Tag Archives: bailout

No thank you, Mr. Keynes. America’s infrastructure does not need a bailout.

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I’m sick of hearing the phase “America’s crumbling infrastructure” from the press and politicians. They have been pushing this theme for at least 18 months now. Observers should look for the motive behind all such recurring news themes, because nothing gets on the air on into print without one.

In this case, we are clearly being prepped for New Deal #2, involving at least the following programs:

  • Public works projects. A resurrection of the Works Progress Administration (aka WPA or “We Piddle Around”).
  • Green energy waste. The Tennessee Valley Authority with a touchy, feely twist. Al Gore, administrator?
  • Neverending War in Asia. That’ll lick unemployment for good!

From Bloomberg, here are the latest brilliant ideas from the Senate:

Sept. 25 (Bloomberg) — Senate Democrats proposed a $56 billion economic stimulus package that would increase government spending on unemployment benefits, food stamps, infrastructure projects, aid to state governments and heating aid to the poor.

Senate Majority leader Harry Reid, a Nevada Democrat, said today that the legislation is needed to help millions of Americans struggling with the slow economy.

“We must not forget Main Street as we work to address the crisis on Wall Street,” he said, adding that the plan would “create hundreds of thousands of good-paying American jobs and prevent cuts in critical services for millions of Americans.”…

The Senate plan would extend unemployment benefits by as many as 13 weeks, expand food stamp aid and provide states coping with high Medicaid costs with an additional $20 billion in federal assistance.

Highway Projects

The plan would also spend $11 billion on highway and other transportation projects, $5.1 billion for heating assistance to the poor, $1.2 billion for the National Institutes of Health and $250 million for NASA.

Will Keynesianism never die?

Politicians and bankers love this repressive and discredited doctrine because it justifies all manner of scams. Today’s professors won’t admit it, but they haven’t changed a bit since falling hook, line and sinker for Orwellian nonsense that intentionally punishes savings and private investment, maintains a dumb consumer class, and allocates full freedom and power only to a ruling class of “philosopher kings”. They tinker around the edges of this egomaniac’s* theory, but they assure us that without the State pulling the levers (following their guidance of course), the economy will crumble down to the stone age.

The last thing America needs in a Depression is more government involvement in the economy, especially not government jobs for government-designed projects. This just steals from the sensible and allocates to the connected, while wasting the capital on unneeded projects with negative returns.

Relax, go for a drive.

The highway and other infrastructure in the US is among the best in the world, especially the road system. I have driven in a lot of places, and nothing beats four lanes each way with stadium lighting, fast and even drainage, huge reflective and logical signage, and perfectly cambered cloverleafs. It is just a joy to drive when you come back after being away. And by the way, American motorists, even New Yorkers, are very safe and considerate by world standards. The are not the Swiss, but we can’t all be.

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* Here is a character study (PDF) of the most-revered economist of the 20th century by one of the smartest and most honest economists of the same, Murray Rothbard, who’s writing happens to be a joy to read. How many Keynesian professors can you say that about?

There is lots more on Keynesian economics here, from America’s real libertarian think tank, the Mises Institute (not The Stato Foundation).

That was quick: Bailout deal coming together.

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We have another rumor and another rally (which we were due for today anyway). I’m scared of what happens after this thing becomes news.

The rumor is the head congresscritters are saying they think they have a deal:

WASHINGTON (AP) – Warned of a possible financial panic, key Republicans and Democrats reported agreement in principle Thursday on a $700 billion bailout of the financial industry and said they would present it to the Bush administration in hopes of a vote within days.

Emerging from a two-hour negotiating session, Sen. Chris Dodd, D-Conn., the Banking Committee chairman said, “We are very confident that we can act expeditiously.”

“I now expect that we will indeed have a plan that can pass the House, pass the Senate (and) be signed by the president,” said Sen. Bob Bennett, R-Utah….

Tony Fratto, the White House deputy press secretary said the announcement was “a good sign that progress is being made.”

“We’ll want to hear from (Treasury) Secretary (Henry) Paulson, and take a look at the details. We look forward to a good discussion at the meeting this afternoon,” he said….

“There really isn’t much of a deadlock to break,” said Rep. Barney Frank, D-Mass, chairman of the House Financial Services Committee.

But there were fresh signs of trouble in the House Republican Caucus. A group of GOP lawmakers circulated an alternative designed to attract private capital back into the credit markets with less government intrusion.

Really? Someone is defending the free market?

Under the proposal, the government would provide insurance to companies that agree to buy frozen assets, rather than purchase them directly as envisioned under the administration’s plan. The firms would have to pay insurance premiums to the Treasury Department for the coverage.

I really got my hopes up there for a minute. Not. This sounds like a phoney, roundabout way to offload the losses to the Treasury. There is no difference whether the Treasury buys the bad debt for more than it is worth or insures it for below market rates; the taxpayer takes the loss either way.

What if they go to plan B?

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What if in response to the overwhelming public opposition, which is surprising even me, Team Banker yanks the bailout? The market will crash, bailout or no bailout, but with no bailout, they can say “I told you so.”

Then when people are really hurting, I mean jumping out of windows hurting, they can come back with emergency powers, Obama or no Obama.

Don’t think they aren’t considering it. These guys are all high-IQ players who think moves ahead and make contingency plans, and they are getting desperate.

Any serious student of the Great Depression will sooner or later come across a very interesting story from the summer of 1933. Somehow I doubt Bernanke discussed this in his Princeton courses.

Want to fight the bailout? Check in with Mish.

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Not all libertarians are as cynical* as I am. Like giving money to Ron Paul’s campaign (which I did, because it was always about the message, not winning), fighting the bailout may be futile in the end, but at least you can look back and say that you made the effort.

Mish is on top of a massive campaign to do the right thing, with resources and guidance for contacting congresscritters, many of whom are reporting that this is the biggest public response that they have ever seen. If you are of a mind to make some noise, head over there.

Mish has drawn up an open letter to Congress with suggestions for removing some of the road blocks that government has placed in way of the market, which would allow our financial system to right itself with no handouts. Passing such a bill would be the most sensible thing Congress has ever done.

Also consider pointing your Congressional ‘representatives’ to Fund manager John Hussman’s plan, which involves more government involvement (so it stands a better chance with Congress than Mish’s, since it gives them something to do, not undo), but is far more sensible than the Paulson plan.

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*My own belief is that educating yourself and others about fractional reserve banking and other scams, while protecting your own assets or even making money on the short side, is good for everyone. It leaves more capital in sane hands and preserves knowledge that can be redeployed at home or elsewhere, whether in the coming years or many decades from now. That’s not cynicism, but realistic hope. Civilization will flourish again, sometime, somewhere, hopefully on earth, hopefully among humans, and hopefully in my lifetime.

Bailout not just for mortgage debt. Paulson wants to take any “troubled assets.”

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Better brush up on your Sun Tzu and Machiavelli if you want to survive in this investment climate, because now we know what rules they are playing by.

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Jeez. I wrote the following this morning, but I thought I was months ahead, not hours, and who knew they would use US tax dollars to bail out foreign banks? That is a surprise, but they don’t call it the international banking cartel for nothing.

I wrote: “The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?)…”

Now I find this on Bloomberg this evening:

U.S. Treasury Widens Scope of Bad-Debt Plan Beyond Mortgages

By Dawn Kopecki

Sept. 21 (Bloomberg) — The Bush administration widened the scope of its $700 billion plan to avert a financial meltdown by including assets other than mortgage-related securities.

The U.S. Treasury submitted revised guidance to Congress on its plan, referring to its proposal to purchase so-called troubled assets, a change from its original plan for investments tied to home loans, according to a document obtained by Bloomberg News and confirmed by a congressional aide.

The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.

Firms that are headquartered outside the U.S. will now be eligible, in another change from the guidance sent to Congress yesterday, according to the document. The size of the plan remains unchanged.

“If you must break the law, do it to seize power: in all other cases observe it.”

– Julius Caesar

They have long since crossed the Rubicon, and are playing winner take all.  Who know our bankers were such good students of history?

I can already hear the pro-Obama suckers saying, “what can you expect from the Bush administration and the Republicans? They are such fascists, always ready with a handout for their wealthy buddies.”

Well, take a look at Obama’s top donors and see if it isn’t a bunch of bankers who happen to be favoring him over the straw man from Arizona (here, here, and here). Besides, who better to enact a New Deal and get us into a really big war (Wilson, FDR, Johnson) than the Democrat wing of the ruling party?

Why bailouts will not stop the depression

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The market is a force of nature, like gravity. To use it is prosperity. To fight it is misery.

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By bankers, for bankers.

This is a bailout of bankers. The Fed was created by bankers, and the Treasury is run by a banker, so there are no surprises here.

The plan is to have the government take banks’ bad mortgage debt (will they add credit card, auto, student and corporate debt?), so that they are no longer insolvent. Solvency has always been the issue, not liquidity — that is a red herring. By no means will all of the bad debt (out of $50 trillion in total domestic financial and non-financial sector private debt) be absorbed by this program, which is going to move $700 billion at a time.

The fact that the government still relies on a market for its bonds puts limits on the pace at which debt can be socialized. There has been a great demand for Treasuries of late as safe havens, so the first tranche or two should be absorbed easily. Bonds may even rally more as assets prices continue to plunge.

Later, after the bulk of the deflation has passed and the bond market is saturated, this demand will ease and the Fed will have to buy greater and greater amounts of bonds with newly created dollars. The government’s spending needs are infinite, but the tax base and bond market are finite, so this phase of inflation can lead to currency failure. That can be chaotic, because contracts become meaningless when currencies are worthless. Out of such episodes arose Napoleon and Hitler.

Econ 101: Savings = Investment.  Lesson: reward savers with deflation.

We should embrace deflation, not fight it, because it restores sanity. The irresponsible go broke, and the prudent are rewarded. When money is tight, prices need to come down, and this encourages the savings that will turn to investment after the dust settles. Those who were smart enough to go into this crisis with savings are the ones you want allocating the capital for rebuilding, not the swindlers who beg for newly printed ‘stimulus’ money for their pet projects.

Your neighborhood, a government housing project.

Let’s assume the program actually removes all bad debt from bank’s balance sheets. Once again, they are fully capitalized and ready to issue loans, with assistance of course from an accommodating Fed. That will ‘fix’ one side of the reflation machine. On the other side, borrowers will still be choking on their existing debt and in no condition to take on more.

So the next step on the road back to inflation city will have to be debt relief for borrowers. As the owner of huge amounts of mortgages, the government is likely to be a very accommodating creditor. Can’t handle $2000 a month? Well, just pay $1000, but promise to spend the rest, ok! Or it could offer a quickie default: we take the house, but you can rent from us for cheap. In either case, the government has title to an enormous amount of housing stock, so all of America takes on the air of an inner city housing project.

(A side note: Once government becomes your landlord, it has a lot more leverage to force the installation of whatever it wants in your home, from ugly fluorescent lighting and those ‘efficient’ toilets that clog, to monitoring devices for your ‘safety’.)

The Crash is the Market, and It cannot be stopped.

Crashes are the market’s way of correcting the perversions of bubbles blown by bankers and governments. They are not market failures. The Market never fails. It is a force of nature. Bankers and politicians can shackle us with their guns and laws, but they cannot change the way the universe organizes itself. Any scheme but freedom, the absence of force (such as theft, a form of which is inflation), will be thwarted by the Market. Tax cheats, corrupt politicians, crooked brokers, smugglers and prostitutes are as plentiful as the laws that create them. In the absence of force (as George Washington said, “government is not reason; it is not eloquent; it is force”), the Market will reward honesty and industry above all else. When force is used liberally, society rewards George Bush Jr and Angelo Mozillo.

The government has tried to thwart the Market for so long, from the New Deal to the S&L crisis and beyond, that the distortions have become too big to support, and this time the Market is taking its revenge. Saving some big banks and some borrowers is certainly possible with bailout programs (rent seekers should call their lobbyists ASAP to get on that list!). But $50 trillion is way, way beyond anything the government can handle, so there will still be massive debt deflation left and right, and asset prices will continue to crash.

Debt revulsion is the fly in the reflation ointment.

To reflate, we need willing and able borrowers and lenders (inflation is the net increase of money and credit, deflation is their net decrease). Even if all bad debt is taken off the books of both borrowers and lenders, can the Feds rekindle America’s affair with debt? The answer is yes, eventually, but it won’t be any fun this time.

If the government forces the issue before the Market has cleared the way for growth, people will only be willing to borrow again to protect against the decline in the value of currency. During the crash, currency will continue to gain in value, so for at least the next couple of years, borrowers are going to be very wary of debt. They don’t want to repeat this nightmare, and besides, with asset prices crashing, the economy in a tailspin, and new regulations restricting commerce, where on earth can investors profitably deploy this capital? China? Not so fast — investing abroad may be restricted. Even with a 0% loan, can borrowers generate any return at all in this environment? With poor investment prospects and no need to protect against inflation, few will be willing to borrow.

This is why the traditional reflation machine will stay broken. This is the machine that Greenspan operated for the bankers with such mastery. But try as Bernanke might, this machine will not start up again until money or credit is somehow flooded into the economy through other means.

¡Chavismo!

In Hugo Chavez’s Venezuela, people borrow not for productive uses, but to speculate in any kind of asset that will lose value at a slower rate than inflation plus interest. It is a sickening thought, because it totally perverts all economic decisions and leads to staggering waste. We have just experienced a milder version of this in the US, but at least we built a few useful things with the credit, though most will go to waste.

In Venezuela, people invest in new automobiles, sometimes fleets of them, because the sum of interest and depreciation on the vehicles is less than the rate of general price increases. Hence, cars bought new appreciate in Bolivars as they rust in driveways. Venezuelan society is in a later stage decay than the US, but it may resemble our future.

The new New Deal, and the Neverending War

So how do you get that stubborn price level (the rearward looking indicator, CPI, was negative in August — expect more and bigger negative numbers for many months to come) to start ticking up again with gusto? After a general asset price crash, which I emphasize cannot be prevented at this point, the government can spend and spend and spend.

If you think the bridge to nowhere was ridiculous, you haven’t seen anything yet. Our sociopathic leaders, with hearty encouragement by esteemed professors, seem to have no problem with the old Keynesian theory of burying bottles stuffed with cash and letting people dig them up. Hey, it puts people to work and raises the price level! Let’s all pray for more hurricanes while we’re at it. Think of the boost to GDP!

Expect lots of pork for ‘green’ energy projects, and expect those projects to cost more than they produce and have all kinds of perverse effects. Expect national ‘service’ programs (if mandatory, they are national enslavement programs) such as have been touted by Obama, Hillary and the media wing of the Fascist party (now the only party in power in the US).

We were all taught in school that although FDR’s valiant efforts helped put Americans back to work, what really saved the US from sinking into a big hole the earth was War, glorious War. How lucky of us to already have two of them going and plenty more enemies lined up just in case!

Debt ceiling to be raised for 3rd time in 12 months. Now $11,315,000,000,000.

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This little provision was slipped into the bailout bill (published on nytimes.com):

Sec. 10. Increase in Statutory Limit on the Public Debt.

Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000.

The last raise was only in July, to $10.6 trillion. Before that it was increased in September 2007 to $9.815 trillion. With the new limit, we have a 15% increase in 12 months, but that pales in comparison to the annualized rate of increase since July.

So those are the debt issuance figures: in the ballpark of $1 trillion extra for now, but surely to rise greatly as the panic deepens, tax receipts dry up, and a new New Deal is enacted. Not to mention any extra war expenditures, also no doubt on the way.

Note that these figures only refer to the sum of Treasury bonds outstanding, not the discounted future cost of entitlements, which adds another $90 trillion to the tab. It is a pretty safe bet that the US will never have a balanced budget again and default on its promises through failure to deliver services and inflating away its Treasury debt.

But before you go and put everything in gold juniors, remember that Japan ran massive deficits all through its lost decade of the 1990s, and they still experienced sustained deflation and had very low Treasury bond yields. The reason is that the debt issuance and public expenditures could not make up for the massive wealth lost in the aftermath of their real estate and stock bubble of the late 1980s. The Nikkei is still down 69% (and falling) from its high two decades ago.

Lehman reportedly to declare bankruptcy. US futures down 3% Sunday night.

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According to The New York Times Dealbook blog, the word is that nobody wanted the entirety of this gangrenous carcass without a complete Federal Reserve guarantee a la Bear Stearns, so the healthy parts are being carved off, while the Fed graciously trades some of its remaining assets for the fetid pieces:

Lehman Brothers will file for bankruptcy protection on Sunday night, in the largest failure of an investment bank since the collapse of Drexel Burnham Lambert 18 years ago.

Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings, these people said. A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government. …

How many billions of its remaining $400 billion in Treasuries is the Fed going to lose in this deal?

Lehman’s broker-deal subsidiaries would not be a part of the bankruptcy filing. Those entities must file under Chapter 7 rules, which are the procedures for liquidation, under the assumption that it is the best way to protect customers. The Securities Investor Protection Corporation would handle the liquidation of such brokerages, and bankruptcy lawyers say that customers are likely to receive their holdings back.

Boy, if I were a Lehman brokerage client, I would hate to have to wait for the bureaucrats at SIPC to get me my securities back. And what about clients with margin accounts? Will they be wiped out?

… Moreover, changes to the bankruptcy code mean that counterparties to Lehman’s credit-default swaps can seize their collateral at any time, posing an enormous potential risk to the entire financial markets. Investment banks, hedge funds and other financial players labored throughout Sunday to offset their exposure to Lehman, moving their contracts to other firms.

As of 7:30 PM in New York, traders are anticipating a nasty open Monday morning. With a Fed meeting Tuesday and options expiration Friday, this should make for an interesting week.

 

 

 

 

 

Wanna bet the Fed bails out Lehman’s creditors?

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There is no way any rational buyer will take over Lehman without someone else taking the risks of holding their bad assets. With a market cap of just $2.6 billion, Lehman’s share price is not the issue. An honest valuation of Lehman’s assets would surely result in a massively negative equity figure.

The company is clearly insolvent, since it showed over $40 billion in Level III assets, $200 billion in Level II assets and $640 billion in total assets, levered on top of just $26 billion in equity. Merill’s recent sale of mortgage assets to Lonestar at 5.5 cents on the dollar gives you an idea for the true value of some huge portion of this stuff. Even writedowns of just 11% on the Level II and III assets would wipe out Lehman, without even considering the true value of the rest of its assets in this lousy environment.

Look for a Bear Stearns style giveaway of the core brokerage, advisory and money management operations to some big bank, while the Fed covers the losses on the riskiest assets. Since JP Morgan already got a handout, maybe Goldman or Bank of America is at the front of the line for these scraps.

Greenspan, Poole and Paulson have all chimed in saying that the Fed shouldn’t finance any sale of Lehman, but that is a smokescrean, because the sale itself isn’t the issue. Any Fed assistance will be to back up Lehman’s debt so that someone is willing to buy the stock ‘with their own money.’

Since there is a lot of resentment out there from the BS and GSE bailouts, our hustlers-in-chief may use some kind of obscure arrangement whereby the taxpayer’s obligation isn’t readily apparent, but is burried in the footnotes. This would allow them to redeem themselves as champions of the free market with the help of compliant editors and producers in the propaganda outlets.

It’s a beautiful day for shorting. My picks: Wal-Mart & Costco

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I wouldn’t be surprised if the market ends down on the week (maybe even the day). This morning’s little bailout* blip just offers shorts another chance to set up some trades we may have missed in the bounce since July. (*For a dissection of the bailout, here’s Mish).

Why short leading discount big-box retailers? Although they sell stuff cheaply, they have come to rely on Americans buying lots of cheap stuff. American’s have a habit of viewing low prices as an opportunity** to buy more of something, not to buy the same amount and save the difference. The aisles of these stores are packed with discretionary goods: a myriad of toys, cosmetics, housewares, sporting equipment, and all kinds of footwear and clothing. People’s homes are overflowing with decades worth of junk: enough clothing for a couple of generations, and used toys, tools and appliances galore.

These stocks are priced for perfection, as if the consumer binge will continue in perpetuity and the companies will continue to open new stores in new exurbs. Unfortunately, many of those new developments will be ghost-towns before long, and the stores will be big, empty cleanup liabilities.

Let’s take a look at the numbers:

Wal-Mart: Price: $61; P/E: 18; Dividend yield: 1.6%; Earnings growth, 2005-2007: 6.5%

Costco: Price: $70; P/E: 24; Dividend yield: 0.9%; Earnings growth, 2005-2007: 0.94%

By any Graham and Dodd style evaluation, these two are massively overpriced, Costco more so than Wal-Mart. However, I like the short odds on Wal-Mart just as much because it is so overbought and near a 52-week high in a sort of nifty-fifty bubble (hence, I picked up some puts this morning — I’ve had long-term puts on COST for a while).

Yes, same store sales may be up, but that is largely on account of groceries and gas. The profits are in discretionary items. Over the next 12 months, watch for sales to go flat and margins to shrink, before sales drop outright.

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**People don’t apply this logic to investment purchases, hence the securities and real estate markets are inefficient.