Homebuyer Tax Credit Outperformed Cash for Clunkers

a huge negative bang for the money...

$8,000 homebuyer tax credit offered by the Obama administration is "exceptionally inefficient", costing taxpayers $80,000 per every additional house sold, according to an analyst at Stifel Nicolaus & Co.

That's quite a negative bang for the money. If you recall, $4,000 cash for clunkers cost taxpayers $24,000 per every additional car sold. This homeowner tax credit program is vastly outdoing the cash for clunkers in terms of loss for the U.S. taxpayers.

Homebuyer Tax Credits ‘Exceptionally Inefficient’: Chart of Day
(David Wilson, 1/7/2010 Bloomberg)

"Tax credits designed to revive the U.S. housing industry are costing taxpayers as much as $80,000 for every additional home sold, according to Michael R. Widner, a Stifel Nicolaus & Co. analyst.

"The federal program is “an exceptionally inefficient use of tax dollars,” Widner wrote yesterday in a report. He estimated the total cost through last November at $17 billion, “a high price to us for relatively little benefit.”

"The CHART OF THE DAY shows existing-home sales would have fallen at a 2 percent annual rate in the three months ended in November without the credits, based on his estimates. Instead, the pace rose 28 percent, according to data from the National Association of Realtors. Resales accounted for 92 percent of homes sold during the past 12 months.

"Widner estimated that 1.83 million new and existing homes were sold to first-time buyers last year through November, and only 303,000 of them changed hands because of the tax benefit. The $80,000 figure reflects his assumption that 30 percent of the added sales would have been made this year, not in 2009."

In other words, 70% of 303,000 houses changed hands in 2009, for $17 billion tax credit. That is indeed $80,000 per additional house.

Talk about taking the money from the poor and give it to the rich. In this case, take the money from the taxpayers who have little to no political clout, give it to the housing industries with huge lobby and political connections.

That's the way the (government) money goes, pop goes the weasel...

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M3 Contraction and Japanese Sovereign Bond Crisis?

I don't think so.

Amrose Evans-Pritchard of Telegraph UK is known for writing cheerful topics like global depression and deflation (he is a deflationist) and coming fiscal, economic, and social crises if not downright catastrophe. In this article from January 4, 2010, probably intended as his New Year prediction, he argues that the sovereign debt crisis will be triggered by Japan, and that will finally stop the bear market rally of the global stock markets.

I regularly follow and read his writings (as you see the box to the left that has the feeds). But I have some problems with this one.

Global bear rally will deflate as Japan leads world in sovereign bond crisis (Ambrose Evans-Pritchard, 1/4/2010 Telegraph)

"The contraction of M3 money in the US and Europe over the last six months will slowly puncture economic recovery as 2010 unfolds, with the time-honoured lag of a year or so. Ben Bernanke will be caught off guard, just as he was in mid-2008 when the Fed drove straight through a red warning light with talk of imminent rate rises – the final error that triggered the implosion of Lehman, AIG, and the Western banking system. "

Right off the bat, I have a problem. He talks about M3 contraction in US and Europe. As you may know, the Federal Reserve stop publishing M3. But that's not my problem. Is M3 really contracting, as he says?

ECB (European Central Bank)'s definition of M3 is slightly different from the U.S. counterpart. It includes:

• Currency in circulation (M1, 2, 3)
• Overnight deposits (M1, 2, 3)
• Deposits with an agreed maturity up to 2 years (M2, 3)
• Deposits redeemable at a period of notice up to 3 months (M2, 3)
• Repurchase agreements (M3)
• Money market fund (MMF) shares/units (M3)
• Debt securities up to 2 years (M3)
  (Source: ECB's definition of Euro area monetary aggregate)

And here's the latest Euro area M3 numbers compiled by ECB. Do you see "contraction"? It was pretty much flat all year, but to call that a "contraction" is like calling a flat day in the stock market a rally because it didn't go down.

How about M3 in the U.S.? M3 is M2 plus large time deposits, institutional money market mutual fund balances, deposits of eurodollars and repurchase agreements (Wikipedia.org). Let's take a look at M2 chart at St. Louis Fed:

In both Europe and the U.S., monetary aggregates didn't contract in the last six months at all. The rate of change may have been decreased or gone slightly negative (in case of EU), but to call that a contraction is really stretching it.

My next problem is this:

"Weak sovereigns will buckle. The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.

"Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE. The country will flip from deflation to incipient hyperinflation. The yen will fall out of bed, outdoing China's yuan in the beggar-thy-neighbour race to the bottom..."

Too bad Fujii just resigned, and the post has gone to probably the worst possible person (in my opinion) in the administration: Naoto Kan. While Mr. Kan may be just the right person for Evans-Pritchard (extremely temperamental Mr. Kan wants weaker yen, more deficit spending), again that's not my problem. It's about Evans-Pritchard's contention that Japanese government cannot sell bonds at 1%.

Who buys Japanese sovereign bonds?

Unlike US Treasury notes and bonds, almost all Japanese sovereign bonds are purchased in Japan by Japanese financial institutions (banks, postal banks, insurance companies, pension funds). Overseas buyers make up less than 4%, compared to over 30% for the U.S. Treasuries. The Japanese government has been trying to push "Kokusai" (sovereign bonds) to the general public, but the reception has been cool mostly due to the super-low interest rate. The issuance of the bonds more than doubled in the past 10 years, but the rates hardly budged.

If indeed the government has to raise rates to attract more buyers, then the general public may finally start to buy. It may finally drive up the rates for bank CDs, and people may be able to save again. Inflation? What inflation? Japan's population is decreasing, and the rate of decrease will accelerate. I don't think much inflation can happen without population pressure.

In the past 20 years, much household wealth was destroyed in Japan not from ongoing recession and deflation but from super-low interest rates. In their effort to preserve and increase their wealth as best they could, ordinary people were forced to chase the high-yielding investments such as CDs in US dollar. That carry trade by numerous households has spectacularly backfired. They were also driven into mutual funds that invested in U.S. commercial real estate, as these funds were sold by neighborhood banks as "safe and high yielding".

They would welcome bonds and CDs that would yield 5%. That would absorb money in circulation, therefore non-inflationary.

For Japan to flip from deflation to hyperinflation, it would need some other disaster than the government issuing more debt or Mr. Kan becoming the finance minister.

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Basis for 'Barbarous Relic' Won, over Dow and Dollar

Gold that is, and silver is not far behind.

Over the past 10 years, Dow Jones Industrial Average is pretty much flat to slightly down, U.S. dollar has lost about 25%. Gold is up almost 300%, silver is up about 230%.

To be sure, John Maynard Keynes called the gold standard 'barbarous relic', not gold itself.


James Turk, founder of GoldMoney, writing more than 5 years ago in this article, says the real 'barbarous relic' is central banking. I tend to agree.

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To Deflationists: Don't Cite Japan as America's Future

Japan may have no choice, with dwindling population.

There is a battle going on, increasingly on the blogsphere, between so-called deflationists and so-called inflationists. Most of them talk about price inflation/deflation, while others talk strictly about monetary inflation/deflation. Some switch between the two to fit their argument of the moment.

One of the arguments by so-called deflationists is Japan. Look at Japan, they've been doing for two full decades what the U.S. has started to do (QE, near-zero interest rate to help big banks repair their battered balance sheet, etc.) and what have they got? Price deflation!

It doesn't quite matter to them that price deflation in Japan (called "price destruction" in Japan) has never been more than 2% on the annual basis.

The new Japanese administration, just like the old one and just like the new one in the U.S., is frantically trying to re-inflate, calling deflation "unacceptable". But Japan, compared to the U.S., has one fatal (I think) disadvantage in their misguided effort to re-inflate: Population decline.

Population in Japan decreased for the 3rd straight year
(1/1/2010 Yomiuri Shinbun; original is in Japanese)

"According to the estimate by the Ministry of Health, Labor and Welfare, the number of deaths in Japan in 2009 exceeded the number of births by 75,000, making it a third straight year of population decline.

"The difference of 75,000 is the largest since the end of World War II.

"In 2009, there were 1,144,000 deaths (increase of 2,000 from previous year) and 1,069,000 births (decrease of 22,000 from previous year). Japan's population started to decrease in 2005 for the first time since the end of World War II.

"The Ministry officials believe the pace of population decline will accelerate further."

With ever-decreasing population, demands for goods and services naturally decline. What could the providers of goods and services do, other than to lower the prices to entice the dwindling number of buyers?

I wouldn't be surprised if Prime Minister Hatoyama tried to spin this population decline as a "wave of the future" for a sustainable, greener world.

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More on Diplomatic Immunity to INTERPOL

More on the amendment of Executive Order 12425, done very very quietly by President Obama on December 16, 2009, as this blog mentioned in this post on December 31, 2009. The amendment, if you recall, will give full diplomatic immunity to INTERPOL.

Executive Order Amended to Immunize INTERPOL In America - Is The ICC Next? (Steve Schippert, Clyde Middleton, 12/23/09 ThreatsWatch.org)

The article, in its "Conclusion" section, has this to say:

"....... In light of what we know and can observe, it is our logical conclusion that President Obama's Executive Order amending President Ronald Reagans' 1983 EO 12425 and placing INTERPOL above the United States Constitution and beyond the legal reach of our own top law enforcement is a precursor to more damaging moves.

"The pre-requisite conditions regarding the Iraq withdrawal and the Guantanamo Bay terrorist detention facility closure will continue their course. meanwhile, the next move from President Obama is likely an attempt to dissolve the agreements made between President Bush and other states preventing them from turning over American military forces to the ICC (via INTERPOL) for war crimes or any other prosecutions.

"When the paths on the road map converge - Iraq withdrawal, Guantánamo closure, perceived American image improved internationally, and an empowered INTERPOL in the United States - it is probable that President Barack Obama will once again make America a signatory to the International Criminal Court. It will be a move that surrenders American sovereignty to an international body whose INTERPOL enforcement arm has already been elevated above the Constitution and American domestic law enforcement.

"For an added and disturbing wrinkle, INTERPOL's central operations office in the United States is within our own Justice Department offices. They are American law enforcement officers working under the aegis of INTERPOL within our own Justice Department. That they now operate with full diplomatic immunity and with "inviolable archives" from within our own buildings should send red flags soaring into the clouds." [emphasis is mine]

American law enforcement officers working within the U.S. Justice Department? That I had to check.

It turns out that the article is correct. Within the U.S. Justice Department, there is indeed the U.S. National Central Bureau of INTERPOL (USNCB). On its "Who We Are" page, they say:

"The USNCB is a component of the U.S. Department of Justice, and is co-managed by the Departments of Justice and Homeland Security pursuant to a memorandum of understanding between the Departments.

"The USNCB is comprised of permanent employees of the Department of Justice and staff detailed from other agencies. Agents, including the USNCB Director and Deputy Director, are detailed to the USNCB from federal and state law enforcement agencies for specified terms. Agents at USNCB are assigned to work in divisions dedicated to specific investigative areas." [emphasis is mine]

The law enforcement agencies detailed to the USNBC are also listed, and they are:

• Bureau of Alcohol, Tobacco Firearms, and Explosives (ATF)
• Bureau of Customs and Border Protection (CBP)
• U.S. Immigration and Customs Enforcement (ICE)
• Drug Enforcement Administration (DEA)
• Environmental Protection Agency (EPA)
• Federal Bureau of Investigation (FBI)
• Transportation Security Administration (TSA)
• U.S. Coast Guard (USCG)
• U.S. Department of State (DOS)
• U.S. Food and Drug Administration (FDA)
• U.S. Marshals Service (USMS)
• U.S. Postal Inspection Service
• U.S. Secret Service

(EPA and FDA?? Why not throwing in the rest of the executive branch? )

These American agents working for INTERPOL will now have full diplomatic immunity and won't be accountable under the U.S. Constitution.

(And since USNCB is conveniently located within the Justice Department, it would be very easy to move data/documents from the Justice Department to INTERPOL, thus making such data/documents protected by full diplomatic immunity. Oh but they wouldn't do such a thing, would they?)

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Now We Have HAFA within HAMP to Stem the Housing Crisis

In plainer language, we have the Home Affordable Foreclosure Alternatives Program, a new program announced on November 30, 2009, which is part of the Home Affordable Modification Program courtesy of the U.S. Treasury Department under Obama Administration.

Home Affordable Foreclosure Alternatives Program (HAFA)
(National Association of Realtors)

"On November 30, 2009, the Treasury Department released guidelines and forms for its new Home Affordable Foreclosure Alternatives Program (HAFA). HAFA is part of the Home Affordable Modification Program (HAMP). HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure (DIL) used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA. A list of servicers participating in HAMP is available at MakingHomeAffordable.gov.

"HAFA applies to loans not owned or guaranteed by Fannie Mae or Freddie Mac, which will issue their own versions of HAFA in coming weeks."

HAFA seems to be in response to the criticism that the administration's loan modification program (HAMP) is not working. The article lists the program features of HAFA in bullet points. They include:

• Allows borrowers to receive pre-approved short sales terms before listing the property (including the minimum acceptable net proceeds).
• Prohibits the servicers from requiring a reduction in the real estate commission agreed upon in the listing agreement (up to 6 percent).
• Requires borrowers to be fully released from future liability for the first mortgage debt (no cash contribution, promissory note, or deficiency judgment is allowed).
• Provides financial incentives: $1,500 for borrower relocation assistance; $1,000 for servicers to cover administrative and processing costs; and up to $1,000 for investors for allowing a total of up to $3,000 in short sale proceeds to be distributed to subordinate lien holders (on a one-for-three matching basis).

The 2nd bullet point looks like the result of lobbying effort by the realtors. But that aside, my question is: What's in it for investors?

Other than up to $1,000 for giving some scraps for the 2nd lien holders?

I think I know the answer.

Many investors who bought distressed mortgages may be already backstopped by FDIC. If a house is foreclosed or sold on a short-sale, and if the realized amount from foreclosure/short-sale is less than the amount the borrower owes on the house, the investors of the loan will receive 80 to 95% of the difference from FDIC under loss share agreement like the one FDIC has with the investors who purchased IndyMac. (FDIC is, by the way as you know, broke).

The kicker here is that these investors probably paid for a fraction on a dollar for these mortgages. If FDIC's asset liquidation is any indication, they are sold at anything from 3 cents on a dollar (non-performing) to 70 cents (performing) on a dollar.

Let's say here's a house in danger of foreclosure. The mortgage outstanding on the house is $500,000. The market value is determined to be $350,000. Now the investors agree to a short sale at that price. To compensate for the loss, FDIC will give $120,000 (80% of $150,000 loss) to the investors. But wait! These investors purchased this mortgage at $250,000 (50 cents on a dollar). So by agreeing to sell the house at $350,000, they will already have made $100,000. On top of that, FDIC will give another $120,000. Total of $220,000 profit on $250,000 investment. 88% return. The return would be much higher if they used leverage (PPIP anyone?).

With such a perverse incentive in place, investors don't have much interest in loan modification; they would rather foreclose and pocket the quick money than going through a slow process of loan modification. So now the government has stepped in again and is telling the servicers/investors to be a little less greedy; instead of foreclosing, how about short-sale? "You will still get compensated for your "loss", but it may just take a bit longer. It will make you look good in the eyes of distressed homeowners, you know, if you give the appearance of taking some hit ..."

Now, the next question is: Who are these investors?

Or put it another way: Do you know who owns your mortgage?

At this point, it is very safe to assume the bank who gave you the mortgage no longer owns it. It's been sold long time ago. Occasionally, you may get to know who owns your mortgage when there's a change of a loan servicer. Then you may get to know that your loan is actually owned by a bank other than the originating bank, Fannie Mae or Freddie Mac (the wards of the state who have just been given an unlimited ATM card by Uncle Sam), a hedge fund that manages billions of dollars, or that your loan has probably been turned into some kind of securities (MBS, CDO, squared, cubed, who knows) as you may see a combination of alphabets and numbers as the investor.

A hedge fund manager has this to say in a New York Times article ("U.S. Loan Effort Is Seen as Adding to Housing Woes" 1/1/2010) about "clearing the housing market" by allowing foreclosure and short sale:

“The choice we appear to be making is trying to modify our way out of this, which has the effect of lengthening the crisis,” said Kevin Katari, managing member of Watershed Asset Management, a San Francisco-based hedge fund. “We have simply slowed the foreclosure pipeline, with people staying in houses they are ultimately not going to be able to afford anyway.”

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

Yes, that may be all true. But it is probably a good bet that his firm is invested in residential mortgages outright or in a securitized form, which they probably purchased on the cheap. He'd rather see his fat profit sooner than later, wouldn't you think?

So, again and again, the government is there for the big boys, making sure that they profit handsomely.

What will the distressed homeowners get after the short sale under this HAFA? No house, battered credit record, and $1500 for relocation. Oh and the peace of mind that the first lien holder cannot come after you for deficiency. No guarantee though of the 2nd lien holder...

Here's the link to the November 30, 2009 Supplemental Directive announcing HAFA within HAMP (27 pages of the total 43 pages are sample forms and exhibits).

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How to Stick It to the Too-Big-To-Fail Banks

Move your money.

"Withdrawal Tax": How to Stick It to the Big Banks That Got Bailed Out, and Make Money While You're at It. Pass It On! (Gary North, 1/2/2010 Gary North's Specific Answers)

"The Huffington Post has come up with a nice little protest movement. Let's pull our money out the the bailed-out banks and put it in local banks that lend to locals. Who are the locals? People just like us.

"This makes sense economically. If you ever want a loan, get it from your own banker. If it's a local bank, you will be treated well.

"The FDIC insures all accounts up to $250,000. Your money is as safe in a local bank as a bailed-out mega-bank.

"The folks at Huffington are on the Left. But we can all agree when we see insider bailouts like the ones in September and October 2008.

"They have produced a video. This video is biased, mean-spirited, and simplistic I love it! The more of these low-budget YouTube videos on the Big Bank bailout, the better.

"The bankers are on the defensive. Let's keep them there."

The article continues. The Huffingto Post article is this, and the video Huffington Post created is this:

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Happy New Year!

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Holiday Gifts for Americans: Lumps of Coal

It looks like Americans got the proverbial lump of coal for the holiday gift from their government.

It started in the week before the Christmas week, but the news quietly spread on the Internet during the Christmas week.

Did Obama exempt Interpol from same legal constraints as American law-enforcement? (12/23/09 Hot Air)

The president of the United States did that on December 16 by amending Executive Order 12425 signed by President Reagan and removing the exceptions in the original Order. Mainstream media didn't report. It was bloggers who caught it.

"In Executive Order 12425, Reagan made two exceptions to that status. The first had to do with taxation, but the second was to make sure that Interpol had the same accountability for its actions as American law enforcement — namely, they had to produce records when demanded by courts and could not have immunity for their actions."

Now that's gone, thanks to the presidential signature. Interpol can do whatever it wants in the U.S., and they don't have to tell anyone why they are doing what they are doing.

Then, on Christmas Eve, we were greeted with two pieces of joyful news. First, in the very early morning,

Senate Passes Health Bill (12/24/09 Politico Live Pulse)

So now we have a new "right" - a right to health care insurance. And we don't have a right not to have health care insurance. And the right will be forced upon us with penalties and taxes and jail-time. (Much like spreading "democracy" at gunpoint.)

Then, after the holiday-shortened stock market was closed, Treasury Secretary Timmy Geithner announced that the government was going to remove the $400 billion cap on aid to Fannie Mae and Freddie Mac, two of the three wards of the state (the third one being AIG):

A Lump of Coal from Treasury (Mark A. Calabria, 12/29/09 Cato Institute)

The existing limit was $200 billion each, total $400 billion. Now the federal government will backstop the entire balance sheets of Fannie and Freddie, and that's over $5.5 trillion dollars. Cato Institute's article speculates that it is not for the support of the U.S. mortgage market but to support large holders (foreign and domestic) of Fannie and Freddie debt instruments.

On Christmas Day, a hilarity and ensuing dismay: a panty bomber struck and failed, and airline passengers get the punishment.

A son of a rich Nigerian banker was assisted by a sharply-dressed man at Schiphol airport in Amsterdam and boarded the plane without passport. Then, just before landing on Detroit, he tried to ignite explosives hidden in his underpants and failed.

As the result, all around the world, people are being subjected to lengthy and probably totally unnecessary pre-boarding checks and other potential intrusions into privacy like whole-body scan and behavioral profiling (whatever that means by this towering intellectual), and a bracelet that can zap you immobile if you are bad ("bad" defined by the panicky flight attendants?).

Then on December 30, a Bloomberg article revealed that Barney Frank's bill for financial overhaul (H.R. 4173) which passed the House include a generous help package for the too-big-to-fail banks: $4 trillion. U.S. taxpayers will have the privilege to pay for it one way (tax) or the other (inflation):

Bankers Get $4 Trillion Gift From Barney Frank (David Reilly, 12/29/09 Bloomberg)


Happy New Year.

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Geopolitical Zigsaw Puzzle You May Not Want to Solve

The U.S. was bombing Yemen at the express order from the U.S. president prior to the failed Christmas Day bomb attack.

The so-called Christmas Day panty bomber says there are more like him in Yemen. The Yemeni government says 300.

That bomber may have been aided by an Indian to board the plane in Amsterdam without a passport.

Another Indian was detained after the plane landed in Detroit.

A U.S. analyst contends that the American who aided the Mumbay bombing terrorists in November last year was a double agent of CIA.

Pakistan has arrested 5 Americans who allegedly tried to blow up a nuke plant in Pakistan.

The U.S. is probably fighting in the Central Asia "-stans" - Tajikistan, Uzbekistan and Kyrgyzstan as Afghan refugees flee to these countries.

On the Caspian Sea, Azerbaijan is threatening Armenia with war. To the north of these countries sits a U.S. ally, Georgia. To the south, Iran. North of Georgia is Russia.

Information that Iran was developing "neutron initiater" was determined by the U.S. intelligence to be a forgery concocted probably by the Israeli intelligence agency.

Israel is having the first-ever meeting of all Israeli envoys to discuss the country's options.

By the way, Yemen has been in a civil war between northern Shi'ites and southern Sunnis. In other words, it's a proxy war. (Iran is Shia. Saudi Arabia is Sunni. Mostly, that is.)

Iran is said to be getting (or trying to get) uranium from Kazakhstan.

Russia says it will develop a new set of nuclear weapons, in response to the sea-based missle shield by the U.S.. It also says it needs more weapons to deter the U.S. from doing whatever it wants in the world.

All these commotions - where are they being directed? I don't think the president of the U.S. has a clue. Vladimir Putin and Hu Jintao may.

Only 29% of Americans think the country is going in the right direction, and this newsletter writer says that's a real good sign of a prolonged bull market in the stocks.

I can't shake off the unsettling feeling that something bad and wicked is coming our way. Maybe it's just Mercury Retrograde.

There were two events which I thought would never happen in my lifetime. One was a severe stock market crash that would trigger a severe recession. The other was a world war. The first one happened.

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Bloomberg: French Constitutional Court Rejects Carbon Tax

After the disaster in Copenhagen, global warmers seem to have gone awfully quiet around the world. Now, the French constitutional court rejected a carbon emission tax as inequitable.

French Constitutional Court Rejects Carbon Tax
(12/30/09 Bloomberg)

"France’s constitutional court rejected a proposed tax on carbon emissions, saying a web of exemptions violated the principal of equality and rendered efforts to cut greenhouse gas emissions ineffective.

"The government said it will make new proposals on Jan. 20.

"The tax, which would have started on Jan. 1, was set at 17 euros ($24.38) per ton of carbon-dioxide emissions, President Nicolas Sarkozy said in September. To make the tax more palatable, he partially or fully exempted power plants, public transport, airlines, farming and fishing, as well as 1,018 older cement, steel and glass factories.

"In all, 93 percent of all industrial carbon emissions in France would have avoided paying the full tax, the constitutional court said in a decision published on its Web site. The tax would have fallen disproportionately on fuel for heating and cars, it said.

"“The court ruled that the system of exemptions, due to their extensive nature, were contrary to the objective of fighting global warming and contravene the principle of equality before the tax system,” the court said.

"The court rejected all the articles relating to the carbon tax in the government’s 2010 budget."

According to the article, it is the Socialist-led opposition who opposes the carbon tax in France, as hurting the poor and handicap employers.

The cap and trade scheme advocated by the U.S. administration and Democratic Congress is even worse. Polluting industries get to pass the cost of carbon credit to the consumers almost entirely, and the middleman (i.e. the government) get to skim off of the consumers by taking from some and giving it to others as subsidies and credits.

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Ben Stein's New Definition of Anti-Semitism

Anyone who opposes the U.S. government's interventionist foreign policy is anti-Semitic, according to Ben Stein, who appeared in CNN's Larry King Live. He did his best to smear the word over Ron Paul, who has always opposed the U.S. government's interventionist foreign policy.

Ben Stein Says Ron Paul Uses “Anti-Semitic Arguments”
(Thomas R. Eddlem, 12/29/09 New American)

The video of the show's segment is here:

Now, if being against the U.S. government foreign policy is anti-Semitic, as Mr. Stein says, does that mean the U.S. government is ... Semitic?

(Remember also, if you are against the government's domestic policies now, you are a racist.)

Or maybe Mr. Stein doesn't know what he's talking about. The last I remember seeing him was on a video from August 2007. He was one of the merry crew ridiculing Peter Schiff's "gloomy" view that the housing bubble was about to burst and investing in the financial firms would be a disaster. He was recommending buying Merrill Lynch at $76, such a bargain for such a well-run company.

By the way, there's a Facebook page set up to demand apology from Ben Stein.

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Bernanke's Exit Stragegy: Term Deposits

The Federal Reserve wants to create a term deposit facility as part of so-called "exit strategies" as outlined by the chairman Ben Bernanke.

Fed proposes term deposits to drain excess bank reserves
(12/28/09 AFP via Google)

"WASHINGTON — The US Federal Reserve proposed Monday the creation of a term-deposit facility for banks to drain some of the more than 1.0 trillion dollars in excess reserves from the banking system.

"The Fed said it was seeking public comment on proposed amendments to the reserve requirements for institutions eligible to receive earnings on their accounts at Federal Reserve Banks.

""Under the proposal, the Federal Reserve banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism," the central bank said in a statement.

""Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy," it said.

"Institutions holding term deposits would "receive earnings at a rate that would not exceed the general level of short-term interest rates," according to the Fed proposal." [The article continues.]

Offering financial institutions interest-bearing term deposits is one of Ben Bernanke's "exit strategies". (For more, please read my post from July, when Bernanke outlined his thinking in Wall Street Journal.)

The Federal Reserve has been paying interest on the banks' excess reserves since October last year. All this term deposit facility will do is to lock up the excess reserves for a period of time, instead of having them as excess reserves (which is good as cash, a demand deposit).

According to the attachment to the Federal Reserve's press release today,

• Term deposits will be made available by auctions.
• No early withdrawal allowed.
• Term deposits will be open to the branches and agencies of foreign banks.
• Maturities will not exceed 1 year, with majority from 1 month to 6 months.
• Institutions can use term deposits as collateral for the Fed discount window.
• Term deposits would receive a zero risk-weight for risk-based capital purposes.

The facility may temporarily transfer the excess reserves into the term deposits at the Federal Reserve, but that will do nothing to shrink the size of the Fed's balance sheet. The term deposits will sit on the Liabilities side of the balance sheet, the same side as the excess reserves.

I find it ironic that the term deposits would receive a zero risk-weight when the Federal Reserve is loaded with agency bonds and mortgage backed securities. That's one advantage of being a central bank, who can print money and who is effectively backstopped by the government (i.e. taxpayers).

What if the financial institutions decline the offer and would rather take the money out of the excess reserves or keep the money in the excess reserves? I suppose that's why the Federal Reserve is seeking comments from the very institutions whom it wants to use this facility and help manage the excess reserves lest they spill over into the real economy (aka Main Street). It is asking the financial institutions what it will take for them to continue to park their money (excess reserves) with the Fed.

Well I have to say, regardless of whether this can be considered as an "exit strategy" (I personally think this should be called "kicking the can further down the road"), the existence of the excess reserves at the Fed is real, not fictional, and the Fed is scared enough of its inflationary implications.

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And in Another Corner of Middle East...

I came across this curious bit of news. The website reporting this is an Iranian news site.

Israel summons envoys from all over the world (12/26/09 Presstv.ir)

"Israel's ambassadors and consuls generals from all over the world have been summoned to attend a conference to be held over global challenges facing Israel.

"The meeting to be attended in Jerusalem Al-Quds on December 27-31 is hosted by the Ministry of Foreign Affairs, headed by Deputy Prime Minister and Foreign Minister Avigdor Lieberman, the ministry reported on its website.

""The idea is to facilitate direct dialogue with the country's leaders, mutual updates on major diplomatic issues, and a discussion of action plans to deal with the challenges awaiting Israel in the international arena in the coming year, including the Iranian threat," it said." [The article continues.]

The Ministry of Foreign Affairs of Israel does indeed have such an announcement. The Ministry says this will be the "first-ever" conference of this nature.

(I will hold on to my call options on a double-long crude oil ETF, just in case.)

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Wag the Dog, for the Nth Time?

Yemen...., where did I read about the country just recently? In an obscure piece of news that got little publicity at that time (about 10 days ago, I believe), but it struck me as odd. Yemen? The news was that the U.S. military was bombing Yemen by the direct order from the U.S. president, killing civilians (but claiming the bombing killed a dozen Al-Quada leader, as usual).

This is what was reported in the semi-official White House PR organ, aka ABC News:

Obama Ordered U.S. Military Strike on Yemen Terrorists (undated, my best guess is 12/18/09, The Blotter from Brian Ross, ABC News)

"On orders from President Barack Obama, the U.S. military launched cruise missiles early Thursday against two suspected al-Qaeda sites in Yemen, administration officials told ABC News in a report broadcast on ABC World News with Charles Gibson.

"One of the targeted sites was a suspected al Qaeda training camp north of the capitol, Sanaa, and the second target was a location where officials said "an imminent attack against a U.S. asset was being planned."

"The Yemen attacks by the U.S. military represent a major escalation of the Obama administration's campaign against al Qaeda."

Reporter Brian Ross, in a video clip on the linked article, emphasizes the order came directly from Oval Office.

(Perhaps President Obama is getting ready for the next year's Nobel Peace Prize by further expanding the war on terror.)

Then, right on cue, the Christmas Day bomber, a son of a wealthy Nigerian banker, materializes, and says there are more like him coming from Yemen.

Curiously, two attorneys (husband and wife) who were on board the plane the Nigerian was trying to blow up claim they witnessed the bomber being assisted by a sharp-dressed man at the boarding gate in Amsterdam so that he could board the plane without a passport.

Something doesn't quite add up.

I'm not yet sure who benefits from all this or what agenda is being promoted while they wag this dog, but it is very clear who the immediate losers are: air travelers worldwide who are now being subjected to ridiculously lengthy and probably unnecessary pre-boarding screenings to prevent them from lighting up a firecracker or two in their pants.

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Short-Term Treasury Bills Lacking Interest Among Foreigners

if 13-week bill auction is any indication.

The U.S. Treasury Department will auction away the last big batch of Treasury bills and notes in the final week of this year. The total amount will probably exceed $200 billion (4-week bill amount yet to be announced), of which $118 billion will be Treasury notes of various durations.

I was making a mental note as I went through the recent auction results, and something felt disturbing (from Treasury Department's point of view, I suppose). So I checked the numbers. And here's the chart of 13-week bill auctions since October, plotting the Indirect Bidder (foreign buyers) Percentage and Bid to Cover Ratio.



13-week bill is a run-of-the-mill Treasury bill. The Treasury Department auctions this bill every single week along with 26-week bill and 4-week bill, to the tune of $30 billion in each auction. No one pays particular attention to the auction results of these short-duration bills. They are continuously rolled over to fund the operation of the federal government.

What I noticed was a rather steep, consecutive decline of the Indirect Bidder Percentage in 13-week bill auctions. Bid to Cover Ratio has also started to decline. Now, both Indirect Bidder Percentage and Bid to Cover Ratio sit below their respective 2-plus month support (dotted lines).

Foreign buyers of Treasuries have shifted to the shorter end, or so we have been told. They now seem to be also deserting the short maturity bills. Treasury Secretary Timmy Geithner has announced the Treasury's intention to increase the average maturity of all Treasuries from the current 49 months to 72 months. That means 7-year note, 10-year note, and 30-year bond issues will be significantly increased. The prices will be pressured. Will foreign buyers increase buying the longer-dated notes and bonds for better yields? Or, seeing that there may be no end in sight for the U.S. deficit spending, will they further decrease the long-term Treasuries holdings?

In the worst case, there will be few foreign buyers to be found for both short-term and long-term Treasuries. The vice chairman of the Chinese central bank has recently said, in no uncertain terms, that the world does not have money to continue to buy the U.S. debt.

Who is going to absorb the avalanche of long-term Treasuries, by the way? This immediately comes to my mind. I hope I'm wrong, but I have this sinking feeling that my hope is ill-founded.

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Merry Free-Market, Hard-Money, Libertarian Christmas!

and don't trust the government.

There are lessons to be learned from Christmas some two thousand-plus years ago, according to a merry (and heart-warming) piece written by Lew Rockwell eight years ago.

The Economic Lessons of Bethlehem (or Who Was the Inn Keeper?)
(Llewellyn H. Rockwell, Jr., 12/22/01 Lewrockwell.com) [emphasis is mine]

There's no room at the inn so they had to stay in a stable. (Cruel inn keeper!)

Far from being cruel, the inn keeper offered what he could to satisfy a customer. As a money-making private businessman, he would have no reason to turn away "this man of royal lineage and his beautiful, expecting bride."

"In any case, the second chapter of St. Luke doesn’t say that they were continually rejected at place after place. It tells of the charity of a single inn owner, perhaps the first person they encountered, who, after all, was a businessman. His inn was full, but he offered them what he had: the stable. There is no mention that the innkeeper charged the couple even one copper coin, though given his rights as a property owner, he certainly could have.

"It’s remarkable, then, to think that when the Word was made flesh with the birth of Jesus, it was through the intercessory work of a private businessman. Without his assistance, the story would have been very different indeed. People complain about the "commercialization" of Christmas, but clearly commerce was there from the beginning, playing an essential and laudable role."

Why were they in Bethlehem to begin with?

Because of the Roman emperor's decree that everyone be counted and taxed.

"It was because of a government decree that Mary and Joseph, and so many others like them, were traveling in the first place. They had to be uprooted for fear of the emperor’s census workers and tax collectors. And consider the costs of slogging all the way "from Galilee, out of the city of Nazareth, into Judea, unto the city of David," not to speak of the opportunity costs Joseph endured having to leave his own business. Thus we have another lesson: government’s use of coercive dictates distort the market."

What did Three Kings (or Three Wise Men, and Lew points out they are usually mutually exclusive) give?

Did they give the new parents some debased Roman coins? No. They gave them frankincense, gold, and myrrh. They give them hard assets of high value.

"These were the most rare items obtainable in that world in those times, and they must have commanded a very high market price.

"Far from rejecting them as extravagant, the Holy Family accepted them as gifts worthy of the Divine Messiah. Neither is there a record that suggests that the Holy Family paid any capital gains tax on them, though such gifts vastly increased their net wealth. Hence, another lesson: there is nothing immoral about wealth; wealth is something to be valued, owned privately, given and exchanged."

Herod wanted to know where Jesus was so that he could come and adore him.

Was that true? Not really. He wanted to kill him.

"...Roman Emperor's local enforcer, Herod. Not only did he order people to leave their homes and foot the bill for travel so that they could be taxed. Herod was also a liar: he told the Wise Men that he wanted to find Jesus so that he could "come and adore Him." In fact, Herod wanted to kill Him. Hence, another lesson: you can’t trust a political hack to tell the truth."

When they learned of Herod's plan to kill the newborn, what did Wise Men and the Holy Family do?

Were they resigned to the reality that the government did whatever it wanted anyway and there was no point in resisting? Hell no. Three Wise Men went home without telling Herod, and the Family fled.

"The Wise Men, being wise, snubbed Herod and "went back another way" – taking their lives in their hands (Herod conducted a furious search for them later). As for Mary and Joseph, an angel advised Joseph to "take the child and his mother, and fly into Egypt." In short, they resisted. Lesson number four: the angels are on the side of those who resist government."

"In the Gospel narratives, the role of private enterprise, and the evil of government power, only begin there. Jesus used commercial examples in his parables (e.g., laborers in the vineyard, the parable of the talents) and made it clear that he had come to save even such reviled sinners as tax collectors.

"And just as His birth was facilitated by the owner of an "inn," the same Greek word "kataluma" is employed to describe the location of the Last Supper before Jesus was crucified by the government. Thus, private enterprise was there from birth, through life, and to death, providing a refuge of safety and productivity, just as it has in ours."

Amen.

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Merry Christmas!

Wolfgang Amadeus Mozart "Regina Coeli" (KV276)

Despite the dismal news and commentary I post on this blog, I believe in human aspiration - aspire to achieve, to become, something higher than lowly, earth-bound self. I am not a Christian, but when I hear the music like this I believe in the ultimate goodness and nobleness of human beings, along with the composer who wrote the music and the performers throughout the ages who have sung the explosively joyous opening chord to praise the "Queen of Heaven".

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Supreme Court Guts Due Process Protection

while our attention is diverted to anything but this.

Supreme Court Guts Due Process Protection
(12/20/09 naked capitalism)

"Reader Walter passed along this distressing sighting from Chris Floyd’s blog. American civil liberties were gutted last week, and the media failed to take note of it.

"The development? If the president or one of his subordinates declares someone to be an “enemy combatant” (the 21st century version of “enemy of the state”) he is denied any protection of the law. So any trouble-maker (which means anyone) can be whisked away, incarcerated, tortured, “disappeared,” you name it. Floyd’s commentary:

"After hearing passionate arguments from the Obama Administration, the Supreme Court acquiesced to the president’s fervent request and, in a one-line ruling, let stand a lower court decision that declared torture an ordinary, expected consequence of military detention, while introducing a shocking new precedent for all future courts to follow: anyone who is arbitrarily declared a “suspected enemy combatant” by the president or his designated minions is no longer a “person.” They will simply cease to exist as a legal entity. They will have no inherent rights, no human rights, no legal standing whatsoever — save whatever modicum of process the government arbitrarily deigns to grant them from time to time, with its ever-shifting tribunals and show trials.

"It is hard to overstate the significance of this horrid decision. The fact that the Supreme Court authorized this land grab says we no longer have an independent judiciary, that the Supreme Court itself is gutting the protections supposedly provided by the legal system. Per Floyd:

"In fact, our most august defenders of the Constitution did not have to exert themselves in the slightest to eviscerate not merely 220 years of Constitutional jurisprudence but also centuries of agonizing effort to lift civilization a few inches out of the blood-soaked mire that is our common human legacy. They just had to write a single sentence."

It is not just about torture or indefinite detention of "enemy combatant". As the article says at the end, ANYONE can be deemed "enemy combatant" if a President of the United States and/or his underlings so declare:

"Yves here. The implications are FAR worse. Anyone can be stripped, with NO RECOURSE, of all their legal rights on a Presidential say so. Readers in the US no longer have any security under the law.

"Roman citizens enjoyed a right to a trial, a right of appeal, and could not be tortured, whipped, or executed except if found guilty of treason, and anyone charged with treason could demand a trial in Rome. We have regressed more than 2000 years with this appalling ruling. "

On the December 14, 2009 Order List of the U.S. Supreme Court, this is the one line that says the court has declined to hear the case and will let the prior ruling stand:

CERTIORARI DENIED

09-227 RASUL, SHAFIQ, ET AL. V. MYERS, RICHARD, ET AL.

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Rozeff: A 400 percent (and Higher) Excise Tax

America on the verge of mass insanity, says Professor Rozeff. The professor is talking about that stupid plan in Congress to tax all stock, option, futures transactions, which I have discussed on this blog here.

A 400 Percent (and Higher) Excise Tax
(Michael S. Rozeff, 12/21/09 Lewrockwell.com) [emphasis is mine]

"The Wall Street Journal brings more bad news. A headline reads "Lawmakers Weigh a Wall Street Tax." The first mention of this was in October. The proposal has not died as Congress seeks new ways to finance its profligate spending. Both houses are considering legislation.

"The tax would fall on financial exchanges of all kinds. It is not a tax on Wall Street. It is a tax on anyone who buys and sells securities.

"James Tobin originated the notion in the 1970s. Larry Summers supported it. Robert Kuttner supports it. That’s three Keynesian economists right there. It must be a bad idea."

The bill that has been introduced in the House would tax stock trading at 0.25% of transaction amount, and 0.02% on options, futures and other derivatives. I(it's not hard to guess who lobbied for lower tax for derivatives - Vampire Squid anyone?) The government's argument is that the tax is so small that ordinary investors won't be affected by it. I strongly disagree, as I've written in my previous posts, and Professor Rozeff also shows how costly this tax actually is:

"A well-known broker charges $7 a trade in any size and provides a more than satisfactory complement of other services. If a 0.25 percent tax goes in, the cost of a $10,000 trade becomes $32. The tax is 3.57 times the brokerage cost of $7. This is an excise tax of 357 percent on this size trade. For a $100,000 trade, the cost is $257. The tax is 35.7 times the cost of $7. The excise tax rate is 3,570 percent."

He notes that in the 1960s the cost to trade was very high, with commissions making up a large part of the cost (1%). After a few decades of efforts by industry participants, the cost to trade has come down significantly. But now the government wants to turn back the clock 40 years so that they can grab more from citizens.

The first $100,000 worth of transaction would be tax-exempt, according to the House bill. But guess what? Even a small-time investors/speculator can use up that exemption in one day, if not in one hour. How? Just by buying, say 100 shares of Google at $594, selling it the next day when it pops up to $620. Roundtrip transaction of $121,400 to net $2600 profit. Now you will have already exceeded your annual tax exemption allowance in just one roundtrip trade.

More importantly, though, Professor Rozeff points out the detrimental effect of the tax on stabilizing the financial markets:

"This tax is as bad as a capital gains tax. The latter discourages investors from moving capital around freely. It discourages risk-taking. It discourages moving out of less and into more productive projects. The tax on financial transactions does the same.

"This tax makes markets far less liquid. There will be fewer buyers and sellers. Bid-ask spreads will rise steeply."

"Lawmakers probably do not realize that a large fraction of the capital stock of corporations is carried by short-term speculators, due to the uncertainties of business. Turnover is high on many stocks because of unwillingness to hold long-term positions under conditions of high uncertainty. If short-term speculators are driven from the market, as this tax will do, then long-term speculators will have to take and hold the stock. They will demand a higher risk premium as they are made to depart from their preferred portfolio holdings. This will drive up capital costs to corporations. This will slow down capital accumulation and growth. This will lower employment and wages.

"Low transactions costs bring both uninformed and informed investors into the market. But the uninformed tend to be weeded out because they lose money. With a transactions tax in place of this size, the informed traders will also be far more reluctant to trade. The bounds within which prices trade will become that much larger. They will become all the worse as signals of value to corporate managers. Investors who attempt to buy and sell in quantity or rapidly will find prices changing due to their own trades, even if they possess no special information."

The professor then quotes a passage in the Wall Street Journal article which quotes the trading tax's advocates and calls it baloney and claptrap:

"The Journal article dutifully reports a mass of lies and totally erroneous ideas of the advocates of the tax:

"Congressional advocates describe the new tax as a matter of fairness: Taxpayers bailed out Wall Street, so Wall Street must help rebuild the economy and shore up the government’s shaky finances. Some experts say the tax also might help reduce market volatility."

"Is it fair to tax innocent investors and brokers who have worked to bring down costs? Is it fair to label them as "Wall Street?" Is it fair for the government to have paid off big banks and the likes of Goldman Sachs in the first place? Is it fair to turn around and then tax investors as if they were the ones who were responsible for doing something wrong? Can such a tax rebuild the economy?"

The answers are no, no, no, no, and big NO.

The article ends with these sentences:

"America seems to be on the verge of mass insanity as Congress comes up with increasingly bad legislation. Can nothing stem the irrationality of American society and government?"

I don't know, Professor. It's not just Congress either. The president wins Nobel Peace Prize for expanding a war, the Federal Reserve chairman is "the man of the year" for bailing out big banks around the world at the expense of the U.S. taxpayers.

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