Archive for March, 2009

Why Does Our Financial System Need Reform?

March 28, 2009

Treasury Secretary Tim Geithner and the Obama Administration are pushing for powers to regulate all aspects of the financial system.  These areas include hedge funds, private firms, and derivatives.  They also want the power to intervene with any company to make sure their collapse will not bring down the financial system.

While these ideas sound great, especially in the middle of the crisis we’re in, they are misguided attempts to intervene, when intervention is the last thing we need.  The perfect example of the need to get involved when it was not necessary was the Sarbanes-Oxley Act after the Enron case.  Everyone wanted regulation, so we strapped every publicly traded company with the huge burden of archiving every piece of data for 7 years.  However, the executives that were in charge of Enron were found guilty of fraud, and the company was bankrupted and dissolved.  The system for weeding out Enron worked, but our government felt the need to act, so they did.

In the current crisis, if we did not bail everyone out, would we need to regulate hedge funds, private equity firms, and derivatives?  Those were fringe investments to begin with, but since the Federal Reserve made credit cheap and easy to obtain, they became too large.  Warren Buffet even called the derivatives market the “financial weapons of mass destruction.”  If we let them fail and liquidate their assets, they would go back to being fringe investments only for specialty firms or the super rich people of the country.

By propping them up, we now have the need to regulate them.  By regulating them, we are acknowledging their existence as a major part of the financial system, when they should only be bit players.  Our system needs to be cleansed of these bad investment vehicles and instead we are implementing rules to legitimize them.

Also, the power to intervene with any company by the Treasury Department is setting a dangerous precedent for the future.  They want the power to take over a company and sell off assets before the company collapses.  Looking at how well the bailouts and toxic assets plans have gone, I question whether they really know what is best for our system to begin with.  Why not just let the companies go bankrupt and liquidate their assets letting the market set the prices?

Also, I question whether these reforms and protections will really help.  We all knew the derivatives market was a problem waiting to happen, and all of the financial geniuses who are now calling for regulation just sat back and watched.  The SEC had rules to prevent things like Enron from happening, but it still happened.  Madoff kept a ponzi scheme going for decades and the SEC couldn’t figure it out.  How can we expect our government to regulate when they have failed us so far?  If another bank does commit fraud or crooked accounting and it slips through the cracks, can we sue the government for their lack of oversight?

These broad government regulations just give us a false sense of security because we think the government is looking out for us.  That gives us the impression that they are watching what funds are doing, and they know that their investments are legitimate.  We fail to do our own due diligence because we think the government already has for us.  Then we will again be burned when the government fails to regulate like they promised.

We need to let the market liquidate the bad investments and let the companies that made these decisions fail.  Once that happens, we can see how widespread the problem was and if there is a need for sweeping regulations.  If anything, we need to regulate the Federal Reserve to make sure that our boom-bust economic policy comes to an end.  We can treat the symptoms (hedge funds, private equity and derivatives) only after we treat the cause of the cancer, which is the Federal Reserve.

Advertisements

Geithner – From Zero to Hero?

March 26, 2009

Read this glowing piece on Tim Geithner from Marketwatch.  How disgusting.

I cannot believe, in anyone’s mind, that a three day stock market rally turns this insider cronie to some sort of market guru.  He’s had almost 3 months in office, and so far has come up with a half baked plan that is bound to fail.

Since when is making the stock market rise the job of the Treasury Secretary anyway?

Also, the author, David Weidner goes as far to bash the free market.  Here’s an excerpt:

The power grab is likely to stick in the craw of anti-government, free-market types who rightfully worry that Uncle Sam is overstaying his visit to Wall Street.

What they need to remember is that the government is not only an unwelcome guest; it’s a reluctant traveler. Wall Street’s despair is of its own making. Had it not threatened to bring down the rest of us with it, the government might have been justified in watching Citigroup and AIG burn in the same way it’s keeping General Motors Corp. and Ford Motor Co. a contained blaze.
Geithner finally seems to understand the delicate political tightrope he must navigate to push through his rescue plans. He must be tough on bonuses. He needs to protect the taxpayer. He has to be positive. That’s why he sold the plan’s details through multiple media outlets this week — and sold them well.

This is such a crock of lies that I cannot believe a financial website like Marketwatch would publish it.  He acts like the free market is responsible for all this, when it has been the actions of the Federal Reserve that fueled the fire.

The reason we’re still even talking about toxic assets is because the government got involved and now has no other path but to keep blowing through money.  If we had let the banks fail and the toxic assets be liquidated, we would have had a deeper, sharper downturn, but we’d already be pulling our way out of it.  The actions of Geithner, and his predecessor Paulson, have just prolonged the crisis and made it worse.

Finally, there is a big reason why Wall Street loves Geithner’s plan: it takes the toxic assets off their books and shoves them on the taxpayer.  The plan is great for banks and financial firms because it gives them a no-risk, all-reward proposition.  It’s like going to Vegas with $100, but if you lose, the casino will give you all but $7 of your money back.

Mark my words, the scandal of Geithner’s plan will be that the same firms strapped with these bad investments will sell them for above their real value and then buy them back for a fraction of that.

Before we put Geithner up on a pedestal, we need to really see how his plan is going to play out.  How will the assets be valued?  Who will buy them?  How long will this plan take to implement?  A three day stock rally is no reason for a parade, and this will all just be false hopes and empty promises.

Why More Regulation Will Not Help

March 25, 2009

Treasury Secretary Tim Geithner wants to have the authority to intervene in any hedge fund or other company that is big enough to bring the banking system down.  The goal is to create oversight and regulation that will help protect us from another recession like we’re in now.

However, we are already supposed to have government agencies looking out for us, and the Supreme Court just ruled that even if they are in place, they are not responsible.

The case I am referring to is one where the Court ruled that even if there is an FDA approved label on a drug, the drug maker and patient are responsible in case something goes wrong.  I can’t remember the specifics right now, but the drug was causing potentially fatal side effects, and the Court just threw it back in the face of drugmakers.

They just passed the buck back to the drugmakers, doctors and patients.  Why then, does the FDA exist in the first place?  If they are supposed to be monitoring drugs that go out to make sure they are safe, why can they shed any sort of responsibility?

I’m sure the same thing would happen if a lawsuit was ever brought against the SEC.  The onus would end up falling on the investor and mangers to do their own due diligence.  Look at all the fraud that had to occur to create the real estate bubble.  Have they brought charges against anyone?

Why then, do we continue to believe that a regulating body will help at all?  Has government regulation proven to be effective?  And even if it works, when something goes wrong, they don’t have to bear any responsibility.

What we need is some good, old-fashioned tough medicine.  Let these banks fail.  Show them that you will not be there to stop their collapse.  If banks knew that they did not have the government as a backstop, they would make wiser decisions.  The moral hazard we have created is going to lead us to our demise as a nation.

We do not need more government regulating bodies, especially ones that have all the authority, but ultimately no responsibility.  The only proven regulator has been the free market.  Let’s let it work.

Easy Way to Curb Mexican Drug Violence

March 25, 2009

Hillary Clinton is in Mexico City, saying that part of the blame for all of the Mexican drug cartel violence falls on America.  She says our “insatiable desire” for illegal drugs is what is fueling all of this violence.

Actually, what has caused all this violence is our own War on Drugs.  If we did not have prohibition on drugs, there would be no reason for the Mexican drug cartels to exist!  Just look at all of the organized crime that rose up during the prohibition of alcohol.  Why is our prohibition against drugs any different?

Rather than making drugs illegal and wasting our tax dollars policing them and locking up non-violent offenders, we should direct our efforts towards counseling and rehab services.

Just because a drug is legal does not mean every person in the country is going to be doing it.  A perfect example is alcohol and cigarettes.  These are two of the most addictive drugs known to man, yet we don’t have everyone just sitting around drinking and smoking all day. Legalizing weed or other drugs will not lead everyone to do those drugs.

Society still functions and we provide help for those with addiction to alcohol and nicotine addiction.  If Alcoholics Anonymous can help those whow battle alcoholism, why can’t there be similar support groups for those addicted to other drugs?  How is throwing them in jail helping us as a country?

Also, many of our country’s most violent street gangs exist because they control the drug trade in a certain area or neighborhood.  Rather than going after gang members, we should go after what gives them power.  If we took away their main source of power, they would collapse because there would be no purpose for them.

If we legalized drugs in the US, we would instantly stop the drug trade and all of the cross-border violence associated with it.  We would also save billions of dollars in the policing and jailing drug offenders.  We need to encourage family and community support along with counseling and rehab services, instead of relying on our police and jails to tackle the problem.

If You Can’t Dazzle Them With Brilliance…

March 25, 2009

There’s a saying, “If you can’t dazzle them with brilliance, baffle them with bullshit.”

To me, this quote best sums up Treasury Secretary Geithner’s one trillion dollar, toxic asset plan.  I haven’t read one article on the internet on any news site that can spell out the basics.  We know it is going to be a public/private partnership, and that the government is going to insure the assets if they go bust.

I also read things about five funds being established to serve as vehicles for investment.  They would take the private investment and government money to buy toxic assets.  These funds would be led by managers who Geithner selected.  These funds will undoubtedly overpay for the toxic assets, giving the financial firms a reward for their irresponsible behavior.

I don’t know if it is part of this legislation or not, but Geithner also wants the authority to intervene in the business of any non-financial institution.  Supposedly this would have allowed them to stop the AIG bonuses, but it will infringe on the rights of every business in the United States.

Of course, after Geithner announced his plan, the stock market jumped.  This is because his plan allows Wall Street firms to buy toxic assets and then have the government insure all the risk.  There is no downside for the Street.

What you don’t read anywhere, is how this plan is going to screw over the American taxpayer.  Geithner knows that if he can distract us with a small stock market rally, we’ll forget about how horrible this plan is for the country a few years from now when we see how much of that trillion dollars the government has thrown away.

This is the perfect plan for Geithner to help bail out his Wall Street and hedge fund buddies in New York (he was the head of the NY Federal Reserve, which dealt directly wiht Wall Steet), and stick the bill on the taxpayer.  His plan was just smokescreen for a huge transfer of wealth from the taxpayer to a small group of financial institutions.  We need to see through it, and call him on this bullshit.

All in the Name of Financial Stability

March 24, 2009

So far, we’ve approved a $750 billion bailout package, a $800 billion stimulus package, and set aside $750 billion for more bailouts.  Also, the Federal Reserve has expanded its balance sheet by over a trillion dollars of printed money, and the FDIC has changed its rules to insure hundreds of billions more than before.

All of this has been done in the name of “Financial Stability,” but the economy has been anything but stable since the Federal Government started getting involved.  They keep talking about the disaster that will happen if they don’t intervene.  Do they not realize we are in the worst recession since the Great Depression?  Their constant meddling and half-baked plans have prolonged the recession and could lead to the demise of our economy.

Now, we have Treasury Secretary Tim Geithner announcing some new plan where the government will form a public/private partnership with investors to buy $1 trillion in bad debts from banks.  Supposedly, for every $100 in bad loans, the government will put in $7, a private investor will put in $7, and the FDIC will provide insurance or loans for the other $86.

The big problem is that we still have not set a price for these securities, and that will be a big factor in how this plays out.  If we they are bought at an inflated price, the government and the taxpayers will definitely be footing the bill.  Geithner has crafted this plan exactly how his Wall Street and hedge fund buddies want – no risk for them and unlimited risk for the taxpayer.

Today, Geithner also plans to ask Congress for new powers, allowing the Treasury to intervene in “troubled” businesses early on, restructure them and sell assets, all in the name of “financial stability.”  Who knows what “troubled” means?  Does it mean their favorite firms?  Does it mean letting their old competitors fail?  Will the books of every company be open to the Fed to review whenever they want?  This is a dangerous power grab by the Executive Branch, and Congress, led by blowhard airheads Pelosi and Reid, is sure to just roll over.

Geithner’s partner in crime, Fed Chairman Ben Bernanke is also calling for more regulation to prevent excessive bonuses and to prevent another recession, in the name of “financial stability.”  Why must we always place regulations after the fact?  Just like after the Enron debacle, we created Sarbanes-Oxley, which put an enormous burden on US companies, and made a few big software companies a ton of money.

There are already ways to discourage the kind of behavior that led to the crisis we’re in.  They’re called bankruptcy and fraud.  If we let firms fail, businesses in the future will know they cannot take excessive risks and invest in all sorts of complicated investments.  If we let them fail, then the government can get involved cleaning up the mess, not trying to prop up and save a sinking ship.  The bankruptcy system works!  It allows us to get rid of debt that will not be repaid and cleanses the system of all of these “toxic assets.”

Also, we need to charge all of these executives of big banks, ratings agencies, and hedge funds for fraud.  How did all of these subprime loans end up rated AAA?  How did all of these complex derivatives get sold and rated?  Because all of the players were in bed together.  We hear Obama talk all the time about how greed got us here, and that’s true.  Some of this greed was illegal, and we need to bring those to justice, not punish the taxpayers!

If we keep going about the bailouts the way we are now, we will keep throwing our money away.  We’ve already wasted trillions of dollars in the name of “financial stability” and it has made our economy worse.  We need to let firms fail and bring those who were responsible for this to justice.

If we do this, firms in the future will not make these bad decisions again.  Since we are just letting everyone get away with it, though, we are creating a moral hazard where those that made bad decisions get all the help.

The path we are going down will do anything but lead to “financial stability” and the unintended consequences are going to lead to more power for the executive branch and less freedom and liberty for the American people.

It’s Impossible to Remove Toxic Assets

March 21, 2009

Information came out yesterday and today that the Obama administration is about to unveil their plan to buy up toxic assets from banks.  They plan to use up to a trillion dollars from the previous bailouts, help from the Federal Reserve and a form of a public/private partnership to accomplish this.  After the uproar over the AIG bailout and bonuses, the administration does not want to go to Congress for more money.

However, it does not matter what kind of plan the Obama team comes up with for one key reason:  Banks will not sell any of their toxic assets.  They will not sell because the second they do, they will have to revalue their assets to the market value, and that will lead to failures across the board.

They would rather sit with billions of dollars of toxic assets on their books, not try to get rid of them, and collect billions from the government.  The only way banks will sell their assets is if the government suspends the mark-to-market accounting rule.

Mark-to-market means that banks have to value assets for their market value.  This is similar to how things operate in the real world for you and I.  Previously, they could use “mark-to-model” accounting, which meant they could value their assets using a computer model to determine their value.

For example, if we bought a home for $500,000, and we want to refinance or pull out equity, the bank will look at the value of our home if we sold it, or the market value.  If it’s value has dropped to $450,000, we have to adjust our plans for the new value.

You will hear some “economists” argue that banks should not have to use mark-to-market because there is no market right now and prices are artificially depressed.  There is a market right now, it’s just that no one will price assets that low because it will trigger all the other banks having to write down their assets.

If the value of these assets was artificially depressed, people should be buying them because their true value is really higher.  Just because it involves millions of dollars and the banking industry does not mean that the rules should be different.

If we suspend mark-to-market it will only lead to inflated prices for worthless assets.  Then the government will buy them and lose all their money and the losses will be stuck on the American taxpayer.  Sounds like a great idea to me.

There is a very simple alternative to all the bailouts and failed schemes – let the banks fail and let the bad debt be liquidated.  Only one politician has been a proponent of this, Ron Paul, and only a small handful of economists have called for this alternative.  It is amazing how the debate is limited to how many billions we should give away and how mad we should get for less than 1% of those billions being handed out in bonuses.

If you talk about bank failures, you are bound hear about Lehman Brothers and how disasterous that was.  I would argue though, that the Lehman failure has nothing to do with the crisis we are in.  Sure, lots of people lost money, but it was pretty orderly, proving the bankruptcy system worked.   Shareholders got wiped out, bondholders settled for 20 cents on the dollar, and the derivatives settled for about $6 billion.

Are we still talking about Lehman?  No.  Are we still talking about another firm that failed but had a government negotiated failure, Bear Sterns?  No.  The government got involved and arranged for a way to settle the debts and found a buyer.

Are will still talking about firms the government has tried to rescue through all the bailouts?  AIG?  Fannie and Freddie?  Bank of America?  Citi?  I know this is anectdotal evidence, but it seems that firms we let fail have gone by the wayside, and those that we’ve saved have just kept causing more trouble.

The point is that spending more taxpayer money and coming up with more schemes to help the banks are futile attempts to put humpty back together again.  The banks will not cooperate and liquidate their debt when they have the promise of government overpaying for worthless assets.  However, we will keep these insolvent institutions alive by giving them money to offset the writedowns on their bad debts.  It is an endless cycle with no light at the end of the tunnel.

The only way to move through this is to let the insolvent banks fail, liquidate their debts, and let the healthy or new institutions fill the void.  Until we do this, the current crisis will continue and eventually lead to the failure of the dollar and our economy as a whole.

Why We Need to Abolish the Fed

March 18, 2009

The Federal Reserve, led by Ben Bernanke is going to kill America.

We had been inching ourselves closer to the abyss, but today’s announcement by the Federal Reserve has put us right on the brink.

The Fed is going to buy $300 billion in long-term US treasury bonds, and $750 billion in mortgage backed securities from Fannie Mae and Freddie Mac.  Their goal is to drive down interest rates to stimulate the economy.  The unintended consequence of their actions is the destruction of the dollar and life as we know it.

With our previous stimulus packages, we have been selling Treasury bonds to foreign countries to fund our spending.  China, Japan, and Saudi Arabia have been acting as our creditors.  Even though we were going deeper into debt, at least there was a method to the madness.

The new program by the Fed uses money created out of thin air to buy bonds from our government.  If that sounds fishy to you, it should!  What happened to our creditor nations?  Did they cut us off?  Is there something more going on here?

Most empires end with the collapse of their currency and the bankrupting of the nation.  Many times this has to do with a bloated foreign military presence as well.  This is exactly what is happening right now.  We are borrowing from ourselves with printed money.  At what point will inflation explode and our dollars become worthless?

Our standard of living is going to be compromised and we will no longer be the leading economy in the world.  We will have to get used to less growth and more of the same malaise we’re in now.

However, the silver lining to the impending collapse could be the return of sound money, savings, and production in the United States.  Maybe this is really a blessing in disguise that will destroy our consumer based economy and replace it with a production and capital based one.  Maybe that’s wishful thinking, but I’m trying to find a silver lining here.

If there was ever a reason to take the controls of the printing press away from the Fed, this is it.  We need to abolish the Fed now and let sound economic principles guide the way, not the whim of a Harvard professor.  This is a critical point in the history of our nation, and we are making all the wrong choices.

The “Outrage” Over AIG

March 17, 2009

I find it very amusing that Fed Chairman Bernanke, President Obama and all of these members in Congress are so “outraged” by the AIG bonuses that add up to $170 million.

Aren’t these the same people who said we had to act swiftly and boldly to help avert falling into a financial abyss?  I know that Bush was still President then, but Obama and McCain both favored the massive government intervention.

This is what happens when you just say things like “protect the taxpayer” but you don’t take the time to read the bill to see if those provisions are really in there.

The AIG bailout was one that was not executed by Congress, but it is still their responsibility to ask questions and press the Treasury and Fed on what their plans are.  You can’t just let things happen and then get mad later at the outcome.

I’m more mad at the $170 billion we’ve given to AIG so far to keep it afloat.  They doled out almost $60 billion to all their big bank friends.  Why aren’t we outraged at that?  Why are we so mad about $170 million?  We need to stop focusing at the small stuff and AIG and start focusing on the bigger picture and the horrible job the Fed and Treasury Department are doing.

You’d think if you gave someone $170 billion, you’d keep good tabs on where it is going, right?  Wrong.  YOou would know that they are just handing over billions to their banking friends, right?  Wrong.  You think you’d actually put in provisions to protect the taxpayers and not just say you did, right?  Wrong.

The AIG bonus “outrage” is just a political ploy to make it look like our politicians care about us, and we’re taking the bait.  Instead of focusing on the mismanagement by the government, we’re making those big, bad greedy executives the scapegoat.

Now Congress wants to tax these bonuses to recoup the money.  However, some people got bonuses of $1000.  It’s more than just the top level that relies on bonuses for a big chunk of their salaries.  I don’t think the execs should be getting this money, but a secretary or administrative assistant?  Let’s take their money too.

This whole thing was a mess from the start and now we’re paying the price.  The government told us how we needed to act urgently and this is what happens.  When will we, the people stop buying it and stand up to this nonsense?

Obama’s Double Talk on Economy

March 14, 2009

When President Obama reassured China and the world that their investments in US bonds and the dollar were safe, he made the following quote:

“And that is not just in U.S.-issued treasury notes, but also in the private sector and the commerce and the industry that has made this the most dynamic economy in the world.”

If our economy is so great and dynamic, why did he just go about ripping it when he was pressing for his stimulus package?  Didn’t he say it was unsustainable and that we needed new clean energy jobs to take us into the 21st Century?  The double-talk from Obama is starting to get ridiculous.  With Bush, at least we knew where he stood.  Obama is a much smarter man, but he seems to be trying to please too many people.

Also, just to clarify things, our economy is not in great shape.  When almost 60% of our GDP has been fueled by spending, I don’t see how we’re in great shape.  This year, in order to make up for the lack of consumer spending, almost half of our GDP is predicted to come from government spending.  Also, we’ve had almost zero savings for the last decade, we have no manufacturing base, and we are up to our eyeballs in debt.  To me, that is anything but a dynamic economy.

We can fix the economy, but no one wants to re-route the ship.  Instead, we’re burning through trillions of dollars trying to keep it down the same path to oblivion.  We need savings and investment from the private sector to provide capital, and we need to start producing goods and services in the US.  We have the best and most skilled workers in the world.  We also have some of the best creative minds.  What we need is more competition to lead to better innovation and new products and skills to turn us around.  We need to strip away layers of government interference that burden businesses and hinder their ability to compete in the global market.

Obama really pushed hard for his stimulus package, telling us how bad of shape our economy was in.  Now that his stimulus isn’t really working, he’s pushing hard to tell everyone how great our economy is.  He needs to decide where he stands on all of this and provide a consistent message to the world.  We need a strong dollar, and we need to start producing and stop spending.  It can be done, but our leader has to come to this realization as well, and not believe the words coming out of his own mouth.