Set up a prepackaged bankruptcy.

I started to argue for something similar to this the other day, but the real world beckoned so I had to stop.  The biggest problem with an automaker going through bankruptcy is that it would be hard to convince buyers that their warranties were worth anything.  A fast tracked bailout or some kind of Congressionally designed “bankruptcy-like” process that would enable the Big Three to make necessary structural changes while assuaging concerns of prospective buyers is a good compromise.  Otherwise Congress will eventually just throw money, in the form of more loan guarantees, at the companies with only modest changes to their failing business model.

I sent an email a while back to Senator Shelby expressing my concerns with the Bailout and thanking him for standing fast against it. He replied with a nice letter and I don’t think he’d mind if I shared it with you. The letter was dated November 3 (any typos are mine):

Thank you for contacting me with your concerns regarding the Emergency Economic Stabilization Act of 2008, which is essentially the financial sector bailout plan devised by U.S. Treasury Secretary Hank Paulson.

I believe that there are significant flaws with this plan that will prevent it from working effectively and will result in unnecessary risks to the taxpayer.  Therefore, I opposed the legislation and would like to take the opportunity to explain my concerns.

First, the process in which this bill was assembled was not as deliberative or thorough as it should have been.  This situation did not appear in a matter of days, and we are not going to fix it with a piece of legislation quickly cobbled together in back rooms of the United States Capitol.  It took nearly 10 years, five Congresses, and three Presidential Administrations for the far smaller Savings and Loan Crisis of the 1980s and 1990s to be resolved.  There are no easy fixes and this crisis will not be resolved quickly.  Deliberation on any potential solutions should not have been done in such a haphazard manner.

Second, the Paulson bailout plan focuses on a single problem — illiquid assets in our financial institutions.  I believe, however, that there are a number of interrelated problems such as the troubled assets on the books of financial institutions and the process of declaring home values that also need to be addressed in order of their significance.  Congress should have undertaken the effort to determine the best course for each of the issues causing problems in our troubled markets.  Instead, we chose to rush through a plan without ever considering any of its details.

Third,  the bill contains a precipitous increase in deposit insurance limits from $100,00 to $250,000.  This would markedly increase the exposure of the already depleted federal deposit insurance fund.  This increase was made with little or no debate and would further amplify the risk to the American taxpayer.  There is also a very problematic track record for rapid increases in deposit insurance, which was one of the factors leading to the Savings and Loan crisis of the 1980s.

Fourth, this law creates the Troubled Asset Relief Program to authorize the Treasury Secretary to purchase up to $700 billion worth of troubled assets from just about any type of institution.  In exercising this authority, the Secretary would be vested with nearly unfettered power.  The oversight, or lack there of, of such power is greatly concerning.  While the bill establishes a Financial Stability Oversight Board to review and make recommendations of the Secretary’s operation of the program, the oversight board is fatally flawed.  The Oversight Board, on which the Secretary himself will serve, along with the Congressional Oversight panel, will not check the Secretary’s authority and will do nothing to address the fundamental flaws within this plan.

Ultimately, my greatest concern is that we have not spent any time determining whether we have chosen the best response to our financial problems.  To the extent that other options exist, I believe that we in Washington have failed the American people in not fully examining these options.  I believe that “choosing something, over nothing,” is a false choice.  This bill does not address the underlying problems with our financial institutions; for that reason I opposed this legislation.

From the AP:

Even as Detroit’s Big Three teeter on collapse, United Auto Workers President Ron Gettelfinger said Saturday that the problem is not the union’s contract with the automakers and that getting the automakers back on their feet means figuring out a way to turn around the slumping economy.

Very interesting.  Supposedly the Big Three “teeter on collapse” and the UAW refuses to concede anything.  Auto industry shills are (falsely) telling anyone that will listen that collapse will cost all of those workers - plus more - their jobs.  Are they that confident that their friendly, paid for legislators (and president elect) will transfer the heavy burden of union compensation onto the backs of the American people?  Or do they not really think the crisis is all that significant - more of a manufactured cash crunch to elicit government aid and union concessions?  If my livelihood was on the chopping block I wouldn’t stubbornly refuse to concede some ground on wages, benefits, or job guarantees.

Reflexively, Gettelfinger said that the culprit is the economy, not lush union compensation packages.

Instead, Gettelfinger blamed the problems the auto industry is suffering from on things beyond its control - the housing slump, the credit crunch that has made financing a vehicle tough and the 1.2 million jobs that have been lost in the past year.

“We’re here not because of what the auto industry has done,” he said. “We’re here because of what has happened to the economy.”

That is an utterly bogus argument.  It reminds me of a coach whose football team just lost blaming the loss on the weather.  Guess what: both teams had to play in the same weather.  German, Japanese, and Korean automakers have all had to deal with the same economic conditions here in the states.

The problems at the Big Three should draw attention to the woes associated with unions.

Average compensation for UAW workers at the Big Three is over $73 per hour, while workers at Toyota receive $48 per hour.  Why should we subsidize that largess?  One could hardly argue that the UAW workers deserve that much more money since Toyota is able to make a superior product for far less.

The UAW struck a deal with Chrysler that forces the company to give laid off workers 90% of their pay until 2011.

Labor contracts have the Big Three and their suppliers paying 12,000 salary plus benefits to sit around in job banks doing (I kid you not) crossword puzzles.  This costs car companies billions of dollars.

There are also high retiree benefit costs, job guarantees, and other such obligations (in addition to the ones mentioned above) that have distorted the labor market and helped push the Big Three to financial insolvency.  Any “rescue” plan at this point must deal with the labor burden directly.  A bailout written by sympathetic Democrats will do nothing to address the problem.  Chapter 11, where labor contracts can be renegotiated, is likely the best bet.

Here is a must read articlefrom Fareed Zakaria of Newsweek.

Amid all the difficulties and hardship that we are about to undergo, I see one silver lining. This crisis has-dramatically, vengefully-forced the United States to confront the bad habits it has developed over the past few decades. If we can kick those habits, today’s pain will translate into gains in the long run.

Since the 1980s, Americans have consumed more than they produced-and they have made up the difference by borrowing.

Two decades of easy money and innovative financial products meant that virtually anyone could borrow any amount of money for any purpose. If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years. The average household owns 13 credit cards, and 40 percent of them carry a balance, up from 6 percent in 1970.

Zakaria goes on to rightly accost governments for taking part in the easy money, buy now pay later orgy.

I am not so confident that we, as a nation, will learn from our mistakes.  Many of the government’s proposed “solutions” to the problems are measures intended to get us back to the status quo that precipitated the calamity we face.  Cutting interests rates to spur increased lending (indebtedness!) is a good example.

While the overall column was quite good, this paragraph in particular jumped out because it was dead on accurate:

In the medium and long term, we have to get back to basics. Households, for instance, should save more. Governments should put incentives in place that make such savings more likely. The U.S. government offers enormous incentives to consume (the deduction of mortgage interest being the best example), and it works. We have the biggest houses in the world, the thinnest flat-screen TVs and the most cars. If we were to tax consumption and encourage savings, that would also work. Regulations on credit-card debt should be revised to ensure that people understand the risks and costs of these instruments. Moving in this direction would be good for families and for the government as well.

I’ve long argued that the mortgage interest deduction is a “perverse encouragement of debt” - an example of government trying to do something it thought was good and setting the framework for long term problems.  As Zakaria points out, it is but one of many well intentioned social engineering ploys that encourages consumption.  Those attempts to goose consumption worked, with the national savings rate falling into negative territory in 2005.

But Zakaria suggests a plan that I have been pushing for years: a tax on consumption.  Our current tax code punishes savings.  It punishes investing.  (And by investing I don’t necessarily mean purchasing stocks - I mean all forms of investing, such as starting a company)  It punishes virtue.  A consumption tax, like the Fair Tax, would reverse that dynamic and encourage savings and investment, while removing incentives to consume.  People will still consume, we all have innate desires to buy things we need and want, but at least the government won’t be laying out a bread crumb trail to the lenders.

I loathe Sen. Richard Shelby’s pork barrelling ways, but I applaud him for having the courage to stand in the way of the $700 billion taxpayer fleecing.  We’ll see how long and fervently he holds his ground.

The proposed bailout is not the solution we should pursue.  George Bush, who I’ve long contended is no conservative, is reverting to unabashed socialism to solve a problem.  It is shameful.

I’ll throw something out there and see how it sticks.

Bush’s decision to socialize the loses of financial institutions was one of fear.  Fear that can be wrapped in one word: 401k. (Is that even a word?)

For far too long the government has altruistically manipulated the populace of this country.  One of the most notable relative to the current situation was creating tax exempt status for investing in mutual funds through 401k’s and similar programs.  Really it was a fantastic coup by Wall Street since their “product” is little more than legalized gambling.  Somehow they convinced the ruling class to guarantee them a huge customer base.  The people reacted accordingly to tax incentives and now there is about $2.4 trillion “invested” in 401k plans.

Bush is hearing, from Wall Street, about the possibility of the credit markets seizing up and a subsequent huge drop in equity values.  That would wipe out a huge swath of paper wealth held by regular folks.  Pretty scary stuff.  But the only reason so much money is held in such plans is because of the well intentioned governmental social engineering.  The similarly altruistic push to increase home ownership - even if it necessitated reduced lending standards - is causing similar negative consequences.  And now Bush, the so-called conservative, is so fearful of the consequences of what decades of government social engineering hath wrought that he is willing to essentially nationalize the financial sector to stave off losses.  The answer is not more government intrusion, but less.

The companies that are struggling need to be allowed to fail.  That is the nature and the beauty of capitalism.  The weak will fail and the strong will not only survive, but will learn from the mistakes of others.  Negative consequences are essential to preventing undesired behavior. The pain will be acute among many, no doubt, and may be felt somewhat by all.  But the solution he is proposing will not only tear asunder the principled underpinnings of our economy, but it will spread the misery among us all through inflationary pressures.  The nasty side of that is that those of us who don’t have golden parachute deals or weekend homes on Cape Cod will feel that pain the most acutely.  This isn’t meant to sound populist; I admire those who work hard enough or are valued enough to succeed (from a materialistic view).  But they were those who engaged in risky or too-complex financial transactions should be the ones who reap what they have sown.  That goes for regular homeowners and Wall Street tycoons alike.

No bailouts with taxpayer money.

I don’t even want to hear another self proclaimed conservative praise Bush.  I’m sick of it.  If you want to praise him as a party loyalist, fine.  Just don’t call him a conservative while you’re doing it.

I’m going to breathe now.

Reactionary Update:

It’s the new Bush Doctrine: Preemptive Bailout.

The Heritage Foundation was nice enough to share their thoughts in an email and link:

Now that a massive bailout of Wall Street is being debated, Heritage Foundation economic experts have laid out eight goals and strategies for lawmakers to keep in mind as they evaluate the proposed legislation.

1. Do not prop up failed or failing institutions. Government should not try to keep failed businesses afloat; instead, as with Bear Stearns, they should “ensure that they are restructured or wound down in a way that does not cause undue disruption in the financial system as a whole.”
2. Do not try to support prices. “Policymakers should not attempt to keep stocks or housing prices from falling to their proper market-determined levels.”
3. Do not allow the government to become the permanent “owner of last resort.” Any assets the government buys should be disposed of as expeditiously as possible.
4. Strictly limit legislation to the immediate need to stabilize the financial situation. “Lawmakers should oppose any and all attempts to expand the legislation being proposed” into a bonanza for special interests or pet liberal causes.
5. Avoid “moral hazard.” Policymakers must discourage others from seeking government support by ensuring businesses receiving taxpayer funds have “skin in the game” and suffer the consequences of their miscalculations.
6. Carefully define the Fed’s role. The Federal Reserve must avoid “unwarranted mission creep” as it exercises its “lender of last resort” responsibilities to ensure liquidity.
7. Limit taxpayer exposure and keep actions temporary. “Any new mechanism or authority to halt the deterioration in the market should ensure that affected firms pay a cost and be strictly limited in time and scope to minimize taxpayer exposure.”
8. Assure liquidity in markets but require full pricing of government insurance. As it considers providing insurance to money market funds, “the Treasury must ensure that the price of that insurance fully reflects the market risk.”

You’ve surely heard by now that the federal government is looking at a $700 billion bailout of the financial industry.  Our government may even include foreign banks in the bailout.  How nice of us!

The way I see it, the whole credit crisis is a result of low interest rates and relaxed lending requirements.  We could argue over who’s to blame: liberals for mandating increased home ownership (which resulted in relaxed lending standards and unprepared debtors) or conservatives for lax regulatory oversight.  Such debating right now kind of misses the point because the truth is that the causes are complex and there is ample blame to spread around.

The easy money craze pushed up home prices to levels that everyone knew weren’t sustainable, but very few were willing to stand up and say something was not right.  The whole country was too busy lusting for double digit annual property value increases to recognize one of the incontrovertible facts of the market: with great risk comes great reward.  Switch risk and reward in that phrase and it is just as true.  If you’re realizing huge returns then you are almost certainly engaged in risky activity.  Nearly everyone played along and so nearly all of us played a role in the situation we face.

What is sadly ironic is that the federal government is the entity riding to the rescue.  Our country is already almost $10 trillion in debt.  As recently as 2003 over 16% of our country’s revenue was spent servicing debt.  And the solution is for our debt laden country to purchase nearly a trillion dollars of the most toxic, risky mortgages on the market?  Sounds like a great idea for banks.  Not such a great idea for taxpayers.  And what is really rich is that the goal is to free up credit markets so the easy money orgy that got us here can continue unabated.  The natural, and necessary, consequences of making bad decisions in a (somewhat) free market are removed.

This likely massive bailout comes on the heels of multiple individual bailouts.  The typical stated logic behind the previous bailouts was that the companies were “too big to fail.”  If that is the case and our government is committed to bailing out any of these massive companies if they encounter trouble then I say we not let them get that big to begin with.  You’ll be hard pressed to find a more resolute free market guy than me, but if the federal government is going to screw taxpayers every time a large company fails then it is reckless to allow them to become that large.  Define a threshold and force companies that cross it to break up.  To do otherwise places taxpayers at an unnecessary risk.

By the way, renters and fiscally conservative people should be absolutely livid.  The government’s actions are meant to, in part, shore up inflated housing prices.  If you’re trying to save for a house then you just got rear ended because your taxes are going to be used to keep prices higher than they should be.

It certainly appears that some kind of action was necessary to prevent an abrupt, massive meltdown.  I’m not privy to all of the information, so I’ll take the experts claims that something had to be done.  BUT, what has to, but probably won’t, happen next is that the air has to be let out of the bubble.

From Steve Forbes to Ron Paul, many have recognized the true cause of high oil prices.  It’s isn’t greedy oil companies who need to be deprived of their “windfall” profits.  The culprit is our weak dollar.

In order to see for myself how the performance of the dollar has affected oil prices I did what any engineer would do.  I looked at the numbers.  I did so by comparing the “value” of oil relative to two currencies, the dollar and the Euro, and one commodity, gold.  I identified daily trading data for oil, gold, and the Euro going back to the beginning of 2000 and plotted the value of oil in terms of dollars, Euros, and gold relative to its value at the beginning of the time period.  The results are striking.

The figure clearly shows that since 2002 the price of oil in dollars has increased dramatically.  In late 2001/early 2002 oil was about 0.7 times what it was in 2000 in terms of dollars.  By the middle of 2008 it was 5.7 times the 2000 price.  That is an 837% increase in less than seven years.  (It is currently 526% above the 2001 low)  The Euro hasn’t done great, but has bested the dollar.  Gold, meanwhile, has been quite stable.  It has remained approximately on par with oil.

The clear conclusion is that while demand most certainly contributes to the price of oil (in dollars) it is actually the debasement of our currency that is making Americans feel the pain of inflation.  Don’t hold your breath waiting for a legitimate politician to recognize this or pledge to fix the problem.

Did House Democrats kill the Colombian Free Trade Agreement to help Marxist FARC terrorists?

It looks like some of them might have…

The Economist, in The FARC Files: Just how much help has Hugo Chavez given to Colombia’s terrorists?, reports that “Interpol has now concluded that the huge cache of e-mails and other documents recovered from the computers of Raúl Reyes, a senior leader of the FARC guerrillas killed in a Colombian bombing raid on his camp in Ecuador on March 1st, are authentic and undoctored.”

Batches of the documents have been seen by The Economist and several other publications. They appear to show that Mr Chávez offered the FARC up to $300m, and talked of allocating the guerrillas an oil ration which they could sell for profit. They also suggest that Venezuelan army officers helped the FARC to obtain small arms, such as rocket-propelled grenades, and to set up meetings with arms dealers.

The Wall Street Journal wrote about the links between FARC, House Democrats, and the Colombian Free Trade Agreement in A FARC Fan’s Notes:

A military strike three weeks ago killed Raúl Reyes, No. 2 in command of the FARC, Colombia’s most notorious terrorist group. The Reyes hard drive reveals an ardent effort to do business directly with the FARC by Congressman James McGovern (D., Mass.), a leading opponent of the free-trade deal. Mr. McGovern has been working with an American go-between, who has been offering the rebels help in undermining Colombia’s elected and popular government.

House Democrats killed the Colombian Free Trade Agreement in April.  The American published a good overview of the FTA process in The Fast-Track Trade War:

By a vote of 224 to 195, Speaker of the House Nancy Pelosi and the House Democratic leadership pushed through an amendment that eliminated rules requiring Congress to approve or reject the U.S.-Colombia Free Trade Agreement…

President Bush charged that “the message the Democrats sent today is that no matter now steadfastly you stand with us, we will turn our backs on you when it is politically convenient.”

Suffice it to say that there is little disagreement on the economic payoff: it is largely a one-way street. Since 1991, most of Colombia’s exports have entered the United States duty-free under the Andean Trade Preference Act. The FTA would provide reciprocal duty-free access for almost 90 percent of U.S. exports to Colombia within five years, and it would ensure total free trade within ten years. (NOTE - this means good for the US)

The special congressional rules for ratification of trade agreements were established in 1974…  Under the “fast-track” legislation, after a trade agreement is sent to Congress the House must vote on it within 60 legislative days, without amendment; then the Senate has 30 days to complete action, which means the whole process must occur within a 90-day window.

FARC’s friend Rep. McGovern was instrumental in killing the Colombian Free Trade Agreement: 

Rules Committee chairwoman Louise Slaughter (D-NY) and Rep. James McGovern (D-MA) had discussed the option of stripping time requirements from the fast-track process since January. When the administration signaled that it would forward the agreement even without a sign-off by congressional Democratic leaders, Slaughter and McGovern seized the opportunity. On Tuesday, April 8, the president formally sent up the agreement and supporting documents; that same evening, Slaughter and McGovern presented the deadline-stripping plan to Speaker Pelosi, who, after meeting with other members of her leadership team, the next day backed the changes in a larger Democratic caucus. And on Thursday, as noted above, the House Democratic majority rammed through the amendments to House rules, effectively gutting the fast-track process for the Colombia FTA. 

More:

…there seems to have been no serious discussion of the far-reaching implications of overturning three decades of U.S. trade policy.

…powerful U.S. foreign policy and security arguments fell on deaf congressional ears. There could be no starker example of a beleaguered U.S. ally, flanked by regimes (Venezuela, Ecuador, Bolivia) increasingly hostile to U.S. interests, than Colombia.

…the speaker of the Colombian House of Representatives described the U.S. House action as “colonial treatment.” 

Rod Dreher recently wrote a great column about the economic plight our country faces and he says it is all our fault. I couldn’t agree more.

It’s been awhile since our country has had to seriously worry about hard times. But the cost of today’s grand national experiment in living beyond our means is finally coming due. How will the nation respond?

…

The cultural roots of this crisis have to do with Americans’ refusal to recognize natural limits. Americans have lost the ascetic virtue of self-discipline and have become impatient with the idea of constraints on their individual will. This is deeply rooted in American history and psychology, and both political parties base their appeals on their own particular version of liberty.

…

For nearly a generation, Americans have had the luxury to organize their political fights around cultural issues like abortion and gay rights because economics haven’t been central to either politics or culture. And we have financed the illusion of sustainable progress through massive accumulation of debt, both personal and governmental. Prosperity masked decline; optimism occluded realism.

“Grand national experiment in living beyond our means.” Great line. Read the rest for yourself.