The Melting Pot Project

Two Big Two Fail

Number Two fully approves of this legislation.

Two pages.

That's the length of the "Too Big to Fail, Too Big to Exist" bill that Senator Bernie Sanders introduced on Friday. The proposal would require Timothy Geithner to submit a list of institutions that are considered "too big to fail" to Congress ninety says after the passing of Sanders' plan, and then, a year after that date, the Treasury would have to go about breaking up every company on the list. The interim period is for determining the best way to accomplish the breakups (several female senators have already opined that doing so via text message is not acceptable).

The simplicity of Sanders' bill is, in fact, the point of the bill itself. It draws a line in the sand. It directly orders Geithner to get rid of this cancer in the economy. The rules of the breakups themselves can be a thousand pages long, but as for actually getting them done, that doesn't take much ink. One year. No dilly-dallying. No lollygagging. And certainly no pussyfooting around.

Why such a need to act? Here's an explanation from Sanders himself:

"Here is an example of amazing irony," the senator said in a video shot by Brave New Films accompanying the legislation's release. "Three out of the four largest financial institutions in the country who led us to this financial disaster are now bigger then they were before the collapse. So we have got to break these guys up so we don't see a recurrence of what we saw a year ago."

And here's another example of "amazing irony." It takes a socialist - literally, Sanders openly defines himself as a socialist - to propose the most capitalist bill of the year.

Congress Approves $500 Billion For Monument To Human Folly

Normally fake news is a no-no around here, but this story is just too good a follow-up to the National Money Hole to ignore:

WASHINGTON—In recognition of mankind's inherent propensity for tragically foolish decisions, Congress allocated nearly $500 billion Monday for the construction of a new national monument honoring human folly.

"From Hannibal's disastrous crossing of the Alps to Custer's humiliating defeat at Little Bighorn, human history has been plagued by senseless mistakes, and it is high time we built a memorial to honor that history," House Speaker Nancy Pelosi (D-CA) said of the expensive and ill-advised monument. "My deepest hope is that future generations of Americans will one day look upon this pointless edifice and be filled with a sense of awe and wonder at mankind's utter lack of foresight...."

"The face of the building will be covered with recently excavated sections of the Titanic, as well as several faulty pressure valves from the Chernobyl power plant and hundreds of uranium-tipped shell casings from the first Gulf War," said Wheeler, whose design calls for the monument to be surrounded by dozens of oil derricks pumping night and day into bare dirt. "But the most exciting feature of the memorial, in my opinion, is the giant glowing orb at the top that will symbolize humanity's needless overuse of energy and will itself use a staggering 12 gigawatts of power per second."

Have You Driven Afford Lately?

Cash for Clunkers, the clever plan to pay thousands of dollars to destroy used cars, ended in late August, somehow making Detroit even more hopeless than it already was. Since then, the numbers on the program have been rolling in, and it appears that we didn't exactly get a lot of bang for our buck:

WASHINGTON – The most common deals under the government's $3 billion Cash for Clunkers program, aimed at putting more fuel-efficient cars on the road, replaced old Ford or Chevrolet pickups with new ones that got only marginally better gas mileage, according to an analysis of new federal data by The Associated Press.

The single most common swap — which occurred more than 8,200 times — involved Ford F150 pickup owners who took advantage of a government rebate to trade their old trucks for new Ford F150s. They were 17 times more likely to buy a new F150 than, say, a Toyota Prius. The fuel economy for the new trucks ranged from 15 mpg to 17 mpg based on engine size and other factors, an improvement of just 1 mpg to 3 mpg over the clunkers....

The data show the average fuel economy was 15.8 mpg for the old vehicles and 24.9 for the new ones.

That last bit is referring to all cars bought through the program, not just the trucks from the earlier part of the article. The federal government handed out $3 billion through Cash for Clunkers. Doing the math there, that's over 329 million taxpayer dollars spent for every mile per gallon gained.

Thank God we don't have a calculator-breaking deficit to worry about, or this whole thing might seem like a hugely inefficient waste of money.

Bohemian Bankruptcy

Clever little spoof from our friends across the pond:

The Parable of the Trading Sardine

Buddy Christ approves this message.

Sudden Debt recently posted this little story, and I would be remiss to not share a lesson taught by guys named "Zebediah" and "Yorick." Enjoy:

Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him, too, about how great these sardines are. The process is repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the “world’s absolute best sardines – EVER”.

Well, Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick: “You crook! You liar! I paid you a million bucks for plain ordinary sardines. They were not the greatest tasting sardines - EVER”, yells Zeb.

Yorick shrugs and replies…

“Hey Zebediah, you are such a schmuck. Those were not eating sardines – them were trading sardines!"

If you're wondering why the big banks are so deathly afraid of allowing anyone to properly price their assets - which you really shouldn't be, but I suppose it's a forgivable offense - well, wonder no more.

This is the Best Housing Bubble Metaphor of All Time

Make sure your speakers aren't on mute:

Yeah, That Seems to Add Up Fine

Rumors of a second stimulus are beginning to swirl inside the Beltway, with the Obama administration worried that there will be approximately eight jobs left in the entire country when midterm elections roll around. But there's legitimate question as to whether or not President Obama has enough political capital left to push more stimulation through Congress; the first package has become increasingly unpopular, and there's the little matter of how to pay for Round Two:

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an outside adviser to President Barack Obama....

Tyson, 62, later told reporters that the U.S. can afford to pay for a second package, even as the fiscal deficit soars. She said the budget shortfall is “likely to be worse” than the equivalent of 12 percent of gross domestic product that the administration forecast for 2009 and the 8 percent to 9 percent it projected for next year.

Remember, Obama said that he wants to cut the deficit in half. And, as the Count from Sesame Street would surely tell you, the best way to do that is to spend more while taking in less. One, two, three billion from China! Ah, ah, ah!

I Award You No Points, and May God Have Mercy On Your Soul.

Debate about a value-added tax has picked up in recent weeks, as those worried about the government's balance on its Chinese Express card have tried to figure out how in the world we're going to pay our enormous bills. Most onlookers worry that such a tax would deliver yet another blow to an economy that has already taken more hits than Snoop Dogg at a medical marijuana convention. But at least one man - Bruce Bartlett, economic advisor and top-notch Rush Limbaugh impersonator - argues that a VAT would actually be the greatest idea since the housing bubble:

Suppose you had a 10 percent VAT and we said we weren't going to collect it for the next 10 months. People would buy like crazy. They'd buy toilet paper, they'd buy anything they could get their hands on that they knew they'd need in the future. We're depriving ourselves of a great stimulant tool by ignoring this.

Bartlett is right, of course. People would buy things like crazy before the tax went into effect. And then, 10 months later, everybody would continue their normal spending (except at a 10% higher rate, of course) and use the huge stash of all the stuff they'd stored up to, I don't know, build a toilet paper fort for their canned soup or something.

Wait, I'm sorry - that's only how things would work if people were total morons and bought some fresh Charmin even though they had 792 rolls in the garage. In the real world, when people stock up in preparation for something, they don't merrily keep purchasing whatever they've stashed if they don't need any more of it. They just stop buying. Which would provide some lovely disposable income if everything that consumers still needed to pay for didn't suddenly get 10% more expensive. At the same time, countless businesses would surely enjoy a sudden and massive drop in revenue hitting right as most of their own costs jumped by 10% as well. They'd probably enjoy it so much that they'd desperately try to stay afloat by trimming fat wherever possible, causing wages to drop and unemployment to rise - and that's exactly what Americans would need to pay for skyrocketing prices on, well, just about everything.

This is an even bigger tsunami of dumb than the first-time homebuyer tax credit, and it's based on the same exact shell game-style thinking. Moving economic growth around is not the same as creating it. If I take a dollar out of my right pocket and put it in my left pocket, my pants haven't just gotten richer. Similarly, if a government policy takes consumer demand from the future and puts it into the present, total demand doesn't increase over the span of time in question. It just creates a bubble. And we've had just about enough of those.

Greenbacks for Geezers

President Obama's latest stimulus plan is to send extra money to Social Security recipients - and, no, it won't be in the form of $8 checks inside of birthday cards, although the irony would certainly be delicious. The elderly will actually be getting two hundred and fifty bucks apiece, despite the fact that they're poor drivers of economic growth. (And cars.)

If you wanted to help the economy and you had $14 billion to bestow on any group of people, which group would you choose:

a) Teenagers and young adults, who have an 18 percent unemployment rate.
b) All the middle-age long-term jobless who, for various reasons, are not eligible for unemployment benefits.
c) The taxpayers of the future (by using the $14 billion to pay down the deficit).
d) The group that has survived the Great Recession probably better than any other, with stronger income growth, fewer job cuts and little loss of health insurance.

The Obama administration has chosen option d — people in their 60s and beyond....

In the 1930s, [the elderly] had little safety net and frequently struggled to meet their basic needs. Four decades later, they were the only group of Americans with guaranteed health care and a guaranteed income. Just consider: The real median income of over-65 households rose 3 percent from 2000 to 2008. For households headed by somebody age 25 to 44, it fell about 7 percent.

In the interest of not sounding heartless, allow me to point out that the reason Obama is sending out the checks is that SS payments won't be getting the cost of living increase that's usually factored in every year. But there's a reason behind the reason - average cost of living actually went down since the last adjustment:

The recession has driven prices down across the board, and the cost of living has actually declined by almost 5 percent. Because of that, and because Medicare premiums won't increase next year, spending analyst Andrew Biggs of the American Enterprise Institute estimates that the average Social Security recipient will have about $725 more in purchasing power next year. So, reasonably, Social Security plans to skip the COLA.

In other words, Obama is creating an inflation adjustment when, technically, our biggest budgetary problem should actually be experiencing deflation. He's become the Viagra of presidents.

The Bank So Nice They Bailed It Thrice

GMAC, financial offspring of the wildly successful business model that is General Motors, should consider itself to be a very lucky enormous pool of red ink. Despite demonstrating all the profit-making ability of a turnip, the Treasury has generously decided that GMAC is once, twice, three times too big to fail:

It might seem like a lot of cash for one supersize clunker, a good-money-after-bad attempt to jump-start a broken-down giant of Detroit. But as the Obama administration contemplates a third rescue of GMAC, the onetime finance arm of General Motors, federal officials, automotive executives and analysts all say the company is — just like the biggest Wall Street firms — too big to fail.

(By the way, this is the same GMAC that renamed its banking division "Ally" and then started offering the highest deposit interest rates in the entire country after being bailed out twice, rates healthy banks couldn't compete with because they actually have to make a profit. And it's still losing money hand over fist. That's like striking out in teeball. While swinging a tennis racquet.)

Don't worry about your money, though. The bailout of the bailout didn't work, but the bailout of the bailed-out bailout should be smooth sailing.

More Pants on Fire

Numbers can be hard to change sometimes. For example, it's a miracle and a half whenever the St. Louis Rams alter their side of the scoreboard. And try asking the Republicans if they'd like to flip the balance of Senate seats. No matter how badly they want 40 to magically transform into 60, it will never happen. (Unless they go to the BLS, in which case all bets are off.)

Recently, TARP recipient United Commercial Bank wanted to change some numbers very badly. But no matter what it did, the results weren't nearly good enough. So it went another route instead - and found out that just lying about the numbers in question is a much easier solution:

Analysts say it is in danger of being closed and sold by the FDIC given the findings of an internal investigation that the bank revealed last month. The bank’s earlier disclosures of its financial health were unreliable, the bank said, partly because some of its executives, “driven by an apparent desire to downplay deteriorating financial conditions,” had fudged losses and misled its auditors through “deliberate and improper actions.”

Luckily, we can all rest assured that this isn't happening at any of the really big banks. Just ask Ken Lewis.

Reaping What They've Loaned

Yet another "Gee, Maybe You Shouldn't Have Done That" award for the nation's biggest banks:

The rate of loan charge-offs by major U.S. banks has exceeded those seen in the early years of the Great Depression as the credit crisis continues to take a toll, Moody's Investors Service said on Monday.

Bank charge-offs -- loans written off as uncollectable -- have reached $116 billion year to date, or 2.9 percent of outstanding loans on an annualized basis, Moody's said in a report. By comparison, bank charge-offs were about 2.25 percent in 1932, the third year of the Great Depression, Moody's said.

On an annualized basis, charge-offs were about 3.4 percent of outstanding loans in the third quarter, matching the Great Depression peak in 1934, Moody's said.

You know what would solve this problem? More loans! Unless, of course, the "credit" crisis isn't actually on the lending side, it's on the borrowing side. But that's just crazy talk. (Or math. Sometimes I get them confused.)

Breaking News: First-Time Homeowners Can Only Own Their First Home Once

Pictured: Rough approximation of Timothy Geithner's response.

One of the more popular remedies for the popping of the housing bubble has been the federal government's $8,000 tax credit for first-time homeowners. This popularity isn't exactly surprising - you'd probably like somebody who handed you a bunch of money, too. And many commentators have said that the program has helped to slow down the giant shipment of economic fail that has been the popping of the housing bubble. Technically, that's an accurate analysis - people want to buy before the incentive runs out, and increased demand puts upward pressure on prices. For the moment, anyway.

But when somebody buys a new home, that same person is unlikely to rush out to purchase another one very soon. (In economics, this is known as the Moving is a Giant Pain in the Ass Principle.) Moreover, scientific studies have shown that fewer than 10% of Americans are capable of buying their first house multiple times. That means that the total pool of potential first-time homeowners is shrinking faster than it "normally" would, which causes two things to happen. First, the tax credit gradually becomes less effective, because more and more of the people who would use it already have. Second, when it eventually runs out, the country is left with a diluted number of people looking to buy, because they've already bought early. And just like increased demand puts upward pressure on prices, decreased demand puts downward pressure on them, which leads to projections like this:

Then there’s the $8,000 tax credit for first-time homebuyers, a program that failed to heed the lessons of the no-questions-asked-mortgage lend-o-rama earlier this decade. Some 74,000 claims may have been ineligible for the credit, including one from a 4-year-old boy, according to a report from the Treasury’s inspector general....

But it will take an increasingly large tax credit to get the same bang for the buck, according to Andy Laperriere, a managing director at the ISI Group in Washington.

Using estimates from the National Association of Realtors on the number of home sales that were borrowed from the future, Laperriere calculates that home sales will drop 11.5 percent next year even with an extension of the $8,000 tax credit. That’s better than the 29 percent decline he predicts if the credit expires, but the sign is still negative.

A decline of 29 percent would create a total crash in the market (you know, again). But it's probably the 18 percent difference between the two mentioned possibilities that will be the government's main focus. Allowing that difference to become reality would trigger the following financial news:

The only alternative is to continuously dole out larger and larger tax credits to more and more people, artificially propping up demand until doing so isn't artificially propping up demand anymore. If this sounds like a bit of a shaky plan, worry not - our fearless leaders in Congress support it, and when it comes to housing, they're never, ever wrong.

Comfortably Dumb

Many moons ago, a giant housing bubble was inflated in the United States. This bubble, as Very Important People have told us, was created because too many Americans "lived beyond their means." They bought houses they couldn't really afford, and then used the temporary price gains in their houses they couldn't really afford to buy cars and TVs and Snuggies they couldn't really afford. (Oddly enough, those same Very Important People actually made the decisions that allowed - even encouraged - all of those bad purchases in the first place, yet we've apparently decided that they're the ones who should be fixing the whole mess.) Once the bubble reached a popping point - as bubbles are wont to do - the system crashed, causing everybody to look back upon what had happened and say, "Gosh, that was pretty dumb. I hope we've all learned something here."

And we did. For about a week and a half. Then, the aforementioned Very Important People got together and determined that the best way to fix the country's economic woes was to have the government sponsor things like this:

Without question, Tejada's loan is toxic--to her and to the taxpayers who are backing the loan. Her house cost $155,000. Tejada's loan was apparently made on a micro-down payment of just 3.5%, the minimum down payment to qualify for an FHA loan. On top of this, however, she got an additional government backed loan to make improvements. Her total loans amount to $183,000. In short, she was immediately underwater on her new house.

The monthly payments on her debt amount to $1328. Her income is $2470, leaving her with just $285 a week to live on. She's paying 54% of her income to make the mortgage payments.

...annnnnd bubblelicious statements like this:

"I bought my house for $155,000.  And now, after all the fixing, after all the remodeling, my house is worth $255,000. So just within a month period, I made a $100,000," she tells Market Place's Scott Jagow.

There's some dispute about whether or not that's true, but for the moment, let's assume that it is. Her house is in fucking California. In case you're not in tune with exactly where housing prices are set to keep plunging like an overworked plumber for the next several years, it's... drumroll please... California. And if (or, to be more accurate, when) she gets sick, or loses a job, or gets into an auto accident, or simply can't sell her house for what she needs to sell it for, you get to help cover the losses! Aren't you excited?

This is the same exact plan, only with even worse numbers, that was brought to you by Alan Greenspan a decade ago, then continually reinforced by Ben Bernanke, Hank Paulson, and Timothy Geithner (when he was running the New York Fed). Now Bernanke and Geithner are doubling down, despite their nearly incomprehensible ability to be wrong about all things housing bubble over and over and over again.

At least there's no way this could possibly backfire.

The Dollar Parties Like It's 1999

Jon Stewart explains a basic economic principle:

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Failout Bill

These are the people in charge of doling out your money.

TARP, the $700 billion bailout bonanza that oozes with more popularity than a high school Dungeons and Dragons club, has had its share of failures. But today was a particularly bad day for the program, which came under fire from a scathing report issued by one of the government's deliberately blinded watchdogs:

A Treasury Department watchdog is warning that a key $700 billion bailout program has damaged the government's credibility, won't earn taxpayers all their money back and has done little to change a culture of recklessness on Wall Street.

"The American people's belief that the funds went into a black hole, or that there was a transfer of wealth from taxpayers to Wall Street, is one of the worst outcomes of this program, and that is the reputational damage to the government," said Neil Barofsky, special inspector general of the Troubled Asset Relief Program (TARP), in an interview.

"We don't even know where the money went," says Rep. Daniel Lipinski, D-Ill., who recently called for TARP assistance to end in December, when it's set to expire. The Treasury has the authority to extend the program until next October.

In the words of the great Emmitt Smith, the American people have "got debacled."

The Bank In the Mirror

For those of you who have never heard of Elizabeth Warren, she heads the Congressional Oversight Panel that was created to oversee TARP. She's also one of the few good guys (or girls) in the federal government when it comes to the financial crisis, not content to simply smile and nod whenever the major banks speak. Thus, she tried to alert The People when Hank Paulson and Timothy Geithner repeatedly decided to give her the Dikembe Mutombo finger-wag every time she requested information about exactly where taxpayer billions have gone. She also dared to utter the truth about the heart of this crisis a few days ago:

The reason banks lost confidence in each other is because they looked at their own books.

Passing the Buck

Reports of Dollar Doomsday are a bit premature.

The past week has exploded with "death of the dollar" talk, likely sparked by the Independent's recent story about foreign central banks secretly planning to give the Heisman to our neighborhood-friendly greenback. The validity of the article can be debated, but if it's true, then the world has an awfully strange way of ditching America's dead presidents:

Currency traders have confirmed that the central banks of South Korea, Taiwan, the Philippines and Thailand were amongst those buying the dollar.

Hong Kong, Singapore, Malaysia and Indonesia were other countries identified as buyers of a currency which has been dumped by traders as the prospects of a sustained economic recovery have improved.

So, here's what's actually going on: A bunch of countries that enjoy exporting lead-flavored toothpaste and other such fine products to the US maintain what's called a "currency peg" to the dollar. For an example, let's use Hong Kong's official currency, Jackie Chan DVDs. Hong Kong officials do what they can to make sure a certain number of Jackie Chan DVDs are equal to one dollar. So when the value of the dollar goes down, the value of Jackie Chan DVDs has to go down as well, thereby keeping the "peg" stable.

How is this accomplished? Technically, there are a number of possibilities, but the above is the most direct option - a central bank simply uses its own currency to buy dollars. More worldwide demand for dollars puts upward pressure on their value, while the increased supply of the currency in question makes it cheaper. This "automatic" response from countries that maintain pegs then creates an "un-automatic," but equally predictable, response from non-peg countries which also depend on exporting to the American consumer. To stay competitive, they have to do what they can to push their currencies lower as well.

All of this is to say that if the dollar is going to die, it's not going first. To allow a true dollar crash would be to destroy the economy of every major exporter in the world. The central banks of those countries won't let that happen on purpose. They can't. Instead, the first step towards a potential dollar crisis will be other currencies going over the cliff, as efforts to keep up with Ben Bernanke's printing press spin out of control. And for the rest of the story, just click here.

Bubble Trouble

Above is quite the nifty little chart. Well, actually, it's two nifty little charts that have been joined in holy chart matrimony (and are, of course, now plotting to destroy traditional marriage with their dangerous chart-on-chart relationship). One of them shows the country's total monetary base, which, for you non-nerds out there, is just a fancy way of describing the most basic measurement of how many dolla-dolla bills are currently in existence. The second chart depicts the price-to-earnings ratio of the S&P 500; to translate again, that's essentially a comparison of the prices of all the stocks on the S&P 500 to how much money the companies listed on the exchange are making. (Note: There are oodles of arguments about the "best" way to calculate P/E ratios, but the numbers on this chart go along with the numbers on the actual S&P website, so we're gonna roll with them.)

You probably noticed right away that both charts turn into the Great Wall of What Will Eventually Be Owned by China at the same time. At first, this might seem like good news - after all, if the Fed can simply print a bunch of money to pump up the stock market, that will help the economy, right?

Well, remember, this doesn't show the actual level of the S&P - it shows a ratio. And one of the funny things about ratios is that a lot of them tend to be pretty consistent over time. This one has jumped from 20 to 140 in just over a year. Since 1900, the last time this ratio even cracked 100 was... never. Not once. In fact, the closest it got was just over 40 at the end of the tech bubble. The average ratio over the past century is in the teens.

In other words, by running the printing presses on overdrive, the Fed has managed to create what economists would technically define as a Really Fuckin' Huge Stock Bubble. And as we've all learned, when bubbles like this pop, it really, really hurts.

(Hat tip to Jesse's Cafe American for the chart.)

That Policy is a Dining Room Table

Barney Frank, a man who has been wrong about housing so many times over the past decade that we should pass a law making it illegal for him to think any thoughts related to the subject, actually offered this defense of the billions upon billions of taxpayer dollars that the Federal Housing Administration has thrown at bad mortgages:

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

So, to be clear, Barney Bubble believes that when banks make bad loans on purpose, it's evil predatory lending. But when the government makes bad loans on purpose, well, that's just policy.