Decade of Zero; Defense Spending Up 72% Since 2000: Are We Any Safer?

Inquiring minds are noting Gates Restores Boeing, Lockheed, Northrop Programs in 2011 Plan.

U.S. Defense Secretary Robert Gates directed the Air Force to restore to its proposed budget three major programs the service offered to cancel, including a Boeing Co. program to build and install upgraded software in the cockpits of C-130 transports, according to a budget document.

Gates directed restoration of $285 million in 2011 and $1.843 billion overall through 2015 on the C-130 program. He also told the Air Force to restore $2.4 billion for an Internet- like radio that Lockheed Martin Corp. is building for aircraft and vessels.

In addition, he told the service to add $280 million to continue installing upgraded Pratt & Whitney engines on the Northrop Grumman Corp. Jstars surveillance plane.

Defense spending since fiscal 2000, adjusted for inflation, has grown about 43 percent. When war costs are included, the number increases to 72 percent. Gates has called for modest growth going forward, with emphasis on improving the security of nuclear weapons, building capabilities to conduct irregular warfare, cyber defense and long-range strikes.

Gates’s directive means “either the service’s budget priorities are out of sync with those of the defense secretary or that that the proposed cancellations were advanced knowing there was little likelihood they’d be accepted,” said Loren Thompson, a defense analyst for the Lexington Institute, an Arlington, Virginia-based defense research organization.

Gates may be supporting the C-130 program because the Army and Marine Corps have become “heavily dependent on those propeller-driven airlifters in Iraq and Afghanistan,” Thompson said.

Support The Troops By Ending The War

These support the troops efforts are galling. The best way to support the troops is to end these stupid wars and bring the troops home. We have wasted $trillions of dollars since 2000, and we are less safe than before.

Gates wants "modest" increases going forward. What we ought to do is slash military spending by 50% and consider that a mere down payment.

If we are going to waste money, we should at least get something out of it. War produces negative benefits. The same amount of money spent upgrading the electrical grid or building nuclear energy reactors would at least have given us something tangible.

I am not proposing such projects, I am proposing that I would rather see such projects than dropping bombs and making enemies.

Amazingly, building and dropping bombs adds to GDP. Realistically dropping bombs should subtract from GDP. We get negative benefits from needless wars and war mongering.

Sadly, what this all boils down to is government is willing to put our kids lives at risk, just to keep unemployment rate from getting any higher and so warmongering CEOs at Boeing, Lockheed Martin, Northrop Grumman, etc can make a fortune in stock options.

Keynesianism Delivers a Decade of Zero

What has all this ridiculous spending accomplished? Ron Paul has the answer in Keynesianism Delivers a Decade of Zero.

The Austrian free-market economists use common sense principles. You cannot spend your way out of a recession. You cannot regulate the economy into oblivion and expect it to function. You cannot tax people and businesses to the point of near slavery and expect them to keep producing. You cannot create an abundance of money out of thin air without making all that paper worthless. The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever. You cannot live beyond your means indefinitely. The economy must actually produce something others are willing to buy. Government growth is the opposite of all these things.

Bureaucrats are loathe to face these unpleasant, but obvious realities. It is much more appealing to wave their magic wand of regulation and public spending and divert blame elsewhere. It is time to be honest about our problems.

The tragic reality is that this fatally flawed, but widely accepted, economic school of thought called Keynesianism has made our country more socialist than capitalist. While the private sector in the last ten years has experienced a roller coaster of booms and busts and ended up, nominally, about where we started in 2000, government has been steadily growing, because Keynesians told politicians they could get away with a tax, spend and inflate policy. They even encouraged it! But we cannot survive much longer if government is our only growth industry.

Krugman seems pretty disappointed with zero, but if we continue to listen to Keynesians in the next decade instead of those who tell us the truth, zero will start to look pretty good. The end result of destroying the currency is the wiping out of the middle class. Preventing that from happening should be our top economic priority.

We marched the troops in, we can march the troops out. Unfortunately, no number of lives killed or destroyed is too high to pay as long as CEOs can make insane amounts of money on it, and Obama gets to artificially lower the unemployment rate in the process.

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

Massive Jump In Emergency Unemployment Compensation (EUC) Benefits - Up 43% In One Month!

I was intrigued by a post by Zero Hedge asking Is The Government Misrepresenting Unemployment By 32%?

"...government spent a record $14.7 billion on Unemployment Insurance Benefits as of December 30, a 24% jump sequentially from the $11.8 billion in November. Yet the DOL has disclosed a mere 1.7% increase in those to whom insurance benefits are paid: from 9.4 million to just under 9.6 million. To put the $14.7 billion number in perspective, in December the Federal Government paid a total of $14 billion ($700 million less) in Federal Salaries!

And some more perspective: in calendar 2009 the government has paid $140 billion in Unemployment Insurance Benefits. This is yet another economic stimulus that nobody in the administration discusses, yet which undoubtedly has the biggest impact on the economy, as all those millions unemployed can moderate their pain courtesy of a passable weekly check from the government which should just about cover the rent and beer.

Which is why more than anything, Obama is dead set on extending insurance benefit payments in perpetuity: because if the 10 million official and 14 million unofficial people who are on benefits (not to mention the tens of millions of unemployed unlucky enough to even get their weekly allowance from Uncle Sam) start thinking about their true predicament and their real "employability", then a landslide loss by this administration at the mid-term elections will actually be an upside surprise to what it can objectively expect.

I figured the explanation would show up in charts somewhere and I asked Chris Puplava at Financial Sense for a chart of Emergency Unemployment Compensation (EUC) Benefits as well as an update on other charts he has graciously provided on request.

Click on any chart below for a crisper image.

From Chris Puplava ...

My answer would be a MASSIVE jump in the Emergency Unemployment Compensation (EUC) benefits, which jumped from 3,594,253 (11/07/09) to 5,143,410 (12/19/09), up 43% in just over a month! The increase in EUC more than offset the decline in continuing claims and we are now at a new record when combining all measures of unemployment benefits. Economists were pointing out that continuing claims and initial claims were falling as a bullish sign, however what was happening was that those benefits were exhausting for people who used up that benefit, leading to the decline in the numbers which is proved by a record (52.24%) exhaustion rate.

Record Unemployment Deterioration



However, these people were not finding employment which is why the House passed a bill in December to extend benefits, thus leading to a massive 43% jump in the aptly named “EMERGENCY” Unemployment Compensation program. The jump was so large that now the EUC numbers surpass continuing claims!

The data I have from Moody’s comes with a lag, so the data in the charts below is only updated through 12/19/09, but the combined unemployment claims numbers just broke out to a new record!

Combined Weekly Claims



Combined Weekly Claims Detain Since 2000



Combined Weekly Claims As % Of Population



Continuing Claims From Bloomberg



Extended Claims From Bloomberg



Emergency Claims From Bloomberg



The above charts and commentary all thanks to Chris Puplava at Financial Sense .
Thanks Chris!

4 Week Moving Average Of Weekly Claims

Those charts should help put the "improvement" in weekly claims numbers from the Department of Labor in perspective.

In the week ending Jan. 2, the advance figure for seasonally adjusted initial claims was 434,000, an increase of 1,000 from the previous week's revised figure of 433,000. The 4-week moving average was 450,250, a decrease of 10,250 from the previous week's revised average of 460,500.

BLS Chart of Weekly Claims



Lovely. The 4-week moving average of initial claims is a whopping 450,000. Yes, that is down from 550,000 or so, last March but it is still consistent with losing jobs. The average needs to get below 400,000 before it is consistent with jobs being added.

Moreover, employers are not firing as many as before, but the above charts show that jobs once lost, are not coming back.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Time To Indict Geithner For Securities Fraud

The web of known parties guilty of fraud, coercion, or securities manipulation keeps getting bigger. Please consider N.Y. Fed Told A.I.G. Not to Disclose Swap Details.

Starting in November 2008, the Federal Reserve Bank of New York under Timothy Geithner began urging American International Group, the huge insurer that the government had bailed out, to limit disclosure on payments made to banks at the height of the financial crisis, e-mail messages obtained by DealBook show.

The e-mail exchange between the bailed-out insurance giant and its regulator portray a strange reversal of roles, with A.I.G. staff arguing for the disclosure of certain details on payments for credit-default swaps to major banks, only to be discouraged by officials at, or representing, the Federal Reserve.

In a draft of one regulatory filing, A.I.G. stated that it had paid banks — including Goldman Sachs Group, Merrill Lynch, Société Générale and Deutsche Bank — the full value of C.D.O.’s, or collateralized debt obligations, that they had bought from the company.

In the response to that draft from the law firm Davis Polk and Wardwell, which represented the New York Fed, that crucial sentence was crossed out, and did not appear in the final version filed on Dec. 24, 2008.

In a March 12 e-mail message whose subject line is “Fw: counterparties” — importance: “high” — Kathleen Shannon, a senior vice president at A.I.G., writes:

“In order to make only the disclosure the Fed wants us to make, which we understand to be to not include the CUSIPs or Tranche names and give the amounts by counterparty on a total rather than a transaction by transaction basis, we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available.”

The messages were initially obtained by Representative Darrell Issa, Republican of California and ranking member of the House Oversight and Government Reform Committee, and first reported by Bloomberg News.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the S.E.C.,” Representative Issa said in an e-mailed statement.

Mr. Geithner, for his part, has defended the A.I.G. rescue, saying he had no choice but to pay full value on the credit default swaps in order to avoid a panic.

Geithner Allowed To Defend Himself

Please see the article for actual memos and other damning evidence.

I am 100% in favor of allowing Geithner to defend himself ... In a court of law, for securities fraud.

And as I have stated before Paulson, Bernanke, and Bank of America ex-CEO Lewis as well.

April 24, 2009: Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis

July 17, 2009: Paulson Admits Coercion; Where are the Indictments?

October 20, 2009: Bernanke Guilty of Coercion and Market Manipulation

While you are wondering where the indictments are perhaps you may wish to review Where The Hell Is The Outrage?

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

USA Today: Jobs May Rebound In 2010 - OK But Where Will Unemployment Be?

The USA Today says Jobs May Rebound In 2010.

The article has some very nice interactive graphs showing state by state forecasts. The charts below that I copied are not interactive.



The chart above is confusing because it does not match the headline. The reason is the chart is showing third quarter 2009 vs. third quarter 2010, while the headline "rebound" is for the whole year.

I am very interested in projecting unemployment. Unfortunately charts in the article do not list numbers precisely. However we can roughly extrapolate from these charts.



I added the lines in blue. Without knowing the precise numbers I can easily be off by a million or more, but assuming the charts are to scale, the USA today forecast is approximately 143.5 million jobs by the end of the 2013.

I think that is an extremely optimistic number but let's see what the unemployment rate would roughly look like if no jobs are added in 2010, then we hit 143.5 million employed at the end of 2013, with 2012 adding the most jobs.

For this scenario, I assumed the number of jobs to keep up with birthrate and immigration (plus return of marginally attached and discouraged workers) is 120,000 a month.

Projecting The USA Today Unemployment Rate



That certainly does not look very pretty does it?

Yet, I assumed some moderately favorable things.

1. No double dip recession
2. A shrinking monthly labor pool rate shrinking from +120,000 down to +70,000 by 2020 (this lowers the unemployment rate)
3. No second recession for an entire decade

Note the unemployment rate is above 10% at the end of 2013 and still above 8% at the end of the next decade.

You can download my spreadsheet and create your own charts automatically using your own assumptions. Click here to download the USA Today Unemployment Scenario as shown above.

Methodology Described

To understand the methodology to change the chart and to see my baseline scenario please see Mish Unemployment Projections Through 2020 - It Looks Grim.

My baseline scenario has the unemployment rate at 10% all the way out to 2015.

Mauldin Scenarios

For scenarios by John Mauldin please see Mapping Unemployment - You Make The Call - Downloadable Spreadsheet

Mapping The Bernanke Recovery

I also mapped the Fed's forecast in Bernanke's Outlook For Recovery and What It Means For Jobs.

....
Inquiring mind just might be interested in mapping Bernanke's statements. Let's assume it takes 100,000 jobs per month to absorb new entrants, decreasing to 70,000 a month by 2020.

Bernanke says jobs will be scarce for some time. He did not define "scarce" or give a timeline. However, let's assume jobs will be scarce only for 1 year. Also let's assume unemployment will rise for about a year (while jobs are scarce), level off, then start dropping in accordance with the paragraphs in red above.

Scenario "B"



Scenario "B" Suggests 100,000 jobs per month from 2010 through 2013 will be needed to keep up with birthrate and immigration. I took the liberty of helping out Bernanke by assuming demographics would start lowing the number of jobs required after 2013.

....

Click here to download the Bernanke Unemployment Scenario as shown above.

Sharp minds may notice that the Bernanke scenario initially assumes 100,000 jobs a month to keep up with demographics while the USA Today assumption is 120,000 jobs a month.

The reason is the faster the growth in jobs, the more likely discouraged workers and marginally attached workers will start seeking jobs. As of November 2009 there were 2.3 million marginally attached workers. Were they all to seek jobs in a year, the number of job seekers would go up by 192,000 a month, not the 20,000 I generously showed.

Thus, my assumptions were quite favorable for holding down the unemployment rate, as opposed to artificially inflating it.

By the way, those 2.3 million marginally attached potential job seekers will not only keep the unemployment rate structurally high, they will also pressure wages for years down the road.

If I can get hard numbers from USA Today, I will plug them into a new, quarter by quarter spreadsheet for as far out as USA Today is willing to provide data.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Governor Paterson: "New York Runs Like a Payday Loan Operation"

I rarely applaud politicians but I will gladly give New York governor Patterson a standing ovation for his state of the state address on Wednesday.

Please consider Paterson Speech Chastises Lawmakers

In a strikingly blunt State of the State address, Gov. David A. Paterson chastised the lawmakers seated before him on Wednesday, saying they had spent the state into near-ruin and stood by as a plague of political corruption destroyed New Yorkers’ trust in their government.

“You have left me and other governors no choice,” Mr. Paterson, the former State Senate minority leader, said. “Whether it be by vetoes or delayed spending, I will not write bad checks, and we will not mortgage our children’s future.”

The public scolding drew a cold response from lawmakers. Some sat stony-faced during the speech, while others fidgeted with BlackBerrys.

The governor entered the packed chamber with nary a handshake for the hundreds of lawmakers and other officials who had assembled to hear him speak, and did not crack a single smile during his 30-minute address.

Lawmakers, Mr. Paterson charged, had too often bowed to the wishes of powerful special interests, feeding an “addiction to spending, power and approval” and plunging the state into economic catastrophe.

“No longer are we going to run New York like a payday loan operation,” the governor vowed.

Referring to industry and labor lobbyists in the chamber, he declared, “The moneyed interests — many are here today as guests — have got to understand that their days of influence in this town are numbered.”

Recognition Time

I am glad to see one governor stand up and unequivocally state there is an enormous problem regarding corruption and wasteful spending.

Typically the only time you hear speeches like that is before someone is elected. After election it is business as usual. President Obama is the classic example of "Yes we can" turned into "business as usual".

State by state, business as usual is going to stop. Everything needs to be on the table especially union salaries and defined public benefit pension plans.

Others will follow Paterson, not because they will be willing participants, but because the market will force their hand.

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

Business Bankruptcies Up 38% In 2009; BLS Birth/Death Model Review

Not only are personal bankruptcies soaring, U.S. business bankruptcies rise 38 pct in 2009.

U.S. business bankruptcies rose 38 percent last year, to a record since bankruptcy laws were changed in 2005, according to a bankruptcy data firm on Tuesday.

There were 89,402 bankruptcy filings by businesses last year, compared with 64,584 the previous year, according to data compiled from court filings by Automated Access to Court Electronic Records, which is part of Jupiter eSources LLC in Oklahoma City.

Personal bankruptcies jumped to 1,357,565 last year, from 1,031,562 the year before.

The data included bankruptcy codes Chapter 7, 11 and others. Consumers often use Chapter 7 to get a new start on their financial lives. Chapter 13 lets people discharge some debts. Businesses typically use Chapter 7 to relieve themselves of debt and Chapter 11 to restructure debt and operations.

The numbers have been "steadily up," said AACER President Mike Bickford. "I don't think (2010) will be less than 2009. I think what's going to tell the tale for 2010 is the first quarter."

US home sales plummet, personal bankruptcies soar

Inquiring minds are reading US home sales plummet, personal bankruptcies soar

An important measure of future home sales fell far more sharply in November than economists had expected. The National Association of Realtors (NAR) index on pending home sales—contracts agreed upon but not finalized—dropped by 16 percent in November, more than three times what economists interviewed by the Dow Jones Newswires had anticipated.

The pending home sales index registered declines in every region: 26 percent in the Northeast and Midwest, 15 percent in the South, and 3 percent in the West.

The NAR report follows the release last week of a Case-Schiller report showing home prices were flat in October, in spite of the surge in purchases based on the home buyer tax credit and exceptionally low mortgage interest rates. This was not enough, a Tuesday New York Times editorial points out, “to overcome the drag created by a glut of 3.2 million new and existing unsold single-family homes—about a seven-month supply.”

“The situation, we fear, will only get worse in months to come,” the Times writes, citing increasing mortgage rates, the eventual ending of the home buyer tax, and an anticipated “flood” of foreclosed homes.

Foreclosures continue to increase. In 2008, more than 1.7 million mortgages fell to foreclosure or similar actions. In 2009, the number swelled to 2 million, and in 2010, the figure is expected to increase to 2.4 million, according to Moody’s Economy.com.

The looming glut of new foreclosed homes will drive down home values by as much 10 percent next year, bringing to 40 percent the four-year drop-off, the New York Times reports.

The above links thanks to "Tin Hat" and "Czarchasm Reigns"

How To Find A Bankruptcy Attorney

For a report on consumer bankruptcies including how to find an attorney specializing in bankruptcies please see How to Find a Bankruptcy Attorney; NV, TN, GA Top Filing List; One in 35 Nevada households filed for bankruptcy in 2009

Here are some interesting comments to the above post.

James Cole: Nothing exposes the fake recovery like statistics such as these. Bankruptcy at these levels in the midst of recovery? Tax receipts turning in another terrible month in December as the economy and retail sales rebound? Bankruptcy can get a family out from under for a time, but when you walk out of the lawyers office, you still need, food, clothing, transportation, health care and the rest. If you went BK because you lost your job, then you are still screwed.

Kill The Debt: National Association of Consumer Bankruptcy Attorneys at www.nacba.org is great consumer BK resource. I give that site out a couple times a day consulting with consumers.

Another great consumer attorney resource if you have been victimized by debt collectors or predatory lending or mortgage fraud is: The National Association of Consumer Advocates at www.naca.net

FatBeard: Bankruptcy is one way to get "mark-to-market".

Leo Chen: So let me get this straight. Iceland's national bank is in default. Argentina was in default. Greece is teetering on the verge of bankruptcy. The Golden State of California can't pay its bills. Florida, Nevada, Michigan, NY, Arizona; they're all running out of money to operate -- the list covers most of the U.S. So what happens when you can't pay your bills? It's a good thing that we have a dominant military.

Birth Death Nonsense

Mish says, take another look at those bankruptcy statistics. Then take another look at the infamous Birth/Death adjustment for jobs.

From Jobs Contract 23rd Straight Month; Unemployment Rate Drop to 10.0%

Birth Death Model Revisions 2009



click on chart for sharper image

That bottom line in numbers is in thousands. It represents the net number of jobs the BLS adds to the payrolls every month due to the birth and death of businesses.

Somehow, in spite of the deepest recession since the great depression, with personal and corporate bankruptcies soaring, the BLS assumed an average gain of 107,000 jobs a month since February due to net business expansion.

That is how ridiculously distorted the jobs data from the BLS is every month.

Massive Revision Coming

There will be a massive revision in February (starting with the January 2010 data), but we still have to suffer through one more month of sheer BLS nonsense this Friday when the December 2009 jobs data is reported.

Most expect a net gain of jobs. I don't, but the BLS might show such a distortion anyway. If not, it will be a record 24 consecutive months of job contraction.

By the way, the question keeps coming up: "How will this affect the unemployment numbers?" The answer is it won't. Official unemployment numbers are based on the Household Survey, another flawed measure with different reporting errors and biases.

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

How to Find a Bankruptcy Attorney; NV, TN, GA Top Filing List; One in 35 Nevada households filed for bankruptcy in 2009

Thinking about bankruptcy?

If you are deep in debt with no realistic way of paying the bills, bankruptcy could easily be the best way out. Today I received an Email from an attorney on the subject.

Mish

More than a few of your posts counsel people to get the advice of an attorney before considering walking away from their upside down houses or filing bankruptcies. While I think that is wise counsel, I also think consumers need to have a resource to look to for such counsel. I suggest you post the website of the National Association of Consumer Bankruptcy Attorneys at www.nacba.org for resources and a listing of local bankruptcy attorneys. I am a member of NACBA and I find their resources absolutely critical to my practice and to counsel my clients.

Thanks for your wonderful posts - I absolutely love reading them and being in the forefront so to speak, I enjoy seeing you dissect the frilly economists' false frills.

--
Laxmi P Sarathy
Associate Attorney
Law Offices of Daniel J Winter
53 W Jackson Blvd, Suite 725
Chicago, IL 60604

I spoke briefly with Laxmi and she asked me to remind everyone that it was important to find an attorney in their own state because local and state laws differ. The above link can help.

The NACBA site has links to some recent bankruptcy news including this article about bankruptcies in Georgia.

Georgia Bankruptcy Filings Up 22%

Please consider the Atlanta Journal-Constitution article Georgia personal bankruptcies rate third-highest in the nation.

Georgia’s crowded federal bankruptcy courts handled 66,925 filings during the first 11 months of the year, a 22 percent increase over the same period in 2008, according to statistics compiled by the National Bankruptcy Research Center.

Only Nevada and Tennessee posted higher rates of personal bankruptcy, according to the center. Personal bankruptcy filings nationwide hit nearly 1.3 million between January and November, up 32 percent over last year.

What’s changed for 2009 are the profiles of those filing, with the ranks these days including plenty of people for whom financial instability is a new experience.

Richard Thomson, a partner at Clark & Washington, a high-volume Atlanta bankruptcy law firm, said early in the economic downturn his firm took on lots of realtors and contractors as clients.

“Now other professionals, we’re seeing them come in more and more,” he said. “They are higher income and have a lot more assets, a lot more items like boats and motorcycles and four-wheelers.”

They simply can’t pay for what they have, Thomson said. “They’re just saying ‘Take it. It’s not worth the effort anymore. I can’t keep up with it.’ ”

More than half of Georgians filing between January and November opted for Chapter 7 filings, according to the National Bankruptcy Research Center. A Chapter 13 filing, chosen by 47 percent, allows consumers to hold on to a house and car but requires that they repay a portion of their debts.

That split is new in Georgia, which for years has been dominated by Chapter 13 cases rather than Chapter 7 filings. Holding onto a house and accumulated equity was the factor that pushed many debtors into Chapter 13 in the past. These days, many homeowners have little equity or owe more than their houses are worth.

Personal Bankruptcy Filings By State



One in 35.3 Nevada households filed for bankruptcy in 2009. Wow!

The above date from the AJC article and further credited to the National Bankruptcy Research Center www.nbkrc.com.

Bankruptcy Filings - As Ye Sow So Shall Ye Reap

The Email that kicked this post off was in response to Bankruptcy Filings - As Ye Sow So Shall Ye Reap.

Two quick ways to dump debt are to walk away from no recourse mortgage loans and file for chapter 7 bankruptcy.

The debt slave act of 2005, better known as the bankruptcy reform act of 2005 was supposed to prevent the latter but it is no surprise in this corner that it didn't. In fact, the law encouraged banks (and was purposely written to allow banks) to make high-risk loans thinking they could make debt slaves out of people forever.

It is fitting the law backfired. As ye sow so shall ye reap.

Permanent Lifestyle Changes

Neither housing prices nor wages will return to what they were. So even after people find jobs, lifestyles for all but a lucky few will not return to where they were. Salary cuts are going to necessitate permanent lifestyle changes.

If you are unemployed, struggling, and deep in debt, it may be best to get it over with. If you manage to land a job first, you will struggle with the means test, forced repayments, credit rebuilding, and other issues on top of a reduced lifestyle. So if you are doomed to file anyway, try and do so when it will do you the most good.

As always, please consult an attorney that knows the laws and procedures for your state.

"Just" Walking Away?

The same advice holds: Before Walking Away Consult An Attorney. There are a lot of potential snags to consider if you go it alone.

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

Taylor , NY Times, Dean Baker Call Out Bernanke

Bernanke's hubris, inability to admit mistakes, and his blaming everyone but himself for his mistakes is increasingly starting to touch on nerves.

On Tuesday, the New York Times asked the right question: If Fed Missed This Bubble, Will It See a New One?

In 2005, Mr. Bernanke — then a Bush administration official — said a housing bubble was “a pretty unlikely possibility.” As late as May 2007, he said that Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

The fact that Mr. Bernanke and other regulators still have not explained why they failed to recognize the last bubble is the weakest link in the Fed’s push for more power. It raises the question: Why should Congress, or anyone else, have faith that future Fed officials will recognize the next bubble?

Just this week, Mr. Bernanke went to the annual meeting of academic economists in Atlanta to offer his own history of Fed policy during the bubble. Most of his speech, though, was a spirited defense of the Fed’s interest rate policy, complete with slides and formulas, like (pt - pt*) > 0. Only in the last few minutes did he discuss lax regulation. The solution, he said, was “better and smarter” regulation. He never acknowledged that the Fed simply missed the bubble.

“We’ve never had a decline in house prices on a nationwide basis,” Mr. Bernanke said on CNBC in 2005.

“The Federal Reserve has unparalleled expertise,” Mr. Bernanke told Congress last month. “We have a great group of economists, financial market experts and others who are unique in Washington in their ability to address these issues.”

Fair enough. At some point, though, it sure would be nice to hear those experts explain how they missed the biggest bubble of our time.

Useless Expertise

All that "expertise" was less than useless. It is amazing how hopeless Bernanke was about housing, about jobs, about the recession, about everything.

Bernanke did not get a single thing right.

Taylor Disputes Bernanke

Please consider Taylor Disputes Bernanke on Bubble, Says Low Rates Played Role.

John Taylor, creator of the so-called Taylor rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.

“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

“It had an effect on the housing boom and increased a lot of risk taking,” said Taylor, 63, who was attending the American Economic Association’s annual meeting.

Taylor echoed criticism of scholars including Dean Baker, co-director of the Center for Economic and Policy Research in Washington, who say the Fed helped inflate U.S. housing prices by keeping rates too low for too long. The collapse in housing prices led to the worst recession since the Great Depression and the loss of more than 7 million U.S. jobs.

“Low rates certainly contributed to the crisis,” Baker said in an interview on Jan. 3. “I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.”

Taylor Rule Nonsense

In Baum Makes Mincemeat of Bernanke's Twisted Logic I noted how Bernanke was hiding behind the Taylor Rule, claiming his interest rate policy was justified.

When the price of money is too low, it is virtually guaranteed to cause speculation in something. In 2000 it was Nasdaq and technology speculation. This go around it was housing, followed by commercial real estate, followed by immense commodity speculation driving the price of oil to $140.

The moral of this story is loose money always finds a home.

It is beyond absurd we have a Fed chairman that does not understand that simple construct or for that matter basic economics in general.

The Taylor Rule itself is actually fatally flawed as it ignores housing and asset bubbles. Even then Bernanke could not get it right, erring on the loose side of the already ridiculously loose Taylor Rule.

See the previous link for a chart and further explanation of how badly Bernanke blew it.

Thoughts From "BC"

I originally stated "The highly respected Taylor Rule is fatally flawed because it only looks at the CPI, while ignoring asset bubbles in virtually anything else, including housing."

My friend "BC" pointed out the Taylor Rule actually uses the GDP deflator, a measure of the level of prices of all new, domestically produced, final goods and services in an economy.

From "BC" ...

Mish, the Taylor Rule uses the GDP deflator, which is worse.

I don't have the work formalized yet, and might never get it to a suitable presentation for peer review, but there is a supportable case to use bank credit growth and government deficits less production as a reasonable proxy for an "inflation" index sufficient to arrive at a "natural rate" of interest (or perhaps a clearing rate of interest for savings in terms of investment and production).

The problem with this approach for government and central bank money printers is that the "natural rate" would be somewhere in the 4-6% or perhaps 7-10% range, which would virtually preclude the ability of policy makers and Wall St. to create lasting asset bubbles and wars as economic policy.

In an idealized world (not on this planet or in this lifetime, to be sure), the yield curve would be flat (or flatter) and the term structure would reflect a rate of interest sufficient to encourage borrowing at a level supplied by savings and at a term at which the debt would pay for itself from production plus replacement.

However, that rate of growth is well below 6-7% nominal and ~3% real output. Rather, the sustainable rate of growth is probably no more than ~2% real (doubling time of 34-35 years, which is approximately a human generation, sufficient time to allow for the production from, and replenishing of, aquifers, forests, and arable land via rotation, etc.) with little or no sustained price inflation from the growth of money and the necessary price inflation to service the expanding debt.

Financial intermediaries in such a system would not be permitted to create money inflation to capture an increasing compounding share of returns via financial rents from future labor and production; rather, they would make money from custodial and service fees, and/or from relatively short-term, self-liquidating loans backed by large equity/collateral stakes.

I am quite sure that in a system of honest money, the yield curve would be extremely flat. I have my doubts if rates would be as high as "BC" thinks. Regardless, in the world we are in, it is crystal clear that both Taylor and Bernanke are wrong, and Bernanke more so than Taylor.

Dean Baker certainly has it right “I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.”

Bernanke thinks the way to manage an economy is to bring it to the brink of disaster then bail out banks at the expense of taxpayers. I think Bernanke should be fired.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Senator Dodd Will Not Seek Re-election - Good Riddance

The New York Times is reporting Senator Dodd Will Not Seek Re-election.

Senator Christopher J. Dodd, the embattled Connecticut Democrat who was facing an increasingly tough bid for a sixth term in the United States Senate, has decided not to seek re-election this year, Democrats familiar with his plans said Wednesday.

The decision came hours after another Democratic senator, Byron L. Dorgan of North Dakota, also announced that he would not seek re-election this November. The developments underscored the fragility of the Democrats’ 60-vote Senate majority, which is just enough to block Republican filibusters. Democratic incumbents also face serious challenges in Arkansas, Colorado, Nevada and Pennsylvania among other states.

Mr. Dodd’s troubles escalated in 2008 when he was one of two Democratic senators — the other was Kent Conrad of North Dakota — who had been accused of receiving improper discounts from Countrywide Financial. In August, the Senate Select Committee on Ethics ruled that it had found “no credible evidence” that the senators had violated gift rules in accepting the loans.

But the committee criticized Mr. Dodd and Mr. Conrad for not avoiding the appearance of impropriety. Both Mr. Dodd and Mr. Conrad had been members of the “Friends of Angelo” V.I.P. program at the bank, named after Angelo R. Mozilo, the chief executive of Countrywide.

As chairman of the Senate banking committee, he had a central role in both the huge government rescue of the financial system and the economic stimulus package that was adopted at the start of last year.

Good riddance. Dodd's best achievement since his election in 1980 is stepping aside now.

A nice gridlock where Obama can do no more damage would be a good thing. All it takes is a few senate seats and a gain of 30+ seats in the House. It would be better yet if Republicans could take control of the house as that would all but guarantee gridlock.

It's a sad state of affairs when the best we can realistically hope for is gridlock. Until both parties get some fiscal religion however, that is likely the best we can do.

But never give up hope. Please seek out, support, and vote for candidates that have strong fiscal and monetary ideas, who also vow to end the military madness in the Mideast. One, by one, by one, we need to clean house. Dodd is a start.

Sound Money Candidates

• Ron Paul - Texas District 14: Ron Paul For Congress
• Jake Towne - Pennsylvania District 15 - Towne For Congress
• John Dennis - California District 8 - John Dennis For Congress, Defeat Pelosi
• Mike Vasovski - South Carolina District 3 - Mike Vasovski For Congress - Sound Money Constitutional Government
• Adam Kokesh - New Mexico District 3 - Adam Kokesh for Congress
  
• Rand Paul - Kentucky Senate: Rand Paul for Senate
• Peter Schiff - Schiff for Senate

If you are looking for some sound money candidates to vote for, there you go.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Iceland's President Effectively Tells UK "Go To Hell" - Hooray For Iceland

Congratulations to Iceland for figuring out that it is better to suffer a credit rating downgrade than to torture its citizens for a decade or longer. Please consider Iceland president vetoes collapsed Icesave Bank's bill to UK

Iceland was plunged back into crisis after its president refused to sign a bill promising to repay more than €3.8bn (£3.4bn) to Britain and the Netherlands after the collapse of the country's Icesave bank in 2008.

The escalating row threatens to further destablise the Icelandic economy, which went into meltdown after the failure of its three big banks, cutting off further aid from the International Monetary Fund and jeopardising efforts to join the European Union. The credit rating agency Fitch immediately downgraded Iceland, describing the latest political row as a "significant setback".

The British and Dutch governments had compensated savers who lost money when Icesave's parent Landsbanki filed for bankruptcy. But both have since put pressure on Reykjavik to repay the money.

Opinion polls suggest that Icelanders will overwhelmingly vote against the passage of the bill. A petition urging Grimsson not to sign the bill attracted 62,000 signatures, around one-fifth of the population. Critics say the bill would burden each citizen with a debt of €12,000 including interest.

In a televised address, Grimsson said: "It is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law. It is...the responsibility of the president to ensure that the nation exercises this right." He said the referendum would take place as soon as possible.

Almost 300,000 British savers had deposits with Icesave, attracted by market beating interest rates. Their accounts were frozen in October 2008, sparking a diplomatic row between Britain and Iceland, which had only recently begun to thaw. Britain outraged ordinary Icelanders at the time by invoking anti-terrorist legislation to freeze the UK assets of Landsbanki.

Repayment Blocked

The Times Online Reports Iceland blocks repayment of £2.3bn to Britain

Today Iceland's President, Olafur Grimsson, vetoed a bill that would have enforced the repayment of the money by 2024.

Under Iceland's constitution there must now be a referendum on the issue.

But the repayment is deeply unpopular in Iceland. A poll in August found 70 per cent of the country was opposed to it.

The Icelandic Government issued a statement to try to reassure Britain and the Netherlands. It said: "Despite the President‘s decision, the Government of Iceland remains fully committed to implementing the bilateral loan agreements and thus the state guarantee provided for by the law."

Iceland’s parliament approved the Bill last week by a narrow majority of 33 votes to 30. Its passing was seen as a way to help boost the country's bid to join the European Union and get its shattered economy back on track.

The Bill is also opposed by the main opposition party.

This is only the second time in Iceland’s history that the President has not signed into law a Bill approved by parliament.

The money represents 40 per cent of the country's gross domestic product but Iceland said that it planned to repay it gradually to savers in the UK and Netherlands by 2024.

UK Denseness

A UK Treasury spokesman said: “The Treasury will consult with colleagues in Iceland to understand why this Bill has not been passed."

It should be perfectly clear that the bill passed but that the president, acting like I wish presidents here would act, went along with the wishes of the citizens of Iceland.

You have to be dense to not understand that, although I suppose it is amazing that presidents anywhere actually listen to its citizens.

You Take Risk, You Pay The Price

This case is easy. There is no free lunch. Extra yield comes with risk. If you take risks, you pay the price. Icelandic citizens should not have to bear the brunt of this folly. I commend Iceland for telling the UK and Netherlands where to go.

Including the Netherlands, the amount in question is about $5 billion. With the veritable $trillions being flipped like pancakes these days, $5 billion might not sound like much. However, it is a very big deal to Iceland.

Per Capita Cost

The Population of Iceland is 317,593 as of December 1, 2009. Let's do the math. $5,000,000,000 divided by 317,593 = $15,743.42.

Noridicom shows there were 116,000 Iceland households in 2005. Let's assume the number is 120,000 today. The household payout would be $41,666.67

Now how long would it take the average Icelandic household to pay that back? I commend Iceland for figuring out that a loan from the IMF is simply not worth the price.

The irony in this mess is that Fitch immediately downgraded Iceland. Heck, the way I see it Iceland ought to be upgraded. With a debt overhand from the IMF, Iceland would have had a default looming over its head for a decade with it citizens struggling under a burden of that debt for a decade or longer.

Iceland may have other problems but at least that one was resolved (hopefully), the quick and painless way. And that should have been the model for US banks as well. The stockholders and bondholders should be the first ones wiped out. Instead Bush started and Obama continued with a policy to punish the innocent to bail out the wealthy, leaving the average taxpayer deep in the hole, against the clear will of the majority.

Beware IMF Trojan Horses

Figuratively speaking, Iceland effectively told the UK and Netherlands to go to hell. That is a good first step. Next, it needs to vote out of office all the political dunderheads in parliament who voted for that ridiculous payout. That would seal the fate once and for all.

In the meantime, Iceland needs to continue its resolve while avoiding associations with the IMF, an organization with nothing to offer but Trojan Horses that would further weaken the country.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Showdown in Cleveland: Unions Refuse Nominal Pay Cuts

In typical fashion, and not understanding how well off they are compared to the private sector, unions have rejected nominal salary concessions in Cleveland.

Please consider Cleveland Unions Have One Week To Accept Concessions Or Face Layoffs.

Cleveland Mayor Frank Jackson plans to follow through on layoff notices issued late last month unless unions agree to sacrifices. Ideastream’s Bill Rice reports.

The mayor sent a total of about 160 layoff notices out just before Christmas in order to meet the a two- week notification deadline to cut employees loose after next Monday. At that time, the Cleveland Fraternal Order of Police – which represents supervisors - had rejected the mayors’ proposed concessions. Shortly after that, the Patrolman’s Union followed suit, as did the EMS union. Those votes will mean the city will lay off just under a hundred officers and paramedics, and demote several higher ranking police personnel.

Jackson has asked all union employees to make concessions equaling a 4.17 percent across the board pay cut. He calls the proposed concessions an opportunity to preserve jobs, and says it’s up to the unions to decide whether there will be layoffs.

Jackson: “Realistically I’ve been able to give them a proposal that would avert layoffs, that would not impact their membership. And those who choose to go along with that, then that is what will happen. Those don’t, the effective date of the layoff is in mid-January.”

Jackson Overly Generous

Jackson is too generous. A 4.17% pay cut is just a down payment for what needs to happen. Unless and until public unions give up defined benefit plans along with agreeing to wages that will not bankrupt cities, these meager cuts will not solve anything.

Jackson's starting point should be more along the lines of 20% pay cuts and termination of defined benefit pension plans for new hires.

Eventually it is going to come to something like that, so why not ask for it upfront? The other reasonable alternative is for Cleveland to declare bankruptcy and let the unions see what they can get in bankruptcy court.

"Mark" who sent me the link writes:

Amazingly enough, cities, counties and states are coming to the conclusion that, if you don't have any money, you can't pay anyone to work for you.

How's that for Economics 101?

I wish the federal government would sign up for this "adult refresher course" as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Baum Makes Mincemeat of Bernanke's Twisted Logic

In Ivory Tower Doesn’t Have a Mortgage, Bloomberg columnist Caroline Baum makes mincemeat out of Bernanke's twisted defense of Fed policy.

Bernanke takes great pains to rebut criticism that the funds rate was well below where the Taylor Rule, developed by Stanford economist John Taylor, suggested it should be following the 2001 recession.

Substitute forecast inflation for actual inflation, and the personal consumption expenditures price index for the consumer price index, and -- voila! -- monetary policy looks far less accommodating, Bernanke said.

It’s always easier to start with a desired conclusion and retrofit a model or equation to prove it.

What if easy money is a necessary but not sufficient condition to explain the magnitude of housing bubbles across countries?

The real fed funds rate was negative from 2002 to 2005, the longest stretch since the 1970s, a decade notable for high inflation and unemployment. The teaser rates lenders offered on ARMs were pretty close to zero when adjusted for inflation.

When you can borrow for free and invest in an asset whose price can only go up (at least that was the perception about home prices), guess what happens? Credit is misallocated. Lending standards decline. Everyone wants in.

Yes, monetary policy is a blunt instrument, as Bernanke pointed out. Keep rates too low -- create too much money -- and sometimes that money chases goods and services prices, which we designate as inflation. Other times it piles into certain assets, which we call a bubble.

“The best response to the housing bubble would have been regulatory, not monetary,” Bernanke said, avoiding any reference to prevention.

The two aren’t substitutes. Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. They are different species, operating in different spheres.

All the regulation in the world can’t counteract the power of near-zero interest rates. At the same time, high interest rates won’t prevent financial institutions from engaging in shady practices. To think regulation can prevent the next asset bubble is naive.

Why is the Fed so fixated on inflation expectations and so blase about asset-price expectations? Aren’t they of a piece?

Taylor Rule Nonsense

The highly respected Taylor Rule is fatally flawed because it only looks at the CPI, while ignoring asset bubbles in virtually anything else, including housing.

I have pointed this out many times, most recently in Ben Bernanke Looks In Mirror, Sees Barney Frank.

Bernanke blames inadequate subprime regulation for the housing bubble.

Bernanke also takes refuge in the Taylor Rule although there is considerable disagreement over what it says. My take is the Taylor Rule is fatally flawed because it fails to take into consideration housing prices (asset prices in general).

Watch what happens when the Case-Shiller Housing Index is substituted for Owners' Equivalent Rent (OER) in the CPI.

Case Shiller CPI vs. CPI-U



click on chart for sharper image

The above is from What's the Real CPI?

The Fed could have and should have acted to rein in property bubbles, but Bernanke is so dense he could not even see there was a property bubble.

Substituting home prices for OER the CPI was running a hot 6%+ in mid 2004 with the Fed Funds Rate near .25%.

Who's The Bigger Fool?

1) Taylor in all his hubris for believing his fatally flawed rule is the only policy tool the Fed needs
2) Bernanke for relying on it to the point of insanity

Academic Wonks vs. Practicality

Bernanke is an academic wonk, totally incapable of looking at policy in terms of anything other than formulas and his twisted ideas about the great depression.

Baum on the other hand shows impeccable logic with...

Relying on regulation to counteract the impetus of easy money is like using a split-rail fence to stop an auto with the accelerator pressed to the floor. All the regulation in the world can’t counteract the power of near-zero interest rates.

Indeed.

When the price of money is too low, it is virtually guaranteed to cause speculation in something. In 2000 it was Nasdaq and technology speculation. This go around it was housing, followed by commercial real estate, followed by immense commodity speculation driving the price of oil to $140.

The moral of this story is loose money always finds a home.

It is beyond absurd we have a Fed chairman that does not understand that simple construct or for that matter basic economics in general.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bankruptcy Filings - As Ye Sow So Shall Ye Reap

Two quick ways to dump debt are to walk away from no recourse mortgage loans and file for chapter 7 bankruptcy.

The debt slave act of 2005, better known as the bankruptcy reform act of 2005 was supposed to prevent the latter but it is no surprise in this corner that it didn't. In fact, the law encouraged banks (and was purposely written to allow banks) to make high-risk loans thinking they could make debt slaves out of people forever.

It is fitting the law backfired. As ye sow so shall ye reap.

And now, with unemployment at 10%, the surge is on. The Wall Street Journal notes Personal Bankruptcy Filings Rising Fast.

The number of Americans filing for personal bankruptcy rose by nearly a third in 2009, a surge largely driven by foreclosures and job losses.

And more people are filing for Chapter 7 bankruptcy, which liquidates assets to pay off some debts and absolves the filers of others. That is significant because a 2005 overhaul of federal bankruptcy laws aimed to encourage Chapter 13 filings, which force consumers to sign onto debt-repayment plans in exchange for keeping certain assets.

Overall, personal bankruptcy filings hit 1.41 million last year, up 32% from 2008, according to the National Bankruptcy Research Center, which compiles and analyzes bankruptcy data. It is the highest level of consumer-bankruptcy filings since 2005. Consumers rushed to file in 2005 before the new bankruptcy laws took effect in October of that year.

Chapter 7 filings were up more than 42% as of November 2009, compared with the same period a year earlier, according to the research center. November is the most recent month with analyzed data available. Chapter 13 filings rose by 12% and made up less than a third of 2009 filings as of November.

"I can't see over the top of the files on my desk," said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect. In a three-month period before those rules changed in 2005, her firm filed five times as many cases as usual.

Ms. Moran's clients in 2008 typically were people who earned between $40,000 and $80,000. That changed last year when a rash of people who earned $100,000 to $300,000 began filing as well, she said.

"Expenditures that were rational when these people were working at the peak of their salary just are no longer sustainable when they lose jobs or take jobs at a third or a half of what they were making before," Ms. Moran said.

Permanent Lifestyle Changes

Neither housing prices nor wages will return to what they were. So even after people find jobs, lifestyles for all but a lucky few will not return to where they were. Salary cuts are going to necessitate permanent lifestyle changes.

If you are unemployed, struggling, and deep in debt, it may be best to get it over with. If you manage to land a job first, you will struggle with the means test, forced repayments, credit rebuilding, and other issues on top of a reduced lifestyle. So if you are doomed to file anyway, try and do so when it will do you the most good.

I do not recommend credit counseling services as many are fraudulent and most of the rest are sponsored by banks with their best interest in mind, not yours.

But please, if you are considering filing bankruptcy for any reason, do not run up credit card balances before you file or make blatantly unaffordable purchases. That constitutes fraud and it could land you in jail.

As always, please consult an attorney that knows the laws and procedures for your state.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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School Bills Due But State Can't Pay: "There is No Money"; Let the War on Public Unions Begin

While the stock market marches on oblivious to the real world, things are rapidly approaching crisis mode in Illinois, and for that matter nearly everywhere you look. Please consider School bills are due, but state won't pay.

Say the words out loud to get a feel for the size of it: Forty-five million, two hundred and six thousand, six hundred and fifty-four dollars, and sixty-one cents. That's how much the state is behind in payments to your local schools.

When the quarterly payments came due at the end of the year, the state again missed its categorical and grant payments to all 871 Illinois school districts.

This money is supposed to fund projects like school buses, special education, reading programs and early childhood development. But the money's not coming, instead getting added bill by bill to an already $4.5 billion IOU the state has for services from schools to homeless shelters.

But the same state that's no longer paying for these programs legally requires them.

Unlike the usual budget bellyaching when political pressure can make money appear, this time is different, said state Rep. Linda Chapa LaVia, D-Aurora. There is no money. "This is not a false alarm. This is not someone pulling a fire drill. This is a fire," Chapa LaVia said.

The West Aurora School District plans to lay off teachers for the second year running. Last year, the district planned to lay off 120 teachers, but ended up only giving 55 the ax. The district didn't have a change of heart -- laying off all 120 would have pushed class sizes past the maximum in the teachers union contract.

There's a fee the district can pay if they want to go past that limit by laying off more teachers. They're considering it. "It's cheaper to pay a premium than to pay a teacher," West Aurora Chief Financial Officer Christi Tyler said.

It's not that the state is denying it owes this money. The Illinois State Board of Education, like many state agencies, is dutifully sending its vouchers to the comptroller's office, where ... nothing happens.

What usually is a bureaucratic delay where the comptroller gets the voucher and then cuts the check within a week or two is now an eternal dead-end for bills, a purgatory where state payments linger while Springfield figures out how to fix the state's funding calamity.

Illinois $4.9 Billion Overdue In Paying Bills

Inquiring minds looking for more details on Illinois' missing $billions are reading Splurge. Borrow. Repeat.

You're a deadbeat, an astonishing $4.9 billion overdue in paying your bills. You owe much of that for services that were provided many months ago by people who, day in and day out, care for your ailing, handicapped and often helpless fellow citizens.

You're also -- sorry to be blunt -- inept. You repeatedly spend more than you earn and borrow to fill the gap. This year you'll outspend your income by some $12 billion.

In the process you've embraced debts that could plague your descendants after you're dead and gone. Examples: You've bizarrely promised your workers some $80 billion more in pension payouts than you can afford. What's more, you've promised them additional billions that you don't have for their health care after they retire.

Your money managers are the politicians who run Illinois. Many of them have failed you spectacularly. What will you do now? Your state is in dreadful shape financially -- well on its way to being New Michigan or, worse, New California.

Yet as 2010 dawns, many of your pols have an incredible deal for you: Yes, they've made you insolvent -- that means you can't pay your bills as they come due -- but they promise to make everything spiffy if you re-elect them. They will pay down your debts, which they manufactured in your name. To that end, they want you to hand them even more of your income in . . . taxes.

We have watched those politicians in recent years create ever more obligations for taxpayers -- yet also spent citizens' money in ways that defy common sense. Many public officials are so terrified of bucking public employees unions and other interest groups that they've ducked crucial decisions: to reduce pension benefits for future state hires, to move Medicaid patients to managed care, to demand consolidation of small school districts, to outsource costly internal functions like janitorial and food services . . . The list of money-saving moves private companies long ago would have made goes on and on.

Today's Illinois even borrows from itself: The sometimes acceptable practice of short-term lending repeatedly has been overused and abused. The result is a Ponzi scheme on speed that pays yesterday's costs with money borrowed today and due back, with interest, tomorrow.

On Feb. 2, Illinois voters have a choice. We can raise up our little porridge bowls and ask for more of the same.

Or we can demand that public officials aggressively streamline their governments and how they do business.

Why is Illinois broke?

The answer is easy. Politicians are unwilling to stand up to unions and demand reform. Instead they put off fixing the problem year in and year out selling long-term bonds to finance short-term needs.

Some complete idiot emailed me today telling me the problem was that unions did not make enough money. He made $70,000 and seemed proud of the fact that he spent every penny of it. It is really sad such fools can graduate from high school not understanding money, interest rates, taxes, inflation, credit cards, or anything they need to know to survive in the real world.

Lesson #1.
It does not matter how much you make but how far the money you do make goes
Lesson #2.
The ability to tax is not infinite.
Lesson #3.
Public unions and politicians who refuse to stand up to them are bankrupting cities, states, and municipalities

The system is flat broke and the state of Illinois is bankrupt. Meanwhile unions refuse to even compromise. At this point compromise is not needed. A taxpayer revolt and all out war on unions, graft, pension promises, and corrupt politicians is.

Let the war begin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ron Paul "No Longer Fringe"

Mainstream media and the public are both at long last starting to realize Ron Paul's ideas no longer fringe. From the LA Times ...

For three decades, Texas congressman and former presidential candidate Ron Paul's extreme brand of libertarian economics consigned him to the far fringes even among conservatives. Not a few times, his views put him on the losing end of 434-1 votes on Capitol Hill.

No longer. With the economy still struggling and political divisions deepening, Paul's ideas not only are gaining a wider audience but also are helping to shape a potentially historic battle over economic policy -- a struggle that will affect everything including jobs, growth and the nation's place in the global economy.

His warnings on deficits and inflation are now Republican mantras.

And with this year's congressional election campaign looming, the Texas congressman's deep-seated distrust of activist government has helped fuel protests such as the tea-party movement, harden partisan divisions in Washington and stoke public fears about federal spending and the deficit.

"People are wondering what went wrong. And they're not happy with what the government is offering up," said James Grant, editor of Grant's Interest Rate Observer, offering an explanation for why seemingly wonkish arguments over interest rate policy and the money supply are spilling over onto ordinary Americans.

And so far, Paul and his fellow conservatives are on the offensive. President Obama and congressional Democrats are repeatedly pledging not to increase the deficit and to begin cutting back soon.

"I think we're going to be in for more revival of fiscal responsibility," said William Niskanen of the Cato Institute, who headed the Council of Economic Advisors under President Reagan.

Niskanen sees the Texas Republican's increasing influence as stemming from the continued economic weakness. "To this extent, Ron Paul gains voice," he said.

Paul would go a lot further in cutting back the government's role than even free-marketers like Niskanen support. If Paul had it his way, for instance, he would do away with the Fed entirely. In his bestselling book "End the Fed," he lambasted the central bank as an "immoral, unconstitutional . . . tool of tyrannical government."

Such rhetoric might once have been dismissed as extremism. But Paul's anti-Fed message has drawn broad support because of the central bank's failure to restrain the flood of cheap money and excessive risk-taking in the years leading up to the financial crisis.

Paul's ideas are grounded in the work of economic thinkers from an earlier era who focused on problems similar to those besetting the U.S. today.

In particular, Paul is a disciple of Ludwig von Mises, an Austrian theorist born at the end of the 19th century who contended that government intervention in an economy would fail because free markets were better at allocating resources and fueling growth.

Paul contends that Austrian economics explains the most recent financial meltdown: "It says if you inflate too much, if you have no restraint on monetary authorities, you're going to bring on a crisis." Now, Paul says, administration policies are leading the country toward disaster.

One By One

Legislative representatives need to be won over one by one by one. We are at critical mass regarding Audit the Fed. However, bankers and the Fed will continue to fight this tooth and nail.

Fiscal issues will be the same slow arduous process with more defeats than victories.

Please keep the pressure on your legislative representatives and strive to do what you can to get rid of the mindless zombies doing the most damage. These are battles that must be fought if there is any hope for our future.

Here are Phone, Fax, and Email numbers from the Online Directory for the 111th Congress.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Reflections On Market Sentiment

Trader's Narrative has some interesting charts and commentary about market sentiment which suggests a great deal of bullish complacency among the bulls and resignation for the bears.

Here is one of the charts from the article.

click on chart for sharper image

Both of the popular weekly sentiment surveys are in agreement showing an extremely bullish mood, which should make any contrarian stand up and take notice. It now stands two standard deviations below its 1 year average. The AAII weekly sentiment survey of retail investors in the US has only 23% bears and a whopping 49% bulls. The AAII ratio hasn’t been this lopsided since May 2008 when the S&P 500 topped out at 1440.

Similarly, the Investors Intelligence survey of newsletter editors has plumbed new depths from last week and reached a new record. We haven’t seen this few bears in 22 years! The II finished off the year with only 15.6% of editors looking forward to lower stock market prices and 51.1% optimistically looking forward to the continuation of the rally.

The keepers of the Investors Intelligence survey, Mike Burke and John Gray, believe that while “some additional gains may occur in the near term, stocks may peak in the first quarter of next year and correct from there.” Smoothing out the weekly results with a 10 week average of the bulls divided by the bulls and bears shows that the market is overbought by 71% - the last time it was at similar lofty levels was back in late July 2007.

There are three other charts in the article and much more analysis. Inquiring minds may wish to take a look.

My friend "BC" who sent me the link writes "Today's increasingly bullish sentiment is consistent with a B (or 2) wave, which would imply a setup for the most destructive (for financial wealth and confidence) phase of a C-wave decline, lasting 2-3 years. "

What "BC" is describing is similar to the sucker bounce in the early 1930 after the stock market crash of 1929.

I am pleased to inform that "BC" has partially come out of the closet. He is now blogging anonymously at the Economics of Oil Empire and Peak Oil blog.

Here is a link to his post Equity Market Sentiment with more of his thoughts as well as additional charts.

Addendum:

I was informed by a reader that the chart in this post is from the December 18th edition of The Elliott Wave Financial Forecast Short Term Update.

Trader's Narrative used it without proper attribution.
I have permission from Elliott Wave.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ben Bernanke Looks In Mirror, Sees Barney Frank

Fed chairman Ben Bernanke is back at it again, pointing the crisis finger at everyone but himself. To be sure there are plenty of congressional clowns deserving of a Babe Ruth style "big point", but the biggest point belongs straight at himself.

Please consider Bernanke Blames Weak Regulation for Financial Crisis.

Regulatory failure, not lax monetary policy, was responsible for the housing bubble and subsequent financial crisis of the last decade, Ben S. Bernanke, the Federal Reserve chairman, said in a speech on Sunday.

“Stronger regulation and supervision aimed at problems with underwriting practices and lenders’ risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates,” Mr. Bernanke, whose nomination for a second term awaits Senate confirmation, said in remarks to the American Economic Association.

Technical models based on historical trends in United States housing prices and monetary policy show that home prices rose much faster than interest rates alone would have predicted, Mr. Bernanke said.

He also argued that trends in other countries demonstrated a “quite weak” connection between housing price appreciation and monetary policy.

Monetary Policy and the Housing Bubble

If you want to wade through 36 pages of self-serving claptrap, please consider Monetary Policy and the Housing Bubble by Ben Bernanke.

U.S. Monetary Policy, 2002-2006

The aggressive monetary policy response in 2002 and 2003 was motivated by two principal factors. First, although the recession technically ended in late 2001, the recovery remained quite weak and "jobless" into the latter part of 2003. Real gross domestic product (GDP), which normally grows above trend in the early stages of an economic expansion, rose at an average pace just above 2 percent in 2002 and the first half of 2003, a rate insufficient to halt continued increases in the unemployment rate, which peaked above 6 percent in the first half of 2003.

Second, the FOMC's policy response also reflected concerns about a possible unwelcome decline in inflation. Taking note of the painful experience of Japan, policymakers worried that the United States might sink into deflation and that, as one consequence, the FOMC's target interest rate might hit its zero lower bound, limiting the scope for further monetary accommodation. FOMC decisions during this period were informed by a strong consensus among researchers that, when faced with the risk of hitting the zero lower bound, policymakers should lower rates preemptively, thereby reducing the probability of ultimately being constrained by the lower bound on the policy interest rate.

...

All efforts should be made to strengthen our regulatory system to prevent a recurrence of the crisis, and to cushion the effects if another crisis occurs. However, if adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach. Clearly, we still have much to learn about how best to make monetary policy and to meet threats to financial stability in this new era. Maintaining flexibility and an open mind will be essential for successful policymaking as we feel our way forward.

You will have to read the full text to see, but amazingly Bernanke is sticking with his Savings Glut theory as the reason for the housing bubble as if massive credit expansion in the US and monetary printing in China somehow constitutes a "savings glut".

Please see Bernanke Blames Saving Glut For Housing Bubble for a rebuttal of Bernanke's thesis. Bear in mind it is absolutely impossible to have too much savings.

Also bear in mind that "Two weeks into the job, Bernanke testified before Congress that it was a positive that the nation's homeownership rate had reached nearly 70 percent, in part because of subprime loans." (See Anatomy of a Meltdown for details).

Now Bernanke blames inadequate subprime regulation for the housing bubble.

Bernanke also takes refuge in the Taylor Rule although there is considerable disagreement over what it says. My take is the Taylor Rule is fatally flawed because it fails to take into consideration housing prices (asset prices in general).

Watch what happens when the Case-Shiller Housing Index is substituted for OER in the CPI.

Case Shiller CPI vs. CPI-U



click on chart for sharper image

The above is from What's the Real CPI?

The Fed could have and should have acted to rein in property bubbles, but Bernanke is so dense he could not even see there was a property bubble.

Instead, Bernanke blames lack of regulation after initially praising the housing boom and subprime lending.

Fed Is The "Great Enabler"

Credit bubbles have their foundation in loose monetary policy that makes borrowing appear attractive. Those bubbles may manifest in the form of stock market bubbles as in the Nasdaq in 1997-2000 or housing in 2004-2007. Indeed the Fed is the "Great Enabler" of bubbles.

Just because bubbles do not form in the same way at the same time everywhere on the planet does not absolve the Fed from guilt.

Bernanke Incapable Of Learning

Bernanke has proven over time to be incapable of learning anything. He sticks with his theories no matter how flawed they are.

Here is a paragraph that proves it:

Is there any role for monetary policy in addressing bubbles? Economists have pointed out the practical problems with using monetary policy to pop asset price bubbles, and many of these were illustrated by the recent episode. Although the house price bubble appears obvious in retrospect--all bubbles appear obvious in retrospect--in its earlier stages, economists differed considerably about whether the increase in house prices was sustainable; or, if it was a bubble, whether the bubble was national or confined to a few local markets. Monetary policy is also a blunt tool, and interest rate increases in 2003 or 2004 sufficient to constrain the bubble could have seriously weakened the economy at just the time when the recovery from the previous recession was becoming established.

Any economist who could not see there was housing bubble brewing is straight up incompetent. That fact alone makes Bernanke incompetent. If the rest of the Fed could not see it, they are incompetent as well.

Moreover, in spite of the enormous crash we just went through, Bernanke is spouting nonsense about what might have happened if the Fed would have acted sooner in 2002 or 2003. How much damage does it take for Bernanke to admit the Fed blew it?

It is galling to read his self-serving platitudes.

Asymmetric Worries

If the Fed is so worried about using "blunt tools" then why is that worry so freaking asymmetric? Where was the concern in 1999 when Greenspan slashed rates over a ridiculous Y2K scare?

Where was the worry in 2002, 2003, 2004, 2005, 2006, or 2007?

Note how easily "blunt instrument" worries go out the window when there is a crisis or even perceived crisis. However, there is never a worry over the damage caused by holding rates too low, too long.

Bernanke, like Greenspan likes to blow bubbles. Bernanke, like Greenspan likes to blame others for his mistakes.

Bernanke's Magic Mirror

Without saying so directly, Bernanke just looked straight into the mirror, and pointed his finger not at himself, but rather at a reflection of Barney Frank for Congress' failure to regulate.

To be sure Fannie Mae and Freddie Mac made the problem much worse and we can thank Barney Frank in particular and Congress in general for that. We can also thank Barney Frank for countless other affordable housing schemes that made matters worse. Year in, year out, Barney Frank was one of the biggest congressional contributors to the mess.

Barney Frank surely deserves the finger, but not from hypocrites like Bernanke who fail to see their own bigger role in cresting this mess.

And so, with the help of Bernanke's magic mirror, this is the biggest case yet of the pot pointing the finger at the kettle, calling the kettle black.

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