A Two Month Tax Holiday In 2009

350 billion dollars are left to be spent from the 700 billion dollar bailout bill spearheaded by Treasury Secretary Henry Paulson, approved by Congress and signed into law by President George Bush.

Certainly, it should be interesting to see what the United States Congress spends hundreds of billions of taxpayer money on, after the new year.

The most likely outcome of this bailout bill spending spree will involve a massive transfer of wealth from taxpayers to government-directed projects. The sad truth is that it will be years before these government projects actually produce any jobs.

However, there is one idea on Capital Hill that does seem to make a lot of sense. As a result, there is probably little chance that it will gather the necessary votes in Congress to become law in 2009. It is a radical idea for sure. The concept is to give much of the remaining taxpayer bailout money back to help the individual taxpayer.

The bill is HR 7309 and was recently introduced in the House Of Representatives by Rep. Louis Gohmert, R-Texas. HR 7309 would require all federal income taxes based on wages earned and FICA withholding be left in paychecks for two straight months in 2009.

The effect of the legislation would be to dramatically increase each worker's take home pay for two months. The result would be economic stimulus in it purest form. Even wage earners who do not make enough to pay income tax would get back their FICA or Social Security withholding under the plan

A two-month reprieve from payroll and FICA taxes would cost $334.4 billion, much less than the remaining $350 billion in bailout funds authorized by Congress. It would represent a 17 percent reduction in income taxes for Americans in 2009.

Of course, the problem for our big government, Congressional legislators is that Americans would get to experience the impact of how much the federal government takes from their paycheck every month in taxes.

So, a two month tax holiday to stimulate the economy will probably never happen. Big government projects, pork barrel spending and Congressional earmarks that feed off of the taxpayer's bailout bounty will likely be the Congressional solution for economic stimulus in 2009.

No Holiday Cheer In Retail Sales This Year

The shopping malls have been quiet during the last few weeks. So, it looks like the result of a recent Gallup public opinion poll for this holiday season is about to ring true.

On average Americans spent $866 dollars on Christmas last year. However, there will be more room under the Christmas tree on December 25th because the average American plans to spend only about $616 this year.

In fact, declining retail sales have been a story for months. According to the U.S. Department of Commerce, retail sales dropped 1.8 percent from October to November. The drop marked the fifth consecutive monthly decline in sales. November 2008 sales, were 7.4 percent below retail sales when compared with same month last year. The report said total sales for the September through November 2008 period were down 4.5 percent from the same period a year ago.

The only exception to the declining trend in retail spending was in electronics. Retail Electronics and appliance stores saw a sales increase from October to November to $9.23 billion from $8.97 billion, or 2.8 percent growth.

The boost in electronics and appliance sales was tied to hot consumer electronic products like video game systems, flat-screen televisions, music players and smartphones. However, while electronics sales grew month-to-month, year-to-year sales were still down 4.7 percent in November compared to the same month a year before.

Of course, the ongoing decline in retail sales reflects a dramatic decrease in consumer confidence in the economy as the 2008 global recession continues. Employment in America fell by 533,000 jobs in November and one million people losing employment may well become a dubious monthly job statistic by next spring.

In tough economic times, consumer discretionary items are always a victim and this year will be no different. There may well be electronics and video games like Wii under the average Chistmas Tree, but Santa will also leave more empty space where presents in previous years used to be.

Look for several large retail business bankrupcy's in the first quarter of the New Year. Indeed, going out of business, liquidation sales, will soon advertise the demise of debt laden retailers. The economic recession of 2008 means there will be no holiday cheer in retail sales this year.

Terrorism Could Mean Death In Outsourcing To India

The last several days were a stark international reminder that we live in a dangerous age of terrorism. Ten armed terrorists killed nearly 200 people in India as that country's totally unprepared police force looked on.

In fact, policemen trying to disarm terrorists linked to a Pakistani militant group associated with al-Queda had only batons or World War I-era rifles to use as weapons.

As a result, India's top law enforcement official has just resigned, bowing to criticism that the attackers appeared better trained, better coordinated and better armed than police. The truth is that India does not even have a trained SWAT team.

These international headlines about a lack of homeland security in India must give corporations that have already outsourced their business functions to that country a reason for concern.

The fact is that Information technology and IT-enabled services will employ 4 million people in 2008 and account for 7% of gross domestic product and 33% of India's foreign-exchange inflows, according to Nasscom, an Indian IT industry organization.

Meanwhile, employee wages are rising rapidly in India and fast becoming more competitive with the rest of the world. The cost advantage for outsourcing to India used to be at least 1:6. Today, the ratio is down to 1:3 and worker attrition is high.

Indeed, the increase in wage inflation in the last several years is staggering. Salaries in India rose 15.1% in 2007, up from 14.4% the previous year. The 2008 forecast is an increase of 15.2% and it marks the fifth consecutive year of salary growth above 10%.

So, after this recent terrorist attack, security against terrorism will become yet another issue for international corporations to consider before outsourcing jobs to India.

As a result, the last few days of terror in India may have ramifications well beyond international politics and the tragic human cost. With worker wages skyrocketing, a lack of national security against terrorism could well mean the death of international business outsourcing to India.

The Citi Never Sleeps In Making Bad Loans

The monetary estimate of bad decisions on Citibank's balance sheet is indeed staggering. The bank that advertises itself as the financial firm that never sleeps, certainly must have worked around the clock to accumulate nearly 3 trillion dollars of bad assets.

Of course, the underlying problem at Citi was greed without any apparent understanding of risk. The problem was summed up in the following quote from a recent New York Times article.

"Many Citigroup insider's say the bank's risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgement, the very people charged with overseeing deal makers, eager to increase short term earnings and executives multi million dollar bonuses failed to rein them in, these insiders say. While much of the damage inflicted on Citibank and the broader economy was caused by errant, high octane trading, and lax oversight, critics say, blame also reaches to the highest level of the bank."

The problems at Citibank were common at many other major financial institutions as well. The truth is that the Fed, the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Office of Thrift Supervision were all negligent in not doing their job of financial oversight.

Meanwhile, the ratings agencies added to the problem and gave all these bad mortgage loans their highest (AAA) rating. It may be a result of corruption or just plain incompetence. Some rating agencies may have even assumed that the national average house price would not decline.

In fact, Citibank has a long history of making bad mortgage loans. In the early 1990s the company nearly went under thanks to taking on lots of real estate risk in the wrong markets. Last week, the firm was on the brink of the financial abyss once again.

After Citi's shares plummeted 60% amid mounting concerns about its viability, the U.S. Treasury and the Federal Deposit Insurance Corp moved to save the firm. The terms of the bailout provided protection against the possibility of "unusually large losses" on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate, which will remain on Citigroup's balance sheet.

The Treasury will also inject another $20 billion in capital into Citigroup through the Troubled Asset Relief Program, receiving preferring stock that will yield 8%. Under the terms of the deal, Citigroup will absorb up to $29 billion in losses on the $306 billion portfolio of risky property-related assets; the government will eat 90% of any further losses, with Citigroup shouldering 10%.

The Citi never sleeps in making bad loans and it is apparent that they were not alone. Unfortunately, the American taxpayer will now pay a very steep price. In Sweden, the total bailout cost to solve a similar problem was twenty percent of GDP. That makes the 700 billion dollar taxpayer funded bailout bill passed by the United States Congress, a quarter of what will eventually be needed for our national financial repair.

Bailing Out Of This Government Bailout

It is hard to believe that the United States Congress has given the Treasury Secretary control over trillions dollars of taxpayer money without any current oversight.

Henry Paulson controls assets equal to the 19th largest global economy and he is not even an elected official.

Of course when the Treasury Asset Relief Program (TARP) was passed, oversight that taxpayer's money would be spent wisely was a Congressional assurance given to a skeptical public.

So is the money being spent wisely? Nobody really knows, but Bloomberg News is at least trying to find out. They have requested details of Federal Reserve lending under the U.S. Freedom of Information Act and filed a federal lawsuit on Nov. 7 seeking to force disclosure. Give Bloomberg News credit, they are doing actual journalism in the real world.

Unfortunately, the same cannot be said for the rest of the media. MSNBC, is currently running promos that say: "Barack Obama, America's 44th president. Watch as a leader renews America's promise." People Magazine 's Cover "The Obamas' New Life!" will not win any Pulitzer for investigative journalism either. U.S. Weekly goes with a new Obama quote for its latest edition: "I Think I'm a Pretty Cool Dad." Meanwhile, the Chicago Tribune opines that Michelle Obama "is poised to be the new Oprah and the next Jacqueline Kennedy Onassis combined!" for the fashion world.

So, 350 billion of taxpayer's money has already been spent and nobody knows where it went and only Bloomberg News really cares enough to find out under the Freedom Of Information Act. The New York Post calls all the current Presidential media hype and attention, "BamALot" and if it continues, it is going to cost the average American taxpayer "QuiteALot".

Now, consider that the need for the remainder of the bailout bill was brought into question last week. Treasury Secretary Henry Paulson changed direction on the need for the money. He announced that the government would not use any of the $700 billion to buy toxic mortgages and other bad assets from banks. That had been the centerpiece of the bailout plan when Paulson and Bernanke first pitched it to lawmakers two months ago.

Meanwhile, CNBC, has been keeping a running tally of the total amount of spending the federal government is doing due to this financial crisis as well as all its other bail out commitments. The amount as of November 13, 2008 is reported to be $4.28 trillion dollars. About sixty eight percent of the sum falls under the Federal Reserve's umbrella, while the another 16 percent is under TARP, as defined under the Emergency Economic Stabilization Act, signed into law in early October.

As a result of the lack of transparency and the staggering dollar amount, Senators, James Imhofe and Bernie Sanders, now plan to introduced legislation to bailout Congress from the 350 billion dollars that remains to be spent on TARP.

The truth is that the entire regulatory regime of the US financial community will require the largest overhaul since the Great Depression. Many regulations that have been repealed need to be put back into place.

However, since so many new financial instruments have been developed, the whole system is in need of review. This should include the Fed, Treasury, SEC, FDIC, the GSEs, and the governmental housing agencies (GNMA, the FHA).

In the meantime, bailing the taxpayer out of this government bailout has become a priority for everyone before all the money is gone and nobody knows what happened, except for a few insiders in the beltway in Washington, D.C.

Paulson's Bailout Plan Is Financial Shock And Awe

It's another Monday and there is another government bailout to talk about in the sub prime mortgage mess.

However, this time its the "mother of all bailouts". U.S. Treasury Secretary Henry Paulson has proposed and the Congress will soon approve a taxpayer bailout plan for everyone.

The Paulson bailout plan will use at least 700 billion taxpayer dollars to bail out toxic mortgages from every United States financial institution and even large U.S. banks that are foreign based.

In addition, the Paulson bailout plan saves any money market mutual fund that was in danger of breaking its one dollar net asset value. There were two such money market funds that were in that dubious category last week.

While there can be no doubt at this point that the Paulson bailout plan was necessary to save the financial markets from the abyss, the plan is financial shock and awe to the American taxpayer nevertheless.

The commitment of 700 billion in new taxpayer dollars to save the financial markets along with the cost of the Iraq war and the already huge federal budget deficit projected for next year will dramatically limit the next President's ability to spend any money.

So, any Presidential candidate that still maintains that he is going to cut taxes, provide National Health Insurance or any of the other myriad of vote pandering treats in the election 2008 goody bag is simply not facing fiscal reality. Make no mistake about this, American taxes are going up and the growth of the economy is going to be subdued during the next Presidents first term in office.

It is really remarkable how poorly our elected politicians and 2008 Presidential candidates have handled this financial crisis during the last week. Last Tuesday, Republican John McCain said: "We cannot have the taxpayers bail out AIG or anybody else." By Wednesday, he had completely changed his mind.

How about this strange quote from the Arizona Republican: "the fundamentals of our economy are strong". Unfortunately he said this as one brokerage house had just filed for bankruptcy, another was about to, and the Dow Jones industrial average had tumbled 504 points in a single trading day.

Meanwhile, America is still awaiting the economic plan of Democratic candidate Barack Obama. He has already delayed unveiling his plan twice. I guess at this point, he has just decided to vote "present" on the current financial crisis. It's apparently a pattern of behavior since he voted "present" on 130 different occasions when he was a member of the Illinois State Senate.

The leadership in the Congress was not much better. In the United States Senate, Majority Leader Harry Reid is quoted as saying "no one knows what to do" while in the House Of Representatives, Speaker Nancy Pelosi initially promised to hold hearings on the crisis after the Congressional vacation.

This week both Republicans and Democrats will spend more than 700 billion dollars of taxpayer money and then go home on vacation. In the 2008 election, it will be business as usual as the candidates continue to make campaign promises that they cannot hope to deliver. However, despite the Congressional commitment of a huge amount of taxpayer money and all those campaign promises, this financial crisis is far from over.

A long and deep U.S. recession has now increased in probability. Indeed, defaults on credit card payments could eventually require the Treasury to commit more taxpayer bailout dollars for banks and credit card companies. In addition, a run on hedge funds is very likely and this whole mortgage mess may well spread throughout Europe.

Paulson's bailout plan of 700 billion taxpayer dollars is certainly American financial shock and awe. However, the sobering reality of the plan is that as an economic solution, it may be only phase one.

A Financial Crisis Of A Century

Alan Greenspan has just called this ongoing United States economic disaster a "once in a century financial crisis."

The problem for Greenspan is that he sounds like an impartial, detached observer providing commentary on the sinking of the Titanic. The reality is that he was the captain of what is now the sinking American economic ship.

The truth is that today's financial crisis can trace its origin back to 2001, amid the end of the Internet boom and the shock of the September 11 terrorist attacks.

It was at that point that the Fed under its Chairman, Alan Greenspan turned on the monetary pump to try to combat an economic slowdown. The Fed poured money into the US economy and slashed the Federal Funds rate from 3.5% in August 2001 to 1% in 2003.

Then, Greenspan's Federal Reserve made two fatal mistakes. First,it kept the Federal Funds rate too low for much too long. In doing so it created the environment of speculation for the creation of a housing bubble which is now exploding.

Next, Greenspan failed to closely regulate the bankers. Lending standards became shamefully lax and the Fed should have done something about it, not to mention the deceptive and in some cases fraudulent sub prime mortgage practices.

The problem is that as Fed Chairman, Greenspan actually encouraged the development of the housing bubble which has led to this "once in a century financial crisis". Remember when Greenspan suggested that many homeowners could have saved tens of thousands of dollars in the last decade if they just had Adjustable Rate Mortgages?

How about his request that encouraged greedy bankers to create those unique alternative products which led directly to the sub prime mortgage problems of today. In 2004 Greenspan said: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."

So, former Fed Chairman Alan Greenspan created the environment and without any real oversight, the immense greed of the investment banks did the rest to create this financial mess. Now, one by one these banks march to the United States taxpayer for a bailout.

It is hard for many American citizens to understand the sheer arrogance and greed of all this. Consider that Lehman Brother's CEO Richard Fuld made over twenty two million dollars in compensation in 2007 alone. Twenty two Million dollars paid to a man who was about to run his company into bankruptcy. He is hardly alone. Tens of millions of dollars in annual compensation is the going rate for all these failed financial bank CEO's.

Indeed, it seems like every weekend brings headline news of another major failure in financial corporate America. Bear Sterns was bought by J.P. Morgan with government guarantees. FannieMae and Freddie Mac are now owned by the Federal government and the American taxpayer. Lehman Brothers has just declared bankruptcy. Merrill Lynch was bought by Bank Of America in a rush to avoid another impending disaster.

The problem is that this economic crisis is far from over and there are many more financial corporate failures to come during the remaining months of 2008. The sad truth is that there have already been 100,000 layoffs in financial services this year. It now looks like there are at least 50,000 more to go.

FannieMae, Freddie Mac And The Magical Piggy Bank

The sub prime mortgage crisis continues to get worse. It seems like every week that the federal government takes over another bank in the financial industry.

In addition, it was only six months ago, on a weekend, that Bear Sterns made international headlines as it became a J.P. Morgan entity backed by Government guarantees.

This last weekend it was government sponsored home mortgage lending giants FannieMae and Freddie Mac that became the recipient of federal government oversight. The government bailed out both financial institutions and the tab to that magical piggy bank known as the United States taxpayer may be as much as 200 billion dollars.

Meanwhile, the CEO's of these two failed home mortgage giants will not have to worry about their next meal any time soon. Fannie Mae CEO Daniel Mudd received $12.2 million in total compensation in 2007. Mudd's pay included his $990,000 salary, a $2.23 million bonus and a $9 million "long-term incentive" award. In 2006, Mudd received a $3.5 million bonus and a long-term incentive award of about $10 million. His total pay for 2006 was $14.45 million dollars.

Over at Freddie Mac, Chairman and Chief Executive, Richard Syron pocketed nearly $19.8 million in compensation in 2007, even though the mortgage company's stock lost half its value last year.

However, these salaries were apparently not enough reward for corporate failure. Daniel Mudd, the departing head of Fannie Mae, is expected to walk away with $9.3 million in pay and retirement benefits for 2008 under the terms of his contract.

Richard Syron, the departing chief executive of Freddie Mac, could walk away with $14.1 million. Mr Syron's larger payoff follows a clause added to his employment contract last summer when the first signs of the credit crunch began to emerge.

It certainly makes you wonder what the term pay for performance means in the business world today.

So, what happened? Why has the government gone from sponsoring these mortgage giants to owning them through a bailout that may cost the taxpayer as much as 200 billion dollars?

A financial audit by Morgan Stanley concluded that the accounting of the mortgage companies, (which represent nearly half of the entire mortgage market) while legal, enabled Freddie, and to a lesser extent Fannie, to overstate the value of their reserves.

Indeed, free-market advocates had warned of this impending disaster for years as Fannie and Freddie used an implicit government backing to borrow at will, with only a small mount of capital to protect them from nasty surprises like the recent sharp decline in housing prices and rise in foreclosures.

Look for the stock market to rally in relief since taxpayer dollars are being used to clean up our national mortgage mess. However, banks will continue to be seized and backed by taxpayer dollars. The 2008 Presidential election campaign will proceed with a never ending list of candidate promises backed by future taxpayer dollars.

Meanwhile, the current United States budget deficit is already projected to be over 480 billion dollars next year, and it still does not even fully reflect the total cost from the war in Iraq or smaller tax reciepts from an extended recession.

So, as corporate CEO's clean up financially and have no accountibility for their own failure, what will prevent executives from other financial companies to gamble even more recklessly in the future? After all, they will still get rewarded even if their gamble fails since the taxpayer now apparently assumes the risk of each financial company failure.

Indeed, it really is a house of cards that all depends on that magical piggy bank courtesy of the United States taxpayer. At some point it is destined to get very ugly when that magic finally wears off.