Volcker Speaks Up
Research for Online Investors

by John Dalt

9/25/09

Paul Volcker, the president’s Economic Advisor, testified before the House financial services committee yesterday.  Mr. Volcker led the Fed in the 1980’s and lends experience to the administration’s inner circle.  It appears he does not agree with some of the positions taken by the white house.  He criticized the current regulatory reform proposals as creating future problems.  By naming certain institutions as “too big to fail”, the government gives them a competitive advantage during tough economic times.

"What all this amounts to is an unintended and unanticipated extension of the official 'safety net,' an arrangement designed decades ago to protect the stability of the commercial banking system," Volcker stated. "The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted. Ultimately, the possibility of further crises – even greater crises – will increase."  ABC has the story, “Obama Economic Advisor Doubts President’s Plan”

The Postal Service is broke, they are asking congress to forgo a required payment to the employee pension fund next week.  House leadership is trying to cover up the problem by inserting language into a continuing resolution that must be passed for the government to run.  This is embarrassing, the pols want to take over health care but cannot run a post office.  Look for a bailout of the postal employee’s pension fund in a few years.

Cash for Clunkers was wildly heralded by the world improvers as being a success.  Car sales are softer now than before the $3 billion dollar boondoggle.  The congress did not increase sales and penetration; they just moved buyers ahead at great cost to the taxpayers and national debt.

This was Detroit’s problem for the last few years.  To counter foreign competition taking an increasing market share, they resorted to financial gimmicks.  “Sell the deal” was the call from Detroit.  “Six months NO interest or up to a $4000 rebate”, the offers were only restricted by the inventiveness of the marketing department.  They sold the deal, not the product.  They had finally filled the pipeline and had the American consumer upside down in vehicles they could not afford to pay for, and were wearing out faster than their payments were going down.

All it took was an economic hiccup to scare marginal buyers, and Detroit dried up.  The manufacturers that built loyalty based on quality, fuel mileage or other benefits suffered also, but their business model is built on desire by the customer, not bribery of marginal buyers with decreasing credit scores.

What did the government buy for $3 billion?  The government claims 700,000 cars were sold under the program.  If the new cars increased gasoline mileage from 16 miles per gallon to 26 miles per gallon and traveled 15,000 miles per year, each car would save 360.6 gallons of gasoline per year.  360.6 X 700,000 = 252,420,000 gallons of gasoline / 45 = 5,609,333 barrels of oil.  The economy saves one-fourth of a day’s usage in oil per year for $3 billion dollars!  At $70 per barrel, total dollar savings are $392.7 million per year, and we destroyed used cars in the process.

Today, it was reported that the median price of a single-family home dropped 2.3% in August. For some perspective into the US real estate market, it would be helpful to look at the US median price of a single-family home over the past 39 years.  That brings us to today's chart, which illustrates how housing prices are currently 30% off their 2005 peak. In fact, a homebuyer who bought the median priced single-family home at the 1979 peak has seen that home appreciate by a mere 4%. Over the past two months, single-family home prices have resumed their decline and remain in an accelerated downtrend.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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