Archive for November, 2008

It is Thanksgiving Day in the U.S. – a day inaugurated by some of the earliest English settlers in America, the Pilgrims. The Pilgrims were a small group of Puritans seeking the freedom to practice their own brand of religion.  I’ll have more to say about them, because, in a way, they are more connected to our lives today than most of us imagine.  However, that will be another time.  Today I wanted to write about our banking system and Thanksgiving; the question being should we give thanks that we have our banking system, or should we give thanks that we seem to have barely survived our banking system  – at least temporarily.

I am inclined to choose the latter because our banking system was in a dire predicament and the people who run the banks had no clue how to get out of it. Only truly massive intervention by the U.S. government has been able, for the time being, to save us from an imminent and devastating meltdown of our entire economy, and perhaps the world’s as well. There are several reasons why this happened but the principle ones are stupidity and greed on the part of the banks. This has been very well explained by Thomas Friedman in a recent article in the  New York Times.  I would like to go a bit further than Tom did, however, because this line of thought should be followed to its logical conclusion.

The principal point I would like to state, which is obvious from the recent financial events in the world, is that the people who ran the investment banks and the other major U.S. banks were incompetent.  As a group they utterly failed to realize the enormously dangerous situation they had created by giving high interest rate loans to people who could not possibly repay them.  They failed to realize that markets go down as well as up.  They failed to realize that real estate was just another bubble much like the tulip bubble in Holland in 1637. There have been many economic bubbles since the tulip bubble.  The U.S. banks failed to recognize the danger in the 1929 bubble too.

However, there is more to this story than incompetence.  In many cases, the U.S. banks that were making the toxic mortgage loans knew that these were really high risk loans. However, they went ahead and got very high, AAA, ratings for them. Then they packaged them as securities and sold them worldwide. Of course some of the foreign banks that purchased them were a bit leery of the AAA ratings and they went out and purchased insurance, i.e. credit default swaps, on the loans they had purchased. Of course the insurance companies, like AIG, never have enough resources to cover the losses when everything tanks at once. They just play a numbers game of probabilities. I guess AIG missed on that one.

The important thing to note, as Friedman points out, is that this meltdown occurred, not only because of plain stupidity, but also because of a failure of “financial ethics”. In other words these banking people were a bunch of crooks.

So I have a couple of questions. 1) How is the FBI’s investigation coming along?  Any suspects yet? Are there any other government investigations still going on? You know, maybe by the Securities and Exchange Commission? Have we caught anyone yet who was misrepresenting toxic mortgages as AAA rated securities?  My guess is that there were hundreds, maybe thousands, of people who were participating in this monumental fraud.  So how many have we caught so far? 2) Are we sure we want to pour trillions of dollars back into these banks and just “let ‘er rip” again? Isn’t there some other alternative, or is Treasury Secretary Paulson right saying that we have to do this right away, and we can’t think about it anymore, because we are on the brink of destruction?

Here’s something to think about: the lending of money at interest is not work. The person who lends the money creates nothing.  This person doesn’t do anything to advance society, he simply rakes in a profit on the back of someone else’s productive work.  Very, very wealthy people like to own banks, either outright or via shares, because they can increase their wealth and not do any productive work at all in the process.  Very, very wealthy people also have an inordinate amount of control in our government, and they use their influence to create favorable tax laws for themselves and favorable banking regulations for their banks – or the lack of regulations for them.

There is an alternative – let the government run the banks. Suppose we change our outlook and consider that banks should be government run utilities, whose sole role is to provide financial services to the working public at cost, i.e. without making a profit.  I know there are probably a lot of people who would call this un-American or Socialist or Communist or something else. The simple fact is that these greedy, stupid, immoral people have had their way too long.  It is these dishonest bankers who are un-American.  These crooks nearly destroyed our country in 1929 and they have done it again in 2008.  The time has come to do a major rethinking of the concept of banks – what their purpose is, how they should operate, and who should run them.

Meanwhile, I suppose we have little choice but to go ahead with the bailouts of Citi and the others. For practical reasons there is little else we can do immediately – these are the only banks we’ve got.  However, it doesn’t have to be permanent. We could create a suitable plan and then embark on a phased shutdown of the private banks and the creation of a government operated banking system that would be well-regulated and operate under a strict code of ethics “for the good of the country”.  Somehow I can’t imagine any one of today’s major banks ever operating with that goal in mind, can you?

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When it comes to American cars, the American people have already voted – they don’t like them, which is why the vast majority of cars you see on the road are either Japanese, Korean, or German. The U.S. auto industry would like us to believe that they are in a jam now because of the credit crisis, but all the credit crisis has really done is accelerate the demise of the industry.  Now we are told that if the U.S. auto industry vaporizes then millions of American jobs will be lost. It would certainly lead to disruption, and in the short term, many people might well lose their jobs; however, in the long term the loss of the American car companies would probably lead to an expansion of the foreign brand manufacturing industry in America. This is just the out sourcing of jobs from Japan, Korea, and Germany to America. There are already plenty of car manufacturing plants in the South making Toyotas, Hyundais, and BMWs. Inevitably there would be more, and the out-of-work people in Michigan would probably have to move south to get these jobs.  This is the same sort of relocation for a job that millions of Americans go through all the time. So what is the issue here? Isn’t this just capitalism at work?  What is so special about the U.S. automobile industry that it must be saved?  The simple fact is that there is nothing special about it and just like we no longer have airplanes made by Douglas, Curtiss-Wright, or McDonnell, we may soon find we no longer have cars made by Ford, GM, or Chrysler. Yet, just like in aviation, other, more competitive companies will be found to meet our needs.

The Big Three are an example of everything that is wrong with American industry. The companies are not meritocracies with the best and the brightest rising to the top to lead. Instead we have mediocre men who lack the vision and foresight to guide their companies in the face of stiff competition. Yet they still manage to take care of themselves very well, with enormous salaries and benefits – such as the use of expensive corporate jets – and in doing so they help bleed the companies of the funds needed to operate at a profit. These inept leaders have stood by and watched while their companies have lost market share year after year. Yet, they have never been able to come up with a way to effectively compete, and so they have now reached the inevitable end of the process. They would have us believe that all of America depends on their industry and that America will suffer greatly if they are allowed to fail. Sounds a lot like Treasury Secretary Paulson talking about his buddies in the banking industry doesn’t it? Yet, when Paulson gave the banks millions the banks just sat on the money rather than lending it. It’s almost like we never gave them any money at all, and yet no catastrophe has happened – the banks just made out like bandits, that’s all. And, of course, Paulson is now sitting back and doing nothing.  Now the auto industry is trying to play the same game with us.

If the auto industry was serious about competing one would think they would come up with some bold, creative ideas to win back market share.  How about offering 200,000 mile, bumper to bumper warranties? That should get some attention, but wait –  maybe they’re afraid their cars won’t last that long. Too bad, most of the Toyota owners I know fully expect their cars to last 200,000 miles, maybe even 300,000 miles.  How about offering some really creative financing, like no payments, no interest for the first year and then, after that, a fixed interest rate of 3% or less?  How about a guaranteed customer satisfaction program or they will take the car back after one month and the customer won’t pay a dime? What? Are they afraid too many people will bring their cars back?  How about asking the potential customers, via their websites, what features they want in a car and then building them like that?  How about asking people why they don’t buy American cars anymore and then taking corrective action?  It could be done you know, but not by these guys who run the companies. They don’t know how to do these things, and they don’t care, and that’s why things are the way they are.

So what do we do now? Congress wants a plan from the car companies – no plan, no money they say. But how tough will Congress be? Will Congress eventually cave in, out of fear of a total collapse of the economy and give them the $25 billion of our money that they want? Probably.  Congress doesn’t want to be blamed for the collapse of the economy. So my guess is that they’ll get their $25 billion and burn through it in a year or two. Then they’ll be right back where they are now, asking for another $25 billion.  It’s really entirely up to Congress now.  They have to hang tough. They need to make these guys come up with a real plan, not just some hand waving fake plan that is only intended to get the money. The problem is that the Congress doesn’t have a great track record when push comes to shove.

Here’s an idea!  Maybe Congress should just give the $25 billion to Toyota and Hyundai and BMW! It could be an incentive to build some more plants in the U.S. that will hire all the laid off U.S. autoworkers! Then we just let Ford, GM, and Chrysler join the ranks of Hudson, Packard, Studebaker, and Kaiser’s Henry J.

It would probably work out better for all concerned, except of course, for the guys with the corporate jets.

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A year ago the smart people knew that the real estate game was over. People were defaulting on their mortgages and the big insurance companies were having trouble covering the credit default swaps (the insurance they had given on the toxic mortgages). It was looking bad for the U.S. and the smart money started bailing out of U.S. dollars – they started buying oil, a good hedge against the inevitable loss in value of the dollar. The dollar started to tank against the Euro and other currencies and as the value of the dollar went down it cost more money to buy a barrel of oil. They call that inflation. People bought even more oil. Goldman Sachs predicted that oil would be $150 a barrel this December (they sort of missed that one, didn’t they?) The thing everyone on Wall Street knew was that with the fall of the housing market, the U.S. economy would be in deep trouble, because, unlike what John McCain said, the fundamentals of the economy were not sound, they were almost completely rotted out.

As the stock market plummeted to half its former value, world stock markets joined in and in the resulting panic they fell even more than the U.S. market and, can you believe it, the value of the dollar increased. That was because these other economies were so dependent on the U.S. economy that investors knew their businesses would suffer even more than U.S. businesses. So now oil is down to the $50 – $60 dollar range.  A lot of this up and down movement has to do with the value of the dollar and not the world’s supply of oil.  We’re not running out of oil, and despite what John McCain kept chanting, it really won’t help to DRILL BABY DRILL!

Now the U.S. auto industry is on the ropes.  It’s their own fault, of course, for building cars that nobody wants.  The problem is that about 3,000,000 jobs depend on the pathetic abilities of the auto industry to produce a desireable product. So, the heads of the auto industry asked for a government bailout, but so far Congress hasn’t been too sympathetic because they know the U.S. auto industry doesn’t have a Popsicle’s chance in Hell of surviving much longer anyway. The Japanese, Koreans, and Chinese are just too smart.

Meanwhile, the keepers of America’s money – the Treasury and the Federal Reserve – decided to completely ignore what they had told Congress they had to do (or the world would implode, they said, and we would all disappear into the black hole that the CERN supercollider is going to create, if it ever works, – or something like that). Instead they gave some of the $700 billion bailout to their friends at Goldman Sachs (the smart guys who predicted we would have $150 oil in a month) and their other banking buddies. This money was sort of a gift. (I think the correct euphemism is that the U.S. taxpayer bought stock in those companies.) I can’t wait until I get my dividend check from Goldman Sachs! For some reason Congress wasn’t too happy that Sec. Paulson and Mr. Bernanke seem to have forgotten about the Troubled Assets they were supposed to buy with all that money. “Remember the TARP?” Congress said. “TARP??  Ummm, no,” was the reply.

One is tempted to say that the 800 pound gorilla in the Congressional chambers that no one wants to talk about is the fact that our economy depended solely on the Housing Market Ponzi Scheme (HMPS). But I think that would be a simplification, because there is really a different underlying factor that drove the U.S. economy for the last ten years or so: Credit. Yes, credit with a capital C.  Our U.S. government, in complicity with the banks and the U.S. financial community over the past twenty five years, has allowed interest rates to reach what used to be criminal values. The very predictable result was that people who were desperate for money signed up for loans they couldn’t possibly repay. The lending institutions knew this and flipped the loans, after they sliced them and diced them, as fast as they could. The people who bought the loans knew they were hot potatoes and immediately bought credit default insurance on them or they flipped them again.

It was all great fun and lots of money was made while everyone tossed the hot potatoes around – until the original borrowers defaulted. It was sort of like playing musical chairs with money. Somebody had to lose, and the game kept going until there were only two players left: the U.S. government and their buddies in the banks.  So the government gave their friends in the banks a bunch of money to be used in any which way they pleased! The banks decided to just sit on it – not lend it, not invest it, not do anything with it – just gloat over it and hoard it – and here we are!

You might think that our one trick pony was the housing market, but it wasn’t.  It was the usurious credit market, and, let me tell you, the credit guys don’t want to play that game any more.  Oh, no.  Whew! Boy, did those guys ever learn their lesson, right?  They’re just happy to count their blessings and have their billions of dollars back!

Meanwhile, the rest of us are sort of starting from scratch now.  The housing industry is a dead horse; so is the auto industry. The rest of our industries have been outsourced to China.  The smart people know all this, which is why they’re not investing in anything, and which is why the DOW is still down about 50%.

It’s up to Barack Obama now to play FDR after George W. Hoover leaves office.  The first thing he needs to do is shoot the one trick pony of the credit industry, i.e. he needs to put the teeth back in our laws against usury.  You can’t run a stable economy based upon letting crooks get away with theft by credit.

Then Barack needs to take us into the 21st Century with a new economy based upon developing new energy sources and new, energy efficient, transportation. That should kick start things; then it will be up to American entrepreneurs to dream up lots more new things to do.  But in our haste to create this new economy, let’s all remember one thing we have to do or we’ll just fall into the same trap again:

Shoot the pony!

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A couple of months ago Secretary of the Treasury Paulson told us the sky was falling and convinced Congress to approve the $700 billion TARP (Troubled Assets Relief Program).  The TARP would buy up all the toxic mortgages that the banks had created out of their failed attempt to satisfy their insatiable greed.  You will recall that these mortgages were given to people who often didn’t have a job and had no ability at all to repay the loans.  These loans were provided by the banks at exorbitant interest rates because the geniuses at the banks (they must be geniuses – they make $30 million or more a year in salaries and bonuses) believed that they could either flip the mortgages to some unsuspecting investors and make a huge profit, or they could hang onto the mortgages and squeeze the lifeblood out of the poor homeowners and still get astonishingly fabulous profits.  It turns out that the bankers were wrong on both counts and the banks wound up holding stunningly massive amounts of absolutely worthless mortgages (also known as Troubled Assets).

Today, Mr. Paulson advised us that regarding the TARP, he is no longer for it. He was for it, but now he’s against it. The TARP, also known as the bank bailout in Democratic circles, would not be used to buy mortgages after all – sorry Congress.  Hey, don’t get mad – it’s only $700,000,000,000.00.  Despite Congresses instructions, the money is now nothing more than a gift to the banks who can now do whatever they want with the money.  Right now they are sitting on it.  Sec. Paulson hopes, but he isn’t sure, that they will lend the money via credit cards or other loan instruments.  (I guess, if all goes well, these new loans will be at the usual extremely high, usurious, gotcha interest rates that will punish the borrowers as much as possible without actually killing them – because of course dead people can’t repay a loan.)

Our President and his administration like to think of themselves as pure Capitalists.  They put their faith in a banking system that is self-regulating, an economy of no rules, an economy that takes no prisoners and where only the strong survive.  Their faith in this is close to a religious faith and they will brook no questions about it. For them this, and only this, is the true spirit of America, and anything less is the road to Communism, let alone Socialism and all the other un-Americanisms.  It is Republicanism at its finest – rule of the wealthy, by the wealthy, and for the wealthy.

So, this is where we have landed. The President and the Secretary of the Treasury, our great defenders of Capitalism (Kapitalism?) are acting like closet Marxists.  They are using the people’s money to bail out the banking businesses, like Paulson’s old employer, Goldman Sachs, while they imply that this will help the ordinary people.  Does anyone really believe that?  It’s pretty clear that helping us, the ordinary people, is, and always has been, the very last thing on their minds. In the end we can’t call this Capitalism, we need to call it what it is; it is Socialism for the banks and Socialism for the owners of the banks.  It is unapologetic Socialism for the wealthy – at the direct expense of the U.S. taxpayer.  The question I have is this: how can our country and the world survive two more months of this selfish incompetence?

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It’s pretty clear that our old U.S. economy is on the ropes.  For the past ten years or even more we’ve been playing a multinational economic game where we bought things cheap from other countries and, in essence, paid for these things with credit – either with credit cards or home equity loans or automobile loans or some other type of loan.  We’ve been living on borrowed money and borrowed time.  With the election of a new President we all have high hopes of getting our economy back on track, but just how do we do that?  How do you actually go about creating a new economy when you’ve pretty much fried your old one?

I think it might be useful to use the analogy of starting a fire in a fireplace.  First you need some kindling wood. For the economy, the kindling wood is our small businesses.  We need to get the small businesses burning first. How do we do that? We need an igniter, which in our analogy is a government stimulus package.  It’s like a match.  It burns bright for a little while, but it is enough to get the kindling wood going.  In the same way as a match, if the government should give every taxpayer $1,000 that they have to spend right away (see my earlier blog about how to do this with a debit card that expires two months after issue).  This will immediately inject a lot of money into the economy and small businesses will be able to start re-hiring people again.

The problem with kindling wood is that it doesn’t really provide a lot of heat, and the fire doesn’t last too long.  You need the big logs for that.  In our case the logs are the major industries of the U.S…. Uh oh!  I think I see the problem – our major industries are all going belly up.  The auto makers will probably be next. The problem with them, as I wrote in an earlier blog, is that they are not competitive. There is no point in using the TARP bailout money to keep them on life support if they don’t realize that they have to change their ways – and I don’t mean just building electric cars – they need to make a better product than the Japanese, the Koreans, the Germans, and the Chinese (watch out for them, they’re coming up fast).  If the US car manufacturers aren’t committed to competing head to head and making really superior products (like offering a 200,000 mile bumper to bumper warranty) then they should just close up and save us our tax dollars.

The other logs we have relied on in the past are in similar trouble.  We are down to only one commercial airplane manufacturer (Boeing), we don’t build ships anymore, our steel industry is a ghost of its former self, our railroads’ glory days are long in the past, we hardly make any furniture in the U.S. anymore. The list just goes on.  The absence of any real logs for our economic fire has been masked over the past thirty years by the actions of our government which caused people to put their own money, i.e. 401k and 529 funds into the stock market or to bet on the housing Ponzi scheme, enticed by the massive windfall available from not paying taxes on the first $500,000 in profits when you flip a house every two years. These are incendiary schemes, not economic logs. They are the equivalent of throwing gasoline on a fire.  It flames up dramatically for a short time, but it soon rapidly dies down. Then you have to throw more gas on the fire. We’ve been doing that for almost thirty years now.  It’s time to put a log or two on our economic fire.

The best chance for a long burning log is probably the transformation of the country so that almost all of our energy requirements are met by electricity.  This would require the development of massive new sources of electricity such as wind, solar, nuclear fission, and nuclear fusion.  This new energy industry would create self-sustaining jobs (and energy) for a long time.  Another log for the fire should be the development of a nationwide, high speed (and I mean HIGH speed) railroad system.  As I said, the car companies could play in this new economy too, but they would really have to get in the game and be serious about competing on a global scale.  In each case the government would probably have to provide the initial funding to kick start the business. Eventually these businesses would be profitable companies, selling products to the world, and we would have a nice cozy economic fire.

The thing we need to do now is start the process of developing the major logs for our fire even as we reignite the flames of the smaller businesses with a stimulus package.

Most of all we need to stop throwing gasoline on our dying economic fire – it just doesn’t work.

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