Doom Loop?

Bailouts are like powerful painkilling drugs. They feel good immediately, but do enormous damage over time if abused.

Politically, the pressure to avoid bailouts is very difficult to resist. In modern US history, Chrysler, Lockheed, Long Term Capital Management, and Savings and Loans have been graced with bailouts. Each bailout instance tends to be bigger - and more urgent - than the last. Economists tell us this is a moral hazard, (and here, and here) because the bailouts are a signal to those who run businesses that they will not be allowed to fail. This encourages them to take risks that they otherwise would not dare take.

The last batch of bailouts have been even bigger, and are approaching a point where there is a question of whether the federal government has the resources to do bailouts "this big".

This article from Seeking Alpha highlights a paper written in the United Kingdom about the "doom loop" that sums up the problem of addiction to bailouts. Each time they get bigger, until they are "too big", and then you are in real trouble.

The paper from the US can be found directly here.

Bailout Nation

Bailouts are the new "normal". AP reports that one in five borrowers have been "reached", with permanent "mods" the next big challenge.

I shudder to think what this means long term.

This sort of program, once it has "reached" a large audience, does not end. Its constituency has a powerful voice, and politicians are not suicidal. What does it mean to have mortgages routinely "modified" by Uncle Sam? What lender will willingly originate a mortgage that is likely to be "modified"?

Though billed as good news, it is not. Voters are being bought, and taxpayers fleeced. Debtors are told they are victims rather than deadbeats. Uncle Sam is now a party in 20% of our mortgages.

How cheaply we sell our freedom and independence.....

Time to shut down Fannie Mae

Take careful note of what has been happening in the mortgage market. Fannie Mae and Freddie Mac were at the center of the mortgage mess, pressuring and enabling banks to let out bad loans, and then in late 2008, pleading for - and getting - tax money to cover the losses.

This article speaks volumes. The problem has not been fixed. The alcoholic has simply been given several more bottles of Jack Daniel's, and is on another bender. He now wants several more cases of booze, and a guarantee of a continuing supply.

It is time to shut down these Government Sponsored Enterprises (GSEs). Their existence is based on the idea that they can be self supporting. Clearly they can't. We've made a mistake. Let's cut our losses, take our (massive) lumps, and shut them down before they do any more damage.

Pay me to move?

It is hard to keep up with the torrent of Bad Ideas coming out of the Democrats in Washington. The latest is the extension of a scheme to borrow billions of dollars from Chinese investors to induce people to change residences, as long as you make the move by November 30th of 2009. The proposal would change the deadline to April 30th, 2010.

What is this, you ask? Why in the world should we spend tax money to get people to move?

Exactly, but after all, this is Washington, and any time politicians can buy favor with tax money, temptation and stampede comes before the dawning of common sense.

In this case, it is realtors, moving companies and house buyers who win. As usual, there are a lot of those who vote, and the program is naturally popular. Who is against free money?

As usual, it is harder to finger the losers, but two of the big losers are clearly the Taxpayers, and their children.

Mr Obama was talking today about a "post bubble" economy, while doing everything possible to ensure that bubble-sustaining incentives remain.

This is insane. Until the taxpayers wake up and refuse to pay the bill, the insanity will continue.

The $700 billion slush fund

In the last year, we have heard a lot of hyperventilating about the economy.  The $700 Billion TARP legislation last fall was stampeded through Congress on the premise that the sky would indeed fall without it.

Now 8 months later, Secretary Geithner has indicated that he considers TARP to be a permanent "revolving" fund, which is not at all in keeping with the spirit of the presentation of this legislation to the American people. (There is an article here that describes where the TARP money has gone.)

The provision of such a "flexible" fund, such as TARP, is the very definition of lawlessness, and begs for corruption.  A $700 Billion slush fund for the US Treasury Secretary is a direct threat to our freedom and well being, and we should be pressing our Congress to end it immediately.

Shape of Things to Come

The headline today is "Chrysler Files for Chapter 11".  It should have been "US President Sweeps Bankruptcy Law Aside".

A view of the extent of interference by the President can be seen here and here. Normally, a bankruptcy judge will balance the interests of the stakeholders in a failed company, and there is quite a body of law that governs who gets what when a company files for chapter 11.

That's what Rule of Law is about.  We have a body of laws that govern our behavior, and everyone - the government included - follows the law.

In this case, the US Government is one of the investors, and is clearly not "just another stakeholder".  It is not politically acceptable to allow the natural events of a Chrysler failure to occur.

The administration is therefore dictating some of the terms, much to the chagrin of some of the bondholders.  Some who thought they had legally binding contracts with Chrysler, and some protection in bankruptcy law, have been swept aside.  The article notes that the President "left no doubt about his anger with some Chrysler creditors who refused to accept a reduced payout".  Think of this as a Presidentially imposed tax on particular bondholders to help pay for his investment in Chrysler.

I challenge anyone to find authority for the administration to do this.

The financial strength of the U.S.A. is in the millions of workers, businessmen, bankers, investors, and risk takers who put their futures on the line with an expectation that they know the rules of the game, and that the game is fair.  They sweat and gamble and strive with the hope that they can win, and their limits are what they can achieve with hard work and inspiration.

When the politicians put their thumbs on the economic scale, the game is no longer fair.  Only a fool plays in a rigged game.  Sweat and hard work no longer count, only political connections do.  Opportunity has lost out to influence.

I wish I could say this was a one-time event, or that we are in unusual times, but history says this is yet another chapter of a repeating story.

Expect a surge in lobbyists' activity.

This is a sad day for the USA.

Cramdown is unwise

Our representatives in Washington, D.C. are feeling pressure to "prevent home foreclosures".  One recent idea being "intensely debated" in the U.S. Senate right now is appropriately called "Cramdown".   A recent news article here.

The idea is that homeowners unwilling or unable to pay their mortgages should have some sort of "help", and the public pressure on Congress to "do something" is intense.

There are only two ways to "help".

The first way is to give the borrower (tax) money so he can pay the loan.  This is not so popular, because it is so hard to determine which borrowers are "worthy" of getting a taxpayer subsidy. How long should the borrower be subsidized? Was the borrower flipping houses?  Was there fraud involved?  Many taxpayers are offended that those of us who have worked hard to make prudent choices should have our money spent to support those who made poor choices and took too many risks.

The second way is to allow the government to modify the terms of the loans.  This is more popular, because it does not spend taxpayer dollars directly.  The trouble with this is that it is basically theft from the lender. Recent news can be seen here.

As you might guess, the lenders, who are facing this idea as upcoming legislation, are not happy about it.  Only a fool would lend money to a borrower knowing that the borrower can ask Uncle Sam to change the loan terms if he has "trouble" paying it back.

The current "cramdown" legislation is theft from the lenders. It is a seizure of some portion of the loan value, to be given to the borrower for political gain.  It is corruption.

The U.S. Constitution recognizes and protects the sanctity of our right to contract. Article I, Section 10 states: "No state shall pass any law impairing the obligation of contracts." Moreover, in the famous case Hale v. Henkel, the U.S. Supreme Court says: "The individual may stand upon his constitutional rights as a citizen. He is entitled to carry on his private business in his own way. His power to contract is unlimited."

Free, responsible citizens pay their debts and keep their word on contracts.

The idea that the federal government has the power to reach out and modify private contracts should frighten us.  This sort of power begs to be abused.  Most of us are borrowers, so this power benefits "us" today, but once power is granted, it is seldom used as intended.  Next time around, we may be the victims.

US Debt - excellent video - decisions

There is a new web site http://www.stopspendingourfuture.com, with contests and prizes for videos and letters.  I really like the video with the person jumping off the cliff.  The video alone can be seen here.

There are only three ways to deal with the debt we, as a nation, are piling up.

• Pay it back.
  
• Renounce it.
  
• Inflate it away.
  

 The best way is to pay it back. This is the right way to do this, but it is hard to imagine the US Government saying that they will cut spending and raise taxes to give the Chinese and the Saudis their money back.  We would have to run a Federal surplus of $1 Trillion for roughly 11 years to pay back the current debt. This is the right thing to do.  Are you, as a voter, willing to demand it?

The second way is to simply refuse to pay the debt.  Third world countries do this from time to time, and the results are very ugly.  No one will seriously consider this, nor should they.

The third way is for the US Government to print money, which makes each dollar worth less. (inflation)  That is what we are currently doing.  The US Treasury issues Treasury bonds to finance deficit spending and bailouts. The Federal Reserve is busily buying those US Treasury Bonds with new money that they are creating out of thin air.  Third world countries do this too.  Zimbabwe has been doing this in recent years, and you can read about the results here. There are other examples here and here.  Note that there is really no difference between this and renouncing the debt, but this is less honest.  The Federal Reserve refers to this as "Monetizing the debt".

The Federal Reserve is "independent", and is not accountable to Congress or the President.  It operates largely in secret. Congress has periodically asked for information about Fed activities, and the Fed has refused.  More detail can be found here and here.  Ron Paul has introduced HR 1207 to change this.

What path are we going to take as a nation?  Will we take the honest and difficult path of paying our debt, or will we continue to pretend that it will just go away?  Will we demand that the Federal Government stop passing out goodies that we cannot pay for, or will we continue to destroy our children's futures?

Come to the Tea Party.