Wednesday, February 22, 2012

It is fitting that there is an announcement in the papers about an upcoming auction of Edvard Munch's painting "The Scream" because as one looks at the financial state of the world we all want to scream.

Greece has managed to force the Europeans to loan that country enough money to pay back what Greece owes to the Europeans. As the head of a reporting government dealer trading desk told me "It is a liquidity solution to a solvency problem". Greece is like your brother-in-law who always needs money. He keeps borrowing from everyone and promises to do something different but never does. All you hope for is that the latest loan will last a few months longer than the last one. One thing is certain, Greece and your brother-in-law will be back!

The governor of NJ Chris Christie has put forward his new budget. The Governor is predicting revenue growth of 7% to pay for increased spending. The latest six months of NJ state revenue has been $326 million below expectations. Also included is a predicted return on the state pension funds of 8.25% when the return for last year was 1.7%. This proposal is being used to justify an income tax cut. The George W. Bush administration showed us that if you cut taxes and increase spending the economy will respond in the short term, but you will be presented the bill later. We are still paying the bill presented in 2008 and most states including NJ have taken significant steps to improve their long term projects. Now is not the time to back slide into feel-good economics. Chris Christie has positioned himself as a tough guy. Now is the time to be a man and do what is right in the long run rather than what is politically expedient.

Another rating agency (Fitch) has sprung into action, they are concerned with the situation in Greece. They announce today a "default" was highly likely. Can't fool those guys. Since the current loan is predicated on a write down of holdings of Greek bonds of 50%+ I am pretty sure the investors in Greek bonds already knew that.

Friday, February 17, 2012

Congress seems like it is breaking its deadlock of not being able to agree on anything. This is a good thing. We need the give and take of different ideas to make progress in dealing with issues. Unfortunately the current agreement to extend the payroll tax cut is ill conceived. The $20 per week benefit offered by the payroll tax cut is unnecessary. The cost of this tax cut / loss of revenue versus the stimulus benefit to the economy is mismatched. One of the ways to address the deficit problem is to use any increase in economic activity to withdraw any tax break or special program and let the economy absorb the hit. Twenty bucks a week does not mean much to most working people but the cost is almost 100 billion to the deficit. I know some people will be affected, but by and large most wage earners will not. We do not need it and it should not be extended. Yes this will slow down the recovery a little but we need to look at both spending and revenue to correct the deficit problem. This is a perfect place to start.

Other countries can provide a real time demonstration of how our current options will play out. Look at Portugal. The country accepted funds and agreed to austerity measures. Certain people seem to be surprised by the fact that their economy is slowing down. Of course it is slowing down. Once the government stops spending economic activity will slow down. What the politicians should tell the Portuguese people is the truth; that the austerity measures will suppress your economy for years. Getting their fiscal house in order will benefit the Portuguese economy in the long run but in the short run it will prolong their current slump. This is true everywhere, so when a politician tells us cutting government spending will create jobs what he is carefully omitting is the job creating is in the future not the present. Again I have no problem with this debate, I only think we should be more willing to have it honestly and not pretend there are no economic consequences to our choices.

Lastly, why is Moody's still in business?

Wednesday, February 8, 2012

Groundhog Day 2012

In the movie Groundhog Day, Bill Murray kept reliving the same day. As I scan the news around the world it seems we are caught in the same loop;

Everyday the financial press reports we are getting closer to a deal on the bailout for Greece. The bondholders are resigned to a haircut on their principal and interest, the government is looking at austerity measures, the northern Europeans are not happy but will agree to the funding, etc. And everyday the people of Greece indicate they will not go along with any of it. They want the money but are not willing to pay the price necessary to get their fiscal house in order. We are no closer to a deal today then we were last year at this time. In March of 2010 I wrote an article about the Greek crises and near as I can determine the people of Greece are not on board in any way at all and never have been.

The US Congress is talking about the extension of the payroll tax cut, the extension of unemployment benefits and a continued level of Medicare / Medicaid payments to doctors. This is the same piece of legislation they passed in December for two months because they cannot agree about anything. Today the same old arguments and accusations are flying around the halls of Congress. Why aren't the members of the House and Senate embarrassed about how dysfunctional they are? Don't we the people deserve better? In business everyone makes compromises all day long in order to get something done. All these politicians talk endlessly about the private sector. If any of them actually had to work in the private sector they would starve to death.