Take a Stand Against Government Spending

"I'd gladly pay you Tuesday for a hamburger today".

-- J. Wellington Wimpy

If you are old enough to remember the Popeye cartoons, you will remember Wimpy and his promise to pay at a later date for a hamburger today. As Congress listens to the latest pleas for $25 billion from GM (GM), Ford (F), and Chrysler, I can’t help but think of Wimpy’s promise. The entire $700 billion bailout (plus the $150 billion of pork used to buy votes) is based on the Wimpy motto. Give me what I want today and I’ll pay you at some future uncertain date. This has become the motto of government, corporate America, and consumer America.

The most amusing part of CEOs begging Congressmen for $25 billion is the assumption that there is $25 billion to give. The United States has no money. We are broke. There is no money – nada, zero, zilch. We have already spent $10.6 trillion more than we have. That is a lot of hamburgers. Next Tuesday is almost here. We have committed $1 trillion more than we have for the next year. We have committed $53 trillion based on promises already in the pipeline. Uncle Sam, the personification of America, may need to step aside for the new personification of America, Wimpy.

Citigroup has overshadowed the automaker’s “miniscule” request of $25 billion with today’s taxpayer bailout of over $300 billion. Over the weekend, when the Fed & Treasury do their best work, Vikram “Wimpy” Pandit asked Ben “Popeye” Bernanke for $300 billion, and promised that his worthless derivatives would be worth something next Tuesday. Somewhere, Charlie Prince is still dancing.

TARP – I Thought Turkeys Could Fly

"As God is my witness, I thought turkeys could fly!!!" -- Arthur Carlson, WKRP in Cincinnati

It's a helicopter, and it's coming this way. It's flying something behind it, I can't quite make it out, it's a large banner and it says, uh - Happy... Thaaaaanksss... giving! ... From ... W ... K ... R... P!! No parachutes yet. Can't be skydivers... I can't tell just yet what they are, but - Oh my God, Johnny, they're turkeys!! Johnny, can you get this? Oh, they're plunging to the earth right in front of our eyes! One just went through the windshield of a parked car! Oh, the humanity! The turkeys are hitting the ground like sacks of wet cement! Not since the Hindenburg tragedy has there been anything like this!– Les Nessman, WKRP in Cincinnati

Arthur Carlson was the clueless moron station manager of WKRP in Cincinnati, a sitcom from the late 1970’s. His idea for a Thanksgiving promotion was based on his belief that turkeys could fly.

Hank Paulson is the Arthur Carlson of our generation. Instead of dropping turkeys from a helicopter, he has dropped $179 billion. It had the same impact. The billions have hit the ground like sacks of wet cement. The $179 billion has been distributed as detailed in the following chart. The first $125 billion was forced on the nine largest financial institutions by Paulson on October 28. Since that forced feeding, 21 other financial institutions have applied for and received an additional $34 billion from the $700 billion trough.

AIG is a bottomless pit that has sucked $40 billion more into its vortex. Every company in America is trying to figure out how to get a piece of the action. American Express (AXP) and GMAC (GMA) are converting to banks so they can get bailed out by taxpayers for loaning money to people who couldn’t repay them. GMAC generated all of GM’s false demand over the last 5 years by providing financing to anyone who could generate fog on a mirror and sign an X on a loan document.

Date	Name of Institution	Amount
10/28/2008	Bank of America Corporation (BAC)	$15,000,000,000
10/28/2008	Bank of New York Mellon Corporation (BK)	$3,000,000,000
10/28/2008	Citigroup Inc. (C)	$45,000,000,000
10/28/2008	The Goldman Sachs Group, Inc. (GS)	$10,000,000,000
10/28/2008	JPMorgan Chase & Co. (JPM)	$25,000,000,000
10/28/2008	Morgan Stanley (MS)	$10,000,000,000
10/28/2008	State Street Corporation (SSP)	$2,000,000,000
10/28/2008	Wells Fargo & Company (WFC)	$25,000,000,000
10/28/2008	Merrill Lynch & Co., Inc.(MER)	$10,000,000,000
11/14/2008	Bank of Commerce Holdings (BOCH)	$17,000,000
11/14/2008	1st FS Corporation	$16,369,000
11/14/2008	UCBH Holdings, Inc. (UCBH)	$298,737,000
11/14/2008	Northern Trust Corporation (NRTS)	$1,576,000,000
11/14/2008	SunTrust Banks, Inc. (STI)	$3,500,000,000
11/14/2008	Broadway Financial Corporation	$9,000,000
11/14/2008	Washington Federal Inc. (WFSL)	$200,000,000
11/14/2008	BB&T Corp. (BBT)	$3,133,640,000
11/14/2008	Provident Bancshares Corp. (PBKS)	$151,500,000
11/14/2008	Umpqua Holdings Corp. (UMPQ)	$214,181,000
11/14/2008	Comerica Inc. (CMA)	$2,250,000,000
11/14/2008	Regions Financial Corp. (RF)	$3,500,000,000
11/14/2008	Capital One Financial Corporation (COF)	$3,555,199,000
11/14/2008	First Horizon National Corporation (FHN)	$866,540,000
11/14/2008	Huntington Bancshares (HBAN)	$1,398,071,000
11/14/2008	KeyCorp (KEY)	$2,500,000,000
11/14/2008	Valley National Bancorp (VLY)	$300,000,000
11/14/2008	Zions Bancorporation (ZION)	$1,400,000,000
11/14/2008	Marshall & Ilsley Corporation (MI)	$1,715,000,000
11/14/2008	U.S. Bancorp (USB)	$6,599,000,000
11/14/2008	TCF Financial Corporation (TCB)	$361,172,000
	Total Distributions	$178,561,409,000

By any reasonable assessment, the Troubled Asset Relief Program has been a miserable failure and a complete waste of taxpayer money. The basis used to ram the bill through Congress was the purchase of the toxic assets off of bank’s books. Not one dollar has been used for this purpose. The main purpose for passing the $700 billion bailout was to restore confidence in the markets. Let’s assess the success of this effort:

• On October 3 when the TARP was signed into law, the S&P 500 was at 1,114. Today, it is 800. The 28% decline in the markets in five weeks doesn’t show tremendous confidence in Paulson’s acts.
• Paulson’s changing course every few days has shown the world that he is winging it. He has floundered from buying toxic assets to jamming capital down the throats of banks to his current plan to support consumer debt. Was Paulson lying to Congress about buying toxic assets all along? Don’t worry, he believes he is smarter than everyone in America because he ran Goldman Sachs (GS) and created the toxic instruments that are bringing down the financial system. He has a Harvard MBA, you know.
• Sugar Daddy Paulson has handed out $310 billion of the initial $350 billion tranche. He would have to go back to Congress for the 2nd $350 billion tranche. Congress was supposed to create a five-member congressional oversight panel, but hasn’t. The White House was supposed to nominate, and the Senate was supposed to confirm, a special inspector general to audit and investigate where the funds are going. After six weeks, President Bush hasn’t made a nomination. It is only $310 billion of taxpayer money, what’s the hurry anyway. I’m sure these banks will use the money responsibly at exotic resorts, flying private jets, paying well deserved bonuses, and getting massages to relieve their stress.
• Poorly run automakers (GM, Ford, Chrysler), poorly run cities (Atlanta, Philadelphia, Detroit, and Phoenix), and poorly run states (California) are begging for a piece of the taxpayer pie.
• The banks who have received the $179 billion have not made any loans with the money. Some are using the money to buy other banks. Their goal is to become too big to fail. Others, like Citigroup, have used the money to buy back bad assets from SIVs they created to mislead investors. They were on the verge of bankruptcy and have sidled up for another $20 billion a week after their CEO proclaimed their strength.

Michael Lewis, author of the classic Liars Poker, in a letter to Hank Paulson last week captures the absurdity of the TARP.

As much as I admire all of your decisions I can’t help but notice that the main qualification of the bankers to whom you have been giving money, so that they might make smart loans, is that they have gone almost bankrupt by making stupid loans.

As your mind is subtle, I can only assume that you secretly believe that the American economy right now needs not smart loans, but more stupid ones -- and thus that you have targeted the bankers who have proven they can make them.

I, unfortunately, have not flirted with bankruptcy, or made any stupid loans. But here’s my point: I haven’t been given the chance! Allow me to prove my financial ineptitude to you. I swear to you that when I return for my second round of assistance I will have proven myself fully qualified to receive it.

By giving money to bankers who have made many stupid loans you have made life harder for bankers who have never made stupid loans. By aiding the dumb banks you prevent the smart ones from replacing them. It may be that just now smart bankers are the last thing we need -- but one day they may come in handy, and so we should do what we can to keep them from getting discouraged.

Hank has indicated that he is done dropping turkeys from the helicopter. He is counting the days until January 20, so he can get out of town and relax with the $700 million fortune that has probably been invested in Treasury bills for the last 2 years. At least he’ll enjoy a comfortable retirement – many Americans will not.

Federal Reserve Gone Wild – Helicopter Ben To The Rescue

As of May 15, 2008 the Federal Reserve Bank of the United States had $881 billion of assets, $840 billion of liabilities, leaving $41 billion of capital. Federal Reserve Chairman Ben Bernanke has fired up the printing presses and helicopters since then.

Ben has created the Term Auction Facility, Term Securities Lending Facility, Primary Dealer Credit Facility, Commercial Paper Funding Facility, and Money Market Investor Funding Facility, among others in the last eight months. He also started paying interest to banks on reserves. The goal of unfreezing the system has been a wretched failure. Banks are finding it easier and safer to borrow from the Federal Reserve, earn interest on their TARP capital, and not make any loans.

All of the facilities and programs are a crutch that encourages banks to do no business. Why would a rational banker make loans to businesses and consumers as we are entering the deepest recession since the 1930’s? This is where our country and government have become warped and dysfunctional. The Government is now encouraging reckless lending as the solution to previous reckless lending.

In the space of two months, Ben Bernanke has doubled the balance sheet of the Federal Reserve. He is accepting bubble gum wrappers, old shoes, and Dick Cheney’s defaced copy of the Constitution as collateral for loans from the Fed. When Paulson and Bernanke were selling their rescue plan in front of Congress in September, they stressed transparency, oversight and openness. The total lack of transparency and oversight were the reason that our financial system came to a grinding halt. Without transparency, no bank trusts any other bank. The black box aspects of derivatives have eliminated trust in the system.

So, what does Bernanke do but withhold the names of all financial institutions that have borrowed from the Fed and will not reveal the collateral that they have put up for those loans. The Fed has lent $2.2 trillion to banks in the last few months. The Fed has refused to reveal any information regarding these loans. Bloomberg News has sued the Fed under the Freedom of Information Act to force them to reveal where $2.2 trillion of taxpayer money has gone. The Bloomberg lawsuit argues that the collateral lists "are central to understanding and assessing the government's response to the most cataclysmic financial crisis in America since the Great Depression.'' Investment Manager Ted Forstmann was correct when he said, “It’s your money; it’s not the Fed’s money. Of course there should be transparency.”

Contrast openness and transparency with the words of Ben Bernanke and Barney (doesn’t he look like Wimpy?) Frank.

Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting. We think that's counterproductive. First, the success of this depends on banks being willing to come and borrow when they need short-term cash. There is a concern that if the name is put in the newspaper that such-and-such bank came to the Fed to borrow overnight for a perfectly good reason, that others might begin to worry is this bank creditworthy and that might create a stigma, a problem, and might cause banks to be unwilling to borrow, and that would be counterproductive.

- Ben Bernanke in front of House Financial Services Committee

My local paper lists the people who were arrested for DUI on a weekly basis. The idea is that if you know that your neighbors will see this, you will not drink and drive. Ben is encouraging banks to drink and drive.

"I talked to Geithner and he was pretty sure that they're OK... If the risk is that the Fed takes a little bit of a haircut, well that's regrettable.'' Such losses would be acceptable, if the program helps revive the economy. Frank said the Fed shouldn't reveal the assets it holds or how it values them because of "delicacy with respect to pricing.'' He said such disclosure would "give people clues to what your pricing is and what they might be able to sell us and what your estimates are.'' He wouldn't say why he thought that information would be problematic.

- Barney Frank, according to Bloomberg 11/21/08

How does complete secrecy restore confidence in the system? I sure feel secure with Barney Frank leading Congress on all financial issues. I wonder what a Washington insider like Frank’s definition of “a little bit of a haircut” amounts to. A 5% haircut on $2 trillion would be a mere $100 billion. Chump change in Washington.

Negative Wealth Affect

As the bureaucrats, professional lifetime politicians, corporate lobbyists, and media spin artists figure out how to waste our tax dollars, real people in America are suffering dramatic declines in their net worth. The chart below shows consistent growth in American household net worth since 1945, with only a slight drop during the Dot Com Crash. The net worth of U.S. households peaked at $58.7 trillion in 2007. We are now in the midst of the greatest decline in the history of the United States.

The household balance sheet of American households tells an interesting story. Americans experienced a dual boom in stocks and real estate between 2002 and 2007. Real estate assets grew by 51% and financial assets by 55% over this time period. These increases gave rise to a positive wealth effect. When people perceive themselves to be richer due to the increase in the value of their homes and actual increases in investments, they are more likely to spend. This perception, along with a strong employment market, led Americans to make dreadful financial decisions. Even though real estate rose by 51%, mortgage debt rose by 75%.

What Americans are learning is that real estate can decline, but the debt stays forever. Much of that extra mortgage debt was used to buy TVs, cars, kitchens, bathrooms, and vacations. None of these luxuries have the potential to appreciate. Based on the decline in housing and the stock market, I have produced an estimate of the current national household net worth. By my conservative estimation, household net worth has declined by over $10 trillion since the beginning of the year and is now back to 2003 levels. By the time this recession is over, we will have eliminated all of the net worth created during the entire Bush reign. It was all an illusion, created by humungous amounts of debt, fraud, manipulation and deceit.

								Estimate
Figures in $ trillions	2002	2003	2004	2005	2006	2007	6/30/2008	11/24/2008
Real Estate Assets	$14.9	$16.3	$18.2	$20.4	$21.8	$22.3	$21.8	$20.0
Financial Assets	$29.7	$34.2	$37.3	$39.8	$43.5	$45.9	$44.3	$38.0
Other Assets	$3.4	$3.6	$3.8	$3.9	$4.1	$4.3	$4.4	$4.5
Total Assets	$48.0	$54.1	$59.3	$64.1	$69.4	$72.5	$70.5	$62.5
Mortgage Debt	$6.0	$6.9	$7.8	$8.9	$9.9	$10.5	$10.6	$10.7
Consumer Credit Debt	$2.0	$2.1	$2.2	$2.3	$2.4	$2.6	$2.6	$2.7
Other Liabilities	$0.8	$0.9	$1.0	$1.0	$1.2	$0.7	$1.3	$1.3
Total Liabilities	$8.8	$9.9	$11.0	$12.2	$13.5	$13.8	$14.5	$14.7
Household Net Worth	$39.2	$44.2	$48.3	$51.9	$55.9	$58.7	$56.0	$47.8

Source: Federal Reserve

American consumers are under intense stress. Now that there is no equity left to borrow against their houses, Americans are doing what they know best. They are whipping out one of their 30 credit cards. The credit card write-offs will be the next tsunami that hits our banking system and will be subsidized by more taxpayer funds. According to John Mauldin, credit card debt has exploded in the last few months:

Commercial Bank 'exposure' via the total amount of Credit Card 'loans' outstanding has risen MORE in the last ten WEEKS, than it did in the previous ten MONTHS COMBINED !!! "Moreover, the growth in the last ten-weeks, $32.3 billion, or about $600 million per 'shopping day' since the beginning of August ... represents nominal growth of + 9.3% ... or ... + 48.3% annualized over the last ten weeks." According to American Express, delinquencies on credit payments rose to 4.1% of all credit outstanding in the 3Q, up from 2.5% in 3Q of 2007, with Bank of America's rate rising even more steeply, to 5.9% in the quarter. Moreover, the 'pool' of loans deemed 'uncollectable' rose to a high 6.7% in the 3Q, soaring from 3.6% last September. What consumer spending there is has been fueled in part by credit card. Greg notes this uncomfortable piece of data: the second largest "merchant-vendor" for credit card use is now McDonalds. This suggests that many consumers are in serious distress when they need to get their $4 Big Mac and fries with a credit card.

The unemployment rate is currently 6.5%, according to U-3 government figures. The broadest U-6 measure, which includes discouraged and marginally attached workers, is 11.8%. If you are still discouraged and jobless after one year, the government ignores you in its calculation. How convenient for the government bureaucrats. If these workers are included, the unemployment rate is currently 16%. When someone tells you our current situation isn’t close to the Great Depression because unemployment was 25% in the 1930’s, keep this chart in mind. We have lost 1.2 million jobs in ten months. The U-3 rate will reach 9% by late 2009. That would be another 3.6 million job losses. These are the kind of numbers that could lead to social unrest. Our social services system and food banks will be pushed to the breaking point.

The S&P 500 has declined by 44% in 2008. It has provided an average annual return of -2% over the last 10 years. It has provided an average annual return of 5.8% over the last 15 years. These aren’t the returns that the Wall Street PR machine has been promising you. They have convinced people that stocks always go up over the long run. I guess it depends on your definition of long run. Pension funds, endowment funds, and financial advisors use annual returns of 8% to 10% in their models and assumptions. This shortfall in return will have devastating impacts on States, Counties, and Companies with traditional pension plans, along with the average 401k investor.

So far, 2008 is shaping up to be the worst year for the stock market in history. The guys you see paraded daily on CNBC are shell shocked. Most of these people are worth millions. When someone had $10 million and now has $5 million, it’s a shame. When a 64 year old guy who has worked hard his whole life, followed the rules, contributed to his 401k every week, listened to the stocks for the long run mantra, and accumulated $500,000 in his 401k, loses $250,000 months before his planned retirement, it is a tragedy.

People who thought they could retire will now have to work for many more years. Millions are losing their jobs, while their home value declines and their mutual fund holdings are cut in half. This is the negative wealth effect in full bloom. People are scared to death and will not spend anywhere near the level they have spent over the last 20 years. Forced frugality is here. Embrace it. Young people should be happy with the dramatic pullback in the stock market and housing market. Many valuation and sentiment measures now point to solid long-term returns from this point onwards.

Source: Barry Ritholtz

Creeping Corporate Fascism

For the last 2 weeks I’ve heard the normal fear mongering rhetoric about imminent disaster if the incompetent leaders of U.S. automakers didn’t get a bailout from taxpayers for their strategic blunders. I have heard that if the 3 U.S. automakers were to fail, 1 in 10 workers in America would lose their jobs. According to the Bureau of Labor Statistics, there were 145 million employed workers in October 2008. According to their own information, the U.S. carmakers employ the following number of workers worldwide:

General Motors 266,000

Ford Motor 87,700

Chrysler 132,130

Total Workers 485,830

Approximately 377,000 of these jobs are in the U.S. This is 1 in 385 jobs in the country. The Center for Automotive Research, based in Ann Arbor, and surprisingly funded by the Big 3, coincidentally issued a report, just before the Big 3 CEOs went before Congress, that 2.95 million direct and indirect jobs would be lost if the Big 3 ceased operation. Even this exceedingly broad interpretation of lost jobs comes to only 1 in 49 jobs. The 1 in 10 jobs that Democratic Congressmen have been spouting is a bold faced lie. The bigger the lie, the more likely people will believe it. You can be sure that some PR maggot came up with this slogan and instructed all Democratic Senators to repeat it at every opportunity.

While their PR machines were busy generating lies, the CEOs of GM, Ford and Chrysler were flying to Washington DC on private corporate jets to beg for $25 billion from U.S. taxpayers. The General Motors corporate jet costs $36 million. Rick Wagoner’s roundtrip cost $20,000. A coach roundtrip fare would have cost $600. This hubris by corporate executives who have made the strategic decisions that have ruined their industry is not surprising. Most CEOs in the U.S. believe they are smarter and deserve to be treated as royalty.

Robert Nardelli, the man who ruined Home Depot (HD) while collecting $123 million in compensation and a $210 million severance package, is the epitome of a pompous elitist CEO. He flies on a corporate jet after firing 28,000 Chrysler employees in the last two years. Rick Wagoner has raked in $25 million in the last 5 years, while leading his company to a $72.6 billion loss since 2005. Alan Mulally, who became CEO of Ford in late 2006, received $28 million of compensation for 4 months of work in 2006. He has been well worth the pay. Ford has lost $24 billion since 2006.

General Motors
Financial Statements
	3rd Qtr	2nd Qtr	1st Qtr
in billions	2008	2008	2008	2007	2006	2005
Cash & Cash Equivelants	$ 15.9	$ 20.7	$ 23.4	$ 27.0	$ 24.3	$ 50.4
Other Assets	$ 94.5	$ 115.3	$ 122.3	$ 121.9	$ 161.9	$ 425.7
Total Assets	$ 110.4	$ 136.0	$ 145.7	$ 148.9	$ 186.2	$ 476.1
Short Term Debt	$ 7.2	$ 8.0	$ 6.0	$ 6.0	$ 5.7	$ -
Long Term Debt	$ 36.1	$ 35.2	$ 38.0	$ 38.6	$ 42.5	$ 285.7
Other Liabilities	$ 112.9	$ 149.8	$ 142.7	$ 141.4	$ 143.4	$ 175.8
Stockholders Equity	$ (59.9)	$ (57.0)	$ (41.0)	$ (37.1)	$ (5.4)	$ 14.6
Total Liabilities & Equity	$ 96.3	$ 136.0	$ 145.7	$ 148.9	$ 186.2	$ 476.1
Net Income	$ (2.5)	$ (15.5)	$ (3.3)	$ (38.7)	$ (2.0)	$ (10.6)
Operating Cash Flow	$ (7.5)	$ (0.6)	$ (1.6)	$ 7.7	$ (11.8)	$ (16.9)
"Wimpy" Wagoner Compensation ($mil)			$ 2.0	$ 14.4	$ 4.8	$ 8.5

Source: Yahoo Finance

General Motors will burn through its remaining cash in less than two months. Ford has a little longer. The Democratic fear monger politicians that have been bought off by the UAW, warn of the imminent collapse of society if these automakers declare bankruptcy. Again, the big lie is more likely to be believed by the masses. The GM Board of Directors does not believe that a Chapter 11 filing is a viable option. This is the same Board that thought the Hummer was viable line of vehicles. Chapter 11 Bankruptcy will allow these companies to close unprofitable plants, close dealerships, rid itself of awful management, and renegotiate UAW contracts. They will come out of bankruptcy with leaner cost structure that will allow them to compete with Honda (HMC), Nissan (NSANY), and Toyota (TM). If Congress bails them out with taxpayer funds, they will continue to pay workers $70 per hour versus the $42 per hour paid by the Japanese automakers.

We are heading down a path towards corporatism, where government merges with corporate interests. It has already taken root with the Defense industry and Healthcare industry. This corporate fascism is clearly taking hold, as no one knows where the Treasury and Federal Reserve will set the line that Government will not cross.

It is also taking place at the State government level. In Pennsylvania, a horrifically run retailer, Boscov’s, which uses 1960’s retail ideas and foolishly used leverage to buy a bunch of bad Strawbridge locations, should be liquidating and joining Montgomery Ward on the scrap heap of retail history. Instead, Governor Ed Rendell is using taxpayer money to prop up this horrible retailer. I’m sure the $130,000 that Al Boscov contributed to Mr. Rendell’s political campaigns had nothing to do with Rendell’s actions. It must be a coincidence.

No Easy Way Out

Gonna stand my ground, won’t be turned around
And I’ll keep this world from draggin me down
Gonna stand my ground and I won’t back down

Hey baby, there ain’t no easy way out
Hey I will stand my ground
And I won’t back down.

– Tom Petty – I Won’t Back Down

The incoming Obama administration is now floating the idea of a $500 billion to $700 billion stimulus package. The story, which will be sold to the American public by his well oiled PR machine, is that we must do this to save the country. Have we heard this story before? The country is going through a necessary de-leveraging that will take years to complete. There is no stimulus package that will stop this de-leveraging process. There is no easy way out.

Obama will convince the American public that once we save the country with the stimulus program, he’ll then address our long-term fiscal problems. He’ll convince the Republicans to support the stimulus package by delaying the tax increases on the rich. Democrats have never seen a spending plan they wouldn’t support. Republicans have never seen a tax that they didn’t want to cut. This is the kind of “cooperation” that will quickly lead to a $13 trillion national debt.

Tax cuts for the middle class sounds great, except that a tax cut today is just a tax increase on our grandchildren. We will borrow this money, to cut taxes. Former Comptroller of the U.S. David Walker describes this use of debt in our country:

Individuals go into debt, and when they pass away, the debts go with them. But government debts stay, and they have to be assumed by our children and grandchildren. That’s not only fiscally irresponsible; it’s morally reprehensible.

It is time to take a stand. Government is the problem, not the solution. If the American public believes that another stimulus package will solve our problems, then they are more gullible than I give them credit for. There will be no easy answer to a problem that built up over a 25 year period. Americans will need to spend less, save more, and finally live within their means. The next 25 years will not be as fun and carefree as the past 25 years. Government must address the $53 trillion of unfunded liabilities, develop a cohesive realistic energy policy, enact a simpler tax policy, create a plan to repair our crumbling infrastructure, and encourage ideas that work for improving our educational system.

One ought never to turn one's back on a threatened danger and try to run away from it. If you do that, you will double the danger. But if you meet it promptly and without flinching, you will reduce the danger by half. Never run away from anything. Never!

--Winston Churchill

We have many problems and dangers before us. We need to meet them promptly, without flinching, or our great American Republic will surely enter a period of long slow decline. The choice is ours. Next Tuesday has arrived.

Comments

[naturallight:]

The problem is that now you need the gov't to stimulate the economy. There's no other option. So spend now, get the multiplier effect, and pay it back later.

Also, it's pretty clear that the massive Bush tax cuts, which ballooned the deficit, were the wrong idea. We should have been saving for a rainy day.

2008 Nov 24 12:18 PM

[jack kreg:]

Reagan's genius of tax cuts, also used by JFK and Bush for economic recovery, is the only path out of the swamp of massive government spending. Yes, we will also have to cut gov spending, but not right now. I would propose immediate tax cuts, a one year time spending plan and then in 2010 impose a spending cap at 2008 levels, minus war spending. We cannot just convert war spending into other gov spending, it must be cut.
UK's Brown is proposing tax cuts as a means for economic recovery, imagine, if Brown's tax cut plan went global, with coordinated cuts on worker and corporate income tax, yes, his plan would set the bottom in the current economic downturn and the global economy could begin to recover.

Why not let workers keep more of their own money, they might even make the house payment or rent payment, put a little aside for retirement (as clearly gov funded retirements in the future will be slim to none), or even buy some gas or food. Let the workers keep more of their own money.
Why keep on giving the same gov more taxes, when they are the ones who lead us to this economic crisis.
Maybe cutting taxes on those who employ us would be a good idea, conversely, raising taxes (did I say windfall taxes) would surely not result in more jobs.
Brown's tax cuts should be taken global, free the workers and their employers to fix what the gov's have broken.

2008 Nov 24 12:43 PM

[WhynoT:]

Time to move.

2008 Nov 24 12:48 PM

[Offgrid:]

Wow - good article. We're in trouble. I'm heading for the hills.

2008 Nov 24 12:49 PM

[2222:]

OK Mr. Quinn, Where is the rest of your article on the Auto Industry. Got the Union wage issue right, how about what the Foriegn Gov'ts do for their comapnies in terms of health care and pensions. Then ask youself how with fuel pricese going thru the roof it is that Toyota can still ship 50% of the vehicles they sell here from Japan and make any money at all? Then ask yourself where all the Toyota growth has come in the last several years and its not from fuel effecient cars its from SUVs and Pickups. Then ask yourself where is the real Buy American movement in this country? Ever read anything bad about a Japanese Manufacturer in the Japan press - not on your life. Ever read anything bad about the Japanese Manufacturers in the US - again not on your life. We need to start supporting our own companies the way the foriegners do. Here is a great thought on helping out our economy, stop handing out stupid loans and start buying our own products. Enough is enough already.....

2008 Nov 24 12:59 PM

[raising4dau...:]

On Nov 24 12:18 PM naturallight wrote:

> Also, it's pretty clear that the massive Bush tax cuts, which ballooned
> the deficit, were the wrong idea. We should have been saving for
> a rainy day.

Did you actually read the article? I'm no apolgist for Bush, but the Bush tax cuts didn't create the deficits and debt; they actually increased revenue to the treasury. The problem is that the Bush administration spent $1.25 for every additional $1.00 in new revenue. The problem is outflow, not income.

2008 Nov 24 01:02 PM

[paulseglund:]

The solution for government, corporate America and households is straightforwrd-cut spending immediately in order to survive. Only households and prudent companies are doing just that right now. Tax cuts are always nice but better would be to throw out the tax code and start over or institute a flat tax. Less regulation not more is in order too as this stymies the smart loan bankers and other corporations an d households. Cut off funding to all countries (Israel & the UN included) for 5 years and see what happens. Reduce Fed districts from 12 to 5 will save on duplicative costs. Reduce the headcount in the House of Representatives to a manageable level so new laws are not generated at break neck speed. Many other solutions are available but basically unleash capitalism and the most productive minds will result in a strong economy in a matter of a few years.

2008 Nov 24 01:09 PM

[The World's...:]

Great article. I will put a link on my blog.

2008 Nov 24 01:10 PM

[JohnAl:]

Excellent synopsis of the insanity, Mr. Quinn.

So now it appears that after Paulson and Bernanke have given out goodies to every Wimpy with his hand out, the new president is going to attempt to do 'em one better with his new make work program. So we'll get new roads and bridges. I have just one question. Who pays?

It won't come from taxes, so it's either going to come from borrowing or spending. Borrowing is going to get increasingly difficult, since investors - both private and foreign governments - just took a major hit and are increasingly less trusting that they'll get paid back with anything resembling the dollars they'd invest. So I guess that leaves printing.

So we'll have dollars that buy us less, and we'll have failed institutions propped up, and we'll have new roads and bridges. But we won't be any more productive than we are now because all of that capital will not have been used in productive pursuits.

2008 Nov 24 01:35 PM

[woodsey:]

"a problem that bult up over a 25 year period". At least 28 years by my reckoning.

2008 Nov 24 01:47 PM

[woodsey:]

"a problem that bult up over a 25 year period". At least 28 years by my reckoning.

2008 Nov 24 01:49 PM

[deadinthelo...:]

Interesting article...and the bit about the turkeys was priceless. Nonetheless, this article seems to be more about your vitriol than any forward-looking solutions you might have. I don't see anything new in your complaints; Paulson's been criticized since Day 1 of the crisis, the Big 3 and their labor costs have been in the press for years (although I agree Chapter 11 should be in their future), and as for your use of shadowstats....please.

"The broadest U-6 measure, which includes discouraged and marginally attached workers, is 11.8%. If you are still discouraged and jobless after one year, the government ignores you in its calculation. How convenient for the government bureaucrats. If these workers are included, the unemployment rate is currently 16%. When someone tells you our current situation isn’t close to the Great Depression because unemployment was 25% in the 1930’s, keep this chart in mind."

25% is also a statistic derived from government data, so shouldn't you be adjusting that upwards as well? Debunking shadowstats isn't that difficult, but putting that aside, it seems irresponsible to use shadowstats as support for your argument and then go right ahead and use BLS figures to do the same just a few paragraphs later.

Your metaphor for banks going to the window: "My local paper lists the people who were arrested for DUI on a weekly basis. The idea is that if you know that your neighbors will see this, you will not drink and drive. Ben is encouraging banks to drink and drive." Does this really hold up? It's more like a newspaper refusing to publish the names of DUI arrests because there's a good chance the public might think one of them is a rapist, so they'll go to his house, burn it down, and kill him - only to find out later he wasn't a rapist. Oops. Yeah, my metaphor isn't that good either, but it's better than yours. If you want to discuss transparency that's fine, but don't just equate banks to drunks and move on.

You have plenty of applicable and discussable quotes, but your attacks go a bit over the top. Although I disagree with portions of this article, it's an interesting read and enumerates some positions that people probably aren't hearing enough about. Nonetheless, a few more solutions in place of the ad hominem attacks (attacking Paulson for his Harvard MBA? C'mon now.) and it could be even better.

2008 Nov 24 02:00 PM

[raytayzmd:]

...another way of looking at it -- we were technically bankrupt even before the crisis started...so is it even possible to be more bankrupt?...the question is, presuming the government will raise this money by selling debt instruments, who's going to buy them?...almost everybody else is broke as well!

2008 Nov 24 02:38 PM

[Smarty_Pants:]

Too bad I can't buy shares of McDonalds with my credit card.

Hmmm, perhaps if I promise to repay them Tuesday ... ?

2008 Nov 24 02:41 PM

[drbob66:]

"Government is the problem, not the solution....Government must address the $53 trillion of unfunded liabilities, develop a cohesive realistic energy policy, enact a simpler tax policy, create a plan to repair our crumbling infrastructure, and encourage ideas that work for improving our educational system."

Wait...is government the problem, or the solution? I'm confused.

2008 Nov 24 09:01 PM

[mn33:]

great article. we needed you to be on the november ballot.

2008 Nov 24 09:03 PM

[mn33:]

"When a 64 year old guy who has worked hard his whole life, followed the rules, contributed to his 401k every week, listened to the stocks for the long run mantra, and accumulated $500,000 in his 401k, loses $250,000 months before his planned retirement, it is a tragedy. "

Except a whole lot of those gains came during the 8 years of the bush administration where borrowing and spending bubbled up the markets.
With good and responsible government behaviors in place he would have gone up slower and less (maybe to $350,00)

2008 Nov 24 09:19 PM

[Jimmy Lathrop:]

I give this article five hamburgers out of five!

2008 Nov 24 10:46 PM

[Kunst:]

I believe Mr. Wimpy's next request was, "And will you take a check?"

We are way past the point of no return on this debt. It isn't going to be paid back. If Mr. Wimpy could buy hamburgers with money he created (Wimpy-bucks, but the name may already be taken by you-know-who), he could eat forever. Well, at least as long as the hamburger stand accepted his Wimpy-bucks.

On the other hand, if the hamburger stand has been accepting his Wimpy-bucks for a long time, and has a large "reserve" of Wimpy-bucks (earning interest, of course), what's to keep Mr. Wimpy from just writing them a check for a few trillion WB's and "paying off" his debt? Did you expect him to pay back in hamburgers?

The US's debt is in --> US <-- dollars, just like Wimpy-bucks. Any time we want, we can just write all our bond-holders electronic checks and pay it off. That's what you get for lending to a wastrel, long after you knew that's what he was.

After that, no more borrowing in dollars. Oh yes, we will actually have to balance our current account, in someone else's currency. No more consuming 25% of the world's energy in that system. The US will be very competitive with a dollar worth 10% of what it is today, just not very comfortable.

2008 Nov 24 11:40 PM

[Teutonic Kn...:]

This is a great article; but most likely the rulers would just let it sit on the shelf gathering dust. That is the easy way out for them. Well, you could call me a pessimist or a defeatist. Real reforms are hard to come by as you survey human history. And although I am not qualified to comment on insanity (as my credentials are in engineering), the power of insanity is awesome - insanity knows no bounds.

I guess somehow those guys that raked off hundreds of millions into their pockets got it made. In this atmosphere they would have been smart enough to stash it away in cash deposits somewhere (probably not C).

The bottom line I am trying to say is this: Once you sold your soul to Faust, what good does it do to yourself?


On Nov 24 09:01 PM drbob66 wrote:

> "Government is the problem, not the solution....Government must address
> the $53 trillion of unfunded liabilities, develop a cohesive realistic
> energy policy, enact a simpler tax policy, create a plan to repair
> our crumbling infrastructure, and encourage ideas that work for improving
> our educational system."
>
> Wait...is government the problem, or the solution? I'm confused.

2008 Nov 25 12:36 AM

[BrianZach:]

Let's prevent a complete economic meltdown first, then we can debate about the moral hazards.

You can complain all you want about government spending, but the economic costs of letting another financial institution go under or even is greater than the cost of bailing out.

There are few instances where it makes sense to do deficit spending , and this is one of them. We can save the ideological battles for another day.

2008 Nov 25 02:10 AM

[huskerbob:]

BrianZach, the point is that all this spending will not and is not preventing an economic meltdown, which should be obvious to anyone.
An economy based entirely on debt: consumers dependent on debt to compensate for decline in real income; companies not viable without continuous issuance of new debt; local, state, and federal governments completely dependent on debt to provide even basic functions, and now sustaining more debt to bail out the debtors by giving them high quality debt in exchange for garbage debt to encourage them to continue lending even more! As if the problem will be solved by borrowing more money. Sigh.
At some point, there is too much debt. Then who is going to lend to us?
Please realize that you cannot keep piling debt on debt forever. Rip off the bandaid now, get assets (homes, equities, cars, etc.) down to affordable prices, and start over.
It will happen sooner or later. There is no getting around it by making more idiotic loans. Why prolong the agony?
But if you think bailouts with borrowed money are great for the economy, please put all your money in a Dow index, because you will get to enjoy trillions of dollars of stimulus and bailouts for the forseeable future. Bon appetite!

2008 Nov 25 03:43 AM

[phat cat:]

James, I don't know how to react. Want to applaud your article but found nothing to be cheerful about. There will be 2 outcomes to all this mess: 1) Things will settle down (like go back to the early 90's settle down, not going back to 2007 settle down) after all the big guns are fired, and 2) Nothing works and we go into a spectacular freefall which human kind has experienced before like the Romans or the Genkis Kan clans.

James, I'd love to hear what would you do IF you are pointed as treasury secretary, head of FDIC AND Fed Reserve Chairman. Please tell us. Maybe together we can avoid a Easter Islandish civilization dissapearance.

2008 Nov 25 05:31 AM

[xsuddensam:]

Trying to solve what is essentially a debt problem run amok by creating more debt is irrational. We need to bite the bullet, let the banks and the weak businesses fail. The government is only delaying the inevitable by propping up these failing institutions with our money.

2008 Nov 25 09:14 AM

[gotnochips:]

I came across an editorial about CHANGE by Norma White in the Amarillo Globe News, Oct. 21, 2008. Here are some of her ideas about change:

0 Limit Congress from serving more than two terms. That is all that presidents are allowed.

0 Stop Congress from voting for their own raises. How did that ever get started?

0 Stop paying lawmakers their full salary after serving just one term, or at retirement. We need to get rid of that pension plan; they’ve let other companies get rid of theirs. You were lucky to get 40 to 50 per cent of your salary after working somewhere for 35 years, but they get 100 per cent.

0 Stop handing out aid to illegal aliens. If we did, then Medicaid and the food stamp program would have enough money to aid the aged and the poor.

0 Secure our borders.

0 Stop allowing babies born to illegal aliens in the United States automatic U.S. citizenship.

0 Have a computer program that cross checks Social Security numbers with fingerprints to stop fraud on many fronts. Use it on voter registration, too.

0 Stop bailing out mortgage companies and banks that give loans to people who can’t afford them.

Only lawmakers can make these changes, as they are the lawmakers.
----------------------...
I have some additional changes that might also help:

1. Institutions that make loans must retain responsibility for the loans. The loans and the associated risks/rewards can't be bundled and passed on to other agencies for investment purposes.

2. Lawmakers should pass laws that ensure that individuals are responsible for their actions. For instance, people who borrow money should be aware they have to pay it back or there will be unpleasant consequences. Of course, people who borrow should be made to realize how the loans are structured.

3. NEVER allow solutions that are constructed at the expense of the people who are not responsible for the problem. People who faithfully make their loan payments should not be penalized for those who do not, just as people who exercise, watch their diet and weight, and take care of themselves should not be penalized for those who do not take care of themselves. Never reward the people responsible for the problem at the expense of those who were not.

.4. Read ATLAS SHRUGGED.

I predict none of the above will happen.

2008 Nov 25 10:05 AM

[TinyTim:]

J. Wellington Wimpy

yeah, him

2008 Nov 25 02:40 PM

[bbzz24:]

A stimulus package CANNOT stimulate the economy. Just look at the GDP composition by sector and you will come clearly to the same realization:
20% share of healthcare that is funded by employees of all other industries;
20% financial services;
17% industry;
There are big non productive pockets that cannot be stimulated in any way: they live off the ability to borrow from abroad. So forget about JM Keynes and government spending as the way out.

2008 Nov 25 03:48 PM

[derryl:]

Mr. Quinn writes,
"By any reasonable assessment, the Troubled Asset Relief Program has been a miserable failure and a complete waste of taxpayer money. The basis used to ram the bill through Congress was the purchase of the toxic assets off of bank’s books. Not one dollar has been used for this purpose. The main purpose for passing the $700 billion bailout was to restore confidence in the markets. Let’s assess the success of this effort:"

Clearly the stated objective has not been achieved and could not have been achieved in the ways that Paulson and the Fed allocated the $billions.

When I was young I couldn't understand how all these supposedly smart political leaders were advocating measures to produce specific economic or monetary or fiscal results that very obviously could not be realized by that course of action. Results were routinely the opposite of what was ostensibly the purpose of the measures. Clearly these policy makers needed to be shown the errors of their thinking.

But even a complete idiot cannot consistently produce results that are opposite to what he claims to be trying for. Eventually I realized that the public statements were just the sales job.

"$700 billion to buy toxic assets and restore confidence to get the credit markets working again." That's a sales job. TARP has spectacularly NOT done what we were TOLD it was designed to do. But I think we can be confident that under the cover of the sales pitch it is spectacularly succeeding in doing what it was actually designed to do. Banking power is consolidating, a lot of individuals are walking away with 10s and hundreds of millions of dollars of personal money, and taxpayers will pay for it all.

Don't watch the magician's wand or listen to what he's telling you. That distracts you from what he's doing with his other hand. Watch what is really happening, what actual results are being produced by these big Treasury and Fed moves. Don't assume these guys are making mistakes when the sales pitch doesn't come true. The mistake is made by us when we believe the pitch.

After spending enough time watching events develop you will see patterns emerging. These are very different than the patterns promised by the sales job. The sales promises are never going to come true, but something else will. And you probably won't like it.

I am beginning to think there really is no way to turn this thing around. We have evolved, or been engineered into, a scenario where the only politically possible way forward--more public debt--is just one more step along the road to serfdom.

There will be a moneyed ruling elite and there will be serfs, just like the good old days before industrialization made a middle class possible. Infantilize the middle class by "entitling" them to cradle to grave health, pension, bailouts, "safety", "security", welfare of all kinds, and you have effectively transformed them from citizens of a Republic to subjects of a monarchy.

Once the people have allowed themselves to be made wards of government the Republic has fallen already in all but external appearance, so maybe the new monarchy won't be so traumatic for people after all. My guess is that by the time the final shoe is dropped the people will be demanding it.

2008 Nov 25 11:34 PM