Feds unveil plans to unfreeze consumer debt market

The AP writes:

The government has introduced a pair of new programs that will provide $800 billion to help unfreeze the market for consumer debt which Treasury Secretary Henry Paulson calls vital to supporting the economy.

Paulson says key markets for consumer debt such as credit cards, auto loans and student loans essentially came to a halt in October. He says the new programs are aimed to get lending back to more normal levels.

Paulson says all the government programs have been aimed at supporting the lending that is vital to the economy.

What? $800 billion? Where does it come from? When did Congress approve this? Is this a joke?

2 months ago they were fighting bitterly over $700 billion and now we have gotten to the point where $800 billion are mentioned in a side note. They have completely lost their minds.

Just a few days ago I mentioned that consumer credit is going to collapse in 2009.

Of course it is merely a coincidence that the main beneficiaries of this measure will be the executives of the largest credit card issuers in the country, the company names at the top of the list appear utterly familiar:

1. JPMorgan Chase
2. Bank of America
3. Citigroup
4. American Express
5. Capital One
6. Discover Card
8. Wells Fargo
10. US Bank

Nice little Christmas present before they jump ship.

Expect the money supply and gold to soar.

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Use Gold Money

A fiat money can only function when forced upon the people via aggression or threat thereof. As a tendency, a government, the bigger and more powerful it gets, will more and more take advantage of the system. The monopoly over money creation tempts those in charge to produce money and spend it for the government’s own projects.

In the United States this happens in the form of government bonds issued by the Department of Treasury. Those bonds are bought up by the Federal Reserve Bank. The government gets to spend the newly printed money first and hence gets to purchase goods before everyone else sees their prices rise. They hence benefit from the inflation and effectively impose a tax on those who get to use the money later, the workers who earn wages in businesses.

In 1971, $28 would buy one ounce of gold. Today $813 are needed. $29 are needed today for what $1 would have bought back then. This trend will continue. Inflation always causes misallocations, disturbs a smooth functioning of the market, and reduces prosperity below the level that could be achieved without it. It transfers wealth from those who receive the newly injected money later to those who get it earlier.

But as a certain amount of inflation becomes acceptable to a conditioned populace, the government will push the boundaries toward more inflation and debt with no end in sight. Those who run the state apparatus won’t owe money to anyone when they jump ship. They have no incentive to be prudent. It is the future taxpayer who will foot the bill. A hyperinflation will wipe out enormous sums of wealth for the common man, before the currency is finally destroyed completely. Those who understand the historical relevance of gold money, and act accordingly, will be the winners of this development.

Last Saturday, at the San Francisco “End the Fed” rally organized by the “Campaign for Liberty“, a man on the podium was holding up a Silver Dollar and an American Gold Eagle. To his left the mighty San Francisco Federal Reserve Bank, to his right the US Bank tower. “I hold here in my hand more money than these banks have ever owned … one Silver dollar buys me 2 popcorn, 2 sodas, and 2 movie tickets. My rent is $40 per month.” I presume he is self employed and demands payment in gold and silver Dollars from his customers as much as possible. He said he uses the money in grocery stores, cleaners, and restaurants who gladly accept sound money.

Now the incredible part: When he earns 50 Gold Dollars, he declares $50 on his income tax return for an asset that has a price of currently about $900. So long as he doesn’t cash it in he owes no income tax on its fair value. An American Gold/Silver coin is considered legal tender over the amount that is imprinted on it. This is, in fact, the law: After hearing him speak, I did my research:

Article 31 U.S.C. § 5112 outlines the details of the arrangement of minting American Eagle coins. The law makes them legal tender for all debts private and public.

As per wikipedia.org, another important decision was made by a court in 1877:

The case of Thompson v. Butler establishes that the law makes no legal distinction between the values of coin and paper money used as legal tender:

A coin dollar is worth no more for the purposes of tender in payment of an ordinary debt than a note dollar. The law has not made the note a standard of value any more than coin. It is true that in the market, as an article of merchandise, one is of greater value than the other; but as money, that is to say, as a medium of exchange, the law knows no difference between them.

I encourage everyone to read this:

It is an article about a Nevada businessman who applied the concept I explained above throughout the 1990s. The most notable sections:

…Kahre hadn’t committed a crime. He had upset the Internal Revenue Service by paying his workers based on the face value of gold and silver coins, versus the market value in the Federal Reserve system (the value of the coins in U.S. paper dollars)…

…The IRS expected Kahre to report his workers’ earnings based on the coins’ market value in the Federal Reserve system. Instead, he didn’t report or pay anything at all because the face value of the coins fell below the reporting threshold. The IRS alleged that Kahre and the other defendants paid at least $114 million (based on the Federal Reserve system) to workers. The use of these coins in trade is a direct challenge to the fiat money system now in place…

…In 1985, Ron Paul and other congressmen challenged our country’s currency system, which was monopolized by Federal Reserve Notes (FRNs) the familiar greenbacks in American wallets. The congressmen successfully pursued the Gold Bullion Coin Act, which required the U.S. government to mint and place gold coins in denominations of $50, $25, $10 and $5 into circulation based on demand. The coins are made of 91.67 percent pure gold….

…[the] jurors delivered zero guilty verdicts. Three defendants, all workers, were acquitted as well as Kahre’s mother, who worked as a runner for her son’s businesses. Two other defendants were partly acquitted, the jury hung on one count each. The jury also hung on all counts faced by Kahre, Loglia and Kahre’s sister, resulting in mistrials…

…The outcome of this case is a magnificent victory for those of us who believe that the United States of America should have an honest monetary system.

I expect to see more cases like this in the near future. As the quality of the US Dollar diminishes people will be forced to look for a better money. What better option is there than using precious metals which the country’s highest federal legislator has made legal tender. The tax savings are a convenient side effect but the practice will certainly be legislated away and violently punished once the government becomes desperate. But at least it would be a means to put an end to the fraudulent Federal Reserve System that has been plaguing this country for 95 years, and once and for all do away with the inflation tax.

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Government Intervention and The Great Depression

I liked today’s email newsletter statement from Andrew Davis, the Libertarian Party’s Director of Communications:

“The 1930s recession became the Great Depression because policymakers didn’t take the necessary actions,” said Democratic economic adviser Jared Bernstein in a recent Washington Post article. “Nobody wants to make that mistake this time around.”

This comment from Bernstein summarizes the prevailing mood of the Obama administration as it looks to take over the reins in January.  So, what does this mean for you, the taxpayer?

Unfortunately, more government spending.

Obama has just recently announced plans to spend at least $700 billion in order to stimulate the economy. This figure includes New Deal-styled programs that will explode the size of government, and dramatically add to the national debt—money that will be owed by generations to come.

Talk about redistributing the wealth!

Despite the obvious problems with government spending even more money when it should be cutting spending, Obama is projected to sign into law a new “Raw Deal” for the taxpayers within days of becoming president—if not even on the day he is inaugurated.

The justifications you will hear for this new spending all revolve around the “New Deal” policies of the Great Depression, so we thought you should know the truth about Obama’s “Raw Deal” and the myths behind what really pulled the U.S. out of the Great Depression.

Here’s a hint: It wasn’t FDR.

Like Democrats, “many people are looking back to the Great Depression and the New Deal for answers to our problems,” says George Mason University Economics Professor Tyler Cowen. “But while we can learn important lessons from this period, they’re not always the ones taught in school.”

What Cowen means is that the conventional wisdom of the Great Depression is absolutely wrong: Government spending did not save the economy.  “In short, expansionary monetary policy and wartime orders from Europe, not the well-known policies of the New Deal, did the most to make the American economy climb out of the Depression.”

Harold L. Cole, an economist at UCLA, agrees with Cowen:

“The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes. Ironically, our work shows that the recovery would have been very rapid had the government not intervened.”

This is the danger we face with Obama and his “Raw Deal” for taxpayers.  Instead of staying out of the economy and letting it work itself out, Obama is continuing the same policies as those of FDR and the Bush administration and spending taxpayer money that will have no positive results.

And it’s not just the spending we have to be worried about under an Obama administration; it is the regulatory policy that may come as a result of using capitalism as a scapegoat for the recent economic crisis.

“There is a familiar urge to restrict those who got us into this mess, but regulation is a nasty business—nasty because the law of unintended consequences is always there to show us how we got it wrong,” says Thomas F. Cooley, the Richard R. West Dean Of New York University’s Stern School Of Business, and Lee Ohanian, an economics professor at UCLA. “The danger we face at this fork in the road is the conventional wisdom that associates more regulation with better regulation and more restrictive policies with less risk. History teaches us that the opposite is usually true and that the costs of getting it wrong can last for decades.”

If Obama is to learn anything about the economy from the lessons of the Great Depression, let it be that government intervention is like sending a car mechanic to perform open-heart surgery.  The complications that arise will have long-term, catastrophic effects.

What better example of this than Fannie Mae—a product of the New Deal that is now at the heart of today’s economic problems.

The Libertarian Party and our members have been saying this from Day 1 of the economic crisis (and for many, many years before): Government is not the answer.

Our solution? Less is more.  That is, less government is more economic prosperity.

Essentially, get government out of the way so that the market can adjust.  This path will not be without its bumps and hardships, but it’s best for the long-term economic stability of the nation. What would have taken three or four years to fix through the market will now take at least a decade because of government intervention.

In the coming days of financial woe, and the coming years of the Obama administration, remember the lessons of history and challenge those around you to avoid continuing the myths of government effectiveness, especially when it comes to economic policy.

Live free,
Andrew Davis
Director of Communications
Libertarian Party

Amen to that.

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Citigroup Agony Prolonged

The associated press writes in “Government unveils bold plan to rescue Citigroup”:

The government unveiled a bold plan Sunday to rescue Citigroup, injecting a fresh $20 billion into the troubled firm as well as guaranteeing hundreds of billions of dollars in risky assets.

There is nothing bold about injecting $20 billion and guaranteeing hundreds of billions. It’s what we have been doing, keep doing, and will be doing until we’re broke.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

Its collapse would wreak havoc? Like the havoc that we have been seeing since we started to bail out one failing business after another with billions of dollars?

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stock has been hammered in the past week on worries about its financial health.

There is nothing sweeping about this plan. The stock has been hammered because the company isn’t worth a dime

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement issued late Sunday night. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks.”

How are we protecting the U.S. taxpayer by taking their money and throwing at failed business operations. This is so far from reality, if it wasn’t so sad I would say it’s laughable.

The Citigroup rescue came after a weekend of marathon discussions led by Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke. Timothy Geithner, president of the Federal Reserve Bank of New York, who is being tapped by President-elect Barack Obama as his Treasury chief also participated.

This gives us a preview of the “Change” that Mr. Obama is about to bring: The person who will lead the bailout scams will have a different name. That’s about it.

Vikram S. Pandit, Citi’s chief executive officer, welcomed the action. “We appreciate the tremendous effort by the government to assure market stability,” he said in a statement.

Of course he does. Who doesn’t like getting rewarded handsomely for being a miserable failure.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government also received an ownership stake.

…and which of course didn’t resolve anything at all. The new $20 billion will accomplish just as much.

As part of the plan, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

These number are insane. Yet, they don’t match the insanity going on at Citi. This bank has $1.1 trillion in off-balance sheet assets alone. That is only on top of all the defaulting loans already on their balance sheet. $306 billion will be of help for a few months to a year. They will do nothing but postpone judgment day.

As a condition of the rescue, Citigroup is barred from paying quarterly dividends to shareholders of more than 1 cent a share for three years unless the company obtains consent from the three federal agencies. The bank is currently paying a dividend of 16 cents, halved from a 32-cent payout in the previous quarter. The agreement also places restrictions on executive compensation, including bonuses.

Among all the nonsense I am surprised to actually find something that makes sense.

Specifically, Citigroup will modify mortgages to help people avoid foreclosure along the lines of an FDIC plan that was put into effect at IndyMac Bank, a major failed savings and loan based in Pasadena, Calif.

…which of course means that the underlying mortgages will have to be adjusted on the books (as they should). More write downs ahead…

Citigroup is such a large, interconnected player in the financial system that it is seen by Washington policymakers as too big to fail. The company has operations stretching around the globe in more than 100 countries.

…and that’s precisely why we should NOT bail them out as I explained in The Economics of Coporate Bailouts.

Citigroup was especially hard hit by the meltdown in risky, subprime mortgages made to people with tarnished credit or low incomes. Foreclosures on those mortgages spiked, leaving Citi and other financial companies wracking up huge losses on the soured investments. The company has failed to turn a profit during the past four quarters and has announced plans to slash thousands of jobs.

…but what they are not telling us is that Citi will pretty soon be writing down massive amounts of simple consumer credit, credit card debt. This appears to be an issue that the media and government don’t even want to hint at.

Again: Citi is a lost cause. Stop throwing more bodies onto the pile. It won’t work.

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Reflate the Economy? Now??

Once in a while you come across articles that are so utterly wrong and full of ambiguities, falsehoods, and undefined terms, that it is necessary to call the author out on the damage he is doing by tainting the minds of the readership. This time it’s yahoo’s Ben Stein who perpetrated the crime, in his article “Reflate the Economy – Now“:

Herewith a few thoughts about the economy, public policy and retirement.

First, a note to the mighty international powers convening at the White House for the G-20 Summit to consider the world economic and finance slowdown. In this situation where aggregate demand is collapsing and where credit is desperately tight almost everywhere, the future dangers facing us are all on the deflationary side.

OK, first of all, Mr. Stein, deflation is a drop of the money supply. At best you could hold that a deflation is a very slow growth or a stagnation of the money supply. Deflation, in that sense, actually started in the middle of the year 2006, indicating an upcoming correction of home, asset and consumer prices, usually starting within 1-2 years from then. This is what many libertarians, including myself, predicted at that point in time. 1 year later the US housing bubble began to leak its first holes. October 2007 kicked off the bear market on Wall Street. 6 months later the commodities and foreign exchange bubble began to deflate. Until October of this year we have seen a significant slowdown of the true money supply. Did you ever, during that time, happen to have the foresight or at least a grasp of what was going on at the time to talk about deflation? Now you are warning of a deflation? Now that the money supply has once again began to grow at an annual rate of 8%, after numerous government bailouts, loans to failing businesses, banks, car companies, Term Auction Facilities by the FED, stimulus packages, you are warning of a deflation? I’m sorry but you pretty much missed out on this one.

Secondly, your statement seems to imply that a deflation is a “danger”. I hope you are aware that this deflation was nothing but a correction from a previous credit expansion which went on from 1992 through 2000 and was recklessly propped up from 2002 through 2006. Deflation is exactly what is needed in order to realign the factors of production to useful occupations. Otherwise we will be back where we are today in only a few years. I suggest you read up on credit expansion. Do you really think we need more realtors, investment bankers, failing auto companies, banks, hedge funds, and reckless lending?

“That means there is virtually — for all practical purposes -no limit to how stimulative fiscal and monetary policy can and should be. The dangers of inflation at this point are extremely modest. There is a worldwide commodities debacle. There is almost no new corporate financing. Even mighty China is slowing hour by hour. Inflation is not a present danger.”

OK, then I recommend you have a look at the money supply data as of October 2008. We’re back to were we were in 2002, it’s the same old song. We are repeating the same mistakes. And you are cheering it on. Also, you are saying “this means” as if there was any connection between the previous paragraph and what you are writing in this paragraph. What is the connection? Because we are in a deflation we need to  start another inflation so in 7 years we will be in another, much more serious, deflation? Your reasoning makes no sense whatsoever.

In this situation, the governments that care about their citizens should and must have extremely expansive policies. That would include running very large deficits — which we are doing,…

…and have been doing for the past 7 years. Are seriously you suggesting that we do more of it? Is this your solution to the crisis? Does it not cross your mind that maybe this policy is what has gotten us into this mess?

…not even mentioning tax hikes until the situation is stabilized, and possibly cutting taxes as a temporary measure…

…ok which one is it now? Tax hikes or cuts? Do you have any concept at all?

…Public works projects, tax rebates, even to people who paid no taxes, extensions of unemployment insurance payments — all of these are necessary…

…of course paid for through inflation and credit expansion which is exactly what caused this mess. Believe it or not, but doing the things that caused our demise will not help, but aggravate the crisis.

…Bailing out the big auto companies, offering loan guarantees to encourage banks to lend, making sure lending facilities are in place for credit card issuers – all of these should be done and immediately.

No, we should not bail out businesses that are worth less than MINUS (!!) $56 billion, that produce goods that no one wants and that employ resources that would be much more useful elsewhere. The more we spend on them, the more agony we cause for the common people as I have explained in The Economics of Corporate Bailouts. Your plan above is a disastrous step by step guide on how to put the final nails in the coffin of the US economy.

Obviously, this is also a time for extreme monetary growth. As we economists would say, the velocity of money — that is, how often it changes hands — is falling rapidly. This means the Federal Reserve can pump up the quantity of money greatly to offset that fall without fear of inflation. There are the usual “pushing on a string” limits to how well this will work but it must be attempted.

What do you mean by obviously? What are you basing your recommendations on? You are making one claim after another without any backup. What help is it if the central bank pumps up the money supply? Absolutely nothing is produced when newly printed money is injected. To the contrary, misallocations result in even less useful production. And again, please note that as outlined above, what you are asking for is exactly what we did in the 90s and 2000s. Why should we do it again? We need the opposite. We do need less consumption, more savings, and a proper allocation of resources to occupations where they are needed.

The real issue choking the economy now is lack of lending and fear by the banks and other lenders. This must be met by explicit solvency guarantees from the central banks. There should be no pussyfooting around this. It’s a matter of extreme urgency.

The real issue that is choking the economy has been excessive lending via credit expansion. What do you mean by “solvency guarantees”? You mean that businesses that borrowed and spent recklessly should get more money to keep doing what they have been doing, money, of course, that will be taken from the taxpayer, the common man, who is suffering enough as is? Whether you finance it via taxation or inflation, the common man will foot the bill for any bailout. What do you mean by pussyfooting? You mean like actually using your head and trying to fix the problems we have created?

The sums involved will be substantial, but tiny compared with the losses to the world if we slide into a world wide depression. I offer as an example that it might have cost the government about $30 billion to $60 billion to save Lehman. That was deemed too expensive. The losses to the U.S. from the panic caused by that blunder are on the order of $4 trillion to $ 5 trillion. This is what is at stake if we do not spend the hundreds of billions and maybe a trillion or more to reflate the economy now.

If Lehman generates losses in the billions of dollars then the damage is already happening . They withdraw resources from uses where they are of more use and employ them in occupations of less use. If we take money from the common man, asking him to restrict his consumption, and throw it at Lehman then they will keep pursuing the same failed business strategy. How is this helping anyone? What damage has been done to the economy by letting Lehman go bust? What are you basing your numbers on? The trillions of fictitious paper value wiped out? You mean like those trillions that got wiped just as much after billions, if not trillions, of Term Auction Facilities, Deficits, and Bailouts? You are so utterly wrong I can’t even express my discontent with what you are writing. You mention a depression. Have you any idea of what caused the crash of 1929, and what turned it into a depression. Have you read any credible books about this event? As always I recommend “America’s Great Depression” by Murray Rothbard.

Mr. Obama clearly has a better idea about this than Mr. Bush, who is dragging his feet about Detroit and other aspects of reflation. I hate to say it, but I think we are lucky Mr. Obama won the election. Of course, time will tell.

What do you mean by Bush dragging his feet about Detroit? Are you referring to the billions that have already been made available to GM, the countless subsidies, “bridge loans”, and what have you, all for a company that has a Shareholder’s Equity of less than MINUS $56 billion?

I desperately hope I am wrong and I may well be, but the government has to put in a bottom here. Otherwise, the bottom is very hard to see. Again, I hope very much I am being too pessimistic.

In that sense, I have good news for you. You are dead wrong. In fact, there is hardly one single thing that you are right about in this article. The fact alone that you write an article and in it say that you hope you are wrong shows me that you have no basic concept of the workings behind the business cycle, credit expansion, inflation, deflation, monetary policy, and bailouts.

Secondly, the broad stock market is now at levels it hit roughly ten years ago on the Dow Jones Industrials Average and the S&P 500. This means something horrifying. If there are to be no long term gains in stocks, the retirement projections of almost everyone are simply demolished. Unless a pre-retiree is terribly lucky, he or she cannot count on meaningful gains in stocks. Obviously, the interest on bonds is modest and aside from Treasuries, they have been hit hard as well.

If workers can only rely on dividend and interest income and not on long-term capital gains of 8% or 9% per annum, pre-retirees have to save enormously more than they had anticipated to adequately fund their retirement. This is serious business.

Yes, bond interest is dropping because the government is once again inflating the market. It is true, one should be concerned about the future productive capacity of this country. It is an important component towards a safe and prosperous retirement. But you are destroying your country’s productive capacity if you keep going down the spiral of inflation, credit expansion, and corporate bailouts. The objective of economic policy is to optimize the utilization of all factors of production as per the market participant’s value preferences (demand), and not to continuously employ them in operations that generate losses and that the consumers don’t need.

Again, I hope I am wrong. Historically, stocks have major recoveries after falling as low as they have in recent months compared with the 15-year moving average of stock prices. This is what my pal Phil DeMuth, of Conservative Wealth Management, tells me, and he is a super smart fellow. But I would also consult my pal Ray Lucia, who requires his clients to have a very large amount of cash or short-term Treasuries to get through long difficult stretches. Ray’s advice has turned out to be spectacularly sensible. But, again, if we have a lot of low return cash and low return stocks and low return bonds, we have to save much more than we thought we did three or even two years ago.

Yes, I have nothing to add in addition to what I already said in my previous comment.

This makes reflation even more desperately needed. I hope Mr. Bush will wake up, stop listening to Dr. Evil, his Treasury Secretary, Henry Paulson, and work with President-Elect Obama to get a large, serious stimulation package into the economic bloodstream pronto.

The fact that you repeat wrong statements doesn’t make them right. You have not understanding of what has happened, what went wrong, and naturally have no solution to this disaster at all. You are mixing up buzzwords, such as “stimulus”, “reflation”, “inflation”, and “deflation” without any basis. Your ‘solutions’ won’t work.

This is getting ugly.

Yes it is. It is because you and many other fellow contributors are completely puzzled by what is going on, and yet infecting the public with utter falsehoods. Public opinion ultimately shapes policy. The public needs to be educated about what really happened and what really needs to happen. You have no historical understanding of what caused the mess we’re in. You are recommending more of the same policies that got us here. I am asking you to take your responsibility toward the public serious. Many are reading and listening to what you write. As we continue driving this economy into a ditch, please don’t forget that you bear part responsibility for it if you keep writing what you’re writing.

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