a mass basis, they would crash the electric grid — assuming that the masses could afford to buy them, which assumes a lot. We simply don’t have the electric generating capacity to run even one-quarter of the current car fleet on volts, and building the necessary nuclear or coal-fired power plants in five years is also an absurdity. (Don’t expect wind, solar, biomass, or anything else to pick up the slack.) If electric cars were produced as just a niche product for the elite (e.g. Goldman Sachs employees), they would soon provoke the resentment of the non-elite left to the mercy of the oil markets. 

     Anyway, America’s motoring dilemma has gone beyond the issue of how we power the cars — and even beyond the insanity of blindly maintaining our extreme car dependency per se.  The continuation of Happy Motoring now hinges on two other big quandaries: 1. the likelihood that there will be far less capital available for car loans, and 2.) the likelihood that there will be far less government money for road maintenance. The problem of Peak Oil — and the prospect of price-jackings and shortages — is just the cherry on top.

     By the way, for practical purposes Bob Lutz of GM is an employee of the US taxpayers now, since the US owns 60 percent of the "new" General Motors, so he must be considered a spokesman for national policy. Since a transformation of the US car fleet to electric vehicles is absurd, what would be an appropriate response to profound economic contraction? How about walkable communities connected by public transit?  Why is that not a focus of the "new" General Motors?  In 1941 the company made the transformation from cars to armaments in a matter of months; why can’t it produce the rolling stock for a renewed passenger rail system?  Or trams?  Is this not enough of a crisis? The answer is that there is no leadership in this direction. If President Obama declared this to be a policy objective, and stuck to it for more than one business day, he could drag the sleepwalking American public in this direction, and the rest of national leadership in government, business, and media with it.

     This kind of thing is what prompts casual observers to wonder if the president is a cynical shill for business as usual, or a victim of the worst conventional thinking with no real vision, or just another clueless sleepwalking bozo with a charming veneer.

      In circles that pass for "progressive" these days, the natives are getting restless. Their agitation seems pretty inchoate for the moment — still resting on vague, poorly-defined wishes for "change."  These vague promptings need to be focused on specific action that is realistic within the context of comprehensive contraction and transformation.  A big piece of this would be the recognition that our suburban sprawl economy is dying, and that we now have to bend our efforts to reorganizing American life on the most fundamental physical terms.  We have to inhabit the landscape differently, move around it differently, generate food out of it differently, and make things on it again.  Whatever remaining real capital there is in the system can’t be squandered on cash bonuses for Wall Street employees. 

       I’m not ready to capitulate to cynicism. There is something in the political wind this summer. I think events will force Mr. Obama to assert some real leadership and take the national debate on our predicament in another direction, even if it is an uncomfortable direction for him and everybody else. Despite the massive disappointment being expressed by so many Obama voters these days, I believe the president will redeem himself before long. 

     Attorney General Eric Holder announced over the weekend that he will commence an investigation into the Bush regime’s misconduct with terrorism suspects.  His department is capable of running more than one investigation at a time. Why doesn’t President Obama direct him to open an investigation of Goldman Sachs’s behavior in the area of securities fraud, insider trading, and misuse of goverment funds?  Without an official inquiry into financial misconduct of this company, and others, I believe public anger will overwhelm any attempts to transform our contracting economy and the president’s ability to manage it.