You Are Government's Line of Credit

Cheap money makes products more expensive. When borrowing gets really easy money becomes cheap. The more qualified borrowers for financing for a product the higher the demand, the more bidders for the product, the higher prices climb. College tuition is a good example. As student loans became cheaper and cheaper more and more people were able to pay for tuition and tuition rose disproportionately to the value of the product produced. Now private colleges will set a family back about $200,000 for four years for a degree that is not much more valuable than that obtained from a state university (also obtained at an inflated price, albeit lower price).

A much more appropriate market to look at is the housing market. As mortgages became easier to obtain and as the amount of money needed for down payment became less and less, home prices climbed. With the introduction of 100% financing with no income documentation prices soared. Suddenly anyone could purchase a home, no money needed, your income was not a problem, hell even if you had crappy credit you could buy a $650,000 home and then all you had to do was wait until it was worth $750,000 and you could sell and make a quick hundred thousand. Or if you liked your home, you could use the same financing to pull equity out of your home. After the first refinance that lowered your rate and your payment and pulled out equity to pay off your revolving debt, you could take out an equity line and use that to remodel your home with all the finest appliances, or buy a boat.

Money for mortgages was cheap, way too cheap, and it created a surge in home prices. But what happened when the money went away? What happened when the mortgage lenders started to fall and the credit decisions became tighter? Housing prices at first stalled and then crashed. Ten percent, twenty percent, thirty percent lower. Suddenly millions of Americans are going through foreclosure, living in homes worth 50-70% of the amount they owe on mortgages and the Obama Administration is pushing lenders to modify loans, forgive principle on debt and relieve borrowers of having to make payments they agreed to make.

At the same time 8 million Americans have lost jobs. Personal consumption, which is 70% of our nation's economy, has dropped precipitously. As a result tax revenues are down, all tax revenues, income tax, property tax, sales tax, capital gains tax. Despite the rising unemployment figures and dropping tax revenues, trends that could be seen to be coming in 2007, our state and federal governments continued on their spending binges. They were like homeowners with an ever increasing home value and lenders willing to make them easy and cheap loans.

Now that the economy has gone further south state governments who do not have printing presses, have now been faced with having to cut their budgets. Despite rising unemployment last year California Democrats, aided and abetted by three Republicans and the Governor, raised taxes, essentially going back to their line of credit--you and me. No doubt they will try it again this year to protect their special interest from budget cuts, yet further cutting budgets for school districts across the state. They see us as their equity line. A cheap and endless stream of funds for them to spend as they see fit. And one can't help but get the feeling that the underlying mentality is, "Obama and Pelosi will bail us out if it gets really bad."

And why shouldn't they have this attitude? GM got bailed out. AIG got bailed out. Homeowners are getting bailed out, or at least they are trying to bail them out. Congress passed a $787 billion spending bill in a few days that went to all sorts of non-essential projects. Why would Washington not bail out California? We are a huge part of the economy, surely we are too big to fail?

The current deficit for the federal government is $1.4 Trillion. This year's spending from Washington is $3.5 Trillion. Our federal debt is $12.6 Trillion. Trillion. I'm not sure everyone is capable of comprehending how much one trillion actually is. The number is thrown around so often it has become as easy to say as "billion" but the difference is enormous. And that is what Washington has been spending with as much thought as you may put into a new set of golf clubs, actually probably less thought since they do not have to worry about paying it back, you do.

Money has become so cheap for Congress and the Obama Administration that they are re-creating the housing bubble with government debt. A health care bill that costs a couple of Trillion dollars. Stimulus packages that add up to a Trillion dollars. Spend, spend, spend, borrow, borrow, borrow. Sound familiar?

Whereas before Countrywide, Bank of America, Wells Fargo, Chase were the lenders for lines of credit that supplied the funds that helped create the housing bubble; today the American voter has become the lender for Congress and the creation of the debt bubble. Our borrow and consume mentality gave us some good times for much of the Aughts, has transferred to our elected officials. Go ahead and spend the money, it's cheap. We'll just have Treasury auction some more T-bills and write another spending bill.

Try to stop government spending and you are demonized. First Senator Bunning and last week the Republican Senators blocked legislation to continue unemployment benefits unless the funding was taken out of either the already passed stimulus bill and unused funds, or cuts are made in another part of the budget. How dare you hold up unemployment checks for Americans in need! Who cares where the funds come from? We are the federal government just spend it!

Just spend it. Borrow it. Rates are low and repayment is cheap. But for how long? How long can the debt bubble continue before it pops? Every month the Treasury has been auctioning hundreds of billions of dollars in various notes, 3 year, 5 year, 7 year, 10 year, 30 year debt auctions have been occurring all year. And most of them have been fairly well received, meaning there have been sufficient buyers to keep the rates on the notes sold low.

But this past week the sentiment was not that great. With the backdrop of Greece having difficulties with its debt, a tremor went through the debt markets. Not as big of a tremor as went through Wall Street when New Century Mortgage had capitalization problems and started the credit collapse, but a tremor nonetheless. Investors hesitated before buying U.S. debt.

Wait a minute. The U.S. outstanding debt is $12.6 Trillion and growing. It's GDP is $14.3 Trillion, and finally growing but at a slower rate. America's equity is mortgaged to almost 90% of its economy's value and they are still spending and increasing their borrowing on their equity line--the American consumer and tax payer. How much more can the United States borrow before its bubble bursts?

Cheap money leads to price inflation, which creates bubbles, which pop. When they pop prices drop, money becomes more expensive and markets collapse. Debt is a market. The more demand there is for someones debt the higher the price and the lower the interest rates the borrower has to pay. As demand wanes prices drop and rates increase. This past week demand was not as great as it has been for U.S. debt.

And Congress went on recess with Democrats upset because they could not spend a few billion dollars more on the credit line. Your credit line.

You, and me, are the lender for the U.S. government, we are guaranteeing debt that at this point approximates $42,000 for every person in America--that's $168,000 for my home, how much for yours? Like the housing and equity frenzy of 2002-2007 a bubble is growing rapidly. When will it pop and what will happen to the credit markets when that happens?

My daughters are 8 and 10, they haven't been to college, haven't bought a car, haven't even had a job yet and already both are over $40,000 in debt. It bothers me to think what that number will be when they start their careers in about fifteen years.

To follow our national debt, revenue and spending check out the U.S. National Debt Clock


DCS 03292010

TARP Funds Coming Back

Big news this morning on the financial front is that Citi has finished negotiations with the Treasury and has a plan put together to repay $20 billion in funds received from the Troubled Asset Relief Program (TARP). As you may recall TARP was the initial government reaction to the current economic cycle. Put together in October 2008 by the Bush Administration, Treasury Department and Congress it allocated $700 billion to assist troubled financial institutions to prevent their collapse.

TARP was (and is) the centerpiece of discontent for many Americans who feel that the government should have just let troubled banks fail. One can imagine the size and depth of the ensuing recession had that occurred. More criticism was heaped on TARP when the Obama Administration used some of the TARP funds to prop up General Motors and Chrysler.

Through TARP the Federal government was able to add restrictions to recipients policies and procedures, mandate capital requirements and restrict lending practices. In several cases the Treasury, on behalf of the American people, became shareholders in banks receiving funds on a preferred stock basis. The largest of these stock holdings became Citi where the U.S. Government retained stock worth 31% ownership in the bank.

Last week, within hours after Treasury Secretary Tim Geithner testified on TARP before a House Committee last week, Bank of America announced it has repaid $45 billion of TARP funds it received and has repurchased all preferred stock owned by the government. This morning's announcement that Citi has reached an agreement to repay its $20 billion in funds and repurchase government's holdings also stated that through the TARP period Citi paid $3.1 billion to the government in dividends and interest. By June Citi will have repurchased all preferred shares held by the Federal Government.

Of the big banks and firms that received TARP funds Wells Fargo is left with no announcement of a plan to repay the $25 billion received. Since Wells did not visit the TARP well twice it has been operating without many of the restrictions, including compensation limits, imposed on other institutions, as such it may not be in as big of a hurry to shove $25 billion in capital out the door.

When enacted TARP had a price tag of $700 billion. To date Secretary Geithner indicates $550 billion of the funds have been allocated and that by December 2010 $175 billion will have been repaid. Somehow through these numbers, $550 billion spent and $175 billion repaid, Geithner told Congress that the cost to the taxpayer has been recalculated from $341 billion to $140 billion. Where the gap of $135 billion gets made up ($550B spent $175B collected leaves $375B uncollected) I don't know.

The biggest question for me on this phase of TARP, repayment, is where will the repaid funds go? With Citi's announcement coming on the heels of Congress slamming through a $1.1 Trillion spending bill this weekend and Obama and Congressional Democrats talking about another $200-500 billion in "stimulus-but-don't-call-it-stimulus" funding and the on going multi-Trillion dollar debate on health care restructuring, I am a little skeptical the repaid TARP funds will be used to pay down debt or go back in the general fund.

While not perfect, thus far it appears the TARP investment in several of America's major financial institutions was a good bet. While GM and AIG are still out there to remind us that no investment is without risk, Bank of America, Citi, Wells Fargo and Chase have shown the infusion of funds kept them open and able to acquire weaker, troubled institutions, saving taxpayers, investors and depositors hundreds of billions, possibly trillions. They are not out of the woods yet however and face significant future risks and challenges, not the least of which will be whatever final legislation comes out of Congress on financial regulations and restrictions. This Congress and Administration has so far shown the ability to be over-reactive to issues and problems restricting markets and future growth, if this happens with banking credit will tighten further. Also on the horizon is the commerical paper on the banks' books, while the focus the past few years have been on residential foreclosures the other shoe is commerical loans that are coming due or facing major rate adjustments through their notes.

Hopefully the health of our lending institutions has recouped enough to withstand coming challenges and restore America's faith in the institutions that hold and protect their hard earned money.

Take The Stimulus Money Back

The news this summer has been very focussed on American citizens at townhall meetings. Some of the news diverts into showing just the screamers, while other reports show the questions being asked and statements being made. Almost all of the reports have been centered on health care reform and the people's objections to legislation currently working through the various committees of the House and Senate. Lost in the reporting is a very common message being given to members of Congress: stop spending money and creating massive debt for our children, grandchildren and great-grandchildren.

On Friday afternoon, with the President and the White House press corps A-Team out of town on holiday, the Administration issued an "oops" press release. It seems that its estimates of the budget deficits in the coming years was slightly off, only about 29%. Instead of the federal deficit reaching $7 trillion in ten years the White House acknowledged the numbers that have been put out by the Congressional Budget Office and said the number is more like $9 trillion--in the hole, negative, red ink.

A LOOK AT OUR DEBT

So far this year the Treasury has been engaged in auctions of all of its bills and notes, 6 month, 1 year, 3 year, 7 year, 10 year. The auctions have actually gone quite well with significant bidders keeping the prices high and the yields low. Low yields when selling debt are important because when you start talking about hundreds of billions the smallest tick in rate costs hundreds of millions. When you are talking about a trillion a small tick is a billion. As of this writing the U.S. debt totals $11,719,060,925,865.86

One reason the Treasury debt auctions have gone well is because there have been plenty of foreign investors. As of June 2009 $3.4 trillion of U.S. Treasury Securities are held by foreign nations and investors. The interest payments on this $3.4 trillion approximates $25 billion per year, being paid to foreign investors, so far. Foreign investment accounts for approximately 30% of our national debt. While much is made of China's holding of U.S. treasury securities, and they own a lot at $776 billion through June, not too far behind China is Japan at $711 billion. What this means of course is that hundreds of millions of dollars per week are paid to both nations in interest payments.

Looking forward from the present there is great concern about the rapidly rising debt and treasury auctions since many of the auctions are used to refinance debt that is coming due. In six months the Treasury will have to pay off the 6 month bills issued this month, how? By auctioning on more bills and bonds. With our economy looking to be coming out of recession in the next six months we will see upward pressures on interest rates. Every one-quarter of one percent in interest rate (00.25%) the interest paid on $11.7 trillion goes up approximately $30 billion--that is the increase in payments.

WHAT CAN WE DO TODAY?

Obviously the primary way to stop debt rising in the future is to stop borrowing today. Since we are talking about the U.S. government that is pretty much impossible, there will always be debt--the U.S. house will never be free from a mortgage. However what can be done is to control spending and reduce hindering future economies and generations with massive debt payments by limiting spending today.

As the current bills have piled up President Obama and the Democrats in Congress have touted that the payments of the bills will come from "the wealthiest among us." Specifically those making more than $250,000 as a family have been targeted as evidently not paying "enough" and will be called upon to pay higher taxes, and or have many tax deductions such as mortgage interest and charitable contributions taken away from them. But how much of a dent can Americans making $250,000 or more put into a $9 trillion deficit? How many Americans will suddenly make $249,000 because they net more after taxes than if they make that extra $1000? Is it realistic to believe that our current spending will be paid by future Americans making above that magic threshold?

It is just as realistic as my proposal to help lower the future deficit and send a message to Americans that they have been heard this summer.

TAKE BACK THE STIMULUS MONEY

Upon returning from summer recess (aside: when you hear Congress is on recess do you picture them on slides and swings, they often act like children I picture them on recess like children), when they return Congress makes huge in-roads with Americans and perhaps gains back a little trust if their first order of business is to repeal the Stimulus Package passed in February for any funds that have not yet been sent out. It is not needed to stimulate the economy as evidence that only 10-15% of the funds have been spent or credited through tax cuts and the economy by almost all reports is on the road to recovery. If the purpose of the $787 billion was to boost and support the economy, and the economy is boosting and supporting without the money then do not spend it. Take it back.

Yes there will be communities through the country upset because their pork projects of renovation of dilapidated and unused rail stations will stay dilapidated, skate parks expansions will stay the same size, walkways will not be built around lakes and some will be stuck with the millions and millions of dollars of signs printed touting a project is being paid for by Federal Stimulus Funding. So what, let them be upset in the end pulling almost $700 billion in spending back into the budget will help reduce the current deficit and the future deficit.

Americans across the country are telling their Congressional representatives to please listen to their constituents, look at how much money has been flowing out of Washington and how much more is on the table--over $1 trillion for HR 3200 the health care reform bill that is the center of most of the debates. Now is a chance for Congress to tell the American people, "we hear you, we understand, we will not spend money that is not needed to be spent by the Federal government."

Were Congress to rescind the unspent stimulus funds and pass a motion to suspend HR 3200 until Congress and the White House are able to reform and make efficient the waste in Medicare and Medicaid, I think they would have a much better chance of passing step-by-step and methodical health care reform.

If I were a "Blue Dog Democrat" on the hot seat in November 2010 for the deficits being rung up I would certainly be touting saving $700 billion and be part of the first Congress to ever un-ring a spending bill.

Think it will happen?

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