Early Afternoon Links

For your reading pleasure:

1. Obama's plan for Afghanistan: once again, the key appears to be figuring out what an administration means by "benchmarks."

2. Pakistan: suicide bomber kills upwards of fifty people in a mosque in Peshawar. Part of Baitullah Mehsud's campaign against the Pakistani government?

3. Iraq: U.S. forces are largely withdrawing from the cities as agreed upon, but may remain behind in areas where sectarian violence is still widespread, like Mosul.

4. Building nanobots...with DNA. Incredible.

5. How health care reform benefits small businesses.

6. Lawyer's should not be judged for who they represent...except when they worked for the tobacco companies, and were balls-deep in the tobacco companies' wrong-doing.

SBA to Cap Loan Guarantees

I don't know much about lending to small businesses, but it seems like now is an especially bad time to institute this policy.

UPDATE: And this on top of the already hard time that small business owners are having.

More economic news

This Business Week article follows up nicely on the topic I began in my Black Friday post, namely that the time is nearing when the credit will run out and consumer spending will fall.

It's been a glorious run for the consumer. In the past 25 years, Americans have kept shopping through good times and bad. In every quarter except one since 1981, consumer spending rose over the previous year, adjusted for inflation. The exception was the first quarter of 1991, and even then the decrease was a mild 0.4% dip.

The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Any particular individual might default, but in the aggregate, loans to consumers were viewed as low-risk and profitable.

The subprime crisis, however, marks the beginning of the end for the long consumer borrow-and-buy boom. The financial sector, wrestling with hundreds of billions in losses, can no longer treat consumers as a safe bet. Already, standards for real estate lending have been raised, including those for jumbo mortgages for high-end houses. Credit cards are still widely available, but it may only be a matter of time before issuers get tougher.

What comes next could be scary—the largest pullback in consumer spending in decades, perhaps as much as $200 billion to $300 billion, or 2%-3% of personal income. Reduced access to credit will combine with falling real estate values to hit poor and rich alike. "We're in uncharted territory," says David Rosenberg, chief North American economist at Merrill Lynch (MER ), who's forecasting a mild drop in consumer spending in the first half of 2008. "It's pretty rare we go through such a pronounced tightening in credit standards."

And to cut to the chase, what will the results of that be?

Research by economist Carroll suggests that every $1 decline in house prices lops about 9 cents off of spending. The current value of residential housing is about $21 trillion, according to the Federal Reserve. So if home prices fall by 10%, as many people expect, that would lead to roughly a $200 billion hit to spending over the next couple of years. A 15% tumble in home prices would produce a $300 billion pullback in spending, or about 3% of personal income.

That accords well with calculations by BEA economists. They figure that households took out $340 billion in cash from mortgage and home-equity financing in 2006. That source of funding could largely disappear over the next couple of years.

Three percent—that doesn't sound like a lot. Look a little closer, though, and it's a bigger hit than it seems. The reason is that much of what the government counts as consumer spending is not directly controlled by households. For example, the $1.7 trillion in medical costs is counted as consumer spending, but 85% of that is spent by the government and health insurers, not individuals. And $1.5 trillion in "housing services" is listed as part of consumer spending, but for homeowners it really just represents the value of living in a home rather than any spending they can change. It's mainly a bookkeeping convention, not a real outlay.

So that 2%-3% decline in income directly hits the wallet and the discretionary purchases that households actually control.

This article doesn't really expand its scope to what the outlook will be for average Americans and instead focuses on what'll happen to business in America, as if that's more important, but hey, it is Business Week. I don't know that the situation we saw with the mortgage market will be repeated with the credit card market, but the Fed can hardly afford to lower interest rates at this point, practically the only move they can make to alleviate the burden of credit, but which, ironically, only spurs people to borrow and spend even more. I'm not a real business analyst but it may be that the American economy is setting up for a real credit crash in a couple of years. We'll just have to track it and see.

In somewhat related news, the dollar is sinking faster than the Titanic.

The Economy is so confusing

From Business Week Online:

No, it's not just you—the U.S. economy really is bewildering. The government says gross domestic product expanded at an annual rate of nearly 4% in the third quarter, the fastest pace in a year and a half. The stock market is still up by 4% for this year, despite a sharp 3% drop on Nov. 7. On the other hand, growth in consumer borrowing slowed unexpectedly in September. Some economists argue that the U.S. is teetering on the brink of a recession, if it isn't in one already.

Well, you do have to consider that American's real incomes are down. This is from a slightly older article from the Christian Science Monitor, but it's still applicable:

Income fell 8 percent, adjusted for inflation, for those under 35 and 9 percent for those aged 35 to 44. The numbers add new weight to longstanding concerns about whether younger generations of Americans will achieve living standards that are better - or at least equal to - those of their parents.

Although this is quite old now, this blog post on The Big Picture from 2004 still manages to give some idea about why the economy overall can be booming yet doing nothing for for the average American.

The bulk of the tax cuts were for the investor class (ie, the top 10%); As you can see, it had the expected response - it stimulated investment in the market. To stimulate the economy, you cut taxes for the spending classes - the middle class. They typically spend most of their discretionary income. That in turn stimulates manufactured goods and service consumption, which should lead to additional hiring. The trade off is less of a fund flow driven rally, and more of a better set of employment numbers.

All told, I don't believe that's the most effective way to spend a trillion dollars. As the President often says, "if you want more of something, tax it less." So, on top of middle class tax cuts, if you want to increase hiring, give companies a tax credit for new hires or health care costs or just cut the payroll tax. It's really not that complicated - when you increase your domestic headcount over a previous percentage - i.e., 2001's high number, the firm gets a tax credit. Note that overseas outsourcing or reducing US headcount will not qualify you for the cuts."

He also talks about underemployment which really hurts a lot of people. And people who like to point out how well the economy is doing simply like to point out how many people are employed rather than how muchthe employed people are making.

Anyway, there's little in the way of analysis I can offer, but if it's not clear, the point is that for individuals, the picture still isn't that great whereas most businesses are still seeing decent prosperity.