Posts Tagged ‘bailout’

TARP Success?

October 5, 2010

Today, the Treasury Department declared that the government will only lose $29 billion from the TARP program.  This is being hailed as a huge success and that we saved the financial system and the economy, preventing a second Great Depression and barely losing any money.

I have some big problems with these statements.  First of all, most of the big banks that were infused with cash paid back that money within a year of the program starting.  How can a bank go from about to collapse to financially stable so quickly?

Think about Goldman, it received $10 billion from the government.  If they just took that money and invested it for a year in 3% government bonds, that’s $300 million!  Citi and Bank of America got $20 billion each.  That could turn to $600 million of pure profit.

Did the big financial institutions create a sense of panic, in order to get the government to step in and “save” them by taking over all their bad debts?  Did they know that this panic would lead the government create a web of regulations that stifles future competition?  Anytime banks and government come together, I have a feeling the banks are going to win.

Also, where did this money come from anyway?  We created $700 billion out of thin air, gave it to banks to earn interest on, took on their bad loans, and then they gave it back to the Treasury.   Will the government now put that money to rest?  Or will it eventually make it back into the economy.

And finally, $33 billion is still a lot of money.  We have just become desensitized to the number because we saw the $750 billion stimulus package and the $700 billion bailout.  $33 billion just seems like a drop in the bucket.

While the government claims the success of TARP, I find it hard to believe that it saved our economy and that the true cost was really that low.  We’re still mired in a stalled economy and the bad debt is still out there and has not been liquidated.  And with all the success of this bailout, business now knows that future bailouts will be sure to follow, allowing them to take more foolish risks and setting us up for even bigger failure.

Bondholders Are Not Villians

May 27, 2009

I’m tired of hearing about the evil bondholders that are preventing GM from avoiding bankruptcy.  Why not call them what they really are?  They are the creditors to GM.  They lent GM money, and now are being villified for wanting to collect as much of that money as possible.

The Obama administration’s “offer” is for the bondholders to trade their $27 billion in debt for 10% of the failing company.  If they go to bankruptcy, the bondholders might get wiped out completely, but in a real bankruptcy, the bondholders usually get paid back first.  The problem is that this is not an ordinary bankruptcy.  It is rigged to give the government and the unions all the power.  The creditors and stockholders are the ones getting screwed.

Also, the “offer” gives the US and Canadian governments a 69% stake in the company.  So the primary debt holders get 10%, but the government gets 69%?  Who in their right mind would accept this rotten deal?

We all know the problem with GM is that their labor costs are too high.  Rather than actually trying to fix the problem, the government is handing the keys to the car over to the unions.  Since they are in a partnership with Uncle Sam, we now will be bailing them out forever.  The current model is unsustainable, but rather than actually fixing the problem we are setting up for permanent transfer of wealth from our pockets to the unions.

So, instead of just saying “it’s the evil bondholders’ fault,” we need to look at the actual offer and realize the only winners are Obama and the UAW, and the losers are every tax paying citizen of the country.

Credit Cards – Regulation for Regulation’s Sake

April 23, 2009

Today, President Obama is meeting with the CEOs of credit card companies, in an effort to protect consumers from rising rates and high fees.  Both the House and Senate are currently working on versions of such a bill.

I agree that a simple law, stating that credit card companies have to inform you when your rate increases and a chart showing the fees you could incur if you missed a payment or went over your limit, should be welcomed by consumers.  Right now, all you get is a little “average daily rate” table but it doesn’t tell you if your rate went up or down.  

However, the need for the government to enact laws to “protect” us are insane, and another example of the government meddling too much in private affairs.

Really, who’s fault was it that we ran up so much credit card debt?  Part of the blame has to fall on the card companies for giving cards with high limits to just about everyone.  The problem was that they were able to securitize their loans and sell them on Wall Street.  So the card companies were just intermediaries between the consumer and Wall Street.  They bore almost no risk.

A large portion of the blame has to fall on the Federal Reserve as well because their easy money policies allowed the card companies to just keep giving away money.  To stave off a recession after 9/11, the Fed kept rates too low for too long, pumping up a huge spending/debt fueled bubble.

However, to act like consumers were just taken advantage of is absolute nonsense.   Even the most uneducated person knows what credit cards are and how they operate.   The card companies did not take advantage of them and did not force them to spend.  Consumers wanted instant gratification and put items on their credit cards they could not afford, with the intent to pay it off later.  Rather than saving, they took out a loan for all sorts of purchases.

Instead of putting regulations on the credit card companies for the sake of regulation, the government should put simple laws in place to inform consumers, and then back away.  By placing all of these restrictions on the companies, we are not solving the problem, which was too many unqualified people having high limit credit cards.  

Obama needs to let the markets work, and let the companies set limits and interest rates in line with the risk of lending people the money.  Until the government stops propping up the securitized credit card debt and meddling in the credit markets, no one will have a clear picture of who should be able to lend and borrow.  The longer the government distorts the markets and meddles in private business, the longer the recession will last.

Tea Parties or Bank Runs?

April 19, 2009

Last week, there were hundreds of new-age “Tea Parties” all across the country on Tax Day, April 15th.  There is currently a lot of frustration out there, which has led to tremendous momentum for financial reform in our country.  Thousand of people attended the protests.  Some people wanted to protest the role of the Federal Reserve, others were mad about our tax dollars being spent to bail out failing companies.  Others wanted to reduce the size of government and federal spending.

The problem with the Tea Parties, is that the media and Democrats have miscontrued the meaning behind them.  They are saying they are just politcal stunts, organized by Republicans and Fox News, who are against anything President Obama does.  Even though there were both Democrats and Republicans at the Tea Parties, the protests have been marginalized by the mainstream media.  All of the effort that people went through to organize these rallies is essentially being wasted because those in Washington are not taking the protests seriously.

There is another method of protest though, that the government, big corporations, and Wall Street cannot stop.  We can all take our money out of big banks that are getting bailouts and put it in a local, community bank.  Most of these smaller, local banks have been able to withstand the downturn because they were prudent with the money we deposited and did not get involved in all sorts of derivatives, trying to make a quick buck.

If we are so upset about the government using our money to bail out banks, why not show the government that we have no confidence in these institutions?  As a business, banks depend on us, the consumer to lend them (deposit) our money so they can make loans.  If we all pulled our money out of the big, failing banks, they would be forced out of business.  We need to literally, put our money where our mouths are.

Local banks are at a disadvantage because they do not have the resources to devote to technology and security that the big, national banks.  But if we all deposited our money with them, their business would naturally grow and they would be able to make banking as convenient and easy as a Wells Fargo or Bank of America.

The same can be said for our investments.  If we are upset that JP Morgan and other Wall Street investment firms are getting our tax dollars, move your account to another broker.  We can’t protest with our words and then let our actions directly contradict our views.

A lot of talking heads have made fun of people for withdrawing their money from banks so they can have cash (as if this is such a bad thing in the first place).  In fact, MSNBC’s Rachel Maddow called Senator Richard Burr of North Carolina “Bank Run Burr” and Keith Olbermann named him the “Worst Person in the World” because he told his wife to withdraw $500 from an ATM.  They said it showed Republicans do not have a plan and that it was unpatriotic to pull his money out of the bank.  Burr said that he does not have any cash at home, and after a briefing that basically told him that banks would be out of cash, he panicked adn told his wife to take out the money.  Like $500 in his account is going to make a difference, anyway.

My plan is not to just take your money out and put it under your mattress in fear of failure.  It is a protest against the big, national banks that are on life support, sucking up billions of our tax dollars a day.  We should embrace our local banks, that know the local economy and community.  They will make prudent decisions and not take unnecessary risks trying to please Wall Street and investors.  Instead of making clever signs and protesting with our words on Tax Day, we should give the banks a vote of “no confidence.”  Only with our actions and our money will we show the government that we do not support the bailouts, or the banks and institutions they are propping up.

Obama’s “New Foundation”

April 14, 2009

Today, President Obama gave a speech entitled “New Foundation” which gave an update on the economy and all of the government policies that are currently underway.

His opening portion of the speech ended with this remark:

And most of all, I want every American to know that each action we take and each policy we pursue is driven by a larger vision of America’s future – a future where sustained economic growth creates good jobs and rising incomes; a future where prosperity is fueled not by excessive debt, reckless speculation, and fleeing profit, but is instead built by skilled, productive workers; by sound investments that will spread opportunity at home and allow this nation to lead the world in the technologies, innovations, and discoveries that will shape the 21st century. That is the America I see. That is the future I know we can have.

The funny thing is that most of what he says makes sense and I totally agree with.  We do need an economy based on production and savings and not debt and spending.  This is the fundamental problem with our current economic system.  He goes on to blame our current crisis on “greed” and “instant gratification” but those arguments don’t hold any water.  We’ve always had greedy people who want things now.  If that were the case, we’d be in a permanent depression.

The problem is that Obama thinks that only the government can implement policies and programs that will accomplish these goals.  I believe that government is the worst possible agent to try and lead us into the future, and that they are only making matters worse.

From a purely economics standpoint, the government is taking resources away that the private sector would be using, or they are undertaking tasks that are not being done by private sources because they are unproductive and inefficient.  Look at the auto bailout, for example.  Imagine what a startup like Tesla or some other company could do with one billion dollars, a fraction of what the Big Three have gotten so far.  We could have a brand new, competitive auto industry for the amount of money that has been wasted propping up dead bankrupt companies.  I do not believe in bailouts and handouts, but if we are going to give money away, it should go to new production, not financial means.

Other examples of Obama’s “stimulus” are building roads, weatherizing homes, and building green energy sources.  If these were profitable endeavours, don’t you think the private industry would already be doing these things?  The reason they aren’t is because there is not any money or benefit to gained at this point in time.  By directing resources to these projects, we are taking money that could be used for other, more profitable forms of production, and putting it to unproductive uses.

To make matters worse, we are funding these projects and bailouts with printed money.  When you think about how a bank works, you realize that they need to have people depositing and saving money in order to make new loans.  The more money saved, the more money that can be loaned out.  The same should be true for the government, except Bush and Obama have been running trillion dollar deficits.  We aren’t funding our “stimulus” with saved resources.  We are just piling on more debt and creating money out of thin air.  In the long run, this misguided form of “stimulus” will hurt our economy more than help it.

Obama has the right intentions, and he keeps talking about fiscal responsibility.  However, his actions to spend more, inflate more, and expand the central government will only dig us deeper into a depression.  We need to stop printing money trying to reinflate our spending bubble, and let the markets work.  Right now, Obama needs to resist the urge to intervene and let the economy readjust and liquidate all of the malinvestment.  How can a small group in Washington know more than an economy of 700 million?  Stop trying to play hero and get out of the way, that’s what he should have said today.

The 401k Problem

April 9, 2009

I read an interesting point in Tom Woods’ book, Meltdown, last night regarding our retirement savings.  His basic premise was that we should not have to worry about 401k’s and other retirement plans.  We should be able to put our cash in a savings account or put our money in gold coins, and be able to rely on that money when we are ready to retire.

However, this is impossible because of our inflationary monitary policy.  You have to invest in the stock market and risky instruments because you have to try and stay ahead of inflation.  You need to build a bigger nest egg because every dollar you save loses tremendous value over time.

The government only helps feed the need to risk our retirement money by giving us a tax break when we invest in a 401k.  If we did not have this incentive, most people would put their money in accounts where they would have more control of their money.

I hate the fact that I need to put money in mutual funds.  The managers of these funds are looking for short term returns, not sustainable gains over 30 years.  I’d rather have an account that had no gains for 29 years and then went up 10 times in one year, rather than riding the rollercoaster of big gains and even bigger losses.

But back to inflation and our need to invest to outpace it.  You would think that in this day and age, prices of everything would be dropping.  We have so much technology in every single sector that we should be able to pay less for everything we buy.  If prices were allowed to fall like they should, we could just sit on our money and not have to worry about higher prices in the future.

Everyone is outraged that Wall Street greed stole their 401ks.  They have the right to be mad, but they should be mad out our inflationary monetary policy and the government’s encouragement to invest in 401ks.  If greed was the problem, we’d have been dust years ago.  The problem is the government’s central economic planning and encouragement for malinvestment.

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.

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.

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.