It can be frustrating each day on the program to deliver a seemingly constantly stream of negative news about the state of the economy and American business. Gas prices are on the rise, home prices are on the decline.   Food costs are soaring, and its nearly a certainty that taxes are going to go higher.   Reason to be upset?  Perhaps.  Reason to be unhappy?  Perhaps not.

The next time you cringe paying $4/gallon for gas, be glad you aren’t in Europe.   Europe has been dealing with much higher gas prices for years.  In many countries the price for fuel is more than double what we pay here.   They also pay more in income tax and cannot deduct their mortgage interest on a home, one of the biggest tax breaks we have.   Even relatively free health care and education don’t balance it out.    In all, Europeans bring home less after-tax pay than Americans.

So how then is it that in a survey of nationwide happiness, America ranked 16th while the top 10 was dominated by European nations such as Denmark and Austria.   Could it be we have focused too much on the the negative news and forgot what we do have?   Have we just grown too used to the good times?

So for today, I am going to focus on the positives we don’t hear enough about:

1. Unemployment may be up, but the employment rate is still more than 94%.   It’s around 98% for those with a college degree.

2. Home prices are falling, but in most areas of the country are still much higher than they were even a few years ago.

3. Foreclosures are rising, but around 98% of homes and mortgages are current.

4. Taxes may rise, but they are still going to be among the lowest in the industrialized world.

5. The Dow is down, but only back to 2006 levels.  We are 2-thousand points above levels 5 years ago.

6. The dollar is weak, but unless you are traveling to Europe do you really care?    The weak dollar is also helping American manufacturers like Caterpillar (NYSE: CAT) and Bucyrus (NASD: BUCY) sell their goods around the world.

Let’s remember we have been here before.   Economic cycles come and go.   We have also been blessed not to fight a drawn out land-based war on our soil since 1865, and with a foreign enemy since 1814.   Europe has seen two massive wars on its continent in the past 100 years.

I am certainly not trying to be a pollyanna.   There are problems out there, and everyone’s situation is individual.  Life can be hard and not always fair.   But maybe we can learn from Europe.   Just because we pay more for gas and have an economic slowdown, we still live in a darn good country.   And a country many people in other nations would give everything they have to live here.  Let’s take back number one on that list.

Its the massive problem no politician will touch.

Boone Pickens notes that importing foreign oil for our needs costs America about $700 billion dollars per year.   We also know that high gas prices eat into American’s pocketbooks.  We hear it daily from politicians, especially the presidential candidates.

But if we are doing all this ranting in the name of economics, why then is there almost no discussion about what may be an even more expensive problem — chronic disease and obesity.

A Milken Institute report found that just seven chronic diseases in America — diabetes, cancer, hypertension, stroke, heart disease, pulmonary conditions and mental health disorders — cost the economy more than $1 trillion dollars per year.   That’s trillion, with a T.     And that number is expected to surge to $6 trillion by mid-century.   Over 100 million Americans are afflicted with one of the seven chronic conditions.    Its even costing the airline industry.

For certain much of this cost has nothing to do with lifestyle.    A few of those seven diseases - notably cancer and mental health conditions - can cruelly strike anyone at any time.   But the report notes that the majority of the chronic diseases eating billions in health care costs and lost productivity do have a strong relationship with obesity and controllable factors such as smoking.

You would think with these kinds of numbers it would be as hot a political topic as oil.    It’s not.   And it’s not hard to figure out why.   It doesn’t matter how much good it may do.   Offering lifestyle suggestions to voters is about as politcally savvy as advising them to fight the high price of gas by simply driving less.

2008 will now doubt go down as the “year of the Congressional hearing.”   Hearings on oil prices in particular.   The modern day witch hunt to find the bad guys that drove up the price.  Never mind that many other commodities — gold, corn, wheat, fertilizer and housing (I would call similar homes in similar subdivisions in similar towns commodities) — have also soared in the past 5 years.   Mere oversight, for certain.

So like with oil this year, I wondered what it would’ve looked like if Congress had hearings two years ago to get to the bottom of why home prices were soaring in many areas.

So here’s an excerpt from the imaginary hearing back in the 13th month of 2006:

—————–

Congressman:  Home prices in some areas have nearly doubled in just five years.   Who’s to blame?

Realtor:  Bankers.

Banker: Realtors.

Congressman:  Are either of you aware that there are people who are buying homes not to live in them, but simply to turn around and re-sell at a profit?

Realtor: You mean ‘flippers?’

Congressman:  That sounds like speculation to me.

Realtor:  Uh, yes.  It is.  They are betting prices will go up.   Is that wrong?

Congressman:  No, but it is driving up prices for everyone else.   Whats the risk on this?

Realtor:  << silence >>

Banker:   None.  We sell the loan to someone else, usually Fannie Mae and Freddie Mac.

Congressman: Oh.  Well … that still doesn’t answer my question: WHY have housing prices soared??

Banker & Realtor:  Lax Congressional oversight and a too-loose mortgage market?

Congressman: << silence >>

The Government wants to bail out the American housing market.   This bailout will cost taxpayers perhaps 25 billion dollar or more.  And make no mistake, it will cost all taxpayers.   Even those who own their home outright…rent…or never took a subprime mortgage are going to pay in one way or another.

If the government really wants to bail someone out .. lets at least make it a group that was largely not responsible for its fate - the entire state of Michigan.

Yes, many auto industry leaders made a series of poor decisions in choosing the cars they built.  And yes, the UAW fought for benefits and pensions which have been found to be largely untenable.   But those choices were made by a FEW.

The real injury though comes to the REST …  the men and women workers of GM, Ford and Chrysler.   People who were not making the high-level decisions.  Their only mistake was in taking the generous benefits offered them.  Something all of us would have done.   No one turns down more money than less.

But as the American auto industry crumbles, so too does Michigan.  It has the highest unemployment rate in the nation at 8.5% .. and one of the worst housing markets to go with it.   Laid off autoworkers .. who would LOVE to get a job at one of the auto plants opening in Alabama or Tennessee .. simply can’t.  Because they cannot move.  If you can’t sell your home, the only way to go find a new job is to walk away from your obligations.

So Congress … dont penalize taxpayers who had nothing to do with inflating the bubble that burst.   If you want to spend, spend our billions (and it is OUR billions) on a state that for nearly a century help build this country.

Its often used for political purposes that “the rich” don’t pay their fair share of taxes.    (I put ‘rich’ in quotes because as I pointed out in an earlier post I’m still trying to understand what ‘rich’ means).

I hope that both candidates read this fantastic editorial in the Wall Street Journal: http://online.wsj.com/article/SB121659695380368965.html

It highlights how supply-side economics really works: when you lower taxes, tax receipts go higher because it provides an incentive to work harder and make more money and also a disincentive to look for tax avoidance strategies.

Another quick note before the show and before I head off to Nashville this evening..

I went to Atlantic City this weekend for my birthday and stayed at the new Water Club by Borgata.  Fanastic place, by the way and highly recommended.

A.C. Expressway was jammed going into town on Saturday.    Stand-still traffic on all 3 lanes heading in.   The hotel was sold out, restaurants were packed and I had to wait 30 minutes for one seat to open on the blackjack table. 

I also went to the airport this morning to drop off my car before heading out this afternoon and the parking lot was full and the security lines long to get on a flight.    Be interesting to see how it is this afternoon.

I know there is a lot of economic pain out there, but as Ive reported in different parts of my travels (Pittsburgh, Upper Michigan, Atlantic City) its just hard to spot from certain things I would call leading indicators.

By the way … I am going to Nashville to interview Nissan CEO Carlos Ghosn tomorrow.  It will be live around 9am ET on Fox Business.  You will not want to miss it. 

Pimco’s Co-CEO and Co-CIO Mohammed El-Erian sees more economic trouble for America.  He thinks the banking crisis will continue to morph into a consumer crisis and give us a few more quarters or years of economic trouble.    He does believe though that there is some value in housing related debt, and indeed Pimco has been buyers of Fannie Mae and Freddie Mac debt.  

If you missed this First on Fox interview, check it out:

http://www.foxbusiness.com/story/markets/economy/pimco-executive-el-erian-sees-pain-economy/

In an interivew today ThinkEquity Partners CEO Mike Moe discussed a stock that is taking advantage of the push in China to learn English.    Many Chinese feel they need to learn English to better compete in the global business community.  There is also the Olympic movement.

Mike’s pick is New Oriental Education (EDU).   They own and run English language training facilities in China.   The stock has been volatile and is off its 2007 highs, though up this year.

One of EDU’s competitors is Li Yang.   He runs his “Crazy English” language courses in China and is incredibly successful.    If you want to learn about this craze in China, read the New Yorker article below.  Its fascinating.

http://www.newyorker.com/reporting/2008/04/28/080428fa_fact_osnos

Alexis Glick interviewed Congresswoman Michelle Bachman (R-MN) this morning around 8:15am ET and it was a very rare blast of fresh air with regard to the current housing and mortgage crunch.  She has been one of the first representatives to highlight what I have been calling “the punishment of the responsible.”   That is, those in America who nothing to do with the problem (housing bubble) but will certainly be on the hook for the solution (bailing out the housing market).

We have heard for many years to be prudent.   To not borrow more than we can afford.   To maximize tax strategies.  To each month put money into the stock and bond markets and forget about it.   This has often been referred to as the safe and smart road.   

It’s turning out that in this housing mess, those who took this road are the ones who are paying the price.    All to help rescue the housing market. 

I have no idea how the Fannie Mae and Freddie Mac problems are ultimately going to play out.   I also do not know when housing will recover or when the subprime crisis will end.   What I do know is that we are all going to pay, in one way or another.   It may come in the form of an official government bailout,  a massive equity infusion, or the government privatizing much of the mortgage industry.   But we will pay.   Taxpayers are going to be on the hook for billions, if not trillions.   Many taxpayers who, I might add, had had nothing to do with helping pump up the 5 year housing bubble.

The methods of paying for this “backstop” are few.   There simply aren’t that many ways the government can cover the cost, particularly not in this economy.    We have heard a few things from different sides and sources, but nothing is confirmed.   That said, its prudent to compile some of the ideas and why there is a downside to each.   Given this multitude of ideas floating about, this is by no means a complete list and is overly simplistic.    But its a few of the methods we may have to use to cover the potential trillions in costs Rep. Bachman highlights taxpayers are on the hook for, ranked by my opinion of their likelihood:

1. Fed allows Fannie & Freddie to borrow from the discount window

2. Government buys billions in Fannie, Freddie stock

3. Capital gains tax rate increased

4. Income tax rate increased

5. Mortgage interest deduction scaled back

(Numbers 1 and 2 aren’t really the ‘payment’ per se.    They are more like the government’s temporary solution, but you get my point).

The issue is that with any or all of the above, it is the responsible taxpayer and investor who is taking the hit.   Those who had nothing to do with housing’s run-up are going to pay to help cover its run-down.    They probably already have in one way or another.   Here’s how each of the above may end up playing out.   

1. Fed opens its wallet to the mortgage industry by alllowing nearly unlimited borrowing, basically printing more money and helping spike inflation (You pay more for the things you buy)

2. Government spends more (by issuing even more debt) to help the housing market, increasing deficits and driving value of the U.S. dollar down even further (Your spending power goes down)

3. Capital gains tax rate increased to make up for the billions the government has to spend to rescue the the housing market (Your real return on gains in stocks, bonds, assets and dividend payments go down, giving you less on your ’smart and safe’ investment)

4. Income tax rate increased to make up for the billions spent as part of any rescue package (If it goes to 39.5% from 35% as Obama favors, families making $250,000/year will pay an extra $11,250 a year in income tax, or nearly $1,000 a month.   This may sound rich to many in middle America, but tell the family mking $250,000/year in the Northeast or Southwest that they are rich)

5. The beloved mortgage interest deduction is scaled back to provide an extra source of revenue for the billions paid out by the government (Though no one has really talked of this much yet and its viewed as sacrosanct, I suspect that in the desperate rush to figure out new revenue sources the government will find little public opposition to lowering the cap on which you can no longer deduct the interest on your mortage.   Currently its $1 million dollars.    How many Americans would complain if thats cut to $750,000 or so?   I can already hear the moving vans loading up in states like New York, New Jersey, Massachusetts and California, especially if this is combined with #4 above)

6. Home prices on average fall nationwide (enough said)

You see the point.   No matter what the ’solution,’ it is going to cost.   And its going to cost everyone, regardless if you were a part of the housing boom and bust.   Consider this: an estimated 30% of Americans own their home outright, with no mortgage.   These people felt no need to refinance to buy a new boat, nor ‘trade up’ to a larger home to show off that 102″ flat panel.   They likely instead did what they were taught: squirrel money away each month into stocks and bonds.   Now those stock investments are likely down with the Dow as the market tumbles.   And the value of that house they own and have paid off is probably going to go down.   No one should be more angry than they.

The Administration continues to remark that the “government” will do what it has to do to protect homeowners.   When will anyone (aside from Rep. Bachman) in Congress or the Executive Branch simply tell us what we already know: many people were sold homes and given loans that could not afford them, and now all of America will have to take the hit.

I’m not going to get into a discussion of how we got here.  Whether you want to blame the homebuyers who bought homes they no doubt knew they would have a hard time affording, the mortgage brokers and lenders who assured said homeowner that “don’t worry you can affford it and here’s how,”  the appraisers who never seemed to believe that prices could actually come down, the late night infomercial hucksters who could ‘teach’ you make millions flipping homes with no money down if you only send them $29.95 for the instructional DVD, or the government for turning a blind eye to the bubble because no one ever wants to speak up when things seem to be going well.   The point is we are here, and now we have to deal with the consequences.

Bachman took the no doubt unpopular view that despite all the Congressional searching for blame with banks, mortgage companies, lenders, et al, that much of the blame may actually fall at the feet of the American consumer.   It no suprise we haven’t Congresspeople who rely on votes of the citizenry are reluctant to ever tell their constituents that they may have been part of the problem.  Its much easier to blame the monster in the closet.   In this case the monster was the lenders, mortgage brokers and even short sellers.   Too bad Congress doesn’t have the same problem telling us that we are going to have to help solve the problem.  

The overall economy never really took the hit from the tech stock bubble bursting.  The damage there was largely limited to those with excess income to invest in stocks.   If anything, the economy boomed because of it as Greenspan & Co cut rates, making credit so cheap that housing became the next tech stock.  We merely traded one bubble for another.   The problem is that the popping of this bubble is much more widespread given housing’s importance on the economy.    And I dont see any new bubble we can create to delay the pain from this one like we did in 2001.  

Another day in which the markets’ collective eye will be tuned in to Fed Chairman Ben Bernanke’s Congressional testimony.   Yesterday there were some pointed comments from members of the Senate Banking Committee about the economy, mortgage market and inflation.   It was refreshnig to see Senators doing their jobs and asking tough, relevant questions rather than using the platform and media coverage to give speeches on localized topics.  Today we find out if members of the House will do the same. 

While this semi-annual testimony is meant to highlight the Fed’s views on the economy, its easy to discern where the concerns are by listening to the questions.   And for most of America, there is nothing bigger than the housing markets and condition of banks.   Inflation, while no doubt on everyone’s mind as they fill up their gas tank or check out at the supermarket, has taken a backseat.   Despite a group effort by the President, Treasury Secretary Hank Paulson and Bernanke to soothe worries over Fannie Mae, Freddie Mac and the financials, most still fell and FNM and FRE tumbled again.   Its clear the market’s discounting mechanism is in full swing, sending a very loud, clear picture that rhetoric alone won’t help these companies.  Paulson and the President continue to remark that a new line of credit to Fannie and Freddie is available, but only “if they need it.”   Granted the stock price and actual health of a company aren’t always neatly aligned, but with 20-30% cuts in price each day the mortgage GSEs are definitely going to “need” something.

By the by, if you are concerned about inflation (and you should be), remember the CPI is out today at 8:30am.   What would normally be a widely-watched report and has been relegated to the atttention-span backburner.   If you don’t think inflation is an issue, this 20 year CPI and Core CPI chart provides a clear picture of how severe price increases have been in the past few years.

On a side note, it  will be interesting to see if the President calls another long press conference just as Bernanke’s testimony begins, as he did Tuesday.   I found the timing interesting, as no doubt the Administration knows networks such as Fox Business can only cover one event at a time.