Making a Silk Purse Out of a Sow's Ear

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The U.S. Treasury revealed its latest plan to rescue the collapsing financial system today. I have lost count of which number rescue initiative this is since there have been so many in the last year and a half. The need for a another new plan indicates the lack of success of all the previous plans that were supposed to fix things. Despite spending trillions of dollars so far, the government has not managed to get control of the problem - and for good reason. Essentially, all the government programs are geared toward making worthless assets worth something. If this is the goal, Harry Potter should be running the Treasury department instead of Timothy Geithner.

The latest idea is to take $75 to $100 billion (multiply this number many times) from the Troubled Asset Relief Program, aka TARP, and combine this with capital from private investors to buy up the toxic assets that are owned by the banks. Treasury claims that private investors participating in the new program could lose their entire investment in some cases and the taxpayer could share in profits (my guess is the chances of either are minuscule). The FDIC, which is close to being insolvent itself, will provide a guarantee for this public-private investment funding. It was not mentioned how the FDIC would be bailed out if any significant amount of these asset purchases went bad.

Under the Treasury plan, private-sector participants will compete to establish a price. Treasury claims that the public-private partnership is superior to a "bad bank" approach because because under the "bad bank" approach taxpayers would take on all the risk, and government could overpay for the assets (as if these two things aren't happening in their alternative approach). Treasury said that it expected a "broad array" of investors to participate in the program, including insurance firms (even though this industry itself is about to need a bailout - participating in this program should help push it over the edge). Treasury also claims that its new plan is designed "to make the most of taxpayer resources." This of course begs the question: What were the previous plans designed to do?

The ultimate goal of the latest, greatest, newest, improved government financial rescue package is to get banks lending again. As with all the other failed rescue packages, this is being done indirectly by attempting to solve some related issue and presuming that this will somehow magically jump start lending (the cause effect connection between the two is usually missing). The new plan is trying to restart trading in 'legacy securities'. The market itself has valued these as worthless and indicated that these are inherently non-viable financial instruments. Nevertheless, the government thinks it knows more than the market and insists on pouring more and more money into this financial black hole. Even though every previous attempt has failed, it is always hopeful that the next one will work. As I have said many time, nothing succeeds like failure in Washington. Where is Harry Potter when we need him?

NEXT: Print Enough Money, Everything Goes Up

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Employment Losses Revealed After the Election

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

When post-election government economic reports are released in the next several months, don't be surprised if conditions are much worse than those reported before the election. This shouldn't be interpreted as conditions having actually significantly deteriorated (although this is probably happening as well), but that there is now less motivation for the Bureau of Labor Statistics (BLS) to fudge the figures to make them look better. The Employment Report released this morning is a case in point. While this report generally contains more fantasy than a Harry Potter novel, apparently there is some limit to the BLS's job conjuring . Now that the election is over, we find that unemployment shot up significantly in October and job losses for August and September were much higher than originally reported. Must be 'coincidence' that they missed reporting on those bigger job losses before people voted.

While the unemployment figures are still grossly understated, they are bad enough as is. A loss of 240,000 jobs took place in October and the official unemployment rate rose to 6.5% from 6.1%. September's job losses were revised upward to 248,000 from the previously reported 159,000 and August now has a loss of 127,000 jobs instead of 73,000. So far the number of jobs have shrunk every month this year and according to the BLS, the total loss is now 1.2 million. The official unemployment rate is now as bad as it got in the 2001 recession and is heading toward the higher levels of the 1991 recession (as you go back in time, each recession was worse in the U.S. until 1974).

Evidence that the BLS is underreporting unemployment can be found in the statistics for the number of people collecting unemployment insurance. It has already hit a 25 year high of 3.84 million, a level last reached in the devastating 1982 recession. Unemployment is paid by the states and there are already five states with insolvent unemployment trust funds and another eight states teetering on insolvency. To handle this situation, the federal government has been 'lending' the states money at very low interest rates. For their part, the states are trying to raise unemployment insurance rates paid by companies, many of which are having serious financial problems of their own (many states lowered unemployment insurance taxes when the economy was good and companies could afford to pay more). Few things are more certain than a number of state unemployment trust funds will need a major bailout by the federal government in the not too distant future.

While it should be axiomatic that a growing economy creates jobs and a deteriorating economy losses jobs, the U.S. government still has not acknowledged a recession exists even after 10 months of steep job losses. More proof of recession can be found in weekly unemployment claims. These were 481,000 last week and have been over the 400,000 level, usually considered the cutoff for an economic decline, for a long time. Perhaps now that the election is over one of the government's other great works of fantasy, the GDP report, will start to veer closer to reality.

NEXT: China Bails Out Asia - at Least for Today

Daryl Montgomery

Organizer, New York Investing meetup

http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.