Are gas prices high?

Jim Treece at Automotive News had a neat little column in today's Automotive News ("Gas too high? Aw, stop griping"). I'd played around with data in the past; here are two graphs. One presents the inflation-adjusted price of gasoline, from 1919 through 2010. Prices are up -- but we're coming off of almost 20 years of the lowest gasoline prices in US history. The second adjusts in a different way: GDP per person, using a 2000 hour work-year to ask how many minutes it takes to buy a gallon. I could have used average hourly compensation (but what of retirees?) or average consumption; that would change the details but I don't think it affects the basic picture. And any such method would have its own drawbacks.

Mike Smitka

Another Round with Rattner

I’ve been “stalking Steve Rattner for months now in an effort to get to the nuts and bolts of the auto industry bailout and subsequent restructuring. There are those who have hung the “car czar” moniker on him, and he tries to be flattered by it. But as Rattner explains it, his great great grandfather was a fur trader in Russia and would turn over in his grave at the thought of any of his offspring being referred to as any kind of czar.

I have followed the workings of the Auto Task Force in the news, agonized daily with my dealer friends in the industry, watched hours of CSPAN hearings, attended Rattner’s presentation at a Federal Reserve Conference in Detroit in May 2010 in advance of his book “Overhaul, An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry” read the book, wrote a book review on it for a variety of publications, participated in an internet teleconference for press members, and now I have attended his presentation to the International Motor Press (IMPA) in New York City Thursday January 20, 2011.

Any undertaking of the size and magnitude of the auto industry restructuring will have it’s critics, and the government’s revamp of the auto industry is no exception. With any endeavor of this size, mistakes will be made. In my own view, shedding dealers was a mistake. Rattner himself watches the sales progress being made by GM and Chrysler on a regular basis these days for signs of progress. Dealers are the customers of the manufacturer. Shedding customers will not sell more vehicles. The report provided by the Special Investigator of the Troubled Asset Relief Fund agreed and excoriated the Task Force for enabling the dealer terminations. When I asked Rattner about the dealer terminations in May 2010 he said the Task Force tried to make sure all parties involved made sacrifices. The Task Force regarded dealers collectively as a single constituency. As the economy and business climate improve, GM and Chrysler will need additional dealers to maximize market share, or will lose ground to competitors.

Rattner fielded a variety of questions and the occasional speech. When asked about GM’s IPO, he says he believes the government can now afford to be patient and wait to sell their GM stock at a premium as the stock continues to rise. He believes GM’s stock is still a bargain at current value, even compared to Ford. I didn’t ask if he owned stock in any of the auto companies, but in the interest of full disclosure, I own some of both GM and Ford. The taxpayers own about 26% of GM and a larger percentage of GMAC/Ally. Chrysler is still controlled by the U.S. government, although Fiat just increased it’s holdings based on meeting previously established benchmarks.

When asked why “car guys” weren’t part of his Task Force, which was made up of people with no real interest in cars but plenty of real world expertise in business restructuring, Rattner was ready with an answer. He asked everyone to recall when the “car guys” Rick Wagner, CEO of GM, Alan Mullaly, CEO of Ford, and Robert Nardelli, CEO of Chrysler came to Capital Hill to beg for a bailout. They came in separate private jets, for which they were soundly scolded by members of the Congressional committee. Mulally came because he knew that Ford would crater if either GM or Chrysler went down, as it would send a ripple of disaster through the supplier base. Such a disruption would have shut down all North American auto production and would have pushed Ford into bankruptcy as well. The three CEOs testified that for a mere 25 billion dollars, allocated based on company size and need, a disaster could be averted. Also on the auto maker side of the discussion was respected economist for Moody Ratings, Mark Zandi. Zandi took direct issue with the CEOs, stating it would take 75 billion dollars at a minimum, and up to 125 billion dollars. The bailout was ultimately 82 billion dollars, which is being repaid or redeemed rapidly. It is obvious the “car guys” were in complete denial as to their financial condition, even Ford’s Mulally. I have thought from the beginning that Ford was not so much smarter and forward thinking than the other car companies in their move to borrow money while they could, to sustain them in case of a severe downturn. It was more a case of the Ford family wanting to protect the status of their favored status of the stock. The family lives off the dividends of that stock.

Why was Rick Wagoner removed? Wagoner was steeped in GM corporate culture and was in complete denial about the condition of the company and the need for bankruptcy. Finance specialists like Rattner “bet more on the jockey than the horse.” Not knowing how much his company would need to survive was really the straw that sealed his fate. The report GM filed after the Bush administration bridge loan was so deficient there really was no other choice for the Task Force other than to replace Wagoner.

Why was the UAW favored over other constituent group? Rattner says is more a matter of perception than anything else. First, world class car companies need skilled workers to build the vehicles. Bankers and bondholders can’t build cars. In addition, he went through a list of concessions imposed on the UAW. The 320 job classifications previously in place are no more. There is no more “jobs bank,” where the Detroit 3 paid workers to stay home to watch Oprah and drink beer.. The union has agreed to serious wage and work rules cuts. Their heath care fund has been turned into a VEBA. Fortunately it has been funded by stock, laying a lot of risk on the union but looking like it will pay off well based on current stock value. The union pensions had already been funded UNLIKE the pensions of the white collar workers and the executives like Wagoner. GM had decided that it was better to bet their executive’s pensions on GM than on the stock market or other investments. That bet didn’t pay off, but the Task Force included a generous pension replacement for white collar workers. The value of bond holders and stockholders had already been determined by the market. The stock was trading at less than fifty cents at time of bankruptcy declaration, and GM bonds were next to worthless. In fact, many bondholders had bought their holdings at distressed prices and were looking to make a killing. Many held bonds that were “insured” by credit default swaps that would only pay off in the case of a complete default. That group of bondholders WANTED to be wiped out, to the consternation of the legitimate bond holders. Rattner then asks rhetorically, what should they have done different with the UAW given the real world situation they were in?

Rattner is the guy that engineered the nuts and bolts of the restructuring and is clearly relishing the current tide of success of GM and Chrysler. Despite my disagreements with some of the actions of his “Task Force,” his book is must reading for those interested in economics, the auto business, and politics. “Car Guys” probably wouldn’t have terminated dealers, but would they have gotten anything else right?

David Ruggles has spent his working life in every phase of the retail side of the auto business, new and used, sales and management, including consulting and training in both the US & Japan. Ruggles has been a dealer for Mercedes Benz, Chrysler, Dodge, GMC, Ford, Mazda, and Subaru and has consulted for one of the world’s largest privately owned Toyota dealer groups located in Nagano Prefecture Japan. He blogs at autosandeconomics.com and writes regular columns for Ward’s Dealer Business, Auto Finance News, and the Daily Post.

Book Review of “All the Devils are Here
The Hidden History of the Financial Crisis”

“Hell is empty and all the devils are here” - William Shakespeare - The Tempest

This brilliantly written book should be required reading for any registered voter in the USA. With all the misinformation “out there” about who and/or what caused the financial crisis, it is important to know where to go for answers. This book is “The Source.” The authors are Bethany McLean and Joseph Nocera. McLean was co author of the highly regarded book on the Enron crisis, “The Smartest Guys in the Room.” Nocera is an acclaimed financial writer for the New York Times. The authors’ mission is to tell the story accurately and honestly with no particular political agenda, to explain the complex in a way that can be understood by those not steeped in Wall Street “speak,” and to provide insight into the personalities and characteristics of the major players. The level of research evident in the book indicates to me that the authors were already well connected before they began their research for the book.

Why is the issue of the financial system meltdown important to those who follow the auto industry, and other sectors of the economy? In the late 1970's, consumption represented about 60% of the total economy. 30 years later, consumption was up to about 70%, despite the fact that the income of the middle class had remained stagnant during that time span. How did this occur? The additional consumption funding came from credit fueled primarily by “securitization.” Wall Street’s version of “securitization” had been invented and had grown to 40% of the total credit market by 2008. This expansion of credit fueled economic growth. When the mortgage backed securities market collapsed, it took down the entire securitization market including, credit cards, student loans, commercial loans, auto loans, dealer floor plan, and many other forms of credit. Losing a major portion of available auto credit and funding for dealer floor plan and working capital, pushed already shaky auto manufacturers over the brink, as auto sales slid and dealers dropped like flies. The resulting vicious cycle took the economy downward into recession. The Troubled Asset Relief Program (TARP) was all that stood between the economy and a major depression.

“Securitization” was the process that “allowed mortgages to be converted into a “bond” by combining numerous mortgages into one huge financial instrument. First, Wall Street invented “tranching” to divide up the securities into segments, typically three, based on the inherent risk each tranche entailed. This protected the highest risk level tranch from loss by paying off defaults from the lower rated tranches first. The next step was to devise “derivative” contracts to “insure” the risk. Based on derivative “insurance” like credit default swaps, Wall Street was now able to convince regulators that it was not necessary to “reserve capital” as a hedge against default claims. Now, if only they could get these securities rated AAA by rating agencies like Fitch and Moody, Wall Street nirvana could be achieved. Now junk could be sold around the world as high yield AAA rated securities. AAA is the rating equal to the rating of Treasury bills. To say the least, billions of dollars were made, huge bonuses paid, and many innocent people bilked.

Guarantors of risk were not required to have the money to make good if their bets didn’t pay off. Yet, traditional depository banks were still required to reserve capital, as had been the norm ongoing. This rendered traditional banks to be uncompetitive UNLES they sold their own mortgage originations to Wall Street. If a depository bank originated a mortgage, it could sell that mortgage to Wall Street, buy it back as a part of a AAA rated security, and avoid the “capital reserve requirement. Rating agencies like Fitch and Moody were paid by the Wall Street banks whose products they rated.

Junk mortgages could be assembled into a MBS (Mortgaged Backed Security), tranched into 3 segments based on “risk,” “insured” with a Credit Default Swap contract where no capital reservation was required (it was assumed that Wall Street would not take risks not in their own interests), obtain a AAA rating to represent the securities’ safety as the highest grade, which allowed them to be purchased by entities limited to AAA investments by law, like pension funds, and sold around the world . Profits were privatized on Wall Street as huge profits were made and mind boggling bonuses paid to executives. The risk, however, was socialized to U.S. taxpayers.

The U.S. government, in the form of the George W. Bush administration and it’s Treasury Secretary Hank Paulson, was put into the position of allowing the world financial system to collapse or step in with TARP. Fortunately, Congress approved TARP, which despite its imperfections, saved the world from an incomprehensible disaster. After all, it was the U.S. government’s lack of oversight that stood by and let it happen in the first place. Other countries were looking to the Americans as their own economies were severely impacted by the actions of American investment bankers.

Governments are generally expected to protect it’s citizens from avoidable disasters. The Republican Party found this out after the Great Depression. Democrats paid a price after Jimmie Carter. Even President Barack Obama has been blamed by some despite the fact he had nothing to do with the disaster, other than casting some votes while a Senator. Unfortunately, many voters lack the ability to grasp complex issues, and fall prey to simplistic explanations.

In 1979, the Wall Street version of securitization was invented and launched by Merrill Lynch. Government Sponsored Enterprises (GSE) in the form of Fannie Mae, Freddie Mac, etc., had securitized the first mortgages in previous years. The GSEs were given objectives of how many low down payment low income loans they should make at a minimum by Congress. The compensation packages of the executives of the GSEs were predicated on these objectives. Interestingly, the GSEs were already making these types of loans at a much higher rate than the objectives they were given, making huge bonuses a given. Further, the GSEs received credit just for purchasing AAA MBSs containing them from Wall Street. The GSEs thought that was safer than holding the paper themselves. In fact, Wall Street had rendered the GSEs superfluous.

Wall Street was allowed to create a “betting market” on almost anything. The problem was not so much deregulation, but a refusal to regulate at all. During the period of time Wall Street was “rocking and rolling” American home ownership increased only 1.7%. Yes, we have paid a terrible price for such a small increase in the percentage of those who get to experience the American dream. Yes, mortgage originators “approved” huge numbers of loans with little chance of them being paid back. And they did this because they were never going to hold the paper anyway, just as an auto dealer sells auto loans to his/her banks. It was all being sold to Wall Street because they could take the lousy paper, turn in into AAA rated securities, and sell it to anyone. But the real problem was with home refinances and home equity lines of credit.

So who caused the meltdown and who were the players? In 2008, I wrote that the meltdown was caused by an “unholy alignment between liberal and conservative political causes.” This was after watching hours of testimony on CSPAN and studying the subject intensely. After two years of additional study, including watching Hank Paulson, the Bush Treasury Secretary and author of TARP, testify before Congress under oath, I have adjusted my thinking. But my own personal opinion is not important. All of us have to satisfy ourselves. For those who want to believe the meltdown of the financial system was caused by the overly altruistic “holding a gun” on lenders, forcing them to make loans they knew would never be paid back, you will be disappointed. It’s a non issue.

Some major “players,” their roles, and some resources are listed as follows:

“All the Devils are Here,” Nocera and Mclean

“On the Brink: Inside the Race to Stop the Collapse of the Global Financial System,” By Henry Paulson”

The last chapter of Bush speech writer David Frum’s recent book: “Comeback: Conservatism That Can Win Again”

“Overhauled” by Steve Rattner

George W. Bush speech on American home ownership from 2002

http://autosandeconomics.blogspot.com/

George W. Bush - consciously worked to prevent anything from slowling the housing juggernaut that was fueling the economy. He also had the guts to stand up to his own party’s ideologues to move to save the economy from destruction by proposing and passing TARP along with his Treasury Secretary. Moved against Congress to bail out GM and Chrysler by using TARP funds after Congress had turned down a bailout package.

Alan Greenspan - a disciple of Ayn Rand, Chairman of the Federal Reserve, fought regulation of derivatives at every turn

Larry Summers - under the Clinton administration was an opponent of regulating derivatives. Teamed with Robert Rubin to squelch Brooksey Born’s bid to regulate derivatives. At the time, Born was Chairperson of the Commodities Futures Trading Commission. As a member of Barack Obama’s administration, Summers was a key player in the bailout of GM and Chrysler, and the direction of many TARP funds.

Robert Rubin - Treasury Secretary under Bill Clinton - worked to quell efforts to regulate derivatives

Brooksey Born - Chairman of the Commodities Futures Trading Commission - moved to regulate derivatives, and was squelched by Rubin and Summers.

J P Morgan - invented the credit default swap by paying the European Bank for Reconstruction and Development to assume it’s risk in their exposure to Exxon, which tapped 4.9 billion of it’s 5 billion dollar credit line after it’s notorious oil spill disaster. It never occurred to anyone to ensure the EBRD had the funds to make good in the case of a default. It turns out it didn’t make any difference. Years later, the were many claims to be paid and only the U.S. taxpayer to pay them.

Moodys, Standard and Poor, and Fitch Rating - Were paid by the same companies who’s products they were supposed to rate. Enabled Wall Street to sell junk as AAA level investments.

The Three Amigos - Lewis Ranieri - Salomon Brothers bond trader - “I wasn’t out to invent the biggest floating craps game of all time, but that’s what happened.” David Maxwell - CEO of Fannie Mae, formed an uneasy alliance with Ranieri and Wall Street. Larry Fink - After creating some of the first mortgage backed securities he later served as a key government advisor.

Blythe Masters - helped invent the credit default swap for J P Morgan

Joe Cassanno - Ran the Financial Products division for American Insurance Group (AIG) - Began selling credit default swaps (CDS) on collateralized debt obligations (CDOs) “Collateral triggers” built into AIG CDSs helped bring the company down.

Phil and Wendy Gramm - As Senator and later as Chairman of the Senate Banking Committee, Phil blocked attempts at regulation at every turn. Wendy Gramm, a PHD economist, was installed as Chairperson of the Commodity Futures Trading Commission (CFTC) by Geroge H W Bush when it’s current Chairman, Mark Brickell, was moving to regulate derivatives. The move stopped the move to regulate in its tracks.

Roland Arnall - Appointed to the post of Ambassador to the Netherlands by George W Bush while his company, Ameriquest, a major sub prime mortgage “lender,” was a leader in blatantly deceptive lending practices. At one point, a group of ex auto business F&I managers operated a consulting company, specializing in showing fledgling mortgage brokers how to falsify and manipulate documents. They went so far as to have a web site devoted to creating phoney pay stubs, tax returns, job letters, etc. In fact, Wall Street wasn’t really concerned about documentation, as they were able to turn lousy mortgages into AAA rated investments under most circumstances.

President Barack Obama - Was duped and gave Arnall a pass during Senate questioning regarding Arnall’s ambassadorship because a mutual friend, Deval Patrick, the current Governor of Massachusetts, sat on the Ameriquest Board of Directors. His administration inherited the economy in a dreadful condition, although without the strong and decisive action of George W Bush, Hank Paulson at Treasury, and Ben Bernanke at the Federal Reserve Bank, things would have been much worse.

These are only a few of the personalities and characters involved. Before a reader allows themselves to be intimidated by the prospect of not understanding everything in the book, please understand that the people perpetrating these evils on the world didn’t fully understand what they were doing themselves. People don’t usually buy books about business for entertainment purposes, but I couldn’t put this one down. It read like a riveting“who dunnit.” Don’t pass up the opportunity!

Ruggles

Buying your last new car

Mike Smitka

Retirees have been good car customers the past decade, particularly those who retired in 2005-2007. Will the next decade will be a different story? -- initial data suggests "yes." And it won't be a good one.

A recent working paper^[1] by Wade D. Pfau at the National Graduate Institute of Policy Studies in Tokyo argues that data show the likely financial status of retirees in 2000 -- not a bad year -- will be worse than for any group since 1926. The basic issue is that returns on investments are low; the "rule of thumbs" for how much you needed to save and the rate at which you could draw down savings are proving optimistic.

Pfau examines the long-accepted 4% rule of thumb for an equity investments: that it's safe to draw down that much of principle. But he finds that US returns during 1926-1980 were higher than they have been during the past 30 years. Furthermore, they were higher than in a wider sample that includes 17 other developed countries and a longer time period; in many cases, a 3% rule of thumb was too optimistic. The past is no guide to the future, but will we see a return of historic dividend levels and capital appreciation anytime soon? Never mind bond performance -- with near-zero interest rates, that's no help for the average investor.

Part of what happens is that down years accentuate the depletion of assets, and down years early on do the greatest damage. That is, those who retired in 1999 and 2000 had to liquidate a larger than anticipated share of their holdings in the bad years of 2001 and 2002. Even though asset prices recovered for the next 5 or so years, that didn't help because they'd sold off so much of their portfolio. Those who retired early were the most vulnerable, in what Pfau notes the finance literature calls "reverse dollar cost averaging."

So what of recent retirees, many of whom saw their paper wealth and chose to stop working at comparatively young ages? I fear the worst. Recent losses on assets make "downsizing" housing, the biggest component of wealth, problematic. The bond component of portfolios is earning almost nothing (though if an individual was prescient and held only "long" bonds they'd have a nice capital gain -- but if they saw the future that clearly, they are probably still working...). The initial hit to stock portfolios was huge, and many invested aggressively. Of course inflation is low -- unless you have a less-than-golden healthcare policy. Or have an old home that isn't well insulated, and, since you're home all the time, you keep constantly warm.

The logic and data of Pfau's article is thus quite unsettling, even if (as he notes more than once) the past is not a good guide to the future. His references though don't suggest that the future will be rosy: John Bogle's Enough: True Measures of Money, Business and Life, John Wiley, 2009; Dimson, Marsh and Staunton "Irrational Optimism" from the Financial Analysts Journal 60:1, 2004; and John West, "Hope is Not A Strategy," Fundamental Index Newsletter, October 2010.

Of course we could be on the threshold of an era of strong growth. But my position as an expert on the Japanese economy is clear: their "lost decade" and what the US is looking at are analytically similar (though our growing population should shorten the period of stagnation).

For the auto industry, that means that a higher than normal share of the baby boomers have already bought their last new car.

[1] See Will 2000-era retirees experience the worst retirement outcomes in U.S. history? A progress report after 10 years by Wade D. Pfau.
Note that I have not looked for data on new car purchases by retirees; my small sample of relatives and neighbors may be sorely misleading. If you have such data, please let me know!!

George W. Bush 2002 speech on home ownership

David Ruggles

The following is posted as a reference to a book review I am working on. The book is "All if Devils are Here, the Hidden History of the Financial Crisis" by Joe Nocera and Bethany McLean

President George W. Bush addresses the White House Conference on Increasing Minority Homeownership at The George Washington University Tuesday, Oct. 15, 2002

THE PRESIDENT: …. I appreciate your attendance to this very important conference. You see, we want everybody in America to own their own home. That's what we want. This is -- an ownership society is a compassionate society.

More and more people own their homes in America today. Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a homeownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future.

We've got to work to knock down the barriers that have created a homeownership gap.

I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families. (Applause) … And it's going to require a strong commitment from those of you involved in the housing industry…

I appreciate so very much the home owners who are with us today, the Arias family, newly arrived from Peru. They live in Baltimore. Thanks to the Association of Real Estate Brokers, the help of some good folks in Baltimore, they figured out how to purchase their own home. Imagine to be coming to our country without a home, with a simple dream. And now they're on stage here at this conference being one of the new home owners in the greatest land on the face of the Earth. I appreciate the Arias family coming. (Applause.)

We've got the Horton family from Little Rock, Arkansas, here today. … They were helped by HUD, they were helped by Freddie Mac. …

Finally, Kim Berry from New York is here. She's a single mom. You're not going to believe this, but her son is 18 years old. (Laughter.) She barely looked like she was 18 to me. And being a single mom is the hardest job in America. And the idea of this fine American working hard to provide for her child, at the same time working hard to realize her dream, which is owning a home on Long Island, is really a special tribute to the character of this particular person and to the character of a lot of Americans. So we're honored to have you here, Kim, and thanks for being such a good mom and a fine American. (Applause.)

I told Mel Martinez I was serious about this initiative… And the good news is, Mel Martinez believes it and means it, as well. He's doing a fine job of running HUD, and I'm glad he has joined my Cabinet. (Applause.)

And I picked a pretty spunky deputy, as well, Alphonso Jackson -- my fellow Texan. (Applause.) I call him A.J. …

I see Rosario Marin, who's the Treasurer of the United States. Rosario used to be a mayor. Thank you for coming, Madam Mayor. (Applause.) She understands how important housing is. …

All of us here in America should believe, and I think we do, that we should be, as I mentioned, a nation of owners. Owning something is freedom, as far as I'm concerned. It's part of a free society. And ownership of a home helps bring stability to neighborhoods. You own your home in a neighborhood, you have more interest in how your neighborhood feels, looks, whether it's safe or not. It brings pride to people, it's a part of an asset-based to society. It helps people build up their own individual portfolio, provides an opportunity, if need be, for a mom or a dad to leave something to their child. It's a part of -- it's of being a -- it's a part of -- an important part of America.

Homeownership is also an important part of our economic vitality. If -- when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new home owners in America; …

Low interest rates, low inflation are very important foundations for economic growth. The idea of encouraging new homeownership and the money that will be circulated as a result of people purchasing homes will mean people are more likely to find a job in America. This project not only is good for the soul of the country, it's good for the pocketbook of the country, as well.

To open up the doors of homeownership there are some barriers, and I want to talk about four that need to be overcome. First, down payments. A lot of folks can't make a down payment. They may be qualified. They may desire to buy a home, but they don't have the money to make a down payment. I think if you were to talk to a lot of families that are desirous to have a home, they would tell you that the down payment is the hurdle that they can't cross. And one way to address that is to have the federal government participate.

And so we've called upon Congress to set up what's called the American Dream Down Payment Fund, which will provide financial grants to local governments to help first-time home buyers who qualify to make the down payment on their home. If a down payment is a problem, there's a way we can address that. And when Congress funds the program, this should help 200,000 new families over the next five years become first-time home buyers.

Secondly, affordable housing is a problem in many neighborhoods, particularly inner-city neighborhoods. … I'm doing is proposing a single-family affordable housing credit to encourage the construction of single-family homes in neighborhoods where affordable housing is scarce. (Applause.)

Over the next five years the initiative will provide home builders and therefore home buyers with -- home builders with $2 billion in tax credits to bring affordable homes and therefore provide an additional supply for home buyers. …

And we've got to set priorities. And one of the key priorities is going to be inner-city America. …

Another obstacle to minority homeownership is the lack of information. You know, getting into your own home can be complicated. It can be a difficult process. I had that very same problem. (Laughter and applause.)

Every home buyer has responsibilities and rights that need to be understood clearly. And yet, when you look at some of the contracts, there's a lot of small print. And you can imagine somebody newly arrived from Peru looking at all that print, and saying, I'm not sure I can possibly understand that. Why do I want to buy a home? There's an educational process that needs to go on, not only to explain the contract, explain obligation, but also to explain financing options, to help people understand the complexities of a homeownership market, and also at the same time to protect people from unscrupulous lenders, people who would take advantage of a good-hearted soul who is trying to realize their dream.

Homeownership education is critical. And so today, I'm pleased to announce that through Mel's office, we're going to distribute $35 million in 2003 to more than 100 national, state and local organizations that promote homeownership through buyer education. (Applause.)

And, of course, one of the larger obstacles to minority homeownership is financing, is the ability to have their dream financed. Right now, we have a program that all of you are familiar with, maybe our fellow Americans are, and that's what they call a Section 8 housing program, that provides billions of dollars in vouchers to help low-income Americans with their rent. It encourages leasing. We think it's important that we use those vouchers, that federal money to help low-income Americans go from being somebody who leases to somebody who owns; that we use the Section 8 program to not only help with down payment, but to help with continuing monthly mortgage payments after they're into their new home. It is a -- it is a way to help us meet this dream of 5.5 million additional families owning their home.

I'm also going to encourage the lending industry to develop a mortgage market so that this script, these vouchers, can regularly be used as a source of payment to provide more capital to lenders, who can then help more families move from rental housing into houses of their own. …

Last June, I issued a challenge to everyone involved in the housing industry to help increase the number of minority families to be home owners. And what I'm talking about, I'm talking about your bankers and your brokers and developers, as well as members of faith-based community and community programs. And the response to the home owners challenge has been very strong and very gratifying. Twenty-two public and private partners have signed up to help meet our national goal. Partners in the mortgage finance industry are encouraging homeownership by purchasing more loans made by banks to African Americans, Hispanics and other minorities.

Representatives of the real estate and homebuilding industries, through their nationwide networks or affiliates, are committed to broadening homeownership. They made the commitment to help meet the national goal we set.

Freddie Mae -- Fannie Mae and Freddie Mac -- I see the heads who are here; I want to thank you all for coming -- (laughter) -- have committed to provide more money for lenders. They've committed to help meet the shortage of capital available for minority home buyers.

Fannie Mae recently announced a $50 million program to develop 600 homes for the Cherokee Nation in Oklahoma. Franklin [Raines], I appreciate that commitment. They also announced $12.7 million investment in a condominium project in Harlem. It's the beginnings of a series of initiatives to help meet the goal of 5.5 million families. Franklin told me at the meeting where we kicked this office, he said, I promise you we will help, and he has, like many others in this room have done.

Freddie Mac recently began 25 initiatives around the country to dismantle barriers and create greater opportunities for homeownership. One of the programs is designed to help deserving families who have bad credit histories to qualify for homeownership loans. …

There's all kinds of ways that we can work together to meet the goal. Corporate America has a responsibility to work to make America a compassionate place. Corporate America has responded. As an example -- only one of many examples -- the good folks at Sears and Roebuck have responded by making a five-year, $100 million commitment to making homeownership and home maintenance possible for millions of Americans. …

The non-profit groups are bringing homeownership to some of our most troubled communities. …

The other thing Kirbyjon told me, which I really appreciate, is you don't have to have a lousy home for first-time home buyers. If you put your mind to it, the first-time home buyer, the low-income home buyer can have just as nice a house as anybody else. And I know Kirbyjon. He is what I call a social entrepreneur who is using his platform as a Methodist preacher to improve the neighborhood and the community in which he lives.

And so is Luis Cortes, who represents Nueva Esperanza in Philadelphia. I went to see Luis in the inner-city Philadelphia. … But he also understood that a homeownership program is incredibly important to revitalize this neighborhood that a lot of folks had already quit on. …

Again, I want to tell you, this is an initiative -- as Mel will tell you, it's an initiative that we take very seriously. … Thank you for coming. May God bless your vision. May God bless America. (Applause.)

The Crisis Yet to Come

The Atlanta Fed's blog from October 27, 2010 has a chilling piece on the source of the downturn in revenue at the state level (and by implication the local level, too). Quite simply, they note and then back with data that (duh! - with hindsight) real estate assessments lag the market. Hence the downturn has to have other sources, specifically declines in individual income tax receipts and sales tax receipts. Real estate tax receipts have actually continued to rise, as higher assessments from the era of peak prices continue to track up.

That's chilling, because it implies that state and local governments will continue to see revenues fall as assessments are updated to track the market down. Now the level of dependence on real estate related revenue varies widely. But on average it suggests that even if incomes begin to recover, government revenues will continue to fall.

Indeed, a recent paper by Cogan and Taylor quantifies the magnitude of the downturn: budget cuts by state and local governments fully offset the much-maligned Obama stimulus package. They had earlier taken a stand on the "multiplier" (the extent to which an expenditure increase or tax cut would stimulate activity). [Look for a discussion of multiplier estimates by Brad de Long.] But when they went to check what ex post performance might show, they found a problem that rendered that discussion moot: ex post, there was no multiplicand to be multiplied. Of course that's not reassuring going forward, because in 2011 there won't be a stimulus package to offset what state and local government are doing. When teachers are fired next summer, and as road maintenance crews are axed and parks closed, there won't be anyone stepping in to hire them or pay for them to be rehired. Now Cogan and Taylor think the multiplier is small; I'm not convinced by their arguments. But small multiplier or large, the job losses will be real.

John F. Cogan and John B. Taylor, "What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package." National Bureau of Economic Research Working Paper No. 16505, October 2010. http://www.nber.org/papers/w16505

If we thought banks were too big to fail, what of the government of the 10th largest economy in the world, California? They are starting their 2011 budget cycle with a $25 billion deficit and a long period of underfunding state and local pension funds. I doubt there's enough available for cutting on the expenditure side, and while I've never lived there, my sense is that there is no ability to enhance revenue, given the demonstrated ability of vocal citizens' movements to impede government via referenda. Pundits may be comparing us to Greece to argue that we need to cut the Federal deficit, but they really don't understand the dynamics of bond markets. But they can and should look at California, and ask whether we will feel compelled to bail them out as the EU did with Greece.

Mike Smitka

Addenda

Readers might see a contrarian position at Slate Moneybox, Default Position: Why we needn't worry too much about municipal bankruptcy by Annie Lowry. She argues first that the incentives are strong to avoid bankruptcy, while a crisis increases policy options. Second, though only implicit in her argument, bond holders can be forced to renogotiate without bankruptcy. While she does not mention it, many bonds are very close to private placements, and that facilitates renegotiating debt. (I handled sovereign debt renegotiations during a banking career decades back.) Third, and again less explicit, the biggest obligations are not formal bonds but retirement systems. It may be possible to renege on those -- tell retirees "no more pension." That may not need Chapter 9. In sum, all of those lessen the role of formal bankruptcy.

Elsewhere I calculated the numbers for California. Their accounting is arcane, but at the state level the budget is around $100 billion with a projected $25 billion deficit. That means tax receipts of $75 billion, so that closing the gap via revenue enhancement would in the extreme require a 33% increase in taxes (and more in tax rates, given exemptions). But in the background California's GDP is approximately $1 trillion, so the gap is on the order of 2.5% of personal and corporate incomes. Of course the state has perhaps $500 billion in unfunded pension obligations. Now in most places where I've lived government salaries are below market so these pensions are in effect part of the total package. I don't believe it ethical to adjust those retroactively. But in any case the magnitude of the problem is well within the taxing ability of the state, without leading to exorbitant rates. The problem is one of politics, not economics.

The Election and the Stock Market

It is hard to understand why Republican gains in Congress are leading to a jump on Wall Street: if we listen to their rhetoric, they are promising us fiscal stringency, hard-nosed policies towards those indebted and thereby not recovery (given the role both play in our economy) but further economic pain.

But maybe I listen (well, read) too much. Ronald Reagan ran as a fiscal conservative, deriding the deficits of Jimmy Carter; Bush II couldn’t complain about deficits because he inherited a surplus, but nevertheless paraded as a conservative. Those running for Congress did the same. Yet at least in terms of economic policy they were radical Keynesians, increasing the size of government. To take the more recent case, under Bush II every single department of the Federal government expanded, while he expanded welfare via the huge prescription drug supplement to Medicare). Yet both cut taxes rather than finding a means to pay for their profligacy.

Will things be better this time around? Or will we have a stalemate in Washington? – for better or (right now) for worse, Obama seems to be a real fiscal conservative (woe is us). So the impetus of Congress (or at least Republican congresses) to spend and spend [and not offset that with taxes] may go nowhere.

Of course we know that financial markets are efficient and thus incorporate knowledge of the future: about half the time when markets go up the performance of the economy proves better than the average forecast....now for you students in intro statistics, why is that somehow less than reassuring?

Mike Smitka

Car Czar Steve Rattner's New Book "Overhaul" Names Names!

David Ruggles

By David Ruggles

I've been waiting for this book since meeting Steve Rattner at a Federal Reserve conference in Detroit in May 2010. The subject of the conference was "After the Perfect Storm, Competitive Forces Shaping the Auto Industry. " Rattner gave a presentation that was largely a promotion for the book he was still working on, offering up fascinating anecdotes only an inside would be aware of, along with some juicy gossip. He also answered some questions from the attendees, which included numerous auto industry veterans, members of the press, and ex GM CEO Robert Stempel. The book is finally available and is MUST reading for anyone interested in the previously unknown details on how the auto industry bailout actually took place. I approached the book with a mixture of curiosity and skepticism due to my personal feelings about certain imperfections in the auto industry bailout, in particular the dealer terminations. I came away from the reading with a new found respect not only for the width and depth of the challenges faced by the Obama Administration's automotive task force, known as Team Auto, but a real appreciation for what they did for the country, in most cases at great personal sacrifice. In Rattner’s case, his personal attorney bill for dealing with the rigors of the vetting process cost him $400,000. The book did nothing toward mitigating my anger over the dealer terminations.

It also reinforced the importance to the nation of the Troubled Asset Relief Program (TARP), an idea proposed by Bush Administration Treasury Secretary Hank Paulson and passed by Congress after the Lehman Brothers collapse in the fall of 2008, without which it is unlikely that the auto industry bailout would have been possible.

Some unlikely heroes came to light, including President George W. Bush, Paulson, and even Vice President Dick Cheney. During the last days of the Bush Administration there was a meeting of Republican Senators who were holding up a bill in Congress proposed by the Bush Administration to bail out the U.S. auto industry, a bill which ultimately failed and forced the Bush Administration to use TARP funds to bridge the two ailing automakers over to the Obama administration. Cheney reportedly broke from his usual "laissez faire" “free market” economics stance in an unsuccessful but impassioned plea for a Congressional bailout saying, "Don't let this happen on our watch unless you want to be known as the party of Herbert Hoover forever."

George W. Bush, before taking the bold step of going against Republican Party ideologues in bridging GM and Chrysler to the new administration with TARP funds, said, “Frankly, there’s one other consideration, and that is, I feel an obligation to my successor. I feel it is good policy not to dump him a major catastrophe on his first day in office.”

Hank Paulson testifying before Congress, “Had the banks not returned or repaid their TARP money early out of fear of government involvement in their compensation practices, instead of loaning the money out to support the economy, it is probable the money to bailout GM and Chrysler wouldn’t have been available.” Paulson also made the point to the Bush Administration that, “There is no private debtor in possession financing available for either GM or Chrysler to go into Chapter 11 on their own.

The book is a chronicle of deadlines, heated and impassioned debate, personalities, “brinkmanship,” and harsh negotiations. There was serious debate among the Obama administration about just letting Chrysler go, as in the long run it was thought it was a lost cause and that letting it liquidate would help GM and Ford. At this point, Treasury Secretary Tim Geithner weighed in on the “fickle nature of public opinion. Right up until Lehman Brothers declared bankruptcy, public opinion favored letting the firm go down. In the ensuing chaos, the consensus had shifted overnight, and the government was believed to have made a terrible mistake by letting them collapse.”

It also became evident that letting Chrysler go would send a ripple throughout the supplier community causing a “run on the trade by suppliers refusing to supply parts if not paid in advance.

Called out in the book as Incompetents, Light Weights, or Obstructionists are such well known figures as: Sheila Bair, FDIC Chairman, Ray Young – GM CFO, Rick Wagner, ex GM CEO, Fritz Henderson, ex GM CEO, and a host of GM board members.

There are those called out for praise including Bob Corker, Republican Senator from Tennessee, Mark Zandi, Chief Economist for Moody’s Economy.com, and Ron Gettelfinger, Head of the United Auto Workers union.

Retired General Electric CEO Jack Welch was consulted frequently.

“Characters” include “Jimmie” Lee and Jamie Diman, of JP Morgan, Sergio Marchionne, CEO of Fiat, and, of course, Rahm Emanuel, President Obama’s Chief of Staff.

There are many unsung heroes who labored in near obscurity. Without the talent and effort of participants too numerous to list here, the bailout wouldn’t have happened. Of particular significance are Harry Wilson, Team Auto’s corporate restructuring specialist, Matt Feldman, Team Auto’s resident genius of bankruptcy law and driver of the Section 363 strategy that allowed for the speedy trips through bankruptcy court, and Brian Deese, Team Auto’s White House liaison. It was Harry Wilson who first proposed that taxpayers take an equity stake on GM to a large degree, and Chrysler to a lesser degree, to minimize the problem of sending them out into the marketplace with a huge load of debt, and the debt service that goes with it. This was probably the biggest decision, one fraught with “moral hazard,” that had to be made by the President.

The two men “driving the bus” were Larry Summers, head of the White House Counsel of Economic advisers, and Tim Geithner, Treasury Secretary, overseen by President Obama, who once asked about the U.S. automakers, “Why can’t they build a Corolla?” It must have been lost on the President that, in fact GM, and Toyota had built “Corollas” together in their joint venture Fremont CA plant that was shuttered as part of the restructuring.
Rattner doesn’t spend a lot of time on the dealer termination issue other than to emphasize that all industry experts he spoke to recommended thinning out the dealer body. I suspect the primary industry expert was Steve Girsky, a one time advisor to the UAW that was disqualified for Team Auto membership by virtue of that relationship. Girksy has been an outspoken advocate of fewer but larger dealers in the interest of efficiency, as he puts it.

Rattner also fails to mention input by the Pentagon to the Bush Administration over concern over a collapse of the country’s industrial base and how it would impact military procurement in the middle of 2 wars.

Chrysler is doing better than anyone anticipated. Both companies are exceeding the conservative projections assigned to them.

There are still issues at GM as evidenced by yet another CEO change as GM board member Dan Ackerson is taking over as CEO after Ed Whitacre “retired“ after only a few months in the job. Rattner also chronicles the ongoing conflict between the old GM board members and the new ones. The are many “players” who will be unhappy with Rattner’s revelations, which is just one good reason to read it. He must have kept writing new chapters as things have unfolded, all the way up to publication of the book. There are chapters yet to be written, but any student of politics, economics, or the auto business needs to read this book.

NYT discussion of electric vehicles

See the following note by yours truly as well as by 5 other analysts of the auto industry. The New York Times Room for Debate feature covers a wide variety of topics, and attracts lots of comments, some of them, uh, unusual as NYT tries to lean towards accepting all comers, but many that are thoughtful and informed. I peruse it regularly, and not just when it covers topics specific to the auto industry or to economics.

Mike Smitka

Has the Obama Stimulus Package Failed?

Well, it certainly failed to keep unemployment under 8% as promised. My guess is the administration failed in part to calculate the cutbacks at the state and local level caused by severe cutbacks due to the deterioration of tax revenue. But overall it was constrained by the diversity of analysis at the time (remember, some well-known economists were still predicting a "V"-shaped recovery?) and because parts were turned into tax cuts. (Little consolation if as you as an individual or corporation have no income to be taxed.)

Then there was politics. The stimulus package was passed in late February 2009 with the help of Susan Collins and Olympia Snowe, both Republicans from Maine. After Obama’s inauguration on January 20, 2009, the stock market continued the “free fall” that began under George Bush in 2008. Rush Limbaugh, John Boehner, and others touted as spokesmen of the "right," frequently commented that the “stock market must not like the prospect of “Obamanomics.” At the time, I thought this was hypocritical at best as the free fall began as a result of the meltdown of the financial system triggered by Joe Cassano, AIG, Goldman Sachs, etc. due to a lack of proper regulation on the Republican administration’s watch, fueled by years of easy money.

After the Stimulus Package was passed, and “markets” could be certain the administration was solidly behind the economy, the stock market began a run that has restored approximately 13.5 trillion dollars of mostly American wealth. Strangely, we haven’t heard anything about this from Limbaugh, Boehner, Beck, etc. It stands to reason that if the stock market is an indicator of how the market likes a President’s economic policies, it should be evident, that at least relatively speaking, the stock market has “liked” Obama since March of 2009 when the stock market advance began.

For my own part, I think this logic is largely overblown, but if the "right" wants to use this logic when they think it benefits them, they should use it when it doesn’t.

When Obama was inaugurated in January 2009, the U. S. economy lost 750,000 jobs in that month. As he had just taken office at the end of the month it would be hard to blame him for this. The job loss wasn’t stemmed the following month. These things usually take a while, 2-3 quarters even after policies change, and a new president can do little without the approval of Congress. (A similar example would be the Reagan administrations struggle with the unemployment situation it inherited from the Carter administration – see below.) In fact, it took about 12 months to stem the monthly job loss, so we went from -740K per month to zero in 12 months. Failure? You be the judge.

The graph below from the Reagan era shows the unemployment results of Reagan’s attempt at economic stimulus, which was largely based on massive tax cuts and then was helped by the Fed's easing of real interest rates by 4 percentage points from record high levels. (The Fed Funds rate briefly broke above 19% in the summer of 1981 with inflation of 10%, falling to under 9% by spring 1983 with inflation of 4%, so from "real" 9% to "real" 5%.) In fact, it was Paul Volcker and the Fed who broke the back of inflation, not Ronald Reagan. No help this time: the Fed lowered interest rates in 2008, and by the time Obama took office they were at historic lows with no further cuts possible.

Most economists agree that in times of economic recession, tax cuts are primarily saved or used to pay off debt by wary consumers (or held onto by the corporate sector for similar reasons). As a consequence, tax cuts are NOT as stimulative as public works spending or (in the opportunity cost sense) by providing help to state and local government so that they wouldn't fire people. In addition, once the economy eventually turns around, tax cuts are difficult, if not impossible, to repeal. This results in institutional deficits year after year. The "right" may claim that this is the way to "starve the beast" but under Bush, when Republicans controlled both the White House and Congress, they showed no ability to actually do so. [MS: They appropriately complain that government is inefficient, it's inevitable because it's asked to do things that the market typically can't do because output can't be measured or a price can't be attached. That's why government reform is even harder than corporate restructuring. But apparently the Republicans under several presidents judged that most of what government was doing was necessary.]

The Reagan tax cuts did not have the same stimulative impact as the Obama stimulus has had so far, as the graph suggests. [Economists insist on complicated models, but this is certainly a good start: MS] It could be argued that the recession Reagan inherited from Jimmy Carter was nowhere near as serious as the one Obama inherited from Bush. The financial system had not melted down and only one automaker was near bankruptcy. Reagan’s voter approval rating was equally as bad as Obama’s at this stage of their administration, as an impatient electorate expected things to rebound faster. Reagan lost 27 seats in the House to the Democrats in his first midterms. His approval rating rose substantially when he was shot by John Hinckley, Jr., and he was rescued by an economy that started to improve, based on pent up demand, fiscal policy and lower interest rates, before his second term election, which he won decisively. Previous to being shot, Reagan's approval ratings were in the range of what Obama's are now.

It is interesting to note that Reagan was nowhere as "right" as people think. He was once President of the Screen Actors Guild, a “union” full of “known leftists,” to borrow a phrase. He established a huge entitlement program in California by proposing and signing a law that provided 2 free years of junior college to California residents. He gave the country a compassionate but inefficient form of universal health care in the form of the Emergency Room Mandate (The Emergency Medical Treatment and Active Labor Act) that he signed into law in 1986. He granted amnesty to millions of illegal aliens. He deregulated the airline industry, beginning a chain of losses and unsuccessful restructurings of such magnitude that the industry has from its inception through today now lost money on net. His deficits eventually swamped George HW Bush, and led to the election of Bill Clinton. (Arthur Laffer, Reagan’s favorite economist and author of the Laffer curve, refers to Clinton as the most conservative president, in terms of economics, of the modern era.) Reagan's deregulation led to other problems. The S&L crisis initially cost taxpayers $600 billion, an amount lowered to $250 billion because the government then closed down most of them and did a good job of selling assets at auction. That crisis didn’t do the elder Bush any good either. Nor did the "grass roots" 3rd party candidacy of Ross Perot, the Tea Partier of his era.

In the last few months, things have stagnated. Job creation has not gained desired traction. We have been stuck at zero – though that sure beats the alternative we'd have absent a stimulus package. The economy has been hit with the double whammy of the European Debt Crisis and the BP oil spill. On top of day after day media coverage of bad news comes economic data that reflected our position at the bottom of a large trough and looked especially bad compared to last year's numbers. Yet last year’s numbers were juiced by an economic stimulus called “Cash for Clunkers”...as anyone who reads this blog has seen discussed in detail.

The fact is, we desperately need Obama’s latest stimulus proposal. Yet, the 
Republicans, who have seen the same graphs I have included here, will obstruct this legislation in any way they can. It remains to be seen if Collins and Snowe will vote with the Democrats on this. The LAST THING the Republicans want is an Obama triumph of any kind going into the midterms, regardless of what might be for the good of the country. Obama was shoved into a ship foundering in deep water when he came into office. He's steered it towards shore, but now partisan electioneering has cut off the engines. Which direction will the boat drift? – we don't know, but if it's not towards port, the Republicans must share the blame.

The closest thing to a Republican plan is the alternative budget they proposed a few months back, a document hopelessly short of detail. Otherwise, they have chosen the “Party of No” approach.

Please note that I am an amateur economist at best, and think of myself as "conservative" (on that dimension, I'm a typical [though now former] car dealer). I have studied Keynes to a degree. I am also familiar with an alternate theory of economics some call the "Austrian School." My understanding of the Austrian School theory is its bottom line of “laissez faire” economics, a kind of “natural selection,” survival-of-the-fittest approach. It makes for an interesting point of view for discussion over a beer. But we haven’t seen it at work since Herbert Hoover. Ron Paul would be a Austrian school advocate, I believe. "Austrians" would have let the banking system and our industrial base collapse in a process they call “creative destruction.” Well, as an auto industry person now consulting on the financial end of the industry, I could see how that would lead to destruction, an unreasonable and unnecessary cost. The Pentagon was fully aware of this and played a part on convincing Bush the second to step in. But there was no discussion among proponents of letting GM and Chrysler liquidate of how long rebuilding would take, of how new institutions could arise from the ashes in my lifetime. Creativity isn't a always matter of inspiration, it's a product of years or decades of hard work.

To be clear, it is NOT my understanding that John Maynard Keynes advocated ongoing deficits; he was a monetary economist and worked hard to keep the financial sector from bringing down the "real" economy where most people worked. In fact, he would have preferred the establishment of a “rainy day” fund before advocating systemic deficits. WW2 represents the ultimate Keynesian stimulus -- FDR was too timid on his own to use Keynesian principles in his public works projects, which combined with restoring a modicum of financial stability only reduced the unemployment rate during the Great Depression from 25% to 17%. None of us are old enough, other than perhaps my father, to remember first hand, but it is sobering to read of the cutbacks because of the political climate surrounding FDR’s campaign for reelection. In addition, the Supreme Court stopped some of FDR’s public works initiatives, while renewed monetary stringency (for reasons that sound chilling given current debates) led to a spike in unemployment in 1937. We really don't want another world war to pull us out of the doldrums.

Even Republicans remember the Great Depression. Tent camps of desperate citizens were called “Hoover Towns.” At one point, 28 states didn't have a single bank open. It took the Republicans a generation to regain the White House, and even then it took a popular war hero like Dwight Eisenhower to accomplish that. The Right Wing and the John Birch Society referred to Ike as a “socialist”, and a “tool of communism.” Ike inherited a wartime tax structure with a top rate of 91%. With hundreds of thousands of young men home from war and needing a job, Ike embarked upon a Keynesian style public works project called the Interstate Highway System, instead of providing tax cuts to bolster the economy. The rest is history and the country was transformed for better or worse.

Another example of deficit spending and Keynesian economic stimulus would be the expansion of railroads after the Civil War. Tax revenues were at low ebb and the country was deeply in debt. We "spent" by giving away land, something that didn't show up in the budget. That and 30 year government bonds financed the transcontinental railroad. Most people would say the investment paid off; even folks who maintain, “The government is the problem, not the solution” might agree. There is an ideal balance to be achieved between “socialism” and “laissez faire” to achieve the desired results. Government is the price we pay for civilization.

To return to the opening topic. If only Obama had inherited a situation that didn’t already included accelerating deficts, burgeoning unemployment, and diminishing tax revenues. But he inherited what he inherited. Nobel Prize winning economist Paul Krugman calculated that the stimulus should have been twice its size. Obama agreed, but recognized that a larger stimulus was politically impossible. As a consequence he chose to let the original, bloated Bush 2009 budget go through without "pork scrutiny" and associated cuts. This represented the breaking of a campaign promise. But cutting government spending in the face of recession leads to Depression. Isn’t this the lesson of the Great Depression and the Hoover era? Does anyone really think the Republicans want to go there again with them in charge? At the moment they are trying to have their cake -- decrying stimulus and money already spent to avoid a crisis -- and eat it to, since as the party of "no" there will be no policy bearing their name.

Sometime in the next few years the government needs to take steps to get rid of systemic deficits. The Republicans across several administrations showed that cutting "their way out" won't work. (Indeed, if you look at the size and composition of the budget, every non-defense Federal bureaucrat could be fired and we'd still have a budget deficit.) Growth will help, a rebound in incomes and employment would improve the revenue side, the "cyclical" part of the deficit. I don't like it, but basic arithmetic still shows the bottom line has to include ... let me phrase this carefully, tax enhancements.

So you be the judge. Did the Obama stimulus package fail? How does the Obama rebound compare with the Reagan era? Does anyone have a suggestion on what Obama could have done to turn things around more quickly, especially in light of Republican opposition?

Marketminder post with additional graphs

David Ruggles [with editorial asides by Michael Smitka]