We saw an article (first published 18th November 2009) featured on MSN which got us thinking; the title is "How long can Social Security last?" Reading the article, the answer seems to be "not long at all." It's very interesting that this article was apparently dredged up from the archives and floated once again on MSN, unless it's just that popular.
The article perpetuates the myth of an SS trust fund, stating that the fund will go in the red "in a few years," and be empty by 2037. Oh darn, that sounds unfortunate. But what actually caught our attention was when the article talked about how to fill the 'short-coming' in the 'fund.' The list was as follows:
-Benefit cuts
-Tax increases
-Riskier investments
The first two options are obvious: more money coming in, less money going out, just like our wallet and bank account. The irony of cutting benefits is that inflation is constantly decreasing the value of the SS payouts, but that is beside the matter. We want to dissect the third option: investing the 'trust fund' in riskier ventures.
Given the present, heady atmosphere in the United States Government, we can think of a few exciting places wherein the SS Administration can dump the excess cash it has just sitting around at the office. Now, we have to point out here, that the SS 'trust fund' is actually just money which flows in and out of the U.S. Government's General Fund. In spite of all the accounting shenanigans, in reality the SS cheques are drawn from the general operating budget, as simply any other expenditure.
If the SS 'trust fund' is authorised to be 'invested' in riskier ventures, it will allow the U.S. Government to treat those monies as, effectively, another slush fund. Or, to put it another way, the SS 'trust fund' becomes the SS 'bank, automaker, and whatever-else-Congress-feels-necessary bailout fund.' This can, of course, be dressed up as a good thing: banks and automakers are 'turning the corner,' and will make massive profits to investors; mortgage-backed securities will recoup their value, and then some; credit cards will become profitable again; car loans will be great as the economy turns around; et cetera, et cetera. All these would seem, on paper, to help the SS 'trust fund' close its fiscal gap.
"Surely they won't do that!" you exclaim, dear Reader; "the Government wouldn't put the retirement of millions of Americans on the line to bail out banks and other corporate interests?"
Well, what can we say to that? Frankly, the U.S. Government seems to be constantly doing exactly the worst thing possible during this Depression. From bailing out banks and automakers, to planning on raising taxes via health care 'reform' and other such nefarious plots, we can't see any good moves having been made at all! So, if the SS 'trust fund' were to be allowed to invest in riskier sectors of the economy, where would that investment go but to the arenas which the Government has already been furiously bailing out for two years? We'd be overjoyed to hear other likelihoods, but such corruption as we lay out herein seems inevitable to us. That is, of course, contingent on the SS 'trust fund' being loosened in its restraints.
If the SS 'trust fund' is successfully retooled as a slush fund for banks and automakers, we fully expect to see all other Federal 'trust funds' to be similarly revised. Since all such 'funds' are facing budget shortfalls, brought on by whatever cause(s), such changes can be presented as both necessary, and intelligent. Perhaps even shrewd. Those manoeuvres will be, of course, none of the kind, but rather hopelessly wasteful and economically destructive.
Showing posts with label bank bailout. Show all posts
Showing posts with label bank bailout. Show all posts
Thursday, January 14, 2010
Monday, November 16, 2009
Housing Price Report for November
Our result for the first six months of our North American Housing Price Index is a drop of 10.45%. This is a very serious drop, and has implication for more than just the house owners who need the value of their houses to say up. It also means that, on average: the housing collateral on bank balance sheets is impaired by around 10%; any and all securities of bundled mortgages have seen their value reduced by 10%; any house owners relying on the value of their house to keep up appearances have seen their appearances reduced by 10%.
Prices are showing some sign of improvement in the USA, which is to be expected thanks to the Federal Government's herculean efforts to prop up the industry.The 10% US Federal income tax credit has been extended, and all things being equal, this will tend to keep prices in the USA 10% higher than they otherwise would be. We'll be watching for a sudden fall when the program ends, if ever.
Interestingly enough, though, we are seeing some weakness in the Canadian housing market. This strikes us as rather odd, as the credit available to Canadian Citizens is still growing at a respectable clip. Additionally, the Federal Government has a very direct hand in guaranteeing mortgages in Canada, whereas the U.S. Federal Government only proves a wishy-washy guarantee to bail out banks.
Frankly, it seems that the animal spirits are friskier in the United States than Canada, undoubtedly supported by the U.S. Federal Government's housing tax credit. It is also possible U.S. Citizenry is a bit more credulous of the 'recession is over' propaganda than are the Canadians; it's time for Americans to do their patriotic duty and spend, spend, spend!
Prices are showing some sign of improvement in the USA, which is to be expected thanks to the Federal Government's herculean efforts to prop up the industry.The 10% US Federal income tax credit has been extended, and all things being equal, this will tend to keep prices in the USA 10% higher than they otherwise would be. We'll be watching for a sudden fall when the program ends, if ever.
Interestingly enough, though, we are seeing some weakness in the Canadian housing market. This strikes us as rather odd, as the credit available to Canadian Citizens is still growing at a respectable clip. Additionally, the Federal Government has a very direct hand in guaranteeing mortgages in Canada, whereas the U.S. Federal Government only proves a wishy-washy guarantee to bail out banks.
Frankly, it seems that the animal spirits are friskier in the United States than Canada, undoubtedly supported by the U.S. Federal Government's housing tax credit. It is also possible U.S. Citizenry is a bit more credulous of the 'recession is over' propaganda than are the Canadians; it's time for Americans to do their patriotic duty and spend, spend, spend!
Thursday, April 9, 2009
Ireland Doesn't Need a Bailout?
Anyway you look at it, Ireland's economy is in shambles. The formerly fastest growing member of the EU is now the fastest shrinking - with a rosy, Government forecast of -8% change in GDP this year.
Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."
The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.
Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.
We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.
The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.
Finance minister Lenihan defiantly claims the nation does not need a bailout from the EU. He defiantly claims that in spite of his staggeringly expensive (1/2 annual GDP equivalent) rescue of the Irish banks, "there will be no bailout of the banks."
The government, not having the luxury of being able to print up money, is being forced to raise taxes to service the new debt as well as meet existing obligations in the face of what would otherwise be rapidly declining tax revenues. This, of course, will soon be seen as a fatal policy blunder. Raising taxes in a Depression is, as everyone who was paying attention in economics class knows, a big no-no. It is taking money out of the hands of the people when they need it most.
Mr. Lenihan is merely a crony and cannot exactly be blamed for this misstep. Presumably, some policy wonks in the Irish Finance Ministry - taking a cue from the Yanks perhaps - are thinking (in Irish Gaelic, of course), "If we reliquify the banks, they will lend again and people can buy houses again, 'n stuff." So pinching the average worker is an acceptable trade-off.
We'll bet any taker that Irish banks won't do squat to revivify the Irish economy, and that the masses are going to have to cut spending even more. We sense a vicious cycle forming.
The end state will be Ireland out of the EU (sans bailout) and its economy worse off than it has been in decades. Emigration will not prove the safety-valve it has in the past as the former destination lands will look less kindly on newcomers. We suspect Ireland is where damage from the 2007 Depression may be most acutely felt, completing the rags-to-riches-to-rags cycle.
Friday, April 3, 2009
The Worst is Yet to Come
What caused this Depression? Can anything be done to make things better? Can anything be done to make them worse?
A lot of things caused this Depression. It might be easier to to list what didn't cause it. At the top of the list would be 'a loss of consumer confidence'. In a nutshell, the origin of the Depression can be found in the prosperity which preceded it. Flaws in the economic system eventually crashed the system. There are many theories of what causes Depressions - many of them have much merit and they are not mutually exclusive.
One theory is that disparities of income and wealth create Depressions. These disparities were glaringly obvious in both the 1920s and the 1990s. So, to answer the second question, perhaps ameliorating these disparities would be helpful - some novel approaches could include creating a maximum wage, or introducing property taxes on financial assets. And, to answer the third question, if the opposite direction is being taken by public policy, it is probable that policy is actually making things worse.
In the present bailout-of-banks mode, financial assets are being protected even as millions of ordinary workers lose their jobs. The result of this is that the very wealthy are becoming less poor than they otherwise would in a freer system, while workers become comparatively much poorer. Thus disparities of wealth and income are not being allowed to narrow and lay the groundwork for a healthier economy. Public policy is actually making the situation worse.
Another theory of Depressions is that too much capital has been allocated towards uses where it is not really productive. This applies very neatly in the present circumstances to - say - automobile manufacturers or making McMansions in exurbia. What could be done to make things better is allow capital to slip away from these uses and towards what people want. Unfortunately, public policy is attempting to prop up both failing automakers and sagging house prices. Again, this will make the Depression worse.
We could go on. At almost every step, the reaction of policy makers is not only to not do helpful things, but to do exactly the worst possible thing. It's going to be a rough ride, folks.
A lot of things caused this Depression. It might be easier to to list what didn't cause it. At the top of the list would be 'a loss of consumer confidence'. In a nutshell, the origin of the Depression can be found in the prosperity which preceded it. Flaws in the economic system eventually crashed the system. There are many theories of what causes Depressions - many of them have much merit and they are not mutually exclusive.
One theory is that disparities of income and wealth create Depressions. These disparities were glaringly obvious in both the 1920s and the 1990s. So, to answer the second question, perhaps ameliorating these disparities would be helpful - some novel approaches could include creating a maximum wage, or introducing property taxes on financial assets. And, to answer the third question, if the opposite direction is being taken by public policy, it is probable that policy is actually making things worse.
In the present bailout-of-banks mode, financial assets are being protected even as millions of ordinary workers lose their jobs. The result of this is that the very wealthy are becoming less poor than they otherwise would in a freer system, while workers become comparatively much poorer. Thus disparities of wealth and income are not being allowed to narrow and lay the groundwork for a healthier economy. Public policy is actually making the situation worse.
Another theory of Depressions is that too much capital has been allocated towards uses where it is not really productive. This applies very neatly in the present circumstances to - say - automobile manufacturers or making McMansions in exurbia. What could be done to make things better is allow capital to slip away from these uses and towards what people want. Unfortunately, public policy is attempting to prop up both failing automakers and sagging house prices. Again, this will make the Depression worse.
We could go on. At almost every step, the reaction of policy makers is not only to not do helpful things, but to do exactly the worst possible thing. It's going to be a rough ride, folks.
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