Obama Recognizes Vietnam Vets

Obama won me over, although I was already a supporter, when he mentioned Khe Sahn in the same breath with Concord, Gettysburg and Normandy in his inaugural address. Typically, Americans look down on Vietnam veterans, probably because most Americans, like George Bush and Bill Clinton, did not go. There are probably very few Vietnam vets on Wall Street. So, to mention a Vietnam battle in a positive context along with other famous battles is another ground breaking step by Obama. Thank you.

My impression is that he is much more concerned about our military and veterans than Bush was, although Bush was always very public about praising them. If he had really cared about them he would have done more to increase the size of the Army and Marines, would have shortened their tours in Iraq and Afghanistan, and would have increased their time at home between tours. Plus he would have done more to make sure they had the best equipment. Instead of raising taxes to provide better equipment, he and Rumsfeld just went to war with what they had. They didn't try to improve the forces. I think Obama takes his job as commander-in-chief seriously and will do more for the troops, as well as for veterans. Appointing Shinseki as VA Secretary is a good first step. Shinseki may not know much about medicine, but he cares about his troops. Thank you.

Take Over the Banks

I like the proposal for a central bank given in the NYT's Anonymous Banker's proposal. First of all, the analogy to a used car dealer is one I thought of myself. We would all think bankers were stupid if they bought cars that didn't run; instead they bought obscure securities that didn't have the value the bankers paid for them, which somehow seems less stupid, although it's probably more stupid because bankers are supposed to be experts on securities, but not on cars. The idea of buying "toxic assets" is good for taxpayers only if the government pays what they are worth, which won't help the banks. Bankers are screaming to get rid of the "mark to market" rule, i.e., the rule that makes them carry on their books only the actual value of their assets. They are saying that the current market value is too low. It's like students complaining about grades. If you're failing, you don't want grades; if you're doing well, you don't mind grades; you might even want them, so that other people, e.g., your parents, will know how well you are doing. The bankers are like failing students.

I hadn't really thought about shareholder value, but the idea of preserving shareholder rights, but keeping them on ice until the bank comes out of the "central bank" seems like a good one. I can see lots of bookkeeping problems, however, if the stock is on hold for 10 years. People will die, get divorced, etc., and figuring out who gets what when the bank re-emerges will be tough.

Since I proposed it earlier, I especially like the idea of limiting the size of the banks when they re-emerge and renewing Glass-Steagall, or something like it to prevent the banks from become too big to fail again. The government could create three, four or five roughly equivalent regions and then limit any bank to just one region.

Break Up the Banks

In this huge Op-Ed in last Sunday's NYT about the financial crisis, I thought there was only one really good idea: Break up the banks that are too big to fail, so that next time they can fail without destroying the US financial system. We should probably allow interstate banking, but put some kind of cap on the size of banks.

Wall Street Was Ponzi Scheme

Both Paul Krugman and Tom Friedman have written columns along the lines that the whole Wall Street bubble over subprime mortgages, derivatives, credit default swaps, etc., was just like Bernie Madoff's Ponzi scheme. There was no "there" there. It was all smoke and mirrors. The money went to the people who came up with the schemes to sell worthless paper; they did not create any productive activity. The salesmen just got their commissions up front, before people realized that they were selling worthless paper, illustrated by this Washington Post article about AIG's descent into chaos.

Gaza Strip War with Israel

I think it's likely that Israel invaded Gaza now because it wanted to do so while Bush was still President. In a few weeks, Obama will be President, and although he has talked a good game in support of Israel, the Jews may be worried that he will not be as supportive as Bush. Bush as clearly given them the green light to do whatever they want. Hence the Israeli decision to invade while Bush is still in office.

Idiots in Charge of America and the World

The Financial Times columnist Munchau is right when he says, "I am sceptical of the Fed's new policy of quantitative easing. We do not have a liquidity crisis, but a solvency crisis...." There have been a lot of complaints from bankers about the "mark to market" requirement, which means they should carry assets on their books at the price at which they could be sold in the market. The problem is that their assets are junk, similar to but much worse than Michael Milken's "junk bonds."

What we have is a bunch of huge banks who went out to talk to the day laborers in front of Home Depot and said, "How would you like to buy a 5,000 square foot house? We'll give you a mortgage at 1% or even a negative percent, if you can't afford 1%." So, a lot of the day laborers and their friends took the banks up on their offer. They could buy a 5,000 sq. ft. house cheaper than they could rent a 1,000 sq. ft. apartment on a monthly basis. In theory they signed away their lives when then completed all the mortgage paperwork at the mortgage broker's office, but in fact because they put nothing down on the house and were not held to any standard of honesty for the background information on income, etc., that they gave; they incurred no obligation when they signed the documents. In essence what the banks got in return for lending trillions of dollars in such transactions were bunches of worthless IOUs for which there was no enforceability other than possibly getting the house back some day. The banks want these IOUs to be carried on the books at face value, but it fact they are worth only a few cents on the dollar. Because they are not negotiable in normal, open markets, nobody really knows exactly how much they are worth. Why are they not negotiable? Because they are a bunch of almost worthless IOUs with little legal enforceability. So, when the bank threatens to foreclose and take back the house, the day laborer says, "Fine, take it; I didn't like the color of the media room anyway."

But Washington is all upset that their goal of getting everyone living in America, citizen or not, into a new, expensive house is threatened by the foreclosures. So, Ben Bernanke at the Fed says, "What do I have to do to get you back into this luxurious house? I'll push mortgage interest rates to zero. I'll forgive any negative equity that you have; we'll reduce your mortgage to whatever value an honest appraiser (who was missing in the original transaction) says it's worth, and we'll reimburse the banks for any loss they incur as a result."

So, Munchau is right when he says the problem is not liquidity (banks' unwillingness to lend) but insolvency (banks' lacking money to lend). Their assets are worth far less than the loans that they already are committed to; the banks have no assets to draw on to make additional loans. The Fed says, "No problem, we'll buy the worthless assets from Fannie Mae and Freddy Mac, so that they have real, Fed supplied assets to make new loans from." This is in essence what Hank Paulson originally proposed to use his $700 billion for. But then he followed Britain's example of just giving the money to the banks to shore up their balance sheets, leaving them their unmarketable toxic assets plus whatever additional capital the government gave them to make new loans from.

It's a house of cards, but Bernanke and Paulson are running around trying to close all the doors and windows to keep drafts from blowing all the cards down. I wish them luck, but why did the future of the United States come to depend on a house of cards? In the old days, they used to talk about investment bankers being the "smartest guys in the room." Now they look like the dumbest. On the other hand, they all became millionaires; they just did it by sucking the blood out of hard-working, ordinary Americans. Wall Street is the vampire capital of the world. Maybe that's why vampires are so trendy now.

Repercussions for Republicans?

Will there be any repercussions for Senate Republicans who blocked passage of the interim auto bailout bill two weeks before Christmas?  They basically said to America, we don't like you; so, we are going to put coal in your stocking for Christmas.  The White House, Treasury and the Fed may save the day for average Americans, or maybe not.  The Republicans apparently don't care if GM goes bankrupt on Christmas Eve.  Scrooge would be proud!  Mitch McConnell, Richard Shelby, and company plan to take Tiny Tim's crutch and beat him over the head with it.  Merry Christmas!

Auto Bankruptcy

The auto bankruptcy is too big just to use the regular bankruptcy law. These are not just any companies. The auto industry is the foundation of American industry. So why shouldn't Congress pass an industry specific bailout law that would contain many provisions of ordinary bankruptcy, which could also have specific requirements for executives' and workers' salaries, hybrid mileage requirements, etc. In addition, some people say the credit crisis will prevent normal bankruptcy from functioning as it should because there will not be sufficient credit available to allow the companies to operate under Chapter 11.

Idiots on Wall Street

The Financial Times reports that the price of credit default swaps, insurance for corporate debt, has been going up again.  The FT interprets this as meaning that the credit crisis is worsening.  I interpret it as meaning that Wall Street, London's City, and the other financial markets are finally learning what they are doing when they make credit default swaps.  They are insuring that a company will pay its debts, and they are saying, "If that company doesn't pay, we will."  For years they have been blithely issuing these swaps as if they were just cheap ways to make money with no consequences.  The horrendous failure of AIG due to the issuance of these CDS's shows that they do have consequences.  Finally, after years of failing to understand the business model for CDS's, Wall Street is learning.  As a result, CDS's are becoming more expensive as they should have been for the last decade, or however long they have been around.  The markets may be bad, but for years the CDS's were priced incorrectly by idiots who did not know what they were doing.  The whole credit crisis was created not so much by the sub-prime mortgages, but by the ridiculously under priced CDS's sold to cover them, which now have the issuing institutions on the hook for trillions of dollars.  The banks don't have enough capital to stand behind these promises; so, the Federal Government has had to step in to prop them up.  

More Housing Pain to Come?

The stock market is now down about 50% from its recent highs. The stock market decline is supposed to be an effect of the housing market bust. Meanwhile, the prices of houses, which are much less liquid and slower to adjust, are only down about 25% from their highs.

This would indicate to me, even allowing for the fact that panic enters the stock market much more quickly than the less liquid housing market, that the worst is yet to come for housing.

I'm not pleased about a big 3 auto bailout, but if they go under, I think it might the tipping point that takes the US into something like a depression, certainly a serious, long recession. The old Mel Gibson Mad Max movies will in actuality take place in post-depression Michigan and Ohio, rather than in post-war Australia. But Congress says, we don't care; Honda, Toyota, BMW, VW and Mercedes will take good care of us. World War II is finally over, and the Axis won. Alabama's Sen. Richard Shelby is waving the white flag as hard has he can to help all those Japanese and German auto plants in Alabama.

Rahm Emanuel Apologizes for Father's Anti-Arab Comments

Kudos to Helena Cobban for calling on Rahm Emanuel to repudiate his father's anti-Arab comments to the Ma'ariv newspaper, and for reporting that he has done so. Like her, I am not crazy about having a dual national Israeli-American as chief of staff to President Obama. I think he ought to renounce his Israeli citizenship. He should be be 100% loyal to America.

Tom Friedman on Patriotism

Thank goodness that Tom Friedman has the sense to see that paying taxes is patriotic. I don't understand why Republicans don't want to pay to defend America, why they hate the troops fighting for them in Iraq and Afghanistan, why they don't want roads and bridges. clean water, sewers. I guess they want to privatize it all, have Blackwater fight our wars, private contractors build toll roads for profit, etc. But while McCain and Palin may hate the American government, there are people like Tom Friedman and me who love it and are willing to pay something for what it gives us. I can only imagine that the greedy SOBs who created the financial mess that we are in were mainly Republicans. Thanks Tom.

Rep. Shadegg Says McCain Killed First Bailout Bill

On CNN's Situation Room today Arizona Rep. Shadegg said that John McCain was responsible for torpedoing the first bailout bill. According to Shadegg, in the Cabinet room, McCain said that the bill was not a good bill and that the House Republicans had a good idea. He thus encouraged the House Republicans who did not like the bill to oppose it, rather than holding their noses and going along with it. What a horrible, horrible man, a man who clearly put his political campaign ahead of the country's good! He is a moral derelict. He made some points with the arch conservatives in his party, but at what a cost! He is willing to bring America to its knees in order to get elected.

The House Democrats have poked fun at the Republicans for saying that Nancy Pelosi's speech was the reason they opposed the bill. Barney Frank said they decided not to act in the best interests of the country because their feelings were hurt. But this is not the first time that has happened. Apparently Newt Gingrich shut down the US Government in the 1990's because President Bill Clinton made him disembark from Air Force One through the rear door. Newt was perfectly capable of punishing America for dissing him, and so are the House Republicans.

John McCain, Newt Gingrich, the House Republicans, and Ronald Reagan would never say those feared words, "I'm from the government, and I'm here to help." They say, "I'm from the government, and I'm here to punch you in the face."

Another letter to Congressman

I commend you for voting for the bailout yesterday.

I am disappointed at the stock market rise today (almost 500 points on the Dow), which essentially was Wall Street saying, “We don’t need no stupid bailout.” I think, though, that if the experts think there is even a 25% chance of a serious recession/depression, then the bailout is probably worth it.

I have become concerned about a new issue: bank size. With their recent acquisitions, properly done to help the economy in this crisis, several more banks are becoming “too big to fail,” as AIG was. JP Morgan Chase, CitiBank, and Bank of America have all swallowed up large, troubled banks, thus pushing themselves into the “too big to fail” category. Meanwhile, Wall Street darling Goldman Sachs has switched from being an investment bank to an ordinary commercial bank. Once this crisis is over, the government should look at the antitrust implications of these mergers, perhaps a partial revival of Glass-Steagall, or some other approach to limit the risk of these huge banks getting into trouble.

People say that the stock market is not a good indicator of the current problem with the economy, which is the credit market. However, the problem with the credit markets freezing up is that they might produce a recession/depression. By going up 500 points today, Wall Street is saying it expects continued good times, not a recession. One standard for judging a reasonable stock price is the price/earnings ratio. If earnings go down, then the price (and the Dow) should go down. Wall Street is saying that even if there is no bailout, it does not expect earnings to go down. That view certainly supports those who voted against the bailout.

I think we are fortunate to have experienced hands like Paulson and Bernanke at the helm of our economy, and if they still strongly support a bailout, then I say do it, although at the moment it seems to go against the majority opinion on Wall Street as well as Main Street.

How Bad Is the Financial Crisis?

After listening to people talk about the crisis for days, I'm not so sure that it's as bad as I first thought it was. It should be pretty bad to warrant a $700 billion bailout. I thought people were talking about avoiding a depression; now they only seem to be talking about avoiding a recession. It it's a shallow recession, and there is no actual recession at all yet, then it may not be worth $700 billion. We've been through recessions before. We've only been through one depression in the last century. The fact that Bear Stearns, Lehman, Merrill Lynch, Fannie Mae, Freddie Mac, and AIG disappeared is unusual, but except for Lehman, they didn't really cease to exist; they just changed names or owners. Even part of Lehman was snapped up. So, how many jobs were lost? A few thousand at Lehman, and bonuses at some firms may be reduced a few million dollars. Nothing serious.

The talking heads are saying that agreement on a bailout bill is close today. At the moment, the stock market is up almost 300 points. On CNBC they have been saying that the credit markets are still acting badly. I'm not sure what that means, although some of it seems to be that banks are still demanding big interest rate spreads to loan money.

So, now I think this bailout may be overkill. Bush did not scare me sufficiently.

And John McCain is politicizing this crisis, if in fact it is one, for all it's worth, which may not be as much as I thought a few days ago. It's pretty clear that his plan was to attack Bush and the Republican leadership in Congress as soon as they approved a bill. The Republicans called his hand on it, because they don't want to go into elections with their party leader, McCain, calling them traitors to the Republican Party. So, instead McCain now claims to be riding to the rescue of the plan, rather than keeping hands off to attack it later.

One thing he is not doing: he is not putting country first. He's putting John McCain first. He has a tough choice. He has been a free-marketeer all his life. Now, does he violate all of his principles and support the bailout bill socializing Wall Street, or oppose it and run the risk of being responsible for the ensuing depression, if there is one? Obama has clearly been more presidential by taking Paulson and Bernanke at their word and pledging to support them with some caveats.

Although as a private citizen I am now skeptical, if I were in a position of power, and Paulson and Bernanke told me there was a genuine chance that the US could fall into a depression, I would support the bailout bill.

Another letter to congressmen re financial bailout

I think we have to do something to prevent the US financial system from self-destructing. Therefore, I support doing something along the lines recommended by Sec. Paulson and Fed chief Bernanke. However, it seemed to me from their testimony this morning that their plan is to have the US government buy mortgage-backed securities from troubled firms for much more than their current market value in order to keep the banks solvent. So, I expect the US to lose a lot of money and the banks to make a lot of money. It is welfare for rich people, but the alternative is poverty for everyone.

Nevertheless, the $700 billion plan is highly inflationary. Bernanke has apparently given up worrying about inflation, which is understandable. It’s sort of like saving someone’s life today by giving them a drug that will kill them in a year or two. Most people would choose to live until tomorrow.

We know the solution for inflation – high interest rates and high taxes. We can’t institute those now, but we should promise to institute them as soon as the recession/depression ends. I would recommend that as a down payment you get Bernanke to promise to raise the Fed rate by 0.25% now and that you raise income tax rates by 1% now, just to remind people that there is a huge bill coming due.

You should not ignore the fact that Paulson was CEO of Goldman Sachs, the troublemaking institution (by dealing in these questionable securities) that has so far come out smelling like a rose. This goes double because Pres. Bush lied to us about WMD in order to get the US to invade Iraq. As a politician, you should remember that Sen. Clinton probably lost the Democratic presidential nomination because she was duped by Bush’s war justification. Although I don’t trust Bush, I think that Paulson and Bernanke are patriots and not purposefully misleading the American people, although these issues are so complex that probably no one understands them completely.

No More Superpower

The economic collapse on Wall Street may be the beginning of the end for the United States’ superpower status, coming about 15 years after the Soviet Union lost its superpower status, also mainly because of economic failures. The US will continue to be a powerful country, and will maintain parity with the EU and other large countries, but will eventually cede its leadership position to China. A sad day for America. Wall Street traders are short term winners, but America as a country is a long term loser. Some time soon it will be time to pay up, mostly to China, and it will be painful. I am particularly saddened because I don't feel that I participated in the excesses that led to this debacle. If I'm going to help pay for an extravagant gambling trip to Las Vegas, I should at least have been there.

America's real loss of prestige and power will probably not become apparent until inflation runs rampant, which is on the horizon, although exactly when is hard to say. Inflation will produce its own winners and losers. I saw this first hand in Brazil a few decades ago, but the country will be a loser. Perhaps we can take comfort from the fact that Brazil after its bouts with inflation is still out there striving to become a great power. The old saying still holds, however, that "Brazil is the country of the future, and always will be." Perhaps the US will become the country of the past that is always trying to regain its stature.

The only good news is that Republican laisse-faire economic theories have been totally discredited. The Republican icon Ronald Reagan turns out to have been wrong. We had a baby boomer generation of good times freeloading on the hard work of World War II's greatest generation.

A Bridge Loan Too Far

Paulson and company have decided to insure money market accounts up to $50 billion. That's too much for me. Granted, a couple of money market funds have "broken the buck" and have lost so much money that they can't return a dollar for every dollar invested. So, Paulson will make up the difference. And in the process he will destroy regular, hometown commercial banks. Why would anyone keep money in a low interest bank account when higher interest money market accounts are guaranteed by the government? Just debit your money market account once a month to some credit card and pay all your bills over the Internet using the credit card. Destroying local banks will, of course, move almost all banking activities to Wall Street, to the people who created this crisis through their poor management. Paulson will destroy conservative local bankers to help his risk-taking friends at Goldman, Sachs. He is truly turning the banking industry on its head, destroying the strong to help the weak.

The problem with bailing out the money market funds is that this is problem that they and their investors created themselves. There are many kinds of money market accounts: some which buy questionable corporate bonds (close to junk bond status) and pay high rates of return, and others which buy government bonds or only high quality corporate paper, and which pay lower interest. One of the funds in question is in trouble because it bought Lehman bonds. Why did it buy Lehman bonds? Because Lehman was in trouble and had to pay higher interest to get people to buy its bonds. So this fund knew it was buying risky bonds; the high interest was a dead giveaway, and the investors in the money market fund knew that they were taking a risk, because the fund was paying higher interest. Everybody involved could see there was a risk, and they decided to take it.

Now the government comes along and says, "You poor dears! Never mind your mistake, we'll give you the money you lost." These weren't people who were tricked; they were just a little too greedy. They should not be bailed out, especially when it means the end of local banking as we used to know it.

So, now Paulson and Bernanke have lost my support. They are just going nuts with the government credit card. They are saying that they don't care a whit about inflation. America is doomed to becoming a banana republic. Paulson saved his buddies at Goldman, Sachs, and he saved his own fortune which is no doubt closely tied to Goldman, Sachs fortunes. I'm guessing that Bernanke will quit the Fed soon and his Jewish friends on Wall Street will take care of him in grand style for bailing them out. America be damned!

But Nancy Pelosi can continue to wear her diamonds and South Sea pearls, and John McCain can continue to flit around in Cindy's private Cessna Citation jet, because Paulson and Bernanke will make sure they don't suffer any financial losses. Well, maybe Pelosi did take a $500,000 hit, but she probably won't have to sell her pearls.

Biden Is a Patriot, McCain Is Not

John McCain has attacked Biden for saying that is patriotic to pay your fair share of taxes. McCain lost me totally, because I agree with Biden. McCain is against supporting the troops in Iraq. It's tax money that buys their flack jackets, their armored humvees, etc. McCain would let them die so that he and Cindy can buy another mansion and a private jet. Poor America!

Letter to the President

I have just read that the government is going to bail out AIG. At this point there may be no alternative if our financial system is going to survive. But you have presided over a massive transfer of wealth from the middle class to the super-wealthy upper class. Under the Bush administration taxes were reduced on the upper classes to the lowest rates in generations, beginning the transfer of wealth. What thanks did we get? The rich virtually destroyed the financial system. But to (hopefully) avoid the total destruction of the financial system, the government has undertaken a further massive transfer of wealth to the rich to bail out their investments. As they say, you have privatized the gains and socialized the losses. You have negated “moral hazard.”

The United States is significantly weaker than it was before the financial crisis. By failing to control the greed on Wall Street, you have undermined our national security, while poor rednecks are fighting two wars far from our shores. The government has betrayed our soldiers. Because of low taxes, particularly on dividends, capital gains, and other investments, the rich didn’t even contribute their fair share to fighting the wars. This bailout is now being done with money borrowed from China, the Middle East, and Europe, most of which will have to be repaid by our children and grandchildren, although I suspect that at some point the government will let inflation run wild so that we can repay today’s huge debts with tomorrow’s worthless dollars.

The government’s further contribution has been to run an expansionary fiscal policy of low taxes and deficit spending during years when the economy was not so bad. The Bush administration inherited a budget in surplus. Now, with the economy in shambles, it will probably be difficult to raise taxes for years to come, making the obscenely wealthy even more obscenely wealthy and virtually destroying the middle class. The entire burden of dealing with the financial debacle has fallen on monetary policy managed by the Fed and Treasury, because corruption and incompetence have destroyed the usefulness of fiscal policy.

On 9/11/2001 Osama bin Laden tried to destroy the U.S. financial system by attacking the World Trade towers. He failed. In September 2008, you finished the job for him. I’m sure Osama is rejoicing and thanking you in his cave.

I am outraged. You have failed America! You should hang your head in shame!