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Archive for January, 2009

Well, I think they’re great, anyway.  I guess Barack and I aren’t quite on the same page yet.  Here’s the way I see it:

There are two basic ways to structure an economy: the economy can be cash-based or credit based.  An economy that is cash-based is essentially a barter economy where your cash represents a tangible object that could have been exchanged for your cash.  For example, I could trade you an ear of corn for a carrot, or I could give you a dollar for your carrot, both of us having agreed that both an ear of corn and a carrot are each exactly worth a dollar.  We also agree that my dollar simply represents an ear of corn in my warehouse and you can redeem it at any time for your ear of corn.  The dollar simply makes it easier for us to carry out our trading transactions.  This sort of economy can grow in a way that the dollar can be used to represent many other things, like maybe 5,000 dollars represents a car or a boat.  The essence of this economy is that there are only so many dollars and they always actually represent something tangible and they can be redeemed for these tangible goods.  Such an economy can be very stable but it is unlikely to grow very fast because of a scarcity of dollars for investment.

A credit based economy could have the same value for a dollar, but in this economy cash transactions are augmented by credit transactions. For example, I tell you that I will give you a dollar for a carrot next week, right after I sell my corn.  You agree and give me the carrot trusting that you will get the dollar next week.  This type of economy can grow fast because it makes use of the promise of future dollars rather than an actual exchange of dollars at the time of sale.  Our U.S. economy is very much this type of economy. Credit is absolutely essential for this economy to operate; however, we now find ourselves in a situation where the usual granters of credit – the banks – are afraid to grant credit.  Without the credit the economy withers, and when the economy withers the banks become more afraid to grant credit, and the economy then withers even faster. That is what is happening now.  Our credit-based economy is spiraling downward to a dreary cash-based economy – also known these days as a depression.

If one wishes to stimulate our economy, it is not enough to pump dollars into the economy by creating jobs.  It is not enough to give dollars to the banks.  It is not enough to reduce taxes.  Because the U.S. economy is not a barter type economy, and it is based upon credit, credit must be restored.  Unless the banks are willing to provide massive credit – and they are not – we cannot recover from this recession (or depression).  That is really the essence of the problem now.  So how do we make the banks grant credit? I suggest that the U.S. government create a set of  rival, government-operated banks that do provide credit – almost unlimited credit to almost everyone (for reasonable purchases of course – not for buying and flipping houses). The government can do this because it can always get back any money it loses through future taxes.  There is no real risk involved for the government.  Once people are able to obtain low cost credit from a government bank the economy will start to grow. Almost immediately, when the private banks realize that the government banks are lending money, they will start lending too because 1) they will have to compete if they want to make money and 2) they will feel confident that with the government directly lending money the economy is once again a really, really good bet.  Our government’s  stimulus package should include this capability, but it doesn’t.

Let’s suppose we gave every single person a $1,000 stimulus check today, with the stipulation that it had to be spent right away and not banked.  What would happen? There would be a huge buying spree and lots of things would be sold. Good for the economy, right? Sort of – for a while anyway. Why? Because when everyone goes out and buys all their stuff, we will find that most stuff these days does not come with a tag saying “Made in USA”.  Most likely it says “Made in China”. Or Mexico, or Pakistan, or Egypt, or a lot of other places.  And the money we spend on our stuff will eventually migrate to Mexico and Pakistan and China and Egypt and everywhere else.  So how does that stimulate the U.S. economy?  Not very well, or not for long anyway.  We are in a global economy now and things that worked pretty well in 1933 probably won’t work so well this time.  I think our country’s stimulus response could be rather muted and short-lived.

Our country leaks money, and we can’t create jobs here if we don’t make things here any more.  Our job stimulus needs to create new jobs here, and not jobs that can easily be outsourced.  Some sort of new high tech industry might be good. Especially if it creates a product that sells well and is only made here – maybe something like 3-D televisions or a new health food where the more you eat the more weight you lose.  The roads and bridges thing is good, but it’s a temporary blip.  It’ll create some jobs initially, but the money will eventually wind up in China’s economy, not ours.  That’s because the people who build the roads and bridges will spend their money at Wal-Mart and other stores and these stores will turn around and send the money to China so they can get their next shipment of stuff.

So, I guess my two cents says to first create Federal Lending Banks, and second, fund lots and lots of high tech, really far out ideas.  The first concept will stimulate our economy (and our banks) immediately by providing badly needed credit again, and the second will create a new, vibrant, modern American economy with jobs for Americans that won’t be outsourced tomorrow.

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About two weeks ago, the USS George H.W. Bush was commissioned at the Norfolk Naval Station.  Construction on the ship began about eight years ago by Northrop Grumman and cost about $6,200,000,000.  She’s the last of the Nimitz class, nuclear powered, supercarriers, built out of the desire to keep us safe from the Russians.   According to Northrop Grumman, this ship will now pave the way for a whole new class of aircraft carriers, just in case, as Sarah Palin so succinctly and convincingly stated, “As Putin rears his head and comes into the air space of the United States of America, where do they go?”  Indeed, where do they go? Thus our need for a whole new generation of hyper-super aircraft carriers.  It’s like John McCain said after Russian troops invaded Georgia to protect ethnic Russians from persecution in South Ossetia, “We are all Georgians”.  Indeed.  Anchors Aweigh!

Meanwhile, having concluded that there weren’t any weapons of mass destruction in Iraq after all (other than the U.S. military itself) let us turn our attention to that irritating issue of Osama bin Laden and his Taliban buddies, hiding out in the hills of Pakistan for these past eight years.  It seems that our occasional potshots, taken by remote controlled Predator aircraft, are upsetting our staunch allies, the Pakistan government. On the other hand, would sending in the USS GHW Bush really make sense in this case? I mean, what do the Pakistanis expect us to do, send in the 10th Mountain Division?  What a silly idea.  How could we possibly find Al Qaeda with specially trained mountain soldiers? It’s like Sarah said, “Where do they go?”

Wait a minute, I just found out that one of the Division’s soldiers once famously said, “We don’t do mountains”.  Oh…. Really? No, they don’t.  But aren’t they called the… Never mind.

Today, Pope Benedict hammered Barack Obama for supporting abortion rights.  This comes a day after the Pope reinstated a Roman Catholic Bishop who had been excommunicated.  It seems that the Bishop, Richard Williamson of Britain, claims that Hitler never gassed the Jews, and denied the Holocaust ever happened.  It’s good to know the Pope has his ethical priorities straight.

Meanwhile, as the U.S. faces a rapidly crumbling economy and refuses to give credence to the extremely dire predictions of leading economists like Paul Krugman and Nouriel Roubini.  President Obama is putting forth a stimulus plan that costs about $825 billion – about 3% of our gross domestic product. Meanwhile the Chinese are allocating about 14% of their gross domestic product for a stimulus package in their country.

So what does this all mean?  I have no idea.  Anyway, I think I’ll go out and get an ice cream cone because my car needs an oil change.  Then maybe I’ll head over to Starbucks and get a cup of coffee and just think for a while about something Sarah said that is still really bothering me: Where do they go? Indeed.

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As economists now start talking about the U.S. entering a Depression rather than a Recession, the discussion still centers on the effects of our overly exuberant Real Estate Bubble.  It was a bubble that sucked in the entire world as other countries either emulated the U.S. policy of giving mortgages to people who really couldn’t afford them, or they invested in U.S. toxic mortgages, or both.  In retrospect, the popping of such a ludicrous bubble was inevitable – so why didn’t we all see it coming? Why weren’t the governments of the world raising the alarm in 2003 or 2004?  It’s probably because most of us don’tbb recognize bubbles until they pop; and then we say, “Oh yeah, it was a bubble all right.”

If we care to look a little more carefully at our economy – if we dare – we would probably find that we have been the beneficiaries of other simultaneous bubbles.  For example the War Bubble.  After the 9/11 attacks, the U.S., which already was spending enormous amounts of money on defense, geared up for the War on Terror, the War on Afghanistan,  and the War on Iraq.  The Defense Department budget grew, we created a separate line item in the budget for the Global War on Terror, and we created the Department of Homeland Security with its own huge budget.

The 2009 U.S. budget calls for a Department of Defense budget of $651 billion. The 2009 budget also calls for a Homeland Security budget of about $38 billion.  Combining these we have total planned expenditures for war, in some way or other, of about $700 billion.  It is interesting to note that some economists predict that the total cost for the Iraq War alone could eventually reach $4 trillion. Now were talking real money!

According to Nouriel Roubini, the NYU economist who predicted our current economic meltdown, the total amount of losses in the financial sector, due to bad real estate loans and bad business loans will be about $3.6 trillion.  So what does this have to do with defense spending? The similarity is this: the frantic economic activity during the Real Estate Bubble: borrowing, buying, and selling, injected trillions of dollars into the economy that trickled down and trickled up to all levels.  In the case of the War Bubble a very similar thing is happening. The U.S. government has borrowed a lot of money from China to finance the Iraq War. However, this cost has not been obvious to the American public because a vast amount of this money was spent either in the U.S. or paid to U.S. contractors involved in the war efforts in Iraq and Afghanistan.  For many Americans, employees of Raytheon, Northrop Grumman, Halliburton, and many, many others, their weekly paychecks have come, either directly or indirectly from the War Bubble.  In short, we have been living on two bubbles: a Real Estate Bubble and a War Bubble. Now, we are about to pop the War Bubble.

As the U.S. pulls out of Iraq and the Obama administration scales back much of our defense spending to more rational levels it seems inevitable that we will all feel the impact as defense contractors scale back.  Defense and war related jobs will be lost.  Hundreds of billions of dollars per year that had been flowing into the economy and trickling up and trickling down will stop flowing.  If the Real Estate Bubble doesn’t send us into Depression, the ending of the War Bubble – combined with the popping of the Real Estate Bubble certainly will.

Unless, of course, the Obama administration takes preemptive action and pumps a lot of money into the economy right away.  The Obama administration’s current plans are to pump about $825 billion into the economy to create new jobs.  The question is this: is that enough? Is this really enough to compensate for the double bubble economy that has been driving our economy throughout the Bush administration? I don’t think so.  He’ll need to put in more money – lots more.  Our economy is now in a screaming nose dive.  Now is not the time to be stingy. Obama should be thinking trillions, not billions.

Even more important, Obama needs to think about creating a stable economy, and a stimulus that builds roads and bridges is nothing more than a temporary fix, a finger in the dike, because it doesn’t create long term, self-sustaining businesses. It’s called a stimulus, but what is it that is being stimulated? There is not an infinite, unending consumer market for roads and bridges.

We also need a science and technology stimulus because that is where we have a chance to find and create the next generation high tech industries that can be the foundation of a 21st Century, self sustaining economy.  This is the best opportunity to get the U.S. away from a bubble economy.  So far, I don’t see much evidence of such a concept, and while the roads and bridges stimulus thing will help in the short term, we need to recognize that ultimately it’s only a Roads and Bridges Bubble.

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No matter how bad you think the economy is, it’s worse than you think it is.  A few days ago, Nobel Prize winner Paul Krugman suggested that we may have some “zombie banks” in the U.S. These Zombie banks, he uses a mythical “Gotham Bank” as an example, have assets that are less than their liabilities – a lot less.  Yesterday, economist Nouriel Roubini, the NYU professor who predicted our current economic meltdown, told a conference in Dubai that the U.S. financial system is “effectively insolvent”.  He expects the U.S. banks to have losses of about 3.6 trillion dollars while only having assets of about 1.4 trillion dollars.  Roubini stated that the economic systems of both the U.S. and Europe are effectively bankrupt.   It sort of puts in perspective the 350 billion dollar TARP bailout, doesn’t it?  Our economic ship has been sinking and we’ve been bailing with a teacup.

So what do we do?  As David McWilliams, an Irish economist, points out, the U.S. doesn’t have enough money to bail out the banks. He also suggests that we probably can’t borrow the money either because the only country with enough money to bail us out is China and they already own as much U.S. debt as they want.  As McWilliams quotes in his article, the China Business News has already said, “the US must pay back its debts, and to do that, it needs to live a more frugal life, instead of others lending it money to maintain its over-consumption”.  So how are we supposed to bail out our banks who apparently need over 2 trillion dollars just to get back to zero?  McWilliams suggests that the only answer is for the U.S. to print a lot of money – effectively devaluing the dollar and sending us into hyperinflation.  The advice for the average investor then would be simple: buy gold.

Maybe. However, there is another way; its just a matter of how you look at the situation.  If we take the viewpoint that the U.S. banks are “too big to fail”, we have an insoluble problem because we can’t stop them from failing.  As Krugman says, without naming names, our major banks are already zombie banks. They are dead banks walking.  If we persist in our belief that these are sacred institutions that cannot be allowed to fail then we should know that when these banks finally do die – as they must – we will be buried with them.  The time has come to view these failing banks as what they truly are: failed businesses. That’s it, that’s all they are. They are failed businesses.  They are not your business, and they are not mine either.  They belong to the rich folks who made some really, really bad investment bets.  Does that mean we have to bail out the rich folk?  I don’t think so, not with my money anyway, and not with yours either.

The solution is for us to start our own bank to replace the inept banks that made the wrong business decisions.  Our bank – the people’s bank – would be a U.S. government owned and operated bank. A bank of the people, by the people, and for the people.  Where would it get it’s money from? Why, from us of course, the U.S. taxpayers. Except, instead of using our tax dollars to bail out the rich folk we would maintain our ownership of our money. Our money would be in our bank, with temporary custody given to the government.  Until we are paid back we would receive regular interest payments on our contributions.  The nice thing about this bank would be that it would be operated for the benefit of the people – no more 33% interest rates on credit cards, no more “gotcha” adjustable rate mortgages, no more personal loans at 12% interest when inflation is at 3%.

The idea of a national banking system makes the rich folk shudder with horror.  They would much rather we just pay for their losses and bail them out indefinitely.  Except, this time they have gone too far.  We can’t pay their bill. They have gone too far.  It’s as simple as that.

Their poorly run investment businesses are dead banks walking, but they don’t know it.

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It seems pretty clear that we are entering a new phase in the financial crisis.  The U.S. banking system, having already received $350 billion in TARP bailout money is failing again – even though they never lent the $350 billion to customers who applied for new loans.  This new phase of bank meltdowns is related to businesses defaulting on commercial loans.  Perhaps this explains why the banks didn’t loan the original $350 billion – they all knew that there was more bad news to come and that the damage from the housing bubble would flow over to the general business sector.

Now, in the space of only a few days, there is bad news about Citibank, Bank of America, JP Morgan Chase, and others.  They all need a lot more money – taxpayer money to be exact.  It looks like they will be needing the remainder of the authorized TARP funds and maybe a lot more – who knows.  Certainly the banks won’t be telling us the facts until the last minute.  So what do we do?  Do we just keep shoveling money into these banks and let them just squirrel it away, afraid to lend it to anyone and thus ensuring that the economy will continue its death spiral?

There is an alternative to simply giving away all of our tax dollars to the wealthy people who own the banks.  Nationalization.  I know, I know…  The banks and the rich folk don’t like the idea.  Nevertheless, there are more and more voices saying the time has come for the government to really step in and sort out this mess because the people who run the banks are really only interested in saving their money and not in saving the economy.  It might be helpful to look at what is happening in Europe for a moment.   Yesterday, the Irish government nationalized the Anglo-Irish Bank, one of the largest banks in Ireland.  They are following the precedent set by the British government last year when they nationalized the Northern Rock Bank at the beginning of the real estate meltdown.  Northern Rock is now a very stable bank.

This is a good time to have a discussion of the pros and cons for nationalizing the U.S. banks that are in major trouble.  It is also a good time to discuss the whole nature of our banking system and why we have exclusively privately owned banks anyway.  Why shouldn’t the government operate a system of banks, sort of as a non-profit utility?  Are we afraid that would cut into the profits of the private banks and the millions of dollars of profit that goes to their owners and employees?

We are approaching a decision point.  Our banks have become dysfunctional.  They don’t loan money and they don’t make money.  So, I have to ask: what useful purpose do they serve or are they likely to serve in the near future?  Our economy drifts along toward another precipice: the complete collapse of our banking system.  Only the government has the ability to get us out of thus situation now. The real question is this: should we continue giving our tax dollars to these banking businesses or should we just have our own national banks that are really owned by the American taxpayer.

I heard there is a joke going around Wall Street saying that The Bank of America really is the Bank of America now, since the government already owns so much stock in the company.

I’m thinking that maybe it’s not a joke; maybe it’s a solution.

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It’s the “Fair Tax”.  Promoted by Mike Huckabee, a prominent Republican and former candidate for President, the “Fair Tax” is anything but fair.  That, of course, is the beauty of the whole idea.  It’s a classic Republican Party ploy, twisting the meaning of words, deceiving the people, and above all, always seeking to enrich the already wealthy at the expense of the middle class.  The proponents of this tax scheme (a millionaire’s dream) have their own website where they try to justify the idea claiming that this is the only tax we need. They say we can eliminate our income tax, estate tax, capital gains tax, and so forth. Basically we can get rid of all the taxes the wealthy people hate to pay.

So how does this work? We create a national sales tax – like the European Value Added Tax – and tax everything that is sold.  The theory is that when the billionaires buy their mansions and their yachts they will get socked with a massive tax while you will only pay a small tax because you are only being taxed on your pathetically small purchases of milk and eggs and such.  Sounds good, doesn’t it? It does at first until you realize that everybody eats food and the billionaire probably doesn’t eat any more pancakes than you do. However, you and the billionaire will pay the same tax on the food you eat.  Same with the tax on clothing, heat, gasoline, medical care, you name it. You will be taxed every time you turn around and so will the billionaire.  And that is what the billionaire wants.  As for the billionaire’s mansion and yacht – he already owns his mansion and yacht – there’s no tax for him there.

The wealthy man can play this game all day long and not feel a thing but you, who can hardly save a dime because you need to use everything you make just to pay your living expenses will now be taxed on every single financial transaction you make. Is that fair?  Is it fair that the fat cat millionaires will pay zero income tax? Is it fair that he will pay zero capital gains tax on all the money he makes on his stock investments?  Is it fair that the wealthy can pass on their accumulated wealth to their heirs, even it is $100 billion and pay absolutely no tax so that fortunes can stay in a particular family forever and never be taxed? What these people want is a return to feudal society where his lordship owns all the land and the money and never pays tax, except for the few things he buys in the marketplace, while you pay the entire burden of the cost of the Department of Defense, Homeland Security, Social Security, and every other government department and expense based upon a nasty little tax on every single thing you ever buy.

And they, the Republicans, call this a “Fair Tax”.  And they have gullible, innocent people who are suckered into their handwaving, deceptive arguments. And one of the leaders is Mike Huckabee.  Mike Huckabee is an ordained Baptist minister.  Think about that for a minute.  A so-called Christian minister promoting a tax scheme that would cause unbearable suffering for the poor and middle class, but would greatly enrich the wealthiest people in the United States.

It isn’t a fair tax.  It is the unfairest tax you could possibly imagine.  It is a trick and a fraud that is meant to dupe the unsophisticated American voter into voting for legislation that would shift almost all the tax burden onto the lower class.  It is the “class warfare” that John McCain likes to talk about, except he only talks about “class warfare” when the wealthy have to pay their fair share by paying income tax, estate tax, and capital gains tax.

Don’t be fooled, the “Fair Tax” is a phony gimmick that would shift the vast burden of taxes to those who can least afford to pay.  As John McCain might say: it’s class warfare.

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Let’s see if I understand this correctly. Last November, as the major banks were crying that they had made a bunch of really bad investment decisions, their man in the U.S. government, Secretary Paulson sounded the alarm.  He essentially told the President, and anyone else who would listen, that the sky was falling and that we had to do something immediately – or else.  There was no time to discuss anything, just give him $700 billion so he could help his friends and save the world.  So, we did.

Now that we have a little time to breathe we can look at the whole thing a little more carefully. It seems that the banks, like Citibank, were a little too exuberant in their mortgage lending practices. They had become believers in the American Real Estate Ponzi Scheme (AREPS). Now, I would have thought that these people were experts and would have seen that this whole thing about buying and flipping houses to each other had to end sometime.  After all, all Ponzi schemes end eventually, right? But the experts at the banks missed that little detail big-time, didn’t they? The result was that they got stuck with a lot of  “Troubled Assets” – a euphemism for mortgages that will probably never be paid on properties that had idiotic values and whose values have now dropped all the way down to reality.

Thus was the Troubled Assets Relief Program (TARP) born, the purpose of which, apparently, was to inject a bunch of money into the banks so they wouldn’t go belly up because we (the United States) cannot live without these particular banks, and so, they must never die, but instead they shall become immortal.  Our Congress apparently believed that line of reasoning and the result was the immediate gift of $350 billion to various banks. “A gift from the people of the United States of America”, just like it says on the burlap bags of rice and wheat we occasionally airdrop on the starving people of Africa, except this time we basically airdropped bags of money on the U.S. banks.

The nice feature about the TARP money is that it comes with no strings. There was some talk about the money being used to bail out people with toxic mortgages, but the way things were written, the banks can, in their infinite wisdom, do anything they want with the money and they don’t have to tell us how they spent it.  So basically they get to keep the bad mortgages (and therefore the ownership of lots and lots of property), and they get the billions of TARP dollars too.  So, when we have an economic recovery they will not only get to keep the billions of TARP dollars (which they have put in their vaults and are not lending to anyone), they also get to keep all the property they own,  which will eventually grow in value.  I guess those bankers aren’t so dumb after all, are they?

Except now Citi is sort of on the ropes again.  President-elect Obama has asked President Bush to request that Congress release the remaining $350 billion in TARP money and Bush has done so.  So far we don’t know Obama’s plan for using the new TARP funds. Is he going to save the banks all over again?  Why are we doing this?  Is it because our current method of banking is the only possible way of doing business, or is it because the wealthy bankers and businessmen control our government? I ask because there is another way.

Imagine if Citi had been a bank that was completely owned by the government and it had made the same stupid real estate decisions. What would have happened? The Treasury would have pumped money into the bank to cover the losses, right? Exactly the same as with the TARP, except for one thing – the TARP money would still belong to you and me.  Same with the “troubled assets”.  Right now it all belongs to Citi and the other banks – no questions asked.  We, the ordinary citizens of the United States have thrown a lifeline to the rich and they have grabbed it.  Meanwhile, I don’t see the government throwing any lifelines to the ordinary citizen, do you?

Barack Obama, the man upon whom the hopes and dreams of a nation ride,  is about to be entrusted with the remaining $350 billion of TARP lifeline money.  The question I have is this: will he throw a lifeline to the Troubled American Homeowners this time or will it go once again to the wealthy bankers of America?

We’ll soon find out.

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