News Flash: Bank Bailout Created Moral Hazard

Someone at the Treasury is actually doing his job, and admits that TARP caused the big banks that took on too much bad debt in the past decade to get bigger and take on even more bad debt.

Link

The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

Who could have possibly predicted this? Well, basically anyone that has read Economics in One Lesson. It's too bad that the smartest financial minds are more concerned with inventing new ways to defraud American consumers, investors, and taxpayers than sound economics.

New blog I have been following and some interesting data

I was recently turned on to Karl Denninger's blog, and his remarkably accurate predictions. He's been at least as accurate as the great Peter Schiff, and with more detail. This post and it's follow-up should be required reading for anyone who cares about this country.

But this is the one that really caught my eye: from October.

In short, it wouldn't have done anything because the economy only grows at a rate of about 20 cents for every dollar of debt taken on. That is, it takes five dollars of debt to generate one new dollar of GDP.

If you have been wondering how the bailouts needed to be in Trillions, this is why. The fundamental theory behind Keynesian economics is that a dollar spent by government multiplies itself in economic growth. It is a true theory, except that the multiplier is below 1 (throughout history, it's around 0.7). For the US, now it is 0.2. That's right, for $1 of Keynesian growth, we have to saddle our children with $5 in debt. It is immoral, and Paulson, Bernanke, and any legislator who voted for the bailouts should be imprisoned for it.

Bailout Madness

The smartest men in the room all told us that if we didn't bail out the banks/mortgage companies/insurance companies, the credit system was going to collapse. I thought that the question that no one was asking was if we do bail out the banks, what would happen? Well the answer to that came sooner rather than later. Some examples:

Newly nationalized AIG burns through $50 Billion of the $80 Billion in taxpayer money in just a couple of months, asks for, and receives $70 Billion more. To me, this is emblematic of the difference between private corporations and socialist entities. Governments tend to give money to those who "need" it most. Private investors tend to give money to those who are likely to make the most money with that investment. At times, the companies who need it most are in that position because of poor management, and are likely to lose more.

The Federal Reserve refuses to identify recipients of $2,000,000,000,000.00 in emergency loans. This was a bailout that wasn't voted on, and since the Fed is a government sponsored entity and not really a part of the Federal Government, it is exempt from Freedom of Information Act requirements. God bless him, Mark Cuban has funded a website called BailoutSleuth.com that attempts to track where the bailout money is going. (I still hope his team loses, but this makes me really respect the man. Edit: I just found out he has been sued for insider trading. I hope justice, whatever that is, is served. I tend to think that the Treasury has contacts within the SEC.)

Now every other struggling industry is lining up to receive their bailout. GM and Ford are first in line, and moreso thant the banks, they have a plausible claim that if they aren't bailed out, their failure will make a bad economy worse. The question that must be asked is: "If they are bailed out, will they survive?" The same issues that make GM and Ford uncompetitive will remain. I wonder if bankruptcy or bargain basement buyout wouldn't be a step toward sustainability.

What industry is next? I know that state and local governments have lined up for their share. Then what? Steel? If automakers can't sell cars, that kills the market for steel. Chemicals? Huntsman is up to its neck in debt. Retailers? Sears could say it's too big to fail. Restaurants? If wages start falling or unemployment goes up, people will start eating at home more.

The United States House of Lords are Traitors

Not two days after the House of Representatives made the boldest stand for the regular guy in decades, the United States Senate voted 74-25 to spend $700 Billion more wealth created by regular middle-class guys and gals buying up horrible investments made by the biggest banks in America. After having told Pitchfork and Musket Junta member Will that the bailout bill has been opposed by a 200-to-1 margin by his constituents, John Cornyn voted for it. Apparently the Senate no longer believes that they are responsible to the American people, and vote based on the assumption that have a lifetime appointment. They have become the House of Lords. They either think that they and the bankers that have been testifying to them all week are smarter than us and that they know better than the entire country what is good for entire country, or they don't care what's good for entire country.

I had a viscerally angry reaction when, after the bill passed, Chris Dodd said that he thought the bipartisanship was in the mold of our founders. A little education for you Mr. Dodd: When Alexander Hamilton set up a National Bank, the last thing James Madison did was show bipartisanship. But then, politicians believed they had an obligation to protect the Republic from the monied interests in New York. And to be fair, the First Bank wasn't supported by taxpayers, although it did have a competitive advantage. Our founders rightfully acknowledged that whenever there's agreement in government, it's only to grow their own power at the expense of the freedom of citizens.

All of the likely suspects voted for this bill (except for Socialist Bernie Sanders), but scarily, so did some of the ones that Conservatives have come to believe that they can count on. Bob Corker, John Sununu, and Tom Coburn all voted for the bill, with promises that it doesn't signal the end of their conservatism. After January, it might not matter much. Angering conservatives (and most of everyone else) in an election year where the Republican brand is already damaged doesn't bode well for preventing a Democrat supermajority.

We've got one chance left to save the American people from this bill. The House will vote on the bill once more on Friday. The House leadership is going to be threatening committee assignments and chairmanships. We must continue to flood our Representatives with phone calls and emails, and tell them that the smart stand is with their constituents and against their leadership. If you have a few bucks, donate to one of the brave Congressmen's reelection campaign today. And pray. We're going to need some help.

God Save the Republic!

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.

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.