Finger Pointing Over Trade

The Washington Post is reporting EU Will Not Improve on Farm Trade Offer.

The European Union said Wednesday it will not enhance its offer on farm trade, calling on the United States and others to match its concessions in talks to liberalize global trade through the World Trade Organization.

"I have no plan to make a further offer in agriculture," EU Trade Commissioner Peter Mandelson told the European Parliament.

He said the farm trade concessions he has put on the table in the WTO talks were "the most substantial offer" the EU has ever made, and that making more "would further unbalance the (WTO) negotiations" that head for a ministerial round in Hong Kong in two weeks.

The EU has offered cuts of 70 percent in trade-distorting subsidies to farmers and farm produce exporters and cutting the EU's average agricultural tariff to 12 percent from 23 percent.

"Taken as a whole, this is the most substantial offer ever made by the European Union in any trade round," said Mandelson.

Mandelson accused the United States and others of dawdling, posturing and focusing excessively on farm trade issues at the expense of progress in other areas of liberalizing world trade. He said a global trade deal can only happen if Europe's partners "stop hiding behind unfounded criticism of the EU, or patently unrealistic and tactical demands ... If they continue merely to ask for more from Europe, without paying into the pot themselves, they _ not we _ risk destroying" the current round of negotiations.

Is that the biggest finger pointing episode since Babe Ruth's famous point in the 1932 World Series between the Cubs and the Yankees?

Probably not, but even if so, I doubt anyone makes a movie out of it.
There are neither legends nor heroes in this round of finger pointing.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Is it 1966 again?

Flashback 1966: Just as the US was sinking ever deeper into the quagmire known as Vietnam, Vermont Senator George Aiken delivered a famous speech in which he said that "we should declare victory and go home." Unfortunately the war dragged on for six more years and eventually North Vietnam won.

Take a look at North Vietnam today: Three decades later, Vietnam is a quasi-capitalist country, cultivating US investment, consumer markets, and tourism. How might history have changed if only we had the guts to admit a stupid mistake in 1966, declaring the war "won" and going home? For starters we would have spared countless American and Vietnamese lives. The outcome of history would have been far different and we would have had one less huge black spot on the soul of the US.

At the time, "staying the course" was posed as a test of American credibility. I was in the 7th grade at the time. Our science teacher, Harry Don Wirth told us "I do not think we should have entered this 'conflict', but It's too late to pull out now". As Lyndon Johnson liked to say: Who would follow the lead of a superpower who "tucked tail and ran"?

Harry Don Wirth was drafted and left in the middle of our 7th grade year. I have no idea what happened to him. He was the single best teacher I ever had. Mr. Wirth was simply amazing. He even had the class dunces motivated to work. The class in general was disappointed if we did not receive enough homework. We ran roughshod over his replacement. I can not even remember his name.

Public sentiment changed against the war in 1968 and Nixon decided to masquerade as the "peace candidate", on a "peace with honor" campaign. By the time I reached senior year in high school, however, the stupid war was still going on. Then on January 23, 1973 Nixon gave his "Peace with Honor" television broadcast announcing the initialing of the Paris 'Agreement on Ending the War and Restoring Peace in Vietnam'.

Fighting between South Vietnamese and Communists continued despite the peace agreement until North Vietnam launched an offensive in early 1975. South Vietnam's requests for aid were denied by the U.S. Congress, and after Thieu abandoned the northern half of the country to the advancing Communists, a panic ensued. South Vietnamese resistance collapsed, and North Vietnamese troops marched into Saigon Apr. 30, 1975. Vietnam was formally reunified in July, 1976, and Saigon was renamed Ho Chi Minh City. U.S. casualties in Vietnam during the era of direct U.S. involvement (1961–72) were more than 50,000 dead; South Vietnamese dead were estimated at more than 400,000, and Viet Cong and North Vietnamese at over 900,000.

Is it 1966 again?

It sure feels like it.
All this talk of "cutting and running" is as much horse hockey today as it was in 1966 when George Aiken proposed doing the same. The only difference is that Senator Aiken was smart enough to package his proposal as a "victory". The sad truth of the matter is that we can no more win this war than we could win the Vietnam War. The entire basis for the Vietnam War was based on one stupid theory and one big fat lie.

Back in the 60’s that Stupid theory was known as "The Domino Effect" whereby if we lost South Vietnam, Communism would spread over all of Asia. The lie was the Gulf of Tonkin incident in which supposedly North Vietnam supposedly attacked the US in international waters.

One can only ask, would Vietnam be any better off today if the US managed to win the war? I think the question is moot because winning was not possible. Vietnam had more willpower and stamina to fight the US than the US public had stamina for sending masses of soldiers to their graves. In short, winning the war was not possible because there was nothing ever to win.

Today’s Stupid Theories and Stupid Lies

Today’s stupid theory is that we can cram Democracy down the throats of people that do not want it and/or are ill equipped to deal with it. President Bush campaigned against "nation building" in the 2000 election yet violated that pledge. It is obvious that he has learned nothing from either the Vietnam War or Russia’s miserable failure in Afghanistan, as he now seems bound and determined to continue his failed policies of "nation building".

Everyone knows today’s lies: Weapons of mass destruction, mushroom clouds, uranium "yellow cake" from Niger, and trumped up charges by Colin Powell in a speech to the UN that he now regrets.

Reminiscent of Aiken’s 1966 speech, Congressman John P. Murtha, in a press conference as well as in a speech before Congress Murtha had this to say...

"The war in Iraq is not going as advertised. It is a flawed policy wrapped in illusion. The American public is way ahead of us. The United States and coalition troops have done all they can in Iraq, but it is time for a change in direction. Our military is suffering. The future of our country is at risk. We cannot continue on the present course. It is evident that continued military action is not in the best interests of the United States of America, the Iraqi people or the Persian Gulf Region.

"We spend more money on Intelligence that all the countries in the world together, and more on Intelligence than most countries GDP. But the intelligence concerning Iraq was wrong. It is not a world intelligence failure. It is a U.S. intelligence failure and the way that intelligence was misused.

"I said over a year ago, and now the military and the Administration agrees, Iraq can not be won "militarily." I said two years ago, the key to progress in Iraq is to Iraqitize, Internationalize and Energize. I believe the same today. But I have concluded that the presence of U.S. troops in Iraq is impeding this progress.

"Our military has done everything that has been asked of them, the U.S. can not accomplish anything further in Iraq militarily. It is time to bring them home."

Unlike the chickenhawks in this administration, Murtha won two Purple Hearts as a combat Marine in the Korean and Vietnam wars, and then tacked on 23 more years in the Marine Reserve. In Congress he has been a huge supporter of the Pentagon, and since 1989, he has been either chairman or the ranking Democrat on the Appropriations Subcommittee on Defense. In other words this was a stunning switch for Congressman Murtha.

Chickenhawk Scorecard

In marked contrast, here is the administration scorecard:

• President Bush hid out in the guard and arguably did not even bother showing up for duty.
• Cheney had 5 deferments.
• Ashcroft had 7 deferments.
• Rove did not serve.
• Hastert? Frist? Did not serve.
• DeLay Did not serve. In fact, in one of the silliest assertions ever, Delay actually said: "So many minority youths had volunteered that there was literally no room for patriotic folks like myself."
• There is not a single member in Congress with a son or daughter actively serving in Iraq
  

Rather than admit the obvious, supporters of this stupid war immediately went on the attack by questioning Murtha’s patriotism. The debate in Congress was rather heated to say the least. At one point in the emotional debate, Rep., R-Ohio, told of a phone call she received from a Marine colonel.

“A few minutes ago I received a call from Colonel Danny Bubp, Ohio Representative from the 88th district in the House of Representatives. He asked me to send Congress a message: Stay the course. He also asked me to send Congressman Murtha a message, that cowards cut and run, Marines never do. Danny and the rest of America and the world want the assurance from this body – that we will see this through.”

By the way, exactly who is this "Colonel Danny Bubp", some kind of war hero like Murtha? No, all of his time was spent in the reserves. In other words, this was a self serving stunt by Jean Schmidt on behalf of a state legislator who never served active duty. Bubp's big claim to fame is receiving a plaque along with Schmidt in support of keeping public displays of the Ten Commandments.

Harmy on the Motley FOOL had this to say about Danny Bubp:
"Danny Bubp is typical of many military and political types who do the tub-thumping that sends young men to war. It has always sickened me the way these people manage to stay out of the real war and yet suddenly appear on the dais when it's all over complete with immaculate shiny shoes and a chest full of medals for the military and civic honours showered upon the politicians. You needn't think that the US is unique in this respect. It happens and has happened in every country. At the conclusion of WW1 the British held a victory parade with the King and Queen, Generals and Politicians all on the dais. The parade took hours to pass but shamefully a battalion of the war's maimed were not allowed to participate because the extent of their injuries might offend people."

Vice President Cheney also attacked Murtha, to which Murtha responded:

“I like guys who have never been there to criticize us who have been there. I like that. I like guys who got have five deferments and never been there and send people to war and then don't like to hear suggestions about what needs to be done.”

Let’s return to reality.
Here is that reality:
CNN/USA Today/Gallup Poll. Nov. 11-13, 2005

Q: "Do you approve or disapprove of the way George W. Bush is handling the situation in Iraq?"
A: Approve: 35% Disapprove:63% Unsure:2%

Q: "In view of the developments since we first sent our troops to Iraq, do you think the United States made a mistake in sending troops to Iraq, or not?"
A: Mistake: 54% Not a Mistake: 45% Unsure: 1%

Q: "All in all, do you think it was worth going to war in Iraq, or not?"
A: Worth it: 38% Not worth it: 60% Unsure : 2%

Q: "Do you approve or disapprove of the way Bush is handling the situation in Iraq?"
A: Approve: 30% Disapprove: 65% Unsure 5%

Q: "Do you think Dick Cheney deliberately misused or manipulated pre-war intelligence about Iraq's nuclear capabilities in order to build support for war with Iraq?"
A: Cheney deliberately misused 52% Did not deliberately misuse: 33% Unsure 15%

Whether or not you agree with this war or not, the reality of the situation is clear.

• The public has turned against this war.
• The public thinks we were misled about the war.
• The public thinks it was a mistake to enter this war.
• Support for this war even by some former Congressional hawks has ended.
• This administration is blowing up in scandal after scandal and senators are distancing themselves from the president.
  

Flash back once again to 1966.
We made a horribly foolish mistake to enter the Vietnam War and an equally stupid mistake to not just admit it and leave.

Flash forward 29 years.
Oddly enough it seems to be 1966 all over again.
We have a chance to admit we were wrong as Congressman Murtha is asking us to do or we can play politics with "Cut and Run" speeches as the chickenhawks are doing.

Can We Win?

Politics aside, we can no more "win" in Iraq than we could "win" in Vietnam. For starters our original goals were too high, based on lies, and we fought the war with to few resources without ever planning for the aftermath. We have made far too many mistakes to "Win their hearts and minds". It was a serious misjudgment to think we could EVER win their hearts and minds at gunpoint. Current polls reveal that 80% of Iraqis want us out of there. Unless we can turn those numbers around it is impossible to win either their hearts or their minds let alone both. Can those numbers possibly be turned around given our use of white phosphorous on civilians, prison torture by US soldiers, and countless collateral damage on civilians? I think not. It is simply too late.

Yes, Iraq is likely to break out into Civil war if we leave. Then again we can stay six more years, waste another $800 Billion dollars on top of the $200-$300 billion we have already wasted, waste possibly 6,000 more US lives, and then leave only to find Iraq break out in Civil war as we eventually toss in the towel. If it plays out like that, it will be an exact repeat of Nixon's "Peace with Honor" victory, only to see South Vietnam overrun the moment we left.

The bottom line is this war can not be won for multiple reasons.

1. It was never really winnable in the first place given that its foundation was based on hopeless intelligence at best and a pack of lies at worst, all on top of a false premise that we could cram Democracy down their throats at gunpoint while they would shower us with flowers in glee.
   
2. We made far too many mistakes to ever win their hearts and minds now, and without doing that there is no way to win.
3. The Iraqi "insurgents" have more willpower as an occupied nation than we do as occupiers
4. Even if you disagree about the above, history is clear about what happens once public support for a war wanes. We will eventually pull out, consequences be dammed. The public seems likely to insist upon a pullout, voting out anyone that gets in the way.
5. Just as in the 1983 movie "War Games" , the only way to win was to not play. It's too late to adopt that strategy now. Seriously, if you have not seen that movie, I suggest you check it out soon.
   

Mish Peace Proposal

We can no longer "win" as defined by our original goals, but perhaps we could escape with some semblance of a "draw" if we could just manage to turn our problems into an Arab problem. The first step in correcting a problem is to admit you have a problem and admit the many mistakes that caused it. It simply must be done to have any chance. We have made dozens of mistakes but refuse to admit any of them. Nor has anyone but low level scapegoats been held accountable for those mistakes. Here is my four step proposal.

1. Apologize to the world and Iraq for the mistakes we a have made.
2. Offer to turn Iraq over a consortium of Arab nations including Saudi Arabia and Iran as well as the UN.
3. Agree to let that consortium set Iraq policy regardless of what happens or how we feel.
4. Hold accountable some higher up military and administration officials for mistakes that have been made.
   

It is unclear if a consortium of Arab nations would agree to take on the problem even with our admission of guilt. Following are the potential outcomes of that proposal:

• The Arab nations refuse to take on the problem. Far from being a total disaster we could immediately wash our hands of this sordid affair and begin pulling our troops out. We would at least be able to say we made a good faith effort.
• They accept the proposal and ask we withdraw our troops. This is likely the best case scenario. We effectively hand over our problems to someone else. We relinquish all control of course, but it is a mistake to assume we ever had any in the first place.
• They accept the proposal but still want a US military presence in Iraq. This is highly unlikely and not realistic. The consequence would be that US military would be under control of UN or Arab command. I doubt that would be acceptable to the US.
• The Arabs want to study the plan for something like forever. If this happened we could force a choice by setting a timetable to withdraw forces in nine months or so if agreement was not reached. In the end, it would probably be better to have the plan rejected upfront rather than after we waste more money and lives.

Personally, I think the odds that we would admit our mistakes at something close to zero%. In other words such a peace proposal would be "politically incorrect" and therefore dead on arrival. Given that likelihood, the best practical approach is probably to do what Senator Aiken proposed in 1966: Declare Victory and Leave.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Do GSEs help make housing affordable?

Reuters is reporting the GSE Mortgage limit raised to $417,000 for 2006.

U.S. mortgage finance regulators on Tuesday raised the limit for loans that can be bought by government-sponsored mortgage enterprises Fannie Mae and Freddie Mac to $417,000 for 2006, in most areas.

Stephen Blumenthal, acting director of the Office of Federal Housing Enterprise Oversight (OFHEO), announced the rise in what is called the conforming loan limit for single-family mortgages purchased by Fannie Mae and Freddie Mac. The 2005 limit is $359,650.

Excuse me but I have a few of questions:

• Weren't we trying to limit the mortgages going to Aunt Fannie and Uncle Fred?
• Wasn't the whole point of Fannie and Fred to make "housing affordable"?
• Aren't Fannie Mae's books still so screwed up that they can not make heads or tails out of their derivative mess?
• Shouldn't Aunt Fannie at least have to get her books in order before we start raising loan limits on conforming loans?

It seems to me that the mission of Aunt Fannie and Uncle Fred has been long lost. One of the reasons housing is not affordable is there are 280 active Federal bills to "make housing affordable".

By charter, the GSE mission is to provide liquidity, stability and affordability to the nation’s mortgage markets. Well we sure have witnessed (for now) success on the liquidity front, but as for price stability and affordability I doubt the failure could possibly have been any greater.

If anyone really wants to make housing affordable, they should scrap nonsense about the "ownership society", eliminate the housing deduction, cancel 280 government programs to "make housing affordable", not cut interest rates to 1% in a silly panic, and with tears in my eyes (I am a sentimental kind of guy), finally bury Aunt Fannie and Uncle Fred.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Now and Then

Let's take a look at what David Lereah, chief economist for National Association of Realtors is saying now :

• "The drop in sales and rise in inventories in October signals that the housing sector has likely passed its peak"
• "Make no mistake, slowing has occurred"
• "We expect further cooling in coming months"

Gee, it only seems like yesterday.....
Well not quite but it was February of this year when David Lereah published

Are You Missing the Real Estate Boom?
The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End of the Decade - And How to Profit From Them

"It’s not too late to increase your stake in the greatest real estate boom of our generation. Whether you are a first-time buyer or already own your home, Are You Missing the Real Estate Boom? will show you how you can dramatically increase your overall wealth. Author David Lereah, chief economist for the National Association of Realtors, shows why the real estate market is poised to climb higher over the next decade—and explains what you can do to profit from it."

Let's look at a couple of charts from my friend Professor Piggington:






The professor lays out the evidence of the bubble for everyone to see.
Take a look at the charts above, read the professor's case, and decide for yourself.

Is it really a "Once-in-every-other generation opportunity"?
I happen to think that it is.
For all the bubble areas especially California and Florida, it is perhaps a once in a lifetime chance to cash out.
Actually, it WAS last spring and summer just as David Lereah's book was rolling hot off the presses.
For those that bought several years ago it's still a great time to cash out.
Unfortunately many of those that recently bought into the hype are finding that they are now underwater.
Heaven help those underwater in condos in bubble areas.

The once in a lifetime opportunity to buy came about 10 years ago. But that was then and this is now. Now it's time to sell.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Parties, Gifts, and Bonuses

The USA Today is reporting firms are cutting back on parties, gifts, and bonuses.

This year marks the first drop in companies holding holiday parties since 2001, when the weak economy and terrorist attacks caused companies to pare festivities. Even long-held traditions, such as the free company turkey, are going by the wayside: Just 2% of employers will give their employees turkeys this year, according to the Washington, D.C.-based Bureau of National Affairs (BNA).

"The findings were quite startling to us," says Dale Winston, CEO of executive search firm Battalia Winston International, whose yearly holiday survey found a decline in year-end company parties. "It is significant, and it's also probably reflective of the spirit of the country. We're at war, there's uncertainty about the economy."

• Parties. 87% of employers will have some type of holiday celebration down from the 95% who had parties last year. Only 17% of companies expect to have more expensive parties this year.

• Bonuses. In keeping with a recent trend toward basing pay on employee performance, more companies are doing away with the year-end bonus. About 60% of companies will not award them this year, according to human resources firm Hewitt Associates.
"They're seeing that as a way to reduce their costs in some places," says Ken Abosch, compensation business leader at Hewitt. "Some might think employers are taking a Scrooge mentality, but they're putting it into a different form."

• Gifts. More than half of companies gave gifts in 1988, the Battalia survey found. But this year, 62% say celebrations will not include gift giving.

Hmmmm. Let's compare pictures.

Picture Number 1:

• Corporation cash coffers are extremely high
• Profits and earnings growth have been favorable
• Share buy-back announcements are extremely high
• Outsourcing continues unabated adding to corporate profits
• One time enormous windfall by repatriating cash from overseas
• CEO pay and bonuses skyrocketing
• Foreward guidance has generally been favorable
• Productivity is up
  

Picture Number 2:

• Corporations are not expanding their businesses
• Corporations are not really hiring compared to normal recoveries
  
• Corporations are being extremely stingy at sharing profits with employees
• Corporations are shifting more benefit costs to employees
  

These contrasting pictures are not sign of a healthy economy. Real wages are declining even while corporations are sitting on record levels of cash. The "Trickle Down" theory does not seem to be working. The fact that corporate cash coffers are so high is sign that companies do not see anything worthwhile to invest in. Overcapacity everywhere? You bet. Instead of investing cash in operations, corporations are buying back shares at bloated prices at the tail end of a three year "recovery".

76% of the GDP is directly related to consumer spending but consumers are going deeper in debt every day. Only rising asset prices on houses and stocks have kept the consumer going. Signs are everywhere that housing and autos have both peaked.

Cutbacks in corporate parties, bonuses, and gifts are still more signs of tougher times to come. It remains to be seen if consumers throw one last Christmas bash before the light go out in 2006. Recession dead ahead.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Another Mish Household Tip

Once again it is time for practical posts for the practical homeowner.
That could only mean one thing......
Yes Mish bloggers, here is another long awaited and long overdue Mish Household Tip.

[Note: This is strictly off track and certainly has nothing whatsoever to do with global economics. I periodically post my "tips" on a couple of stock message boards that I am on and they generally have been received well. Previous posts have been on how to catch raccoons living under one's porch, why it matters the order in which one paints their front porch vs. sealing their driveway, how to fix a flat on a wheelbarrow, and other such helpful advice. Actually my advice is generally practical advice on how NOT to do something. As a public service announcement and without further ado I am pleased to announce my latest set of household tips.]

Mish's Tips For Today.

1) Do not attempt to thaw out a frozen bottle of Pompeian Red Wine Vinegar on a high setting in your microwave. Even if you think you can watch it, the phone just might ring and you just might leave to take the call, only to return to the kitchen and find that the label on the bottle of vinegar actually caught fire with smoke billowing out of the microwave.

2) This is a taste preference kind of thing but I prefer Pompeian over some of the crappier brands.

3) Enquiring minds might wonder how that bottle of vinegar got frozen in the first place. That of course leads to tip number three: Do not turn the settings on your freezer and refrigerator to max and leave them there for extended periods of time.

4) Some feeble minds might leave it at that. But many Mish readers are made of sterner stuff and would not easily be satisfied with such fluff answers. More inquisitive readers just might be enquiring as to why Mish turned up the settings in the first place. This of course leads to tip number 4: Do not go on a rampage buying pork chops and steaks and other stuff that is on sale, so much so that it does not really fit in one's freezer compartment. If you do, you might be tempted to cram it all in to the point there is no cold air circulation and stuff starts to thaw out. In time this leads to one's freezer compartment and ice maker dripping water all over the floor, forming big puddles that have to be mopped up. Then, in an attempt to stop the dripping, one just might be tempted to turn the refrigerator dials to the "cold side".

Here is the bottom line: If you overstock your freezer you just might end up with the label on a bottle of Pompeian Red Wine Vinegar catching fire in your microwave to nicely compliment the puddles of water all over the floor the day before.

As always, I speak from practical experience on these matters.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Lumber Dispute Resolved?

The New York Times is reporting
U.S. to Accept Nafta Ruling to Cut Duties on Lumber.

The Commerce Department said Tuesday that it would accept a Nafta dispute panel ruling in a long-running dispute with Canada and would substantially reduce hefty duties on Canadian softwood lumber.

But while the United States government accepted the settlement's finding that countervailing duties should fall from about 16 percent to less than 1 percent, it did not endorse it. And John Sullivan, general counsel for the Commerce Department, said that the acceptance of the ruling did not prevent the United States from starting an extraordinary appeal later.

"We start off with the premise that Canada subsidizes lumber," Mr. Sullivan told reporters during a conference call. "We're complying with the panel's decision, but we don't agree with it."

The United States will continue to collect its 20.96 percent tariff on Canadian softwood - which includes a separate antidumping duty of about four percentage points - until the Nafta panel completes the case, which may take more than six weeks. Any extraordinary challenge would further extend that period.

Mr. Sullivan also said that the ruling had no impact on duties that have been collected to date but set aside because of the trade dispute. Canada estimates that those funds total about 5 billion Canadian dollars, and it is demanding their return.

At the heart of the case are differences in the sources of lumber. In Canada, the vast majority of lumber comes from logs harvested from government land, while private land is the primary source in the United States. American producers contend that Canadian provinces subsidize their industries by charging artificially low cutting fees.

While Tuesday's move is far from the final word in the dispute, it may provide some political relief for the Canadian prime minister, Paul Martin, and his Liberal Party. His minority government could be facing an election shortly, and early Tuesday, before the Commerce Department announcement, he was attacked by the opposition Conservative Party for failing to advance the softwood case.

The Coalition for Fair Lumber Imports, a group representing American producers involved in the dispute, condemned the move to reduce the duty.

"I could go on for hours about how outrageous this subsidy decision is," said Harry Clark, a Washington-based lawyer for the group. "What we have here is a Nafta panel that simply decided to flout its obligation to enforce U.S. trade laws."

I am not sure if the word "accept" is exactly correct.
In spite of 5 separate NAFTA rulings the US is still saying "We start off with the premise that Canada subsidizes lumber".
Furthermore the US is going to continue to collect 20% tariffs for 6 weeks or so until the case is "final", then issue an "extraordinary challenge" to further extend the case.
Does this come close to "accepting" the decision?
I think not.

In one of the silliest statements on free trade yet, Harry Clark, lawyer for "The Coalition for Fair Lumber Imports", said Nafta is "flouting" its obligation to enforce U.S. trade laws. Flouting? Mr. Clark, why shouldn't NAFTA want the US to enforce its treaties? If ever there was "flouting" it was blatant flouting by President Bush on behalf of US lumber companies to collect mammoth tariffs in spite of 5 arbitration rulings in favor of Canada. That is the essence of "flouting" and that is why there has been little or no progress in reaching new trade accords earlier this year in South America. Point blank: The US is not afraid to play the bully in one-sided agreements, and that is why the US and EU are becoming increasingly isolated on free trade issues while China, Australia, and others forge ahead.

One more thing: Anytime one sees there is a Coalition for "Fair" Anything, rest assured it is in reality a Coalition for Increased Protectionism, Unfair Subsidies, and/or other Government Handouts, all at taxpayer expense. That Mr. Clark, is exactly what you and your coalition are all about.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

No Social Security Number? No Problem!

It's the American dream : owning a home.

With the recent spike in housing costs, it's become more difficult for many Valley families to qualify for a home loan. But some local banks are giving out loans, and they don't even require a social security number.

David seems like your typical first-time homeowner. The house is small, money's tight. But his family is happy. "It was our dream." he said. "So it was like our dream became true, finally."

But getting a loan from the bank almost didn't happen. An employee from the bank called and said it seemed they had a problem. The problem was David's social security number ... it's a fake.

He is undocumented, an illegal immigrant. David thought it was a dead end, but not in California. It's among a few states where banks are offering mortgages to people who they know are illegal.

David got a 30-year, $135,000 loan. He pays $950 a month for his house in the South Valley.

The Valley non-profit group Acorn is helping people like David. They set him up with Citibank in Fresno, where a social security number is not required.

Instead, it asks for an Individual Taxpayer Identification Number, or I-TIN. It proves they pay taxes to the IRS. Applicants also have to have a bank account, proof of US residency for two years, and two years of credit references.

Diana Hull, an illegal immigrant opponent and president of a group called Californians For Population Stabilization says against the law. "There is a law against aiding and abetting illegal aliens to continue to live in the United States. Issuing a mortgage to an illegal alien is helping him establish himself and remain the United States, which is clearly illegal. It's a felony," she says.

Despite the accusations that what they're doing is illegal, Citigroup and Acorn stand by the program.

Acorn issued a statement saying everything about their program is legal. They say in the United States, it is perfectly legal for non-citizens to own property.

When asked about its opinion on whether the program is indeed legal, or unlawfully entices illegal immigrants to stay, the U.S. Attorney's office refused an answer.

The attorney general refused to answer a question as to whether or not the practice is illegal?! What kind of nonsense is this?

This is how I see it.

There is nothing illegal about foreigners owning property in the US but it an entirely different matter when they lie about their status, lie about income earned illegally, and lie about their owner occupied status in order to get a lower rate. Then again, they will be occupying that house, so who cares if they do so in a legal or illegal manner? Certainly not Citicorp who is more than happy to process the loan sell it for a fee to Fannie Mae. As long as someone can make money on these loans no one really cares if they are aiding and abetting illegal aliens or not.

Here is the bottom line.

• Money speaks louder than principles.
• The US Attorney General is a wimp.
• Unless there is a huge tightening of our borders, illegal aliens will come pouring in.
• Neither the Democrats nor the Republicans have the backbone to face this issue right now.
• The problem is likely to simmer until one of two things happen: 1) there is a massive public outcry against illegal immigration over jobs 2) some sort of disaster happens such terrorists slip over our porous, poorly guarded border and cause some sort of huge problem somewhere.
  

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

What card does your pet carry?

It seems that distinguished cats prefer American Express.

Last month Marilyn Hecox's 4-year-old black domestic short-hair, Samson, received an offer for the American Express Rewards Plus Gold Card.

Mish note: Click on the above link to see "samson".

"At first it's funny. Then you get a little nervous about it," Mrs. Hecox said, sitting in her dining room and thumbing through the application with a puzzled look on her face while Samson sat at the door waiting to be let outside.

"As the membership criteria at American Express remains stringent, the Rewards Plus Gold Card is difficult to acquire for all but the most financially disciplined," the application letter starts off.

"Only a select group of people will ever carry the Rewards Plus Gold Card. It instantly identifies you as someone special - one who has earned a superior degree of financial freedom."

According to the Federal Reserve, Americans were carrying $2 trillion in credit card debt in September, a $300 billion increase since 2000.

How much of that is carried by cats?
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Can GM be saved?

The problems at GM continue. Its stock price is near 52 week lows and GM is reportedly looking to sell a stake in its consumer financing unit to raise some $11-15 billion dollars to fund operations.

Not so fast says the Pension Benefit Guaranty Corp. It seems The PBGC may seek additional pension funding from GM to safeguard against a taxpayer bailout should GM go bankrupt sometime down the road according to the Wall Street Journal article Pension Agency Casts Shadow on GM Sale.

If General Motors Corp. raises $11 billion to $15 billion by selling a stake in its highly profitable consumer-finance arm, the U.S. agency that partly guarantees defined-benefit pension plans could demand that a chunk of the windfall go to GM's pension funds rather than to shareholders or to the development of new auto models.

Douglas Elliott, president of the Center on Federal Financial Institutions, a nonpartisan think tank, said a termination of GM's $100 billion pension plan could result in a claim on the PBGC larger than the total of all the previous claims on the agency since it was created in 1974.

"The PBGC could get some agreement on what GM will do with the proceeds from GMAC in return for protecting the buyer or approving the [General Motors Acceptance Corp.] transaction," said Brian Johnson, an analyst with Sanford C. Bernstein & Co.

Separately, the Securities and Exchange Commission is investigating whether the assumptions GM has used to calculate its pension liabilities are overly optimistic. Even a relatively small change in those assumptions could drop GM's pension funds into the red, according to GM's own measures.

At the heart of the issue is whether or not GM's pension funds are fully funded now. GM claims that its pension plans are fully funded. The PBGC calculates that the plans are underfunded by an estimated $31 billion. Technically both are correct under the arcane rules that govern pension accounting. On a practical basis, however, the PBGC is correct: GM's pension funds are enormously underfunded.

Meanwhile GM has sustained $3 billion in losses this year, its debt has been downgraded several times to junk status, GM is losing market share, and it appears the economy and car sales are both slowing as well. Although GM Chairman and Chief Executive Rick Wagoner has repeatedly stated that bankruptcy isn't an option, the S&P has placed the bankruptcy odds at 30%. GM's stock price is hovering near 52 week lows around $25.

The risks involved with GM spinning off part of GMAC and relying more on its core auto business are considerable, says Standard & Poor's Corp. auto analyst Scott Sprinzen. "We have a B-minus rating on, and we're still reviewing that rating," said Mr. Sprinzen. "It's still on credit watch, and we could lower the rating further, even if there's a transaction with GMAC. The risks are high, that's how we see it."

Mr. Wagoner acknowledged in a recent interview that spinning off GMAC will put more pressure on GM's auto business to perform, but said the spinoff is needed to secure GMAC a better credit rating.

"We're going at it to get GMAC back to an investment-grade credit rating, and, frankly, support the business purpose of GMAC, which is to support GM and its growth options," Mr. Wagoner said. "That's sort of step one in the discussion. What we will do with the proceeds is to be determined."

I think what Mr. Wagner means is "What GM is forced to do with the proceeds is to be determined." It will also be interesting to see if the PBGC or the bond markets forces GM to cut its dividend. Were that to happen in a timely enough manner (as in now), GM's stock would likely plunge but its bonds would likely gain. If the market forces the issue at a later date it might not be good for either. The point is all moot however, since in my mind the real debate is not whether GM will go bankrupt, but whether said bankruptcy occurs sooner rather than later.

The real question then should be how to handle the upcoming bankruptcy in the most equitable manner possible rather than wasting money trying to prevent it. I would not wish for GM pensioners to go through the torture that the airline industry employees just went through.

In that regard Mish actually has a five step plan to "save" GM.
Here it is:

1. GM should sell off all its profitable units
2. Fully fund its pension plan
3. Declare bankruptcy
4. Dissolve the union agreements
   
5. Start all over on a smaller scale
   

Following are the benefits of the above proposal:

• The plan would protect GM pensioners.
• The plan would protect US taxpayers from a bailout.
• The plan would reduce much of GM's cost disadvantage.
• The plan would give a future GM some semblance of a fighting chance at competing in a global marketplace. Those that believe GM knows how to design and manufacture cars that people want would have their chance to prove it, without fighting excessive cost overheads.
  
• The plan would remove unneeded auto manufacturing capacity that is depressing the sector.

GM is currently on collision course with bankruptcy anyway so it may as well happen in a manner that protects the most people. The 5 step program above would protect both GM pensioners and US taxpayers. No doubt union members will object to step number 4, but a reduction in the power of the UAW would appear to be a foregone conclusion anyway. All one has to do to see the writing on the wall is look at how the unions were treated in the airline bankruptcy proceedings. I see no reason to believe that the UAW would be treated any differently coming out of bankruptcy than the airline unions were when they came out of bankruptcy. Finally, the union may as well lock in a good deal for its pensioners right now as opposed to a poor one later that might also affect taxpayers to the tune of $30-100 billion or so.

The Mish proposal is unlikely to be implemented as Chairman and Chief Executive Rick Wagoner has declared repeatedly that "bankruptcy isn't an option". Furthermore GM stockholders and bondholders would not particularly be pleased with my plan to say the least. If a CEO has a duty to shareholders, then as a practical matter what anyone deems "fair" to pensioners or taxpayers is irrelevant. What that means of course is that regardless of the obvious benefits (or lack thereof) depending on your viewpoint as a GM shareholder or UAW worker, the Mish plan to save GM in a "fair and equitable manner" was a purely theoretical exercise that favored pensioners while ignoring huge implications to GM stockholders and bondholders. In that regard it can not be viewed as a serious proposal.

That said, to the extent that the PBGC is willing to force GM to fund its pension plan rather than fund its operations, we just might be following the proposed 5 steps anyway. If my read is correct, then the PBGC is determined to prevent an enormous mess from being dropped in its lap down the road. Given that forcing GM to fund its pension plan is likely to have negative shareholder implications, the PBGC just might be steering GM to a smaller taxpayer bailout sooner rather than a bigger taxpayer bailout later. Furthermore it would not surprise me to see new legislation protecting pensioners in the next Congress. Such a law would certainly not do GM share prices any good. For now, $31 billion seems like a lot of cash for GM to come up with and that does not take into consideration what might happen to its pension investments or its ongoing operational funding requirements in an economic downturn either. Hmmm. Are we back to square one? I believe we are.

Here is the bottom line: No matter what CEO Wagner believes about bankruptcy, it seems likely the market or the PBGC or perhaps even a new law protecting pension benefits over bondholders will force him to change his mind. If history is any guide, not only will GM go bankrupt, but pensioners will get the shaft and taxpayers will end up footing some of the bill. Right now, the PBGC seems like it is trying to minimize that taxpayer bill that will be coming due.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Bank Lending Practices

The October 2005 Federal Reserve Survey on Bank Lending Practices shows that most banks still haven't altered lending standards for home equity lines of credit even after the FED raised concerns about whether lenders were adequately weighing risks.

The report shows domestic commercial banks reported a further net easing of lending standards and terms over the past three months.

In response to the special question about changes in terms on mortgage loans to purchase homes, notable net fractions of domestic institutions reported that over the past two years they had eased a number of terms, including the maximum size of primary and second mortgages, spreads of mortgage rates over an appropriate market base rate, and the maximum loan-to-value ratio.

Here are some highlights of the survey:

• Nearly 10 percent of respondents, on net, reported having eased their credit standards on loans to large and middle-market firms.
• About 30 percent of domestic respondents reported that they had reduced the costs of credit lines in October.
• Almost all domestic banks that reported having eased their lending standards and terms in the October survey cited more-aggressive competition from other banks or nonbank lenders as an important reason for doing so
• Almost 40 percent of domestic banks, on net, reported that over the past two years they had increased the maximum size of primary mortgages they were willing to provide.
• About 30 percent, on net, indicated that over the same period they had increased the maximum size of second mortgages.

According to CFC October 2005 Operational Results, it seems that Countrywide Financial is one of the purveyors of the yet still looser bank lending practices that the regulators are talking about. Here are the highlights:

• Adjustable-rate loan fundings for the month were $23 billion, up 42 percent from October 2004. Year-to-date adjustable-rate fundings totaled $214 billion.
• Nonprime loan fundings totaled $3.9 billion in October, which compares to $3.3 billion for the same period last year. Year-to-date nonprime fundings were $36 billion.
• Pay-option fundings for the month were $8.5 billion, as compared to $3.4 billion in October 2004.
• Interest-only loan volume was $8.9 billion for the month of October 2005, which compares to $5.9 billion, for the same period a year ago.

The most amazing of those statistics is the rampant increase of "pay-option loans" smack in the face of flattening or declining home prices and a FED that seems bound and determined to break the housing bubble by hiking interest rates.

The LA Times recently discussed The hidden perils of pay-option loans. Let's take a look.

Borrowers with dangerous adjustable rate mortgages that give them the option of paying just about any way they like may find the loans even more perilous — and more expensive — than they ever imagined.

For starters, borrowers may find that as the rates on their mortgages adjust, they could be paying as many as three or four percentage points more than they would had they chosen a different type of adjustable mortgage.

Perhaps even worse, once borrowers realize they acted unwisely, they may not be able to get out of their loans without paying a hefty penalty. Even if you sell your house, you could be required to pay a prepayment fee totaling six months' interest to terminate the mortgage.

In exchange for all this, the broker who put his client in this precarious position is getting paid three times as much as he would had he placed the borrower in a more consumer-friendly adjustable mortgage.

Typically, lenders who actually fund the mortgage pay brokers a half-point — 0.5% of the loan balance — when they bring in borrowers who want a so-called payment-option ARM. But if the loan carries a prepayment penalty, they'll pay the broker a larger incentive.

These kinds of extreme charges are not attached to any mortgage other than pay-option ARMs, a loan that allows the borrower to choose from four different payment options each month.

Borrowers can pay the absolute minimum as calculated by a complicated formula. They can make an interest-only payment based on the fully indexed rate but with nothing going toward the outstanding balance. Or they can make a full interest and principal payment based on either a 15- or 30-year payment schedule.

Borrowers are drawn to pay-option ARMs because of their 1% start rate. But what they often don't realize — and sometimes aren't being told — is that while their payment doesn't change for a year, the rate starts adjusting after the first 30 days.

Of course, with these loans, the payment doesn't change until after 12 months. But because the rate moves on a monthly basis, the result is what's known as "negative amortization." That means that whatever the difference between what you pay and what you owe is added to the loan balance.

For pushing such an unfriendly loan on uninformed borrowers, mortgage brokers are paid handsomely, as are loan reps who work for lenders themselves.

"The kind of stuff going on out there is wrong," says Mitch Ohlbaum, a West Hollywood mortgage broker. "I think these loans work well when explained and priced properly. The problem is that no one is educating borrowers on what they are getting into."

A regular person with a regular job will fall behind very quickly if he makes interest-only payments. "People who know what they make each month have no business in a loan like this. They will get demolished."

Mish, is that what this is all about: greed on behalf of the lender and stupidity on behalf of the borrower? That seems likely but it really is impossible to say. Perhaps it is more like stupidity on behalf of both the lender and borrower to be taking risks like this at the pinnacle of this bubble in the face of repeated FED warnings. At any rate please remember the excuse the lemmings gave in the survey before they followed each other off the cliff: "Almost all domestic banks that reported having eased their lending standards and terms in the October survey cited more-aggressive competition from other banks or nonbank lenders as an important reason for doing so."

What this most assuredly boils down to is:

• Fear of losing a deal
• Desire to increase market share or "make the numbers" regardless of risk
• Plain out and out greed
• Belief that Greenspan (or Bernanke) will bail them out if anything goes wrong
  

Mish, how rampant is this nonsense? That is a good question and enquiring readers might make note of the fact that in bubble areas such as California, 28% of new mortgages in the first half of 2005 were subprime vs. 5% in 2000. 42% of first time buyers made no down payment on their home, and over a third devoted at least 33% of the incomes to mortgage payment.

It seems like this is starting to matter right now, but even if not, it is going to matter sooner rather than later. Much sooner in fact, as evidenced by this chart.



Some time within the next year 60% of all of the outstanding subprime adjustable loans are going to reset. This is going to be a rude awakening to many who will see monthly mortgage payments skyrocket. Worse yet, given rising inventories and falling or stagnant home prices it is going to be hard to sell.

Right now it does not seem to matter. That is the way it always is. Nothing matters until it matters, and the corollary is that it never matters until the bitter end. Right now it seems that the fat lady is singing but few hear the tune.

Mish, Saxon Capital just reported, what did they have to say?
That is a good question so let's take a look.

Saxon Capital, Inc. Reports Third Quarter 2005 Operating Results .

"During the third quarter, we continued to see the unfavorable market conditions that we discussed in the second quarter", said Michael L. Sawyer, Chief Executive Officer of Saxon. "The continued rise in short-term interest rates, and accelerated prepayment speeds, coupled with the extended period of muted market pricing increases continue to adversely effect our results. We remain committed to prudent management through these times, concentrating on reducing general and administrative expenses, growing our centralized retail origination platform, focusing on capital preservation, and ensuring a strong balance sheet."

Well so much for honesty as the following chart shows.



Is Saxon being punished for honesty while CFC is taking on more risk?
Unfortunately I have no answer to that question other than perhaps CFC's day of reckoning is coming.

Mish readers might recall that we previously discussed Saxon Capital in Are we headed for a "credit derivatives event"?

In their last conference call Saxon was saying:

• "At the point in time WHEN the credit event comes, AND IT WILL we will be very well placed to take advantage of what happens next"
• "I am concerned about the level of capital" of our competitors "to service the bonds as those portfolios age"

It seems to me, based on the above chart, that the market is more worried about a "Credit Event" at Saxon than its competitors.

Meanwhile, from The Economist Global Agenda, Buttonwood is asking With a pfffffffft or a fizzle?

What could give this scenario an uglier twist is the sharp increase in funny loans to funny borrowers over the past few years. “Subprime lending” to people who would not normally be able to make the grade is running at about $500 billion a year. Much of it takes the form of variable-rate, interest-only and negative-amortisation loans. Both debtors and creditors are now more exposed to interest-rate changes.

Banks have been happy to lend to marginal debtors, safe in the knowledge that they could unload many of the loans either on one of the quasi-governmental housing agencies (Fannie Mae, Freddie Mac) or to private investors in asset-backed securities. Many of these loans end up in collateralised debt obligations (CDOs, which slice up bundles of referenced loans into tranches of different riskiness for different investors). Japanese and European investors have been especially enthusiastic buyers of this sort of paper, but there are signs of battle fatigue now: spreads have widened sharply over the past couple of weeks.

Indeed. Hot potato is the name of the game.
Take what you can when you can and pass the trash if you can.

Can this go on forever?
Not likely if the following headline is the start of any kind of trend:
Swiss pension fund shifting away from U.S.

Switzerland's $15.5 billion state pension fund plans to reduce its investment in U.S. bonds and dollar-denominated debt because of concern that rising U.S. government debt and interest rates may hurt the U.S. economy.

Higher market interest rates could lead to defaults on loans by homeowners and affect mortgage finance companies including Fannie Mae and Freddie Mac, Eric Breval, managing director of the Swiss pension fund, said during a recent interview in Geneva. Assets will be shifted into euro-denominated bonds, he said.

U.S. government debt stands at a record, and Congress has increased its scrutiny of Fannie Mae and Freddie Mac amid concern that their debt may be too large, posing risks for the economy. Together, the two companies own or guarantee almost half of the $7.6 trillion U.S. mortgage market.

"There is a greater risk in the U.S. than elsewhere," Breval said. "When you see some institutions such as Fannie Mae and Freddie Mac and the time bomb they are sitting on, something may happen there one day, and we want to be less exposed."

Fannie Mae is a "time bomb".
I couldn't have said that better myself.
But the party continues. Right now money is still flowing into stocks and the market seems bound and determined to have a year end party. Who am I to argue? All I can say is that it will be one hell of a hangover when the party ends.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Outsourcing Lawyers

India Times is reporting that Indian offshore firms are courting lawyers.
Let's take a look:

Close to the rugged farmlands of Haryana near Delhi, dozens of shirt-sleeved graduates are busy at work in an office park. Much of this work at a firm called Evalueserve in the town of Gurgaon is the same as is done thousands of miles away in wood-panelled Manhattan law offices by young attorneys, some of whom command six-figure dollar salaries. Although Indian lawyers cannot argue in a U.S. court, local start-ups reckon they can take on much of the legal back-office burden, such as filing patents that mix high technology and U.S. law -- the latest in the outsourcing wave that uses high-speed telecoms and low-wage, English-speaking Indians to save Western firms hundreds of millions of dollars a year. "The only thing that can't be outsourced to India is something that requires physical presence," said Sanjay Kamlani, co-founder of Pangea3, a firm employing 23 lawyers in India and five in the United States, plus technical engineers. Kamlani insists that training Indians for U.S. law is easy. "Both the U.S. and India were British colonies and common law is British," said the U.S.-based lawyer of Indian origin whose firm has 20 clients helping in legal document management, contract drafting, legal research and patent filing. According to India's National Association of Software and Service Companies (NASSCOM), India has so far tapped only 2-3 percent of an estimated $3-$4 billion U.S. market of "outsourceable" legal services.

One by one white collar jobs are following blue collar jobs to India and China. The following quote sums up the situation nicely: "The only thing that can't be outsourced to India is something that requires physical presence". In the meantime even jobs that do require physical presence do not necessarily go to US citizens.

The St. Petersburg Times is taking a look at Who's rebuilding New Orleans?

Locals angrily point out migrant workers, saying they're taking jobs to the exclusion of residents who can't afford to come home.

As military helicopters thumped overhead, R.J. Rouzan paced and waved his arms inside an office in City Hall.

National Guard troops that morning last week had blocked him from visiting his property in the Lower 9th Ward. Something to do with needing a permit. City officials didn't know what he was talking about.

Then, in the middle of an argument that seemed to be about red tape, Rouzan veered suddenly toward a subject that has angered many local residents.

"They let trucks full of illegal aliens in there and not the property owners?" Rouzan yelled at a weary-looking receptionist.

Immigrant workers - some in the country illegally - have been pouring into New Orleans since Hurricane Katrina devastated the city.

While no one knows how many Hispanic workers are in New Orleans, teams of Mexican and Central American laborers drawn from around the United States appear throughout the city. Wearing white protective suits and yellow boots, they pressure wash mold-infested rooms, tear out Sheetrock, rip down soaked insulation and empty rotten shrimp from refrigerators.

Rouzan, a black owner of construction and trucking businesses, said his employees are scattered across several states. Without a place to stay, they can't come back to work. Watching Hispanic workers take similar jobs, Rouzan seethes.

"They are allowing people to come in who are getting jobs while we as homeowners who built this city, they don't let us get access to our property," Rouzan said.

At some point there is going to be a huge backlash over the loss of jobs.
You can see it coming and you can feel the heightened protectionism that will likely come of it.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Investors Warned by JPM

The headline reads: Investors warned of stock bubble.

What is interesting to me is not that it is being said but who is saying it and most importantly no one is listening. Here are some comments by Jonathan Golub, New York-based managing director and U.S. equity strategist for JPMorgan Asset Management speaking before a group of about 50 clients and business leaders at Nonna's Euro American Ristorante:

• There's no real estate market in the nation that's beat the stock market in the last three years. Investors don't recognize the nearly unprecedented three-year surge in stocks because most are 'mentally anchored' to March 2000, the top of the tech-driven market.
• Americans, many of whom "feel wealthy" because of the growing value of their homes, are spending more than they make.
• The riskier the company, the junkier the company, the worse your management was, the better your return was. "Why? Because when you put free money in the system, junk rises to the top."
• Prudent investors should seek quality companies with strong earnings, dividends, good business plans and solid management. More traditional investments should be in favor "not just for the next six months, but for the next two to three years."
• Something must curb the level of consumer spending, and it likely will have to be something drastic
• "I don't see something that's going to quietly burst this bubble. I frankly thought it was going to be (hurricane) Katrina. ... But Americans shrugged that off like it was a little storm. That was shocking."

Indeed. Junk for the most part has risen to the top.
Furthermore, in spite of a warning bell that was rung by TOLL and accompanied by a choir of rising rates from the FED, it seems that everyone is deaf. Apparently there is still just too much money sloshing around right now that needs to be destroyed before anyone pays attention.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Trade Summit Fails

The trade summit in Argentina ended in complete failure. The lofty goal was to open a free trade zone stretching from Alaska to Chile. The summit ended without even so much as an agreement to restart the failed talks at a later date.

Argentine Foreign Minister Rafael Bielsa said the summit's declaration would state two opposing views: one favoring the proposed Free Trade Area of the Americas and the other saying discussions should wait until after World Trade Organization talks next month.

Mexico, the United States and 27 other nations wanted to set an April deadline for talks, but that was opposed by Brazil, Argentina, Uruguay, Paraguay and Venezuela.

The United States says the Free Trade Area of the Americas, stretching from Canada to Chile, would open up new markets for Americans and bring wealth and jobs to Latin America. The zone's main opponent, Venezuelan leader Hugo Chavez, says it would enslave Latin American workers.

The Wall Street Journal is reporting Failed Summit Casts Shadow On Global Trade Talks.

A failed summit of leaders of the Western Hemisphere dealt a blow to global trade liberalization and strengthened the influence of Venezuelan President Hugo Chavez, a critic of the U.S. who favors protectionism and old-style socialism.

The Bush administration had hoped to use the meeting of 34 heads of state to breathe new life into negotiations on a long-stalled Free Trade Area of the Americas, a free-trade zone reaching from Alaska to Tierra del Fuego, Argentina. Instead, the meeting was so wracked by division that diplomats drafting the final communiqué failed to reach agreement even on when to resume talks on the free-trade zone.

In handing Washington an embarrassing defeat, Venezuela was joined by the four countries of the Mercosur trading bloc, a customs union led by Brazil and Argentina and also including Paraguay and Uruguay. "We were five musketeers, kneeling, sword in hand," to oppose the FTAA, Mr. Chavez said afterward. He condemned the U.S. free-trade model as a "perversion" that would unduly benefit the U.S., and instead pushed for closer trade ties among Latin American nations.

On Friday, the first day of the summit, Mr. Chavez had given the keynote address at a peaceful rally condemning FTAA and President Bush's policy in Iraq. Later that evening, protests against the trade pact turned violent, with groups of demonstrators vandalizing businesses in downtown Mar del Plata.

The summit confirms the Venezuelan as heir apparent to Fidel Castro as Washington's prime nemesis in its home hemisphere. Mr. Chavez favors heavy state involvement in the economy, and many Venezuelans fear he intends to impose a Cuban-style economic model. He has sharply increased government control over his country's all-important oil industry, forcing foreign oil companies to accept a majority government role in their local ventures. He also has seized what his government considers "idle" farmland from large rural estates and given workers in some factories an ownership stake and management voice.

It’s easy to bash a moonbat and make no mistake about it, Chavez is indeed a moonbat. However, attempting lay blame on Chavez for single handedly wrecking a trade summit is a cop out. Yes Chavez is gloating but he really is not the one who should be taking the "credit, or the blame for these failed talks. Before we can properly lay blame, we must understand what all this bickering is about.

The heart of the matter is agricultural subsidies. Developing nations, seeking to boost their exports, want the U.S. and EU to slash agricultural subsidies. Wealthy nations want poorer ones to slash tariffs, open their service industries to foreign competition and strengthen intellectual-property protection. The poor nations blocked the last major round of talks in Cancún, Mexico, two years ago, because of concern that agricultural subsidies weren't being addressed sufficiently.

Two years have passed and we are no closer to resolving the impasse than we were before. Who is really to blame? Here are the culprits in order. Drum roll please.........

1. France
2. USA

This is not about Chavez favoring protectionism and old-style socialism as the Wall Street Journal suggests. It is about the willingness of countries to give up something to get something in return. Developing nations have little to gain by giving in to the current “offer”. Their biggest potential exports for many developing countries are agricultural, but they can not compete when the US and EU are unwilling to open up their markets. In other words, the US and Europe want access to emerging markets but are unwilling to give up anything in return. Yes the EU has agreed to "some" cuts in agricultural subsidies but not enough to please anyone, including France who is not happy about giving up anything at all. Meanwhile, the US is attempting to look like the good guy by "offering" to substantially cut back farm subsidies "IF the EU does" knowing full well that France will never give in on the issue. If the US was really interested in trade agreements it would be a leader instead of waiting for France to act, and it would be willing to phase out subsidies completely not partially. On that note it seems another telepathic question just came in: "Mish, are you sure France will never give in?" Well “never” is a long time but for now I am quite sure.

France Threatens to Torpedo World Trade Agreements.

France will not approve any global trade deal that challenges a 2003 reform of the European Union's common agricultural policy (CAP), Foreign Minister Philippe Douste-Blazy said in a newspaper interview released on Monday.

"Nobody can have any doubt about France's determination not to approve, in Hong Kong, in December, an accord that challenges the CAP as reformed in 2003," Douste-Blazy said told Les Echos newspaper in an interview to run in its Tuesday edition.

French President Jacques Chirac warned EU leaders last month he was ready to torpedo a World Trade Organization (WTO) deal if it called into question the CAP, of which France is the biggest beneficiary.

France is also bickering with the UK over the "budget rebate".

For those that want to understand more about the "budget rebate", what it is, why it was put in place and how France and the UK are at the center of this trade issue, here is a Q&A on the UK budget rebate.

Currently, France is insisting that the rebate be dropped. The UK is quite willing if France is willing to remove the "imbalances" which led to the creation of the rebate in the first place. In other words: the UK wants France to give up its agricultural subsidies. Of course we know where that debate is heading: nowhere (as noted by this headline).

UK's Straw says EU must tackle rebate, farm spending in tandem.

UK foreign secretary Jack Straw, whose country holds the rotating EU presidency, said Europe must tackle Britain's budget rebate and farm spending in tandem.

"The prime minister and I have made it quite clear that we are happy to talk about the rebate, but it's a question of reforming the budget," Straw said on his way into a meeting of EU foreign ministers which will hold the first detailed debate on the bloc's future spending since talks broke down amid acrimony between France and the UK in June.

"The reason the rebate was justified was because of the distorted nature of the budget. So we have to deal with them both," he said.

The US has already shown its true colors on "free trade" in disputes with Canada over Lumber as previously discussed in US misses softwood deadline.

The United States missed a key deadline yesterday for complying with a NAFTA ruling that should have dramatically cut duties in the bitter softwood dispute, denying Canada the gesture of good faith it's been requesting before it would resume talks to settle the conflict.

Yesterday's foot-dragging especially angered Ottawa because it was only on Monday that Prime Minister Paul Martin called on U.S. Secretary of State Condoleezza Rice to provide proof that Washington still respects the North American free-trade agreement.

Canadian-U.S. relations concerning the $8-billion softwood dispute have been in a downward spiral since August, when Washington spurned a different NAFTA ruling that should have ended the conflict.

In this separate case, a NAFTA panel of trade adjudicators has ruled five times -- most recently Oct. 5 -- that the United States's calculation of part of its softwood duties was illegal under U.S. law and it has five times urged Washington to bring its results into line.

If the US really wanted a "free trade" agreement with Brazil it would have one. It does not really want that. It wants the same thing France does: something for nothing. France will not give in on agricultural subsidies and neither will we. The proof is in what we say and do. We can not even resolve what should be a relatively minor dispute with our best trading partner in the world: Canada.

In the meantime the world moves on. China is forging trade alliances with both Brazil and Canada. Australia is doing the same. Instead of bickering about lumber and building bridges to nowhere we should be concerned about being left behind in new trading alliances that are willing to form with us or without us. As it stands we are the losers in this game and have only ourselves to blame.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Real Estate Experts Discuss Price Drops

Every time I see a headline like Real Estate Experts Discuss Possible Home Price Drops I think the "experts" may finally get it. Then I read the text and see it is the same old same old, otherwise known as the PHP or the TCT: "Permanently High Plateau" theory or the "Temporary Correction Theory".

Here are a few snips:

Rising mortgage rates and construction costs will cool the red-hot residential market and home prices could actually fall on the East and West Coasts in the next 18 months, real estate experts told the fall meeting of the Urban Land Institute Thursday. ... But, there is no bubble to burst in the middle of the country.

There is a glut of condos in downtown Chicago, said Douglas Crocker, partner in Chicago-based DC Partners LLC. "There's too much product under construction and being converted," Crocker said in an interview. "Housing prices won't fall, but they will go sideways."

Nationwide, a cool-off in the market won't translate into a drop in the price of new construction homes. "Nationally, construction materials costs jumped 10.8 percent in the last 12 months, and they are projected to rise 5.2 percent in 2006," said John Ware, general manager of RS Means in Kingston, Mass.

"In the housing sector, there has been bubble talk, but we think it is a cycle," said Peter Korpacz, director of global strategies finance for PricewaterhouseCoopers. "As prices and interest rates go up, people will fall out of the market. There won't be a bubble unless there are job losses, and now the economy seems resilient.

"Housing is definitely cooling off, but we will be shielded from a major turndown by new buyers in the market," Nadji said.

"The demand for housing will be bolstered by the 76 million Baby Boomers and 70 million echo Boomers with rich parents."

No matter what the headlines read, the text is invariably bullish. By the way, where is this baby boomers demand supposed to be coming from anyway? Do boomers not already own a home or two? If they intend to downsize now, just who can afford to buy from them with housing affordability at an all time low?

Questions like those are never answered. Heck, they are not even asked. In the meantime, support for the permanently high plateau theory seems to be gaining widespread acceptance. I guess we will see.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The Education Gap

A CNN article is asking Is the U.S. becoming hostile to science?
Let's take a look at a few snips:

A bitter debate about how to teach evolution in U.S. high schools is prompting a crisis of confidence among scientists, and some senior academics warn that science itself is under assault. In the past month, the interim president of Cornell University and the dean of the Stanford University School of Medicine have both spoken on this theme, warning in dramatic terms of the long-term consequences.

Cornell acting President Hunter Rawlings, in his "state of the university" address last week, spoke about the challenge to science represented by "intelligent design" which holds that the theory of evolution accepted by the vast majority of scientists is fatally flawed.

In the past five years, the scientific community has often seemed at odds with the Bush administration over issues as diverse as global warming, stem cell research and environmental protection.

Evangelical and fundamentalist Christians have built a powerful position within the Republican Party and no Republican, including Bush, can afford to ignore their views.
This was dramatically illustrated in the case of Terri Schiavo earlier this year, in which Republicans in Congress passed a law to keep a woman in a persistent vegetative state alive against her husband's wishes, and Bush himself spoke out in favor of "the culture of life."

The issue of whether intelligent design should be taught, or at least mentioned, in high school biology classes is being played out in a Pennsylvania court room and in numerous school districts across the country.

Polls for many years have shown that a majority of Americans are at odds with key scientific theory. For example, as CBS poll this month found that 51 percent of respondents believed humans were created in their present form by God. A further 30 percent said their creation was guided by God. Only 15 percent thought humans evolved from less advanced life forms over millions of years. Other polls show that only around a third of American adults accept the Big Bang theory of the origin of the universe, even though the concept is virtually uncontested by scientists worldwide.

Jon Miller, director of the center for biomedical communication at Northwestern University said science and especially mathematics were poorly taught in most U.S. schools, leading both to a shortage of good scientists and general scientific ignorance.

U.S. school students perform relatively poorly in international tests of mathematics and science. For example, in 2003 U.S. students placed 24th in an international test that measured the mathematical literacy of 15-year-olds, below many European and Asian countries. Scientists bemoan the lack of qualified U.S. candidates for postgraduate and doctoral studies at American universities and currently fill around a third of available science and engineering slots with foreign students.

Northwestern's Miller said the insistence of a large proportion of Americans that humans were created by God as whole beings had policy implications for the future.
"The 21st century will be the century of biology and we are going to be confronted with hundreds of important public policy issues that require some understanding that all life is interconnected," he said.

Compare and contrast the denial of science and math in the US with current happenings in China.

China Recruits Top US Scientists

The new York Times is reporting China Luring Scholars to Make Universities Great.

When Andrew Chi-chih Yao, a Princeton professor who is recognized as one of the United States' top computer scientists, was approached by Qinghua University in Beijing last year to lead an advanced computer studies program, he did not hesitate.

China wants to transform its top universities into the world's best within a decade, and it is spending billions of dollars to woo big-name scholars like Dr. Yao and build first-class research laboratories. The effort is China's latest bid to raise its profile as a great power.

China has already pulled off one of the most remarkable expansions of education in modern times, increasing the number of undergraduates and people who hold doctoral degrees fivefold in 10 years.

"First-class universities increasingly reflect a nation's overall power," Wu Bangguo, China's secondranking leader, said recently in a speech here marking the 100th anniversary of Fudan, the country's first modern university.

The model is simple: recruit top foreign-trained Chinese and Chinese-American specialists, set them up in well-equipped labs, surround them with the brightest students and give them tremendous leeway. In a minority of cases, they receive American-style pay; in others, they are lured by the cost of living, generous housing and the laboratories.

"Maybe in 20 years M.I.T. will be studying Qinghua's example," says Rao Zihe, director of the Institute of Biophysics at Qinghua University, an institution renowned for its sciences and regarded by many as China's finest university. "How long it will take to catch up can't be predicted, but in some respects we are already better than the Harvards today."

The president of Yale University, Richard C. Levin, interviewed in Shanghai, where he was the featured guest at Fudan's centennial celebration in late September, also had high praise for China's students.

"China has 20 percent of the world's population, and it is safe to say it has more than 20 percent of the world's best students," he said. "They have the raw talent."

But Mr. Levin also noted that China's low labor costs simplified the effort to upgrade. He said he had been astounded by the new laboratories at Jiaotong University in Shanghai, which he said could be built in China for $50 a square foot, compared with $500 a square foot at Yale.

But the biggest weakness, many Chinese academics indicated, is the lack of academic freedom. Mr. Yang, the former president of Fudan University, warned that if the right atmosphere was not cultivated, great thinkers from overseas might come to China for a year or two, only to leave frustrated.

Students here are not encouraged to challenge authority or received wisdom. For some, that helps explain why China has never won a Nobel Prize. What is needed most now, some of China's best scholars say, are bold, original thinkers.

"The greatest thing we've done in the last 20 years is lift 200 million people out of poverty," said Dr. Xu. "What China has not realized yet, though, if it truly wants to go to the next level, is to understand that numbers are not enough.

"We need a new revolution to get us away from a culture that prizes becoming government officials. We must learn to reward real innovation, independent thought and genuine scholarly work."

It seems we are at a genuine crossroads, both in the US and in China. While political forces in the US attempt to put us back in the middle ages so to speak, China has its own problem to learn to let academia challenge government authority.

There is also an issue of cost. When I started school at the University of Illinois way back in 1973, the tuition was something like $246 per semester.

Here is a chart of current costs at the University of Illinois.



Look closely and you will see that you need to add an extra $2,522 per year for the Biochemistry, Chemistry, Biology, Integrative Biology, and Molecular/Cellular Biology programs; and $3,162 per year for all programs in the College of Engineering.

With the add-ons the cost comes close to $20,000 per year. That is for the University of Illinois too. Private schools are much more expensive. Not having children, I can not fathom what it might be like attempting to put two kids (four? yikes!) through college. Nor can I fathom going to school for four years and ending up close to $100,000 in debt upon graduation. That does not count medical school, graduate school or a law degree either.

It seems kids are being indoctrinated to the idea of being enormously in debt right out of college, while parents are going ever deeper in debt in a struggle to help out.

After graduation, the next big hurdle is finding a job at an adequate pay scale to pay back college loans. Does it even pay to get an advanced technical or computer engineering degree? Not if the outsourcing trend continues as it has been going.

We are Outsourcing the Soul of America.

Business Week discussed this idea in "Outsourcing Innovation"

When Western corporations began selling their factories and farming out manufacturing in the '80s and '90s to boost efficiency and focus their energies, most insisted all the important research and development would remain in-house.

But that pledge is now passé. Today, the likes of Dell, Motorola, and Philips are buying complete designs of some digital devices from Asian developers, tweaking them to their own specifications, and slapping on their own brand names. It's not just cell phones. Asian contract manufacturers and independent design houses have become forces in nearly every tech device, from laptops and high-definition TVs to MP3 music players and digital cameras. "Customers used to participate in design two or three years back," says Jack Hsieh, vice-president for finance at Taiwan's Premier Imaging Technology Corp., a major supplier of digital cameras to leading U.S. and Japanese brands. "But starting last year, many just take our product. Because of price competition, they have to."

Boeing Co. is working with India's HCL Technologies to co-develop software for everything from the navigation systems and landing gear to the cockpit controls for its upcoming 7E7 Dreamliner jet. Pharmaceutical giants such as GlaxoSmithKline (GSK) and Eli Lilly (LLY)are teaming up with Asian biotech research companies in a bid to cut the average $500 million cost of bringing a new drug to market. And Procter & Gamble Co. (PG) says it wants half of its new product ideas to be generated from outside by 2010, compared with 20% now.

Some analysts even see a new global division of labor emerging: The rich West will focus on the highest levels of product creation, and all the jobs of turning concepts into actual products or services can be shipped out.

Consultant Daniel H. Pink, author of the new book A Whole New Mind, argues that the "left brain" intellectual tasks that "are routine, computer-like, and can be boiled down to a spec sheet are migrating to where it is cheaper, thanks to Asia's rising economies and the miracle of cyberspace." The U.S. will remain strong in "right brain" work that entails "artistry, creativity, and empathy with the customer that requires being physically close to the market."

Are the "right brains" somehow deficient in citizens from China or India? Somehow, I think not. With China and India turning out more engineers and the US "dumbing down" math and science with "unintelligent design" concepts, it's hard to see how we are going to maintain any creative edge if and when China decides to free up its academia from political interference. Unfortunately for the US, our academic paths now seem to be crossing. China seems to be opening up its academia while the US is reverting to religious fanaticism.

Combine religious fanaticism, rising tuition costs, and wage pressures (especially for computer engineers), with massive outsourcing of everything that is not tied down and you have the makings of an Education Gap that is destined to get much, much worse.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The President’s Advisory Panel on Tax Reform

Here is a report by the President’s Advisory Panel on Tax Reform.

Notes:

• The above link points to a 92 page PDF document.
• It will take some time to read, but it is well presented and definitely worth a look.
  
• There are two options presented by the tax panel. One is called "The Simplified Income Tax Plan"; the other is called "The Growth and Investment Tax Plan". Many features are the same under both plans but there are differences especially when it comes to savings.
  
• Some of the differences between the plans as well as my conclusions are discussed below.

Mish Conclusions:
The panel's recommendations are a very good start at reform but the proposals could in theory be even simpler (i.e. a flat tax or consumption tax). However, the modifications suggested by the panel vs. the present tax nightmare are quite substantial. The panel attempted in good faith to address many fairness issues and come up with recommendations that stand a chance at getting passed. That is the key. A theoretical better solution would do no good if Congress would not pass it.

No doubt the national association of realtors (among others) will be all stirred up over some of the recommendations, such as reducing the interest deduction allowed for homes. As long as that deduction must remain (and for political reasons it probably must remain in some form), the idea to limit home deductions yet spread them out so that more people qualify seems more fair than the current system. Allowing interest rate deductions on second homes never made any sense and the panel was wise to reject that totally. The idea to cap the deduction also makes sense.

Personally, I do not think it should be the goal of government to encourage the purchase of certain asset classes at all. In that regard, I believe one of many reasons housing is not affordable now, is the fact that there are currently 80 bills that encourage "affordable housing". If it was up to me, I would scrap them all, right along with Fannie Mae.

That said, there is "ideal" and there is "possible". The panel's proposals are far more likely to fly than any kind of "flat tax" that might eliminate all deductions such as interest paid on mortgages. A flat tax would likely be viewed by many as "too radical". There are just too many vested interest groups that would pick apart such proposals.

The AMT is eliminated.

Everyone should applaud the panel’s recommendation to eliminate the nightmare known as the Alternative Minimum Tax (AMT). With the Panel’s recommendations, millions of taxpayers would no longer have to take on a complex series of calculations just to determine whether they are entitled to a tax benefit or whether it is taken away by the AMT. Here is what the panel had to say:

The AMT is an entirely separate tax system with its own definitions, exclusions, deductions, credits, and tax rates. It is the most vivid example of the wasteful complexity that has been built into our system to limit the availability of some tax benefits. The AMT was conceived as a way to make all Americans pay tax, regardless of their tax shelters and avoidance efforts. But over time, the AMT’s simple mission has been made more complex and less effective. For example, as part of the 1986 tax reform effort, lawmakers who eliminated the state sales tax deduction nonetheless preserved an itemized deduction for state and local property and income taxes – but only for those paying under the regular tax system. For those subject to the AMT system, the income and property tax deductions were eliminated as well. At that time, this rule had little significance for most taxpayers, but it is increasingly relevant as the reach of the AMT, which is not indexed for inflation, has grown.

Eliminating the AMT would free millions of middle-class taxpayers – 21.6 million in 2006 and 52 million in 2015 – from filing the forms, preparing the worksheets, and making the seemingly endless calculations required to determine their AMT liability. In 2004, an individual had to fill out a 12-line worksheet to see if he needed to file Form 6251, a 55-line form with eight pages of instructions. Those eight pages of instructions also tell the individual to redo many regular tax forms and schedules, including Forms 4952 (Investment Interest Expense Deduction), 4684 (Casualties and Thefts), 4797(Sales of Business Property), and Schedule D (Capital Gains and Losses) using the AMT rules. The individual may also have to fill out and file Forms 8582 (Passive Activity Loss Limitation) and 1116 (Foreign Tax Credit) on an AMT basis. The taxpayer also has to fill out a 48-line form (Form 8801) to determine whether he is entitled to credits for prior AMT payments. Finally, the instructions warn that if the taxpayer claimed the standard deduction for regular taxes, he should recalculate his regular and AMT taxes using itemized deductions because while the standard deduction is not available under the AMT, some itemized deductions are, but only if the individual itemizes for purposes of the regular tax.

Personal Exemptions, Child Tax Credits, Earned Income Credit, and the Marriage Penalty have all been addressed.

A recommendation was made to consolidate the standard deduction, personal exemptions, child tax credit, and head of household filing status into a single “Family Credit”. A recommendation was made to consolidate the earned income tax credit and refundable child tax credit into a single “Work Credit”. Both of these are good ideas. These ideas will eliminate many complex forms replacing them with a simpler one, while encouraging more people to work as opposed to stay on welfare.

Other highlights:
The Panel's recommendations would simplify the tax treatment of Social Security benefits and help reduce the marriage penalty as follows: options would make all marginal tax rate brackets, the Family Credit for married couples, and the Social Security benefits deduction thresholds exactly twice the amount for singles. By providing marriage penalty relief, the Panel’s options help reduce the barriers faced by potential second earners.

Reducing Disincentives to Save
It was encouraging to see the panel address the savings rate.

Household saving is crucial to the health of our economy and to the financial health of American families. An income tax reduces the return to saving because it taxes the income that saving generates. An individual who earns a dollar today pays taxes on those wages. If he then consumes the after-tax proceeds, he will not pay any further taxes. In contrast, someone who earns the same amount today, pays the same taxes on his wage income, but then decides to save the proceeds will be subject to additional tax in the future on the investment income generated from savings. A person weighing whether to spend money today or save it for the future may compare how much he can buy today against what he will be able to buy in the future with his savings. If the return on savings is subject to tax, current consumption will be less expensive than future consumption financed from savings. The tax on savings therefore operates like a penalty for those who choose to save.

Following is one of the charts presented in the PDF:



Mish readers will not that the chart is way out of date. The current national savings rate is -1.6% (as in we are spending more money than we are making which of course is not only staggering on an national basis but also unsustainable).

The panel's recommendation is to simplify and expand opportunities for tax-free savings for retirement, health, education, and housing. Following is the pertinent discussion:

The Simplified Income Tax Plan would nearly eliminate the double tax on corporate profits by excluding dividends paid out of income earned in the U.S. In addition, 75 percent of capital gains on sales of stock in U.S. corporations would be excluded from income.

Under the Growth and Investment Tax Plan, the return to savings not held in these tax-preferred savings accounts would be subject to a flat rate tax of 15 percent. In addition, the simplified employer-sponsored accounts would use a “Roth IRA,” or prepayment approach, while the Simplified Income Tax Plan would use a “traditional IRA,” or postpayment approach. These two approaches provide similar incentives for savers, but they have different near-term tax revenue consequences. The overall tax burden on capital income would be lower under the Growth and Investment Tax Plan than under the Simplified Income Tax Plan, although some types of capital income might have a lower tax burden under the Simplified Income Tax Plan.

Both of the Panel’s recommended options would remove existing disincentives to save. These options would provide opportunities for Americans to save in a simple and efficient manner by replacing the tax code’s plethora of savings incentives with a unified system that would make tax-free savings for education, health, a new home, or retirement flexible, convenient, and straightforward. The tax code’s redundant savings incentives and accounts would be combined into three simple and flexible accounts for savings. The creation of these three simple saving opportunities significantly reduces the bias against saving and investment that exists under the current system. In addition, the Panel proposes changes to the administrative rules for some employer plans that would point workers in a pro-saving direction. The plans would allow most Americans to prepare for their future financial security free of tax. Not only would these accounts provide simpler and expanded opportunities to save, the playing field for tax-preferred savings would be leveled by eliminating exclusions under current law that allow some taxpayers to save an unlimited amount tax-free through life insurance, annuities, and executive deferred compensation arrangements. The Panel’s plans also would include a refundable Saver’s Credit that would give low-income Americans a strong incentive to save by matching contributions to savings accounts.

These approaches would diminish the need for taxpayers to hire tax professionals to help them navigate the tax code’s multitude of incentives. Americans would be able to make investment decisions based on their preferred investment strategy and no longer would be required to jump through hoops to make sure that they maximize their after-tax returns. Taxes would play a less prominent role in household savings decisions.

Given the partisan nature of Congress, as well as the likely nitpicking by groups feeling they were "unfairly picked on" by the proposed changes, the question remains as to what will happen in Congress over these proposals. The devil will be in the details as worked out by Congress, and therein lies another problem.

It can and has taken years just to address this mess and there might not be another chance for years more to come. The temptation for Congress to meddle with the Panel's recommendations will be extremely high. Lobbyists will be all over many if not all of these proposals in one second flat.

Is this proposal really revenue neutral?

The biggest problem I have with the set of proposals is simple: I fail to see how it can possibly be tax neutral. Let's see: we are getting rid of the AMT, reducing the marriage penalty, encouraging more tax free savings, and eliminating double taxation of dividends. In return, there is a reduction of part of the home interest deduction, elimination of deductions for state and local income taxes, and ending preferential treatment of employer provided fringe benefits such as childcare, life insurance premiums, and education costs. Even though part of the home interest reduction was eliminated, the plan was broadened such that more people who do not itemize are likely to benefit than before.

I can easily believe some recommendations are revenue neutral (like replacing Earned Income Credit and other complicated nonsense with a single "work credit"), but others such as eliminating the AMT seem to take a huge "leap of faith". The panel ended its discussion on the AMT with the conclusion that the AMT could be eliminated because they were "broadening the tax base". I am not exactly sure how any of their proposals did just that, at least enough to matter considering that the revenue generated by the AMT is expected to exceed regular tax revenues by 2013. It's too bad the report did not put a "price tag" on each proposal. Then again, putting a price tag on each proposal might have encouraged too much Congressional bickering. Perhaps it best to just take that "leap of faith".

To the extent that this plan is not revenue neutral, I certainly am all in favor of slashing the military budget, pulling all of our troops out of Iraq, Europe, Japan and South Korea, and reducing military expenditures enough to pay for any shortfalls. While we are at it, I would eliminate funding for the arts, a lot of foreign aid, bridges to nowhere in Alaska, crop subsidies, and probably a ton of other needless expenses as well.

Then again, even if the plan is revenue neutral, I am still in favor of slashing the military budget, pulling all of our troops out of Iraq, Europe, Japan and South Korea, reducing military expenditures, elimination of funding for the arts, cutting back on foreign aid, canceling projects that would build bridges to nowhere in Alaska, etc etc etc in order to help balance the budge deficit. It's high time we see some sense of fiscal responsibility out of this administration.

The bottom line is what matters and here it is: The panel's recommendations were probably a "best effort" at producing a significant proposal that will simplify the tax code, make it fairer, and have some chance of making its way through Congress. All in all, Mish applauds the work of The President’s Advisory Panel on Tax Reform.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/