Friday, February 27, 2009

Re-Capitalization, Moral Hazard, & Class Warfare

Trying to Do the Right Thing in the Wrong Way?

Famed hedge fund manager and head of Sears, Edward Lampert contends that government is putting capital into the banks incorrectly to try to ease credit. CNBC anchor and analyst Larry Kudlow recently asserted that banks do not loan out the banks’ own capital; they treat most of their own money most safely, investing in things like….ready for this… t-bills.

According to a recent Frontline documentary, the bankers were essentially forced in a single day last November to each accept a 25 billion dollar TARP loan from former Treasury Secretary Paulson . Therefore if Kudlow, Lampert, and my analysis is correct U.S. Treasury insisted for the good of the country that the biggest ten banks must accept a quarter trillion dollars and pay 5% interest on it each year for next five years. Then for the good of their own bank, these bankers turn around and buy treasury bills anywhere from say .25% to 2% ? If true, that government plan would actually remove more capital from the banks: at least 3% of 250 billion dollars every year.

But hey its okay; the taxpayer is making money here. We were demanding a bank pay treasury 5% while we pay them less than half to keep their new cash safe. We tell them its non-voting stock because we don’t want to interfere in your bank business. Then we tell them how to run their business from acquisitions, to bonuses, to corporate jets, to company parties, to sports sponsorship, to demanding they show they are lending more than they otherwise would be. Sounds soundly Soprano like to me (Tony - not an opera singer). No wonder bank stocks fall,! Who wants to invest in airlines where the pilots are flying a plane wearing handcuffs? Kudlow said that banks really only loan out their deposits not their own capital. Therefore the most efficient way to recapitalize banks is to expand their deposit base. And the only good way to do that then is …..TRICKLE UP

USA Today: Roll the Dice, Crap-Out, & Meet Robin Hood!

Sadly bailouts now for banks, insurance, and auto companies make the same sense as bailing out the airlines after 9-11. About every other country that has one is subsidizing their automobile companies in this crisis. Not to do so ourselves would be folly and the loyal opposition reluctantly agrees. But bailouts focusing on individuals, those in most trouble? The loyal opposition scream moral hazard, they gambled, they lost, they pay. Why the difference? Follow the campaign money! Who gives more money to politicians: citizens or corporations? The answer tells you who they really work for first and foremost. Remember who got congressional immunity for illegal wiretaps? And recall who wrote and benefited from the last Prescription Drug Bill.

If it were not such dire economic times, if the middle class had not been encouraged to go deeply in debt, it the working class had plenty of work, the burden might be shared a little more equally. But currently there is only sector of society that can afford to pay more and it just happens to be the same demographic that has benefited the most if not all of the last 25 years. The evidence from Malcolm Gladwell’s Outliers and countless other sources is that it takes more than hard work, determination, family, and luck. It takes a community and a society. Everyone’s success is built on the shoulders, backs, and often graves of those that came before them or along with them. No man is an island.

Lockboxes & Patriotism

The economic choice presented back in the election of 2000 was to stash our then annual budget surplus away in a “lockbox” versus “let the people have their money back, tax cuts make the economy grow”. One can only wonder how many more options and how much quicker could we pull out of this mess if we were currently a creditor nation instead of debtor nation. The idea that raising taxes on the wealthy and closing corporate loopholes would somehow cause less government revenue is disproved by the fact that the fastest growing or biggest economy in the world has never existed with say a 1% percent tax rate. It has now been well documented that tax cuts for the upper class do not result in greater spending but greater savings by them. So now more than ever, all tax breaks must be directed towards those that spend it paid for by those that can most afford it. There is your moral hazard.

But perhaps here is something conservatives, independents, progressives, liberals, Obama idealists, and maybe even some libertarians can agree. Instead of looking around for worst of us for who is most to blame let us look around at who is the best of us for who to reward.

I propose some or most or all of the TARP or TALF money be used to do something extraordinary and unexpected. As a simultaneous stimulus, tax cut, re-capitalization of the banks and rewarding our heroes: the ones that let us have these discussions: for the next two years cut enlisted military taxes to zero and officers, firemen, policemen, nurses, and teachers by 50%. And for every solider that served more than a year in Iraq or Afghanistan or was wounded there additionally let us put 20 to 50 thousand in the bank for every them to spend on education, and/or owning a home. For those that made the ultimate sacrifice that bonus would be banked for their children's education, or for their spouse, or for parents’ retirement.

But let us start with an investment here: update, expand, and modernize our Veterans Administration hospital system to accommodate every solider and their dependent and every veteran that ever served. Finally let us bring home the vast majority of the half million Americans under arms in foreign lands. America must learn what to let go of or risk losing itself, its hopes, and its dreams. Values will need to be prioritized but surely we can live up to our Key ideal of “land of the free and home of the brave.”

Wednesday, February 25, 2009

Starting first post with the universally fundamental truth of mathematics as it applies to our current economic crisis. Our economy is the sum total of all goods and services, aka Gross Domestic Product ( GDP ) so….

GDP = Consumer Spending (70%) + Business Spending + Government Spending

If consumer and/or business spending should falter from say increased unemployment there is only one source that can make up the difference. It seems intuitive that some government spending would create more jobs quicker than others but according to the math it ultimately does not matter. What we spend on reflects our value choices as a society. But just any government spending on domestic goods and services is the most important aspect of keeping the economy from contracting as much as it otherwise would. That is why most economists say the stimulus was not big enough now nor in the Great Depression of the 1930s.

GDP = Money Supply x Velocity

Our economy in dollar terms equals how much money is in circulation multiplied by how many times each dollar changes hand every year. When people lose their homes and especially their jobs or even fear that they might the velocity of money plunges. That is why printing money is not inflationary at a time like this. In fact velocity has fallen so fast and so much that despite multiple massive government capital interventions in numerous ways from Federal Reserve and Treasury prices have fallen on almost every asset class in the last six months. These formulas are so accepted that Richard Nixon said in 1971 that “We are all Keysians now.”

We are not bankrupt as a nation unless our citizen creditors and foreign debtors say so with their money. And if fact, right now, they say the opposite. They feel the book value of America far exceeds its debt. So despite having a government and people that lived long time beyond their economic means America is in a much better strategic position than every other major country. The cost of capital for our government has never been cheaper as fearful investors seek the relative safety of government t-bills and bonds. Not taking advantage of that opportunity to make wise and valuable investments in our country and people would be the true economic calamity.

I am not saying all is guaranteed and rosy path to the future. Quite the opposite. We face our own explosion in poverty and a world that will be worse shape than us. I have heard phrases that I have never heard before like “pet food bank” and “Police prepare for ‘Summer of Rage’” on a CNN crawl. Gas mask supplier says business is “through the roof”.

Whether it ends with orderly markets and good visibility or ends with no markets and new currency is still a real question at this point. The Saudi Arabian and the Chinese government each independently have the option of ending western capitalism as we know it simply by selling their t-bills and buying gold. Will they? Probably not but thought that they could still makes me uneasy and a bit queasy. I got to think a growing 10 to 20 percent of their leadership would ,now favor cutting off their own nose to spite America’s face. Their feeling is that they could end up as the world’s economic powerhouse on the other side of the chaos. On the other hand I heard Art Cashman say recently, “Don’t bet on the end of the world, it only happens once.”