Tuesday, September 30, 2008

Why the Crash Will Happen, and Why it's a Good Thing

Over the past few years, much ado has been made about the dangers of a consumer-driven economy, the dangers of the horrible personal savings rate, and the dangers of the amount of personal debt in the United States. Cheap credit and federal mandates to lenders have fueled the debt explosion and discouraged savings. More than one financial experts have rightly noted that Americans don't save, they buy houses. Our GDP is driven, not by how much we sell, but how much we buy. It hurts our sustainability, and it increases our trade deficit, and it transfers wealth to other countries.

Americans have wised up. They have seen the folly of tying up most of their net worth in a house that they can enjoy, but never realize the return. Many are even rejecting cheap consumer credit. Savings rates have went through the roof. According to the Department of Commerce, personal savings rates have risen from -1% in the 3rd Quarter of 2005 to 3% in the 2nd Quarter of 2008. Rumors are that the savings rate in the 3rd Quarter of 2008, which ends today, are 7%.

This really hurts the big banks that are most exposed. Big businesses put their deposits in big banks and get their credit from big banks, but individuals and small businesses put a disproportionate amount of their savings in small banks and credit unions, while they also get their credit from big banks. People are spending less and saving more in small banks and credit unions, and consumer-driven big businesses are depositing less in big banks. So big banks, who have the most credit out and most bad credit out are getting fewer deposits, while small regional banks who were already less exposed are getting more deposits. If big banks continue to fail, small banks stand to benefit even more.

So if people are saving and not spending, what's going to happen to that money? It's going to be turned into loans, and much of it for producers. Manufacturing has been building for several years, and those projects are starting to produce. Existing small companies and entrepreneurs can borrow from the well-positioned small banks and credit unions to produce products or provide services to those producers. And if personal savings continue at these rates, that means more products available for exports, which will reduce our trade deficit, maybe convert it into a surplus, and make the country more sustainable.

This conversion to a producing economy will be painful to those who benefit most from a consumer-driven economy, especially lenders, but it is inevitable. It will hurt many on Wall Street, and many of those about to retire who are heavily investment in stock. Any bailout will just prop up companies with an outdated business model, and delay or prolong the crash. The good news is that once this crash is over with, new economy that we emerge with will be better than the one we left behind. Those of us who are young enough to benefit have exciting times ahead.

Disclaimer: I'm no economist, and these are just my observations. If they are wrong, I blame ignorance.

Sunday, September 28, 2008

Rural Connectivity Administration

Obama is talking big about putting major investment into bringing broadband to rural communities. It sounds awful familiar. Remember the Rural Electrification Administration? It was the commission that was charged with building electrical lines to small rural communities and little houses on the prairie. And it never went away. It continued taking taxpayer money and adding bureaucracy to the top of rural electrical co-ops. When we still had a significant number of fiscal conservatives in the House, this was a target of their scorn. The slick squirrels in Washington eventually changed the name to the Rural Utility Service to obfuscate the fact that it was a worthless hanger-on bureaucracy. Now Barack Obama wants to add a Rural Connectivity Administration to the mess. Expect it to last well past the destruction of the economy of the country.

To be fair to the New Deal Socialists and the Hope and Change Socialists, the Rural Electrification Administration was and is, and the Rural Connectivity Administration will be a tiny fraction of the Federal Budget. But it's a key example of how nothing that Washington gives us ever goes away, even when it's outlived its usefulness.

Provision That I'd Put In The Bailout Bill

My friend Will has an idea for a provision in the bailout bill that's not just window-dressing, and that would really protect the taxpayer. Congress should add a provision that if any company is bailed out by this bill, their limited liability protections are suspended until the entire loan is paid off. If this plan were really absolutely necessary for the economy to survive, let the big bank owners put their own neck on the line. I doubt that it would happen. I'm guessing that if it got personal, the doomsayers would get a little less bearish.

Friday, September 26, 2008

The Bailout and the Squirrels in Washington

We are being told that there's no agreement in Washington about the terms of the bailout, and huge debates are going on. But here's the nasty truth: There is no substantial debate among those in the Administration, those in the Senate, or those in the House committees about the bailout or the size and scope of it. Everyone that is currently involved in the process is committed to spending roughly a trillion dollars of American taxpayer money to buy terrible investments at above maket prices. The debate is all window-dressing. The debate is on three issues: 1. How much control Congress gets of the money flow, 2. Whether they will spend the money on stock of failing banks or near-worthless assets of those failing banks, and 3. Whether or not the government will get to set pay of the executives of the failing banks that they buy out.

Let's talk about these issues one by one:

1. Giving Congress more control over the money flow - In theory, I suppose this is marginally better than the original proposal. Congress would be able to cut the purse strings at $200 Billion or $350 Billion if they decided. And Congress is directly accountable to us and up for election really soon. The Department of the Treasury is only indirectly accountable to the voters, and the Federal Reserve isn't accountable at all. But I don't think it change the cost to the taxpayer at all. Congress almost never spends less than they can, and I don't think they'd start now.

2. Assets or Stock - This is a lose-lose situation. If the government just buys the assets of failing banks, they lose our money. If the government buys stock in the failing banks, they get all kinds of new control and they lose our money. It's a plan with Barney Marx Frank's fingerprints all over it.

3. Restricting Executive Pay - This has a nice populist appeal to it. Lets stick it to the criminals who did this to us. Of course, in the grand scheme of things, this amount of money is pennies, and all of these executives made tens of millions just 3 years ago when bank profits often exceeded 30%. I don't think they'd hurt much, and it certainly wouldn't help the taxpayer much.

The fact that there is vicious debate on window dressing while the substantive plan remains unchallenged brings me to an observation. This often happens. Remember when the FISA bill was passed, and no one debated whether we'd reauthorize the ability of the Justice Department to tap our lines with only ex post facto paperwork filed away in a secret court that it's illegal to talk about? The only debate about was whether or not we would provide immunity to telecom companies who obeyed orders from the DOJ. It reminds me of watching a cat hunt a squirrel. The squirrel will sit and eat, all fat and happy, his big bushy tail twitching away. The cat will very carefully stalk the squirrel, but when it gets close enough will get distracted and pounce on the tail. The squirrel will scamper away unscathed. Washington is full of squirrels.

And that gets us to the rhetoric. Anyone who is against this bailout plan is getting blasted by Paulson as wanting to do nothing, and anyone who suggests that we scale it back significantly is demonized by Bernanke as wanting the economy to fail. The same fear tactics who got us into war with Iraq are being used by the Fed and the Treasury to get Congress to agree to waste taxpayer money on the mistakes of bankers. Newt Gingrich and Ron Paul have proposed solutions based on sound, proven free-market principles. If we return to free market principles, the bubble will continue to deflate, and there will be pain. But the pain will be short, the plans will spur investment, the economy will recover, and the country will be stronger long-term. I somehow doubt it will happen. Because as we've been told by Paulson and Bernanke all week (I paraphrase):
"If we don't let the Federal Government buy the banks, the Communists Win!"

Thankfully, there may be one group left in Washington with some courage and concern for the taxpayers. Republicans in the House of Representatives are showing intelligence and resolve that is all too uncommon in Washington nowadays. They are committing some additional taxpayer money to the FDIC, but nothing close to the risk that the current Paulson proposal (or Barney Frank's "compromise"), and they are taking steps to encourage investment. With a little luck and our support, these brave men and women may help us avert disaster to the taxpayer. That would be a breath of fresh air.

Sunday, September 21, 2008

The Great New York Money Grab

While cleaning up from Hurricane Ike and trying to put their lives back together, Texans got looted worse than any looting in the history of the world. In one short week, with the help of Congress, the President, and the Secretary of the Treasury, a few Wall Street bankers made off with 700 Billion Dollars of money made by hard-working people in Houston, Beaumont, Galveston, Port Arthur, Texas City, Pasadena, and Baytown (and Detroit, Cleveland, and other producing cities). That's $2500 for every American man, woman, and child living outside the 5 Boroughs, and over $6000 per non-New York taxpayer. It was an Western train robbery of which Jesse James could have only dreamed. It's a travesty. The South and West, and especially Texas has held up the national economy for a decade now, by holding taxes relatively low, attracting major investment manufacturing companies like Toyota, Honda, Shell, and GE. Texas has led the way in keeping manufacturing jobs in the US, keeping the existing energy infrastructure sound, and building the new energy sources. And what thanks does Texas get? When the chickens from the bad eggs laid in Washington and New York come home to roost, Texans get robbed to pay the farmer.

Never in the history of this country has State sovereignty been so important. We couldn't afford the Federal government before we had to bail out banks, we certainly won't be able to afford it now. The salvation of this country will not come from Washington. It has to come from the States. It's time for us to demand that Austin quit sending bad money after bad to Washington and New York, and declare the sovereignty of it's citizens. We can't afford to support our own citizens and New York bankers' mistresses, too.