Obama’s blowout budget

Feb 1, 2010 16:53 UTC

Now that the worst of the financial crisis is behind us, one would think the budget deficit might start to come down. Actually, no. Obama’s proposed budget sets a new deficit record — $1.6 trillion this year compared to $1.4 trillion last year.

The President thinks he can help the economy with more deficit spending. But debt is the reason we have a jobs problem in the first place. We’ve accumulated more debt than our incomes can support (see chart at bottom) so the economy is trying to pay it down, leading to less spending and higher unemployment. Adding to the debt pile only makes the employment picture uglier in the long-run.

In his blog entry introducing the budget, Office of Management and Budget Chief Peter Orszag tries to argue that the administration is working to close the deficit. Meanwhile the spin from the White House is that this budget marks the beginning of a “new era of responsibility.” Of course that’s not at all what we’re getting. Orszag even trots out the line that we can grow our way out of debt:

Economic recovery – on its own – would take our deficits from 10 percent of GDP to 5 percent of GDP.

But GDP — a measure of spending — can’t grow unless we’re spending more. Seems to me the only way for aggregate spending to grow faster than government spending is for the private sector to spend more. But households are tapped out. They’re saving more to repair already busted balance sheets.

We’ve published the following chart here at Reuters, which illustrates a key talking point for deficit doves:

cyh96h

At 10%, the deficit is far smaller as a share of GDP than during WWII. We’ve spent far more before, the argument goes, so it’s no trouble to spend so much today. One problem with this argument is that it ignores unfunded liabilities for Medicare and Social Security. If the budget was calculated according to the same accounting principles that apply to corporations, the deficit would look much worse. We had no such unfunded liabilities in the ’40s.

The argument is also incomplete. Americans’ total debt burden amounts to much more than what the federal government owes. Including private debt makes the picture look far worse than the ’40s:

US_DEBT1209

It was easier to service higher public debt in the ’40s because de-leveraging during the Depression had wiped out most private debts.

Debt is the problem. We (should have) learned that after the Depression, yet we’re piling on more in a misguided effort to prop up an economy that desperately needs to de-lever.

Obama certainly inherited a mess, but driving us deeper into debt only compounds the unemployment problem.

COMMENT

The other question worth asking is what assumptions did Orszag’s team use to create the GDP growth projections? Did they assume that the past two decades of levered GDP growth is representative of what to expect going forward in a “recovery”?

Posted by Conrad | Report as abusive

Afternoon Links 1-20

Jan 20, 2010 21:25 UTC

Must Read – Short sale fraud + follow-up (Olick, CNBC) Great sleuthing from Diana Olick. Sounds like outright fraud being committed by big banks. One follow up question: In many cases, the second-lien holder is also the first lien holder. How is that impacting short-sales?

Buffett opposes bank fee (CNBC) See 2/3rds down the page. Obfuscation worthy of a banker. This should come as no surprise as Buffett is Wells’ top shareholder. He previously opposed the bank stress tests because it diluted his shareholdings. Nevermind that the stress test forced the bank to raise desperately needed capital. It’s a shame, really. As his career winds down, he’s sacrificed his reputation as a financial straight-shooter to protect his wealth.

In other Buffett news: He’s opposed to Kraft’s bid for Cadbury (he’s a big Kraft shareholder) and he split his shares, something he never wanted to do. So not a great day for the Oracle.

FT as shameless Fed booster (NakedCapitalism) Yves takes down the FT piece that said the Fed has made a killing on its AIG holdings.

CRE prices up 1.0% in November, not expected to continue (CR) Moody’s released its data for CRE prices for November today. They showed a month over month uptick for the first time in a while. That said, this is not a super reliable index due to the few number of data points available. And Moody’s says to expect prices to head back down.

Scott Brown successfully capitalized on bank bailout blues (Bottari, CMD) Walker Todd sent a missive over this morning noting, too, that while the healthcare bill’s unpopularity certainly played a role in Brown’s surprise win, anger over Obama’s kowtowing to banks may have pushed him over the edge. Unfortunately, Republicans are equally captured by the bank/homeowner lobby.

Foreclosure efforts failing b/c don’t reduce principal (Nasiripour, HuffPo) Helpful confirmation of a fact that is well-known.

Obama/Dems reach deal on debt, pay-go, fiscal commission (Alarkon, The Hill) A good start, but doesn’t sound like the kind of fiscal commission we really want….i.e. something like the base-closing commission that made recommendations that Congress was forced to vote on without amending.

China asks some banks to limit lending on insufficient capital (Jun/Dingmin, Bloomberg)

NY governor adds soda tax, raises cigarette tax, sanctions cage fighting in proposed budget (Kramer, WCBS)

Multitasking (imgur)

ht CSQT….

fish

Lunchtime Links 1-14

Jan 14, 2010 17:06 UTC

Obama to unveil plan on bank taxes (WSJ) Surprisingly this doesn’t look dead on arrival in Congress, maybe because banks know that the tax — spread over 10 years — isn’t likely to hurt very much. It’s a missed opportunity to shrink big bank balance sheets.

The advanced technology trade deficit (Mandel, ht NG)

Sheila Bair testimony before FCIC (FDIC.gov) Bair was the highlight of the morning’s hearing and the headline from her testimony is that it’s the Fed’s fault. Had Alan Greenspan taken Edward Gramlich’s advice to regulate subprime, perhaps many of the excesses of the bubble could have been avoided. In other news, the commission is unhappy with Attorney General Eric Holder b/c the Dept of Justice isn’t sharing as much information as the commission would like.

The rise of the permanent temporary workforce (Coy/Conlin/Herbst, BW) More evidence we’re becoming Japan.

T Boone Pickens cuts order for wind turbines by over 50% (Souder, Dallas News) He’s still a big fan of natural gas…

Male chromosome may evolve fastest (Wade, NYT) Wives everywhere beg to differ.

Thirsty Koala (ht Danny W)

Koala

Morning links 12-14

Dec 14, 2009 14:07 UTC

No shortage of news this morning….

Dubai gets bailout from Abu Dhabi (Reuters)

Exxon to buy XTO for $41 billion (Reuters) $41 billion is the enterprise valuation. It’s incomplete to say the Exxon is only paying $31 billion for the stock when it is also assuming $10 billion of debt.

Citi to repay TARP, raise $17 billion (Reuters) The ringfence agreement on Citi’s pile of toxic assets will end and Treasury will also start selling its common shares back to the market. Here are all the details from Citi.

Morgan Stanley hires Greg Fleming (NYT) Fleming was the guy who pressed Merrill to sell itself to BofA. He hashed out the deal, including Merrill’s controversial bonus package, with BofA’s Greg Curl.

VIDEO: “Wall Street doesn’t get it.” Too bad Obama’s reform plan does little to change the status quo. And in any case, Fed policy will continue to support banks for an “extended period.” The Prez meets with Wall Street CEOs this morning.

Watch CBS News Videos Online

COMMENT

$41B including assumed debt. “Only” $31B in stock.

Posted by Andrew | Report as abusive

Lunchtime Links 12-8

Dec 8, 2009 18:29 UTC

(Reader note: still working on the bugs….please click “continue reading” to see all the links)

Banks, U.S. spar over TARP repayment (David Enrich) This is the kind of thing that gives me a better feeling about Tim Geithner and Ben Bernanke. They are hammering banks to raise equity capital to get out of TARP. They have leverage and are using it productively, forcing bank shareholders to eat losses via dilution so that balance sheets are more stable. Great! Stick to your guns guys!

Questioning the unemployment rate (Kaminska, Alphaville) Dennis Gartman doesn’t buy the good news in the jobs report.

FASB wants accounting standards “decoupled” from bank capital rules (Norris, NYT) Can you blame ‘em? Seems to me Bob Herz just wants to be left alone. If regulators want to give banks more slack, fine.

Consumer credit contracts again (Federal Reserve) Though the contraction seems to be moderating. Just the latest improvement in the second derivative. I’m a fan of this trend. As consumers get out of debt, they rebuild their savings.

NY Fed President Dudley says monetary policy can limit leverage (CalculatedRisk) CR hightlights some key sections of Bill Dudley’s most recent speech. On the one hand it’s good to see him talk about the Fed’s ability to prevent credit bubbles by limiting leverage. On the other, he repeats that rates will stay low for an extended period. So the Fed is doing what it does best, inflating the next bubble. This time ’round they say they understand why that’s a problem. Yet they seem unwilling to do anything about it.

Obama to announce new jobs program (Zeleny, NYT) Including a cash for caulkers program….

BofA CEO candidate under scrutiny (Nadgir/Comlay/Eder, Reuters) Greg Curl was one of two names discussed at Judge Rakoff’s famous hearing back in August…

Greece faces ratings downgrade over spiraling deficit (Atkins/Oakley/Hope, FT) Alphaville is all over this story.

Don’t try this at home

Missed connection (Craigslist)

Late for work…

COMMENT

is there some sort of issue with using the ‘page down’ button for the latest batch of creativity-less web designers? oh, right, how will we get clicks unless we force readers to click just to read. at least we know its about content and not so much about money.

aka, new format = thumbs down

Posted by todd | Report as abusive

SNL on the U.S./China economic relationship

Nov 23, 2009 16:08 UTC

“Why are you trying to do sex to me like I was Mrs. Obama!?!”

Small quibble: SNL doesn’t note that the Chinese are, uh, “doing sex” to themselves by manipulating the yuan.

A healthcare failure could save Obama

Sep 9, 2009 16:58 UTC

The rising costs of Medicare and Medicaid threaten to destroy the nation’s fiscal future, but President Obama is pushing for healthcare reform that would increase costs. Instead, he should refocus his presidency on paying down debt.true-national-debt-updated1

America’s obligations over the next 75 years now surpass $62 trillion, up 8 percent since last year. And a new report released today by the Peterson Foundation suggests that total will go even higher if the House’s health care legislation is passed.

(Click table to enlarge in new window)

With today’s pliant bond market, it’s easy to pretend we can have things that can’t be paid for. But that’s the kind of attitude that led California into the fiscal abyss. We have to get serious about bringing our expenses in line with our income. Now.

Unfortunately Republicans and Democrats alike are more concerned with winning elections than passing good public policy. Republicans told us “deficits don’t matter,” signed a prescription drug benefit for Medicare that created a bigger fiscal hole than Social Security, waged two very expensive wars financed with debt, and borrowed to bail out banks.

For their part, Democrats complain about the deficit they “inherited,” then proceed to expand the bailouts, pass hundreds of billions worth of “stimulus,” and try to increase our health care liabilities over and above already unsustainable levels.

Partisan economists on both sides provide intellectual cover for this foolishness, but most Americans know better. They know our spending is unsustainable. They see what’s happened to California and know intuitively that government can’t deliver services it can’t pay for. Not forever.

Unfortunately, and this is what happened to California, the longer we wait to solve our fiscal mess, the more expensive it will be. The more we borrow today, the less we’ll have in the future.

If we wait, by the year 2040, Social Security will have gone from a small surplus as a percent of GDP (0.13 percent) to a substantial deficit (-1.34 percent). Medicare’s hospital insurance plan will have gone from a small deficit (-0.08 percent) to a huge one (-3.23 percent).

The Medicare trustees don’t provide estimates for the shortfalls of the two other Medicare programs, including for prescription drugs since, technically, there’s no shortfall: Congress has promised to fund the programs out of other government revenues.

But at that point there won’t be other revenues to spare. If nothing changes, by 2040, income taxes will be enough to cover only Social Security and interest on debt. National defense, education, Medicare, and everything else will all be unfundable. At that point income taxes would have to be doubled to put us back on a sustainable path.

But we won’t get that far. Long before most economists care to admit, foreign lenders will decide it’s no longer prudent to buy our bonds. That will be enough to cause interest rates to rise, hammering asset values and forcing the economy into a far deeper contraction.

The good news is that this problem can be solved a lot less painlessly if we confront it today. Unlike publicly-held debt, the unfunded obligations of Medicare and Social Security are promises that can be taken back.

So instead of making new promises he can’t pay for, Obama should co-opt the Republican platform of fiscal restraint. That worked pretty well for Bill Clinton after his own health care proposal died. By the end of his presidency, we were running substantial surpluses for the first time in generations. That’s the kind of change that overindulged Americans truly need.

But don’t expect that to happen. Obama and the Democrats will push some sort of health reform through Congress. Then they’ll congratulate themselves for expanding coverage — for getting more passengers on board a Titanic healthcare system that’s heading straight for an iceberg.

COMMENT

Do every one of these blog/articles have to boil down toDemocrats Vs Republican rumbles? Seriously is it simply easier to point at the other party and scream as we all swirl down the toilet bowl together? There is another party out there my friendsGive me control of a nation’s money supply and I care not who makes its laws.RothchildRepublicans/Democrats? LOL they control NOTHING

Posted by Ritual | Report as abusive

White House: 10-yr deficit now $9 trillion

Aug 21, 2009 22:56 UTC

Some breaking news from Reuters about an updated deficit projection:

The Obama administration will raise its 10-year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report next week, a senior administration official told Reuters on Friday.

The higher deficit figure, based on updated economic data, brings the White House budget office into line with outside estimates and gives further fuel to President Barack Obama’s opponents, who say his spending plans are too expensive in light of budget shortfalls.

At first glance, I’m inclined to give Obama credit for this, for updating his deficit forecasts at a politically inconvenient time. He’s pushing his health care plan pretty hard and this news gives a HUGE talking point to critics who say we just can’t afford it.

But of course there would never be a politically convenient time for this news to hit, not with the agenda to which Obama has committed himself.

And the way the news was announced is suspect. There were two deficit projections released this week. The good news — about this year’s deficit projection falling from $1.84 billion to $1.58 billion — was released mid-week.  The bad news — about the 10-yr deficit projection rising 27% — was dumped at a very convenient time: late on a Friday in August, when Congress is out of town and most folks are on vacation.

On a related note, this week the deficit passed the latest $100 billion threshold, $11.7 trillion

(Click chart to enlarge in new window)

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COMMENT

I love how people still blame Bush for deficits…

The economy was sound after Bush inherited a recession from Clinton and kept the economy afloat after Enron and 9/11. It was only after 2006 when the Dems took over Congress that problems started to materialize.

Posted by Marko | Report as abusive
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