Wednesday, April 14, 2010

The Economy: A Pragmatic View

I come here today to assess the nation's economic recovery efforts and will provide links to support and fill in the details at the end of this essay.

 Just as a sick patient, the economy is out of intensive care and on the road to recovery. A return to full health is fragile. The wrong combination of events could return it to the OR where the coroner's call is on standby.

Our free market system is a cruel process where economic forces should be allowed to run its course along side enough government regulations to keep the bastards honest.

The financial institutions which drove us into the ditch while regulators looked the other way or were too stupid to recognize the symptoms, are now in decent recovery thanks to government bailout. Those paying back the TARP funds are now reporting substantial quarterly profits.

JP Morgan Chase, the first of the major banks to report, claims a $3.3 billion profit for January-March 2010. They achieved it by investing in derivative investments to offset the toxic residential and commercial loans still on their books from the bad old days.

To gain profits, Chase and other major banks are rehiring the same young Turk geniuses that drove the economy off the cliff. This time they also are focusing on astute risk management officers to avoid the same pratfalls. And yes, with the TARP restrictions off their backs, they have returned paying obscene bonuses and compensation to the best of the profit rainmakers.

That's the way banks operate. Get over it. Politicians and their constituents can't understand that. Keep in mind, the lowest of the low-level employees, the bank tellers, barely receive minimum wage.

As far as new bank regulation and financial reform legislation, the bill passed by the House and the one under consideration in the Senate have a few salient measures but on the whole go too far. One good measure is regulating hedge fund activities. A bad proposal is the government bullying banks to reduce principle on underwater home mortgages.

Don't believe for a minute what President Obama claims is an effort to prevent a complete market collapse in the future.

Don't believe for a minute the congressional bills in their present form would not curtail bank performance but instead pass additional costs onto the consumer. With some judicious additions and structural changes, the existing bank regulations are adequate. Financial reform should not be confused with health overhaul reform where doing nothing would have been unacceptable.

Don't believe Senate Minority Leader Mitch O'Connell when he says the legislation would have the government again protect those banks which are too big to fail. It doesn't.

This is all political claptrap.

The economic recovery for the masses and small businesses coupled with the unemployment rate officially at 9.7% but in reality closer to 14% will take years to improve. Home foreclosures continue at the rate of 2 million annually. By the time Obama seeks reelection in 2012 one of every four homes will have been in foreclosure sometime during the past five years.

The brutal fact is because of government encouragement, greedy lenders and easy consumer credit, half of the people who lost their homes had no business qualifying and buying homes in the first place. Nor did it make sense with both husband and wife working to pay down a mortgage that equaled half their monthly income.

Yet, in a negative sense, consumers going into 2007 were victims of a system that unwittingly conspired to cripple them and then handed the bill to pay for the mess allowing the offenders to get back on their feet first and any "help" the working stiffs received only prolonged and deepened their indebtedness.

No wonder the masses are upset with Wall Street and the Washington political comedy of errors.

Cheer up. Hope if not help is on the way.

Retail sales were up 9.1% in March, the largest single monthly gain in a decade. Carmakers reported that incentives helped them post a 24% increase in March sales, the industry’s largest year-over-year increase in eight years. Total consumer prices, meanwhile, increased just .01% in March.

The bad news is the Fed is in near-panic mode that inflation is on the horizon and to counter that an increase from record lows in the prime lending rates will increase the next three years. That could translate into slower economic activity meaning less revenues for business and government spending programs.

Like it or not, the fat cats eat the best parts of the chicken first and the bones tossed over the fence are left for the masses. Employment gains work the same way. The first to be rehired by the banks are the rainmakers. The last are the grunts who actually produce a product or service the masses such as the department store sales clerk.

As Walter Cronkite said, that's the way ii is.

If you don't believe me, click here, here, here,  and here.

Readers comments are welcome as long as they remain civil. We reserve the right to delete any comments that are vulgar, libelous and totally irrelevant to this posting. -- Jer

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