"Sharing the pain" when you didn't create it in the first place

By Mish's Global Economic Trend Analysis

President Obama has called for sacrifice and sharing. I wholeheartedly agree.

However, before sharing the pain, and before working towards a solution, we must understand the problem. To date, many mistakes have been made because Congress, the Fed, and the previous administration did not attempt to understand the problem and the role everyone played in it.

Fed's Role

The Greenspan Fed slashed interest rates to 1% in 2002 fueling the biggest housing bubble in history.

Furthermore, Greenspan was the biggest cheerleader of derivatives and subprime lending on the planet. Fed Governor Ben Bernanke went along with Greenspan every step of the way. The serial bubble blowing tactics of the Fed that must be eliminated at all costs.

It should be clear now that the Fed does not know, and is guessing every step of the way what interest rates should be, and is also guessing what the solution to this mess is.

Congressional Role

Congress refused to rein in the GSEs and ignored repeated warnings by many to cutoff their lending. Fannie Mae and Freddie Mac were accidents waiting to happen.

It simply is not Government's job to promote housing in the first place. Promotion of housing caused prices to go up (until they crashed) and this is why Congress was always chasing its tail perpetually looking for affordable housing solutions. The very sponsorship of affordable housing programs guarantees that affordable housing will not exist.

In addition, Congress threw money at every problem, built bridges to nowhere, and wasting a trillion dollars on a war in Iraq fought on trumped up charges of weapons of mass destruction. All of those things cheapened the US dollar and kicked off a commodities bubble that has also crashed.

State Legislatures Role

State legislatures are also to blame. 44 states now have large budget deficits. California in particular is a basket case. States believed the housing party would last forever and failed to fund pension plans while squandering money on all kinds of irresponsible pet projects. Property taxes rose to and remain at unsustainable heights. States are now running out of money to fund all the projects and benefits they have promised.

My biggest fear right now is Congress will throw money at the states, without requiring them to make the sacrifices that need to be made. Spending must be cut, programs must be cut, benefits must be slashed, and pensions must be capped.

I ask that not one cent of Federal (taxpayer) money go to any state that does not make the necessary sacrifices. Part of that sacrifice must be a reduction in pay by the Governor and legislature of every state.

I commend Ohio Governor Ted Strickland for having the courage to ask for across the board union pay cuts. That is a start, but it is only a start.

Pension Plans

Pension plans are a particularly sore point for many citizens. Promises have been made to unions that cannot be kept. Such promises caused the bankruptcy of the city of Vallejo, California. Other cities are sure to follow.

Wages and pension benefits of all government employees needs to be brought inline with wages and benefits in the private sector. There is no other way out. Pension benefits must be capped for all new state and federal hires. Taxpayers should not have to bear the pain for funding massive benefits for government employees when they have no such opportunities for themselves.

Fractional Reserve Lending

Unquestionably bank greed came into play. Massive leverage and off the book SIVs by Citigroup and others certainly played a role. However, it is important to understand the Fed's role as an enabler.

The culprit in this case is fractional reserve lending. This fraudulent policy, sponsored by the Fed, allows more credit to be extended than there is base money supply. This was the enabler that allowed banks to lend and securitize over and over and over again, recording fake profits every step of the way.

Over time, asset bubble form such as the bubble in housing. To keep the bubble going, the Fed printed more and more money, and banks extend more and more credit. As with every credit bubble, there eventually there comes a day reckoning when what has been lent out, cannot possibly be paid back. That day of reckoning is now.

In simple terms the Fed is a sponsor of the world's biggest Ponzi scheme. The scheme has now blown sky high, as money to keep the bubble growing simply ran out. That is why 10 new Fed programs have failed to produce any results.

Unless and until fractional reserve lending is eliminated, these kinds of problems will reappear. I ask Congress to disallow fractional reserve lending. It cannot be done at once, but it can be phased in over time. It will be a painful process but banks must share in the pain for their role in the mess.

Role of the SEC

Many blame the rating agencies for the ridiculous AAA ratings on mortgage backed securities. The rating agencies deserve criticism, but one must take the problem back to the root source. It was SEC sponsorship of the rating agencies that actually created the problem.

The origin of the rating game mess dates back to 1975 with the establishment of the Nationally Recognized Statistical Rating Organization (NRSRO) by the SEC.

NRSRO turned upside down the model of who had to pay. Previously debt buyers would go to the ratings companies to know what they were buying. In the revised model, the issuers of debt had to pay to get it rated or they couldn't sell it. Not only that, but they have to be rated by one of the rating agencies approved by the SEC.

This led to shopping around to see who would give the debt the highest rating. In the new model, the rating agencies got paid by the quantity of the work they did rather than the quality of the work they did.

Now there are calls for regulation and oversight of the ratings agencies. However, the simple and correct solution to this problem is to eliminate government sponsorship of the rating agencies returning to the model where the rating agencies get paid by the quality of their work rather than the quantity of it. I guarantee this solution will work.

Why Banks Aren't Lending

Money was given to banks and many members of Congress are asking for banks to increase lending. I suggest that instead of attempting to force banks to lend, that Congress seek reasons why banks are not lending. Here is the answer.

1. Banks are still insolvent after all those capital injections. There is simply no capital to lend. Book values of banks, if credit were to realistically be marked to market is negative.

2. There is no reason to lend. What do we need more of? Cars? Pizza Huts? Houses? Nail Salons? Malls? Furniture? What? Nothing is what. There is no consumer demand because there are no jobs.

It is a serious, serious mistake to force banks to lend at this point. All it will do is increase bank writeoffs.

A Word About Jobs

In spite of what Krugman and other economists say, Government cannot really "create" any jobs per se. It can raise taxes and shift private sector jobs creation to government jobs (typically a malinvestment), and it can bring production and consumption forward for those jobs that are genuinely needed (filling potholes and repairing bridges), but once the potholes are filled and the bridges repaired, one has to ask the question, "What will we do for an encore?"

There is no free lunch. It is impossible to spend one's way out of a hole. It cannot be done and should not be tried. Japan proved it. So did FDR. Ultimately it was World War II and the destruction of much of the world's productive capacity that ended the great depression. The US was relatively untouched by the war, and could lead a worldwide recovery.

That said, there is a genuine need to repair infrastructure and that need must be done at the cheapest possible price.

I Urge Congress To Scrap Davis Bacon

When it comes to jobs creation, we need to get the most work done for the cheapest amount. The way to do that is to scrap the Davis-Bacon act. Economist Greg Mankiw writes:

"More public projects would pass a cost-benefit test if we repealed the Davis-Bacon Act. This law requires contractors on these public projects to pay "prevailing wages," which are typically union wages well in excess of what would occur in a free market. If the government paid market-determined wages for infrastructure projects, we could have both more infrastructure and less government debt. Without doubt, that legacy would benefit future generations."

Where's The Apology?

Now that the bubble has burst there has not been one peep from Bernanke for his role in the mess. Nor has there been an apology from Barney Frank or anyone in Congress for their role in this mess.

What about an apology from governors and state legislatures for their role in the mess. How about an apology from the SEC?

Instead we are told we must share the pain. Here is a synopsis of the plan to date.

Sharing The Pain Plan

Ordinary Taxpayers 100%
Banks 0%
Congress 0%
State Legislatures 0%
Bernanke 0%
Fed Governors 0%
Fannie Mae Bondholders 0%
Freddie Mac Bondholders 0%
FDIC executives 0%
SEC 0%

Is it any wonder the average person is up in arms over the bailouts. When does Congress share the pain? When do bank executives share the pain? When does Shelia Bair share the pain? When does Paulson share the Pain? When does Bernanke share the pain?

Bernanke, Barney Frank, and anyone else in Congress who supported Fannie and Freddie owe US taxpayers a huge apology. They should share in the pain.

Healing cannot begin until those responsible for the mess own up to their part in it. Instead, Congress is turning to Bernanke for answers when he failed to see the problem. If Bernanke could not see the problem, how can he possibly see the solution?

Bernanke failed to see this coming, denied it every step of the way, then threw 10 new programs at the credit crunch, all of which failed.

• I call for Congress to share the pain by cutting their own salaries.
• I call for Congress to not give one cent to the states unless they do the same.
• I call for a reduction in salaries at the FDIC, the SEC, and every Federal department.
• I call for a reduction in salaries at the Fed.
• I call for a reduction in salaries in state and local governments.
• I call for capping of pension plans everywhere in government.
• I call for Congress to revoke Davis-Bacon.
• I call for the end of SEC sponsorship of the rating agencies.
• I call for union concessions from the auto makers.
• I call for executives and all employees of banks and brokerages receiving money to share the pain.
• I call for an apology from all who contributed to this mess, including Bank and Brokerage executives.

Most of all, I call for the resignation of Fed Chairman Ben Bernanke, the abolishment of fractional reserve lending, and the end of the Fed itself, the latter to be phased out over an appropriate period of time.

Chrysler continuing to spend hundreds of thousands of dollars to "thank us"

Chrysler is continuing it's recent PR stunt by purchasing full page ads in both USA Today and the Wall Street Journal, thanking Americans for helping them out. As if we had any say whatsoever in the automaker looting of America. This is the ultimate salt in the wound maneuver; spending hundreds of thousands of our own tax dollars to thank us for doing so.

This has got to be the worst PR strategy ever. The same management that drove Chrysler into the ground must also be at the helm of their marketing department. This speaks volumes about Chrysler's inability to gauge public opinion, and just might be the reason no one wants their cars.

I encourage everyone to respond, as many have done already, to this by posting your opinion on Chrysler's blog.

http://blog.chryslerllc.com/blog.do?id=564&p=entry

GMAC becomes bank, bailed out with TARP funds

To be PC, the word "bailout" has been replaced by the happier terms "rescue" and "lifeline."

---

NEW YORK (CNNMoney.com) -- In yet another move to prop up the crumbling U.S. auto industry, the government announced Monday that it will pump $6 billion into GMAC Financial Services, a financing company critical to the survival of General Motors.

The rescue package has two parts. The Treasury Department is injecting $5 billion directly into GMAC in exchange for preferred equity shares that pay an 8% dividend. GMAC also is issuing warrants to Treasury in the form of preferred stock. If exercised, the warrants will pay a 9% dividend.

Also, the government will lend $1 billion to GM that the automaker will invest in its financing arm. GMAC needs the funding to convert to a bank holding company, a necessary step to receiving the bailout money.

The Federal Reserve said last week that it would approve GMAC's conversion to a bank holding company, subject to certain conditions.

The move deepens the federal government's bailout of the troubled auto industry. Less than two weeks ago, President Bush announced a $17.4 billion rescue package to prevent the collapses of General Motors and Chrysler LLC.

Continue Reading...

Automakers get their money, Stalin rejoices

The amount: 13.4 billion, with the opportunity for an additional 4 billion in February.

The reasoning: "To avoid a disorderly bankruptcy." "To avoid further economic collapse." "Insert random fear mongering tactic here."

The conditions: Must prove to be financially viable by March or the loans are called back to the Treasury. Must cut executive compensation. Absolutely nothing so far about any Union compromises.

The stakes: More wasted taxpayer dollars via an unconstitutional doling out of money.

The dictators: George Bush, with Hank Paulson now assuming the role of car czar. He'll use his expertise in auto manufacturing to tell them how to build better cars.

The victims: The Constitution. The Senate and the legislative branch (completely sidestepped). The American people (being continuously looted and lied to).

The winners: The global elite. The Union cartels and their respective mob bosses.

Another sad day for America. I want my Republic back.

Chrysler closes plants for a month; White House scrambles

Chrysler has announced that it will shut down all plants for at least a month, with the last shift ending tomorrow. This comes off the heels of a failed bailout legislation, that was defeated handily by the Senate due to failure of the UAW to budge on a labor compromise. It also follows GM, who announced it will idle over 20 plants in a cost cutting measure.

As a result, the White House has accelerated plans to "rescue" the automakers, hoping to get something done before Christmas. It is expected that the White House will attach certain conditions on any potential bailout, with a pre-packaged bankruptcy reportedly on the table, but it is unclear what exactly the White House will demand from the automakers in exchange for taxpayer Federal Reserve notes. The figure of 14 billion, the original amount debated in Congress, is likely to balloon to somewhere in the neighborhood of 40 billion, a number that is most certainly dreamed up out of thin air.

It's likely that Dictator Hank Paulson will now assume the role of the ridiculous "car czar", since the White House is choosing to sidestep Congress in another unconstitutional stunt to please the elite big wigs in Detroit. However, it will be interesting to see how a potential bailout is funded. Only 15 billion remains in the TARP fund, enough for the original bailout plans, but any additional funds will require Congressional release of the remaining 350 billion, something that Paulson says he will not persue before leaving office.

Clearly, however, Congress has become increasingly irrelevant as the tyrannical White House does whatever it wants, regardless of the opinion of Congress and the people of this country. Any act of Congress is simply a formality and a grand showing of political theater at this point.

Ron Paul on the auto bailout

GOP Senator Warns of 'Riots' if Automakers Are Bailed Out

By Jeff Poor

Business & Media Institute

Time and again we’ve heard about the lost jobs and economic impact of failing to bail out the beleaguered American auto manufacturers. But little mention has been made of the consequences of going through with the bailout, and how such an action would be viewed by other Americans.

In an interview following a Dec. 10 press conference where he and four other senators aired their opposition to the proposed bailout deal struck by congressional leaders and the White House (and approved by the U.S. House of Representatives 237-170 that evening), Sen. Jim DeMint, R-S.C., warned that the perception that some industries are being bailed out and some aren’t could lead to violence.

“We’re going to have riots. There are already people rioting because they’re losing their jobs when everybody else is being bailed out. The fairness of it becomes more and more evident as we go along. The auto companies may be hurting,” he said, but “there are very few companies that aren’t hurting and they’re going to hurt. We don’t have enough money to bail everyone out.”

DeMint blamed the unions for pushing this issue as far as it has gotten. The senator said the notion that reorganization under bankruptcy would not work was generated by the unions for fear of losing their power.

“The primary driver behind this is the unions, because bankruptcy allows the auto companies to basically restructure all their contracts in a way that a bankruptcy judge says will make them sustainable,” DeMint said. “And if they do that, then essentially the unions lose all their leverage. It’s the unions that have brought them to the brink. So definitely, I think the reason they want a political solution and a car czar is because a car czar can protect the unions through this whole process at the expense of the taxpayer.”

Continue Reading...

TARP to the rescue

Just when you thought the bailout was rightfully dead in the water, what a surprise that the White House and Hank Paulson show up with Federal Reserve Notes in hand. This only proves the case that the administration is bought and paid for, considering they were staunchly against this bill just days ago. Oh how things change when you have a UAW gun pointed to your head! After all, the UAW funded many of these guys' campaigns.

This is yet another stark reversal for the Treasury, who has been strongly against giving the taxpayer giveaway to anyone except those in the financial sector (or those who are best friends with Paulson and Bernanke). We can't be that surprised; this isn't the first time that the Treasury has changed it's mind on something, further proving that they A) don't have the slightest clue as to what they are doing or B) are not working for the taxpayers at all, they are merely puppets for the real shot-callers in this country. I tend to believe it's both.

Bailout? More like failout.

Looks like the the Senate finally grew a pair and stood up to the unions. Leading the charge is Bob Corker (R-TN), who seems to be one of a few in Washington that knows the real problem facing the Big 3 and actually has a spine. Everything out of Bob's mouth has made absolute sense, perhaps too much sense for thick-headed House democrats, but I digress.

Now that the current bill is dead in the water, here comes the fear mongering. Harry Reid has stated that he "dreads Wall Street's reaction today." I'm sorry Mr. Reid, but you and your confidants just spent weeks speaking against Wall Street and the bank bailout, yet now you are afraid of the effect on Wall Street? That's strange indeed.

I don't doubt that the Dow will plunge several hundred points today, throwing gas on the fire. We've all seen this picture before; in response, the Dems will run around with their heads cut off, demanding that the Republicans pass a new version of the bill or else the country will descend into a black hole. Does this sound familiar? I believe it does. Lets just hope that somebody, ANYBODY, in Congress is smart enough to stop it this time around.

I'm not holding my breath.

UPDATE: The Dow is open and down less than 100 points. So much for Harry Reid's scare tactics.

Democrats hungry for pork in auto bailout bill

Well well, looks like there is another treasure hidden deep within the Automaker bailout. This time it's a 2.8% raise for Federal judges next year, justified with the "raise in the cost of living." Oh, by the way, their current salary is a paltry $169,300. How could they be expected to survive on a salary like that?

Seriously though, is there any responsibility left in Washington? NOBODY in Washington should be getting a raise, NOT A SINGLE PERSON. If anything, salaries should be cut! People are losing their jobs, being forced to collect unemployment, and Federal judges want a raise to offset the "cost of living?"

This is hubris in it's purest form.