Competence

One has to be amazed at how badly we, as a nation, choose our leaders. Generally, the business of Government is complicated and it would make sense to have people who were experienced and competent. However, we tend to elect candidates who we like, competent or not. Now, if the candidates were simply front men for a unified party that had policies and plans we had reviewed and felt comfortable with, this might be OK. However, last year we elected a charismatic candidate with very little experience who had an agenda that most Americans were hardly familiar with. He did promise change, and based on the conditions at the time, change seemed good.

So now, a year later, I think it is fair to say that most Americans are unhappy with the very policies that he always espoused. Maybe we should have paid more attention. Universal health care, should be no surprise. Anti business rhetoric that does nothing to create jobs or fire up the economy, should be no surprise. No experience in foreign affairs and, while good in photo ops, no progress in promoting American policies on the world stage. He continues to pour troops into Afghanistan because, well he doesn't know what else to do.

You can't really blame the President for his lack of experience. We all knew about it. However, he comes out of a political environment (the City of Chicago) where most things that need to happen are in place and all you really fight about are things like what ethnic group or community benefits. Even in that environment, he was really on the outside, criticizing, not on the inside getting things done. His time in the senate certainly wasn't long enough for him to really learn much.

He may be talented, he is certainly very bright, and, after a few years, he may learn how to do his job. Can we really afford to wait? Well we have to, and what is going to happen is that we are going to take away a lot of his support in the mid-term elections and further prolong our Governments inability to address the issues we need addressed.

But then again, what did you expect?

Opinions

Everyone is entitled to have an opinion. They are also, at least in most western countries entitled to express it. As we approach the middle of January 2010, I have heard any number of pundits express any number of opinions. The problem that I have with most of them is that they often don't provide enough logical backup.

Now, I will admit that many of these opinions are expressed in forums that really don't allow enough time for someone to fully support their positions. It is certainly possible that the simplistic explanations for the positions i.e. "the Government has printed too much money" or "the Chinese are fudging their numbers" or "the economy can't recover if the unemployment rate stays this high" may have a lot more reasoning behind them then the time allowed to express them.

However, I do think that many of the analysts are what I call long pole people. They have decided that a single indicator, probably because there was a good correlation in the past is enough to determine the future. Now, that prior correlation may have resulted in significant profits, but the question always exists about cause and effect vs coincidence.

It seems pretty simple to say that if there is more money created by the Government that prices will go up since the increased supply of money will decrease its value. However, there is so much more complexity involved in price increases and money supply than this statement would imply. First, if as a whole consumption falls and goods then become more available, that would indicate a decrease in prices. If the money being printed does not go into circulation, it does not lead to higher prices. If the supply of a particular item increases faster than the amount of money in circulation, it would imply a reduction in price.

The price of gold has been increasing and you hear more and more people jump on the bandwagon and maintain that gold should be a part of your portfolio. I particularly like the ads that talk about how gold is a "real" asset that will never go to zero value. Of course, gold could become completely worthless, although I doubt that would happen, but having lived through the last big run up in gold prices in the late 70s, I know that it doesn't have to go all the way to zero to be disastrous. There was a time when gold was above $800 an ounce in 1980 dollars and everyone was saying it is going higher. Well it didn't and in fact it basically collapsed (can we say bubble?). Even at current prices, it hasn't exceeded those prices on an inflation adjusted basis and if you were one of the last to jump on the gold bandwagon then, you are still not really back to even.

Now, gold may continue to increase, and maybe, just maybe it will retain a lot of the current value. However, it could easily repeat the past and drop to levels 50-75% below where they are now. Anyone who tells you different is simply either deceiving themselves or deceiving you. Of course, if you can hold it for 30 years or so, you can possibly wait out any drop in price.

Am I saying we are having a gold bubble? I suspect we may be on the verge of one but similar to other bubbles it is very hard to know if we have passed from high range prices to a bubble. I have some investment in Gold and I'm not getting out of it yet, so I clearly don't think we are about to see it collapse. Of course, that is my opinion and I'm entitled to it. I may of course be wrong.

Profits or Sales Growth?

In 2009 a fairly constant refrain heard as companies reported better than expected earnings was "but they are doing it on lower sales". Now as we kick off the first 2010 earnings season, Alcoa had higher sales but missed the profit estimate. This caused the market to have a small correction, although of course other factors were in play.

The objective of any business is to make money, otherwise it is a hobby. There have been many many cases of businesses that expanded so much on credit that ultimately they were forced into bankruptcy. Having more market share or sales without more profit is not a path to success.

Clearly the ideal company would grow both. The best way to do that of course is to make sure you have a secure business model and expand only when it is clearly justified. Some executives and companies start to think that bigger is better and do whatever they can to expand (including reducing margins). The strategy here is to become so large that competition becomes irrelevant and they can then increase margins. This strategy has a number of issues, and can lead to being over leveraged.

The contraction has left many companies smaller than they were. The ones that have adjusted to this and eliminated significant costs have profited and will continue to profit. Owning stock is owning a piece of a company, and if that company is making money, the share ultimately will reflect that. Profits are the goal.

Government action?

The one thing that needs to happen to get the economy moving is to create jobs. We just had a massive Government stimulus program that when all is said and done, did not create enough jobs to overcome the down tick in the economy. We also can see that companies used the recession to get rid of marginal jobs and many of these jobs will never be filled again as technology or outsourcing replace them due to the high cost of full time employees.

So faced with a lack of job creation is it better for the Government to take action, or conversely better for the Government to simply let the marketplace resolve the issue. If we decide it is to be the marketplace, we need to understand what that means. A large number of people in this country will remain unemployed until the cost of their labor drops enough to make hiring them preferable to other alternatives. Of course, that level is yet to be determined and it may represent a fairly dramatic drop in the American lifestyle. Now, certain people will do quite well in this scenario but are we willing as a society to see a reduction in our standard of living?

To some extent we probably have to but maybe not. The current issue has two significant aspects that need to be resolved. Ultimately, the individual lifestyle of a nation's inhabitants cannot exceed the total amount of wealth in that nation divided by the number of people sharing that wealth. Now, we don't distribute wealth equally and I'm not suggesting that we should, but if the annual wealth created and retained by the nation does not exceed the population growth we will see a reduction in amount of wealth available to each person. The formula is essentially the same for an individual, as it is for a nation and if we are consuming more than we are creating, we are ultimately getting poorer. The second issue is that partly as a result of our success and rapid expansion, we as a nation generally have a higher standard of living than most people in other countries. This makes our labor expensive and in a worldwide economy, jobs move to where the cheap labor is. Now when items are consumed here but produced elsewhere by foreign labor, we exacerbate the first issue, the exporting of wealth. Economic forces, left to their own devices will level the playing field, meaning that jobs will migrate until the costs equalize. This is good for much of the world as their standard of living improves, but as we revert to the average, not so good for us.

Now, before I go further, the more Americans can reduce consumption voluntarily, i.e. by being more energy efficient, we can maintain the same standard of living by effectively being more efficient. There is a lot of opportunity in this area and it is probably vital that we consume less by being more efficient.

However, if the Government sits back and allows the free market to act, the result will be that it will be replaced. Americans are not willing to put up with high unemployment and loss of wealth over a prolonged period of time. Further, some of the current conditions exist because the Government has encouraged them and we have not had a truly free market for most of our history. Certainly, in many cases, Government intervention protects those who otherwise would be left vulnerable. For example, we have can be confident that money put into a Government sanctioned bank is safe and that the bank won't simply close their doors and leave town with our money.

Further, under a free market response to the current economic conditions, we will see a prolonged period where tax revenues are insufficient to pay for Government. We are currently experiencing that problem and the response has been to borrow money with the hope of repaying it in the future. However, if we don't fix the wealth equation, we will have less wealth to tax and the Government will either have to take a larger share or shrink. Now it is very difficult for the Government to shrink when we have so many people needed assistance. To expect that is simply unrealistic. Further, for the next few years at least we are going to continue to spend a significant amount on foreign adventures. One could argue whether the amount of money spent first on destroying Iraq infrastructure and then on rebuilding it was worth it in the long run, but it did represent a significant consumption of wealth.

If you are not willing to accept the draconian result of Government inaction, what action should the Government take? Some argue that if the Government were to reduce business taxes, it would encourage business growth, create more jobs and consumption and ultimately lead to more Government revenue. The fundamental idea here is that it would stimulate wealth creation and more wealth would provide more for everybody, including the Government. However, this is by no means certain considering that the efficient use of the Government tax breaks could easily be to hire more foreign workers or import more foreign technology. Since any such tax breaks would have to be financed by borrowing and that would be an obligation for ALL the American people, they have the right to demand a decent guaranteed return on any such investment. It is not internationally a good idea to restrict trade and it would be difficult to see that return in any general sort of tax reduction.

It is important to consider the objectives of any Government action. I would argue that these objectives need to be the increase in the wealth of the nation. The areas that are costing us the most wealth is our use of foreign energy and our importation of more goods than we export. We have many examples from history where attempts to tax imports have led to a reaction that decreased overall global activity. Also, if you consider the "buy American" campaigns we have seen over the last 20 years, it is fairly clear that people are going to buy the most economical product.

Ultimately, the objective can be summarized as more production and less consumption. Now, the one area where we can accomplish this easiest would be for the Government to stimulate the domestic and renewable energy fields. This is starting to happen and will create jobs and preserve wealth.

Another area is to revise taxes to one based on consumption, and not production. Instead of taxing profitability and to some extent allowing marginal companies to prolong their existence by getting tax breaks, we should instead tax everything consumed in this country, regardless of its country of origin.

The Government also needs to make business and individuals pay the real cost of their actions. If you drive a car that pollutes more than the average or run an inefficient factory that spews pollution, you should pay for the cost of cleaning up your mess. The alternative is of course that everyone else pays for you.

Finally, some things, such as retirement and health care should be recognized as Government responsibilities and financed via taxes. Our current system is both unfair and a burden to many industries.

Hiring disincentives

If you want to hire someone to do some work for you there is really only one determination that you need to make. Will the person you are hiring produce more for you than he/she costs? When you introduce uncertainty into that equation, hiring slows down.

Over the last couple of decades we have seen a tremendous increase in the cost of health insurance. While other factor have been at play, each of the last few recessions saw what has been called jobless recoveries. There is a fairly simple explanation for this. When you are forced to let an employee go, it is both painful and costly since you have to pick up increased charges for unemployment. Clearly, for most companies, they don't engage in wholesale firings unless they see it as clearly the only logical move. So generally, not in every situation of course, firing is the last alternative. By the same token, once you have reduced your workforce the decision to hire is also the last alternative. The first thing you consider is whether you can cover the additional work via increased productivity or new technology. You consider if you can outsource the work to another company and let them worry about hiring and firing. If none of these alternatives are available, you will then hire.

Now the adaptation of technology and the outsourcing do create jobs, but generally not to the same extent as those lost and unfortunately not necessarily in this country. There is some factor that could probably be computed that would equate the loss of jobs vs a decrease in revenue and the subsequent increase in jobs as that revenue returned. I'm sure it is less than 1 meaning less jobs are created per dollar of revenue than are lost after a recession. Suppose the factor is .9 (and I suspect it is lower that that). It would mean the if revenue loss of 100 mil resulted is job loss of 100,000, a return of that revenue would only produce 90,000 jobs. To get back to where you were at a factor of .9 would require revenue growth from prior levels.

If you want to absorb those jobs, and increase the number of jobs overall one or more of the following has to happen:

a. Increase revenues
b. Find new growth industries
c. Alter the economics of hiring.

Now when you see the increase in health insurance and the current uncertainty surrounding what may happen over the next few years, the economics of hiring are getting worse, not better. To hire an employee and invest in his/her training with the hope of keeping them for some reasonable period of time, you really need to know that their costs are somewhat predictable. As long as there is so much uncertainty related to those costs as well as cost related to payroll taxes and medicaid, companies will be reluctant to take the final step and hire.

While it is not the only solution, the resolution of our ongoing health care initiative is one of the things we need to get hiring moving. If we really want to improve hiring, we should move those costs out of the equation completely.

Health Insurance and Hiring

If you run a business, one of the big impediments to hiring is the cost of benefits and in particular the cost of health insurance and until recently, pensions. This country had evolved a system where the primary responsibility for the providing of health insurance for most has become the responsibility of the employer. Over the years we have seen skyrocketing increases in this cost and while many employees have attempted to reduce cost via HMOs and other changes such as higher deductibles, the incremental cost of hiring an employee now includes an ever growing tab for health insurance. Add to that the uncertainty related to what the Government is going to require and even further what the economy is going to look like and you would have to be very confident in your future business to hire anything other than temporary or contract workers.

Until recently and in some cases still, the growth in pension liabilities was becoming a great strain on employment. However, very few small businesses attempt to offer pensions any more outside of a 401 plan. This type of benefit is a defined contribution plan and defines the costs you as an employer are responsible for in a pre-determined way. When I first reviewed compensation plans, most companies offered defined benefit plans that required them to pay a certain level of benefit for the employees retired life. This puts all the risk on the employer. A defined contribution plan switches the risk to the employee largely since the 401 plan will only provide income until it is gone. Of course most employees also have social security to fall back on and employers face some risk in that area if the rates go up, but nothing like the risk of a defined benefit plan.

It would seem we could learn a lot from this pension change. If the costs of health insurance could be defined to the same extent that the pension cost have been, employers would be more likely to risk hiring. One way to do this would be for everyone to effectively fall under a Government plan funded by taxes and where the variable cost of hiring an employee no longer included a health insurance risk. This solution is politically difficult with many arguing that the Government is unable to run anything well. I personally don't agree with that but it is not a viable option at this time. The other option would be to have a defined contribution health benefit for employees where the cost to the employee was defined, similar to a defined contribution pension plan. There has been some movement in this area via the use of savings funds, but I am not aware that there is any widespread movement in this direction. To some extent this is the way the federal employee plans work although the contribution amount is determined by a formula related to the average cost of all the health plans included. Employees pick up a variable cost depending on the plan they choose and the more expensive plans actually cost the employees more. The net result of this has been some cost containment as a certain number of employees switch to more affordable plans every year, reducing the average cost below what it would have been and therefore reducing the Government contribution below what it would have been otherwise. The Government pays the lower amount of the following

a) 72 percent of the overall weighted average; or
b) 75 percent of the total premium for the plan you select.

What you will note from this is that if you pick a plan that has higher than average costs, the Government contribution for you is less. The formula has a built in incentive to control costs.

Now, the size of the Government workforce gives them significant influence and most companies only have one health insurance provider. However, even in the absence of a public option, we could and should have a benefit pool that employers could join where the benefits from many insurers were available to that companies employees and where the employers could define the amount they would contribute, either as a percentage of the average or a set amount. The difference would become the employee's responsibility but the employee would get the benefit of being part of a large pool with many choices.

This blog for today has gotten a bit longer than I like so I'll return to this subject and explore more options tomorrow.

Meanderings

When you live in a country where some of the greatest concerns for most people include, losing weight, whether they should buy a new car this year, whether they should take a stay cation or vacation, you need to maintain perspective.

The "great" recession was very painful for many people. However to misquote an entertaining TV financial advisor is a slightly different light, there is always a recession somewhere. Even in boom times we have people who lose jobs, get foreclosed on and unfortunately significant numbers of homeless people.

What happened last year was that a proliferation of financial hubris let major firms chase profits into high risk areas, many of which were related to housing and when the risk materialized and the Government didn't bail out one of the firms, we had a financial scare.

The loss of credit and the panic in the stock markets, led to a belief that we were in the worst financial crisis since the great depression. That remains to be seen as economic historians examine the data, but clearly, in hindsight it looks a lot more like a regular recession with some unique characteristics.

Now the businesses that survived and most of them did, took this opportunity to greatly increase productivity through cost cuts and layoffs. They are not going to reintroduce those costs or employees until they really need to.

Foreclosures

There is a chance that we may see an increase in employment when the data comes out for December. However, it is not going to result in all the unemployed people going back to work all at once. Still, if you like to look at trends it is very hard to dispute a positive one in the ratio of firings to hiring and if it continues we will start to see a slow reduction in unemployment.

One of the problems in trying to determine how the economy is doing is the fact that each of us is really our own individual economy. You have a job or a business and regular income or you don't. You can afford your mortgage payments or you can't. The sum of all the various individuals is simply an accumulation of all these individual situations and while it is necessary to look at it that way it can be very deceptive.

For example, we saw a trend where some homeowners who saw the value of their homes go underwater simply walked away from them. Now, remember that during the boom, there were two categories of home buyers that were created that are not normally representative of most American homeowners. These are the flippers and the unqualified.

It became popular for some people who believed that housing would simply continue to appreciate in value to buy houses on spec with the intent of getting rid of them at a profit. It got so bad in some states (coincidentally the ones that had the biggest problems later) that people would line up and compete to put deposits down on condos and homes under development hoping to transfer those rights before ever actually occupying those homes. Now when the real estate bubble burst, these people had no real financial or personal investment in these homes and found it very easy to walk away. There was no real emotional attachment and as real estate plunged they walked and they walked early. However, most homeowners do not fall into this category and have strong emotional attachments to their homes. They go into foreclosure because they really can't make the payments, not because they see it as financially desirable.

The other group were the unqualified, meaning people who got zero interest or negative equity mortgages when they really didn't have enough financial assets to justify the prices they were paying. Of course they were also hoping for price appreciation and further for personal advancement in their jobs before the payments increased. When this didn't happen, they were forced out, since really they had no way to refinance or to make the payments in most cases.

So this created a significant short term trend. However, I would argue that while there may still be some people who fall into these categories waiting for the shoe to drop, so to speak, by this time most have been driven out. This leaves homeowners who really want to keep their homes. The fact that some of them have missed a payment because they wanted to have a good holiday season or because other bills came due, does not mean they have decided to walk away. Yes some will end up being forced into foreclosure, unfortunately, but not because they decided to walk away from an underwater mortgage situation, but because their individual situation just didn't give them any other option.

My point is that with the two groups who walked away easily greatly diminished, the trends calculated based on their behavior is simply misleading. Most homeowners will do everything they can to avoid foreclosure. Some of them will go into foreclosure, but most will find a way to avoid it. It isn't just economics to them.

Inventory Replenishment

The new year started off with a bang as far as the stock markets are concerned with the ongoing increase in manufacturing causing renewed optimism. However, there remain lingering concerns that the increases are related to inventory replenishment and that once that is complete, manufacturing will stagnate again.

Of course this ignores the fact that retailers and wholesalers learned a bitter lesson after the contraction we saw at the end of 2008. They have adjusted to keep inventories lean. Now, we have finished the holiday season and are awaiting reports but preliminary data indicates that sales were good. They exceeded last year but have not returned to the levels of say 2007. Now, the stores all went into this season leaner and for most, the sales level should result in improved profitability. Of course there will be winners and losers, there always are, but in general, stores were prepared for a difficult holiday season and the one we got should be a profitable one.

Similarly, no one is rushing out to buy a ton of potentially wasteful inventory. Yes, they are buying stock but no one, or at least almost no one, thinks sales are going to be as robust as they were during the boom. So, if the belief is that retailers and wholesalers have forgotten the lesson of 2008 and are stocking up to some lofty level I would like to see some evidence. The speculation seems to be just that speculation. I believe the inventory rebuild is going to levels that should be supported by the current economic conditions, high unemployment and wealth degradation. To think otherwise is to basically assume our business people are essentially idiots.

In fact, if the economy is better than most of the business people think, we are likely to see shortages of some products leading to increased production, not less.

More 2010 Thoughts

Yesterday I was going on about how we need to do three things to really get the economy moving in the future. The fundamental issues that face the economy can be traced to one truly basic issue and that is whether the amount of growth in the country is growing faster than the population. Now, consider the amount of wealth the "pie". If the pie is effectively shrinking, then there will be less available for each of us. That is not to say that the pie is, or even should be divided equally, but if the pie is shrinking someone has to suffer and in general, the average amount for each of us goes down.

There is a simple equation that contains extremely complex components to determine this. Effectively it is the amount of wealth created minus the amount of wealth consumed. Wealth creation and wealth consumption are not easily defined however. One gross approximation might be to compare the growth in GDP to the population growth. There are many problems with that measurement, not the least of which is that GDP growth is in dollars and you would probably have to look at real GDP (GDP after inflation) at the very least.

However, to improve the ratio, you don't necessarily have to define everything. There is one area where we know we are consuming much more wealth than we create domestically and that is related to energy. The amount of energy we consume from foreign sources, far exceeds any energy we export. As long as this continues, it either has to be offset in other areas or it will decrease the net wealth of the nation. So, if we simply fix that issue, it will have a positive impact on the formula. It may or may not be enough to change the calculation from a negative result to a positive result, but improvement is improvement.

Another clear indicator is when we export jobs. When we decide it is more economical to employ a foreign worker to provide domestic goods and services, the amount spent on those services becomes a negative. Now in a world where trade flows fairly evenly, this can be a neutral component, but clearly for quite a few years now, domestic employment has been transferred to other countries. This may be the right decision for an individual company and it simply indicates that we have created an imbalance via our tax system that needs to be corrected. Now, ultimately, in a free market, we will see the currency adjust and fix this problem eventually, however we can certainly do other things to improve the situation, such as review our tax and health care situations.

Of course, housing is pretty much a domestic issue and the deflation that took place in housing has many causes. One scenario would suggest that it was a way for the financial system to adjust perceived wealth in the economy to reflect the fact that it is decreasing. Unfortunately, when this happens it is similar to the way an earthquake happens, subtle pressure build up over time but are unable to break through resistance until they get to a point where they effectively release years of pent up energy. The only real answer to housing is to reverse the wealth formula so that assets in this country start to appreciate and there is more wealth available. In the short term, principal modifications with the Government using the stimulus money to help mortgage holders instead of banks, could provide a base for housing from which it could grow steadily. However, if we don't fix the energy and tax issues, it will in the long term be ineffective.

Thoughts on 2010

Now that 2009 is behind us, will 2010 continue the path to prosperity or will it show that the recovery that started in 2009 does not have enough internal strength to continue leading to a second recessionary period and additional economic disruption.

Now if you consider the economy, there is one problem that I'm not going to be able to solve here. If you consider the only true recovery one that takes us back to the most recent cycle top, you are likely to be waiting for quite a while. It is clear that some of our economic activity was the result of bubble economics where assets were overvalued. Now, housing will take years to approach some of the high prices we saw a couple of years ago and in fact, if we approach those levels, it is likely due to excessive inflation. There is a term going around about the new normal and it isn't a good explanation of our current situation. I think what we have to adjust to is simply a revised starting point.

When the asset bubble burst, a tremendous amount of wealth disappeared. In effect the loss of this wealth reversed a lot of the growth we saw over the last decade. Now of course some wealth was merely redistributed, but a tremendous amount simply vanished as house and asset valuations plummeted.

Now to rebuild this wealth is going to take time and that time can be viewed in two ways. One would be that until all the lost wealth is recovered we remain in recession and in recovery. However, I think that assumes that those levels were appropriate. If you consider that the lost wealth is simply gone and consider the current economic levels the new starting point, we are entering a new period of growth. Yes, in some ways we are retracing areas we "grew" through in prior periods, but that does not negate the growth aspects.

Fundamentally the signs of economic robustness is whether the businesses can make money. They have reduced costs (including labor costs) to levels that allow them to make money at current levels. If they now see growth of any sort, profits will increase and so will employment. However, if a business has reduced its labor force by 20% because its business base has decreased that much, and now it sees 3% growth a year, it is not hiring back all the employees it once had. Further it will replace many of those employees with productivity enhancing technology.

However, these steps will make the business profitable and provide employment stability of a sort for those still employed. So, based on the fundamental changes these businesses have made, it is likely that we will take four or five years to reabsorb those employees let go during the current recession.

So is this a boom economy? I believe it is a growth economy and it is growing from a lower base, but we still have millions of people underemployed or unemployed. To resolve that problem requires three things, only one of which seems to be happening.

The one that I see happening is the switch to domestic and renewable resources. Simply increasing our use of Natural Gas instead of Oil will improve our balance of payments and create jobs. It doesn't have to be an all at once switch and using more solar, wind and nuclear will have the same impact but if we were to see a significant pickup in converting our autos from petroleum to liquefied natural gas, we would have significant employment in executing the conversion and we would retain much more wealth within this country. Of course while we do have bountiful amounts of natural gas right now, ultimately we probably need to go renewable, but right now, I believe liquefied natural gas vehicles will provide Americans with the power and distances they need. Further, is we can start to get significant renovations going in existing homes to add more energy efficiency and renewable energy supplements, we will create jobs in construction.

The two things that I don't see happening yet is the reform of our tax system and a meaningful change in how we modify mortgages. I have talked previously about how we need to tax consumption instead of production so that everyone who sells product in this country pays their fair share. This would eliminate a lot of the motivation to export jobs since the cost of labor would decrease. Of course, this can't be an additional tax since that would simply drive more business away, but if we tax all product sold in this country equally, and eliminate producer taxes except in special situations (social security, carbon), we will see a significant increase in the competitiveness of our employment force.

The final thing needed is to use our stimulus money more effectively and hopefully at less long term cost to the taxpayer. Suppose the Government used the bank stimulus to pay down mortgages in trouble to some more affordable level. I would suggest the best format for this would be as a Government primary lien on the property that would be held interest free until the ultimate sale of the property. Further, in order to encourage homeowners to make payments, this lien could be structured as a 50/50 deal on future equity increases.

As an example, suppose someone had a 400,000 mortgage on a house that is currently worth 300,000. The mortgage is modified to a 300,000 mortgage, the bank receives 100,000 from the Government and the Government acquires a 100,000 lien on the property, that it carries interest free (or alternately interest could accumulate at the treasury rate). Now the initial cost of this modification is the 100,000 and the homeowner now has a 300,000 mortgage on a 300,000 house. If he or she can still not make payments and the house is foreclosed, the bank and the Government share the proceeds with the Government getting its money minus some agreed to fee to the bank first. Remember that the bank was already going to lose the 100,000 before the deal and has theoretically had the use of that money in its reserves for some period of time. However, if the homeowner is successful in making payments the Government lien would simply continue as the equity in the house increased and the homeowner would be able to tap 50% of any equity above the bank mortgage amount. Now the cost of this program on a short term basis would be significant, but, it would transfer the underwater portion of the homeowners debt from the bank to the Government, increase bank capital reserves and give homeowners who qualified an incentive to stay in their homes.

I ike to keep these short and somewhat confusing so I'll stop here. I never really addressed the question of what is going to happen in 2010 but I'll discuss it further in the next few blogs.