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Tuesday, September 30, 2008

The Coming Economic Crisis Under Barack Obama

Introduction: I have already said that if John McCain is to win this election he needs to make the connection between the bailout, inflation, the weak Dollar, and spending. Whoever is the President will have to deal with executing the bailout. Furthermore, his entire economic policy will be predicated based on this bailout. As such, Barack Obama's many promises must be looked at again in the new context of this bailout. Thus, Barack Obama's many economic promises must be re examined. Either, he will lie his way into office and not do any of the things he has promised to do, or he will cause an economic meltdown the likes of which we have never seen. Finally, to all my liberal readers please spare me with the standard rhetoric like things can't get any worse than under Bush/Republicans. Rhetoric won't save us when real economic doom hits, and it won't save you when you realize that nothing he said during the campaign will come true.

Now, then, let's examine what the bailout will do. The first thing it will do is expand our debt. Expansion of our debt will weaken our Dollar and it will put upward pressure on inflation and with it interest rates. Furthermore, bailout or not, we are likely headed into at least a recession.

Here is what Obama has proposed in new spending ideas. (as well as what he believes each plan will cost)

A $65 billion-a-year health plan
$15 billion in green energy spending
$85 billion in tax cuts and credits
A $25 billion-a-year increase in foreign aid
$18 billion a year in education spending
$3.5 billion for a national service plan

Beyond this spending, his so called tax cuts are actually filled with hidden spending that he claims are tax cuts. Obama claims that 95% of the people will get a tax cuts, except that 40% of people don't pay any taxes. As such, 40% of the people will get a government welfare check that he will claim are a tax cut. That is an extra roughly $300 billion in new spending according to his own estimates. Of course, there is no way to know how much universal health care will cost. Furthermore, he wants to spend money on "infrastructure", and of course, with a Democratic majority in both Houses, there is no telling how much in goodies and giveaways there will be. That's why Dick Morris estimates that his spending proposals will likely have a real price tag of a trillion dollars yearly.Here is what Obama has proposed in new spending ideas.

Now, Obama claims that he will pay for these spending cuts by among other things ending the war in Iraq. Of course, even his own conservative estimates have a "responsible withdrawal" taking at least a year and a half. Furthermore, he wants double down on our efforts in Afghanistan. As such, it is unclear just how much that will save and when. Furthermore, our weakening economy will cause government tax receipts to drop in general.

What we have is a massive new debt load. A massive new debt load will weaken an already weak Dollar. The weak Dollar will contribute to exploding gas prices and food prices. Furthermore, the increased borrowing right after we borrowed about $700 billion for this bailout, will put enormous pressure on inflation. Remember, this is the candidate that couldn't name one program he would cut, and even highlighted after school education as a program he would like to increase funding for. If he increases funding for after school education, do you really think he will cut any of his other programs. This perfect storm will likely cause not merely inflation but hyperinflation in our economy.

Now then, let's examine what his tax policy will do to the economy. Barack Obama believes that he can build the economy from the "bottom up". This is of course code for income redistribution. He plans on giving the middle class a tax cut, but it is the middle class that will be most hurt by increased inflation. Hyper inflation will kill the middle class, and the increase in everyday bills will dwarf whatever tax cuts Obama gives them. An extra thousand dollars in reduced taxes is peanuts, when your gas and grocery bill doubles. The downward pressure on the Dollar Obama's spending plans will create will have that sort of dramatic effect on gas and food prices. (both of which are priced in Dollars)

Of course, beyond his middle class tax cuts, he will also create a series of tax increases. He will raise taxes on those making $250,000 and more. Many of these are small business owners that also file individual taxes. Millions of small businesses will have less money for capital, equipment, and new hires at exactly the time when those businesses need to expand.

Of course, Obama's most dangerous tax increase is the Capital Gains Tax. This is the tax on all sorts of investments: real estate, equity, and all sorts of other investments. Now more than ever, we will need capital investment. Yet, Barack Obama will punish exactly that sort of behavior. Capital investment is one of the best ways to get an economy out of a time of weakness. There will be less real estate investment just as the real estate market is going to face its worst time.
There will be less stock investment at exactly the time that stocks would face their biggest weakness. Furthermore, between November and January, many investors will begin to sell off whatever investments they have that are making money so that they can avoid paying the higher capital gains tax.

What this will cause is a shrinking business and personal capital investment at exactly the time when it is needed. That will lead to lesser jobs, and that will eventually lead a depression. In other words, we are likely to face, if Senator Obama follows through on his promises, to not only face stagflation but depression and inflation at the same time. In other words, we are about to face an economic apocalypse if he is elected and follows through on his promises. Either that, or he is simply lying about everything he will do for everyone and we are electing an untested first term Senator and none of us know what he will do.

Alan Greenspan and the Lessons of Artificial Liquidity

I put most of the blame for the start of this crisis on Alan Greenspan. By dropping the Fed Funds Rate below 1% (.75% to be exact) he created artificial liquidity. At the time, we were facing a different sort of liquidity crisis. It wasn't that banks were under capitalized. They had enough capital. The problem then was that no one had confidence in the economy and so lending and borrowing was grinding to a halt. In order to spawn business, he dropped the Fed Funds Rate below one percent, and he artificially created liquidity. That artificial liquidity found its way in a massive way into real estate. That started the ball rolling.

Just as it was irresponsible for Greenspan to create artificial liquidity by dropping the Fed Funds Rate so low, so too, would it be irresponsible for the government to create artificial liquidity through this bailout. There seems to be a strain of thought that acknowledges just how irresponsible it is but says it is necessary in order to create enough liquidity to do business. Of course, the exact same thought was used to drop the Fed Funds Rate as low as it was when that was done.

The reason there is a liquidity and confidence crisis is because all sorts of financial institutions took massive bets, sometimes on massive margins, on bad loans. No one can change that through any sort of bailout. There should be a liquidity crisis. Those that are supposed to have liquidity acted foolishly. Some believe that a crisis on Wall Street doesn't spill onto Main Street. They are themselves foolish. Wall Street controls the money and once you control you control everything. Of course, this liquidity crisis will affect businesses and consumers. It will be tough, and so be it. Massiv mistakes were made and there must be some payment for those mistakes. Anyone that says that capitalism comes without ever having a bump in the road is lying. Anyone that says there will never be a big bump is also lying. Yet, attempting to erase a mistake with a bailout only makes the chances of future mistakes even greater.

The problem with this bailout isn't merely that let's a lot of fat cats off the hook, though it does. Beyond that, what it does is place into same irresponsible hands $700 billion in fresh capital. Banks are much like crack addicts. Only their crack rock is loans. Banks want to do loans. They need to do loans. If they are given $700 billion in fresh capital, that's exactly what they will do. Some think that's a good thing. After all, business can't get loans, people can't get car loans, and they can't get student loans. Yet, if loans are suddenly generated through an artificial infusion of capital, we will start down the exact same road that landed us here.

Once these banks get their hands on a fresh set of money, they will lend like there's no tomorrow. That's is the problem. They've probably learned their lesson on mortgages, residential at least. Maybe they will move into commercial loans now. Commercial loans were relatively unscathed because they work on a somewhat simple premise. A bank won't loan money unless monthly income on the commercial property is at least 120% of monthly expenses. Of course, with all that money, there will be more money then loans. Maybe, soon enough, banks will loosen that up or forget about it entirely. Maybe they will go all into small business loans. Maybe soon, you won't even need a business plan, or maybe banks will disregard weak and troubling balance sheets.

You think that is just ridiculous. I bet you would have also though it ridiculous to give multi hundred thousand dollar loans without ever verifying income and assets. They did, and that's because artificial liquidity caused there to be more money than loans. So, banks created new ones to keep up with the money. Now, the Federal Government is about to infuse banks again with more money. It will be more money than they will have loans. So, they will create some new ones. We will be here again a few years from now.

The LGBT School Experiment: Innovation or Misguided Social Engineering

Anyone who follows such things knows there is a serious crisis in the Chicago Public School system. At the beginning of the school year, State Senator James Meeks staged a walk out in order to protest the the discrepancy in funding between the inner city public schools and the wealthy schools of the North Shore suburbs like Winnetka. Because Illinois funds their public schools through property taxes, it is just a fact that wealthier areas get more funds than poorer. Either way, many Chicago Public Schools are woefully underfunded.

That's why I found it peculiar to read that the same Chicago Public School system struggling for funding is now in the final stages of opening up a special school for lesbian, gay, bi sexual, transvestite and questioning students.

An LGBTQA Chicago Public Schools ( CPS ) high school has been proposed and, if given the green light, the school would join the likes of New York's Harvey Milk High School in becoming a national model in providing a welcoming, safe education for queer and questioning youth and their allies.

The Greater Lawndale Little Village School for Social Justice submitted the proposal to the CPS Office of New Schools for a Social Justice High School-Pride Campus. This project has been in the works since spring of this year. If approved, Pride Campus, a voluntary public high school that would implement a college prep curriculum in all subject areas, would open in 2010. It would serve LGBTQA ( lesbian, gay, bisexual, trans, questioning and allied ) students from all over the city.

So, it appears that the same school system that struggles to find funding for most of its schools will now open up a school that will isolate gay students. I am first troubled by the same system that can't produce funds for some schools finding funds for an idea that has almost never been tried before.

Of course, what is most troubling is the social experiment that this school will attempt to create. First, I am very sympathetic to the difficulties that a gay student would face in the typical high school. Being bullied and being an outcast in the school system are two things I am unfortunately all too familiar with. I was an immigrant from the Soviet Union at the height of the Cold War when I went through most of my schooling. If you think it is tough being a gay kid in school, try being referred to as a "Russian Pisspot" for several years. That said, there are plenty of children that have it difficult in school, short people, funny looking people, foreigners, and religious minorities. I won't get into a grievance war, however where will it stop? After we are done isolating gay kids among their own kind, maybe we should move onto short people, Hispanics, etc.

Furthermore, after these gay kids are done living in a bubble in which everyone is exactly like them, they will at some point have to move into the real world in which things will be very different. How exactly will this school prepare them for the world?

That's not to say that I am against schools that isolate students. Many of my friends in college went to a Catholic high school. Their experience in high school was far superior to mine. A Catholic high school, though, is privately funded. That is the sort of place for this type of school. I have no problem with an all gay high school as long as private funds are used to fund it. I have no problem with any innovative idea for schooling as long as it isn't tax money used to fund it. The public school system is not the place for social engineering. Those sorts of ideas are meant for private funds. That's where they should stay.

The Bailout: Anatomy of Failure (The Inside Baseball)

When it is all said and done, there will be plenty of blame to go around. Members of both parties will share responsibility for the failure of this bailout. Furthermore, the entire nature of the bailout is likely the biggest culprit. In other words, this was a bad bill, hastily done, and more than anything else, that's why it failed. Yet, in my opinion, the biggest villain without it even being close is Nancy Pelosi. Her behavior regarding this bill is an epitome of everything that is wrong in D.C. She played a duplicitous, cynical and hypocritical game full of political calculation and never once did she put the fate of the country above her own political power. That said here is how things broke down.

I was struck from the beginning at the behavior of the Democrats. While they have blamed President Bush for everything including this crisis, it was amazing how much deference they gave to the plan. Despite their bluster, from the beginning, they went along with most of its premise. They were always in favor with the basic philosophy of the bailout. It's like they blamed Bush for the crisis and then wanted to give him the authority to fix it. All their changes were either ridiculous, non sensical, or cosmetic. Trying to fund ACORN through the bailout was ridiculous. Attempting to put union reps on the board of failed companies was non sensical, and limiting CEO pay was cosmetic. That's about all they offered to the process.

Republicans, on the other hand, were against the plan on wholesale philosophical reasons from the beginning. They didn't believe that bailing out bad investments was the right way to fix things.

As such, by midweek the message from Capitol Hill was a very confused one. Depending on who you listened to a deal was imminent, dead on arrival, or a long way away. As such, John McCain made a bold move on Wednesday. He suspended his campaign and planned on returning to D.C. to help get a deal done. This appears to have frightened the Democratic caucus which was totally freaked out that he could get any credit for moving the process. This appears to have set the stage for a hastily made "deal" at about noon the next day. McCain hadn't arrived yet, and he was about to meet with the President in a bi partisan meeting hours later.

This deal didn't pass my sniff test from the beginning. Speaking for the Republicans was one
Robert Bennett of Utah. I am political astute enough to know that 1) I've never heard of him and 2)that means he can't be all that significant. If he was in the Republican leadership, I would have at least have known his name before he stood up to represent the Republicans in this deal. Hours later my suspicions were corrollated as one leader after another spoke out against the deal, Richard Shelby, John Boehner, and Mike Pence to name three.

Then, came the fateful meeting at the White House later in the day. Only those in the room know what happened. Here is what we do know, 1) it was contentious and confrontation, 2)Republicans who weren't included in prior discussions spoke out vigorously against the agreement and 3) and in many ways most important, Barack Obama was the de facto leader of the Democrats in the meeting. After this meeting, it was clear there was no deal. Yet, anyone that could read between the lines knew that there wasn't really a deal to begin with.

Now, the Democrats who failed to strike a deal prior to McCain's arrival began to pivot. They began to blame McCain for derailing a deal that was never really there. McCain, for his part, made a series of missteps that will likely cost him the Presidency. First, his campaign decided to get involved in partisan fingerpointing. His campaign put out a statement bemoaning the partisan nature of the process. He would have been much better served putting out a statement explaining that the legislative process is messy, lot's of heated things are said in the middle of battle, but that he was committed to seeing the process through and that he would spend the rest of the weekend on Capitol Hill making sure this deal was done.

Then, he was spooked by the Democrat's accusations and he stopped showing up on Capitol Hill. Instead, he made a series of phone calls from his office. Whatever he did to move the process along, no one will know it because he did at arm's length. Finally, at the debate, rather than jumping on the Republican's pro free market plan, he muddled through an answer about bi partisanship. Rather than hanging the bailout around Obama and the Democrats, he jumped aboard a bad policy full of bad politics.

Meanwhile, back on Capitol Hill, Democrat and Republican negotiators were busy NEGOTIATING. Meanwhile, Speaker Pelosi was busy poisoning the waters. Over the weekend, she accused the House Republicans of being unpatriotic for not showing up to negotiations earlier in the week. Of course, this was the height of hypocrisy and duplicitousness. The reason they didn't show up was because they weren't invited by Pelosi herself. Meanwhile, her caucas was engaged in heavy handed tactics. At one meeting, scheduled to be two Republicans and two Democrats along with Treasury and Bernanke, the Democrats sent in an army of nine to negotiate with only two Republicans.

By just after midnight, on Sunday morning, a deal had been struck, but this was tenuous at best. The philosophy of the bailout was still in place. Most of the rank and file Republicans were totally opposed to such a structure. Meanwhile, there was nothing in the deal for Main Street which would be a difficult sell for Democrat rank and file. Now it was Minority leader Boehner's turn to show a lack of leadership. In presenting this deal, he once referred to it as a "stinker", and to say that he tepidly supported it would be a massive understatement. With that "ringing" endorsement, the rank and file needed no more reason to oppose. Meanwhile, Mike Pence renewed his objection and made this statesmanlike statement.

Our nation has been confronted by a serious crisis in our financial markets. The President and this Congress were right to act with all deliberate speed in addressing this crisis.

We now have a deal that promises to bring near-term stability to our financial turmoil, but at what price?

Economic freedom means the freedom to succeed and the freedom to fail.The decision to give the federal government the ability to nationalize almost every bad mortgage in America interrupts this basic truth of our free market economy.

Republicans improved this bill but it remains the largest corporate bailout in American history, forever changes the relationship between government and the financial sector, and passes the cost along to the American people. I cannot support it.

Before you vote, ask yourself why you came here and vote with courage and integrity to those principles.If you came here because you believe in limited government and the freedom of the American marketplace, vote in accordance with those convictions.

Duty is ours, outcomes belong to God.We have fought the good fight. Now we need to finish the race and make sure that posterity and the American people know there were conservatives who opposed the leviathan state in this dark hour.

And if you do this I promise you, I will stand with you and, I believe with all my heart, the American people will stand with you as well.

As such the battlelines were drawn, either follow the half hearted leadership of Boehner into a deal he himself believes is a "stinker", or follow the passionate leadership of Mike Pence. Gee, I wonder why most Republicans stood up against the deal.

Meanwhile, Nancy Pelosi's political opportunism was now going into overdrive. She was hoping to hang the crisis that lead to the bailout around the neck of Bush and the Republicans. Furthermore, she would do everything to minimize the number of Democrats that would vote for the bill hoping that Boehner would pull his weight. As such, we learned from Congressman Defazio that he wasn't whipped. In other words, the Democratic leadership never counted the votes and did little if nothing to twist arms. As it turns out, multiple committee persons and multiple folks from California voted against this measure. It appears that Nancy Pelosi couldn't get members of committees she assigned them and members of her own state to vote for this bill.

Finally, she added the final poison pill with this speech.

This partisan speech attempted to lay the blame for the entire crisis on Bush and the Republicans just before the vote. Here is how Megan McArdle described what Pelosi was attempting to do.

She then spent a week openly and repeatedly blaming the Republicans and the Bush administration for the current crisis. The way she set things up, it was "Heads I win, tails you lose": vote for the deal and I'll paint you as heartless reactionaries bailing out your fat cat friends. If you're going to do that, you'd better make sure you have some goddamn margin for error in your own party. She didn't. Then she got up and delivered yet another speech blaming the Republicans for the bailout deal she was about to pass.

Now, Republicans then blamed the speech and Democrats called Republicans whiney children. Both characterizations are much too simplistic. Any Republican that would vote for the bailout would do it holding their nose. By delivering that speech, Pelosi was laying the groundwork for using that very vote against each and every one of them. Now, imagine you are a rank and file Republican. You don't like this bill. Even if you are voting for it, you aren't sure it is a good idea. Then, you see your political opponent attempting to use your vote against you for naked political purposes. Why in the world would you then vote for it and commit political suicide?

Meanwhile, Barack Obama has spent the entire process in full political mode. He has calculated that he needs to be as far away from the process because he most likely believes getting too close will hurt him. Today, we learned that he called exactly ZERO House Democrats. That includes a lack of phone call to four Chicago area Democrats that voted against the measure. He's never even really taken a position. Meanwhile, he sends out statements demanding that something pass. He has becried the process from the beginning. Yet, he's done nothing to get his hands dirty in the process.

All of these things combined together proved doom for the bill, and in my opinion, good riddance.

Monday, September 29, 2008

Bailout Fails: Now What

All right, we are just a couple hours after the failure of the bailout bill. It's disappointing if not surprising that each and every politician is blaming someone from the other party for its failure. The reality is that the leadership put together a bill that most of the rank and file didn't like and it didn't pass.

First, here is what happened to make it fail. From the Republican side, most of the rank and file were simply against the bill in principle. The bulk of the rank and file saw this as socialism and they couldn't vote for it. On the Democratic side, the rank and file saw it as a bailout for Wall Street and they weren't going to vote for it unless there was also something for Main Street. They wanted some combination of stimulus checks, moratorium on foreclosures, or some other giveaways to the folks.

Now, we are right back where we started. While we have seen a rather large drop in stocks (the greatest single point drop but not in the top ten on a percentage basis), we saw a rush to safety and bonds exploded at the same time. The financial world has NOT blown up as some predicted. Most continue to believe that something must pass, though no one is sure when or even if that will happen.

Here is the problem. If the Democrats are allayed and in the next bill there are more giveaways to the public, you will likely lose even more Republicans. If the next bill is the Republican supported pro growth bill, it is unclear if any Democrats are going to be in favor of it.

The Republicans, and John McCain in particular, need to come out strong for a pro growth plan. Both the Republicans and John McCain should emphasize that the American people have rejected the bailout. They should say that the people want a market oriented solutions, and that a market oriented solution is the one they will back. They should emphasize that if the Democrats insist on passing a bailout, that ultimately they won't stand in their way (filibuster) but they won't support it. If the Democrats want to come up with a bi partisan resolution though, then it needs to be a market oriented solution.

The Democrats are somewhat stuck. Most of their caucus has voted for this. A bailout is what most of the rank and file agree with. If they have a political play, I am at a loss for what it is. As for the Presidential candidates, it appears to have benefitted Obama so far, however, there is still plenty of opening. McCain still has the silver bullet if he wants. If he backs up the Pence approach, and goes all in on it, he can still come out on top of this issue. Barack Obama continues to say little about the bailout and it has worked so far, however that could backfire as well. The bottom line is that the issue continues to be dynamic and the short term effect is not necessarily the same as the long term.

Post Bailout: What McCain Can Still Do

At this point, passing the bailout continues to be dicey. I firmly believe that he missed a huge opportunity when he tacitly backed this bailout rather than backing a more market friendly way out of this crisis. Here is how Dick Morris put it.

The bailout ideas proposed by the House Republicans and trumpeted by former Speaker Newt Gingrich make eminent sense. Indeed, they make so much sense that it is as if the roles of the parties have been reversed. It is the Republicans who are demanding that the banks and financial institutions pay for their own bailout, granting them only a mixture of loans and premium-paid insurance, while the Democrats want to pass the hat among the taxpayers to buy their dirty paper.

In an unusual act of political foresight and skill, the normally dead-headed House Republican leadership has crafted a platform that can carry the party to victory in November. All that remains is for the Party’s candidate - and perhaps even its president and Treasury Secretary - to get on board. McCain can recover at the negotiating table the economy issue he lost in Friday’s debate. He needs to have the courage of his convictions and insist on a bailout without requiring taxpayer-funded purchase of defunct mortgages from failing institutions.

The difference in the bailout plans is, of course, largely cosmetic. Dead paper is dead paper whether it is on the books of the government, purchased from banks, or on the books of the banks, insured by the government. The game is the same: Through loans or grants fund the deficient debt service on the defaulted mortgages until homes can recover their value in the cyclical real estate market.

The opportunity to oppose the bailout is over, and the time is over to back a plan that would attempt to solve this through market forces.

That said, this bailout can and should dominate each and all debate over the economy. That's because it is the main priority of the next President. Any candidate who thinks they can propose new spending like universal health care, infrastructure, or education is a fool and naive. The only thing the next President will be able to do for at least the next two years is manage the execution of this bailout.

This gives McCain a new opportunity for McCain to once again re focus the debate. This maybe his last chance to snatch victory from the jaws of defeat. What McCain needs to do is to explain the potential corrosive effect of this bailout on the economy, and how it ties to one of his favorite causes, spending. This bailout will be financed through serious infusion of bonds. The government will take on massive new debt. When the government takes on massive new debt two things happen. First, it puts inflationary pressure on the economy. Second it weakens our currency. The way to counteract each of those things is for the government to SPEND LESS. The massive new debt will put enormous inflationary pressure and enormous downward pressure on the Dollar. The only way to counter act this is to cut spending and reduce the deficit in other ways.

Now, Barack Obama proposes to cut taxes on 95% of the folks. Yet, 40% of the folks don't pay taxes at all. That isn't a tax cut but a welfare check. In other words, it adds to spending. He proposes increases in health care spending, education spending, infrastructure spending, and spending on alternative energy, and this is among what some estimate to be one trillion in new spending. Tax cuts mean nothing if they usher in an era of hyper inflation. If the government adds a trillion dollars in new spending after a $700 billion bailout, that's exactly what will happen.

McCain needs to point out that his tax and spending proposals will balloon the price of gasoline, food, and other everyday items. A one thousand dollar check means nothing, if that check causes your everyday bills to go up by two thousand dollars yearly. That's exactly what Barack Obama's tax and spending proposals will do. They will usher in an era of hyperinflation. McCain needs to point out that someone that themselves asked for $1 million Dollars daily in earmarks is not credible in counteracting the pork that will no doubt be laden in each and every spending bill that would come across his desk.

In the last debate, Barack Obama couldn't name a single program that he was willing to cut. He has made his whole campaign around providing things for the little guy. What John McCain needs to do is explain to the public that as a result of this bailout, their needs to be a priority on limiting spending. If Congress continues to spend as they have it will cause massive inflation. If that happens, there are no tax cuts. You can't have a President that got elected buying the votes of every aggrieved group. That's exactly what Barack Obama is. If he is elected spending will be out of control. If spending is out of control, it will cause hyper inflation in the aftermath of this bailout. That will be a disaster for all Americans. That needs to be John McCain's economic mantra. If he does that, he still has a chance to snatch victory from the jaws of defeat.

The Bailout: The Inmates are Running the Asylum

One of the biggest problems for me about this bailout is that most of the same folks on the so called front lines of ignoring and creating this crisis are now in charge of trying to get us out of this crisis. Everyone agrees that many in the Federal government were asleep at the wheel while this happened, and yet, we are now giving them the power to get us out of this. Let's take a look at the players.

1) President George Bush

How long did President Bush tout the all time highs in new home ownership during his Presidency? Well, now we have all seen that this was created on the backs of bad loans, fraudulent loans, and loans to people that should never have been approved. Did he know? Did he care? When Alan Greenspan dropped the Fed Funds Rate below one percent where was President Bush to explain how dangerous this was? When fraudulent loans literally explode where was President Bush to provide oversight? His peformance, or lack thereof, in combating this crisis has been atrocious. Yet, now it will be his administration in charge of creating and rolling out this multi hundred billion dollar bailout plan.

2) Ben Bernanke

Last September he began to furiously drop rates. At the time, the Dollar was already weak. What this furious drop in rates did was weaken an already weak Dollar. This contributed to ballooning oil and commodities prices, and this exploded gas and food prices. His furious reduction in rates did ABSOLUTELY NOTHING to combat the weakening economy, failing banks, or growing financial crisis. Then, he stepped in and wore the multi hats of investment banker, rainmaker, and Fed Chairman in making sure that Bear Stearns was bought out in a weekend when normally such a deal would be done in about half a year. This massive usurption of power was supposed to be done because it was necessary. We were supposed to avert crisis as a result of this move. Then, he picked and he chose which financial institutions would die and which would be saved. Then, he suddenly reversed course and said we need a massive bailout. Does this sound like someone who competently knows how to deal with the crisis?

3) Hank Paulson

Here is what Hank Paulson said in May.

Treasury Secretary Henry Paulson said Wednesday the worst of the credit crisis may have passed but acknowledged that rising gas prices will blunt the effect of 130 million economic stimulus checks.

He ruled out a second stimulus package for now....trio of crisis — housing, credit and financial — have pushed the economy to the edge of a recession. To help cushion the blow, the Bush administration and Congress speedily enacted a $168 billion stimulus package of tax rebates for people and tax breaks for businesses.

So, five months ago, the worst of the crisis, in his opinion, was over. Where has he been for the last five months? What exactly has happened in the interim? We are about to hand $700 billion to buy bad loans to someone who five months earlier didn't see these very loans as creating any further problems. Does this sound like someone who we can trust to do this properly.

4) Chris Dodd and Barney Frank

Both of these guys were in charge of overseeing Fannie Mae and Freddie Mac. They allowed both to not only make their own loans far too aggressive but to stake aggressive positions in even more aggressive Mortgage Backed Securities of sub prime loans. Furthermore, last fall, Barney Frank wasted everyone's time for a month with H.R. 3915. He attempted to remove Yield Spread Premium, a tool of a mortgage broker to make money, and that would have ended the mortgage broker industry. Chris Dodd was the front man on a recently atrocious and corrupt bailout of troubled borrowers. These borrowers would get brand new FHA backed loan at below market rates and even reduced mortgage balances. In other words, borrowers that couldn't pay their loans on time would be rewarded with loans that good borrowers couldn't qualify for. Furthermore, both of them are among the biggest recipients of campaign money from both Fannie and Freddie. Do these two sound like the sort of point men to make sure that this plan is executed properly?

Any sort of massive government plan as this one needs competent leadership. I think we can all see that the leadership on this bill is totally incompetent.

Sunday, September 28, 2008

Bullseye on Blagojevich?

Let's play the game connect the dots? Do you know how Patrick Fitzgerald was unwittingly instrumental in putting Barack Obama on the brink of the Presidency? In 2001, Peter Fitzgerald (no relation) then U.S. Senator from Illinois chose Patrick Fitzgerald to be the U.S. Attorney for the Northern District of Illinois. This choice upset the Illinois political establishment, on both sides, quite a lot. Why? It's because Patrick Fitzgerald was an outsider and all indications were that he was a pretty straight prosecutor. This was a problem for the entire Illinois political establishment because that meant all of their malfeasance might actually come under scrutiny. Of course, in Illinois, there is all sorts of malfeasance among politicians. After choosing Fitzgerald, Peter Fitzgerald lost the support of the entire establishment. While he was wealthy enough on his own to run again, he simply didn't have enough support without the support of his party. As such, he decided not to seek reelection in 2004. This eventually opened up the door for Barack Obama to win the U.S. Senate seat and the rest is history.

Patrick Fitzgerald has been a relatively controversial prosecutor but that's mainly because for the most part, he has been doing his job. Fitzgerald has successfully prosecuted all sorts of folks close to both Chicago mayor Richard Daley and Illinois governor Rod Blagojevich. His most recent high profile prosecution was of course that of Tony Rezko. Now, latest reports have Rezko beginning to talk.

Antoin “Tony” Rezko, a convicted influence peddler who was once one of Gov. Rod Blagojevich’s most trusted confidants, has met with federal prosecutors and is considering cooperating in the corruption probe of the governor’s administration, sources told the Tribune.

Rezko’s possible change of heart—after years of steadfast refusal—has sent ripples through a tight circle of prominent defense attorneys who represent dozens of potential witnesses and targets in the wide-ranging probe.

His cooperation would give prosecutors investigating the governor and his wife access to someone they have described as an ultimate political insider at the center of a pervasive pay-to-play scheme.

Now, there is all sorts of speculation about whether or not Fitzgerald is targeting Blagojevich, Daley, and of course in the hopes of most Conservatives Barack Obama. In my opinion, Fitzgerald isn't targeting anyone. He will go where the evidence takes him. I am not so convinced that he would find any direct wrong doing by Daley himself. I believe that Daley leaves the direct wrongdoing to his underlings. I do believe that he will find plenty of wrongdoing on the part of Blagojevich. One thing is clear. Patrick Fitzgerald is the worst thing to happen to the Illinois political establishment in a long time. Peter Fitzgerald may have paid with his political career by choosing him, but I suspect he believes it was worth it.

A Bailout by Any Other Name of course still a bailout. There is all sorts of spin on the right to make it seem as though Republicans got major concessions. No doubt, they changed the bill dramatically, however, what they didn't change was the basic premise of the bill. If you listened to Republican heavy weights like Mike Pence and Richard Shelby the problem wasn't merely the details of the bailout but the bailout itself. Yet, that is exactly what we have.

Those pragmatists on the right proclaimed that we have no choice because only a bailout would make sure that there is confidence on our markets. Well, first, I disagree that a bailout was the only option. Second, the reason that there is no confidence in our financial system is that they all bought into all sorts of bad investments. Taking those bad investments off their hands doesn't change what they did.

So, what do we have? First, Wall Street's obscene irresponsibility will be forgiven because most of those bad investments will be removed from their books with the wave of the magic Treasury wand. Second, financial services have effectively been socialized. The government now effectively runs financial services. There won't merely be oversight in this bill but interference from the government on financial services. Rather than allowing these poorly run financial services companies fail, the government will effectively take over their day to day management. If ever the founding fathers were rolling over in their graves, this is it. Many of them are likely also telling Alexander Hamilton that this is exactly what they feared when he suggested a centralized Treasury.

Then, we have also expanded debt. Barack Obama continues to claim that he will help the middle class with tax cuts. Great, yet, he supports this bailout which will greatly increase our deficit, and he couldn't in the debate name one program that he would cut. Controlling spending will be the number one priority of the next President. That's because this bailout has just exponentially increased the probability of major inflation in the next couple years. It matters not if a middle class family receives a thousand dollar tax cut if their grocery bill increases by a thousand dollars.

Finally, some have made the assertion that over time the Treasury will likely re coup their investment and even likely make plenty on it. That may happen, but not only is that not guaranteed, but it is frankly way up in the air. Here is what we know. First, the Treasury has agreed to buy really bad debt. Second, that debt is backed by something solid, real property. Third, the Treasury will buy this debt for pennies on the dollar. Here is what we don't much is that property worth. The four years from 2003-2007 saw an explosion in real estate prices. While real estate has a tangible value, what that value is remains to be determined. If real estate drops another forty percent from here, there is no guarantee that the Treasury will recoup anywhere near what they outlayed. Furthermore, it could be years before this paper finally shows a profit. While in the end, they may in fact, two things need to be considered. First, they are borrowing to make the investment. As such, any profits have to be above and beyond what they paid to make the investment. Second, there is also the time value of money. Even if they make money in the end, if it takes five to ten years to turn a profit, that isn't money well spent.

How Bad is it...Three Words...620 Stated, Stated

Do you want to know just how bad our mortgage crisis is? First, you should know just how far credit was loosened at the height of the boom. The most aggressive loan, one that became an industry standard, was one known as 620 Stated/Stated. What does this mean? It means someone with a 620 credit score could get a loan without ever proving either how much money they made or how much money they had in the bank, and they could do all of this and still buy a property WITH ABSOLUTELY NO MONEY DOWN.

Now, let's just see how irresponsible this loan was. The median credit score is about 660-670. That means the middle of the country has a score of 660-670. As such, someone with a score of 620 is somewhere in the bottom fifty percent of this country. They are probably somewhere in the bottom 30-40% of all scores. As such, someone who is looking up at 60-70% of the country in terms of credit worthiness was still able to get a loan. They weren't merely able to get a loan though. The could get a loan even though they never had to verify just exactly how much money they made yearly. Often times, these were salaried employees who made exactly the same each and every month. Banks were allowing teachers to state that they "made" a 100k yearly. Secretaries were allowed to state that they "made" 60k yearly. Janitors could "state" that they made 50k and more. Small business owners and salespersons could state whatever they wanted, since those professions had no limits.

Of course, there is more. Besides stating their income, these loans allowed borrowers to state how much they had in the bank, 401k and other investments and money accounts. If you think it was ridiculous that someone is allowed to state but not verify their income, how ridiculous is it to state but not verify the assets they have in a bank account? Of course, we are still not done. After a 620 score stated income and stated assets, they were still allowed to buy a home with no money down. If you think it can't get any worse, it can. Sometimes, banks would allow these same borrowers buy two unit properties with the same guidelines. How dangerous is that? Well, since there is no history of rental income, often times, bank would merely accept a"lease" to verify the income the borrower would receive from the extra unit. In other words, their income, their bank assets, and their rental income could easily be simply made up.

How prevalent is this loan? No one will ever know that, but I suspect that more than half these loans will default. Let's think about just how dangerous these loans are. Since they bought the property with no money down, the loan is almost certainly worth more than the value of the property. Since they put nothing down, they have litte invested in the property. Since these folks are in the bottom 30-40% of all credit worthiness, they have a great motivation to simply go bad on the loan.

Now, if you aren't already scared, let me really scare you. Guess how human nature works. Once an extreme loan is developed, guess where most professionals gravitate to. This was never some off the wall program that was used sparingly, not at all. Once this program was developed, mortgage professionals suddenly had a plethora of new loans to do. That's because there were all sorts of folks that didn't qualify under previous programs. Suddenly, they had a program for them. That's exactly what happened. Unfortunately, human nature is such that the most extreme products are also the ones that are most used. When some financial analyst uses the term toxic, just remember the loan 620 stated stated.

Next Stop Global Stagflation?

Here were the two biggest stories of the last twelve hours. The first is that the Congress apparently agreed on a bailout, though it appears to initially be significantly less than $700 billion. The second is that Belgian financial services company Fortis appears on the edge of collaps. So, let's look at the consequences of each.

Steve Chapman gave an astute analysis when he said this.

Sometimes bipartisanship is grounds for celebration, but more often it is cause for tears. Last week, congressional leaders from both parties went into a room to hammer out a plan that would put taxpayers on the hook for $700 billion. But they assert that the investment is essential to the health of the economy. And they insist that if we make this investment, we'll get all or most of it back.

This promise would be more believable if the federal government had a long record of using tax dollars responsibly. In fact, it's the equivalent of the guy who raids his kid's piggy bank to feed the slots. The most notable impulse of our leaders is spending money the Treasury doesn't have, piling up bills that future Americans will have to cover.

How do our leaders intend to pay for this massive new outlay? Not by raising taxes. Not by cutting spending in other parts of the budget. No, they will borrow the funds. The Chinese and other foreign investors will lend us money so we can keep the economy humming, which will allow us to make the payments on the money we already owe them.

Now, when the Federal Government creates billions in new government bonds, that is no different than printing money. In fact, Government bonds is the 21st century equivalent of actually printing money. Now, when the Federal government prints money, two things happen. First, they weaken their own currency. Second, they create inflationary pressure in their economy.

Normally, I would say that this action would weaken the dollar except that we have to look at what the consequences of closing down Fortis are. Soon, banks all over the world will begin to fail, and their own governments will have to bail out their banks. Invariably, Socialists all over Europe aren't about to cut spending in order to pay for these bailouts. As such, they will also issue all sorts of new debts. That means, that in an absurd way, currency levels won't change as a result of these bailouts. They will all be equally weaker. Instead, it will usher in a new era of world wide inflation. As governments all over the world need to borrow to bailout their financial institutions, they will begin to print money with no end. As such, the first step in world wide inflation will be ushered in.

Then, as weak economies all over the world face unbridled new inflationary pressures, buying power will be weakened all over the world. Folks will wind up paying more for gas, food, and other everyday items. In a time of an already weak economy, that is almost certain to send the world into a global recession. When we have global recession at the same time we have global inflation, that is called global stagflation. In other words, we have an unmitigated disaster.

Saturday, September 27, 2008

Analyzing the Impending Doom of Fortis

According to Bill Kristol the Belgian financial services company, Fortis, is on the brink of being shut down.

I've received phone calls in the last hour from two economists I respect, one of them Larry Lindsey, the other in a position where he'd prefer not to be named. Both have government experience, neither is alarmist by nature, and they say this:

The huge European bank Fortis is apparently about to fail. The ripple effect on the American banking system could be disastrous, with bank runs, liquidity crises, and stock sell offs possible Monday. Wachovia may well fail next week. As Larry put it, this really will be 1933 soon if we don't move rapidly to stabilize the banking system

Actually, they are more than a bank. They have their hands in all sorts of financial services like insurance, investments, and banking. In fact, some analysts have called them the Belgian version of AIG. There are three consequences of this latest news.

1) Mortgage Backed Securities were bought world wide. Furthermore, finance is globalized.

These toxic (as they are now being called) investments were bought by banks, financial services companies, and institutional investors from around the world. That means that financial institutions from Wall Street, to London, to Hong Kong, and everywhere in between are all in danger.

Banks, brokers, and financial institutions are all dependent on each other all over the world. If something like an AIG fails, it would affect financial institutions all over the world. These institutions serve folks all over the world. The borrow and they lend around the world. In other words, the dominos may fall all over the world.

2) Will this bailout also cover non American institutions with American assets?

This is the most important question and one that is not so easy to answer. Let's take a foreign company Credit Suisse (before anyone goes nuts I have no information that they are in trouble). They bought American bank First Boston several years ago. While they are based in the Switzeralnd, they have all sorts of tentacles inside the U.S. If they fail, it would cause all sorts of ripples within our country. This raises all sorts of new questions about the bailout. How much of a presence does a financial institution have to have in the U.S. in order to get a bailout? Would Credit Suisse get one while the Royal Bank of Scotland wouldn't?

3) What will happen to all those financial institutions that don't get a bailout and what will happen as a result?

Here is what everyone should be aware of. First, these MBS are really bad. Second, everyone all over the world has some. So companies like Goldman Sachs, Morgan Stanley, and maybe Wachovia will get a bailout. What will happen to all those banks that don't get a bailout? The global financial market won't survive if only those companies with lots of tentacles in the U.S. get a bailout. This is a global crisis and it will require a global solution.

Barack Obama Explains Why It's a Bad Idea to Negotiate With Iran

Last night, one of the things that Barack Obama said was that Mahmoud Ahmadinejad may not be the one that we should negotiate with because he may merely be a figurehead. This brings up an interesting point about that country. It's a totalitarian regime, and no one is really sure who is in charge. It maybe Ahmadinejad, or it maybe the Mullahs, or it maybe someone else we don't even know about. George Chang described a similar problem when negotiating with China.

As an initial matter, China's central government moves slowly during crises, largely due to the fragmented nature of decision making in the Chinese capital. There are numerous civilian and military factions that must be consulted and won over before anyone can speak on behalf of the central government. In 2001, for instance, the fragile coalition that ruled China took days to decide what to say and do after a reckless Chinese fighter pilot clipped an unarmed Navy reconnaissance plane, which was forced to land on China's Hainan island.

Since then, Chinese officials have tried to clarify and streamline their decision-making process, but recent evidence shows that not much progress has been made. In November, China denied Hong Kong port-call privileges to the Kitty Hawk strike group on the day before Thanksgiving. On the day of the denial, Foreign Minister Yang Jiechi told President Bush that the turndown had been the result of a "misunderstanding." Yet a few hours later the Foreign Ministry in Beijing repudiated Yang's characterization of events.

In other words, if we don't know who is in charge, we also don't know who to negotiate with. Just imagine if Ahmadinejad is just a figurehead and yet Obama sits down with him thinking he is in charge. Then, not only was he legitimized with the meeting, but we were negotiating with someone with no power.

The problem with what Obama said is that he is under the impression that he will figure out who is in charge. Unless he has some secret plan he isn't telling anyone about, that is unlikely. Iran has a closed off society and only those in charge know who is in charge. It isn't like negotiating with France where the leader is clear.

The only way to really know who is in charge is to have a double agent in proximity of the leadership of Iran. That may in fact what we have, however it is highly unlikely that if we did, Barack Obama would know. As a Senator it is unlikely he has such clearance. In other words, Barack Obama is ready to negotiate, himself as President, even though he isn't sure if the person he will be negotiating with holds any power.

Furthermore, as Secretary Kissinger later explained, the problem with negotiating at the highest levels right away is that if those talks fail there is nowhere to go. If his own meeting doesn't work out, will he then send his Secretary of State to negotiate with their counterpart?

In other words, there, in a nutshell, is why Barack Obama's plan for direct negotiations is as naive as his opponents say it is.

Republican's/McCain's Mind Boggling Missed Opportunity

House of Games is one of my favorite movies. It involves an elaborate con in which the mark is set up and trapped into giving up all sorts of money without realizing it. (I won't give you anymore details as I hope you will click over and buy it and see for yourself) I was thinking about that movie as I watched events unfold on Capitol Hill. It appeared that the Republicans were laying the trap so that the Democrats would be married to not only President Bush but a deeply unpopular and massive bailout.

By noon on Friday, it appeared that there was an agreement in place for the $700 billion bailout, however the only Republican mentioned in the agreement was Robert Bennett of Utah. There was not a single real Republican leader that was mentioned in this agreement. Then, the leadership of the Republican party one after another came out against the plan and they were members of the both the House and Senate. Most of the Republican leadership was against the fundamental principle of a bailout.

The Democrats were now set up to be married to Bush's bailout while the Republicans could present an alternative that forced Wall Street to hold onto these bad bonds. There was one other thing that worked for the dynamic for the Republicans. Since the Democrats are in the majority, they don't need them to pass the bailout. This is something that was missing from any of the Republicans' talking points. I was waiting for someone in the leadership to make it clear that if the Democrats want to pass this bailout, the Republicans won't stop them, but they won't support it either. Someone should have made it clear that if the time comes the Republicans wouldn't filibuster the bill.

Then, came the debate. At the very beginning, Barack Obama made an allusion about this $700 billion bailout and by doing so he implicitly endorsed it in principle. Then, came John McCain. Inexplicably, he said that he hoped to be able to vote for a bill as well. I was floored. The rest of the debate became inconsequential because his game changing moment had come and gone. Now, imagine if he had answered like this.

Jim, I came to Capitol Hill yesterday because I was concerned that Republican voices weren't being heard in the compromise. I have spoken with most of the Republican leadership and we are convinced that simply bailing out Wall Street and relieving them of their loans is a bad idea. We have several alternatives on the table including providing insurance and opening up the Fed's open window. Let me make two points clear. If the Democrats want a bi partisan bill, then it can't be a bailout. The other point is this. The Democrats don't need Republican support. We will not vote for a bailout but we also understand that the situation is dire and so we will not filibuster either if they bring it to the floor. If the Democrats, and Barack Obama, want to go along with the President and provide a bailout to Wall Street they can do that on their own. If they want to work together, they must entertain our non bailout pro growth ideas.

This would have put Barack Obama on the defensive. He had already implicitly supported the bailout. For the rest of that portion of the debate, he would have had to defend his position and constantly inch himself closer to Bush. It would have also made clear that the bailout was a Nancy Pelosi, Harry Reid, Chris Dodd, Barney Frank, and George Bush special. If they wanted to include Republicans, it would need to be something different than a bailout.
That should have continued to be the mantra of Republicans from Friday afternoon all the way through till this bill is passed. They will not stand in the way if the Democrats insist on a bailout, but they will not support it.

That would have put the Democrats siding with the President on the most important piece of legislation. That would have made the Democrats singularly responsible for passing a monstrocity that the public can't stand. If they wanted political cover, then they would have had to compromise. If they didn't compromise, then, their constant attacks attaching President Bush to Republicans and McCain specifically would have seemed silly. After months and years tying the Republicans to Bush, it would have been the Democrats tied to Bush. That would have been the political coup of the campaign. It would have been the game changer.

Instead, they are compromising, and it won't be a bill that will give their side anything of substance. It is a largely fruitless exercise for the Republican side, and yet they are going along with it. They had set up the Democrats brilliantly and yet, at the moment, that they finally needed to finish them off, it was as though they lost their nerve. This was a mind boggling missed opportunity.

Avoiding a BAILOUT: Open up the Fed Window

The fundamental question as to whether or not this bailout must go forward is whether or not we can force these Wall Street folks to hold onto these mortgages without a bailout. If there is simply no way to avoid a financial meltdown without a bailout, then frankly we have no choice but to bailout Wall Street. I believe there is a viable alternative and that's why I am against this bailout.

I have several problems with this bailout but not least among them is that the Department of Treasury is NOT an investment bank. Yet, what this bailout will affectively do is use taxpayer money to perform a largely investment banking function. On the other, on of the primary functions of the Federal Reserve is to act as the lender of last resort

The lender of last resort serves to protect depositors, prevent widespread panic withdrawal, and otherwise avoid damage to the economy caused by the collapse of an institution. Borrowing from the lender of last resort by commercial banks is usually not done except in times of crisis. This is because borrowing from the lender of last resort indicates that the institution in question has taken on too much risk, or that the institution is experiencing financial difficulties (since it is often only possible when the borrower is near collapse).

In the United States the Federal Reserve serves as the lender of last resort to those institutions that cannot obtain credit elsewhere and the collapse of which would have serious implications on the economy. It took over this role from the private sector "clearing houses" which operated during the Free Banking Era; whether public or private the availability of liquidity was intended to prevent ’runs’ on the banking system. In the United Kingdom this role is undertaken by the Bank of England, the
central bank of the United Kingdom.HSBC is an example of a non-central bank that has acted as a lender of last resort on several occasions.

If the Federal Reserve serves one of its primary functions, I believe that we can avert disaster while also making sure that Wall Street takes full responsibility for their mistakes. What opening up the window does is give these firms time.

One of the things that everyone needs to understand about all of these Mortgage Backed Securities is that ultimately they aren't nearly as worthless as they are currently being seen as. While they are being backed by mortgages that are full of folks that can't or won't pay, those mortgages are backed by something tangible, real estate. The problem is that not only does no one know just how many bad loans there, but also no one is sure just how much further real estate will fall. If you have a bunch of bonds full of bad borrowers and the underlying real estate behind them continues to fall, that is an awful combination.

If we open up the window, and combine this with several pro growth strategies, that can stimulate the real estate market, that will give the market enough time so that real estate settles down. Once real estate settles down then there will be buyers for these bonds. That's because even a foreclosed property fetches 60-70% of its value. If an investor can fairly predict how much the real estate is worth, they will make sure to pay enough for these bonds to leave themselves a profit.

So, first the Federal Reserve opens up its window. Banks borrow to make sure they can stay afloat. Then, we enact several proposals. First, for the next three years any withdrawal from any retirement account can be done tax free and free of penalties as long as the money is used to purchase real estate. Second, we bump up the write off for real estate interest from $2000 to $5000. Then, we end the FASB 157 so called marked to market and replace it with a three year rolling average. This will stop panicked selling of assets that would need to be written down. Finally, we suspend the capital gains tax for any investment purchased in the next three years. This will give extra incentives for financial sharks to step in and buy these bonds. These things combined should give the banks enough time to stay afloat until the real estate market steadies out. Once it steadies out, they can sell these assets at a price that will keep these firms operational. None of them will ever be the same. They will take a giant hit. Our market will continue to face a certain amount of illiquidity for a long time, however we won't have artificial liquidity created by government intervention.

The Alternative Minimum Tax, Vague Loopholes, and Barack Obama

Last night, Barack Obama often referred to "closing loopholes" as a way to generate revenue for the government and making sure that fat cats and corporations pay their fair share. One thing missing from the rhetoric was a specific loophole and how he would close. I have always found demagoguery on loopholes troubling, without specifics, and that's because of the Alternative Minimum Tax.

Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns. (See Appendix for the AMT’s legislative history.) In inflation-adjusted terms, those 1967 incomes would be roughly $1.17 million in today’s dollars.

This tax avoidance by a few high-income taxpayers was widely perceived as
unfair. Rather than directly addressing the problem by eliminating the
deductions and credits in the tax code that were leading to the tax avoidance,
Congress laid an additional layer of complexity over the regular income tax in
the form of the AMT.

In other words, 155 fat cats were using a LOOPHOLE to avoid paying taxes and Congress supposedly closed that loophole. What has transpired in the forty years since its creation is nothing short of a monster. In making sure that 155 fat cats did pay their taxes, Congress has since raised taxes on millions. In the last ten years, this pernicious tax has begun to affect millions of middle income earners. Because it was never set to inflation, this tax began to eat at them middle class. In fact, for the last two years, Congress has enacted a single year moratorium just to make sure 20 million more middle income folks aren't hit with this tax.

I am always weary of the demagoguing politician preaching against so called loopholes when they have no specifics. That's because I have seen with the AMT that the solution to closing a loophole is often much worse than the problem caused by the loophole itself. What's worse, letting 155 fat cats get away without paying taxes at all or hitting millions of middle income folks with an unexpected tax?

The word loophole is easy to rail against and that's because it carries with it such a negative connotation. Barack Obama acts as though corporations use accounting tricks to hide money. If that were really the case, he would have specifics. Often times, what Barack Obama refers to as a "loophole" is the disclosure of a legitimate expense that corporations should have every right to write off.

Politicians have been railing against loopholes for decades, and yet, I don't know of any that has ever actually successfully done anything to close what are illegitimate loopholes used squarely to avoid paying taxes. I know this because this continues to be a favorite tool of populist politicians. Barack Obama is just the latest to promise to "close loopholes", and the next time one calls for it, just remember the AMT, it closed one loophole and opened up an all new tax nightmare.

Friday, September 26, 2008

Post Debate Analysis (UPDATE)

The debate is broken into two different parts, the economy and foreign policy. I thought that Obama won the economic portion of the debate and McCain won the foreign policy portion.


McCain had a huge opportunity on this issue and in my opinion he blew it. Obama endorsed, in principle, the Bush bailout. He implicitly agreed that this bailout should go forward. He qualified it with transparency, accountability, and all those other buzz words. Yet, on the fundamental issue of whether or not there should be a bailout, he agreed with Bush.

McCain had an opportunity to draw a distinction and point out that he isn't for the bailout at all. In fact, that is the problem that most of the Republican leaders have with this plan. They don't believe that there should be a bailout. Eric Cantor, for instance, believes that the federal government should provide insurance for these bonds, but that the Wall Street firms should be forced to hold their own paper. This was an opportunity for McCain to draw a distinction and to paint Obama as the Bush clone (on an issue the public hates). Instead, McCain said that he hoped there would be a bi partisan agreement. He had an opportunity to crush Obama and in my opinion he blew it.

As for the rest of the economic portion of the debate, McCain focused on spending an earmarks. Those are good issues and important issues, but the public at large doesn't really understand how those two affects them. On the other hand, Obama continued to focus on the "fact" that 95% of the folks in this country will get a tax cuts. Of course, 40% of the folks don't pay taxes at all. McCain never brought this up so this distortion was left unchallenged. Certainly, Obama's inability to name one program that he would cut even in light of a $700 billion bailout perpetuates the perception that he is a tax spend liberal, but that was his only major mistake on the economic portion of the debate.

Foreign Policy.

Here it was reversed. The line I remember of the evening was in response to Obama saying that the idea that we would merely allow Ahmadinejad to spout off and say nothing, Senator McCain correctly pointed in mocking and condescension that we would say no. McCain's point is that sitting across the table from Ahmadinejad gives more credibility to such statements, in and of itself.

I also think that Obama did himself a huge disservice by attempting to quote, and frankly misquote, Henry Kissinger. Watch for Kissinger to write an op ed explaining exactly how he views negotiations with rogue nations. Watch for that op ed to be diametrically different than the way that Obama attempted to paint him.

Obama was weakest in trying to defend his position that despite the surge's success he was still right in opposing it. That is an untennable position and that's why he sounds so silly in defending it. He did a good job of hammering home that Afghanistan is the central front in the GWOT. Again, I believe that McCain missed an opportunity. The central front is in Pakistan and there is no military solution there. Obama makes it seem as though we "took our eye off the ball" and that's why we haven't caught UBL. Of course, he hasn't been caught because he has safe haven in Pakistan. No matter what we do in Afghanistan, he will continue to have safe haven in Pakistan. Of course, I can't make that point, but rather, John McCain needed to make that point.

Finally, it ought to be noted that Obama said that he agreed with John McCain no less than seven times in the course of the debate and McCain already has an ad up pointing this out.

That was a minor point. Ultimately, if this election is about foreign policy then John McCain wins. If it is about the economy, then as it stands, Barack Obama wins. That's how it is right now. McCain had an opportunity to tie Obama to the Bush bailout, which would have been the economic game changer, but he missed that opportunity.


To no one's surprise, Henry Kiissinger countered what Obama said about him immediately.

Henry Kissinger believes Barack Obama misstated his views on diplomacy with US adversaries and is not happy about being mischaracterized. He says: “Senator McCain is right. I would not recommend the next President of the United States engage in talks with Iran at the Presidential level. My views on this issue are entirely compatible with the views of my friend Senator John McCain. We do not agree on everything, but we do agree that any negotiations with Iran must be geared to reality.”

Watch for an oped very soon to fully explain his position and how it is different from the manner in which it is different from the way Obama described it.

Modus Operendi, the Mark, the Roots of a Corrupt Psychiatric Expert Witness

Imagine you are a psychiatrist or psychologist asked to contribute to proceedings involving divorce or child custody in the family court system. Imagine further that you are a corrupt individual and you have decided to use these proceedings for the strict purposes of lining your own pockets with as much money as possible. How would you pick your mark and what would your Modus Operendi be? The beauty of being a corrupt psychiatrist is that your function in any family court proceeding allows you access to all the information you need to find your perfect mark and orchestrate against them.

1) Money

This is almost a no brainer however a corrupt psychiatrist would also have access to all the necessary information in order to determine if the parties have money. Furthermore, a corrupt psychiatrist would have enough access to determine if one party or another is more flushed with cash. As such, the corrupt psychiatrist could determine which party ally themselves in part at least based on which party has more money. In all three of the cases I covered Susan Diamond, Katherine Tranum, and Darcy Boatman the parties were small business owners. They could each be able to afford to pay five six and even seven digits of bills from their corrupt psychiatrist (in this case Dr. Mark Blotcky)

2) Non arm's length extended family structure

Some folks move, others don't have big families, and yet others simply aren't close to their extended families. In either case, such a family dynamic sets someone up to be the perfect mark. That's because those with lot's of close relatives nearby, also have lot's of close relatives that spend time in the home. In the case of Katherine Tranum, she had moved to the Dallas area several years earlier. Most of her family lived outside the area. Susan Diamond's case was much the same. Susan Diamond was accused of having munchhausen by proxy. With no close relative nearby, she had no close relative nearby to dispute the charges. Close family become almost like eyewitnesses in a custody case. If a corrupt psychiatrist makes false accusations, a family member could be there dispute charges if they spend enough time in and around the family. Of course, if there is no close family nearby, such a person presents a perfect mark.

3) No good circle of friends to witness the family dynamic

Most folks have friends of course, but not everyone has friends that are friends with an entire family. A circle of friends that knows an entire family could replace or augment the lack of a large extended family being around. If friends are around to witness mom's and dad's interaction with each other and their kids, they could present a counter argument to any false diagnosis or observation by a corrupt psychiatrist. That's why if someone misses that sort of a friend dynamic, they also become the perfect mark.

4) A fractured or lacking community.

In the case of Susand Diamond, a territorial dispute between the major synagogues in her area turned out to spill over into her divorce proceedings. Ohr Hatorah and Shaara Tefila were the two synagogues in the area. The two congregations developed a rivarly at about the time that Mrs. Diamond began her divorce proceedings. That rivalry was exploited and her husband was able to get several folks from the other congregation, many of whom only knew Mrs. Diamond marginally, to testify against her. Once again, a strong community structure surrounding a person can also act as an eyewitness to counter the false or misleading charges of a corrupt psychiatrist. If that community structure is broken down or fractured, a person becomes a perfect mark.

5) Find one or a few people that are close to the situation and get them to back up your story

Once again, in the case of Dr. Diamond, her maid testified against her. She largely corraborated the story told by Dr. Blotcky in court. Within months, she stopped working for Dr. Diamond and worked for her ex husband and he paid her $3000 monthly for her work as a maid. You do the math.

Fannie/Freddie Didn't Create the Crisis..They Contributed to Making it Worse

The partisan and ideological opportunism is at full swing. Both sides of the ideological spectrum are using the financial crisis to try and score cheap political points. While liberals are blaming deregulation, the Republicans are blaming social engineering and Fannie Mae/Freddie Mac. Why blame these two giants? I myself pointed out that both these giants are much closer to Democrats than Republicans. Furthermore, they have a quasi Socialistic structure which conservatives can then blame on the crisis. (In fact, I myself also pointed out that these two are the best argument against universal health care) So, the opportunity for ideological points are plenty.

As such Conservative media gives reports like this.

Sometimes the greatest blame comes from great praise when viewed in hindsight. The Los Angeles Times proves that with an article from 1999 heaping praise on the very people most responsible for the credit-market meltdown. Ronald Brownstein lauded the Clinton administration for boosting minority ownership by forcing lenders to offer better terms to marginally-qualified borrowers — and noted the financial
creativity from Fannie Mae and Freddie Mac as a crucial component of Bill Clinton’s efforts. It also demonstrates why Congress mandated the failure of the lending system, and why it has to act to fix it (via Hot Air reader abinitoadinfinitum):

You also get reports like this.

The only problem is that these reports are either a distortion of reality or even worse just flat lies.

To blame Fannie/Freddie for creating this crisis is to simply act naively about where it started, or worse yet, to hope that you can fool others that are naive. Everyone is in agreement that this crisis is rooted in sub prime mortgages. How then are Fannie/Freddie responsible for the crisis? Fannie/Freddie securitize conforming loans (as we call them in the business), and those are loans to people with good credit. Sub prime mortgages are those for people with bad credit. The loans that started this crisis had absolutely nothing to do with either of the two giants. They were done totally outside their scope. So, how can people claim this started as a sub prime crisis and also lay the blame at the feet of Fannie/Freddie at the same time? It's because they themselves likely have little grasp of the entire situation.

Last night, Laura Ingraham was peddling this meme on the O'Reilly Factor. She blamed the social engineering in the form of the Community Reinvestment Act for creating this crisis. O'Reilly agreed with her. Except, there is only one problem with this meme. Mortgage Backed Securities are bundles of loans with absolutely ZERO loans securitized by Fannie/Freddie. Fannie/Freddie securitize their own loans. They don't put their loans into bundles with MBS. So, how could Fannie/Freddie be responsible for the crisis when the problem mortgages that started this crisis were done outside their scope? It's because they aren't responsible for the crisis.

They did however contribute quite largely to expanding this crisis. For instance Fannie/Freddie had a hand in buying a lot of these mortgage backed securities. This seems awfully peculiar given their mission statement.

Freddie Mac continues to fulfill its mission to provide liquidity, stability and affordability to the nation's residential mortgage market, even as other investors have left the market.

What in the world does buying up bundles of risky mortgages have to do with providing liquidity in the market place? It has absolutely nothing to do with this. These two giants bought these mortgages for one reason only...they saw an opportunity to clean up and make lot's of money for the company. Therein lies the real problem here. Both these giants were involved in risky behavior that fell totally outside the scope of their mission. Why? It's because they knew full well that if it worked the company, it's shareholders, and most importantly senior management would make out like bandits. If it didn't, the government would have to bail them out because they are too vital to fail.

That's one way they contributed to the crisis. They fed into the feeding frenzy of MBS' which were the securitization of largely risky and fraudulent sub prime mortgages. Second, they responded to the aggressive posture of sub prime by loosening their own restrictions on the loans they securitized. This was further risky behavior that contributed to the crisis. Yet, they were responding to outside sources. Now, there is no doubt that government should have been overseeing all of this and they weren't. There is no doubt that much needed reforms would have prevented much of their own behavior, but it is a total distortion to claim their behavior is responsible for the crisis itself. Conservatives see an opportunity to pin all the blame for this crisis on Democrats by pinning all the blame for the crisis on Fannie Mae/Freddie Mac and linking them to the Democrats. The problem with setting the right context for Fannie/Freddie's contribution to the crisis is that you would then also find other contributing factors, and those might have Conservative fingerprints. As such, some partisans want to put all the blame on institutions they can then link to their opponents. Unfortunately, in order to do this, one would have to distort what happened and create an alternate reality that didn't exist.

For a full summary of how this crisis started, developed and took on a life of its own please read this piece.

The Bailout Chess Match Continues

Hopefully, there was no one out there that actually thought our politicians would put politics aside and try and do what's best for the country only and disregard how things would work out for their party. It appears the political positioning is in full force.

Ed Morrissey has figured something out. The Democrats don't need the Republican leadership to pass this bailout. The President would be more than happy to sign it, and the Democratic leadership can withstand any filibuster threat in the Senate. So, what's the problem? Let's let Mr. Morrissey explain.

If Pelosi has her entire caucus in line to support the Paulson plan, then she has the vote to pass it. Some estimates have as many as 50 Republicans ready to support the plan in defiance of Boehner. If that’s true, Pelosi could lose all of her Blue-Dog Democrats and still pass the bill.

So why not just call a vote? Pelosi doesn’t want to get married to George Bush, that’s why. She wants to spread the political risk and get consensus on a bailout plan so that the responsibility for any failure doesn’t rest solely on her shoulders, at least in the House. Both Pelosi and Harry Reid wanted John McCain to deliver both GOP caucuses to cover their own butts on the bailout bill, and McCain — at least thus far — hasn’t convinced Boehner to do so.

Meanwhile, her deputy Barney Frank is echoing those thoughts.

President Bush scrambled Friday to bring rebellious members of his own party behind a multibillion-dollar government bailout of the financial system amid bitter political recriminations from both Democrats and Republicans over collapsed negotiations.

Bush delivered a terse statement from outside the Oval Office of the White House, acknowledging that lawmakers have a right to express their doubts and work through disagreements, but declaring they must "rise to the occasion" and approve a plan to avert an economic meltdown.

"There are disagreements over aspects of the rescue plan," he said, "but there is no disagreement that something substantial must be done. We are going to get a package passed."

Given that only yesterday afternoon there was an agreement in principle, what exactly is the problem? It isn't the entire Republican caucus that is against this bill just most of its leadership. This brings up another interesting observation. Why was the agreement hammered out on this bill minus all remnants of any Republican leadership? Folks like Richard Shelby and Jim DeMint came out afterwards to say that they were not in favor of the agreement. Why weren't they merely included in the original negotiations? Of course, only the powers that be know why Robert Bennett of Utah became the front man for the Republicans in the original negotiations. I suspect that some thought that if they got enough Republicans on board the leadership wouldn't dare go against it. If that was their thought, they were wrong.

Fox News is reporting that the House Republican leaders are planning on meeting at noon Eastern Time. Expect the leadership to come out of that meeting with a radically altered proposal. Expect this proposal not to allow a bailout, but either a loan or insurance on these bonds. Expect this package to be full of stimulating tax cuts, an end to marked to market, along with an alternative mechanism to a bailout.

Then, the Democrats will get a very good view at the space the occupies what is between a rock and a hard place. The Democrats have spent the last half a day blaming McCain for the collaps of the BAILOUT.

After the hour-long White House meeting, [Dodd] said: ‘What has happened here is that we have spent seven straight days to find a rescue plan for the economy.

'What this looked like was a rescue plan for John McCain. To be distracted for two to three hours by political theatre doesn’t help.’

Democrats said the Republicans were on board with the deal until Mr McCain intervened an injected presidential politics into the situation.

There are two serious problems with going all in on this position. First, the public doesn't like the bailout. Second, the very unpopular President proposed it. You want to know what a bad position is. It's when you agree with the unpopular President (who will never again be on the ballot) of the opposite party on an equally unpopular bill, and the other party proposes something the public at large will like even better.

What will the Democrats do? It isn't as though they have an idea of their own. Will they force a vote down everyone's throats and announce to the world that it was they that forced American taxpayers to bailout out greedy and irresponsible bankers with tax payer money and in so doing socialize mortgage securitization? Talk about bad politics. That's the poster child for bad politics. No, instead they will stall and huff and puff looking for an alternative. They'll likely demand a conference to try and hammer out an agreement. They'll likely even get the Republicans to capitulate on things like CEO pay limits and even a small stimulus pay out "to the middle class". I don't mind. I can use a $600 check.

Ultimately though, it will be the Republicans that will look like the party that saved the country from an obscene bailout. It will be the Democrats that looked as though they agreed with the unpopular President from the other party. It will be John McCain in the middle of all of it. This will be the game changer we will be talking about for decades.

Thursday, September 25, 2008

The Republican's Master Stroke

Let's see if I understand this correctly. The Democrats, ready to increase their advantages in both Houses of the legislature, are now in a position where they are in agreement with an unpopular President about a very unpopular and massive tax payer funded bailout. At the same time, the Republican side of the legislature has decided to totally oppose the President on the same issue.

Let's review what has happened so far today. At about noon, it appeared that the President had come to an agreement largely in principle with the legislature on the $700 billion bailout. Yet, if you looked at the details of the agreement, it was brokered by the likes of Chris Dodd and Barney Frank on the Democrat side. On the Republican side, the so called leadership was Bob Bennett of Utah. In other words, the leadership of the Democrats on financial issues were with the President on this. Meanwhile, some back benchers of the Republican Party spoke for their side.

Later in the day, the real leadership of the Republicans, folks like Richard Shelby, John Boehner, Eric Cantor, and Jim DeMint, came out totally opposed to this plan. One Republican went so far as to say if Nancy Pelosi wanted to pass this thing she should do it herself.

Keep in mind, that a significant economic package must be passed and soon. On the other hand, it need not be a bailout. In fact, the Republicans laid the ground work for an alternative a couple of days ago. Eric Cantor added another idea to this today.

Meanwhile a group of House Republican lawmakers circulated an alternative that would put much less focus on a government takeover of failing institutions' sour assets. This proposal would have the government provide insurance to companies that agree to hold frozen assets, rather than have the U.S. purchase the assets.

So, watch for the Republicans to push a counter proposal that is diametrically different from the bailout. It will focus on pro growth ideas, ending the so called marked to market (Newt Gingrich suggests a three year rolling average), and give distressed companies loans or insurance but force those companies to hold the distressed assets they bought.

This plan will be much more well received by the public because it doesn't put the tax payer on the hook for all these bad loans. Furthermore, in a stroke of political genius (one that will likely be taught in advanced political science classes for decades) they will be in a position to disagree with the unpopular President of their own party while their opponents are already on record largely in agreement with the same unpopular President. Finally, while the Democrats will likely attempt to stall this plan, they will, in the end, have no choice but to pass it because a package needs to be passed or the financial market will face a crisis of confidence.

As such, not only will the Republicans show real leadership, but the Democrats will also be on record as supporting a tax payer funded bailout that the public hates. On top of it, the Republican Presidential candidate will be in the middle of all of this while his Democratic opponent will be watching from the sideline. This bill is a game changer. Not only does it make McCain the new front runner for President, but it puts the Republicans in strong position to make serious gains in the legislature as well.