Property Grunt

Wednesday, March 08, 2006

What is going on here?

Below is an article I found on the drudgereport.

Mar 6, 1:18 PM EST

Treasury Dept. Moves to Avoid Debt Limit

AP Economics Writer

WASHINGTON (AP) -- Treasury Secretary John Snow notified Congress on Monday that the administration has now taken "all prudent and legal actions," including tapping certain government retirement funds, to keep from hitting the $8.2 trillion national debt limit.

In a letter to Congress, Snow urged lawmakers to pass a new debt ceiling immediately to avoid the nation's first-ever default on its obligations.

"I know that you share the president's and my commitment to maintaining the full faith and credit of the U.S. government," Snow said in his letter to leaders in the House and Senate.

Treasury officials, briefing congressional aides last week, said that the government will run out of maneuvering room to keep from exceeding the current limit sometime during the week of March 20.

Snow in his letter notified lawmakers that Treasury would begin tapping the Civil Service Retirement and Disability Fund, which Treasury officials said would provide a "few billion" dollars in extra borrowing ability.

Treasury officials also announced that on Friday they had used the $15 billion in the Exchange Stabilization Fund, a reserve that the Treasury secretary has that is normally used to smooth out volatile movements in the value of the dollar in currency markets.

Treasury has also been taking investments out of a $65.3 billion government pension fund known as the G-fund.

Officials have said that once the debt limit is raised, the investments taken out of the pension funds would be replaced and any lost interest payments would be made up. The formal title for the G-fund is the Government Securities Investment Fund of the Federal Employees Retirement System.

Democrats hope to use the upcoming congressional debate over raising the debt limit to highlight what they see as the failings of the administration's economic program with its emphasis on sweeping tax cuts.

An actual default on the debt, a situation when the government misses making payments to current bondholders, is a doomsday scenario considered highly unlikely given what it would do to the government's credit rating.

It is expected that after intense debate, Congress will approve an increase in the current $8.18 trillion debt limit by perhaps $781 billion.

But Rep. Charles Rangel, the top Democrat on the House Ways and Means Committee, said Monday that any further increase in the debt limit should be tied to legislation that would get future deficits under control.

"Simply raising the limit on George W. Bush's credit card and crossing our fingers won't solve anything," Rangel, D-N.Y., said in a statement. "Any long-term debt limit increase must be accompanied by a serious effort to bring our budget back to the balance we achieved under the Clinton administration."

Treasury Department spokesman Tony Fratto said it was critical for Congress to act before leaving for a spring recess on March 17. He said Snow planned a number of meetings with lawmakers this week to discuss the urgency of taking action.

The administration has sent Congress a budget that on paper would cut the deficit in half by 2009, the year President Bush leaves office.

But Democrats contend the administration met its deficit-reduction goal only by leaving out major spending items such as the full costs of the Iraq war. They say the deficit will not improve unless Bush abandons his effort to make his first-term tax cuts permanent.

Sen. Max Baucus, D-Mont., said last week that under President Bush the total of the deficits has increased by $3 trillion, a 40 percent increase from where the national debt - the total of previous deficits - stood when Bush took office in January 2001.

Okay. When the government starts to tap into pension funds, well that just really scares the crap out of me. I believe this is how Enron got started and we know how that movie ended.

I do not have a finance backgroung but I know what the governemnt is doing is very risky. When you mess with people's retirement you are walking on very shaky ground and you need to be extrememly careful because you literally have the future of the masses in the palm of your hand.

We should all be concerned because the housing market has been driving our economy for quite some time. One of the key components of the market has been mortgages which have been bundled up and sold overseas to Asia as bonds. Perhaps this is the administration's way of extending our credit in order to make our debt more acceptable. Any finance people want to chime in?

Maybe this was what Mr. Roach was talking about.

Stephen Roach:
Economic `Armageddon' Predicted
BRETT ARENDS / Boston Herald 23nov04

Stephen Roach, the chief economist at investment banking giant Morgan Stanley, has a public reputation for being bearish.

But you should hear what he's saying in private.

Roach met select groups of fund managers downtown last week, including a group at Fidelity.

His prediction: America has no better than a 10 percent chance of avoiding economic "Armageddon."

Press were not allowed into the meetings. But the Herald has obtained a copy of Roach's presentation. A stunned source who was at one meeting said, "it struck me how extreme he was — much more, it seemed to me, than in public."

Roach sees a 30 percent chance of a slump soon and a 60 percent chance that "we'll muddle through for a while and delay the eventual Armageddon."

The chance we'll get through OK: one in 10. Maybe.

In a nutshell, Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants.

The result: U.S. consumers, who are in debt up to their eyeballs, will get pounded.

Less a case of "Armageddon," maybe, than of a "Perfect Storm."

Roach marshaled alarming facts to support his argument.

To finance its current account deficit with the rest of the world, he said, America has to import $2.6 billion in cash. Every working day.

That is an amazing 80 percent of the entire world's net savings.

Sustainable? Hardly.

Meanwhile, he notes that household debt is at record levels.

Twenty years ago the total debt of U.S. households was equal to half the size of the economy.

Today the figure is 85 percent.

Nearly half of new mortgage borrowing is at flexible interest rates, leaving borrowers much more vulnerable to rate hikes.

Americans are already spending a record share of disposable income paying their interest bills. And interest rates haven't even risen much yet.

You don't have to ask a Wall Street economist to know this, of course. Watch people wielding their credit cards this Christmas.

Roach's analysis isn't entirely new. But recent events give it extra force.

The dollar is hitting fresh lows against currencies from the yen to the euro.

Its parachute failed to open over the weekend, when a meeting of the world's top finance ministers produced no promise of concerted intervention.

It has farther to fall, especially against Asian currencies, analysts agree.

The Fed chairman was drawn to warn on the dollar, and interest rates, on Friday.

Roach could not be reached for comment yesterday. A source who heard the presentation concluded that a "spectacular wave of bankruptcies" is possible.

Smart people downtown agree with much of the analysis. It is undeniable that America is living in a "debt bubble" of record proportions.

But they argue there may be an alternative scenario to Roach's. Greenspan might instead deliberately allow the dollar to slump and inflation to rise, whittling away at the value of today's consumer debts in real terms.

Inflation of 7 percent a year halves "real" values in a decade.

It may be the only way out of the trap.

Higher interest rates, or higher inflation: Either way, the biggest losers will be long-term lenders at fixed interest rates.

You wouldn't want to hold 30-year Treasuries, which today yield just 4.83 percent.


Yesterday, Frontline broadcasted "The Storm which examined the aftermath of Katrina and how everything went horribly wrong in New Orleans.

Let's be frank. Not all administrations are perfect but from watching this episode it scares the crap out of me how disorganized and oblivious all parties were about this situation.

FEMA has been a dumping ground for buddies of the administration who are about as qualified to run a disaster agency as Michael Jackson is qualified to run a child day care center. And the people have suffered from these decisions.

Despite the need for FEMA, there has been a recent push to further gut the agency and changes that are still needed have yet to take place. If you have not seen this episode of Frontline, I highly recommend you watch it because of the revelations it presents.

The question I pose is that could another Katrina happen in the real estate market? I found this article from Housing panic about a recent appointee to the Federal Reserve who's resume is comparable to Michael Brown.

Fed rookie's financial resume is short


Kevin Warsh, President Bush's recent appointee to the Federal Reserve's Board of Governors, has thin qualifications for the job — to put it mildly. What message the president is trying to send in nominating someone with so little relevant experience or education is unclear, but speculation abounds.

The appointment also illustrates how little the general public cares about the Fed Board. Warsh's nomination is somewhat akin to Bush's failed nomination of Harriet Miers to the U.S. Supreme Court. Like Warsh, Miers worked in the White House and gained the president's confidence. By all accounts she was intelligent, hard-working and competent. But it also was clear that she was not well-qualified to sit on the nation's highest court.

Warsh apparently is bright — he graduated cum laude from Harvard Law School. He may have been quite competent in the few jobs he has held since leaving Harvard in 1995. He apparently earned the president's confidence in the three years he worked in the White House. No one alleges any wrongdoing on his part at any time.

But in terms of education and experience, Warsh is much less qualified than any other recent Fed appointee. He has a law degree but little training in economics. His experience consists of seven years with investment bank Morgan Stanley and three years in an administrative position on the National Economic Council. At 35, he is the youngest person ever nominated as a governor since the Fed was created in 1913 and the one with the fewest evident qualifications.

Yet, in contrast to the firestorm of criticism ignited by the Miers nomination, Warsh was confirmed without ever appearing on the national radar screen. Specialized business media like the Wall Street Journal and Bloomberg News did cover his nomination and raised the issue of his qualifications. Some quoted harsh comments by former Fed Vice Chairman Preston Martin, a Reagan appointee, on Warsh's inexperience.

Others noted the new governor's father-in-law, Ronald Lauder, son of cosmetics entrepreneur Estee Lauder, has donated large sums to the Republican Party in recent years. This is the first time in history that there is even a hint that campaign contributions played any part in a Board of Governors appointment. But general news media didn't pick up on the story.

The interesting backdrop is that Roger Ferguson, the sitting vice chairman, resigned at the same time Warsh was confirmed. Ferguson was the last Clinton appointee on the board. When he is replaced, President Bush will be the first president since Franklin Roosevelt to have appointed all seven governors.

This is not the intention of the law. Governors theoretically are appointed to 14-year terms. One such term expires on Jan. 31 of even-numbered years. Even two-term presidents can only nominate the majority to the board near the end of an eight-year presidency.

In practice, few governors stick out a full term, however. Most resign to pursue other interests. Thus, Bush not only has named a four-vote majority, but also all seven members. And, he has nearly three years to go as president.

That brings us to what message the Warsh appointment sends. Critics warn that the board will now be a complacent lapdog of the administration, keeping quiet about budget deficits and suppressing interest rate increases that might be unwelcome at 1600 Pennsylvania Ave. The fact that three Bush appointees served directly on the White House's economic staff compounds such anxieties.

A few supply-side gurus share the same belief, but hail it as good news. For them, all of the old academic fuddy-duddies have been swept away. The coast is now clear for a supply-side campaign — i.e., continued tax cuts for the rich and a blasé attitude about budget deficits — unhampered by a benighted central bank.

Others interpret the appointment as a sign that the administration has scant respect for the Fed Board. Some think it is considered an unimportant backwater, like the Federal Emergency Management Agency, that can serve as a haven for political favorites who need a cushy position.

Still others see evidence that the Bush administration is hard-pressed to find respected economists who support its economic policy. Even many economists who are staunch Republicans are uneasy about the administration's expansion of non-defense spending and its unwillingness to rein in deficits.

I don't worry that the Fed will become a complacent respondent to White House economic initiatives. Despite the fact they are Bush appointees, new Chairman Ben Bernanke and new governor Randall Kroszner of the University of Chicago are fine economists. And Donald Kohn, promoted from the ranks at the Fed, is no dove in monetary policy matters.

In any case, the District Bank presidents who also participate in Federal Open Market Committee meetings are not political appointees, ideological flakes or fools. Once again, the dispersed power structure of the Fed system will safeguard the nation.

St. Paul economist and writer Edward Lotterman can be reached at

Bernanke comes from the Greenspan school of economics and his qualifications are unquestionable. So I don't forsee him getting into a pissing match with Warsh. Let's face it, he could probably crush Warsh with just one of his testicles. I have to admit I would love to see a fight break out between the Bush appointees and Bernanke and his crew.