FAKE GLOOM:

Cause for Optimism Amid Gloom (Joseph Calhoun, 2/24/09, Real Clear Markets)

The housing market, which everyone believes must be healed before recovery can begin, is quietly healing itself. Home sales in California, the eye of the housing storm, are rising. Lower prices are attracting buyers at a rate 85% above last years pace. Indeed, even as the median price fell over 40%, the total dollar volume of sales in December was higher than the same month last year. Florida has seen existing home sales rise for four consecutive months, although the rise is more muted than California, up only 27% over last year in December. The government’s actions last week to limit foreclosures not only angers responsible homeowners, it slows the process of moving houses from those who can’t afford them to those who can.

The news of the credit markets’ death also seems to have been a bit premature. Those real estate sales in California and Florida weren’t all cash deals. While banks are certainly requiring more in the way of a downpayment and may actually call your employer to verify you are indeed gainfully employed, it is obvious that banks are lending. Contrary to news reports, banks are even extending financing for other consumer wants; consumer loans at commercial banks are still rising at a 10% rate. That doesn’t mean that lending as a whole is still rising; the securitization market is basically dead. As non-bank lending has withdrawn from the market, banks have stepped up to fill the void. The total volume of lending may not be where it was, but is that something that should be lamented by anyone other than the Wall Street firms who benefited from the easy profits in the boom years? I think not.

Leading economic indicators have risen two months in a row. Some have been quick to seize on the fact that the rising money supply is the biggest contributor to the rise. These pessimists assume that we are in a liquidity trap and that monetary policy has lost its effectiveness. If that is true then the rise in money supply means nothing and the LEI is rendered ineffective as an indicator, but based on the continued rise in bank lending, I remain unconvinced. Furthermore, in last month’s LEI report, five of the ten indicators were positive.

Productivity, which fell in the bad recession of 1981-82 and during the Great Depression, was up 3.2% in the fourth quarter. Incomes, adjusted for the recent deflation in the CPI, are rising. And while the Keynesians among us fret about the paradox of thrift, I find the rising savings rate comforting. Higher savings is exactly what we need to repair the damage done to our economy by excess consumption fueled by easy credit. And besides, retail sales were up in January.

Obviously, we are still in recession and there is more pain to come, but the gloomy mood that surrounds the Obama administration is either manufactured for some political purpose or completely unwarranted.

Ironically, that purpose could be to further the ends of rightwing budget hawks, The Deficit Hawks' Attack on Our Entitlements (Robert Kuttner, February 23, 2009, Washington Post)

With the enactment of a large economic stimulus package, fiscal conservatives are using the temporary deficit increase to attack a perennial target -- Social Security and Medicare. The private-equity investor Peter G. Peterson, who launched a billion-dollar foundation last year to warn that America faces $56.4 trillion in "unfunded liabilities," is a case in point. Supposedly, these costs will depress economic growth and crowd out other needed outlays, such as investments in the young. The remedy: big cuts in programs for the elderly.

The Peterson Foundation is joined by leading "blue dog" (anti-deficit) Democrats such as House Budget Committee Chairman John Spratt of South Carolina and his counterpart in the Senate, Kent Conrad of North Dakota. The deficit hawks are promoting a "grand bargain" in which a bipartisan commission enacts spending caps on social insurance as the offset for current deficits.

President Obama's economic advisers devised today's White House fiscal responsibility summit to signal that the president takes the deficit seriously and to lay the groundwork for such a bipartisan deal. Originally, Peterson was slated to be a featured speaker.

Looting Social Security (William Greider, March 2, 2009, The Nation)

o understand the mechanics of this attempted swindle, you have to roll back twenty-five years, to the time the game of bait and switch began, under Ronald Reagan. The Gipper's great legislative victory in 1981--enacting massive tax cuts for corporations and upper-income ranks--launched the era of swollen federal budget deficits. But their economic impact was offset by the huge tax increase that Congress imposed on working people in 1983: the payroll tax rate supporting Social Security--the weekly FICA deduction--was raised substantially, supposedly to create a nest egg for when the baby boom generation reached retirement age. A blue-ribbon commission chaired by Alan Greenspan worked out the terms, then both parties signed on. Since there was no partisan fight, the press portrayed the massive tax increase as a noncontroversial "good government" reform.

Ever since, working Americans have paid higher taxes on their labor wages--12.4 percent, split between employees and employers. As a result, the Social Security system has accumulated a vast surplus--now around $2.5 trillion and growing. This is the money pot the establishment wants to grab, claiming the government can no longer afford to keep the promise it made to workers twenty-five years ago.

Actually, the government has already spent their money. Every year the Treasury has borrowed the surplus revenue collected by Social Security and spent the money on other purposes--whatever presidents and Congress decide, including more tax cuts for monied interests. The Social Security surplus thus makes the federal deficits seem smaller than they are--around $200 billion a year smaller. Each time the government dipped into the Social Security trust fund this way, it issued a legal obligation to pay back the money with interest whenever Social Security needed it to pay benefits.

That moment of reckoning is approaching. Uncle Sam owes these trillions to Social Security retirees and has to pay it back or look like just another deadbeat. That risk is the only "crisis" facing Social Security. It is the real reason powerful interests are so anxious to cut benefits. Social Security is not broke--not even close. It can sustain its obligations for roughly forty years, according to the Congressional Budget Office, even if nothing is changed. Even reports by the system's conservative trustees say it has no problem until 2041 (that report is signed by former Treasury Secretary Henry Paulson, the guy who bailed out the bankers). During the coming decade, however, the system will need to start drawing on its reserve surpluses to pay for benefits as boomers retire in greater numbers.

But if the government cuts the benefits first, it can push off repayment far into the future, and possibly forever.

But they'd better hurry before the recovery starts to take hold.

Posted by Orrin Judd at February 23, 2009 9:25 AM