States Selling Public Assets for Money, The WSJ and the FDIC, ALT-A Defaults Climb, & BLS Understates Job Losses.

August 4

Roads, airports on the block as budgets tighten (Aug 1 - Reuters NEW YORK)

Cash-strapped U.S. state and city governments are likely to sell or lease more highways, bridges, airports and other assets to investors desperate for stable returns after being frazzled by the credit crisis.

The trend is set to pick up speed given worsening budget deficits in state capitals and city halls nationwide.

It will also be welcomed by Wall Street bankers hoping to help create and market so-called "infrastructure" transactions at a time many debt markets remain paralyzed, and after major U.S. stock indexes fell into bear market territory.

I realize that states are going to perform all kinds of stunts in an effort to raise cash, but I find this route to be unacceptable. For a one-time cash infusion, the revenue rights and maintenance responsibilities for roads, bridges, airports, and other assets will go to private companies.

This is a terrible idea, for two reasons.

First, because public money (taxes) was used over the years to build these assets. They are public assets built with public money and they belong to the public. The idea of selling or leasing them off for a one-time cash infusion is simply short-sighted and wrong. However, never underestimate the desire of a public official to avoid raising taxes or cutting spending in an election year, which are the other options besides selling off the public trust.

Second, because often these assets are effectively monopolies. I trust private companies to keep prices low and maintenance up when they have to compete. So if there were two side-by-side bridges over the same river going to two separate companies, I’d probably say, “Okay, lease ‘em,” and see how it goes. But if a company buys a portion of I-90 and jacks up the prices, then leaves it full of craters, what are you going to do, take I-40?

This whole concept is a bad idea borne of desperation.

Protect Yourself From Bank Failures (Aug 3 – WSJ)

Can you bank on the safety of the money you've got stashed in banks?

Some consumers are worrying as banks report billion-dollar losses from bad loans and in the wake of the seizure of IndyMac Bank, the third-largest bank failure in U.S. history.

The good news is that you can eliminate the risk of losing money in a bank failure -- by making sure none of your accounts exceed the limits of federal deposit insurance.

Many people have not been diligent about doing that, however.

Well, I suppose it’s good that the WSJ is out there raising consciousness about the FDIC and bank account insurance limits. But I take exception to the way they’ve worded this, “…you can eliminate the risk of losing money in a bank failure…”

Eliminate?

No, it’s not possible to eliminate that risk. You can reduce it, but the FDIC is really only a few good failures away from trouble itself, and nobody knows quite how that might turn out.

Otherwise, this is a fine article for those wanting to know about how to stay as safe as possible, at least as far as things stand right now.

Housing Lenders Fear Bigger Wave of Loan Defaults (Aug 4 – NYT)

The first wave of Americans to default on their home mortgages appears to be cresting, but a second, far larger one is quickly building.

Homeowners with good credit are falling behind on their payments in growing numbers, even as the problems with mortgages made to people with weak, or subprime, credit are showing their first, tentative signs of leveling off after two years of spiraling defaults.

The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

If you were reading this site a year ago, you read then that ALT-A loans were going to be the next big problem. Their time has arrived. However, even I am shocked that they’ve managed to hit a 12% delinquency rate so early in the game. This implies that the ultimate rate is going to be closer to 20% or more, when all is said and done. Fannie and Freddie are surprisingly exposed to this type of mortgage, and I am thoroughly comfortable stating that the $25 billion bailout estimate is far too low.
To put that number in perspective, I just read today that a group of materials scientists believe that it would require $1 billion over the next ten years to create the next generation of low-cost solar cells that could be used to generate electricity for home use. But they are not sure where that kind of money will come from…

Is BLS understating the "true" job losses? (Aug 1 – The Skeptical Capitalist)

TrimTabs employment analysis, that uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, finds that the U.S. economy shed 169,000 jobs in July. Meanwhile, the Bureau of Labor Statistics (BLS) reported today that the U.S. economy lost only 51,000 jobs in July. In addition, we estimate total job losses for the year have reached 734,000 while the BLS estimates that only 463,000 jobs have been lost, a difference of 37%. We believe the BLS is seriously underestimating the harm high oil prices are inflicting on the U.S. economy. The BLS' flawed methodology will finally report that the U.S. labor market was in trouble in 2008 sometime next year.

The stock market was recently cheered by the BLS announcement that job losses were ‘only’ -51,000 rather than the expected -70,000. As anybody who has attended my seminar knows, the BLS uses highly questionable practices to derive their numbers. If not fraudulent, then their reports are perplexingly self-delusional.

But there’s this private company that actually tracks tax receipts and then uses that info to estimate actual employment, since all reported earnings are taxed. What a clever idea!  Actually using hard data that can be tracked, rather than estimation models so complicated to deploy that the BLS won’t fully reveal how they actually work.

In short, I trust the tax receipt numbers much, much more than I trust the BLS and their mysterious methods. One test of whether there is anything systematically wrong with a model is to determine if it misses high just as often as it misses low. The BLS misses on the high side by such a huge amount on a monthly basis that if their employment data were a freshman statistics class project, they’d get an “F”.