The Obama Economy

The Obama Economy – As the Dow keeps dropping, the President is running out of people to blame.

As 2009 opened, three weeks before Barack Obama took office, the Dow Jones Industrial Average closed at 9034 on January 2, its highest level since the autumn panic. Yesterday the Dow fell another 4.24% to 6763, for an overall decline of 25% in two months and to its lowest level since 1997. The dismaying message here is that President Obama’s policies have become part of the economy’s problem.

Americans have welcomed the Obama era in the same spirit of hope the President campaigned on. But after five weeks in office, it’s become clear that Mr. Obama’s policies are slowing, if not stopping, what would otherwise be the normal process of economic recovery. From punishing business to squandering scarce national public resources, Team Obama is creating more uncertainty and less confidence — and thus a longer period of recession or subpar growth.

[Review & Outlook]

The Democrats who now run Washington don’t want to hear this, because they benefit from blaming all bad economic news on President Bush.  Mr. Obama has inherited an unusual recession deepened by credit problems, both of which will take time to climb out of. But it’s also true that the economy has fallen far enough, and long enough, that much of the excess that led to recession is being worked off. Already 15 months old, the current recession will soon match the average length — and average job loss — of the last three postwar downturns. What goes down will come up — unless destructive policies interfere with the sources of potential recovery.

[McAuleys World – Absent Obama’s destructive policies and politics – we, the American people, should be seeing signs of a recovering economy – instead projections of a recovery are being postponed into 2010 and projections for future job and equity losses are growing daily]. 

The  sources of receovery have been forming for some time. The prices of oil and other commodities have fallen by two-thirds since their 2008 summer peak, which has the effect of a major tax cut. The world is awash in liquidity, thanks to monetary ease by the Federal Reserve and other central banks. Monetary policy operates with a lag, but last year’s easing sahould have stirred positive economic activity.

Housing prices have fallen 27% from their Case-Shiller peak, or some two-thirds of the way back to their historical trend. [McAuley’s World: Yes, that means housing prices still need to fall 13 – 15%  further in certain areas] 

While still high, credit spreads are far from their peaks during the panic, and corporate borrowers are again able to tap the credit markets. As equities were signaling with their late 2008 rally and January top, growth should under normal circumstances begin to appear in the second half of this year.

So what has happened in the last two months? The economy has received no great new outside shock. Exchange rates and other prices have been stable, and there are no security crises of note. The reality of a sharp recession has been known and built into stock prices since last year’s fourth quarter.

What is new is the unveiling of Mr. Obama’s agenda and his approach to governance.

Every new President has a finite stock of capital — financial and political — to deploy, and amid recession Mr. Obama has more than most. But one negative revelation has been the way he has chosen to spend his scarce resources on income transfers rather than growth promotion. Most of his “stimulus” spending was devoted to social programs, rather than public works, and nearly all of the tax cuts were devoted to income maintenance rather than to improving incentives to work or invest.

His Treasury has been making a similar mistake with its financial bailout plans. The banking system needs to work through its losses, and one necessary use of public capital is to assist in burning down those bad assets as fast as possible. Yet most of Team Obama’s ministrations so far have gone toward triage and life support, rather than repair and recovery.

AIG yesterday received its fourth “rescue,” including $70 billion in Troubled Asset Relief Program cash, without any clear business direction. Citigroup’s restructuring last week added not a dollar of new capital, and also no clear direction.

Perhaps the imminent Treasury “stress tests” will clear the decks, but until they do the banks are all living in fear of becoming the next AIG.  [Why are the specifics of the stress test still secret].  All of this squanders public money that could better go toward burning down bad bank debt.

The market has notably plunged since Mr. Obama introduced his budget last week, and that should be no surprise. The document was a declaration of hostility toward capitalists across the economy. Health-care stocks have dived on fears of new government mandates and price controls. Private lenders to students have been told they’re no longer wanted. Anyone who uses carbon energy has been warned to expect a huge tax increase from cap and trade. And every risk-taker and investor now knows that another tax increase will slam the economy in 2011, unless Mr. Obama lets Speaker Nancy Pelosi impose one even earlier.

Meanwhile, Congress demands more bank lending even as it assails lenders and threatens to let judges rewrite mortgage contracts. The powers in Congress — unrebuked by Mr. Obama — are ridiculing and punishing the very capitalists who are essential to a sustainable recovery. The result has been a capital strike, and the return of the fear from last year that we could face a far deeper downturn. This is no way to nurture a wounded economy back to health.

Listening to Mr. Obama and his chief of staff, Rahm Emanuel, on the weekend, we couldn’t help but wonder if they appreciate any of this. They seem preoccupied with going to the barricades against Republicans who wield little power, or picking a fight with Rush Limbaugh, as if this is the kind of economic leadership Americans want.

Perhaps they’re reading the polls and figure they have two or three years before voters stop blaming Republicans and Mr. Bush for the economy. Even if that’s right in the long run, in the meantime their assault on business and investors is delaying a recovery and ensuring that the expansion will be weaker than it should be when it finally does arrive.

The AIG Bailout – VP Biden’s Family & Alan Stanford / The Paradigm Stanford Fund

What happened to AIG – from the World’s largest Insurance and Financial Company to a penny stock.

AIG was a very successful insurance company until it entered the shadowy world of Hedge Funds and Sub-prime Mortgage lending.

Incredibly risky Sub-prime mortgages were sold . Those mortgages were then “bundled” and resold in groups to investors all over the world. As mortgage defaults began to rise, these investors (like Citi Group) lost their equity in the investments and became insolvent.

The Government is mandating that American taxpayers “recapitalize” or replace these losses – through loans and bailouts.

Enter AIG. AIG created and sold a new product – Insurance Policies for the “bundled mortgages” – a policy that would “wrap around” a group of bundled subprime mortgages and provide insurance protection if the mortgage buyer defaulted or there was a “loss in value” of the underlying mortgage should the real estate market collapse. We know what happened.

So where is the Taxpayer money going. Why is the Federal Governemnt hiding the facts from the American people. Why don’t we have the transparency the Government promised us. Who, exactly, is getting these bailout dollars.

Did you know that the Biden Family (Vice President Joe Biden) ran a Hedge Fund called the Paradigm Companies.

The Paradigm Companies had an “exclusive sales agent” – Sir Alan Stanford – the disagraced financier charged with defrauding investors of $8 Billion dollars. Stanford even invested $2 Million of his own money in the Biden fund. , , ,

Has this Hedge Fund received funds through AIG under the Government bailout? What other Hedge Funds received money through the bailout? Did we, the American Taxpayers, send money to Bernie Madoff through AIG or any of the other Bailout recipients?

The questions are: Why don’t we know where our taxpayer dollars are going? Where is the transparency?

The American Taxpayer will never see any of the money poured into AIG. AIG is in liquidation – the Companies profitable companies are being sold off – the AIG companies that hold the “mortgage related policies” will be all that remains – those companies will never be profitable – they are worthless. $180 Billion in taxpayer money has been spent and the Government won’t tell us where it is going.

Now that the Government controls AIG – the decisions about where AIG spends the Tax Payer money will be made behind closed doors by Trustees appointed by the Government.

Stock Market & “Naked Short Sales” – What are they? A repost

SEC adopts rules against naked short-selling

By MARCY GORDON, AP Business Writer Wed Sep 17, 9:31 PM ET

WASHINGTON – Federal regulators on Wednesday took measures aimed at reining in aggressive forms of short-selling that were blamed in part for the demise of Lehman Brothers and which some feared could be used against other vulnerable companies in a turbulent market.

Short selling is a form of speculation that allows a trader to sell securities that he does not own, effectively taking a “negative position“. They do this when they expect the value of the securities to decrease in the market, allowing them to sell securities at today’s price and then buy the securities back when they decrease in value. With a large enough move in the price, the trader can purchase the securities, “covering” their position, for less money than they received for selling them earlier.

Short sellers bet that a stock’s price will fall so that they can profit from it. They borrow shares of the stock and sell them. If the price drops, they buy cheaper actual shares to cover the borrowed ones, pocketing the difference.

Naked short-selling occurs when sellers don’t even borrow the shares before selling them, and then look to cover positions immediately after the sale.

The Securities and Exchange Commission adopted rules it said would provide permanent protections against abusive “naked” short-selling. Unlike the SEC’s temporary emergency ban this summer covering naked short-selling in the stocks of mortgage finance giants Fannie Mae and Freddie Mac and 17 large investment banks, the new rules apply to trading in the broader market.

In a further move, SEC Chairman Christopher Cox said he planned to ask his four fellow commissioners to consider on an emergency basis a new rule that would require hedge funds and other large-scale investors to disclose their short positions — the stocks they have borrowed and sold but not yet replaced.

The rule would be designed to ensure transparency in short-selling in general, beyond the practice of naked short-selling, Cox said in a statement issued Wednesday night. Investment managers with more than $100 million holdings in securities would be required to promptly begin public reporting of their daily short positions.

Certain Commenators believe that “short-selling” accelerated the demise of Merrill Lynch and Lehman Brothers and that it was also involved with the sudden drop in AIG stock values that led to the Government takeover. The Primary reason for these Companies economic troubles was their ill-advised real-estate investments, however, “naked short sales” may have killed the already ailing Companies.

The Mortgage/Financial Crisis – A Visual Reminder Of How We Got Here

Are these the people who will lead us out of this mess? 

Now the Congress will reward the irresponsible, the specualtors and those that lied to obtain mortgages they could not afford – all at Taxpayers expense.

FDIC’s “Insurance Fund” Myth – By Bill Issac – former FDIC Chairman

The FDIC’s “Insurance Fund” Myth

By: Vernon Hill   Thursday, September 11, 2008 10:02 AM

When FDIC head Shelia Bair says her agency might have to bolster the FDIC’s insurance fund with Treasury borrowings to pay for the new spate of bank failures, a lot of us, this 40-year banking veteran included, assumed there’s an actual FDIC fund in need of bolstering.We were wrong. As a former FDIC chairman, Bill Isaac, points out here, the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government’s general coffers for “spending . . . on missiles, school lunches, water projects, and the like.”

The insurance premiums aren’t really premiums at all, therefore. They’re a tax by another name.

Actually, it’s worse than that. The FDIC, persisting in the myth that its fund really is an insurance pool, now proposes to raise the “premiums” it charges banks to make up for the “fund’s” coming shortfall. The financially weakest banks will be hit with the biggest tax hikes.

Which makes absolutely no sense. You don’t need me to tell you the banking industry is on the ropes. The last thing it needs (or the economy needs, for that matter) is an expense hike that will inhibit banks’ ability to rebuild capital, extend new loans, or both. If the FDIC wants to raise its bank tax once the industry has recovered, I suppose that’s fine. But to raise taxes on the industry now is perhaps the dumbest thing the agency can possibly do. At the margin, the FDIC will be helping bring about more of the failures it says it wants to prevent.

But this is the government we’re talking about, so logic goes out the window. First, the FDIC insists its mythical bank insurance fund exists, when it really doesn’t. Then the agency does what it can to run the imaginary fund’s finances straight into the ground. Your tax dollars (sorry, “premiums”) at work. . . .

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