The Provocateur

The nine most terrifying words in the English language are 'I'm from the government and I'm here to help'

Sunday, July 12, 2009

Video, Quote, and Word of the Day

shibboleth

a peculiarity

All life is an experiment. The more experiments you make the better.

Ralph Waldo Emerson

The President as Pollyanna II

One of the worst things that can happen to an administration is for them to see things as rosey while the citizenry suffers. It's sometimes called the Pollyanna effect. Especially when they are talking about the economy, the administration is always in a difficult position. If they sound gloomy, they talk down an economy. Furthermore, economic health is the administration's responsibility. So, if the economy is suffering, who's responsibility is it? Remember how Jimmy Carter addressed the nation and presented a near doomsday scenario. That didn't help him or our nation. Yet, when you proclaim everything just fine while things aren't it could be even worse. Those are the waters that President Obama is dangerously close to treading on right now. Yesterday, the president used his weekly radio address to defend the stimulus and call for more patience.

Now, he's using a Washington Post column to do the same thing.

The swift and aggressive action we took in those first few months has helped pull our financial system and our economy back from the brink. We took steps to restart lending to families and businesses, stabilize our major financial institutions, and help homeowners stay in their homes and pay their mortgages. We also passed the most sweeping economic recovery plan in our nation's history.

The American Recovery and Reinvestment Act was not expected to restore the economy to full health on its own but to provide the boost necessary to stop the free fall. So far, it has done that. It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall. We must let it work the way it's supposed to, with the understanding that in any recession, unemployment tends to recover more slowly than other measures of economic activity.


Now, the president continues to claim that aggressive action has "helped pull our financial system" from the brink. What does this mean besides making sure that banks and financial institutions can continue to function? It certainly doesn't mean that lending has gotten anything but more difficult. CNBC has a good microcosm of just how much more difficult things have gotten since our "financial system was pulled from the brink".


Inna Komarovskaya was ready to do her part to revive the economy: She found a “really cute” condo to buy.

Despite a good credit score, a six-figure income and an ample down payment, Dr. Komarovskaya, a recent dental school graduate, could not get a loan. Her mortgage broker told her she ran afoul of new rules requiring two years of sufficient tax returns from some home buyers, instead of only one.

“Everyone says this is a buyer’s market, but they wouldn’t let me buy,” said Dr. Komarovskaya, 30. “It’s not fair.”


The rule requiring two years of tax returns was put into place after TARP and the stimulus. Lending on condos has gotten significantly more restrictive. Finally, Fannie/Freddie created all sorts of new credit score break points in January that added to the rate of anyone with a credit score below 740. These are just three examples of dozens of new restrictions put into place since the administration supposedly made things easier to get credit. (like the new appraisal rules created by Fannie/Freddie)

Yet, the president continues to say that we have been pulled back from the brink. The biggest problem from the perspective of the administration is that their defense of the stimulus is vague. It's vague in the face of real and specific maladies. We're at 9.5% unemployment and going higher. We're losing near 500,000 jobs monthly and there' no sign of that loosening. So, how does the president counter these very stark economic problems? He says it will take two years to fix things.

There is a whole other set of problems with the president's new proclamation that the stimulus will take two years to work. First, he demanded immediate passage because we couldn't wait. We needed the stimulus right away. If that's so, why would it take so long to make its way through the economy? Wouldn't it have made more sense to debate a bit more but pass a stimulus that worked quicker? It's certainly an effective line of attack.

More than that, what does the president mean when he says,


It was, from the start, a two-year program, and it will steadily save and create jobs as it ramps up over this summer and fall.

Does the president mean that the economy will be fixed in two years? If so, he's out of his mind. We've lost just over two and a half million jobs since he took over. We'll lose at least two million more before the end of the year. It's going to be the summer next year at best before we stop losing jobs. That means we might still be at double digit unemployment two years from the implementation of TARP. Does that sound like an effective two year program?

Maybe, the president means that it will take two years to hit bottom. If that's the case, no one is going to consider that a success.

The president has two significant problems. At best, he has an effective program but totally underestimated how serious the situation is and made rosey projections that look foolish now. (remember how our unemployment rate would cross 8% without the stimulus) At worst, he's chosen the wrong approach and will continue to defend it while the economy gets worse and worse. (I would however be more confident it was the first if he could come up with something more than platitudes to defend the policy)

If it's the first, his Democratic colleagues will get crushed in 2010 while he will likely get re elected. If its the second, we can all only hope that things get reversed before it's too late.

A World Without TARP: A Thought Experiment II

Jeffrey Miron has an excellent piece on this subject that I also recommend reading.

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Most people think we started stimuli and bailouts back in September with TARP. I go back even further. I go back to May of last year when the government bailed out Bear Stearns. Bear Stearns was days away from filing for bankruptcy when the Federal Reserve, in one weekend, stepped in and brokered a deal in which JP Morgan Chase would buy them out. Such a deal would normally take months to work out. Yet, this was worked out all in one weekend. You could say, as Michael Corleone would say, the Federal Reserve gave each an offer they couldn't refuse. Since Bear Stearns was on the verge of collapse, they had no room for bargain. The mere fact they would get bought out was good enough. As for JP Morgan Chase, the Federal Reserve sweetened the deal so much that they simply couldn't refuse. In other words, the Federal Reserve structured the deal so that it was so undervalued that Chase had to accept. They even backed it up with loans and equity.

When I first heard about this, I was shocked. Here was our central banker also acting as rainmaker, investment banker, and debt backer. This appeared to me to be a massive usurption of power. The story got its due of publicity but not nearly enough. Furthermore, while most business folks acknoweldged the troubling aspects of the Fed's power grab, they also justified it by saying the financial system would collapse without this deal. (Doesn't that sound familiar) No one, at the time, seemed to ask what sort of a system we had that one company, Bear Stearns, could bring it down. Of course, only months later Lehman Brothers failed and the system came down anyway.

I bring this up because the Bear Stearns fiasco was about thirteen months ago. Yet, things haven't gotten better but worse. Those that defend the bailouts clam, as the president did, that our financial system has come back from the brink. What exactly does this mean?

After all, lending has only tightened since Bear Streans, Lehman, and TARP. We've spent more than a trillion dollars to prop up the financial system and it's harder today to get a loan than it was before we spent all this money. Commercial mortgage lending is nearly non existent. Meanwhile, residential lending continues to get more and more difficult. In the months since TARP, Lehman, and Bear Stearns, things have only gotten worse in the credit markets.

When folks that defend the bailouts say we have come back from the brink, what they really mean is that things have gotten slowly worse since then. That's sort of like a .400 hitter who suddenly starts hitting .200. Then, you tell people that you brought him back from the brink because he's now only hitting .195.

Sure the financial companies are healthier. Of course, they are. We pumped two trillion dollars into the system. The Federal Reserve let's them borrowe for free (through a fed funds rate that is currently at ZERO). Of course, they've gotten healthier. We've spent trillions to make that happen. The problem is that their health hasn't filtered into the rest of the economy. Sure, their investment banking operations are making money. Sure, they make more margins on their own loans. (since they borrow for free) None of it makes its way into the rest of the system. So, when the feds say we brought the financial system back from the brink, what they really mean is that they made sure that bankers could continue enjoying profits. There's no evidence, however, that those profits were actually shared.

Mr. Miron makes an excellent point about the fundamental fallacy of bailouts.

By doing nothing, I mean we could have done nothing new. Existing policies were available, which means bankruptcy or, in the case of banks, Federal Deposit Insurance Corporation receivership. Some sort of orderly, temporary control of a failing institution for the purpose of either selling off the assets and liquidating them, or, preferably, zeroing out the equity holders, giving the creditors a haircut and making them the new equity holders. Similarly, a bankruptcy or receivership proceeding might sell the institution to some player in the private sector willing to own it for some price.

With that method, taxpayer funds are generally unneeded, or at least needed to a much smaller extent than with the bailout approach. In weighing bankruptcy vs. bailouts, it's useful to look at the problem from three perspectives: in terms of income distribution, long-run efficiency, and short-term efficiency.

As a nation, we set up a sophisticated system for dealing with companies that failed, banks included. Yet, those that favored trillions in bailouts would have us believe that these systems weren't equipped to deal with the failures such companies as Bear Stearns and Lehman Brothers. Why not? When Bear Stearns went under our unemployment rate was in the fives, it's now nearly ten percent. The sort of doomsday scenarios that were floated to justify its bailout are occurring. The only difference is that it took over a year to get there, whereas without it we would have gotten there much faster.

The problem with bailouts is that it subverts some very important characteristics of markets. Markets are supposed to reward the strong and punish the weak. They reward risk but punish excessive risk. None of that is happening now. The folks that didn't dip too far into sub prime and other risky mortgages are the ones that are supposed to be benefitting from the failure of all those that did. Instead, those weak companies are propped up with endless amounts of government money. The reality is that if AIG had simply been allowed to fail, someone would have stepped in to buy it for pennies on the dollar and gladly taken on their debt obligations if the price was small enough. Instead, the federal government has pumped nearly two hundred billion into a company worth $1.5 billion. How does that make sense?

The same is true for endless bailouts of troubled borrowers. Those that favor bailouts, John McCain included, would tell us that mass foreclosures hurt not only the foreclosed but those around them. After all, everyone's property value falls when there are mass foreclosures. Of course, that's only true if you sell right away. It's also only true if you are a seller at all. One third of this nation rents. All of those folks would benefit from lower real estate prices. Once again, the dynamics of markets are dismissed. Those flushed with cash now would be able to take advantage of low home prices. Instead, the government props up home prices under the misguided notion that artificially keeping them up helps all. So, borrowers that became overextended are rewarded with new better rates. Meanwhile, qualified borrowers face all sorts of new ristrictions. Just think about it. The best deals in the mortgage market right now are for loan modifications. Those can go as low as 2%.

The biggest problem with bailouts is that stops the market bottom. Markets bottom out when those that survive see opportunities and invest back in. That isn't happening either on the corporate or individual end because government intrusion is stopping those opportunities. There should be millions of homes being sold in a desperate attempt to unload foreclosures. The recipients of those deals would create the bottom. There should also be thousands of health parts of hundreds of unhealthy financial firms that would be sold right now to financial vultures looking for deals. Just think about it. If Citigroup had been allowed to fail, someone would have gotten a deal for Salomon Smith Barney. Instead, Citigroup is kept whole through about $50 billion in government money.

Here's the real problem with all of this. Despite what some may claim, there is something called an economic cycle. Economic booms are followed by economic busts. The busts bottom out but only after the excess has been removed. That's removed when those that took too much risk are punished with removal. That isn't happening and so the bottom gets dragged out longer, much longer, than it needs to be.

That's why it's important to track the beginning of these bailouts to May of last year. Had we let Bear fail, it would have created a significant but quick crater. We would have had all sorts of economic pain. Yet, our pain would now be ending and we would be starting the recovery. Not to mention that the government wouldn't have spent two trillion dollars.

Saturday, July 11, 2009

The Supreme Court, Abortions, and the Culture Wars

Remember when Bill Bennett said this.

If you wanted to reduce crime, you could -- if that were your sole purpose -- you could abort every black baby in this country and your crime rate would go down.

That would be an impossibly ridiculous and morally reprehensible thing to do, but your crime rate would go down.


This was said in a hypothetical, thought experiment, manner, and the controversy surrounding it lasted for weeks. Bennett's reputation was never the same. He was referred to as a racist and people claimed he advocated the killing of all black babies. I remember most of the media just having a field day with that statement.

Now, we have this statement from Judge Ruth Bader Ginsberg.

Q: Are you talking about the distances women have to travel because in parts of the country, abortion is essentially unavailable, because there are so few doctors and clinics that do the procedure? And also, the lack of Medicaid for abortions for poor women?

JUSTICE GINSBURG: Yes, the ruling about that surprised me. [Harris v. McRae — in 1980 the court upheld the Hyde Amendment, which forbids the use of Medicaid for abortions.] Frankly I had thought that at the time Roe was decided, there was concern about population growth and particularly growth in populations that we don’t want to have too many of. So that Roe was going to be then set up for Medicaid funding for abortion. Which some people felt would risk coercing women into having abortions when they didn’t really want them. But when the court decided McRae, the case came out the other way. And then I realized that my perception of it had been altogether wrong.

Boy those statements sound pretty much the same. Yet, the only places where there is controversy regarding this statement is in the conservative media. That's how the MSM treats abortion. When a conservative says something controversial, it's turned into a front page story for as long as possible. When a liberal does it there is a collective yawn. The reporter that asked the question didn't even follow up with any clarification from Ginsberg.

In fact, this isn't the first abortion supporter to make such a claim. One of its main initial advocates, Margaret Sanger, made a very similar statement to that of Ginsberg.

it is a vicious cycle; ignorance breeds poverty and poverty breeds ignorance. There is only one cure for both, and that is to stop breeding these things. Stop bringing to birth children whose inheritance cannot be one of health or intelligence. Stop bringing into the world children whose parents cannot provide for them. Herein lies the key of civilization. For upon the foundation of an enlightened and voluntary motherhood shall a future civilization emerge.

Those in the pro life side of the philosophical side have always been concerned that abortion would be used as a tool of social engineering. That's exactly what Sanger thought it should be used for, and it's pretty much the same philosophy that Ginsberg espoused in the interview. Of course, outside of a few corners these very controversial and provocative comments have received no attention.

Analyzing Obama's Accra Speech

This was one of the best speeches that President Obama has given in my opinion. There was none of the moral equivalencies, America bashing, and straw man arguments that President Obama has grown far too fond of using in other speeches. First, here's some of my favorite portions.

So I do not see the countries and peoples of Africa as a world apart; I see Africa as a fundamental part of our interconnected world – as partners with America on behalf of the future that we want for all our children. That partnership must be grounded in mutual responsibility, and that is what I want to speak with you about today.

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It is easy to point fingers, and to pin the blame for these problems on others. Yes, a colonial map that made little sense bred conflict, and the West has often approached Africa as a patron, rather than a partner. But the West is not responsible for the destruction of the Zimbabwean economy over the last decade, or wars in which children are enlisted as combatants. In my father’s life, it was partly tribalism and patronage in an independent Kenya that for a long stretch derailed his career, and we know that this kind of corruption is a daily fact of life for far too many.

Of course, we also know that is not the whole story. Here in Ghana, you show us a face of Africa that is too often overlooked by a world that sees only tragedy or the need for charity. The people of Ghana have worked hard to put democracy on a firmer footing, with peaceful transfers of power even in the wake of closely contested elections. And with improved governance and an emerging civil society, Ghana’s economy has shown impressive rates of growth.

This progress may lack the drama of the 20th century’s liberation struggles, but make no mistake: it will ultimately be more significant. For just as it is important to emerge from the control of another nation, it is even more important to build one’s own.

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This is about more than holding elections – it’s also about what happens between them. Repression takes many forms, and too many nations are plagued by problems that condemn their people to poverty. No country is going to create wealth if its leaders exploit the economy to enrich themselves, or police can be bought off by drug traffickers. No business wants to invest in a place where the government skims 20 percent off the top, or the head of the Port Authority is corrupt. No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery. That is not democracy, that is tyranny, and now is the time for it to end.

In the 21st century, capable, reliable and transparent institutions are the key to success – strong parliaments and honest police forces; independent judges and journalists; a vibrant private sector and civil society. Those are the things that give life to democracy, because that is what matters in peoples’ lives.

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Now let me be clear: Africa is not the crude caricature of a continent at war. But for far too many Africans, conflict is a part of life, as constant as the sun. There are wars over land and wars over resources. And it is still far too easy for those without conscience to manipulate whole communities into fighting among faiths and tribes.

These conflicts are a millstone around Africa’s neck. We all have many identities – of tribe and ethnicity; of religion and nationality. But defining oneself in opposition to someone who belongs to a different tribe, or who worships a different prophet, has no place in the 21st century. Africa’s diversity should be a source of strength, not a cause for division. We are all God’s children. We all share common aspirations – to live in peace and security; to access education and opportunity; to love our families, our communities, and our faith. That is our common humanity.

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Freedom is your inheritance. Now, it is your responsibility to build upon freedom’s foundation. And if you do, we will look back years from now to places like Accra and say that this was the time when the promise was realized – this was the moment when prosperity was forged; pain was overcome; and a new era of progress began. This can be the time when we witness the triumph of justice once more.



Throughout the speech, I thought that President Obama spoke much like Bill Cosby does to the African American community. Just as Cosby says that it's time for African Americans to stop using prior wrongs as an excuse to live life poorly, so too did President Obama say that prior wrongs done on the continent by outsiders are no excuse for what is happening now in the continent.

Africa has a long and terrible history of oppression, slavery, and colonialism. That history has lead drawing lines of sovereignty that have a lot less to do with history and relationships and lot more to do with the naive randomness that outside colonials dreamed up in their heads. While President Obama acknowledged this terrible history and its weight on current African society, he said firmly that this was no excuse for corruption, tyranny, and the broken societies that this leads to.

President Obama laid out four pillars to transforming the continent: better governance, more opportunity for economic growth, better health care, and a decrease and ultimate end to conflicts.

Anyone that knows anything about the current politics and geopolitics of Africa knows that all four are symbiotic. For instance, there can be no economic opportunity in a country full of government corruption. Africa is gripped in an AIDS crisis and this a direct result of corrupt governments standing by while that disease took hold.

In fact, you could even say the last three are a by product of the first. President Obama is further right that an isolated election here and there does NOT make for good governance. Herein lies the rub. While the president recognizes the complexities of good governance, especially in the African nation, and pledges to support all such governments, it will take more than one good speech to make this happen. That's been our policy for decades but the continent simply refuses to take anything more than marginal steps toward this.

Of course, there can be no economic opportunity in countries run by corrupt governments. A former client spent a lot of time working for Motorola in the Phillipines. Motorola has a strict policy of never being a part of any corruption. That's no easy task in the Phillipines. As such, intermediaries were often used for pay offs so that Motorola was never directly part of any pay offs. Ask any citizen of any third world nation and you will always find obscene corruption: pay offs are a part of doing business.

AIDS exploded in Africa for several reasons. First, men simply thought it was weak to wear condoms. Truckers travelled the region having sex with any women they could find and then in fect their wives when they got back home. Beyond this, the governments are so corrupt that they were simply ill equipped to handle the virus as it spread. Instead, these governments often joined in propaganda campaigns claiming that AIDS simply didn't exist.

Of course, conflicts are often all too normal reality on this continent because it's ruled almost entirely by either strongmen or by weak and corrupt governments. (or in the case of Somalia, no government) Too many of the second lead directly internal conflicts that often spill outside their borders. So, in the last twenty years Ethiopia, Somalia, the Congo and the Sudan are just some of the African nations that have experienced conflict.

While the president did an excellent job of laying out the problems, he was short and vague on solutions. Of course, that's natural. The solutions can't possibly be summed up in any reasonable way in a speech that was about a half hour. The solutions can be laid out in a speech but it will take hard work, not yet seen, to resolve them. So, while I commend the president on an excellent speech that identifies many of the problems on the continent, and lays out in broad strokes the solutions. It will be, as the president himself pointed out, up to the African continent to follow through and lift itself up. We can only be there to support those that support freedom, democracy and good governance. (something the president also said)

full audio here.

Video, Quote, and Word of the Day

acrid

bitter

Vanity and pride are different things, though the words are often used synonymously. A person may be proud without being vain. Pride relates more to our opinion of ourselves, vanity to what we would have others think of us.

Jane Austen

TARP for Small Businesses: Theory Vs. Reality

The government is now floating the idea of giving small businesses money from the Troubled Asset Relief Program.

The Obama administration is working on a plan that would make available funds from the $700 billion banking-system bailout package to millions of small businesses struggling to survive the recession, FOX News has confirmed.

Gene Sperling, a top adviser to Treasury Secretary Tim Geithner, developed the idea of using funds from the Troubled Asset Relief Program (TARP) to help small businesses as part of a department-wide push to generate ideas to pump life into this ailing part of the economy. The concept is to use TARP funds to increase Small Business Administration loans that are obtained when the government backs 90 percent of a bank loan.

It is unclear how much TARP money might be involved. Of the $700 billion appropriated, roughly $127 billion remains. The SBA has authority this year to provide $17.5 billion in loans to small businesses. According to agency records, the SBA provided $6 billion in loans through June.

Now, small businesses are a sort of third rail in our society. No politician wants to be against helping small business owners. So, it's likely this policy idea will be met with little resistence, at least while it's still in concept. The problem is that while this sounds good in theory, in reality this is a total mess. There's about 27 million small businesses in the U.S. if you consider a small business as having less than 500 employees.

So, how do you figure out who gets what? If you give each small business $1000, that's $30 billion. Ten Thousand for each business is $300 billion. So, we simply don't have enough to give everyone money.

Now, we get into reality. If the government gave money based on need, then the government would be rewarding failure. It would subsidize the weak and make things difficult on the stronger small businesses. If the government did in other random ways, that would lead to favoritism. (just see the PPIP program for that) If you gave everyone the same amount, that would mean that the smallest of small businesses would get the better part of it.

There's another problem. This is the Troubled Asset Relief Program. It's not the Troubled Small Business Relief Program. By giving money to the automakers the government already moved money to things they weren't meant for. In fact, the program was supposed to buy "toxic assets" from banks. It has never been used as it was passed. We are, after all, a nation of laws. This law wasn't intended to bail out small businesses. It wasn't even intended to bailout banks. It was supposed to buy "toxic assets" from the banks. The more time passes, the more it does nothing it was intended. If the president wants to provide a bailout for small businesses, then have him go to Congress and pass another law. TARP is not that law.

If the president really wants to give small businesses relief, then he needs to demand an across the board tax cut. That would put more money into the pockets of small business owners themselves, and into the pockets of the consumers that frequent them.