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Corporate America Is Sitting On The Solution To The Jobs Crisis: Report

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Saw a B-O-A commercial the other day. A couple, portrayed as somewhat Greek, years and years ago found a hotdog cart they wanted to buy and start a business, went to BOA and got the money. I thought, that was years ago, what would BOA do today ?

They make it like anyone could go in today and get the cash to start up a business which isn't the case unless you have the money to back the loan, in which case who needs to borrow ? I doubt a minority or even myself with a home and more could get a loan today with all the people I know telling me how difficult it is to get a mortgage.

 

Then I saw this study today. If true, why would they hold up the prosperity of the nation ?

 

 

 

WASHINGTON -- Corporate America is sitting right on top of the solution to the nation's employment crisis, according to a new report from a group of University of Massachusetts economists.

 

If America's largest banks and non-financial companies would just loosen their death-grip on a chunk of the $3.6 trillion in cash they're hoarding and move it into productive investments instead, the report estimates that about 19 million jobs would be created in the next three years, lowering the unemployment rate to under 5 percent.

 

"There is no reason that the U.S. needs to remain stuck in a long-term unemployment crisis," Robert Pollin, lead author of the report and co-director of the Political Economy Research Institute, said in a statement accompanying the report's release Tuesday.

 

"Getting the banks and corporations to move their hoards into productive investments and job creation requires carrots and sticks -- policies such as a new round of government spending stimulus as well as taxes on the banks' excess reserves -- that can both strengthen overall market demand and unlock credit markets for small businesses," Pollin said.

 

Even as the nation continues to confront massive unemployment, the nation's biggest companies have been hoarding cash. Banks have been able to borrow the money essentially for free from the Federal Reserve, so why not? In fact, according to the Federal Reserve (Table L.109, line 28), banks are sitting on $1.6 trillion in reserves -- about 80 times the $20 billion they held in 2007.

 

Meanwhile, non-financial companies are keeping their profits liquid, rather than plowing them back into investments, to the tune of about $2 trillion.

 

Together, that amounts to almost a quarter of the U.S. gross domestic product.

 

Pollin and his colleagues figured that even accounting for a massive safety cushion, at least $1.4 trillion of those reserves should be considered excess.

 

Meanwhile, the report notes, small business are having a hard time getting anyone to lend them money.

 

The report concludes that investing the $1.4 trillion in private businesses would generate an enormous surge in employment. It recommends that the money in particular be channeled toward "small businesses that face larger than normal credit constraints; more labor intensive businesses; and businesses that generate large social as well as private benefits."

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In the article it says this;

 

Meanwhile, non-financial companies are keeping their profits liquid, rather than plowing them back into investments, to the tune of about $2 trillion.

 

I think the banks are so leveraged (if that's the correct term) with worthless transactions they are amassing money in case of a run on the banks ?

 

This may have something to do with it;

 

Derivative contracts total about three-quarters of a quadrillion dollars in "notional" amounts, according to the Bank for International Settlements. These contracts are tallied in notional values because no one really can say how much they are worth.

 

But valuing them correctly is exactly what we should be doing because these comprise the viral disease that has infected the financial markets and the economies of the world.

 

Try as we might to salvage the residential real estate market, it's at best worth $23 trillion in the U.S. We're struggling to save the stock market, but that's valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion.

 

Compare any of these to the derivatives market and you can easily see that we are just closing the windows as a tsunami crashes to shore. The total value of all the stock markets in the world amounts to less than $50 trillion, according to the World Federation of Exchanges.

 

To be sure, the derivatives market is international. But much of the trouble we're in began with contracts "derived" from the values associated with U.S. residential real estate market. These contracts were engineered based on the various assumptions tied to those values.

 

Few know what derivatives are worth. I spoke with one derivatives trader who manages billions of dollars and she said she couldn't even value her portfolio because "no one knows anymore who is on the other side of the trade."

 

Derivatives pricing, simply put, is determined by what someone else is willing to pay for the contract. The value is based on an artificial scenario that "X" will be worth "Y" if "Z" happens. Strip away the fantasy, however, and the reality of the situation is akin to a game of musical chairs -- without any chairs.

 

So now the music has finally stopped.

 

That's why stabilizing the housing market will do little to take the sting out of the snapback we are going through on Wall Street. Once people's mortgages were sold off to secondary buyers, and then all sorts of crazy types of derivative securities were devised based on those, and those securities were in turn traded on down the line, there is now little if any relevance to the real estate values on which they were pegged.

 

We need to identify and determine the real value of derivatives before we give banks and institutions a pass-go with more tax dollars. Otherwise, homeowners will suffer as banks patch up the holes left in their balance sheets by the derivatives gone poof; new credit won't be extended until the raff of the old credit is put behind.

 

It isn't the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished -- trading phony instruments to the tune of $700 trillion.

 

Let's figure how to get out from under that. Then maybe the capital will begin to flow again through the markets. Right now, this elephant isn't just in the room, it's sitting on us.

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Wait a second, in addition to the banks getting bailed out Obama put 800 billion out there to create jobs. We know the banks are sitting on their bailout but who is sitting on the additional 800 billion Obama issued?

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Companies are hoarding cash because they feel they HAVE to. 

 

They all experienced the credit crunch of 2008 and vowed never to live through that again.

 

Understood (though I have always believed "have to" as the most common lie told by people-it is also victimy), but was not a significant part of the intent of the bailout to loosen credit markets?

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Understood (though I have always believed "have to" as the most common lie told by people-it is also victimy), but was not a significant part of the intent of the bailout to loosen credit markets?

 

It was....I don't know who believed that though

 

I sure didn't

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Corporations sitting on piles of cash? Not really

 

NEW YORK (AP) – Hardly a day goes by without some politician or pundit pointing out that companies are hoarding cash — roughly $3 trillion of it. If only they would spend it, the thinking goes, the economy might get better.But the story is not as simple as that. Though it seems to have escaped nearly everyone's notice, companies have piled up even more debt lately than they have cash. So they aren't as free to spend as they may seem.

 

"The record cash story is bull market baloney," says David Stockman, a former U.S. budget director.

 

U.S. companies are sitting on $358 billion more cash than they had at the start of the recession in December 2007, according to the latest Federal Reserve figures, from June. But in the same period, what they owed rose $428 billion.

 

Before the recession, you have to go back at least six decades to find a time when companies were so burdened by debt.

 

Companies borrow money all the time, of course. They borrow to build factories, cover expenses, even make payroll. The problem: Debt doesn't go away. A business can cut costs during a recession. But it can't just shred the IOUs.

 

Heavy debt means companies could have to dip into those reserves of cash to pay their lenders. And when interest rates eventually go up, companies will have to spend more money just to service the debt.

 

In the last recession, which ended in June 2009, small businesses that depended on credit cards and bank loans got slapped with higher rates just as sales began to drop. Some got cut off all together.

 

Peter Boockvar, equity strategist at Miller Tabak & Co., says business debt is too high even if the U.S. manages to stay out of a second recession. If economic growth doesn't pick up, "they'll be more bankruptcies, and more defaults," he predicts.

 

Even if companies used cash to pay off what they owe, they would be left with plenty of debt — in fact, an amount equal to 83% of all the goods and services they produce in a year, according to Federal Reserve data for incorporated businesses.

 

In March 2009, the low point of the Great Recession, companies owed 95%. To stay afloat, companies tapped credit lines at banks, increasing debt while they were bringing in less money. They burned through cash to meet expenses.

 

Before that, though, it has been at least six decades since companies owed so much money as a share of what they produce, says Andrew Smithers, a London consultant who has written extensively about debt.

 

In short, American business is awash in cash like a man who borrowed from a bank is rich. He may have plenty of money in his pocket, but he still has to return it.

 

Already, there are signs that companies are struggling to pay off debt. Since this summer, buyers of bonds issued by deeply indebted companies — called junk bonds because they're so risky — have been demanding 14% more in annual interest. Some companies haven't been able to sell bonds at all.

 

The financial picture is at least better for the biggest, publicly traded firms. Non-financial companies in the Standard & Poor's 500 are making more money than ever and adding to their cash fast. It's middle-sized and small companies that appear to be most vulnerable.

 

"There are almost two economies out there — the big S&P 500 companies, then everyone else," says Michael Thompson, managing director of S&P's valuation and risk strategies.

 

But this sunny picture for the largest companies is marred by debt, too. Since the start of the recession, S&P 500 companies have borrowed an additional 44 cents for every additional dollar they've hoarded in cash. For many companies, debt has risen more than cash.

 

Drugmaker Pfizer added $3.5 billion to cash from the start of the recession. But it added $28 billion of debt, according to FactSet. PepsiCo added $22 billion more debt than cash. Hewlett-Packard added $16 billion more, Wal-Mart $13 billion.

 

The lack of fear about debt is an about-face from the recession. Back then, Wall Street was worried that many companies had borrowed too much during the boom, and would suffer for it in the bust.

 

The expectation was that this "wall of debt" would cause some companies to fail. Others would struggle but ultimately pay their lenders. Either way, borrowing would ultimately fall.

 

But that didn't happen. Instead, the Federal Reserve slashed benchmark interest rates to near zero, lowering yields for conservative investments like money market funds and pushing frustrated investors into riskier corporate bonds offering higher returns. As demand for those bonds rose, businesses were able to issue more of them than ever, and use the proceeds to pay off old ones coming due soon.

 

"The Fed encouraged debt refinancing, but we need debt extinguishment," says Boockvar. "It's bought time, but it doesn't deal with the fundamental problem."

 

That problem could upend the expectations of investors. Many are banking on companies using cash to buy back more of their own stock, which might lift sagging prices.

 

Smithers thinks high debt will eventually force companies to do the opposite — cut buybacks.

 

And given the big role these purchases play in the market, that could wallop stocks. Smithers says that buybacks by non-financial companies over the past decade have more than compensated for the wave of selling by individuals and mutual funds.

 

The problem with debt is you don't need an actual recession to cause trouble for companies, just the fear of one. Spooked lenders can hike rates on new loans needed to pay off old ones, or cut companies off completely.

 

For companies issuing those risky junk-rated bonds, that day has already arrived.

 

A maker of private planes in Kansas saw rates on its bonds jump 40 percent in just a month. And on Wednesday, a shipping company in Florida filed for bankruptcy because it was unable to borrow to pay off old loans.

 

"They thought, 'We survived that one and we won't have another for 10 years,'" says Martin Fridson, global chief credit strategist at BNP Paribas Investment Partners, speaking of the Great Recession. "But the economy is not out of the woods yet."

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Quote:

Originally Posted by moonbat View Post

 

Understood (though I have always believed "have to" as the most common lie told by people-it is also victimy), but was not a significant part of the intent of the bailout to loosen credit markets?

 

Well, as far as I understand the "bailouts" (like TARP)... these were directed at recapitalizing banks and other financial institutions.  This was to address the immediate solvency problem, not necessarily to get banks to lend. 

 

 

 

The kinds of companies being discussed that are described as hoarding cash in the article are non-financial corporates ... (manufacturing, retail, industrial, etc).  The cash hoarding is basically an acknowledgement of financial uncertainty and concern that bank and other financing isn't available.  In other words, as a widget maker, we better hold 2x the cash we normally hold, because we can't get a line of credit or issue short term IOU's like commercial paper in this environment.  Big multinational companies might not have this problem as much as the small business guys.

 

 

 

The behavior of banks (as distinct from non-bank/non-financial companies) hoarding cash (prior to QE2.5) was driven, ironically, by Federal Reserve's low interest rates via the so-called carry trade.  Banks could borrow money from the fed at 0.25% and then invest it into U.s. treasuries yielding 2.5% (at the time), thereby earning a spread of 2.25% on huge sums.

 

 

 

Because of Dodd-Frank, US banks have to have more capital on hand as a percentage of total bank assets- so now they have to have more cash.  They can get cash by 1) raising capital, or 2) shrinking their balance sheets.  Unfortunately for a lot of bank employees, banks are shrinking (option #2), and that requires less people, so layoffs are occurring as we speak.

 

 

 

I kinda have a beef with the thrust of the article - if companies would only spend, then the economy would pick up.  That would be pushing on a string, in my opinion - remember 2/3 of our economy is based on people buying stuff.  The problem is, people aren't buying stuff as much as they used to because 1) they're in debt, 2) they have no job, 3) everyone's worried about the future, so keeping a tight hold on purse strings.

 

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Quote:

Originally Posted by curl View Post

 

Yet the real question is how profitable in todays current environment are they ?

 

Big difference between growing profits by growing sales (as a result of making a better widget or a growing economy), vs. growing profits by cutting expenses only.

 

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