The Bad Bank – The Madness Continues

Government advisors, unimpressed with the recent failures of TARP and all accompanying bailouts and guarantees, blithely continue the nonsense. Bloomberg writes:

Renewed questions about U.S. banks’ viability are pushing regulators toward a new plan that would remove toxic assets from bank balance sheets, in what may become the biggest effort yet to unfreeze lending.

President-elect Barack Obama‘s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

“They need to do something dramatic,” said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.

Federal Reserve officials are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.

Oh boy. Here we go again. Get prepared for the next toxic asset bill. Looks like this time the trillion mark will be cracked. The fact that TARP, as expected, is a complete failure, doesn’t seem to concern these gentlemen. And just in case anyone cares: Whatever they try next to meddle with the current correction will be an even larger failure.

Fed Chairman Ben S. Bernanke called for “a comprehensive plan to stabilize the financial system and restore normal flows of credit,” in a Jan. 13 speech in London. He outlined options including a bad bank, “which would purchase assets from financial institutions in exchange for cash and equity.”

He need not look any further. The bad bank is the bank that he heads. It is called the Federal Reserve Bank.

“Buying toxic assets from banks is a good thing because I think confidence comes back into the banking system when you are certain — or more certain — that you have no time bombs ticking,” said Josef Ackermann, chairman of the Institute of International Finance, the Washington-based group that includes most of the world’s large banks.

Ackermann, who is also head of Deutsche Bank AG, Germany’s biggest bank, said “the real challenge here” is determining the price at which to remove the assets. He added, in a conference call with reporters Jan. 14, that Deutsche Bank doesn’t need to unload illiquid assets into such a bad bank.

What is Mr. Ackerman talking about? He knows damn well that the assets he is referring to are worth nothing. The price for something that is worth nothing is $0.00. Plain and simple. The banks should write down these assets accordingly and live with it. What good is it to establish a taxpayer funded bank that in the end will have to do the same in case it buys the asset at current cook value? Ah right, it secures for our high and mighty bank executives a few more millions that the hapless taxpayer should not be so sqeamish about.

“How do you use this next round of money in the most efficient and effective way? This is a Rubik’s Cube of a problem where there is no easy solution,” said John Douglas, a former FDIC general counsel who is now a partner at the Paul, Hastings, Janofsky & Walker law firm in Washington. “Doing something sooner rather than later to instill confidence is important.”

The solution is to put and end to this madness, let the market work, let the correction occur as quickly as possible, let the responsible banks stay in business, the reckless ones go out of business, let capable investors take parts of them over where possible, and let Americans save more and consume less, so we have genuine savings available again that can serve as a lending base. Before this happens, nothing will improve, nobody will lend, no one will borrow and we will have a lost decade. There is no way around the business cycle that this government has created. The only solution is for it to finally get out of the way.

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Freedom, Liberty, Peace, Happiness and Prosperity

Freedom is the degree to which a thing can move without obstruction from other sources, while in itself not obstructing other things’ freedoms.

Liberty is directly derived from freedom. It is the concept of freedom applied to society. A society in which every individual is able to do what he wants with his body and his property while not infringing upon other people’s freedoms, that is their bodies and properties, can be called a society that has endorsed the concepts of liberty.

Since liberty, by that definition, requires absence of aggression from anyone against anyone, liberty cannot exist without peace. Peace is the indispensable precondition for liberty. Liberty can’t do without peace and peace can’t do without liberty.

Happiness is a subjective aim. It is that goal that every individual, with every action and every step he takes, seeks to attain. So long as one can pursue his desires in an unobstructed manner he becomes happier every step of the way. He might make false decisions once in a while, but this doesn’t in the slightest change the overall direction towards happiness. He will change course if he realizes that something doesn’t make him happy, seek advice with his fellow men, and get on the path he considers right again.

But when someone forces him down a path that he doesn’t approve of, it will be completely impossible for him to pursue happiness. Nobody can possibly tell someone else what it is that will make him happier. If one finds happiness in infringing upon other individuals’ liberties he has to understand that his lifestyle could not possibly be one that is applicable universally. For if he is to be allowed to infringe upon others’ freedoms, what keeps someone else from doing the same to him? Thus happiness, freedom, liberty and peace are inextricably linked.

At times one may seek material wealth and at times indulge in spiritual/intellectual activities. But before one gets to enjoy the delightful beauty of a Monet painting or the subtlety of a Kafka novel, he needs to provide for the means of bare subsistence for himself and his family. To blame capitalism for a lack of cultural or spiritual progress, or to blame it for negligence of the poor and the weak is thus an utter mistake. It is precisely in those countries that have later than others embarked upon a policy of destroying the accomplishments of the Age of Enlightenment and their corollary, free market capitalism, where people got to enjoy an abundance of art museums, opera houses, philosophical lectures, and the like. It is in those very countries where the vast lot of the poor and unemployed have been able to find employment in factories, behind desks and elsewhere and raise their standards of living beyond levels that a Croesus or the Medici would have envied them for. It is in those very countries where a dynamic market has provided for an ever rising supply of health care and pharmaceutical products to improve the lifes of the unfortunate, instead of casting them off a cliff. It is in those very countries where an indispensable network of churches and voluntary charities has been able to appeal to their affluent countrymen’s compassion and raise sums of money that dwarf all governmental welfare programs, quantitatively and most importantly qualitatively, in taking care of those few who were still falling through the cracks.

We are in the process of a complete destruction of all these accomplishments in the United States. We are returning to a state of mass poverty, pauperism, and militarism. But capitalism is not to blame for this unfortunate development. It is the rise of interventionism and the radical expansion of government intrusion that used to be unthinkable up to 100 years ago.

Prosperity is a direct outcome of the pursuit of happiness. To say that money or material wealth alone do not make one happy is to utter a rather pedestrian truism. There is no one thing in the universe that makes one attain a state of complete happiness. But every action voluntarily taken aims at getting closer to that state. It is what Thomas Jefferson had understood long before he chose his words for the Declaration of Independence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Government, by definition, is an obstacle to the pursuit of happiness. Its very essence consists in the infringement upon its subjects’ liberties through compulsory taxation. If it weren’t for this modus operandi, government would not pose such an obstacle.

If the past millennia have shown us one immutable economic law it is this: That governments always and everywhere grow and grow and grow in the long run, to the point of a complete and utter social collapse, only to start the cycle anew. The youngest and probably best example is that of the United States. Founded in 1776 as arguably the smallest government that has ever existed, it only took a few hundred years for it to turn into the biggest, most armed, most powerful, and most bellicose government in the whole world, along with a crushing public debt that will inevitably cause the demise of the current system within the coming decades.

These facts are not arcane or hidden. They are right before us. It doesn’t take the precision or smarts of a brain surgeon to grasp this. Quite the opposite: It takes really hard work and strenuous effort to ignore them and to delude yourself into believing anything else. The root causes for this deliberate self-delusion can be found in scar tissues from our childhoods and until one deals with one’s own personal childhood depredations and mental/physical abuses and corruption from authority figures, one is never going to accept such seemingly simple ideas.

For those who have understood the truth behind the concepts outlined above, it is obvious that there can only be one proper solution: The elimination of that institution commonly referred to as government, aka voluntaryism.

But all these realizations are worth nothing if the people who are subject to the government’s depredations and propaganda are not educated accordingly. In today’s world there is an overwhelming, though fading, compliance on the part of the public with the depredations of interventionism. It is thus my intention to spread the word about these truths wherever I can. Anyone who agrees should, if it doesn’t cause him major discomfort, do the same. It is in conversations in bars and restaurants, in the announcements in the news media, in town halls and on public squares, in quick chats with neighbors and friends where public opinion is formed.

Without an educated public, all the concepts that stand behind liberty and peace are meaningless. It is thus the duty of every one of us to take the word to those around us and show them the right way towards a better world.

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Bail Out Detroit? – Now??

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?

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Bailouts for Everyone

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.

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Bailout Fatigue is Setting In

After about $8.4 trillion pledged so far for numerous Auction Term Facilities, Troubled Asset Relief Programs, bridge loans,  to failing banks and businesses, one has to wonder how many more failures the government wants us to support.

House Democrats Barney Frank and Nancy Pelosi have clearly lost their minds and their last shred of common sense over the past months. They can’t do any more than repeat the same utter falsehoods, lies, and scams. “Bankruptcy is not an option” (…because I say so). “Letting them fail would lead to an epic disaster” (…so please, come on, give us more of your money!!).

After each taxpayer has now committed about $56,000 one has to sit back for a moment and ask “Has this been working so far? How much more money should we take from the people? How many more useless projects should we support with it? How much longer should we prolong the agony?”

Among reasonable people in congress one can sense the bailout fatigue. The car bailout of the big 3 in Detroit exemplifies this brilliantly: First it was going to cost $25 billion. Then it went up to $34 billion. Then one guy testified that over $100 billion might be needed. After it became obvious that House Republicans wouldn’t play ball the last desperate moves were made to tap into an existing funding package of $15 billion which was supposed to support clean energy cars. Then $1 billion was set aside for environmental programs. Now the scammers were hoping to at least take the remaining $14 billion.

One hour ago even this bill was voted down. Thanks, Senate Republicans for getting it right this time. That wasn’t that hard, now was it? You could have done this much earlier. It could have saved us roughly $8 trillion.

I don’t doubt for a second that Nancy Pelosi, Hank Paulson, Harry Reid, and George Bush are already convening in order to figure out a way how to force the scam down the taxpayer‘s throat this time.

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