Squaring the Culture

"...and I will make justice the plumb line, and righteousness the level;
then hail will sweep away the refuge of lies,
and the waters will overflow the secret place."
Isaiah 28:17

02/22/2010 (11:21 pm)

Watch Your 401(k)

BusinessWeek reports that the Treasury and Labor departments are asking for public comment on “the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams.”

Sound innocent? Newt Gingrich and Peter Ferrara over at Investor’s Business Daily explain at some length what it means: it means the Obama administration is taking a look at turning your 401(k) account into the government’s piggy bank.

Here’s how it would work: the government would first require that your bank or investment house offer that you receive the proceeds from your 401(k) as an annuity. Later, they would mandate it; they would probably be nice and offer you three different repayment plans to fit your particular needs. The annuity would exist in the form of Treasury notes. Meanwhile, behind the scenes, they would take all the funds in your account and spend them on federal budget items, leaving you with a promise by the government to pay you back. Just the way they did with the Social Security and Medicare trust funds.

From the viewpoint of the Obama administration, this is a logical step. They’re running massive annual deficits, and the 401(k) pool represents probably more than a trillion dollars in available revenue to finance the deficits. They’ve already done exactly the same thing with Social Security, and they imagine that Treasury bills are the safest, most secure investment on the planet, so in their minds it’s not really stealing. In the odd rigidity of the liberal mind, there is no possibility that “the full faith and credit” of the government could ever become anything other than the absolute guarantee that it has been all their lives; they have no notion that their actions can, and will, produce genuine insolvency.

But insolvency will come, as night follows day. As the world’s investors see the irresponsibility of the government’s actions, they will abandon the T-bill, and then the Fed will have to crank up the presses to buy American debt with inflated dollars — and then pay the investors back with those inflated dollars. A retirement nest egg that should have sufficed for a comfortably middle-class old age will barely ensure survival, and God help the retiree whose nest egg was only just enough.

Either that, or massive new taxes will have to be drafted, which will break the back of the economy. They will never think of the only solution that would have a chance of working, to privatize as much of the massive entitlement programs as possible. Reducing their own power is against their nature.

The authors added:

Argentina provided a precedent in 2008, taking over that country’s private retirement accounts for forced investment in government bonds to cover spiraling deficits. Ambrose Evans-Pritchard editorialized at the time in Britain’s Daily Telegraph that this may be “a foretaste of what may happen across the world as governments discover .. . that the bond markets are unwilling to plug the (deficit) gap. . .. My fear is that governments in the U.S., Britain and Europe will display similar reflexes.”

This is just the latest chapter in what is developing into a war by the left on America’s seniors. All that class-war rhetoric about “the rich” ends up targeting seniors, who tend to have accumulated the most in savings and investment on average because they have been around the longest.

The attorneys at PowerLine think the Obama administration will not be able to get away with this. They point out that a large percentage of the nation’s lawyers have million-dollar retirement accounts, and will scream bloody murder if the government attempts to force them to finance the deficit. It is not clear that the Obamanites will willingly abandon their own base in this fashion; the Obama machine runs on money.

That’s plausible, but hardly reassuring. The mere threat that the government might take this step, an idea that’s been quietly floating on the air for a few months, is already slowing the rate of investment in retirement accounts. PowerLine’s Hinderaker notes:

Earlier today I learned that a relative on Wall Street has stopped accumulating funds in his retirement accounts precisely because he thinks they may be confiscated by the Obama administration. Instead, he is acquiring untraceable, tangible assets–gold and silver–that the government won’t be able to steal without a physical search of his property.

If major investors deflect their retirement savings into hard assets, like gold or collectibles, that will take those savings out of circulation, making expansion capital that much rarer and extending the recession that much further.

Socialism has failed the world in every imaginable way. No nation can afford what is planned for it by those who imagine themselves the rightful engineers of the perfect society.

05/26/2009 (3:38 pm)

Whole World Choking on Government Debt

An article in this morning’s UK Telegraph highlights the problem President Obama and the Federal Reserve have created with their ill-considered attempts to stimiluate the US economy. It seems the US is having a little trouble selling its bonds — and so is every other nation on earth that’s doing the same thing.

The US is not alone in facing a deficit crisis. Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe. Kyle Bass from the US fund Hayman Advisors said the markets were choking on debt.

“There isn’t enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there,” he said. “If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.

“The bottom line is that there is no global ‘get out of jail free’ card for anyone”, he said.

As a result of competition for the available funds and of wariness about the US “printing money” to pay back their debt with debased currency, investors have driven up the price of bonds 90 basis points since March. That’s not a crippling amount — yet — but it’s an indicator of what’s to come. It’s only going to get worse.

The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September.

“The dynamic is just getting overwhelming,” said RBC Capital Markets.

As the price of the US debt goes higher, the cost of maintaining the debt goes higher, and interest rates in the US go higher as well.

The world is watching to see how much money the Fed is going to “print,” which they do by buying their own debt issues. If they buy too much, the world may stop buying our debt, and then the dollar would crash:

The US Treasury is selling $40bn of two-year notes on Tuesday, $35bn of five-year bonds on Wednesday, and $25bn of seven-year debt on Thursday. While the US has not yet suffered the indignity of a failed auction – unlike Britain and Germany – traders are watching closely to see what share is being purchased by US government itself in pure “monetisation” of the deficit…

The dollar has fallen 11pc against a basket of currencies since early March. Mutterings of a “dollar crisis” may now constrain the Fed as it tries to shore up the bond market. It has so far bought $116bn of Treasuries as part of its “credit easing” blitz, out of a $300bn pool.

The crash has not come, but it may be on its way.

05/19/2009 (9:20 am)

I'm Keeping This One

I tracked a link to my blog from a week ago, and found this stunning video of a moment during President George W. Bush’s 2006 State of the Union address to Congress. The clip shows President Bush reminding the Congress, with a decent joke to punctuate the sobriety, that entitlement spending eventually is going to break the government’s budget, and must be fixed. Watch the Democrats stand and wildly applaud their own obstruction on the subject, and even continue to applaud when the President chides them that the problem is not going to go away.

This is also for darkhorse, who simply does not believe that Democrats lie more frequently than Republicans. Al Gore ran his presidential campaign in 2000 partly on the looming crisis in entitlement spending, and Democrats went along; yet, by 2006, Democrats insisted it was not a crisis, and amounted to nothing but fear-mongering on the part of Republicans. They applauded here because their win helps them gain power; but their power came at the expense of chaining the government to a crippling debt that most sensible nations have already avoided. Lying to obtain political power, in a manner that one knows is detrimental to the interests of the country, is evil.

I’m holding onto this one against the day when, as is inevitable, the Social Security debt brings the government to its knees, and the Democrats attempt to claim that it’s entirely the fault of Republicans, just like they tried to shift their blame for Fannie Mae onto Republicans. It won’t solve the collapse of our currency — the Democrats have seen to that, it’s pretty much inevitable at this point — but it will make me feel better then, and maybe the angry mobs will lynch the real villains. This is not to be taken as condoning either lynching or angry mobs, mind you; but, like the collapse of currency, such events are more or less inevitable. The Democrats have seen to it. (Added after the fact: I don’t want to give the impression that I think Republicans are blameless in the story of irresponsible government spending; some are blameless, but most have gone along complacently with the rest. But the Democrats are a lot more to blame.)

The link came from Wolf Howling, but he got it from Gateway Pundit, whom I regard as one of the finer conservative bloggers.

05/04/2009 (8:51 am)

Weak-ARMing the Economy

The mortgage crisis is far from over. Study the following chart for a moment (click on the image for a slightly larger, clearer image):


I found this graphic on a leftward blog called Eschaton, where they’re touting “cramdown” legislation — legislation granting courts the power to alter the terms of mortgages in bankruptcy proceedings. The graphic shows that, beginning in the third quarter of 2009 (just a few months from now) and proceeding for the next three years, roughly $20 to $30 billion worth of adjustable-rate mortgages each quarter will be recast to higher payments, with the new payments averaging between 35% and 80% higher than the current payment. These changes will be according to the agreement the banks offered and the borrower signed.

Think about what would happen to you if your house payment jumped by 50%.

I remember being offered ARM loans while buying houses. The argument went that it permitted me to get into the house at a favorable rate, and that I could refinance down the road. If worst came to worst, someone would say, I could simply sell the house, and then at least I’d have had the benefit of living in a nice house for 3 years. That sounded like a nightmare to me — selling and moving in 3 years — and it seemed awfully likely to happen. I was never quite daft enough to take that risk just to save 1% on the initial rate. I always paid the slightly higher rate for a conventional, fixed-rate mortgage, and left the ARMs to the greedy idiots.

So, here it comes. For the next three years, millions of homeowners are going to suffer the re-adjustment of their ARMs and be faced with the worst of all possible worlds: a payment they can’t handle, on a house they can’t sell. Goodbye, nice home; hello, financial ruin. A large number of them will simply walk away from the house.

This, by the way, is another of the reasons why Treasury Secretary Paulson’s bailout plan last September was a bad idea. Attempting to prop up the bad loans, even if it works (and it doesn’t seem to be,) postpones the inevitable adjustment in housing prices back to realistic levels. Once the adjustment is over, it becomes much easier to buy and sell houses again. Then, homeowners stuck in a bad ARM can at least sell their houses, take their losses, and move on. The longer we extend the bubble (which is what we’re doing,) the more people have to abandon their homes.

So, the Democrats’ solution is going to be to change the way America has done business for the last 100 years, change it in favor of homeowners (they say.) The homeowners who were so incredibly stupid and greedy as to sign an ARM agreement can declare bankruptcy, and the bankruptcy judge will be able to rewrite the terms of the mortgage to something they’ll be able to pay.

The irony of this move is that the person who loses the most is the homeowner. By shielding individuals from the full consequences of their greediness, the courts enable greediness. “Enabling,” in this context, is a therapeutic term; it’s the term used when family members make excuses for the alcoholic in their family, making it possible for that person to continue their alcoholism without facing the full impact of what it costs. Enabling bad behavior makes it last longer. The best result when a lot of people suffer from their own bad choices is that a lot of people repent. The nation gets stronger this way. The result of many liberal schemes is to prevent people from growing and changing. This is how we’ve become a nation of adolescents. Cramdown legislation is an instance, a scheme to prevent people with character flaws from growing up.

Now, what about the banks?

Banks do not benefit from foreclosures. On the whole, they probably obtain about $.30 on the dollar when they have to foreclose a mortgage. Sometimes the houses remain on their books for years, and they can’t resell them. Usually the costs of resale eat them alive. They’d rather not foreclose if they don’t have to. So, making them eat the bad fruit of offering ARM loans will probably deter them from offering ARMs in the future. (ARMs were an innovation to soften the blow of high interest rates in the early 1980s. They had not been permitted before 1982; it would probably be good for everybody if they went away.)

However, the cost of foreclosure is a predictable cost most of the time. It’s a risk the lender takes whenever they make a loan, and they’ve already figured that risk into their pricing. Cramdown legislation adds to the risk of lending a risk that they’ve not figured — the risk that some court will come along and summarily change the rules on them. This is something they cannot predict. Their response to it will naturally be to raise the rates of conventional mortgages a few points, to adjust to the eventuality that the terms of some of the loans they make will be rewritten against their will, and to their detriment. They’ll also require stiffer down payments. The result will be higher barriers to home ownership and higher mortgage payments for everyone from now on.

“But stiffer terms are just what the doctor ordered,” you say. “Easier terms is what got us here in the first place.” Not exactly, no. Artificial, government-mandated easier terms is part of what got us here. And yes, allowing banks to apply sensible loan criteria again would be an improvement. But that’s not what we’re talking about here. What we’re talking about is another artificial risk being added on top of the existing risk, requiring the banks to tighten their criteria even further than they ought.

Bankruptcy courts have long been permitted to adjust the terms of credit card debt and signature loans. The law prohibits the courts from interfering in the terms of loans for which there exist hard assets as collateral. Consequently, the interest rates on credit card debt have always been higher than on mortgages and other collateralized loans; mortgages, traditionally, are cheaper because they’re less risky to the bank. Change the law to make mortgages more risky, and we should be prepared to pay rates for mortgages that are like the historic rates for credit cards. How does that sound? That’s not precisely correct, but you get the idea.

Ultimately, it’s a question of the rule of law. Businesses and individuals alike should be able to count on the law requiring that participants in business keep their word. So long as the borrower possesses the property, he has the means to satisfy his debt, and should be required to do so. Arbitrarily removing the rights of businesses by imposing artificial rights of borrowers, as in “every man has a right to own a home, even if he can’t pay for it,” creates a situation in which it’s uniformly unfavorable for businesses to build homes, or for banks to loan money for them. Whatever’s unfavorable, they’ll stop doing. Democrats love to feel like they’re Robin Hood, robbing from the rich and giving to the poor, but a system that uniformly punishes lenders for lending will drive lenders out, and the result will be fewer homes for everybody. Treat businesses like Bad Guys, and there will be fewer businesses.

wrybobThe history of banking and mortgages in the US is a history of bumps and distortions caused by unmitigated government tinkering. We never seem to learn that whatever action the government takes produces effects nobody foresaw. The simple fact is that no human mind can comprehend an entire, complex system, and therefore no attempt to regulate a complex system will produce predictable results. Humans can formulate laws that proscribe criminal behavior — e.g., participants are not permitted to lie, cheat, or deliberately defraud, and must clearly disclose all terms — but should stay away from trying to fine-tune complex systems.

Be that as it may, this part of the US mortgage crisis is going to continue for at least another 3 years, and Congress is likely to pass cramdown legislation. We will all suffer the further indignity of expensive mortgages and reduced home construction into the foreseeable future. This will not be Socialist indignity, just Dumb Democrat indignity. But it will make the US poorer, and less adult.

04/07/2009 (8:01 am)

Global Governance Germinates at G20

Last Thursday, a communique from the G20 summit announced the creation of the Financial Stability Board, a quasi-regulatory organization tasked with monitoring and coordinating “systemically important financial institutions” in all member nations. The member nations are to include all of the G20 nations.

Beginning yesterday, Dick Morris has been trumpeting around the country that this announcement “repealed the Declaration of Independence.” While the announcement of that specific repeal is actually premature — Morris cannot always be taken seriously — he’s correct about the potential impact, and we had all better pay attention. I’ve embedded his video below.

From the Financial Times last Thursday:

On Thursday the G20 issued a communiqué that renamed the FSF (“Financial Stability Forum”) the “Financial Stability Board”, with an elevated mandate to monitor global financial stability and promote medium-term reform, alongside the International Monetary Fund. The G20 also confirmed an earlier announcement that the FSB would expand its membership to include representatives from all the G20 nations for the first time – in effect turning the group into the nearest thing the world has to a prototype of a an overarching global financial regulatory group.

For the moment, FSF officials deny they plan to act like a world regulator. Instead, they insist that Thursday’s announcement merely crystallises a wider shift that has been stealthily, and informally, under way for several months.

When the FSF was set up in the late 1990s, its main role was to allow western financial leaders to discuss global macroeconomic iss-ues. Then it moved into issues of banking regulation and when the credit crisis erupted in the summer of 2007, the FSF was asked to craft recommendations for financial reforms.

One set of reforms duly emerged in the summer of 2008, and the second set was published on Thursday, covering issues such as banking pay and bank capital rules.

However – and crucially – in recent months, the FSF has also quietly assumed a second role, co-ordinating the crisis measures emerging from different nations.

Where Morris has this right is that if (note the word, “if”) the FSB is granted regulatory teeth by each of the member nations, then we will have handed over regulatory control of US banking to a Euro-centric governing board. Where he has it wrong is that the board does not have those teeth — yet. The G20 does not have the authority to commit the US to a new regulatory regime; only the US Senate can do that. Furthermore, previous attempts by the G20 to secure coordination of member nations have fallen flat; a Bloomberg article from last Thursday notes that after the G20 announced its rejection of protectionism at its November 2008 summit, member nations enacted no fewer than 47 new trade restrictions. We can’t assume that the announcement of the FSB will actually produce anything tangible.

So, no, Dick, we haven’t repealed the Declaration of Independence just yet. But the potential is there.

And make no mistake, global regulation is what they intend. UK Prime Minister Gordon Brown has already called together the heads of British banks to make sure they implement the guidelines established by the FSB at the G20 summit meeting. Watch for Treasury Secretary Geithner to attempt something similar in the coming weeks.

As much as five years ago, I was predicting that the next Democrat to take the White House, whoever that might be, would compromise US sovereignty to some sort of international governance. I expected it would be led by carbon allocation to address concerns about climate change, but also considered there might be moves surrendering our sovereignty over pharmaceutical pricing or surrendering our courts to the World Court over some supposed affront committed by our military.

I was wrong about the touchstone issue, and wrong about which international body, but correct about the internationalist intent of the Democrats. The first real effort to secure US cooperation with international governance seems to be occurring over banking, thanks to an international banking crisis. Don’t surprised, though, if those other issues follow. In fact, Spain, a bastion of international socialism, has begun criminal proceedings against six US officials from the Bush administration over “torture.”

I do agree with Dick Morris about this: our reaction should be immediate, loud, and very, very negative. Cooperation is fine, but international regulation is not. National sovereignty is worth defending. The issue is the protection of human liberty; if all nations exist under a uniform government, and that government turns tyrannical, where do we go to find safety? And in fact, the expressions of internationalism have all come from international socialists, and human liberty is absolutely the last thing in the world they want to protect.

We need to keep our eyes open for stealthy attempts by the Obama administration, which has already demonstrated its taste for the stealthy removal of liberties, to introduce approval of this measure in the US Senate under cover of some other measure. We also need to stay alert to spot coercive attempts by the executive branch, which has already demonstrated its taste for coercion and for ignoring the role of Congress, to force US financial institutions to obey FSB regulations even without approval by the Senate. We’re still independent for the time being, but it becomes clearer that if we follow President Obama’s lead, we won’t be for long.

Here’s Dick Morris’ video. It’s cheesy, and the sound quality stinks, but it’s worth listening to the message. 3½ minutes.

Hat tip to Gateway Pundit for being first to the punch on this story. Also, you might want to pay a visit to The Real Barack Obama, which has pulled together a very impressive set of articles discussing the move.

04/03/2009 (8:37 pm)

Anti-Capitalist Arrogance in the White House


This almost requires no comment whatsoever. Listen to the arrogance:

The bankers struggled to make themselves clear to the president of the United States.

Arrayed around a long mahogany table in the White House state dining room last week, the CEOs of the most powerful financial institutions in the world offered several explanations for paying high salaries to their employees — and, by extension, to themselves.

“These are complicated companies,” one CEO said. Offered another: “We’re competing for talent on an international market.”

But President Barack Obama wasn’t in a mood to hear them out. He stopped the conversation and offered a blunt reminder of the public’s reaction to such explanations. “Be careful how you make those statements, gentlemen. The public isn’t buying that.”

“My administration,” the president added, “is the only thing between you and the pitchforks.”

This report came from inside the meeting; one of the participants spoke with Eamon Javers of Politico, and a few others confirmed.

He’s not kidding about the pitchforks, by the way. We’re seeing serious threats of violence against capitalists in London (see also here and here,) and we heard about threats being mailed to AIG executives as well. This is the Krystalnacht moment for the socialists; are show trials next?

The accounts demonstrate that despite the public comments on both sides that the meeting was cordial, the tone in the room was in fact one of mutual wariness. The titans of finance — men used to being the most powerful man in almost any room — sized up a new president who made clear in ways big and small that he expected them to change their ways.

There were signs from the outset that this was a business event, not a social gathering. At each place around the table sat a single glass of water. No ice. For those who finished their glass, no refills were offered. There was no group photograph taken of the CEOs with the president, which typically happens at ceremonial White House gatherings but not at serious strategy sessions.

“The only way they could have sent a more Spartan message is if they had served bread along with the water,” says a person who attended the meeting. “The signal from Obama’s body language and demeanor was, ‘I’m the president, and you’re not.’”

So, here’s what we’ve got:

By attacking executive compensation, the government crippled the banks’ ability to attract talent.

When they tried to explain this to the President, what they got was a threat and belittling signals; anything but assistance in attracting talent to their banks.

bankvandalThe administration, the media, and the Democratic party have sold the American people on the notion that the bankers’ “mistakes” are responsible for the current economic crisis. This is practically slander; certainly they made mistakes — who doesn’t? — but the crisis is the responsibility of a large number of seemingly unrelated measures, involving community organizers, Congress, the Fed, Fannie Mae, three Presidents, mortgage salesmen, land speculators, fraudulent home buyers, securities traders, and yes, some bankers — that all came together at once to cause a problem. Hardly any of this was caused by “greedy bankers,” ill-informed opinions to the contrary; such phrases come from partisans who couldn’t explain a single one of those supposed “mistakes” if their mothers’ lives depended on it. But the socialists need a scapegoat, and they genuinely believe that greedy bankers are to blame, so… pitchforks. It’s the American way, right?

What we’re going to get is a lesson in mistakes. Since the banks will not be able to attract the sort of talent they need to run their business, they’re going to get the sorts of managers who will make the supposed “mistakes” of the current lot look like untarnished brilliance. We’re going to see how quickly a passel of inept bankers can tie a banking system in knots, and perhaps come to appreciate the skill and wisdom of these men we’re currently busy demonizing.

All this from the President of the United States, a man who never outgrew the sophomoric socialism that infects so many young people while they’re still callow. He actually thinks he’s greater and smarter than these bankers, not to mention their moral superior.

We are SO screwed…

03/23/2009 (5:01 pm)

Recover the US' Reputation, Demolish the World Economy

A number of the leftist memes concerning President Bush irked me, but the one that has seemed the most ironic during the few, brief months of the Obama administration has been the one about how the US’ reputation in the world has suffered because of Bush. Today it seems ironic because so far, the strategy of the Obama administration for improving the US’ reputation has been to use the dollar to blow up the world’s economy. Somehow, I don’t think that’s going to do the trick.

In response to the bursting of the housing bubble, the government — beginning under President Bush, but continuing unchanged under President Obama — first sent out checks to taxpayers, then pumped trillions of dollars into the money supply, then allocated hundreds of billions of dollars to shaky financial companies, then ordered almost a trillion dollars in government spending, and has only just within the last week pumped another trillion dollars into the money supply. The aim in all of this has been, according to the various instigators of all this cash-flinging, to get credit markets moving again. They’re still not moving, and now all that money-printing and government spending has the dollar in serious trouble.

Every dollar the government spends has to come from someplace. If the government cannot raise the money from tax revenues, then they have to borrow it by selling US Treasury Notes (T-bills of various denominations.) Treasury notes are bought by large investment houses, banks, foreign governments, you name it. Until recently, there has been plenty of demand for US debt, because, with the world economy suffering from the bursting of the housing bubble as much as the US is suffering, investors are eager to put their money into a safe place. Until now, the dollar has been considered the safest place on the planet for large investments. This is quickly changing.

First, with the Fed essentially printing money as fast as they can run the presses, investors in US debt know that they will be paid back in inflated dollars. In effect, what they get back from their investment in dollars will be less, in real value, than what they invested. Second, creditors are beginning to wonder if the US government will ever be able to pay back the debt that it is accumulating. With those two issues looming large in investors’ minds, some of them are preparing to dump the dollar. We saw the first signs of this just a few days ago, when the UN declared that they were considering moving away from the dollar toward some more stable medium of exchange.

It’s hard to think of the Obama administration actually improving the US’ reputation in foreign countries when we hear comments like this from finance geeks north of our borders (emphasis mine):

Helicopter Ben Bernanke’s Federal Reserve is dropping trillions of fresh paper dollars on the world economy, the President of the United States is cracking jokes on late night comedy shows, his energy minister is threatening a trade war over carbon emissions, his treasury secretary is dithering over a banking reform program amid rising concerns over his competence and a monumentally dysfunctional U.S. Congress is launching another public jihad against corporations and bankers.

As an aghast world — from China to Chicago and Chihuahua — watches, the circus-like U.S. political system seems to be declining into near chaos. Through it all, stock and financial markets are paralyzed. The more the policy regime does, the worse the outlook gets. The multi-ringed spectacle raises a disturbing question in many minds: Is this the end of America?

Of course, what people say about the chaos of American politics is not the true measure of how they feel (which is one point leftists missed while spewing their Bush-deranged assessments of how the US’ reputation fared during the Bush years.) The truest measure is how they treat the dollar — and the dollar is not doing so very well today. Also from the Canadian Financial Post:

Many investors are clearly starting to question the ability of the Treasury to raise the $2.5- to $3-trillion it needs to finance this year’s deficit and the various bailouts…

…the Fed announcement follows closely last Monday’s very disturbing report from the U.S. Treasury. It disclosed that in January international sales and purchases of U.S. assets showed a net outflow of $148.9-billion for the month. This is in contrast to net inflows of $196-billion at the height of the credit crisis last October.

While China has not (yet) stopped buying $12-billion in Treasuries, 95% of its recent purchases have been in short-term T-bills. Lower interest rates on the T-Bonds will not encourage China or any other foreign investors to increase their long-term commitments to Treasuries and agency debt.

Take that slowly. What that comment about “inflows” versus “outflows” means is that the overseas market for US Treasury bills is drying up. The Treasury is always turning over its debt: as T-bills of various lengths (3-month, 6-month, 1 year, etc.) come due, the government pays them off and then issues new T-bills to new buyers. A net outflow of almost $200 billion means that the government was not able to replace all the debt that came due in January from foreign sources.

The next comment, about China buying short-term T-bills, makes it even worse. What that means is that instead of planning for holding T-bills for the long haul, they’re preparing themselves to dump US debt as an investment. If the US government is paying attention, it will probably need to raise the yield on Treasury Bills pretty soon… which means higher domestic interest rates and serious inflation.

Asia Times echoes the Canadians’ fears about China buying short-term Treasuries…

China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of Treasuries and other financial assets.

…and explains how the current wave of interest in US Treasury bills constitutes a bubble of its own, that will also eventually burst (emphasis mine):

The truth is that the potential for a global dollar panic is becoming greatly heightened, in spite of (and in part, actually because of) the dollar’s recent significant gains as a refuge for investors, the bulk of whom continue to be distinctly risk-averse. Ironically, this massive piling onto the dollar opens yawning new vulnerabilities and risks that either did not exist before, or were at most very minimal.

For example, a number of experts warn that US Treasuries are increasingly taking on the characteristics of a bubble… Much discussion and debate is currently underway as to whether the US will find sufficient global demand for the more than $2 trillion in new Treasuries coming online this fiscal year alone. But …serious risks for the dollar also arise if global demand for Treasuries is sustained. Why? Because that would only thrust the present Treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the Treasuries bubble.

By a “bubble,” they mean the asset is being treated as though it has more value than it actually has. This is what caused the crisis we’re in: investors treated mortgages as being worth a lot more than they actually were. sickbobWhen investors recognized the genuine value of the mortgages, anybody who had their money in mortgages lost their socks. This is likely to happen with Treasury bills, only it will affect a much larger number of investors in a much wider number of places around the world.

The irony about the US’ reputation in the world is, of course, that ruining the world economy by quadrupling the national deficit (which is what creates the need to sell all those T-bills) and by printing money as fast as the presses can print it (which is what “the Fed expanded the money supply” means) is hardly the way for the US to gain back whatever face it allegedly lost during the Bush years. I suspect that in the aftermath of the current crisis, which is very likely to get much worse, most foreigners would gladly go back to the days when all the US provided for them to complain about was how uncooperative that Cowboy Bush was over Kyoto and UN initiatives.

03/20/2009 (12:39 pm)

First They Came for AIG…

The text of the US House of Representatives’ reaction to the AIG Wage Rage, HR 1586, is available to the public, and it’s frightening on several levels.

Launched because of envy masquerading as a quest for justice, the law was supposed to confiscate most of the bonuses paid to AIG employees out of funds supplied by Congress to rescue the failing insurer. However, the actual wording of the law gives it far wider applicability. The law targets employees of any company that has received more than $5 billion from the TARP fund, mostly financial giants (GMAC, Wells Fargo, JP Morgan, Chase, etc. See here.) It establishes a 90% tax rate for “TARP bonuses.”

Is a bonus just a bonus? No; a TARP bonus, according to this law, includes any adjusted gross income for the family exceeding $250,000 for a married employee, or $125,000 for a single employee.

So basically, if a person works for one of the big US banks or brokerage firms, the gross income for their family has just been capped at $250,000.

Now, I’m not saying that’s it’s difficult to live on $250,000 a year. However, since the confiscation occurs only among very large brokerage houses, and since the skills used by the employees of such firms are useful elsewhere, what we’re going to see in very short order is an exodus of talent from large banks and brokerage firms. The best people will leave and go to work elsewhere, where they can make what the market is willing to pay for their talent. The shortage of labor in the big firms that will be created will be filled with the lesser talent that cannot command higher salaries, or workers that have been hoping for promotion into more responsible positions but have been unable to get there. Thus smaller firms will acquire better talent, and larger firms will be staffed by lesser talent.

In short, the Congress has just consigned large, American financial firms to a slow and painful death by incompetence. In doing so, the Congress has guaranteed the decline of the American financial industry and the rise of large foreign financial entities. Thus, the industry that made New York City the hub of the world is being driven offshore… by Congress.

Knowing the impact, many firms from here on will choose not to participate in TARP funds. This will, in effect, cripple any impact that the federal stimulus might have had, either positive or negative. Firms that refuse to participate in TARP will simply muddle through the economic downturn without capital. This is an instance where the unintended consequences of an overreaching Congressional acts might be positive; by frightening companies away from TARP funds, the negative effect of the bailouts might be reduced.

Congress has been warned of the impact. However, true to the character of American liberals, they are more concerned with displaying the appearance of doing something moral to quell inequality than they are with preserving prosperity, genuine virtue, or anything that works. They will persist in their policy even if it demolishes American business, because, after all, there’s nothing more important for the American people than that liberals can say they are brave and moral.

Historically, demagogues and tyrants begin their tyranny by encouraging outrage against a hated group, and creating precedent in their treatment of that group that later gets applied more widely. Do not be surprised if the US government moves to cap income generally; this is just one aspect of the income redistribution that candidate Obama accidentally let slip in Ohio, and which he later denied. He was lying; anybody familiar with the candidate (and not addled by idol worship) knew it. And the more the government attempts to enforce “justice” (which is actually not justice, but a faux virtue that has more to do with hubris than it has to do with anything decent,) the more talent will leave our shores and enrich foreign nations.

We elected them, and now they’re destroying us. Hope you enjoy the rule of Democrats, America.

Oddly enough, the blogger that’s gotten this right is Josh Marshall at TPM. I don’t recall agreeing with him before, even a little. Have a look.

03/19/2009 (2:23 pm)

The AIG Wage Rage Smoke Screen

aigtokyosmallThe contrast between the Obama and Bush administrations could not be clearer. The Bush administration, for all the noise about “lies,” announced its intentions plainly and defended them, sometimes ineptly. The Obama administration seems habitually, if 2 months of a pattern can be called a “habit,” to attempt to do all business behind a cloud of smoke, a cloud created by attacking American citizens. It’s an ugly pattern, and ominous.

The smoke screen this time is manufactured rage over AIG executives receiving contractually-demanded retention bonuses after having received federal bailout funds. And while some of the rage properly has been spilling over onto Treasury Secretary Timothy Geithner, who knew all about the bonuses but said nothing, and Sen. Chris Dodd (D, CT,) who slipped loopholes into bailout legislation that permitted the bonuses to be paid, the entire matter is still nothing but smoke to obscure what ought to be the real outrage: why did AIG receive almost $200 billion in federal funds in the first place?

The fact that $200 billion sounds like a small figure defines the times, doesn’t it? It’s an enormous sum (about 1½ times the annual budget requested to run the entire US Army in 2007). It’s so large that we actually filter it out. Americans can get outraged about a buck-fifty in ATM charges, and because outrage has its limits, the same energy undergirds outrage against a few hundred million in executive bonuses and a few hundred billion in federal subsidies. Outrage is outrage, and numbers are just numbers. But there really is a reason why we should be a thousand times more outraged by the waste of a thousand times more money — which is the proportion between the chump change being paid in bonuses (required by contract) and the sum being lent to AIG. And in fact, as I’ll argue later, we should not be outraged by bonuses at all.

AIG received its first round of government money in September 2008. AIG had been “insuring” derivatives trades by banks around the world against precisely what has happened — a loss of asset value underlying the derivatives, in this case the deflation of the housing bubble. Since the division of AIG providing the “insurance” was actually structured as a bank rather than an insurance company (hence the quote marks around the words with the root “to insure,”) AIG was forced by mark-to-market accounting rules to revalue its assets downward to reflect the falling value of housing, and further forced to obtain a huge amount of additional capital to meet reserve requirements. This occurred at the same time that AIG’s financial rating was downgraded by leading financial rating institutions, with the result that it was more difficult and expensive for AIG to obtain the additional funding. About to fold, AIG cried out to the Treasury Dept for help. They received an $85 billion loan from the Treasury, in exchange for 80% ownership by the government (without approval by the stockholders, I might add.) On Nov 10, the government raised the loan to $150 billion. On March 2, 2009, they added another $30 billion.

And the situation does not appear to be improving. Investors are suggesting that bankruptcy would serve them better, and certainly that would serve the American taxpayer better. But Goldman Sachs might have suffered, so here we are.

Even during the Bush administration, there was talk of a possible cover-up of favoritism within the Treasury Department to protect Goldman Sachs. Goldman was the source of Treasury Secretary Paulson, the father of the Grandmother of All Bailouts. There was a rumor, later debunked, that the President of Goldman Sachs, Lloyd Blankfein, was the only private citizen present in a special meeting at Treasury to discuss aid to AIG. Though debunked, it remains nonetheless true that Goldman Sachs was the largest beneficiary of AIG’s bailout. And favoritism might explain why the Treasury allowed Lehman Brothers to founder and sink beneath the waves, but sailed boldly to the rescue of AIG just a few days later.

Part of the outrage should be directed at the fact that enormous blocks of US funds, to be paid back by future Americans, have gone directly to large, foreign banks. Now, this part is not hidden or unexpected. The surface reason for rescuing AIG was that the failure of the large insurer would send ripples through the international banking community; for a lot of people, that phrase rolled off their tongues without them having considered precisely what it meant. What it meant was that international banks with holdings in mortgage-backed securities would not be compensated by AIG for the loss of the value of those securities, and would suffer, possibly fatally. So, when Treasury handed AIG a series of checks worth $173 billion, AIG proceeded to turn around and write checks to Goldman Sachs ($12.9 billion,) Societe Generale ($11.9 billion,) Deutsche Bank ($11.8 billion,) Barclays PLC ($8.5 billion,) and quite a few others. The US economy is shrinking, and lots of Americans are scrounging, but big, foreign banks are safe and sound. Your tax dollars at work.

I have nothing against foreign banks, and the world should be grateful that these banks are sound. However, I don’t imagine Congress would have approved foreign aid packages in those amounts to those recipients, nor do I think the people Congress is representing would have approved. It is not a proper use of US funds. AIG should have been permitted to fail.

madbobMore to the point, I don’t think the Obama administration is interested in directing outrage against foreign banks. Surely they could easily have done so, but they’ve been quiet about it. Quite the contrary; the Obama administration hates American exceptionalism, and is most likely eager in the extreme to hide the fact that the US government is paying to keep Deutsche Bank afloat.

The Obama administration is clearly interested, though, in directing outrage against American corporations. Why? Because rage against American corporations feeds the next steps in the Obama administration’s plans.

American liberals — Democrats, progressives, and some independents — deny that they are Marxists. It’s a fact that traditional American liberalism focuses on individual liberties, the sorts of liberties that have become the watchword of American conservatives like me (the roles have shifted.) However, American liberals have been deeply influenced by Marxism, much more than they are aware. It shows in a number of policies, but most directly it shows in their hatred of American business. The outcry against “big corporations” is nothing more or less than the Marxist denunciation of the bourgeoisie, translated onto the American landscape.

And in Marxist-like fashion, it’s remarkably easy to amplify this outcry in the public eye during a period when people are afraid for their jobs, simply by fanning into flame one of the basest of human evils — envy. It’s a stalwart soul that, while struggling daily with bills for basic things like heat and rent, let alone facing the possibility of layoffs, can resist envy when watching another man receive a single paycheck larger than the sum of his entire life’s paychecks. The best of us deflect that reaction only with difficulty. Couple that reaction with the fact that we resent the company having received a bailout in the first place, and with the fact that we perceive the company as having failed but not paid for its failure, and you have a demagogue’s dream. This is why the House is holding hearings on the bonuses, and why it’s calling for draconian taxes on them, and contemplating full takeovers. It’s why Rep. Barney Frank, himself one of the individuals most directly responsible for the collapse of the US economy, is calling for the AIG executives to be named publicly; imagine how long this issue can be stretched out over such a demand!

It’s also, plausibly, why Senator Dodd slipped the wording protecting bonuses into the bailout legislation in the first place, and why the administration pretended surprise at the announcement of it last weekend. This was a planned diversion, an orchestrated alarm designed to initiate the next stage in the administration’s rapid-fire assault on American capitalism.

And all of it serves to obscure the fact that the Bush administration, followed by the Obama administration, is funding major foreign banks with tax dollars to be collected from the next two generations of American taxpayers.

There is not a sound reason on earth why the compensation of executives should ever be the government’s business, nor any of ours, unless we are stockholders of the corporation. Compensation of executives is determined by a company’s Board of Directors, the individuals responsible for protecting the interests of the company’s stockholders. The salaries of executives are determined by a market where talent gets to negotiate its own worth. If an executive makes a huge sum, it’s because at some point in time the Board of Directors of the company employing that executive felt it was worth the expenditure of that sum of money to hire the talent necessary to run the company. The stockholders are the ones injured if the Chief Executive Officer of a corporation performs poorly; they’re the ones who should care the most, as they own the company. Consequently, the stockholders, represented by the Board of Directors, are the only ones who should be concerned if the CEO makes too much money. It’s their money, you see. And if any of us becomes jealous of the money the executive earns, that’s just too bad; if we want to earn that sort of money, we should work our way up the executive ladder to the place that our skill can command that sort of paycheck. The fact that most of us would never make it that high explains why their talent just might be worth that sort of money.

Even the provision of a large loan from the federal government does not make their compensation our business. The loan was not made in order to obtain federal control of the company; and to the extent that it was, the federal government stole the value of the company from the true stockholders, who were not consulted in the deal. If we are outraged about how our money is being spent, we should insist that the government provide no more such bailouts, not that executives not get paid what they are worth on the open market.

But whatever your feeling about executive compensation, the real enemy in this affair is the totalitarian impulse that deliberately diverts our attention from an encroaching government domination by encouraging hate toward other Americans. The White House has deliberately targeted radio show hosts, Republican legislators, and now American heads of American companies, as the targets for our rage, all to get us to accept increasing government domination of the US economy. Expect the pattern of character assassination to continue; it’s what they do best.

For further reading on the subject, consider spending a few minutes with Newt Gingrich’s explanation of how Treasury Secretary Timothy Geithner actually architected the bailout as President of New York’s Federal Reserve Bank. Whenever we pierce the smokescreen even a little, we’re told that the Obama administration inherited the mess; in Geithner’s case, it is not true. Even apart from Geithner, though, the Obama administration has not objected to the crisis, but rather reveled in it, and is determined not to let it go to waste.

03/17/2009 (1:06 pm)

Apparently, Then, We Do Care

No sooner do I post about President Obama believing incorrectly that people don’t care then I find recent support for the notion that they do care.

From CBS News, in a live phone poll of 896 adults taken from 3/12 through 3/15, we have these factoids (actual poll results here):

Do you approve or disapprove of the federal government providing money to banks and other financial institutions to try to help fix the country’s economic problems?

37% Approve
53% Disapprove

Which best describes your feelings about Barack Obama’s policies toward the nation’s banks and financial institutions – mostly relieved that those institutions might start lending to home buyers and businesses again, or mostly resentful that the policies could benefit irresponsible managers and bankers?

40% Mostly relieved
48% Mostly resentful

Do you think providing government money to banks and other financial institutions is
necessary to get the economy out of recession, or would the economy probably improve
without doing that?

41% Necessary
48% Economy will improve without it


The only problem I see here is that the people blame the banks for their own problems by a margin of 75% to 17%. Too few people are aware of how powerfully the federal government first demanded, then incented the banks to make loans to borrowers with questionable credit. However, people are starting to think the economy will recover without the massive bailouts, and that’s good news from two standpoints; first, that confidence is returning generally, and second, that people recognize the government is not essential here. Confidence is returning because virtually nothing has been done aside from talk at this point, but the world has not ended. The longer we go without real calamity, the more likely the markets are to return to normal.

President Obama may still be enjoying honeymoonish approval, but when his policies run afoul of American good sense, people begin to say so. The honeymoon will be over soon enough. President Obama had better start paying attention to the voices of the people.

Hat tip to one of my favorites, Jennifer Rubin at Commentary.

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