10.16.09

10.16.09

          The Treasury Department reported yesterday that the Federal budget deficit for fiscal year 2009, which ended September 30, was $1.42 trillion. That’s $1,420,000,000,000. That’s three times the previous one-year deficit. It amounts to more than India’s total economy. Over the last 12 months the U.S. has paid $190 billion ($190,000,000,000) just in interest on this debt.

          This unbelievable government spending has rescued the economy from a second ‘Great Depression’, bailing out the banking and auto industries, funding the continuation of two long and expensive wars, and helped save a number of Wall Street firms.

          Are things really improving now that the economy is supposedly on the mend? This September the government spent $46.6 billion more than it took in. So is the economy really in recovery, or is it just the government spending that’s creating that illusion? For awhile during the summer home sales picked up, before returning to recent monthly declines. It was first time home-buyers accounting for 30% of the home sales that created those four monthly increases in home sales. Was that temporary pick-up just the government buying houses? Didn’t the government make the FHA required 3.5% down-payment on the homes with the $8,000 buyer bonuses, and simply let the ‘buyers’ take possession to make the subsequent mortgage payments?

Auto sales also popped up for a couple of months, before plunging again.  But wasn’t that also just the government buying autos with its $4,500 ‘cash for clunkers’ program. The $4,500 more than made the required down-payment for people who wouldn’t have ordinarily bought a car. They are then allowed to own and drive the cars the government bought in exchange for making the balance of the monthly payments.

However, one area where the unprecedented government spending has made a real difference is with the handful of the nation’s largest banks. Those giant financial institutions that were rescued because they were deemed too big to fail, have been made even larger by the government largesse. And while consumers, businesses, and the overall economy have been suffering over the last 12 months, those few, and I do mean few, major banks have prospered to almost an obscene degree.

          Investment banks, Goldman Sachs and JPMorgan Chase, were allowed to convert to bank holding companies. That gave them access to low-cost funding from the Federal Reserve that has always been available only to lending institutions, and allowed them to issue many $billions of dollars of FDIC guaranteed bonds. The Treasury Department (then under former Goldman CEO Hank Paulson), and the Federal Reserve, hoped the generosity of government funding and guarantees, would result in banks being willing to loan to consumers and businesses again. But instead, the banking giants are minting fortunes by using the money to trade stocks and bonds, fighting all efforts to get them back into the low-profit area of lending money. For instance, of Goldman Sachs 3rd quarter revenues of $12.4 billion, trading and investing accounted for $10.1 billion, while its core business operations slowed. So just 12 months after they were supposedly going under, the chosen few, and they are very few, are bigger than ever, are making huge profits by taking leveraged trading risks their smaller or less fortunate competitors, especially those with larger dependence on and ties to consumer and small business loans, wouldn’t dare take. They are paying back the TARP money to free themselves of restrictions so they can go back to paying themselves obscene salaries and bonuses, after only a one-year hiatus.

          But while the very few prosper, the vast majority of banks are in a different situation, more than 100 having gone under since early 2008, and more than 300 on the FDIC’s ‘troubled bank’ watch list. As demonstrated by their 3rd quarter earnings reports this week, even some of the behemoths, like Bank of America and Citigroup, with larger ties to consumer credit, are still struggling to recover.

          It not only bothers me that the chosen few that have been provided with humungous amounts of government funding and favoritism, are using it to go after trading profits for themselves, often with high risk derivatives, rather than lending to help the economy as was intended. It also bothers me that they are also the large program-trading firms that account for up to 40% of all the trading on the NYSE (and who knows how much of the Nasdaq’s volume, since the Nasdaq does not report that information).

          As is typical, program trading accounted for 30% of all the trading volume on the NYSE last week, and the top seven firms by volume engaging in it were Goldman Sachs, Morgan Stanley, Merrill Lynch, Barclays Capital, Deutsche Bank, Credit Suisse, and JPMorgan.  I feel that there is something that the Obama Administration can do to force these companies to do more lending to help the economy get up to speed again.

          For now, we are still waiting for better signs to allow us to get back into the market. We remain 100% in CASH.

Till next time

The MTA Staff