The loss transfer scheme met with more than a cold shoulder from the public. It met with outright hostility. One New Jersey congressman said his calls were running 50-50: 50 percent “no,” and 50 percent “Hell no!”

The bailout also generated the derision it deserved. One blog posting described it succinctly: “Taking money from people who made good investments and giving it to people who made bad investments will make good investments in the future and the people who made good investments will keep making them even though they will have less money to do so.”

The lame-duck president let Secretary Paulson call the tune, while he tap-danced through a couple of White House performances: “…without immediate action by Congress, America could slip into a financial panic.” (His first treasury secretary, Paul O’Neill, said of the president at the time, “I don’t think he understands or knows much about any of this and it shows.”) Paulson, the former Goldman Sachs CEO, was determined to reliquefy Wall Street even at the risk of the treasury’s solvency. The bailout was sold to the governing classes under the guise of reinflating the mortgage market, an act of self-evident futility. If the last bubble could be reinflated, people would still be coughing up million s for dot-com business plans scrawled on cocktail napkins and the NASDAQ index would still be over 5,000. Unlike their counterparts in the Senate, members of the House, closest to the people and all up for reelection in a month, resisted the bailout at first go-around, but the pork fest of more giveaways, the heavy arm twisting, and talk of opponents being blamed for the next Great Depression prevailed. One representative, Brad Sherman, D-CA, claimed on the House floor that members were told without the bailout there would be martial law in America. And so the Paulson plan passed, a mechanism to transfer the losses from institutions that in the expectation of gain willingly undertook the risk of loss to those who had no opportunity for gain or willingness to undertake loss.

If the idea seems antithetical to the American way, it is. Philosophical consistency is not to be expected from politicians, but shouldn’t shame for supporting the giveaway have spread rampantly among Republicans? After all, the 2008 Republican platform had just been passed at the beginning of September. It addressed the mortgage meltdown in these terms: “We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself.” And what about modern-day conservatives who some years before opposed Hillary-care, insisting that socialized medicine is a mistake for the body politic? How then had socialized investment banking become overnight a prescription for economic health? When foreign heads of state, from Iran’s President Musaddiq, who was toppled for it in 1953, to Putin in Russia or Chavez in Venezuela, nationalize their country’s oil, they become enemies of the American state. But when American leaders nationalize finance, the people are told it’s for the good of all concerned. Before long South American Marxists including Hugo Chavez were taking great delight in calling “Comrade Bush” a fellow traveler.

The early costs of the frenzy of “rescues” were astonishing. A week into October, Bernanke claimed the Fed had already committed $800 billion in loans to banks and other activities, and that was before $200 billion for Freddie and Fannie and before the $700 billion bailout. The bailout gave news life to the expression “Legislate in haste, repent at leisure.” It only took a couple of months to notice that the bailout produced none of the promised results in mortgage values. The Treasury handed out the first tranche of the TARP money, $350 billion with virtually no accountability for how the money would be spent. Early in 2009 the Congressional Oversight Panel was able to conclude that the Treasury had paid $78 billion more than market value for the first $254 billion it spent.

While all eyes were on the bailout debate, September 30, like some eerie fiscal planetary conjunction, went unnoticed, a silent harbinger of America’s economic future. While fiscal year 2008 ended that day, rolling up an all-time-high deficit of $455 billion, the explicit national debt actually increased by more than a trillion dollars for the year, breaking through an astronomical $10 trillion. Meanwhile, all but eclipsed by the debate over the bailout bill, President Bush signed another stopgap spending bill that day. This one was for $634 billion, including $5 billion in earmarks, $25 billion in low-interest loans to automakers (yes, even foreign ones!), and a 6 percent bump in Pentagon spending. By the time he signed the bailout bill three days later, it had been a $1.34 trillion week. As part of the bailout, commanding the sun and the moon of economic reckoning to stand still, Congress raised the national debt ceiling to $11.315 trillion. (Four months later it would raise the debt limit again, this time to $12.1 trillion.)

The Paulson plan was presented as an attempt to undo the harm of mortgage market excesses by again inflating mortgage assets on the balance sheets of Wall Street players. It was a strange, homeopathic remedy, a “hair of the dog” approach for a problem that was caused by excess credit engineered the Federal Reserve to begin with. Rather than letting housing prices that had inflated beyond sustainability deflate, instead of letting a market of buyers and sellers arrive at some equilibrium, at values that reflected the actual conditions of supply and demand, the plan called for more of the asset inflation that led to the pumping of more air into the tire that had already had a blowout was ridiculous on its face, and the populists were right in suspecting that it was Wall Street welfare, a case of the politically connected of American finance passing the Old Maid of loss to the people.

Informed observers, the Cassandras who had seen the bubble forming and tried to raise the alarm when it would still do some good, were, of course, not consulted about the plan. Five years to the month before the Fannie and Freddie bubble popped, Congressman Ron Paul introduced a measure that would have avoided the calamity. His September 2003 remarks in the House Financial Services Committee on the dangers of government-sponsored enterprises (GSEs) like Fannie and Freddie are nothing less than a shockingly precise preview of exactly what came to pass:

“This explicit promise by the Treasury to bail out GSEs in times of economic difficulty helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy. Thus, the line of credit distorts the allocation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt…

“Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market…

“Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever.

“When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

“Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.”

In viewing the Paulson plan, the Cassandras must have wondered how often the same discredited economic nostrums need to be refuted. But the administration didn’t turn to Ron Paul for advice. Nor did it consult the scholars at the Ludwig von Mises Institute, who had warned about the government-sponsored expansion of bank credit and money and its inevitable cycle of bubbles and busts. Instead Bush turned to Henry Paulson and his team from Goldman Sachs, despite the fact that under Paulson’s leadership as CEO, Goldman Sachs had been among the industry’s leaders in the issuance of subprime and other mortgage-backed securities, rotten paper that was downgraded scores of times by Standard & Poor’s and Moody’s Investors Service. And Bush followed the counsel of Fed chairman Ben Bernanke, who was on board and at the helm as the Fed frothed up the real estate and mortgage bubbles to begin with.

Sincerely,
David Goyette

December 7, 2009

The Bailout Was a Wealth Transfer Scheme was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

That’s a little more than those who are drowning right now.

One in five U.S. mortgage-payers is underwater.  That’s over 8 million of us.  In times like this I cross myself and thank God I’m a renter.

Home values plunged a collective $2.4 trillion last year.

California, Texas, Nevada, Virginia and Florida form the primary wastelands.

However, according to First American — who tracks mortgages from California’s ground zero — should housing prices drop another 5%, another 2.2 million will get dragged under the swift current of decline.

That takes the tally up to 10.2 million — no surplus to be found in this “new” program. President Barack Obama proposed $275 billion plan makes use of refinancing or restructuring America’s home loans.

All you need: most recent tax return and two pay stubs…oh, and also an “affidavit of financial hardship.”

About $75 billion (good until 2012) would be used to rescue homeowners by paying lenders to alter troubled mortgages – inducing the lender to reduce borrowers interest rates as low as 2 percent.

The catch: you can only modify once.  And if you bought after Jan. 1, 2009, you’re outta luck.  Also, if you were mad enough to try for property worth over $729,750…call your relatives and hand the keys to the bank.  (If you’re lucky, they’ll want to make a reality TV show about your “hardship.” I hear one of the latest TV pilot shows is an ex-Wall Streeter who has to move back home with mom and dad.)

About 5 million folks fall under the aegis of Fannie or Freddie, and they’ve got until 2010 to rework these rotten loans to temporarily sweeter terms.

Now here’s what’s rotten in the state of Washington D.C. – this currently un-legislated and unfunded plan looks pretty similar to its circa 2005-2006 cousin…the brainchild of one Neel Kashkari, interim head of our Office of Financial Stability. (Yes, created by that first “bailout bill” – code name: Break the Glass.)

This fellow from Akron, Ohio, who advanced in life to Hank Paulson minion, took this hallowed fiscal post on Oct. 6, 2008.  Before that, he was a V.P. of Goldman Sachs in San Francisco, where they nicknamed him “the Borg.”  Then, Kashkari approach Mr. Paulson for that solid government job in 2006 – great timing!  He worked shoulder to shoulder with Hank in bailing out Fannie, Freddie and our perennial problem with the gambling addiction AIG.

In the years between making money for Goldman and overseeing money for Goldman-times-Politics-squared, Mr. Kashkari dabbled in the housing market.  Fat surprise that!

To get to any useful information on his 2006-2008 years in service of our government, one has to sift through all sorts of gush, childhood stories, college professor praise, and even “sexiest man alive” references.

Finally, after typing “Kashkari 2006” into my search engine, I found blogger Angry Bear, corroborating my recollection of forays I conducted just after Paulson tapped this “wet-behind-the-ears” pipsqueak for this interim post.

“HOPE NOW”  — The John the Forerunner of “Making Home Affordable”

Kashkari was the genius behind Bush’s HOPE NOW Alliance in 2007. (Again, it was already far too late to do much).  HOPE NOW looks like Obama’s plan of today, only it “encouraged” mortgage lenders to restructure subprime loans voluntarily. Hank announced it in Oct. 2008 – just after the takeover of Fannie and Freddie.

Like a McDonald’s sign, the HOPE NOW slogan is “Over 1 Million Helped” – when in fact, it just seems that they mailed letters about HOPE NOW to 1 million delinquent homeowners.

Ha!  How many subprime borrowers even live at the address?  I hear story after story of mortgage lenders who convinced folks to take funds for homes they couldn’t afford, then arranging a deal where they could buy a second home!

Ultimately, what HOPE NOW boils down to is a trademarked Hotline: 808-995-HOPE.  The number of calls fielded is what goes into the press release – 1.2 million in 2008 – not the number of workouts.

With today’s new plan, we’re stuck with dollar-for-dollar matching to encourage lenders to notch down their lending rates.  Guess that’s how the government can put its money where its mouth is.

We applaud Kashkari’s immense ability to lobby a mere six years’ work in finance to such a high position, and hope the Senate won’t be asked to confirm him anytime soon.

How About Holding Someone Accountable?

Now, a chum of mine, who worked at Fannie circa early 2000, since retired in disgust.  Why?  Because he saw how pervasive the federally-mandated home ownership tyranny had become.  It sickened him.  Physically… seeing the heads of Fannie conduct their pep-talks and flash pocket-of-the-government comments.  (I’ll warn ya, we’re getting him to write you a “chock-full-of-numbers” shot soon!)

Now, I’m all for buying a chunk of good land, planting a garden, and having a home of one’s own.  But I don’t have my own house yet.  Because the kind of house my income affords is in a neighborhood I can’t walk unmolested in.  Facts of life.  I swallowed them.

I use my credit card for what I can pay off at the end of the month.  And I resist the urge to “hope for better times” and shoulder a nice, hearty “American Dream” mortgage.  Now if only about 5 million or so (giving cushion for those surprised by lost jobs, etc.) had been as grown up as me.

I presume the same toxic shenanigans my friend describes at Fannie were happening over at Countrywide…and we know how that one blew!

So let’s play a little round of “Where Are They Now?” before Gary pours our parting shot.

See What Countrywide’s Iago Does Today: PennyMac

Fannie, Freddie, AIG, are just like blokes foisting a tin cup in our faces… And they’ve got just as many sob stories up their sleeves as you find in the savvy street bum – the one you know is faking it.

Here’s how it runs:

“Got here on the bus, see.  And I went to the hospital here (flashes ubiquitous pink or orange plastic bracelet).  I’m trying to get back to the hospital, and I need some money for the bus.

“(We wait another minute to point out that said hospital is only 10 blocks down the street)  Now is when he trots out the wife or child in the background, hanging in the shadows on the street corner.  “Me and insert name, we’ve just come all the way up from West Virginia…”)”

Here’s someone who’s not holding out the cup – because he’s working the system instead – and better than an welfare check recipient we know of. Stanford Kurland.  And he now stands to mint millions from this home mortgage mess.

Don’t know him? Mr. Kurland played Iago to Mr. Mozilo over at Countrywide Financial.  His bag of tricks?

With the more than $200 million he netted from selling his Countrywide stock, and hundreds of millions raised from private equity giants like Blackrock, he’s buying up the delinquent home mortgages that the government was forced to takeover from the likes of Fannie and Freddie – we’re talking for pennies on the dollar here.

So how’s that for private enterprise making lemonade from lemons? I see it as reprocessing lemonade to shape something that looks, tastes, and smells like a lemon – but ain’t.

He’s got this nice, glass-walled boardroom in L.A. for an outfit called PennyMac.

Yes, PennyMac.  The irony of the name makes my stomach lurch.

Can we say nothing about their abusive lending processes that gave some trash-compactor firm like PennyMac a raison d’être in the first place?  And I can’t help but want to stalk Mr. Kurland when I fly out to West next week and ask him about the proliferation of low-rate “teaser” loans at Countrywide starting back in 2003.

But he’ll blame Mozilo, of course, and say it all went to pot in 2006.  Yes, yes, businesses regulate themselves – when those disgusted by bad business practice defect to create new businesses.

How’s that for “growth?”

Of course our government will abet Stanford and friends’ modus operandi.  What choice does it have?

I leave you with this lovely quote from Depression-hardened investor Leon Levy:

“Business people who often sound like libertarians when markets are going up suddenly sound like socialists and beg for bailouts and protection from governments when the economy heads south.”

Regards,
Samantha Buker

March 5, 2009

Making Home Affordable: The Kickoff Begins was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

This unfortunate phrase from President Obama’s otherwise sturdy inaugural address, echoed through my mind last week as I cruised the suburban outlands of Montgomery, Alabama. All the usual commercial furnishings of consumerist America hugged the flattish ochre and dusty-green landscape of played-out cotton fields where thirty feet of topsoil has washed away in the two hundred years since the mainly English settlers shoved out the native Alabamu, Coosa, and Tallapoosa. Along the low horizon, mall followed strip mall followed “lifestyle center,” book-ending the “one house” failed subdivisions of otherwise empty unsold lots in a cavalcade of floundering enterprise. It seemed at times as if the terrain was a kind of sea-like expanse, and all the retail boxes ghost ships drifting to oblivion.

They say that the banks have stopped calling in their loans on the commercial real estate, even though the owners of the malls and strip malls have arrived firmly in default. Calling in the loans would only pin another horrifying liability on the banks’ balance sheets. So all parties join in a game of “pretend,” that nothing has really happened to the fundamental equations of business life. Something similar goes on at the next level down, where the tenants of the malls and strip malls sink deeper into rent arrears every month, and the eviction process is simply postponed, while the stores themselves put off paying their vendors and suppliers – as the whole system, the whole way of life, enters upon a circle-jerk of mutual denial in a last desperate effort to forestall the mandates of reality.

How long will these games go on? This is the primary question that haunts the republic as we wait for new TARPS, and “bad banks,” economic stimulus packages, infrastructure renewal roll-outs, and other policy life-lines thrown out in guarded hopefulness to haul America out of a ditch.

The center of Montgomery was instructive, too. Not unlike any other city in the USA (pop. about 200,000), the former main artery of downtown commerce – Dexter Avenue, rolling out like a red carpet below the state capitol hill, where Martin Luther King’s early career kicked off in a modest red brick church, and where Rosa Parks famously refused to move to the back of her bus – this “main street” presented a sad sequence of  empty shopfronts interrupted here and there by rather creepy amateur murals depicting the cruelties of slavery, as if a remonstrance to the politicos up the hill. Most of the buildings lining the avenue still stood burdened by the clownish facade re-doos and ghastly claddings of the 1950s, which had replaced the ordered classical-vernacular decorum of the original 19th century frontages. Once the malls had landed in the old cotton fields, and MLK moved on to Atlanta, Dexter Avenue was just left to rot in the memory trunk.

Here and there around the rest of the downtown, other weird experiments in American post-war anti-urbanism presented themselves, most notably a “building” designed to look like a small-scaled Death Star, all black reflective glass, canted concrete and steel walls – which turned out to belong to Morris Dees’ renowned Southern Poverty Law Center — deployed directly across the street from the modest white clapboard-with-green-shutters house once occupied by Jefferson Davis after Richmond fell and the Confederate leadership skeedaddled further south. There were a few recently-built government towers that looked like Nascar trophies. But the rest of the downtown – the parts not dedicated to surface parking – was the ubiquitous array of muffler shops, or restaurants and churches that looked like muffler shops.

With the city center thus nearly dead, and the asteroid belt of malls and strips on their knees financially, this emblematic Sunbelt metro area finds itself in a pickle. Cotton being well-past decline, and having wrecked the soil, the “new” economy of recent decades dedicated itself to building car-dependent air-conditioned suburban sprawl – the perceived perfect antidote to a previous economic order based on serfdom, hook-worm, and inescapable heat. That now-not-so-new economy of sprawl, in turn, has come to a screeching halt, as a cruel destiny threw sand in the mechanisms of reliably cheap oil and revolving credit, and the gears seized up. A mood of ominous watching and waiting pervaded the city, but many of the movers-and-shakers had pinned their hopes on the chance that Mr. Obama’s stimulus bill would allow them to commence building a new freeway to the ocean on the Florida panhandle.

My journey continued on the Jesus-haunted blue highways, to that selfsame place, Walton County, Florida, where some of the most famous experiments in the New Urbanism were conducted beginning in the 1980s with the new town of Seaside. I had been there many times over the years, and I was called down to get a prize in the service of the movement, but it was a little disconcerting to see how the build-out had progressed.

The Seaside experiment began very modestly as the idea for a bohemian village of architects and artists in what was then an almost empty quarter of piney woods owned by the St Joe timber company. Seaside was designed so beautifully that it attracted the attention of every thoracic surgeon and corporate lawyer between Nashville and New Orleans, and pretty soon Seaside became the Riviera of the Sunbelt’s economic elite – and came in for gales of criticism for becoming that. The newer houses and commercial structures grew ever grander, as a Boomer generation status competition ramped up into the new millennium. Several more, ever-grander New Urbanist towns sprouted along the adjacent beaches, some of the most recent composed of immense mansions embarrassing in their opulence. The outcome was a little scary, especially now that the fortunes behind many of these mansions may be threatened by the multiplying fiascos of finance and economy overspreading the nation like a vicious plague.

The New Urbanists had not set out to build monuments to Yuppie-Boomer consumerism, but a peculiar destiny shoved them into that role for a while – even while they toiled elsewhere around the nation to reform town planning laws and generally provide an antidote to the fatal cultural cancer of sprawl, that is, of a settlement pattern guaranteed to comprehensively bankrupt our society. Anyway, the collapse of the housing bubble has affected the New Urbanists’ business, too, and this may turn out to be a very good thing because they can put aside the distractions of building very grand places to sop up ill-gotten wealth and focus on the issues that Mr. Obama’s people should have been paying attention to all along, namely, how are we going to reform the way we live in this country and what will be the physical manifestation of how we live in the decades to come.

The New Urbanists have preached for years that conventional suburbia would fail America in the long run, and that we’d have to prepare for this failure by restoring traditional modes of occupying the landscape. So far, the Obama team has not been willing to identify the suburban system as the heart of our economic problem. They can’t recognize it for what it truly is: a living arrangement with no future – and an economic, ecological, and spiritual disaster. It is, of course, the primary reason why we find ourselves in the deadly predicament of importing over two-thirds of the oil we use every day.

But then, more than half the population lives the suburban way of life, with its deadly mortgage traps, its mandatory motoring, and its civic disengagements. Nobody in power dares tell the truth: that we can’t live this way anymore.

But there are scores of places like Montgomery, Alabama, and thousands of traditional main street small towns that are sitting out there waiting to be re-activated. We need to do this much more than we need to build new freeways to the beach. Suburbia is not going to be abandoned overnight (even if it fails logistically and economically!) but we have got to arrive at a consensus about rehabilitating our forsaken small cities and small towns. The New Urbanists have gathered, organized, and codified all the principle and methodology needed to carry out this campaign. This should be their moment. Mr. Obama and his team should get with the program.

Regards,
James Howard Kunstler

February 5, 2009

Road Trip Through Montgomery: The Collapse of Consumerism and Suburbia was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

There is, however, a “Bankruptcy Clause” in the U.S. Constitution (Article I, Section 8, Clause 4). I’ve written before about bankruptcy in Whiskey & Gunpowder. See “National Bankruptcy,” and “A Suggestion of Bankruptcy,” Part I and Part II.

The key point is that the framers of the U.S. Constitution specifically anticipated that the nation would encounter economic troubles from time to time. So they gave Congress the power to enact bankruptcy laws, as opposed to “bailout” laws. And throughout U.S. history, the various economic “Panics” — which occurred every couple of decades — always led to one direction or another in the evolution of state and federal bankruptcy laws. Hey, bankruptcy works. (Full disclosure — I used to practice bankruptcy law.)

At some times in U.S. history, the bankruptcy laws favored the creditor class. During other times, the bankruptcy laws favored debtors. The point is that the economic hardships were eventually manifested in bankruptcy proceedings.

Just as all rivers flow to the sea, bad debt must find its way to discharge. So bankruptcy court was where judges and attorneys and other financial experts (like accountants and actuaries) could deal with each case on the merits. The problems could come to some sort of resolution. Some people came out OK. Other people lost everything. But capital flowed from weak hands to strong hands, and the economy moved along.

Why Not Bankruptcy Process?

But not today. Indeed, according to the New York Times many law firms — including firms that focus on bankruptcy work — are actually scaling back and laying off staff. Why is that? Why are the politicians so eager to avoid seeing companies go into bankruptcy? The government is trying to solve the problems of gargantuan levels of debt — along with chronic insolvency and illiquidity within the economy — without resorting to the constitutional-based legal mechanisms and tools that have served the nation well for over 200 years.

Consider the problems of derivatives. Few understand them. Many so-called derivative “contracts” are little more than mathematical formulae based on a series of futuristic occurrences that are entirely speculative. Their initial value in the best of times was entirely somebody’s guess. So is it any surprise that it is all but impossible to place a value on such things during the throes of a recession? Yet derivatives are some of the “troubled assets” that the Treasury is attempting to bail out. This is ridiculous!

Why is the Treasury allowing even one dollar of taxpayer money to get near a derivative? Why not use the bankruptcy process in this kind of situation? The companies that hold unsalable derivatives should have to go into a Chapter 11 proceeding and let a bankruptcy court sort it out. If the derivatives have value, let someone say so — under oath — in front of a federal judge. If the derivatives are worthless, let the judges do what we pay them to do — void the instruments and allocate the losses.

Sure, bankruptcy cases take time to roll through the courts. But could Chapter 11 bankruptcy be any worse than the current drip-drip-drip, hemorrhage of funds into the black hole of the likes of AIG? And at least some bankruptcy judge might just put a stop to the AIG exploits of taking nice vacations to exotic resort locales.

Or what about the U.S. automobile industry? Now the domestic carmakers want some of that TARP money too. Or else what? They’ll have to file for Chapter 11? Yeah? And then?

Well on the day that the automakers file for bankruptcy, the automobile factories will still be there. The patents and designs aren’t going anywhere. The workers and design teams will stick around for a while — it’s not like there are a whole lot of other jobs out there, except maybe raking leaves in leafy suburbs.

It seems to me that General Motors, Ford or Chrysler — without the legacy costs of pensions and health care and featherbed contracts for non-working union members — would actually be a decent investment for a Debtor-in-Possession (DIP) form of financing. Any DIP-lender worth its salt would certainly go into the management suites to take names, kick ass and get rid of the deadwood. And over the long term, if U.S. automakers actually paid more for steel than they have to pay for retiree health care, then we might actually see a revival of that industry.

Meanwhile, We’re Losing Time

Meanwhile, we are losing time. “Ask me for anything,” said Napoleon to his lieutenant. “Anything but time.”

What Napoleon was saying to his subordinate was that in the context of war, there are always setbacks. Terrain, for example, is sometimes captured and lost to the enemy. But lost terrain can be regained. And troops are lost in combat, but the armed forces can be rebuilt and reconstituted from the strategic reserve. Lost time, however? Once it has passed, time is gone forever. You will never get it back, and no general — however great — can win it back on any field of battle.

It is the same thing with the declining U.S. and world economy. The world’s central bankers and treasury ministers dither, and squander capital into bottomless pits of a deflationary recession.

But the great villain in all of this is debt, pure and simple. And much debt is just a collection of bizarre debt instruments, exotic forms of speculative contracts, and obligations so massive that they will never be repaid. So why prolong the agony? Liquidate it now. Let the bankruptcy courts do what the framers intended.

That’s all for now.

Until we meet again…
Byron W. King
November 19, 2008

Bankruptcy, Not Bailouts was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Life in the Leafy Suburbs

There is a problem with living in a leafy suburb. When autumn rolls around, the leaves turn brown and fall off the trees. So you have to deal with cleaning up the yard. And after being away in South Africa for two weeks, I sure had a lot of dead leaves in my yard. Thus did I spend time the other day, working like a man on a chain gang — totin’, liftin’ and haulin’.

There I was, raking leaves and dragging them down to the front curb. From curb side, the local municipality has a dump truck with a big sucking machine (the “suck truck”) that scoops up the leaves and takes them to some place called “away” — wherever that is.

And then this guy drives up in a pickup truck and says, “Hey sir, are you the owner?”

I acknowledged that I was the owner, and the man said “I need work. Could I help you clean your yard for a couple hours and you could just pay me?”

The guy seemed OK, and I had a heck of a lot of yard work to accomplish. So I figured I’d hire him for a couple of hours and get the work done faster. Thus did Mike — my casual employee — and I clean up the area around my house.

As we worked, Mike and I talked. Mike is 45 years old. He’s a high school graduate. He served in the Navy (See? I knew he was OK.) After the Navy he worked at a manufacturing job, from which he was laid off in the early 1990s. Then he worked in a warehouse, which closed in the mid-1990s. Then he worked as a mechanic, until his employer went bankrupt in 2000. Then he drove a truck and hauled freight, until that fell through last year after his major customer moved operations out of the country.

“It’s the story of my life,” said Mike. “I’ll work someplace for a couple of years. Then the economy changes or there’s a business setback, and I’m out on my butt.”

Doing Jobs That Americans Won’t Do

Now Mike drives around leafy suburbs. He looks for people who might need help with cleaning up around their house. Mike’s wife is a cashier at Target, “so she’s got the real job in my house.” Mike has settled down to where he lives in the world of cash, earning a few dollars here and there.

“Y’know,” said Mike, “George Bush said that we need more immigrants here in the U.S. because ‘they do jobs that Americans won’t do.’ What the hell was he thinking when he said that? Here I am. I can strip a diesel engine down to the last nut and washer. And I’m cruising neighborhoods looking for yard-work. Heck, I was born in Pittsburgh. I served my country and I’m no immigrant. But I can’t tell you the kinds of crappy jobs I’ve done just to pull a couple of bucks out of the economy for me and my family.”

“We’re All Immigrants Now”

Mike continued. “I don’t see it getting much better for people like me. That’s for sure. And now all the big banks and big businesses are laying people off too. Everybody’s losing their retirement funds. I guess we’re all immigrants now.”

Where Do We Go from Here?

So where do we go from here? At least Mike can strip a diesel engine down to the last nut and washer. Are we all destined to become — as Mike so delicately put it — “immigrants.”

Call me quaint — even old-fashioned — but I’m proud to be an American. It’s just that I don’t like this “immigrant” sort of governance that has evolved within the U.S. We have too many family political dynasties, taking care of their old friends from way back — if you know what I mean.

Really, it seems like every political administration of recent vintage has had people from Goldman Sachs hiring other people from Goldman Sachs to bail out more people at Goldman Sachs.

Yes, it may be paranoia at work. I confess that I think along these lines quite often. But it has been especially prominent in recent days, as Treasury Secretary Hank Paulson — a former Goldman man — comes up with new and different versions of the Wall Street and banking bailout plan.

First Congress authorized $700 billion — quite a bit more than the entire Department of Defense budget — for some sort of “troubled asset relief plan (TARP).” (Nobody ever really explained it to my satisfaction. Somehow we were going to throw money at a very big problem and fix it.) Then the money flowed like rainwater to Wall Street and a bunch of banks. Then the banks and Wall Street houses continued to pay their insiders’ big salaries and bonuses. And the banks have not exactly been lending into the economy. Meanwhile nobody has been buying up any of those so-called “troubled assets.” So for $700 billion, we are not getting any results. And there’s little or no accountability.

Then Sec. Paulson comes along and says that the TARP money really doesn’t have to be used to buy “troubled assets.” He says we’ll use it for other things instead.

But wait a minute. It would be like Congress authorizing funds for the Navy to buy a new aircraft carrier (actually, 100 new aircraft carriers for $700 billion), and then the Secretary of Defense saying, “No, we won’t use the money to buy aircraft carriers. We’ll use it to pay big salaries and bonuses to defense industry executives.” How long do you think that a charade like that could go on?

Let’s go back to the beginning. Did it ever make any sense for the U.S. Treasury to buy up “troubled assets” — whatever those are and however one might value them? And does it make any sense for the Treasury to just hand out funds to banks and bankers? Like I said, call me quaint or old-fashioned, but of course not.

Until we meet again,
Byron W. King
November 18, 2008

Americans as Immigrant Workers in America was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Better still, imagine they spell out the words “your savings” instead. Here’s goes…

“We need concerted action by governments, central banks and market participants to help stop this wave [of liquidations]…”

— Josef Ackerman, head of Deutsche Bank, speaking in Frankfurt on March 17

“The government is prepared to do what it takes to maintain the stability of our financial system…”

— U.S. Treasury Secretary Hank Paulson to Fox News, March 16

“In every country in 2008, every government has one aim — to maintain stability through the world economic slowdown. Britain with its central role in the world’s financial system is no exception…”

— U.K. Finance Minister Alistair Darling, in his Budget speech of March 12

Not quite with it yet? Check these examples, already done for you…

“The U.S. tax-payer last week agreed to help J.P.Morgan acquire Bear Stearns after a run on Bear, once the second-biggest underwriter of US mortgage bonds. In an effort to shore up Wall Street’s other firms, you also agreed to become lender of last resort to all 20 primary dealers in Treasury notes…” (Bloomberg)

“U.S. leveraged institutions, which include banks, brokers-dealers, hedge funds and tax-sponsored enterprises, will suffer roughly $460 billion in credit losses after loan loss provisions, Goldman Sachs economists wrote in a research note released late on Monday…” (Reuters)

“The [investment] banking system is facing the 21st-century equivalent of the wave of bank runs that swept America in the early 1930s. And your money is rushing in to help, with hundreds of billions from the tax payer, and hundreds of billions more from tax-sponsored institutions like Fannie Mae, Freddie Mac and the Federal Home Loan Banks…” (Paul Krugman in the NY Times)

With it now? Great fun, isn’t it! Just cut to the chase about bailouts and financial aid by remembering what the state’s big generous hand-outs are made from — your tax payments, both current and future, plus the spending power of your savings, ripe for inflating away by elected officials and their unelected agents and staff.

This game beats playing “Spoof” any day, we reckon…which is funny again when you come to think about it.

Because Spoof — played in pubs and bars across the world to decide who buys the next round of drinks — is a game without winners, only a loser. Exactly like this game, then.

Fancy another cocktail before playing (and paying) again?

“We need a continuing message from tax payers and cash savers around the world that they will do what it takes to support economic growth. That will not be easy. It may necessitate taking some risks with inflation. But the message has to be unambiguous…”

So said John Varley — or as near as damn it — in a long open letter to government, published by The Banker magazine at the start of this month.

Varley is group chief of Barclays bank here in London. According to the annual report released on Thursday, he took home £2.4 million last year ($4.8m), just down from his 2006 payout of £2.5m after annual group profits fell 1% to £7.08 billion “due to the global financial turmoil” as the BBC puts it.

Don’t get me wrong here; I have no problems — moral or otherwise — with the concept of multi-million-dollar salaries. Executive pay merely puts flesh on those inequities which life itself thrives upon. The profit motive in finance is precisely what created the joint-stock company, mortgage lending, the safety-net of insurance, credit cards, overdrafts and all the other monetary tools developed by Homo economicus in the last five hundred years.

But what sticks in the craw and makes us choke on our martini-olives, however, is the “privatization of profit [and] the socialization of loss” as Martin Wolf calls it in the Financial Times. Every time the bankers screw up, your money steps in to patch up the losses. Letting the crisis wear on is simply not possible, because no one has dared to try it before. “The authorities feel compelled to intervene,” writes Charles Kindleberger in his history of Manias, Panics & Crashes. “The dominant argument against the view that panics can be cured by being left alone is that they almost never are left alone.”

Hence the pleading from Wall Street and Washington alike.

“Tax-payers need to continue to supply liquidity,” Varley’s article in The Banker very nearly goes on, “and they can help the restarting of the residential mortgage-backed security and commercial mortgage-backed securities markets by being prepared to accept this paper as collateral.”

More than that, “it would have a significantly (and disproportionately) positive impact if your cash savings were to buy commercial paper.”

Ain’t you brave, gentle reader, stepping into the breach so gamely like this! And so modest, too. Thanks to you covering Wall Street’s losses with your tax-dollars, “we’re going to have maybe a mild recession, but we’re going to avoid anything worse,” reckons Jeremy Siegel, professor of economics at Wharton.

Yet the plaudits will go to somebody else, with nary a murmur from you, reckons Siegel. “[Ben] Bernanke may very well easily turn out to be a hero here,” he explains.

Which I guess was precisely your aim in putting money aside to provide for your future.

“Systemically important institutions must pay for any official protection they receive,” Martin Wolf continues for the Financial Times. “Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted.

“This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidized, casino will not allocate resources well.”

This quid pro quo — the “this for that” stated so bluntly by Varley at Barclays and Ackerman at Deutsche Bank — is fast-becoming the surest financial consensus in history. If we bail out the banks to stop their stupidity creating a second Great Depression, they must accept far tighter regulation by those governments and bureaucrats who step in to save the day. No redemption without legislation.

Thing is, of course, we’ve all been before. Across the world, hundreds of times. New regulations come in to stall the last crash…and a new complex system of finance sprouts up, thriving on excessive risk, which ends up needing your money — your tax receipts and your savings – to mop up the mess when it explodes in turn.

From Barnard’s Act of 1734 — which sought “to prevent the infamous practice of stock-jobbing” that had already peaked and exploded with the South Sea Bubble 14 years earlier — through to Sarbanes-Oxley in 2002, which tried to stop Enron and Worldcom once they had crashed, new standards come in after it matters. Financial risk-taking, meantime, simply moves on to find new ways to gear up, using the latest regulations to pin-point those loopholes that will, in due course, be closed up when it no longer counts.

“After the collapse of Equitable Life in 2000,” notes a letter to The Times of London today, “the Financial Services Authority [U.K. watchdog] set up a review team on the regulation of the assurance society. Among the important ‘lessons to be learnt,’ identified in 2001 were — and I quote verbatim — that ‘the FSA management take steps to ensure that the supervisory team is properly constituted with persons with the necessary expertise and knowledge’…

“[Yet] from the recent internal audit by the FSA on its regulation of Northern Rock [the top five mortgage lender which blew up in Sept. 2007] we learn that the bank ‘was monitored by supervisors with expertise in insurance, not banking’…”

More than that, the FSA failed to conduct a proper review of Northern Rock’s operations for the entire 18-month period leading up to its collapse. Even then, prior to that last full review of Feb. 2006 — and “contrary to standard practice” as this week’s official report into the scandal revealed — “formal records of key meetings were not prepared.”

Thus the quid pro quo of bailouts for new rules becomes, in the end, a straight swap of excessive risk for incompetence. Underpinning this long-run historical fact you’ll find the assumption that “if one cannot control expansion of credit in boom, one should at least try to halt contraction of credit in crisis,” as Charles Kindleberger concludes.

For you, the taxpayer and saver, all that means is you get to pay twice — first in higher deductions and then through inflation.

Bet you’re glad Ben Bernanke will get all the thanks.

Cheers!
Adrian Ash
BullionVault
April 4, 2008

Who Pays for the Bailout was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.