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Posts Tagged ‘Bailout’

It’s difficult to say when it began, but I am sure the seeds were planted on the very first day the Pilgrims landed at Plymouth Rock.  Surely the beliefs that allow such betrayals are contained in the essence of the Calvinist/Puritan teaching of the concept of the “elect”.  Surely such beliefs are made manifest in the wholesale slaughter of the native Americans who owned this land.  Surely such beliefs are made manifest in the enslavement of an entire race of people, all for the sake of the enrichment of private fortunes. They called America the land of opportunity. And who comes to a land of opportunity except opportunists?

Through the centuries there have been numerous examples of men who professed a love for this country and its people, and all the while they acted out of anything but love for either the country or its people.  These captains of industry and leaders of government, clever with words and even more clever with the manipulation of the populace, time and again took advantage of the people solely for the purpose of self-aggrandizement.   The use of slaves in the south, the use of child labor in the factories of the north, the ejection of native Americans from their homelands on which they had lived for over 10,000 years, are all the work of opportunists – people without a sense of honor, righteousness, or human sympathy. These people knew only greed for wealth and would say anything, do anything, and go anywhere to obtain it. As they would say, ” You gotta do what you gotta do.” And they called themselves Americans.

We should have seen it coming fifty years ago. That’s when the captains of industry began moving the manufacturing industry of America from the industrial northeast to the south in order to take advantage of the cheap labor and thus obtain even greater profits. It was an opportunity not to be missed. And over the years the northeast lost many, many thousands of jobs and once thriving manufacturing towns became empty as people left, looking for work somewhere else. Never mind that the captains of industry had been good citizens. Some had even held political office. All had claimed they were working for the good of their communities. And then they left – for the opportunity to make even more money. And what about the people left behind? Who cares?

We missed the signs, though they were obvious to see. Then it happened again, except this time the captains of industry moved their factories to other countries where the people would work for even less money – it was an opportunity, you see. And our government? Well, it was just fine with our elected officials. No need to erect tariffs to keep out the cheaply made goods that would compete with American made products. It’s competition – good for everyone. Right? But it wasn’t. Sure it was good for Wal-Mart. Sure it has been wonderful for China. But what about the American worker? What could he do now?

Ah! The government had an idea (with the help of the banking industry). The poor people could buy and flip houses! Let them become mini-Capitalists! They can make their fortune’s that way and so can the banks. And the government said, “Let it be so.” And it was.

As Americans now look at the smoking ruin that was once the American economy, there is a strong sense of betrayal. Look at the Tea Party. They are made as Hell and they aren’t going to take it any more. Sadly, they have no clue about exactly what happened to them. They just know that they don’t want to pay taxes anymore. Everywhere there is unhappiness. The government cannot be trusted. The people we elect don’t deliver. They promise to do things and then they never even attempt to do them once they are elected. Democrat or Republican – it makes no difference, because, you see, they are all opportunists in this land of opportunity.

We, the people, don’t get it. It’s not about community. It’s not about patriotism.  It’s not about helping your neighbor. It’s not about people helping people. At least those are not the concerns of our captains of industry or our captains of government. We have been betrayed, fooled, bamboozled. The Tea Party knows it. We are a nation of suckers, believing political promises and televised slogans from big business. Our Supreme Court, in its mind-boggling wisdom, has declared that corporations are like people and that they enjoy the same freedom of speech that real, living people do.  Really! So now corporations can use their billion dollar megaphones to drown out the voices of dissent from the people.  We are indeed betrayed. Our jobs have been moved overseas. Our wealthiest citizens pay almost no taxes while our poorest people are evicted from their foreclosed homes to live on the streets. Our banks have received billions of dollars from the government in order to cover their losses. Our industries have received billions of dollars from our government in order to cover their losses. All because our government and our industry leaders deliberately moved the key machinery of our economy to China, India, and the rest of the developing world – and all at the expense of the American citizen.

The people of America have been betrayed by the leaders of their industries and their elected leaders for many, many years.  And now, while the smoke still lazily drifts upward from the ruins of a devastated economy, the politicians prod the people once again. “Vote for me. Vote for me.” But Washington, don’t you see? The people are tired of your tricks, tired of your betrayals, tired of your promises that mean so little.  We know you are nothing but opportunists.

I fear that the time is near when the American people, like Estragon and Vladimir in Beckett’s Waiting for Godot, will simply not move.

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About a year ago, when it looked like the world was about to end and the economies of countries around the world were beginning to melt away like a Salvador Dali painting, the leaders of the U.S. government, i.e. President Bush and Treasury Secretary Paulson told us that we had only days, maybe only minutes, left to rescue those great bastions of Capitalism – the banks of Wall Street.  Everybody panicked. We couldn’t shovel money into the banks fast enough. If they died, we died – or so we were told anyway.

Today, the dust has settled, the banks are alive – having been given massive transfusions of life-giving money – and the people of America are left wondering: what just happened?  Here’s what happened: we were robbed by the banks.  After Lehman Brothers melted into a little puddle of red ink, there were reports that Goldman Sachs might be next.  Goldman Sachs!?!?  How could that be?  Isn’t Goldman the underlying sine qua non of American capitalism? If Goldman goes down won’t the entire country just dissolve? That’s what we were led to believe by Bush, Paulson, and their cronies.

So what happened? We (that means you and me, the American taxpayers) gave them a loan, called TARP, to keep them alive. We gave a lot of banks a lot of money because we were told we couldn’t survive without them.  They were “too big to fail”. Of course we didn’t give them our own cash, because we were also drowning in the melting economy – so we just printed the money and decided to let our descendants pay the government back through their tax bills over the coming centuries.

Here is where the big scam comes in: while Americans made a lot of stupid decisions buying houses they couldn’t afford at prices they couldn’t pay, the banks were equally – if not more – stupid because they gave us all those loans that we couldn’t pay back.  If the banks had the intelligence of a rock they would have realized that making such loans was pure folly.  They used to know that, but in their greed they put aside their knowledge as they chased the huge profits that can be made in a bubble economy.  So, what had happened was that we, the people, lost a bundle and so did the banks, but the banks got reimbursed for their losses – by us! But nobody reimbursed us! So now, not only do we owe the money we foolishly invested in overpriced houses, we are also on the hook for all the TARP money we printed because a lot of that will never be paid back.

Meanwhile, the bailed out banks – the ones we can’t live without, the ones that are too big to fail because our Capitalist economy depends on them – don’t want to play Capitalism anymore. They don’t want to lend money anymore. Instead they are hogging all their TARP money, refusing to lend money to people who need money for many purposes. In other words the big hog banks aren’t really functioning as banks anymore, which leads one to wonder why we thought they were too big to fail. In a sense they have already failed.  If they aren’t lending then they have failed in the principal purpose of a capitalist bank – making capital available. So if they have failed in their role, and yet, here we are, still alive and functioning, doesn’t that mean that they really weren’t “too big to fail” after all?  Aren’t the big hog banks proving every day that we really don’t need them after all? Isn’t this the big lie of Bush and Paulson?  Isn’t this the big lie of Wall Street?

One of the great drags on our economy now is the lack of available capital to restart businesses.  If we had simply nationalized the banks we would now have government-run banks that would be in the business of lending money to us because we would be the owners of the banks! They would sort of be like giant credit unions.  Instead, we have the Boss Hogs of Wall Street sitting on 200 billion dollars of TARP money, unwilling to do that for which we bailed them out.  The TARP bailout didn’t rescue the economy – the money we gave to the banks is still sitting in the banks, so how could it have any effect on the economy? The only thing TARP did was prove one thing: the whole Too Big To Fail story was nothing but a Big Bank Lie that only passed on the losses of the big banks to the American people.  We were duped. We were done a huge disservice by former President George Bush and former Treasury Secretary Hank Paulson, and we will be paying the price for this for generations to come.

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It seems like such an easy question: how much is my house worth? The problem is that this is not an easy question – and that fact that that is a problem is the real problem.  Let me explain…

A long time ago, when Tricky Dick Nixon was President of the United States, our country was running up a huge bill trying to pay for the Vietnam war.  There was only so much money coming in from taxes so we had to borrow money by selling treasury securities to other countries and Americans too.  Treasuries were a pretty safe bet – as good as the dollar, which in those days had its value fixed in relationship to gold.  At one time you could redeem your paper dollar for its equivalent in gold. Later, the paper dollar could be redeemed in silver, if you felt like carrying around bags of silver with you. The point was that a dollar was nothing more than a proxy for your ownership of some precious metals that were stored at Fort Knox or somewhere else.  Nixon’s problem was that there was only so much gold and silver in our vaults – so we could only print so much money.

At some point Nixon or his advisers came up with the perfect solution, disconnect the dollar from any relationship at all to any precious metal – in fact detach it from anything physical. The dollar became a Federal Reserve Note, not redeemable for anything.  This allowed Dick Nixon to print as many dollars as he liked so when it came time for people to cash in their Treasury securities they would be paid back in dollars that were worth much less than if they had been backed by a certain amount of gold. The value of the dollar had dropped – or, another way of looking at it is that the value of gold went up a whole lot.

Which brings us to houses – almost anyway.  There is little doubt that the increase in house prices and lots of other stuff since Dick Nixon inflated his way out of Vietnam War debts was not the same thing as an increase in value. The value of things didn’t change much, just the price because the dollar was losing its purchasing power. OK. So that’s it? No. Not exactly.

If we are talking about the value of a house, and not the price – which we can now see is not the same thing – how do we actually determine its value?  Well, the common sense way of determining the value of something ought to take into account the value of the things that went into it, like wood, stone, paint, drywall, and so forth.  Then there is the cost of labor – a bunch of carpenters, electricians, plumbers and so forth had to be paid for the value of their labor. So we have to figure in that value too. Then there is the value of the land.  How large is the lot? Is it swampland? Is it next to a superhighway? Is it level? Is it cleared?  Some of these items are easy to value, for example, if the lot isn’t level we need to pay for a bulldozer to level it.  And so forth. On the other hand, there are some items that are sort of intangibles, like the proximity to a superhighway.  How do you value that?  This is where things get a little difficult.

The issue we are faced with is trying to place a value on something that has no intrinsic value. It doesn’t cost anything more to build a house next to a superhighway than it does to build it far away.  However, it does make it less desirable.  So, we enter the world of supply and demand, where the value of things is not related to tangible things but to emotional things like desire.  This is where the trouble begins too.

Several years ago we entered a fantasy world of house prices.  The price of houses was going up because…because…well, because the price of houses was going up.  It was a fabulous game anyone could play.  Buy a house, flip it, and make a lot of money.  Except there was nothing tangible supporting the price of houses.  Sort of like the Emperor’s New Clothes, only with houses.  For the past couple of years house prices have been in a near free fall in some parts of the country and they are expected to continue falling. So how far will they go?

Now that the balloon has popped it seems that house prices will have to fall until the “irrational exuberance” of home buyers and the equally exuberant lending banks is completely dead. House prices have to fall to the point where they reflect the actual construction costs of the house, i.e. materials, labor, and land, plus some sort of adjustment for the desirability of its location as determined by the local market.  But all the price inflation due to the irrational exuberance of flipping houses has to go.

Oh. There is one other thing. The dollar isn’t what it used to be either. You need to account for the inflation of the dollar since you bought your house. Figure somewhere between 5% and 10% per year – roughly. It’s a cumulative effect so you need to calculate each year of ownership separately – a computer program might help a lot.  Then there is depreciation. Things wear out. Houses get old and start to fall apart, so unless everything is fixed up like new you need to deduct the loss in value from normal wear and tear, plus the natural aging and decay of things.

All things considered, your house is probably worth a lot less than you think it is – unless you happen to live in one of those parts of the country that, for some reason or other, never got caught up in all the irrational exuberance. For those areas out west like California and Arizona and in the east like Florida, homeowners face more pain to come in the great housing value reality check.

House values are a bit difficult to figure at anytime because of all the ingredients that go into their value like materials, labor, loss of value of the dollar, and so forth.  Irrational exuberance is not part of this equation. It doesn’t add value; it only increases the price.  The problem is that as the irrational exuberance of home buyers fades, so does the price.  Eventually, houses will return to their real value, but it looks like a lot of formerly exuberant, but many ordinary American citizens will continue to have an extremely painful reintroduction to reality.

Thank God the banks are OK.

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I would guess that, prior to the recent World Economic Meltdown (WEM), most of us never gave much thought to which industries were “too big to fail”.  Who knew we couldn’t live without AIG or Bank of America?  Insurance companies and banks come and go, right?  It turns out that this rule only applies to the smaller banks and insurance companies.  It seems that the big banks and insurance companies, taken collectively – even individually as with AIG – are indispensable and critical to the very existence of the United States. Therefore, the U.S. government had to step in and rescue these companies – for the good of the country.

So, I’ve been thinking that it might be nice to know in advance which other companies or industries are also too big to fail, just so I can be prepared. Apparently the U.S. automobile industry is also too big to fail – at least the Ford and GM parts of the industry – maybe not Chrysler. It seems that the economic impact of losing GM (Ford is doing OK) would be detrimental to the U.S. so we just aren’t going to let them fail (a structured bankruptcy is not really failing).  My question then is this: is there some way I can identify other sectors or companies that are also too big to fail?  What other companies can expect a guaranteed government lifeline if they also get into financial trouble?

I took a look at the 2008 Fortune 500 list of America’s biggest companies, which, incidentally,  is called the Fortune 1000, to see if I could see some sort of pattern or trend that would help me identify the other “too big to fail” candidates.  I found that, of the top 25 revenue earning companies in the U.S., they could all be placed into one of the following six groups:

1. Oil/Energy

2. Finance/Insurance

3. Retail

4. Communications/Technology

5. Automobile

6. Health/Medical

The sectors above are listed in order of total revenues for 2008. The number one spot goes to the oil industry with total revenues of about $1.2 trillion. The financial sector came in second with revenues of about $810 billion.  I have to assume that the reason we have to save the banking/insurance industry is because they play such an important role in our economy. However, our government decided that the auto industry is also to big to fail and they came in at only fifth place with revenues of about $360 billion.  Given the recent measures taken by our government to save both the financial and auto sectors of our economy, I think it is only reasonable to expect that the other members of the top five would be saved if they imploded too.

My conclusion is this: if the time comes when disaster strikes any of these other sectors of our economy, namely oil/energy, retail, or communications/technology we can expect our government to immediately step in and declare that these are “too big to fail” also.  This must be especially true for Big Oil because they are the largest sector of our economy.  It’s probably comforting for Big Oil to know that if they ever do get in trouble, we, the American taxpayer, will be there to bail them out.

As far as the health/medical sector goes – I don’t know.  You guys didn’t make it into the top five, you know.  And what about the aviation sector: the airlines, airplane manufacturers, and so forth?  Sorry, you didn’t even make the top ten – you’re actually not even on my chart! I guess we can do without the U.S. aviation industry, right? Maybe we could outsource and insource all our aviation needs from other countries!  After all this is a global economy, right?

Come to think of it, we could probably outsource and insource our medical needs too, couldn’t we?  I mean if it really comes down to it, couldn’t we just buy all of our pharmaceuticals from China or India? Couldn’t we just use our electronic technology to outsource diagnostic testing to Canadian or British or even Chinese doctors?  Maybe so… Sorry, health/medical, but you’re only number 6.  You’re out too.  Sorry.

So that’s it then.  There’s my top five list of U.S. industries too big to die.  We are saving two of them right now, and with only three more to go.  I wonder who’ll be next?

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Paul Krugman, the Nobel prize winning economist, is fond of using the term “Zombie banks” to describe banks that are operating despite having liabilities that exceed their assets.  Most of our major banks have fallen into this category – the living dead.  However, it seems that the situation is changing with the Obama/Geithner rescue plan for our financial giants.  We, meaning the government – meaning us, will work a deal with private investors to buy up all the toxic waste inside the banks which we either pay for directly or guarantee to the private investors.  Wall street likes the idea and bank stocks have surged recently as blood begins to flow again into the pale white faces of the undead bankers.  The problem is: it’s our blood.

One thing that our government has conveniently overlooked – at least, and hopefully only for the moment – is that these nearly dead banks never had a soul.  These undead banks functioned more as vampires in our lives than as agents of community development.  Have we forgotten credit cards that sucked people in with promises of 0% interest only to escalate to 33% interest when a payment might be a microsecond late?  Have we forgotten how these vampires gleefully raised the rates on all of our credit cards simultaneously simply because we had somehow overlooked a single credit card payment for a day?  Have we forgotten what it is like to be in Credit Card Hell?

Then, of course, there are the mortgages – the ones given to unsuspecting homeowner wannabees that just wanted a house of their own but needed a break on mortgage payments.  So they got an adjustable rate mortgage that was easy to pay during the first year, but after that the payments were just impossible because the interest rate adjusted into the stratosphere.  Which, of course, is exactly what the banks wanted. Just like Credit Card Hell, the banks had also created Mortgage Hell.

Did you know that General Motors is a bank?  I thought they made cars. It turns out that they are actually a bank, so they got TARP bank bailout funds.  I thought General Electric made appliances.  It turns out that GE Capital Finance is the largest finance company in the world.  It seems that you can make a lot more money by loaning money to people than by building stuff and selling it to people.  When President Obama was on Jay Leno’s show he said that over the past 15 or 20 years about 40% of the U.S. economic growth was based upon the financial sector. That’s what happens when you lend money to people at extremely high interest rates.  So now, in order to rescue our economy, it has become necessary to remove the stake from the heart of the vampire banks and give them new blood.

Paul Krugman points out the problem in today’s New York Times. We can’t just give the vampires a transfusion and then think everything is going to be OK.  It won’t be long before they start stalking us again – offering 0% loans for six monthsb, then an interest rate tied to the value of the Russian Ruble divided by the ratio of the Euro to the dollar times the population of China at the end of the six month introductory period.  We need protection from the vampires. We need “stakeholders”, so to speak, who will stand up to these soulless, deathless entities and tell them “No more!”  Tim Geithner is hinting that he might be thinking that way, but is he a true vampire killer?  Is President Obama?

Many years ago our government (yes OUR government, meaning “us”) had laws that limited interest rates. Back in those days you couldn’t get a “Pay Day” loan.  (Check out My Cash Now.  Their annual interest rate is 485.45%!!!!!)  Then came a period of “deregulation”, i.e. leading the lambs to slaughter where the restrictions on interest rates were lifted and many of us got suckered into loans that drained us of everything we owned and the bloated banks still weren’t satisfied. Of course not; you can never satisfy a vampire.

Guess what?  I just checked the stock market.  They’re back.  What will President Obama do? I think he’s a smart guy. I think he wants to put the “us” back in “U.S.”, but so far he’s being cautious.  I think he doesn’t want to spook the vampires – same with Geithner.  I think both of them might be stealth vampire hunters, but it’s too early to tell. Meanwhile, I would be careful about taking out a new loan from any institution without calculating the total cost to repay it.  Try using an interest rate calculator like this one. For example, if you put in a loan of $10,000 at 18% interest for ten years you’ll find that you have to pay not only the $10,000 but also $7,989 in interest.  On the other hand if the bank jacks up the interest rate to 33% you have to pay $79,160 in interest!!  The vampires love that.

Until President Obama and Secretary Geithner rein in the bloodsuckers it’s best to be careful before taking out any new loans…. and whatever you do, don’t go into any bank after dark.

Ever.

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