Friday, February 29, 2008
In reality, the answer to that question is…maybe. It is way too early to tell if a recession has appeared. In fact, it takes two, consecutive, quarters of negative GDP for a recession to be officially declared. In the fourth quarter of 2007, GDP grew (albeit a very small amount). Then, we have President Bush and Ben Bernanke saying that we will not endure a recession, just slow growth. So far, they have been right. However, every time the stock market goes down, more talk of recession surfaces. The first three days of this week saw stock prices go up a decent amount. However, disappointing news today, from a few major companies, caused investor fear to skyrocket, sending all three major exchanges down over 2% each.
It seems as though any slight sign of economic distress causes investors to dump shares like no other. Let us consider the case of NutriSystem (NasdaqGS: NTRI). This is a company that has experienced significant growth over the past few years. They are a cash-rich, debt-free company, and should be able to weather a recession. When they reported fourth quarter 2007 earnings, they actually earned .04/share more than Wall Street analysts expected. However, they said that they may not experience the same level of growth they had in the past few years due to increased competition, and the possibility of economic hardship. Their stock price fell over 30% in two days. To me, this seems totally ridiculous. I mean…DUH! What company will experience rapid growth during a recession (growth defeats the whole point of a recession)? If the company is profitable, and debt free, all of this panic is unwarranted. If all of the recession “hype” was not around, NutriSystem’s stock price definitely would not have taken this massive a hit. All of the talk about the recession is making investors rationally ignorant with respect to the facts of the companies they own stock in. They simply see recession in the news, and dump any stock that has less-than-stellar news.
The sad about this whole situation is that no matter what policy makers, such as Bush and Bernanke, do they cannot simply make the recession rumors stop. As they keep on lowering interest rates (or announcing tax rebates, for that matter), in order to boost the economy, all they are really doing it temporarily sustaining it until more bad news comes out of the market, and reducing the value of the dollar.
Populism and the economy
President Bush raised to the pulpit about a month ago with fire and brimstone about a tax cut needing to reach the people to stave off this horrid recession and return us on to the road of economic growth again. Quite a heroic charge; the people, through their president and public sentiment put full force upon the congress to act quickly to resolve the presidents request and bring money to their pockets, and, as could be expected, the congress railed and the tax rebate passed. All well and good the federal government saw an economic downturn, as reported by one of its agents, and responded in a Keynesian fashion. But what’s happening behind the scenes? what are the assumptions the assumptions the government is making?
Is the economy heading toward a recession, possibly, but that is not what interests this economist. Why did we possible go into a recession? And are our actions (at the federal level) hurting or helping? Why is an interesting question. Certainly there have been problems from the sub-prime mortgage mess but that is such a small part of the economy. What is really happening. I far as I can tell fear and inflation. The “credit crunch”, as reported on Fox and CNN, is not causing the economy to collapse as they are predicting; they, the major news media, are causing the recession. I think it is a simple premise. If one is surrounded by the news media stating over and over that the country is plugging into recession I believe that this mentality simply becomes part of your thought process. You are told a recession is occurring and therefore you cut spending to survive through the recession. The recession then the news media was predicting now comes to fruition, but they claim it was because of this or that.
This recession rhetoric, as far as I can see, actually causes the recession. But now lets look at the actions and response of the government towards the “impending doom” now upon us. The feds actions of lower interest rates pushed more money into the economy. The federal government then passed a tax credit through adding further money to the market. The federal reserve, by lowering interest rates so quickly and so low has little more room to maneuver. Also by all of this money entering into the market inflationary pressure could force the federal reserve to then raise interest rates. But more to the point, the federal government actions have the problem of coming within the next 6 months possible right as the economy is coming around from the federal reserve action. This could further lead to inflationary pressure and cause the federal reserve to increase interest rates even more.
This is what I draw from the situation, Populism isn’t the necessarily the correct policy making device.
In a market based society, the emergence of alternative energy and energy conservation will surface by themselves as it becomes profitable for them to do so. As these energy methods increase in popularity, one still has to deal with higher energy costs because both the current state of using oil and gas will not necessarily be more expensive than the alternatives since these alternative companies will also be looking to profit from the switch in energy. While the alternative companies receive a tax break totaling about $8 billion and the individuals/foundations who participate in energy conservation (adding up to approximately $2 billion) may benefit, the average consumer does not.
The new taxes on the large oil companies would do nothing but cause prices to increase on oil, gas, and any products made from oil, such as plastics, tires, and carpets, and possibly cause a decrease in supply. This does not aid the consumer in either case because as the big oil companies are taxed more, the more consumers will have to pay for goods. While this is largely theoretical, it can be seen in the market because the tax will be partially passed on to the consumer even if the legal tax incidence is on the large oil companies.
Using simple microeconomics one can understand these changes. The decrease in the supply of oil and gas would shift the price of the good(s) up assuming that the demand for oil and gas stays the same. This would decrease the quantity demanded for these goods. This decrease in quantity is then supposed to transfer to the alternative energy(s) available, causing the demand for these forms, such as wind and solar energy, to increase. If the supply for these forms remains constant, as they would at first, the price would increase due to the increase in demand creating a profit for these alternative sources that House of Representatives offered tax breaks for.
We have just gone in a big circle. Tax the excess profits from the large oil companies, pass part of that tax on to the consumer, cause an increase in the alternative energy sources and energy conservation, and end up with profits that do not have to pay as much in taxes on. Quoted from the article: “Pelosi called the shift of tax benefits from oil to alternative energy development critical to increased energy independence and lowering energy costs.” From the article and the economics that I know, this bill would not cause lower energy costs, but the same if not higher costs to the consumer, just spent in another form.
The Troubled Times of Hillary Clinton
What’s sad is it didn’t need to be like this. Few can be said to understand politics as well as Hillary Clinton, and she’s spent years putting this presidential run together. Oddly enough, however, is it’s those years of preparation that may well be doing her in right now.
The median voter model demonstrates the best way to win an election, in a two party system, is to position yourself as close to the middle as possible, if, perhaps not leaning slightly to opposite side. One does this because in any given election it is assumed that each side has a particular base they’ve already captured. Thus it is the goal of the political aspirant, not to rally their own side, but to galvanize the undecided in the middle ground, and perhaps capture a few of the shaky supporters from across the aisle.
One can clearly see this strategy coming to light in Hillary’s senatorial voting record over the years. Compared to other liberals it has a distinct streak of red running through the, primarily, democrat blue dating all the way back to her initial supporting vote for the Iraq war.
But in doing this Hillary ignored the primary. And why not, there certainly didn’t seem to be any major threats looming on that horizon. Previous winners of the Democratic Derby, Al Gore and John Kerry, seemed unlikely to try their luck again, and could be written off as once and future losers should they muster the courage venture forth. The remaining opposition, such as John Edwards, looked even weaker having already lost to failed candidates. The primary process appeared to be little more then a tiptoe through the tulips before it was on to the main event.
Enter Obama. And, perhaps, exit Hillary.
Because while Hillary’s voting strategy may be pulling her towards the middle on a national level, amongst Democrats it only means she’s drifting to the right. And just maybe to the status of also-ran.
Democrats Cross the Line
According to a report by MSNBC on Friday February 29th 2008 Barack Obama and Hillary Clinton announced that they will work with the Republican Party in order to better the country. This is a clear move across the middle of the political spectrum. According to Randall Holcomb author of Public Sector Economics, both parties in an election will begin their campaign on their respective sides and slowly move towards the middle of the two parties, and will eventually make moves across the middle in order to gain voters from the opposite side. Clearly both democratic campaigners are moving in this direction, crossing party lines in order to capture the other side. As a result many republicans have already indicated they will vote outside their party.
Thursday, February 28, 2008
The Fed is arguably an Aristocracy, capable of moving fairly quickly, and even they have the significant timing problems mentioned earlier. Applying these same issues to a representative democracy, there are clearly some potential problems. Take the obvious example of the new "economic stimulus". It took about six months from the initial concerns and actions of the Fed for the Congress to pass the plan. Even though it has been over a month since, the checks are still months away. The dangers of this delay are that, again, stabilization policies could become destabilizing.
This applies to just about every policy the government can make, including national security. Public opinion clearly demanded a more active foreign policy after 9/11 and supported a war with Iraq (at least to the necessary degree). Now in retrospect, the public has changed its mind, and a less aggressive policy is considered better. It is unfortunately easy to see the possibility of the public's opinion changing slowly over five years while the body count increases until they demand a pullout right when there begins to be progress. If it takes five years to change their minds in one direction, it will take more time then we possess to consider the possibility of progress. Barack Obama says under his leadership we will "be as careful getting out as we were careless getting in", I hope he's right, or this could be one of the most tragic examples of Destabilization Policy.
Wednesday, February 20, 2008
Hillary's "plan" (click the subject to go to her site) makes me shudder, as I see it not promoting a rebound in the industry at all. In addition, I see her call to action as prompting results that I would not think the democratic party would value- bank consolidation and lower rates of homeownership.
Hillary's plan includes 2 main points...
1. A foreclosure moratorium for 90 days, so "At-risk homeowners can get financial counseling to help them transition to affordable loans".
The issue? A bank cannot begin foreclosure proceedings until the borrower is already several months (normally 120 days) behind in their payment. Also, foreclosure is generally the "nuclear option" for lenders in the first place, as it is hugely expensive and in most cases garauntees a loss.
The reality here is that a borrower that is 90+ days late on their mortgage no longer has the credit profile to obtain an "affordable" loan. These borrowers fall into the realm of "subprime", with high rates and fees- the same loans that got then into trouble in the first place! While there are some govt-back programs that have been put into place to help, they are limited in applicability.
By blocking foreclosure, the we are not helping people transition into new loans- there is no workable refinance option in most cases (which is why the homes are in foreclosure rather than the borrower refinancing into a more affordable loan BEFORE this point).
What we are doing is extending the point where the borrower can live in the house without making the payments. This additional cost on the lenders increases the cost of making FUTURE mortgage loans, increasing rates and tightening guidelines. This mushrooms- because of higher rates, people who COULD have refinanced no longer qualify, and thus fall into foreclosure as well, creating more costs which then force guidelines and rates ever higher.
The net result? Less borrowers can get homes, less banks can profitably operate, which leads to industry consolidation as they are bought at fire sale prices by the larger banks. Is making it tougher to get a house and decreasing competition (fewer firms) Democratic principles?
2. Freeze Adjustable Rate Loans for "at least" 5 years- "or until subprime mortgages have been converted into affordable loans." First, many lenders are choosing do this in order to keep people making payments (and preventing them taking the foreclosure loss). But making this compulsory takes away the incentive to migrate out of a loan. Why?
Many of the adjustable rate loans that are in question here have a very attractive start rate that is significantly lower than what a traditional fixed mortgage rate would be. By extending this rate period, the incentive to migrate to a more stable loan goes away- for 5 years. Even assuming you could, why move from a 5% rate that is guaranteed for 5 more years when you would have to pay 8% on a refinance rate?
And again, who bears the cost of this rate freeze? The bank holding the loan. By inducing a 5 year freeze, we are slowing the correction process down by prolonging the malaise in the banking sector. Do we want the housing crisis to be longer in time, or shorter?
Banks should be accountable for their poor decisions, and their punishment has been taken in the extreme losses seen in the banking sector in 2007 and continuing into this year. However, banks also form a cornerstone of our economic performance. Without easy access to credit, the economy simply does not move forward- fewer banks operating under tighter lending guidelines at higher rates drive up the cost of financing, driving down economic expansion.
The mortgage meltdown is not an easy situation, but in recommending that the banking sector shoulder all the costs of fixing the problem will only serve to throw more wrenches into the economic engine.