Financial Transaction Taxes Would Cause Stock Market Crash

Congress is discussing a horrible idea, putting a "transaction tax" on every stock or option purchase or sale. Please consider AFL-CIO, Dems push new Wall Street tax.

08/30/09
The nation’s largest labor union and some allied Democrats are pushing a new tax that would hit big investment firms such as Goldman Sachs reaping billions of dollars in profits while the rest of the economy sputters.

The AFL-CIO, one of the Democratic Party’s most powerful allies, would like to assess a small tax — about a tenth of a percent — on every stock transaction.

Small and medium-sized investors would hardly notice such a tax, but major trading firms, such as Goldman, which reported $3.44 billion in profits during the second quarter of 2009, may see this as a significant threat to their profits.

“It would have two benefits, raise a lot of revenue and discourage speculative financial activity,” said Thea Lee, policy director at the AFL-CIO.

“The big disadvantage of most taxes is that they discourage some really productive activity,” she said. “This would discourage numerous financial transactions. People flip their assets several times in an hour or a day. They make money but does it really add to the productive base of the United States?”

Lee said that taxing every stock transaction a tenth of a percent could raise between $50 billion and $100 billion per year, which could be used to pay for infrastructure projects and other spending priorities. She said the tax could be applied nationwide or internationally.

In Congress, Rep. Peter DeFazio (D-Ore.), chairman of the Highways and Transit Transportation Subcommittee, has seized on the idea as a way to help pay for a new massive surface transportation reauthorization bill, estimated to cost $450 billion over six years.

Instead of taxing all stock transactions, as the AFL-CIO has contemplated, DeFazio wants to focus on oil-based derivatives.

At the end of July, shortly before the House broke for the August recess, DeFazio introduced legislation that would impose a 0.2 percent transaction tax on crude oil futures contracts. The legislation would tax the options for oil futures (in other words, the premium paid to have the option to buy a futures contract) at 0.5 percent.

Potential Financial-Transaction Tax of 0.25% on proceeds and purchases

Earlier this year Money Blogs was discussing Potential Financial-Transaction Tax of 0.25% on proceeds and purchases

Monday 01/19/2009
Details of a new, proposed tax — a financial-transactions tax on the sale or transfer of financial assets — have come to light, and it’s not good news for traders. This new tax sounds small in percentage terms — it’s only 0.25 percent of proceeds and purchases as proposed — but it can add up to large sums for day traders and other hyperactive traders and force them to exit this business activity. Many active traders have sales proceeds of $10 million or more per year; some have well over $100 million. A 0.25-percent financial-transaction tax on $10 million of proceeds and $10 million in purchases equals a $50,000-tax per year, even if they breakeven or lose money.

This new financial-transaction tax was proposed to apply to stock, options, futures, and perhaps many other types of financial instruments too. Passage would spell disaster for the trading and brokerage industries, including collateral service providers. Our firm is dedicated to online traders and hedge funds, so we would also be impacted if this tax is passed. We need to take action to see that this doesn’t happen.

How did this tax proposal come to fruition?

A “financial-transaction tax” reappeared as a tax proposal during the first round of TARP legislation negotiated and passed in the fall of 2008. But that proposal failed. The proposal for this new tax was buried in the fine print of the TARP bill and it did not receive much public attention at the time; the much bigger TARP issues overshadowed it.

Thankfully, this proposal did not survive final negotiations in Congress, as has been the case many times in the past. Can we count on Congress to keep putting this fire out over the next several years, considering that that media may turn negative toward traders and Wall Street in general?

Britain and U.S. Clash at G-20 on Tax to Insure Against Crises

Unfortunately this ridiculous idea has surfaced again. Please consider Britain and U.S. Clash at G-20 on Tax to Insure Against Crises.

November 7, 2009
The United States and Britain voiced disagreement Saturday over a proposal that would impose a new tax on financial transactions to support future bank rescues.

Prime Minister Gordon Brown of Britain, leading a meeting here of finance ministers from the Group of 20 rich and developing countries, said such a tax on banks should be considered as a way to take the burden off taxpayers during periods of financial crisis. His comments pre-empted the International Monetary Fund, which is set to present a range of options next spring to ensure financial stability.

But the proposal was met with little enthusiasm by the United States Treasury secretary, Timothy F. Geithner, who told Sky News in an interview that he would not support a tax on everyday financial transactions. Later he seemed to soften his position, saying it would be up to the I.M.F. to present a range of possible measures.

“We want to make sure that we don’t put the taxpayer in a position of having to absorb the costs of a crisis in the future,” Mr. Geithner said after the Sky News interview. “I’m sure the I.M.F. will come up with some proposals.”

The Russian finance minister, Alexei Kudrin, also said he was skeptical of such a tax. Similar fees had been proposed by Germany and France but rejected by Mr. Brown’s government in the past as too difficult to manage. But Mr. Brown is now suggesting “an insurance fee to reflect systemic risk or a resolution fund or contingent capital arrangements or a global financial transaction levy.”

Supporters of a tax had argued that it would reduce the volatility of markets; opponents said it would be too complex to enact across borders and could create huge imbalances. Mr. Brown said any such tax would have to be applied universally.

Tax Would Increase Volatility And Reduce Liquidity

I am aware of several large hedge funds that would move their operations overseas if this measure passed. If I am aware of some, I am sure there are hundreds more.

Think of the implications on traders thinking about stepping into a plunging market to buy. With this transaction tax who would want to step in? It sure won't be the LTBH clowns because they would already be in.

Right now shorts and short-term traders are the only ones who might step into plunging markets. The former to cover shorts, the latter to take a chance. Both provide much needed liquidity. The traders could count on a stop loss nearby where they can exit if wrong.

If this bill were to pass, there will be no one willing to step into plunging markets. Liquidity would immediately dry up.

Proposed as a way to soak the rich while decreasing volatility, this bill would soak all stock holders and increase volatility. The markets will crash if this bill passes. Of course Congress is doing so many other stupid things, the market is likely to crash anyway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bloggers' Right to Free Speech and Use Anonymous Sources Questioned in New Hampshire Supreme Court

The case of Mortgage Lender Implode-O-Meter vs. Mortgage Specialists Inc (MSI) has reached the New Hampshire Supreme Court. MSI has demanded Implode-O-Meter reveal the identity of one of its sources in a defamation case and Implode-O-Meter refuses.

Please consider New Hampshire Suit Challenges Mortgage Blogger's Use of Anonymous Sources

The New Hampshire Supreme Court heard oral arguments Wednesday in a lawsuit that calls into question the legal protections available to independent Web sites that cover news.

The case involves mortgage lender Implode-Explode, a Las Vegas-based site launched in 2007 that publishes stories about the meltdown of the mortgage industry.

The dispute began in November 2008 when The Mortgage Specialists Inc (MSI) won a temporary injunction requesting that a confidential document, "2007 Loan Chart," be removed from Implode-Explode's site, ml-implode.com. MSI also requested the identity of the source and of a commenter, "Brianbattersby," who they allege made defamatory comments about the company and its president.

Implode-Explode removed both the loan chart and the comments, but refused to either provide the identity of their anonymous sources or promise to refrain from posting the document again in the future. Unsatisfied, MSI pressed for a permanent injunction against the site and won the case in a New Hampshire Superior Court in March 2008.

Aside from those facts, nearly everything else about the case remains in dispute. During their extended 15-minute presentations before the court, the two lawyers called on precedents from Dendrite International v. Does and The New York Times v. United States to argue their claims of anonymous sources and confidential documents, and what constitutes a real journalist.

Jeremy Eggleton of the Orr & Reno, the firm representing Implode Explode, spoke first, calling the injunction a case of prior restraint and a violation of the "basic principals of the First Amendment," that, "tramples on the rights" of his client to speak freely.

Alexander Walker of Devine Millimet & Branch, speaking for MSI, dismissed the First Amendment concerns as a red herring in the case. "This is not the Pentagon Papers," he said. "They [Implode Explode] are not journalists."

According to Sam Bayard, a fellow at the Berkman Center for Internet & Society at Harvard, and assistant director of the Citizen Media Law Project, the potential impact of any decision is the shortage of case law dealing with these issues in an online context. "As we are moving online and our journalism is going online," he said, "this could have a big impact."

If the court rules against Implode, Bayard also cited the precedent-setting New York Times v. United States as an example of the concern. In today's environment, The New York Times would post the Pentagon Papers Web-first. If MSI's claim is upheld, he said, it would be as if "two days later the government came along and filed an injunction" and then the papers were removed as if they never existed.

Fraud Charges Against Mortgage Specialists

The origin of the dispute goes back to Summer of 2008 when Mortgage Specialists Faces Fraud Charges.

The New Hampshire Banking Department has received nine consumer complaints about The Mortgage Specialists in the last few years, but it was the department's routine check of the business that led to fraud charges.

The Mortgage Specialists was issued a cease-and-desist order it must respond to within 30 days, according to department spokesman Rich Arcand. The company, which received the order last week, could face $200,000 in fines and revocation of its license.

Banking Department staff visited the main office in Plaistow a few weeks ago to perform an examination that is routinely administered every 18 months, Arcand said.

When the department asked for 20 files stored at a site within a 10-minute drive, it took more than four hours for employees to return with the folders, according to the cease-and-desist order. Documents were missing from all the files, but the department said it later found some of them in a bin waiting to be shredded.

The department found customers' signatures had been photocopied and attached to new documents, the order said. Two broker fee agreements and an application for a federal mortgage loan were also altered.

The Mortgage Specialists couldn't provide two requested files of canceled loans, and the Banking Department said it also found those files in the shred bin.

The Massachusetts Division of Banks was just finishing its own routine examination when it uncovered the use of unfair and deceptive practices, such as inflating borrower income, according to the cease-and-desist order the state issued yesterday.

"The division's temporary cease-and-desist order requires The Mortgage Specialists to place all remaining loans with a qualified lender or broker with no loss to consumers and forbids the company from initiating any new mortgage loan transactions," spokeswoman Kimberly Haberline said.

The charges include 14 counts of fraud, 20 counts of incomplete records, 15 counts of dishonest and unethical practices, and three counts of destruction of records.

Scandal-tainted N.H. mortgage co. gets to keep Mass. license

Inquiring minds are reading Lenders cry foul over firm.

A scandal-tainted home-loan firm that's using Red Sox knuckleballer Tim Wakefield as a pitchman should be thrown out of the mortgage game, some Bay State lenders say.

Home-loan executives are blasting regulators' decision to let Plaistow, N.H.-based The Mortgage Specialists Inc. stay in business despite allegedly forging client signatures and dumping incriminating records.

Massachusetts and New Hampshire regulators OK'd a settlement under which Mortgage Specialists will keep licenses in both states but pay $725,000 in fines.

The firm - which admitted no wrongdoing - will also hire outside auditors to review records back to 2005, as well as going forward for up to three years.

The deal comes after state inspectors allegedly found Mortgage Specialists had cut-and-pasted customer signatures onto some documents instead of getting real sign-offs.

In one case, a client who applied for a 30-year mortgage allegedly wound up with a much-more-costly 40-year loan - apparently without the person's knowledge.

Another loan application reputedly inflated a woman's 2005 income to $99,000, even though she made just $17,700 as of 2007, according to court filings.

Inspectors allegedly found many suspect documents in a shredding bin after Mortgage Specialists took four hours to produce files stored just 10 minutes away.

Mortgage Specialists President Michael Gill has a controversial history.

Outside of the loan business, Gill is one of thoroughbred racing's most successful horse owners, winning millions of dollars in purses. He's even netted an Eclipse Award, the industry's top honor for owners.

However, tracks in New York, Delaware and elsewhere have partly or fully banned Gill's horses over the years amid speculation that his animals received performance-enhancing drugs.

Gill has denied such charges, but one of his horses did test positive for the substance benzylpiperazine at Boston's Suffolk Downs in 2001.

Six years earlier, New Hampshire racing officials banned Gill for three years after a horse he trained came up positive for the drug clenbuterol.

I spoke with Aaron Krowne this morning via Email.Aaron writes:

Here are some additional statements I can give.

(1) Our belief is the "brianbattersby" forum comment now removed from the site was substantially true. We do not think we should have to censor it or disclose who the person is.

(2) We have received substantial, additional highly-detailed information from a person or person(s) who clearly was at the company or close to it while fraudulent activities were going on, and is attempting to leak them. However, we no longer can release this information thanks to the lower court's ruling and the general air of "shoot the whistleblower" surrounding this case.

(3) The Loan Chart that MoSpec is claiming is "secret" is not only not secret according to the law (NH banking regulations state only that the Banking Commission can't release the info), but our best information is that it was actually sent openly to MoSpec investors. So MoSpec themselves would be the "leaker". After all, it is merely their production volume, and theoretically, any company MoSpec sells or brokers loans to would have a copy of that chart.(4)

Point #2 above is in all likelihood the real reason for this "SLAPP" suit.

I believe the court ruled improperly in forcing the documents to be removed from Implode-O-Meter. Moreover, I believe Aaron should be able to post all of the relevant documentation he has on The Mortgage Specialists.

While some may consider a $725,000 fine substantial. I do not believe it was substantial enough. The sad irony in this case is that The Mortgage Specialists is fighting to shut down Implode-O-Meter, when it is The Mortgage Specialists who should be shut down.

This case has profound implications on the right of online journal and blogs to state their case. This is both a freedom of speech case and a journalist right to protect sources case.

Aaron Krowne and Implode-O-Meter deserve your support.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Jobs Contract 22nd Straight Month; Unemployment Rate Hits 10.2%

This morning, the Bureau of Labor Statistics (BLS) released the Odctober Employment Report.

The unemployment rate rose from 9.8 to 10.2 percent in October, and nonfarm payroll employment continued to decline (-190,000), the U.S. Bureau of Labor Statistics reported today. The largest job losses over the month were in construction, manufacturing, and retail trade..




Establishment Data



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Highlights

• 190,000 jobs were lost in total vs. 263,000 jobs last month.
• 62,000 construction jobs were lost vs. 64,000 last month.
• 61,000 manufacturing jobs were lost vs. 51,000 last month.
• 61,000 service providing jobs were lost vs. 147,000 last month.
• 40,000 retail trade jobs were lost vs. 39,000 last month.
• 18,000 professional and business services jobs were added vs. 8,000 lost last month.
• 45,000 education and health services jobs were added vs. 3,000 added last month.
• 37,000 leisure and hospitality jobs were lost vs. 9,000 last month.
• 00,000 government jobs were lost vs. 53,000 last month.

A total of 129,000 goods producing jobs were lost (higher paying jobs). Retail and professional services contributed to to the plus side.

Last month I noted "The one cheery bit of news in the above numbers is the loss of 53,000 government jobs. Unfortunately, this trend is likely to reverse in a major way with as of yet unannounced son-of-stimulus and grandson-of-stimulus jobs packages."

On a month to month basis Government jobs were up by 53,000 even though they did not add any overall jobs. Government jobs, education, and to a lesser extent professional jobs accounted for all (and then some) of the improvement vs. last month.

Note: some of the above categories overlap as shown in the preceding chart, so do not attempt to total them up.

Index of Aggregate Weekly Hours

Work hours were flat at 33.0. Short work weeks contribute to household problems. Moreover, before hiring begins at many places, work weeks will increase.

Birth Death Model Revisions 2008



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Birth Death Model Revisions 2009



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Birth/Death Model Revisions

After the typical in January in which the Birth/Death Model revisions bore some semblance of reality, the Birth/Death numbers remain in deep outer space.

At this point in the cycle birth death numbers should have been massively contracting for months. The BLS is going to keep adding jobs through the entire recession in a complete display of incompetence.

However, what does stand out last month at -33,000 jobs and again this month at -36,000 Leisure and Hospitality Jobs.

Leisure and Hospitality Categories

• Arts, entertainment, and recreation
• Food services and drinking places
• Hotels and other accommodations

Think consumers are not cutting back on discretionary spending?

Please note that one cannot subtract or add birth death revisions to the reported totals and get a meaningful answer. One set of numbers is seasonally adjusted the other is not. In the black box the BLS combines the two coming out with a total. The Birth Death numbers influence the overall totals but the math is not as simple as it appears and the effect is nowhere near as big as it might logically appear at first glance.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth and death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle.

The BLS has admitted however, that their model will be wrong at economic turning points. And there is no doubt we are long past an economic turning point.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

• The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.
• Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.
• The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

Household Data

In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983.

Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.

Among the major worker groups, the unemployment rates for adult men (10.7 percent) and whites (9.5 percent) rose in October. The jobless rates for adult women (8.1 percent), teenagers (27.6 percent), blacks (15.7 percent), and Hispanics (13.1 percent) were little changed over the month.

The civilian labor force participation rate was little changed over the month at 65.1 percent. The employment-population ratio continued to decline in October, falling to 58.5 percent.

The number of persons working part time for economic reasons (sometimes referred to as involuntary part-time workers) was little changed in October at 9.3 million. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Persons Not in the Labor Force

About 2.4 million persons were marginally attached to the labor force in October, reflecting an increase of 736,000 from a year earlier. (The data are not seasonally adjusted.) These individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

Among the marginally attached, there were 808,000 discouraged workers in October, up from 484,000 a year earlier. (The data are not seasonally adjusted.) Discouraged workers are persons not currently looking for work because they believe no jobs are available for them. The other 1.6 million persons marginally attached to the labor force in October had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities.

Some "Recovery"

In a typical recovery, the participation rate should go up not down. The reason is people hear there is a recovery, hear things are getting better, hear the talk about "green shoots" and think there might be a job if they go looking.

Last month the participation rate dropped by .3% and the civilian labor force drop by 571,00 workers. This month the participation rated ticked down again by .1% while the civilian labor force dropped by 31,000. In normal condition, the civilian labor force ought to be growing by 120,000 a month due to increasing population and immigration.

Is this a "recovery"?

Table A-5 Part Time Status



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The chart shows there are 9.28 million people are working part time but want a full time job. A year ago the number was 6.8 million.

Note the trend in part-time work. It is inching up. In a recovery it should be headed down quickly. The reason is employers increase the hours of part-time workers before they start hiring full-time workers.

The key take-away from this series are the millions of workers whose hours will rise before companies start hiring more workers.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look



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Grim Statistics

The official unemployment rate is 10.2% and rising. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 17.5%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further although most likely at a slower pace than earlier this year.

Looking ahead, there is no driver for jobs and states in forced cutback mode are making matters far worse.

Unemployment is likely to continue rising until sometime in 2011.

Depression Level Statistics

I consider these job losses to be depression level totals. Admittedly conditions are not as bad as the great depression, but this is certainly no ordinary recession by any economic measure including lending, housing, bank failures, jobs, the stock market, commodity prices, treasury yields etc. For more on this idea please see Humpty Dumpty On Inflation.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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A Canadian Says "Short Canada"

Although I have mentioned the enormous property bubble in Canada on numerous occasions, I have also stated a belief that Canada as a whole was better off than the US.

Not so fast says Jonathan Tonge of the America Canada Blog.

Jonathan pinged me with the following email:

Mish,

Observing the attached August 2009 GDP report you’ll note that Canada’s economy is still receding and it has not escaped recession. Furthermore, the only sectors that are growing are from the result of one of two things: stimulus and a massively inflationary credit environment.

Canadian Real Estate:

Canada’s home prices have skyrocketed in this recession. When the dollar was at 97 cents US a couple weeks ago, average Canadian home prices hit roughly $320,000 US – an all-time high. Residential mortgage debt has over doubled since 2002. We will surpass the US in per capita residential debt within the next year. In 2009 alone, we will add 100 billion in fresh residential mortgage credit (equivalent of about 1 trillion in the US on a per capita basis)

The average price of a detached Toronto home has approached $600,000. I have attached a home listed at $559,000. The home is about a 15 minute drive from downtown in an average location. It is clearly overvalued.

The listing-to-sales ratio in Toronto, the fifth largest city in North America, has surpassed the late 1980’s bubble. Moments after that point Toronto’s housing market crashed losing 25% of its value and the country went into a deep recession. Toronto’s housing market took 12 years to recover, and needless to say its recovery was brought on by a massively inflationary credit environment.

In the greater Vancouver area, our third largest metropolis after Montreal, the average price of a detached home in March 2008 was $921,000. In fall of 2008 the market tanked, but only to find itself growing again in 2009. By September 2009 the average price was back up to $904,000. Average household incomes in Vancouver are lower than average incomes in Toronto. They hover somewhere around the $70,000 mark.

All of these prices are one hundred percent attributable to ultra low interest rates and a government insured credit market. CMHC, the equivalent of Fannie and Freddie, has expanded securitization of mortgage debt to nearly 100% of the credit market in Canada. The government of Canada insures the securities. The healthy banks in Canada, something that gets bragged about internationally, have fewer loans on their books then they did in 2007. This is despite the credit market growing by 30% since then.

The Bank of Canada has already admitted to a real estate bubble in Canada. Mark Carney, head of the BOC, has threatened to manipulate the mortgage market if borrowers don’t come to their senses.

Exports and Buy America:

Exports to the United States have fallen nearly 50%, in part thanks to “Buy America”.



I was just transferred from our Mississauga, ON offices to Hamilton, and I get the pleasure of driving through the steel armpit of Ontario daily. US Steel purchased Stelco, our largest steel manufacturer, two years ago and just after it received hundreds of millions from Ontario’s provincial government to keep operating. Within days of “Buy America”, US steel shut down the Canadian Stelco plant.

A few months ago, as the benefits for the laid off workers dried up, US Steel was notified that they would have to either bring the workers back or pay out their pensions. US Steel decided to bring them back to work. Instead of making steel, they painted all the buildings in a fresh coat of blue paint. If you understand the size of the Stelco plant and buildings, then you can understand what a formidable task this was.

A couple weeks after it now appears that all the buildings are blue and the workers have been laid off again. However the steel mill now sends clouds of pollution miles high in the sky. I have been told by some locals that the US Steel sends its iron ore to the plant to be refined. Once refined it is put back on the ship and sent to one of their US plants – most likely in Gary Indiana – to be turned into steel. So we get the pollution up here but none of the profits or labour. The government of Canada has taken US Steel to court for $10 million per day for breach of contract.

Wait until more Canadians find out about this. “Buy Canada’, or more plausibly, “Do Not Buy America” will gain steam. We’re a free trade country by and far, but “Buy America” has been a hard hit below the belt for most of us.

Deficits:

In Ontario, a province with 1/3 the number of citizens as California, we are running a 25 billion deficit, which is getting revised upwards of 10 billion every two months. On top of that the governments in Canada are in bed with the government unions, and for obvious reasons they truly believe that running massive deficits are good for the economy. They remember nothing of the hardship that Canada went through in the 90’s when our debt-to-gdp topped 100%, our country went into deep recession, and we lost our triple A rating.

As an example of this ludicrous spending, Ontario, despite the record deficit, just passed all day kindergarten. The program, a concoction of the teacher’s union, insisted that the all day program shall be taught by university educated teachers. These teachers can earn almost $100,000 per year. The program is expected to serve up to 100,000 students and cost $1.5 billion per year. That’s $15,000 per year per child to receive an additional half day of kindergarten class.

Between our federal and provincial governments we will run deficits well over 100 billion. On a per capita basis, that is the equivalent of the US running a trillion dollar deficit. This is the fastest and most significant meltdown of our national finances in a single year in history. Last year almost everything was operating in surplus.

Conclusion:

All in, I’d short Canada if it was a stock. This isn’t good news for America. We are by far your largest trading partner. We consume more American made products than any other nation by a long shot (4 times what China consumes). If our economy crashes in the near future, it will impact tens of millions of US workers who depend daily on the free trade of goods between our countries.

Regards,
Jonathan Tonge

CHMC - Canada's Fannie Mae

Please consider CMHC - Canada's Breaking Point by Jonathan Tonge.

Everyone here is probably very well aware of who CMHC is.

For any international visitors, CMHC was formed as a crown corporation in Canada after World War II to address the shortage in housing. It's mandate was to make home ownership accessible to all Canadians. CMHC primary deliverable is mortgage insurance and mortgage backed securities. Think Fannie and Freddie.

In 2001 GE Capital was permitted to join CMHC in the Canadian mortgage insurance industry to provide competition in the marketplace. GE Capital began insuring Canadian mortgages and issuing NHA-MBS (Mortgage Backed securities insured by the Government of Canada). In response to competition, CMHC began its trip down a new road.

In 2002 total outstanding mortgage debt in Canada was still a cool $467 billion. This was predominantly issued to good credit and people with proper downpayments. CMHC insured a small portion of this debt.

In 2003 CMHC decided to remove the price ceilings limitations. That is, it would insure any mortgage regardless of the cost of the home.

In 2007, after years of lobbying, the now defunct AIG found new hope with the newly elected Conservative government. AIG was now permitted to insure high risk Canadian mortgages. It was also permitted to issue mortgage backed securities and exchange these on the open market. At the same time, the Conservative government launched a radical policy that allowed CMHC, AIG & GE to insure 35 year ams and 0% down payments. A few months later this was expanded to 40 year amortizations.

Thanks to this stimulus in 2007 the market radically changed.

Historically high home prices continued to gain steam. High risk borrowers flooded the real estate market. Throughout 2007, the average home buyer who took out a mortgage had only 6% equity in their homes. That's the national average downpayment for all mortgages including buyers who moved up.



CMHC mandate is to help provide affordable housing. Yet it has only served to fuel the credit markets, increasing the price of homes well beyond affordable levels.

Inquiring minds are reading When Home Prices Rise also by Jonathan Tonge.

I'm about to offer the absolute best evidence of why Canada's housing market has to crash. It's written into the cards. So here it is in three quick charts.

We can start off by taking a quick snapshot of residential mortgage credit in Canada over the past thirty years.

Total Residential Mortgage Credit



Residential Mortgage Credit as a Percent of Salaries and Wages

Click on the chart for a sharper image. Note that in the past thirty years, home prices have only risen substantially when credit is accelerating.

This summer brought to us record home sales and average prices despite stagnating incomes. This was all caused by government stimulus priming the credit markets - mostly thanks to CMHC and the Bank of Canada.



In 1985 we borrowed 45% of our gross salaries and wages to pay for housing. By April of 2009 we borrowed 110%. This of course is an average of our entire country including those without mortgages.

To the bulls and bears, please put aside your emotions. A real estate correction is written into the cards. It's a mathematical must.

Vancouver Ownership vs. Rental

Here is an Email from "Ian" on the merits (or lack thereof) on owning a house in Vancouver.

Ian Writes:

Mish

I just did a quick comparison to see what the premium to own vs. rent in Vancouver & Toronto looked like, and I thought you may be interested.

Vancouver

Unit 1101-550 beach is available to purchase for $759,000



Unit 2101-550 beach is available to rent for $2300/month

Assuming: The purchaser pays full price, gets a 5 year closed at 4.1% and puts 20% down, the monthly cost to buy (including condo fees) is $3718. Premium to own vs. rent is 62%…..not to mention the additional $72k the Vancouver buyer needs in order to put down 20%.

Ian had Toronto examples as well but unfortunately the listings expired. The bottom line from Ian is Toronto is much more affordable than Vancouver (at least on a comparison of price to own vs. rent).

Ian Continues ....

I guess it’s important to consider a few other differences between the two cities.

Toronto/Ontario has:
A higher rate of population growth 9.2% vs. 6.5% (5 year average)
Higher median income ($78,802 compared to $74,961)
Higher savings rate (3.7% ONT vs. -2.6% for BC)
A bigger and more diverse economy

Vancouver/BC has:
A more aesthetically appealing city
A better hockey team
Way more Starbucks

Ontario deficits: No one cares

Deficit spending is not just for the US. Canada likes them too (and so does the UK, Japan, China, and everywhere else). Please consider Ontario deficits: No one cares

October 22, 2009 5:09 PM
Bond markets shrugged off news that Ontario will run a larger-than-expected $24.7-billion deficit.

There was widespread anticipation that Canada’s most populous province would overshoot its deficit forecast going into Thursday's economic update. So bond traders said the spread, or premium, on benchmark Ontario bonds widened by just one basis point when Finance Minister Dwight Duncan revealed an additional $6.2-billion in deficit spending.

Ontario is expected to see its total borrowing requirement for this fiscal year increase by $3.2-billion to $42.6-billion. A large portion of that additional borrowing - up to 50 per cent, according to investment banking sources - will be done on international markets.

Ontario taxpayers bracing for years of deficits

The Vancouver Sun notes Ontario taxpayers bracing for years of deficits

October 21, 2009
Ontario’s finance minister is bracing taxpayers for years of budget deficits, warning Canada’s most populous province could be in for a “long, slow grind” before it swings back to true economic recovery.

The scope of Ontario’s financial crisis is underscored by its sputtering economy, so closely tied to the United States.

The province’s gross domestic product, a key measure of economic health that represents the dollar value of all goods and services produced, stood at $508.9-billion in the second quarter. That’s roughly the same size as it was in 2005, meaning Ontario’s economy has not grown in the four years since. Government revenues are also now back at levels they were that year.

Since peaking in the fourth quarter of 2007, real GDP has shrunk 5%.

Corporate tax revenues have plunged over the past year as the recession took hold. That in turn will make it more difficult for the province to dig itself out of a deficit position by 2015 as promised.

Ontario is not alone however. Based on the most recent estimates compiled by TD Bank Financial, the federal and provincial governments combined are on pace to tally a deficit of $85-billion in fiscal year 2009-2010 on an aggregate basis, representing 6% of GDP.

TD Bank says the real shortfall could top $100-billion as governments revise their estimates higher. Tackling the deficits will be made tougher by the likelihood of a historically slow rate of GDP growth nationwide and age-related spending challenges like seniors’ benefits, the bank said in a report released Tuesday.

Exactly how Ontario intends to sustain its public services while restoring a balanced budget is still unclear. The province spent $4-billion to help rescue General Motors Co. and Chrysler earlier this year. It is running a deficit that’s roughly 20% of total revenues, according to TD -- the highest ratio of any province.

Ontario credit downgraded by S&P

The Financial Post is reporting Ontario credit downgraded by S&P after record deficit projection

The Ontario government had its credit rating downgraded one category by Standard and Poor's Ratings Services on Thursday in response to its recent projection of a record deficit and negative prospects for the province's economy going forward.

The province's rating was dropped to AA-minus from AA.

Last week the Ontario government said it expects to run a deficit of $24.7-billion in the current fiscal year, up from its expectation of $14.1-billion in March.

The bigger shortfall is largely a result of more money being spent than earlier expected, including $4-billion that's going toward auto-industry bailouts. As well, it expects now to get $5.8-billion less in tax revenues than previously anticipated as earnings for both companies and individuals alike have taken a hit from the recent recession.

Government To The Rescue

In an amazing bit of irony Ontario schools to teach financial literacy.

Starting in September, 2011, Ontario students from grade four to 12 will learn how to better manage their money in courses that will be integrated into their overall school curriculum in an effort to improve financial smarts.

“The global economic challenges of the last year have highlighted the need to ensure a financially literate population,” Ontario Education Minister Kathleen Wynne said in a statement.

The Globe and Mail had this iStockphoto to go along with its financial literacy article.



The person really needing financial literacy education is ...



Dalton McGuinty, Ontario's 24th Premier.

I have certainly been wrong about when Canada's housing bubble would burst for good. However, burst it will and when it does the pain will be no less than what has happened in the US.

By the way, with reckless spending everywhere, it is no wonder gold is soaring.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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"Wells Fargo Madness" a Reader Reply to Fear and Shame Tactics

I have received a couple more replies to Government and Lender Policies of Fear and Shame Help Keep Homeowners Debt Slaves that are worth sharing.

This one is from "Wells Fargo Madness" who writes:

What a timely and spot-on post....

I can personally attest to the truth of the situation described in your latest missive:

"Given these economic incentives for the lender, a seriously underwater homeowner with good credit and solid mortgage payment history who responsibly calls his lender to work out a loan modification is likely to be told by his lender that it will not discuss a loan modification until the homeowner is 30 days or more delinquent on his mortgage payment.

The lender is making a bet (and a good one) that the homeowner values his credit score too much to miss a payment and will just give up the idea of a loan modification.

However, if the homeowner does what the lender suggests, misses a payment, and calls back to discuss a loan modification in 30 days, the homeowner is likely to be told to call back when he is 90 days delinquent. In the meantime, the lender will send the borrower a series of strongly-worded notices reminding him of his moral obligation to pay and threatening legal action, including foreclosure and a deficiency judgment, if the homeowner does not bring his mortgage payments current. The lender is again making a bet (and again a good one) that the homeowner will be shamed or frightened into paying their mortgage. If the homeowner calls the lender’s bluff and calls back when he is 90 days delinquent, there is a good possibility that he will be told that his credit score is now so low that he does not qualify for a loan modification."

I bought a house back in 2004, having moved halfway across the country for a new job. It was a house I could comfortably afford - I made a little over $70,000 as a senior manager for a newspaper, and my mortgage was a little under $900 a month (including taxes and insurance), fixed at 5.25% for 30 years with Wells Fargo. In spite of the pressure put on me by a broker when I was buying, I avoided the no money down variable option because I wanted to do what I thought was the responsible thing to lock in my payments at a decent rate I knew I could afford and avoid the reset lotto.

In April of 2008, I was notified that the job I had moved across the country for was set to be eliminated, along with the entire staff of my department. The company I worked for was highly levered in an environment where revenues were shrinking, and 'consolidations' were being made across the company. The day I found out that I was going to be out of work, I called Wells Fargo to see if it would be possible to make some alternate payment arrangements until I found work, and was told precisely what the article you reference noted - that they couldn't even discuss the matter with me until I was 30 days in arrears. I was mortified, knowing that being 30 days in arrears would leave me with the dreaded 'mortgage late' on what had been a pristine 800 credit score. I had been prudent and saved a fair sum of money, so I decided to try and keep the plates spinning while I looked for work.

I applied myself to the job hunt, but with nearly 50 positions eliminate from my company and a few hundred at other domestic newspapers who shared my area of specialty, it was a tough task finding work.

Then in August, Gannett, the biggest newspaper company in the world, announced that they would be laying off 1000 workers, and my sources inside Gannett told me that they were going the 'consolidation' route, meaning that in the course of 3 months nearly a third of the total positions in my field had gone *poof*. My prospects for finding work in the industry where I had experience had just gone from tough to Quixotic.

I again called Wells Fargo to see if there was anything they could help me with that didn't involve damaging my credit - I still had a sizable amount of savings to negotiate with - but the answer was the same: 30 days late or no discussion. I decided I'd have to take them up on the offer.

When 30 days had elapsed, I contacted them once again, only to now be told that they couldn't work out any arrangements until I had found work. I was angry, as one might imagine. I decided that they had received the last payment they were going to receive from me. Fourteen months later, I have kept the vow.

I'm not proud of walking away from my 'responsibility', but in light of the situation - nearly 18 months without finding work - it seems that it was the best thing that could have happened. If I had kept paying all along, I'd have depleted a good deal of my savings, and I'd still be facing losing the unemployment benefits that are keeping the other bills paid. As it stands, I've still got that nest egg to see my family through the rough days that lie ahead.

I've been to the housing counselors the state has set up, and the best they were able to do for me was that I could pay off the back payments, penalties and interest, and resume making payments.

My house is set to be sold at auction next week, and due to the rules in the state, the minimum price will be well in excess of what I suppose the market price would be. I expect that the bank will be the buyer by default.

If my experience is representative, walking away might be the best option.

From Wells Fargo's perspective, this was an avoidable situation. I called them when I found out about my joblessness, and I did everything I could to avoid a default. All I wanted was some recognition that I was willing to work with them if they would work with me - maybe only paying interest until I was able to find something.

However, once I felt double-crossed, having been told to let it go into arrears so that they could work with me, and then to be told they still couldn't work with me, I did what I thought was prudent. I decided to see how long I could live rent free. As of today, it's been almost 14 months.

Assuming that the house sells next week and I get an order to vacate the next, I'll be here through the end of January (it takes a minimum of 60 days to affect an eviction here). More likely, I won't get the order to vacate until the bank sells my house as part of a package foreclosure deal for about 20 cents on the dollar. I might get to live here rent-free for a good spell longer. I could have, and probably would have, paid them nearly 50% of the house's value as a cash settlement 14 months ago if they'd been willing to have a conversation.

I've come to the realization that I'm not going to find work in the field to which I'm accustomed and I'm back in school to get another degree. I started in August after the Gannett news came out, as much to avoid a long gap in my resume without an explanation as anything else. I've been doing programming and database work since I minored in computer sciences 15 years ago, but I figured I'd legitimize my skills with a degree - since I have the down time. I've got 8 classes to go and a 4.0 GPA. The big question is: will I find work when I get done this spring?

"Wells Fargo Madness"

Thanks "Wells Fargo Madness". Good luck on your job hunt! You did the smart thing and the moral thing as well, which is to protect your family instead of the piranhas at Wells Fargo. When a significant percentage of those Option ARM holders Wells Fargo start to walk (and I believe they will), Wells is going to be in deep trouble.

Misguided Morality

In a comment on this blog to the original post, Ron writes:

Walking away because you can't make the payments is understandable. Walking away even though you can make the payments tells something about your character and morals.

It does not matter if everyone else in the world is doing it. Justifying something just because others are doing it does not make it right. A person of morals and character knows this and will never be convinced otherwise.

That is what I was taught as a youth by those I respect. No amount of criticism will change my beliefs.

Ron and others are entitled to believe what they want.

However, the sad reality is that "misguided morality" perpetuates the problem. The quicker homes fall and the quicker bad debts are written off and the quicker that we kill one-sided morality the better off we will all be.

If there is any morality at all in these situations it consists of two things:

1) Doing the best to take care of one's family
2) Lenders preying on misguided morality

Those waking away are not only doing the smart thing for themselves, they are also helping the economy over the long haul. The Fed criticized Japan for years for not writing off bad debts and making the banks Zombies.

The US has not only Zombified banks, but Zombified consumers, all for the sake of misguided morality that does not stand up to scrutiny if one would simply read and understand Government and Lender Policies of Fear and Shame Help Keep Homeowners Debt Slaves.

Consult An Attorney

If you are considering walking away, please Consult An Attorney Before Walking Away.

Thoughts on Foreclosure Hearings and Deficiency Notes

To tie up some more loose ends, Larry Nusbaum at the Millionaire Now Blog wrote:

I am a RAC (Resolution Assistance Contractor) for the FDIC and wanted to add to what attorney Dan McKillop, J.D stated in the "Consult An Attorney" advice:

• Since Florida is a Judicial Foreclosure state I would attend the Foreclosure Hearing and demand that the foreclosing lender "produce the note", because the may not have it. Also, take the appraisal to the judge.
• The decision to pursue a deficiency is going to be based on the financial picture of the (former) borrowers. In many cases I instruct our attorneys not to bother and simply write it off if the guy has no money.
• However, in many cases, the Deficiency Balance (note) will be sold for cents on the dollar. So, in that case it makes sense for the borrower to make an offer to pay off the now greatly reduced note. But, in that scenario do not settle the deficiency! Buy the note for the agreed upon price so that no 1099 is issued.
• 1099? Yes, if you do a short-sale or foreclosure AND the bank/lender writes off the deficiency you get a 1099.
• Lastly, a judgment, can always be included in a Chapter 7 federal bankruptcy

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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$45 Billion Boondoggle of Which $33 Billion Goes To Homebuilders

The Senate approved yet another plan to stimulate the economy. It's called throwing $33 billion at homebuilders. This is of course doing nothing but giving money to the greedy pigs that helped create this mess. However, that is the way Washington works.

Senate Majority Leader Harry Reid even had the gall to brag about it. Please consider Senate Approves Extended U.S. Homebuyer Tax Credit.

The U.S. Senate approved a $45 billion plan to expand a tax credit for first-time homebuyers, extend jobless benefits and provide tax refunds to money-losing companies.

Lawmakers voted 98-0 for the measure, sending it to the House, where Majority Leader Steny Hoyer of Maryland said in a statement it will receive a vote as early as tomorrow. The bill then would be forwarded to President Barack Obama for his signature.

The plan would be the first major extension of provisions in February’s economic stimulus plan. The $8,000 homebuyers’ tax credit, slated to expire this month, would continue until April 30 and be expanded to include people with higher incomes and some who already own homes. That would cost about $10 billion in the fiscal year that began Oct. 1, according to Congress’s Joint Committee on Taxation.

The measure includes $2.4 billion to extend unemployment benefits for as many as 20 weeks, enough to aid the jobless through the holiday season. It would loosen tax rules for homebuilders and other money-losing companies to let them claim an estimated $33 billion in tax refunds this year, according to Joint Committee on Taxation estimates.

“Republicans used every trick in the book to slow and stall and ensure we can’t do important work,” Senate Majority Leader Harry Reid, a Nevada Democrat, said today.

Other Stimulus Measures

Lawmakers are still considering whether to extend several other elements of the stimulus package, including subsidies to help the jobless buy health insurance and increased funds for food stamps. Obama has called for sending seniors $250 checks because they won’t get a cost-of-living increase next year in their Social Security checks.

Waste of Money

Senator Christopher Bond, a Missouri Republican, called the tax credit a waste of money, saying studies show that most of those claiming the break would have bought homes anyway.

Goldman Sachs Group Inc. said in a research note yesterday that the credit probably spurred 200,000 home sales that otherwise wouldn’t have occurred.

Extending the credit to people who own homes wouldn’t reduce the excess housing blamed for the slump because “every buyer taking advantage of the move-up credit would necessarily be a seller,” Goldman Sachs said. It said the plan may increase housing prices by 1 percent because “sellers are likely to incorporate a fraction of the credit amount in their sale prices.”

Waste Of Money

Of course it's a waste of money. The most galling thing about it is $33 billion of the $45 billion is not going to do anything but pad the pockets of those who helped create this mess. A mere $2.4 billion was given to extend unemployment benefits.

If Goldman Sachs is correct (and I believe they are), then most of the $10 billion in tax credits is a waste as well. Moreover, we have a huge inventory of homes already and we are creating incentives to build more.

The whole thing reeks and the Senate knows it. Note that Senator Christopher Bond called it a waste of money but there was not a single "No Vote". The bill passed 98-0 undoubtedly because the homebuilders padded the pockets of those voting for it with campaign contributions. This is the way Congress "works".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bank of England Throws Money at Economy

It's no wonder that gold is soaring with the US, UK, and China all printing money like mad. Throw enough money around and gold is bound to rise regardless of anything else that might happen (all of it bad).

Please consider the latest insanity in the UK: BOE May Expand Bond Plan as Officials ‘Throw Money’ at Economy.

The Bank of England may increase its bond-purchase plan by 50 billion pounds ($83 billion) today as central bankers and politicians scramble to shore up Britain’s banking system and drag the economy out of recession.

Governor Mervyn King’s nine-member Monetary Policy Committee will expand the asset-buying program to 225 billion pounds at 12 p.m. in London, the median of 48 forecasts in a Bloomberg News survey shows. That follows Prime Minister Gordon Brown’s pledge this week to spend almost 40 billion pounds in a second bailout of two the nation’s biggest banks.

Any increase in the Bank of England’s emergency program would be the third since King unveiled the plan in March. Brown’s first bank bailout, the government’s fiscal stimulus measures and an injection of 175 billion pounds in newly printed central bank money have so far failed to end Britain’s longest recession on record.

“They’ve got to throw money at it,” said Neil Mackinnon, an economist at VTB Capital Plc and a former U.K. Treasury official. “The fact of the matter is that the U.K. economy is lagging behind. As to whether quantitative easing is working, the jury is still out.”

Quantitative Easing History Lesson

Mackinnon does not know if the strategy is working yet still insists “They’ve got to throw money at it.”

Neil Mackinnon is in dire need of a history lesson. Quantitative Easing was a spectacular failure in Japan, it will prove to be a spectacular failure in the UK as well. For more on the lesson of Japan, please see Is Debt-Deflation Just Beginning?

However, this should not take a history lesson. Common sense alone says you cannot cure a debt problem by throwing still more money at problems hoping something will stick.

It is impossible to have a sustainable recovery based on loose money policies. The global housing bubble should be proof enough of that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Pandora’s Box of New Taxes (and the Tale of Thidwick the Big Hearted Moose)

Californians Against Higher Taxes warns that New Taxes Would Hurt Local Businesses.

Saying the current Legislative special session threatens to open a Pandora’s Box of new taxes, business leaders here came together today to warn of the negative impact higher taxes would have on small and minority-owned businesses struggling to stay alive in this economy.

The special session in Sacramento is considering a slew of tax increase proposals. Speakers today slammed proposed increases in the gas tax, a new tax on oil production and a new tax that would place a levy on services such as dry cleaners, tax preparers and even funeral services for the first time.

”I’m going to have to pass that tax along to my clients at a time when they can’t afford fee increases,” said Velma Union, managing partner of ACV Financial Services. “This has the potential to really hurt my business – either through losing clients that can’t pay more, or keeping them by absorbing thousands of dollars in new taxes I can’t pass along. Since many small companies are service businesses, this will put a lot of us at risk.”

“No matter what the politicians say, a tax on fuel either when it comes out of the ground or when a consumer fills up his tank, means higher gas prices,” said Jovonnie Mabrie, who is a real estate appraiser. “For a small business person like me, every dollar I have to pay in higher gas prices means a dollar less to pay my bills.”

“We’re talking about jobs here, too,” said James Clark of Innovative Contractors. “When your costs go up, you make cuts, and because payroll is one of the biggest expenses, you have to look at laying some people off. There are enough people out of work in California already.”

The Tax Man Cometh

Earlier today I noted Chicago Metro Area Sales-Tax Receipts Plunge, Property Taxes Rise Cook County and Chicago raised sales taxes only to see sales tax collections plunge. In response to falling revenues Chicago raised property taxes 4.2% in spite of plunging property values.

"Despite last year’s housing market crash, tax officials calculate that property values for tax purposes rose 8.23 percent in suburban townships and 9.96 percent in the city."

Think that is good for property values or business? I don't.

Pension Crisis Bankrupts Prichard, Alabama

Inquiring minds are reading Prichard Alabama Files Bankruptcy Over Pensions; Wildcat Strike In Philadelphia; Oregon's Financial Gamble

Prichard Mayor Ron Davis released the following statement Wednesday morning:

“I have looked at every opportunity available to obtain money to help fund the retirement plan for the City of Prichard. After careful review of all of our options, bankruptcy protection seems to be the only solution left at this time.

Over the past 50 years, the pension plan was amended by the Legislature more than fifteen times, and always the economic burden on the City was increased. This has been a long term problem that was unfortunately inherited by this administration.

After several lawsuits filed by pensioners, it has forced us to come to this decision, one that will protect the city and its residents.

Prichard Meets Thidwick the Moose

Congratulations are in order for Prichard, Alabama otherwise known as Thidwick the Big Hearted Moose. If you do not know the story of Thidwick the Moose, please read Dr. Seuss On The Economy.

I am quite sure you will enjoy it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Chicago Metro Area Sales-Tax Receipts Plunge, Property Taxes Rise

Crain's Chicago Business is reporting Cook County sales-tax receipts plunge.

Suburban Cook County experienced the biggest drop in sales tax revenue during the second quarter relative to the six collar counties, according to a study released Wednesday.

Sales tax revenue plummeted 14.4% during the April-June period from a year ago, based on a study conducted by the Chaddick Institute for Metropolitan Development at DePaul University. That followed a 12.1% drop in the first quarter and compares with a regional average of an 11.8% slump. Suburban Cook County excludes Chicago and Evanston.

The recession has hit the heartland very hard,” says Joseph Schwieterman, director of the Chaddick Institute and professor of public service at DePaul. However, “crossing the 10% threshold has appeared to have changed the consumer’s buying experience.”

For all of 2008, sales tax revenue fell 4.5% in suburban Cook County. That compares with a 4.1% decline for the region on average, the study showed.

Cook County’s second-quarter revenue loss topped a 13.3% drop in tax receipts in Lake County. DuPage was next with a 12.7% decrease.

Just near the edges of Cook County, sales tax revenue has plummeted as well. The village of Barrington Hills, near Lake County, posted the biggest loss, down 34.3%. The village of Barrington followed with a 19.5% loss in sales tax revenue.

The city of Chicago fared better than the rest of Cook County, posting a 9.6% drop in sales tax revenue in the second quarter. That's after an 8.6% decline in the first quarter for the city vs. a 12.1% drop for the suburban county.

The report attributed the relative outperformance of Chicago, in part, to the addition of new big-box stores, which helped improve the quantity and price-competitiveness of the city’s retail sector and reduced the drain of retail dollars to neighboring communities.

Outperformance of Chicago

The report Crain cited claims big-box stores helped sales in Chicago. I disagree. Once stores reach a saturation point they actually decrease sales because of competition of lower prices.

Chicago held up better than the Northern suburbs because many in Chicago are spending every dime they have on food, gasoline, clothes, and other day to day living expenses.

Contrast to Barrington, one of the richest areas in the entire state.

The village of Barrington Hills, near Lake County, posted the biggest loss, down 34.3%. The village of Barrington followed with a 19.5% loss in sales tax revenue.

The wealthy can afford to cut expenses far more than the poor who already spend every dime they have. One would (or should) expect to see the poorer suburbs affected less than the wealthier ones.

I believe the Chaddick Institute Study missed the mark in concluding box-stores helped Chicago.

Chicago Raises Property Taxes

Inquiring minds are disgusted with what Chicago and Cook County are doing about revenue shortfalls. Please consider Property taxes going up in Chicago and Cook County.

October 20, 2009
Probably not much of a shock, but it’s now official: Collectively, homeowners and businesses in Cook County are being hit up for 4.2 percent more in property taxes this year than last.

The semi-annual round of property tax bills will be arriving in mail boxes across the county in coming weeks, and most will be bigger than last year. Results will clearly vary from house to house, shop to shop and factory to factory, but the total property tax burden for Chicago taxpayers will rise more than 6 percent over last year, the clerk’s office said. Suburban taxpayers as a group will see a lower increase, but it is difficult to come up with a comparable projection because most communities are comprised of a plethora of taxing districts that apply to some residents and not others.

Despite last year’s housing market crash, tax officials calculate that property values for tax purposes rose 8.23 percent in suburban townships and 9.96 percent in the city. The calculation includes an array of moving parts, not the least of which is the gradual phase out of a program to limit assessment increases that was implemented at the height of the housing market boom earlier this decade.

Chicago Proud To Say "We Have The Highest Taxes In The Nation"

On July,1 2008 CBS News reported Taxes In Chicago Now 10.25 Percent, Highest In Nation while asking the question "Sales Tax Hike In Effect; Will Shoppers Revolt?"

Chicago is no longer the "Second City" when it comes to the sales taxes. Thanks to a 1 percent sales tax increase that went into effect Tuesday, we're number one in the nation. Some shoppers are promising to revolt, but will they?

The 1 percent increase hikes the sales tax in Chicago to 10.25 percent. By comparison, the sales tax in Lake and Will counties is 7 percent, and in DuPage County, it's 7.25 percent.

A sales tax of 10.25 percent is also significantly higher than the sales tax in other major cities. New York, Los Angeles and Dallas all have a sales tax of less than 8.3 percent, Phoenix has a tax of 6.3 percent, and Denver's sales tax is only 3.6 percent. Birmingham, Ala., earlier this year passed a sales tax hike--to 10 percent.

It will definitely be cheaper to shop in the suburbs. Buy a $500 TV in DuPage County where the taxes are 6.75 percent and you'll pay $534, in Chicago where the taxes are 9 percent, you'll pay $545 for that same television, and when taxes increase to 10.25 percent, you'll pay $551.

"It's kind of frustrating," Ashmalla said. "I go to Best Buy or something, and high-priced electronics – it adds like $20, $30 to a TV I bought." "I'm not going to be purchasing in Chicago much more – not electronics or anything high-priced," he said.

Cook County Commissioner Tony Peraica (R-16th) was one of the commissioners who led the fight against the tax hike. He says it's not too late to repeal it.

He plans to introduce the measure to repeal the sales tax at the next County Board meeting in mid-July, but he predicts getting his proposal to pass will be a challenge.

Leading a "tax revolt" outside the James R. Thompson Center on Tuesday, across the street from the County Building, Peraica told angry consumers, "This is nothing but a corruption tax ladies and gentlemen. Corruption equals higher taxes..."

At Left: A DuPage County gas station advertises that customers don't have to pay the high taxes of stations in neighboring Cook County.

Businesses are concerned that consumers will leave Cook County to make purchases, and some businesses outside the county are capitalizing on the opportunity already.

Some residents of Palatine have been so upset by the tax hike that they have even talked about seceding from the county.

Chicago is driving business away and destroying property values by raising sales taxes and property taxes. It should be reducing taxes and cutting expenses. The fact that Chicago has the highest taxes in the nation strongly suggests it has the most bloated bureaucracy and overpaid workers in the nation to go along.

I wish Palatine would follow through with succeeding from the county. The madness has to stop.

Chicago should be thankful it did not get the Olympics. It would have made a boondoggle out of them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Prichard Alabama Files Bankruptcy Over Pensions; Wildcat Strike In Philadelphia; Oregon's Financial Gamble

Inquiring minds are noting another city has been driven to bankruptcy because of pension promises that cannot possibly be met.

Please consider Prichard Alabama Files For Bankruptcy.

Prichard Mayor Ron Davis released the following statement Wednesday morning:

“I have looked at every opportunity available to obtain money to help fund the retirement plan for the City of Prichard. After careful review of all of our options, bankruptcy protection seems to be the only solution left at this time.

Over the past 50 years, the pension plan was amended by the Legislature more than fifteen times, and always the economic burden on the City was increased. This has been a long term problem that was unfortunately inherited by this administration.

After several lawsuits filed by pensioners, it has forced us to come to this decision, one that will protect the city and its residents. I hope that a solution can soon be found that will be fair to all. As Mayor, it is my duty to make sure that the City of Prichard continues to move forward by providing essential municipal services and to operate for the benefit of its citizens.”

Commuter Strike in Philadelphia

The unions in Philadelphia have not gotten the message there is no money and their over-bloated pension plans are unsustainable.

Proof of the above is in the Philly report SEPTA strike catches commuters off guard.

Tue, Nov. 3, 2009
Hundreds of thousands of commuters scrambled this morning to find a way to work or school after SEPTA's largest union staged a surprise predawn strike, shutting down all subway, bus and trolley service in the city.

The walkout by Transport Workers Union Local 243, which began at 3 a.m. and caught commuters off guard, also affected Frontier Division buses in Bucks, Montgomery, and Chester counties.

The walkout even caught some members of the striking union unaware. Sly Wagner, a train operator for 17 years, showed up at the Fern Rock station ready to go to work. "I'm like everybody else," he said. "The only way I found out was when I went to the station and the gates were locked."

In the end, it was a difference over wages that sparked the walkout. Earlier Monday, transit officials disclosed that both sides had reached a tentative agreement on health care and were reportedly close on wages.

"Nobody wants to leave something on the table," U.S. Rep. Bob Brady, who had been involved in the negotiations since last week, said during yesterday evening's break.

But union president Willie Brown, in a telephone interview, painted a different picture early today.

"They wouldn't provide the proper numbers" during negotiations, Brown said. "When it comes right down to it, they've underfunded our pension for years."

Governor Rendell said the union chose to walk away from an "excellent" contract offer that includes 11 percent in wage increases over five years, and 11 percent increase in pension contributions, and no increases in workers' contribution for health care.

"Think about that," Rendell said. "Whose pension has been increased in this day and age?"

SEPTA's 5,100 unionized bus drivers, subway and trolley operators earn from $14.54 to $24.24 an hour, reaching the top rate after four years. Mechanics earn $14.40 to $27.59 an hour.

I would offer the unions a take it or leave it pay cut to $12.00 an hour. The city would be flooded with workers willing to take that wage. Pensions need to be cut, not added to. It is nearly unbelievable that unions would walk out that way when so many are unemployed begging for any job.

Lorain Ohio Budget Woes

Please consider Lorain asks unions to take pay cut in order to avoid layoffs.

As many as 39 employees could be laid off if Lorain city unions do not agree to take a 7 percent pay cut or City Council does not find ways to quickly bring cash into the city.

Mayor Anthony Krasienko's administration sent letters to bargaining unit presidents Wednesday afternoon asking them to consider pay cuts in order to avoid layoffs. Layoff notices will be sent Monday if the units decline to accept the pay cut. The layoffs will most likely be made based on seniority, according to the administration.

The Lorain Ohio Patrolmen's Benevolent Association Telecommunications and Fraternal Order of Police Lodge 3 declined to take a pay cut. The International Association of Firefighters Local 267 will not even respond to the request, union president Jonathon George said.

"As far as Local 267 is concerned, we are currently under an agreement that prohibits the city from laying off any of our members," George said. "Therefore, there is no need for us to entertain, much less respond to, any threats of such action from the administration. Until written notification of the city's intention to opt out of the current agreement is received, it would be inappropriate to enter into any discussions of layoffs for the remainder of 2009."

Buddy Sivert, president of FOP Lodge 3, said the city improperly asked his group to take a pay cut and he will not take the request to his membership. Instead, he said he hopes City Council will find ways to generate the income necessary to keep the police force at its current level.

The article does not detail the budget shortfall but if it is severe enough (and I suspect it is both severe and growing), I recommend the city to declare bankruptcy.

The unions can then see what they can get out of bankruptcy court. Please see Judge Rules Vallejo Can Void Union Contracts for a synopsis of the situation in Vallejo, California.

Alternatively or in addition to bankruptcy, the city just ought to privatize everything it can, including the fire department.

Houston Is Bankrupt

In case you missed it, Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton; and Tom Roberts, CPA, Retired Partner at Fitts Roberts have combined to declare the City of Houston is Bankrupt.

The culprit is pension benefits.

Gambling Over Pensions In Oregon

Inquiring minds are concerned about Oregon's Financial Gamble.

A financial investment that has helped fill gaps in pension funding since 2002 quickly turned sour with the stock market's misfortunes last year, losing $1.9 billion for nearly 140 government agencies in the state, according to a Statesman Journal analysis.

The investment strategy called for selling bonds and investing the proceeds. It was backed by the financial companies that stood to profit from the investment move.

That financial gamble might force school districts, cities and counties to consider layoffs or service cuts in 2011, when pension contribution rates reset. That amount will reflect 2008-09 investment returns, including 27 percent losses in 2008.

In 2001 and 2002, state legislators passed laws that essentially allowed, for the first time in Oregon, the majority of public agencies to "refinance" their pension obligations by making a financial move called arbitrage.

Here's how arbitrage play works: Cities, counties and school districts took advantage of low interest rates at the time and issued pension bonds. They then deposited bond proceeds into "side accounts" with the state pension system. The side account created a way to invest bond proceeds with other pension assets in the investment portfolio.

If the rate of return on the investments (say, 8 percent) is higher than the bond interest rate (say, 5 percent), the agency makes money on the difference (in this example, 3 percent). That translates into a savings to an agency's pension costs, as the difference helps an agency pay its pension contributions.

PERS, Oregon's Public Employees Retirement System, aims to earn 8 percent return on its investments. Historically, pension investments earned 10.25 percent from 1970 to 2008, said PERS actuarial-services manager Dale Orr.

Since 2002, agencies have issued pension bonds with interest rates of 4.7 percent to 7 percent, according to a Statesman Journal analysis of bonds issued in Oregon.

A handful of agencies issued bonds with a 7 percent interest rate, according to bond data from the state treasurer's office — a smaller margin than most for the arbitrage play.

"If everything goes right … but of course, there's risk," Orr said. "There is risk that our portfolio won't earn 8 percent."

'Caught up in the … mania'

In Oregon, more than 90 percent of the 140 agencies that issued pension bonds did so from 2002 to 2005, according to a Statesman Journal analysis of pension bonds in Oregon. The time frame is significant because it coincides with the housing market boom, Thoma said.

"There's an exact parallel," Thoma said. "It's the same things that were happening in housing: People were convinced that there were these riskless ways to make money. It turns out it wasn't risk-free. People wanted to believe that housing prices would always go up. They wanted to believe that this time was different."

'Looming crisis'

In a year, the economy unraveled and the arbitrage play showed signs of running into problems.

The housing boom busted. Financial giants failed. Lending tightened and borrowing stalled. Investments nose-dived. Unemployment soared.

As a result of one investment year, Oregon's unfunded actuarial liability in the pension system skyrocketed. In 2008, pension investments lost 27 percent, the largest loss in the agency's history.

"Our investment strategies are for the long term, and we recognize that the market is going to be volatile," Orr said. "Twenty-seven percent is a lot to try and recoup. Most likely, it will not be recouped in one year or even two years."

Borrowing Money At 5-7% Betting On The Stock Market Is Madness

It is economic madness to think risk-free returns of 8% can be had when 2-year treasuries are yielding .9% and 10-year treasuries are yielding a mere 3.4%. The years 1980 to 2000 are NOT the norm. In 1980 one easily could have locked in 12% returns just by throwing it all into the 30 year long bond.

Moreover, pension funds cannot count on dividends. Please consider the Dividend Yield for Stocks in the S&P 500.

139 S&P 500 stocks do not have any dividend. The average yield for the group is a mere 1.84%.

I think pension plans will be lucky to average 5% a year for the next 5 years. Indeed it is quite likely the bottom in equities is not even in. If that pans out we might see negative returns for the next 5 years.

Even IF the bottom is in, the best one can hope for in a buy and hold index strategy is 5-7% The pension plans need 8% in a 3%-5% world. It cannot be done.

Expect More City Bankruptcies

Expect to see many plans blow up betting the bottom is in or chasing risk because they need 8%. We are in a major pension crisis and this one is not going to blow over. Meanwhile the unions in Philadelphia are on a wildcat strike asking for more.

The mayor needs to show them the door. Unless he does, I can predict the future. The future is Prichard. It's already too late for Houston and Detroit. It's probably too late for Baltimore as well. Please see Time for Baltimore to "Pull a Vallejo" and Declare Bankruptcy for details.

Look for more city bankruptcies over wage and pension benefits. They are without a doubt coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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