Speaking of gripes there are still no signs that the street in front of my house is going to be paved any time soon. Given the holiday weekend I’m guessing we won’t see anything until Tuesday at the latest. Let me put it this way. If a guy comes around putting up signs on Monday warning us to get our cars off the street for the construction crews, I’m going to be upset. Three weeks and counting.

If you can’t air your gripes on your blog, where can you air them? I’ve been a small business owner for 30 years. Before that I worked in various capacities for a series of companies ranging from tiny companeis to very, very large ones. In the thirty years that I’ve been a small business owners, I’ve had clients that were very, very small and clients that were among the very largest companies in the world.

When business is slow, you don’t just sit in your office and say “Boo hoo. Demand is low”. You hustle. You advertise. You develop new products and services. You hire salesmen. You improve your commission plan. You go door to door if necessary looking for new business.

That’s why I don’t understand the explanation of the low level of business investment as due to low demand. I don’t think that’s a sufficient explanation. I’m using that word advisedly. It may be necessary to explain low business investment but I don’t think it’s sufficient. There’s got to be something else at work.

Low ROI I can understand. Low appetite for risk-taking I can understand. Doing all of your investment overseas due to better opportunities I can understand. Not investing due to low demand I can’t understand.

In the wake of the frankly lousy monthly jobs report. I’ll add my contribution (which I’ve rescued from a comment I made to this post at OTB).

The NFIB, the largest organization of small businesses, conducts a regular survey of its members. The top three concerns of its members IIRC are (in this order) slow business (demand), the cost healthcare insurance, and the cost of compliance (regulations). Sure, slow business is a factor. But it’s not the only factor.

Notably, the guy that Alex quoted in his post at OTB is in the home construction business. Okay, let’s focus on that. What should the federal government do to promote demand for new homes? My answer: sweet fanny adams. There was a bubble. It collapsed. It will be a decade or more before home construction recovers, if ever. More than three hundred years later tulip bulb prices still haven’t returned to the heights they reached during the Tulip Craze.

The evidence that federal infrastructure spending promotes increasing hiring and spending on the part of small businesses is slim to none. The contracts tend to go to a small number of pretty good-sized businesses that don’t staff up to execute them. That’s the experience.

One last point. Small businesses per se aren’t responsible for most of the new job creation. New businesses are and most new businesses start small. The rate of creation of new businesses has been falling for decades. Why? I think that part of the answer is a decline in entrepeneurial spirit but I think that the other two answers are big businesses and big government. Big Government prefers to do business with Big Business and subsidizes it. Just look at the banking industry. Over the last four years the federal government has subsidized big banks to the tune of well over $1 trillion while closing thousands of small banks (thereby making the big banks bigger). Making big businesses bigger doesn’t create jobs.

Speaking of Mike Shedlock, take a look at the fabulous interactive graphic over at his place illustrating U. S. employment by county and business sector. Here’s a snapshot of what it shows for Cook County:

As you can see, the greatest job growth is in healthcare and education and the greatest declines in construction and manufacturing. Since healthcare and education are preponderantly dependent on government spending and, ultimately, government spending comes from the taxes extracted from the sectors of the economy that don’t depend on government spending, I don’t see this as a positive trend.

You can use Mish’s graphic to zoom in on the employment situation in your own county.

At Business Insider Mike Shedlock makes the case that the U. S. is already in recession:

The US is in a recession now. I am not the only one who thinks so.

Last Friday, I received an email from Rick Davis at Consumer Metrics, complete with an Excel spreadsheet that shows that had the GDP deflator been based on the consumer price index (CPI) rather than the BEA’s measure of price inflation, the US would already be in the second quarter of contraction.

It’s certainly no surprise. Based on my own favorite metric, the shopping mall parking lot-o-meter, a brand spanking new recession has been building for some time.

More anecdotal support: the owner of my local Chinese takeaway tells me that he’s never seen business so slow. He’s been operating for more than 50 years.

Public school teachers are starting to receive their first checks of the new school year. I wonder how many of them are seeing declines in take-home pay despite their step increases due to increases in their contributions for their healthcare?

The New York Times is reporting that the Federal Housing Finance Agency, which oversees the government sponsored enterprises Fannie Mae (FNMA) and Freddie Mac (FHLMC), will file suit nextweek against Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank among others for misrepresentation and failure to perform due diligence, leading the enterprises to lose billions:

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.

The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.

There are fears, probably well-founded fears, that the suit could put the banks, particularly Bank of America, at risk. In my view the error was in bailing them out in the first place. We can’t fix what’s wrong with our financial system by indemnifying the banks against risk and encouraging them to continue the practices which have put them at risk. But that’s, apparently, what we’ve been doing. According to an article in American Banker fraudulent practices in foreclosures on the part of banks continue:

Some of the largest mortgage servicers are still fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners.

The practice continues nearly a year after the companies were caught cutting corners in the robo-signing scandal and about six months after the industry began negotiating a settlement with state attorneys general investigating loan-servicing abuses.

Several dozen documents reviewed by American Banker show that as recently as August some of the largest U.S. banks, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc., and OneWest Financial Inc., were essentially backdating paperwork necessary to support their right to foreclose.

Some of documents reviewed by American Banker included signatures by current bank employees claiming to represent lenders that no longer exist.

Many banks are missing the original papers from when they securitized the mortgages, in some cases as long ago as 2005 and 2006, according to plaintiffs’ lawyers. They and some industry members say the related mortgage assignments, showing transfers from one lender to another, should have been completed and filed with document custodians at the time of transfer.

My reactions to these issues aren’t based on vindictiveness but, rather, on the simple observation that when you subsidize something you get more of it. We’ve been subsidizing these practices for decades and doing it on steroids since 2007.

Turn, turn any corner.
Hear, you must hear what the people say,
You know there’s something that’s goin’ on here,
That surely, surely, surely won’t stand the light of day.

Update

Yves Smith remarks:

The American Banker article, disappointingly, fails to discuss what these continued abuses mean. As we have stressed in repeated past posts, the failure to get the notes to the securitization trusts by the cutoff date is not fixable by any legitimate means. Do you think banks and law firms would continue to fabricate documents, particularly in the wake of so much harsh media and Congressional scrutiny, if they had any other way out?

The failure to get the notes to the securitization trust correctly does NOT mean that no one has the right to foreclose. It does mean that the party that can foreclose is someone earlier in the securitization chain who was paid for the note but in effect, no one bothered to collect it from him. No one wants that party to foreclose because, first, it would prove that the securitization did not have the note and investors were misled, and second, there is no way to get the proceeds into the trust for the benefit of the investors.

Yves’s first paragraph reminds me of one of my favorite movie lines from the old western The Comancheros:

Circuit Court Judge Thaddeus Jackson Breen: Major here has told me what your troubles are. I’ve been thinking it over and in light of my forty years experience in legal jurisprudence, I have come to the positive conclusion that there ain’t no way to do this legal and honest… but being good sensible Texans, we’ll do it illegal and dishonest! Now all the boys here in the room have agreed to sign a paper I have prepared. They all are going to commit perjury. That’s legal language for just a plain, dumb blasted lie.

which I think shows rare insight ino the legal process.

This is just a story about a tree. It’s not a parable or an allegory. It’s just a story about a tree.

Across the alley from us in a neighbor’s yard there’s a black walnut tree. It must be well over fifty years old. It was there and fully grown when we moved in more than a quarter century ago. You probably couldn’t have found a scrawnier, scruffier, scragglier walnut tree if you went out looking for them. It had lots of bare branches and many of the leaves it had were yellow and withered. Every year it produced a few walnuts and struggled on.

You see, the black walnut tree was overshadowed by a large oak tree. Very little sunlight made it through the oak tree’s thatch of leaves to make it to the walnut tree. Last year the oak tree died and our neighbors, prudently, had it removed. Suddenly, their yard was flooded with sunlight.

This year the walnut tree has no bare branches, has three times the foliage I’ve ever seen on it, and its leaves are vibrant, thick, and green. The alley has been deluged by a crop of walnuts. The squirrels are going, well, nuts and I suspect that the abundant walnut crop has contributed to the influx of rats we’ve noticed in the alley this year.

Inspired by comments

The Social Security Trustees Report for 2011 is now available, right on the dot. As was the case last year both Social Security and Medicare are in the red in the sense that what they’ve paid out in benefits exceeds what’s been taken in in revenues. I should warn you in advance that, if I were to use all of the quotation marks that would be necessary (because they’re quotations) for things that aren’t what they’re being called in the report, this post would rapidly become unreadable. It won’t be any too readable as it is: the Trustees Report is enough to make anybody’s eyes cross.

Suffice it to say that the Social Security Trust Fund is, by law, a stack of IOUs from the Treasury on which the Fund is paid interest (more on that later).

In 2010 the Trust Fund was in the red by $49 billion. In 2011 that figure declined to $46 billion. The increase on the expense side of the ledger was not unforeseen: more people are retiring and, consequently, receiving benefits and that’s been expected for more than sixty years. The decrease on the income side, due to the large number of people who are unemployed and, consequently, aren’t paying into the system, was less foreseen.

The significance of this comes when you look at it from a cashflow standpoint. As recently as 2007 Social Security was in the black to the tune of $180 billion per year—it was providing positive cashflow. Now it’s contributing to negative cashflow and is likely to do so for the foreseeable future. By 2036 Social Security is expected to have spent down its trust fund, be receiving no more interest on that trust fund, and be entirely dependent on tax income. BTW, if the federal government used any sort of reasonable accounting standards the surpluses of the second term of the Clinton Administration would vanish. They were largely due to the increases in the Social Security Trust Fund that occurred. Remember those IOUs? The actual cash goes into the Treasury.

I don’t think that the significance of this reversal from cashflow positive to cashflow negative can be overstated. It’s responsible for a big chunk of the deficit.

Medicare is, if anything, in even worse shape. Its expenditures exceeded its revenues (including interest) by roughly $60 billion in 2010, much, much more than Social Security with far fewer assets. That shortfall is anticipated to be about $70 billion in 2011 and, absent some major change in the plan, it will never go into the black again. The HI component of Medicare (the part that pays hospitals) is broke now.

Medicare expenses are growing at roughly 9% per year. When you add insolvency to rapidly growing costs, you understand the obsessive attention I’ve paid to healthcare reform over the years. Slowing Medicare expenses isn’t enough. It’s already broke. We’ve got to change the system and we’ve got to do it now.

Here’s how the trustees summarize the situation:

Projected long-run program costs for both Medicare and Social Security are not sustainable under currently scheduled financing, and will require legislative corrections if disruptive consequences for beneficiaries and taxpayers are to be avoided.

The financial challenges facing Social Security and Medicare should be addressed soon. If action is taken sooner rather than later, more options and more time will be available to phase in changes so that those affected can adequately prepare.

Bruce Krasting, who’s been on top of the Social Security and Medicare Trust Funds for a long time, points out the significance of the interest payments that the Social Security Trust Fund is receiving:

There is one interesting thing to consider with SS. They have this paper surplus called a Trust Fund. That Trust Fund earns paper interest. Lots of it. At the end of the year that fund will total $2.65 trillion. It will have an investment average maturity of 7 years. The rate of interest paid to SS is currently 4.25%.

Now consider that the Treasury yields today for 7 years is a measly 1.58%. The difference of 2.67% comes to a whopping $70 billion a year in “excess” interest being paid to SS.

If one applied this same thinking to SS’s sisters, (the Military and Federal Workers Funds) it comes to ~$4T of principal that we are (over) paying interest on. The excess interest on the whole mess that is referred to as the “Federal Pension Obligations” comes to a very important $100+ billion. Every Year!

I’m not sure what to make of this. Clearly society is providing a significant ON BUDGET subsidy to these programs (this alone is 7% of the deficit). At a time when everything else is getting ReFi-ed at lower rates (and savers are getting creamed on their holdings) there should be a discussion of the biggest ReFi of them all, the federal Trust Funds.

Or, said another way, the longterm solvency of Social Security is a pleasant fiction. If you claim to pay a high enough interest rate on such a large obligation you can come up with nearly any number you care to.

One of the ways in which I part company from Republicans is on Social Security. I think it’s necessary. If it didn’t exist we would need to create it. For at least half the population there is no realistic prospect that they can save enough or that there are investments sound enough that they could provide for their old age. And if we rely exclusively on the other half of the population (who would be doing their own saving for their retirements) to do the consuming that makes our economy tick it makes the prospects for that economy dim indeed.