AIG's Corruption

AIG's Corruption

From January 25, 2010 Reuters:

NEW YORK (Reuters) - U.S. securities regulators originally treated the New York Federal Reserve's bid to keep secret many of the details of the American International Group bailout like a request to protect matters of national security, according to emails obtained by Reuters.

Crisis in Credit

The request to keep the details secret were made by the New York Federal Reserve -- a regulator that helped orchestrate the bailout -- and by the giant insurer itself, according to the emails.

The emails from early last year reveal that officials at the New York Fed were only comfortable with AIG submitting a critical bailout-related document to the U.S. Securities and Exchange Commission after getting assurances from the regulatory agency that "special security procedures" would be used to handle the document.

If there is anything that the Bush and Obama Administrations could agree upon it was this: that incompetent Wall Street firms needed government protection. And that alone should have been enough argument for letting them go under. Painful? Yes. But I wonder how much of the continuing crisis more than a year later is because of the unwillingness to allow the market to liquidate and rationalize the bad consequences of the 1999 decision to encourage bad loans.

Just A Coincidence, I'm Sure

Just A Coincidence, I'm Sure

From the December 9, 2009 The Hill:

Nearly $6 million in stimulus money was paid to two firms run by Mark Penn, Hillary Clinton’s pollster in 2008.
Federal records show that $5.97 million from the $787 billion stimulus helped preserve three jobs at Burson-Marsteller, the global public-relations and communications firm headed by Penn.

Burson-Marsteller won the contract to work on a public-relations campaign to advertise the national switch from analog to digital television. Nearly $2.8 million of the contract was issued to Penn’s polling firm, Penn, Schoen & Berland Associates, according to federal records.
Federal records also show that a former adviser to President Barack Obama’s 2008 presidential campaign received nearly $70,000 from that contract to help alert viewers in difficult-to-reach communities that their televisions would soon no longer receive broadcast signals.

The adviser, Alfredo J. Balsera, who heads a public-affairs firm based in Coral Gables, Fla., helped craft Obama’s Hispanic advertising message.

Handing these contracts to these firms might have been perfectly legitimate, but imagine if the Bush Administration had done stuff like this. It would be clear evidence of conflict of interest, corruption, etc. And I would agree: it would look really corrupt. Just like this.

Notice also how the government spent almost six million dollars to save three jobs. At almost two million dollars a job, I think the money could have been better spent. What if Congress had cut taxes by two million dollars? Do you think it would have created more than three jobs?

More Uh Oh

From Australian Broadcasting Corporation--a three minute discussion of the current economic crisis.

Uh Oh

A prediction from economist Arthur Laffer in the June 7, 2010 Wall Street Journal:

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. President George W. Bush's tax cuts expire on that date, meaning that the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. Lots and lots of other changes will also occur as a result of the sunset provision in the Bush tax cuts.

Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there's always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere.

...

Also, the prospect of rising prices, higher interest rates and more regulations next year will further entice demand and supply to be shifted from 2011 into 2010. In my view, this shift of income and demand is a major reason that the economy in 2010 has appeared as strong as it has. When we pass the tax boundary of Jan. 1, 2011, my best guess is that the train goes off the tracks and we get our worst nightmare of a severe "double dip" recession.

 I guess this isn't the time to be buying stocks, is it?  Or houses, or anything except maybe canned food, ammo, and guns.  On the plus side, if adults take over Congress in the November elections (Republicans certainly will, but adult Republicans is more uncertain), they will have an unprecedented opportunity to hold Obama's feet to the fire.

National Bankruptcy

National Bankruptcy

Remember when Democrats were criticizing Republicans for running up absurd deficits?  Obama is making those deficits look downright responsible.  (Something that I didn't think was even possible.)  From the May 12, 2010 Washington Post:

The Treasury Department said Wednesday that the federal deficit for April soared to $82.7 billion, the largest imbalance for that month on record. That was significantly higher than last year's April deficit of $20 billion and above the $30 billion deficit that private-sector economists had expected.

The government generally runs surpluses in April, as millions of taxpayers file their income tax returns. But income tax payments were down this April, reflecting the impact of the recession, which has pushed millions of people out of work.

Total revenue for April was down 7.9 percent from a year ago, dipping to $245.3 billion.

The article goes on to blame the recession, but let's stop fooling ourselves: that "stimulus" bill was huge.

The disaster in Greece is likely to be the disaster in Portugal, Spain, and California next.  If we don't get some adult supervision in Congress after the November elections, the U.S. is headed down the same path.  And when I say "adult supervision," I don't mean Republicans.  I think Republican control of the House after November is a given; I'm just not sufficiently confident that it will be adult Republicans.

What to do?  Buying stocks right now seems incredibly risky.  Buying bonds used to be considered safe--after all, what's safer than U.S. Treasury bonds?  Right now, it seems to be ammo, rifles, and a few years worth of canned and dried food.  Even the traditional safe investment--real estate--doesn't seem all that safe.  Houses near the bankrupt Tamarack resort in central Idaho are still priced as though the economy hasn't collapsed, along with the Tamarack-driven local economy.  Raw land prices are about the only thing that seems to be settling back to reality.

The people that are out of work?  I feel very sorry for them.  I feel bad for young people who are finishing up college--and have relatively few options available to them.  And for a lot of people in my cohort--the May 12, 2010 New York Times is announcing that their jobs are gone, and aren't coming back.

Blaming Bush isn't going to work any longer for Obama--this is now the Democrats' disaster.  Some radical change is required--the sort of radical change that will offend the Ivy Leaguers that have been in control of Congress, the courts, and the White House for most of my lifetime.

Another Bond Called

Another Bond Called

A few days ago, it was Fannie Mae 6.5% bonds being called.  No great surprise on that.  Now, some 5.5% Ford bonds due next year are being called.  What's going on?  If you are expecting interest rates to rise dramatically, I don't think that you call existing bonds.  This almost looks like a dramatic reduction in interest rates is coming.  Or am I missing something?  Or is it just that Ford is flush with cash and doesn't need to borrow money?  Or are they able to borrow so much so cheaply between now and next year that it makes sense to call the bond?

Not Quite Sure What This Means...

Not Quite Sure What This Means...

I just received notice from my broker that some Fannie Mae bonds that I bought several years ago are being called.  These were bonds that have a 6.5% coupon, due in 2037, and that cost me slightly below par.  Since they are redeeming the bonds for the full par value, that means that I get 1-2% capital gain, and I earned 6.5% interest each year the last several years.  That was a decent return for a very low risk investment.

That the bonds are being called would indicate that the underlying mortgages have been paid off--perhaps because of a refinance of the loan, or the sale of the house.  Either way, this is probably a good thing for the borrowers, and probably a good sign for the economy.

I am expecting interest rates to rise--perhaps quite catastrophically--in the next year or two, so now I have to figure out where to invest this money in the meantime that gets a decent return, and yet doesn't lock me into the current not very impressive interest rates.

The Obama Cheerleaders Are Busy

The Obama Cheerleaders Are Busy

A person we know who is a public school teacher sent us (and many others) some propaganda from Organizing For America that shows how the number of jobs lost each month has been falling since Obama took office. (Not unemployment, which has been rising, but the number of new jobs lost.) And from there, it goes onto how the stimulus bill stopped what could have been a much worse situation!

My response (to everyone on the distribution list):

Back on January 8, 2009, the Congressional Budget Office issued a report to Congress about the future of our economy. It's here.

On page 1 of that report, they explained that their predictions assumed “that current laws and policies regarding federal spending and taxation remain the same...” (meaning, if Congress did not pass the stimulus bill then being discussed.) On page 2? “CBO anticipates that the current recession, which started in December 2007, will last until the second half of 2009, making it the longest recession since World War II. (The longest such recessions otherwise, the 1973–1974 and 1981–1982 recessions, both lasted 16 months. If the current recession were to continue beyond midyear, it would last at least 19 months.)”

In short, the CBO's estimate was that if Congress did NOTHING, the recession would start to recede in the second half of 2009. Did the stimulus bill do any good? Hard to know for sure. But we do know that it did something that seemed impossible: made Bush and the last several Congresses look almost responsible in their budgets. You can see the results in the graph here, which shows both the White House estimates of deficits over the last and next few years, and the Congressional Budget Office estimates. Either way is profoundly disturbing.

Here's another source for deficit numbers that let's you pick various starting and ending years.
Obama, and more importantly, these last two Democratic Congresses, have, with some cooperation from Mr. "Compassionate Conservative" dug a hole that our grandchildren are going to be paying back--if they are lucky.

The Obama Administration claims, according to USA Today, to have saved one million jobs with the stimulus bill. That would mean that they spent $787 billion to save one million jobs--or $787,000 PER JOB SAVED. This is something to brag about? If they had given ME $787,000, I could have put about a few people to work for several years improving our property (building a garage, finishing paving the back driveway, paving the shared road into our subdivision, etc.), and had $600,000 left over. (And there are few people that really believe that the stimulus bill saved a million jobs.)

This Is Worrisome

This Is Worrisome

A big part of what caused the current economic mess was that the federal government, through Fannie Mae and Freddie Mac, encouraged risky lending, by a combination of cajoling big lenders, and their willingness to buy the high risk mortgages.

I have seen no evidence that they have fixed this mess--leaving us open to another disaster, once the economy recovers. Of course, this may be the goal--another disaster upon which the Democrats can ride the rescue. If the Democrats had an opposition party, they would fix this after gaining control of Congress. But the Democrats don't have an opposition party, so....

This November 22, 2009 New York Times article on CNBC isn't precisely the same disaster, but again, the federal government may get stuck holding the bag:

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.

For instance, a fund might offer to pay $40 million for a $100 million block of mortgages from a bank in distress. Then the fund could arrange to have some of those loans refinanced into mortgages backed by an agency like the F.H.A. and then sold to an agency like Ginnie Mae. The trick is to persuade the homeowners to refinance those mortgages, by offering to reduce the amounts the homeowners owe.

The profit comes when the refinancings reach more than the $40 million that the fund paid for the block of loans.

The strategy has created an unusual alliance between Wall Street funds that specialize in troubled investments — the industry calls them “vulture” funds — and American homeowners.

But the transactions also add to the potential burden on government agencies, particularly the F.H.A., which has lately taken on an outsize role in the housing market and, some fear, may eventually need to be bailed out at taxpayer expense.

If the government agencies buying these mortgages had some adult supervision, this probably wouldn't be so worrisome.

How Much More Gloomy Can A Prediction Get?

How Much More Gloomy Can A Prediction Get?

A friend pointed me to this depressing prediction, based on how the price of gold has burst through the $1,100 per ounce ceiling:

For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world's central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck.

...

With current Fed policy, gold is headed rapidly toward $2,000 per ounce, probably within six months. The forecasters who see such a price, but suggest it would take four to five years to get there, are ignoring history. Since gold was able to get from $185 to $850 in 18 months in 1978-80, there is no reason why it cannot get from $1,100 to $2,000 in six months now. What's more, although 1980's peak seemed madness at the time, and was equivalent to nearly $2,400 today, there is no reason why gold cannot go much higher if it is given another year or so to get there. The supply of gold from new mining is around 1 million ounces per year LESS than in 1980 and the supply of speculative capital that could flow into gold is many times greater. Hence, a $5,000 gold price is possible though not certain, if present monetary policy is continued or only modestly modified – and that price could be reached by the end of 2010.

As was demonstrated by the housing bubble of 2004-06, modest rises in interest rates are not sufficient to stop a bubble once it is well under way. Given the Fed's recent track record, it is most unlikely that we will get any more than modest and very reluctant interest-rate rises. Even if inflation is moving at a brisk pace by the latter part of next year, the price rises will be explained away, or possibly massaged out of the figures as happened in the early part of 2008. Hence the bubble will inexorably move to its denouement, at which point gold will probably be north of $3,000 an ounce and oil well north of $150 per barrel. Even though there will be no supply/demand reason why oil should get to those levels, and gold has almost no genuine demand at all, the weight of money behind those commodities in a speculative situation will push their prices inexorably upwards, beyond all reason until something intervenes to stop it.

At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the U.S. economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing. Once again, the banking system will be in deep trouble. The industrial sector, beyond the largest and most liquid companies and the extractive industries, will in any case have remained in recession – it is notable that, in spite of the Fed's frenzy of activity, bank lending has fallen $600 billion in the last year. Unemployment, which will probably enter the second downturn at around current levels, will spike further upwards. The dollar will probably not collapse, but only because it will have been declining inexorably in the intervening year, to give a euro value of $2 and a yen value of 60 to 65 yen to the dollar.

And then it gets really bad. I have held off on buying bonds. Some friends are buying commodities--which really aren't an investment, but they can be a good hedge against inflation--and especially hyperinflation.

If the Democrats had an opposition party, there could be a very good opportunity for that opposition party to win decisive control of Congress next year. But there is no opposition party anymore. And even getting in control of Congress, isn't going to be able to clean up this mess as long as the Democrats control the White House. And that's assuming that this mythical opposition political party actually had the courage to do something.

Maybe it's time to stockpile canned food and ammunition.

UPDATE: A reader tells me that the $850 peak around 1980 didn't last very long--a day or two, before falling back. My recollection is that when my wife and I went out to buy wedding rings in early 1980, gold was at about $1000 an ounce, and our wedding rings are proportionately skinny as a direct result. I also notice that the "buy gold now!" advertising seems to be getting more intense--almost like someone wants to dump their inventory while the price is high. This is not at all what you would expect if there was a realistic chance of gold going a lot higher. On the other hand, the deficit is going to definitely cause inflation at some point.

What A Surprise: "Jobs Saved" Number Bogus

What A Surprise: "Jobs Saved" Number Bogus

From the November 6, 2009 Sacramento Bee:

Up to one-fourth of the 110,000 jobs reported as saved by federal stimulus money in California probably never were in danger, a Bee review has found.

California State University officials reported late last week that they saved more jobs with stimulus money than the number of jobs saved in Texas – and in 44 other states.

In a required state report to the federal government, the university system said the $268.5 million it received in stimulus funding through October allowed it to retain 26,156 employees.

That total represents more than half of CSU's statewide work force. However, university officials confirmed Thursday that half their workers were not going to be laid off without the stimulus dollars.

"This is not really a real number of people," CSU spokeswoman Clara Potes-Fellow said. "It's like a budget number."

That certainly was not the way Gov. Arnold Schwarzenegger described it at a news event with Vice President Joe Biden late last week, where he focused on people, not budgets.

"Anyone that criticizes the stimulus money should talk to those 100,000 people that have retained their jobs or gotten jobs because of the stimulus money, especially the 62,000 teachers that have kept their jobs or gotten jobs," Schwarzenegger said.

Count on RINO Schwarzenegger to help the Democrats with their campaign of deception.

There's no question in my mind that properly done, a governmental spending package could be a stimulus to the economy. But so would a tax cut, especially if it was targeted to American-made goods or industries. But the porkulus that Congress passed seems to have been neither an honest Keynesian stimulus, nor particularly effective as a Laffer Curve tax cut.

An Irish Explanation of Derivatives Markets

An Irish Explanation of Derivatives Markets

This arrived in the mail. It's funny, and it's a reasonably accurate description of what went wrong. There's only one thing missing from it: Heidi starts this insane "drink now, pay later" program because the banker selling the bonds was threatening to have the city health inspector close her bar if she didn't do this. It's an "Irish" explanation because alcohol is the driving force. (As an Irish-American friend's mother once explained, "Alcoholism is the curse of the Irish." Some of us would say, alas, it's only disproportionately the curse of the Irish; there's no shortage of damage elsewhere.)

An IRISH Explanation of Derivative Markets

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit. By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses. One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the bank's liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.

Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers. Now, do you understand?

Broken Glass

Broken Glass

PajamasMedia has published an article by me about a proposal now getting support from law professors to require businesses to post on the front window that they don't approve of homosexuality, and for the same reason that a lot of storefronts in the early years of the Nazi regime had Juden on them--to economically destroy those who don't approve.

White House Finally Admits $9 Trillion Deficit

White House Finally Admits $9 Trillion Deficit

From August 21, 2009 Reuters:

WASHINGTON (Reuters) - The Obama administration will raise its 10-year budget deficit projection to approximately $9 trillion from $7.108 trillion in a report next week, a senior administration official told Reuters on Friday.

The higher deficit figure, based on updated economic data, brings the White House budget office into line with outside estimates and gives further fuel to President Barack Obama's opponents, who say his spending plans are too expensive in light of budget shortfalls.

The White House took heat for sticking with its $7.108 trillion forecast earlier this year after the Congressional Budget Office forecast that deficits between 2010 and 2019 would total $9.1 trillion.

"The new forecasts are based on new data that reflect how severe the economic downturn was in the late fall of last year and the winter of this year," said the administration official, who is familiar with the budget mid-session review that is slated to be released next week.

What just amazes me is this, "But he did it too!"

Obama, who has promised to halve the deficit by the end of his four-year term and likes to remind constituents he inherited a $1.3 trillion deficit from former President George W. Bush, says bringing down healthcare costs is critical to long-term deficit reduction.

Wow! The reaction to W. running up a 1.3 trillion deficit--for which Obama rightly criticized Bush--is to run up one that is several times larger?

A Clunker Of A Program

A Clunker Of A Program

The "Cash for Clunkers" program had at least two goals:

1. Revive the U.S. car industry.

2. Replace vehicles that get terrible gas mileage with cars that get better mileage. That's part of why the list of vehicles that you could trade in for $3500 or $4500 was based on their EPA mileage figures.

So what did Americans buy with these allowances? According to the August 7, 2009 CNN:

NEW YORK (CNNMoney.com) -- What are people trading their clunkers in for? It depends on who you ask.

The government's results showed small cars as the top choice for shoppers looking for Cash for Clunker deals. But an independent analysis by Edmunds.com disputed those results, and showed that two full-size trucks and a small crossover SUV were actually among the top-ten buys.

The discrepancy is a result of the methods used. Edmunds.com uses traditional sales measurements, tallying sales by make and model. The government uses a more arcane measurement method that subdivides models according to engine and transmission types, counting them as separate models.

For example, the Ford Escape is available in six different versions including two- and four-wheel drive and hybrid versions. The government counts each version as a different vehicle using guidelines from the Environmental Protection Agency. Only the front wheel drive, non-hybrid version made the government's top ten list.

The Ford Escape crossover SUV, instead of being the seventh-most popular vehicle under the program, as the government ranked it, was actually the best seller, according to Edmunds.com. The government pegged the Ford Focus as the top seller.

You would think, if the goal was to replace low mileage vehicles with high mileage cars (which is a worthy goal), that there would have been some restrictions on the vehicles to purchase. But that would require a bit more intelligence than our government seems to have.

I frequently hear leftists argue in favor of intelligent, thoughtful, farseeing governmental management of the economy. Well, that would be wonderful. Those intelligent, thoughtful, farseeing bureaucrats should be arriving on their flying unicorns shortly.

Why Republican Whoring After Rich People Is A Mistake

Why Republican Whoring After Rich People Is A Mistake

It isn't just because it is bad politics; it is because rich people are the Democratic Party's natural constituency. This July 20, 2009 Wall Street Journal article reminds us which party represents the wealthy:

Friday, two freshmen representatives -- Dina Titus, from suburban Las Vegas, and Colorado's Jared Polis, representing Boulder, Vail and some of the tonier suburbs of Denver -- joined Republicans to vote against Mr. Obama's top-priority health-care overhaul when it faced a vote in their House Education and Labor Committee. One reason was a one-percentage point-surtax on couples earning between $350,000 and $500,000 -- gradually increasing to 5.4 percentage points on earnings more than $1 million -- to pay for it.

...

Election gains in some of these affluent regions have helped give Democrats big majorities in the House and Senate. Of the 25 richest districts, 14 are represented by Democrats, according to Congressional Quarterly. In 1995, Democrats represented just five of those districts.

Recently elected Democrats from higher-income areas also have been cautious about legislation that would make it easier for labor unions to organize, and about legislation imposing tough new rules on banks.

Republicans would be both financially responsible and engaged in smart politics if they took the position that while increasing marginal tax rates is a bad idea, especially in the current economic crisis, there's really no need to keep focusing on cutting the top marginal tax rates. The absurd maximum marginal tax rates of the 1970s certainly impaired economic growth. It's not clear that telling people who make $500,000 a year that they need a tax cut has that same pragmatic basis today. Cutting spending to cut deficits is the first step towards restoring fiscal sanity in Washington (assuming that can even be done).

Some Ideas Are So Bad...

Some Ideas Are So Bad...

That we need to repeat them. Hans Bader has a piece here pointing out that the Obama Administration's "reforms" continue the disaster that created the current economic crisis:

The mortgage crisis was caused largely by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie and Freddie, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.” Worse, Obama’s plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

(Fannie Mae engaged in massive fraud and political bullying to thwart reform. It and Freddie Mac lost so much money gambling on the housing market that they were taken over by the Federal Housing Finance Agency, which took them over in the name of ending their risky practices, but instead actually increased their purchases of risky mortgage loans in an effort to artificially prop up the housing market. Obama made Freddie Mac lose $30 billion more after the takeover in order to write off mortgage loans to delinquent mortgage borrowers.)

Worse, Obama’s proposed regulatory blueprint actually increases the pressure on banks to make risky mortgage loans to low-income borrowers, by ratcheting up enforcement of regulations mandating such lending under the Community Reinvestment Act, which was a key contributor to the financial crisis. His financial regulation overhaul would create a new bureaucratic agency, the Consumer Financial Protection Agency, to enforce the Act without regard for banks’ financial safety and soundness.

It's enough to make you wonder if Obama is trying to destroy this country. But perhaps I'm giving Obama too much credit for cunning.

More Reminders Of Where Messing With Free Markets Takes You

More Reminders Of Where Messing With Free Markets Takes You

I've expressed my concern about ethanol as fuel (at least, corn-derived ethanol as fuel) before. The May 14, 2009 Business Week has an article about an increase in problems associated with gasoline with too much ethanol in it:

Scott Morrison is the owner of the City Garage chain in North Texas and he related the story of his technical director's run-in with ethanol; in December he filled up his E85 Flex Fuel Chevy Suburban at the Exxon station in Ovilla, just south of Dallas. His Suburban died on the spot, because even an E85-equipped vehicle will not run on the 100% pure ethanol that Exxon station was pumping that day. In that case it was not Exxon's fault but a mistake at the distribution center, and Exxon (XOM) quickly made good for the cost of repairs.

On Jan. 16 of this year, Lexus ordered a massive recall of certain 2006 to 2008 models, including the GS Series, IS and LS sedans. According to the recall notice, the problem is that "Ethanol fuels with low moisture content will corrode the internal surface of the fuel rails." In layman's terms, ethanol causes pinpoint leaks in the fuel system; when leaking fuel catches your engine on fire, that's an exciting way to have your insurance company buy your Lexus. Using ethanol will cost Toyota (TM) untold millions.

The article claims that the mass media are ignoring the problem--and I can't find a lot of other coverage of the problem.

The case for ethanol as fuel was to reduce dependence on foreign oil; the actual reason that the federal government went so overboard on the tax credits was to satisfy the agricultural lobby. Like many of these other crazy interferences in the free market, there is always:

1. The good, socially responsible reason to do this.

2. The greedy, special interest reason to do this.

3. The expected positive benefit. Sometimes this actually comes true, although seldom as large a benefit as was promised.

4. The completely unexpected result. If we are lucky, it's something as minor as engine fires. Sometimes, it's the destruction of a whole industry, with the jobs that go with it.

The cap-and-trade idiocy that Democrats are shoving through Congress right now is going to be the same set of problems, and for the same set of reasons.

Inflation Strategies

Inflation Strategies

It has been so long since I worried about galloping inflation--and I had so little in the way of assets the last time this was an issue--I find myself wondering how to cope with the near future. Obama and the Democrats have started a deficit spending frenzy that makes the last Republican controlled Congresses look responsible.

I mentioned almost three months ago that there are signs that the Fed is inflating the money supply to try and revive the economy--and the only reason that it isn't causing price inflation yet is that the velocity of money is quite low, as everyone has been socking money away into savings, instead of spending it.

At some point, the chickens are going to come home to roost on this, and when they do, we're going to see some serious inflation. Inflation benefits people who have fixed rate loans, especially long fixed rate loans, and no significant dollar denominated assets. For those who have lived in the same house for a number of years, doing a refinance at current fixed rates would be a good thing; I rather doubt that it would be worthwhile for us, since I suspect that 80% of current appraised value would be quite disappointing compared to our current loan.

On the investing side, variable rate or other forms of inflation protected bonds are probably a pretty decent deal, and I do own some of those. But what else makes sense? The great German hyperinflation of the 1920s was extreme, but in that case, people demanded to be paid twice a day, and then ran out and bought whatever tangible goods they could immediately buy with the noon paycheck, so that they could trade those goods for what they really needed at the end of the day.

That was an absurd hyperinflation, one that I don't think that even Obama's wrecking crew is stupid enough to engineer. The same principles apply, however, to other inflationary spirals.

Keep in mind that there are two different concerns here: inflation hedges, and true investments. An inflation hedge is something that you buy with the hope that you it won't dwindle in value because of the inflation. If you have $1,000 in the bank, and we get a galloping inflation of 25% a year, at the end of two years, even if you earned 10% interest per annum on your deposit, will still be worth 80% of what it was at the start of the inflation. (And that's assuming that your interest isn't taxed, because your job disappears during the inflationary chaos.)

The problem for inflation hedges is that:

1. The transaction costs of the tangible goods need to be small. If it you spend $100 to buy $1,000 worth of goods, you are 10% down right there.

2. The goods should not depreciate over time. So automobiles (unless you actually are going to use them, and need them in the interim) are not a particularly good choice.

3. It's important that whatever you buy as an inflation hedge doesn't have some sort of irrational valuation because of emotions. Yes, Ferraris and Corvettes are examples. So is gold. The market value of these items can be inflated beyond their rational value, and emotion can make the market value deflate suddenly, too. Buying lumps of osmium might be an example of a non-emotionally valued item. (Most people don't even know what osmium is--an essential component of ball point pens.) This website is quoting a spread of $360-$400 per ounce, which seems oddly cheap compared to gold, but this may be a sign of the irrational nature of gold buying.

4. It would be good for the commodity to be relatively easy to transport, if you had to hide it or carry it with you. (Advantage of osmium over ammunition.)

Investments, however, are a harder problem. What investments, historically, have kept ahead of inflation? I don't know.

UPDATE: A reader tells me that buying U.S. Senators is the best investment of all. Agreed, but they are a bit out of my price range. Perhaps if a few hundred of us kicked in $1000 each, and agreed to share control over his voting digit.

Obama As Mafioso

The Obama Administration As Mafioso

That was a sweetheart deal that the the UAW, an unsecured creditor, got on the Chrysler restructuring; they ended up with 55% of the company, while secured creditors (in law, higher up on the food chain) received 29% of the value of their bonds. And look at some of who suffered from the Thug-in-Chief being on the side of the UAW, sidestepping existing bankruptcy law. From the May 21, 2009 Wall Street Journal:

Indiana Treasurer Richard Mourdock revealed this week that his state's police and teacher pension funds have lost millions of dollars in the Chrysler "restructuring." Indiana's State Police Fund and Major Moves Construction Fund, which finances roads and bridges, together lost more than $1 million. And the Teacher's Retirement Fund "suffered, at a minimum, a loss of $4.6 million due to the action of the Federal government," reports Mr. Mourdock.

Far from being speculators, these funds represent retired public employees, including cops and teachers. The funds paid a premium to buy "secured" status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy.

"In the past, to be 'secured' meant an investor was 'first in line' in the event of a bankruptcy and 'non-secured' creditors would receive value after secured-creditors were paid," Mr. Mourdock says. "In the Chrysler bankruptcy, however, secured creditors received $.29 on the dollar even as non-secured creditors received higher values and ended up with a 55% ownership of the new company, which is fundamentally wrong and a dangerous precedent to the capital markets."

Not surprisingly, Mourdock is no longer investing public funds in similar bonds where the prospect of political interference with the process may injure the bondholders. Obama and his thugs seem to be a curious mixture of progressive rhetoric and better spoken organized criminals. I sure hope that all those wealthy people who voted for him just to provie how unracist they were have learned their lesson.