The Abyss Deepens

A trillion here and a trillion there, and pretty soon you are talking about real money

Me

Since my last fulmination, government intervention in the economy continues to escalate. The new administration announced Friday that taxpayer ownership stake in Citigroup is now greater than 35%. Citigroup used to be the most highly valued bank in the world, worth in excess of $300 billion. Now you can buy two shares of the formerly storied financial institution for less than the price of a morning latte. Absent government intervention, Citi would have been forced into bankruptcy months ago (by way of full disclosure, I had been short Citigroup for over a year until recently covering my position).

Just this morning the Treasury and Fed threw another $30 billion of taxpayer money at what used to be the most highly valued insurance company in the world – AIG. Total government support for this hapless corporation has thus increased to a mind-numbing $160 billion. This is more than $500 in support for every man, woman and child in the US. The government calls its bailout an “investment.” I do not know about you, but I would rather take my $500 and choose how I will invest it myself.

In my last blog, I mentioned that there were plans in the works for a massive $50 billion federal mortgage bailout program for “homeowners.” Actually, that is a bit of a misnomer, as the problem is that the people being bailed out generally own very little, if any, of their homes. But apparently $50 billion seemed too inconsequential of a sum, so the Obama administration upped it to a $75 billion program in a futile effort to arrest falling home prices, as well as spare Americans from rising foreclosures.

Oh, and late last week the new administration announced it will be setting aside an additional $250 billion to purchase “toxic assets” from banks in its budget proposal for Congress. This is on top of the $700+ billion set aside by the Bush administration for the same purposes. For taxpayers this is great news of course. We get to have almost $1 trillion of our hard-earned dollars buy assets that are deemed by financial institutions to be so impaired that they cannot sell them on the free market to anyone else. This will clearly be a fantastic government investment. In the meantime financial institutions and their owners can breathe a collective sigh of relief that H.L. Mencken was literally correct: “No one ever went broke underestimating the intelligence of the American public.” This is particularly true when that intelligence is channeled through its politicians. Financial institutions throughout the country will have foisted upon us poor saps “assets” which are in actuality liabilities. This will undoubtedly cost the American taxpayers billions and billions in losses.

Some people are doing the math as to what the price tag of all this spending will cost this coming year should Obama’s budget get approved: $3.6 trillion dollars!! This constitutes more than one quarter of the entire economic output of the nation. By way of a minor detail, the government will be coming up just a tiny bit short in terms of balancing the budget under the proposed spending plan. The shortfall? Let’s see, add this, multiply that, carry the one. Ah, a mere $1.75 trillion dollars. That will add more than 15% to our existing national debt of almost $11 trillion dollars, which is already increasing at a rate of almost $25,000 per second. It took the federal government until the second Reagan administration, or almost 200 years, for the national debt to reach $1.75 trillion. But if the administration has its druthers, fiscal year 2010 alone will rack that up.

The government is clearly pouring money into the economy at a heretofore unprecedented scale. So how is that working out for us thus far? Hmmm. This morning the overall stock market officially pierced the previous lows of last November. The S&P 500 (a market-weighted index of the largest 500 companies in the nation) had its worst opening two months for a calendar year ever (depression era included). The index is actually at a lower level than it was at the end of Clinton’s first term twelve years ago!!

But twelve years ago is nothing when it comes to the fall in national output as measured by the fourth quarter gross domestic product (GDP) numbers. The economy shrank at an annual rate of 6.8%. This was the worst contraction since 1982, harkening me back to the day when I was blithely listening to Duran Duran and reeling from the fact that my new nickname at middle school was “Zitmore.” Consumers certainly do not appear to be taking much stock in the government’s efforts to jump-start the economy. At no time in the last 50 years have so many people polled voiced concerns over a deepening recession and rising unemployment.

"Economic developments in recent months have been consistently worse than the worst-case scenarios," noted Stephen Stanley, chief economist for RBS Greenwich Capital, on Friday. Well, that is not true. There were a small minority of us Nervous Nellies who thought that the logical result of the biggest credit bubble in history would be the worst economic fallout since at least the Great Depression. I will say that most of us who were in that camp have been stunned at the rapidity with which things have unraveled in the last several months, without any signs of a meaningful short-term bounce along the way.

Even Warren Buffet, the richest man in the world and one of its greatest investors, is struggling. Berkshire Hathaway lost 11.5 billion in net worth during 2008, the worst performance in Buffet’s 35 years of running the company, even accounting for inflation. Since peaking with the rest of the US stock market in the Fall of 2007, Berkshire’s share price is down 45%, sending it to the same level it was almost ten years ago.

Unlike 99% of CEOs or investment professional, Buffet issued a very forthright mea cupla: “During 2008 I did some dumb things in investments.” Wow. What a breath of fresh air. Unlike most of the logic-impaired (I am trying to be diplomatic for once) financial company executives that have been grilled by shareholders, the media and Congress alike, Buffet shouldered responsibility for making bad decisions that cost real people very real sums of money (although at $74,000 for a single A share in Berkshire Hathaway, one can safely assume that widows and orphans were not the primary victims of Warren’s lapses in judgment).

While 2008 was not a year of excellence for the Oracle of Omaha, I would not count Mr. Buffet out. He has proven himself to be one of the shrewdest, most canny investors ever. So unlike my contrarian babble, we should all sit up and take notice about what he thinks concerning the economy: “We're certain, for example, that the economy will be in shambles throughout 2009 -- and, for that matter, probably well beyond” (emphasis added).

Something about “all the king’s horses and all the king’s men” seems fitting when it comes to the Obama administration’s colossal fiscal efforts to revive the economy.

There is a noticeable trend for my blogs to be getting longer. In an effort to spare my readers eye strain, I will try to post shorter blogs more frequently. This will mean some will be more current events driven like today. The next one will relate to a more practical financial advising matter, which I will post by Wednesday. Social justice and government programs will have to wait. Cheers!