Tuesday, March 27, 2012

The Supreme Court Health Care Review

The Supreme Court is now going to take on the issue of Obamacare. It’s anybody’s guess as to how it will come out. But there is a mindset problem creeping into our thinking. Congress passed Social Security and Medicare. And now we are about to receive health care. Notice that whenever someone threatens to reduce any of these benefits, they change from entitlements to fundamentally God given guaranteed rights.

Social Security is pretty straight forward; you receive 7 times what you contributed into the plan. There is a definite cap on what will be paid out. When it was first passed, 50% of the population survived to collect it. Since then, 20 percent more of the population live to collect it and live 5 years longer than they did when the program first started. The fact that Congress has looted the Social Security piggy bank to the tune of two trillion dollars shows what government can do with creative financing.

Then there is Medicare and Medicaid. In Abraham Lincoln’s time, total lifetime Medicare costs wouldn’t have exceeded $100 per person; medicine was in its infancy. In today’s world, the ability of the government to pay all health care costs (considering the technological advances in medicine) could bankrupt any country. Today, even without Obamacare, there is no bottom line cost per patient with Medicare.

To put it in perspective, imagine that your pet dog got very sick. At the animal hospital, the costs are all laid out in front of you before any treatment. Say the bill comes to $3,000 with no guarantees of survival, what do you do? You have to make a decision. Can I afford to pay it? This is where you hear the words “death panels” when it comes to state run health insurance. It’s an admission by government that there is a limit on their resources.

The total benefits each taxpayer is entitled to over their lifetime needs to be defined and it isn't. The concept of “government insurance” in a Democracy is nothing more than a free ride. The reason being, governments don’t have to make a profit, insurance companies need to, in order to survive (if you're not making a profit, you're giving away the store). Government health care is kind of like telling a hooker what rates she can charge and advise her, no one can be denied service. The neat thing about that, the price is right---grab a number and wait. And just like Obamacare, you'll have a long wait before she gets to your number.

The Supreme Court will be looking at three questions. Can the government force everyone to purchase a product that they don’t really feel they need? Should the government be able to force arbitrary rules on an insurance company that would limit their profitability or drive it out of business (forced to cover preexisting conditions). And third, does the Congress have the constitutional authority to nationalize the health industry?

Obama and the Congress passed this 2074 page bill without reading it. The Supreme Court will read it looking for errors and omissions. Will they give this unread "Work of Art," a good review? We won't have to wait long to find out.

Copyright 2012 by Jim Brubaker

Sunday, March 18, 2012

Printed Dollars to Wreak Havoc on State Budgets

Countries worldwide are spending more than they raise in taxes. People are beginning to realize that the funding for all of this is unsustainable over time. In Greece, rumor has it that they will need a further bailout down the road (May or June). Was the EU able to solve Greece’s financial problems? Notice, nobody showed up at Greece’s doorstep with tons of gold to buy off the creditors. Europe didn’t raise taxes to bail out Greece; they did a Fanny and Freddie refi--get a payment today and worry about it again next month.

Us old farts understand inflation. The loaf of bread we paid 20 cents for as a child is now two dollars. Being a millionaire in today’s world just doesn’t have the same cachet as it did back in the 1960’s. The high school graduates today, have read about inflation but have yet to experience it. The price of gasoline just went up 50 cents a gallon last week and Obama has appointed an Oil Speculation Task Force to look into the matter. Gas is still a dollar cheaper in Mexico. So we can pretty well deduce that Obama hasn't got a clue on this one.

Our government is facing a "Catch 22" situation. Tax receipts are decreasing because of the economic slump. Wages are pretty much frozen. So when the government prints dollars, the normal expectation is for wages to rise in lock step with inflation, which in turn increases taxes collected, and that isn’t happening. The extra printed dollars have lowered the average person’s standard of living while at the same time raised governments fixed costs of doing business. Using this example, it is easy to see that the reduced standard of living (from the ability to consume less-i.e. higher energy costs) has the same effect as a tax increase. The government’s problem; they collect the same amount in taxes, but it doesn’t go quite as far, as it did the year before. (Now how can that be?)

California’s latest update of tax receipts for February of this year looked a bit abysmal when compared to last year. Corporate, personal and sales tax collections have dropped a total of 23%. See the chart below.
With the 25% increase in the price of gasoline and the 23% decrease in the State’s tax receipts, any State service that consumes fuel (police, fire, ambulance, school bus, highway repair etc.) is going to get a very unpleasant reality check. Remember, no State cuts to entitlements (unless you're feeling suicidal).

There is some good news though; California’s food stamp participation is the second lowest in the country. The reason, the welfare offices are too overwhelmed by demand --- the State can’t afford the staff needed to cope with the problem (I'm not making this up). And naturally in an election year, Obama has ads running informing voters about their possible eligibility for the food stamp program. The November election could reflect a change in attitudes this year. The Democrats will be too tired or too mad to vote the party line after trying to sign up for food stamps.

Monday, March 05, 2012

Inflation Is the Goal, Deflation Is The Dream

The 30 year home mortgage is at unheard of low interest rates of 4%. Of course people with savings in the bank, are getting about 1 ½ per cent interest. Whereas the banks, are borrowing short term from depositors and loaning long term to the home buyer.

What if bank B offers 5% interest on savings deposits? Whose money at bank A was loaned out for the 4% 30 year real estate loan? The most a depositor has to wait to get their savings out of a bank A is 90 days. The real question here, are the banks stupid enough to loan at these rates and repeat the fiasco the Savings and Loans had in the 1990’s (borrowing short and loaning long)? My guess is no, this is probably some sort of government supported funding of our real estate market.

The one thing that everyone overlooks is the fact that the original sellers of the homes now in trouble got paid cash when the sale closed. All the new owner had was a promise to pay for 20 to 30 years. This new home owner will walk away from the agreement. His promised payments over thirty years would have generated real earned dollars. Guess what, with a foreclosure, the Fed has to step in and pay the full amount today. When you look at the final outcome, the tax payer will pay for all those homes bought and foreclosed on. The previous owners got real money, and when the homes go into foreclosure, the banks get printed dollars from the Fed to cover their loss. If the loan had been paid off as agreed, the borrowers earnings would have been spent on servicing the note over a 30 year period. With the Feds quick payout, 30 years of future payments get blasted into the financial system immediately with no work effort to produce the funds.

This is where the difference lies between the deflationary depression of the past and the inflationary one we have today. In the 1930’s the banks failed, real estate collapsed, and the stock market crashed. Everyone lost money. There was no government bailout.

If the real estate bubble of 2006 had been allowed to fail (GSA’s included) and the banks not reimbursed, we would have had a deflationary depression.

We just had the biggest bank robbery our nation has ever seen (real estate speculation). Our government’s solution, print a like amount of dollars to cover the loss. The reasoning, the “stolen funds” will have only half of the buying power because of the dilution and as long as most of the money stays in the banks (why not, they’re federally insured) the loss of buying power will be realized very slowly. Of course Congress got carried away and printed an extra trillion or two (nobody will notice).

At some point in the future, interest rates have to rise. The present very low interest rate on 30 year bonds makes them dynamite. The same with 30 year 4% home loans, and as to who owns them, we can probably assume that the banks have none. They may write these loans but figure them to toss them like a hot potato.

The real kicker is the FDIC bank insurance and the Treasury offerings. All are insured against loss, but not against loss of purchasing power. The historical affection the Hoi Polloi had for gold in relation to the printed dollar has been broken. The price of gas, gold and ice-cream are all rising. We know OPEC is responsible for the increase in gas prices, but who’s responsible for the rise in the price of ice-cream?--- probably some dairy farmer cartel.

The last time there were complaints like this, someone said, "Let them eat cake." My advice this time around, let's not lose our heads over this.

Friday, March 02, 2012

Reader's Comment on Fannie Mae Shenanigans

Here is a comment from an anonymous writer to my blog (see post from February 11). Although it is anecdotal, the general validity of what is going on, has come to my attention from several other sources. This gentleman took the time to write, and unfortunately, the remarks section of my blog gets passed over by a majority of viewers. So here it is, in case you missed it.

Anonymous Feb 29th “In Obama’s Plan to save the homeowner.”
Due to job transfer, I'm trying to buy a house in Oregon (Portland metro). Fannie/Freddie/et. al. are trying to "stabilize" prices by offering homes above market and refusing to negotiate. To lure in buyers, they offer 0% down, no closing costs, no appraisal loans. Sound familiar? HAFA short sales dictate price, but pay the seller cash to move out and offer deed in lieu if the short sale doesn't work out. And Fannie/Freddie/et. al. don't disclose serious defects. I tried to buy a Fannie home - turned out to be in a flood plain - no disclosure. So the house goes in and out of contract, with Fannie hoping to find the sucker who doesn't discover the flood plain. If they wait 'til summer, when the waters recede until next winter, they'll probably get their wish. Kicking the can, indeed.

Meanwhile, Realtors are back to their old games. Every property "has an offer coming in," and agents swear that most houses sell within 2 days of list unless they're seriously defective. Half the inventory is short sales. There's another 100% of current inventory somewhere in the foreclosure process.

The risk in a low-rate environment is that buyers generally buy on payment - when rates rise, payments have to rise or prices have to fall. 4% mortgages are far below historic norms. We are creating a new generation of underwater homeowners, with NAR collecting their 6% tip as the housing Titanic takes on water. Low rates are a godsend if you're going to stay put for 30 years, but the average homeowner will be short-selling in 7 years when rates revert to normal and salaries haven't kept pace with rising rates and inflated home prices. How long can the 3% loan keep the ship afloat? I am actually hearing agents repeat 2006 asking prices (so high that houses didn't sell even in the greed bubble of 2006!) and saying "look what a bargain it is now!" Are buyers still that stupid?

Here is a Previous Post of mine, from a few years back, that shows that the predatory animal (Fannie Mae) hasn't lost its touch! Buyer beware. They are going to give you the deal of a century----the one that nobody else wanted!

A hat tip to the anonymous author.