from Tales from the Trail:

Bold budget boosts bailout

USA-OBAMA/How do you buy $750 billion of toxic bank assets with only $250 billion of taxpayer money?

If you know to play U.S. budget rules like a violin.

President Barack Obama told Congress in passing this week he might need more money than lawmakers have already approved to stabilize banks and pull the economy out of the ditch. 

How much? His budget virtuoso Peter Orszag said on Thursday he could support buying up to $750 billion in bad assets but only needed to set aside $250 billion to do it.

Regular US budget rules assume government credit subsidies will recoup some of their value. Appropriators budget for such items according to how much they think the government will lose -- not the full amount of the credit.

Orszag explained his thinking on Thursday:

"Honest budgeting suggests, when you pay a dollar for a financial asset, that doesn't make the government worse off by a dollar," he said at a news conference. "It's not the same thing as a net cost of a dollar, because you are getting something in exchange for it."

from Tales from the Trail:

When is a housing crisis like venereal disease?

If you're among those upset that your taxpayer dollars may be spent in volume to rescue people who -- for whatever reason -- can't make their mortgage payments, Federal Financial Analytics analyst Karen Shaw Petrou recommends thinking about it this way:

"Preventing foreclosures has a lot in common with treating syphilis. In both cases, you help some who are undeserving, but – in an economic collapse or a public-health emergency – one acts nonetheless. "

Just as in an serious epidemic, you'd take care of the problem and leave moral judgements to others, the right course of action is to take action to halt the housing crisis and leave the debate about moral hazard to economists, she wrote in a note to clients on Friday.

Germany, Japan hit by global consumer thrift

The world’s second largest economy, Japan, and Europe’s largest, Germany, all of a sudden have a lot in common. 


Their most striking resemblance in recent weeks is the breathtaking speed of economic decline, with output ransacked by a collapse in world demand for high-quality manufactured goods and an overvalued currency.


The fundamental problem is simple and doesn’t take an economist’s model to explain. At this stage of the financial crisis, who wants to replace a fully-functional Audi they bought a few years ago? What’s wrong with the 2007-vintage Sony PlayStation connected to the two-year-old Bravia or Grundig flat-screen TV? And who in their right mind would want to import the stuff in bulk when the euro and the yen are so expensive?

Trichet says spend, spend, spend

The financial crisis is causing people to do some funny things, but when the head of one of the world’s biggest central banks looks down the lens and tells people to stop being so cautious and go and spend, spend, spend, you know something strange is going on.

Despite European high street stores offering up to 90 percent off, rattled Euro consumers have reacted to the financial crisis by slamming the brakes on spending.

It is not exactly an irrational response. Jobs are being slashed at an eye-watering rate and savvy shoppers know that, as stores become ever more desperate, there is a good chance the
must-have jeans, gadget or new car they have been eyeing may be even cheaper in a few weeks.

So many ways to say goodbye

It takes a delicate touch to make job cuts sound more palatable. As U.S. companies reduce payrolls by the thousands, the press releases seem to be getting more and more creative.

Check out today’s announcement from The Reader’s Digest Association, which is eliminating 8 percent of its global workforce and suspending matching contributions to employees’ 401(k) retirement accounts. Somehow it stings a bit less when you tell employees that it’s all part of a ”Recession Plan” right?

“We have announced a comprehensive ‘Recession Plan’, which is our internal roadmap for dealing with the extraordinary effects of this recession on consumer spending,” Mary Berner, president and CEO, said in a statement.

Hey Europe, stop acting so happy

Merrill Lynch economist David Rosenberg’s views are well-known for bearing no resemblance to his firm’s trademark bull, so when he says European clients seem too upbeat, what he really means is they weren’t thoroughly depressed. The New York-based economist just got back from a marketing trip across the Atlantic and didn’t find much common ground.

In particular, he said European clients seemed more concerned about inflation than the deflation that he sees coming, and they may have unrealistically high expectations for President Barack Obama.

“Unbelievably … portfolio managers seem to think they are taking a bigger risk with their careers by missing the rallies than by missing the sell-offs,” he wrote in a note to clients. “I can tell you that this is not a condition from a sentiment standpoint that terminates bear markets.”

from Global Investing:

And the next Iceland is…

If there's one thing you don't want to be, it's the next Iceland.

Since its currency, colossally indebted banking sector and economy collapsed in spectacular fashion in October, the country has become a byword for an economy that has truly hit the rocks.

Within weeks, banking problems and currency falls meant Hungary was being hyped as a "second Iceland", at least until a joint International Monetary Fund and European Union rescue package restored some stability.

Next to win the unwanted comparison was Ukraine.  Having lost at one stage half its value, the currency has somewhat stabilised -- although most foreign investors are very hesitant to hold Ukrainian assets again.  And like Iceland itself, Ukraine is now dependent on an IMF lifeline.

The holiday shopping season that wasn’t

We knew U.S. consumers were retrenching, but today’s December retail sales figures from the Commerce Department show that households were cutting back even more than economists had thought. That suggests no end in sight for a U.S. recession already in its second year.

The headline number was bad enough, down 2.7 percent, which was more than double the decline that economists polled by Reuters had predicted. A lot of that had to do with the well-documented problems with U.S. auto makers, as well as falling oil prices which pushed down sales at gasoline stations.

But even if you strip out autos and gasoline, retail sales were down 1.5 percent last month, the biggest drop since September 2001 — a month when many Americans stayed away from shopping centers for fear of attack in the days after September 11.

Political poster child?

George Alogoskoufis is a hardly a household name outside Greece and EU financial circles. But the newly sacked Greek finance minister could yet become a poster child for politicans struggling to fight off economic decline and banking industry collapse. His demise was in large part due to a public perception that he was helping out the banks but ignoring rising joblessness.

Greece, of course, is a special case at the moment, still recovering from riots over the police shooting of a teenager. But finance ministers, central bankers and other responsibles are probably not immune from Alogoskoufis Syndrome. Balancing the need to bail out the finance industry with rising economic misery among everyday people is not easy. Fat cats are not exactly in favour at the moment.

This could, indeed, come to a head later in the year. Investment cycles tend to recover before economic ones. So what happens when Wall Street, the City and the like start bringing in the money again just as unemployment lines start getting even longer?

U.S. economic growth? Wait ’til next year

The U.S. Federal Reserve seems to be growing gloomier each month. Sure, they’re not the only group whose economic forecasts have been a moving target of late, but check out how their staff view of the U.S. economy has changed in the past few months.

Back in 2007, the hope was that the housing market “correction” would taper off and 2008 would bring healthier growth. Then the best guess was that the economy would regain its footing in the second half of 2008. Now, the horizon is moving into 2010.

According to newly released minutes from the central bank’s December meeting, when it pushed short-term interest rates down to a range of zero to 0.25 percent, Fed staff now think the world’s biggest economy may be a year away from returning to normal growth.