Tag Archives: TARP

French Fry Euro And Zone

The news today is filled with allegations that Sarkozy has made a direct threat to abandon the Euro and to withdraw from the Euro zone confederation.   Denials from the Germans, Spanish and “aides” to “Sarkozy have spewed forth in the media ether already.  But the European markets and our own are reacting with alacrity to the putative pronouncement.  If you know a bit of French history and European history it would come as no surprise whatsoever that the French would abandon their partners when crunch time comes.

It is another question altogether whether or not the EU and central bank there should offer such a bailout package for the Greeks.  A very cogent and moral argument can be made that the Greeks should be made to suffer the consequences of their own folly.  The debate is really not much different, if at all, than the one we endured during the fall of ’08 about whether we should bailout AIG, Fannie and Freddie, GM and Chrysler and then a group of large banks.   Pundits, economists and great thinkers can and will debate the efficacy of that program for decades to come.  Not allowing failure to fail is certainly not the format for a vigorous free market system.  If they had all gone under there would have been lots of pain but most of it would have been borne by those who were running or working for those companies or doing business with them.  Those were all choices made by those various groups.  Depositors could have been protected for far less than the cost of the TARP program and the Stimulus bill only leaked away like sprinkling drops of water into the ocean.  We still lost 2.5 million (or calculate your own number) since that time anyway.  Except for a handful relatively speaking of construction jobs here and there who the heck has benefitted from any of that money?  The Europeans can bailout whoever they wish, it is their deal not ours.   We are NOT all in this together.   Maybe the Europeans haven’t learned anything from our experiences so far.

I am not mad at the French for their position but find it typical of their view of partnering with anyone.  Many individual Frenchmen are grateful people.  You can go to the coast of Normandy today and talk with the older folks and many will heap praise on the Americans and British for the invasion and their liberation for the Nazis.  But as a nation they are not grateful and always have the attitude of what is in it for them.   Thus is has ever been so.  Certainly since the days of Talleyrand and the end of the Napoleonic era they have always sought only what is in their interest in their dealings with all parties including those who are their allies.   Loyalty is not their long suit.   Talleyrand astutely observed that nations do not have friends but only interests to be protected.  

In international relations and the diplomatic world that is a realistic policy and not necessarily to be condemned.  It matches well with the Realpolitk of Bismarck from the 19th century and the diplomacy of Kissinger during the Cold War.   It is not that they are looking out for their own interest that is bothersome it is the hypocrisy and arrogance they deploy in their messages to the world that boggles the mind.  They have a history of bugging out when the going gets tough.  They never gave much of a thanks for the British blood shed in Flanders fields for their protection during WWI nor did they heap praise on the American Expeditionary forces that closed the military deal against Germany.  During WWII they quit when they still had millions of men under arms and made their peace with the Germans and split France into Vichy and occupied France.  Those Vichy French killed the first American troops to storm the beaches in North Africa a couple of years later and Churchill had to send the British navy to sink a goodly portion of the French fleet at Oran because they didn’t have the guts to bring their ships to Allied ports.  All those decisions they thought were best for them at the time made.

After the War and the creation of the United Nations and NATO then French looked for the first opportunity to dump their friends again.  De Gaulle withdrew the French from the NATO alliance because he thought he could win better terms dealing with the Soviets without the encumbrance of allies.   Maybe so, maybe not but you don’t abandon your friends and those who helped you when the bullets were flying.  Now they face difficulties with their EU partners.  Whatever decision they make you can rest assured will only be examined through the prism of what they believe is in their best interest alone without regard to any commitment made to others.  Again they are loyal only to themselves.  Sacrifice is not a word often used in their vocabulary.   Vive la France!

“the mob, those political animals need organization, which means simple orders and chiefs.”  De Gaulle.   http://www.olcranky.wordpress.com

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Dog Bites Man And Govt. Motors Pays Itself

Those headlines would deserve  equal credit as to newsworthiness in a sane world.  But over the last 18 months or so since the current administration took the reins of power such news is heralded as the most wonderous of events.  I watched some of the “ceremony” at GM this morning as they breathlessly announced their repayment of 5.8 billion to the US and Canadian governments as though that was some stupendous achievement.  There was lots of hoopla and all that was lacking was the confetti and balloons.  All that happened in reality was that the government paid itself.  Not one darn bit different than if you wrote a check to yourself out of your checking account and then deposited it right back.

The fact of the matter is that Government, Inc. owns GM.  It is merely paying itself.  The fact that they have been able to make a profit should come as no surprise to anyone with an IQ higher than weeds.  You could take almost any major company from the Standard and Poors 500 that had lots of debt and do the same thing as occurred with GM.  I mean the “new” GM came out of the government mandated Chapter 11 with nothing but assets.  All its debts were left behind with the old GM.  Is it remarkable at all that given that scenario it has made a profit?  The surprise would have been if it made only a small profit. 

Don’t forget that in addition to the 5.8 billion in direct loans during the Chapter 11 that GM had a capital infusion of about 50 billion.  Give me a company with no debt and a fresh 50 billion to play with and I will guarantee you a profit even if I was selling buggy whips.   Also don’t forget that GMAC its partner in crime also got I believe it was over 40 billion in Government funds to continue its financing arrangement.  This was conveniently done under TARP when GMAC during the holidays of ’08 was converted into a “financial” institution with a bank charter from the Feds.  

The power brokers and czars in Washington must think we really have a short attention span or they are contemptuous of our ability to reason.   Speaking of czars, you have surely noticed that Mr. Rattner who lead the government team doing all the negotiating with creditors of GM has run into his own buzz saw of accusations recently.  Really nice to know we had such an honorable fellow carefully selected by the White House to run that show and ram through the Chapter 11 of GM.   This entire situation is another example of the danger of the too big to fail syndrome that has consumed Washington since the fall of ’08.  The financial regulations being proposed by Dodd, of Countrywide fame, does not solve this problem but only exacerbates it.  Please read it for yourself.  The fine print gives authority to bureaucrats appointed and funded by the politicians  the say to determine who is a systemic risk and what should be done.  It allows them to determine who will be paid and how.  Worst of all it allows for unlimited government backing of the credit of a failing company.  If it quacks like a bailout, walks like a bailout, it is a bailout regardless of the headline news and the disclaimers of Dodd.   Geithner defends it so you know it must be a really bad idea. 

Every time you buy a GM car or part you are supporting the gang in Washington.  It is not a private company but a captive of government and in turn the auto unions which were the real raison d’etre behind the bailout of GM in the first place.  I hate it that I can’t support them anymore.  Years ago I loved my Suburban.  Unfortunately they have become part of the problem with our economy and government and not any contribution to the solution or a better path for the country.  The Democrats got themselves even more loyal ground troops for the political wars.  They already had the overwhelming majority anyway but now they have tens of thousands of cadre to send out on the political warpath.  Even better for them every GM car sold is nothing more than a political contribution for the largest political PAC supporting Democratic candidates there ever was.

The great pyramids in Egypt are quite something to behold.  More remarkable is the preciseness of the engineering that was employed with only the most rudimentary of tools. They had no GPS or laser  controlled measuring or surveying devices.  Line of sight, plumb bobs and string and knowledge of basic geometry is what they worked with.  The Great Pyramid near Assuan was about 150 yards high and was about 250 yards wide on each side of its base.  Those blocks weighed a lot.  There were 7 yards long and hand to be man-handled to the top.  Amazingly, the engineers were so good with their limited tools that the mean error of the base line was only 6/10’s of an inch in length and 12 seconds in angle from a perfect square.  I wonder if we could do that well today.   http://www.olcranky.wordpress.com

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Joe The Plumber And Wall Street

The headlines are filled these days with comments, criticisms and expositions about Wall Street and the workings of Wall Street and the people who work there.   To read the media of all stripes one could easily conclude that Wall Street is a monolithic institution run by a few dozen people.  There is this constant drum beat about the conflicts and discord and disconnect between Wall Street and Main Street.  Those allusions are inaccurate at best and deceiving at the worst.

Yes, there is a Wall Street in Manhattan.  It got its name because it in the mid 17th century there was a wall built there for protection from the Indians and the English.  Yes, the NYSE is located there and it is also true that many investment bankers and brokers work there or near there in Manhattan.  But “Wall Street” as the term is used nowadays is really a reference to the entire universe of buyers, sellers and traders in the stock, bond and investment instrument markets around the US and the world.   The NYSE and NASDAQ play a very important function in regulating the activities of traders and as a clearing house for transactions so they can be monitored and the record of transactions is clear.  But there is no group of a few dozens or even a few hundred people who sit around and make grand strategies about the course and direction of our entire economy and make money regardless of what is happening on Main Street.  Nothing could be farther from the truth.

Wall Street today is diverse geographically.  Sure there is a high concentration still in Manhattan but that has changed dramatically in the last couple of generations and is accelerating with the advances in communications–computers.  Now there are major players located around the country and the world.  Warren Buffet is a heavy hitter by any measure and he doesn’t hang out on Wall Street.  Wall Street today is the loose group of thousand and indeed probably a few millions who make investments in companies and commodities from around the world.  Los Angeles, Chicago, Connecticut, Dallas, London, Singapore, Hong Kong, Sydney, Paris and all points in between are Wall Street.  

The alleged big Fat Cats sitting around making decisions on the economy that affect all of us are like the old Pogo comment about meeting the enemy and they is us.  Harvard and all the Ivy league schools and other major universities have billions upon billions of dollars in investments.  They are part of that Fat Cat crowd.   The major pension funds from public employees control untold billions.  Calpers alone in California has more to invest than most nations of the world.  All the firefighters, policemen, teachers and other public employee unions have zillions in funds they invest on a daily basis.  Every union with a Fortune 500 company has millions or billions they control.   They are the Fat Cats of Wall Street.  Yes, each individual member doesn’t control billions but they group sure does.  Same is true of the investment bankers.  They are advisers for the most part.   To castigate Wall Street is like a dog chasing its tail.  At the other end of that blast of invective is Main Street.  All of these funds, trusts, unions and endowments have boards, trustees, and administrators to control that wealth and to try and make it grow.  Indeed when it doesn’t grow they have hell to pay from the criticism they receive from the funders of the respective fund of money.   Those people who manage all that money are the Fat Cats of Wall Street. 

It is always so tempting to identify an enemy as the cause of troubles.  I am NOT defending any particular investment house, I have no special love for Goldman Sachs or Citigroup, but they are only some of the participants in the game on Wall Street.  When we talk about regulating Wall Street remember that you are talking about regulating yourself.  Yes, there needs to be rules of the game.  The most important of which is disclosure of data in a timely fashion so we are all dealing with the same information.  Calpers controls as much or more money than many of the hedge funds.  They are not babes in the woods.   Their paid staff get a lot of money to make wise investments.  No one holds a gun to their head to buy anything.  They can always decide to invest every nickel in Treasuries or CD’s but the outcry from that with their  retirees would be tremendous.  Yeap there have been some outright crooks like Madoff and there has been since time long gone–Jacob cheated his brother Esau out of his inheritance remember.   Criminal laws are for the law breakers but regulation affect us all.  Careful how you regulate.

Before we start making the Fat Cats wear a Scarlet Letter we best take a look around and truly assess how many of us would have to be wearing the same badge.   We may not be important players like the presidents of some of the investment banks but we are players and collectively we, through our various organizations that invest for our behalf, are part of the Fat Cat crowd.   Main Street is Wall Street.  They are symbiotic and form a financial symmetry that benefits us all.

Next time you are angry at the Fat Cats remember that it was J P Morgan who personally loaned the Government 65 million in gold to stave off complete collapse in the Panic of 1893.  He did this at the request of the government.  www.olcranky.wordpress.com

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Can You Hear Me Now?

Some matters in history do recycle themselves even though we tend to ignore that fact.  The world has seen plenty of bubbles over the years.  There was the Tulip Bubble of the Dutch East Indies Company in the 17th century then the South Sea Bubble in the 18th century followed by several more during the 19th century on into our own contemporary times.  As long as we have a somewhat free market system we will  have another in the future for sure.  The Soviets didn’t have any bubbles during their 75 year reign and if they did we sure wouldn’t have been allowed to know about it.   Our recent housing bubble is part of a legacy from bad economic decisions by those in the market place and inevitably exacerbated by government action or inaction in every case.   One of the more profound of the bubbles was the Panic of 1893.

Of course our housing bubble was not the only cause of our recent financial distress.  You can certainly add a big dose of idiotic government policies regarding the purchase of mortgages by Fannie and Freddie and the exuberance of some on Wall Street to market those mortgage-backed securities.  Likewise the Panic of ’93 was caused by several factors.  The railroads over build capacity by leaps and bounds.  Indeed as part of this episode several rail roads went bankrupt.  A few of them you would recognize by name because they were resurrected.  Just as many believe the failure of Lehman Brothers in Sept. of ’08 was the true beginning of the financial crisis we have now, the failure of the Philadelphia and Reading Railroad in Feb of 1893 kicked off the Panic.  Later the Northern Pacific, the Union Pacific and the Atchison, Topeka and Santa Fe railroads would all go bankrupt but they live on now after their revival.  The country had undergone a great expansion for 15 years or so before this time in just about every category you can name–immigration, new railroads, mines, telephones, telegraphs, and industries of every sort plus the migration to fill up this still mostly vacant mid-west and west.   Just before this the silver mine production had reached a peak.  Our money was backed by both gold and silver at that time.  But gold remained the favored metal.   The government got involved which is always a bad thing in any market and required that millions of ounces of silver would be bought by the government.  Meantime a drought struck the Mid-West and severely hurt the farmers for several years and many ended up defaulting on their mortgages.  All this before worries about climate change and Fannie and Freddie, hard to believe isn’t it.

As these things occur, people started getting a little nervous about the economy. In 1893 the people moved on the banks.  Many decided it was better to have gold than silver or any paper money.  First it was just a trickle but soon a flood of demands on the banks.  Like always the banks could not pay everyone at one time.  No bank can ever do that if everyone demands all their money as the same time–remember “It’s A Wonderful Life”?   Like now, there was also alarm in Europe and many there decided to sell American stocks and get gold.  The price of silver and silver backed bonds dropped.  The US reserves of gold reached their limit and the US had to stop redeeming for a while the gold backed securities which only made the panic even worse.  All this was also made worse by the protective trade tariffs imposed in 1890 by McKinley.  As usual those trade barriers have more negative effects than positive ones. For every job protected more than that are lost from diminished trade.

One notable difference in all this panic was that it was Wall Street that came to the rescue of the government rather than Washington allegedly riding to the rescue.  It got so bad that in order to support the gold standard for our currency after we had tapped out, Cleveland had to go to J P Morgan and borrow 65 million in gold bullion for the government to bolster support for our money.   Wonder how it would have been if he had declined?  But he stepped up to the bar and helped out.  He also was a major factor in the Panic of 1906 by helping to resolve which banks could survive and  which would have to be closed.

Wm. Jennings Bryan and his group wanted the silver standard to be the only standard because this would cause inflation and the farmers, miners and others would be able to repay their loans with debased and cheap money.  Fortunately that didn’t work out for them.  Banks and money have to have some regulation but it should be the minimum.  Set rules evenly applied and known beforehand without constant tinkering by politicians.  There is no easy way to target with precision the “cause” of the Panic of ’93 anymore than we can pinpoint on Lehman or other matters now for our financial distress.  Usually, they come from a series of bad mistakes, too much optimism and heavy-handed government interference.  The government actions are always touted as well intended and necessary and the mistakes aren’t recognized as mistake at the time but opportunities (The Dotcom bubble) not to be missed.   We can learn and hope we will. 

In case you didn’t read it the Reconciliation Bill provides for 1 billion for “Federal administrative Expense” to implement the health care act.  That used to be a lot of money.  Can it really take that much to shuffle papers between bureaucrats?   http://www.olcranky.wordpress.com

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Supply Side Economics From Centuries Ago

With all the bailouts and Stimulus money floating around and the unimaginable amounts of money printed by the Fed being injected into our economy there is renewed debate about the best way to turn our economy around.  Many, especially those in the current administration, tout the idea that we need to keep pouring on the money machine or things would be worse and that only Government, Inc. can lift the economy from its depths.  Of course that is a political view as much as anything sense there are those who love big government and view it as benevolent and further they like the idea of folks being dependent upon government and placing all their faith in government.  Paul Krugman is an advocate of such an approach.   They are completely dedicated to the Keynesian model and method.   That goes well beyond merely deficit spending for a short period.  The government as the engine of growth and prosperity is their long-term goal.   Consolidating command and control of the economy into D. C. is their vision of Nirvana.

Those of this view are already talking about even more stimulus and more government programs to revive the economy.  They have floated the idea of bringing back a WPA type program.   So far all the stimulus money has done the way I see it is to prop up banks and financial institutions that should have been allowed to fail and go out of existence, create even more government jobs, facilitate the takeover of the bulk of the auto industry and make the granting and marketing of mortgages a Federal government program and all the people with mortgages the wards of the State.   Remember that more than 90% of all mortgage loans these days are made directly by the government (FHA, VA, etc) or held by the government (FHLB, Fannie and Freddie).   That can’t be a good thing.   The only growth industry these days is government.  D. C. continues to grow, literally in population and the amount of our national resources that it consumes and the stimulus money has been utilized thus far to primarily attempt to bolster payrolls of other government employees at the State level.   Now the push is on to completely control and regulate the health system, not merely insurance but the delivery of medical services.

Others prefer a so-called supply side approach to fix the current problems and as the best long- term program for expansion of our economy and the continued improvement in the standard of living for the people.  That approach basically calls for less taxation, less regulation and a tax code that offers real monetary incentives for investment into new business ventures large and small.  That was the approach that Reagan brought with him to the White House in 1980.  We had to suffer the pain a bit by squeezing out the inflation and stagflation that had gripped the country for the preceeding decade.    That same philosophy with a few ups and downs was followed by Clinton.  He mostly followed it because the Congress had enough Republicans that they wouldn’t allow tax or budget changes that would gut that supply side approach.  In fairness I believe he also thought it was a pretty good way to foster growth in the economy.  We had remarkable growth and upward mobility throughout the ’80’s and the ’90’s.  It was Clinton’s administration that repealed the Glass-Steagal Act to allow the commercial banks and investment banks to merge into one being and perform the complete gamut of financial services to the populace.  Another day we can discuss the cause of the current problems.  The biggest issue was 9/11 which is mostly forgotten by folks now.  The economist seem to particularly overlook it.  We were shut down and had to respond some way just as we did after Pearl Harbor.  Government mandates about how money could be loaned and who it was loaned to also poured poison into the economic system because so many of those mortgage transactions were not made on sound financial reasoning but to fulfill government edicts.  We reaped what Government, Inc. sowed.

Trying supply side economics is not something really all that new although to listen to some you w0uld think it had never been tried until 1980.  They may know a lot about economics but they sure haven’t studied their history. 

In the mid 5th century the Roman Empire was beginning to crumble. It had already been assailed by Attila and other barbarians and was now permenantly divided into the Eastern and Western Empires.  Things were rather bleak to say the least.  Roman power was diminished but it still had some swagger and the idea of a Roman Empire continued to command respect even if no longer deserved as before.   It was a weakened giant.   In this period one more citizen stepped forward to assume the mantel of the purple and rule as emperor over the Western empire, his name was Majorian.  He probably was the last of strong and decent emperors.  He wrote the Conscript Fathers of the Senate with his pledge to restore Rome.  They were called conscript fathers because it had been viewed for centuries in the Roman world that the nobles had a duty to fulfill toward the Empire.  They were “conscripted” to fill that duty as Senators to give back for the largesse they received as Roman citizens from the Empire.  In those days many of the subject peoples still under the rule of Rome were required to not only pay taxes for mostly local use but also had to pay an annual tribute to Rome for the use of the central government.  Upon taking power he required tax collectors to deal honestly and rooted out corruption and he also forgave the annual tribute payments to Rome from the provinces of Gaul.  The past due tribute was forgiven and the future ones put on hold.  Lo and behold,  the revenues to Rome actually increased.  The people had felt repressed and in despair over the burden imposed by these tribute payments; now they had hope for the future and felt their labors would be rewarded.  The economy thrived for those brief years under Majorian.  Alas, the decay and decadence of past regimes had eroded the foundations of Empire too far and the structure continued its decline.  There really isn’t anything new under the Sun.

“Dictators always look good until the last minutes”  T.  Masaryk   http://www.olcranky.wordpress.com

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Stimulus Spending and 1983

Quite often in the last several weeks defenders of the administration’s stimulus plans, bank and auto takeovers, cap and tax and health care reform have made references to how our economy was in 1983.  They especially use the data regarding unemployment from that time to justify the current policies and proposed policies.    Inflation was still high at that time and so was unemployment.  But that is about where the analogy begins to break down.  We are told by the administration apologists that if we will follow their advice and let Government, Inc. take the leading role in our economy and raise taxes through the income tax code and cap and tax and green jobs and government control of banks and the auto industry that everything will turn up roses.  Their position is that if we just trust them that the economy will recover and prosper under their directives and direction.

Well, they have only a couple of their facts right and all their conclusions wrong about comparing 1983 to today.   First, we had been dealing with a decade of inflation.  Gerald Ford even had that silly WIN button he wore to try to promote the fight against inflation.  For those who don’t recall it stood for  “Whip Inflation Now”.   It didn’t work and nothing that Carter did made things better.  Indeed his efforts made things even much worse.  In the late ’70’s and into the election of 1980 there were weekly rumors about what item or items would be in short supply due to FERC and all the other government policies in vogue at that time.  You can’t turn the economy on a dime, it takes time.  Even when an administration is attempting to alter the economic course the general public and the business world have to buy into it and believe in it.   Confidence and expectations are what drive any economy.  Consumers spend more when they are confident about their jobs and what their tax burden will be and even more so if they believe their taxes will be reduced.   Likewise Wall Street and everyone with an IRA or 401K always make their investment deciions on what they believe the future holds.  They never look back except as a learning tool and guidance about what they believe tomorrow will bring.  

In 1983 the atmosphere and confidence level were quite different than they are today.  Today we face the prospect and threatened certainty of much higher taxes across the board.  The income tax rate will jump for high wage earners, the cap and tax legislation will tax everyone that breaths, even the estate taxes will jump up again in 2011 and the price tag for health care reform will be high, very high.  The small business owner will be hit from all sides, his personal taxes will rise, his cost of doing business will rise with health care reform and the cap and tax legislation will make his cost for his product or service more expensive to deliver to his customers.  At the same time the cost for electricity will soar and those who want a new car in a couple of years will find the cost much high due to CAFE standards and the “green” initiatives being proposed.   Add to those factors the overwhelming US debt and the continued borrowing by Government, Inc. and the concommitant interest expense to pay the Chinese and others for buying our bonds and the propects for inflation are plain to be seen by anyone who looks.  We are assured that inflation is not a concern but it is self evident that it is a concern unless spending is dramatically curtailed or tax revenues are sharply increased.  There is virtually no talk of any coherent plan to address the spending debacle and nothing to indicate a drop in borrowing for a far as the eye can see.

In 1983 there was hope–lots of hope and enthusiasm.  Even though inflation was still high and so was unemployment the proposals from Washington were encouraging, not discouraging for small business.  It was indeed a time to celebrate a “Morning in America”.  Optimism abounded because the prospects were for lower taxes for individuals and businesses and for less government intrusion into our daily lives, not more.  When folks thought about the future a year or more out they believed that things would be improving.  They didn’t see the US debt being a insurmountable burden on their shoulders.  They believed that they could achieve success.

Who do you know these days that is optimistic about the future of our economy?  How many do you know who even optimistic about the preservation of our freedoms and a restrained Federal role in our affairs?  The true believers love the proposals.  They like and want the government involved in everything and they like the government controlling all or almost all of our economic activity.  They love Big Brother and want to be a part of his organization.  While that number is significant I don’t believe it is more than a 30% or so range of our population.  I may be wrong.  Maybe I hear a different drummer.  But the one I hear beats the tune of freedom and hope.  I do hope many will go back and refresh their memories about what was occurring during the early ’80’s.  I think it would be great to recycle that approach to government and our c0untry again.  We faced dark clouds hanging over us in 1980 but unleashing the American spirit for entreprise parted them to a bright sky for years.  We face storm clouds today and they are of our own making and we can cast them away if we follow tried and true principles.

American Presidents should not be addressing school kids.  Not any of them of any party.  That is not a wise path to take.  It is too fraught with potential abuse to be allowed.   A President should not speak to captive audiences but only willling citizens.   www.olcranky.wordpress.com

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Message From Europe

The election results are finally tallied from all the recent voting in Europe.  We already know the outcome of the California tax issues elections.  Seems that some one in Washington should start paying attention to these results.  The mantra has been around for a few decades that California leads the way in the US on all issues.  They do it first and then it spreads to the nether reaches of this fair land so the theory goes.  In economic, social and cultural aspects there has been a strong element of truth to that adage for a number of years.  Seems as though those Tea Parties carried a bit more heft than some of the politicians would care to acknowledge.   IsCalifornia leading the way again?

The California vote was not only against raising taxes it was also a referendum on the growth of government and the deficit spending that goes with that unrestrained growth.  There was a hue and cry that painful cuts would have to be made in State services if these issues failed even though the California government has added over 150,000 employees in this century already.  The voters get it and still didn’t want any increase in taxes and more expansion of government.  What particularly got my attention was the spread in the vote–the five issues rejected were voted down by virtually a 2 to 1 ratio.  That is a landslide in political terms.   The Washington crowd appears to be moving along blithely ignoring those results as though they didn’t happen.  That vote I hope is only a straw in the wind for a growing rebellion by the taxpayers against Government, Inc. and the desire of politicians to sop up even more of our economy into the maw of government like a cat licking the last drop of milk from the saucer.   It would be nice if all the planned US government expenditures were put to a referendum right now.  I wonder how well, TARP, PIPP, TALF, the mortgage rescue plans, the GM and Chrysler bailouts, the GMAC funding and the insane purchasing of Treasury bills by the Federal Reserve would do in such a vote.  Those guys spending our money might give a moment’s thought to the next election which looms around the corner with each passing day.  The health care plan alone will drown us in debt and higher taxes with no end in sight.  Everyone wants better health insurance but at what price?  

The European elections are even more interesting.  There was a decided lurch to the right by the Europeans across the Continent and the UK.  So many of our academics, pundits and politicians of the liberal wing have been wanting to emulate that European model in socialism and to expand the size and scope of our government and they must be disappointed.  Just as California leads the way in the US  many of our liberal friends they have always looked to the European model as the template for their game plan in the US.  The swing to the right was not isolated to only a couple of countries but was spread from the Dutch to Spain to the UK to France and Germany, Italy and the Scandanvian lands.  Those folks knew what they were voting for and it clearly was for putting the brakes on government growth and higher taxes.  It seems the socialist agenda is waning in favor among the voters of Europe.  They have always been much more “liberal” in social matters than we have been and they are accustomed to the government running and/or owning significant portions of their industries.  The European governments’ percentage of GDP has always been much higher than ours and now ours is heading in that same direction.  But the Continentals are backpedaling in a major way.  Apparently many of them have had about all that Mother Government they can stand and would like a little more freedom and lower taxes for a change.  It was quite strking also when analyzing the results that the left wing parties lost ground from previous years.  It was not only a growth on the right but a loss of the left that produced the rather dramatic European results. 

On immigration matters the Europeans are bringing to rein in their open arms philosophy and intergration policies.  Several of the anti-immigrant parties will have representation for the first time in the European Parlianment.  That is stunning given the history of Europe since the War.  They apparently do want their borders protected and don’t want to be “Balkanized” or “Islamified” as some of the papers stated it.  Maybe those in Washington calling for amnesty for illegal aliens will pay heed to this trend.  The Europeans are tired of their riches and generosity being abused by those who come there illegally. 

You are urged to do your own reading about these vital elections.  Reach your own conclusions.  The British are clearly pulling back from government expansion and higher expenditures and deficits.  Labor is on its way out.   That special relationship we have with them should be used as a learning tool for our politicians.  They are going one way and we are heading in the opposite.   That  is truly an astounding circumstance and only the second time in my lifetime.  Thatcher was the first.  Europe sent us our forefathers four centuries ago and maybe now they will send us lessons about taxes, size of government and restrained government from abroad.

“Any pary which takes credit for the rain must not be surprised if its opp0nents blame it for the drought.”   Dwight Morrow

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Government, Inc. Grabs Control and Law Be Damned

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It was with sadness that I have read and heard the latest news from our new seat of Industry–Washington.  The latest proposals now call for even more intrusion into the private sector by the Treasury and/or other regulatory agencies to mandate pay and pay methods for employees of the banks who did not receive any TARP funds.  Who knows exactly what the restrictions will be but whatever they are they will be intruding on the private perogatives of shareholders and their property and contract rights. 

The expressed rational is that Government, Inc. will use the “safety and soundness” standard under bank regulatory authority to justify whatever these new compensation restrictions will be.  I have no particular sympathy for banks or bankers but I do respect the necessity and fundamental rights of private enterprise and the free markets to manage their own affairs as they see fit and the rule of law.  I understand and do not oppose the concept that banks should be regulated.  But I expect the regulations to be utilized for their intended purposes and not as a bludgeon to brow beat banks into submission to Government, Inc.’s world view.   The Federal Reserve and FDIC and others such as the Office of the Comptroller of the Currency have had the power for decades to shutter a bank that they believe is not practicing its lending with safety and soundness.  We want our banks to be safe and certainly financially sound.  That is why we regulate them.  However what we are witnessing now is the use of this standard to control the internal affairs of the bank that have nothing to do with those principles but rather to make them conform with a political agenda  and populist notions now prevalent in Washington.

It was only about 20 years or so ago that a similar outcry was made about the large salaries paid to top CEO’s in industry, including the banks.  The argument ran that those folks were making huge sums of money without regard to long term and even short term performance.  That is what really kicked off the new method of lower salaries but then awarding stock bonuses based on financial results.  It was the simple idea of rewarding better those who performed better.  You may not recall these events but you can research and see this was the fact.  So under lots of governmental pressure at that time the CEO’s of large companies did get agreements to reward them handsomely for good results in exchange for lower base salaries.    Then we got great growth in our economy for two decades and those stock bonuses turned out to be terrific deals for those CEO’s.  Now some of the banks are staggering and the politicians are again on the hunt for scapegoats and those large bonus payments are in the bull’s eye.

The method of c0ntolling these compensation issues  is twisting, warping and ignoring the law.  As we have seen so often in the last few months the law of the land and the Constituion apparently have no meaning to those currently in power.  The “crisis” seems to justify anything in their minds.  Let’s be clear, the Federal authorities do have the right under the existing law to shut down any bank they find to be conducting itself in a manner that threatens the “safety and soundness” of the bank.  They can shut it down immediately and have done so many times over the last century.  Almost 30 have been shuttered this year alone.  The banks if they so choose could challenge that finding in court.  It never happens but at least the legal right exist to protect the shareholders of the bank.  Bureaucrats have been known to be wrong.  When the Feds went on their last rampage 20 years ago during the S and L crisis they made deals with some banks regarding their closure and then changed the rules during the middle of the game.  (Sound familar these days?)  A few of those banks finally sued and lo and behold they won!  Billions were awarded to them after the fact in the mid to late ’90’s.

The power to shut down the bank does not equate to the power to dictate compensation terms for employees of the bank be they the janitor or the CEO.  That is for the shareholders.  It is the legal right and authority of the shareholders and their elected boards to deal with that issue.  Government, Inc. is arbitrarily usurping that perogative from the shareholders.  That is a violation of law and the taking of property without compensation.  I hope some brave bank will have the gumption to stand up to them and take Government, Inc. to court.  Simply refuse to obey the mandate and dare the government to shut them down.  Then the government would have to justify its conclusion about safety and soundness in a court room with transparency that everyone seems so keen on these days and offer real evidence rather than conclusions from some 30 year old bureaucrat with his green visor, or maybe the evidence would be that the order wasn’t even from a bureaucrat but came much higher up the food chain–like the Treasury or the White House.  Be nice for the public to know exactly who made the decision and what the facts were to support it.

We created the Collossus and we can tame it if only we are brave enough to stand tall. 

I find it amazing about the recent research revealing that the twinned forces in physics when separated and then observed will react at the same time even though separated by distance.  The two forces move and react as one and that communication from one to the other seemingly defies the speed of light.  Paranormal happenings going on here?  I don’t think so but quantum physics is a mystery within an enigmatic universe I don’t comprehend.

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Stress Tests Weak Hearts

I wonder if our free market system still has a heartbeat sometimes.  There is no question that the interventions of Government, Inc. over the last 6 months has severely wounded the vital organ.  Our income tax chief who can’t calculate his own taxes correctly and who also happens to be the Secretary of the Treasury announced with some fanfare the imposition of stress test on the banks a couple of months ago.  Now those results are about due.   It has become clear however that “passing” the stress test is going to be in the eyes of the beholder.  In this case the beholder is Government, Inc., the entity wearing mulitple hats and having more conflicts of interests than a Rostenkowski aide.  (For those under 40 or so he was the Democratic speaker of the House in the ’80’s who was finally caught with his hand literally hanging out of the cookie jar–another famous or infamous Chicago politician.)   

Even though several banks have said they are prepared to return the TARP money the Treasury has demurred and told them no.  They can’t do it without regulatory approval.   Geithner acts like the FDIC is some foreign entity from Mars that has no connection with Treasury.  I assume the same is true with the Comptroller of the currency.    Why does Government, Inc. keep trying to hide who is in charge?  Another thought that is just as troubling is that maybe they don’t know who is in charge.  Is it Larry Summers?  Is it Geithner?  Paul Volker?   The testimony yesterday from Geithner was confusing at best when he stated the government would like to get back the TARP money but wouldn’t allow the banks to do it if in the opinion of “regulators” that such payment would have a negative impact on the macro-economic situation.  He can tell the regulators what to do why he is trying to hide this fact?   The market responded in a sensible way and concluded that this vacillation was merely a ruse to cover a deepening government desire to control the entire banking system.  This was especially true given the idea floated by Government, Inc. in the last couple of days that it was considering converting its preferred stock to common stock in some of the banks who received the TARP funds.  That gives Government, Inc. direct voting power in the banks.  With that power they wouldn’t have to make those offers that can’t be refused like the Mob and could assert direct control of banking decisions in the future.    The current administration doesn’t like the negative publicity of financial aid to the banks but is chomping at the bit to exercise dominion over that vital section of our economy.  You can rest assured that the spin will be that they had to do it for our own good to expunge the market place of those corrupt bankers. 

The government is owed money by the banks and some of those large banks in turn are owed billions by GM.  Government, Inc. is already running GM.  Anyone who doubts that should recall the “dismissal” of Waggoner as the President of GM.  The government wants the large banks including Citigroup and JP Morgan to take at least an 85% haircut on their loans to GM.  They could probably recover 100% of their debt even in a Chapter 7 liquidation of GM.  They do hold the first liens on the assets of GM.  The banks don’t want to do that understandably enough.  Why should they take a loss when they don’t have to?   Well, because they are being bullied by Government, Inc.  The g0vernment runs GM, is owed money by GM and is owed money by the banks who want to repay their TARP  loans and now Government, Inc wants to force the banks to take a loss from the GM loans.  I wonder how that loss will be calculated under the stress test?   If the market was truly free the banks would push GM to the limit and it would file a Chapter 11 to reorganize it company.   A substantial portion of GM would emerge from that process.  It would be smaller but stronger.  The banks would recover their money and GM would survive to fight another day and compete with cars the public wants.  

It would appear however that the designs of Government, Inc. are driven purely by political ambitions.  Populists notions and numbers of votes on election day will be driving these decisions, not the free market system.  They will complain that the market system broke down and can’t recover without their help.  Balderdash!  They are not allowing the market system to function and make the corrections it would impose on losers and then move on and grow again.   Government, Inc. is involved in centrally planning key and large segments of our economy.  It has bootstrapped itself into the role of regulator, creditor and owner of the banks and GM simultaneously.  That is the grossest of conflicts of interest.  The puppet master is pulling all the strings behind the curtain.   Our market system with all its flaws and ups and downs over the last 200 years has been the most productive and wealth creating one ever seen on this earth.  By any measure you want to use, any metric as the moderns like to say, we have outperformed any other nation on earth.  Our people are healthier, richer and have the most modern of conveniences and freedoms so far.   The “heart” of our free market system is under stress for sure.  There are those in power who wish to replace it with an artificial heart designed and operated from Washington.  Please keep up with the news.  Observe the reach of government into an ever expanding behemoth striding across our economy.  Along the way Government, Inc. is ignoring the rights of due process for companies and individuals and breaches the private property rights guaranteed under the Fifth Amendment.  Where are those shareholder suits under the Fifth Amendment against the Government?   What about the rights of the shareholders of GM, the large Banks, (remember some of the banks were strong-armed into taking the money in the first place by government)  and even AIG? But that is a topic for another day.   Would the failure and closure of any or all of these entities have produced results any worse than we are facing now?  Think about it.  Papers will be written on that subject in a few years. 

Am I the only one that has doubts about the efficiency of the modern computer and printer making drafting documents quicker to produce.  I remember in the ancient days when the secretary had to type  the document and use carbon paper and make corrections using “white out” ink.  It was laborious.  But because of that you and your secretary were pretty darn careful with the very first draft of any document.  Normally only typos would have to be corrected.  Then with the advent of the modern system where everyone hits the “print” button and corrects on the computer screen I noticed that the guys in the office were making 4 or five drafts of a document.  They would go back over it and had in their head it would only take a minute to make the corrections on the screen then hit the print button again.  I really wonder if that has expedited the process.  I actually think the old way was quicker from composition to finished product.

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Dig Deeper and Faster To Escape

Let me get this straight.  It was a credit and debt problem that got us into  financial difficulty.  The credit and debt problem was built upon the foundation of the Government injunction under CORE that banks HAD to loan money to those that weren’t credit worthy because that would promote diversity of home ownership and would fulfil the Government mandate for affirmative action in the housing market.   Yes, the private market took that instruction and did everything it could to figure out a way to make a profit off of the Government policy.   That is human nature.  Even prisoners will do everything they can to make their circumstances as good as they can.  If those were going to be the rules of the game then the private market would be creative and innovative to exploit the rules.  That is what private markets are supposed to do.   There is nothing inherently wrong with that.  If Congress passes new legislation restricting certain uses of the internet don’t you think that Microsoft and Google will be burning the midnight oil to figure out the best way to make lemonade out of the lemons?  Such proposals are being bandied about as you know now.  Heck some of those high tech companies might see an opening to make even more money from the Government restrictions.

There is nothing wrong with what the markets did with the mortgages they were forced to make.  The shame and guilt belongs to the Government and its proteges
Fannie and Freddie.  It was Government that built the Frankenstein of the financial world.   If the Government had not required such loans to be made then all those derivatives and credit default swaps would not have been issued.  You are reminded that back when CORE and its various iterations were proposed and passed it was the financial markets that opposed them on economic grounds and the “right” that opposed them on ideological grounds.  Those loans by the tens of thousands would never have been made in the first place but for threats by the Government regulators, adhering to the CORE requirements, to come down hard on the banking institutions that did not make enough of those sub prime loans.   The banks had no choice but to comply with the Government mandate if they wanted to stay in business since the regulators had the power to shut them down.   Once the loans were made then Fannie and Freddie stepped in to buy up those mortgages.  You do remember that those executives of Fannie and Freddie made huge salaries and bonuses.  Certainly equal to those of other Wall Street types.  Fannie and Freddie were complicit in the bundling of those sub prime loans and then the marketing of them by Wall Street.  Wall Street would never have been able to market those mortgage backed securities without the support and active participation of Fannie/Freddie–Government.

This was all political policy and social engineering, not economic or financial markets, that created the the mess.   Imagine how things would have been if none of those ridiculous and none economic loans had been made.  We still would have been building houses and selling them.  It would have been at a reduced rate and the values of houses would have increased but not at the unsustainable rates caused by “selling” houses to people who couldn’t afford them and maybe didn’t have a job at all.  There would have been no bubble.

But through the greed of politicians for power and their misguided attempts at social engineering we are where we are now.   The proposed solution is to dig an even deeper debt hole.  We are already in a huge debt hole  but the remedy proposed is to have even more people jump in the hole with more shovels and dig it deeper.  It occurs to me that we might just be making a hole that will trap even more people in the future.  We have already had 700 billion of TARP, don’t forget the 800 billion announced by the Fed a couple of months ago to buy notes for mortages, credit card, auto loans and student loans, then there is the 1 trillion stimulus package working its way through Congress now and the Treasury has let it be known that it will need another 1 to 2 trillion for additional TARP beyond that already recieved.   Everyone talks about putting that debt on our children.  I am not so sure about that anymore.  That much debt can’t wait that long for attention.  It is us that will have to deal with it.   I do wish the people would demand that Congress discuss now exactly how they propose to handle the additional debt, not merely put it off for another day.  Don’t forget that we also have to find a solution to the Social Security and Medicare shortfalls which is going to be trillions more.   We need a long term plan.  Even the Government has a limit to its credit card.  Yes, I know it can print up all the money it needs but that is self -defeating because of the additional inflation it would cause. We are going to have enough inflation with what is on the plate now  to damage our future economy.

This is all from a group who can only get about 70% of their major appointments correct.   Trying to manipulate the total economy is more complicated than making appointments.   I am not encouraged.

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