Posts Tagged ‘bailouts’

The Problem with Tea Parties

April 13, 2009

There is going to be a Tea Party in Santa Ana, which is close to my hometown of Huntington Beach.  There is a series of speakers, one of which is Dana Rohrbacher, who is my Congressman.  He’s been in the House since 1988.

My big problem with this is that he was in Congress during the Bush years, when the Federal Government grew to the largest it’s ever been.  Now, all of a sudden he’s outraged?  Where was he speaking out against the budgets and taxes under the Bush Administration?

There is a political theory that when a party is out of power, they go back to their core principles, only to abandon those principles and grow the government when they go back into power.  How true is this of the Republican party?  They pushed for the biggest growth in government spending in the history of our country when they were the majority, but now that they are in the minority, they are all about fiscal responsibility again.  We need to see this for the fraud it is and not fall for this trap again.

Also, many of these figures act like they support limited government, but all they want to do is trim a program here or there and shift the tax brackets around.  We need more than these little, inconsequential tweaks right now.  We need real change and a political revolution.

We need to start to question the need for central economic planning, led by the Federal Reserve and the monopoly it has on our money supply.  We need to question our fiat currency, and if local currencies backed by gold might be a better way to manage our money.  The first step would be to repeal legal tender laws and to eliminate capital gains taxes on gold money.  Ron Paul has laid out this plan to open up our money supply to competition of gold backed money and fiat money.  This needs to be discussed at any Tea party.

We also need to not just be mad at our money being used for bailouts, but we need to be mad that the government, as Rothbard put it, “legally plunder” from us.  Why is the government entitled to a third of our hard earned money?  We should not just be mad about our money going to bail out Wall Street, but we need to be mad that it is going to build bombs, fight foreign wars, build foreign bridges and roads, and support our welfare state.  In order to truly reform our government, we need to take as much out of the hands of Washington as possible.  Our Constitution lays out the framework for a limited central government and strong local and state power.  We have moved so far from this vision that we have a tyrannical government that has overriding rule over all.  This is what we should be revolting about!

The anger and frustration over the bailouts is a good way to start to build energy towards a revolution, but we can’t keep our scope so limited.  Every one of these Tea Parties need to go beyond the bailouts and taxes and to the Constitution and the vision of our Founding Fathers.  They should have speakers who believe in eliminating the Federal Reserve, cutting or ending the income tax, ending our empire, and drastically reducing the size of our government.  We need to move beyond the symptom, which is the recession we’re in and the bailouts, and really fix our country.

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.

The Auto Industry in Trouble – Again

November 10, 2008

About a month ago, while we are all focused on the $700 billion Wall Street Bailout, Congress gave the Big Three automakers a $25 billon bailout.  Now, they are back for more, saying that they won’t have enough money to last the rest of the year.

I’ve read multiple articles and saw some interviews on TV this morning where experts and analysts are saying that without more money from the Federal Government, the automakers will fail.  The governor of Michigan even said that 3 to 4 million people will lose their jobs if the Big Three go bankrupt.

I agree that the US auto industry is vital to our economic health.  The problem though is not going to be fixed by giving them more money to burn.  This brings me to the question:  What really is the problem anyway?

There are two main reasons for the US automakers to constantly be in trouble:  the United Auto Workers union and unfair laws that give foreign car makers an advantage.

First, the UAW needs to recognize the changes in the way the world operates today.  When the union was first formed, it was to protect the auto workers from unfair manipulation by the automakers.  Today, they do not have the sympathy from the public because most of us do not get health packages and pensions equal to what the auto workers get.  Auto workers should have to help fund their insurance and retirement, just like most workers.  They need to realize that their demands will not be met at all if their employers are out of business.

Second, there are laws in that exist that give the US automakers an unfair handicap.  Government regulations require that a certain percentage of cars are made in the US if they are a domestic company.  Since Toyota and others are foreign companies, they can assemble a smaller percentage of profitable cars in the US.  They can use US factories to boost efficiency and make their business stronger.  

The US automakers have to assemble almost all of their cars in the US, whether they make business sense or not.  While the US companies make money on their trucks and large vehicles, they lose money on nearly every compact car produced domestically.  If they could shift some production to non-union plants or to Mexico, it would help the Big Three make their businesses more efficient.  These regulations were meant to help protect US jobs, but are crippling the automakers.  There won’t be any jobs to protect if they drive the companies out of business.

Another reason for the auto bailout is supposed to help the industry shift to producing more fuel efficient cars.  Do you know that our cars were more efficient in 1998 than they are today?  What happened over the last ten years?  The auto industry can make more efficient cars if they want.  Nothing will assure us that the bailout money will lead to more efficient vehicles.

Rather than throwing more money at the Big Three automakers, we should be looking at outdated government rules and regulations that are handcuffing the companies.  In order to really fix the problem, we need to tackle more than “slumping auto sales.”  If Congress and the Treasury look at more than just balance sheets, we can solve the crisis the automakers are facing once and for all.