Obama Cuts 0.47% from Budget

Today, word came out that President Obama has cut $17 billion from the 2010 budget.  While that is a lot of money to you and me, it is a measly 0.47% of the $3.55 trillion budget that has been proposed for this year.  Surely, with the way things are going, the 2010 budget figures to be even bigger, so the $17 billion will become an even smaller percentage.

During his campaign, Obama promised to go through the budget, line by line and cut programs that weren’t working or were not necessary.  Looks like he thinks 99.53% of all the government spending is necessary.  And he’ll probably tout this as the “change” he promised and the media and all of his supporters will eat it up.  They’ll just blame the Republicans and Bush for making all the spending “absolutely necessary.”

Just when I think Obama can’t be more of a hypocrite, he does something like this.  Why even announce you’re “cutting” less than one-half of one percent of the budget?  This country is going off a cliff, and Obama isn’t putting on the brakes, he’s flooring the gas.

The Problem with Tea Parties

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.

Another Look at Our Banking System

With Wall Street and the Banking System at the heart of our current economic meltdown, I think it would be good to take another look at our banks in terms that are not normally used.  I’m not an economist, so this might be pretty crude, but it really is important to think about banks as businesses, and not failsafe financial institutions.

First, when you put your money in a savings account, you are not a “depositor.”  You are actually the lender, letting the bank borrow your money to invest.  Your return on this investment is the percent yield you earn on your account.  Banks then will lend this money to businesses or people who want to buy a home.  They charge these people a higher amount of interest than they are paying you.  This is called leverage, which is using borrowed money to make money.

The big question now, is why don’t we look at a bank’s finances and what they are planning on doing with our money when we put it in a savings account?  If we went to get a loan, they would look at all of our records and make sure we had a sound plan for the money.  We just deposit our money into any old bank without a question asked.

The main reason for this is the FDIC, which used to only insure interest bearing accounts (savings) but now insure non-interest bearing (checking) accounts as well.  They also just upped their limit from $100,000 to $250,000.  The reason the FDIC exists is to protect us, the depositors in a bank, in case it goes under.  As long as we have less than $250,000 in that bank, we know the Federal Government will make sure our money is safe.

The unintended consequence of this insurance is that the bank can basically gamble with the first $250,000 of every savings account.  They can put it in all sorts of speculative products because they know if all their investments go bust, the goverment will be there to pick up the tab.  It’s like me going into a casino knowing that if I lose my first thousand dollars, the casino will give it back to me.  The real world does not work this way.  Why then, do we think it’s alright for the people who are supposed to be keeping our money safe to do this?

If banks were not backstopped by the Federal Government, they would have to take less risks, or no one would deposit their money with them.  Without depositor money, a bank cannot make loans to make a profit.  Rather than just putting our money in Any Bank USA, we would make sure that they were making safe investments and know the risks that are involved.  This would weed out the speculative and aggressive banks before the seeds of a banking collapse are sown.

The idea of the FDIC sounds great to the consumer if we think of banks as the keepers of our money.  If we view them as borrowers and business partners, we see the FDIC program makes no sense.  It just allows the banks to gamble with our money and make the taxpayer pick up the tab when their bets go bad.  We need to stop relying on government institutions to protect us and to start making informed decisions of what banks we will lend our savings.  This will help stop bank speculation and keep them honest, and be a part of preventing a crisis like this from happening again.

When Will It Stop?

Today, President-elect Barack Obama announced that he has upped his goal to add at least 3 million jobs in his economic programs.

Also, we announced that we are going to double the number of our troops in Afghanistan.

Both of these announcements comes on the news that we just bailed out GM and Chrysler for $17 billion, and the Treasury is requesting to use the other $350 billion of the TARP that’s not a TARP plan.

Seriously, how are we going to pay for all this?  Even though creating jobs is a good thing, is it really the role for the government to create and pay these jobs?  How much will it cost to continue our military prescence in the Middle East and around the world?

At what point are we going to stand up and say enough?  It’s like we are all waiting for someone in the government to say it for us.  Well, I really doubt that is going to happen.

We need government to lead by example, not do exactly what we did to get into this mess.  Many people were living beyond their means, going deeper and deeper into debt, and now they can’t afford their mortgage payments and don’t want to spend money.  Now, our Federal Government is doing the same thing!  They are printing trillions of dollars, running up more debt, trying to inflate our way out of this crisis.

It’s not going to work!  Who’s going to bailout the dollar when the money finally makes it’s way down through the system?  Our Federal Government cannot print money forever.  It’s going to need a bailout, and when that happens, all of our standard of living will dramatically decline.

We need our government to try reign in their spending and pay attention to the huge deficit they are running.  Everything is at a standstill, waiting for the next bailout.  If they would just say, “we’re done, you figure it out” we would be out of this mess already.  The prospect of more and more money is making everyone sit on their hands.  We won’t find a bottom until the government stops trying to be a hero and gets out of the way.

Everyone is expecting Obama to come in and pull a couple of levers and make everything good again.  His already announced spending plans have the chance to run us into an even deeper hole.  We need a sound fiscal policy to start with the government and we need them to stop printing money and bailing everyone out.  Only after that will we really turn the corner and return to prosperity in the US.

Obama = More of the Same

Today, the incoming Obama administration announced they would use “executive orders” to cancel out some of the executive orders the Bush administration has signed, or will sign in the coming days.  Some of these concern stem cell research and drilling for oil and gas on Federal land in Utah.

Read about it here on the BBC website.

This, in a nutshell, is a big problem of what’s wrong with the government of this country right now.

These executive orders are an abuse of the power by the executive branch which contradict one of the main points of our Constitution and the founding fathers.  There is a separation of powers and checks and balances for a reason.  Our country began when we broke away from the Monarchy of England, and the founding fathers did not want to be governed by an all-powerful central government again.

Why is there no outrage among members of Congress?  Probably because they are part of the Washington establishment that is meant to take power away from the individual citizens of this country.  They know the more power they have, the less chance they have of being unseated in Congress.  Also, they know that when their party is in the White House, their agenda will be on the favorable end of these orders.

If the President can write an executive order about stem cell research based on his religious or personal beliefs, what’s to stop him from signing other beliefs into law?  It won’t happen overnight, but the more power that is handed over to the executive branch, the closer we become to being ruled as a dictatorship.  There will not be one leader, but the executive branch will be a small cartel of power.

The apathy and complacency of the citizens of this country is amazing.  I don’t think most of the people even know what executive orders are and how they are a slap in the face of the Constitution.  If you read this, please tell a friend or colleague.  The more people who know, the more our voices will be heard.  We need to put the power back into the hands of Congress and the electorate.  A weaker federal government and stronger state governments is necessary to the strength of this nation moving forward.  We need another revolution, started from the ground up, to restore this nation to the principles in the Constitution on which it was founded.

Thanks for reading and please leave a comment, however short or long you want.

Figuring Out the Financial Crisis

What really is the crisis right now?  I can’t seem to really figure it out.  Here’s what I’ve heard or read in the last few days on CSPAN, the internet and on TV.

Lost Confidence

Banks have lost confidence in each other to the point where they will not loan each other short term funds.  Normally, at the end of every business day, if the bank has a surplus of cash, they will lend it to other banks.  If they have a deficit, they will borrow from another bank.

Now, banks have so little faith in each other, that they will not make these loans.  There isn’t one specific reason for this.  It could be that the other banks have too much subprime holdings or don’t have enough of a capital cushion.

These banks are still getting the loans they need, but the Treasury is serving as an intermediary.  Banks with a surplus buy Treasury debt, and the Treasury loans that money to banks with deficits.

So, one step to solving this is to restore confidence and faith back to the short term, bank to bank funding system.

Illiquid Assets

According to what you are hearing every day on the news, there are billions of “toxic” debt and “illiquid assets.”  These are all holdings that were tied to subprime lending that are now filled with loans that will never be paid off.

Illiquid means that there is no market for them.  Trust me, there is a market out there for these securities, it’s just that the banks don’t want to drop the price low enough for someone to buy them.

In accounting, these subprime loans were valued with “mark to market.”  This means their values were based on what the market price is for them.  Basically, when the were put on the books, they were valued very highly, probably on a dollar for dollar value.  All the write downs you heard about were banks “marking” them down to market value.  However, if they never sold them, how did they know the value?

If the banks right now cut the price to 1 cent for every dollar, there would be a market for them.  Investment banks and foreign countries would scoop them up.

In order to restore faith between banks, they need to know that the other banks aren’t going to be burdened by this subprime debt and not be able to meet their obligations.

The Bailout

This is where the bailout comes into play.  The Federal Government is going to buy these illiquid assets to take them off of the banks books.

The risk for the taxpayer, who is funding the deal, is that the Federal Government is going to overpay.

You’ve heard a lot about “reverse auctions” too with all the bailout talk.  This means, the Government is going to say, “here’s $1 billion, what will you sell us for $1 billion.”  The banks would offer up different packages of their illiquid assets.

This does not set the market price for these.  This sets an artificially higher price because the Government only has a certain number of packages to choose from.

It should work in a pure auction format.  The banks should present a package they want to sell.  Then they can start the bidding between other banks, private investors, and the Fed.  The package then goes to the high bidder.  Using this method, the true market price is found.

Does This Fix the Problem?

There are many roots to this problem, but a main one was people defaulting on their subprime mortgages.

A lot of people right now are upside down.  This means they owe more than their house is worth.  If they bought at the peak, their mortgage could be for $300,000 but their house is only worth $250,000.

Many people defaulted on their loans when they could no longer make the payments.  Their adjustable rate period is up and they can not make the higher payments.  However, there are some people who are just walking away from their homes.  They can get foreclosed on and walk away with only a hit to their credit score.  There is no incentive right now for them to try and pay the bills.

A New Approach?

The focus should be on the subprime loans and how to get them to be current, rather than having people lose their homes.  There are still waves of adjustable rates jumping up, so there are still a lot of homeowners in trouble.

If the subprime loans would get paid, then the illiquid assets would have value because investors would know they would pay off.

Since the Fed has taken control of Fannie and Freddie, they are basically the ones who decide who gets a loan and who doesn’t. They also generate mortgages and re-sell them to investors.

The Fed should offer attractive, 40 year refinancing to any homeowner that wants it.  They should write off the losses of the home compared to the mortgage as well.  So homeowner’s would no longer be upside down, and they would have more affordable payments.

I am not a fan of government intervention at all. If they are going to intervene though, they should do it to help the root of the problem, not a symptom.  The banks failing are a symptom of the subprime meltdown.

Already the Fed has pumped billions and billions into the market and that money hasn’t done anything.  What is another $700 billion going to do?  It’s too big of a risk to throw that much money at a system that is not functioning.

They need to address the root of the problem and stop homeowners from defaulting.  If they fix that, they can fix the system.  Bailing out big Wall Street banks will help their fat cat friends, but will only patch holes in a dam that is about to burst.