Nine economic thoughts to nibble on as you recover from Thanksgiving dinner.

Commentary about business and finance.
Nov. 30 2010 5:29 PM

A Financial Party Platter

Nine economic thoughts to nibble on as you recover from Thanksgiving dinner.

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So … let's just fix it!

Is Uncle Sam a party to fraud? My pal John Ferguson used to work at Bank United, which was taken over by the Federal Deposit Insurance Company in the largest bank failure of 2009. The bank found new private-equity owners and is now preparing for an IPO. Its bailout cost taxpayers about $5.7 billion, according to one lawsuit. As of Sept. 30, the bank reported $1.82 billion in late or unpaid loans, representing 44.6 percent of its total loans. Almost all of that was absorbed by the FDIC in a loss-sharing agreement.

Ferguson writes:

What bothers me about this deal is that the FDIC has looked at most of these loans and they know that they were done fraudulently or, at the very least, not done in the best interest of the borrower. If that is the case then, how can the FDIC not only allow the bank to foreclose on these homeowners, but reward the bank when it forecloses by guaranteeing the losses with the loss sharing agreement?

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Seems like a good question!

Do lower taxes really lead to increased economic growth?Again from David Pesikoff, who is using data from the St. Louis Fed in real dollars: "From the 1990 recession to the next one in 2000, we gained 18 million jobs, trough to trough. From 2000 to 2009, trough to trough, we gained 3 million jobs. From 1947 to 2000, growth in gross domestic product was 3.6% compounded. From 2000-2010, growth in GDP will be about 1.6% compounded." Pesikoff points out that had we kept up the 3.6 percent growth rate (which occurred during an era when, most of the time, the top marginal income-tax rate was 70 to 90 percent), we'd have grown our economy by about $3 trillion more than we did during the previous decade (when the top marginal income-tax rate was a mere 35 percent). True, there are a lot of variables that have affected growth, and lower taxes may not be the problem. But are they the solution?

Fannie Mae and Freddie Mac can't be killed. Bill Maloni, Fannie's former chief lobbyist, writes an acerbic blog about these much-maligned "government sponsored enterprises," which pioneered the securitization of home mortgages. (Thanks to the collapse of the mortgage market, the GSEs have also, since Sept. 2008, been government-owned.) In a Nov. 29 dispatch ("Cats and Dogs"), Maloni wrote:

Good for Rep. Spencer Bachus (R-Ala.), who reports to friends that the House GOP Caucus will name him Chairman of House Financial Services, despite all of the GOP unhappiness with him when he was ranking member. All of [their] Lilliputians seeking to chop Bachus off at the ankles have gone onto other things. (Keep walking Michele Bachman (R-Minn)!) I've suggested that Bachus will rule over a restive Financial Services Committee with his party dying to tear apart Fannie and Freddie, but not being able to do so until they have a viable alternative in place and "therein lies the rub!"

Indeed. Won't it be hugely amusing to watch the newly Republican House try to make good on its promises to get rid of the crippled beasts that also happen to be the only things supporting the housing market?

State and local governments are propping up the U.S. economy.Former Merrill Lynch economist Dave Rosenberg now serves as the chief economist at the Canadian wealth-management firm Gluskin Sheff, where he pens a daily digest (registration required). On Nov. 22 he wrote: "What I think is being underestimated by the growth bulls is that the fiscal disarray at the state and local government is a major headwind for the U.S. economy." At 13 percent of GDP, Rosenberg writes, spending by states, cities, and counties "is the second largest contributor to spending outside of the American consumer." But now state and local governments are at least trying to get their financial house in order. Should they succeed, that will be good news for bond holders (see above) but not necessarily good news in the short term for everyone else. Rosenberg notes that in mid-November when technology giant Cisco announced results that did not make investors happy, it blamed (in part) lower spending by state and local governments.

Have yourself a disappointing little Christmas. On Nov. 24, Rosenberg wrote: