Monthly Archives: March 2009

Good news trickles in…

Good news is trickling in on the economy. Is a turn-around coming?

Today, the National Association of Realtors announced that existing-home sales were up 5.1 percent in February, an unexpected positive. Sale prices were way down from February 2008, but up from January 2009.

New residential housing construction was up 22 percent in February, and car sales were up compared to January.

Wall Street seems to be taking heart. The Dow was up almost 4 percent in mid-day trading.


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AIG and donuts

We are a nation surrounded by cream-filled donuts, and we’re determined to eat every one no matter how much it hurts us.

A. Cuomo

A. Cuomo

We’re overindulging not in fat and calories, but in anger. Pent-up frustration has combined with Obama-fueled empowerment, and we can’t stop ourselves.

The latest chapter is AIG bonuses. Understand:

1) AIG was contractually obligated to pay $165 million in bonuses. Our liability for nonpayment, now that we are the owners of the company, would far exceed the bonuses paid out.

2) We need some AIG executives to stay at the firm if, as taxpayers, we are to have any chance of seeing our money again. We have $170 billion tied up in the company, and we need insiders to sort out its complex transactions.

3) AIG’s mistakes were far from unique. Millions of people who took our home equity loans, obtained mortgage loans, developed real estate, built houses, invested in real estate and bought shares in banks made the same mistake. We did not expect housing values to decline.

4) New York A.G. Andrew Cuomo is grandstanding and abusing his authority, and President Obama isn’t doing much better.

5) It is not AIG’s fault that it was “too big to fail.” We did not bail the company out as a favor, but to save an economy that relied too heavily on too few businesses. We should have regulated, but we didn’t.

We all need to chill out. Rather than fueling the flames, our president should blaze a path toward wisdom.

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Spending debate misses the point

As more and more of our neighbors lose jobs, the political debate over a solution misses the point.
In January, Morgan County’s unemployment rate was 8 percent. That means 4,463 people in the county who wanted to work were unable to find a job.
For many, that means foreclosure or bankruptcy. For all, it means hardship. The numbers represent misery.
Stated broadly, there are two approaches to the misery. One is to do nothing. The other is to increase demand through government spending.
Neither approach is clearly wrong in an economic sense. Doing nothing means letting the market correct itself, which most agree it eventually will do. The do-nothing approach has the advantage of not add­ing to our national debt. Free-market purists view any governmental intervention as mucking up a system that works best when left alone.
Most economists advocated the do-nothing view before the Great Depression. Twenty-five percent unemployment, soup lines and a decade of widespread misery did not fit well into the concept that a free market optimizes employment and production.
The other main school of thought says the free market is not always self-correcting, at least not within an acceptable timeframe. Moneta­ry policy — usually adjustments in the interest rate — will stabilize the economy in most situations, according to this view.
When that does not work, the government should intervene with fiscal policy. In a situation where the nation’s production is falling, as it is now, that means expansionary fiscal policy. By using borrowed money to increase spending, the government can increase aggregate demand. If the government spends enough, it will kick-start the market toward full employment.
Lost in the debate between the do-nothings and the spend-mores is the narrow focus of their dispute. Again speaking broadly, the spend-more crowd does not believe government spending should always exceed tax reve­nue. It is only in a time of crisis, when production and employment are plummeting and monetary controls have failed, that they advocate government spending as a tool to prevent depression.
With due respect to U.S. Sen. Richard Shelby and Rush Limbaugh, picking through line items of the stimulus package and complaining they are a waste of money does not make much sense in this debate.
The whole point of the stimulus package is to spend money. The specifics of what it is spent on are incidental to the primary goal of increasing aggregate demand. Whether the spending is on health care, on roads or to get the stink out of pig poop does not matter. Just spend the money, and quickly.
Maybe, lessons of the Great Depression notwithstanding, it will turn out that the do-nothings were right. But the nation, both under the current president and the previous one, chose to pursue the spend-more approach to avoiding a depression. The greatest risk now is that Congress will spend too little. Repaying the debt will be tough if we spend enough to kick-start economic growth. It will be impossible if we spend too little.
Contact Eric Fleischauer at his blog,

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Obama’s ‘F’

March 12, 2009 – 10:31:37
President Barack Obama scored an “F” on his efforts to revive the economy in a recent Wall Street Journal survey of 49 economists. I suspect the grade has less to do with his competence than an impossibly divided Congress.

A minority of economists reject the use of fiscal policy (deficit spending) to stimulate the economy. Obviously they would grade Obama as a failure, because he has embraced the Keynesian view that the government must increase spending to pull out of the recession. A majority of economists believe increasing aggregate demand is necessary, but most of them think Obama is not spending enough. They would also give Obama a low score — not because he’s spending too much, but because he is spending too little.

In truth, Obama appears to be aligned with the majority, but he is hamstrung by politicians that want to treat the Keynesian approach to avoiding a depression as being in the same category as normal deficit spending. Political leaders who rightly decry deficit spending in normal times can’t seem to grasp that this is an abnormal time.

What we’re seeing is the economic equivalent of the Vietnam War. The nation desperately needs to pick a policy and run with it. Instead we’ve picked a policy — that of expansionary fiscal policy to avoid a depression — and we’re limping toward it. Congress is still debating the policy when it needs to be going forward. As in the Vietnam War, straddling the two policy directions may be the worst possible approach. If we run up debt in a half-hearted approach at fiscal expansion, we won’t stimulate the recovery we need to pay off the debt later.

Obama will continue to get low grades, and unemployment will keep growing, until Congress unites around the necessary evil of short-term deficit spending.

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The bottom rung

March 10, 2009 – 22:16:11
Moody’s Investors Service published a list on Tuesday called the Bottom Rung, which details companies that the ratings agency says are most likely to default on their debts. Moody’s estimated that almost half will default on debt in the next year.

The Bottom Rung represents about the riskiest 15 percent of all companies that Moody’s tracks.

To compile the list, Moody’s chose companies with the lowest credit ratings (B3 or below), whose ratings were either negative or under review. Moody’s B3 rating is the 16th lowest out of 21.

Applying this same methodology retroactively to 2008, there would have been 157 companies. Sixty eventually defaulted.

Moody’s list includes 283 companies. Here are a few of particular interest to Decatur-area readers:

Advanced Micro Devices Inc
Arby’s Restaurant Group Inc.
Blockbuster Inc.
Carmike Cinemas Inc.
Charter Communications Inc.
Chrysler LLC
Cumulus Media Inc.
Dole Food Co.
Eastman Kodak Company
Ford Motor Company
Freedom Communications Inc.
GateHouse Media Operating Inc.
General Motors Corporation
Krispy Kreme Doughnut Corporation
MAPCO Express Inc.
MediaNews Group Inc.
Michaels Stores Inc.
Morris Publishing Group LLC
Oriental Trading Company Inc.
Reader’s Digest Association Inc.
Rite Aid Corporation
R.H. Donnelley Corp.
Sirius XM Radio Inc.
Six Flags Inc.
Synagro Technologies Inc.
Wolverine Tube Inc.

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So much for ‘baseline’

March 9, 2009 – 19:15:19
February’s 8.1 percent unemployment rate is disturbingly close to the Federal Reserve’s “baseline scenario.” This scenario, it explained, is the “consensus view about the depth and duration of the recession.” Under these expectations, in 2009 unemployment would rise to 8.4 percent. That we hit 8.1 percent two months into the year, and that many indicators suggest the rate has not bottomed out, is good reason for concern. The Fed’s “more adverse” scenario projected an 8.9 percent unemployment rate.

The Fed developed its alternate scenarios last month in connection with “stress tests” for large banks. If unemployment rates hit those numbers, can the banks survive?

Sadly, unemployment may blow past the Fed’s baseline scenario long before it has completed the stress tests. Expect economists to call for an even larger stimulus, and don’t count too heavily on the $250 billion “marker” in President Obama’s proposed budget to be anything like a cap.

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Herd instinct

Sunday, March 8
When Bobby Green, pastor at Wesley Memorial United Methodist Church, was 11, he went fishing with his father and four brothers. They caught 51 crappie; he caught 30 of them. A neighbor saw the stringer and asked, “Who caught these?” Bobby’s father responded, “We did.” Frustrating answer to an 11-year-old who had caught more than the others combined.

Later, in violation of their father’s instructions, Bobby and his brother loaded a hay wagon nine high instead of seven. It tilted in a creek and half the hay was drifting away when the landowner approached, fuming. “Who did this?” he yelled. Bobby’s father responded, “We did.”

The story has relevance to the increasing friction between America’s economic classes. The rich — those with capital — used their ingenuity in past decades to create astonishing wealth. Some of that wealth helped those without capital. That same capitalist class caused much of our current mess, by investing recklessly and sharing too little.

The capitalists’ temptation was to overstate their value when things were good. “They” created prosperity, not “we.” Those without capital tend to overstate capitalists’ blame now. It’s “their” fault, not “ours.”

In truth, our economic system functions only with all classes. The rich can only produce if others will consume. The masses cannot consume unless the rich produce.

Bobby closed with a snippet from the movie, “Ice Age.” Manny the mammoth risks his life to save a member of his misfit herd, Diego the saber-toothed tiger. Why did he do it? Diego asks.

“Thats what you do in a herd,” Manny responds. “You look out for each other.”

Rewards in a capitalist system are unequal, but each of us has an indispensible role. Now would be a good time to look out for each other.

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