From Leverage to Income: Why Our Economy Has a Long Way to Go

Lost in the confusion and sophistication of the initial financial bailout in September was something very revealing about our economy. Politicians were constantly referring to companies not being able to meet payroll unless banks were able to get short term lending.

This should have in and of itself been a startling wake up call to the manner in which our economy operates. If a company needs to constantly receive short term lending in order to meet payroll, does this sound like a viable operation? Furthermore, the epidemic which created an entire market for companies that used short term lending in order to cover payroll was a symptom of a much bigger American problem. Our economy was drifting farther and farther into a leveraged economy.

The average American family has just over $9,000 in credit card debt.

Americans are loaded with credit card debt.

The average American household with at least one credit card has nearly $9,200 in credit card debt, according to CardWeb.com, and the average interest rate runs in the mid- to high teens at any given time.

Many of these families are paying the minimum on their way to a lifetime of never ending debt. To add to this, the last four years brought about a new form of leverage. Americans were using new found equity from the inflated prices of their properties to borrow agains their homes.

The so called credit freeze has revealed a much more sinister American problem. We have all gone far too long with far too much debt. Our economy had become dependent on the sort of artificial growth that comes from using someone else's money and the leader of this pack was the federal government itself, with debt currently just over $9 trillion.

Now that the economy has slowed down, many folks, businesses, banks, and consumers are re thinking the manner in which they have maintained their finances for far too long. Everyone is afraid to spend not merely because they fear the future of the economy. They are afraid to spend because they are all re thinking the manner in which their finances have been handled. The by product of this economic malaise will likely turn most of America from a borrowing nation to a saving nation. In the long run, that is very healthy. Unfortunately, while Americans from businesses to consumers are hoarding their cash away, this will only go to further weaken our economy.

Over the next several years, what you are likely to see is a significant reduction in everyone's debt. Once this is over, the economy will not only recover but the recovery will be very healthy. Until then though, it will be a painful economy. That's because everyone will go through a long painful process of reducing their debt load. The problem is that this debt load is layered. Even those that are owed also owe someone else. For the next several years, we will be paying for the excesses of many years prior. The process is ultimately good...call it a cleansing, but it is very painful as we go through it. It will be much like a heroin addict that quits cold turkey and goes through withdrawal. It will be excruciating pain while the process is happening, but ultimately we will all be healthier at the end.

The Auto Bailout: What is the Purpose of Business

One of the problems I have with economic liberalism is that it fails to recognize the purpose of business. Listen to any populist liberal on the campaign trail and you would think that corporations were created to provide jobs for Americans. Companies are routinely demonized for daring to go outside the U.S. to find workers because they've found the labor cheaper there (THE HORROR). The purpose of business is to maximize profits. To borrow from Gordon Gekko,

that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit

Companies aren't in this for any other reason but the most selfish of them all, GREED. If employers could, they'd pay their employees nothing, they'd charge their customers as much as possible, and they would use as cheap a product as possible. It is the free market system that creates a delicate balance that forces all involved to find an equilibrium point between all of this. Adam Smith referred to this as the invisible hand. Ultimately though, a business needs to make every decision with only one goal in mind, maximizing profits. Economic liberals don't see the world in such a way, but unless all businesses are able to maximize profits no one will want to start a business.

This brings me to this very troubling piece by E.J. Dionne.

A hideous class bigotry has disfigured this debate.

The failure of the Big Three is regularly attributed to the high wages and benefits earned by members of the United Auto Workers union, and it's true that the Detroit-based auto companies operate under heavy "legacy costs" for retirees' pensions and
health coverage negotiated during the industry's fat times.

But the blame-the-workers-first cant ignores the fact that if the Big Three had designed better cars, they would not have lost as much market share to Toyota, Nissan and other competitors. The unions did not stop management fromproducing a better product -- and I say that as someone who has enjoyed driving Saturns for the last 15 years.

...

But "properly structured" is in the eye of the beholder, and if this bailout happens, it should reflect the core reason it will pass: Long-term economic growth depends upon a well-paid middle class (and that definitely includes autoworkers) with real purchasing power. If saving our auto industry means moving GM workers ever closer to Wal-Mart wages, the bailout isn't worth doing.

For economic liberals like Dionne any government bailout should serve only one function, protecting the living wage of the employees of said company (in this case the automakers) Whether or not such a wage can keep said companies profitable for the long term is entirely irrelevant to someone like Dionne. I have a friend that ran several businesses and he told me that he seemed to always ultimately find himself in a position where his workers got paid, his suppliers got paid, his customers got a good deal, only after all this there was nothing left for him. That's of course no way to run a business, but for someone like Dionne, he would be the model of a successful business. Someone one like Dionne would be happy to give someone like my friend loads of money just as long as he continued to promise to take care of everyone but himself.

Currently, our government is frustrated that the bailout of the banks has been used mostly to hoard cash. The Feds were hoping that the banks would use this money to lend. Yet, it was significant undercapitalization, not enough cash, that caused these banks to get into dire financial straits to begin with. The banks see more capitalization as the key to their long term viability. They were given free money and they are holding onto it because keeping it is their best strategy for long term survival.

Therein lies the rub of all bailouts. Companies are in business to make money. Governments do bailouts because they see a certain company as vital to jobs, the economy, and the health of the nation. That's not how the companies themselves see themselves. The bigwigs at the big three may give Congress some sob story about being vital to the fabric of society, but in reality they are only concerned with making money for the company.

No one can expect a company to change its goals just because the government gives it money. Furthermore, if they were to change, they would fail even quicker. That's why I am fundamentally against bailouts. Companies have failed at their primary function, making money, and yet we are all too willing to give them even more money. We give them billions because we fail to realize why business happens, to make money. The idea that autos should be bailed in order to keep workers employed is as naive as it is dangerous. Companies should only stay open if they are profitable. If they are not they need to go away. All bailout decisions should be made with this in mind, not some silly notion that companies are in business to provide jobs.

The Limits and Danger of Monetary Policy

When dealing with economic turmoil, the federal government has two options,Fiscal policy and Monetary policy.

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is essentially the manipulation of interest rates. The last two recessionary periods, 2001-2002 and this current period, have shown policy makers the limits of monetary policy.

In the last recessionary period, then Federal Reserve Chairman Alana Greenspan furiously dropped interest rates until the Federal Funds Rate was dropped below one percent to a low of .75%. The current Federal Reserve Chairman, Ben Bernanke, has dropped nearly as much so far to a current level of 1% with most expecting it to go even lower.

The purpose of monetary policy is to lower interest rates so much that it spawns borrowing from lenders like banks to small businesses to consumers. The limits of monetary policy is that if the economy is weak enough no entity, bank, businesses or consumers, want to take on any extra obligations in the form of debt. As such, the Central bank could drop rates all the way to zero (something currently being contemplated) and borrowers will still not bite because the act of borrowing is something that the current economic environment makes all entities averse to.

The recession at the beginning of the decade showed two limitations of monetary policy. Then, the recession began with the popping of the internet bubble which eventually caused three trillion Dollars in paper losses in the equity markets. This was followed by the events of 9/11 which caused one million job losses in the immediate aftermath. Finally, this was combined with the revelations of accounting malfeasance of Enron et al. The continued reduction of interest rates proved useless against this economic malaise until they were combined with tax cuts by the Bush administration. Then, when the tax cuts expanded the economy, the obscenely low interest rates wheels in motion for the current mortgage crisis.

The current crisis is also showing the limits the limits of monetary policy. Currently, there is far too much fear for lenders to borrow themselves and to lend. Furthermore, borrowers and other entities became so leveraged during the boom in between that they are fearful of taking on any new debt.

Fiscal policy is the process by which the government manipulates the economy through tax policy. Unlike monetary policy which attempts to manipulate by getting entities to use other people's money, fiscal policy attempts to manipulate the economy by allowing entities to keep more of their own money. It is one thing for an entity to spend more of their own money, and it is quite another for an entity to borrow more money from someone else to spend. The last two recessionary periods show the limitations of monetary policy.

The Root Causes of Terrorism

What are the root causes of evil? In order to understand the root causes of terrorism one needs to ask that question. It appears that Deepak Chopra has sparked this debate again. I think that the root causes of terrorism are things that we should debate and discuss. I also think that we should recognize this debate for what it is, a debate on the root causes of evil. I can tell you what are somethings that are not root causes of terrorism: poverty, U.S. foreign policy, despair, or any outside stimulate. In other words, whatever the root causes they are entirely the product of decisions and behaviors created by the terrorists themselves.

Here is how Chopra characterized it.

What happened in Mumbai, he told the interviewer, was a product of the U.S. war on terrorism, that "our policies, our foreign policies" had alienated the Muslim population, that we had "gone after the wrong people" and inflamed moderates. And "that inflammation then gets organized and appears as this disaster in Bombay." . . .

Now, the idea that someone had a moderate point of view and then saw some geopolitical event and this caused this person to strap a bomb to their persons, find as many innocents as possible, and then blow themselves up is patent nonsense. If someone straps a bomb to their selves in order to kill innocent civilians whatever their reasons, they are nothing more than internal justifications for pure evil.

Whatever the root causes, they are still entirely internal. To me, evil comes from a combination of two things. First, is a massive inflated selfishness where not only does one make decisions in their own best interest but the interests of anyone else aren't ever even contemplated. The second component is a demented sense of right and wrong or even worse a total lack thereof.

To me, the only way to deal with evil is to confront it and eliminate it. Trying to turn an evil person good is a noble endeavor, but it is not one that should have any place in geopolitics. Those in clergy, psychology, and simply does that try and reach out should attempt to turn evil folks into good folks. That is NOT the job of those in geopolitics. Furthermore, no one is turned evil by another's foreign policy. Turning to evil is entirely the product of individual's own decisions. Examining the roots of terrorism is a healthy debate, but let's start at the right place, evil. Evil is the product of decisions made by the individual that is engulfed in it. It is not our fault that there is terrorism, and any suggestion of such entirely misunderstands the evil that is at the root of it.

Pakistan, India, the GWOT, and Sovereignty

The best question from today's news conference announcing Barack Obama's new foreign policy team came from Jake Tapper. He reminded Barack Obama that he has announced that if there is actionable intelligence on Al Qaeda in Pakistan and Pakistan won't act we will. Tapper asked if he would give India the same privilege in going after the perpetrators of Mumbai in Pakistan.



Obama circled around the question and it wasn't clear how he would respond in such a situation. This is a very important question. It's easy to talk tough, but once we allow for sovereign rights to be violated, that leads to chaos. If India were to do what he suggests we will, that would lead to a war between the two nations.



None of this is easy. Most of the countries in the world are unwilling or unable to go after terrorists among their midst. Many of the terrorists are residing in Pakistan. Pakistan's government has no control over the areas that the terrorists call their home bases. Yet, if we were to enter their nation without the permission of their government, it would either lead to war or the total disintegration of the government. If India were to do the same with the perpetrators of Mumbai, it would lead to a war between two nuclear nations.



This brings me back to the question and Obama's position on the issue. Barack Obama has made it easier for other nations to violate sovereignty with this bold proclamation. By announcing boldly that if need be the U.S. is willing to violate sovereignty for the GWOT other nations also see the violation of another's sovereignty as something less consequential. Without sovereignty, we have geopolitical chaos. It's easy during a campaign to act tough, but the geopolitical reality here is a license for any country to invade another under the guise that folks within the invaded are a threat to their national security. Such operations should always be made as quietly as possible using back channel diplomacy. By being so public with his proclamation, Barack Obama has opened up such questions. He's also given license to other nations to do as he intends.

Obama's National Security Team: Bold and Risky

Ultimately, the top level cabinet members and advisers are almost always difficult to predict each of their effectiveness. Colin Powell was seen as President Bush's strongest pick and once in office he never meshed with the rest of the team. Donald Rumsfeld was generally viewed as a solid pick and then turned into one of his most controversial choices. Both Paul O'Neill and Scott

were both picks that weren't seen as remarkable and both wrote virulent anti Bush picks out of office.



As such, whatever analysis of Obama's cabinet picks we have, they are all likely to turn out in ways that no one can predict. The picks can be viewed one of two ways, bold or risky. Barack Obama put the past behind him and chose Hillary Clinton as his Secretary of State. He put party and partisanship behind him by keeping on Robert Gates as Defense Secretary. Eric Holder brings years of experience near the top of justice to the Attorney General's seat. Janet Napolitano has governed a border state and brings that to Homeland Security.



Here is a more cynical view of the cabinet. Hillary Clinton has no foreign policy accomplishments to speak of that are entirely her own. Eric Holder was involved in some of the most corrupt pardons (Rich, FALN, etc.) in history and was also intimately involved in the debacle that allowed armed U.S. agents to snatch Elian Gonzales from his relatives and force him to Communist Cuba. Janet Napolitano's record on illegal immigration is shoddy at best and she has no record to speak of in fighting terrorism period.



Certainly, the most solid pick is General James Jones for National Security Council chairman. There is someone with an extremely impressive resume. The most inconsequential pick was Susan Rice for UN Ambassador. It's not that Rice is inconsequential but rather that the UN ambassador is inconsequential. Conservatives love John Bolton but even Bolton was handcuffed by the position he held.



Clearly, the most risky pick was Clinton. Several reporters asked about the tension with Clinton and Obama downplayed by calling such questions fodder for reporters. Yet, if there becomes tension or if this pick blows up, these questions won't become whispers, but rather they will become the subject of endless speculation. Obama was either trying to be inclusive in his cabinet, or uncomfortable with his own knowledge, or he might just be out of his mind by picking Clinton. For my money, I would have been fine with a bitter rival if she were more qualified. Clinton really isn't at all qualified. Obama said she has spent time on the Foreign Relations committe but lots of Senators are on that committee. She really has no foreign policy accomplishments to speak of. If this blows up,

The Auto Bailout: Time For Congress To Play Venture Capitalist

When Congress rejected the automaker's bid for a bailout, they told them to come back when the big three had a plan to get their business moving. Congress even wanted to see a plan for making the big three more heavy in energy efficient vehicles. In other words, before Congress invested in the big three, they wanted to see a plan for where their investment would go. Of course, we have a name for someone that does this, venture capitalists. Typically venture capitalists providing funding for start ups but they don't have to. Whenever a business goes and seeks capital to inject into their own business, those they go to are venture capitalists.

There is a certain absurd irony into Congress venturing into venture capital. Obviously, it is foolhearty and ridiculous for a bunch of politicians to take on the role of venture capitalists because they barely understand their own jobs. GM, Chrysler, and Ford, can come back with a plan but it isn't going to mean anything to a bunch of politicians. Professional venture capitalists have enough trouble figuring out whether or not a business strategy in need of capital is a good idea. The idea that Congress people will figure this out is not only stunning, but it shows an absurd amount of hubris on the part of all those that are asking for it. Yet, by asking for a plan at least its better than just giving them money.

The problem of course is that by Congress playing venture capitalists what they are really doing is exposing the futility and nonsense of this bailout. The reason this bailout is a bad idea is exactly because Congress is not a venture capitalist firm. If the big three need money, there is a market where they can present their recovery plan and get money. That market has already told them no which is why they are now sitting in front of Congress so they can give them money.

The fact that real venture capitalists have rejected the big three should have been reason enough for Congress to reject a bailout out of hand. Yet, the big three presented a sob story about the fabric of our society crumbling. Real venture capitalists don't much care about the fabric of society. What they care about is making a lucrative venture. Clearly, when this was merely about Dollars and Cents, the big three had no takers. Now that it is based on some other less tangible concept, there is no doubt that Congress will go ahead and spend tax payer money in order to fund an operation no one using their own money ever would.

So, soon the big three will venture back onto Capitol Hill. They will have nice graphs, charts, and projections. They will tell the pseudo venture capitalists known as Congress exactly what they want to hear. Congress will then tell us, the tax payers, what they think we want to hear. Then, we'll all pray and hope that the realities of the market known as our economy and the automobile will somehow stop being cruel and fair. For a sob story and energy efficient vehicles won't actually make a bad business good again. It won't drop their costs, and it won't end their terribly negotiated union contracts. Even if they had a plan for all of this, the likely ultimate outcome would still be failure. That's because companies in this much trouble file bankruptcy not look for venture capital. That's another reason why real venture capitalists wanted no part of this. Congress can feel good for a minute or two and tell us all they didn't just give away our money. They saw a plan. They just aren't at all qualified to judge that plan, and those that are have already judged it a failure.