Balance Sheet Recession

In today's world of CDO's, CDS's and ABS's add another term: "Balance Sheet Recession". Albeit, all the CDO's, CDS's and ABS's brought and sold using debt have led to a balance sheet recession, plunging the economy in a downward spiral. Or in other words, the former is causing the latter pulling the economy down with it.

Alex Leijonhufvud, Professor of Economics at UCLA, explains why the current recession is no ordinary recession, and why if we do not fix the balance sheets of banks soon, this recession can drag on for a long time to come.

It resides in the state of balance sheets. The financial crisis has put much of the banking system on the edge – or beyond -- of insolvency. Large segments of the business sector are saddled with much short-term debt that is difficult or impossible to roll over in the current market. After years of near zero saving, American households are heavily indebted.

The holes that have opened up in the balance sheets of the private sector are very large and still growing.So the private sector as a whole is bent on reducing debt. Businesses will use depreciation charges and sell off inventories to do so. Households are trying once more to save. Less investment and more saving spell declining incomes. The cash flows supporting the servicing of debts are dwindling. This is a destabilising process but one that works relatively slowly.

Martin Wolf also writes about the balance sheet recession for the Financial Times

Creeping Nationalism?

Ben Bernanke must be having a headache after today's Senate testimony.

Link obtained from Planet Money

Uncertain Times Call for Innovative Measures

Whether you are a consumer or a producer, these are uncertain times. Consumers have stopped spending on any new purchases whether be it big or small. Sales of new cars have dropped to a trickle. Just ask the GM, Ford and Chrysler. The government is trying to do its part to boost new car sales by making sales tax on cars tax deductible. But what are the car manufacturers doing on their part to boost sales?

Just watch this Hyundai commercial to find out



Its not just car companies that are targeting consumers in these desperate economic times. Home builder, Toll Brothers, is offering a mortgage protection plan where it will pay 6 months of mortgage upto $2500 for home-buyers who lose their jobs.

Certainly, uncertain times do call for innovative marketing techniques.

Nature Vs Nurture - What Makes a Genius?

Were Albert Einstein, Mozart, Isaac Newton or Tiger Woods born geniuses, or did their upbringing play a role in who they ultimately became? If they had a different upbringing, would they have not acheived the greatness that they achieved, or were they born destined to achieve greatness irrespective of how they were brought up.

A recent article on Time magazine debates this point.

Also read my previous post What it Take to be Great

Whats in the Stimulus Package to Kick Start the US Economy

The American Recovery and Reinvestment
Act of 2009,aka economic stimulus package, was signed into law this week by President Barack Obama. Total size of the package is $787 Billions and includes a mixture of spending and tax cuts. Now the question is, are there enough provisions in the bill which will help jump-start the ailing US economy. Read the summary of the bill to find out.

SPENDING

AID TO POOR AND UNEMPLOYED

_ $40 billion to provide extended unemployment benefits through Dec. 31, and increase them by $25 a week; $20 billion to increase food stamp benefits by 14 percent; $4 billion for job training; $3 billion in temporary welfare payments.

DIRECT CASH PAYMENTS

_ $14.2 billion to give one-time $250 payments to Social Security recipients, poor people on Supplemental Security Income, and veterans receiving disability and pensions.

INFRASTRUCTURE

_ $48 billion for transportation projects, including $27.5 billion for highway and bridge construction and repair; $8.4 billion for mass transit; $8 billion for construction of high-speed railways and $1.3 billion for Amtrak; $4.6 billion for the Army Corps of Engineers; $4 billion for public housing improvements; $6 billion for clean and drinking water projects; $7.2 billion to bring broadband Internet service to underserved areas; $4.2 billion to repair and modernize Defense Department facilities.

HEALTH CARE

_ $24.7 billion to provide a 65 percent subsidy of health care insurance premiums for the unemployed under the COBRA program; $86.6 billion to help states with Medicaid; $19 billion to modernize health information technology systems; $10 billion for health research and construction of National Institutes of Health facilities; $1 billion for prevention and wellness programs.

STATE BLOCK GRANTS

_ $8.8 billion in aid to states to defray budget cuts.

ENERGY

_ About $50 billion for energy programs, focused chiefly on efficiency and renewable energy, including $5 billion to weatherize modest-income homes; $6.4 billion to clean up nuclear weapons production sites; $11 billion toward a so-called "smart electricity grid" to reduce waste; $6 billion to subsidize loans for renewable energy projects; $6.3 billion in state energy efficiency and clean energy grants; and $4.5 billion make federal buildings more energy efficient; $2 billion in grants for advanced batteries for electric vehicles.

EDUCATION

_ $44.5 billion in aid to local school districts to prevent layoffs and cutbacks, with flexibility to use the funds for school modernization and repair; $25.2 billion to school districts to fund special education and the No Child Left Behind law for students in K-12; $15.6 billion to boost the maximum Pell Grant by $500 to $5,350; $2 billion for Head Start.

HOUSING

_$4 billion to repair and make more energy efficient public housing projects; $2 billion for the redevelopment of foreclosed and abandoned homes; $1.5 billion for homeless shelters; $2 billion to pay off a looming shortfall in public housing accounts.

SCIENCE

_ $3 billion for the National Science Foundation for basic science and engineering research; $1 billion for NASA; $1.6 billion for research in areas such as climate science, biofuels, high-energy physics and nuclear physics.

HOMELAND SECURITY

_ $2.8 billion for homeland security programs, including $1 billion for airport screening equipment.

LAW ENFORCEMENT

_ $4 billion in grants to state and local law enforcement to hire officers and purchase equipment.

___

TAXES

NEW TAX CREDIT

_ About $116 billion for a $400 per-worker, $800 per-couple tax credits in 2009 and 2010. For the last half of 2009, workers could expect to see about $13 a week less withheld from their paychecks starting around June. Millions of Americans who don't make enough money to pay federal income taxes could file returns next year and receive checks. Individuals making more than $75,000 and couples making more than $150,000 would receive reduced amounts.

ALTERNATIVE MINIMUM TAX

_ About $70 billion to spare about 24 million taxpayers from being hit with the alternative minimum tax in 2009. The change would save a family of four an average of $2,300. The tax was designed to make sure wealthy taxpayers can't use credits and deductions to avoid paying any taxes. But it was never indexed to inflation, so families making as little as $45,000 could get significant increases without the change. Congress addresses it each year, usually in the fall.

EXPANDED COLLEGE CREDIT

_ About $14 billion to provide a $2,500 expanded tax credit for college tuition and related expenses for 2009 and 2010. The credit is phased out for couples making more than $160,000.

CHILD TAX CREDIT

_ About $15 billion to provide the $1,000 child tax credit to more families that don't make enough money to pay income taxes.

EARNED INCOME TAX CREDIT

_ $4.7 billion to expand the Earned Income Tax Credit for low-income families with three or more children.

HOMEBUYER CREDIT

_ $6.6 billion to repeal a requirement that a $8,000 first-time home buyer tax credit be paid back over time for homes purchased from Jan. 1 to Nov. 30, unless the home is sold within three years.

AUTO SALES

_ $1.7 billion to makes sales taxes on paid on new cars, light trucks, recreational vehicles and motorcycles tax deductible through the end of the year.

RENEWABLE ENERGY INCENTIVES

_ About 20 billion in tax incentives for renewable energy and energy efficiency over 10 years, including extending tax credits for energy produced from wind, geothermal, hydropower and landfill gas; grants to build renewable energy facilities; tax credits for purchases of energy-efficient furnaces, windows and doors, or insulation; tax credit for families that purchase plug-in hybrid vehicles.

BONUS DEPRECIATION

_ $5 billion to extend a provision allowing businesses buying equipment such as computers to speed up its depreciation through 2009.

REPEAL BANK CREDIT

_ Repeal a Treasury provision that allowed firms that buy money-losing banks to use more of the losses as tax credits to offset the profits of the merged banks for tax purposes. The change would increase taxes on the merged banks by $7 billion over 10 years

When he signed the bill , the President said that the bill will help save or create 3.5 million jobs going forward. A quick glance at the above summary and you should realize that the bill is top heavy with tax cuts and aid for low income Americans. The only provisions with any seeming potential of creating jobs are spending on Infrastructure, Health Care, Alternative Energy and Home Land Security. Now, whether these provisions will help in creating or saving 3.5 million jobs and kick start the economy is the Trillion Dollar question.

Lets Forget About the Moral Hazard

David Brooks a columnists for the NY Times bats for the economic stimulus package in his most recent op-ed column. This column was in response to Rick Santelli's rant on CNBC against the administrations housing rescue package, about how it will increase moral hazard by rewarding people who made bad decisions. Below is a brief excerpt from his column.

Government isn’t fundamentally in the Last Judgment business, making sure everybody serves penance for their sins. In times like these, government is fundamentally in the business of stabilizing the economic system as a whole. Individual responsibility doesn’t mean much in an economy like this one. We all know people who have been laid off through no fault of their own. The responsible have been punished along with the profligate.
It makes sense for the government to intervene to try to reduce the oscillation. It makes sense for government to try to restore some communal order. And the sad reality is that in these circumstances government has to spend money on precisely those sectors that have been swinging most wildly — housing, finance, etc. It has to help stabilize people who have been idiots.

Also see Robert Gibbs, the current Press Secretary respond to Rick Santelli.

Evolution and Tax Cuts

What do Evolution and Tax Cuts have in common. "The Republicans". They hate one and cannot live without the other.



From R.J. Matson at the St. Louis Post Dispatch.

Link obtained from Crooks and Liars