Decline of the Empire

What Is An Investment?

Understanding the Decline of the Empire is really not that hard. It only requires a small but profound change in your thinking.

At Yahoo's Tech Ticker, Dartmouth professor Richard D'Aveni talks about the difference between expenditures and investments. With expenditures, like those in Obama's stimulus plan, the Empire spends money to boost short-term consumption. That's why it's called a stimulus. The key word is short-term. It's like having a few drinks or doing some blow. You feel good for a while, but the effect quickly wears off. Then you need more stimulants to keep the feeling going. That's exactly the position of the United States today.

With capital investments, your goal is longer term wealth creation. There may not be much immediate reward, but eventually you'll get a big payoff. Reforming and expanding the electrical grid, or building high speed rail, are the gifts that keep on giving (more below). Watch the video.

I've written about high-speed rail in the past. In Planes, Trains and Automobiles, I introduced the Goldman Sachs/High-Speed Rail Scorecard, which indicated that expenditures (bailouts,  gifts) given to the Giant Vampire Squid were far larger than those for high-speed rail. Actually, it's very hard to figure out just how much money the Sea Monster has received—the total benefit—because they own one branch of the government outright, and rent another. Thus it is very difficult to think of a policy that does not benefit them. We do know that the Squid's profits were quite impressive in 2009. I expect 2010 to be another banner year for Lloyd Blankfein & Company.

For new trains, the picture has not changed much since April 23, 2009 when I wrote Planes, Trains and Automobiles. The amount of stimulus money expended to study (not build) High-Speed Rail remains the same: $8 billion. (The Vampire Squid got $12.9 billion from the AIG deal alone.) I say "expended" and not "invested" because to count as an investment, you've actually got to do something that creates wealth over the longer haul. An expanded train system has been studied more than once in the past.

The only new development showed up in my local newspaper, the Pittsburgh Post-Gazette. (I use the word "newspaper" loosely here.) I'm going to quote the whole thing so you can get a good feel for the Futility of all this.

Region gets little money for fast rail lines

$750,000 to study connection between Pittsburgh, capital

Friday, January 29, 2010

By Jon Schmitz, Pittsburgh Post-Gazette

While Western Pennsylvania appeared to get very little from President Barack Obama's $8 billion high-speed rail initiative, there were a couple of glimmers of promise following Thursday's grant announcements.

The only money coming here is $750,000, to pay half the cost of a study into improving Pittsburgh-to-Harrisburg passenger rail service.

The Pennsylvania Department of Transportation said the study will assess what improvements are needed to increase service from the current one daily round trip to eight, and to increase the speed to 110 mph, similar to service east of Harrisburg.

Currently, passenger trains from Harrisburg to Pittsburgh average less than 50 mph.

The study will look at possible improvements to the corridor, including dedicated tracks for passenger trains. The current line is congested with freight traffic.

The Harrisburg-to-Philadelphia segment got $25.65 million in Thursday's announcement to add to years of improvements that have increased train speeds, frequency of service and ridership.

But possibly the best news for Pittsburgh was that Ohio scored $400 million toward its plan to launch passenger rail service between Cleveland, Columbus, Dayton and Cincinnati.

Efforts have begun to upgrade service between Pittsburgh and Cleveland, which would better tie the city into Ohio's emerging hub of passenger rail lines, and eventually to a network that is contemplated to crisscross the Midwest.

U.S. Rep. Jason Altmire, D-McCandless, said Thursday that he would continue efforts to get Pittsburgh-to-Cleveland added to the nation's list of designated high-speed rail corridors. Govs. Ed Rendell of Pennsylvania and Ted Strickland of Ohio also have requested the designation.

"When I heard what the amount (of the Ohio grant) was, I was very happy," said Ken Prendergast, executive director of All Aboard Ohio, a nonprofit group that has been pushing for years to restore passenger rail service connecting the state's urban centers. "But I have to tell you there's a lot of work remaining to be done."

The funding will pay for track upgrades, grade crossings, new stations, maintenance facilities and rail cars. Ohio had sought $564 million but Mr. Prendergast said he believes the award is sufficient to launch the service within two years.

It won't be high-speed rail -- top speeds are contemplated at 79 mph -- but the Ohio Rail Development Commission sees 110-mph trips as a longer-term goal.

The biggest winners in Thursday's announcement were California, $2.25 billion; Florida, $1.25 billion; Chicago-St. Louis, $1.1 billion; and Wisconsin, $810 million. The $8 billion was allocated in last year's economic stimulus legislation.

Although Pennsylvania got a relatively meager sum, there was nary a cross word from political leaders. "From a national perspective, it is highly appropriate to make the largest investments in the two marquee projects in California and Florida," Mr. Rendell said.

U.S. Sen. Bob Casey said the planning grant "takes us a step forward toward extension of high-speed rail service all the way to Pittsburgh." "I am pleased to see stimulus funds at work for high-speed rail in Pennsylvania," said U.S. Sen. Arlen Specter.

"Obtaining funding for a planning study for high-speed rail between Pittsburgh and Harrisburg is an important step forward, but we must remember that this is only the first step," Mr. Altmire said.

This is not an investment. What we have here is a bunch of political hacks fighting over meager spoils from the stimulus package. Simply ridiculous. Is it any wonder the Empire is in decline?

Remedy du Jour -- January 30, 2010

The 2nd in a series. Not everything sucks. That's what the remedy is for.

You'll have to turn the sound up for this first one. Miles Davis - trumpet, Wayne Shorter - tenor sax, Herbie Hancock - piano, Ron Carter - bass, Tony Williams - drums.

The Biggest Loser

President Obama has proposed using $30 billion in TARP funds for loans to small businesses. As the Wall Street Journal points out, this is a drop in the bucket.

The $30 billion in Troubled Asset Relief Program funds targeted by Mr. Obama represent about 4.3% of the $700 billion in small-business loans held by U.S. banks and savings institutions, according to the Treasury Department. As of November, the 22 largest banks that got capital infusions through TARP had $257 billion in small-business loans, the Treasury said.

This meager public funding is meant to create save or create small business jobs. Another Exercise In Futility. Let's take a brief look at where the TARP money stood in December, 2009. These charts are from the Treasury's TARP Monthly 105(a) Report.

Losses in December stood at $209.44 billion, with the biggest losers being the Capital Purchase Program (bank bailouts), AIG (bank bailouts to CDS counterparties), and the Auto Industry Financing Program (auto industry bailouts. Shouldn't there be a TV program called The Biggest Loser? And of course there is! It's on NBC. It's unlikely that anybody from AIG or General Motors will ever appear on it. Too bad.

No, we don't ridicule overpaid CEOs for screwing up. These well-connected suits get rewarded for their failures. We ridicule fat people instead. Watch this, it's really, really sad.

YouTube gave me a MacDonalds ad to watch before the video. Now there's some healthy food. Nobody ever got fat eating at MacDonalds, right?  Abusing obese people passes for entertainment during the waning days of the Empire.

This is what you get when you let corporations run The State.

I'm just hopelessly out of touch. The most discouraging thing about looking through People Magazine in the grocery store check-out line is that I have no clue who most of the beautiful people I'm looking at actually are. And why are they in People Magazine? Generally, I just file them under Beautiful Person of Unknown Provenance.

Anyway, the $30 billion for small businesses is also a drop in the bucket in TarpLand. I should also mention that Obama has announced plans for a new fee to collect up to $120 billion in lost TARP money from the banks.

The Obama administration official said the amount of money raised from the fees would not exceed $120 billion since this was the higher end of conservative estimates of the cost of the Troubled Assets Relief Program, or TARP.

U.S. Treasury officials expect TARP losses to be much lower than that sum, and over the course of years the fee will pay back any costs of the $700 billion taxpayer bailout, the administration official said.

Adding up the auto bailouts and AIG bank bailouts, that's $121.73 billion right there. How much will the ultimate TARP losses be? At most $120 billion says the Obama administration.

Who's going to be The Real Biggest Loser? My money is on AIG.

Nobody F**ks With The Jesus

Yesterday, the Senate re-appointed Time's Man Person of the Year as Federal Reserve chairman by a 70-30 vote.

Nobody f**ks with the Jesus.

Less Bad Is Still Bad

The BEA's advance estimate for GDP just came out this morning. The "headline" number was a +5.7% annual growth rate in the 4th quarter of 2009. As I had warned you about, the real change in private inventories drove most of the increase—3.39% of the fourth-quarter change in real GDP to be precise (i.e. most of the the 5.7% change). The Wall Street Journal alerted me to the news this morning.

The U.S. economy surged at the end of 2009, driven more by slower inventory liquidation than by consumer spending.

Slower inventory liquidation? You may thinking, am I reading this right? Yes, you are. From the BEA's press release—

The change in real private inventories added 3.39 percentage points to the fourth-quarter change in real GDP after adding 0.69 percentage point to the third-quarter change. Private businesses decreased inventories $33.5 billion in the fourth quarter, following decreases of $139.2 billion in the third quarter and $160.2 billion in the second.

Here's the graph of changes in private inventories since 1997.

Figure 1 — Changes in Private Inventories (BEA data) through 2009:Q3 taken from here. Sorry, the dates are a bit hard to read, but the downward trend since 2008:Q1 is clear enough.

MarketWatch reports some other outstanding yardsticks to measure our progress—

Even with healthy growth in the second half of the year, the economy shrank 2.4% in 2009, the worst year for GDP since the 10.9% drop in 1946, when the United States geared back to a peacetime economy. Business investment fell the most since 1942...

Final sales, which exclude inventories, increased at a 2.2% annual rate in the fourth quarter, the most since the spring of 2008. For all of 2009, final sales fell 1.7%, the largest decline since 1946...

Consumer spending rose at a 2% annual rate. For all of 2009, consumer spending fell 0.6%, the worst year since 1974. Spending on services for the year grew at the slowest rate in 71 years...

Fell the most since 1942. Largest decline since 1946. Worst year since 1974. Slowest rate in 71 years. The Chicago Fed's National Activity Index was –0.61 in December, down from –0.39 in November, meaning things got worse month-over-month. I consider their CFNAI-MA3 to be the most reliable guide to where the economy stands.

Less bad is still bad. Well alright, it's not all bad. The stock market is not rallying, just as I predicted it would. This kind of "decrease in the decrease" in inventories is a one-time event when a "recovery" is underway. It means that businesses are not anticipating any large upswing in personal consumption expenditures (PCE, which makes up 71% of GDP). After all the stimulus, and the Fed's massive intervention in finance & the housing market, this is best we could do.

What's worse, this number will undoubtedly be revised downward in future reports. Don't look for a Rockin' Good Time in 2010.

Haiti Has More Oil Than Saudi Arabia

Having written lots of stuff about the oil industry over the years, I was shocked when an alert from World Oil Magazine showed up in my e-mail box entitled Haiti could have larger oil reserves than Venezuela.

Amidst the utter devastation left in the wake of the earthquake that rocked Haiti on January 12th, new findings indicate the existence of 3 million barrels of oil in a shallow formation offshore the island.

The Greater Antilles, which includes Cuba, Haiti, the Dominican Republic, Puerto Rico and their offshore waters, probably hold at least 142 million barrels of oil and 159 billion cubic feet of gas, according to a 2000 report by the US Geological Survey. Undiscovered amounts may be as high as 941 million barrels of oil and 1.2 trillion cubic feet of gas, according to the report.

Apparently a French scientist, one Daniel Mathurin, thinks that even the fantasy resource numbers of the USGS—undiscovered amounts may be as high as 941 million barrels—are far too low:

“The Central Plateau, including the region of Thomond, the plain of the cul-de-sac and the bay of Port-au-Prince are filled with oil”. [Mathurin] added that “Haiti's oil reserves are larger than those of Venezuela . An Olympic pool compared to a glass of water that is the comparison to show the importance of oil Haitian compared to those of Venezuela.”

Whoa! Mathurin appears to be innumerate in so far as he has mixed up millions (10⁶) with billions (10⁹), but maybe he knows something the rest of us don't? I will spare you a deep analysis of why Venezuela's proved reserves, measured in billions of barrels, keep going up even as their actual oil production keeps going down.

Moving on, the always reliable USGS has now decided that there are "an estimated 513 billion barrels of technically recoverable heavy oil are in Venezuela’s Orinoco Oil Belt." Well, OK, that's the mean fantasy estimate of technically (not economically) recoverable "extra heavy" Orinoco crude. (I'm using the term "crude" loosely here.) The stated range was 380 billion barrels (the "F95") up to 652 billion (the "F5"). The "F" in F95 (for example) has a specific statistical meaning for the USGS based on their Monte Carlo roll of the dice combined with their take on the unexamined geology. It does not stand for Fantasy as you might reasonably conclude.

If that sounds like a whole lot of oil, you're right, it is. The recovery rate (or factor) is the important variable regarding these Orinoco "extra heavy" hydrocarbons. Trust me on this one, these huge numbers make little difference regarding our ultimate Petroleum Fate. The BBC weighed in with Venezuela oil 'may double Saudi Arabia'—

Scientists working for the US Geological Survey say Venezuela's Orinoco belt region holds twice as much petroleum as previously thought. The geologists estimate the area could yield more than 500bn barrels of crude oil.

This assessment is far more optimistic than even the best case scenario put forward by President Hugo Chavez.

The USGS team gave a mean estimate of 513bn barrels of "technically recoverable" oil in the Orinoco belt. Chris Schenk of the USGS said the estimate was based on oil recovery rates of 40% to 45%.

Petroleos de Venezuela SA (PDVSA), Venezuela's state oil company, has not commented on the news. However, Venezuelan oil geologist and former PDVSA board member Gustavo Coronel was sceptical. "I doubt the recovery factor could go much higher than 25% and much of that oil would not be economic to produce", he told Associated Press news agency. 

Not even the Venezuelans believe the USGS! Let's put it all together.

• Haiti has more oil than Venezuela
• Venezuela has more oil than Saudi Arabia

Therefore

• Haiti has more oil than Saudi Arabia

And you probably think that today's advance GDP number (+5.7%), as a measure of bullshit, is as bad as it gets. That's nothing compared to recoverable reserves estimates. Believe me, I know what I'm talking about here.

Why I Stopped Reading Baseline Scenario

Then you will know the truth, and the truth will set you free
   —Gospel of John, 8:32

I'm sure many of you are familiar with The Baseline Scenario, where former IMF chief economist Simon Johnson (now at MIT) holds sway along with colleagues James Kwak and Peter Boone. I read the website avidly for months before I finally got disgusted.

Here's the thing: Simon Johnson goes on and on and on about breaking up the Too-Big-To-Fail banks and about their inordinate political influence—economists call this rent seeking.  And he's right about everything. Just after we bailed the banks out, we should have begun the process of breaking them up, spinning off internal divisions, selling their assets, making shareholders eat the losses, etc. Economist Allan Meltzer said "capitalism without failure is like religion without sin." Damn right.

Plus, the remaining banks are even bigger and haven't changed the way they do business. They are an ongoing threat to everyone's safety. We are taking enormous risks by allowing them continue in their current form.

So I have no argument with any of that. What I do object to is this: who exactly is Simon Johnson trying to persuade to do something about these problems? Is it the Congress? Only they can pass a law changing the current regime. Here's Illinois Senator Dick Durbin talking about the banks' influence in Congress—

Sen. Dick Durbin (D-Ill.) has been battling the banks the last few weeks in an effort to get 60 votes lined up for bankruptcy reform. He's losing.

On Monday night in an interview with a radio host back home, he came to a stark conclusion: the banks own the Senate.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place," he said on WJJG 1530 AM's "Mornings with Ray Hanania."

So, there's a more fundamental problem here. Michael Lewis' commentary says it all.

July 28, 2009 (Bloomberg) -- From the moment I left Yale and started working for Goldman Sachs, I’ve felt uneasy interacting with those who don’t.

It’s not that I think less of Goldman outsiders than I did while I remained among you. It’s just that I feel your envy, and know that nothing I can do or say will ever persuade you that I am no more than human.

Thus, like many of my colleagues, I have adopted a strategy of never leaving Goldman Sachs, apart from a few brief, spasmodic attempts to make what you outsiders call “love” or “the beast with two backs.” Goldman recognizes how important it is for its people to replicate themselves. We bill no performance fees for the service.

Today, the sheer volume of irresponsible media commentary has forced us to reconsider our public-relations strategy. With every uptick in our share price it’s grown clearer that we who are inside Goldman Sachs must open a dialogue with you who are not. Not for our benefit, but for yours.

America stands at a crossroads, and Goldman Sachs now owns both of them. In choosing which road to take, ordinary Americans must not be distracted by unproductive resentment toward the toll-takers. To that end we at Goldman Sachs would like to dispel several false and insidious rumors.

Rumor No. 1: “Goldman Sachs controls the U.S. government

Every time we hear the phrase “the United States of Goldman Sachs” we shake our heads in wonder. Every ninth-grader knows that the U.S. government consists of three branches. Goldman owns just one of these outright; the second we simply rent, and the third we have no interest in at all. (Note there isn’t a single former Goldman employee on the Supreme Court.)

What small interest we maintain in the U.S. government is, we feel, in the public interest. Our current financial crisis has its roots in a single easily identifiable source: the envy others felt toward Goldman Sachs.

So give me a break, Simon. If you're really serious about our problems—see Too Politically Connected To Fail In Any Crisis—then stop being a publicity hound and Make A Concrete Suggestion about how we're going to fix this Wall Street-Washington Axis of Evil.

MARCY KAPTUR: That says to me that Wall Street and Washington is a circuit. And because Mr.Geithner headed the New York Fed that that historic relationship, unfortunately, continues. And it gives them special access and special power to influence policy.

SIMON JOHNSON: Well, I think it really tells you how the system works. The system is based on access and is based on what on Wall Street shaping Washington's view of what's important. 

It's the people who are very close to Mr. Geithner before when he was the head of the New York Fed. Before he became Treasury Secretary. These people have unparalleled access. And in a crisis, when everything is up for grabs, you don't know what's going on, the people who will take your phone calls, right, in government and people who are going to be standing in the oval office, making the key decisions. That's the heart of the system. That's the heart of how you get your agenda through, by changing their worldview.

Yes, yes, yes. By now, Simon, you are probably aware that the Supreme Court struck down any limits on corporate campaign contributions or related advertising. I know you are aware of it because some comments on your blog mentioned it, though apparently you didn't think the news was worth blogging about.

We're utterly f***ked. What the hell are we supposed to do about the banks now that they can buy & sell Congressmen without limit? Are we supposed to storm the Capitol Building? Relive the French Revolution and start cutting off some heads? Obviously not. What are we to do, Simon? You've got a blind spot we can drive a truck through. Or maybe you're just angling for a job. Good luck with that!

Clearly it's impossible to Make A Concrete Suggestion about how we fix all this—if Congress is bought & paid for, there isn't one. Simon Johnson has not been candid about our corruption problem. So, he's right about the Finance system, but it's mostly empty talk. Which is why I quit reading The Baseline Scenario.

And then there's the totally bewildered James Kwak. Just read Is It Possible To Detect Bubbles? Or read his latest, Good For Goldman, from which I quote:

As a result, investment bankers are overpaid. Now, before all the bankers get all indignant on me, let me say that bankers should make more money than average people, at least according to the normal rules of our society; for one thing, they are, on average, better educated than most people. (As I’ve written before, I don’t think there’s any moral reason why people should make more money simply because they are better educated, or have unique skills, or are more intelligent, or work harder; but that’s the way the world works, and most people are OK with that in principle.)

How much more overpaid? I’ve previously written about the paper by Thomas Phillipon and Ariell Reshef on wages in the financial industry. According to Figure 10, you would expect wages in finance to be about 30% higher than in the economy at large because of higher education and lower job security; yet, also according to Figure 10, wages in finance were over 70% higher than average earlier this decade. 40 percentage points divided by 1.7 implies that wages should come down by about 25%. This an industry-wide figure, however, and recent wage growth has been much higher in investment banking than in the rest of the industry (largely banking and insurance), so 25% is probably a very low figure for investment banking. But without more data, that’s the best I can do.

Now, Philippon and Reshef’s data only go through 2006. In 2006, Goldman paid $16.5 billion out of $31.1 billion of its profits to employees (53%, the same as in 2007), which worked out to about $620,000 per employee. (In 2007, that figure was about $660,000.) Subtracting 25%, we get that Goldman employees should have earned abut $470,000 on average. This is probably still much too high, because that 25% figure is undoubtedly far too low for investment banking. But it’s a starting point.

Now, what did Goldman do for 2009? Through September, they had already set aside $16.7 billion for compensation, a 57% payout ratio; annualized, that comes to a stunning $22.3 billion, or $700,000 per employee. In Q4, however, they did the unthinkable; it reduced its compensation expenses by $500 million.** This lowered the annual compensation pool to $16.2 billion, or $500,000 per employee, and lowered the payout ratio to 46%.

And for lowering their annual compensation pool to $16.2 billion, the Giant Vampire Squid should be praised. But James suspects this might just be a PR move by the Sea Monster! 

My prediction is that this is just a PR stunt and next year (assuming it is a good one for the banks), per-employee compensation at Goldman returns to at least $600,000 and maybe $700,000. But I would love to be wrong.

It's just all too much for Kwak. Like I said, he's totally confused.

The Impossible Hamster

Most people in the developed world—many of them are economists—do not understand what exponential growth means over the long run. This is ironic in light of the fact that they use exponential functions to model the economy every day. I think this video explains what they're missing very nicely.

Read Economic growth [is] no longer possible for rich countries. Well, that may be somebody's idealistic view of what needs to happen to avoid future catastrophes, but very few people are going to take such a view seriously. The global economy will continue to grow until at some future time in the 21st century ... it can't, due to lack of sufficient energy inputs, anthropogenic climate change, lack of fresh water, fished-out oceans, an ongoing mass extinction, etc. ... or some lethal combination of these. One thing won't change: there will be still be very well-off people who can afford to gobble up the remaining resources.

If you're really feeling ambitious, read this press release about Tim Garrett's work.

A University of Utah scientist argues that rising carbon dioxide emissions – the major cause of global warming – cannot be stabilized unless the world’s economy collapses or society builds the equivalent of one new nuclear power plant each day.

“It looks unlikely that there will be any substantial near-term departure from recently observed acceleration in carbon dioxide emission rates,” says the new paper by Tim Garrett, an associate professor of atmospheric sciences.

Garrett’s study was accepted for publication by Climatic Change, a journal edited by Stanford University climate scientist Stephen Schneider. The paper is scheduled to be published is online...

Garrett says colleagues generally support his theory, while some economists are critical. One economist, who reviewed the study, wrote: “I am afraid the author will need to study harder before he can contribute.”

“I’m not an economist, and I am approaching the economy as a physics problem,” Garrett says. “I end up with a global economic growth model different than they have.”

He treats civilization like a “heat engine” that “consumes energy and does ‘work’ in the form of economic production, which then spurs it to consume more energy,” he says.

If you're in your twenties or younger, I believe you'll see the End Of Growth in your lifetime. And maybe if you're in your thirties. Or forties. I am pretty pessimistic about all this. Sorry about passing on the bad news. If only we had two Earths ... but clearly we only have one.

They Suck

You can easily find a transcript of the President's remarks to Congress. I am particularly happy with this one from the Chicago Sun Times because it marks all the times our elected representatives applauded.

The President was well into his speech before the assembled primates gave him the thumbs up. During the early part of the speech, the preamble, these remarks got no applause at all

For these Americans and so many others, change has not come fast enough. Some are frustrated; some are angry. They don't understand why it seems like bad behavior on Wall Street is rewarded, but hard work on Main Street isn't; or why Washington has been unable or unwilling to solve any of our problems. They're tired of the partisanship and the shouting and the pettiness. They know we can't afford it. Not now.

Partisanship? Petty bickering? Washington's unwillingness to solve any of our problems? No applause for that.

It wasn't until the President mentioned Hope, Motherhood and Apple Pie that our Elected Representatives clapped their hands together.

It's because of this spirit -- this great decency and great strength -- that I have never been more hopeful about America's future than I am tonight. (Applause.) Despite our hardships, our union is strong. We do not give up. We do not quit. We do not allow fear or division to break our spirit. In this new decade, it's time the American people get a government that matches their decency; that embodies their strength. (Applause.)

And then, much, much later in the speech, Obama spoke of the powerful & the rich in government, the media and business, of all the people who have benefited and continue to benefit from the corrupt policies of the Empire. The President reminded them all that they suck—

In the end, it's our ideals, our values that built America -- values that allowed us to forge a nation made up of immigrants from every corner of the globe; values that drive our citizens still. Every day, Americans meet their responsibilities to their families and their employers. Time and again, they lend a hand to their neighbors and give back to their country. They take pride in their labor, and are generous in spirit. These aren't Republican values or Democratic values that they're living by; business values or labor values. They're American values.

Unfortunately, too many of our citizens have lost faith that our biggest institutions -- our corporations, our media, and, yes, our government -- still reflect these same values. Each of these institutions are full of honorable men and women doing important work that helps our country prosper. But each time a CEO rewards himself for failure, or a banker puts the rest of us at risk for his own selfish gain, people's doubts grow. Each time lobbyists game the system or politicians tear each other down instead of lifting this country up, we lose faith. The more that TV pundits reduce serious debates to silly arguments, big issues into sound bites, our citizens turn away.

No wonder there's so much cynicism out there. No wonder there's so much disappointment.

There was no applause.

Housing Market? What Housing Market?

I was browsing over at Yahoo's Tech Ticker, where Aaron Task interviewed Dan Greenhaus, chief economic strategist with Miller Tabak. Greenhaus says that Signs of A Housing Recovery Will Fade When Govt Stimulus Ends.

Home prices in November fell 5.3% from a year earlier, the smallest year-over-year decline in two years. Overall, the S&P/Case-Shiller home-price index rose 0.2% from the prior month, the sixth-consecutive monthly rise. Meanwhile, the pace of annual decline in home prices has improved for 10-straight months.

So is a housing recovery upon us?

This is one of those set-up questions we all like to use to make a negative point. Is a housing recovery upon us? Are you kidding? Surely you jest!

Figure 1 — Latest Case-Shiller home prices, year-over-year percent change. Home prices continue to decline by this measure, but have risen month-over-month for the last 6 months. It's like unemployment, the losses pile up at a slower rate.

Figure 2 — Calculated Risk's "Distressing Gap" between existing and new home sales. The boost in existing home sales was due to the first time home buyer credit. New homes sales rallied briefly, but are headed down again. See my The Reverse Square Root.

And the obvious point? 

Also, Greenhaus says any signs of a recovery are built on a foundation of government stimulus in the form of the first-time home buyer's credit and the Federal Reserve's purchase of mortgage-backed securities (MBS) -- which are both set to expire this spring.

When those policies fade Greenhaus is confident prices could decline "another 10%" and mortgage rates will rise, the latter because he doesn't see enough private demand for MBS to replace the Fed's buying.

What's the bottom line? Here it is—

There is no private housing market in the United States

OK. That's a small exaggeration. There's no private housing market to speak of.

Can you imagine where house prices would be without the massive Fed purchases of government sponsored enterprises (GSEs, aka Agency) MBS? Without the home buyers credit? And of course you know that Fannie Mae & Freddie Mac are both insolvent. You will recall that Tim Geithner stepped up on Christmas Eve to cover their losses for the rest of Obama's term of office (which will also be the extent of his presidency).

The Treasury Department announced on Christmas eve it would allow the two firms, known as government-sponsored enterprises, to have unlimited losses until the end of 2012.

Their losses had earlier been capped at $200 billion each. The Treasury also said it was scrapping plans for the two agencies, which play a role in funding three-fourths of all U.S. residential mortgages, to reduce the size of their investment portfolios. The 2010 limits on their portfolios, in fact, would allow their investment holdings to grow.

That timeline gives the Obama administration time to figure out what to do with the two entities since any changes are politically difficult and most analysts see the process taking years.

[My note: We the tax payers current own 80% of these dogs. Full nationalization is an option.]

So here's the second thing you need to know.

The government-supported housing market in the United State is bankrupt

Bankrupt? Yes, but as long as Fed can print dollars and the Treasury can issue & sell bonds, they can extend this mess for a long time ... until they can't.

What will happen when the Fed stops buying Agency MBS? Well, do you really believe the Fed will actually end their purchases in the Spring? I don't. Extend & Pretend. Pray for Rain. Most analysts see the process taking years.

Do you want to get a handle on the current (and future) housing market? Think of the American housing market as a comatose patient on a heart-lung machine—that's close enough.