Why Some Businesses Supports Indirect Taxes

The day after we filed to pay our income tax (direct taxes) and in reflection of the "across the board" tax increases (indirect taxes) that were pushed and past this last legislative session, it is good to reflect on why some business groups might have pushed for these widespread tax increases.

After I wrote yesterday's post, I read a selection from From Out of Step: The Autobiography of an Individualist, by Frank Chodorov; The Devin-Adair Company, New York, 1962, pp. 216-239 entitled Taxation is Robbery.  It is definitely worth reading, and I thought I would draw your attention to this piece in particular:

Tacit support for indirect taxation arises from another byproduct. Where a considerable outlay in taxes is a prerequisite for engaging in a business, large accumulations of capital have a distinct competitive advantage, and these capitalists could hardly be expected to advocate a lowering of the taxes. Any farmer can make whiskey, and many of them do; but the necessary investment in revenue stamps and various license fees makes the opening of a distillery and the organizing of distributive agencies a business only for large capital. Taxation has forced the individually-owned and congenial grog-shop to give way to the palatial bar under mortgage to the brewery or distillery. Likewise, the manufacture of cigarettes is concentrated in the hands of a few giant corporations by the help of our tax system; nearly three-quarters of the retail price of a package of cigarettes represents an outlay in taxes. It would be strange indeed if these interests were to voice opposition to such indirect taxes (which they never do) and the uninformed, inarticulate and unorganized consumer is forced to pay the higher price resulting from limited competition.

I know I'm on a big versus small kick that might seem to be getting old to some, but I think this theme deserves a lot more attention than the traditional partisan rhetoric. It is the shifting economic paradigm of our times.

The Big Against the Small Continued

I've noted time and time again that a change has occurred in America that is quite unsettling.  The dynamic shift that concerns me is the alignment of big business and big government interests against those of small businesses and individuals. Now, maybe this has always existed, but I don't think so - at least not to the level that is currently evident.

It used to be that government interests (tax collection and regulation) were contrary to the majority of business and individual interests, but this has now changed.  What has emerged is a return to days of old (i.e. landed aristocracy and ruling monarchs indenturing the masses and suppressing entrepreneurship).  Consider that "too big to fail" businesses are now encouraging increased taxation and regulation that will:

1. stifle competition from upstarts with regulatory barriers to entry
2. burden potential challengers with profit draining regulation
3. create new revenue streams by artificially increasing costs of individuals (think cap and trade)

The latest evidence of this trend is the new compliance focus of the IRS:

A new study by the Transactional Records Access Clearinghouse (TRAC) shows that despite a growing federal deficit, IRS audit efforts aimed at the nation's largest corporations have precipitously declined in the last few years and now are at an all time low.

According to Dean Zerbe, alliantgroup National Managing Director and former Tax Counsel on the Senate Finance Committee, "As if April 15th isn't frightening enough for small business owners, now comes news that the IRS has increased audit hours for small and medium businesses by 30% over the last five years, while at the same time decreasing the number of hours spent auditing large corporations by 33%."

Keep in mind, that taxpayer bailouts went to the largest of corporations.  Those same corporations are now reaping the rewards of free money:

For 2009, the Fortune 500 lifted earnings 335%, to $391 billion, a $301 billion jump that's the second largest in the list's 56-year history, approaching the increase in the robust recovery of 2003. 

Yet, this taxpayer investment into corporate profits has nothing to do with creating jobs for Mr. and Mrs. Taxpaying America.  In fact, the opposite has held true:

The number of Americans filing for unemployment insurance for the first time jumped for the second week in a row, according to government data released Thursday.

There were 484,000 initial jobless claims filed in the week ended April 10, up 24,000 from an unrevised 460,000 the previous week, according to the Labor Department's weekly report. 

 And, it's not just jobs that continue to disappear. Those losing their homes also continues to increase:

In the first three months of 2010 foreclosure filings rose 7%, to more than 930,000, compared with the previous quarter, according to the online foreclosure marketing firm RealtyTrac. That is a 16% jump over the first three months of 2009.

Foreclosures started off the first quarter with modest gains but spiked in March to a record 367,000 filings. Plus, nearly 258,000 of those filings were for bank repossessions, the highest quarterly total RealtyTrac has ever reported.

This is not good for America.

Is the Worst Behind Us?

On April Fools Day I received an email newsletter from David Murphy of Salestraq, which unfortunately wasn't an April Fools joke. In it, he tells anecdotes of people he knows who have not paid their mortgage for 11 months and yet have not been foreclosed by their financial institutions. That's pretty scary in that it means there is potentially a second shoe yet to fall.

And, the link he provides to the dynamic TransUnion Data Map seems to confirm that the worse is not yet behind us. It shows the national average 60-Day mortgage delinquency rate at 6.89%.  But, if you factor in many people are not being foreclosed that are significantly beyond this, it is not unreasonable to expect this to get much worse before it gets better.

The other thing that jumps out at anyone looking at the TransUnion map is that credit card defaults are much, much lower with the 90-Day Delinquency rate at 1.21%.  That really doesn't make sense when you think about it. So, where does this leave us?

Well, we already know that the state, despite its recent special session to deal with budget shortfalls, is still in trouble:

Revenue collections for the current budget year are running $76 million below what had been anticipated, according to the Legislative Finance Committee.       

That spells potential trouble for public schools, colleges, courts and state agencies, although it could be July or August before it's clear if weak revenues will force more budget reductions.   

If revenues fall short for the fiscal year ending in June, then New Mexico's cash reserves must make up the difference to balance the budget.

Those reserves are the state's financial safety net. 

Now, consider that mortgage foreclosures mean less property tax revenue collected, and if unsecured debt defaults increases it means less consumer spending and lower GRT. On top of all this consider that unemployment in the state continues to increase, and I hate be all doom  and gloom, but I don't see how this means the worse is behind us.

Compliance Trumps Jobs as Governmental Priority

There is well reasoned analysis out there that the high unemployment numbers we are currently experiencing might be with us for some time:

The unemployment rate hit 10 percent in October, and there are good reasons to believe that by 2011, 2012, even 2014, it will have declined only a little. Late last year, the average duration of unemployment surpassed six months, the first time that has happened since 1948, when the Bureau of Labor Statistics began tracking that number. As of this writing, for every open job in the U.S., six people are actively looking for work.

All of these figures understate the magnitude of the jobs crisis. The broadest measure of unemployment and underemployment (which includes people who want to work but have stopped actively searching for a job, along with those who want full-time jobs but can find only part-time work) reached 17.4 percent in October, which appears to be the highest figure since the 1930s. And for large swaths of society—young adults, men, minorities—that figure was much higher (among teenagers, for instance, even the narrowest measure of unemployment stood at roughly 27 percent). One recent survey showed that 44 percent of families had experienced a job loss, a reduction in hours, or a pay cut in the past year.

So, it is kind of interesting that federal and some state governments are more interested in "catching" businesses in a worker misclassification game to fill government coffers than making sure that people can work and feed their families.

President Barack Obama's proposed 2011 budget suggests tough times ahead for employers who rely heavily on independent contractors in order to keep down labor costs.

If the budget is approved, the Internal Revenue Service will add 100 new enforcement personnel as part of a $25 million plan to crack down the misclassification of workers as independent contractors.

When you consider that 50 percent of jobs created during the economic recovery are contingent labor, you quickly see that a Catch-22 situation is unfolding.

Of course, many of the businesses that are able to survive the recession are also smart enough to quickly assess the forthcoming penalties and make employment decisions based on those pending government regulations.  Those decisions will be in the best interest of the business and its current employees, but will do nothing to put out of work Americans back to work:

And our associates voted to schedule 50-hour workweeks rather than hire new associates — even if it means working five 10-hour days or maybe even working on Saturdays when needed. We’re just not going to hire right now because we don’t know what’s coming next. We hope something will be made clearer in the next 90 days as our country focuses on what is necessary to create jobs in America. Then we can re-evaluate our decision.

Put yourselves in the shoes of the tens of millions of Americans struggling to keep their families fed and housed.  Now, think what this crackdown will mean to them.  Instead of earning a living, they will be forced to remain on the public dole or worse, so that tax collectors can go after those that are trying their hardest to survive.

Visual Depiction of Unemployment Reality

A reader sent me a link to this visual depiction of our nation's unemployment numbers since January 2007, and it eerily looks like a disease infecting the entire nation.

The Make-Believe Results of the Stimulus

Republicans won in New Jersey and Virginia yesterday and not surprisingly the dismal state of the economy helped them earn their victories:

A plurality of voters in both states cited the economy as their top concern, according to exit polls. Majorities in both states said Obama's job performance was not a factor in their vote.

So, what does this mean for New Mexico and the 2010 elections? Well, it looks promising that those serving in leadership positions in the current Administration will be shown the door. Keep in mind, that New Mexico has always lagged behind other states when it comes to experiencing economic downturns, and this truth has continued through the current crisis. But, inevitably the piper has to get paid.

Spaceport funding for billionaires and trains serving the geographically privileged continue to drain state coffers, while talk of raising "painful" taxes on the masses, turning prisoners loose on a scared public and breaking contracts with municipalities is the Administration's agenda of the day. This set of priorities just won't sit well with voters come Election Day 2010.

Now, for those of you who think the economy is getting better, and all will be well by that fateful November day, I say think again. Earlier this week, we looked at the economic deception of the Cash for Clunkers program. Now, let's look at the reality of job creating/saving stimulus scam:

President Barack Obama's economic recovery program saved 935 jobs at the Southwest Georgia Community Action Council, an impressive success story for the stimulus plan. Trouble is, only 508 people work there.

Of course, that's only the tip of the proverbial iceberg the same article from which the excerpt above was taken also notes:

The latest stimulus report, released Friday, significantly overstates the number of jobs spared with money from programs serving families and children, mostly the Head Start preschool program. The report shows hundreds of the programs used nearly $323 million to provide pay raises and other benefits to their existing employees.

The raises themselves were appropriate — the stimulus law set aside money for Head Start salary increases — but converting that number into jobs proved difficult. The Obama administration told Head Start officials to consider a fraction of each employee as a job saved.

Nice. Turning pay raises for some government employees into make-believe new saved/created jobs. Now, you know why the phrase "stimulus scam" has entered the popular vernacular. Okay, so if jobs created/saved numbers are false, then what does that mean for our economy. It means we're in trouble. It means that the unthinkable is starting to be thought about:

Governments of rich countries are borrowing so much that it's conceivable that one day the twin assumptions underlying their burgeoning debt (that lenders will continue to lend and that governments will continue to pay) might collapse. What happens then?

Of course, that question is talking about governments on a national scale. The problem we're facing is an economic collapse in state and municipal governments. You'll recall that in the state of New Mexico government is the largest employer. Now factor in all of those in our relatively poor state that are living on the government dole and about to lose it. It's not a pretty picture.

Government is spiraling out of control, and the lack of real leadership has never been more obvious. If those connected to the hip with Governor Richardson think they are going to fare well come November 2010, well there is a good chance they also believe that the stimulus package created/saved jobs, and the that tooth fairy leaves money under pillows.

The Changing Tide

The Left has historically outperformed the Right in New Mexico when it comes to turning out crowds to rally behind political causes. However, it seems that the continued radical and extreme shift to the left of our federal government is beginning to change that.

Consider the turnouts of Tea Party demonstrations in recent months:

The Albuquerque Tea Party released its unofficial attendance count for the July 4 rally that drew thousands of supporters.

Now, compare that turnout to the pro-public option healthcare rally that occurred this past weekend:

More than 300 people from all over the state attended the rally, which was one of many held across the country on Sunday. The rally was organized by Grassroots4PublicOption, a nonpartisan New Mexico group.

Of course, the recent polling conducted for the Albuquerque Journal provides some insight as to why attendance at the government run healthcare rally was so weak:

While most members of New Mexico's congressional delegation support a government-run public option for health care coverage, nearly half of the state's registered voters don't want one, a Journal Poll found.

Forty-nine percent of the voters surveyed statewide said they opposed a government-run insurance program that would compete with private industry.

Forty-two percent said they favored a government-run program, or public option. Nine percent said it would depend or they didn't know.

Intensity also was apparent. Respondents who "strongly opposed" a public option outnumbered those who "strongly favored" such a plan by more than 3-to-2.

Registered Democrats outnumber registered Republicans in the state. However, the majority of voters in New Mexico, with the exception of this last presidential election, seem to vote center/center-right. Factor in the growing legions of independent voters, and those in office who blindly rubber stamp the ultra-left agenda will likely find themselves in serious trouble come Election Day.

Despite claims political claims to the contrary, the economic situation for everyday Americans is not improving. In fact, if you really listen to what is being reported, you'll hear nonsense like...

Speaking to reporters, White House press secretary Robert Gibbs pointed out that the most recent numbers from the U.S. Department of Labor indicate that “we continue to see a slowing of the pace of job loss.”

I've heard of putting a positive spin on something, but this is ridiculous. The White House actually wants the public to get excited about the fact that things are worsening, albeit at a slower pace. That's the equivalent of telling a terminal patient to feel good that he doesn't need a new pair of glasses.

Attempting to spin an economic reality does nothing to increase confidence in government. In fact, it has quite the opposite effect. People listen to our leaders saying things are getting better, yet those same people know that they're struggling to pay their bills. In New Mexico, you can combine that growing reality with the ongoing corruption scandals, and failing government programs (i.e. education), and we may just be at a point where folks feel enough is enough.

A World Turned Upside Down

Today marks the eighth anniversary of the attacks of 9/11. It is a day that should always serve as a reminder of two irrefutable facts:

1. There are people in this world that hate America and the freedom it represents, and would do anything to destroy us.
2. There are unsung heroes that everyday put their lives on the line to safeguard our communities.
   

Let me first acknowledge that second point by thanking the firefighters and police officers that step up everyday when no one is looking to protect and to serve. Thanks for what you do.

As to the first point, I can't help but be concerned about the direction our country is heading. On 9/11, the terrorists failed to destroy America, but since that time, a greater and greater number of those elected to lead our country have made, and are making, decisions that might well accomplish what the terrorists failed to do those eight years ago.

On a state level, we've seen indictment after indictment against our elected officials. Yet, rather than outrage, the citizens of the state seem willing to accept this as just the way things are. Even the recent fleeing from the scene of an accident by the Governor and his staff is just seen as just another news story:

The state's boating law says the operator of a vessel has 48 hours to provide information about an accident, and Condit complied with that, according to Jodi McGinnis Porter, spokeswoman for the energy and minerals agency.

Porter said Fay, the boat's owner, stayed at the scene and provided information to investigators, while Richardson, Condit, Miller and the state police officers left. They were not required to remain there, she said.

What's been largely missing from this discussion is not what is legal, but what is ethical. Legally, the perpetrators of the accident may not have been required to remain at the scene of the accident, but ethically, they should have remained.

Think about it.

There are only two reasons that the Governor and his staff fled. First, there was alcohol involved, and it would have been determined that a crime had been committed. Or second, they wanted to avoid the unfolding public relations nightmare that would have been made worse by having their pictures taken at the scene of the accident. I'm reasonably confident that if cell phone records were checked, one of the individuals in the party will be shown to have called for advice on whether or not they "had" to remain at the scene of the accident.

There is always a lot of gratuitous talk about the need to legislate ethics in this state. But, this is just another example of why you can't legislate ethics. Unethical people will act in their own self-interests, and the shrewdly unethical will do it in within the letter of the law. You probably also noticed that not one Democrat running to lead our state in 2010 condemned the blatantly unethical act committed by Governor Richardson and his staff.

Speaking of speaking out, Representative Joe Wilson is in trouble for breaking with decorum by shouting out that the President of the United States was lying to the American people while giving his healthcare address. Yet, there was much truth to Representative Wilson's accusations:

A GAO report finds that illegal immigrants constitute more than one-third of all Medicaid-funded pregnancies in California. Elsewhere in the country, the GAO found: "From 1992 to 1995 in Texas, the number of Medicaid-funded births to undocumented alien mothers more than doubled, while the total number of births remained fairly stable." People respond to economic incentives. Even when the people and the incentives are illegal.

Missouri attorney general Chris Koster has estimated that one in ten Medicaid claims is fraudulent. How much of that fraud diverts money to illegal immigrants? Nobody knows for sure and don't ask the state bureaucrats for help in finding out: When the federal government passed new rules demanding better documentation of legal residency for Medicaid recipients, the states resisted. In California, officials representing the state's Medicaid program, Medi-Cal, wanted to use such lamentably inadequate documentation as insurance records and school report cards in place of passports and birth certificates. We are entitled to question their motives, and their prudence.

So, Representative Wilson could use a visit from Miss Manners. But he is telling the truth, and President Obama is not.

Of course, President Obama's dishonesty on this topic is not limited to the question of whether or not illegal immigrants will benefit from the healthcare changes being proposed. There were numerous inaccuracies his speech. For example, take this:

OBAMA: "Nothing in this plan will require you or your employer to change the coverage or the doctor you have."

THE FACTS: That's correct, as far as it goes. But neither can the plan guarantee that people can keep their current coverage. Employers sponsor coverage for most families, and they'd be free to change their health plans in ways that workers may not like, or drop insurance altogether. The Congressional Budget Office analyzed the health care bill written by House Democrats and said that by 2016 some 3 million people who now have employer-based care would lose it because their employers would decide to stop offering it.

In the past Obama repeatedly said, "If you like your health care plan, you'll be able to keep your health care plan, period." Now he's stopping short of that unconditional guarantee by saying nothing in the plan "requires" any change.

Considering how much effort goes into writing a presidential speech, these careful manipulations of the English language cannot be considered accidental. Again, we deal with a question of ethics. Is it ethical to put something forward as factually truthful that is actually intended to deceive?

Of course, these unethical manipulations of language are not limited to our elected officials. They are also being used by "community organizations" to confuse the issues. Consider this taken directly from the ACORN site:

The Association of Community Organizations for Reform Now does not apply for nor does it receive any federal grants.

ACORN has had contracts with other nonprofit organizations to perform work on projects which received federal grant support.

In illegal circles, what ACORN is describing is called money laundering. Organized crime has been doing this for years. In the case of organized crime, dollars from an illegal activity, take prostitution as an example, are flowed through a third party entity before making its way to a "legitimate" business. In this way, the business has deniability about the illegal source of the funds. Much the same way as ACORN has deniability about the federal source of its funding.

As long as we're on the topic of federal funding, ACORN and prostitution, you might want to consider this:

Two staff members of the Baltimore office of ACORN were fired Thursday after they were captured on hidden camera appearing to give advice on evading tax laws to a man and woman posing as a pimp and a prostitute.

The video depicts a man and a scantily dressed female partner visiting the Charles Village office of the Association of Community Organizations for Reform Now, where they appear to ask two employees about how to shield their work from state and federal tax requirements. The supposed pimp also appears to ask the employees how to conceal underage girls from El Salvador brought into the country illegally to work for him.

"If they don't have Social Security numbers, you don't have to worry about them," the employee says.

If you haven't seen the videos, I strongly urge you to watch them. It's like watching an SNL skit from when SNL was actually funny.





Of course, the only problem is that this isn't a comedy skit. It's actually real. Now, factor in the economy, our increasingly uncompetitive educational system, the ever-growing size of government, and the you'll see why I'm so concerned that America may be doing to herself what the terrorists failed to do on 9/11.

Government Regulation and Ingenuity

A recent review of Michael Moore's new film, Capitalism: A Love Story, concludes with the following summary:

Surely what spun out of control because of government indulgence and indolence needs to be repaired by government regulation and ingenuity.

This pretty much captures in a nutshell what I see as the basic problem with where we are currently heading on the road to bigger government. A great many of our current problems have been created by an overreaching and exponentially expanded government. Worse, government regulation heaped upon government regulation has done absolutely nothing to protect the general population. In fact, all it has done is to enrich those large enough to play the regulatory game, and put financial welfare of the nation at risk.

Consider for a moment the banking system. This is without a doubt among one of the most regulated industries in America. Yet, despite these regulations, the system continues to have massive failures. Regulations didn't stop the S&L crisis from occurring, and additional regulations post S&L crisis didn't stop the financial crisis that led to the recent "too big to fail" crisis. Actually, interventions since too big to fail has done only one thing, make the biggest banks bigger:

When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.

Today, the biggest of those banks are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

At the same time, the government's favoring of everything big has not been without its casualties.

Five more US banks shut down on September 4, pushing the total failures to a whopping 89 entities so far this year.

The count of collapses is more than three-fold that of 2008, when 25 banks went out of business in wake of the raging financial meltdown.

Even scarier is the fact that the worse is yet to come for the banking sector. Unemployment figures continue to rise, and with the rise of those unemployment numbers, it is only natural to expect that defaults on the unsecured debt represented by credit cards will increase. What does that mean for the remaining large banks that now issue "two of every three credit cards" remaining on the market? It's bad news. Now consider that defaulting credit card debt is not the only problem these bank behemoths are going to face:

Some $700 billion of option ARMs were written in the U.S. between 2004 and 2007. Most option ARMs are set to recast after five years -- meaning that the first wave of higher payments is hitting borrowers this year.

WaMu [now owned by Wells Fargo] -- which wrote $133 billion worth of option ARMs when house prices were at their peak between 2005 and 2007 -- said in its annual report last year that 13% of its option ARM loans are due to recast this year. The bulk of recasts are due to take place between next year and 2012.

Now, you don't need to be a PhD economists to see the writing on the wall. People's home costs are about to go up in a big way. At the same time, all indicators are that we are on the road to a "jobless recovery" of the economy:

Many experts envision a jobless recovery, in which the economy grows but job losses persist. That would reprise the end of the last recession in 2001, when payrolls continued to decline for nearly two years afterward.

Actually, maybe you do have to be a PhD to understand how it is possible for the economy to grow without jobs. We've lost over 7 million jobs since the recession began. I consider myself to be a reasonably well-educated guy, and I've got to tell you, I don't understand how the economy can truly recover when people are without jobs. But, I guess that the beauty of government ingenuity. It doesn't have to make sense.

Government Has Two Options

The crunch is getting tighter. We've heard about state governments giving IOU's on their debts or just failing to write state employees checks, and it doesn't look like America's cities are faring much better during the continued economic downturn:

Overall city revenues declined by 0.4%, even as expenses rose 2.5%, and city officials expect steep drops in tax collections in the next two years, making for the worst outlook in the 24 years the group has been surveying its members. Western cities were particularly downbeat.

The gloomy mood "is indicative of the depths of the downturn, that they have the worst ahead of them, and the fact that the recession is universally hitting their revenue sources," said Chris Hoene, research director for the league.

Because employee wages, health care and pensions are a major component of municipal budgets, two-thirds of the cities reported hiring freezes or layoffs. Almost as many cities said they were postponing big construction projects.

While a quarter of the cities said they raised property tax rates, far more -- 45% -- raised fees on everything from garbage collection to overdue library books.

Just a reminder folks, raising fees is the same as raising taxes. Actually, it may be worse because on occasion we hear about tax cuts, but I don't think I've ever heard of a fee cut. Once it goes up, it stays up.

So, here's a thought for dealing with budget crunch:

Guest-blogging on the liberal Democracy for New Mexico Web site, state Sen. Linda Lopez wrote that her solution to the state’s budget problems is to “return to pre-2004 tax rates to fix the budget shortfall.”

A much better solution is available. Rather than raise taxes back up to pre-2004 levels, the Legislature should lower spending back to pre-2004 levels.

I'm just saying it sounds like a good idea to me. We've been on a binge for the last several years. Sometimes, you just need to cut the fat.

An Upside Down World

We're living in a make-believe business world. Business news reports that AIG stock was up 264% in the month of August on reports of profits and a new CEO at the helm. But, here's the thing, none of it is real:

Since the government holds its 79.9% interest in AIG in preferred shares, taxpayers don't stand to gain from a steep rise in the company's common stock price.

Instead, the preferred shares pay a dividend. But the dividends on the TARP part of the bailout -- $41.6 billion, or about half of its overall loan -- are "noncumulative." That means that the company can skip dividend payments without the obligation to make up the difference later.

And that's just what AIG did on Aug. 3, failing to declare its dividend payment to Treasury. Should AIG miss three more dividends, the government will have the right to nominate two more directors to the insurer's board.

Despite Benmosche and investors' enthusiasm, AIG is still a very troubled company with a sizeable debt to repay to the government.

Think about this for a moment. You've got a company that doesn't have to pay dividends to 80% of it's owners (i.e. U.S. taxpayers), yet it gets to pretend it profitable. This is all surreal. What I don't understand is why this is being reported in the business news. A company that is 80% owned by the federal government is for all intents and purposes a government entity, not a business entity.

You disagree? Well, think about who is hiring the new CEO and approving his salary:

In the Securities and Exchange Commission filing, AIG also said that Kenneth Feinberg, the Obama administration's pay czar, "expressed approval in principle" for Benmosche's compensation package. Feinberg still must formally approve the new CEO's compensation.

By the way, the compensation package for running this bailout created government agency is really pretty impressive:

AIG, the bailed out insurer whose pay practices sparked outrage earlier this year, has agreed to a $10.5 million pay package for its new CEO -- a stark contrast to his predecessor's $1 pay but drawing zero outcry from politicians or regulators.

The approval for a package, with a cash component that dwarfs what many competing insurers' CEOs have received, may be a sign that the Obama administration and lawmakers have begrudgingly accepted that even firms that took federal funds will have to pay top dollar to attract, and keep, executives.

Who are we trying to kid here? This is no longer a firm that took federal funds. This is a federal firm. The CEO of this firm does not create shareholder value. The CEO of a company like this should be on a government pay schedule.

Clunker Lessons for Healthcare

Beware the government's next big idea. This should be our motto after watching how the the $3 billion dollar Cash for Clunkers fiasco has panned out:

But why did taxpayers, having already bailed out GM and Chrysler once, have to do so again to the tune of $3 billion through the $3,500-$4,500 C4C incentives? This taxpayer money simply enabled the dealers to avoid having to offer discounts off sticker prices and to extract higher profit margins than they would have otherwise obtained on the qualifying new cars. The program proved so popular that inventories of the qualifying cars soon dwindled, further boosting the dealers' negotiating leverage and unit profit margin.

Did C4C sell more cars? Maybe in the short term but, in reality, the promotion stole largely from future sales with taxpayers subsidizing over half a million new car sales that would have occurred anyway.

Did the consumers win in this game? No, we did not. Was this a good deal for the American taxpayer? No, it was not. So, who are the beneficiaries of this latest round of bailouts? The same big businesses who have already gone to Congress with one hand out and the other in our back pocket. Of course, the taxpayer ripoff is only half of the story. I mentioned that consumers didn't win either in the Cash for Clunkers debacle:

Like hundreds of thousands of folks this summer, Anna Causey knew a deal when she saw it. Enticed by the rebates offered under the cash for clunkers program, the Summerville, S.C., resident ran her 1986 Buick Century down to a local dealer last month, scrapped it for a 2009 Dodge Ram pickup, and scooped up a $3,500 government discount for the trouble.

A month later, it doesn’t seem like such a great bargain.

Causey’s trade, it turns out, didn’t qualify for a rebate based on the cash-for-clunkers’ mileage requirements. Though she’d signed all the papers, swapped the tags and updated her insurance policy, Causey was called back to the dealership shortly afterward and presented with two options: either accept a new contract — one that would grant $1,000 for the old Buick and require that she pay back the $2,500 difference — or give up the truck. Thinking a deal’s a deal, Causey and her husband chose a third route: they stormed out, and hired a lawyer instead.

Now, consider this was a rather straightforward program that went through billions in weeks. You have an old car with high gas mileage, and you bring it in and get $4,500 off a new car. Should have been simple, but instead, the execution has been a total disaster for everyone involved. Yet, there are still some of you out there that want to put these same people in charge of administering your healthcare program?

I don't get it.

Waiting for the Other Shoe to Drop

I can't help being pessimistic about the direction our economy is taking. I've watched in absolute amazement as the market has climbed over the last few months on better than expected earnings that in reality are just less than expected losses, or make believe "profits" from government bailouts.

I'm normally a glass is half full kind of guy, but I'm also not blind. Everyday I see more and more space available signs in office and commercial buildings. A week doesn't pass that I don't hear of a friend that has been out of work for more than six months. At one point, it was friends in homebuilding that were losing jobs, now it seems the job losses are happening in every sector.

The rate of bank failures hasn't really slowed either. BNO News the Breaking News Wire's late Friday afternoon tweets are now called BANK FAIL FRIDAY as it seems that every Friday sees another three bank collapses. We're up to 77 so far this year. And, it's not just the little guys anymore that are collapsing:

The Federal Deposit Insurance Corporation seized the struggling Alabama-based lender Friday and sold it to BB&T Corp.

Late Friday, the FDIC announced four other banks had been closed: Community Bank of Nevada and its Arizona subsidiary, Community Bank of Arizona; Union Bank, Gilbert, Ariz; and Dwelling House Savings and Loan Association, Pittsburgh.

The Colonial BancGroup deal will knock roughly $2.8 billion off a pool of money, known as the Deposit Insurance Fund, which the FDIC maintains to guarantee bank customer deposits.

BB&T /quotes/comstock/13*!bbt (BBT 27.02, -1.19, -4.22%) agreed to assume all of Colonial's deposits, which totaled about $20 billion at the end of June, the FDIC said. Depositors of Colonial will automatically become depositors of BB&T and customers can continue accessing their money by writing checks or using ATMs and debit cards, the regulator stressed.

Colonial had $25 billion in assets at the end of June. That makes it the largest bank failure this year, exceeding the collapse of Florida's BankUnited Financial /quotes/comstock/11i!bkunq (BKUNQ 0.25, -0.05, -16.33%) , which had less than $13 billion in assets. See full story.

This morning the DJIA took a dive. It may recover, but I don't understand what that recovery could possibly be based upon. Moody's Consumer Flow Update show consumer spending virtually non-existent:

Consumer sentiment slipped in August, according to the University of Michigan as key positive drivers of confidence have yet to fall into place (see: Michigan Confidence Not Improving).

In line with weak consumer sentiment and weak spending, consumers' financial situation remains weak, as indicated by soaring bankruptcy filings (see: Bankruptcy Filings Still Soaring). Dismal consumer fundamentals are also making consumers more hesitant to take on additional debt (see: Declines in Consumer Credit Accelerate).

A key driver behind the spending recovery will be the job market recovery but the outlook suggests that this process will be painfully slow (see: Unemployment Will Remain Elevated for Years to Come).

Whereas New Mexico has traditionally been insulated from these up and downs because of the reliance of federal spending in this state, this year that does not seem to be the case:

New Mexico's revenues will fall more than $400 million short of what's needed to cover spending in the current budget, lawmakers were told Friday as they received a bleak new financial report.

Revenues are down more than $700 million over two years, and the shortfall is large enough to wipe out the state's cash reserves if the Legislature doesn't cut spending and take other actions to balance the budget.

According to the latest financial forecast, revenues will drop to about $5 billion in the current budget year, which started in July. That's $433 million less than what had been anticipated when lawmakers enacted the budget.

Revenues also came up short last year, about $309 million below what had been previously forecast. Final revenue figures for the just-ended 2009 budget year won't be available for several months.

Most of the revenue decline over the two years is from weaker income and sales tax collections that economists blame on the national recession.

I'm still sticking with my prediction that the critical fall and holiday retail sales of 2009 will be one of the worst on record. We'll have some more big name national retailers and thousands of Mom and Pop shops close their doors for good. Which means that sales tax and income collections will be even worse going into next year as more people lose their jobs and find their income and credit simultaneously slashed.

The Ugly Truth About ARC Loans

The federal government under the Obama Administration and the Bush Administration before it has bent over backwards to bailout America's largest mismanaged companies from banks to automotive makers to insurance companies to investment houses. And, when they're not bailing out big business, they're bailing out mismanaged states. The latter is why the vast majority of the Recovery Act dollars are being floated through states before... never mind, there is no before. The dollars are just flowing into state coffers, period.

Now, maybe you're thinking that small business is getting a piece of this stimulus spending. After all, you've heard the countless news stories about that great SBA program, the American Recovery Capital (ARC) Loan:

ARC loans can be used to make payments of principal and interest, in full or in part, on one or more existing, qualifying small business loans for up to six months. ARC loans provide an immediate infusion of capital to small businesses to assist with making payments of principal and interest on existing debt. These loans allow borrowers to redirect cash flow from making loan payments to investing in their businesses, to help sustain the business and retain jobs. For example, making loan payments on existing loans with proceeds from an ARC loan can allow a business to focus more funds on core operations, such as buying inventory or making payroll.

ARC loans are interest-free to the borrower, carry a 100 percent guaranty from the SBA to the lender, and require no fees paid to SBA. Loan proceeds are provided over a six-month period and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years.

Hey, I own a small business, actually three, and wow, what a great deal. After all, I'm part of the original MTV generation. "Money for Nothing" was practically a theme song of my high school years. So, forget my limited government, no bailout philosophy. Sign me up for the free money. After all, look how quickly the federal government has been able to put billions upon billions of dollars in the pockets of big business. How difficult can it be for me to get my hands on a small $35,000 loan? Well, it turns out very difficult.

Diego Iorio sounds like the kind of small business owner the government's new ARC loans are made for. His two-employee audio gear retailer, SIRS Electronics, had been profitable through last year, with 2008 revenue nearing $500,000, but his projections for this year are down 40% to 50%. Although he has not missed any payments yet, SIRS, based in McAllen, Tex., has $140,000 in debt split among credit cards and payments owed to vendors. "We are in a very delicate situation right now," the 41-year-old Iorio says.

He prepared 200 pages of paperwork, including financial statements and tax returns going back three years, and applied for an ARC loan through Wells Fargo (WFC) just after the program launched June 15. The loans, made by banks and fully guaranteed by the government, give small businesses up to $35,000 interest-free to pay off other debts for up to six months, with repayment deferred for a year after that. But Wells Fargo rejected Iorio's loan application because his personal credit score, at 649, was below the 680 the bank requires. To Iorio, it's a catch-22: His score had been above 700, but it suffered when he took on debt to support the business.

Let me bring this to a more personal level. I called a business banker in town I've known for years when this money finally became available. He told me his bank would only be considering making the loans to current bank customers. Okay, fair enough. So, I called one of the banks with which I have a business account. As luck would have it, it was none other than Wells Fargo.

Wells Fargo told me they couldn't give me information over the phone or email me about the program, and that I would have to stop into a branch. Okay, no problem I had a deposit to make anyway. So, off I went to my local branch. I made a deposit into my business account and when the nice lady behind the counter asked me if there was anything else. I said, "Yes, I'd like to apply for an ARC loan." She looked at me quizzically. So, I explained what an ARC loan was. She thought she might have heard of that. Unfortunately, she said she'd have to take down my name and number and have someone get back to me later that day about how to apply for the loan. So, off I went.

Well, two and half weeks went by and I still hadn't heard anything back. I decided to go back into the bank. I signed the book, took a seat and waited 30 minutes for a banker to become available to see me. She called my name, and we sat down at her desk. As luck would have it, it was the same nice lady that had taken my deposit during my previously mentioned visit. I told her why I was there, and her response was, "Oh right, I remember you."

She then took out a piece of paper and said, "You're going to have to call this number and talk to a business banker. We don't have a business banker at this branch, so no one here can actually give you information on ARC loans." I asked if I was going to have to go into that branch and repeat the process, and she said, "Oh no, he'll be able to tell you over the phone whatever you need."

Hmm, couldn't help but wondering if he could help me over the phone, why I ever had to go in to the branch in the first place. Well, I called the guy and got voicemail. No surprise. He did return my message that same day, and after I told him what I was looking for, he said, "I can send it to you, but you should know it's a 25-page application."

"No problem," I thought. Although, since I'm in the business of billing for my time. I was beginning to doubt this whole money for nothing concept. I'd already spent a couple of hours looking into this thing. Heck, I was thinking this might take less of my time if I could just be called to testify in front of Congress and then walk away with a much bigger check. I would even know not to take the company jet. Granted, I don't own or have access to one, but I still would know not to take it.

So, the guy emails me the ARC application. Hmm, they could answer my question over the phone and email the application. Still wondering why I had to go into a branch. Sure enough, it was 25 pages long. But, I actually didn't have to spend too much time filling it out because I didn't get past the first page, which contained this fact listed under the section, Facts about the ARC Loan Program and Wells Fargo::

ARC loan funds are to be used for payments of principal and interest for up to six months on existing, qualifying small business loans, capital leases, business credit cards and vendor loans. Wells Fargo will only fund Wells Fargo business credit cards transactions of $5,000 or higher.

As luck would have it, I don't have business credit cards with Wells Fargo. But, this all got me to thinking. First, why couldn't Wells Fargo include these facts on their website? Next, exactly who is this loan fund supposed to benefit?

Apparently, it's not intended to benefit me the small business owner. In fact, it looks like another gift for large banks. Specifically, it looks like a way for a bank like Wells Fargo to convert their unsecured credit card debt of $5,000 or higher to a 100% guaranteed loan backed by the SBA at prime, plus two percent. Not a huge profit by credit card standards, which is probably why the bank is only interested in converting their own credit card debt.

Despite the lip service paid over and over again to small business driving the economic engine needed to bring us out of the deepening recession. Nothing could be further from the truth. When it comes to small business, the only interest the federal government has is how to increase taxes on those businesses.

Democrats to Blame

Going into last year's legislative session all anyone could talk about was the budget shortfall. The spending party that has been the cornerstone of the Richardson Administration was over - sort of. What do I mean?

Well, during the 2009 legislative session the people in charge (read: Democrats) didn't really slice the budget the way it required in light of decrease oil and gas revenue and declining tax revenue. Instead, they just kind of froze spending - again, sort of.

Consider that the vast majority of New Mexicans are cutting our annual spending, and you'd think that state government would try and do the same. But no, they want to get creative:

State government spending has grown by about 40 percent during the past six years. Smith and other lawmakers might focus on alternatives to new revenues to pay for the state's nearly $5.5 billion annual budget, such as shifting money from stalled infrastructure projects, shortening the government's workweek or furloughing state employees, should a special legislative session be called this fall by Gov. Bill Richardson to address budget problems.

Here's an idea. Instead of looking at sources of new revenue (read: taxing struggling families) or looking at creative ways to shuffle funds and pretend we're not in a zero sum game, how about you just cut all the recently added programs and return them back to 2002 levels?

Think about it. We significantly increased our investment in education and have seen continued declines in student performance. We've increased our investment in economic development and seen increased job losses. We've funded pet projects like spaceports and trains to benefit a select few without any significant benefit for the majority of the population.

When are we going to finally acknowledge that the government is really good at making grand promises, but comes up awfully short on delivering on results? The spend, spend, spend experiment of the Richardson Administration and a rubber stamp legislature has been a horrible failure. But, here's the absurdity of New Mexico politics:

If taxes were to be raised, Democrats, who control the executive branch and both houses of the Legislature, could face the lion's share of the blame, Sanderoff said.

Really? The Democrats "could face the lion's share of the blame." You think? Only in New Mexico could those in charge of everything only potentially face the blame. How about we stop the spin here? The Democrats should face the lion's share of the blame.

• They should be held accountable for out of control spending with nothing to show for it.
• They should be held accountable for every and any tax increase .
• They should be held accountable for an education system that costs more and more and delivers less and less.
• They should be held accountable for the institutionalization of corruption.

Unless we start holding them accountable, we will go from bad to worse.

Here Come the Taxes

Remember all of that nonsense about how the government was going to expand health care coverage while cutting costs? Yeah, well, it looks like they are going to try and expand health care coverage the old fashioned way:

President Barack Obama is declining to take a surtax off the table in the escalating debate over how to pay for a new health care system that would cover millions of uninsured people.

That's right, here comes the tax increases. Remember, taxation is a zero sum game. When you start taxing for ever larger government programs, you are removing dollars that would otherwise be invested in the economy. Think about that as you read about the next increase in unemployment numbers and business closures.

Slowing of the Deepening Recession

A slowing of the deepening recession is not the same as coming out of the recession. It's important to remember that simple fact. I'm kind of harping on this in recent posts, because it appears that the media and administration are at times trying to spin us into believing that everything is getting better. It's not. It is just not getting worse as fast as it was before:

U.S. home prices continued their multiyear tumble in April, according to the S&P Case-Shiller home-price indexes, which showed their third-straight month of slightly smaller declines.

Meanwhile, U.S. consumer confidence retreated in June, especially regarding expectations for the economy six months from now, a report released Tuesday said.

Remember that when consumers are not feeling confident, they don't go out and buy. We have only two months left until the holiday buying season starts (back to school followed by holiday shopping). With consumer confidence continuing to fall, we can expect more people to sit on their money.

I wouldn't be surprised if, on top of everything else, this leads to more declines in gross receipts taxes at the state and local level in New Mexico. If that happens, we can expect a special session where tax increases are pushed. I wouldn't be surprised to learn that polling is already being conducted to determine the type of tax increases New Mexicans might support.

Let me just say now, if anyone calls you, the answer should be, "No, tax increase."

The Makings of a Perfect Storm

During last year's election cycle, the perfect storm was created, and Democrats from the Roundhouse to the White House prevailed. Come the day after the election, there were some lost seats that astounded everyone:

Nobody thought Karen Giannini was going to win.

Not local political junkies (like us at NMI) watching tight races on election night; not her new Democratic colleagues in the state House of Representatives; and certainly not her incumbent opponent, Rep. Justine Fox-Young, who was sitting in what everyone considered a safe Republican seat.

But somehow this Air Force veteran and divorced mother of three defied all odds and expectations by beating her well-financed incumbent opponent.

And she did it without spending a dime.

Of course, next year's election is shaping up to be a little different. There are no indications on Main Street USA that the economy is improving. Quite the contrary, with even the Administration having to admit that the massive bailouts have been a failure. Instead of creating 3.5 million new jobs as promised, the bailouts, at best, have saved or created 600,000 jobs:

Just 10 days before taking office, Obama's top economic advisers released a report predicting unemployment would remain at 8 percent or below through this year if an economic stimulus plan won congressional approval.

Yet the Bureau of Labor Statistics reports that unemployment in May rose to 9.4 percent.

Biden said the White House is keenly aware of the gap between the rhetoric used to sell fast passage of the legislation and the reality that has 14.5 million people unemployed. The administration had predicted that the stimulus bill would create or save as many as 3.5 million jobs.

14.5 million people in America are now unemployed, and what lays ahead in the future? Well, for the answer we go straight to the top:

President Barack Obama offered stern words for Wall Street and a prediction of 10 percent U.S. unemployment even as he said the “engines” of an economic recovery have begun to turn.

Now, I know that some of you will consider leaving comments that unemployment is a lagging indicator, and that the economy is turning around. Personally, I don't think so, but honestly, it's nothing more than an academic discussion. What's important is the political reality come Election Day 2010.

All of these people are not going to suddenly be employed by that point, and the people's concerns quelled. Hungry, unemployed people really don't care about lagging indicators. They care about providing for their families. In fact, if the public opinion trends continue, we have the makings of a Jimmy Carter situation:

Nearly seven in 10 survey respondents said they had concerns about federal interventions into the economy, including Mr. Obama's decision to take an ownership stake in General Motors Corp., limits on executive compensation and the prospect of more government involvement in health care. The negative feeling toward the GM rescue was reflected elsewhere in the survey as well.

A solid majority -- 58% -- said that the president and Congress should focus on keeping the budget deficit down, even if takes longer for the economy to recover.

Yet, Congress is going to keep on spending because that is what Congress does - at least of late. We've got bigger and bigger and vastly more expensive programs coming down the pike. Now, you couple these federal problems with the never ever ending list of political scandals plaguing the Land of Enchantment, and you have the makings of a new perfect storm.

A storm where those that were swept in the last election cycle with little to no effort, could very easily find themselves just as quickly swept out. With this being the case, it's probably no surprise that new candidates for the Roundhouse are starting to emerge at what may seem to many a very early date. Take for example Nate Gentry, a former aide to Senator Domenici, who has already launched his website to take on the accidental incumbent noted at the beginning of this post in House District 30.

Let the games begin.

Government Shakedown of the Homeless

Every once in awhile you come across a perfect example of what's wrong with government's natural tendency to regulate:

Larry Moore was a homeless man who got it together and started a shoeshine business. From his profit, he saved enough money to rent an apartment and get off the street. And then, the city of San Francisco slapped with him a bill for sidewalk vendor permit. The shakedown cost Larry hundreds of dollars, because in San Francisco, as is most places, offering a product or service that people are will to pay for and pulling your self up by your bootstraps requires someone’s permission.

Another perfect example of American entrepreneurship being regulated out of existence. Now tell me again, who is keeping the poor, poor?

The Great American Clunker Scam

Yesterday the House passed a bill that dumps another $4 billion into the auto industry. When is enough, enough?

The move by the House would deepen the federal government's involvement in the auto industry, only a week after federal officials announced spending another $30 billion in addition to the $19.4 billion already given to GM to cover its losses and operations.

Let's be real here. The government keeps dumping money into the auto industry, but it is doing nothing to protect jobs:

The number of initial claims in the week ending May 9 rose 32,000 to 637,000. It's the highest level since mid-April. Economists had been expecting claims to rise. They estimated that about 27,000 Chrysler employees are eligible to file claims in the wake of the company's bankruptcy filing.

Worse, we have a credit crisis in America because the country and it's citizens have borrowed themselves into a hole. So, what brilliant plan passes the House? A plan to encourage individuals to try and take on more debt to buy new cars. I fail to see the logic here.

Oh, and for those of you who believe this is all about a creating a greener environment:

While the original cash-for-clunkers proposal had its roots in an environmental initiative, this bill aims to jump-start sales of new cars and trucks, including some that don't quite meet the average fuel efficiency standards.

So much for that theory. At best, this is a finger in the dike, while the walls come tumbling down.

Oops, Did We Say Shovel-Ready?

How foolish of you? When you heard that the government was planning on spending billions upon billions of dollars on "shovel-ready" projects, you assumed that meant construction projects. You couldn't have been more wrong.

The "public face" of the stimulus effort has been a worker in a hard hat, employed on a federally backed infrastructure project, The Associated Press reported nationally. But reviews of spending in New Mexico and around the country show that the phrase "shovel-ready" to describe the focus of stimulus projects probably has been overused.

In fact, in New Mexico and around the country, social spending, not construction, is in line to be the biggest winner in the ambitious federal effort to spark a sluggish economy.

Less than 10 percent of New Mexico's estimated $3 billion in stimulus money is slated to be used for highway construction. Only 12 percent will be spent repairing dams, building water treatment systems and undertaking other capital projects.

Nearly half of New Mexico's stimulus dollars — about 46 percent — will be spent on Medicaid and education.

Turns out that shovel-ready has nothing to do with reinvesting in America's ailing infrastructure. Instead, the term shovel-ready refers to the main instrument American taxpayers will need to dig themselves out from under the pile of, shall we call it manure, being relabeled as a stimulus package.

If this is what the Obama Administration calls stimulus....

Obama has claimed as many as 150,000 jobs saved or created by his stimulus plan so far, even as government reports have shown the economy has lost more than 1.6 million jobs since Congress approved funding for the program in February.

I wonder what a total economic collapse would like? This is worth repeating "150,000 jobs saved or created while losing 1.6 million jobs from the economy." I hope you're paying attention to that careful talking point coming out of the administration. You know, the one that uses the phrase "jobs saved or created." It is a careful spin that is being repeated by state level administrators of the biggest economic scam ever played on the American people:

Anaya defended the effectiveness of appropriating stimulus dollars to education, Medicaid and other social programs, saying the influx of federal dollars is already saving jobs statewide.

Jobless rate climbs ever higher and everyone in government is pretending they are saving jobs. Well, they may be saving government jobs and programs, but the private sector, despite numerous bailouts and so-called stimulus packages is going to hell in a handbasket.

Education is a means to an end. However, as it stands today, no matter how well we educate out children, something we've been failing at for years, they're not going to be able to find jobs upon graduation. Don't believe me? Go ask a recent graduate about how their job hunt is coming along. To make matters worse, they are going to be saddle with paying off this debt with higher taxes for years to come.

Since last year, I've predicted that the worse is yet to come. I predicted a 10% unemployment rate, and at 9.4% we're almost there. And, I stand by my prediction that the fourth quarter of this year and first quarter of 2010 will be the worse yet. Consider the absurdity of this job creation plan:

President Barack Obama promised Monday to deliver more than 600,000 jobs through his $787 billion stimulus plan this summer, with federal agencies pumping billions into public works projects, schools and summer youth programs.

Summer youth programs...hmm. Summer youth programs will not feed hungry unemployed families going into the cold, harsh winter months. Summer youth programs will not open the capital markets for the small mom and pop businesses on main street that are shuttering their doors everyday at an alarming rate. Summer youth programs will accomplish very little beyond this summer.

The situation is getting worse by the minute.

No Bailout for Tech Failures

Time has an interesting look at the ten biggest tech failures of the last decade. You know, companies and products that failed when common sense still dictated that it was okay to allow a business to have a lifecycle.

Some of this biggest and most recognizable brands in the world made the top ten. Heck, Microsoft is on there twice:

1. Microsoft Vista
2. Gateway
3. HD DVD
4. Vonage
5. YouTube
6. Sirius XM
7. Microsoft Zune
8. Palm
9. Iridium
10. Segway

These companies aren't getting bailouts, nor should they. As anyone who has ever taken a business class can tell you companies have lifecycles. Only the foolish expect them to last forever, and to invest in a company on its way out is, well, beyond foolish. Yet, that is exactly what the federal government has been doing with our taxpayer money.

Consider February reports regarding the amount of taxpayer money that flowed into GM and Chrysler:

General Motors and Chrysler LLC asked the government Tuesday for $21.6 billion in additional loans, but the final cost of a bailout of the auto industry could be significantly higher.

The two struggling auto giants have already received a total of $17.4 billion in loans. If they get the new loans they want, the price tag of the bailout would climb to $39 billion.

What's more, $7.5 billion in loans have already been approved for the financing arms of GM and Chrysler. Congress also approved funding last year for $25 billion in loans to help automakers convert their plants to produce more fuel efficient cars.

And, what did that huge investment get us? A temporary reprieve of a few months. Ultimately, the inevitable still happens - GM bankrutcy and massive job cuts:

The next auto businesses on the chopping block will be 2,600 General Motors dealerships.

GM Chief Executive Fritz Henderson said Monday that the company would by the end of the week start notifying dealerships it wants to eliminate over the course of the next year. The company said last month that it planned to eventually eliminate 42% of its 6,250 dealer locations, which employ more than 300,000 workers among them.

On Thursday, Chrysler LLC's announced that it is dropping nearly 800 Chrysler, Dodge and Jeep dealers, or about a quarter of its network, as part of its bankruptcy restructuring.

If we don't start letting more businesses move through their natural lifecycle without attempting to bail them out, our county will go bankrupt.

Markets Versus Economic Reality

I've been watching the markets rise with... I guess the word is surprise. It hasn't really made any sense to me. I've written before that I expected to see the Dow Jones Industrial Average (DJIA) trading at around 5,000. Yet, it has been steadily rising for weeks. That is until today.

See, today's plunge makes sense. There is nothing that has been in the economic news over the last several weeks that should give investors confidence. Banks stress test were reported and, despite the federal claims to the contrary, it was not pretty:

The nation's biggest banks are regaining their health, but some need to replenish their coffers to withstand any new difficulties, the government said in an upbeat report Thursday.

The Federal Reserve's highly anticipated "stress tests" found that 10 of the 19 largest banks needed to bolster their capital by a combined $75 billion. Most of that must be raised by two banks with a large California presence -- Bank of America Corp. and Wells Fargo & Co. -- highlighting the role of the state's housing market meltdown in the recession.

After the billions in bailouts more than half of the major banks are still in trouble. There are claims that the new housing market has picked up, but not enough attention seems to be paid to the fact that the foreclosure rate continues to rise:

Despite the efforts, however, more homeowners fell into default in March. Servicers initiated foreclosure proceedings against 290,000 mortgage borrowers, a jump of nearly 20% from February's 243,000, and the highest monthly total since the coalition began tracking data in mid-2007. Starts have risen by more than a third since January.

Stimulus packages have, as expected from this blogger, not resulted in people going out and spending more:

Retailers logged a second straight month of sales declines in April as consumers continued to pull back on all types of unessential purchases, the government reported Wednesday.

The Commerce Department said total retail sales fell 0.4% last month, compared with March's revised decline of 1.3%.

Sales in March were originally reported to have declined 1.2%. Economists surveyed by Briefing.com had been expecting April sales to be unchanged from the previous month.

And, today anyone paying attention to what Main Street looks like today, this should not come as a surprise. My youngest son attends a Charter School in Albuquerque. When I drive back to my home office after dropping him home, I more often than not drive up Menaul. If you haven't done so lately, I suggest you take the drive and pay particular attention to the number of empty store fronts between San Mateo and Louisiana. You're in for a shock. It looks to me that about 20% of those places of business are vacant.

It's not just the traditional bricks and mortar stores that are suffering:

The Eight Northern Indian Pueblos Arts & Crafts Show has become another victim of the weak economy. Organizers announced Tuesday they have canceled the annual show for the first time in its 38-year history.

"We all are" disappointed, director of programming and development Valerie Lyon said Tuesday. "It's just the economy. The economy had its impact on artists and sponsors."

The show, scheduled for July 18-19, had attracted only 51 artists willing to pay $400 for a booth instead of the usual 150-200, according to ENIPC executive director Michael Miller. And instead of $60,000 to $70,000 that has come in sponsorships in previous years, "we had one committed sponsor for $5,000," he said.

Keep in mind that New Mexico has traditionally been somewhat sheltered when it comes to radical swings of the economy because of our heavy reliance on federal spending. Yet, we are obviously hurting as much as the next state right now.

Even more troubling is that on an anecdotal level I've heard of more and more unemployed people taking their severance packages and jumping into day trading - because they are "some great opportunities to make quick money." Personally, I think that is nuts. I still think we're going to see the DJIA at 5,000 going into the 4th quarter of this year or the 1st quarter of next year. The worse is still ahead of us.

This brings me to President Obama's visit to New Mexico tomorrow. He is coming to hold a credit card town hall. If you think the housing collapse had a negative effect on the economy, wait until you see what happens when the current unsecured debt bubble bursts. Combined that with the ugly truth about current government spending:

The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates. Budget office figures released Monday would add $89 billion to the 2009 red ink - increasing it to more than four times last year's all-time high as the government hands out billions more than expected for people who have lost jobs and takes in less tax revenue from people and companies making less money.

The unprecedented deficit figures flow from the deep recession, the Wall Street bailout and the cost of President Barack Obama's economic stimulus bill - as well as a seemingly embedded structural imbalance between what the government spends and what it takes in.

We've only hit the tip of the iceberg.

Stimulus and the Albuquerque New Home Market

It's rare that I post someone's article here in full. Actually, I don't think it has ever happened before now. But, today that is precisely what I'm going to do. This weekend I received an e-newsletter from David Murphy, Publisher of SALESTRAQ™ of New Mexico, regarding the impact of the stimulus of package on the local home market. I found it very enlightening and asked his permission to reprint it in its entirety here. If you send David an email, I'm sure he'll send you a copy of SalesTraq of New Mexico’s current May 2009 “Fast Facts” spreadsheet....

An element of common wisdom shared among parents for many generations is that they shouldn’t allow their children to eat too much candy. If their children eat too much candy, they’ll get a tummy ache, and eventually, vomit. In like manner, as adults we should intuitively know that we shouldn’t indulge ourselves with too much personal debt, including the mortgage variety. Of course, it will feel good at first to have our hands on whatever it is the debt has acquired for us. But in the end the debt will give us adults a different form of tummy ache, known as an ulcer. The Federal Government of the United States of America on the whole, however, hasn’t seemed to grasp this simple concept of “too much debt is bad”. Perhaps the growing economic bellyache our Country is experiencing is a necessary evil – a lesson we need to learn that too much debt may be sweet at first, but becomes sour later on.

We’ll get to some housing data shortly, but think about this with me for a moment; any city / municipal or state governments that have debt obligations exceeding their projected income must choose between two courses of action (or utilize a combination of the two). The first course is to cut expenses. This may mean downsizing programs or even eliminating some of them. They might require lay offs of local government workers. The second course of action is to increase the revenue stream via higher taxes, either on public services or privately generated incomes. (Recent American “tea parties” bear witness to the lack of popularity that the second option affords). How is it, then, that in recent memory the Federal Government of the United States generally promises to take neither route and still manages to substantially grow itself? How can it promise to increase public services and public sector employment, while simultaneously decreasing taxes? What magic does the U.S. Federal Government possess that makes this paradox possible, and can such magic charm us indefinitely?

To ascertain the answer, let’s first consider that the U.S. Federal Government acquires its spending power through three primary channels. 1) Selling U.S. debt to foreign countries. 2) Taxes; on goods, services, and personal and corporate incomes. 3) Inflation / Currency Devaluation. “Huh?” . . . what’s that? That, is the magic which the Federal Government possesses which lesser forms of government do not – the ability to print U.S. dollars out of thin air. Let’s just call it by a sweeter, candy-like name . . . “Stimulus”.

What may come to mind when we see that word “Stimulus” is the so-called “Stimulus Package”, or ARRA (American Recovery and Re-Investment Act) that recently passed the U.S. House and Senate and was signed into law by President Obama. In truth, Government “stimulus” also includes all the prior and subsequent bailouts for various banks and businesses, home foreclosure moratoriums, as well as millions of “stimulus checks” sent to the Americans deemed most likely to go out and blow them right away on candy, flat-screen TV’s and a plethora of other consumables. (God forbid anyone should actually save it or pay bills with it - that would be counter productive to the Government’s efforts). Even write offs of mortgage interest on your personal income tax is a form of Stimulus. In sum, it’s ALL “Stimulus”. Remember the financial “bazooka ” that then U.S. Treasury Secretary Hank Paulson boasted could be used to salvage Fannie Mae and Freddie Mac back in July of 2008? He was simply referring to yet another form of “Stimulus”. (Of note, that bazooka theory didn't work out so well.)

But I digress.

How does the Government Stimulus impact the local housing market? In the most tangible way, there is currently an $8,000 first-time home buyer tax credit being offered (to anyone able to qualify for a loan that is). In typical fashion, the government defines “first-time” home buyers as anyone who hasn’t owned a home in the 3 years prior to purchasing this "first" home. (This is similar to saying that an individual busted for DWI just over 3 years ago can be caught now and regarded as a “first-time” offender.) Consequently, the government is able to deliver on its promise to essentially “lower taxes” by luring someone to buy a home that they otherwise would not, or could not, in exchange for some Stimulus candy. In the process, the U.S. Government must accordingly “print the difference” which has been lost in tax revenue. Will such Stimulus measures for luring home buyers ultimately succeed to pull housing out of its depression anytime soon? The answer to that, I believe, is no. It’s not for lack of trying on the part of the Government, but it’s something deeper and more profound. The country is simply piling up debt, ad infinitum, to the point where paying it back will become impossible. “We the People” are waking up to this dreadful fact.

In turn, the U.S. homebuyer psyche is in uncharted territory, as the local housing market is inextricably linked to the national economy right now in a way never before experienced by human society. There’s something fundamentally different about this recession/depression than those which have preceded it, and that fundamental difference is our modern day access to macro-economic information and its powerful effect on us. When, during all of prior human history, have we had such instantaneous access to such vast swaths of information about the economy? Economic news has now even become a form of entertainment, bearing a stronger resemblance to an NFL football game than to the academic and boring information outlets of old. It’s become popular and hip to talk about the economy, housing statistics, and investing, with the media utilizing fast-paced background music and high-velocity camera motions on shows to try to convince us why we should hold on to Bear Stearns’ stock when it really should have been dropped like a hot potato. The local housing market breathes and exists largely on the choices of men and women whose minds are being shaped as never before by what they daily see, read and hear about the broader U.S. economy. There is so much information out there today, and trying to digest it all can make one feel overwhelmed.

I hope that my assessment of the local housing market is more refreshing that that. My hope is that my evaluations are honest, fair and accurate. I am certain that I don’t always get the details perfect, but I hope that you can look with me at the local housing data with one eye, while keeping your other eye on the “big picture” which invariably drives the local housing market. Moreover, remember that numbers can be interpreted in a variety of ways. Let’s look at some important local data, and I’ll give you my interpretation of it.

I want to begin by taking a fresh look at where local New Home Base Prices are at, especially for the “entry level” buyer right now. Several months ago we looked at the increasing trend of smaller, less expensive floor plan options entering the local new home market. It’s time to look at that once again with updated information. The following data shows the number of local new home floor plans in the greater Albuquerque metropolitan area that have been available to be built for less than $150,000 – going back over the course of several years:

Quantity of local new home floor plans available to be built under $150K in the greater Albuquerque metropolitan area. (includes Single Family Homes, Condos, Town Homes and Apartment Conversions):

May 2003 = 570 plans
May 2004 = 437 plans
May 2005 = 227 plans
May 2006 = 46 plans
May 2007 = 49 plans
May 2008 = 37 plans
May 2009 = 65 plans

Only 5 years ago back in May of 2004 there were 437 different options for buyers to get in a new home for under $150,000 in the greater Albuquerque metropolitan area. Today, there are only 65. That’s an 85% decrease over the last 5 years. Having said that, there has been a 76% increase compared to just last year. Notice how the terms “85% decrease” and “76% increase” sound close to each other numerically. It seems like it might be close to a “wash” in terms of percentage, right? The reality behind the actual numbers, however, can become lost in the translation. Going from 437 to 65 is a huge decline that shows how out-of-whack local new housing has been over the last several years. What we are seeing, then, is a sharp correction of the supply side heading in the right direction of demand. This is a “good sign”, in one sense. It’s “good” because we need more affordable new housing, and it’s beginning to show up more in the market. In another sense, this is a “bad sign”. It is “bad” in the sense that these smaller, less expensive homes will generate less revenue. In other words, the sales agent makes less money on the smaller house because the price is obviously lower. The subcontractors who built the smaller home make less for the same reason. The local and state government makes less in tax revenue on the smaller home for the same reason. The primary beneficiary is then the homebuyer, who (assuming s/he keeps their job), has a smaller monthly mortgage payment to deal with. No matter how you slice it though, the majority of people with ties to the home end up making less money, which means less disposable income, which means local businesses begin to suffer, which means layoffs for some, which all feeds back into the recession cycle.

As the housing bubble deflates in real terms due to a change in home buyer demand for smaller, less expensive new housing, it also continues to deflate in subsidiary terms as previously built, price-inflated bubble era homes are foreclosed on, walked away from, or in some cases pillaged like a vulture cleaning the carcass of a dead animal. All of these realities combine to spell less tax revenue for governments of all shapes and sizes, and sends any true “bottom” of the housing market further off into the hazy future.

This “big picture” of what’s happening to the housing market and its effects on Government is difficult to analyze. It’s very similar to watching the formation of storm clouds. You just look up one moment and say to yourself, “Whoa! Look at those storm clouds! It was clear just an hour ago!” If you have ever seen a time-lapse film of gathering storm clouds, it becomes much more apparent how the storm actually formed. In general observation, the process is very slow, almost totally imperceptible. But if you speed up the film, the mind grasps how it all came together and happened in the first place. The same is true when looking at the U.S. economy and its ties to housing. In hind sight it’s easy to see what went wrong, but during the moment it was happening it was almost impossible to notice, even for our illustrious politicians.

But I’ve digressed, again.

Let’s focus briefly on the other end of the housing spectrum; the local luxury resale market. When home prices were inflating during the early and mid part of this decade, many luxury custom homes were built. I want to look specifically at homes which today are listed on the local MLS at or above $1,000,000. A search earlier today showed there were 150 properties on the local market that fall into this price category. So, how many sales in this price range happened during the first quarter of this year? The answer is, 1. There was only one resale home sold for over $1,000,000 during the 1st quarter of 2009. If even 3 such properties could sell during each coming quarter from here on out, and not a single new listing entered the market for over $1,000,000, then it would still take over 12 years to absorb the current supply. Ouch! In terms of housing bottoms, the luxury market has the farthest to go without question.

So, what’s yet to come?

In my opinion, we are near a bottom in housing in some ways, but that bottom will likely be with us for quite a few years. The recession/depression we’re in will likely appear to wane in coming quarters, partially through the effects of “Stimulus” and Government redefinitions of economic indicators, but in reality I believe that price inflation is right around the corner and will have significant negative effects. I say that because anything of real value has at its core, scarcity. If something is rare, its value is naturally higher. When the U.S. Government prints up hundreds of billions more U.S. dollars via “Stimulus”, it is by definition devaluing the currency. The rarity of U.S. dollars, and thus the value of U.S. dollars, is eroded away when trillions more come rapidly into existence. Combined with dwindling inventories due to lack of credit availability, rising prices are inevitable. The benefits of inflation are reaped by those who receive the newly created money up front. Expect to see over the next two years some companies (with government contracts of course) do exceedingly well, including producers of solar cells, wind turbines, and other renewable energy manufacturing companies. Expect also to see over the next two years, further suffering in the private sector, especially in chain retail stores, the auto sector, and yes, new housing. Going forward it will be a mixed bag to say the least.

The famous investor Warren Buffet placed his bets on See's candy back in 1972. His investment strategy has had a great return so far, because he knew that even in economic downturns, candy sales would remain intact. That's because candy is relatively cheap, it’s legal, and it’s a strong vice for those who might be feeling down and need a quick pick-me-up. Just remember, too much of it isn’t good, but you probably won’t hear that from Mr. Buffet. In like manner, too much debt isn’t good . . . but you probably won’t see or hear that from Uncle Sam either.

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New Communities for May 2009:

(No new communities opened in the last 30 days)
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Closed Out* Communities this month: (Floor Plans still available in the SalesTraq floor plan archive file)

(No new communities closed out in the last 30 days)

*Builder either no longer has lots available, or development has ceased for the time being
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More New Subdivisions and Developments COMING SOON:
CASA VERDE VILLAGE by Jenco Custom Homes (Far Northeast Albuquerque)
MESA DEL SOL Master Planned Community (Southeast Mesa)
VENTANA DEL BOSQUE by Aspire Homes (Downtown Albuquerque area)
VILLA LOMA TOWNHOMES by Points West Homes (Northeast Heights)