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Posts Tagged ‘Bailout’

Spreading the Wealth

Obama may be looking at a big giveaway on the eve of this fall’s elections:  mass reduction of outstanding principal debt on upside down homes. While I am averse by nature to big government interventions, this one has more to recommend than the earlier bank bailouts.  After all, homeowners are probably, on the whole, net taxpayers.  Further, mass indebtedness is encouraging walkaways and bankruptcies among people that would not, outside of this housing bubble, have done so.

But the problem is that this program treats the symptom and creates the roots of new, additional bubbles.  It would force the government to incur additional federal debt to keep Fannie and Freddie on the gravy train.  Like his health plan and his stimulus packages, itt puts off to tomorrow the need for deleveraging, which will take a decade or more.  Finally, with massive unfunded commitments to social security and medicare, this measure would simply accelerate the day of a dollar/federal government default.  This will be the day the music stops.  Even with the ability to turn on the printing press, this kind of moving money in circles and irresponsible borrowing can’t go on forever.

Obama’s cynicism knows no bounds, I must conclude.  This giveaway serves no real social end other than transferring wealth from the public at large to a small number of homeowners (and voters), some irresponsible, others less so.  The inequities would be massive:  those who have struggled heroically to keep up with obligations, those who put more money down and avoided second and third mortgages, less wealthy renters who have watched the bubble come and go, and those whose homes are paid off would all be paying to a class made up of both unlucky and improvident borrowers, some of whom bought homes they could clearly not afford with almost no money down at the height of the bubble.

Of course, it would be hypocritical to embrace the original bank bailout (which I opposed) while being against this.  And as between the two, I’d prefer a bailout that stimulates and assists the average American versus international bankers.  But we can’t be giving away a trillion dollars every other year without going completely broke as a country.  And the worst aspect of all these bailouts is that everyone–including me–is becoming more and more cynical about the old fashioned rules of providence, moderation, and the identity of interests of business and the country at large.  It’s becoming a predatory war of all against all, and the federal government’s largesse is the battlefield.

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Wall Street will always be greedy and profit-minded. That is a given.  But the extent of the rot is really alarming.  The failure of all forms of regulation–internal, public, and market-based, such as bond-rating agencies–will leave a cloud over capital markets for some time.

The fearlessness by participants suggests that non-market considerations–friendships, loyalty, ethnic and religious ties, habit, absent moral compasses, and incompetence by regulators–have at least as much to do with where and how money is spent as ordinary considerations of profit and loss.  Of course, this is not always bad, as Francis Fukuyama pointed out in his research on the importance of trust in risky business transactions. But American business, particularly at the top level, has long been tempered by a broader notion of fair play:  rejection of nepotism and bribery, standardized procedures, meritocracy, some respect for “good birth,” the habits of good education and conscience, and a strong culture of fiduciary duties by officers to shareholders and other stakeholders.

This culture has come undone on Wall Street in particular, where cleverness and deception have displaced wisdom and hard work as the hallmark values.  The real value of investment instruments are increasingly hidden from outsiders through dishonest and opaque instruments, whether “barges” ten years ago or asset-backed-securities today.  Consider the headlines:  A $50B (!) ponzi scheme by Bernard Madoff. A lawyer hocking $380M in fake promissory notes. The scale, brazenness, and long-persistence of these frauds suggests that something is deeply wrong on Wall Street that no regulator alone can fix.  Something must happen to the culture, which likely depends on banning a great many people from any kind of dealings in complex financial matters, revising the famous bonus structure of Wall Street firms, a revolt by shareholders and commercial banks, and sending a great many people to jail for a very long time.

The banker of old was a staid, somewhat humorless, but universally respected symbol of prudence and rectitude.  He made a good living, but his living depended on the survival of the institution with which he was affiliated.  The Wall Street impresario of today is a 30 year old castle collector who went to Ivy League schools and learned how to do regression analysis and also that “God is dead.”  He’ll switch jobs 3-4 times in a decade, and his entire compensation structure is directly proportional to the risks he takes with the money of others.  He represents an alien value system that has taken root on Wall Street.  It is un-American, untied to the broader moral traditions of western civilization, and we are witnessing its self-destruction.  The return of that earlier ethic of sturdy, sober, WASP Americana–an ethic that all social climbers, whether immigrant or “low born,” were expected to follow–is part of the solution to what’s wrong with Wall Street, which for too long has taken the Michael Douglas film as a “how to.”

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Bush was never a real believer in Free Markets. He instead believed in preserving the power and privilege of people like him. He sold it as a new kind of middle way, so-called “compassionate conservatism.”

Bush did not work hard to get where he was, instead inheriting his name, his network, and most of his money from his family. My experience with these “fortunate sons” is that they have a certain blindness about their own and others’ economic fortunes. Not having attained their success through their own efforts, they either feel guilty about it and indulge in various guilt-driven flirtations with leftism, or, alternately, don’t care about the structures that allowed their enterprising ancestors to attain wealth, aiming instead to preserve what they have at the expense of the economy as a whole.  Consider Bush’s perception that a woman who needed three jobs to support herself and her family was “uniquely American” rather than a tragic consequence of a low wage, screwed up economy.

Bush has been willing to sell out American workers and manufacturers out for many years to China and Mexico in the name of a cockeyed notion of fairness.  Now, worried about his legacy, he’s willing to kick the auto manufacturing can down the road by giving away TARP money to the Big 3 automakers.  There is no rhyme or reason to it, and his selective involvement in the economy is an invitation to chaos and politically chosen winners and losers.  Instead of setting the rules of the road, under Bush, the government has chosen very distinct winners and losers in the economy.

Consider Bush’s numerous deviations from free market principles and basic fair play:

  • The giveaway to MBNA and other credit card companies in the ex post facto bankruptcy reforms of 2005;
  • The giveaway to the pharmaceutical industry in the form of the prescription drug Medicare benefit of 2006;
  • The rescue of Bear Sterns earlier this year coupled with the rejection of a Lehman Brothers bailout;
  • The $190B farm subsidy bill of 2002;
  • The cheap-money, high deficit imposition of various costs on future generations in order to create the present day illusion of prosperity.

Bush has repeatedly put a particular social class–corporate America, its multinational managerial elite, and the wealthy in general–above the good of the country as a whole.  Unlike Reagan and the long traditions of the Republican party, Bush has shown indifference to American workers and businesses most threatened by globalization. Obviously the Big 3 have problems largely of their own making, caused not least by the short-sighted greediness of their unions.  But they did not create the last decade’s unbalanced trade with China, our overly leveraged and under-regulated financial sector,  the slow money-suck of constant inflation, nor the immigration-driven wage gap with the rest of the “blue collar” economy.  They should not be bailed out now, not least because they have a tool in bankruptcy to reform themselves.  But the trade and monetary conditions of the last 10-20 years should never have come to pass.  Now terrible decisions are being made under crisis conditions by an ideologically unmoored failure.

Unfortunately, Obama and the Democrats promise more of the same whether in the form of spending on make-work infrastructure programs, appointing an “auto czar,” or “investing” in new technologies.  Their policies, an exagerrated version of Bush’s with even less regard for the national interest, will perpetuate the legacy of cronyism and failure with slightly different winners and losers, i.e., giveaways to minorities, the unproductive, and politically correct Third World supplicants.  Whenever the government gets involved in these matters and insulates participants in the market from the usual requirements of profit, loss, and competition, then political considerations come into play, just as they do in a smaller way in the realm of government contracts, such as the practice of affirmative action set asides and other forms of patronage.

Bush did not embrace free markets tempered by some consideration of the necessity of a strong, vibrant, and diversified national economy.  Unfortunately, his term went down in the recent history books as “extreme conservatism” rather than the nonideological jumble that it was, the reflection of a man with a peculiar past and a worldview formed by lifelong associations with preservation-minded elites in the world’s most corrupt nations.

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I thought Mitt Romney’s op-ed opposing the Detroit bailout had the right combination of free market instincts, industry knowledge, patriotic compassion, and credibility. It reminded me of why I voted for him.  I say that as someone who recognizes the unfairness of bailing out Wall Street while letting this strategically important industry suffer.  But there’s no reason to throw good money after bad.  The Unions have screwed themselves, management has done little more than make excuses, and the only way to get it right is a “cut to the bone” slashing of workers, debt, and other costs in a Chapter 11 proceeding.  I don’t buy the criticism that Chapter 11 is the death of GM or Ford, not least b/c the actual products are decent enough and warranties can always be exempted from the stay, something that occurs routinely in manufacturers’ bankruptcies.  But without changing their cost structure, all these companies are dead, to our collective detriment as their well-paid workers do not have skill sets that can be easily transferred, and there are a lot of reasons America should be making its own cars.

This bearish report by Gerald Celente predicting tax riots and mass homelessness rivals my own bearishness and, sadly enough, comes from a guy that has been right on everything from the Panic of 2008 to the Asian Financial Crisis of 1997.

This analysis of the ebb and flow of “idealism” in American politics was interesting. Some of my favorite homeboys like Burke and Oakeshott make an appearance.  I’m glad the author noted that Obama is at best a pragmatist but, more likely, a purveyor of washed up 60s-era Welfare-statism.  One thing I wish Obama and his supporters would remember is that deficit spending is not wealth-creating, the government rarely “invests” right, and that all this money for bailouts to failed sectors and infrastructure and healthcare must be siphoned out of the healthy parts of the economy, which risk suffocation under the burden of “spreading the wealth around.”

The David Brooks thing on the “formerly middle class” is depressing, but worth absorbing.   I’ve met more such people (or people on the brink) in the last 12 months than I have in my entire life previously.

On a related note, I perused gunbroker.com recently. It’s the ebay of gun buying.  Colt 6920s are now going for $1700.  CMMG, STAG, and other generic M4s are north of $1000.  Thirty round PMAGs have crept north of $20, though they were previously available for about $14.  Ammo prices remain ridiculous, in spite of the drop in commodity prices.  This panic will probably last a while, both from the fear that Obama, the former Brady Campaign/Joyce Foundation board member, will make guns now available banned forever and untransferrable to boot.  I think the overall conditions also suggest fear of increasing crime, disorder, and Depression-era conditions.  My gut instinct on this is reinformed by the ridiculous premiums over spot–20-30%–for silver and gold coins.

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If America lurches towards dictatorship, it will be more with a whimper than a bang. We won’t need to fear secret police so much as the oppressiveness of mass conformity, social pressure, the siphoning of wealth, and the spread of “official” viewpoints. I realize Americans’ fears of one’s political opponents assuming dictatorial powers are a bit overwrought and overdone. Neither W, Bush Senior, Clinton, nor Reagan was in any real sense a potential dictator, even though all three were reviled and feared by many opponents. Nonetheless, with the perspective of time, we see that their imagery, styles, goals, and personalities were American through and through.

The times and the place create the leader, and our post-religious, meaning-starved society more than ever wants atonement, purpose, and passion. The Obama message to white and black alike has resonated.  To the former he promises forgiveness, to the latter, dignity and power.  But his style, his words, and the imagery of his campaign are all new, whether in the form of enormous adoring crowds or the creepy posters. Coupled with an existing economic crisis and the Bush administration expansion of executive power, Obama certainly could move us in a very bad direction from which it would be very difficult to return to ordinary, constitutionally limited government.  Some of the brakes we take for granted will be absent.  Obama can cry racism, for instance, in the casual, insinuating way he did in his primary campaign against Hillary Clinton.  Further, his supporters and his support is both intense and untethered to specific actions.  It is hard to imagine that Obama will be forced to deflect the kind of criticism Bush has been subjected to from the right. By 2004, Bush was widely treated by conservatives as a mere magistrate and widely defended simply as the lesser of two evils.

The best analog would probably be someone like the Four Term leader, FDR, who retained a cult-like level of respect long after his death among working class survivors of the Great Depression. In reading a collection of contemporary essays, I was struck by the prescience and continuing relevance of the following passage by Herbert Agar:

Our real danger is from people like the late Huey Long, or the amiable Doctor Townsend. If fascism comes to America, it will not come as the result of a comic-opera putsch in which Wall Street buys an ex-general of Marines to lead a march on Washington. It will come as it came to Europe, as a revolt of the lower middle class, of the people who want to be self-respecting proprietors, but who find themselves-dispossessed–proletarian in fact, but not in feeling. These people are easy game for the demagogue, for the man who will promise them the moon and promise it quickly, who will tell the desperate middle class the the problem of making them all kings, or all financially independent, is perfectly simple.

If the middle class is sufficiently desperate, it will vote the demagogue into power. And when the demagogue comes to power, he will find that his ‘age of plenty’ is not so easy to provide. At that point fascism is born. At that point the demagogue, threatened with a breakdown of the whole economic system, turns to the Lords and Masters whom he has been abusing, and makes a deal.  The demagogue stays in office and keeps the people quiet.  The Lords and Masters stay in power and run the economic systems just the way they ahve always wanted to run it.  The corporate State is monopoly-capitalism made safe, monopoliy capitalism with the whole power of society behind it.

The economic bailout rammed through Congress will give Obama and his future treasury secretary incredible leverage over every sector of the economy.  Apparently “helping” our basket case auto industry is now on the agenda, but everything will have a catch:  obeissance to whatever faddish idea Obama has about giving his constituents a fair deal, anti-free-market environmentalist extremism, and who knows what else.  The worst thing about this will be that Bush’s corporate welfare was always rightly labeled as such by genuine free market critics.  Obama will have his mass movement in his corner, denouncing critics as retrograde special interests and uncompassionate failures.  He’ll tie the passions of young people with the most small-minded and short-sighted indulgences in mercantalism.  Judging by the way he handled things in Chicago and on the campaign trail, don’t expect kid cloves from The One, especially when he’s pursuing bad policies that help the connected few at the expense of the many.

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