Bailout Watchdog: TARP Has Increased Risk of Another Crisis

January 31, 2010 · Posted in Government · 2 Comments

As we all know bailouts accomplish nothing but making matters worse, create false incentives, and make all of us poorer. Thus, as can be expected, the TARP watchdog reports:

The government’s response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” Barofsky wrote.

Since Congress passed $700 billion financial bailout, the remaining institutions considered “too big to fail” have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky’s investigation.

Barofsky renewed a call for Treasury to enact clearer walls so that such apparent conflicts are less likely.

Treasury said it welcomed Barofsky’s oversight but resisted the call to erect new barriers against conflicts of interest. The new rules “would be detrimental to the program,” Treasury spokeswoman Meg Reilly said in a statement. The existing compliance rules “are a rigorous and effective method of protecting taxpayers,” she said.

Much of Barofsky’s report focused on the government’s growing role in the housing market, which he said has increased the risk of another housing bubble.

Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration.

The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates.

“The government has stepped in where the private players have gone away,” Barofsky said in an interview. “If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of” artificially pushing up home prices in the coming years.

The report warned that these supports mean the government “has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.”

Barofsky’s report echoed concerns raised by housing experts in recent months, as home sales and prices rebounded. They warn that the primary reason for the turnaround last year has been billions of dollars in federal spending to lower mortgage rates and prop up demand.

Once that spigot of cash is turned off, they caution, the market will be vulnerable to a dramatic turn for the worse. Daniel Alpert, managing partner of investment bank Westwood Capital, wrote in a report that national home prices are bound to fall 8 to 10 percent below the lows of last spring.

“The lion’s share of the remaining decline will occur in markets that saw sizable bubbles but have not yet retrenched,” he wrote.

Officials from the Obama administration counter that massive federal intervention has helped the housing market stabilize and prevented more dire consequences.

Barofsky’s report also disclosed that, while the Obama administration has pledged to spend $75 billion to prevent foreclosures, only a tiny fraction — just over $15 million — has been spent so far. Under the Making Home Affordable program, only about 66,500 borrowers, or 7 percent of those who signed up, had completed the process as of December.

He said the key to preventing future crises is to reform Fannie Mae and Freddie Mac, create and improve loan underwriting and supervision of banks. He stopped short of endorsing specific proposals for overhauling financial regulation, but said many of the proposals would go far to improving the system.

Sorry, but that conclusion is just hilarious. This really is akin to a woman in an abusive relationship who continues to believe her boyfriend will change and continues to run back to him, no matter how many times she gets beaten up.

The entire article points out how incapable of solving any one problem the government is and concludes with the solutions of “reforming” nationalized banks, “creating” loan underwriting, and doing some more bank supervision. Who does all these things? Of course, that same government! That is supposed to solve the structural problems in the financial system?

No, what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above and many more evils would automatically go with it.

Tags: anarchism, bailouts, corporate bailouts, tarp

CIT Group – Trading Halted

July 15, 2009 · Posted in Interventionism · 3 Comments

The AP reports Trading halted in CIT shares:

Trading in the shares of crippled commercial lender CIT Group Inc. was halted on the New York Stock Exchange late Wednesday afternoon.

A trading halt often occurs when news about a company is about to be released.

Regulators have been poring over the books at New York-based CIT trying to determine which of its assets remain strong enough to secure emergency financing.

The company has been teetering on the brink of a bankruptcy filing as its assets decline in value and a large debt payment looms.

Industry and government officials say representatives from the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. have been meeting to discuss plans for a possible rescue of CIT.

Time for more corporate bailouts. Yipeee!

On a side note: Just as an example, please consider the phoney argument of an “independent” Federal Reserve Bank raised against auditing it in light of what I highlighted above.

Tags: bailouts, cit, corporate bailouts, government bailouts

Saving the X Industry

April 24, 2009 · Posted in Interventionism · Comments Off

Henry Hazlitts Economics in One Lesson is timeless, clear, and simple. When it was written in 1946 its lessons were as true as they are today. Unfortunately most journalists, economists, and politicians have not learned from it and still resort to the same tired arguments that have been refuted long ago. Please consider Chapter 14, “Saving the X Industry”. Feel free to substitute “Auto” or “Banking” for the “X”:

The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion picture theaters will lose business, and depression will spread in ever-widening circles. But if the X industry, by prompt action of Congress, is saved—ah then! it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers and neon-light makers, and then it is prosperity that will spread in ever-widening circles.

It is obvious that this is merely a generalized form of the case we have just been considering. There the X industry was agriculture. But there are an endless number of X industries. Two of the most notable examples in recent years have been the coal and silver industries. To “save silver” Congress did immense harm. One of the arguments for the rescue plan was that it would help “the East.” One of its actual results was to cause deflation in China, which had been on a silver basis, and to force China off that basis. The United States Treasury was compelled to acquire, at ridiculous prices far above the market level, hoards of unnecessary silver, and to store it in vaults. The essential political aims of the “silver Senators” could have been as well achieved, at a fraction of the harm and cost, by the payment of a frank subsidy to the mine owners or to their workers; but Congress and the country would never have approved a naked steal of this sort unaccompanied by the ideological flimflam regarding “silver’s essential role in the national currency.”

To save the coal industry Congress passed the Guffey Act, under which the owners of coal mines were not only permitted, but compelled, to conspire together not to sell below certain minimum prices fixed by the government. Though Congress had started out to fix the price of coal, the government soon found itself (because of different sizes, thousands of mines, and shipments to thousands of different destinations by rail, truck, ship and barge) fixing 350,000 separate prices for coal! One effect of this attempt to keep coal prices above the competitive market level was to accelerate the tendency toward the substitution by consumers of other sources of power or heat—such as oil, natural gas and hydroelectric energy.

But our aim here is not to trace all the results that followed historically from efforts to save particular industries, but to trace a few of the chief results that must necessarily follow from efforts to save an industry.

It may be argued that a given industry must be created or preserved for military reasons. It may be argued that a given industry is being ruined by taxes or wage rates disproportionate to those of other industries; or that, if a public utility, it is being forced to operate at rates or charges to the public that do not permit an adequate profit margin. Such arguments may or may not be justified in a particular case. We are not concerned with them here. We are concerned only with a single argument for saving the X industry—that if it is allowed to shrink in size or perish through the forces of free competition (always, by spokesmen for the industry, designated in such cases as a laissez-faire, anarchic, cutthroat, dog-eat-dog, law-of-the-jungle competition) it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else.

What we are talking about here is nothing else but a generalized case of the argument put forward for “parity” prices for farm products or for tariff protection for any number of X industries. The argument against artificially higher prices applies, of course, not only to farm products but to any other product, just as the reasons we have found for opposing tariff protection for one industry apply to any other.

But there are always any number of schemes for saving X industries. There are two main types of such proposals in addition to those we have already considered, and we shall take a brief glance at them. One is to contend that the X industry is already “overcrowded,” and to try to prevent other firms or workers from getting into it. The other is to argue that the X industry needs to be supported by a direct subsidy from the government.

Now if the X industry is really overcrowded as compared with other industries it will not need any coercive legislation to keep out new capital or new workers. New capital does not rush into industries that are obviously dying. Investors do not eagerly seek the industries that present the highest risks of loss combined with the lowest returns. Nor do workers, when they have any better alternative, go into industries where the wages are lowest and the prospects for steady employment least promising.

If new capital and new labor are forcibly kept out of the X industry, however, either by monopolies, cartels, union policy or legislation, it deprives this capital and labor of liberty of choice. It forces investors to place their money where the returns seem less promising to them than in the X industry. It forces workers into industries with even lower wages and prospects than they could find in the allegedly sick X industry. It means, in short, that both capital and labor are less efficiently employed than they would be if they were permitted to make their own free choices. It means, therefore, a lowering of production which must reflect itself in a lower average living standard.

That lower living standard will be brought about either by lower average money wages than would otherwise prevail or by higher average living costs, or by a combination of both. (The exact result would depend upon the accompanying monetary policy.) By these restrictive policies wages and capital returns might indeed be kept higher than otherwise within the X industry itself; but wages and capital returns in other industries would be forced down lower than otherwise. The X industry would benefit only at the expense of the A, B and C industries.

Similar results would follow any attempt to save the X industry by a direct subsidy out of the public till. This would be nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained. The great advantage of a subsidy, indeed, from the standpoint of the public, is that it makes this fact so clear. There is far less opportunity for the intellectual obfuscation that accompanies arguments for tariffs, minimum-price fixing or monopolistic exclusion.

It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And consumers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.

But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.

These results are virtually inherent, in fact, in the very arguments put forward to subsidize the X industry. The X industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration? The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.

We do the same thing, however, when we try to prevent any industry from dying in order to protect the labor already trained or the capital already invested in it. Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both, old needs and new wants are to be filled by better commodities and better means.

Tags: bailouts, corporate bailouts, economics in one lesson, henry hazlitt

US Stake in Citi Won’t Fix a Darn Thing

February 24, 2009 · Posted in Business · Comment

Reuters writes New U.S. stake in Citigroup may not calm doubts:

Even if the government took a large common equity stake in Citigroup Inc, worries would likely persist about the bank’s ability to absorb soaring losses in a deepening recession.

The third-largest U.S. bank by assets is in talks with federal regulators on a plan for the government to increase its stake, a person familiar with the matter said. Converting $45 billion of preferred stock, which the government obtained last fall, to common stock is one of many options, the person said.

An agreement could be announced Monday or Tuesday, CNBC television said.

Citigroup shares rose on Monday after the White House repeated that President Barack Obama believes keeping banks in private hands is “the best way to go.

U.S. bank regulators, meanwhile, said they stood ready to provide more capital to the sector and keep “systemically important financial institutions” viable.

But investors remained worried that losses from credit cards, emerging markets, trading and toxic assets could overwhelm Citigroup Chief Executive Vikram Pandit’s efforts to restore the bank’s fiscal footing. Analysts do not expect the New York-based bank to be profitable in 2009 or 2010.

Converting preferred shares to common equity “helps their capital ratios but it doesn’t help their problem assets,” said Walter Todd, portfolio manager at Greenwood Capital Associates LLC in Greenwood, South Carolina. “If Citi were out of the woods, the stock would not be at $2.”

The government plans on Wednesday to subject banks with more than $100 billion of assets to “stress tests” to decide which need more capital. Citigroup ended 2008 with $1.95 trillion of assets.

Citigroup shares closed up 9.7 percent at $2.14. They earlier traded as high as $2.48, but gave up some gains as broader indexes fell.

One needs to wonder how many more times it needs to be pointed out until people realize that Citigroup is dead:

Citi’s Endgame

Citigroup Agony Prolonged

Game Over for Citi

Now regulators are discussing a conversion of $45 billion from preferred stock into common stock. How is this supposed to solve any structural problems? All that is behind this move is that Citi doesn’t want to pay the preferred dividend to the taxpayer anymore. Kiss the idea goodbye that taxpayer money invested will be recovered in any way. Citi’s common stock market cap is at around $10 billion now. A $45 billion conversion of preferred into common stock will all but wipe out common shareholders. Citi’s shares will follow Fannie Mae and Freddie Mac’s leads and turn into penny stocks.

In reality the company’s common stock isn’t even worth $0.00. I have explained this so many times and it can be read up on in the links I posted above. So I won’t get into it again.

How does any of this clean up Citi’s balance sheets?
How does any of this help investors trust that assets are marked to fair market value?
How is any of this supposed to restore trust in the US banking system?
How are we supposed to get credit flowing again if the banks’ balance sheets are full of garbage and people don’t trust banks with their savings?
How have any of these policies helped avert the continuous decline of the US economy?
How does the taxpayer get anything out of this?

To hell with Citi. Let them go bankrupt and be done with ongoing postponements of the inevitable.

The source of the crisis is that in response to the most irresponsible monetary and fiscal policy, US consumers and government borrowed too much, spent too much, and saved too little, setting in motion The Business Cycle via Credit Expansion and creating an environment of capital consumption. Nothing of what the government is currently doing even remotely addresses these issues. To the contrary, it continues and aggravates the irresponsible habits of the past. Big government is getting bigger by the day. Just as it has been for the past decades, with no change in sight under the Obama administration.

Tags: Citigroup, corporate bailouts, government bailouts

Tell Congress to Stop the Fiscal Madness

January 13, 2009 · Posted in Politics · 1 Comment

The TARP bill is a complete disaster. It has done absolutely nothing to fix the economy. Things have gotten worse since. Temporarily there was a phony outcry in the media about what happened to all the money. The banks have either hoarded it, paid it out to their executives, or used it to snap up smaller firms. What do our dear representatives expect from the next $350 billion? Is it too much to ask to apply common sense? I was blowing the whistle back then and I have to do it again. I can’t do more than appeal to reason and reject madness. Contact your Congressman and Senator at http://www.usa.gov/Contact/Elected.shtml

Dear Senator/Congressman,

In hopes that this time you will listen to me I have to tell you one more time: You are making a huge mistake if you let this second $350 billion bailout bill pass.

The first $350 billion have hurt our economy. We have dug ourselves a deeper hole. Some people even acted surprised when they noticed that Hank Paulson and Ben Bernanke had no idea what to do with all the money. What do you expect?

You actually did include a little condition. You said that the second $350 billion will need separate approval. The idea being that you wanted the Treasury to take the initial $350 billion, do something good with it, and report to you what actually happened with the money. Here we are. The first $350 billion have been spent. The banks refuse to tell you what happened to the money. Foreclosures keep soaring. Unemployment keeps rising. GDP keeps falling. Retirement savings keep falling. And now you think it is a good idea to give them more money? If so, then what was that initial condition added in for? Is it unreasonable to assume that is was a nothing but phony maneuver to win over a few more skeptics?

These people don’t have the solution to the financial crisis. They have been wrong on everything they said. Remember how Paulson said a few months ago the banking system was sound? Remember Bush’s endless reassurances that the economy is strong and stable? Remember how they said they were going to buy illiquid assets so as to stabilize their prices and then changed course completely by buying outright stakes in the banks?

Why listen to these people any longer?

Why not sit back for a second and listen to the people who have been talking about this problem for years? How about listening to the people who have been right on everything? The people who saw this coming and who have again and again presented logical solutions.

You have to understand: This bailout plan is more of the same. The cause for the credit crisis is that the Federal Reserve and government entities like Fannie Mae and Freddie Mac have been buying up mortgage backed securities with taxpayer money and/or printed money. It has been fully explained by the theory of The Business Cycle (http://www.economicsjunkie.com/the-business-cycle). This bill suggests more of that. It will not fix the situation, it will aggravate it!

I hope you take at least five minutes to seriously think about what I just wrote.

I am furious. I cannot believe what is going on. Especially since we have had this kind of rush scenario again and again. And every time we asked ourselves afterwards: “How could they approve that?”

Sincerely,
Name
Phone Number

Tags: 700 billion bailout, bailouts, corporate bailouts, letter to congress

Bail Out Detroit? – Now??

December 17, 2008 · Posted in Interventionism · 9 Comments

An obviously delusional and disturbingly confused Ben Stein once again contributes to dumbing down the masses by writing what appears to be an attempt to an article: Bailout Detroit – Now:

Usually this column is about finance. It usually is an attempt to help the reader make money and have a more comfortable life. I am well aware that I have made a lot of mistakes and that in the short run many of my suggestions have turned out badly. Believe me, I am sorry. I still believe that in the long run the investment ideas will do well, but I am terribly sad that people’s hopes have been disappointed in the short run.

That’s fine Ben. If people are stupid enough to listen to you they deserve to lose money. Another lesson learned means smarter decisions in the future. He who wants to understand finance and economics should seek advice with someone who does understand finance and economics, not with someone who has absolutely no idea what he is talking about.

My best guess is that we are in a panic of sellers and market manipulators and that we will recover within a few years, but I base this on history. We may have moved into a new phase where history is irrelevant. I would be surprised if that were so, since it’s never been true before, but one never knows.

I highly recommend you end the guessing and try some specific thinking. Otherwise, how are we to believe you actually switched the brain on as you continued writing. For beginners like you: We have seen an excessive credit expansion from 1990-2007 which has diverted goods from occupations where the majority of the consumers demanded them and are now in the inevitable and soothing correction which our government is turning into a depression by not allowing it to happen. Those who are in panic mode are you and all the bailout fanatics and government officials. Had we let it occur cleanly it could have been over by now and we’d be ready to get back to useful work. Now we’re in for a decade of agony.

However, today, let’s talk about the American auto companies. They need a bailout from us taxpayers, and they have to get it yesterday. Here’s why

First, we are on thin ice economically. To allow our largest heavy industrial component to fail at this delicate moment is suicidal. To put a couple of million more Americans into unemployment is just not sensible. Mr. Barack Obama is talking about public works projects to employ hundreds of thousands of Americans -bridge building, school building, airport building. These projects take time to start, disrupt local community life, and are famously wasteful.

And that’s why we should do neither of the two. Bailing out Detroit will, from the consumers’ point of view, continue to keep resources from being employed in more useful lines of production, and force the taxpayer, the common man, to cut down on his consumption in order to be able to keep the failed operation going. Our car industry will continue its miserable decline into inefficiency and irrelevance and be back quickly for new bailouts once the money is squandered. How I know that? Oh right, maybe it’s because Chrysler got a bailout years ago and is now back asking for another one!!! You claim to be a financial adviser. Did you ever take a look at GM’s financials? The company is worth minus $60 billion. In a time like this you are asking taxpayers to sacrifice their hard earned dollars and throw them at a business that is worth LESS THAN NOTHING. Shame on you, Mr. Stein! You are one lousy adviser.

I will not again go into details as to why public works projects are going to accomplish nothing but the same. All I needed to say on this I already wrote in detail in The Trouble with Bureaucracy.

Why not be smart about it and NOT LET AMERICANS GET UNEMPLOYED IN THE FIRST PLACE? (Please pardon the shouting.) There are millions of Americans already hard at work making great American made cars and trucks. Why not keep them on the job? Wouldn’t that be smarter than allowing the whole upper Midwest to fall into oblivion and then rescue it over a fifty year period?

BECAUSE OTHER AMERICANS ARE ASKING THAT THEY BE EMPLOYED IN USEFUL OPERATIONS AND NOT IN THEIR CURRENT ONES. (Please pardon my shouting back.) You should really familiarize yourself with the simple economics 101 on entrepreneurial profit and loss. That should help you understand why factors of production should not be kept in operations that generate a loss. You are not the only person in the world, Mr. Stein. There are other Americans who, in their purchasing decisions, express their willingness for a change in Detroit.

Second, I get sick when I hear about how this or that professor says we cannot have bailouts in a free market. Really? How about the bailouts the professors get because gifts to colleges are tax free? How about the bailout they get because if they have to teach six hours a week they feel overwhelmed, while the guy on the line in Dearborn works a grueling forty and doesn’t whine about it?

Ben, if you want to make gifts to the auto companies, please, go ahead and do it. No one is holding you back. And take a lot of people with you when you go. Nothing wrong with that. And if you would like to lobby for a law that makes voluntary gifts for auto companies tax free, go ahead, you’d have my support. Until then, please spare your readers pathetic and irrelevant comparisons.

Somehow, we can give bailouts to investment banks where the top dogs make hundreds of millions a year for running the company into the ditch and wrecking the whole credit picture in America. Somehow we can have bailouts for Fannie Mae and Freddie Mac, whose bosses were trading on the credit of the taxpayers to make themselves rich while pumping up a serious housing bubble.

Exactly right, we shouldn’t have done that either. And I have consistently argued against it. You have not. Now you do. Yet, in the same article you support bailouts to car companies where the top dogs make tens of millions a year for running the company into the ditch and wrecking the whole auto picture in America. Somehow we can have bailouts for GM, Ford and Chrysler, whose bosses were making and reselling auto loans on the credit of the taxpayers to make themselves rich while pumping up a serious consumer credit bubble. It is in the realm of possibilities that you are being a hypocrite?

Amazingly, we can have whole fleets of C-130’s fly to remote areas of Iraq and Afghanistan with pallets of hundred dollar bills piled from floor to ceiling. Then we can pass them out to warlords who make tea for our soldiers one hour and blow their guts out the next. We can send CIA operatives into Somalia and give millions, maybe hundreds of millions, to warlords to fight other killers.

Ben, if you want to argue in favor of the auto bailout, it might make sense to actually talk about the auto bailout. The US foreign policy you describe above it indeed a bad one. But this does not in the slightest make the auto bailouts a good one.

But we cannot find it in our hearts to save our fellow Americans in Ohio and Michigan and Indiana who make the cars and trucks that about half of us buy? We can send billions to Germany and Japan to bail them out after they bombed us and killed our POWs and killed six million Jews. But we cannot help the children and grandchildren of the men and women who fought our war and made us the arsenal of democracy?

Something is very wrong here.

Sure we can help them. We can release them from their current inefficient occupations and enable them to be integrated into a productive modern economy. We need to do this sooner rather than later. The auto companies will fail either way. We can either prolong the agony and then leave the workers without any viable experience in modern, profitable operations, or we can let the companies restructure quickly and efficiently. The longer you want to keep them where they currently are, the worse will the situation be for the very people you are trying to help.

And please don’t tell me how GM and Ford and Chrysler have made bad cars that people don’t want. I drive only American cars, only GM cars actually, and they are the best, coolest cars I have ever driven: my 1962 Red Corvette, my mighty Cadillacs whose potent engines and super brakes have saved my life many times on the freeway. Yes, the cool people in DC and New York don’t drive American cars. But a lot of other good people do and we love them. And my Cadillac dealer down here in the desert, Jessup Motors, gives me a lot better service than my Mercedes, Porsche, BMW, Jaguar, or Acura dealers ever did. I would trust my life to Detroit iron any time.

That is good for you. I have no problem with your desire to buy GM cars. Nor do I have a problem with other people having the same desire. I do have a problem when you want to send IRS agents after me to take my money to subsidize your car. I don’t ask you to give me money to pay for my next ski trip either. A simple solution: Why don’t you and all other GM lovers, out of patriotism, simply pay 4 times the price you currently pay for your car. This way GM might actually break even next year.

And why are we so angry at the car companies’ executives? They get miserable pay by Wall Street standards and have much harder jobs.

I’m not sure what your high and mighty standards are that you call $14,000,000 a miserable pay. Still, I’m not angry at them. In fact, I don’t care about them. They’ll do just fine. I’m not asking more of them than a bakery owner asks of his manager: Be profitable so we can pay our bills and have some money left at the end of the day.

Why are we so angry at the unions? They negotiated their deals in good faith. It’s not their fault that roller coaster gasoline prices messed up their world.

What makes you think that bailout opponents are angry at the unions. I’m not. If they want to close deals that bankrupt their business, it’s their free decision. Just don’t come knocking on my door afterwards to help you continue make bad decisions. Make better ones next time.

They are our brothers and sisters. They fight our wars. They maintain our middle class lives. Maybe they get paid a lot, but they have been giving back for years. When will it ever be enough?

Ben, are you suggesting that GM workers are the only ones who are our brothers and sisters and fight our wars? I hope not. What do you mean by “they maintain out middle class lives”. You mean their middle class lives? Did you know that there are a lot of people who earn less than the average UAW worker? Did it ever cross your mind that there are people who are suffering quite a bit more than the GM auto worker who makes $150,000 a year? Why do you want to milk these people for tax money when they are already struggling? Have you no compassion for them?

And what about the retirees? They get the benefits they were promised. If those can be taken away, then whose benefits are safe? And do you think it will be cheaper if the government takes on those costs directly?

And what about the retirees whose pension money will be worth close to nothing once the inevitable result of this bailout mania unleashes the inevitable hyperinflation upon us? What about the taxpayers whose money can apparently be taken away without a qualm from your end.

Let’s stop the Depression before it starts. Let’s show some fairness and good faith to our own. Let’s bail out the Big Three, help them slim down, shape up, and keep making great cars and trucks. The Big Three are us and if we cannot help ourselves, who can we help?

Correct, let’s not cause another Great Depression. Let’s not again prolong the agony of a necessary correction by trying to keep prices up and failing businesses going, like we did in 1929 and 1930. Let’s help the big 3 become efficient by allowing the consumers to decide what is to happen. Let their owners go through Chapter 11 if necessary. Let the good pieces be turned into efficient and successful businesses and the useless parts be released for more useful occupations so the American car industry can once again be a force in the world rather than a caboose. The Big Three are NOT us. They are GM, Ford, and Chrysler. If they can’t help themselves, then who should?

Tags: bailouts, ben stein, chrysler, corporate bailouts, Ford, gm

Bailouts for Everyone

December 13, 2008 · Posted in Interventionism · Comment

The US faces the most severe crisis in history. Everyone is facing the threat of bankruptcy. If everyone were to go out of business, everyone would lose their jobs. Everyone is too big to fail. It is not just those who are directly employed by everyone, millions of people are contractors and vendors who supply everyone. They, too, would be affected.

Unfortunately the bailout for everyone faces strong opposition in Congress. Only a few brilliant public figures have realized how severe the situation is:

Financial Services Committee Chairman Barney Frank had the following to say:

“If we don’t help everyone, we will see a disastrous ripple effect that will affect everyone. In a crisis like the current one we cannot afford this.”

House Speaker Nancy Pelosi:

“Bankruptcy is simply not an option for everyone. It takes way too long to go through the Chapter 11 proceedings for everyone. There is too much at stake here. We’re not just looking at anyone here, we’re talking about everyone!”

President Elect Barack Obama:

“If Congress doesn’t act during the lame duck session, my first act, when in office, will be a bailout for everyone. Everyone employs roughly 100% of the American workforce. We can’t afford unemployment to jump up to 100%.”

President Bush:

“I’m a market kinda’ guy, you know that. But after consulting with my experts Hank Paulson and Ben Bernanke I suddenly realized that a failure of everyone would be disastrous for everyone. The risk of not bailing out out everyone by far outweighs the cost of the package.”

A businessman from Detroit who sells stuff and is directly affected by everyone’s financial problems:

“Imagine you buy something from everyone and then it breaks. Who’s going to fix it when everyone goes out of business?”

It is time to end the partisan debate. It is imperative that the government step up to the plate and bail out everyone, whether Congress likes it or not. The money for this historic bailout would of course have to be raised through taxes, levied upon everyone. Now is really the time for everyone to set aside their selfish greediness and do what is right for everyone.

Tags: corporate bailouts, government intervention

The Economics of Corporate Bailouts

November 20, 2008 · Posted in Business, Interventionism · Comments Off

The objectives of economic policy are to continuously improve the well-being of the largest possible number of people in society by making sure that the scarce resources available on earth are utilized so that every one’s most urgent needs are satisfied before less urgent ones are addressed.

When a business squanders factors of production which, from the consumers‘ point of view, would satisfy more urgent and/or ample needs in other lines of production, it operates at a loss. This sends a signal to the entrepreneur running the business to do one of the following, lest his operation contribute to a deterioration of the welfare of society:

- find a better use for the factors of production employed (produce different, more demanded goods)
- find more effective ways to employ them (increase the output of the factors employed)
- abort the operation, make the factors available to entrepreneurs who plan to employ them in more urgent lines of production, thus releasing them from their current occupation (declare bankruptcy)

Those are the choices he has under a capitalistic system on a market where the consumer, the common man, is supreme, a market based upon voluntary action. Any of these steps would swiftly remedy the misallocation of the resources and align them to the benefit of the common people, the consumers.

(Whether the workers employed in the business are paid market or union wages, they will easily be able to find a new, profitable, occupation at wages that are equal to or below the ones they are currently being paid. Overall, the consumers that the new employer sells to will benefit to the extent that the new workers contribute to a larger supply of valued and demanded goods. True, the individual worker may not be happy about the fact that he has to adjust and/or start off at a level that is slightly below his previous one. However, the people he produces for are workers, too. For the majority of the products produced in a capitalist society are produced for the common man. Everyone is now consumer, now producer, and would like to be favored in both roles. But there can be no other means of reconciling these conflicting interests than making sure that at any given point in time as many workers and other resources as possible are, from the consumers’ point of view, employed in the most urgent lines of production. The greatest harm is inflicted upon society as a whole if resources are withdrawn from these most urgent uses and occupied in less urgent, wasteful, operations.)

In an interventionist system, however, the entrepreneur who operates at a loss has another choice: He can petition with the government for a bailout. Under this arrangement, the government obtains additional tax money from the people under its governance territory and uses it in order to cover the losses generated by the business. It hence forces the people to restrict their consumption in order to keep up an operation that, from the their own point of view contributes to a lowering of their standard of living. It relieves the entrepreneur from the responsibility for this damage and lets the taxpayer, the consumers, shoulder it.

Alternatively the government can obtain the money by having the central bank produce it and make it available to it in a credit transaction. This would of course result in inflation and credit expansion, which again the consumer pays for in the form of prices that are higher than they would have been without the intervention (this could be rising prices, but it could also just mean prices that are dropping more slowly).

The government could also borrow the money in a credit transaction on the market, along with the implicit commitment to tax people in the future, meaning to forcefully take their money, in order to repay this debt. All this does is to shift the burden of restricted consumption into the future, while in the present withdrawing resources that capitalists may have employed for factors of production in profitable, and thus urgently demanded, operations, instead of loaning it to an entity that can simply repay by stealing it from others, and thus has no incentive to address consumer demands. This can be vividly witnessed in the fact that the money is made available to largely unprofitable businesses in a corporate bailout.

If unprofitable, in other words wasteful and less-urgently needed operations are subsidized while proper conduct is taxed and thus punished, it is only to be expected that more undesired behavior will be encouraged. Irresponsibility, short-sightedness, and imprudent conduct in business will the the inevitable outcomes over time.

Either way, such a policy of course necessitates a well planned and thought out propaganda and fear campaign before public approval will be granted.

The management style of the business will then in no way be a profit oriented one. If not already bureaucratic, it will become an inherently bureaucratic operation. But the bureaucratic style is precisely the opposite of what it needs. It needs to stop withdrawing resources from occupations where they could fulfill more urgent and ample needs from the consumers’ point of view.

But even from the business’s point of view there is no long term help for its employees and managers if its failed operation is bailed out. The bureaucracy and inherent lack of innovation will ultimately maneuver the business toward a devastating collapse which can no longer be justifiably funded out of tax money. All employees will lose their occupation. But since the failed operation went on for much longer than necessary, the bulk of the employees will be trained in ineffective, outdated, and unprofitable procedures. Now it will be even harder for them to adjust to the conditions on the market.

This holds true for any type of business, no matter what products and services it provides. Whether it builds cars or brokers credit transactions, the consumers’ judgment tells the entrepreneur whether they are supplied with the most urgently demanded goods or not.

The more resources the business employs, the more suppliers it purchases from, and the larger the loss, the more will the standard of living of the common people, the consumers, deteriorate, if the bailout intervention continues. Every single dollar appropriated would be better employed by the consumer it is forcefully taken from. Every dollar used to obliterate the loss is misspent. The larger the business that is being bailed out, the more immediate harm is inflicted upon the common man.

Thus, there is nothing that could be farther from the truth than the argument that some corporations are too big to fail. It is hard to find a more sinister and callous consumer scam perpetrated upon the populace than the corporate bailout. It adversely affects the standard of living of the common man, who is consumer, taxpayer and worker at the same time, and on top of that leaves the employees of the business poorly trained and inflexible once the inevitable collapse occurs.

Tags: bailouts, corporate bailouts, government bailouts, government intervention