Confidence: not yours

I was going to remark on the relation between Treasury Secretary Timothy Geithner's speech yesterday, the way the markets reacted, and right wing pundits and opinion columnists, but I am having a bloggers' existential funk. I'll get back to that.

What I was going to say was a response to Geithner's comment,

"Our challenge is much greater today because the American people have lost faith in the leaders of our financial institutions, and are skeptical that their government has – to this point -- used taxpayers' money in ways that will benefit them. This has to change."

I wondered how much the lack of confidence the people have in governments ability to spend us out of the economy is due to past failures, or if it was due to the constant barrage of ideological criticism the bailouts have faced. I initially thought that this was a slightly more tenable position than friends I have who simply remark, "I hate the Republicans," when discussing the situation. While possibly more nuanced, I have come to realize that that thought is still colored by my dislike for the general Republican platform and my disgust with Congress.

Then I considered why my own criticism didn't cause me to feel any cognitive dissonance with regard to the thought that Republican ideologues are just peddling uncertainty. Other than a certain us vs. them outgroup antagonism, I find myself hard pressed to reconcile the apparent hypocrisy. To be sure, there is a significant difference in the details of the two (three?) bailouts, but what I am trying to do is separate out my moral, emotional, and ideological proclivities from the factual differences in hopes that I can logically assess the situation.

Clearly that is difficult for someone like me coming from a background of squatters rights and phreaking.

The New Politics: RIP 2/1/09 That Didn't Take Long

Apparently Republicans are running around raising ideological opposition to Obama's huge economic stimulus package. Heh heh. The Republicans got a good look at Obama's Package this week and the President spent time coming in and out of their offices trying to get them to take it. It seems like the do nothing Congress has decided to keep with what they know rather than try to spend massively huge shit tons of money in hopes Keynesian economics does work.



The kicker is that the debate isn't over whether the money should be spent. Its about whether we are giving enough tax breaks to the wealthy fuckers that aren't feeling the pinch. This is a debate over ideology rather than substance. Let me point out that tax cuts and government spending are actually the same thing. Cuts in income and spending both reduce the amount of money in the treasury. The two terms are just ideological code for where the politician thinks the money should go. If you believe in entitlement of the upper class you say "tax cuts." If you believe in entitlement of the poor you say "appropriation." It's bullshit and I am surprised that the fact this is all about ideology doesn't rise to the level of public discourse. Sure you might say that there is an economic debate behind the two sides, except real economists will admit that even amongst them it is really an ideological debate because there is no lab in which to experiment and prove who is more wrong.

The Real Cost of the Bailout

As I've written here on this blog before, our public policy has come closer and closer to engendering moral hazards. Now, this statement has come to a sick and twisted fruition. The cause of this putried flowering is the confluence of two individual factors. The first, is President-elect Barack Obama's pledge to help the ailinig auto industry. Already bleeding money like it needs a tournequet and considering passing another series of economic stimulus packages, the deficit is already such a theoretical number that adding to it won't make much of a difference. The second is another set of behaviors that, besides the aforementioned moral hazard, are morally questionable in other ways. General Motors is burning cash like it's needed to power plant machinery lost $7.35 per share in its latest report. Furthermore, this cash crunch is putting the company in the position where it will no longer be able to fund regular operations. However, instead of consider options like marginal spending decreases, or bankruptcy, the consequences of which CEO Rick Wagoner says would be "dire", he is waiting for President Obama to pull out the checkbook and write a check to the auto industry. After all, the financial industry is in the process of receiving checks without any strings attached, so why shouldn't the Big Three, also? I'm sure Rick is also already beginning to plan how he is going to spend the bonus that he no doubt will feel he earned because he drove the company into the ground so hard and fast that the government needed to bail it out or face political consequences.  Herein lies the moral hazard and the real cost of the Emergency Economic Stabilization Act. Instead of engaging in normal business practices that would help shore up the bottom line, such as closing additional plants and laying off hourly workers, or even declaring bankruptcy and arresting the further deterioration in its credit rating, a company that is potentially too big to fail, is probably going to be able to get a handout from the federal government. So, instead of receiving the punishment of the markets for not balancing its liabilities and assets properly, and for not developing products that the public is willing to purchase, a company is instead able to receive the public's money in the form of a handout, probably without any strings attached.  

The Friday Bacon: A Bonus Bacon!

If we can't send bacon to our congressmen as an insult, then the terrorists have won.

The video is less hilarious than it should be.

The office of House Minority Leader and Ohio Representative John Boehner was evacuated on Monday because of a box of bacon. Apparently an angry constituent sent this as a commentary on the pork laden Wall Street Bailout. I wonder how many more taxpayer dollars will be wasted on overreactions to imaginary threats.

The Ben Franklin Report: The Bailout Settles In

Just in case you need a reference point to how much the bailout was, consider the number to the right, the cost of the War in Iraq thus far. Yes, the bailout that was passed last week surpasses the amount of money spent on that mistake by leaps and bounds. So, when history is written, how should this period be judged? Where were our priorities? Did we ensure that every child in America had access to primary health care? Were we more concerned about finding a cure for cancer, or spending money on making sure that phone calls and emails didn't contain terrorist-related content?



The bailout and its effects in the market place, in a nut shell. Apparently, today the chaos continues as the first market to open after Bush's signature, the Israeli Tel Aviv Stock Exchange tumbled like a rock going down a sheer slope. 

The fundamental source of the entire financial crisis has been the opaque nature of the books of the biggest financial institutions. The fact that they refused to value assets which, if shown in the light of day, would be revealed to have little revenue potential, will probably end up costing the companies billions in dollars is only being papered over by the bill that the various branches of the federal government approved on Friday. This is further reinforced by new rules from the Securities and Exchange Commission stating that corporations no longer have to price these assets on a 'mark-to-market' basis. That is to say, they no longer have to value them at the price they would likely fetch in a free and open market, but rather can just pencil in whatever they want and use these assets as capital, or as collateral for the various short-term lending programs offered by the Federal Reserve. However, the hanging $55 trillion question in the air is what happens when the Credit Default Swaps start becoming unbundled. For instance, you may remember A.I.G. which met its fate and an $85 billion bailout from the Federal Treasury because of these insurance policies, but has yet to sell a single asset, despite blowing through $61 billion of the money provided in the bailout. Yet their executives party like Nero in Rome. Party on, Wayne. Why worry when none of those responsible for the lending practices will ever be prosecuted? 

So, with some banks saying that they won't even participate in the No Bank Left Behind program and banks that will still fail regardless of their participation, what are we left with? A budget problem that will hamstring the domestic and foreign policies of the next President, whoever it may be, an IRS with undercover investigative powers which will be on the prowl to make sure that every dollar Uncle Sam has coming is brought to the Treasury, and good, old-fashioned rage almost everywhere other than Wall Street. 

The Ben Franklin Report: Talking Points and the MSM

It was interesting to me to observe the tone of media coverage regarding the Bailout over the last week. Prior to the rejection of the first bill by the House the coverage was neutral with most coverage being directed at explaining just what the legislation was supposed to do but there was almost no coverage of popular opinion which was vastly opposed to the measure. After the shock subsided from the precipitous drop in the stock markets following the vote by the House, and it was found that the sky had not fallen and business continued as normal, the MSM started covering the vast negative public sentiment. This was mainly as a means of explaining why the Representatives voted as they did and attached to the old adage that the House is the more populist body. Suggesting that the real people of the country are only actually represented in government at the national level in the House of Representatives.

Until this morning the MSM was freely using the term "Bailout" to describe this massive gift of taxpayer dollars to the greedy rich motherfuckers that got us into this crisis in the first place. However this morning, the MSM has started referring to the bill as the "Rescue Plan." Yes, the Bailout that passed the Senate in the dark hours of the night when noone could see their shame has been spun. Instead of being a colossal failure of leadership, this is now a plan. Instead of being a giant burden of over $10,000 on every taxpayer, this is being called a "Rescue."

How long will this kind of transparent bullshit go unchallenged? Where is the voice of the American people? We, the people of the United States are overwhelmingly opposed to this legislation but if you look at the MSM you would think that we all accept this bill as a necessary evil. This is exactly the same failure of the media that got us into Iraq. Where are the pointed questions? Where are the experts holding the feet of the members of congress to the fire? Why is Kucinich the Keebler the only person that sounds sane? It takes a vegan who thinks he was abducted by aliens to raise concerns about the artificial haste with which this bill is being forced through congress? What about the old adage that the Senate is the more deliberative side of the Legislature?

Where was the thought process yesterday? It was clouded by fear and greed. Fear that there is an imminent catastrophic collapse in the future, and greed motivated by all that money. Why think about rational solutions when you can slip in a rider that directs funds back to your pet projects? If you are going to alienate millions of people by voting "yes" you might as well buy the votes of a few back home.

Like 9/11, this is another crisis that was easy to foresee but once it materializes people in government are using the ignorance of those that did not see it coming to create an unjustified panic in order to gain unfettered power. I cant' believe that exactly the same trick is working on the same people just six years later. I guess Lincoln was wrong.

I wish that was all I had to say about this but I want to highlight the behavior of the presidential candidates and I want to single out a particular economic pundit who has been causing me great personal outrage for the last three weeks.

The H-pod has been getting increasingly aggravating with his constant reliance on the trickle down theory of economics as if it is still a valid method of thinking. As if trickle down hasn't been clearly disproven by the recent recession. As if he isn't just fattening us up for the slaughter. Velshi is just trying to keep the taxpayers calm and encourage acceptance of the vastly flawed Bailout.

As for the candidates, they have both failed to show leadership in this crisis. Neither candidate has even attempted to deliver a strategy for solving this problem. Neither candidate nor their VP nominees have given concrete examples of things they would do if elected that differs from anything they have been saying since June of '07. To me its painfully obvious that they could follow FDR and his lead that propelled us out of the last Great Depression. They start a massive public works project. How about one that creates energy independence? Then you solve two national problems at once. OK, its four problems is you include oil wars in the middle east and energy's impact on the environment. Massive building projects that create super solar farms in the sun belt, wind farms in the great lakes and off the Atlantic coast, factories that produce the new solar power generating windows. The government can spend some of the seven hundred fucking billion dollars of U.S. taxpayer rape on investing in our technology future. The U.S. is falling behind. It was the lack of foresight of congress that caused the Large Hadron collider to be built in France and Belgium.

Both parties have failed. Both houses of Congress have failed. The Bush administration has failed. Local governments have failed. Wallstreet has failed. Individual investors and property buyers have failed. Foreign governments and corporations have failed. There is plenty of blame to go around but little understanding of the full scope of the failure. This colossal failure of leadership is not likely to be cured by panic and a rush to pass the first piece of legislation proposed by an administration that has showen itself to be power hungry and incompetant. We need to vote every one of these selfish beureaucrats and politicians out of office. We need to finish the job of cleaning house that we started in 2006.

Throw the bums out.

A Little More Bacon Makes the Medicine Go Down

Unfortunately, the professional politicians of the Senate, including Sens. and presidential candidates Obama and McCain, voted in favor of a revised version of the bailout. Now, with some tax breaks and other pork barrel spending to enhance the bill's chances to pass through the House, and of course extra flavor. This delicious bacon costs an addition $100 billion, which is far more than I would ever pay for it, no matter how delicious it is. In addition, there are other sections that have been added to the bill, and you don't need to worry anymore about your children's wooden arrows being taxed at an exorbitant rate. One may argue that it passed through the Senate because only a portion of its members have to worry about re-election, which may or may not be the true reason. However, if one feels that this bill is overtly socialist, consider the opposition of Sen. Bernie Sanders, a self-described socialist, who describes the bailout as unfair.

Also, I would like to see the opinion polls that Americans are more confused than opposed to the bill. I'm sure Mike Shedlock would have something to say about that, in between falling asleep at his computer, leading the charge against this horrible piece of legislation.

For those who need this explained, one has the choice of either the illustrious Dr. Ron Paul's Campaign for Liberty, or if you need to have it put into perspective with examples, this Opinion piece by Jonathan Weil is a must-read.

I wish that I could believe that this bailout is just an inefficient piece of legislation written in a system that didn't suffer from the systemic failings that went through Sweden's financial system in the 90's. But, even with, or should I say despite, the benefit of the experience of Sweden's former Finance Minister, the legislation is going forward in the worst way possible. When these banks are able to price these horrible pieces of financial wizardry that are currently befuddling their balance sheets at a price dictated by a former head of Goldman Sachs, the economic crisis will continue unabated, as the underlying fundmental economic problems remain. People will still be losing their jobs and inflation will be destroying the purchasing power of the dollars that are still being earned by those fortunate enough to have employment. This is a very dangerous game, with even more money being wasted on tax breaks that aren't substantiated in any significant way.

Victory for the American People

It hasn't been often in the last 7 plus years of the Bush Administration when one could truly say that the power of people defeated the people of power. When special interests took a back seat to those who really run the country, Mr. and Ms. Average. Since the bailout was originally announced, there have been numerous campaigns to stop it, academic disputes, and even the rarest of the rare, a public battle among the normally tightly disciplined Republican party. But, in the end, those who have to face up to the voters on November 4th realized that voting yes was potentially one of the biggest threats to their political careers, regardless of party. If you look at the list of how people voted in this historic vote, those on the 'yes' side will probably have a rough time of it, if not lose their seats to those who chose not to approve the still horrible re-negotiated version of the bailout proposal. In particular, I'm sure Dennis Kucinich (OH-10th) is feeling a little smug, knowing that he predicted the outcome of the vote.

On a slightly different note, I'm not sure why everyone in the world of pundits is characterizing this rejection of the bailout proposal a failure of governance. In common parlance, bills are said to have failed, but that is almost a bureaucratic term. In real terms, this bailout was an ideological battle between those who are in favor of and those who are against nationalization and similar bailouts in the United States. Moreover, this is not a vacuum of leadership in which the U.S. government is flying down a country road like a  '62 Corsair without a driver., as that has been happening for the last 7 years. 

Of course, in a vacuum, comes the punditry. Perhaps the most offensive piece I've read thus far about the political process that brought about this conclusion comes from Rupert Cornwell from the U.K.'s Independent. My favorite metaphor in the article compares the mechanisms of American democracy to Alice Through the Looking Glass. Putting that aside, though, the author clearly doesn't understand the huge popular backlash against the bailout. Sure, in the U.K. and other parliamentary democracies, the Prime Minister isn't approved by the people at large, but in the U.S. the leaders need to be especially accountable. And to say that the bill died in partisan sniveling is obviously disregarding what was essentially a bipartisan effort to keep the American people from having to shovel out $700 Billion or more on a plan that was only designed to correct the dangerous excesses of the richest segments of society. Perhaps, too, the American people have become wary of those who warn about apocalyptic disaster and offer a solution that meets a certain biased politican agenda. 

Kevin Connolly from the BBC, in looking at the reasons behind the bailouts defeat in the House of Representatives, expresses a strange sentiment, that after this bill's defeat and the sense of crisis that it engenders will offer a way out for the bailout proposal, that Main Street hasn't suffered yet. Unfortunately, the people of the United States have been suffering, which is the underlying cause for this economic crisis. With the inflationary impact of cheap money, combined with tepid job growth, primarily in the services sector since the recession of 2001, people were forced to choose between living and surviving, which meant that the mortgage had to go unpaid. Thus, in a trickle up fashion, the banks and other financial institutions, who were holders of arcane financial securities into which these poorly written mortgages were conglomerated, began to suffer the counsequences of their poor lending practices. I think Mr. Connolly underestimates the intelligence of Mr. and Ms. Average and their understanding of this situation, as Mr. or Ms. Average are probably already unemployed, underemployed, or facing the prospect of losing their job in the failing economy. 

From the campaign trail in Iowa, Sen. John McCain who, infamously, suspended his campaign to not show up in Washington for negotiations, has called upon Congress to return to the drawing board and to get back to work right away. Sen. Barack Obama, from a rally outside of Denver, called for calm, saying that things in Congress are never smooth, and instead of imploring or demanding that his colleagues work on the proposal to shore up the wealth of the financial sector, he used a baseball metaphor.  

So panic thus gripped the financial markets, and the Dow Jones suffered its worst lost ever in terms of points. But, have no fear for liquidity, because Helicopter Ben Bernanke has come to the rescue, increasing the amount of dollars in the global financial system by a whopping $630 Billion dollars. To show you a frightening graph that indicates inflation, perhaps even hyperinflation, is just around the corner, here is the Adjusted Monetary Base, courtesy of the St. Louis Federal Reserve. The highlight of a series of moves in the banking industry, Citigroup has purchased Wachovia, after the stock lost more than 80% in trading on Monday. 

I made you an economy but I broked it.

If any of you are regular readers you may be wondering why these last two weeks have gone without a posting on the economy. There are several reasons. First, our senior economic analyst, TheRedKap is still stuck behind the Great Firewall. Second, my political rage peaked about a year ago. After seven years of rising outrage at this administration I finally reached my limits and fizzled out somewhat.

I haven't been able to listen to Marketplace in almost a year so I have had to try and make sense of this stuff myself. Which is difficult for even economists to understand. If the voodoo priests of the dollar can't explain on whats going on, what hope does an average American have? Here is one thought I had yesterday which I hope is not so obvious that I appear foolish for taking the time to lay it out.

One economist yesterday likened the current $700 B...B...B...Billion Bailout to that scene from Blazing Saddles when Bart, played by Cleavon Little, holds a gun to his own head to keep the town from lynching him. Wall Street, here played by Henry Paulson, is holding the gun to its own head and saying they will pull the trigger if we don't save them from their own mistakes. That's pretty obvious but it's the first step. So, what caused this situation? Housing and real property values have risen astronomically bolstered by unfettered access to credit. People were given loans that they could never pay back and the sleaze bags that sold them these loans bunched them together to hide that they were bad investments and then gave them to ratings agency sleaze bags that told the whole world that this was some good shit. Then the poor people who were lied to about how much house they could afford in George Bush's "ownership society"start defaulting on their mortgages. Banks sit up and take notice and start forecasting falling profits and eventually losses and then admit that they don't know how many of these toxic mortgages are going to explode, but they have lots of em'. Opportunist investment bankers then short sell the stock of these banks. (Short selling is either complicated, or simple and commonplace depending on which economist you are talking to and their politics, but the basic explanation is investment bankers try to drive down the value of a stock in order to make a quick buck. They do this because they don't actually have jobs and don't contribute anything of value to society and can only destroy. Like little economic vampires in suspenders.)

So, you get to our current situation with overinflated housing values putting pressure on the markets because banks are so heavily invested in these things that aren't worth what they paid. Now they want the government, meaning the taxpayers, meaning you and me, to buy these worthless bundles of mortgages. They say this will set a bottom level price that they can always be sold to the government for, so that investors can never loose all the money they put into these mortgages, eliminating the mystery of whether the one they just bought will explode in their hands, thusly bolstering confidence in the market and loosening up credit so you and I can go back to buying 72" LCD TVs and leveraging our house to put a pool in our back yards. Thusly fueling the rampant over consumption that has fueled the economy.

Except maybe some of these banks should fail. Maybe an economy based on credit is inherently unstable. Maybe we shouldn't just go back to buying cheaply made garbage from overseas? Maybe these same people that have been pushing for deregulation and chanting the mantra of the free market, when suddenly faced with the terrifying face of the monster that is the free market, they let up a cry for socialism such that has not been heard since Lenin. These people who have played games with our retirement and destroyed the value of our employers and our homes want it both ways just as long as they don't have to feel the pinch. Analysts point out that CEO's of these failed banks are getting fired but mention golden parachutes to them and they begin to dissemble. It doesn't take an economics degree or an MBA to understand that if someone who made over a million dollars in income last year looses their job, they aren't going to loose their house or go hungry like the guy working down at the Ford plant in Cleveland, or the GM factory in Janesville. These guys on Wall Street are more out of touch with what middle class is then McCain. When was the last time an investment banker welded the bumper onto a car or pulled a ton of coal out of the Earth with only their sweat and muscle?

OK, I got distracted by class warfare there. Where does this $700 Bubble Burst Bailout Billion come from? It doesn't just come out of the ass of Johnny Taxpayer, it gets squeezed out of the value of the Dollar. What the markets and Paulson are asking congress to do is to transfer the overinflated value of housing and real property indirectly to the value of the dollar. Inflation. I am talking about inflation with a capital "I." The value of the dollar has been falling against other currencies over the course of this whole subprime crash and since commodities are pegged to the dollar it has fueled the rise in costs of oil and food and other basic essentials. So basically after destroying the value of our homes and companies, the Wall Street voodoo machine is going to destroy the value of our labor and the dollar. I think they are doing this because they know that their "labor" doesn't have any value.