Monday, March 30, 2009

GM bankruptcy?

The Obama's administration's leading plan to fix General Motors Corp. and Chrysler LLC would use bankruptcy filings to purge the ailing companies of their biggest problems, including bondholder debt and retiree health-care costs, according to people familiar with the matter.

For months, we libertarians have been saying to let GM go bankrupt. The lefties called us crazy and talked about all the jobs that will be lost. Somehow, I doubt they will attack President Obama with the same level of anger, if at all. In the mean time, the taxpayers could have saved tens of billions of dollars had we let them go bankrupt.

Sunday, March 29, 2009

The government solution

Geithner on the Sunday talk shows: "The market will not solve this."

Yes, of course the market will not solve this economic crisis because it is not being given a chance. Except for the deregulation or Reagan in the early 1980s, the market hasn't been allowed to work us out of a recession, depression, or panic in over nearly a hundred years (the last time was in 1921).

Geithner added: "And the great risk for us is we do too little, not that we do too much."

SARCASM ALERT: I totally agree! Federal government spending has gone from 19% to 28% of GDP, but that is not nearly enough. I think it should go to 40 or even 50%. Heck, why not 100%? Remember, "the great risk for us is we do too little, not that we do too much." So government spending accounting for 100% of GDP should alleviate that concern.

Thursday, March 26, 2009

French workers on Thursday freed the manager of a factory run by U.S. company 3M held hostage in his office for more than 24 hours in a labor dispute over terms for laid-off staff.

French workers have every right to protest and express their grievances. But to hold a person hostage is clearly a violation of his liberty. How often do we hear these "liberals" (socialists really) go on about the government violating civil rights, yet here they have no problem doing so themselves?

We are seeing the same problem with AIG here in the US. Not only do we hear Senators, ACORN, and protesters attack AIG executives and their big bonuses, their spouses and children are afraid of being attacked.

Over in England, Fred Goodwin, CEO of Royal Bank of Scotland, had his house vandalized his kids bullied, and wife shouted at in the street.

The intolerant left is bringing back Liberal Fascism.

Thursday, March 19, 2009

Who will buy the rest?

The Treasury bond market went wild yesterday after the Fed announced it will buy $300 billion of Treasury bonds. The 10-year Treasury rate fell from 3.00% to 2.53%, the biggest decline in years.

While $300 billion is a lot of money, the expected deficit this year is $1.75 trillion. So after the Fed buys their chunk, who will be buying the other $1.45 billion? The market got excited about yesterday's news, but the fundamentals are still working against Treasury bonds.

AIG bonuses

"The bill would apply to bonuses of people making more than $250,000 a year, and would apply only to payments from companies getting more than $5 billion from the federal government."

So now, everybody making more than $250,000 and getting bonuses at AIG will quit and find a job elsewhere. For example, if a trader makes tens of millions in profit for the company or a salesman brings in hundreds of millions in new client funds, that person will quit and find work for somebody willing to pay for his talents. In the end, the good employees, the ones earning big bonuses as a result of making huge profits for the company, will quit. And the bad employees who don't do well enough to earn a bonus will stay.

Wednesday, March 18, 2009

AIG distraction

I am a bit confused why everybody is an uproar about the $160 million of bonuses given to AIG executives. AIG has received $173 billion from the government so far, so the bonuses make up just 0.09% of the total. Maybe we should be focusing on the other 99.91%?

By comparison, the recent budget bill included $8 billion in earmarks. Congress porks up 50 times as much money as the AIG execs, but Congress distracts us with AIG's "greed" and wants us to ignore Congress's waste and corruption.

Why aren't we hearing about the huge bonuses that Lehman executive are getting? Oh yea, because the government let Lehman go bankrupt and now we don't have to reward their incompetence.

UPDATE: We must not forget that the federal government will get back 35% of those bonuses through the income tax. So the bonuses account for just 0.06% of the total money given to AIG.

Friday, March 13, 2009

Preference to American Workers?

Recently, Senator Charles Grassley of Iowa said that Microsoft should give preference to American workers instead of foreigners when laying off employees. He said it was Microsoft's moral obligation.

Disregarding the argument about whether a company can have morals (they certainly should have ethics, but morals?), the question arises of whether this should apply to all US corporations.

How about Exxon Mobil, for example? Shouldn't Exxon give preference to American workers? Shouldn't Exxon expand production in the US with US workers rather than venture overseas? As such, shouldn't the US government make available all area with drillable petroleum, such as ANWR and the continental shelf, to help employ US workers? Isn't it a "moral obligation" to do so?

(Yes, I know Mr Grassley is in favor of increased oil production and drilling in ANWR. I'd like to hear him lecture his fellow Senators about their moral obligations instead of lecturing a company that has already created millions of new jobs.)

Gordon Gekko lives!

Lawrence H. Summers, the White House economic adviser: "Before, we had too much greed and too little fear. Now, we have too much fear and too little greed."

Monday, March 9, 2009

The Death of Capitalism

It is often hard to precisely date a transition from one era to another. In a previous post, I argue that the current crisis stems from the LTCM crisis in 1998 and the moral hazard and low interest rate that followed, but that is certainly up for argument.

These days, one often hears the refrain that capitalism in the US is dying. But in fact, America left free market capitalism way back in 1913.

The year 1913 is best known in the US as the year Woodrow Wilson became President. Woodrow Wilson, of course, was the US's first "modern liberal" President. Two other events, which the Progressives from both parties had been working on for years, finally occurred in 1913 that marked the end of American capitalism: the income tax and the Federal Reserve.

The Sixteenth American, giving Congress the "power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration" was ratified by the required number of states in 1913. As promised, the income tax at first affected very few people. From 1913 to 1915, most people paid no income tax, and the top income tax rate was a low 7% on incomes above $500,000 (a huge sum in those days). But then came World War I and the top tax rate jumped tenfold to 73%. The top tax rate would eventually fall back to 24% under President Coolidge, but the government had proven that it can and will increase taxes significantly if it "needs" to. Under FDR, the top tax rate would hit a whopping 94% and even the lowest rate was at 23%, about as high as the top tax rate under Coolidge.

The second act, which Progressives had been working on for years, was the Federal Reserve System, which was enacted by the Federal Reserve Act of 1913. Like the income tax, this act appeared to have little significance at first. The purpose of a Federal Reserve was to provide an "elastic currency," which would in theory help prevent panics like that of 1907. The obvious initial problem with the Federal Reserve System is incompetence. With such a system, we rely on the Federal Reserve member to decide when and by how much to expand or contract the money supply. Herein lies the fatal conceit that government agents can know what market participants do not know. Market participants take their cues from price signals to determine supply and demand (in the case of money, they look to interest rates). In order to be more effective than the market system, government agents must have some other vast source of knowledge to replace price signals. History and logic prove that they do not.

While the Federal Reserve System is certainly a statist system, it was initially constricted by the gold standard. The Federal Reserve could expand and contract money supply in the short term, but the long term money supply was determined by the amount of gold in the system As long as we had the gold standard, the Fed was limited in its inflationary abilities. The gold standard stayed around much longer than low income taxes. While England and most other countries left the gold standard in World War I, the US managed to maintain it until 1933, when gold coins were confiscated and the conversion rate was changed from $20.67 per ounce of gold to $35 per ounce. This standard, more or less, was maintained until 1971 when the US left the gold standard once and for all.

Not surprisingly, if one looks at the long term trend of inflation in the US, one sees a big spike during WWI, when Britain left the gold standard and the world's gold came into the US, another increase in inflation starting in 1933 and through WWII, when the US changed the dollar to gold ratio and made gold coin ownership illegal, and after 1971 when the US permanently left the gold standard.

These two acts spelled the death of the United States' long history as a capitalist country. With the income tax, and more so with income tax withholding, a person's income no long belonged to himself. Yes, the government is kind enough to let us keep 70% of our income. If you believe your income belong to you and you give the government a share, try not paying your taxes. Furthermore, the government can raise taxes to extreme levels (94% under FDR) and even do so retroactively (under Clinton). When the government can take as much of your future or even past income with threat of garnished wages and imprisonment, obviously your income no longer belongs to you.

While the income tax takes away your income, Federal Reserve induced inflation takes away your wealth. Since the creation of the Fed, the value of a dollar has declined to 5 cents. Of course, we all expect inflation and it is built into bond rates and expected returns for stocks. In "normal" times, the constant 2-3% rate of inflation is discounted and does not affect the value of our assets. But not all times are normal. In the late 70s and early 80s, inflation shot up to double digit rates. The government can easily run the printing press, pushing inflation higher to devalue US government debt, either on purpose or through incompetence. Now, anybody who has US dollar denominated assets, such as Treasury bonds, US bank or money market accounts, or US equities, will see their net worth shrink dramatically.

Starting in 1913, the government has the power to take away your US dollar denominated wealth through inflation and to take away your income through income taxes. All of a sudden, the US government, not the American citizen, became the economic judge, jury, and executioner. As a result, 1913 goes down in history as the year capitalism died in the United States.

BTW, 1913 also marked the death of states rights with the ratification of the Seventeenth Amendment, transferring Senator selection from each state's legislature to popular election by the people of each state. Prior to 1913, the state legislatures chose Senators, giving the states a powerful check on the federal government. But after 1913, with direct election of Senators, the Senate became little different than the House of Representatives and Senators became more interested in "national" legislation and no longer had to follow the advice of the state legislature to get re-elected. As U.S. Senator Zell Miller of Georgia said: "Direct elections of Senators … allowed Washington’s special interests to call the shots, whether it is filling judicial vacancies, passing laws, or issuing regulations." In 1913, the states lost their last check on federal power and the federalist system officially died.

Thursday, March 5, 2009

Banking moral hazard

Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures. “Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

When banks and their executives and insulated from the risks they are taking, yet they receive the rewards, they take on more risk than they would have in a free market environment. The government's "insurance" through the FDIC enabled banks to risk our deposits in by lending to high-risk businesses and home-owners or, even worse, by buying high yielding mortgage backed securities. Instead of acting prudently, banks gambled with our money.

Banks became like an option. Risk was limited (to the option holder) but reward was still huge. In reality, that risk was not limited, it was just shifted onto the government and the taxpayers.

Another successful government program...

UPDATE: Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

Now we have the government bailing out other parts of the government.

Tuesday, March 3, 2009

Geithner versus tax evaders

President Barack Obama's Treasury secretary says the administration will unveil a series of rules and measures in the coming months to limit the ability of international companies to avoid U.S. taxes. Treasury Secretary Timothy Geithner told the House Ways and Means Committee on Tuesday that Obama will propose legislation to limit U.S. companies' ability to shelter foreign earnings from taxation in the U.S. He also said the administration will try to limit wealthy Americans' ability to use tax havens to avoid taxation.

Geithner the tax evader will head up the attack on tax avoiders. As the old insult goes, it takes one to know one.

Trader Obama

President Barack Obama said Tuesday he's "absolutely confident" that the global economy will recover, and suggested that stocks might be a good buy now that prices have fallen so hard. "Profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it," Obama told reporters.

Maybe Obama should have become a trader or market analyst instead of President.
The European Union's top economy official said Tuesday that the 16 euro nations have a solution to rescue any member that risks economic collapse. EU Monetary Affairs Commissioner Joaquin Almunia said it would not be clever to give out details in public "but the solution exists." "Don't fear, we are equipped intellectually, politically, economically to face this crisis scenario," he said in a speech at an event organized by the European Policy Centre think tank. "But by definition this kind of things should not be explained in public."

I can rest easier now knowing that they have a super-secret solution to all our problems. I'll just ignore all their previous screw-ups, all the stuff they did to get us where we are today, and all the previous "solutions" that didn't work. This time, they have it figured it for sure!