Sen. E.J. Pipkin says, in Paul Adams's story today, that "It's the same old story with Constellation. These kinds of threats are not constructive."

But it's not the same old story. BGE parent Constellation energy has set a new mark of aggressiveness in responding to public officials questioning its policies. During the 2006 special session that created the legislation Constellation is complaining about, I was repeatedly struck by Constellation's measured tone in response to what was quite an extraordinary situation -- a legislature called into special session specifically to meddle (as Constellation perhaps saw it) in its business. Constellation officials' main worry seemed to be retail rate caps that might drive BGE into bankruptcy, and they said barely a word in protest about the issue they're suing over now. They even began giving customers the credits the legislature required -- under protest, it's true. But it took them until now to sue.

The trigger, it seems clear, is the stance taken by Public Service Commission Chairman Steve Larsen and the rest of the PSC. As directed by the legislature, they subpoenaed Constellation last fall and are trying to revisit matters that Constellation regards as having been settled years ago, especially Maryland's 1999 electricity deregulation settlement. There are many moving parts: the "stranded cost" compensation that ratepayers were forced to pay Constellation; BGE customer levies for eventually decommissioning the Calvert Cliffs nuclear plants; part of the profit BGE collects; Constellation's earnings on the non-regulated wholesale electricity market; and the 2005-2006 wholesale auction (much of which was won by Constellation) that led to the 72 percent BGE rate increase.

I bet there's one more shoe. The PSC isn't done examining the 2005-2006 auction. Don't be surprised if the PSC calls the integrity of the auction into question and tries to get a rebate for BGE customers on that basis, as well. This will prompt more brimstone from Constellation. My best guess is that, in the end, Gov. O'Malley, Larsen and Constellation will put all these issues on a negotiating table and reach a global settlement that includes a modest rebate for households that use BGE. That way Gov. O'Malley can say he redeemed his pledge to stop the BGE rate increase -- or at least did something about it. And Constellation will have obtained political peace -- at a price. Here is my recent column on one of Larsen's blasts.

Posted by Jay Hancock at 10:21 AM | Permalink | Comments (14)
Categories: BGE/electricity
        

William Poole voted against last week's Federal Reserve interest-rate cut. So presumably he would have voted against today's. But he didn't. Apparently he wasn't there. If he had been, the vote to cut short-term rates by another half-percentage point would have been 9-2 instead of 9-1. Poole is skipper of the Federal Reserve Bank of St. Louis, a monetarist and enemy of inflation. From today's statement:

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.

UPDATE: base4rip notes correctly that Bill Poole is not a voting FOMC member this year. So how come he voted on the unscheduled cut last week, along with other non-2008 members?

2ND UPDATE: Here is how the Fed explains it. Committee membership doesn't change until the first regularly scheduled FOMC meeting of the calendar year. So even though the Jan. 21 meeting took place in 2008, it was populated by 2007 members because it was unscheduled. So Bill Poole is out of the picture for the rest of the year and Richard Fisher, president of the Federal Reserve Bank of Dallas, is playing the bad cop.

Posted by Jay Hancock at 4:25 PM | Permalink | Comments (1)
        

To hear the Public Service Commission tell it, Baltimore Gas & Electric and parent Constellation Energy have complained to everybody about the PSC's stranded-cost report except the PSC. Now the agency has called a hearing for next week for BGE to have its say.

Constellation Energy Group has made public statements indicating the reports contain inaccuracies. According to statements of the company’s CEO information has been distributed to Wall Street analysts, Maryland Legislators, and the Governor that allegedly rebuts the Commission’s reports. This information has not been provided to the PSC. In accordance with the provisions of Senate Bill 400, the PSC is initiating this proceeding to investigate further the issues identified in its report, and is holding this hearing at the outset to allow BGE to identify and explain the errors it claims the Commission has made.

The hearing is a week from today -- Feb. 6. Here is my column on the report.

Posted by Jay Hancock at 3:20 PM | Permalink | Comments (0)
Categories: BGE/electricity
        

The scariest five sentences I read yesterday come from Michael Mandel, Business Week's chief economist and the author of the recent cover story, How Real Was the Prosperity?

In truth, we're at the beginning of a long, arduous process of figuring out how much of the post-tech bubble prosperity was real and how much was the result of a credit-induced frenzy... As of the third quarter of 2007, the 10-year growth rate for consumption was 3.6%, vs. GDP growth for the same period of 2.9%. This difference represents an enormous gap. If consumer spending had tracked the overall economy over the past decade as it has in the past, Americans today would be spending about $600 billion less a year. The extra spending has amounted to a total of about $3 trillion since 2001.

In other words, since the tech bubble really took off in 1997, which was followed by the credit bubble of the early 2000s, which was followed by the housing bubble, consumer spending has outpaced economic growth by $3 trillion. The implication: Such a rate of growth was based on funny stock-market and housing money and is woefully unsustainable. Over the years I have written many columns saying (correctly) that consumers still had gas in the tank and shouldn't be ruled out. Now, seeing the figures as Mandel puts them, and seeing the challenges the economy faces, I think it is probably time to stop saying that.

Posted by Jay Hancock at 10:16 AM | Permalink | Comments (1)
        

Why does AP write ledes such as this?

NEW YORK - U.S. home prices plunged by a record 8.4 percent in November, marking two years of slowing returns, according to a key index released Tuesday.

It's simply not true. Home prices did not fall 8.4 percent in November. They fell 8.4 percent over the 12-month period that ended in November. AP does this all the time. By declining 8.4 percent in one month, home prices would have been falling at 65 percent annual rate. If you think the Fed is panicked about an 8.4 percent annual decline in home values, think what they would do about a plunge at a 65 percent annual rate.

AP's second sentence does clear things up: "The decline in the Standard & Poor's/Case-Shiller 10-city composite home price index was the biggest year-to-year drop since a 6.7 percent decrease in October." But why couldn't they say "year to year" in the lede?

Posted by Jay Hancock at 11:14 AM | Permalink | Comments (1)
        

The latest Case-Shiller home-price numbers are out this morning. As expected, not pretty. A composite index of home prices in 20 cities fell 7.7 percent for the 12 months ended in November. A 10-city index fell 8.4 percent compared with November 2006. That's about how prices did in Washington (and presumably, Baltimore). The Washington index 7.8 percent for the period -- right with the pack. The worst performers were Miami (minus 15.1 percent), Las Vegas (minus 13.2 percent) and Detroit (minus 13 percent). The best performers were Charlotte (plus 2.9 percent) and Seattle (plus 1.8 percent).

The full Case-Shiller press release is here. The AP story is here. An easy-to-read HTML table of the results is on Calculated Risk, here.

Posted by Jay Hancock at 10:56 AM | Permalink | Comments (0)
        

Quote of the day. From Harry Truman's diary, Dec. 25, 1947

I appointed a Secretary for Inflation. I have given him the worry of convincing the people that no matter how high the prices go, nor how low wages become, there just is not any danger to things temporal or eternal. I am of the opinion that he will take a real load off my mind-if Congress does not.

Then I have appointed a Secretary of Reaction. I want him to abolish flying machines and tell me how to restore oxcarts, oar boats and sailing ships. What a load he can take off my mind if he will put the atom back together so it cannot be broken up. What a worry that will abolish for both me and Vishinski.

I have appointed a Secretary for Columnists. His duties are to listen to all radio commentators, read all columnists in the newspapers from ivory tower to lowest gossip, coordinate them and give me the result so I can run the United States and the World as it should be. I have several able men in reserve besides the present holder of the job, because I think in a week or two the present Secretary for Columnists will need the services of a psychiatrist and will in all probability end up in St. Elizabeth's.

I have appointed a Secretary of Semantics-a most important post. He is to furnish me 40 to 50 dollar words. Tell me how to say yes and no in the same sentence without a contradiction. He is to tell me the combination of words that will put me against inflation in San Francisco and for it in New York. He is to show me how to keep silent-and say everything. You can very well see how he can save me an immense amount of worry.

Posted by Jay Hancock at 8:06 AM | Permalink | Comments (0)
Categories: Quotes of the day
        

Bill and Melinda Gates are donating $300 million to help Third World farmers improve productivity. This is great. Too bad, however, that the developed nations have all but stalled attempts to cut trade barriers so the world's rich people can actually buy what the poor people grow, which would lift them from poverty. Three-hundred million will go a long way, but an agreement by the World Trade Organization to outlaw subsidies to developed-nation farmers and end agricultural import quotas would multiply the good a thousandfold.

Posted by Jay Hancock at 11:31 AM | Permalink | Comments (2)
        

You heard it here first. The (almost always) optimistic economist Ed Yardeni suggests that the government has overstimulated the economy and that we'll be off to the races soon. (He seems to be a little facetious. 3/4 serious, I would say.) (Jerome Kerviel is the alleged rogue trader at a French bank who perhaps caused Monday's overseas stock meltdown, which prompted the Fed to cut interest rates by a huge amount.)

The recession is almost over thanks to Jerome Kerviel in Paris and the Policy Panic in Washington! I don’t recall so much policy stimulus and so many bailout plans thrown at the economy so fast before there was compelling evidence of a recession. It is all a bit reminiscent of the monetary and fiscal response to 9/11 when our policymakers feared that the terrorist attacks would cause a financial and economic meltdown. That didn’t happen, perhaps because of the policy response, or perhaps because the recession of 2001 ended in November, having started in March.

Posted by Jay Hancock at 10:05 AM | Permalink | Comments (1)
        

Société Générale: Allfirst Financial, Sumitomo Copper and Barings Bank feel your pain.  Good one, pulled from comments: "How ironic that the rogue trader from France looks rather like Charlie Sheen's character Bud Fox in the 1980s movie, Wall Street."

Posted by Jay Hancock at 9:42 PM | Permalink | Comments (1)
        

Now this is fantasy baseball. Randy Newsom is a 6-foot-2, 200-pound, submarining, relief-pitcher prospect for the Cleveland Indians. He is selling 4 percent of his future, major-league earnings -- if there are any -- for $50,000. You don't have to put up the whole 50K, however. You can buy shares in Randy at $20 per pop, as brokered by Real Sports Investments, his company. Each share is worth 0.0016 percent of his future, major-league earnings. So say he turns into something like Dan Quisenberry, earns an average of $4 million a year and works for 10 years. The 4 percent stake held by investors would be worth $1.6 million, and your little, $20 venture would pay $640 over the course of his career.

Last year Newsom played for the Akron Aeros, Cleveland's AA farm team, and had four wins, one loss, 18 saves and a 3.12 ERA, according to Real Sports Investments.

"The key now for him is to become more consistent and show he can continue to pitch in pressure situations," says the Cleveland Indians Minor League Insider blog. "Newsom does not have a blazing fastball, wipeout slider, or a knee-buckling curveball, but he is extremely intelligent, has moxie, commands his pitches well, has great makeup, and goes right after hitters. He should start the season in the Buffalo bullpen and could make his professional debut with the Indians sometime in 2008."

And if he does, the Randy Newsom intial public offering will start paying off. He needs to make $1.25 million for investors to break even. Newsom shares are similar to the David Bowie bonds sold a decade ago. The rock singer got $55 million up front from Prudential Insurance, and the bonds were secured and funded by royalty streams from Bowie albums up to 1990. But Bowie bonds weren't available to the public. And rather than just loaning money to Newsom, as with a bond, you would become his equity partner, sharing in all of his upside. If he washes out and never makes the bigs, however, he keeps the $50,000. And you've struck out. I think I’d rather invest in his Real Sports Investments company, which is trying to sell pieces of other minor leaguers, than his pitching career.
HT: Marginal Revolution

Posted by Jay Hancock at 9:37 AM | Permalink | Comments (0)
        

Until now, Mark Gorton and his companies, which left Mid-Atlantic electricity players holding an $80 million bag recently when they defaulted on a contract, have kept silent. I called Gorton's Tower Research Capital a couple weeks ago, and they said they weren't commenting. The $80 million estimated loss, generated by Tower affiliate Power Edge, has to be borne by PJM's members -- including Baltimore Gas & Electric. Today, however, Gorton has sent a five-page, single-space letter to the members of PJM Interconnection, which manages the Mid-Atlantic grid. In it, he explains what happened, apologizes and argues against new, tougher collateral rules proposed by PJM to keep this from happening again. I can't find it on PJM's Web site yet. Thanks to the alert PJM member who sent it to me.

The highlights: Gorton is "sorry" about the default but makes no offer to cure it. Power Edge put up only $3 million in collateral to control the huge, money-losing trade. Power Edge acquired the position from another investor, according to Gorton. And PJM seems to have allowed an exception to its own, already lightweight collateral requirements, to let Power Edge acquire the position. Gorton blames the default on "a rare failure of a large transformer and schedule changes that caused overlapping of transmission outages each capable of handling 15-20% of the electrical load in Jersey City..." The changes, he says "radically transformed the make-up of the New Jersey electrical grid."

Some excerpts:

As manager of Power Edge, I am extremely sorry that a default associated with a fund I run has damaged PJM and its members. The current market structure and poor oversight of PJM created a situation where there was no institutional support to prevent a default. As manager of Power Edge, I depended more upon the collateral requirements of PJM as a risk management tool than was wise. My experience with other markets around the world led me to take false comfort in the collateral requirements of PJM.

The behavior of the Power Edge FTR portfolio these past few months has been a great lesson to me of the unpredictable nature of FTR values... I feel very badly about the default of Power Edge. I intend to work diligently to help rectify the structural problems at PJM that have allowed a situation like the Power Edge default to occur.

No offer to actually pay back the money that Power Edge owes. According to Gorton, Power Edge acquired its (eventually losing) position in "financial transmission rights" from another entity called Exel Power Sources LLC.

Despite being thinly capitalized, Exel was allowed to bid for a large number of FTR positions, and in Round 2, in particular. Exel won an unusually large amount of FTRs. Even before the term of the FTRs started, Exel was unable to meet its initial collateral requirements, and PJM knew it had a significant problem on its hands...

So in order to help Power Edge to take the entire Exel portfolio, PJM reduced the collateral requirements of taking the portfolio from $14.7 million to $3 million and allowed this $3 million to also be used to support bids in upcoming auctions. Power Edge would never have acquired the Exel portfolio if PJM had enforced its own collateral requirements.

And more:

Upon hearing of the default, the [PJM] Membership was understandably outraged that poor market regulation and oversight could have left them facing such a large socialization. Even after the default, Power Edge has continued to work with PJM in an attempt to mitigate this bad situation. Power Edge has always kept a low profile, and after the default, Power Edge did not come forward to explain the history behind the default. This silence is partially because Power Edge received assurances from PJM that PJM would engage in dialogue with us to resolve the issues at hand.

Posted by Jay Hancock at 4:54 PM | Permalink | Comments (0)
Categories: BGE/electricity
        

Another front-page, clear-as-a-bell story by Paul Adams describing developments in the Maryland electricity market. This one is about how BGE customers will pay $100 more per year to send price incentives to companies that might be thinking of building new generation capacity. The ordinary, sky-high price of electricity wasn't enough of an incentive to generators, reasoned PJM Interconnection, the grid manager for the Mid-Atlantic. So they padded the bill with an extra "capacity" charge that is nothing but pure profit for generation companies such as Constellation Energy, BGE's parent. And still hardly anybody is building new generation.

No wonder Pittsburgh's Duquesne Light is quitting the PJM grid and joining the Midwestern grid, which it can do because it's right on the border. The Midwestern grid doesn't have "capacity" charges that pay generators for merely existing. BGE can't secede because it's stuck in the heart of PJM territory.

Posted by Jay Hancock at 11:05 AM | Permalink | Comments (1)
Categories: BGE/electricity
        

Merrill Lynch published a very gloomy forecast today, revising earlier estimates downward. Read the whole report here.

-- We now expect an outright contraction in economic activity in the first three quarters of 2008. This downturn should be led by consumer spending.

-- We anticipate job losses in the range of 2.5 million, close to what we saw in the last recession. This in turn is expected to push the unemployment rate up, to 5.75% by the end of 2008 and to 6% by early 2009.

-- Home prices are expected to decline by 15% in 2008 and by a further 10% in 2009, with more depreciation likely beyond the forecast period.

Posted by Jay Hancock at 2:24 PM | Permalink | Comments (1)
        

Unreconstructed monetarist William Poole was the lone "No" vote in today's announced decision by the Federal Reserve to whack short-term interest rates by the biggest amount since 1994. It was also the first emergency rate cut since right after the 9/11 terrorist attacks. Poole has made no public statement, but through his history and his writings we can take a pretty good guess at what he's thinking: He's worried about the integrity of the dollar and what may be the most threatening resurgence of inflation since the 1980s.

Posted by Jay Hancock at 11:19 AM | Permalink | Comments (0)
        

If you owned a business, would you be expanding?

Argy, Wiltse & Robinson, P.C. (AWR), a rapidly-growing certified public accounting and business advisory firm, is pleased to announce the opening of a fourth office in Bethesda, MD. The office will accommodate many current AWR clients and employees and serve to attract more clients and professionals who are located in Maryland.

“We have been looking for the right time and place to open an office in Maryland,” said Paul Argy, AWR’s President & CEO. “With over 18% growth in 2007 and expecting even more rapid growth in 2008, we are outgrowing our Virginia space and have always seen Bethesda as an area of natural expansion. The Bethesda location will allow us to better serve existing and new clients in Maryland, as well as improve the work-life balance of our Maryland-based employees.” AWR currently has approximately 218 employees, about 185 of whom are located in the Washington area.

Posted by Jay Hancock at 10:25 AM | Permalink | Comments (0)
        

Martin Luther King Jr., Aug. 28, 1963, the Lincoln Memorial, Washington D.C.

I am happy to join with you today in what will go down in history as the greatest demonstration for freedom in the history of our nation.

Five score years ago, a great American, in whose symbolic shadow we stand today, signed the Emancipation Proclamation. This momentous decree came as a great beacon light of hope to millions of Negro slaves who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.

But one hundred years later, the Negro still is not free. One hundred years later, the life of the Negro is still sadly crippled by the manacles of segregation and the chains of discrimination. One hundred years later, the Negro lives on a lonely island of poverty in the midst of a vast ocean of material prosperity. One hundred years later, the Negro is still languishing in the corners of American society and finds himself an exile in his own land. So we have come here today to dramatize a shameful condition.

In a sense we have come to our nation's capital to cash a check. When the architects of our republic wrote the magnificent words of the Constitution and the Declaration of Independence, they were signing a promissory note to which every American was to fall heir. This note was a promise that all men, yes, black men as well as white men, would be guaranteed the unalienable rights of life, liberty, and the pursuit of happiness.

It is obvious today that America has defaulted on this promissory note insofar as her citizens of color are concerned. Instead of honoring this sacred obligation, America has given the Negro people a bad check, a check which has come back marked "insufficient funds."

But we refuse to believe that the bank of justice is bankrupt. We refuse to believe that there are insufficient funds in the great vaults of opportunity of this nation. So we have come to cash this check — a check that will give us upon demand the riches of freedom and the security of justice. We have also come to this hallowed spot to remind America of the fierce urgency of now. This is no time to engage in the luxury of cooling off or to take the tranquilizing drug of gradualism. Now is the time to make real the promises of democracy. Now is the time to rise from the dark and desolate valley of segregation to the sunlit path of racial justice. Now is the time to lift our nation from the quick sands of racial injustice to the solid rock of brotherhood. Now is the time to make justice a reality for all of God's children.

It would be fatal for the nation to overlook the urgency of the moment. This sweltering summer of the Negro's legitimate discontent will not pass until there is an invigorating autumn of freedom and equality. Nineteen sixty-three is not an end, but a beginning. Those who hope that the Negro needed to blow off steam and will now be content will have a rude awakening if the nation returns to business as usual. There will be neither rest nor tranquility in America until the Negro is granted his citizenship rights. The whirlwinds of revolt will continue to shake the foundations of our nation until the bright day of justice emerges.

But there is something that I must say to my people who stand on the warm threshold which leads into the palace of justice. In the process of gaining our rightful place we must not be guilty of wrongful deeds. Let us not seek to satisfy our thirst for freedom by drinking from the cup of bitterness and hatred.

We must forever conduct our struggle on the high plane of dignity and discipline. We must not allow our creative protest to degenerate into physical violence. Again and again we must rise to the majestic heights of meeting physical force with soul force. The marvelous new militancy which has engulfed the Negro community must not lead us to a distrust of all white people, for many of our white brothers, as evidenced by their presence here today, have come to realize that their destiny is tied up with our destiny. They have come to realize that their freedom is inextricably bound to our freedom. We cannot walk alone.

As we walk, we must make the pledge that we shall always march ahead. We cannot turn back. There are those who are asking the devotees of civil rights, "When will you be satisfied?" We can never be satisfied as long as the Negro is the victim of the unspeakable horrors of police brutality. We can never be satisfied, as long as our bodies, heavy with the fatigue of travel, cannot gain lodging in the motels of the highways and the hotels of the cities. We cannot be satisfied as long as the Negro's basic mobility is from a smaller ghetto to a larger one. We can never be satisfied as long as our children are stripped of their selfhood and robbed of their dignity by signs stating "For Whites Only". We cannot be satisfied as long as a Negro in Mississippi cannot vote and a Negro in New York believes he has nothing for which to vote. No, no, we are not satisfied, and we will not be satisfied until justice rolls down like waters and righteousness like a mighty stream.

I am not unmindful that some of you have come here out of great trials and tribulations. Some of you have come fresh from narrow jail cells. Some of you have come from areas where your quest for freedom left you battered by the storms of persecution and staggered by the winds of police brutality. You have been the veterans of creative suffering. Continue to work with the faith that unearned suffering is redemptive.

Go back to Mississippi, go back to Alabama, go back to South Carolina, go back to Georgia, go back to Louisiana, go back to the slums and ghettos of our northern cities, knowing that somehow this situation can and will be changed. Let us not wallow in the valley of despair.

I say to you today, my friends, so even though we face the difficulties of today and tomorrow, I still have a dream. It is a dream deeply rooted in the American dream.

I have a dream that one day this nation will rise up and live out the true meaning of its creed: "We hold these truths to be self-evident: that all men are created equal."

I have a dream that one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at the table of brotherhood.

I have a dream that one day even the state of Mississippi, a state sweltering with the heat of injustice, sweltering with the heat of oppression, will be transformed into an oasis of freedom and justice.

I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.

I have a dream today.

I have a dream that one day, down in Alabama, with its vicious racists, with its governor having his lips dripping with the words of interposition and nullification; one day right there in Alabama, little black boys and black girls will be able to join hands with little white boys and white girls as sisters and brothers.

I have a dream today.

I have a dream that one day every valley shall be exalted, every hill and mountain shall be made low, the rough places will be made plain, and the crooked places will be made straight, and the glory of the Lord shall be revealed, and all flesh shall see it together.

This is our hope. This is the faith that I go back to the South with. With this faith we will be able to hew out of the mountain of despair a stone of hope. With this faith we will be able to transform the jangling discords of our nation into a beautiful symphony of brotherhood. With this faith we will be able to work together, to pray together, to struggle together, to go to jail together, to stand up for freedom together, knowing that we will be free one day.

This will be the day when all of God's children will be able to sing with a new meaning, "My country, 'tis of thee, sweet land of liberty, of thee I sing. Land where my fathers died, land of the pilgrim's pride, from every mountainside, let freedom ring."

And if America is to be a great nation this must become true. So let freedom ring from the prodigious hilltops of New Hampshire. Let freedom ring from the mighty mountains of New York. Let freedom ring from the heightening Alleghenies of Pennsylvania!

Let freedom ring from the snowcapped Rockies of Colorado!

Let freedom ring from the curvaceous slopes of California!

But not only that; let freedom ring from Stone Mountain of Georgia!

Let freedom ring from Lookout Mountain of Tennessee!

Let freedom ring from every hill and molehill of Mississippi. From every mountainside, let freedom ring.

And when this happens, when we allow freedom to ring, when we let it ring from every village and every hamlet, from every state and every city, we will be able to speed up that day when all of God's children, black men and white men, Jews and Gentiles, Protestants and Catholics, will be able to join hands and sing in the words of the old Negro spiritual, "Free at last! free at last! thank God Almighty, we are free at last!"

Posted by Jay Hancock at 8:52 AM | Permalink | Comments (0)
        

In principle, crafting a quick, temporary tax rebate for America is a good idea. In practice, it may turn out to be a bad idea. Once Washington makes up its mind to do "something," something often turns out to be not quite what the doctor ordered. Stimulating America could turn out to be an excuse for all kinds of nutty plans that will do little for this year's economy and could hurt the long-term economy.

Some Republicans want to make the Bush tax cuts that expire in 2010 permanent. Virginia Rep. Eric Cantor wants to cut the corporate income tax rate, for crying out loud. And, as Jeff Birnbaum and Jonathan Weisman wrote in Thursday's Washington Post, "a bidding war among the top three Democratic candidates is complicating congressional efforts to produce a package that would not worsen the budget deficit."

The godfather of fiscal stimulus is English economist John Maynard Keynes. Nixon sure was right when he said, "We're all Keynsians now." We're Keynsians even when we don't need to be. We may not even be in a recession yet. When the economy slumps, the job of reviving it falls primarily to monetary policy and the Federal Reserve. It's true that Ben Bernanke's Fed is taking its sweet time about cutting rates. But that should change soon. Let's let the Fed do its job. If it fails, then Congress can attempt a stimulus. If this weren't an election year, would Congress be so eager to do "something"?

Posted by Jay Hancock at 11:45 AM | Permalink | Comments (2)
        

Assets owned by the State Retirement and Pension System of Maryland gained 1.56 percent in value for the six months ended Dec. 31 -- not a bad result during a tumultuous period, a new report shows. Give credit to bonds and international stocks, which offset declines in U.S. stocks and real estate. The fund, which finances retirement income for teachers, police and other public employees, is more diversified than it used to be. That reduces the chances of the kind of multibillion-dollar declines that roiled the system in the early 2000s.

Standard & Poor's index of 500 big U.S. stocks delivered a return of negative 2.7 percent for the period. The pension system beat the S&P 500 because it's less exposed to it and U.S. stocks generally than it used to be. Seven years ago, U.S. stocks made up 48 percent of the portfolio. Now they're only 41 percent.

In 2000 the system's assets were 21 percent international stocks; now they're 23 percent. Foreign stocks have done much better than American stocks recently because, for the most part, overseas economies are still growing quickly and have avoided a U.S.-style housing collapse. In 2000 bonds and other fixed-income investments made up 24 percent of the pension system's portfolio, thanks to the 1990s bull market in stocks, which made the bond position proportionally smaller. Now the portfolio is 30 percent bonds, which are far less volatile than stocks.

The system does have, however, a 5 percent position in real estate and real-estate-related investments. That's up from 3.8 percent in 2000, and real estate did not have a good 2007. The system runs on the state fiscal year, which ends June 30. For the year ending June 30 2006, the fund gained 17.6 percent, helped by U.S. and foreign stocks alike. If the markets behave for the next six months as they did for the last six, this could be the fund's lowest-return fiscal year since FY 2003, when it gained 3.2 percent. (It lost 17 percent in 2001 and 2002.) Total assets on Dec. 31 were $39.5 billion. Still, no reason for alarm. A quick glance suggests the fund is in good shape.

Posted by Jay Hancock at 10:42 AM | Permalink | Comments (1)
        

No pork, he's saying. No long-term tax-cut fetishes. No drawn-out negotiations that lead to stimulus after a recession is over. And when he says the stimulus should be "efficient," he seems to be pushing demand-side efforts that put money in consumers' pockets rather than supply-side sops to corporations. From Federal News Service:

"To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving. Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed.

"Any fiscal package should also be efficient, in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue. Finally, any program should be explicitly temporary, both to avoid unwanted stimulus beyond the near-term horizon and, importantly, to preclude an increase in the federal government’s structural budget deficit. As I have discussed on other occasions, the nation faces daunting long-run budget challenges associated with an aging population, rising health-care costs, and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult."

Posted by Jay Hancock at 10:59 AM | Permalink | Comments (0)
        

Federal Reserve Chairman Ben Bernanke is speaking to the House Budget Committee. From Federal News Service:

"I agree that fiscal action could be helpful in principle, as fiscal and monetary stimulus together may provide broader support for the economy than monetary policy actions alone. But the design and implementation of the fiscal program are critically important. A fiscal initiative at this juncture could prove quite counterproductive, if (for example) it provided economic stimulus at the wrong time or compromised fiscal discipline in the longer term."

Translation: There are enormous opportunities for Congress, in an effort to plump up the economy before the elections, to further damage the country's long-term economic prospects.

Posted by Jay Hancock at 10:53 AM | Permalink | Comments (0)
        

Maryland new-car sales fell 9.6 percent in December to close out the poorest year since 1999, according to new figures from the Motor Vehicle Administration. Dealers sold 24,312 new cars, down from 26,879 in December 2006. And December sales were probably boosted by the fact that Maryland's auto-title tax went from 5 percent to 6 percent this month, spurring people who were going to buy in February or March to buy in December. 1 percent on a $30,000 car is $300.

For the year, Maryland dealers sold 378,184 new cars -- down 5.3 percent from 2006 results and down 11.7 percent -- 50,000 cars -- from the record in 2004. It'll be interesting to see what kind of incentives car companies put on the table. "We're doing less of that now," a GM spokewoman told me a couple days ago. Just wait a few months.

Posted by Jay Hancock at 9:50 AM | Permalink | Comments (0)
        

This from a Constellation spokesman on the Public Service Commission complaint to the Feds about big profits reaped by Maryland power plants: "Based on our preliminary analysis no Constellation Energy plants contributed to the alleged overpricing."

Look for more in Paul Adams' story in tomorrow's edition of The Sun.

Posted by Jay Hancock at 5:56 PM | Permalink | Comments (1)
        

More from the PSC's complaint just filed with the Federal Energy Regulatory Commission. The Mid-Atlantic grid monitor found that a lack of competition cost Maryland electricity consumers $87.5 million in 2006. (See post below.) In addition to asking FERC to put price caps on the exempt plants, the PSC wants electric companies to pay back some of the excess profits to consumers -- starting in September 2006, when the market monitor first raised issues, and also in 2007 and up to now. The companies are not identified -- this is based on a macro analysis that doesn't break out who was getting what. Presumably that would be part of the FERC investigation.

"The MD PSC also requests that the Commission intitiate an investigation to determine whether generators exempt from offer capping have exercised market power -- as the [market monitor's] conclusions and data show -- for the period from 2006 to the present, and... order disgorgement of monies where price manipulation is found."

Posted by Jay Hancock at 1:28 PM | Permalink | Comments (0)
        

Here's the most precise, striking analysis yet of how the lack of competition in Maryland's deregulated electricity market drives up prices for BGE customers and everybody else.
Last summer I wrote: "Expect interesting headlines in October, when [Public Service Commission Chairman Steve] Larsen's latest posse of consultants delivers findings on electricity just in time for a General Assembly session. The smoking gun may not be as hot as in the CareFirst case, but it's well worth uncovering."

It took longer than October, but now the consultants' findings are starting to come out. Research by Mid-Atlantic grid monitor Joseph Bowring undergirds a complaint just filed by Larsen & the PSC with the Federal Energy Regulatory Commission. The complaint finds that there is a substantial lack of electrical-generation competition in Maryland and that federal rules have allowed generators to raise prices willy-nilly in times of high demand -- even with the lack of competition. It's over 200 pages long, and Paul Adams and I are still going over it, but here are a few highlights:

Bowring found that 17 generator plants in Maryland "exercised local market power in Maryland in 2006 to set the locational marginal price during 1,083 hours and significantly increased Maryland's wholesale energy prices by about 73 cents per megawatt hour of load-weighted hourly average LMPs." Local market power is a lack of substantial competition to prevent generators from raising prices.
According to Bowring, the plants "added $87.5 million to Maryland's 2006 real-time energy-related charges."

These plants are exempt from price caps that apply to other generators in non-competitive situations. The PSC is asking FERC to slap price caps on, pronto. The exemptions, says its complaint, "are anticompetitive and distort the PJM (Mid-Atlantic grid) energy markets to the detriment of electric customers." The lack of caps, the PSC adds, is "discrimintory, anticompetitive, unjust and unreasonable."

Bowring first complained about this situation to his grid bosses a year ago, but they silenced him. Since then the gird has new bosses and Bowring is getting an independent operation. But FERC, which approved the new setup, has never addressed the problems that underlay Bowring's complaint -- problems that cost you and I and other electric customers millions. Now the PSC again is trying to get FERC to do something.

Posted by Jay Hancock at 1:04 PM | Permalink | Comments (0)
Categories: BGE/electricity
        

Just in time for Maryland slots -- House Bill 46, which would prohibit Marylanders from deducting gambling losses on their state income-tax return. You can deduct "wagering losses" on your federal return, but only to the extent that you itemize and had wagering income. This bill, sponsored by Prince George's Democrat Justin Ross, would require Marylanders to add gambling losses back to their reported state income. So if you win $2,000 at the slots in February and lose $3,000 in March, you would still have to pay Maryland income tax on $2,000. Hmm.

Posted by Jay Hancock at 5:43 PM | Permalink | Comments (1)
        

The news media often get blamed for fanning the flames of recession or boom simply by writing about it. There is a certain truth to this. People read that foreclosures are soaring or Internet stocks are going to the moon, and it affects how they think and helps turn the trend into a self-fulfilling prophecy. It's the Heisenberg Uncertainty Effect of current events: the mere fact of observing and recording a phenomenon changes the phenomenon. But that's how human communication and behavior works. Sometimes people overreact to the news; that's certainly no a reason not to report it. Stifling the facts to avert a potential negative popular reaction is a recipe for tyranny.

But out today, from the Conference Board, is an economic reading from those much less likely to be influenced by headlines and much more likely to know what's really going on: CEOs. CEO confidence has fallen to its lowest level since the end of 2000 -- right before the last recession. These folks are seeing corporate sales, profits and shipments as they're happening. The Conference Board results probably provide an early look at fourth-quarter corporate profits. Most profit results haven't been released yet. But in today's report, the CEOs who already know those results are telling us how disappointing they're likely to be. This is a matter of hard facts driving perceptions, not vice versa.

Jan. 15, 2008…The Conference Board Measure of CEO Confidence, which had declined to 44 in the third quarter of 2007, fell to 39 in the final quarter of 2007 (a reading of more than 50 points reflects more positive than negative responses). The last time the Measure fell below 40 was in the final quarter of 2000 when it fell to 31.

“CEOs’ confidence in the state of the U.S. economy continues to wither and is now at a seven-year low,” says Lynn Franco, Director of The Conference Board Consumer Research Center. “Given continued trouble in the housing and credit markets, persistent volatility in financial markets and increases in energy prices, it’s not surprising that confidence has eroded. Looking ahead, the majority of business leaders expect these lackluster economic conditions to prevail throughout the first half of 2008.

CEOs’ assessment of current economic conditions was considerably less positive, with just 7 percent of CEOs – down from 14 percent last quarter – stating economic conditions had improved. In assessing their own industries, business leaders were also less optimistic. Approximately 15 percent claim conditions are better, down from approximately 17 percent in the third quarter.

Looking ahead six months, the outlook has turned more negative. Currently, 16 percent of business leaders expect economic conditions to improve in the next six months, down from 20 percent last quarter. Expectations for their own industries are also less upbeat, with only 17 percent anticipating an improvement, down from 27 percent last quarter.

Posted by Jay Hancock at 10:36 AM | Permalink | Comments (0)
        

This just out. Legg is getting permanent financing through Kohlberg Kravis Roberts to buy back the Legg stock that Citigroup got when they swapped operations awhile back. KKR's Scott Nuttall will join Legg's board. This is smart. The stock owned by Citi was looming over Legg. Citi badly needs to raise capital. This is vastly preferable to Citi dumping the Legg stake on a third party. Legg stays in control, raises some capital -- which it, too, could use -- and forestalls a fire sale of at least some of the shares held by Citi -- unclear whether this is all of them.

From the press release:

-- KKR will purchase $1.25 billion of 2.5% non-voting, contingent convertible senior notes due in 2015. The notes are convertible, if certain conditions are met, into cash up to the $1.25 billion principal amount of the notes and, wiht respect to any excess conversion value, into either cash or shares of Legg Mason common stock, or a combination of cash and common stock, at the Company's option.

-- In a related transaction, Legg Mason has agreed to repurchase and retire Legg Mason preferred stock which is convertible into 2.5 million shares of its common stock that is currently owned by Citigroup Inc.

-- Chip Mason: "We carefully considered a number of options with a number of institutions, including accessing the public markets, and decided that this transaction, wiht a firm as respected as KKR, was the best option for our company and for our shareholders."

Posted by Jay Hancock at 6:20 PM | Permalink | Comments (0)
        

"While this is ChangeWave's fourth consecutive survey since June showing a consumer pullback, this is first time consumer spending growth has actually gone into the red," said Tobin Smith, founder of ChangeWave Research and editor of ChangeWave Investing, who added, "Frankly, the news doesn't look good on the spending front."

 The survey asked the 34% of respondents who say they'll be spending less to say why they planned to spend less. Better than one-in-three (36%) pointed to Inflation - which is 6-points more than the previous ChangeWave survey in November. Another 33% blamed Higher Energy Costs, 4 points higher than previously.

In a strong sign that consumers are worrying more about their nest eggs, 57% of those spending less say they're trying to improve their personal finances by reducing debt (32%) and saving more money (25%). These totals are also up 4 points since November. Nearly every consumer category looked at in the survey scored lower than a year ago in terms of spending going forward. This decline was led by restaurant spending, which has deteriorated 12 points compared to year-ago levels.

Posted by Jay Hancock at 12:25 PM | Permalink | Comments (1)
        

This is fun. Thanks to Peter Nguyen for calling it to my attention. The game, from the San Francisco Federal Reserve, has three variables: inflation, unemployment and short-term interest rates. You set rates on a regular basis. Newspaper headlines and graphs show what happens to inflation and unemployment as a result. There seems to be a heavily robotic Phillips Curve built into the program, but that's OK for amateurs like us. (Phillips' observation, that unemployment rises as inflation falls, doesn't follow the plot points as neatly as some might wish, and numerous other variables not included in the game can make the curve steeper or more gradual.)

In my stint as Fed chairman, I quickly got unemployment down to 1.5 percent -- an all-time low. Was the nation grateful? Did my name appear in headlines next to the word "maestro"? No. The president fired me, and I went back to my lucrative Goldman Sachs partnership in ignominy. Maybe the 17 percent inflation rate had something to do with it.

Posted by Jay Hancock at 11:23 AM | Permalink | Comments (0)
        

For a disturbing look at Maryland's horse-racing future, read Hanah Cho's terrific piece on Magna Entertainment and Frank Stronach in Sunday's paper if you missed it. A richly reported portrait of a dysfunctional company.

Posted by Jay Hancock at 10:24 AM | Permalink | Comments (0)
        

The phrase "jump the shark" has jumped the shark: It has appeared in a headline in The New York Times.
Update: I now realize that saying "jump the shark" has jumped the shark also jumped the shark a long time ago.

Posted by Jay Hancock at 10:29 PM | Permalink | Comments (0)
        

PJM Interconnection is the Pa.-based nonproft that manages the electrical grid from New Jersey to North Carolina. Terry Boston of the Tennessee Valley Authority is the new CEO, replacing Phil Harris, who left after PJM's market monitor accused PJM management of suppressing his suggestions that sometimes the market wasn't working to the best advantage for consumers. Good to see they got an engineering/operations guy instead of a Wall Street type. Karl Pfirrmann, who lost out to Boston but will stay at PJM, is an electrical engineer. Prior CEO Phil Harris had an engineering degree from West Point.

PJM NAMES TERRY BOSTON AS PRESIDENT & CEO

(Valley Forge, Pa. – Jan. 11, 2008) – W. Terry Boston, executive vice president of TVA’s Power System Operations, was named as PJM’s new president and chief executive officer, effective Feb. 4, the PJM Board of Managers announced today.

“We’re fortunate to have an executive of Terry Boston’s caliber, whose extraordinary career at the nation’s largest electricity wholesaler and public power provider has prepared him extremely well to lead PJM into the future. These are some of the most challenging times faced by our industry and Terry is the person to help us meet those challenges,” noted Board Chairman Howard Schneider.

The senior officer responsible for the Tennessee Valley Authority’s transmission and power supply network of 17,000 miles of transmission infrastructure, Boston will assume the post now held on an interim basis by Karl V. Pfirrmann, who will serve as PJM’s executive vice president.

“Karl’s leadership and professionalism have been crucial to ensuring stability and high performance during a very critical time of transition for PJM,” Schneider said. “His management skills and experience will play an important role in moving PJM forward.”

Boston joined TVA as a power supply engineer in 1972, and was named head of the Power Supply Group in 1980. Over the next 16 years, he directed three TVA divisions in succession: Transmission, Regional Operations, and Electric System Reliability. He was named senior manager of Pricing in 1996 to prepare TVA for deregulation, and he assumed his current duties in 1999.

As executive vice president, Boston led TVA’s efforts to develop formal arrangements with neighboring utilities and regional transmission organizations in creating a transmission network to preserve reliability and enhance wholesale electricity markets. TVA’s system has more than $4 billion in transmission investments and collects $600 million in annual transmission revenue. Under his leadership, the TVA transmission system has operated with 99.999 percent reliability for eight consecutive years.

Posted by Jay Hancock at 2:05 PM | Permalink | Comments (1)
        

Baltimore's South River Consulting is not a huge electricity player. It's an independent energy advisor helping commercial clients negotiate a deregulated electricity market. But it has a small account with PJM Interconnection, the grid manager for the Mid-Atlantic region. And because of this, the recent $80 million default by Power Edge LLC will cost South River $20,000, says principal Bert Wilson. As I wrote Wednesday, Power Edge's goof and lack of collateral means the rest of the PJM system -- including Baltimore Gas & Electric -- has to make up the difference. Plenty of people are really steamed. Wilson is a passionate advocate of free markets, but he thinks the Federal Energy Regulatory Commission really messed up. Here is his email to me this morning:

I'm really incensed by this. By the way we have a PJM account that we were just getting ready to use (never had any activity) and this is going to cost us $20,000 directly. FERC really screwed up. Everybody should have to be secured just like at NYMEX or any other market. Speculators are a necessary function of the market as they provide liquidity and take on risk position, but they should have to bear the full burden of risk they took and not send it back to those who wanted to avoid the risk.

However; you may note there is an underlying aversion for people in the
electric market (top to bottom) to want to deal with this like any other
commodity. I've been pushing quietly for a couple years on this issue
and am on the credit committee. There is a large amount of unsecured
exposure in PJM that is granted simply based on investment grade
ratings. Note how fast Enron collapsed. Even big companies want the
float and don't want to fully deal with this on a commodity level. At
the small end (you and me) we expect a commodity (electric) to be
delivered to us and we will pay for it later, couple months, maybe.
Poor financial discipline.

As I know I mentioned to you before, you
don't get to leave the grocery store with your food without
paying...it's probably notable that margins on food and commodity
electric are actually similar. As an owner of a small oil company we
cannot drop off a load of oil without pay or we would be out of business
in no time. The real underlying problem unrealistic expectations about
how this business should work. FERC needs to recognize this too as any
other trading exchange has...everybody needs to provide suitable
security and credit is not an issue of the exchange but one between you
(participant) and your bankers/owners.

Posted by Jay Hancock at 12:20 PM | Permalink | Comments (0)
        

Maybe city officials really DID misplace/disregard subpoenas that originally arrived in their offices in November. Subpoenas! From the state prosecutor! But if they can lose your tax-assessment appeal, maybe they can lose a solemn demand for evidence from a high law enforcement authority. Whatever the reason for the delay, it could have threatened the integrity of the evidence at the Finance Department and Board of Estimates.

From today's story on new (sort of) subpoenas at City Hall by John Fritze:

City officials said the subpoenas were served in November but did not reach Mayor Sheila Dixon's Finance Department or the offices of the Board of Estimates until this week because of a mistake by city officials. Their existence has not previously been disclosed publicly.

City Solicitor George Nilson said the subpoenas were issued in tandem with a subpoena served on the Baltimore Development Corp., the city's development agency. Though he did not disclose their contents, Nilson said all three subpoenas seek similar information.

Posted by Jay Hancock at 10:56 AM | Permalink | Comments (3)
        

People having trouble making mortgage payments no doubt are maxing out credit cards to obtain cash. They're paying 19 percent in credit card debt, in other words, so they can meet mortgage obligations of 9 percent or whatever. This can have only one effect.

Today Capital One and American Express both warned of deteriorating profits. Capital One, according to AP, said that

increased loan delinquencies and additional legal reserves in the fourth quarter will cause the company to report a fourth-quarter profit of 60 cents per share and full-year earnings of about $3.97 per share, below its prior forecast of "about $5 per share."

American Express, said AP,

expects slower spending and more missed payments on credit card bills to hamper its profit throughout 2008, the company said Thursday.

While rich people are still doing fine, American Express said the slumping housing market has begun to take its toll on the American consumer. Charges on the company's roughly 84.7 million cards began to tail off in December, American Express said, and more clients failed to repay their debts.

The company plans to reserve $440 million for the fourth quarter, preparing for loans that are currently overdue.

Posted by Jay Hancock at 5:38 PM | Permalink | Comments (2)
        

From the Wall Street Journal, 10 minutes ago. More here from Reuters. Countrywide stock spikes $3 on the news:

Bofa In Talks to Buy Countrywide By DAMIAN PALETTA, VALERIE BAUERLEIN and JAMES R. HAGERTY January 10, 2008 2:37 p.m.

Bank of America Corp. is in advanced talks to acquire struggling Countrywide Financial Corp., according to people familiar with the situation.

It isn't clear how quickly a deal might be struck, but two people familiar with the matter said it could occur very soon. It also is possible that an agreement could be delayed or fall apart altogether.

The market value of Countrywide has plunged to about $3 billion, which represents about two months' profit for Bank of America. The Charlotte, N.C., bank paid $21 billion cash over the summer for LaSalle Bank of Chicago.

Posted by Jay Hancock at 2:45 PM | Permalink | Comments (0)
        

The taxes are always lower across the border. At least that's what anybody arguing against a tax increase always claims. Here's a real estate agent being quoted in a budget story Tuesday's News Journal of Wilmington:

"Delaware already has among the highest transfer taxes in the country," said Camilla Conlon, a real estate agent with Jack Lingo Inc. in Rehoboth Beach and president of the Delaware Association of Realtors. "To add another quarter percent for us will drive buyers to Maryland, Virginia, Pennsylvania."

Maryland transfer tax rates run as high as 2 percent, if you combine state and local charges. In Delaware they're as high as 3 percent. When you have no sales tax, you have to make up the revenue somehow.

Posted by Jay Hancock at 9:00 AM | Permalink | Comments (4)
        

Maryland's sales tax went from 5 percent to 6 percent on Thursday. (Although often it's a little more than 6 percent. See this post.) A few stores did not make a smooth transition, apparently. I got a couple emails from readers who said they were overcharged a few cents at Home Depot stores. One was the Whitemarsh store. I queried Home Depot about this.

Spokeswoman Anne Manning said that there was a problem at "a small few" stores and that it has been fixed. "We were able to quickly work out any issues with our point-of-sale process by Friday," she says. "We have not received any further customer complaints and believe the issue is resolved. If you hear otherwise, please let me know."

If YOU hear otherwise, please let ME know.

Posted by Jay Hancock at 11:40 AM | Permalink | Comments (0)
        

Today's column is about the ~$80 million default by Power Edge, an affiliate of Tower Research Capital, a New York hedge fund. The losses will be spread among Baltimore Gas & Electric and other member of PJM Interconnection, the Mid-Atlantic electricity grid, driving up costs for customers.

The column recounts how PJM and big electricity users urged the Federal Energy Regulatory Commission to require Power Edge and similar entities to post adequate collateral to avoid just such an outcome. Here is FERC's order on Oct. 26 denying the full protection PJM sought. Here is PJM's Dec. 26 announcement of the default. Merry Christmas.

Posted by Jay Hancock at 11:02 AM | Permalink | Comments (0)
Categories: BGE/electricity
        

Angela Hartley exercised incentive stock options when working for a California biotech company in 2000 and so incurred "phantom income" on stock that later declined. She is one of thousands facing the ISO-AMT pitfall that Congress so far has refused to completely fix, despite huge efforts last month to get the Senate to do the right thing. I wrote about this last week. After reading the column, she emails:

I flew to Washington DC on borrowed frequent flyer miles right before the final votes were taken. I spent two days walking the halls of Capitol Hill putting a face of reality on the proposed legislation. I received a lot of sympathy but in the end, political wrangling defeated attempts to attach this legislation to the AMT patch. If Congress believes it is a travesty for common taxpayers to pay an additional few thousand as a result of the regular AMT, how can those of us owing hundreds of thousands of dollars of AMT be ignored? We are hanging on to hope based on the dedication and support from a growing number of Representatives and Senators, but we desperately need Congress to pass legislation to end the nightmare once and for all.

I lost my home, my retirement, have paid over $500,000 to date (way over the original amount owed) and still am fighting the IRS for the remaining interest of $115,000 which grows faster than I could pay it. Meanwhile, after years of letter campaigns, meetings, and (yes) begging, we still cannot get a legislative fix or even an abeyance from IRS harassment.

More on Hartley's story here and here.

Posted by Jay Hancock at 8:26 AM | Permalink | Comments (1)
        

It's the worst-case privacy nightmare. Hackers get into the Internal Revenue Service's computer system, which has incomes, Social Security numbers and other detailed financial information on practically every American. It hasn't happened yet, but the Government Accountability Office is saying today that the IRS still has "pervasive weaknesses" in security.

IRS made limited progress toward correcting previously reported information security weaknesses... About 70 percent of the previously identified information security weaknesses remain unresolved. For example, IRS continues to, among other things, use passwords that are not complex, grant excessive access to individuals who do not need it, and install patches in an untimely manner.

... Other significant weaknesses in various controls continue to threaten the confidentiality and availability of IRS's financial processing systems and information, and limited assurances of the integrity and reliability of its financial and taxpayer information. IRS has not consistently implemented effective controls to prevent, limit or detect unauthorized access to computing systems from within its internal network. For example, IRS did not always (1) enforce strong password management for properly identifying and authenticating users (2) authorize user access to only permit access needed to perform job functions (3) encrypt sensitive data (4) effectively monitor changes on its mainframe, and (5) physically protect its computer resources...

Accordingly, GAO has reported a material weakness in IRS's internal controls over its financial and tax processing systems.

Posted by Jay Hancock at 2:00 PM | Permalink | Comments (0)
        

The Accrued Interest blog, which usually confines its attention to the bond market, can't figure out why stocks haven't fallen even more. When interest rates on corporate bonds (corporate spreads)  diverge from interest rates on Treasuries, as they are doing now, the bond market expects a downturn. Yet there is no signal of comparable magnitude from stocks. Here is Accrued Interest:

A disturbance in the Force

I don't comment about the stock market very often, but something isn't right. Take a look at the chart below. The S&P 500 is in red, charted on the left axis. Corporate bond spreads are blue and are inverted on the right hand axis. Thus when the blue line "falls" that should mean the economic picture is deteriorating. From my seat, watching corporate bond spreads widen dramatically over the last 6 months, you'd certainly think recession is on the horizon. In fact, if you draw a horizontal line from where we are now in corporate spreads, you'd see that we've rarely been wider than current levels. We are wider than the worst points during the 1991 recession and 2001 recession, although we did touch a bit wider during 2002. And yet the stock market is very near all-time highs. I did this graph up through 12/31, so the S&P would be a bit lower. But the basic story would be exactly the same: the stock and bond markets don't agree about where we're going next.

Posted by Jay Hancock at 9:45 AM | Permalink | Comments (0)
        

The Baltimore Examiner weighed in last week on a study from the American Legislative Exchange Council on state-by-state tax competitiveness. The study found that many states with low taxes and low wages have experienced population increases and economic growth, and it claimed one was caused by the other. The Examiner's conclusion, expressed on the editorial page, was different than mine.

Examiner:

Here’s a New Year’s resolution for Maryland and Virginia state legislators: Before you leave for Annapolis or Richmond, get a copy of “Rich States, Poor States” from the American Legislative Exchange Council and learn how they got that way.

In this must-read book, former Reagan economic adviser Arthur Laffer and Stephen Moore of The Wall Street Journal analyze the real-life consequences of the tax and spending policies in all 50 states.

Laffer and Moore also explain why a record 8 million Americans — more than 1,000 per day — packed up all their worldly possessions in 2006 and moved to high-growth states, which more often than not are those with the lowest tax burdens.

Hancock:

Virginia crushes Maryland in Economic Ranking of All 50 States" was the provocative headline on last week's announcement by a pro-markets, pro-limited government research group.

That's true - if you don't measure poverty, education, business creation, household income, homeownership growth, venture-capital investment, broadband access, major league sports, cultural opportunities, sprawl and pollution.

Other than those areas, in which Maryland does better than Virginia, this is a terrible state in which to live, raise a family, hold a job and own a business.

As you might guess, the study by the American Legislative Exchange Council gave states favorable marks for low taxes, low wages and not much else.

But low taxes aren't everything, or else Mississippi would be a thriving corridor of biotech startups and investment banks. Economies need reasonable taxes and investment in brains, bodies and infrastructure.

Posted by Jay Hancock at 6:11 PM | Permalink | Comments (4)
        

Crude oil has hit $100 a barrel, sending heating-oil prices to new highs. But natural-gas prices have dipped thanks to large inventories and the absence of a bad cold snap. Baltimore Gas & Electric's January natural-gas commodity price is 93.64 cents per therm -- lower than the December price of 95.58 cents and far lower than January 2007's $1.0373 and January 2006's $1.2405. If you're a BGE natural-gas customer and you didn't sign up for a (higher) fixed price contract with an alternative vendor such as Washington Gas Energy Services, 93.64 cents is your January price -- plus costs for delivery etc. Not that it's any consolation (93 cents is still up sharply from a few years ago), but your oil-burning neighbors are probably paying more to heat their houses than you. Because natural gas isn't as easily transportable as oil or usable in as many applications, their prices sometimes diverge.

Posted by Jay Hancock at 10:23 AM | Permalink | Comments (1)
Categories: BGE/electricity
        

Today the Labor Department reported employers added only 18,000 jobs last month -- a disappointing total not far from recession, in which the nation sheds jobs instead of adding them. This is only an estimate however, and in coming months the government will refine the figure and eventually pin it to reality by counting unemployment-insurance accounts. Many economists complain that the actual job-growth figures are often not very close to the initial estimates. The estimates are at special risk of being wrong at turning points in the economy -- beginnings or ends of recessions.

So I was curious about how good a job the Labor Department did at counting jobs during the last recession, in 2001. The answer is, pretty good. A comparison of the preliminary estimates and the final figures shows substantail revisions but not much change in the overall trend, which was steady job loss through the year. Conclusion: We should take the preliminary estimates quite seriously, as the stock and bond markets are today.

2001 Recession: March--November

Initial job growth estimate / Final number

January: +269,000/ -13,000
February: +135,000/ +80,000 (New York Times headline: "Job Growth Unexpectedly Strong, Easing Recession Fears")
March: -86,000/-47,000
April: -223,000/-295,000
May: -19,000/-32,000
June: -119,000/-130,000
July: - 42,000/ -117,000
August: –113,000/ -134,000
September: -199,000/ -255,000
October: -415,000/ -330,000
November: -331,000/ -308,000
December: -124,000/ -162,000

Posted by Jay Hancock at 12:45 PM | Permalink | Comments (0)
        

Maryland's higher, 6 percent sales tax took effect Thursday and drew plenty of comment. "Do I give the extra penny to you or do I send it right to Gov. O'Malley?" somebody queried the cashier as I stood in line to buy breakfast. Until Thursday Maryland sales tax had been 5 percent.

Forgotten, however, is that the old rate was actually often more than 5 percent, and the new rate will often be more than 6 percent. Why? Unlike many states, Maryland rounds the tax up to the next-highest penny even if a strict, 6 percent calculation says only a third or a fourth or a 10th of an extra penny is owed.

So if you buy a $1 worth of nails, the 6 percent tax is 6 cents, naturally. But if you buy $1.01 worth of nails, the "6 percent" tax is 7 cents -- at least in Maryland, where legislators sometimes wonder why the state gets a reputation for being tax-greedy. Actually, of course, a 7-cent tax on a $1.01 sale equals 6.93 percent. I didn't hear anybody in Annapolis talking about raising the sales tax to 6.93 percent.

This is not how your third-grade teacher taught you to round numbers. Most states use "mathematical rounding," in which the tax isn't bumped up to the next penny unless at least half an extra penny is owed. Maryland's little scheme nets it an extra $18 million a year, the comptroller's office has calculated.

Sometimes tax increases are necessary, and sales taxes aren't a bad way to raise revenue. But it would have been nice if, even as they raised the rate, legislators had ended the fudge and make 6 percent mean what it says.

Posted by Jay Hancock at 10:42 AM | Permalink | Comments (10)
        

Bloomberg's John Berry, co-dean of the nation's economics journalists (many share the title: Allan Sloan, Floyd Norris, David Wessel), says the economy will avoid going into reverse. I think he might be right.

Berry:

Some analysts were predicting a recession would hit the U.S. economy in the fourth quarter as consumers, hurt by falling house prices and the high cost of gasoline, cut spending.

It didn't happen, and there's no reason to think it's going to this year either.

Economic growth will be slow in the first half of 2008, and the unemployment rate, which was still a low 4.7 percent in November, is likely to rise. Housing sales and construction will continue to be a drag for months to come.

On the other hand, economic growth should accelerate in the second half of the year as financial-market conditions and the U.S. trade deficit improve, the housing drag lessens and the effect of the 100-basis-point cut in the Federal Reserve's overnight lending-rate target in recent months begins to kick in.

Some optimistic analysts believe growth might rebound to a 3 percent rate in the second half.

Given the turmoil in financial markets, the risk of a recession is hardly zero. Nevertheless, the current state of the economy simply doesn't show the signs usually associated with one.

In a forecast released today, Mickey D. Levy, chief economist at Banc of America Securities, said most recessions have begun after the Federal Reserve raises interest rates and ``generates a slump in aggregate demand.''

``As a result, expansion peaks tend to be characterized by overhangs in inventories, too many employees and excess capital stock relative to output,'' Levy said.

Posted by Jay Hancock at 10:59 AM | Permalink | Comments (0)
        

Quote of the day:

"Our greatest triumph is usually not doing, keeping things in balance, refraining from the act we can't redeem."

-- Sam Tanenhaus, Literature Unbound, 1986

This is at the core of the conservative ethos. (Note he said "usually"!) Such wisdom, or at least the ability to express it, is often not obtained until middle age or later. So it's interesting that Tanenhaus, now editor of the New York Times Book Review and Week in Review sections, published this when he was 31.

Posted by Jay Hancock at 10:22 AM | Permalink | Comments (0)
Categories: Quotes of the day
        

Quote of the day:

"Invest at the point of maximum pessimism."

-- Sir John Templeton, who bought every stock trading below a dollar on the New York Stock Exchange when Hitler invaded Poland.

Posted by Jay Hancock at 3:55 PM | Permalink | Comments (0)
Categories: Quotes of the day
        

From Associated Press:

Crude oil prices soared to $100 a barrel today for the first time, reaching that milestone amid an unshakeable view that global demand for oil and petroleum products will outstrip supplies.

Surging economies in China and India fed by oil and gasoline have sent prices soaring over the past year, while tensions in oil producing nations like Nigeria and Iran have increasingly made investors nervous and invited speculators to drive prices even higher.

Violence in Nigeria helped give crude the final push over $100. Bands of armed men invaded Port Harcourt, the center of Nigeria's oil industry Tuesday, attacking two police stations and raiding the lobby of a major hotel. Word that several Mexican oil export ports were closed due to rough weather added to the gains, as did a report that OPEC may not be able to meet its share of global oil demand by 2024.

Light, sweet crude for February delivery rose $4.02 to $100 a barrel on the New York Mercantile Exchange, according to Brenda Guzman, a Nymex spokeswoman, before slipping back to settle at a record close of $99.62, up $3.64.

Posted by Jay Hancock at 12:59 PM | Permalink | Comments (0)
        

Debt analysts at Gimme Credit have long been known for the acerbic, snarky aside even as they deftly steer investors away from dumb bond investments. This one on Baltimore's Sinclair Broadcasting is pretty brutal:

Sinclair Broadcasting says TV stations are too expensive, so it's diversifying by buying non-TV investments on the cheap. So in December, while the rest of us were shopping for gifts, Sinclair was out buying investments in apartment buildings, a shopping mall, an alarm company and a fund that lends to small businesses. There must be some coherent strategy here but this random buying spree makes management look like it's easily distracted by bright, shiny objects.

Posted by Jay Hancock at 12:30 PM | Permalink | Comments (0)
        

What I learned/had reinforced from thousands Ron Paul supporters (or people pretending to be Ron Paul supporters or people interested in what Ron Paul supporters or those pretending to be Ron Paul supporters had to say), after I quoted/linked to Megan McArdle's amusing riposte to Ron Paul supporters who keep telling her the federal income tax is illegal:

1. When blogging, quoting and/or linking to somebody else's intellectual property is often more effective in drawing traffic and is certainly easier than coming up with your own intellectual property.

2. Many people are unaware of the convention in which bloggers indent quoted material to indicate it was written by somebody else. When Jay quotes Megan saying: "I wish that Ron Paul supporters would stop informing me, in ALL CAPS, that various current policies are UNCONSTITUTIONAL..." readers attribute this to Jay.

3. Sun blog czarina Mary Hartney knew what she was doing when she made sure Sun blogs were part of the Google News universe. (This is an interesting situation. Most independent blogs -- even very popular ones -- appear not to be in Google News, so MSM blogs have an advantage here.)

4. Some Americans who appear to be on the right-hand side of the political spectrum are just as angry about the war in Iraq as those on the left.

5. On the Internet, nobody knows you're a dog -- or a troll pretending to be a Ron Paul supporter. Would a real Ron Paul supporter have written this? "With a name like Hancock, you should really appreciate our liberties and our Constitution and rights. I recommend that you read a book by someone that can actually wright."

6. Many (probably most) Ron Paul supporters understand that the federal income tax is legal and constitutional. Many Ron Paul supporters also want to scrap the federal income tax.

7. Many Americans, however, appear to be innocent of ideas of settled law, legal precedent, the authority of the nation to amend the Constitution and the authority of the courts to interpret constitutional amendments. For example: What matters, some believe, is not the definition of "incomes" in the 16th Amendment as held by countless federal judges, but what THEY think "incomes" means or what they claim those who wrote the amendment thought it meant.

Posted by Jay Hancock at 11:00 AM | Permalink | Comments (58)
        

This is no surprise. The deal was supposed to happen months ago. PHH's vehicle fleet-management unit is based north of Baltimore. PHH Chairman Buzzy Krongard, who worked for George Tenet at the CIA, has had a busy 2007. First the publicity over his would-be affiliation with Blackwater USA and whether he told his brother, Cookie, who was inspector general for the State Department, about the link. Then questions about the destruction of CIA interrogation videotapes (done after Krongard had left, but he is talking about it on the record). And PHH. From Bloomberg:

PHH Corp., the New Jersey-based mortgage and vehicle leasing company, scrapped its $1.8 billion sale to General Electric Co. and Blackstone Group LP because Blackstone failed to get financing for the transaction.

GE agreed on March 15 to buy PHH, sell the mortgage division to New York-based Blackstone and keep the vehicle- leasing unit. The acquisition price was $31.50 a share. PHH said Sept. 17 that JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. told Blackstone they may fall $750 million short in funding the private equity firm's part of the deal.

Blackstone ``was not able to obtain the requisite debt financing,'' PHH said today in a Business Wire statement. ``The board will determine in due course whether to continue to explore the company's strategic alternatives.''

PHH said it asked for $50 million from Blackstone as a termination fee, in terms of the agreement. GE, which is based in Fairfield, Connecticut, was to make the acquisition of the vehicle-leasing unit through its commercial finance division.

PHH, based in the Philadelphia suburb of Mount Laurel, New Jersey, has provided mortgages and related services such as billing for other companies to offer under their own brands, including American Express Co. and Charles Schwab Corp.

``There can be no assurance that any further exploration of strategic alternatives that the board may determine to undertake will result in any agreements or transactions,'' PHH said in its statement today.

Posted by Jay Hancock at 12:20 PM | Permalink | Comments (0)