David Cay Johnston, says, The Rich Get Richer

The Rich Get Richer

The rich, thanks to government handouts, are getting richer at everyone else’s expense. At least that’s what David Cay Johnston claims in the book Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill)

“This enormous growth of incomes at the top is not the result of market forces — there’s some market forces — but it’s largely the result of all these rules nobody knows about,” he tells Dan and Aaron in this clip.

The problem starts with government subsidies, says Johnston, a Pulitzer Prize-winning journalist. States are spending around $70 billion on government subsidies, he estimates. That doesn’t include the hundreds of billions more doled out in federal subsidies.

“Is that capitalism?,” he complains. “Go compete in a competitive arena. Don’t go to Washington and say ‘give me money’ either by saying ‘I don’t have to pay taxes’ or forcing other people to pay taxes that go to me. Go earn your money in the marketplace.”

The wealth gap in America is outpacing much of the world. “Income inequality in the United States has soared … with 1 percent controlling 24 percent of American income in 2007,” New York Times columnist Nicholas Kristof recently wrote. Kristof notes that’s worse than “historically unstable countries like Nicaragua, Venezuela and Guyana.”

What’s even more striking is that many of these unfair advantages are given to the biggest political contributors. The Wall Street bailouts are a perfect example.

“There’s been a massive turnover of money to people who didn’t have to face the consequences of the market,” Johnston says. “Goldman Sachs got its bad bets paid off at 100 cents on the dollar. I’ve never seen the government do that for me.”

If the trend continues the next crisis could be a lot worse than 2008 and 2009, Johnston warns.

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Elizabeth Warren says, Housing Market Getting Worse

Home Foreclosures Will Last For Years

10 to 12 million U.S. Homes Could Ultimately Go Into Foreclosure

There’s been a lot of talk lately about a recovery in the housing market – even reports of bubbles re-inflating in certain markets. Elizabeth Warren, chair of the Congressional Oversight Panel, isn’t buying it. “We see things getting worse in the housing market,” Warren says, citing the pernicious effects of foreclosures, which rose 5% in the third quarter to a total of 937,840, according to RealtyTrac. “The long-term impact of high foreclosure rates on our housing market and overall economy would be disastrous,” Warren warns, citing estimates that 10 to 12 million U.S. homes could ultimately go into foreclosure. “We have to get foreclosures under control. “Why the sense of urgency?

A single foreclosure property brings prices down an average of $5000 for every house in a two-block radius and costs investors an average of $120,000, she says. In its most recent report, Warren’s panel criticized the Treasury’s foreclosure modification efforts as “inadequate” and “targeted at the housing crisis as it existed six months ago, rather than as it exits right now. “Specifically, the Treasury program is targeted at subprime borrowers hit with ballooning mortgage payments vs. prime borrowers hit by job losses.  As for the “morality question” of whether the government should be bailing out homeowners, Warren says “I’m passed that,” noting “there’s plenty of unfairness to go around.”More importantly, “ultimately the American taxpayer — thanks to Fannie, Freddie and FHA — is going to stand behind many of these mortgage,” she says. “We need to be thinking more globally what is cheapest possible way to bring this crisis to an end. “One solution: Force investors holders these mortgages who may be betting on a government bailout to take a haircut, as occurred with GM and Chrysler creditors. “That’s why they call it investing,” Warren says. “You make profits in good times, take losses in bad times. That’s the fundamental part of this [modification effort] that’s missing.”

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PAUL KRUGMAN says, “Things are still getting worse”

nytimes1

Ben Bernanke, the Federal Reserve chairman, sees “green shoots.” President Obama sees “glimmers of hope.” And the stock market has been on a tear.

So is it time to sound the all clear? Here are four reasons to be cautious about the economic outlook.

1. Things are still getting worse. Industrial production just hit a 10-year low. Housing starts remain incredibly weak. Foreclosures, which dipped as mortgage companies waited for details of the Obama administration’s housing plans, are surging again.

The most you can say is that there are scattered signs that things are getting worse more slowly — that the economy isn’t plunging quite as fast as it was. And I do mean scattered: the latest edition of the Beige Book, the Fed’s periodic survey of business conditions, reports that “five of the twelve Districts noted a moderation in the pace of decline.” Whoopee.

2. Some of the good news isn’t convincing. The biggest positive news in recent days has come from banks, which have been announcing surprisingly good earnings. But some of those earnings reports look a little … funny.

Wells Fargo, for example, announced its best quarterly earnings ever. But a bank’s reported earnings aren’t a hard number, like sales; for example, they depend a lot on the amount the bank sets aside to cover expected future losses on its loans. And some analysts expressed considerable doubt about Wells Fargo’s assumptions, as well as other accounting issues.

Meanwhile, Goldman Sachs announced a huge jump in profits from fourth-quarter 2008 to first-quarter 2009. But as analysts quickly noticed, Goldman changed its definition of “quarter” (in response to a change in its legal status), so that — I kid you not — the month of December, which happened to be a bad one for the bank, disappeared from this comparison.

I don’t want to go overboard here. Maybe the banks really have swung from deep losses to hefty profits in record time. But skepticism comes naturally in this age of Madoff.

Oh, and for those expecting the Treasury Department’s “stress tests” to make everything clear: the White House spokesman, Robert Gibbs, says that “you will see in a systematic and coordinated way the transparency of determining and showing to all involved some of the results of these stress tests.” No, I don’t know what that means, either.

3. There may be other shoes yet to drop. Even in the Great Depression, things didn’t head straight down. There was, in particular, a pause in the plunge about a year and a half in — roughly where we are now. But then came a series of bank failures on both sides of the Atlantic, combined with some disastrous policy moves as countries tried to defend the dying gold standard, and the world economy fell off another cliff.

Can this happen again? Well, commercial real estate is coming apart at the seams, credit card losses are surging and nobody knows yet just how bad things will get in Japan or Eastern Europe. We probably won’t repeat the disaster of 1931, but it’s far from certain that the worst is over.

4. Even when it’s over, it won’t be over. The 2001 recession officially lasted only eight months, ending in November of that year. But unemployment kept rising for another year and a half. The same thing happened after the 1990-91 recession. And there’s every reason to believe that it will happen this time too. Don’t be surprised if unemployment keeps rising right through 2010.

Why? “V-shaped” recoveries, in which employment comes roaring back, take place only when there’s a lot of pent-up demand. In 1982, for example, housing was crushed by high interest rates, so when the Fed eased up, home sales surged. That’s not what’s going on this time: today, the economy is depressed, loosely speaking, because we ran up too much debt and built too many shopping malls, and nobody is in the mood for a new burst of spending.

Employment will eventually recover — it always does. But it probably won’t happen fast.

So now that I’ve got everyone depressed, what’s the answer? Persistence.

History shows that one of the great policy dangers, in the face of a severe economic slump, is premature optimism. F.D.R. responded to signs of recovery by cutting the Works Progress Administration in half and raising taxes; the Great Depression promptly returned in full force. Japan slackened its efforts halfway through its lost decade, ensuring another five years of stagnation.

The Obama administration’s economists understand this. They say all the right things about staying the course. But there’s a real risk that all the talk of green shoots and glimmers will breed a dangerous complacency.

So here’s my advice, to the public and policy makers alike: Don’t count your recoveries before they’re hatched.

Published: April 16, 2009

Fed To Buy Frozen Money Market Assets

Show Me The Money

Show Me The Money

New Money Market Investor Funding Facility (MMIFF)

Fed To Buy Frozen Assets To Meet Redemptions from Money Market Accounts

Federal Reserve will help finance purchases of up to $600 billion in assets from money market mutual funds which have suffered redemptions from investors seeking the safety of government debt. The program start date should be announced by the end of this week. Holy Hell, what’s next?

Treasuries Rise on Speculation Credit-Market Losses to Deepen

Bloomberg News

March 6 (Bloomberg) — Treasuries rose and three-month bill rates fell to the lowest level since 2004 on concern that the Federal Reserve may be unable to prevent credit-market losses from deepening.

Investors sought the safety of government debt as Citigroup Inc. planned to pare its U.S. residential unit’s mortgage and home-equity holdings by about $45 billion over the next year. Bonds briefly pared gains as speculation increased that the government would have to guarantee mortgage agency securities before a Treasury spokesperson said the conjecture was untrue.

“Every day is like the 1987 stock market crash,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York, the investment-banking arm of Canada’s biggest lender. “There isn’t a day when you’re not at the edge of your seat. The system is at daily risk.”

The yield on the two-year note fell 13 basis points, or 0.13 percentage point, to 1.50 percent at 4:32 p.m. in New York. The price of the 2 percent security due in February 2010 rose 1/4, or $2.50 per $1,000 face amount, to 100 31/32. The 10-year note’s yield decreased 10 basis points to 3.58 percent.

The three-month bill’s rate dropped 13 basis points to 1.36 percent after touching 1.31 percent, the lowest level since July 2004. The drop pushed the so-called TED spread, the difference between what banks and the government pay for three-month loans, to 1.64 percentage points, the widest amount since Dec. 27.

`Driven by Fear’

“The short end is really being driven by fear,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh.

The cost of exchanging fixed for floating interest-rate payments for two years climbed to a record high as investors sought to lock in rates. The spread between the rate on a two- year interest-rate swap, used to hedge against and speculate on interest-rate swings, and the Treasury two-year note yield, reached 110.06 basis points, the largest since at least November 1988, when Bloomberg began compiling data.

“This is the most illiquid market we’ve ever had, bar none, 9/11, any time in the history of the bond market,” said Thomas Roth, head of U.S. government bond trading at Dresdner Kleinwort in New York. “And it’s not getting better any time soon. We’re going to be living with this for a while.”

Merrill Lynch & Co.’s MOVE index, a measure of expectations for Treasury volatility, increased to 164.9 yesterday, the highest level since Jan. 28, two days before the central bank reduced its lending target by a half-percentage point.

`Screen Prices’

“There’s liquidity but not at the screen prices,” said Brant Carter, managing director of fixed-income retail trading for government and agency bonds in Memphis, Tennessee, at Morgan Keegan Inc. “By the time you make a quote and get an execution, the prices are, depending on the size of the transaction, a tick or a plus away to even more. That hasn’t happened in a long time.”

Ten-year securities yielded 2.07 percentage points more than two-year notes, the most in almost four years, on speculation further interest-rate cuts by the Fed will stoke inflation as commodity prices soar. Oil traded at a record of $105.97 a barrel in New York.

The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, or TIPS, climbed to 2.57 percentage points today, the most since August 2006. The difference reflects the rate of inflation traders expect for the next decade.

Negative Real Yield

The yield on two-year notes is almost 1 percentage point below the 2.5 percent annual rate of inflation excluding food and energy through January as reported by the Labor Department. The real yield for two-year Treasuries, or the difference between their interest rate and the pace of inflation, is negative 0.99 percentage point.

“This is not a value play in Treasuries,” said Richard Volpe, head of U.S. government bond trading in New York at Bear Stearns Cos., on Bloomberg Television. “This is about preservation of capital.”

Fed funds futures on the Chicago Board of Trade show a 72 percent chance the Fed will lower the 3 percent target rate for overnight lending between banks by three-quarters of a percentage point, compared with 54 percent odds yesterday. The balance of bets is for a cut of a half-percentage point.

Geithner on Stress

New York Fed President Timothy Geithner said the central bank may need to keep interest rates low for “some time” if financial markets remain under stress. The New York Fed president is a permanent voter on the rate-setting Federal Open Market Committee.

The cost of protecting corporate bonds from default rose, with credit-default swaps on the benchmark CDX North America Investment-Grade Index increasing 4 basis points to 170 basis points, according to broker Phoenix Partners Group.

Citigroup’s CitiMortgage division will decrease its total holdings mainly by making fewer loans that can’t be sold, CitiMortgage President Bill Beckmann said. Moody’s Investors Service downgraded bond insurer CIFG Guaranty four levels to A1, citing its “significant exposure to the mortgage sector.”

Bloomberg News By Daniel Kruger and Deborah Finestone