The Corporate Debt Swamp, Or Do Republicans Read the Business Section?

What a week it was and it's only the sixth full week of 2009 but don't look now, corporate defaults for 2009 have already reached 25% of the total $157 billion of high-yield-loan and bond defaults in all of last year. As of February 6th, 21 US companies had defaulted on $43.1 billion of high-yield bond and bank debt. But let's add Paul Allen's Charter Communication, the nation's fourth largest cable company, to the list. $8 billion, cha-ching. At the beginning of the week, Muzak Holdings LLC, known for producing background music, and packaging company Pliant Corp. sought Chapter 11 protection. Muzak missed a $105 million payment. Pliant's restructuring plan hopes to eliminate $674 million in high-yield debt. On Thursday, Cleveland-based Aleris International, which produces aluminum products, and the US operations of Midway Games Inc. also ran for Chapter 11 cover. Aleris' liabilities total $3.98 billion but the company secured debtor-in-possession financing that will allow the company to remain operational. As for Midway, it has $281 million in liabilities. In December, the company laid off 25 percent of its work force, or about 180 people even as it negotiated a sale of the company.

According to Moody's, the US is entering a period likely to feature the most corporate-debt defaults, by dollar amount, in history. By various estimates, US companies are poised to default on $450 billion to $500 billion of corporate bonds and bank loans over the next two years. In percentage terms, the credit rating agencies expect defaults on non-investment-grade debt to triple to 15%.

Now connect the dots. The coming default wave is another source of trouble for the global financial system, which already is grappling with hundreds of billions of dollars in defaulted mortgages, credit-card debt, student loans and other consumer debt. Corporate defaults threaten to hurt banks, pension funds and private-equity funds, which in recent years gobbled up high-yield corporate debt and pieces of bank loans. When companies default, it is the shareholders that get wiped out first. Surely, this is common knowledge.

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Illusory Thinking

"We need to make tax cuts permanent, and we need to make a commitment that there'll be no new taxes," Mr. McCain said. "We need to cut payroll taxes. We need to cut business taxes."

It is, and always has been, illusory to think that the GOP would forgo playing politics, join the ranks of the economically sane and sign on to the American Recovery and Reinvestment Act as currently hammered out in negotiations between the President's economic team and the leadership in the Congress. The only thing more illusory is their adherence to the belief that tax cuts work as an economic stimulus. But at least their views are now clearly stated and I suspect that should please the President for he can and should now just ignore the recalcitrant wing of the GOP, or put another way, all but a handful of them. The bankruptcy of GOP economic thought should now be plainly evident and that's a case the President can make directly to the American people.

"Right now, given the concerns that we have over the size of this package and all of the spending in this package, we don't think it's going to work," the House Minority Leader John A. Boehner, Republican of Ohio, said on NBC's "Meet the Press.""And so if it's the plan that I see today, put me down in the no column."

Actually, it's more like the irrelevant column. The Congressman from Ohio can pout all he will, the Senator from Arizona can rant and rave all he wants and it won't change the fact that tax cuts have been an abysmal failure in lifting the economy. The GOP's main contention has been now for over 30 years that by reducing the top tax rate on personal and corporate income that a large increase in aggregate total savings would result. Yet the savings rate of American households has been declining for more than a decade and it now stands at the lowest level of the post-WW II era. Since 2003, the combined annual net savings of households, businesses, and government have declined to about one percent of gross national income. So if increasing the savings rate is the goal so as to thus increase investment, cutting taxes hasn't worked.

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The American Crisis

US payrolls were slashed by 524,000 jobs in December and by 1.9 million in the last four months of 2008. All told,  2.6 million jobs were lost in all of 2008. That's quite a dubious achievement but this didn't happen by accident, it happened by design. Conservative free market ideology and their devotion to a race to the bottom they call low taxes is the cause of all this. Let's not ever forget this. Conservatives profess to love their country and they profess to hate government. The pity is that, at times, they can't differentiate between the two. There is clearly a difference between the country and the government. The former is much larger if more nebulous than than latter but let's not forget that the government, in all its manifestations, is part of the visible edifice and the ledger of our country. In their zeal to drown the edifice of government in a bathtub, conservatives have managed to drown the country's ledger in a near eleven trillion dollar debt and throw at least 7.2% of us out of work.  It's not just the government that owes that lofty sum, it's the country. It's us. It's Americans who are now increasingly out of work thanks to the nefarious effects of an ideology that benefits the few at the expense of the many.

Conservatives so hate government that they can't seem to see that they are destroying the country in said pursuit. Even now. This is not a charge I say lightly. Even though conservatives have long impugned the patriotism of liberals for several generations now, we, as liberals, have failed to answer back. It's time we do. Conservatives wrap themselves in the flag even while they trample the rights, liberties and livelihoods of most Americans. Free markets are not free, there are costs. Witness AIG. There is no such thing as free trade, it too has costs. These are euphemisms for a perverse notion that conservatives call "economic liberty". By this, they mean unregulated markets, low taxes, the right to move capital across global markets (to call them countries is so 19th century) in pursuit of unholy profits based on tapping the cheap labour of the unprotected masses in the developing world. Backed by a devotion to a strong dollar and weak barriers to trade, they have dismantled brick by brick American manufacturing moving it to China, Bangladesh or wherever the lowest cost worker happens to be. I ask you is this patriotic? Is this love of country?

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Apples and Oranges

The night before last, I could not sleep. My mind was stuck on a phrase uttered by the President-elect based on a report by the Congressional Budget Office (CBO), trillion dollar deficits. Plural. A trillion dollars and more per year for the next few years. I tried to picture just how much money that actually is. How many zeros? Well, I went a million is six, a billion nine, and a trillion thus twelve. A one followed by twelve zeros. Mind-boggling and sleep depriving.

It is some small consolation to hear that members of Congress are today in shock over the CBO projections. At least, we now know that they aren't asleep at the wheel though it is certainly not fair to blame the deficit sins of the past on the current 111th Congress. But now it seems the debate over the size of the fiscal stimulus is taking on new twist in light of the stunning deficit projections. Via the Christian Science Monitor:

Stunned at the prospect of a $1.2 trillion deficit this fiscal year, lawmakers in Congress are taking a harder look at how big a stimulus plan America can afford.

Until Wednesday's release of the Congressional Budget Office (CBO) estimate, the main topic on Capitol Hill was how big the recovery package needs to be to reverse the economy's slide.

Now, there's a second theme: Is there a tipping point between the stimulus needed to revive the economy and a level of borrowing and debt that's too much for future generations to bear?

"There's a consensus among economists that we need to do something big," says House Speaker Nancy Pelosi. "But we need to calibrate between creating jobs - green jobs, long-term jobs - and not getting weighed down with too much burdensome debt."

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The President Wonders "How Did We Get Here?"

In Sunday's New York Times, there is this gem:

The global financial system was teetering on the edge of collapse when President Bush and his economics team huddled in the Roosevelt Room of the White House for a briefing that, in the words of one participant, "scared the hell out of everybody."

It was Sept. 18. Lehman Brothers had just gone belly-up, overwhelmed by toxic mortgages. Bank of America had swallowed Merrill Lynch in a hastily arranged sale. Two days earlier, Mr. Bush had agreed to pump $85 billion into the failing insurance giant American International Group.

The president listened as Ben S. Bernanke, chairman of the Federal Reserve, laid out the latest terrifying news: The credit markets, gripped by panic, had frozen overnight, and banks were refusing to lend money.

Then his Treasury secretary, Henry M. Paulson Jr., told him that to stave off disaster, he would have to sign off on the biggest government bailout in history.

Mr. Bush, according to several people in the room, paused for a single, stunned moment to take it all in.

"How," he wondered aloud, "did we get here?"

The short answer is Milton Friedman, Arthur Laffer, Robert Hall, Jude Wanniski, Robert Mundell and Michael Boskin in theory as well as Ronald Reagan, Donald Regan, James Baker, Newt Gingrich, and Alan Greenspan among many others in practice. A longer answer would take a volume but to perhaps put it succinctly for 28 years the Republican party has advocated a deadly framework of economic policies revolving around lower taxes, free markets and free trade. And within this mix is the answer to how we got "here".

The conservative recipe for economic prosperity had three main ingredients: cut taxes, low inflation through monetary policy controls and free the market which is an euphemism for unfettered and unregulated markets. The first and last are simply toxic to any large economy. Low inflation is a laudable goal but it's not clear that monetary policy alone is capable of controlling inflation. From the early 1980s through this year, one can make the case that inflation was largely the result of one key factor, we had cheap energy prices. Absent that, inflation can rear its ugly head at any point and earlier this year as oil prices approached $150 a barrel we began to see global inflation tick up. And tapping China's cheap and vast labor reserves also has been a significant factor in checking global inflation since 1991. Both of these factors are outside the control of US monetary policy.

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