Obama Tries to Square the Economic Circle

Just a quick and simple example to demonstrate President Obama’s tragic cluelessnes when it comes to grasping our economic problems.

In his speech on the economy on April 14th he said:

IT IS NOT SUSTAINABLE TO HAVE AN ECONOMY WHERE IN ONE YEAR 40% OF OUR CORPORATE PROFITS CAME FROM A FINANCIAL SECTOR THAT WAS BASED ON INFLATED HOME PRICES, MAXED OUT CREDIT CARDS, OVERLEVEREGED BANKS, OVERVALUED ASSETS. IT’S NOT SUSTAINABLE TO HAVE AN ECONOMY WHERE THE INCOMES OF THE TOP 1% HAVE SKYROCKETED WHILE THE TYPICAL WORKING HOUSEHOLD HAS SEEN THEIR INCOMES DECLINE BY NEARLY $2,000. THAT’S JUST NOT A SUSTAINABLE MODEL FOR LONG-TERM PROSPERITY.

Yes. An overleveraged banking system and an overleveraged economy are unsustainable. Overleveraging occurs when a business enters into more obligations than it can provide equity collateral for. Like for example a bank that makes $10 available in credit transactions for every $1 it receives. One would think that he got at least this point.

Unfortunately the teleprompter later on also made him utter the following words in that very same (!!!) speech:

ALTHOUGH THERE ARE A LOT OF AMERICANS WHO UNDERSTANDABLY THINK THAT GOVERNMENT MONEY WOULD BE BETTER SPENT GOING DIRECTLY TO FAMILIES AND BUSINESSES INSTEAD OF TO BANKS, ONE OF MY MOST FREQUENT QUESTIONS IN THE LETTERS THAT I GET FROM CONSTITUENTS IS “WHERE’S MY BAILOUT?” I UNDERSTAND THE SENTIMENT. IT MAKES SENSE INTUITIVELY AND MORALLY, BUT THE TRUTH IS THAT A DOLLAR OF CAPITAL IN A BANK CAN ACTUALLY RESULT IN $8 OR $10 OF LOANS TO FAMILIES AND BUSINESSES. THAT’S A MULTIPLIER EFFECT THAT CAN ULTIMATELY LEAD TO A FASTER PACE OF ECONOMIC GROWTH. THAT’S WHY WE HAVE TO FIX THE BANKS.

This is not a joke. He seriously said these two things in one and the same speech. I could understand if he were to hold different speeches to different interest groups and lie to each of them in a different way by appealing to their particular constituents. After all he is nothing but an average politician who knows no better than to play this game.

But what he is doing here is rooted in a much more tragic circumstance: President Obama has no clue about how precisely this fractional reserve system caused excessive credit expansion and leverage and thus created the business cycle with its inevitable culmination, the credit crunch.

He is lost in a maze of inconsistencies and won’t get out of it until he realizes that he has appointed the wrong man as Secretary Treasury and that the Federal Reserve System is inherently broken precisely because of the concept of fractional reserve banking. Just as we can’t square the circle, we simply can’t borrow, spend, and leverage our way out of too much debt, too much consumption, and too much leverage.

It didn’t work in the Great Depression. It won’t work now.

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TARP Overpaid $78 Billion for Bank Assets

Moneymorning writes Watchdog Agency Says TARP Overpaid $78 Billion for Bank Assets:

The watchdog agency overseeing the Troubled Asset Relief Program (TARP) said Friday that the Treasury Department paid banks $78 billion more for assets than they were worth.

The Congressional Oversight Panel said the Treasury dispersed $254 billion for capital purchases of bank assets worth about $176 billion under the TARP program.

“The loss estimate is conservative,” said House Financial Services Committee member Rep. Alan Grayson, (F-Fla.). “It could turn out that those assets in the end are worthless.”

The $700 billion TARP program has been under scrutiny since it began in October because of a general lack of understanding of how the program is being run and where the money is going.

The congressional report is the latest in a series of revelations about the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.

The Congressional Oversight Committee detailed what the Treasury has spent so far in the TARP program.  In addition to the $194.2 billion spent on direct equity investments in banks, $40 billion funded a program to shore up American International Group, Inc. (AIG), $52.5 billion was set aside to stabilize Citigroup, Inc. (C) and Bank of America Corp. (BAC), and $20.8 billion was earmarked for Detroit automakers.

Neil Barofsky, TARP’s special inspector general, said in congressional testimony Thursday that he will ask companies to detail their planned use of the funds, including how they will comply with executive compensation rules. He will also ask the companies to document how the funds were used and to give the inspector general’s office accuracy certifications, Forbes reported.

“The most significant failing from a transparency standpoint: Understanding the process and criteria Treasury used to decide who would receive TARP funds and what the recipients have done with the hundreds of billions of dollars that have been invested,” Barofsky said.

The public’s stake in the nation’s banking system continues to mushroom as President Barack Obama’s team works to pull the economy out of the deepest recession in at least two generations. TARP, which is part of the $8.5 trillion the government has pledged to stabilize the economy, has guaranteed $350 billion to banks and the auto industry so far, with another $350 billion set to be allocated in coming months.

“Our money – and our economy – are on the line, and we all have a stake in the outcome,” Harvard Law School professor Elizabeth Warren told the Senate Banking Committee. Warren heads the five-member congressional oversight panel overseeing TARP.

So far, TARP hasn’t succeeded in clearing bad assets from banks’ balance sheets, which would allow the companies to lend money and get the economy going again, Gregory Miller, chief economist at Sun Trust Banks Inc. (STI), told Bloomberg News.

“It hasn’t cleaned up the asset side of bank balance sheets and it hasn’t helped bank uncertainty about bank balance sheets at all,” Miller said. “Uncertainty has now overwhelmed economic decision making.”

The lack of transparency has put TARP administrators on the defensive.  Neel Kashkari, appointed by the Bush administration to run TARP, on Dec. 5 told the Mortgage Bankers Association that the government isn’t “looking for a return tomorrow.”

“We are looking to try to stabilize the financial system, get credit flowing again, and over time, we believe that the taxpayers will be protected and have a return on their investment,” he said.

Indeed, former Treasury Secretary Paulson, who was succeeded last month by Timothy Geithner, originally promoted TARP as a possible moneymaker.

“This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything,” Paulson said Oct. 20.

On a sidenote: The losses will be much more than 78 Billion. These are very optimistic figures, the final numbers will be much worse. Most of these assets will turn out to be completely worthless.

My comment: Yes, TARP overpaid. The taxpayer got screwed. Paulson was wrong with what he said on October 20th. Every single argument advanced in favor of TARP was wrong. Everyone who supported it was wrong. As it always is when scare tactics are used, all warnings went unheeded. Should this be a surprise to anyone? Of course not. This was the whole point of the bill. To screw over the taxpayer. What else should one expect? As I pointed out again and again, the people who supported it have been wrong consistently. Every single thing they had said was wrong. Why would it be any different this time? And they will continue to be wrong. But it won’t matter.

It is the same old song, again and again. When our leaders tell us that disaster is impending, we tend to stop thinking and give in to false emotions. When Paulson told us that it needed to be done “quick and clean” or else a “delay would put the economy at risk“, he had no logical arguments to support his thesis. But that’s the whole point. If you have no arguments you need to scare people to have it your way.

A failure to act, and act now, will turn crisis into a catastrophe and guarantee a longer recession, a less robust recovery, and a more uncertain future…

Sound familiar? This is yet another successful attempt to cover up a lack of logic and reason, and to appeal to fear and use scare tactics. This time it’s not George Bush or Henry Paulson fulfilling this solemn duty. It is Barack Obama.

Welcome to “Change”!

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Obama Makes an Unnecessary Gamble

The $800 billion spending bill that is currently being discussed will not fix the US economy. Just as too much government intervention caused (not fixed) the Great Depression in 1929 and the following years, just as the Bush administration’s spending spree which turned surpluses into deficits, just as the rise of government expenses over the past 100 years, more government spending will not solve a darn thing. Quite the opposite. It will dig us a deeper hole. There is no way around this truth. There is no point ignoring or denying The Trouble with Bureaucracy.

There is no “Change” in having the government  spend more money. If government spending was good for the economy, the United States should by now have the best economy in the universe. Spending more money is in fact precisely the opposite of change. It is more of the same.

Comments on some of President Obama’s flawed statements from today:

“We’re not going to get relief by turning back to the very same policies that, for the last eight years, doubled the national debt and threw our economy into a tailspin,” he said. “We can’t embrace the losing formula that says only tax cuts will work for every problem we face…”

The idea to drastically cut government expenses and use the cost savings to cut taxes is not more of the same. Why would it be? Who ever suggested that the Bush administration cut spending and subsequently cut taxes significantly? It simply didn’t happen. If, of course, you cut taxes by a little bit and borrow and spend ever more nothing will change. This is what happened. The tax cuts were completely insignificant, the spending kept on growing. In fact, the only period in the post war history of the US where taxes where higher than now was from 1997 through 2002. That aside, taxes are at an all time high right now. So please , everyone, stop spreading the nonsense that what has happened in the past 8 years is a proof that a policy of limited government, little government spending and low taxes has failed.

The idea to return to a sound monetary system is not more of the same. It is the opposite. What has led to this crisis is credit expansion and the inevitably ensuing business cycle, caused by excessive money printing by the Federal Reserve Bank, an institution detached from reality and from any checks and balances. There is no change in more deficits and government debt, monetized by an unchecked Federal Reserve. It is more of the same.

The idea to cut taxes on small incomes, payroll taxes, capital gains, dividends, and interest has nothing to do with “trickle down” economics. Who pays the payroll tax? It’s the little guy, the worker, who receives a monthly paycheck which has a large chunk deducted for income and payroll taxes immediately. It’s him who saves part of what is left in stocks and bonds to receive interest and dividend income for his retirement. How is this “trickle down” economics? In fact, I can’t see a better example for “trickle up” economics than this one.

To critics who argue that the government shouldn’t be spending billions with a large and growing deficit, Obama said, “I found this national debt doubled, wrapped in a big bow waiting for me as I stepped into the Oval Office.”

The American people called for change in November, he said, “and that’s what we’re going to deliver.”

The Americal people voted for your program which promises fiscal soundness. They didn’t vote for another $1 trillion additional spending. In case anyone cares what they think on this specific issue, please consider Public Realizes – Stimulus Won’t Work.

Obama rejected calls for more tax cuts and significant slashing of the bill’s more than $800 billion price tag, and said complaints the package was a spending bill rather than a stimulus bill were off base.

“What do you think a stimulus bill is?” he said. “That’s the point.”

Well, Mr. Obama, you keep talking about the “failed policies that doubled our national debt”. What do you think it is that doubled the debt?? What do you think it is that the government has been doing for the past 8 years and beyond that? What do you think has led us to where we are right now? That’s the point.

“They did not vote for the false theories of the past, and they didn’t vote for phony arguments and petty politics, and they did not vote for the status quo.”

President Obama promised change. Cutting taxes and spending would be change. Keeping taxes as insanely high as they are, even considering to raise them, and spending more money is not change. It is the exact opposite of change. It is more of the same. More of the same failed policies that have led to the demise of the US economy.

Considering the facts that

a. the public opposes this bill and
b. it will not work and make things worse,

Obama is gambling with the future of his administration. If he doesn’t deliver true change, things will get worse and worse. If he shoves this bill down the throats of the American people, it will be him and Democrats in Congress who will have to share the blame. This bill was never his bill. It was the Congressional Democrats’ bill, led by Harry Reid and Nancy Pelosi. Now Obama has made it his bill. All the scandals, wasteful projects and corruption that will be uncovered under the projects funded by it will be associated with him. His partisan speech today might very well have marked an early end to bipartisanship for the rest of his tenure.

His fundamental misunderstanding on this matter is that he believes these disagreements are nothing but political games. They are not. They reflect sincere and deep-rooted concerns of the direction where this country has headed. They represent the voices of millions of frustrated workers, businessmen, housewives, students, and retirees calling their representatives, jammed fax machines, letters, town hall meetings, and the like. The movement for liberty is not one of political expediency. Its members are not in it for personal, monetary, or political gain. They are in it for true conviction and with all their heart. But on top of that, it is a movement of substance, reason, logic, and sound understanding of historical and economic facts. There is nothing in the world that could change some one’s mind, once one has understood the true blessings of Freedom, Liberty, Peace, Prosperity, and Happiness. It is a patient movement. It is not in a rush. It isn’t going away. It will grow stronger year by year. To ignore it would be the biggest mistake Obama could make now.

If he continues doing it, the political retaliation will ensue sooner or later in the next Congressional elections and maybe in the next presidential elections. This is an unnecessary, harmful, and avoidable political gamble.

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Finally – Obama Calls for Mark to Market Accounting!

President Obama has spelled out what neither Bush nor Paulson nor Bernanke nor anyone from the executive branch dared to tell the American people during this financial crisis.

In an interview with MSNBC’s Matt Lauer he implicitly called for mark to market accounting:

In an interview airing Monday on NBC’s TODAY show, Obama said the nation’s banks were in “very vulnerable positions” because of the reckless risk-taking that led to the meltdown of the financial services sector late last year. The situation he inherited 13 days ago is so bad that “it is likely that the banks have not fully acknowledged all the losses that they’re going to experience,” Obama said in the interview, which was conducted Sunday at the White House.

Stressing that ordinary Americans’ deposits, which are insured by the federal government, would be safeguarded, the president said banks were “going to have to wring out some of these bad assets.”

Hello?? Did anyone hear this? This bit seems to have gone relatively unnoticed with most people. Among all the stimulus nonsense and bailout mania, President Obama, in a relaxed manner, spelled out precisely what is needed for the US economy to get back on its feet. This is exciting news for anyone who, like me, has been waiting to hear anything like it for the past year and was instead consistently disappointed by repetitive and never ending Bush/Bernanke/Paulson lies and nonsense.

Obama then went on to utter the following 5 words:

…some banks won’t make it.

If he is serious about this, it marks a substantial change in the administration’s banking policy. This is bad news for most of the US’ national banks whose shareholders are still under the illusion that their assets are worth something, it is good news for the economy and for the people. If followed through upon, it significantly improves the outlook for economic recovery over the next years, that is of course after the government lets the sharp recession and the bank failures run their course in an unhampered manner.

As explained in the business cycle, the malinvestments need to be liquidated as fast as possible in order for phase 9, the correction, to be able to run its course. Marking bad loans to market is exactly what this is.

Dollar bulls, who are looking for a reason as to why the current short term Dollar rally might turn into a rather substantiated mid-term rally: This is it.

It will be interesting to watch the development of the money supply over the next few months. It is conceivable that the recent reflation attempts will prove completely futile and that the money supply growth will once again drop back to deflationary levels. In fact, if this administration encourages the destruction and consolidation of bad debts, I don’t see any other possible development than that.

Watch the video here:

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Obama’s Fiscal Promises

President Obama’s campaign promises include, among others, the following:

Reinstate PAYGO Rules: Obama and Biden believe that a critical step in restoring fiscal discipline is enforcing pay-as-you-go (PAYGO) budgeting rules which require new spending commitments or tax changes to be paid for by cuts to other programs or new revenue.

We haven’t heard much of this in regards to the $819 Billion bill that was passed today. Mr. Obama needs to clarify how he will adhere to this campaign promise. People should ask these questions and encourage the administration to be open about it.

End Wasteful Government Spending: Obama and Biden will stop funding wasteful, obsolete federal government programs that make no financial sense. Obama and Biden have called for an end to subsidies for oil and gas companies that are enjoying record profits, as well as the elimination of subsidies to the private student loan industry which has repeatedly used unethical business practices. Obama and Biden will also tackle wasteful spending in the Medicare program.

Inquiring minds might want to read the “American Recovery and Reinvestment Act of 2009” and decide for themselves to what extent Obama and Biden are stopping wasteful, obsolete government programs that make no financial sense. One provision in the bill is a requirement to establish the website recovery.gov which promises transparency and accountability for projects. I will examine in detail what this site will tell us and where the money is going once this spending bill, just like the previous ones, is successfully shoved down the throats of the American taxpayers.

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