Bailing Out the Bad Guys, Auto Sales in Depression, and Uninsured Municipal Bank Accounts at Risk

August 2

Economic Free Fall? (July 30 – The Nation)

Washington can act with breathtaking urgency when the right people want something done. In this case, the people are Wall Street's titans, who are scared witless at the prospect of their historic implosion. Congress quickly agreed to enact a gargantuan bailout, with more to come, to calm the anxieties and halt the deflation of Wall Street giants. Put aside partisan bickering, no time for hearings, no need to think through the deeper implications. We haven't seen "bipartisan cooperation" like this since Washington decided to invade Iraq.

In their haste to do anything the financial guys seem to want, Congress and the lame-duck President are, I fear, sowing far more profound troubles for the country. First, while throwing our money at Wall Street, government is neglecting the grave risk of a deeper catastrophe for the real economy of producers and consumers. Second, Washington's selective generosity for influential financial losers is deforming democracy and opening the path to an awesomely powerful corporate state. Third, the rescue has not succeeded, not yet. Banking faces huge losses ahead, and informed insiders assume a far larger federal bailout will be needed--after the election. No one wants to upset voters by talking about it now. The next President, once in office, can break the bad news. It's not only about the money--with debate silenced, a dangerous line has been crossed. Hundreds of billions in open-ended relief has been delivered to the largest and most powerful mega-banks and investment firms, while government offers only weak gestures of sympathy for struggling producers, workers and consumers.

Here’s your weekend reading! Grab a cup of coffee and read one the most important and best summaries I’ve yet read on where we are and how we got here. Our ‘leaders’ are busily compounding mistakes while rewarding those who brought you this mess and punishing innocent people everywhere. We will not get to a national solution until this culture is exposed to bright light and made to retreat. That’s what this article does and that’s why you should read it.

U.S. Vehicle Sales Fall 13.2% Amid High Gas Prices and Tight Credit (Aug 2 – NYT)

Vehicle sales in the United States fell last month to their lowest level in 16 years, as consumers continued to shun large trucks because of high gas prices, and tight credit kept less creditworthy customers off lots.

Sales were down 13.2 percent, at a time when the companies had expected to begin seeing an improvement.

Instead, the five largest automakers each reported sales declines on Friday. Sales fell 26.1 percent at General Motors, the largest car company, while Chrysler, which used to be the third-largest, reported a 28.8 percent decline and came within a few thousand sales of falling to sixth place. The Ford Motor Company posted a 14.7 percent decline.

These sales are much worse than expected (at least by the ever hopeful Wall Street crowd) and speak to the fact that the US GDP reports, which show we are still in positive territory, are in serious error. It is simply not possible for autos, one of the larger individual segments of our economy, to be down this much in a still-expanding economy. As you know, the reason our economy is still being reported as expanding is due to a fraudulently low measure of inflation used by government statisticians.

One way we could fix that issue is to peg all government budget expansion against the inflation number. No special off-budget spending. No incremental spending of any sort, no matter what, that exceeds the pace of inflation. All of a sudden, I predict, the methodology would change, and we’d get proper readings for inflation.

Billions in tax deposits uninsured: State, local accounts secured, so loss unlikely (July 31 – Columbus Dispatch)

Your bank account is insured up to $100,000, but you still have a lot at stake in the event of a major failure: hundreds of billions of state and local tax dollars in accounts nationwide that are not insured by the Federal Deposit Insurance Corp.

Losses aren't likely, says a state official, but government treasurers are keeping a close eye on the funds. Franklin County currently has $300 million of taxpayer money in banks; the city of Columbus easily has tens of millions; and local school districts hundreds of millions more, officials said.

By Ohio law, the uninsured portions of these accounts are backed by collateral purchased by the banks. But many might be backed by bonds of agencies that are in trouble themselves, namely government-sponsored mortgage behemoths Fannie Mae and Freddie Mac.

I’d been wondering about state and municipal bank accounts and how those were protected, and then this article comes along and clears up the mystery. Thanks!  It would seem that the “insurance” on these deposits rests with the fact that they are backed by collateral. So the towns/states place cash in a bank, and then the bank buys something with that money that is worth something that presumably could be sold in the event of an emergency. But it turns out that not all the deposits are so “covered.” In fact, only 24% out of some $290 billion was determined to be covered, in a 2006 study by the FDIC. But the real irony here is the thought that banks are “covering” deposits with Fannie Mae bonds…and here’s where we get to the song about how the hip bone is connected to the thigh bone…

If a bank goes down at the same time that Fannie bonds are getting hit, even the 24% that is insured will suddenly be worth a lot less than advertised. Lots and lots of uncovered losses would mount for various local school districts, towns, and states if the contagion was wide enough. And if that happens, Muni bonds will take a big hit, raising borrowing costs for towns and states even as their financial conditions worsen. Which will lead to more bank stress and probably failures. The hip bone is connected to the thigh bone…

It is this level of interconnected complexity that is at the heart of our current crisis. It is the main reason why I am secure in my belief that the Fed and the Government will do everything in their power to prevent this sort of deflationary spiral from coming to pass. Unfortunately, their options are few, and they cannot possibly operate to this effect without employing the very same bankers and financiers that created the mess in the first place. Sort of like being forced to reuse the doctor that botched your first operation.