The Laws of Obamanomics a.k.a Interventionism

The Examiner writes in a book review Obamanomics defined: Big Government in service of Big Business:

The Laws of Obamanomics

Underlying Obamanomics are some basic economic facts and political realities. These are the Four Laws of Obamanomics, paired below with some of the lobbying strategies that exploit these laws.

1) During a legislative debate, whichever business has the best lobbyists is most likely to win the most favorable small print. Similarly, once a bill has passed, the business with the best lawyers and lobbyists will best be able to craft the regulations and learn how to game them. A big business, counting on this fact while lobbying for more government spending or control, is employing The Inside Game.

2) Regulation adds to overhead, and higher overhead crowds out smaller competitors and prevents startups from entering the industry. When corporations, knowing this, lobby for more regulation of their industry, I call this the Overhead Smash.

3) Bigger companies are often saddled by inertia, meaning robust competition is a threat. Adopting regulations that stultify the economy is the equivalent of raising the basketball hoop to twenty feet at half-time: it protects the lead of whichever team is ahead. When Big Business seeks to stultify the economy to hold back smaller competitors, I call it Gumming the Works.

4) Government regulation grants an air of legitimacy to businesses, boosting consumer confidence, often beyond what is warranted. This is The Confidence Game.

While I agree that all these laws do accurately describe the current US economic policy under the current president, I ask: How did those laws differ under Bush, or under Clinton for that matter, or under Bush Sr., or under Reagan??

People have to realize: What is outlined above does not outline some new phenomenon. These are, simply put, the laws of interventionism, the system that has dominated the entire past century. All the problems we are facing today can be traced back to it, all the cures prescribed to fix our problems are just more of very things that caused our problems.

It is a system under which, during all the bogus back and forth, all the talk in the media from left or from right, all the discussions about tax hikes by 4% or by 5%, about whether or not we should send 30,000 or 40,000 hitmen into a foreign country, about whether we should spend $5 billion or $7 billion in yet another foreign aid bill, about whether this or that government institution should oversee banks, or whether centrally decreed interest rates should be .25 or .5 percent, one thing has remained consistent and uncontested by the blind public for decades: the growth of government.

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AIG – A Ponzi Scheme, Endorsed and Bailed Out by Uncle Sam

AIG, of which, since the “rescue”, 80% is now owned by the Federal Reserve Bank, is a bloated, confusing, procrastinating, monstrous, liabilities-shifting, allegations-denying, catchphrase-uttering apparatus whose cracks are leaking left and right:

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.’s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.’s case, regulators are eager for the insurers to keep writing new business, because they see it as the best hope of paying back taxpayers.

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound — that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

My comment: This sounds a lot like the early assurances that “sub-prime” was a well contained issue that will have no spill over effects to other sectors, right Mr. Bernanke? It was obviously clear to everyone that these statements from the insurance regulators were complete and utter nonsense, right?

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

Echoing state regulators’ statements, the company said the interdependency of its businesses posed no problem and strongly disputed that any units had obligations they could not pay.

“There is absolutely no concern about the capital in these companies,” said Rob Schimek, the chief financial officer of A.I.G.’s property and casualty insurance business. The company authorized him to speak about these issues.

My comment: If there was absolutely no concern, then why does Mr. Schimek have to assure us so vehemently? What he really means is of course “There are serious, really serious, concerns about the capital in these companies but I am hoping we can hide it for as long as I am still in charge”.

Nothing is wrong with spreading risks to other companies, a practice known as reinsurance, when it is carried out with unrelated, solvent companies. It can also be acceptable in small amounts between related companies. But A.I.G.’s companies have reinsured each other to such a large extent, experts say, that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them.

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana. If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”

My comment: … also known as a “Ponzi scheme”.

Mr. Myrick has not fully examined all the A.I.G. subsidiaries but said his own recent review of many state filings raised serious concerns, particularly about the use of reinsurance to “bounce things around inside the holding company group.”

“That is a method used by holding companies to falsify the liabilities,” he said.

A.I.G.’s premiums have, in fact, been declining in important lines. Its ratings have fallen, and customers tend to steer clear of lower-rated insurers. To woo them back, A.I.G. has in some cases lowered its prices, competitors say. A.I.G. executives insist they would rather lose a customer than drive down prices dangerously.

A.I.G. has also pledged a share of its life insurance premiums to the Fed, to pay back about $8 billion. Details have not been provided, but consumer advocates say it is not clear how the life companies will pay future claims if their premiums are diverted.

“Eventually, there’s going to be a battle between the policyholders and the feds,” said Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm that specializes in insurance fraud. “The Fed is going to say, ‘We want our money back,’ but the law says, ‘Policyholders come first.’ It’s going to be ugly.”

Mr. Gober is a consultant for a lawsuit on behalf of A.I.G. policyholders, filed in California Superior Court in Los Angeles. The lawsuit seeks a court order requiring all A.I.G. subsidiaries doing business in California to put enough money to cover their obligations into a secure account controlled by the state treasurer.

The goal is to keep money from being moved out of California or used to finance A.I.G.’s other activities, said Maria C. Severson, a lawyer for the plaintiffs. The lawsuit also seeks to bar A.I.G. companies from soliciting new business without full disclosure of their financial condition.

The condition of A.I.G.’s individual companies is hard to see in the parent company’s filings with the Securities and Exchange Commission. Those filings simply tally all the individual subsidiaries’ financial information.

The companies’ weaknesses emerge in their filings with state insurance regulators — particularly when several are reviewed together. But that appears not to happen often, because there are so many. A.I.G. has more than 4,000 units in more than 100 countries.

Responsibility for A.I.G.’s 71 American insurance companies is spread among 19 state insurance commissions, which do not conduct examinations simultaneously.

As a result, Mr. Myrick said, a conglomerate like A.I.G. “can keep moving assets around to clean up one company” at a time, when examiners were looking. He said that it would take a coordinated, multistate examination of all the insurance companies to catch this.

Mr. Schimek, speaking for the insurance companies, said that in 2005, a team of examiners had at least considered A.I.G.’s property and casualty businesses as a group.

“It was a thorough examination,” he said. “I have absolutely no concern about the integrity of the financial information that’s been filed under my watch.”

My comment: Translation: “I am absolutely and 100% concerned about the integrity of the financial information filed under my watch.”

State regulators confirmed that they believed the A.I.G. subsidiaries under their authority were solvent. Mike Moriarty, deputy insurance superintendent for New York State, said that while A.I.G. subsidiaries did not report all their reinsured obligations on their balances sheets, state regulators could “follow the trail of liabilities” and make sure they did not get lost in the holding company.

Obligations “can’t be hidden from state insurance regulators,” Mr. Moriarty said.

One A.I.G. subsidiary, the National Union Fire Insurance Company of Pittsburgh, shows what can happen by heavily relying on affiliates. Its most recent regulatory filing in Pennsylvania said it had more than enough money to pay its obligations.

But at the end of 2008, more than a third of National Union’s portfolio was invested in the stock of other A.I.G. companies, which are not publicly traded. National Union might not be able to sell all of these shares, and it is not clear what it could get for them. Many states bar insurers from investing that heavily in related companies.

Meanwhile, National Union has $42.1 billion in obligations looming off its balance sheet. These have been transferred to 56 other A.I.G. companies, through reinsurance. National Union will have to pay any of these claims and then collect from its relatives.

But it is not clear that the affiliates could pay promptly. National Union’s biggest reinsurance partner is American Home Assurance, an A.I.G. subsidiary that has taken $23.1 billion of obligations off National Union’s hands. In a New York filing, American Home reports total assets of $26.3 billion, but part of that consists of assets that cannot be used to pay claims, like furniture. It too includes a number of investments in other A.I.G. companies.

My comment: This is, by and large, one of those cascading dependencies that I was talking about in Inflation & Deflation Revisited:

The US economy has been at the center of a worldwide network of such cascading credit relationships. Central banks loaned fiat money to fractional reserve banks, those would pass it on to financial institutions which would make it available as wholesale mortgages, individual mortgage banks would take those on and make loans to homebuyers. Insurance companies would insure one or the other loan in the chain and again consider the insurance policy as good as money, using it as collateral to obtain … more credit.

Everyone insures everyone and everyone thinks everything is fine. In the meantime the money has been squandered and it will come back to haunt everyone once everyone wants to see real cash.

In addition, American Home has “unconditionally” guaranteed the obligations of 16 other A.I.G. subsidiaries, bringing the total it might have to pay to $140.6 billion.

Normally, when an insurance company weakens, regulators in its home state will first measure its capital. They may demand a weak company rebuild its capital, and if it fails, eventually bar it from selling new policies.

Like New York regulators, Pennsylvania regulators say they do not see a problem. “The insurance companies remain strong and are probably the most valuable assets within the A.I.G. structure,” said Joel Ario, Pennsylvania’s insurance commissioner. “To the best we know it, we think the companies are sound.”

My comment: Haha, well put, commissioner! Such a statement requires no further comment.

But policyholder advocates said they feared state regulators were deferring to the wishes of the Fed and Treasury, to use the insurance operations to pay back the taxpayers.

“The insurance commissioners, for whatever reason, are letting them do this,” Mr. Myrick said. “I’d be jumping out of my shoes.”

Taxpayers won’t see their money back. Why would they?? The very purpose of corporate bailouts is to rip him off! It is what we already realized months ago: Sinking Money Down a Hole.

The government should have let AIG go bankrupt right then and there. Now the Fed is stuck with a huge non-performing asset that will be worth a tiny fraction of what they paid. Who knows, most likely the obligations to policy holders will be worth much more than what was acquired, in which case the value of assets held is less than zero. The oh so “independent” Fed just needs to assure us one thing: Don’t you dare come to the taxpayer and have the Treasury reimburse you for the losses you will suffer and probably have already suffered from this hideous acquisition of AIG!

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The Effects of Different Minimum Wages in Different States

The latest minimum wage map from the DOL website shows us the following:

Minimum Wage Laws in the States – July 24, 2009

Note: Where Federal and state law have different minimum wage rates, the higher standard applies.

Clickable map of America

Green States with minimum wage rates higher than the Federal Yellow States with no minimum wage law
Blue States with minimum wage rates the same as the Federal Red States with minimum wage rates lower than the Federal
Brown American Samoa has special minimum wage rates

As I outlined recently, minimum wage laws create unemployment if the wage is fixed above the market wage.

Expect those states with minimum wages above the federal level (green) to experience problems with their minimum wage legislation sooner or later. That portion of unemployment which is to be imputed upon minimum wage laws will be significantly higher there. Thus overall unemployment is likely to be sustained at much higher levels there. We may see a noticeable exodus of workers from those green states to some of the red, blue, or yellow states over time.

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How Minimum Wage Laws Create Unemployment

The Emergence of a Market Wage

Wage is the price of a labor service. An entrepreneur exchanges money against a worker‘s labor, combining factors of production, and yielding consumer goods. The amount of money to be paid for the labor is negotiated between the entrepreneur and the worker. How much the worker accepts depends on the offers he receives from competing entrepreneurs, how much the entrepreneur is willing to pay depends on the wages that competing workers of similar skill set are asking.

The entrepreneur will only be able to pay a wage that still grants him a sufficient entrepreneurial profit, otherwise he will not embark upon the project in question.

When an entrepreneur looks for a worker to employ, he will, as a tendency, hire that worker who asks least, out of the available pool of skilled workers. The next entrepreneur who is looking for a similar worker, will have to hire one with the next highest asking price, and so on and so forth.

The workers who are already employed, but at lower wages, will ask for higher wages if they notice that other fellow workers are being hired at higher wages, or else they will leave and start working for those entrepreneurs who pay more. So long as the entrepreneur still earns a sufficient profit, he will be able to up his pay. Some entrepreneurs will have no problem at all to up their pay accordingly, others who are less profitable will have to follow along reluctantly.

At some point the wage reaches a level beyond which the least profitable entrepreneur, the marginal entrepreneur, would be unable to employ a worker. He would have to cease his operation and release the worker. The unemployed worker would now have to offer his labor at a lower wage again in order to find employment.

In addition, there is also a wage level below which some workers would be unwilling to sell their labor. They would withdraw themselves from the market for that particular labor and force entrepreneurs to now compete for workers from a smaller pool of people, by upping their offer.

Thus, a market wage emerges somewhere between those two narrow boundaries, which ensures that all workers who have a certain skill to offer can find labor with entrepreneurs who are looking for that skill. It also ensures that all entrepreneurs can find workers at a price level that they will be able to afford.

Minimum Wage Legislation

When a government imposes a minimum wage, is threatens employers with police force if they accept an offer from a worker below a certain wage level. A voluntary agreement between two individuals is outlawed by compulsory means.

If this minimum wage is below the market wage it has no effect at all. It is an empty decree with no purpose whatsoever. The scenario we have to examine more closely here is the one where the minimum wage is set at a level above the market wage.

If the government begins enforcing a wage that is above the market wage, the marginal entrepreneurs that I mentioned above will have to cease their operation. The people who are let go would have to offer a lower wage in order to find new employment. But if the minimum wage is persisted and enforced at the higher level, the worker will not be able to find employment because he won’t be able to work at the wage he is voluntarily offering to accept. Unemployment ensues in the sector where the minimum wage is being enforced. If it is enforced across all sectors, unemployment across all sectors will inevitably ensue.

Current Minimum Wage Situation

Recently the federal minimum wage was raised to $7.25 per hour:

The FLSA establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $7.25 per hour effective July 24, 2009. Overtime pay at a rate not less than one and one-half times the regular rate of pay is required after 40 hours of work in a workweek.

It is true that for most occupations, this wage may currently be below the prevailing market wage. There are separate minimum wage laws in most states which fix it above the federal level.

But we are now in an environment of deflation, with market prices and wages declining left and right. The ability for prices to adjust during such a deflationary environment is the number one driver for employment. The failure to let prices adjust quickly was one of the main causes of mass unemployment during the Great Depression.

One friend of mine recently posted a simple job at the San Francisco minimum wage which is $9.79. He got flooded with tons resumes from college graduates and experienced people. This tells me that even well below that wage he would find willing and able workers for the position he posted.

The solution would be an unconditional abandonment of all minimum wage legislation across the country. Tantamount to this would be a drop or a maintenance of minimum wage levels well below market wages where they fulfill no purpose other than maybe make people feel good.

States and the federal government have to pay serious attention to this issue. If market wages across the country fall below the minimum wage, long-term mass unemployment will ensue and not go away anytime soon. Lots of people will of course seek refuge on the black market, get paid in cash, and pay no taxes. But to the extent that governments actually enforce those minimum wages that are fixed above market wages, I see nothing but trouble ahead on the employment market.

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Obama Administration Needs to Foreclose on its Foreclosure Prevention Programs

Politico writes White House’s $50B foreclosure plan a bust so far:

The Democrats’ political and policy fortunes rest on their ability to persuade voters that they’re fixing the economy. But experts say that rising foreclosures will only exacerbate the nation’s economic woes, pushing down home prices
, slashing state and local tax revenues and imperiling consumer confidence.

“Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in unusually harsh words for a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far.

“It’s just hard to explain to the working families in America how it is we could move so fast with extraordinarily complicated deals with the huge financial institutions, and we are moving so incredibly slowly, mired in paperwork, in rules, in talking to banks back home,” said Sen. Jeff Merkley (D-Ore.).

The foreclosure listing service RealtyTrac Inc. reported Thursday that the number of homeowners in foreclosure in the first six months of 2009 was up 15 percent from the same time period a year ago.

The Center for Responsible Lending, a nonpartisan research and policy organization, projects at least 2.4 million additional foreclosure starts this year, causing nearly 70 million surrounding households to lose a combined $500 billion in property value.

The group estimates there will be 9 million foreclosures through the end of 2012, at the cost of $2 trillion in lower home values — enough to pay for the House Democrats’ health care plan, twice.

The White House realizes the stakes. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan took the 27 participating servicers to task in a July 9 letter to their CEOs, telling them to add more staff, improve training, create an appeal path for borrowers dissatisfied with the service and fulfill other measures to do more modifications, better.

And so the circus continues. Tim Geithner’s solution to a completely failed policy: Throw more bodies on the pile, employ more people. This is, to anyone who is familiar with project management, the number one indicator that a project is failing and that the person in charge has no insight into its fundamental shortcomings and its subtleties. The administration’s policy is failing as expected. Will they admit failure? Of course not. Will they do everything possible to blame the man on the moon for it? Absolutely. Mark my words:

Obama’s ill-conceived foreclosure prevention plan is in the final steps of falling apart. The backlog that the moratorium naturally created, is beginning to flood the market.

It won’t be too long and people will start asking where the $50 billion subsidies for mortgage adjustments went. And then people will start acting surprised when they find out that yet another chunk of taxpayer money went down the drain.

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