Consumer Credit Drops $11.5 Billion, 5.6% annualized, 12th drop in 13 Months; Increase In January was a Mirage related to Student Loans

Take away January's rise in consumer loans related to government buying up more student loans from private lenders, and consumer credit would have fallen 13 consecutive months.

Please consider Consumer credit drop resumes

Total consumer credit fell a seasonally adjusted $11.5 billion, at an annual rate of 5.6%, to $2.448 trillion in February, the Federal Reserve reported. Economists predicted a decline in total borrowing of $0.7 billion in February, according to a consensus estimate from Briefing.com.

"February's decline reflects on the still dire state of the economy," said Yasmine Kamaruddin, an economic analyst at Wells Fargo.

"Even if we have seen retail sales and personal expenditure increase in past months, we haven't seen these gains translate into the use of credit because consumers faced with unemployment and slow wage and salary growth are still shying away from taking on credit," she added.

The decline was led by a 13% annual rate drop in revolving credit, which includes credit card debt.

"The pop last month didn't really reflect the consumer," said Kamaruddin. "It was really due to the federal government's holding of nonrevolving credit, since they were buying up more student loans from private lenders."

G.19 Federal Reserve Report

Inquiring minds may be interested in the raw data from the G.19 Federal Reserve Release



click on chart for sharper image

Consumer credit decreased at an annual rate of 5-1/2 percent in February 2010. Revolving credit decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent.

Some of that decrease is writeoffs. Regardless, this was a very weak report.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Eyes Wide Open

Here is an email from "Captain Sheeple" (Jeff) about a video he put together.

Hi Mish

I'm a daily reader of your blog. I'm also a long-time member of the Chris Martenson forum (JAG), and I made a video entitled "Eyes Wide Open" with the hope of attracting more people into a discussion of our current economic predicament.

I wanted to inquire if you might be interested in posting the video to your blog at some point. The video is really geared towards a younger audience than that typically found in the financial blogosphere, but any exposure can't hurt.
Thank you for everything that you do.
Jeff

Please consider Eyes Wide Open



Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Health Insurers Stop Offering New Coverage to Small Businesses and Individuals in Massachusetts in Battle Over Rates

The battle over health care costs in Massachusetts has intensified. Insurers want to hike rates while the regulators say no. In a showdown on regulatory power, Health insurers sue to raise rates.

A half-dozen health insurers yesterday filed a lawsuit against the state seeking to reverse last week’s decision by the insurance commissioner to block double-digit premium increases — a ruling they say could leave them with hundreds of millions in losses this year.

The proposed rate hikes would have taken effect April 1 for plans covering thousands of small businesses and individuals. Insurers wanted to raise base rates an average of 8 percent to 32 percent; tacked on to that are often additional costs calculated according to factors such as the size and age of the workforce.

Yesterday’s legal action sets the stage for a showdown between state regulators and the health insurance industry.

Governor Deval Patrick has made reining in runaway health care costs a centerpiece of his administration and his campaign for reelection — contending they are stifling the capacity of small businesses to create jobs. At the same time, health insurers argue that government is forcing them to sell policies at a loss that is unsustainable as the costs of medical services climb.

Filing the suit were Blue Cross and Blue Shield of Massachusetts, the state’s largest health insurer, and the five commercial members of the Massachusetts Association of Health Plans: Harvard Pilgrim Health Care, Tufts Health Plan, Fallon Community Health Plan, Health New England, and Neighborhood Health Plan. All are nonprofit carriers.

The insurance carriers will go before a judge on Thursday in Massachusetts Superior Court in Boston asking for a preliminary injunction against Insurance Commissioner Joseph G. Murphy’s decision to reject 235 of 274 premium hikes proposed by the insurers.

Barbara Anthony, undersecretary of the state Office of Consumer Affairs and Business Regulation, which oversees insurance regulators, defended Murphy’s rulings and said the insurers’ lawsuit lacked merit. She said state law gives the commissioner the right to reject rates that are excessive compared to the benefits provided. “He’s on firm legal ground in disapproving the rates,’’ Anthony said.

Coverage Denial

Depending on the outcome of the lawsuit, states may mandate rates, but they cannot force businesses to issue policies.

Please note insurers have stopped issuing new policies as noted in State, insurers up the ante over health rates.

The stand-off between Massachusetts regulators and health insurance companies intensified today as most insurers stopped offering new coverage to small businesses and individuals while state officials demanded that the insurers post updated rates online and resume selling such policies by the end of the week.

People seeking to buy health insurance for the first time, or existing customers looking to change policies, found themselves out of luck, at least temporarily, in the aftermath of last week's decision by the state Division of Insurance to reject 235 of 274 premium increases proposed by insurers for what is known as the small group market. The segment covers about 800,000 residents.

That Did Not Take Long

Less than a week ago, in Health Care Price Controls Hit Massachusetts I noted that state regulators denied rate increases to Massachusetts health insurers.

At the time I asked a few questions including ...

• Excuse me for asking but wasn't Obamacare supposed to increase competition and lower health care prices?


• When do health care companies pull out of Massachusetts?

The answers are now in: 1) Yes, but it didn't happen. Nor does it look like it ever will. 2) Now.

Addendum:

"BB" writes:

Mish, Doesn't it look all too convenient that rather than trying to contain costs by pressuring hospitals to keep costs in check, insurers prefer to hike rates and keep their profit margin on the higher valued insurance premiums?

Indeed. The system is broken and we knew in advance that Obamacare did nothing to increase competition or lower costs. Instead it provided a new pool of insureds who were forced to buy health care or pay a penalty.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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L.A. to Shut Down City Departments in Budget Crisis; IBEW Local 18 Head: "How Taxpayers Feel Is Not Relevant"

Yesterday I noted L.A. Controller Says City Could Run Out of Cash by May 5

After raising taxes and fees, again and again and again, the city is broke and Mayor Villaraigosa is blaming the city council for not hiking fees yet again.

Having run the city into the ground, Villaraigosa calls for shutting down some city departments amid budget crisis

Los Angeles Mayor Antonio Villaraigosa called Tuesday for all city agencies -- except for police, other public safety and revenue-generating departments -- to close for two days a week starting April 12 because of the city's continuing budget crisis.

"We have to act, and we have to act quickly," Villaraigosa said at a press conference.

Villaraigosa's call comes one day after executives with the city's Department of Water and Power said they would recommend not sending a promised $73.5-million contribution to the city's beleaguered treasury because the City Council recently declined to grant a desired electricity rate increase.

Union contracts and pension benefits are the biggest city problem and Villaraigosa is ignoring police and fire departments, the worst problems of the lot.

DWP Digging

I have been doing a bit of digging into where those DWP rate hikes go. Here is an interesting article from way back in July 2008: L.A.'s best jobs: Average utility employee earns $76,949 per year

As the Los Angeles Department of Water and Power seeks a hefty taxpayer rate hike, a Daily News review of salary data shows the average utility worker makes $76,949 a year - or nearly 20 percent more than the average civilian city worker.

More than 1,140 of the utility's employees - or about 13 percent - take home more than $100,000 a year. And General Manager Ron Deaton, who is on medical leave, rakes in $344,624 a year - making him the city's highest- paid worker.

DWP salaries are on average higher than city and far higher than private-sector workers' even as the utility has come under fire for recent power outages and another round of rate hikes: A 9 percent, three-year electric-rate hike and a 6 percent, two-year water-rate hike.

While DWP workers have long been some of the highest-paid in the city, salaries got even more lucrative two years ago with a five-year contract guaranteeing 16.8 percent raises and up to 28 percent depending on inflation.

According to a study by Huron Consulting Group earlier this year, the total cost per full-time employee in fiscal 2007 was $142,400 a year including health care, death benefits and disability, workers' compensation, medical services, employee health benefits and training.

That's expected to rise to $151,000 in just five years.

"The increase in cost per employee is primarily due to wage increases dictated by the union contract," the study said.

Meanwhile, even though a city report concluded nearly four years ago that the pay disparity between DWP workers and civilians in some jobs was as much as 55 percent, the Daily News review of current DWP salaries shows the issue has remained unaddressed.

Bear in mind that is from July 2008. The DWP now wants a 22% hike for businesses and up to a 28% hike for residential customers.

Amazingly Mayor Villaraigosa has the gall to blame the city council for the budget crisis, for not approving those rate hikes.

Repeating a snip from the first link ...

Reckless, Irresponsible Spending

The mayor is now blaming the city council. Instead, Mayor Antonio Villaraigosa ought to look in a mirror to see who is to blame.

The city is broke because Mayor Villaraigosa led the City down a path of reckless and irresponsible spending says blogger Phil Jennerjahn in Petition to Recall Mayor Antonio Villaraigosa

Despite record income over the last five years, Mayor Villaraigosa has led the City down a path of reckless and irresponsible spending that would have been avoided by a more professional and logical City Official. In the face of a crushing recession, the Mayor actually accelerated spending and hiring to the point that the City may have to declare BANKRUPTCY before the end of 2010.

While he is now asking City officials to eliminate 1000 city jobs, the Mayor has selfishly refused to fire a single member of his enormous staff - including 16 Deputy Mayors and 93 personal staff members.

In 2009, the Mayor offered a 3.9 BILLION dollar contract to the IBEW (Electricians Union) for the potential construction of solar panels. The no-bid contract, awarded without competition to his political supporters, creates the appearance of corruption and collusion, and would have increased costs for citizens of Los Angeles.

DWP Salary Schedule

Here is a list by name and title of DWP Salaries.

Unfortunately the list is from 2007 and severely out of date. I am sure salaries are much higher now.

The Price Of Power

Inquiring minds are reading SoCal Connected Investigates The Price of Power

In the middle of the worst budget crisis in Los Angeles history, one department is thriving without mandatory job cuts, furlough days or loss of the perks they've come to enjoy. In fact, thanks to a new contract approved by the L.A. City Council in December, most of its already well-paid workers will get salary increases over the next five years. Which department is it? It's the Los Angeles Department of Water and Power (DWP) and this week SoCal Connected Anchor Val Zavala looks into how the DWP stays immune from L.A.'s fiscal problems.

In a rare sit-down interview, Brian D'Arcy, powerful head of the IBEW Local 18 (the union representing 9 out of ten DWP workers) defends the deal, saying the higher salaries paid DWP workers are merely the price of attracting talent in a competitive job sector. Confronted with the complaints of angry ratepayers, he responds that "...generally how they feel is not relevant."

According to a former DWP commissioner, some L.A. residents should soon expect their utility bill to exceed their monthly mortgage.

IBEW Local 18 Head: "How Taxpayers Feel Is Not Relevant"

Sadly that appears to be the attitude of L.A.'s politically and morally corrupt mayor as well.

L.A. desperately needs to dump Villaraigosa and elect a mayor and city council willing to stand up to union thugs.

Better yet, the city should declare bankruptcy immediately and seek to overturn those contracts in court on grounds the bargaining was not in good faith. Clearly, no one was representing the taxpayer.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Food Stamp Usage Hits Record 39 Million, 14th Consecutive Monthly Increase

Food stamp usage is up again except the program is now called SNAP Supplemental Nutrition Assistance Program.

Inquiring minds are looking at a SNAP Participation Table that shows a record 39,430,724 receive SNAP benefits, a 22.4% increase from a year ago.

Biggest State Increases

Arizona - 32.9%
Colorado - 32.9%
Florida - 38.6%
Idaho - 45.7%
Nevada - 46.9%
Rhode Island - 42.4%
South Dakota - 32.6%
Utah - 37.3%
Wisconsin - 38.9%
Wyoming - 40.0%

Those numbers are as of January 2010

Households

Household SNAP participants increased from 12,728,981 in Fiscal Year 2008 to 15,232,105 in fiscal year 2009, a 16.4% increase. For comparison purposes, watch the growth in household participation.

SNAP Household Participation

FY 2005 - 11,197,377
FY 2006 - 11,734,491
FY 2007 - 11,789,594
FY 2008 - 12,728,981
FY 2009 - 15,232,105

Cost of SNAP Program

FY 2005 - $31.07 Billion
FY 2006 - $32.91 Billion
FY 2007 - $33.19 Billion
FY 2008 - $37.66 Billion
FY 2009 - $53.63 Billion

Household and cost numbers are as of March 30, 2010.

Clearly the recession took its toll, and will continue to do so until there is a dramatic decrease in the unemployment rate.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Detroit Bankruptcy Looms with Deficit of $446 Million in Budget of $1.6 Billion

Detroit has hit the end of the line. It's budget deficit is between $446 million and $466 million (28% to 29%) of $1.6 billion with few ways other than drastic cuts in wages and benefits to address the problem.

If unions will not give in (and they won't), Detroit Faces Bankruptcy.

Mayor Dave Bing and the City Council must reduce the size of government and slash the city's budget deficit to stave off bankruptcy or state receivership, according to a report released Monday.

Without draconian cuts and changes aimed at downsizing government, the city could end up with a "possible" general fund deficit between $446 million and $466 million to its $1.6 billion budget.

"Detroit city government must be restructured," according to the report from the Citizens Research Council of Michigan, a nonprofit that has studied Detroit finances for decades. "The new structure must reflect both the reduced tax base and the limited ability of state government to provide shared revenues."

The report, titled "The Fiscal Condition of the City of Detroit," was prepared at the request of Business Leaders for Michigan, a statewide coalition.

The 60-plus page report outlines much of what officials know: The city's dramatic population loss, high unemployment and other ills have had adverse effects on the city. And now government must respond in a dramatic way to downsize and make sound budget choices, the report argues.

The Fiscal Condition of the City of Detroit

With that introduction, inquiring minds are diving into the Citizens Research Council report on The Fiscal Condition of the City of Detroit

The Economic Base

The deterioration of the economic base of the city has accelerated. There were an estimated 81,754 vacant housing units (22.2 percent of the total) in Detroit before the recession; that number increased to an estimated 101,737 (27.8 percent of the total) in 2008.

The average price of a residential unit sold in the January through November, 2009 period was $12,439, down from $97,847 in 2003. Remaining businesses and individuals are challenging property tax assessments on parcels that have lost value and, in some cases, cannot be sold at any price.

More than half of employed city residents work outside the city limits; the metro area has the highest unemployment rate of the 100 major metro areas in the U.S.

Revenues

All major tax revenues will be below budgeted levels, significantly so in some cases. State revenue sharing was budgeted at an amount equal to the prior year budget, but state budget problems will result in reductions that could add $40 million or more to the projected deficit.

The city budgeted $275 million as revenue from the monetization of assets. Although there is precedent for the sale of future revenue streams in other cities and states (Chicago leased the Chicago Skyway Toll Road and parking meters, and tried but failed to lease Midway Airport), it is highly unlikely that Detroit can sell future revenues from the parking and lighting departments.

Expenses



The Potential Deficit

The city could well end the year with an accumulated deficit that is over a quarter of the total $1.6 billion general fund:

• $280 million - Budgeted prior years accumulated deficit
• $46 million - Estimated increase in prior years accumulated deficit
• $80-$100 million - Estimated current year general fund operating deficit
• $40 million - Potential state revenue sharing shortfall

The possible general fund deficit is $446-$466 million.

Personnel costs are 50.1 percent of all general fund appropriations. The plan for reducing expenditures includes a ten percent wage cut and layoffs. If laid off employees earn salaries in the $30,000 to $50,000 range and if civilian pension and fringe benefit costs are 65 percent of salaries, about $66,000, less unemployment benefits, could be saved per laid off employee in the first full year. One thousand layoffs would therefore produce a savings of $66 million, less unemployment benefits, in the first full year of the layoff.

Potential Solutions

Clearly, the city government cannot afford to remain at its present size. There are four ways the government can downsize:

• The elected mayor and city council can develop and implement required changes.
• The mayor and city council can implement changes specified in a consent greement
reached with a review team appointed by state officials under the Local Government Fiscal Responsibility Act
• An emergency financial manager appointed under the Local Government Fiscal Responsibility Act can negate the authority of the mayor and city council, can implement changes, and can renegotiate (but not abrogate) contracts.
• If an emergency financial manager recommends, and the state approves, reorganization and restructuring can occur under protection of bankruptcy, which does allow contracts to be abrogated. No Michigan municipality has ever filed under federal bankruptcy laws.

In order to address what could be an accumulated general fund deficit exceeding $400 million, Detroit city government must be restructured. The new structure must reflect both the reduced tax base and the limited ability of state government to provide shared revenues. Restructuring will necessitate process improvements, load shifting, load shedding, privatizing, concentrating service delivery on an area
smaller than 138 square miles, and other strategies.

The most recent Crisis Turnaround Team has recommended closing facilities, privatizing services, improving and centralizing processes, renegotiating contracts, improving debt collection, restructuring debt, and other actions. It remains to be seen whether the city’s elected officials will be able to implement these recommendations.

Pensions

While the most recent published actuarial valuations for the city’s pension systems indicate that there were no unfunded accrued liabilities, all public and private
pension systems have suffered the effects of stock market and real estate market volatility over the past two years.

The Auditor General’s analysis notes that the budget includes a third excess funding
credit of $25 million used to reduce the required contribution to the Police and Fire Retirement System, and that no provision has been made for the cost of implementing the defined contribution plan, estimated to exceed $20 million.

Detroit has an unconditional contractual obligation to make debt service payments on the pension obligation certificates. Failure to make payments when due allows the contract administrator to file a lawsuit to force payment. A court judgment could require the city to raise the payment through an unlimited tax levy, for which voter approval is not required by Michigan law.

Privatization

The 1997 Detroit City Charter created new provisions ostensibly authorizing the city to privatize city services. The process created in Section 6.307 of the Detroit City Charter, for the most part, laid out best practices for a meaningful examination of the costs and benefits of privatizing services.

However, interwoven in that section is language that does more to hinder privatization than to facilitate it. The most glaring hindrance is created in subsection 7 requiring a super-majority (2/3) vote by city council to approve the privatization of any city services.

Summary

Detroit city government must be restructured; the organization chart must be more compact. This will require strong leadership and clear lines of authority. The new structure must reflect both the reduced tax base and the limited ability of state government to provide shared revenues. Restructuring will necessitate process improvements, load shifting, load shedding, privatizing, concentrating service delivery on an area smaller than 138 square miles, and other strategies. The most recent “crisis turnaround team” has recommended closing facilities, privatizing services, improving and centralizing processes, renegotiating contracts, improving debt collection, restructuring debt, and other actions. It remains to be seen whether the city’s elected officials will be able to implement these recommendations.

Detroit Should Embrace Bankruptcy

The only legitimate solution for Detroit is shed pension obligations, privatize everything it can including the fire department, and dump unions contracts en masse. Since those items can only happen in restructuring, Detroit should openly embrace bankruptcy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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L.A. Controller Says City Could Run Out of Cash by May 5

Los Angeles is in deep trouble. The situation has gotten so grim that the city controller says L.A. to Run Out of Cash in a Month.

Los Angeles will run out of cash on May 5, city Controller Wendy Greuel said today in a release in which she requested a $90 million transfer of reserve funds to pay bills.

“The question I have been asked most often during the budget crisis is, ‘When will the city run out of money?” Greuel said in the e-mailed release. “Unfortunately, we finally have the answer.”

Greuel, 48, said in the release that the city might not be able to make payroll. She asked Mayor Antonio Villaraigosa and the City Council to release $90 million from reserve funds to meet what she described as “an urgent cash need.” The controller’s financial reporting division estimated that the city would need $90 million to ensure solvency through the fiscal year that ends June 30, according to Golombek.

The crisis came to a head on Monday when the Los Angeles Department of Water and Power today indicating the utility wouldn’t send an anticipated $73 million payment to the city’s general fund.

The Department of Water and Power normally makes an 8% contribution to the city in lieu of taxes but does not have the expected $73 million because the city council blocked a proposed electricity rate hike.

Reckless, Irresponsible Spending

The mayor is now blaming the city council. Instead, Mayor Antonio Villaraigosa ought to look in a mirror to see who is to blame.

The city is broke because Mayor Villaraigosa led the City down a path of reckless and irresponsible spending says blogger Phil Jennerjahn in Petition to Recall Mayor Antonio Villaraigosa

Despite record income over the last five years, Mayor Villaraigosa has led the City down a path of reckless and irresponsible spending that would have been avoided by a more professional and logical City Official. In the face of a crushing recession, the Mayor actually accelerated spending and hiring to the point that the City may have to declare BANKRUPTCY before the end of 2010.

While he is now asking City officials to eliminate 1000 city jobs, the Mayor has selfishly refused to fire a single member of his enormous staff - including 16 Deputy Mayors and 93 personal staff members.

In 2009, the Mayor offered a 3.9 BILLION dollar contract to the IBEW (Electricians Union) for the potential construction of solar panels. The no-bid contract, awarded without competition to his political supporters, creates the appearance of corruption and collusion, and would have increased costs for citizens of Los Angeles.

Taxes and Economic Policies

Wikipedia has some interesting facts about Taxes and Economic Policies.

Taxes

Villaraigosa has tripled the city's trash collection fee from $11 per month to $36.32 per month for single-family homes. Villaraigosa supports Proposition O, which currently adds $10.22 to the property tax bill of a $350,000 home and will eventually climb to $35. The mayor also campaigned last fall for two education bond measures that will increase the size of property tax bills over the next decade.

LADWP Controversy

On March 23, 2010, Villaraigosa in a leaked memo, warned the Los Angeles City Council that their potential failure to support a series of four proposed rate increases totaling 37% and already approved by the city's Department of Water and Power would be "the most immediate and direct route to bankruptcy the city could pursue".

Water use

On August 10, 2007, The Los Angeles Times published an expose on water use by Villaraigosa at his private residences. During the Summer of 2007, Villaraigosa challenged Los Angeles residents to slash their water use by 10% in the face of an historic drought. "Los Angeles needs to change course and conserve water to steer clear of this perfect storm," Villaraigosa said then. But DWP records obtained by the Los Angeles Times show that he and his family used 386,716 gallons of water at their Mount Washington home, far higher than the average of 209,000 gallons. Villaraigosa blamed his high water use on "gophers that chewed holes through a rubberized drip-irrigation system."

Labor Organizer

Villaraigosa been criticized because of the high frequency in which he holds press conferences, attends photo-ops, and travels out-of-town (including campaigning for Hillary Clinton).

Before being elected to public office, Villaraigosa was a labor organizer. Villaraigosa served as a national co-chairman of Hillary Rodham Clinton's 2008 presidential campaign and as a member of President Barack Obama's Transition Economic Advisory Board.

And so, after raising taxes and fees, again and again and again, the city is broke and Villaraigosa is blaming the city council for not hiking fees yet again.

L.A. is bankrupt

There is no way L.A. can pay pension obligations thanks to overly generous union contracts and pension benefits. Heck L.A. might not be able to pay any bills on May 5 unless the council votes to increase utility fees.

The best thing Villaraigosa could do would be to admit L.A. is broke and hope to tackle wage and pension issues in bankruptcy court. Instead, and as I commented on January 22, 2010 Mayor of Los Angeles Says "Bankruptcy is Not an Option"

When a politician says something is "not an option" that generally means it is (or soon will be).

... LA is bankrupt, all we are talking about here is whether the city realizes it or not. The mayor's statements prove he does not fully realize the gravity of the situation. Villaraigosa is unfit for office.

In response to the above, an attorney friend of mine had this to say:

If LA's unpaid creditors start attaching assets, the mayor has no choice. Literally. He would have to immediately terminate all LA employees before they accrued federal tax trust amounts. If he allows those amounts to accrue without funds to pay them, he's committed a federal felony.

Here's how it works. Basically, you can stiff creditors generally or "stretch" them as is the bankruptcy parlance. So though somebody is on 30 day terms, you effectively fall behind and pay them effectively on 90 day terms. And on one-time creditors whom you don't need in the future, you just stiff them. So long as you have enough cash to pay the employees for the tax trust fund accounts they are accruing -- and generally for their compensation -- you can keep skating. So if LA or Illinois ever get that low on cash, a filing will happen.

Also if lots of those little (and not so little) creditors get restless and sue, you start having problems. They can move for pre-judgment attachments of cash -- freezing cash and preventing it from being used for other purposes -- like paying employees or putting money away for trust funds. Or they can choose simple expedited collection procedures that lead to prompt judgments and attach cash post-judgment. Same effect, you have to file.

But LA and Illinois, I'm sure, have excellent lawyers who know this. Saying bankruptcy is not an option is total bulls*** and he knows it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Judge Holds Off Ruling After Boston Scientific Admits Hiding Problems With Implantable Heart Defibrillators

Boston Scientific admits it failed to disclose short-circuiting problems with its defibrillators. Some users died as a result. But hey, anything for a profit, especially when penalties are low. Please consider Judge Holds Off Boston Scientific Unit Plea in Probe.

A federal judge reserved ruling on a guilty plea by Boston Scientific Corp.’s Guidant unit to charges it hid problems with its implantable heart defibrillators, citing objections raised by plaintiffs suing the company.

U.S. District Judge Donovan Frank in St. Paul, Minnesota, said today he will rule on the plea and a related settlement within three weeks when he decides whether to put the company on probation and order restitution.

The medical device-maker agreed to plead guilty to two misdemeanors for excluding defibrillator-malfunction reports from product updates sent to doctors and failing to alert the U.S. Food and Drug Administration to the defects. Boston Scientific agreed to pay $296 million in November to settle a U.S. Justice Department probe of the unit’s handling of the devices.

Prosecutors said in court papers that Guidant officials learned as early as 2002 that some of the defibrillators had short-circuiting problems that led to some users’ deaths. The company didn’t disclose the defects for more than three years, the government added in the filings.

Last month, Boston Scientific halted all sales of heart-rhythm devices because of an erroneous filing with regulators.

“When a corporation who makes life-saving devices lies to the FDA, that puts the implantees and others at risk,” Charles Zimmerman, an attorney for plaintiffs, said during today’s hearing. “Today Guidant comes before the court and asks you to accept a plea of guilty in which they admit they have lied.”

Boston Scientific’s shares fell the most in 17 months on March 15 after the company said it stopped sales of defibrillators because of a documentation error. The devices brought in $1.79 billion last year, or 22 percent of Boston Scientific’s revenue, according to data compiled by Bloomberg.

The company’s heart pacemakers and defibrillators are implanted in patients’ bodies to shock hearts back into normal rhythm.

Earlier today I commented that Pfizer Caught Illegally Marketing Bextra. However, the Feds would not prosecute because "Pfizer Is Too Big To Nail".

Pfizer got off with a fine, while Boston Scientific plead guilty to two misdemeanors. As long as companies get off with insignificant penalties, do not expect corporate behavior to improve.

In poetic justice of sorts, Boston Scientific paid $27 billion for Guidant in 2006. The market cap for Boston Scientific is currently $11 billion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Trash Collecting Entrepreneur Squashed In San Francisco

In response to Seattle Trash Collectors Make Average of $109,553 But Want More; 1,600 Apply to Haul Trash if Teamsters Strike I received an Email from Michael about union monopolies in San Francisco.

Michael Writes ...

Here in San Francisco picking up a garbage costs about $37/can per week.

A contractor I know got fed up, canceled his service as did his neighbor. They simply loaded both houses garbage into his truck, took it to the dump and paid the $40 to get rid of it. He charged his friend $10.

As a contractor he had to go to the dump all the time anyway. Pretty soon he had a small business, neighbors paying him $10 instead of $37, a difference of over $1400 per year or the price of a vacation or plasma TV for the family.

He sorted their garbage and turned in the recycling for more money. Normally the neighbors had to keep two cans, sort their garbage themselves and the Garbage monopoly took all the recycling fees anyway.

Pretty soon he hired a couple of neighborhood kids and his crew of 3 did both sides of residential streets at the same time. If you had an old monitor or TV, motor oil, or paint to get rid of he'd take that too, sometimes he'd charge you $5 + what the dump charged for the special item. Need an extra pickup? No problem. He'd work from 5am to 8am and he was earning $200 per day and his workers $75.

The amazing thing he kept telling me was that the larger the truck you had the more money you could make. He was amazed that with only a modified large pickup truck he could make money at a third of what the Garbage company charged.

When the local garbage company and its union found out about "Joe" they complained to the city. Within a year a law was passed stating that garbage service was now mandatory for all residents at the price the city's monopoly charged, which was shortly raised. And Joe? For a while he still took our recyclables until he was fined $4000, even though he had our permission. It appears our household recyclables are owned by the Garbage company, not us, as it subsidizes our low cost of garbage service!

It is clear that monopolies are bad in business or unions and monopoly unions exist to enrich a class of privileged workers at the expense of ordinary workers.

Cheers, Michael

In regards to trash hauling wages in Seattle, many people wondered how Waste Management arrived at the figure of $109,553 per employee.

It should not have been two difficult to find. Links were in the article. Here is Waste Management's Economic Proposal To Teamster Local #174.



As I stated in the first link, $109,553 is simply preposterous, yet the union complained and even authorized a strike.

Trash collection can easily be done for a third of what the union gets as "Joe" in San Francisco proved. Thus, a total compensation packaged for hauling trash for $50,000 would be extremely generous. Yet the union complains about compensation totaling $109,553.

Seattle should put the contract to a genuinely competitive bid as should San Francisco. Taxpayers should not have to put up with union thugs or corrupt politicians buying votes.

No doubt some will crow this example proves privatization does not work. Nothing could be further from the truth. Indeed "San Francisco Joe" proves privatization would work in spades if given a chance.

Corrupt politicians in Seattle and San Francisco simply bought union votes and taxpayers were screwed by this unholy alliance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Pfizer Caught Illegally Marketing Bextra, Feds Won't Prosecute Because "Pfizer Too Big To Nail"

CNN Health has an interesting article detailing illegal marketing practices at Pfizer. However, government officials looked the other way because Pfizer too big to nail.

Imagine being charged with a crime, but an imaginary friend takes the rap for you.

That is essentially what happened when Pfizer, the world's largest pharmaceutical company, was caught illegally marketing Bextra, a painkiller that was taken off the market in 2005 because of safety concerns.

Internal company documents show that Pfizer and Pharmacia (which Pfizer later bought) used a multimillion-dollar medical education budget to pay hundreds of doctors as speakers and consultants to tout Bextra.

Pfizer said in court that "the company's intent was pure": to foster a legal exchange of scientific information among doctors.

But an internal marketing plan called for training physicians "to serve as public relations spokespeople."

According to Lewis Morris, chief counsel to the inspector general at the U.S. Department of Health and Human Services, "They pushed the envelope so far past any reasonable interpretation of the law that it's simply outrageous."

By April 2005, when Bextra was taken off the market, more than half of its $1.7 billion in profits had come from prescriptions written for uses the FDA had rejected.

But when it came to prosecuting Pfizer for its fraudulent marketing, the pharmaceutical giant had a trump card: Just as the giant banks on Wall Street were deemed too big to fail, Pfizer was considered too big to nail.

Why? Because any company convicted of a major health care fraud is automatically excluded from Medicare and Medicaid. Convicting Pfizer on Bextra would prevent the company from billing federal health programs for any of its products. It would be a corporate death sentence.

Prosecutors said that excluding Pfizer would most likely lead to Pfizer's collapse, with collateral consequences: disrupting the flow of Pfizer products to Medicare and Medicaid recipients, causing the loss of jobs including those of Pfizer employees who were not involved in the fraud, and causing significant losses for Pfizer shareholders.

"If we prosecute Pfizer, they get excluded," said Mike Loucks, the federal prosecutor who oversaw the investigation. "A lot of the people who work for the company who haven't engaged in criminal activity would get hurt."

Pfizer says the company has learned its lesson.

But after years of overseeing similar cases against other major drug companies, even Loucks, isn't sure $2 billion in penalties is a deterrent when the profits from illegal promotion can be so large.

"I worry that the money is so great," he said, that dealing with the Department of Justice may be "just of a cost of doing business."

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Why Repegging the Yuan and Other Non-Free-Market Solutions to Trade Imbalances With China Will Fail

In spite of much yapping by economists, especially Paul Krugman, I strongly doubt a currency repeg by China would do much (if indeed anything at all) to cure any global imbalances.

As a starting point in understanding why, please consider this statement made by Michael Pettis in response to a comments on his post How will US savings rate rise if you don’t penalize consumption?

"...to use a controversial example, if the US were able to force up the value of the dollar by 20% or more against all other currencies, it would become far more profitable to produce cars domestically, it would revive the aluminum and chemical industries, and it might cause a significant divergence of electronics assembly to the US."

Ironically, if that is the case, then it would appear the solution to the global trade imbalance is for a stronger dollar not a weaker one. Yet nearly everyone except China is clamoring for a weaker dollar.

Correction From Pettis:

Mish, sorry, I meant force “down”, not up. The point is that if the dollar were devalued by 20%, the immediate impact would that US manufacturers would become much more profitable and foreign much less so. That would shift US and foreign consumption of cars from foreign producers to US producers, and would of course have a positive impact on US employment.

Now over the longer term that advantage would disappear as inflationary pressures in the US eroded the initial price advantage, but assume that the US closed its capital account and engaged in very heavy sterilization and financial repression — as China and the other “Asian development model” countries do and did. This would permit the relative price advantage of US cars to persist indefinitely, until enough capital misallocation in the US eventually created its own distortions.

Who Is The Manipulator?

Stepping back for a moment, why is it manipulation for China to peg its currency where it wants, yet it is not manipulation when the Fed pegs short-term interest rates where it wants, and openly monetizes treasuries and agencies on top up it?

Supposedly the Fed's monetization ended in March, but we will see.

Regardless, the pot is clearly calling the kettle black when it comes to blatant manipulation.

Yet, Krugman screams "manipulation" at the top of his lungs and wants massive tariffs if China will not do something about its supposedly undervalued Renmimbi.

I expressed some thoughts on China and balance of trade issues on March 22 in China Not As Simple As Krugman Thinks; The Coming Trade War With China.

Finding a cure to global imbalances is far more complex than currency. Yet most are focused on the "currency manipulation" aspect of China's peg, hoping to force China to revalue the RMB.

Is The Trade Deficit Even A Problem?

According to Rothbard in Money and Its Purchasing Power "More nonsense has been written about balances of payments than about virtually any other aspect of economics."

Economist Frank Shostak explains what Rothbard meant in Does the widening US trade deficit pose a threat to the economy?'.

Most economists are of the view that the ever-growing US trade deficit and the subsequent expanding foreign debt pose a threat to the well-being of Americans. What is then required, so it is held, is to set in motion policies that will help curtail the widening trade imbalances between the United States and the rest of the world. Focusing on the trade deficit as the supposedly major problem of the US economy only diverts the attention from the real culprit, which is the US central bank.

What matters for the process of wealth formation is the flow of real savings. The balance of payments statement doesn't provide such information. Consequently, it is not possible to determine the implications of a given state of the current account on the well-being of Americans without information regarding the state of the flow of real savings. Therefore various pessimistic assessments regarding the US economy, which are based on the state of the balance of payments, are likely to be without much foundation.

I agree with Shostak that the Fed is the problem, not the trade deficit per se. However, does anyone believe the flow of real savings in the US has been positive? Likewise, does anyone think the trade deficit is not a symptom of a negative flow of real savings?

Looking At Solutions In Isolation Is A Mistake

One problem I see is that everyone looks at various "solutions" in isolation, without considering alternative market reactions.

For example ...

The Fed and many others believe a weaker dollar will stimulate exports. In practice however, a weaker dollar might stimulate more speculation than exports, just as it did from 2002-2007.

If the US wants to encourage savings, a higher interest rate and stronger dollar would sure do it. However, the Fed does not want to raise rates with unemployment so high.

In regards to manufacturing: Wages certainly enter into play, so much so, that wages (not currency exchange rates) are likely the determining factor as to where manufacturing takes place.

In regards to agricultural exports: weather, soil, rainfall, and land are likely to be the determining factors.

In theory, energy prices could rise so high on account of peak oil, that shipping costs could become a major determining factor for all goods and services.

In regards to the RMB: Given that 99% of economists think the RMB would soar if China floated it, I am not convinced it would.

When have 99% of economists ever been right? Bear in mind, I am making up a number, but sentiment is overwhelming for sure.

What if the RMB fell? Heck what if it just stayed flat? Or what if it rose and then hot hedge-fund money rapidly exited China, profit in hand?

Note too, the recession did more to reduce US trade deficits than a collapsing dollar did.

That is just a start of this intertwined mess. Thus, things are sure a lot more complicated than Krugman makes them out to be.

Let's back up a second and ask a seemingly simple question: Exactly what problem are we trying to solve?

It should not take much reflection to realize that is not such a simple question, and problems go well beyond trade.

Major Global Problems

• Trade Imbalances
• Massive consumer debt and leverage especially in the Western world
  
• Huge wage differentials between developing and developed countries
• Public unions contribute to wage imbalances and savings internally
  
• Unfunded liabilities such as Social Security
• Unsustainable pension promises in the US, Europe, and Canada.
• High US unemployment
• Commercial Real Estate Bubble in the US
  
• Real estate bubbles in China, Canada, Australia, and the UK that have not popped but most assuredly will
• Demographic nightmare in Japan
• Interest rates artificially low in the US, UK, and EU
• The PIIGS
• Stock market bubbles reinflated
• Carry trade speculation

I am certainly in favor of letting the free market solve all of those. Indeed many of them are so intertwined, that only the free market has a chance in hell of solving them.

Non-Free-Market Solutions Failed Miserably

Central banker actions, Congressional actions, and SEC sponsored non-free-market ideas all failed miserably. Proof of that statement is easy enough to find.

Example number one: What does Japan have to show for fighting deflation for 20 years but the largest debt to GDP ratio in the world? Yet the Fed is back at it with monetarist policies and Congress is following up with Keynesian stimulus efforts that wrecked Japan.

Example number two: A massive housing bubble was a direct result of the Fed's attempt to stimulate its way out of the 2001 recession.

Example number three: The SEC sponsored the big three rating agencies by changing the rating agency model from quality to quantity. Please see Time To Break Up The Credit Rating Cartel for details.

Example number four: Fannie Mae and Freddie Mac

What about Tax Policy and Tariffs?

US corporate tax policy certainly encourages corporations to produce and hold profits overseas. What if tax policy allowed deferral of profits in the US instead of overseas?

If the US imposed tariffs, what if China were to say in response "OK we will buy planes from Airbus instead of Boeing"?

Indeed, it would not surprise me one bit if a threat like that from China (or fear of a threat like that from China) is the reason we have not yet seen the Treasury department label China a currency manipulator.

Through China's Eyes

Looking at things from China's point of view, what happens if China slows and there is social unrest?

Property Bubbles

The property bubbles in Canada, Australia, and China have reached spectacular heights.

Please see Email from a Chinese on China's Real Estate Bubble for one person's view.

Things That Need To Happen

• China needs to float the RMB.
• The US and the rest of the world need to let the market set interest rates.
• Globally, bad banks need to fail instead of being propped up.
• Housing prices need to fall to the point where they are affordable.
• The US needs to encourage savings.
• China and the US need to stop insane levels of fiscal stimulus
• The US needs to stop being the worlds policeman.

Currency Peg Cannot Possibly Work

Attempting to solve global trade imbalances by forcing China to repeg the Renminbi is like attempting to put out a house fire by turning on the air conditioner.

If there is a perfect number to peg to, only the free market can find it, because the number will constantly change.

Likewise, no central banker knows what short term interest rates should be. Yet they all manipulate rates, often with conflicting goals. For example, does any central bank want a strong currency now?

Certainly, insane stimulus needs to stop across the board, and that especially includes China and the US. Indeed, it was massive stimulus and excessively low interest rates following the 2001 recession that fueled the global debt and housing bubbles. Excessive stimulus is fueling commodity speculation and the property bubbles in China, Canada, and Australia right now.

The irony is no country (especially the US and China) wants to give the free market a chance, even though regulation (Fannie, Freddie, and the rating agencies) together with preposterously low interest rates from the Fed and central bankers in general is exactly what created this mess.

Instead, the US and China (along with Europe and Japan) are all involved in mutual finger pointing, with no country willing to do what really needs to be done: trust the free market to fix these problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Seattle Trash Collectors Make Average of $109,553 But Want More; 1,600 Apply to Haul Trash if Teamsters Strike

One might think that $109,553 in this economy would be way more than enough to keep nearly anyone happy. In Seattle, it will not even keep trash collectors happy.

Please consider Teamsters dump Waste Management's 'best, last, final offer'

The Teamsters Local 174 says it has chosen not to accept Waste Management's 'best, last, final offer."

Union spokesman Michael Gonzales said the Teamsters have submitted a new proposal with "significant movement," and have no plans to strike.

Waste Management's five-year offer includes a wage increase of $1 per hour in the first year, bumping up the current pay rate of $26.29 per hour by 3.7 percent.


In addition, Waste Management said it is offering a one-time $1,000 bonus to each employee if the contract is ratified by April 3.

"By attaching an artificial deadline, it looks like they're trying to ram a bad contract down the sanitation workers' throats," said Brent Barrett, a yard waste driver.

A bad Contract?

The Teamsters Unions is a collection of overpaid fools who do not appreciate what they have.

Inquiring minds note that 1,600 apply to haul trash in case of Teamsters strike.

More than 1,600 people have applied to work as replacement drivers for Waste Management in case of a strike by the Teamsters, a company spokesperson said Saturday.

"We're preparing to hire replacements in the event of a prolonged strike. It's part of our contingency planning," said Jackie Lang, spokeswoman for Waste Management.

The company submitted what it calls its "best, last, final offer" to union garbage truck drivers represented by Teamsters Local 174, but the offer was rejected Friday by the union.

Union representatives said the Teamsters are unhappy with the company's final offer and have submitted their own new proposal with "significant movement" on the issues.

"The idea that the company can introduce new language and throw all kinds of changes at us and expect our members to vote on a short deadline is offensive," said Rick Hicks, secretary-treasurer of Teamsters Local 174 and lead negotiator.

"From a union's perspective, this appears to be a tactic to divide the membership and force them to vote on a substandard deal," said Local 117 Secretary-Treasurer, Tracey A. Thompson. "This approach to bargaining calls into question whether the company is bargaining in good faith."

Waste Management's five-year offer includes a wage increase of $1 per hour in the first year, bumping up the current pay rate of $26.29 per hour by 3.7 percent.

By the last year of the contract, the average driver's annual compensation will reach $109,553, Waste Management said, and the company will contribute more than $15,000 per year to each employee's pension fund.

Waste Management Was Overly Generous

Waste Management was more than generous with that offer. Indeed waste Management should have offered a 50% reduction. It would still have been able to fill every position.

How much talent does it take to haul trash anyway? And what is Seattle doing? It should be seeking competitive bids for hauling. I bet if Seattle tried, it could lower costs by 50 to 70%. There is no way, trash hauling jobs should pay $109,553.

$50,000 for hauling trash is more than generous.

At $50,000 Waste Management could fill every position with more than qualified personnel, improve service by adding extra workers, and still offer Seattle a 30-50% reduction in cost.

Seattle needs a new contract with Waste Management. This one is clearly absurd.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Sunday Funnies 2010-04-04: Seasonal Adjustments

Department Of Labor Spends $40 Billion To Create One Amazing New Job

Inquiring minds are reading Department Of Labor Spends $40 Billion To Create One Amazing New Job.

In an effort to stimulate economic growth and boost the confidence of the American workforce, the federal government has allocated $40 billion to create one unbelievably mind-blowing new job, Labor Secretary Hilda Solis announced Monday.

The position, which will require the selected applicant to relocate to a sprawling, white-sand-beach facility on St. John in the U.S. Virgin Islands, will begin immediately after the employee is hired. In addition to a $500,000 annual salary, Solis said that the job also includes 12 weeks of paid vacation, a generous pension, bimonthly bonuses for adequate attendance totaling more than $2 million a year, a company rocket pack, and full health benefits.

"After carefully surveying the current employment landscape, it has become evident that generating a single, incredible new job is the most effective course of action," Solis said. "Rather than place 2 million Americans in unfulfilling, dead-end careers, we feel that giving one citizen the opportunity to contribute to the study of multiple orgasms in a controlled hot-tub environment will ultimately yield the most lasting change."

Solis stressed that the new job will "not be a handout," and that the chosen worker will be expected to put in long hours riding a Jet Ski while taste-testing a variety of new microbrewed craft beers. Though the new employee will not report to an immediate superior, he or she will be required to submit monthly progress reports pertaining to an ongoing trampoline-and-bottle-rockets public works project.

Happy Easter!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Congress Pressures Geithner To Label China A "Currency Manipulator", Geithner Postpones Action

China is back in the forefront of US policy concerns. Here are a number of articles to consider on whether or not China is a currency manipulator, and if so what to do about it.

Geithner Sidesteps Congress

Geithner Delays Currency Report, Urges Flexible Yuan

U.S. Treasury Secretary Timothy F. Geithner delayed a scheduled April 15 report to Congress on exchange-rate policies, sidestepping a decision on whether to accuse China of manipulating the value of the yuan.

Geithner in a statement urged China to move toward a more flexible currency and said a series of meetings over the next three months will be “critical” to bringing about policy changes that lead to a stronger and “more balanced” global economy. The delay comes as Chinese President Hu Jintao is scheduled to visit Washington for a nuclear summit April 12-13.

The Treasury chief has faced demands from Congress to label China a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years. Geithner is instead betting that China will take steps on its own in the next several months to strengthen its currency, analysts said.

“We are disappointed, but not surprised, by the administration’s decision,” Senator Charles E. Schumer, a New York Democrat, said in an e-mailed statement. “After five years of stonewalling, punctuated by occasional, but halting action by the Chinese, we have lost faith in bilateral negotiations on this issue.”

Schumer, along with four other senators including South Carolina Republican Lindsey Graham, last month introduced legislation to require the Treasury to determine if a nation had a currency misaligned with the dollar and make it easier to respond by imposing import duties.

Today’s delay “underscores the urgent need” for Congress to pass such legislation, said Alan Tonelson, research fellow with the U.S. Business and Industry Council, a Washington-based organization representing about 2,000 manufacturing companies.

“There can be no question that attempts to negotiate an end to China’s currency manipulation have failed for eight years and it is long past time for unilateral U.S. responses,” Tonelson said.

“The past few years have proven that denying the problem doesn’t solve anything,” Senator Charles Grassley of Iowa, the top Republican on the Senate Finance Committee, said in an e- mailed statement. “The Treasury Department should cite China as a currency manipulator.”

China’s Premier Says Trade Imbalance Not Fault of Any One Country

Wen Says Lopsided Trade Not Fault of Any One Country

China’s Premier Wen Jiabao said one country can’t be blamed for imbalances in trade relationships, a comment that comes amid pressure on the Asian nation to allow its currency to appreciate.

Trade problems “can’t be blamed on one side,” visiting Japanese Finance Minister Naoto Kan quoted Wen as saying today.

“I didn’t tell him what to do” about China’s currency, Kan told reporters today in Beijing after the meeting. “I told him I expect China to make a wise judgment.”

Geithner Confident China Will Move to Strengthen Yuan

Repeating treasury statements going back to Paulson and before that to Snow, Geithner Says He’s Confident China Will Move to Strengthen Yuan

Treasury Secretary Timothy F. Geithner expressed confidence China will decide that a stronger currency is in the country’s interest, saying the U.S. is trying to “maximize the chance that they move quickly” on the yuan.

“Our strategy is going to be designed to increase the odds that China does decide to do what’s in their interest, which is to let their currency start to move up again, and that’ll be part of making sure we have a more healthy global recovery in place,” Geithner said in New York.

Hu’s decision to visit Washington this month increases the likelihood his nation will escape being branded a currency manipulator by the U.S., strategists said. Ties between the two countries may be mending after a year marked by disagreements over the yuan’s value, U.S. arms sales to Taiwan and Google Inc.’s decision to pull out of China.

“It is probably true that Washington and Beijing have an agreement: the U.S. will not label China a currency manipulator and China will make some sort of yuan policy change at or before the end of the bilateral Strategic and Economic Dialogue in late May,” said Derek Scissors, a Washington-based research fellow for Asia economic policy at the Heritage Foundation.

China Trade and American Jobs

Inquiring minds are reading the Wall Street Journal article China Trade and American Jobs

Although the Chinese currency appears to be undervalued, the evidence suggests that appreciation will not reduce the bilateral trade deficit. Between July 2005 and July 2008 the renminbi rose 21% against the dollar, to $.1464 from $.1208, where it had been pegged since 1997. But the trade deficit, according to the trade statistics compiled by the U.S. Census Bureau, nevertheless increased to $268 billion from $202 billion over that period.

Textbooks say that the Chinese should increase purchases of American products when the renminbi's value increases against the dollar—and indeed they did by $28.4 billion. But exports to China were already increasing rapidly before the currency began to appreciate, rising by $19 billion between 2002 and 2005, according to the Census Bureau.

Textbooks also predict that Americans will reduce their purchases of Chinese products in response to an appreciating renminbi. But U.S. imports from China between 2005 and 2008 actually increased by a whopping $94.3 billion, or 39%.

Sen. Charles Schumer (D., N.Y.) and others on Capitol Hill attribute 2.4 million American job losses between 2001 and 2008 to the bilateral trade deficit. This figure comes from the union-backed Economic Policy Institute. EPI's methodology is not taken seriously by most economists because it approximates job gains from export value and job losses from import value, as though there were a straight line correlation between the figures. And it pretends that imports do not create or support U.S. jobs.

But U.S. producers—purchasing raw materials, components and capital equipment—account for more than half of the value of U.S. imports annually, according to the U.S. Bureau of Economic Analysis. Those imports support U.S. jobs in a wide range of industries.

Furthermore, according to the results from a growing field of research, only a fraction of the value of U.S. imports from China represents the cost of Chinese labor, materials and overhead. Most of the value of those imports comes from components and raw materials produced in other countries, including the U.S.

In a 2006 paper, Stanford University economist Lawrence Lau found that Chinese value-added accounted for about 37% of the total value of U.S. imports from China. In 2008, using a different methodology, U.S. International Trade Commission economist Robert Koopman, along with economists Zhi Wang and Shang-jin Wei, found the figure to be closer to 50%. In other words, despite all the hand-wringing about the value of imports from China, one-half to nearly two thirds of that value is not even Chinese. Instead, it reflects the efforts of workers and capital in other countries, including the U.S. In overstating Chinese value by 100% to 200%, the official U.S. import statistics are a poor proxy for job loss.

According to a widely cited 2007 study by Greg Linden, Kenneth L. Kraemer and Jason Dedrick of the University of California, Irvine, each Apple iPod costs $150 to produce. But only about $4 of that cost is Chinese value-added. Most of the value comes from components made in other countries, including the U.S. Yet when those iPods are imported from China, where they are snapped together, the full $150 is counted as an import from China, adding to the trade deficit and inflating EPI's job-loss figures.

Krugman’s Chinese renminbi fallacy

Rounding out this set of articles on China please consider Krugman’s Chinese renminbi fallacy.

In 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. On 1 January, in his piece “Chinese New Year”, Krugman claimed that America had lost 1.4 million jobs because of the undervalued renminbi and, therefore, he endorsed trade protectionism against China. On 11 March, in another piece, “China’s Swan Song”, he advised the Treasury Department to name China as a currency manipulator. And on 12 March, at an Economic Policy Institute event, in Washington, he said that global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running a trade surplus.

Let’s imagine some scenarios in which Krugman gets what he asks for. The US Treasury Department names China as a currency manipulator and the Obama administration launches a trade war against China. If this were to happen, the most likely scenario is that China would then stick to its current exchange rate regime and retaliate with trade sanctions against America. This would reduce trade between the two countries and, more importantly, seriously damage investor confidence worldwide. A trade war between the two largest economies is a non-trivial event for the world economy. In face of a much more uncertain economic future, investors would scale back their investment plans and consumers would cut back their spending.

A less likely scenario is that China would be forced to appreciate the currency sharply by, say, 40 %. This is likely to cause significant difficulties for Chinese companies. Again, there could be two possible outcomes. The first is that Chinese companies would no longer be able to export because of sudden loss of competitiveness. The market vacuum newly made available by the exit of Chinese products would be taken up by products from other low-cost countries like Vietnam and India. American companies would not be able to compete with these countries. So this would not add new jobs in the US, but the inflation rate would move higher.

Since exports account for more than one-third of the Chinese economy, a collapse of exports would cause serious difficulties for China. Chinese growth would decelerate sharply, as happened in late 2008. This would be unfortunate since most major economies are still struggling with recovery. And sudden weakening of the world’s most dynamic economy would send chilling messages across the world markets. Investor confidence would again fall sharply.

The second possible outcome is that China would continue to export to the US market, at higher prices but lower profits. This would push up inflation rates significantly in the US and force the Fed to tighten monetary policy quickly. Both steps could hurt the momentum of America’s recovery, which is still not yet on steady footing. New difficulties in the US and China, the two largest economies of the world, would impact global investor confidence negatively.

I expressed some thoughts on China and balance of trade issues on March 22 in China Not As Simple As Krugman Thinks; The Coming Trade War With China

As I said in the above link, things are not as simple as Krugman thinks. I will have still more thoughts late Sunday or Monday on what needs to be done and why.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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158,000 Personal Bankruptcies In March, 75% of them Chapter 7

Those looking for economic bright spots will not find it in foreclosures or bankruptcies. Please consider Sharp Increase in March in Personal Bankruptcies from the New York Times.

Federal courts reported over 158,000 bankruptcy filings in March, or 6,900 a day, a rise of 35 percent from February, according to a report to be released on Friday by Automated Access to Court Electronic Records, a data collection company known as Aacer. Filings were up 19 percent over March 2009. The previous record over the last five years was 133,000 in October.

“Even with the restrictive new law, we’re back up over where we were before the law changed,” Mike Bickford, president of Aacer, said in a phone interview Thursday from his headquarters in Oklahoma City.

Other experts point out that filings invoking Chapter 7 of the bankruptcy code, a simple and inexpensive option, are rising faster than more complex Chapter 13 reorganization filings, under which consumers repay a portion of their debts so they can keep their homes, suggesting that more homeowners are simply walking away from underwater mortgages.

Statistics from the United States Trustee Program, the Justice Department office that oversees bankruptcy cases, show that Chapter 7 filings as a percentage of all bankruptcies have increased to about 73 percent in 2009 from about 62 percent in 2006-07. Of the 158,141 bankruptcy filings in March, 118,505, or 75 percent, were Chapter 7s and 38,241 were Chapter 13s, the Aacer report says.

The Debt Slave Act of 2005 (better known Bankruptcy Reform Act of 2005) continues to make complete fools out of its sponsors. After the bill passed, banks made very poor loans figuring people would be forced into chapter 13 and would have to pay the loans back some way somehow.

Well, people without a job cannot restructure anything, nor would they want to if they could, because most of them are hugely underwater in houses.

Banks got everything they wanted in the bill. It is fitting it blew up in their faces.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Email from a Chinese on China's Real Estate Bubble

In response to 10 Signs of Speculative Mania in China "Panda" a Chinese, commented on the real estate bubble in China.

Panda Writes:

I am from China and I am shocked by the real estate bubble in China. Housing in China now is more expensive than in the US, while salaries are way lower than in the US. Housing is out of reach for most wage earners, and more than 80% people in the past year bought houses as an investment.

The common belief is that Government will not let housing prices fall and that the supply of housing is too limited especially in Shanghai and Beijing for prices to fall. Does this sound familiar?

I am one of the few Chinese who believe the China housing price will crash, soon and hard.

I asked Panda for more details and in a followup Email Panda offered ......

Hi, Mish:

I would very much like to share my view of China real estate bubble with you. Also please bear in mind China does not have property tax now. There is talk about it, but no plan right now.

First, please let me introduce myself.

I was born in China, and got my Bachelor degree from Beijing University in 1999. Then, I went to Princeton University and got my Phd in Computer Engineering in 2004. After that, I have been working at an IT company in bay area.

Even though I have been living out of China for more than 10 years, I visit China regularly and contact my family on a weekly basis. Hence, I have a good understanding of what is going on in China, and in US.

The real estate bubble in China is enormous, and even out of the control of government. Here are a few questions and answers.

1. How big is the real estate bubble?

My home town is a second tier city with a population of around 1 million. The average wage in the city is around $3500/year. Housing costs around $90/sq-feet for a condo or apartment. You don't have much land for your home, and for even the small land belonging to you, you are only authorized to use it for 70 years. The obvious question is what will happen after 70 years? It seems that nobody really cares: 70 years ago, China was fighting the invasion of Japan in world war II. God only knows what will happen 70 years in the future. And given the quality of the buildings, it is questionable whether or not the building can last 70 years anyway.

The average apartment (1000 sq feet) will cost $90,000. This comparable with US condo prices in a second tier city. The price/income ratio is 25.7 for a single buyer! Even with a two-wage-earner family, the ratio is larger than 10.

For Beijing and Shanghai, housing is much more expensive. In Shanghai for example, the price for decent area is around 30000-Yuan/sq-meter, i.e., around $440/sq-feet. And yes, they are only condos/apartments. Hence, a 1000sq feet apartment will cost around $440,000. Yet the average college graduate earns only $5500/year.

How can they afford it? Short answer is they cannot. For the few who managed to buy in recent years, they dipped into the life-time savings of their parents, or even grandparents. One house deprived several generation's wealth in this case.


2. How did this happen?

The most important reason is the local governments. They heavily rely on the sale of real estate for their wasteful spending. During boom times, they get huge amounts of money for selling the land, and thus increase government employee's wages and compensations. It is to their benefit to have a huge housing bubble, and they do everything they can to sustain the bubble.

Another important reason is the government-controlled companies. These companies are a monopoly in China, and can easily get money from state-owned banks. They co-operate with local governments to propel the housing price up. These companies buy land from local governments at an insane price with the money borrowed from state-controlled banks.

The state controlled banks do not care about the risk taking. If the money lent cannot be paid back, the central bank will just print money to clean the balance sheets of the state-owned banks. China did that in the 90s, and they will do it again.

Construction companies also plays a role. They get easy money from banks, and earn a fortune by selling over-priced housing to people.

Thus, the bubble is a result of corruption among local governments, banks, construction companies, combined with Chinese tradition. Lastly, please note the Chinese mindset. Chinese people love to buy houses. In the cities, it is often a prerequisite for a Chinese man to buy a house before marrying a Chinese woman.

3. What will happen?

When I visited my hometown in 2009, I drove around many empty buildings, which are completely dark at night, and could not help thinking how can this possibly end well. The bubble will burst. Government will print money to bail out banks.

4. What will happen to China as a whole?

On one hand, Chinese people are smart and hard working. And they all believe there will be a bright future for them. On the other hand, look at the huge bubble. How can it possibly end well?

If China has very bright future if it can learn from this. Right now, however, my take is that in short term, China is likely to experience a depression.

"Panda"

Thanks for sharing "Panda"!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Fed Finally Reveals Some Toxic Bear Stearns Related Garbage On Its Balance Sheet

Having lost two court cases in lawsuits filed by Bloomberg, Fed Reveals Bear Stearns Assets It Swallowed in Firm’s Rescue.

In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information.

The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating.

“The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart, a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.”

By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend, a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh.

The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts.

The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages.

The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade.

Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed.

Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades.

“The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement.

Bloomberg filed freedom of information lawsuits against the Fed in April and November of 2008. The Fed fought Bloomberg every step of the way. Sanity prevailed in court.

With this disclosure, everyone should now be able to clearly see what many of us knew all along: The Fed was not seeking to protect weak banks as it alleged, but rather to protect itself from having to disclose billions of dollars of pure garbage on its balance sheet.

Clearly the first Maiden Lane operation was such a rousing success the Fed needed to do repeat performance, only bigger. Thornburg, Countrywide, Hilton, MBIA, and Ambac are all in the mix.

Now, after nearly two years of delays, the New York Fed has the gall to issue the statement "“The Federal Reserve recognizes the importance of transparency..."

If Bernanke and Geithner were Pinocchio, their noses would be a mile long.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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LA Deputy Chief of Staff Says "Unions Have Priced Themselves Out Of A Job"

The Los Angeles city council is finally starting to get the message about union waste and extravagance. Unsurprisingly, the union termites have not yet gotten the message. Please consider the Wall Street Journal article Cash-Poor Cities Take On Unions.

Mayor Antonio Villaraigosa once organized for a teacher's union here, and later ran a branch of the American Federation of Government Employees. That makes him an unlikely advocate for cutting the benefits of the city's workers.

But with the city facing a budget deficit that could drain its reserves by summer, Mayor Villaraigosa wants to re-open contract talks with 45,000 cops, firefighters, librarians and other city employees in hopes of persuading them to contribute more to their pensions and health-care costs. His deputy chief of staff, Matt Szabo, puts it bluntly: "Unions have priced themselves out of a job."

In Memphis, the city's health-care committee recently recommended raising current and retired employees' health-insurance premiums by as much as 15%. And Toledo's city council last week wrung $3.1 million in concessions from its firefighters' union as part of a measure to close its budget gap.

In New Jersey, outrage over state deficits helped Republican Chris Christie defeat incumbent Democrat Jon Corzine last November. A few weeks after Mr. Christie's victory, a Quinnipiac University poll found that three-fourths of state voters supported a wage freeze for state workers, and 61% favored layoffs. Last month, Gov. Christie signed a set of bills that would, among other things, cut pension benefits for future employees.

Andrew Koenig, a Republican state representative in Missouri is sponsoring a bill in his state that, over the next several decades, would shift away from a defined-benefit plan, where an employer puts as much money into a pension fund as needed to cover future retirement benefits. It would be replaced with a 401(k)-type of plan (similar to those now in place at many private-sector employers) where workers absorb the market's ups and downs.

In Redding, Calif., the mayor and city council are asking city workers to contribute 7% to 9% of their salaries to their pension funds; currently the city picks up that tab. Patrick Jones, who runs his family's gun shop in addition to serving as part-time mayor, says if the council doesn't win concessions it might use a November ballot initiative to ask voters to demand that the city negotiate benefit cuts. That move, he said, would give the city leverage in any union negotiations. "We're just trying to get as many tools as possible to quicken the time it takes" to get concessions, Mr. Jones says.

New Jersey Governor Chris Christie Leads The Way On Tackling Unions

March 18: Governor Christie Calls Unions "Crass Bullies of State Street"; Says Unions Have a Choice "Givebacks or Layoffs"

Every time I listen to New Jersey Governor Chris Christie I want to stand up and salute. Today is no different. Christie says "This is the Moment to Fix It"

March 17: Christie to cut N.J. school aid by $800M

Gov. Chris Christie's budget includes an across-the-board cut in state aid to school districts that will equal up to 5 percent of their budgets for the current fiscal year, a move the administration expects to be challenged in court, according to three state officials familiar with the plan.

March 11: Hardball In New Jersey, No Balls In Virginia; Brass Balls In Las Vegas

New Jersey Governor Chris Christie is doing what he was elected to do, govern. And that means playing hardball with union termites who refuse to give an inch to help the state out of budget problems primarily caused by untenable union promises, union wages, and union pensions.

March 2: Governor Christie: "Time to Hold Hands and Jump Off the Cliff" - Chris Christie For President?

In an amazingly candid appraisal of the sorry state of affairs in New Jersey, Governor Chris Christie laid it on the line in a speech to about 200 mayors at the New Jersey League of Municipalities.

The speech is 24 minutes long and well worth a listen because it is both an honest admission of the problem, and a refreshingly accurate appraisal of what the solutions are. He chastised the legislature, unions, municipalities, and affordable housing initiatives while promising to do something about all of those.

The mayor of LA is yapping, but the governor of New Jersey is doing. In case you missed it, please click on the link immediately above and play Christie's speech to the New Jersey League of Municipalities. It is one for the ages.

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