$4 Trillion and Nothing to Show for It.

Congress, without debate or investigation of any sort, blindly approved bailout after bailout.  $4 Trillion dollars of your hard earned dollars have gone to the financial rescue of banksters.  Now, after committing to spend all that money, your non-representative representatives heard a report from an oversight panel that told Congress the bailout plan was ill conceived and isn't working. 

The Congressional Oversight Panel, approved after Congress voted without little debate on allowing Treasury to have $700 billion of TARP fund.  The panel is chaired by Elizabeth Warren, a Harvard Law School professor.  The findings (Executive Summary found here) point out that there are three general approaches to crises: 1) liquidation of troubled institutions (as was done in the 1980's S&L crisis); 2) reorganization of the institutions using conservatorships (as was done with Continental Illinois and Sweden in the 1990's); or 3) Subsidization (as was done with Japan during its lost decade).  The report noted that the total spent on subsidization to date exceeds $4 Trillion Dollars.

The liquidation option, while the best choice is politically difficult, but provides certainty to the markets, prevents unending subsidies, and results in a quicker resolution to the crisis.  Our elected officials chose not to liquidate the insolvent banks.  It worked during the S&L crisis.  Reorganization involves replacing management and selling off bad assets, but it taxes government resources and results in politicization of the business.  Our non-representative representatives chose not to reorganize and replace management.  It sort of worked with Continental Illinois.  Subsidization involves endless commitment of taxpayer resources, hides true value and delays economic recovery.  It didn't work with Japan, but this is how our government chose to spend our money - without debate or fact finding.  

We know the path our elected officials chose - a path doomed to failure from the beginning.  The only way subsidization could work is if the crisis was short and shallow.  In other words, if the crisis was limited to just a temporary dip in housing prices that caused a short term liquidity issue, subsidization might have worked.  We all know from history that real estate crises are never short term.  Despite receiving calls and letter at the rate of 300 against the bailout to every one in favor, and despite having a cadre of economists telling Congress that the bailout was a bad idea, Congress went ahead with its plan.  Now we know it won't work. 

What are you going to do about it?  It is never to late to exercise your constitutional right to let your elected officials know how you feel.  Send the tea bags.  Write the letters.  Go onto the websites and send email messages.  There are plenty of ways to express yourself.  Remember - if you don't tell your representative, who will?

Below is a video introduction to the oversight panel's report.  Enjoy,

SOTUS

AUTOS CONTINUE TO RUST IN PORTS

US Automobile sales are expected to continue to decline about 42% from last year at this time, Reuters reports..  That is only 685,000 cars and light trucks were sold in February, although that number should be up slightly  from January sales.  Annually, that projects to 9.5 million cars and trucks - that is the same sales level as in 1982.  Yikes.  

The decline, however, should not have been unexpected from the auto industry.  Over the past five years, the industry ramped up production and sold cars on credit to borrowers with lower risk profiles than normal.  The availability of credit and low interest rates artificially accelerated demand by a couple years.  The decline in auto sales is heading towards the mean, although as can be expected, the sales decline will need to overshoot the mean before coming back.  

This is not the first time in history that we have experienced such a cycle in manufacturing and in the auto industry in particular.  Granted, this occurs at the same time a global financial crises occurs (due in part to the auto makers' foray into the credit industry), but it is hard to have any sympathy for an industry who's business practices caused sales demand to increase beyond what was sustainable.  Instead of taking the profits and putting them to use restructuring the company and preparing for the inevitable decline in demand, the auto makers squandered the resources and find themselves begging Washington for more bailouts.  

Bailouts are not the solution to poor business practices.  Forced restructuring is the solution.  Chop the companies up into bits and sell off the parts to the highest bidder.  The industry won't go away, and will be much stronger  as a result.  Manufacturing can be profitable, and America can sell price competitive products once the legacy systems burdening the industry are put to rest.  

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.

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.)

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

The Outrage Is Beginning

Mr. President - Pay Attention To The Person On The Street!  

I do not live in a sheltered environment.  Nearly everyone I speak to has a comment about the government spending program.  While there is some debate as to whether spending will stimulate anything (I don't think so, but I could be wrong), everyone uniformly criticizes the plan to subsidize mortgage payments so people can stay in houses they can't afford.  There is sheer outrage when discussing the mortgage bailout plan.  

Most of us work hard and play by the rules.  We spend our money wisely.  We bought houses that we could afford with 30 year fixed mortgages (well, most of the people I know).  We didn't move up into the $1,000,000 - $2,000,000 McMansions because we knew the monthly payments ate up too much of our monthly income.  We bought on credit, but we paid the credit back.  Now, we want to punish people like us for living responsibly and reward those that took a risk and failed.  Instead of making them pay for thier mistakes,  our governement is making us pay for our neighbor's mortgage.  This goes beyond a liberal-socialist wealth redistribution plan.  It is pure stupidity.  It turns my stomach.  It is the stuff that foments rebellion.  It is acts like those that will be cited as one of the reasons for the Second Boston Tea Party.  

Not only is it morally wrong - and even liberals have morals (I know, I was a knee-jerk liberal in my younger days) - but it is being funded with money we don't have.  Ultimately the $275,000,000,000 mortgage subsidy plan will cost much more, and will be funded either with a substantial increase in taxes paid by those who worked hard, saved and played by the rules, or will be funded by the cruelest tax of all - the devaluation of the dollar.  We know this; we understand this.  Don't let it happen.  Taking my money to line your friends pockets is not only undemocratic, but it will lead to the downfall of our form of government.  You are starting a rebellion Mr. President.  Let's have some change we can believe.

What Exactly Are We Stimulating?

By the time I post this President Obama will have signed into law one of the largest government spending programs in history. I realize that Congress needs to do something and many of the citizens of this Country and the world at large have called upon our government to DO SOMETHING, but I think we all expected that these elected officials would actually try to figure out how to do something that would actually help rather than hurt. This spending bill is more of the same pork barrel governmental waste that is symptomatic of the root cause of the mess in which we are mired. 

The problem is demand. Demand creates jobs. Demand increases production. Demand supports prices when it exceeds the available supply. The spending bill does not create demand for anything. It spends money taking unemployed people and putting them on the taxpayer's dole. 

Demand in our country is created by the consumption of goods and services by individuals and the private sector. Demand itself is stimulated by need. Individuals and the private sector are not in a position to need anything because of our massive increase in consumption over the past few years and their bloated debt. How many new TVs, cars, computers, ipods do we need? Freeing up credit and making it available to people who can't afford to take on more debt doesn't create real demand. It creates real bankruptcies.  It creates the overextension of credit issue that started this mess to begin with.

Any solution proposed by the government needs to focus on reducing our nations debt burden, and reducing the debt burden of the individuals and businesses who spend their dollars in a productive manner. Most americans get this. Over the last few months, we (collectively) have been charging less on our credit accounts and paying down some of our debt.  Certainly there are some who haven't and can't pay down debt.  There are those whe never should have borrowed to the extent they did in the first place and will have to endure a painful solution to reduce their debt.  Why can't the government take steps to reduce the debt of the people as well?  It is time to pay the piper.  

John Maynard Keynes postulated that while government debt matters in theory, it doesn't matter in practice because the debt will have no effect in his lifetime.  That has been our philosophy for the 3+ generations since Keynes.  Well, you know what? Keynes is dead.  His immediate followers are dead.  Government continues to rack up debt.  Someone needs to pay the debt.  Debt does matter now!  Keynes convinced generations to put it on the next generation.  We are that next generation, and we now need to pay the piper not only for our own excesses, but for those of the generations since the last great depression. Until we clean up our collective balance sheets - either by bankrupting debtors or devaluing the currency or by some other method - we will have a substantial barrier to demand growth.

Let's focus on the real problem!  Government spending does not create real jobs.  It is a stopgap measure that takes away labor and capital from the private sector.  Don't get me wrong, I am not saying that everything in the spending bill is evil - there are some noble pork projects that our elected representatives have been lobbied hard to deliver and might in a perfect world improve some standard of living in some segment of our society.  Those are issues for congress to debate.  Just don't do it under the guise of trying to stimulate the economy.  In the long run it chokes the economy.  While the long run may not have had a practical effect on our parents and grandparents, it does to us.  Deliver a real solution that addresses the core issues, not a band-aid for a symptom.