Fed Truncates Non-Performing Loan Data Series; Is the Fed Hiding Something?

Reader Wendy pinged me with a question I have no answer for: What happened to the Fed data series on non-performing loans? 

Here is the link:  Assets at Banks whose ALLL exceeds their Nonperforming Loans (LLRNPT).

Reader Wendy writes ...

The original series showed how banks always had 90% or above allowance for loan and lease losses until the 2008 financial crisis. It then dropped like a stone to 15%. It has been gradually struggling up since then and is now 35%.

The old data series showed how pathetically inadequate the reserves are and how slow the recovery (actually, non-recovery since about 2/3 of loan and lease losses are not covered!).

The new series makes the "recovery" look significant. I'm amazed that the Fed did this.

Mish, please take a look at this and comment to your wide readership.

Wishing you a very Merry Christmas,
Regards,
Wendy

Hello Wendy, Merry Christmas to you and all my readers as well.

I do not know when this happened, or why, so I cannot comment on that. However, I have a few historical charts to show from late 2009, and I have some thoughts on the data series following the charts.

Current Truncated Chart



Click on any chart for sharper image

To show you what Wendy is asking about, here are a few charts that I captured in 2009.

Assets at banks whose ALLL exceeds Nonperforming loans



Banks with Total Assets from $1B to $10B where ALLL exceeds Nonperforming loans



Banks with Total Assets from $1B to $10B (Pacific Region) where ALLL exceeds Nonperforming loans




Banks with Total Assets over $20B where ALLL exceeds Nonperforming loans



Remember that allowances for loan losses will decrease as charge offs increase. However, the above charts are in relation to non-performing loans.

Description of Allowances for Loan & Lease Losses 

To understand the importance of ALLL, inquiring minds are reading a description of Allowances for Loan & Lease Losses.

Businesses try to predict, on an ongoing basis, the amount of loss in their accounts. They take periodic charges to earnings to better match losses to periods when they occurred. Banks do this as well. They use current income, through the provision for loan and lease losses, to create and build a reserve to absorb losses.

The ALLL can be increased another way. When the bank collects on previously charged-off loans, the amount recovered goes into the ALLL.

Charged-off loans decrease the ALLL. If a bank decides it has overestimated its potential loss exposure, it can choose to reduce its ALLL and add the amount to its income. This is known as making “reverse provisions” for loan and lease losses, because the bank decreases the allowance, or reserve amount, rather than increasing the provision. It is rare for a bank to make a reverse provision, however, because of the imprecise nature of determining an appropriate reserve.

One last point to remember with respect to the reserve is that the ALLL is a general reserve. Therefore, even if a bank analyzes and estimates the loss on each loan, the allowance is there to absorb all losses in the loan portfolio and is not specific to a particular loan.

Implications

Because allowances for loan losses are a direct hit to earnings, and because allowances are at ridiculously low levels, bank earnings have been wildly over-stated.

Thanks Wendy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Merkel's Hypocritical, Undeserved Self-Praise; German Taxpayers at Serious Risk of Uncontrolled "Transfer Union" Budgets

Praise from German chancellor Angela Merkel is typically hard to come by. However, Merkel is freely distributing praise these days, to the person least-deserving, herself.

As the eurozone marches down the "Road to Shared Liability" Germans are largely unaware of the Hidden Risks of the Euro-Zone Bank Oversight Plan risks that Merkel ignored when agreeing to the eurozone oversight plan last week.

German Chancellor Angela Merkel was full of praise for the euro-zone bank oversight plan passed last week at the EU summit in Brussels. But the deal is not nearly as watertight as she claimed. It lacks a legal foundation and could lead to a conflict of interest at the highest levels of the European Central Bank.

Angela Merkel received recognition from the highest possible level -- herself. The most recent resolutions made by the European Union in its ongoing effort to save the common currency, she said last Thursday, "can't be spoken of highly enough." Her administration had been able to "push through Germany's core demands," she said.

Self praise, of course, is often inaccurate. But in this case, the gap between fiction and reality is particularly wide. The agreement reached by European leaders and their finance ministers during last week's summits in Brussels could ultimately destroy Merkel's reputation as a level-headed and firm savior of the common currency.

Merkel has tirelessly called for EU leaders to push forward with the political integration of Europe. But at the most recent EU summit, she personally ensured that plans to that effect, created by European Council President Herman Van Rompuy, didn't even make it onto the agenda. At the same time, German Foreign Minister Wolfgang Schäuble voted in favor of a new banking supervisory agency under the authority of the European Central Bank.

It is a plan that Germany's own central bankers view with concern. Lawyers at the Bundesbank object that the responsibilities of the new super-agency remain nebulous. The project has no "lasting, sustainable legal foundation," they say.

The German Vision

No longer is "more Europe" the focus of EU efforts. Instead, German taxpayers could be made liable for billions in risk taken on by large European financial institutions. There is little left of Merkel's motto calling for "increased liability only in the case of increased integration."

Not Enough Legal Protections

Merkel was unsuccessful in ensuring that larger euro-zone members have more influence in the oversight agency. As has been the case thus far in the ECB, a vote from Malta counts just as much as a vote from Germany. It is a situation that makes in possible for expensive bailout packages for Irish or Spanish banks to be pushed through despite German opposition.

No wonder, then, that financially powerful countries outside the euro zone are less than impressed by the new banking watchdog. The oversight regime is open to non-euro-zone EU members as well, but Sweden, for example, isn't even considering it. The risk, says Finance Minister Anders Borg, is simply too great. "We don't believe it contains enough legal protection for taxpayers," he says, "so that they won't be made liable for mistakes made by foreign banks."

As I have pointed out on numerous occasions, chancellor Merkel is willing to sell her soul and German taxpayers down the river if that is what it takes to create a nannyzone.

And what a nannyzone it will be, if a vote from Malta or Portugal counts as much as a vote from Germany or France. It's no wonder that Euroskepticism on Rise in New EU Members.

Indeed, citizens from Poland, Latvia, Bulgaria, and the Czech Republic are all having doubts about joining the eurozone, even if some of the political leaders of those countries are willing to proceed full speed ahead.

The Czech president is one of those thinking clearly. He went so far as to call the ESM a "monstrous and outrageous thing". Merkel does not care about such matters. Her vision is that of a combined Europe, regardless of what it takes, or who is damaged in the process.

Since no one else in Germany is singing Merkel's praises at the moment, she (like all politicians) is willing to do that herself.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Congressional Spending Problem in Easy to Understand Format; It's Only Make Believe

Since 2000, how much has your average hourly wage gone up?

If you are in the upper crust, the answer may be staggering. If not, perhaps the following chart more closely resembles your experience.

Average Hourly Earnings 2000-2012



Just the Facts Ma'am

• The average hourly earnings was $13.75 on January 1, 2000.
• The average hourly earnings is currently $19.84.
• Since 2000, average hourly earnings are up 44.29%

Bear in mind, those are averages. Don't be surprised if you are much worse off because of distributional skew (huge wage increases at the high end pull the average up).

Moreover, the above chart does not reflect sales taxes, property taxes, state income taxes, gasoline taxes, fees, etc., all of which are way higher now than in 2000. In other words, the chart reflects average hourly wages, not spendable income.

Actual spendable income is up far less than 44%.

It's a peculiar thing how the CPI does not properly account for tax hikes.

While pondering those thoughts, please consider federal spending.

Federal Spending

The following table will show without a doubt the purported "revenue problem" in Congress, is without a doubt really an "out of control spending problem".

Department	2000	2012 estimate	Percentage Increase
Legislative Branch	2,871	5,253	82.97
Judicial Branch	4,057	7,581	86.86
Department of Agriculture	75,071	150,680	100.72
Department of Commerce	7,788	11,326	45.43
Department of Defense--Military Programs	281,028	688,254	144.91
Department of Education	33,476	98,467	194.14
Department of Energy	14,971	38,998	160.49
Department of Health and Human Services	382,311	871,836	128.04
Department of Homeland Security	13,159	60,443	359.33
Department of Housing and Urban Development	30,781	56,788	84.49
Department of the Interior	7,998	11,241	40.55
Department of Justice	16,846	34,556	105.13
Department of Labor	31,873	127,157	298.95
Department of State	6,687	29,937	347.69
Department of Transportation	41,555	84,135	102.47
Department of the Treasury	390,524	579,618	48.42
Department of Veterans Affairs	47,044	129,186	174.61
Corps of Engineers--Civil Works	4,229	9,184	117.17
Other Defense Civil Programs	32,801	51,991	58.50
Environmental Protection Agency	7,223	9,352	29.48
Executive Office of the President	283	414	46.29
General Services Administration	74	1,083	1363.51
International Assistance Programs	12,087	25,554	111.42
National Aeronautics and Space Administration	13,428	17,637	31.34
National Science Foundation	3,448	8,281	140.17
Office of Personnel Management	48,655	87,462	79.76
Small Business Administration	-421	3,157
Social Security Administration (On-Budget)	45,121	188,552	317.88
Social Security Administration (Off-Budget)	396,169	638,509	61.17
Other Independent Agencies (On-Budget)	8,803	53,199	504.33
Other Independent Agencies (Off-Budget)	2,029	-5,120
Allowances	..........	125
Undistributed Offsetting Receipts	-173,019	-279,289	61.42
(On-budget)	-105,586	-151,066	43.07
(Off-budget)	-67,433	-128,223	90.15
Total outlays	1,788,950	3,795,547	112.17

Problem in a Nutshell

• Average salaries are up 44%.
• US spending is up 112%.

The idea behind this post comes from a friend, Bob Gudas.

The numbers are from OMB Historical Tables. The spreadsheet is from Table 3.1 Outlays by Superfunction and Function: 1940-2017.

I downloaded the excel spreadsheet, hid all columns except 2000 and 2012, then calculated the percentage difference discarding a few columns where the numbers were negative or the calculations infinite.

Military Spending

Wages are up 44%, military spending is up 145%, total outlays are up 112%.

Let's dig deeper.

What are veteran's affairs programs and homeland security? By any rational measure of sanity, those programs constitute defense spending.

How much of NASA is really defense spending? How much of department of education spending is free tuition for those putting in military service? What about the department of state? How much of the cost of building the embassy in Iraq and other places is buried there?

Let's go further yet and investigate the 2012 OMB budget. Specifically, consider the separate budget item of $96.7 billion for "Overseas Contingency Operations".

Where was that line item in 2000?

What about the "National Intelligence Program" at 52.6 billion? Is that not defense?

Let's ignore all of that and simply total up Defense, Homeland Security, and Veteran's Affairs.

• 2000 Total (281,028 + 13,159 + 47,044) = 341,231
• 2012 Total (688,254 + 60,443 + 129,186) = 877,883
• Percentage Increase 157%

I suggest defense spending is out of control, as is nearly everything else.

Medicare and Medicaid

Medicare and Medicaid are not broken out in the spreadsheet, so here are the numbers from the Fiscal Year 2013 Budget (which contains the most current estimate of 2012 spending), and the Fiscal Year 2002 Budget (which contains actual spending for 2000).

Medicare 2000: 200,588
Medicare 2012: 480,202

Medicaid 2000: 117,744
Medicaid 2012: 283,597

Medicare spending is up 139%
Medicaid spending is up 140%

Where's the Problem?

All things considered, what's the bigger problem? Failure to collect more taxes, or out of control spending?

It's Only Make Believe

Regardless of your answer to the preceding question, one thing is for certain: The purported effort to balance the budget is nothing more than an exercise in make believe.

With a tip of the hat to Conway Twitty I offer this musical tribute.



Can we get President Obama, Ben Bernanke, and John Boehner to do a remake? If so, we need background vocals. I propose Nancy Pelosi, Dick Cheney, Hank Paulson, Barney Frank, Tim Geithner, along with international rock stars Angela Merkel, Shinzo Abe, and Mario Monti.

We just need one slight change in the lyrics.

People see us everywhere.
They think "we" really care.
But myself, I can't deceive,
I know it's only make believe.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Boehner Scraps Fiscal Cliff Plan "B", Futures Plunge; Why the Surprise?

Lacking Republican support, House speaker John Boehner scraps Fiscal Cliff Plan "B", not that it ever had a chance in the first place.

Representative Rob Bishop of Utah says "The odds go up that we go over the fiscal cliff".

S&P Futures



S&P futures are fluctuating around -20 points or so, but are up 30 points from the initial massive reaction.

Boehner Scraps Fiscal Cliff Plan "B"

Please consider House Scraps Vote on Boehner’s Tax Plan Lacking Support

House Republican leaders canceled a planned vote tonight on Speaker John Boehner’s plan to allow higher tax rates for annual income above $1 million amid stalled budget talks.

“The House did not take up the tax measure today because it did not have sufficient support from our members to pass,” Boehner, an Ohio Republican, said in a statement. “Now it is up to the president to work with Senator Reid on legislation to avert the fiscal cliff." Harry Reid, a Nevada Democrat, is Senate majority leader.

Boehner said he will call President Barack Obama, said Representative Steven LaTourette of Ohio. A House leadership announcement said the chamber will hold no more votes until after the Christmas holiday and will return "when needed."

"The odds go up that we go over the fiscal cliff," said Representative Rob Bishop of Utah, a Republican. Texas Republican Joe Barton said, "It was just too big a hill to climb."

Why the Surprise?

Does anyone find the cancellation of the vote a surprise? If so, why?

As I have pointed out for days, "Plan B" had no chance of passing the Senate, so it made no difference even if it passed the House.

Here is a clip from a post I did on Tuesday titled Boehner Floats Fiscal Cliff "Plan B".

Significant Differences

• There is a huge gap between $400,000 and $1,000,000 on tax hikes.
• There is a huge gap between $400 billion and a $trillion on entitlement cuts.
• Boehner wants a debt-ceiling deal to include spending cuts for every dollar upped.

Nothing has changed since Tuesday, at any point. Yet, for some reason the market seems surprised by all of this.

For the conspiratorial folks, this is a Wall Street staged event to get Congress to do what it wants.

Regardless, assuming the futures hold, this may be one of the biggest "bull traps" in history.

Nothing would surprise me at the moment, including a "green" open tomorrow morning or a gap down that takes out the low on the overnight futures at 1391, nearly a 60 point plunge from Thursday's close.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Euroskepticism on Rise in New EU Members

The Financial Times reports Newest EU members go cooler on euro.

The enthusiasm for the euro is cooling among the EU’s newest members in eastern Europe, as Latvia’s prime minister warned that his citizens are turning against the single currency.

Valdis Dombrovskis, who led one of Europe’s toughest austerity programmes in part to keep Latvia’s euro membership hopes alive, says he faces a struggle to get the Baltic republic into the single currency by the 2014 target.

“Five years ago before the eurozone crisis everyone wanted to enter the euro, but we weren’t economically ready. Now that we are ready to enter, many have become sceptical,” said the centre-right leader.

Bulgaria, which like the Baltic states has pegged its currency to the euro for a decade and is one of only three EU countries that currently meet the Maastricht entry criteria in full, has recently made clear it has no short-term plans to move towards membership.

Boyko Borisov, prime minister, told the FT recently his government had no plans to join until the eurozone crisis was over. The EU’s poorest country should not have to help fund bailouts of richer states, he said.

“I think for the time being it would be unfair to join the eurozone and to support countries where pensions are higher than the pensions of our people,” he said. “How can we tell Bulgarians, we will take from your pensions in order to pay pensioners in Greece, Spain or Italy?”

In Poland, public opposition to euro adoption has edged up slightly as the eurozone crisis has deepened, with a new opinion poll sponsored by the finance ministry finding 56 per cent of Poles were against joining, up 3 percentage points from a last year.

Petr Necas, the [Czech] premier, has said that his country will not join during this government, whose mandate expires in 2014, and not until 2020 at the earliest, subject to approval by a referendum.

Vaclav Klaus, the eurosceptic Czech president, has called the European Stability Mechanism “a monstrous and outrageous thing” and said this month he would not sign the EU treaty amendment creating the eurozone rescue fund.

Why any country would consider joining the eurozone now is beyond me. Yet, in spite of the fact that 56% of Polish citizens are against the idea, the Polish government intends to ram this mess down their throats anyway.

The Czech president has the right idea, that the ESM is a "monstrous and outrageous thing". Moreover, nannycrat agreements like the ESM are bound to get worse as the Spanish, Italian, and French economies implode.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

France Faces Growing Pension Deficit; French Youth Lose Hope; Politicians in Denial; Bond Market Patience Can't Last

With sovereign debt yields in most of Europe stabilizing, and the euro on the rise vs. the US dollar there is a growing sense of complacency in the eurozone. Such complacency is not warranted.

I sense another storm in Southern Europe and huge problems ahead for the core of Europe, including Germany and France. The focus of this article is France.

Young French Losing Hope as Prospects Fade

French president Francois Hollande has not delivered on his promise to create jobs so Young French Lose Hope as Prospects Fade.

Youth unemployment in France has been high for some time, but it has now climbed to 26 percent. For decades, regardless of their political affiliation, lawmakers have been promising to create a better situation for young people. But exactly the opposite has happened. Labor laws protect those who already enjoy steady jobs, while the economic crisis and recession have limited the number of new jobs created. Meanwhile, housing has become both scarcer and pricier.

Some 23 percent of the country's 18- to 24-year-olds live in poverty, according to a study by the National Institute for Youth and Community Education (INJEP). These are mainly high school or university dropouts who have little to no access to health care and limited chances of improving their situations.

Such is the folly of Hollande's Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It". If companies cannot fire workers, they will not hire them in the first place.

Coupled with foolish tax hikes on businesses and consumers alike, rising unemployment should be expected, and that's exactly what has happened. Businesses are upset, as well they should be, yet the politicians have not gotten the message that they are the problem.

Last week, Arnaud Montebourg, the French minister of industrial renewal, threatened steel giant ArcelorMittal, with "temporary nationalization" if Mittal shut down two furnaces, eliminating 630 people. Mittal employs 20,000.

Montebourg's inane proposal sent shock waves all the way up to the president's office.

French in Denial as Crisis Deepens

Spiegel reports French in Denial as Crisis Deepens

In the midst of the economic crisis, France's Socialists are denying reality. The minister of industrial renewal is calling for nationalization of some industries, while the president shies away from necessary structural reforms. Business leaders fear the clock has been turned back 30 years.

France's business leaders felt as if they had been set back 30 years, to a time when the first Socialist president of the Fifth Republic, François Mitterrand, began his term with a wave of nationalizations and, after two years, was forced to reverse his policy. Some even drew a comparison with 1945, when the government nationalized automaker Renault after accusing it of having collaborated with the enemy. Wasn't Montebourg, who had always been an eloquent preacher of deglobalization, dividing business owners into different camps, good and evil, patriotic and unpatriotic?

"Has the government forgotten that nationalization means expropriation?" asked Laurence Parisot, the appalled head of MEDEF, the employers' union.

The liberal economist Nicolas Baverez, who predicted "France's downfall" 10 years ago and has just written a book titled "Réveillez-Vous" ("Wake Up"), saw the wrangling over Florange as proof that the French left still hasn't accepted globalization, and acts as if the country were an economic and cultural preserve. "The idea of nationalization sends an ominous message to all investors," Baverez said.

Even Finance Minister Pierre Moscovici carefully distanced himself from Montebourg, saying: "Our policy differs from the past experiences of leftists in power."

But the workers at the Florange site and their unions were thrilled with Montebourg's threat. According to a snap poll, a majority of the French people and, in particular, leftist voters, appreciate such showdowns with the patrons, or business owners. It's no accident that France's young people see working in the public sector as the ideal professional career. The government promises protection and security.

A Plethora of Public Servants

"Whenever a new problem popped up in the last 25 years, our country reacted by increasing spending," says banker Michel Pébereau.

Public sector spending now accounts for almost 57 percent of GDP, more than in Sweden or Germany. For every 1,000 residents, there are 90 public servants (compared with only about 50 in Germany). The public sector employs 22 percent of all workers.

La douce France is a sleepy country of bureaucrats and government officials who want their peace and quiet. But the bad news is beginning to pile up for Hollande.

There are many indications that time is running out for Hollande, that Prime Minister Ayrault's days could already be numbered, and that the valiant knight Montebourg, who had initially aspired to be Ayrault's successor, is more likely waging a tragic battle against the windmills of globalization.

France Faces Growing Pension Deficit

On top of a growing unemployment problem, a growing deficit problem, and a bloated
public sector France Faces Growing Pension Deficit.

France’s national pension system is sliding deeper into deficit despite bitterly contested reforms pushed through by Nicolas Sarkozy, former president, adding to the tough economic challenges facing François Hollande’s socialist government.

An official report published on Wednesday forecast the pension system deficit would rise to €18.8bn in 2017 from €14bn last year and would be likely to exceed €20bn in 2020. The annual cost of pension payments has risen to 14 per cent of gross domestic product.

The issue is a big headache for the government, already battling to reduce public debt rising above 90 per cent of GDP. It has run into strong opposition from business over its hefty increases in taxes and has yet to detail where the burden will fall from €60bn of spending curbs planned over the next five years.

Mr Hollande’s Socialist party opposed reforms enacted by Mr Sarkozy’s right-of-centre government in 2010 which raised the minimum retirement age to 62 from 60. Although relatively modest by the standard of reforms in other European countries, they provoked weeks of mass street protests led by trade unions

The scenarios set out by COR, the pensions’ council, showed that unemployment would have to be more than halved from its present level to 4.5 per cent and productivity growth increased to 1.8 per cent to bring the pension system back into surplus by 2060; if unemployment averaged 7 per cent and productivity growth 1.3 per cent, the deficit would widen to more than €60bn in the same period.

Bond Market Patience Can't Last

How long the bond market puts up with these problems is unknown, but it will not be forever. Indeed, I doubt bond market complacency with France lasts another year.

In the meantime, the odds of France doing something to address these problems is roughly zero percent. If anything, Hollande has shown a marked propensity to send France into reverse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

"Wine Country" Economic Conference Hosted By Mish
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Fiscal Cliff Talks Stall On Veto Threat; Name-Calling Begins; Showdown Over "Plan B"; Obama's Fantasyland Statements

"Fiscal Cliff" Talks Turn Sour

Yesterday, the sides were so far apart on critical issues that I wondered how a deal could be made in two days. The market saw it otherwise, mainly on hype Obama Offers Concessions Regarding Tax on Wealthy.

Today is a different story as "Fiscal cliff" talks turn sour, Obama threatens veto.

Talks to avoid a fiscal crisis appeared to stall on Wednesday as President Barack Obama accused Republicans of digging in their heels due to a personal grudge against him, while a top Republican called the president "irrational."

Boehner and Obama have each offered substantial concessions that have made a deal look within reach. Obama has agreed to cuts in benefits for seniors, while Boehner has conceded to Obama's demand that taxes rise for the richest Americans.

However, the climate of goodwill has evaporated since Republicans announced plans on Tuesday to put an alternative tax plan to a vote in the House this week that would largely disregard the progress made so far in negotiations.

Obama threatened to veto the Republican measure, known as "Plan B," if Congress approved it.

Boehner's office slammed Obama for opposing their plan, which would raise taxes on households making more than $1 million a year and is a concession from longstanding Republican opposition to increasing any tax rates.

"The White House's opposition to a backup plan ... is growing more bizarre and irrational by the day," Boehner said through his spokesman, Brendan Buck.

Concession Nonsense

Reuters writers Matt Spetalnick and Mark Felsenthal said "Boehner and Obama have each offered substantial concessions that have made a deal look within reach."

What "substantial" concessions were those? This is how I stated things yesterday.

Significant Differences

• There is a huge gap between $400,000 and $1,000,000 on tax hikes.
• There is a huge gap between $400 billion and a $trillion on entitlement cuts.
• Boehner wants a debt-ceiling deal to include spending cuts for every dollar upped.

The gaps that still remain are huge. Nonetheless, the stock market acts as if a deal is at hand.

To be sure, "token" concessions were made, but "substantial" is another matter.

White House Said to Tell Business Groups Talks Stall

Bloomberg reports White House Said to Tell Business Groups Talks Stall

Obama administration officials told leaders of business and financial services groups that negotiations with House Speaker John Boehner have deteriorated in the past 24 hours, a person familiar with the meeting said.

Obama said at the White House that he offered congressional Republicans a “fair deal” and accused them of “posturing” in the talks. Republicans need to “take the deal” he offered, the president said.

Boehner, who is pressing Obama to accept deeper spending cuts and a higher income threshold for tax-rate increases, said if the president doesn’t accept the Republican plan he’ll be responsible for “the largest tax increase in American history.”

The $4.6 trillion tax increase over the next decade, scheduled to start taking effect in January, would be about 2.3 percent of the U.S. gross domestic product. In those terms, it would be smaller than a 1942 tax increase during World War II, which was 5 percent of GDP according to the Treasury Department.

Who's Posturing?

Obama accused the Republicans of posturing. It's only posturing if the Republicans give in. Perhaps it is Obama who is posturing.

Perhaps both sides are posturing. If so, this is another case of the "pot calling the kettle black".

Showdown Over "Plan B"

Yahoo!Finance reports Boehner Challenges Obama With 'Plan B' Showdown

House Speaker John Boehner pressed his backup tax plan Wednesday despite a White House veto threat, saying it will be approved Thursday by the GOP-controlled House.

"Then the president will have a decision to make," Boehner said. "He can call on the Senate Democrats to pass that bill, or he can be responsible for the largest tax increase in American history."

Earlier in the day, President Barack Obama threatened to veto Boehner's "Plan B," pressing instead for a deal to avert the "fiscal cliff." He said the two sides were only a few hundred billion dollars apart, and he hoped to get the job done before Christmas.

"Plan B" calls for extending tax cuts for people making up to $1 million. The White House immediately rejected it Tuesday, saying it was unbalanced and didn't go far enough on seeking more revenue from the wealthy.

Obama said he would continue to work with Boehner and was prepared to do "tough things." But he said he would not compromise on his demand that he be given authority to raise the debt ceiling without Congress' approval.

"What separates us is probably a few hundred billion dollars," Obama said. "The idea that we would put our economy at risk because you can't bridge that gap doesn't make a lot of sense."

Obama's Fantasyland Statements

President Obama is in fantasyland, not only in terms of dollars but also in terms of the negotiation process itself.

For starters, on the issue of tax hikes, Boehner would hike taxes on those making $1,000,000 while the president wanted hikes on those making over $400,000. That is a huge difference.

The president would not negotiate on the debt ceiling.

On the issue of being only "a few hundred billion dollars" apart, I rather doubt it. But even if true, Obama would only give in a mere $50 billion on entitlement cuts.

Plan "B" is a Sham

On the other side of the coin, plan "B" which does not address the revenue side of the equation at all is certainly not fiscally prudent. In fact none of this negotiation is.

Unfortunately, there is still time to snatch defeat from the jaws of victory. In this case, victory is letting the fiscal cliff happen. The other alternatives do even less to address out-of-control budget deficits.

So, let the fiscal cliff happen.

It would be better yet if genuine deficit cuts were added on top of the fiscal cliff, instead of being negotiated away in January. Don't count on that because both parties are more interested in talking about reducing the deficit than actually doing something about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com