The Low, Low Price Of $8 Trillion

CNN has calculated the current cost of the bailout from Bear Stearns to Obama's simulus package and come up with eight trillion dollars.

"Monetary stimulus alone is not enough - it must be combined with fiscal stimulus if you want more bang for your buck," he noted.

But the new program, which Obama aides have said could total $775 billion, will also weigh heavily on the ballooning federal deficit. The current fiscal year is barely a few months old and already the government is running a deficit exceeding $400 billion -- nearly the same amount as all of last year. Many economists believe it will top $1 trillion in the end.

Some say that the benefits of massive spending outweigh the cost of inaction.

"While it seems like quite a lot, we don't really need to focus on the cost due to the depth of the recession," said Mark Vitner, economist with Wachovia.

Others, while saying that government action is needed, question the vast sums that are being allocated and proposed.

"The government says it can spend the money better than you can, but that hasn't been the case in the past," said Bill Beach, director of the center for data analysis at the conservative-leaning Heritage Foundation. "That will really show up when they have to raise taxes in the future to make up for the increasing deficit."

If we've thrown that much money at the economy already and we're still very much expected to have an even worse 2009 and 2010, there's something fundamentally wrong with both Bush and Obama's assumptions on the economy. Obama's plan just isn't going to work. It will soften the blow somewhat, but the reality is the massive deficit we'll be carrying from this will only serve to slow down the economy even more in the future. As much as I hate to agree with anyone from the Heritage Foundation ever, Obama is going to have to raise taxes at some point, and raise them significantly.

We're looking at a very long process that may stretch a decade or more.

The Other Shoe Is Dropping

The housing depression has been bad enough, but far less attention has been paid to its corporate counterpart in commercial real estate. The bad news is that the commercial real estate market is plunging almost as badly as the residential one, and it too is about to hit crisis mode.

Vacancy rates in office buildings exceed 10 percent in virtually every major city in the country and are rising rapidly, a sign of economic distress that could lead to yet another wave of problems for troubled lenders.

With job cuts rampant and businesses retrenching, more empty space is expected from New York to Chicago to Los Angeles in the coming year. Rental income would then decline and property values would slide further. The Urban Land Institute predicts 2009 will be the worst year for the commercial real estate market “since the wrenching 1991-1992 industry depression.”

Banks and other financial companies have not had the problems with commercial properties in this recession that they have had with residential properties. But many building owners, while struggling with more vacancies and less rental income, will need to refinance commercial mortgages this year.

The persistent chill in lending from banks to the credit markets will make that difficult — even for borrowers who are current on their payments — setting the stage for loan defaults.

The prospect bodes ill for banks, along with pension funds, insurance companies, hedge funds and others holding the loans or pieces of them that were packaged and sold as securities.

Jeffrey DeBoer, chief executive of the Real Estate Roundtable, a lobbying group in Washington, is asking for government assistance for his industry and warns of the potential impact of defaults. “Each one by itself is not significant,” he said, “but the cumulative effect will put tremendous stress on the financial sector.”

The commercial real estate market collapse is the main reason why I believe recovery in the economy is several years off. Even if the residential market turns around in 2010, the commercial market still has a long way to go to daylight. Ten percent vacancy rate is horrifying, and it's going to get far worse, causing another round of bad bank problems and massive corporate defaults on property, triggering another round of bailout cash pleas for the business sector.

It's going to get far, far worse before it gets better.

In Which Zandar Answers Your Burning Questions

TPM's Josh Marshall asks:

Can someone help me come up with an argument for why the Obama stimulus plan isn't turning out to be a painful joke?

...as he references the news that Obama's stimulus package contains $300 billion in tax cuts.

The answer of course is "I got nothin', bro." It is very much a painful joke. As I said yesterday, the most likely outcome is that the GOP will insist on passing the tax cuts immediately, and will then block spending with enough Blue Dog Democrat interference in the House and/or Senate to assure that anything that does pass will simply fail to help the economy. Obama will take the blame for it, and by the time November 2010 rolls around the economic picture will still be so bad that the Dems may even lose control of one or both chambers, assuring that what recovery we do have will be targeted at the top instead of the bottom up.

In other words, the Dems still don't have enough of a working majority to deal with the completely repudiated conservative economic garbage of the last 25 years because Washington is still run by the Village Centrists who want the status quo of Reagan/Bush "trickle-down" nonsense.

If the Dems can't find their spines in 2009 and run the country like voters actually put them in charge of things, we're looking at far, far worse times ahead.

[UPDATE] Paul Krugman weighs in and nails it cold.

What this says is that there’s a reasonable economic case for including a significant amount of tax cuts in the package, mainly in year one.

But the numbers being reported — 40 percent of the whole, two-year plan — sound high. And all the news reports say that the high tax-cut share is intended to assuage Republicans; what this presumably means is that this was the message the off-the-record Obamanauts were told to convey.

And that’s bad news.

Look, Republicans are not going to come on board. Make 40% of the package tax cuts, they’ll demand 100%. Then they’ll start the thing about how you can’t cut taxes on people who don’t pay taxes (with only income taxes counting, of course) and demand that the plan focus on the affluent. Then they’ll demand cuts in corporate taxes. And Mitch McConnell is already saying that state and local governments should get loans, not aid — which would undermine that part of the plan, too.

OK, maybe this is just a head fake from the Obama people — they think they can win the PR battle by making bipartisan noises, then accusing the GOP of being obstructionist. But I’m really worried that they’re sending off signals of weakness right from the beginning, and that they’re just going to embolden the opposition.

For Pete's sake, if Krugman the economist can clearly see the politics in this and how it plays out, it's got to be patently obvious to everyone. I don't think this is a head fake. I think Obama is walking right into the Clinton Triangulation Trap(tm) and somehow thinks he's smart enough to come out ahead.

Why the hell is Obama going at this from a position of weakness? What makes him think the GOP has any respect for his position or his agenda when they just stopped publicly calling him all but a secret Muslim terrorist only two months ago? They will not stop until they get everything they want: another Bush trillion dollar plus tax cut for the rich and especially for corporations. If they don't get it, they will destroy the entire spending package and the economy along with it. If they do get it, they will destroy the economy and finish the most massive transfer of wealth in history and eliminate the middle class.

Obama's already playing like he's lost, and he's not even President yet.

The New New Deal Deferred

Congressional leaders on both sides of the aisle today expressed serious doubts about getting Obama's stimulus package ready by the time the President-Elect is sworn in on the 20th.

Representative Steny Hoyer of Maryland, the House majority leader, expressed doubt on Sunday that the Jan. 20 goal set by some for getting a stimulus package before the new president could be met.

“It’s going to be difficult to get the package together that early,” he said. Instead, he told “Fox News Sunday,” lawmakers hoped to have it to the new president by mid-February. [Like the others appearing on the day's talk shows, Mr. Hoyer made his comments before it was known that New Mexico Gov. Bill Richardson had withdrawn as the Commerce nominee.]

Senator Harry Reid of Nevada, the majority leader, was more cautious about any deadline, saying simply, “We will work this just as quickly as we can.” As to the amount of a stimulus package, he said only, “It’s whatever it takes to bring this country back on a fiscal footing that’s decent.”

But Senator Mitch McConnell of Kentucky, the minority leader, agreed with Hoyer that the Jan. 20 goal was impractical.

Mr. McConnell also expressed reservations about the ideas of extending unemployment benefits to part-time workers or expanding government-assisted health care insurance. “Those are very big systemic changes,” he told ABC’s “This Week,” and so warranted public hearings and deliberate bipartisan discussions.

And he raised a caution about the notion that as many as 20 percent of the jobs to be created by a stimulus plan might be in the public sector. “Is that a good idea?” he asked. He also urged Obama to support an immediate middle-class tax cut — possibly lowering the 25-percent rate to 15 percent — saying, “This is the sort of thing we could have bipartisan agreement on.”

It's pretty clear that the stimulus will be held hostage until the GOP and the Blue Dogs get everything they want in it. I would expect we'll still be squabbling over this in June. Considering how fast Bill Richardson was shown the door, I think Obama will happily cave into the GOP demands in the name of expediency.

In other words, the package that does pass will be useless, and Obama will be blamed for it.

[UPDATE] News leaking tonight that Obama will entice the GOP with a $300 billion tax cut.

President-elect Barack Obama and congressional Democrats are crafting a plan to offer about $300 billion in tax cuts to individuals and businesses, a move aimed at attracting Republican support for an economic-stimulus package and prodding companies to create jobs.

The size of the proposed tax cuts -- which would account for about 40% of a stimulus package that could reach $775 billion over two years -- is greater than many on both sides of the aisle in Congress had anticipated, and may make it easier to win over Republicans who have stressed that any initiative should rely relatively heavily on tax cuts rather than spending.

Which" individuals" and which "businesses" is the question, but the program appears to be aimed at the middle class.

The largest piece of the overall tax relief would involve cuts for people who pay income taxes or who claim the earned-income credit. It would serve as a down payment on the "Making Work Pay" proposal Mr. Obama outlined during his election campaign, providing a credit to offset Social Security and Medicare payroll taxes of $500 per individual or $1,000 per family.

On the campaign trail, Mr. Obama said he would phase out a similar tax-credit proposal at around $200,000 per household, but aides said they haven't settled on an income cap for the latest proposal. This part of the plan is similar to a bipartisan initiative launched in early 2008, which sent out checks worth $131 billion.

As for the business tax package, a key provision would allow companies to write off huge losses incurred last year, as well as any losses from 2009, to retroactively reduce tax bills dating back five years. In effect, this would entitle companies to receive cash from the government that they otherwise couldn't have claimed.

We'll see how this goes over. I'm betting the GOP will want to pass the tax cuts now and will block the other $475 billion in spending...in fact, I can almost guarantee it.

A Month Of Black Fridays

With the worst holiday shopping season in decades now in the books, it's looking more and more like many retailers on the edge will soon be pushed over the cliff into bankruptcy.

The ugly sales year that was 2008 will haunt U.S. retailers in 2009, with industry experts warning that disastrous holiday sales will spark a domino effect of store closures and bankruptcy filings.

And, with thousands of fewer stores, the "shop-'til-you-drop" mentality that has characterized American consumerism could be coming to an end.

"There's going to be a massive sea change in the retail landscape," said Nina Kampler, executive vice president with Hilco Real Estate, which advises retailers on their property management.

She said many strip shopping centers already have multiple big-box vacancies after several large stores filed for bankruptcy in 2008. Some eventually went out of business.

When that happens, the smaller stores in the strip centers can't attract the requisite customer traffic to stay productive and profitable.

Michael Burden, principal with industry adviser Excess Space Retail Services, expects as many as 14,000 stores will close in 2009. "We could see among the highest ever number of closures," he said.

You figure if those 14k stores employ an average of twelve people a piece, that's 168,000 people out of work. Add up the domino effect of anchor stores closing and leaving strip malls, shopping centers and entire malls too weakened to operate, and that number can go much higher.

As retailers' sales continue to tumble and mall traffic evaporates, one of the biggest challenges for sellers is their rent occupancy costs.

Kampler explained that the amount of rent a retailer can comfortably pay for a given store location is proportionately related to the volume of sales generated at that location.

Ideally, she said a retailer's occupancy cost should be equal to 10% of its sales. But a long stretch of slumping sales and rising mall vacancies can dramatically push up the occupancy costs.

"Once rent and occupancy costs hit the 20% to 25% of sales threshold, you are treading water," she said. "You can't run a viable business with those numbers".

Also, once a retailer faces a cash shortage, the likely next step is to file for bankruptcy protection. To that end, Kampler predicts that retail bankruptcy filings will " be huge" in January.

But given the implosive impact of the overall economy on the retail sector, Kampler said filing for bankruptcy could be the death knoll for those merchants.

"It used to be that when [a company] filed for bankruptcy, it was to restructure its debt and realign its operations in order to emerge alive," she said.

"Now it's almost impossible to restructure," she said, pointing out that a significant number of retailers that did file for Chapter 11 bankruptcy protection this year have eventually gone into liquidation.

In other words, the jobs lost in the retail sector are going to be gone for a long, long time. Seeing that happen in manufacturing is scary enough, there's plenty of expensive factory equipment that goes idle when factories close, and changing them over to another manufacturer is expensive and tough to do. As a result, the Bush economy saw those manufacturing jobs replaced with retail jobs.

But seeing that kind of thing happen with retail jobs means there's nowhere to go to replace those jobs easily. Obama's "green jobs" program seems to be more necessary than ever.

The US Government as employer of last resort? It's worked in America's past...and it may very well be the key to America's future.

House Of Pain

CNN is reporting the Case-Shiller index of home prices in 20 US markets fell a record 18 percent for October. The CSI is always about six weeks behind the times, but the numbers are still bad bad bad given that the effect of the housing markets on the rest of the economy can reverberate for months down the road.

If housing prices are still falling (and this confirms they are and will be well into 2009) there's no real chance at recovery for the economy in the forseeable future.

Year-End Clearance

It's "Predictions for 2009" time 'round the 'net, and we start with the Frog Pond's ertswhile Steven D's pretty detailed list of what he thinks will go down in '09. Highlights:

* Unemployment (real unemployment, not the massaged numbers the media reports) will hit 20% or more in the USA this Spring.

* Corporate Bankruptcies will hit record numbers and will include many, many major retailers, and automobile related companies, including one or more of the Big 3 (Chrysler and GM especially).

* Automotive Lobbyists will scream loudly to change the bankruptcy code to make Chapter 11 (the reorganization provisions) more corporate friendly and less labor friendly. Expect those to pass easily.

* Individual bankruptcies and foreclosures will also increase spectacularly. Do not expect much relief for homeowners, individuals and small businesses, however. Senate Republicans and Blue Dog Democrats will see to that.

* Health Care Reform will pass, but it will be too little, and provide too many bones for Big Pharma and the Health Insurance companies to be of any real benefit to most Americans. Health Care costs will continue to rise for most people.

But the gobsmacker is that there's a couple of pretty disturbing social predictions that I see as plausible enough to explore further:

* Riots will break out this summer in one or more major American cities. The causes could be unemployment, food shortages, hot weather, racial animus, anger at police violence, or all of the above.

* The number of assassination threats against Obama will skyrocket. The FBI and Secret Service will break up more than one serious conspiracy. Other political figures will also see increased numbers of death threats with the risk that various politicians or other prominent leaders will be killed.

* Food shortages may occur later in the year, particularly of produce.

Considering this morning's StupidiNews story on a US Army War College professor gaming out scenarios where this sort of thing happens and the US military's role should include the effort "to rapidly determine the parameters defining the legitimate use of military force inside the United States", it's worth considering the effects of that.

Things are already pretty bad in a number of major American cities. Facing another year of draconian state and local budget cuts greatly affecting law enforcement, mass layoffs continuing across the country, and real unemployment approaching one in five if not one in four Americans, I happen to think there's a significant amount of merit to the prediction of shortages, unrest, and some sort of major incident occurring in a US city in 2009 or 2010.

I'll have my own predictions up in the next day.

Dear America:

"This economy proves Obama is the worst President ever. The fact that he's not actually President yet is just semantics."

--Holman Jenkins, Wall Street Journal

Not So Fast

While I hate to be a humbug on Christmas Eve, it's worth pointing out that many of the predictions of a weak economic recovery in late 2009 are based on the housing market finally having bottomed out. The only problem with that is that the housing market shows zero signs of bottoming out at all, if anything the decline is accelerating.

The U.S. housing market took a sharp turn for the worse while Spain joined a growing list of countries in a recession that shows no sign of abating.

Existing U.S. home sales and prices both fell at a record pace last month, according to a report released Tuesday, further evidence that the financial turmoil which intensified in September was driving consumers deeper into retreat.

"The quickly deteriorating conditions in the job market, stock market and consumer confidence in October and November have knocked down home sales to another level," said Lawrence Yun, chief economist for the National Association of Realtors.

Sales of newly built U.S. homes slowed to the weakest level since 1991, according to separate figures from the Commerce Department.

We're getting closer and closer to that death spiral depression scenario every month, it seems. The housing market crash lowers consumer consumption, lower consumption causes layoffs, layoffs take more and more people out of their homes, and prices continue to fall as a result as more homes are put on the market and more buyers are taken out as credit requirements tighten.

At this point a gargantuan stimulus package, well above the trillion dollar mark, may be the last hope we have. All signs point to an even steeper pace of deterioration in early 2009.

As bad at this year has been, next year will be much, much worse.

[UPDATE] Just in time for Christmas, the weekly job numbers are out with new unemployment claims hitting a 26-year peak at 586,000. It'll get worse. Much worse.

Happy Holidays.

The Center of A Viper's Nest Indeed Contains A Serpent

While the Madoff case rages on, another case involving bank regulation is developing, this time a federal regulator has been removed from his job for pulling the strings behind IndyMac Bank.

The Office of Thrift Supervision has removed its west region director as a result of an inspector general's investigation into the collapse of IndyMac earlier this year, according to correspondence made public today by Sen. Charles Grassley (R-IA).

Darrel Dochow was fingered by the OTS inspector general as having approved a backdated capital infusion of $18 million into IndyMac by its holding company to stave off a downgrade in the rating assigned to the bank. A downgrading in its level of capitalization would have triggered additional regulatory restrictions on IndyMac, according to a letter to Grassley from OTS Inspector Eric M. Thorson.

This isn't the first time Dochow has been the regulator involved in a major banking collapse. A generation ago he resisted calls to shut down Charles Keating's Lincoln Savings and Loan before its collapse, which became notorious thanks to the Keating Five scandal.

Dochow's approval for the backdating came in early May and was intended to buttress the bank's capital position as of the end of the first quarter, March 31. The plan -- some details of which, Thorson concedes, remain unclear -- was discovered by the inspector general for the FDIC in documents held by IndyMac's auditor, Ernst and Young, and were turned over to Thorson's office.

So a former Keating Five figure was covering for a bank to the tune of $18 million instead of regulating it. Gee, that's not SOP for the Bushies. And the best part? There's even more of these back-dated capital infusions floating around still being investigated.

Thorson's investigation, which is ongoing, found that OTS allowed other thrifts to similarly backdate capital infusions, but the letter provides no additional details about those other cases.

If you've done something bad enough in the Bush administration in order to actually lose your job, then you're in serious trouble.

Looking For Heads To Roll

According to TPM, the revelations of the Bernie Madoff case has put the SEC in a "state of complete panic" :

The revelation that Bernard Madoff -- who himself had in the past served as an adviser to the SEC on electronic trading -- was running an alleged "$50 billion ponzi scheme" has rocked the SEC to its core, according to a current long-serving member of the commission's enforcement division.

"This has put the agency into a state of complete panic," the SECer told TPMmuckraker in an interview.

The source said that one associate director in the enforcement division had in recent days ordered junior staff to review every case that's been closed over the last few years, to ensure that violations weren't missed -- as they appear to have been in the 2006 investigation of Madoff. "There's a real paranoia around here," the source added.

With a new administration incoming, a new boss in Mary Schapiro who now has to prove she's tough enough to reform the SEC, a vowed plan to overhaul financial regulatory bodies in general and even a plan to combine agencies, the natives are indeed restless. That a lot of heads will roll from the Madoff case is the fear around the water coolers at the SEC, and rightfully so. Considering she's already got one strike against her as being too buddy-buddy with the types of folks she should be regulating after giving a job to Bernie Madoff's son at the regulatory agency she ran before, the axe is going to swing freely and there will be blood in the streets. It'll be a good show.

But in the end the real question is just how much new regulatory pressure Obama and Schapiro will be allowed to bring on Wall Street. My guess is more of the same: regulations barely enforced if at all by a brutally underfunded agency and an administration unwilling to go after the most egregious violators to "avoid hurting what economic growth is left". Schapiro will make a show of it, she has to. But in the end the transfer of wealth away from what's left of the American middle class to the super-wealthy will continue unabated, especially since the super-wealthy have lost trillions in vanished stock market value. They'll want it back. It'll come from us.

Guaranteed. After the sturm und drang, the status quo will roll on.

Geared Up To Drive Down

Terrence in DC takes a broad view of what the GOP aversion to unions (and especially their unbridled rancor towards the UAW) really means, and comes up with a pretty damn good theory: nothing conservatives do makes sense unless you accept the truth that their goal is to make America globally competitive by dramatically lowering our standard of living.

Anti-unionization, deregulation, and increased outsourcing are all hallmarks of contemporary conservatism. So, at least we know who to thank for our current situation. But that's the unspoken message of conservative economic philosophy in a globalized economy: the only way Americans can "compete in a global economy" as envisioned and delivered by conservatism is to accept a lower standard of living. As low as the market demands. How low? Read up on working and living standards in just about any country you can find on any label on just about anything in your own house.

Read the whole article, but the general theory is extremely sound.

Conservatives think that you are making too much money, and they are not. They see America as a country full of stupid, hungry locusts, but locusts necessary to provide the wealthiest their vast resources. In a republic such as ours, these masses still get some power. The conservative way to solve this dilemma is to destroy the infrastructure of upward mobility to keep the masses from using it.

Health care, college, even free time to explore our world: this is what conservatives must put out of our reach in order to maintain the yoke around us, and unionized labor represents the most direct and powerful method of fighting back. When the people take power through collective bargaining, they take power in other ways.

That's the real reason why unions must be destroyed in America. The dismal economic situation makes it all the more necessary and urgent to the powers that be. In the last eight years the American middle class has all but been destroyed. The GOP seeks to finish the job. More than anything else, that's the thing to remember.

Auto-matic Response

How much do the wingnuts like Malkinvania hate the UAW? Their brilliant idea is, no joke:

Instead of wringing their hands, I’d like to see fiscal conservatives in Congress put their money where their mouths are and file suit against this illegal, unconstitutional bailout.

That's right. Sue the US Government for the auto bailout. The reasoning? The auto bailout uses TARP funds. TARP funds are for "financial institutions". Treating GM and Chrysler's finance arms as "financial institutions" for this purpose is the worst thing Bush has ever done as far as these folks are concerned, instead of letting the horrible, terrible UAW die screaming and taking millions of jobs with them. It's so bad in fact Congress should sue Bush for this unconstitutional use of unchecked executive power.

Stop and think about this. Congress should sue Bush, she says. Not over illegal wiretapping. Not over torture. Not over Scooter Libby, not over Iraq, not over Afghanistan, not over Gonzo's US Attorney firings, nor any of the dozens of scandals over the last eight years. No, the outrage that prompted Michelle Malkin to say that Congress should stand up to the President is the outrage of refusing to kill the UAW.

Nothing that Bush has done before warranted being sued by Congress in her eyes. Nothing. Not a single thing. Until, in a lame-ass attempt to punt and spare the atomized wreckage of his "legacy", Bush went too far in his use of executive power for even Malkinvania to handle by committing the unforgiveable sin of failing to put a couple million Americans out of work by destroying an iconic American industry.

I salute you, Madam Malkinvania. Your infinite lack of humanity has even shocked and surprised the most cynical of observers such as myself.

Fate In The Balance

Rumors around the Big Three are swirling today. One one hand, some are reporting a bailout deal is imminent and could come as soon as today. On the other hand, there's plenty of reporting that there's no deal coming and automakers like GM are facing an "orderly bankruptcy":

General Motors is likely to file for bankruptcy protection with government backing, giving bondholders a recovery of more than 25 cents on the dollar, according to Moody's Investors Service.

There is a 70 percent probability that the restructuring plan for U.S. automakers will consist of a prepackaged bankruptcy financed by government loans to get GM and Chrysler through to 2009, Moody's said in a report dated Dec. 15. Under that scenario, bondholders would be likely to lose less than 75 percent of their investment, Moody's said.

Either way, there are a lot of sectors of the economy in dire trouble. If Toyota is expected to be posting its first ever yearly loss today, you know things are bad for the automakers...all of them.

[UPDATE] Bush is apparently making a major automaker bailout announcement at 9 AM.

[UPDATE 2] The bailout is on, $17.4 billion in bridge loans.

The federal government will provide $13.4 billion in loans to automakers General Motors and Chrysler, the White House said Friday.

"Allowing the U.S. auto industry to collapse is not a responsible course of action," President Bush said Friday morning.

"The terms and conditions of the financing provided by the Treasury Department will facilitate restructuring of our domestic auto industry, prevent disorderly bankruptcies during a time of economic difficulty, and protect the taxpayer by ensuring that only financially viable firms receive financing," according to a statement released by the White House.

An additional $4 billion may be available in February, the Bush administration said.

A senior administration official briefing reporters said he expects that GM and Chrysler officials will be signing the loan papers to access the cash later Friday morning.

GM and Chrysler have until March 31 to prove financial viability, or the loans are called in.

We'll see where this goes. The fate of the Big Three is now in Obama's hands.

Get To Dah Choppah!

Roubini vs. Helicopter Ben's Zero Interest Rate Policy (ZIRP)!

Round One.

Fight!

The Fed decision to cut the target for the Fed Funds rate to the 0% to 0.25% range is just underwriting what was already obvious and happening in reality: While the target Fed Funds was until Tuesday still 1%, in the last few weeks--following the massive increase in liquidity by the Fed--the actual Fed Funds was already trading at a level literally close to 0%.

So the Fed just formalized what had already been happening for weeks now, i.e., that the Fed Funds rate was already zero and that the Fed had already moved to quantitative and qualitative easing (QE) in the form of a massive increase in the monetary base and aggressive use of monetary policy to reduce short-term and long-term market rates that are stubbornly high in a sign that the credit crunch is severe and worsening.

I predicted early in 2008 that the Fed Funds rate "would be closer to 0% than to 1%" in the midst of a severe recession. Now, 12 months into this severe recession--a recession that will last at least another 12 months (if not, as is possible, much longer)--the Fed Funds rate is already down to 0% (the beginning of the zero-interest-rate-policy, or ZIRP, for the U.S.) and the Fed has moved into uncharted unorthodox monetary policy as a severe stag-deflation is taking place.

And, as predicted by me over a month ago, the Fed is now committed to keep the Fed Funds rate close to zero for a long time (as a way to push lower long term Treasury yields); purchasing agency debt and agency MBS in massive amounts; and even considering purchasing long-term Treasuries as a way to push lower long-term government bond yields that are already falling sharply.

More aggressive policy actions may be undertaken by the Fed as a severe credit crunch shows no signs of relenting. In a 2002 speech on deflation, Ben Bernanke spoke even of helicopter drops of money, monetizing fiscal deficits and even buying equities.

The latter actions have already been partially undertaken: The Fed is effectively already monetizing U.S. fiscal deficits as the purchase of markets assets is financed with the Fed printing presses rather than the TARP program. And now, with the Fed considering the purchase of long-term Treasuries, such monetization of deficits will be made more formal.

Also, since the TARP has been turned into a program to recapitalize financial institutions (and thus boost their capital and market value), the U.S. has already effectively intervened indirectly in the equity market (by partially nationalizing a good part of the financial system). Once the Fed starts to buy the long-term Treasuries financing the TARP program, this indirect Fed purchase of U.S. equities will be even clearer.

While Fed actions to reduce mortgage rates--via purchases of agency debt and agency MBS--are partially successful as long-term mortgage rates are falling, most of the Fed purchases of private assets have been so far limited to very high-grade securities.

Thus, the gap between the yield on high-grade commercial paper purchased by the Fed and the one that the Fed is not purchasing is sharply rising; ditto for the gap between agency MBS and private label MBS. Also, while long-term Treasury yields are sharply falling, the spread of corporate bonds--both high-yield and high-grade--relative to Treasuries remains huge as a sign of a severe credit crunch.

Thus, as a next step, the Fed may be soon forced to walk down the credit curve and start buying private short-term and long-term securities with lower credit ratings. That would mean the Fed will take on even more credit risk than it is already taking on today while purchasing illiquid private assets. But desperate times lead to desperate actions by desperate policy makers.

Not good. In other words, the Fed plan is this:

1. Lower interest rates to zero.
   
2. Make shit up as we go along and hope it works.
   
3. Profit!

Which is a friggin' great plan, if, you know, you're not the central bank of the largest economy on Earth.

We're currently on Step 2 up there. We'll be there for quite some time.

Dear America:

"Obama's crackpot 'green energy' plan? Are you kidding? Every President since Johnson has tried and failed miserably to get us off foreign oil. He's crazy, I tell you! TAXES! TAXES! JOB LOSS! BLAH BLAH BLOOGITY BLAH TAAAAAAAAAXES! HE MIGHT CAUSE A RECESSION!"

--Arthur Laffer, Wall Street Journal

Merry Christmas, You Unionized Bastards

Looks like the White House might now get around to a bailout decision before Christmas Day.

The White House and the Treasury are deep into negotiations with General Motors and Chrysler over reorganization plans that could result in freeing up more than $14 billion in emergency loans to keep the companies afloat through the first quarter of 2009, according to industry executives and a senior administration official.

The Bush administration appears to want an agreement with the automakers before Dec. 25. It was unclear, however, when all of the particulars might be worked out, said the senior official, who spoke on the condition of anonymity because of the delicate nature of the negotiations.

But the official indicated that the administration was inclined to do more than just keep G.M. and Chrysler alive until President-elect Barack Obama takes office, saying, “Giving them enough money to limp along doesn’t solve anything.”

In the negotiations, the Treasury secretary, Henry M. Paulson Jr., is effectively taking on the role of “auto czar,” which was envisioned in the carmakers rescue bill written by the White House and Congressional Democrats and approved by the House but blocked by Senate Republicans.

In the days since the White House said it would step in to prevent the collapse of G.M. and Chrysler, Treasury officials have been poring over detailed financial data in a meticulous exercise that one G.M. executive likened to “putting on the aqualung” and diving deep into the companies’ books.

One has to wonder if Citigroup, AIG, and the rest of the financials that quietly took hundreds of billions had anybody dive into THEIR books before they got any cash.

As one commenter said yesterday, "...I definitely lean towards survival of the fittest and seeing that they brought this on themselves in many ways. Bailing out might help (might!), but so would better practices and less waste." That's true. But my gut feeling is that the damage is done, and that the US auto industry won't be around in a couple of years in any form. I honestly forsee Big Three plants broken up, sold to foreign companies and liquidated. There may not be anything Obama can do to save them short of nationalizing the industry. I doubt even Obama is willing to make UAW workers into Federal employees.

As I've said, America in early 2011 is going to look a lot different from America early 2008.

30 Days Of Night

Chrysler is furloughing all US plants for 30 days as of the last shift on Friday. The interesting reason behind the shutdown? No credit for people to buy cars.

"Chrysler dealers confirmed to the company at a recent meeting at its headquarters, that they have many willing buyers for Chrysler, Jeep and Dodge vehicles but are unable to close the deals, due to lack of financing," the carmaker said in an announcement. "The dealers have stated that they have lost an estimated 20% to 25% of their volume because of this credit situation."

Auto sales have been hit hard by tight credit and the struggling economy. Overall auto sales in the United States were down 37% last month compared with November 2007. Chrysler's situation was especially bad. Its sales dropped 47%.

Chrysler's financing arm, Chrysler Financial, has tightened lending terms for buyers and earlier this year, it announced it would no longer offer leases.

Remember, just over two months ago, the President assured us that everything was fine, and the recession was just all in our heads. Chrysler's all but done, as is GM. An entire American industry is now on the brink and the government has pledged trillions and trillions of dollars to fix the problem over the last nine weeks or so. Trillions.

It will not be the last industry facing extinction. America a few years from now is going to be a very different place, like the difference between 1928 and 1932. We're going to have to reinvent our entire economy from scratch. Many of the old industries and jobs they represent will vanish for good over the next few years.

Our consumer consumption economy is dying before our eyes. What will replace it? That is Obama's true test...and Bush's true legacy of disaster.

You Think I'm Depressing?

I'm not depressing. Now, James Boyce is depressing.

It will start with the housing market which will, once again, be determined by issues like the number of people living in a market, incomes and rental prices.

How far will housing prices fall? To the historical mean, which is another 20-40% down, depending on where you live. This graph is shocking for two reasons. One, how it disproves the basic belief that a house is a good investment, it's not. And second, how we should have seen a correction in 2002, but post 9/11, all we saw was a bubble. Currently prices are down 20% from the top that was shown in this graph, but clearly, they still have a long way to go.

Will housing prices return to historical averages? Yes. But what's going to happen first? Here's the view of Whitney Tilson who was on 60 Minutes on Sunday and one of the few who predicted the mortgage disaster.

"We had the greatest asset bubble in history and now that bubble is bursting. The single biggest piece of the bubble is the U.S. mortgage market and we're probably about halfway through the unwinding and bursting of the bubble," Tilson explains. "It may seem like all the carnage out there, we must be almost finished. But there's still a lot of pain to come in terms of write-downs and losses that have yet to be recognized."

The housing bubble will deflate slowly, unfortunately for our recovery because now people are just pulling their houses instead of selling at a loss. "I'll wait till the market comes back" you here but it's not coming back, any more than lightbulbs.com stock is going to be worth $100 a share anytime again ever.

In real dollar terms, in our lifetime, housing prices will never be what they were in 2005 and 2006. They may never even get within 25% of that false peak. In the next 100 years.

Problem is, I don't see anything wrong with his logic.

Zero Hour

The Fed has cut the chief lending rate to zero.

The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will do whatever is needed to end the longest recession in a quarter-century and revive credit.

The Fed “will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “Weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Treasury notes rallied in anticipation the Fed will buy the securities to force borrowing costs for consumers and companies lower. Nine rate cuts in the prior 14 months and $1.4 trillion in emergency lending have failed to reverse the economic downturn.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

The statement noted that the Fed has already announced it will purchase agency debt and mortgage-backed securities, and said the Fed is ready to expand the program. The central bank said it continues to weigh the potential benefits of buying longer-term Treasury securities.

And the liquidity trap closes with a ghastly, echoing crunch, like something out of an Edgar Allen Poe story. We're in uncharted territory here. The other half of the Fed policy, just as expected, is to magically invent a crapload of money. Officially, the Fed has today signaled that the Japan Scenario is on.

The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.

Japan’s central bank kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

So there we are. And much like Japan, the cure will be far worse than the disease. The Fed is turning on the faucet full blast in a desperate effort to stave off a deflationary depression spiral. But Japan's already high personal savings rate and low personal debt contributed mightily to their eventual freedom, it just took a decade to do it.

We have no such reserves to fall back on. Everything the Fed has tried so far has failed. We're down to the last card in the deck now, zero rate and unlimited fiat money. When this too fails to turn around the economy, what then?

We're now officially a third world economy.