THE ORACLE OF OMAHA SPEAKS

Berkshire Hathaway, the company chaired by Warren Buffet, released its annual report today.  Mr. Buffet's annual letter to stockholders is always a good read, if not prescient.  Because the letter is dense and has many topics, this post will be longer than usual, but it is worth it.  

Buffet noted that the US economy is in shambles:

"We're certain, for example, that the economy will remain in shambles throughout 2009 - and for that matter, probably well beyond - but that conclusion does not tell us whether the stock market will rise or fall."

And we are not out of the woods.  Whether the market will yield investable opportunities or not is unknown, even in a downward spiraling economy; however, Buffet offered these words of wisdom:  "When investing, pessimism is your friend, euphoria the enemy."

The government is taking acts to give the appearance that it is taking acts to help the economy, but no one really knows if these actions will work.  We do know that they didn't work during the great depression and they didn't work in Japan.  Nevertheless, we do know that the  government solutions will have unwelcome aftereffects.  Buffet said:

"The U.S. – and much of the world – became trapped in a vicious negative-feedback cycle. Fear led to business contraction, and that in turn led to even greater fear. This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation."

Aside from inflation, the government spending is making private industries, and municipalities dependent upon government aid.

"[M]ajor industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly."

In other words, be prepared for continuing this extreme level of wealth redistribution far into the future.  Just think how long it has taken us to dismantle the temporary solutions put in place by FDR to get us through the depths of the great depression. (Hint: Those Programs Still Exist.)

What is worse, the government is playing favorites.  After years of trying to level the playing field among various financial institutions (on the theory that competition helps consumers and the economy), the administration's bailout is playing favorites by giving  insolvent banks money at lower cost than banks that didn't act irresponsibly.

"Funders that have access to any sort of government guarantee – banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella – have money costs that are minimal. Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be. This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” "

In other words, our government is rewarding bad economic policy.  It is the same  wrong headed message we send when we tell people that if they borrowed money to buy a house, the government will step in to pay the mortgage when the borrower can't pay.  Here we are telling banks that if they make bad loans and become insolvent, instead of letting the banks fail, we will give them a competitive advantage over other banks and lenders by giving them money below market cost.   

Berkshire Hathaway also has a division that is involved in housing, mainly through manufactured homes.  While not immune from credit risk, Buffet's company is in a far better position to weather the storm because of sensible lending practices. 

Here is what Buffet had to say:

Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments. 

*  *  * 

The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified. Putting people into homes, though a desirable goal, shouldn't be our country’s primary objective. Keeping them in their homes should be the ambition.

There are many more tidbits in the annual report, but this post is lengthy enough so I will move on.  Please go to the Berkshire Hathaway site to read the entire annual report.  Enjoy the read.

Washington Post Budget Graphic

The Washington Post has a great graphic on the budget and where this deficit stands in relation to historic deficits.  Not since World War II have we had deficits this large.  The graphic is:

TAXATION YOU CAN BELIEVE IN

Last night I provided a few comments on Obama's massive budget increase.  More and more details are coming to light.  One of the ways Obama plans to pay for the increase is by increasing taxes and eliminating deductions.  One of the increases proposes to eliminate the mortgage deduction.  Another eliminates charitable contribution deductions.  

Remember the campaign promise not to raise taxes on those making less than $250,000 per year?  Well, this budget breaks that promise by reducing the amount of a mortgage deduction if you make over $208,000 per year.  Now that's change lies you can believe in!

Taxes not only raise revenue for the government, but can support governement policies and provide incentives for spending in certain areas.  Typically in stressed economic times tax policy encourages businesses to spend by providing credits or accelerated depreciation, etc.  In times of deep economic stress, we rely upon charitable institutions - including colleges and universities, aid and alms organizations, health care clinics, and so forth - to fill a need that the government can't.  These institutions rely upon charitable giving.  We already are among one of the lowest societies in per capita in alms giving.  Eliminating the tax deduction for charities at a time when unemployment is skyrocketing and these organizations are most needed is unconscionable.

The Wall Street Journal has an insteresting summary of these tax increases here.  

HOLY COW! $3.9 TRILLION DOLLAR BUDGET

Just two (2) days after telling the nation about fiscal responsibility President Obama sends Congress a Three Trillion Nine Hundred Billion Dollar Budget (that is $3,900,000,000,000.00) for 2009 and a $3.5 Trillion dollar budget for 2010.  The last president approved a record deficit of $455 Billion Dollars based on a $3.1 Trillion dollar budget for 2009.  Obama’s updated budget for 2009 proposes a deficit of $1.750 Trillion and for 2010 $1.170 Trillion!  I was really hoping Obama was going to be different. 

I understand the shift in budget priorities – after all, that is the fundamental difference between the two major political parties.  As the prevailing party controlling both the White House and both houses of Congress, it is reasonable for democratic budget priorities to predominate the proposal.  And it does so dramatically.  This budget, however, completely blows the imagination not only in terms of scope but in terms of the huge increase over prior years.  Not only has spending dramatically increased, but governmental revenues (mainly from income tax) are down.  Obama promised change in the way we do things in Washington.  Tax and spend is not change. 

My fear is that the ordinary citizen, having been squeezed over the past decade by relatively flat growth in basic business and jobs (excluding the financial engineering of Wall Street), will begin to rebel.  Increasing the Government’s share of personal productivity is never good.  Minor fluctuations in the imposts of government on private earnings are tolerable – everything in moderation.  While taxes are never liked, most recognize taxes as the price we pay for a free society.  What is fundamentally different in this case is the penal like shift in burdening the taxpayers and small business owners with government contributions, without a corresponding benefit.  The increase and burden is immoderate and unfair.  Representatives and Senators hole up in Washington unresponsive to the people that elected them and view the taxpayers as a perpetual piggy bank that can be robbed time and time again. 

That is only on the Federal side.  Taxpayers across the Country are also being increasingly burdened by their state governments.  Increasing taxes at a time of economic uncertainty is counter intuitive.  We need to create policies that encourage investment in new industries.  We need policies to get risk capital into the hands of fledgling businesses.  We need policies that open the door for small businesses to hire new employees.

 How much productivity and growth can we expect if the Governments confiscate nearly 70% of our earnings?  Where is the money for new jobs?  After the government fills the pot holes and builds the bridges to nowhere, what have we left?  Have we created a sustainable economy?  When we increase handouts (entitlements – whatever you want to call them) what do we create?  We are planting the seeds of rebellion with these policies, and if we don’t watch out, we may destroy the very society we are trying to save.

Fraud, Fraud, Fraud

Every boom market has fraudulent schemes that are only uncovered when the markets reverse.  Today the SEC was busy announcing 3 new fraud cases.  Certainly these are not of the magnitude of Madoff or Sandford, but they are significant.  First up was Westgate Capital Management LLC and its principal James Nicholson, who were charged with using an unregistered hedge fund to fraudulently take other people's money.  The SEC Press Release stated that Nicholson and Westgate defrauded current and prospective investors in 11 hedge funds they managed by misrepresenting the value of the hedge funds to investors, and soliciting new investors with sales materials that claimed a nearly impossible record of investment success.  Apparently, Nicholson created a fictitious accounting firm and produced bogus financial statements.

Action was also taken against Paul Greenwood and Stephen Walsh for defrauding investors out of $500 Million Dollars.  According to the SEC, these folks and their companies convinced institutional investors (public pensions, educational institutions,  retirement funds) to invest in a stock index arbitrage strategy.  Instead of making investments, Greenwood and Walsh purchased multi-million dollar homes, horse farms, exotic vehicles, etc.  The fraud was going on since 1996!

Rounding out the trio of fraud cases  is the one launched against Mark Bloom and his firm North Hills Management LLC.  This relatively small case - involving a mere $30 Million defrauded from about 40-50 investors since 2001 - seems like a common case of fraud.  Apparently, according to the SEC, Bloom obtained the funds to be invested in diverse hedge funds.  Instead, he used about $13 Million to buy homes, boats, cars and support a lavish lifestyle.  The balance of the money was put into a fund that was fraudulent itself.  

It seems that the amount of fraud going on this time was extreme.  But going after a few headline cases this time may not be enough.  In ordinary times ferreting out the fraud is necessary to maintain confidence in the system.  This time the level of fraud occurred at every stage.  The government needs to get serious about prosecuting the fraud to restore confidence in the markets.  The cases need to be filed not only against those involved in garden variety fraud, but cases need to be filed against the rating agencies that deliberately over-rated securities, from the banks that put mortgages in collateralized securities knowing the mortgages were no good, to the borrowers that lied on their applications.  Purging the system is what is needed.  Having the government fulfill its fundemental obligation of pursuing these crimes is needed on a large scale.  If the government cant do it, then consider authorizing private attorneys general to hold those responsible for the fraud accountable.

Sen. Buris and the 17th Amendment

The calls for the resignation of Roland Burris, the controversial junior Senator from the State of Illinois, keep mounting.  The controversy surrounds how he was appointed by now impeached Governor Rod Blagovjevich and whether there were any improper payments made for the appointment to the Senate seat vacated by President Obama.  Aside from whether anything improper was done, there is some unease over  a Governor under the threat of impeachment making a vacancy appointment.  Senator Russ Feingold even introduced legislation to begin the process to amend the Constitution to prohibit filling vacancies other than by appointment.   Before we go there, maybe we need to rethink why we have Senators and how they are selected.

Before 1913, the Constitution provided that Senators were appointed by the legislatures of the states.  Governors could only fill vacancies when the legislature was not in session.  The reason Senators were appointed by state legislatures was because the Senate was supposed to represent the states themselves - remember we are in a government of dual sovereignty where states have (or at least had until 1913) a voice in the federal government.  Because they represented the states, they reported to the legislature, and at least for some time were subject to recall by the legislature.  The system made perfect sence in 1789.  There was no direct federal tax on citizens, but there were levies on the States, and the States were responsible for raising the revenue (and most of the federal revenue was originally thought to have come from duties and imposts).  Since the state legislatures had to pay the bills of the Federal government, they should have a voice that reported to them.  After all, the Constitution gave representation to the people through a representative for every 30,000 people (see Taxation with Representation is Not So Good Either).  

Well, all of that changed in 1913 when the 17th Amendment was adopted.  The 17th Amendment changed the rules and required that Senators be elected by the people of the state - thereby disenfranchising the States.  Not coincidentally, 1913 was also the year that the Constitution was amended to make it clear that the federal government could directly tax the income of citizens.  Essentially, the States were left as virtually powerless administrative units with no effective representation.  We all have heard complaints of unfunded federal mandates placed on the states.  It is unlikely that those laws would have passed if the Senators were representing the States as opposed to a mass of people.  

There are many good reasons to have the election of our Senators directly by the people, but we need to recognize that doing so evicerates our States' influence in the federal government.  It is a lot easier to consolidate power when you have to be ousted by millions of voters, than by a few dozen legislators.  Senators are beholden to no one but their own conscience.  Remember that all politics are local, and we have influence more influence over local actions than we do distant governments.  We have more influence if our representatives were elected by 30,000 rather than by over 700,000.  

Feingold's Amendment has facial appeal, but it is inconsistent with the original intent of a full partnership between State and Federal Governments and the People they represent.  Certainly, our Country is much larger than it was in the 18th and 19th centuries and modern conveniences have made many conventions obsolete.  If we are rethinking how we elect Senators and Representatives, it is time we rethought how many we elect as well.  

My proposal is to have 3 Senators from each State - one appointed by the Governor, one by the legislature, and one elected at large by the people of the state.  All would be subject to recall by the same method they were appointed or elected.  In terms of the House, we need to increase the number so we decrease how many people are in each congressional district.  We need representatives of the people to be responsive.  My suggestion - limit the size of congressional districts to 150,000 inhabitants, which would result in a congress of about 2,000 members.  A large body to be sure, but not unworkable given the size of our Country and the issues we have before us.  Indeed, with modern technology, the need to be present full time in Washington is limited.  Representatives could spend more time in their districts and learn what the people really want.

Obama Delivers Message of Hope

His oratory is phenomenal.  The President's speech, about an hour long, highlighted not only what needs to be done immediately to keep credit flowing and assist the ailing auto industry, but also showcased his budget priorities.  Those priorities are renewable energy, health care reform, and education.  At the same time he told Congress to reduce the deficit.  Obama talked about elimination of waste in government and reform of antiquated programs.  Follow this link for the full text of President Obama's address.  The showcase line delivered by the President was:

"But while our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before."

The budget and priorities will be debated, and hopefully legislation will be enacted quickly to advance renewable energy, reform health care delivery and improve education.  With that said, however, there is still serious disagreement as to the short term tactics to handle the economic crisis.  The issue is not the flow of credit to individuals and small businesses, but whether we have the capacity to borrow more without repaying the debts we previously incurred.  When people have gorged themselves on all forms of credit available at the buffet they stop eating until they digest their food.  Restaurants do not force them to eat more than they need or before they are ready.  No matter what we do with the banking system, responsible borrowers need to clean up their balance sheet before we begin borrowing anew.  Responsible lenders will not extend credit when the risk of default is great.  Returning to the practices that got us into the problem is not the solution.  Create a new banking system that can lend to borrowers without regard to bad loans on its books.  Stop the bleeding of the insolvent banks.  That will get us out of this situation, 

 

The President's otherwise wonderful speech was unfortunately marred by a few partisan snipes aimed at the Bush administration that he could not resist delivering. While most of his comments were met with bipartisan standing ovations, only the Democrats stood and applauded his partisanship.  In addition he gave credit to America for inventing the automobile.  Hopefully our German friends wont take much umbridge at the sleight to Daimler, Maybach and Benz.  Nevertheless, his comments were well received and hopefully will set the tone for some real budget cutting and reform.

Obama To Give Message of Hope

President Obama is expected to deliver a sorely needed message of hope to this Country in a short while.  After the President outlines the recent culture of placing short term gains ahead of long term prosperity, he will take the opportunity to pave a new beginning of responsibility.  He is expected to tell America that:

"Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity. Now is the time to jump start job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down."   

We know President Obama will use all of his fabled oratory skills to convince America that it is time to start focusing on the long term, but his challenge (and our challenge) will be to convince 435 members of the House of Representatives and 100 Senators to break their culture of bickering, infighting, partisanship and pork barrel politics.  It is hard to imagine how the existing crew, with about 470 running for election every 2 years, would be willing to put the Nation's long term interests above the perceived need to get something accomplished in the short term at the expense of another party in order to get re-elected.  Let's hope Mr. Obama can deliver this type of change.

More Bailouts Are Just Wasteful

Every day we hear more and more news about companies coming back to the government for more bailout funds.  Banks, insurance companies, auto makers have all received massive amounts of our tax dollars and are now coming back for more.  The New York Times is reporting that the U.S. is Pressed to Add Billions to the Bailout .  The real question is whether any of this will help.  

The fundamental problem with the economy is that the consumer, the main engine of the economy, is tapped out.  Collectively, we are trying to get our own balance sheets in order.  Instead of buying new big screen televisions and automobiles, we are trying to pay down the debt we accumulated.  Hopefully, we are starting to live within our means.  But, that also means we need to adjust the way we do business.  The demand for goods and services will not return to the way they were anytime soon.  Take a look at this chart from Contrary Investor:

What this chart shows is that households are borrowing less and less.  It is a sign that we are starting to unwind the debt we have accumulated.  While no one can predict where this chart may lead, it is very likely in the coming months, if not years, that this chart will actually be negative - that is, that households will be reducing more debt than we collectively borrow.  

What does that say for the future of the financial industry that relies upon the collection of interest?  It means revenues are permanently down.  A smaller pool of resources.  What does it say about product companies like the automotive industry?  It means demand will be reduced.  In the end, it will be a good thing if we all live within our means.  In the short run, it means that industries will need to readjust what they are doing to meet the lower levels of demand.  

With the spectre of lower demand, how does it make any sense to continuing to finance the banks, insurance companies and auto industry when they can't make a profit?  It doesn't.  It is one thing if we are adding funds to preside over an orderly liquidation and restructuring, but it is quite another to keep funding these industries without any plan or goal in mind.

Microsoft Lets FIred Employees Keep Severance Pay

In January, Microsoft laid off about 1400 employees - the first layoff in its history.  Like most humane companies in layoff situations, Microsoft paid a severance to the departing employees.  On Friday, February 13, 2009, Microsoft sent letters to about 25 of the employees claiming it overpaid severance and asked for some of the severance back.  Apparently, Miscrosoft short changed about 20 employees and overpaid 25 employees between $4,000 - $5,000 each.  

Word got out that Microsoft asked its former employees to return some of the severance pay.  Microsoft went through this effort to collect $100,000 - $125,000 from the employees it fired.  Realizing the idiocy of its decision, on Monday, February 23, 2009, Microsoft reversed its position and magnanimously decided to let its former staff to keep the severance pay.  You can't buy good public relations like that!

I would be curious to see what Microsoft's legal position would have been.  Typically severance pay is accompanied by a separation agreement that includes among other things, a release of the employer and an agreement to continue some agreements like confidentiality and non-competes.  The agreements also specify the amount to be paid in severance.  I don't know what agreements Microsoft offered, but they would be hard pressed to ask for the money back after an agreement was reached.  

Create A New Banking System Now

The challenge we face, and the challenge the administration is grappling with, is what to do with insolvent financial institutions.  If you let them fail it will send the market into a panic.  Credit will seize up as it did when Lehman went under.  Without credit, the engines of the economy - at least the engines of large business - grind to a halt.  The fear mongers tell us that jobs will be lost and all commerce will stop.  Whether that will be the result or not is unknown, but there is no question that the catastrophic failure of banks without a replacement financial system in place would have far reaching consequences.  

Here is an idea floating around.  Instead of spending money trying to keep insolvent banks afloat while all their bad loans come home to roost, spend the money now to create a new banking system that will be in place when the insolvent banks inevitably fail.  David Warsh in his blog , Economic Principles, suggests using government money to set up half a dozen start-up wholesale banks, and once they get to borrowing and lending freely, sell them off to the public.  Once these banks take root, we can dismantle the existing Wall Street system that cannot survive.  

Common sense tells us that this can be done rather quickly - especially with full government backing.  Imagine newly chartered banks with fresh capital and no legacy obligations.  Depositor would be attracted to them for they would at the same time have a lower risk than Bank of America, Citgroup, JPMorgan or any of the other large mega banks burdened by bad loans and hard to value assets.  Whether money would be lent out is a very different question.  The fact remains that in times of uncertainty there can be little faith that sums lent will be repaid except only to the most credit worthy of all the borrowers.  Prudence should remain the backbone of lending, and the reason we are even discussing the banking crisis is because these banks made impudent loans and/or purchased assets backed by these imprudent loans.  Nevertheless, there will come a time when the risk reward ratio will make sense, and these newly created institutions would have the ability to lend.  Further, the swift privatization of these new banks will assure that taxpayer funds get repaid to the treasury.

Once the system is in place, we can cut the life support to the insolvent banks and let the shareholders and bondholders get what they deserve.   

  

Fiscal Responsibility Summit Held to Pull Wool Over Nations Eyes

Obama held is Fiscal Responsibility Summit today.     We truly applaud his efforts to reign in deficit spending, but doubt he is serious about fiscal restraint.  George W. Bush's record deficit reached $455 Billion.  Obama just went on a huge bailout spending spree increasing deficit spending into the trillions of dollars.  The highlight of Barak Obama's 10 year plan is to cut the deficit spending in half by 2013 when he leaves office.  Cutting in half to our President means reducing the deficit to only $533 Billion Dollars by the time he leaves office  - some $78 Billion Dollars more than Bush's record deficit!  In other words, Obama plans to spend like hell over the next 4 years and claim fiscal victory when his final year spending is less than what he builds it up to be.  Tell me again how that is fiscal responsibility?

The words out of Obama's mouth resonate with fiscal conservatives - pointing out the deceptive games Congress plays with budgeting, the effect of the huge accumulation of national debt, the cost of paying interest thereon (especially in light of the cost of other government spending programs).  We still believe Obama is only paying lip service to fiscal restraint.  Any plan that increases spending beyond our means - and that means receipts - is by definition irresponsible.  It increases the national debt without a plan to retire the debt.  

Yes, truth in budgeting and across the board spending cuts are necessary, but dont tell me you are serious about reducing the deficit when your plan calls for a substantial increase over the prior year.  Please talk to us straight about your plans and don't claim your plan is to reduce spending when you plan an absolute increase over your predecessor.  Stop spending, reduce the government size, reduce the waste, get rid of the antiquated programs and subsidies that no longer have relevance to society, reform the entitlements, and come up with a viable plan to reduce the debt.  That would be change we could believe.

CItigroup Is Near Nationalization - Updated

There is much attention this morning to reports that the US may not only convert its $45 Billion Dollar bailout of Citigroup into common stock, but that our tax dollars may go to buy up to a 40% stake in the insolvent bank.  Mike Shedlock has done an excellent analysis of the report, and Barry Ritholtz has also noted that we are proposing to throw good money after bad.  Best of all is Karl Denninger's analysisposted on his blog.  Henry Blodgett had joined the debate as well pointing out that at current valuation converting the taxpayer's $45 Billion preferred into common would result in an 80% stake not a 40% stake as the insolvent bastards propose.

Taking another stake in the bank is a bad idea.  Throwing more money at the bank will not work.  How much more will the government commit waste of our tax dollars?  More than the whole is worth?  If you or I had an old family car in need of repair, we would look at the cost of repair in relation to its market value.  No prudent man would pay more for repair than the item is worth.  No government should spend more to fix a problem than the problem is worth.  Citigroup's current market value - the sum of the outstanding shares of the enterprise is approximately $12 Billion.  Does adding $40 Billion to the enterprise make sense?  More than 3.5 times its cost?  For an insolvent company that is ready to be taken over by the FDIC?  Where is the prudence?  See for yourself.  Here is Citigroup's chart:

Either liquidate Citigroup because it is insolvent, or nationalize it to preside over an orderly liquidation.  Just don't waste more money trying to save an insolvent bank.  We roundly criticized Japan for maintaining zombie banks during their 20 year depression.  Why should we follow in their footsteps?  There is going to be paid either way, but the question is whether the pain should be quick and deep to get it over - which will hurt most those with a financial stake in the bank (stockholders and bondholders), or should we drag the pain out slowly, every day watching another crisis, spending taxpayer dollars with another bailout and spreading the loss and pain to the entire nation over 20 years.   Neither solution is good, but my vote is to make those that took the risk and benefited from the gain to take the loss.  Not the taxpayer.  Short term nationalization of banks now is what is needed to liquidate the banks and purge the rottenness out of the system.  Only when we have rid ourselves - through bankruptcy or the equivalent - of these insolvent banks will we be able to recover the economy and start the growth cycle anew.

Oh and by the way, its time to move your money to a local community bank that you know is solvent.  The return to Main Street is underway.  Do business with people you know and trust.

Obama's Plan to Limit Deficit Spending

Obama is out to prove that he is a fiscal conservative now!  In another yeah, right move, Obama proposes across the board spending cuts in an effort to reduce the budget deficit.  As of October 2008, we had a budget deficit of $455 Billion Dollars.  After 5 months of bailouts/stimulus/wasteful spending, the deficit is heading towards $2 Trillion Dollars.  Obama wants to cut that deficit in half - so we have a $1 Trillion Dollar annual deficit by 2013 when Obama is ready to leave office.

The problem with the plan is that it is still deficit spending.  The US Government is addicted to spending beyond their means, just like our fellow neighbors have been addicted to credit.  This can't go on.  Every year since 1957, our national debt has grown.  Right now, the national debt is over $10 Trillion Dollars.  That means that every deficit increases the debt burden of our government.  Interest on the national debt is over $451 Billion Dollars each year.  Debt is 400%  of annual revenue - some 70% of GDP.  Cutting the deficit in half still means increasing the burden of this debt.  We can't afford it anymore.  It is no coincidence that Hillary Clinton's first trip as Secretary of State was to China - the largest debt holder of US obligations.  

We cannot effectively return to prosperity until our balance sheet is in order.  It is foolhardy to think we can inflate ourselves out of this debt without bankrupting everyone.  Instead of trying to cut the deficit in half President Obama, eliminate deficit spending now.  Amortize the national debt so it is repaid within 20 years so our children can prosper.  Households are taking steps to reduce their balance sheet; why can't my government do the same.   Thomas Jefferson, a man who understood how government should work, cautioned that  

"It is incumbent on every generation to pay its own debts as it goes."

 That is something that has been lost on us.  If we don't address our debt burden Mr. Obama, our Country may be lost.

Oops! Irish Police Finally Learn to Speak Polish

Ireland has been chasing a Prawo Jazdy, a Polish motorist who has accumulated over 50 citations in Ireland.  Well, Reuters is reporting that the chase is over.  Apparently, the internationally saavy police force finally realized that "Prawo Jazdy" means "Driving License" in Polish.  The Police had been copying down the words printed on the license thinking it was the driver's name.  It looks like now there are 50 separate scofflaws instead of one motoring mastermind.

The Rant Heard Around the World

Rick Santelli's now famous rant on CNBC in reaction to the President's mortgage plan has resonated with America.  Evidence of how he hit home comes from the White House response, which shamelessly attacked Rick in a most undignified manner.  Well, Rick and CNBC are not taking the attack sitting down.  Rick defended himself and once again explained how Obama's plan to use our tax dollars to pay for bad loans so banks don't have to take a loss and the borrower can keep houses they can't afford is simply bad policy and unfair to the nation.  

I encourage Rick and CNBC to tour across the country to rally the 92% of us who play by the rules to make Obama and Congress act in a fair and prudent manner, especially with our tax dollars.  If the government continues on this course, history will look back at Rick at view his rant as the shot heard around the world.  (I have never owned a pitchfork, but if Rick has a rally, I may just go buy one.)

Obama Calls For Fiscal Responsibility - Yeah, Right!

Last week, President Obama signed into law a $787,000,000,000 spending bill.  About 70% of the bill is pure government spending (including using tax dollars to repay irresponsible borrowers'  mortgages) and the rest tax cuts.  $787 Billion Dollars.  Our deficit is now about 10% of GDP.   After cheer leading spending in the Senate and now expanding government spending from the White House, Obama now calls for a "fiscal responsibility" summit.  

This sounds like a Clintonesque listening tour where you gather everyone in a room purportedly to hear their views and you end up cramming down your logic for more spending.  To top it off, the "summit" is being hosted at a the White House State Dining Room (at taxpayer expense).  Fiscal Responsibility is sorely needed in this Country.   Our social programs have morphed from a safety net to help those most in need to an entitlement program where everyone participates in the redistribution of wealth.  Pork barrel politics remains a fixture of legislation.  Tax and spend is the hallmark of our government - whether by the liberal left of conservative right.  Government is too big; it takes up too much of our economy; it burdens real economic growth.  

President Obama is an advocate of big government and big spending.  Don't give me this lip service crap that he is truly interested in fiscal responsibility.  If he was, he would let the insolvent banks go bankrupt instead of using taxpayer dollars to line the pockets of the banks' executives.  He would allow market prices to find their natural levels without government interference.  He would veto pork spending by Congress - including most of the wasteful and useless programs in the $787 billion spending bill. On the revenue side, he would make sure people in his administration pay their taxes like we are asked to do.  It is an insult to America to call for a "fiscal responsibility" summit when you don't believe it.  Stop the nonsense.  Just stop.  The link to the story from the Washington Post is below.

The Washington Post Article Obama Plans Summit Next Week On Long-Term Budget Difficulties

Big Brother Is Now Watching You

We all knew it was just a matter of time before George Orwell's vision in his then futuristic book 1984  would come to pass.  Little by little the network is being put to use.  The latest, courtesy of Homeland Security, is installed in Chicago.  The network of street cameras is up and monitored by Chicago's emergency communication center.  Sure, you make a 911 call and the nearest camera is identified, but take a close look at the picture from the New York Times Article.  This is not just emergency assistance - it is outright monitoring of our activities.  Hello Big Brother.

What Is Wrong With Deflation?

Fed Chair Ben Bernanke strongly believes that deflation is a very bad thing, and is using all the resources of the central bank (even some beyond its authority) to prevent deflation from setting in.  Is deflation really that bad for most of us?  Let's take a quick look.

First, the arguments that deflation is a bad thing center around the debt burden of individuals and businesses.  The theory is that it is more expensive to repay debt with deflated money, than it would be otherwise.  As a result, businesses would go bankrupt (as they did during the great depression) because they could not handle the relative increase in  the debt burden.  In addition, deflation slows the pace of commerce because consumers delay purchases today because deflation makes goods cheaper tomorrow.

While the drum has continually beaten those arguments to support monetary policy that continually devalues the dollar, they ignore reality.  To begin with, deflation is a good thing for the 95% of our society that lives within their means.  When the price of a new car falls, that is a good thing.  Commodities are cheaper, finished goods are cheaper, food and necessities are cheaper.  I am not an economist, but it seems to me that having lower prices helps me out.  Our trade deficit keeps growing because we can't price goods and services competitively.  If prices are lower, exports may grow.  Indeed, maybe there will be a return to manufacturing right here in the States!  Creat a few jobs.  That's a thought - using American ingenuity to produce better, faster, cheaper products at home.  But, I am not an economist.  Besides, it makes all the pennies I have been collecting in my jar more valuable.  I might even spend them someday.

So, what of the argument that debt is more expensive?  The fear is that companies will be wiped out.  What the protagonists ignore is modern bankruptcy law that restructures debt.  If prices (and consequently income) falls to a level where debt can't be serviced, the debt will be lowered through bankruptcy.  Indeed, as long as we are on the path to nationalizing our insolvent banks, once we take them over, we can just restructure everyone's debt with legislation.  For years the banking industry has lobbied to make bankruptcy laws tougher, and in fact successfully convinced Congress to "reform" the bankruptcy laws by making it tougher for individuals to get out from under their debt.  It is time to rethink that strategy.  If lenders must suffer a lost from bad credit decisions, then it is more likely that they will force themselves to make better credit decisions and not lend to people who can't afford to repay.  But that is prospective.  We need to authorize bankruptcy courts to reduce everyone's debt - even home mortgages.  Better yet, just calculate the rate of deflation and reduce everyone's debt by that amount!

Deflation would not slow real consumption.  To be sure, people will not finance purchases of goods they cannot afford, but that is not real consumption.  If we have needs, we will purchase goods at market prices, even when they will be less expensive later.  I will still go to the grocery store weekly to buy food.  I will still go to the barber shop.  I will still purchase a new car when my existing one dies.  (I have 7 tvs in my house, I doubt I will purchase a new one in a long time.)  Just take a look at computer prices.  Over the past 10 years (or longer), computer prices have continually fallen.  Has that stopped the flow of money into computer purchases?  Other than cyclical demand issues, deflation has not affected the computer industry.  (Of course, the Government in its infinite wisdome ignores price declines in calculating CPI and instead imputes the "hedonistic" value of better products into the equation to make deflation look like inflation.)  Deflation in products has spurred a culture of improvement to provide more value in order to induce purchases.  To me, that is a good thing.  But, I am not an economist.

Tax Cuts For Everyone!

Normally I am ecstatic when I hear of tax cuts.  Anything that will reduce the cost we bear to sustain our government is generally good.  On the other hand, Obama's "stimulus" tax cuts are just plain stupid.  Reuters is reporting that President Obama ordered the Treasury Department to begin implementing the tax cuts to the nation's workers by reducing the amount withheld from paychecks.  How much is less will be withheld?  About $15 per week.    

Barak Obama actually sounded proud of that!  What will $15 per week do anyway?  How many more big screen TVs will that buy?  Let's see, at $15 each week, if saved in our nations insolvent banks (with virtually no interest) after a year, each worker will have about $750.  After 2 years they might be able to buy another TV.  That is stimulus we can believe in!  

Wait - with $15 per week, I can apply for a new mortgage loan.  I will just accidentally add 2 more zeros to it and get a huge mortgage to buy a new, larger home with a third bathroom, then default on the mortgage and have the government pay for it!

The link to the Reuters story is: 

http://www.reuters.com/article/topNews/idUSTRE51G5X720090221

Great Chart from EconompicData!

The Econompic Data blog (http://econompicdata.blogspot.com/) has a great graphic on the moral hazard of Obama's mortgage bailout plan.  Very pithy, but it also points out exactly why the majority of us are so outraged by having our government steal our money to pay for property other people can't afford.  The chart is reproduced below, but you can see more at the above link.

Click on the above chart for a bigger picture

Hold Those Responsible Accountable!

Outright bank fraud and fraudulent and reckless banking practices contributed to the current economic meltdown.  Everyone involved in the process - from the borrowers to the brokers to the bankers to the underwriters and ratings agencies - should be held accountable.  How?  Existing fraud laws are sufficient, but Congress should expressly authorize private individuals to pursue these bad actors for a cut of the recovery.  Authorize the public to bring the equivalent of a qui tam  action in the name of the People of the United States against those  involved in this massive fraud and reckless conduct.  Until these individuals are pursued, the country will not be able to put the crisis behind and will not be able to have faith in the markets or banking system.   

As we well know by now, borrowers falsified mortgage applications to get loans they could not repay in order to buy houses they could not afford.  Mortgage brokers assisted and guided these borrowers into lying in order to get qualified so the mortgage broker could get a commission from the banks.  The banks, in turn, knew and understood that they were approving loans with less security and lower ratios than they usually required, and they knew that noone to that point had verified the information on the mortgage applications.   Knowing these loans were substandard, the banks packaged the mortgages for sale and colluded with the ratings agencies to give the collective pool of loans a higher rating than the individual loans in that pool deserved.  That was only the start of the chain, but that chain is oozing with culpability.

Instead of bailing out the banks that were at the very least collusive with the reckless conduct and/or using my tax dollars to pay my neighbor's mortgage, spend the tax dollars to pursue and hold accountable those truly responsible or authorize the private sector to do so.  Create an army of private attorneys general to pursue those who participated in this fraud.  Start with the borrowers who lied on thier applications.  Not all borrowers lied on thier applications and not all borrowed beyond their means.  Recover what you can from the ones that are culpable and leave the rest alone.  Some estimates are that these liars are less than 8% of the mortgage borrowers.  Hold these thieves accountable!

After ferreting out the dishonest borrowers, use discovery or whatever practical leverage can be applied to encourage the lying borrowers to identify the mortgage broker involved and the process used.  Then pursue the mortgage brokers.  With a vengence.  Like borrowers, not all mortgage brokers are evil.  Many were actually doing a great job placing legitimate credit with lenders.  As an aside, it is a shame that the governments are moving to over regulate the mortgage brokerage industry based on the fruadulent actions of a relatively small minority.  Focus on the small minority of mortgage brokers.  Discover how the brokers encouraged (or misled) borrowers into misstating accurate information on their application.  (Did you ever use a mortgage broker - you filled out forms by hand and they input the numbers into the computer on their forms - - the trouble is the broker never put the same numbers onto the form - - but I digress.)  These brokers were instrumental in perpetrating the fraud.  Either they failed to input the correct information in order to fudge the numbers, and/or they encouraged the borrower to misstate their financial information and/or they turned a blind eye to obviously false information.  Ferret these brokers out and recover from them the money defrauded out of the system by these loans.  Hold these thieves accountable!

 Don't stop at the mortgage brokers.  The fraud gets worse and the pool of wrongdoings is not empty.  Go after the executives and everyone in the chain at the banks who recklessly or intentionally encouraged the mortgage brokers to lie.  There is a now famous "Cheats and Tips" memo from Chase that circulated instructing its brokers how to lie on loan applications.  (Isn't that bank fraud?)   Many more examples will surface if we stop protecting those responsible and hold them accountable.  Hold these thieves accountable!

There is further to go too!  We have the ratings agencies that packaged and sold these junk bond grade assets as the highest grade assets.  That is fraud too.  It isn't just an errant opinion on value, it is systemic fraud.  Hold these thieves accountable!

Authorizing private actions and an army of private attorneys general will remove the burden of prosecution from the government and remove the recovery from the spectre of government corruption.   Part of the problem with arresting the downward slide of the economy is that noone has any faith in the system - with good reason.  It was a rigged game.  Until the government is willing to prosecute the people that raped our banking system with fraudulent and reckless practices to line their own pockets, no faith will ever be restored in the system.  (With all this fraud out their, maybe we should just forget about authorizing private actions and use the stimulus money to hire every attorney out there to purse the perpetrators - nah  - we need the private attorneys general. )