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Citigroup Hikes Rates For ‘Some’ U.S. Credit Card Accounts

I once had a credit card from Citigroup.

They took it away from me, probably because I wasn’t spending as much as they wanted me to, and when I did rack up a balance, I paid it off monthly.

Not the kind of customer they were looking for.

From Reuters’ Hezron Selvi this morning:

Citigroup Inc has increased interest rates on up to 15 million U.S. credit card accounts just months before curbs on such rises come into effect, the Financial Times reported citing people close to the situation.

Citigroup had upped rates on 13 million to 15 million credit cards it co-brands with retailers such as Sears, the paper said.

In a statement, Citigroup said “We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles.”

“These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit,” Citigroup told the paper.

Well, that’s one way of helping the American consumer get back on its feet…

Source:

“Citi raises rates on millions of credit cards: report”
Hezron Selvi
Reuters, July 1, 2009

Related Post

From our sister blog Investorazzi.com tonight:

“Bill Gross: U.S., U.K. Credit Ratings In Trouble”

“Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. ‘eventually’ will lose its AAA rating, but not any time soon.

‘It’s certainly nothing that’s going to happen overnight,’ Newport Beach, California-based Gross said in an interview today on Bloomberg Television. ‘The markets are beginning to anticipate the possibility.’”

Credit Crunch Hits Farm Belt

The credit crunch has arrived at the doorsteps of rural America. From the Associated Press’ Roxana Hegeman yesterday:

More lenders are tightening their restrictions for agricultural loans in the Midwest at the same time that repayments on loans have dropped, The Federal Reserve Bank of Kansas City says.

The Federal Reserve reported Friday that its quarterly survey found that the percentage of lenders raising collateral requirements reached another record high in the Tenth Federal Reserve District. The rate of loan repayments also fell for the second straight quarter.

Turbulent agricultural conditions contributed to the tightened farm credit, the agency said.

“The thing to take away from all of this is … farmers are positioning themselves to get through turbulent times,” Federal Reserve economist Brian Briggeman said.

The district includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming as well as parts of New Mexico and Missouri.

Hegeman discussed other findings from the quarterly survey. She wrote:

Survey respondents reported farm income had slipped from the record highs of last year, especially in Oklahoma and Kansas. Livestock producers also were struggling with low cattle and hog prices amid waning global demand for meat.

New equipment sales slowed dramatically. The Association of Equipment Manufacturers reported a 20 percent decline in tractor sales during the quarter when compared to last year’s record high, according to the report.

Farmland values appeared to stabilize after modest declines in 2008, and most bankers expected those values to hold steady, the agency reported.

Non-irrigated farmland values rose 1.4 percent across the district compared to the previous quarter, with no change in the value of irrigated acreage. Ranchland values declined by less than 1 percent, reflecting the struggling livestock sector.

Nebraska had the most dramatic fluctuations in land values with the highest gains in 2008, but also the sharpest declines in the past two quarters.

The Federal Reserve’s quarterly report was compiled from 255 lenders surveyed.

You can read the entire four page survey (in .pdf format) here.

Source:

“Federal Reserve: Agricultural credit tightened”
Roxana Hegeman
Associated Press, May 18, 2009

U.S. Risks Losing Triple A Credit Rating

When the former chief accountant of the United States warns that the nation’s credit rating is at risk, Americans might want to listen to what he has to say. David Walker, chief executive of the Peter G. Peterson Foundation and former Comptroller General of the United States, wrote in the Financial Times (UK) this past Tuesday:

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Walker warned that the nation’s credit rating could be downgraded with the help of two developments. He wrote:

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

On the topic of health care reform, Walker noted:

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

Walker concluded that a new government commission is needed to help get the nation’s finances back on track— or else. From the piece:

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Source:

“America’s triple A rating is at risk”
David L. Walker
Financial Times (UK), May 12, 2009

Fannie Mae: Please Sir, I Want $19 Billion More

Oh, Fannie Mae. What a wreck you are.

The Wall Street Journal’s Peter Wallison wrote last September:

The most astonishing thing about Treasury Secretary Henry Paulson’s plan for Fannie Mae and Freddie Mac is that he intends to use taxpayer funds to resuscitate the companies and return them to profitability.

This after 20 years, during which Fannie and Freddie used government backing to enrich their shareholders, managements, lobbyists, former government officials and Washington insiders; after they rigged the political process with campaign contributions; and after their Congressional supporters resisted every effort at reform until the two companies were on the verge of collapse. Now a Treasury secretary in a Republican administration aims to put them back in the same business, and get the taxpayers to finance it.

And financing it we are…

From the Associated Press this morning:

Fannie Mae says it needs $19 billion in additional government aid after posting a loss of $23.2 billion in the first quarter as the taxpayer bill from the housing market bust mounts.

The mortgage finance company, seized by federal regulators last September, posted a quarterly loss of $4.09 per share on Friday. That compares with a loss of $2.5 billion, or $2.57 a share, in the year-ago period.

The results were driven by $20.9 billion in credit losses due to declining housing market conditions and $5.7 billion in writedowns of the value of its mortgage-backed securities.

The request for federal aid is its second since the takeover. The company received about $15 billion earlier this year.

“Family Guy: Stewie In Oliver Twist”
YouTube Video Link

Sources:

“How Paulson Would Save Fannie Mae”
Peter J. Wallison
Wall Street Journal, September 12, 2008

“Fannie Mae Seeks $19 Billion in US Aid After Loss”
Associated Press, May 8, 2009

I’d Be Broke If Ben Bernanke Were My Financial Adviser

Yesterday, I came across an Associated Press piece that attempted to track Federal Reserve Chairman Ben Bernanke’s recent economic predictions. From the article:

Federal Reserve Chairman Ben Bernanke said Tuesday that the U.S. economy could begin to grow later this year if the government can gradually repair the financial system. His testimony to Congress’ Joint Economic Committee largely echoed statements he’s made in recent months. But this time, Bernanke was a bit more optimistic: He said not just that the recession could end but that the economy could start growing again by year’s end.

Here’s a look at Bernanke’s recent comments on the economy:

May 5 — “We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke told lawmakers, sounding more confident about the prospects for a recovery later in 2009.

April 14 — “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing,” Bernanke said in a speech at Morehouse College in Atlanta. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

April 3 — He said he expects a “gradual resumption of sustainable economic growth.” However, he didn’t say when in remarks to a Fed conference in Charlotte, N.C.

March 15 — “We’ll see the recession coming to an end probably this year,” if the government succeeds in bolstering the banking system, Bernanke said in an interview with CBS TV program “60 Minutes.”

March 10 — The recession was more severe than the Fed had expected, Bernanke acknowledged after a speech to the Council on Foreign Relations. Still, he added there’s a “good chance” the recession could end this year if the government managed to get financial markets to operate more normally again.

March 3 — Testifying to the Senate Budget Committee on the bailout of American International Group Inc., Bernanke didn’t repeat remarks he had made a week earlier that the recession could end this year if the government succeeded in turning around wobbly financial markets.

Feb. 24 — Bernanke said he hoped the recession will end this year, but that there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again. ”

Jan. 13 — “Fiscal policy can stimulate economic activity, but a sustained recovery will also require a comprehensive plan to stabilize the financial system and restore normal flows of credit,” Bernanke said at the London School of Economics.

There’s no doubt that Mr. Bernanke is consistent with his statements.

And when you look further back at the Fed chair’s economic forecasts, the consistency becomes even more remarkable.

As in remarkably wrong on a consistent basis.

From a Boom2Bust.com post on March 16:

Lest we forget some of his other notable predictions, such as:

“Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, ‘largely reflect strong economic fundamentals,’ such as strong growth in jobs, incomes and the number of new households.”

-Washington Post, October 27, 2005

“A leveling out or a modest softening of housing activity seems more likely than a sharp contraction…”

-in testimony to a House Financial Services Committee, Thursday, February 16, 2006, (source: Washington Times, February 16, 2006)

“We think that, by the spring, early next year, that as these credit problems resolve and as we hope, the housing market begins to find a bottom, that the broader resiliency of the economy which we are seeing in other areas outside of housing will take control and will help the economy recover to a more reasonable growth pace.”

-in testimony to the Joint Economic Committee on Thursday, November 8, 2007 (source: “Nightly Business Report,” Thursday, November 8, 2007)

“The Federal Reserve is not currently forecasting a recession.”

-after a speech given in Washington, D.C., on Wednesday, January 9, 2008 (source: AFP, Thursday, January 10, 2008)

“My baseline outlook involves a period of sluggish growth, followed by a somewhat stronger pace of growth starting later this year as the effects of (Fed) and fiscal stimulus begin to be felt.”

-in testimony to the U.S. Senate Committee on Banking, Housing, and Urban Affairs on February 14, 2008 (source: FederalReserve.gov)

I cannot help but wonder how anyone could take Mr. Bernanke’s economic forecasts seriously, considering his track record over time.

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Source:

“Tracking Bernanke’s comments on the economy”
Associated Press, May 5, 2009

IMF: Global Losses Could Surpass $4 Trillion By End Of 2010

From Reuters UK this afternoon:

The economic crisis may be at its worst now and a recovery could follow unless downside risks materialise, euro zone countries are likely to tell a Group of Seven meeting on Friday, a G7 source said.

Yep. Things are looking up for the global financial system. Or, at least, that’s what we’re told. From Bloomberg’s Timothy Homan today:

Worldwide losses tied to distressed loans and securitized assets may reach $4.1 trillion by the end of 2010 as the recession and credit crisis exact a higher toll on financial institutions, the International Monetary Fund said.

Banks will shoulder about 61 percent of the writedowns, with insurers, pension funds and other nonbanks assuming the rest, the Washington-based lender said in a report released today on the state of the global financial system. The fund forecast $2.7 trillion in losses from U.S.-originated loans and assets, compared to its estimates of $2.2 trillion in January and $1.4 trillion in October…

The $4.1 trillion estimate is the first by the IMF to include loans and securities originating in Europe and Japan.

Bloomberg Television reported elsewhere today that global financial institutions have suffered writedowns and credit losses exceeding $1.3 trillion since a credit crunch began in mid-2007.

The IMF report follows one issued by JPMorgan Chase analysts last Friday that warned banks are looking at $400 billion more in losses. From Bloomberg’s Jody Shenn yesterday:

Banks are likely to realize about $400 billion more in losses on soured assets, requiring further injections of government capital, JPMorgan Chase & Co. said. Banks will need to set aside about $215 billion more in reserves against their holdings of $2.1 trillion of U.S. home loans that haven’t been packaged into securities, mortgage-bond analysts led by Matthew Jozoff in New York wrote in a report dated April 17.

A surge in defaults on subprime mortgages that began in 2006 escalated a U.S. housing slump, leading to a global economic downturn. Banks worldwide have taken writedowns and losses of $920 billion so far, compared with $900 billion of capital raised, the analysts wrote.

Sources:

“UPADTE 1-Euro zone to tell G7 econ may be at bottom –source”
Jan Strupczewski
Reuters UK, April 21, 2009

“IMF Says Losses From Crisis May Hit $4.1 Trillion (Update1)”
Timothy R. Homan
Bloomberg, April 21, 2009

“Banks Face $400 Billion More in Losses, JPMorgan Says (Update1)”
Jody Shenn
Bloomberg, April 20, 2009

Cheap Oil May Not Be Around For Much Longer

“Morgan Stanley said crude oil prices are likely to decline in the second quarter ‘and remain at depressed levels through 2009.’”

-Bloomberg, March 19, 2009

Back in late February, Jim Rogers, the well-known hard assets investor, told CNBC’s Maria Bartiromo the following in an interview:

Oil prices are down at the moment, but that’s temporary. And you’re going to see higher prices, especially of commodities, because the fundamentals of commodities are enhanced by what’s happening.

So, what exactly IS happening? Last night, MarketWatch’s Steve Gelsi shed some light on what the commodities guru was referring to. Gelsi wrote:

ConocoPhillips Chief Executive Jim Mulva didn’t mince words with Wall Street analysts when, in the face of a slowing economy and lower oil prices, he outlined the oil major’s nearly $2 billion cut in capital spending for 2009 and other belt-tightening measures.

“We believe our decisions, actions and plans will enable us to live within our means,” Mulva said following the company’s fourth-quarter results in February.

ConocoPhillips is far from alone in its effort to scale back spending to deal with the harsh economic realities, as energy-infrastructure projects around the world are put on hold in the wake of oil’s slide to $50 a barrel from more than $100 last year.

U.S. petroleum inventories sit at about 360 million barrels, their highest level since 1993, and natural-gas supplies remain at 1.65 trillion cubic feet, some 32% more than a year ago and 22% above the five-year average.

Against this backdrop, experts and energy company officials are now debating whether the cutbacks in production and infrastructure spending could lead to energy shortages and to another price spike down the road.

Oil’s 40% rise from multiyear lows of $35 a barrel in December to about $50 now — with just a whiff of economic recovery on the horizon — illustrates how quickly prices could resume their climb toward last year’s record of $147.

Rogers, who correctly predicted the start of the commodities bull market back in 1999, has been telling the financial media and anyone willing to listen to him that the recent decline in commodity prices, in conjunction with the difficulties by commodity producers to access capital due to the credit crunch, is resulting in the postponement or cancellation of projects meant to increase production capacity, thereby setting the stage for higher hard asset prices down the road.

Some veteran traders and investors understand where the author of such books as Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market and A Bull in China: Investing Profitably in the World’s Greatest Market is coming from. From the MarketWatch piece:

“Every bull market in oil is really born in the zenith of a bear market,” said Phil Flynn, vice president at Alaron Trading in Chicago. “The cutbacks we see today are going to lead to a spike somewhere in the future. The big question is when it’s going to happen.”

Energy traders are keeping an eye on production cuts by the Organization of Petroleum Exporting Countries, as well as scaled-back capital projects by the Western oil majors and state-run oil giants such as Saudi Aramco or Russia’s Rosneft.

“If the economy comes back and they don’t ramp up quickly, prices could spike up,” Flynn added.

Gelsi pointed out additional evidence of retrenchment by the oil industry. He wrote:

Gene Shiels, assistant director for investor relations at oil-field service giant Baker Hughes Inc., said that since late last summer, energy companies have scaled back the number of drilling rigs actively looking for oil and gas in the United States by about 50%…

Outside the United States, large deepwater-drilling projects have been slower to scale back, because they require years to complete and are funded by consortiums of big oil companies and overseas governments. But even some of these major undertakings may soon feel the pinch, according to Shiels.

“If oil stays at $40 or even $50 a barrel, a lot of heavy oil projects in Canada or deepwater projects may not continue,” he said. “We could we setting the stage for an oil spike if capital spending is cut for a long time.”

Gelsi pointed out one final hurdle to increasing production capacity. From the article:

Energy producers face the double challenge of a current supply glut, coupled with relatively high costs of building energy projects. While oil prices are half of what they are a year ago, the price tag for building deep-sea oil rigs and other infrastructure remains about double what it was a decade ago, and hasn’t fallen that much since energy prices burst last year.

All this, just when you thought it was safe to buy that ginormous SUV you’ve had your eye on.

Oh, and by the way, here’s the second part of that Bloomberg excerpt from March 19:

“Oil will ‘eventually’ head back toward $100 a barrel once the economy recovers and global supplies decline, Morgan Stanley said in a note today.”

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Sources:

“Morgan Stanley Says Oil ‘Will Remain Depressed’ Through 2009”
Alexander Kwiatkowski
Bloomberg, March 19, 2009

“Jim Rogers Doesn’t Mince Words About the Crisis”
Maria Bartiromo
BusinessWeek, February 26, 2009

“Energy-spending cutbacks spark price-spike talk”
Steve Gelsi
MarketWatch, April 8, 2009

Credit Card Write-Downs At All-Time High

Stories related to credit card woes probably shouldn’t surprise anyone these days. From Reuters this afternoon:

Credit card write-downs soared to record levels in February, representing an all-time high in the 20-year history of the Moody’s Credit Card Index, as job losses mounted, the rating agency said Wednesday.

Credit card charge-offs, the write-down of uncollectable debt, advanced decisively to 8.82% in February, marking the sixth consecutive month of increases. The level is more than 300 basis points higher than a year ago.

Sharp increases were experienced across several large issuers and have closely followed the surges in unemployment occurring over recent months, the rating agency said.

“We expect that the charge-off index will threaten double digits by the end of the year, in light of our expectation that the economy will worsen throughout the remainder of the year,” Moody’s said.

It predicts the charge-off rate index will peak at about 10.5% in the first half of 2010, assuming a coincident unemployment rate peak at 10%…

Delinquency rates on credit cards also advanced in February. Moody’s delinquency rate index broke through the 6% level to 6.14%.

Got Good Credit? Rates as low as 7.88%. Borrow up to $25,000 to help fund any project. No collateral needed.

This news comes a day after the U.S. Senate Banking Committee signed off on legislation seeking to ban “abusive” credit-card practices. From the Associated Press’ Laurie Kellman yesterday:

Democrats in Congress are taking a swipe at credit card issuers and their increasingly creative reasons for raising fees on strapped consumers, sparking a well-financed duel over how to crack down on alleged abuses.

Striking the right balance between getting credit moving again and protecting consumers who depend on it is a long and complex process and nowhere near complete. But lawmakers were hoping to advance consumer-friendly legislation before they head home for Easter at the end of the week and face their constituents – 12.5 million of whom are out of work.

“Right before this break coming up I thought it was a good time to try to deal with it, get it done,” said Senate Banking Committee Chairman Christopher Dodd, D-Conn.

His panel led the way Tuesday by narrowly voting to send the full Senate a bill that would ban some of the many reasons credit card issuers raise interest rates and fees on consumers, raising the hackles of industry advocates who say such limits would ultimately cost consumers more money.

“Making this credit available is a very risky business and the committee’s action today will unfortunately make it harder, not easier, for banks to continue doing so,” said American Bankers Association’s Kenneth J. Clayton.

Sources:

“Uncollectable credit card debt hits record high”
Reuters, April 1, 2009

“Congress considers limits on credit card companies”
Laurie Kellman
Associated Press, March 31, 2009

881 U.S. Car Dealerships Close In 2008

While on the topic of cars, here’s something from Reuters’ Soyoung Kim yesterday that caught my attention. Kim wrote:

A record 881 U.S. auto dealerships closed in 2008, with Detroit’s three struggling automakers representing 80 percent of the decline, according to data released on Thursday.

In the face of tight credit and a plunge in sales of cars and trucks, about 4.2 percent of the country’s 20,084 auto dealerships shut their doors, according to data firm Urban Science.

The number of closures, the bulk of which occurred in the fourth quarter, represents the biggest decline since 1991 when the company started to collect data.

The lack of credit has made it difficult for dealers to finance their vehicle inventory and for customers to secure financing to buy vehicles…

U.S. auto sales fell 18 percent in 2008 to 13.2 million units. Analysts and auto expects have forecast a further decline in sales to as low as 10 million units this year.

Talk about a sinking feeling…

Source:

“Record 881 U.S. auto dealerships closed in 2008: data”
Soyoung Kim
Reuters, February 19, 2009

Analyst: Over 1,000 Bank Failures On Tap

An analyst for Royal Bank of Canada-affiliated RBC Capital Markets is predicting a large number of bank failures over the next couple of years. From MarketWatch’s Alistair Barr yesterday:

More than 1,000 banks may fail during the next three to five years as the recession intensifies and loan losses climb, an analyst at RBC Capital Markets estimated on Monday.

In 2008, analyst Gerard Cassidy forecast 200 to 300 bank failures, but now he says the environment has deteriorated since then.

“Residential mortgage delinquencies remain at record levels, home-equity loan defaults are steadily rising and residential construction and land loan non-performing assets are skyrocketing for lenders with excess exposure to the weakest housing markets in the U.S.,” Cassidy wrote in a note to clients.

“In conjunction with the slowdown in the economy, credit deterioration has accelerated in the commercial and industrial and commercial real estate loan areas,” he said.

Since the mortgage-fueled credit crunch erupted in 2007, 34 banks have failed in the U.S. While Washington Mutual became the biggest bank failure in history last year, Cassidy expects most of the banks that collapse will be relatively small, with less than $2 billion in assets.

Source:

“More than 1,000 banks may fail, analyst estimates”
Alistair Barr
MarketWatch, February 9, 2009

It’s The Hoovers We Remember

From the Wall Street Journal’s “Washington Wire” blog last Friday:

The top congressional leaders from both parties gathered at the White House for a working discussion over the shape and size of President Barack Obama’s economic stimulus plan. The meeting was designed to promote bipartisanship.

But Obama showed that in an ideological debate, he’s not averse to using a jab. Challenged by one Republican senator over the contents of the package, the new president, according to participants, replied: “I won.”

The statement was prompted by Senate Minority Whip Jon Kyl of Arizona , who challenged the president and the Democratic leaders over the balance between the package’s spending and tax cuts, bringing up the traditional Republican notion that a tax credit for people who do not earn enough to pay income taxes is not a tax cut but a government check.

Obama noted that such workers pay Social Security and Medicare taxes, property taxes and sales taxes. The issue was widely debated during the presidential campaign, when Sen. John McCain, the Republican nominee, challenged Obama’s tax plan as “welfare.”

With those two words — “I won” — the Democratic president let the Republicans know that debate has been put to rest Nov. 4.

For me, these two words go beyond signaling the end of the debate over the contents of the stimulus package.

The significance behind the President’s statement is that the Obama administration will no longer be able to escape the blame of the American public should efforts to jump start the economy fail and the nation’s economic health deteriorates further.

But couldn’t they blame the Bush administration for the crisis?

This might work in the short-term, but not for the long-haul. History shows it’s the Hoovers that we remember.

What do I mean by this statement?

If we look back at the Great Depression of the 1930s, which American president is blamed for letting that fiasco happen on their watch. Why, President Hoover, of course. Think “Hoovervilles.”

A “Hooverville”

Herbert Clark Hoover was the 31st President of the United States, serving in that office from March 4, 1929, until March 4, 1933. A number of historians cite October 29, 1929, the “Black Tuesday” stock market crash, as the beginning of the Great Depression in the United States. While a number of President Hoover’s actions only made the country’s economic situation worse, a strong case can be made that the seeds for the crisis were laid during the years of the prior administration.

While the “Roaring Twenties” are depicted as being a time of great economic prosperity in the United States, the truth was anything but:

• Uneven income distribution- in 1929 the top 0.1% of American families had a total income equal to that of the bottom 42%.
• Massive consumer debt- In this era of individualism, Americans abandoned their spend-thrift ways and engaged in an orgy of mass consumption. And when the money wasn’t available, consumers gladly opted to participate in new “buy now, pay later” programs.
• Unstable banking system- After World War I the United States became the world’s chief creditor. American bankers lent heavily to European borrowers, especially Germany, who would have difficulty repaying the loans in the event of a significant economic downturn.
• High tariffs- The United States maintained high tariffs on goods imported from other countries. At the same time, it was making foreign loans and trying to export products. As other nations could not sell their products in the United States, they could not buy American goods or repay loans from U.S. banks.
• Stock market bubble- Wealthy Americans fueled a stock market “bubble” in the latter part of the twenties. This, in turn, drew many less-affluent Americans into the market as well. And in an era of easy credit, these new investors bought millions of stock shares using margin.

The end result? Robert S. McElvaine, author of The Great Depression: America 1929-1941, wrote:

The stock market crash announced the beginning of the Great Depression, but the deep economic problems of the 1920s had already converged a few months earlier to start the downward spiral. The credit of a large portion of the nation’s consumers had been exhausted, and they were spending much of their current income to pay for past, rather than new, purchases. Unsold inventories had begun to pile up in warehouses during the summer of 1929.

Now, the American President during this time was John Calvin Coolidge, Jr., who served in that role from August 2, 1923, until March 4, 1929. Yet I never hear President Coolidge’s name mentioned in the same sentence as the Great Depression. It’s always President Hoover.

Last year’s stimulus program proved to be a failure. As President Obama said the other week, “Anything is possible in America.” So is the potential for “I won” turning into “We lost” if this next stimulus package fails. And to add insult to injury, like President Coolidge, it won’t be the previous administration in the White House that the American public will blame. As with President Hoover, it will be the man at the helm during the crisis who will be remembered. 

For better or worse. 

Sources:

“Obama to GOP: ‘I Won’”
Mary Lu Carnevale
Wall Street Journal (Washington Wire blog), January 23, 2009

“Great Depression in the United States”
Robert S. McElvaine
Microsoft® Encarta® Online Encyclopedia 2008

Nouriel Roubini: Banking System Could Face Insolvency

More scary predictions about potential U.S. financial losses today from “Doctor Doom” Nouriel Roubini, a former Treasury Department director under the Clinton administration and head of Roubini Global Economics in New York. Bloomberg’s Ayesha Daya and Henry Meyer wrote today:

U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Referring to the recent reports of fourth-quarter losses at Bank of America Corp. ($1.79 billion) and Citigroup Inc. ($8.29 billion), Roubini added:

The problems of Citi, Bank of America and others suggest the system is bankrupt… In Europe, it’s the same thing.

According to Bloomberg, losses and write-downs at financial companies worldwide have surpassed $1 trillion since the collapse of the U.S. sub-prime mortgage market in 2007.

Source:

“Roubini Predicts U.S. Losses May Reach $3.6 Trillion (Update1)”
Ayesha Daya, Henry Meyer
Bloomberg, January 20, 2009

2009 Federal Budget Deficit Already Surpasses Last Year’s Total

Reaching a milestone most Americans would rather forget, the federal budget deficit in the first three months of fiscal year 2009 has now surpassed the deficit for the entire 2008 fiscal year. CNN Money’s David Goldman wrote today:

The federal budget deficit expanded by $83.6 billion in December, the Treasury Department reported Tuesday, bringing the total deficit for the first three months of the 2009 fiscal year to $485.2 billion.

By comparison, the budget deficit for all of fiscal year 2008 was $455 billion. In fiscal 2007, it was $161 billion.

The deficit has ballooned in the first quarter of the fiscal year as the Treasury, Federal Reserve and FDIC began spending record amounts of the $7.2 trillion committed so far to bailouts, financial stabilization efforts and capital investments. The numerous emergency actions began as a result of the credit crisis that started in mid-September.

A decline in tax receipts, stemming from the 1.5 million jobs lost in the first three months of the fiscal year, also contributed to the soaring deficit…

Budget experts have projected that the federal deficit for this fiscal year, which began Oct. 1, will be nearly $1.2 trillion. But that total doesn’t count the economic recovery package that President-elect Barack Obama has started to push forward.

Source:

“U.S. deficit soars to $485.2 Billion”
David Goldman
CNN Money, January 13, 2009