The Circus is Back in Town

Hopium really has a propensity to spend and borrow. In the case of the "jobs bill" he goes right to the heart of it by giving a costly payroll tax break (cost $175 billion) to employees. I presume the Republicans could buy that one, hook, line, and sinker.  The part about individual payroll tax looks tricky as he proposed cutting it in half, cost $65 billion.  Perhaps I missed it, but what about the payroll tax that is expiring, that was $120 billion? Does this add to that?   These numbers nao combinam. The UI extension was $49 billion, so that one seems to be cut back.  Still those measures using the possibly trick numbers provided total $284 billion. In addition has proposed what can only be called stimulus junior, with pork barrel of about $140 billion. This will be balanced by "hoped for revenues", and spending cuts in the outer years. You can rest assured that the FY 2012 budget deficit is going into orbit even if some of these measures are enacted. Talking heads give both the employer and employee payroll tax cuts good odds.

Meanwhile the super committee starts meeting, and one senator, Kyl, immediately threatens a work out if defense spending is cut. It really looks like this is going to be taken to new levels of circus high wire acts. I think it is save to assume that we will see the same tactics applied to attempts at taxes to pay for these proposals. Interesting the tax repatriation scam is being held in reserve, no doubt for some "grand compromise".

I suspected that there was a new student lending bubble developing since Hopium arrived on the scene. I just didn't realize how bad it was until I read this Michael Panzer article.  

I think Bruce Krasting has hit the nail on the head on the refi operation being floated by Hopium. A big refi of underwater, income deficient types. Really nothing but a glorified cheap rent program, except the debtor is stuck in the property and has little mobility. No mention of any serious debt forgiveness.  In medieval times this was called serfdom.  Not clear to me what the economic benefits of this are.


John Hussman, key points on who takes the hit can’t be stressed enough.


“The global economy is at a crossroad that demands a decision – whom will our leaders defend? One choice is to defend bondholders – existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse.Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.


“The alternative is to defend the public by focusing on the reduction of unserviceable debt burdens by restructuring mortgages and peripheral sovereign debt, recognizing that most financial institutions have more than enough shareholder capital and debt to their own bondholders to absorb losses without hurting customers or counterparties – but also recognizing that properly restructuring debt will wipe out many existing holders of mismanaged financials and will require a transfer of ownership and recapitalization by better stewards. That alternative also requires fiscal policy that couples the willingness to accept larger deficits in the near term with significant changes in the trajectory of long-term spending.


“In game theory, there is a concept known as ‘Nash equilibrium’ (following the work of John Nash). The key feature is that the strategy of each player is optimal, given the strategy chosen by the other players. For example, ‘I drive on the right / you drive on the right’ is a Nash equilibrium, and so is ‘I drive on the left / you drive on the left.’ Other choices are fatal.


“Presently, the global economy is in a low-level Nash equilibrium where consumers are reluctant to spend because corporations are reluctant to hire; while corporations are reluctant to hire because consumers are reluctant to spend. Unfortunately, simply offering consumers some tax relief, or trying to create hiring incentives in a vacuum, will not change this equilibrium because it does not address the underlying problem. Consumers are reluctant to spend because they continue to be overburdened by debt, with a significant proportion of mortgages underwater, fiscal policy that leans toward austerity, and monetary policy that distorts financial markets in a way that encourages further misallocation of capital while at the same time starving savers of any interest earnings at all.


“We cannot simply shift to a high-level equilibrium (consumers spend because employers hire, employers hire because consumers spend) until the balance sheet problem is addressed. This requires debt restructuring and mortgage restructuring. While there are certainly strategies (such as property appreciation rights) that can coordinate restructuring without public subsidies, large-scale restructuring will not be painless, and may result in market turbulence and self-serving cries from the financial sector about ‘global financial meltdown.’ But keep in mind that the global equity markets can lose $4-8 trillion of market value during a normal bear market. To believe that bondholders simply cannot be allowed to sustain losses is an absurdity. Debt restructuring is the best remaining option to treat a spreading cancer. Other choices are fatal.”