Stop Taking Soma!

On the Tuscon Tragedy

2011-01-12T22:56:00.000-05:00

There is no shortage of discussion to be found on the sad events of this past Saturday. I feel no obligation to contribute to the discourse, but I do want to provide a few thoughts.

Before I begin, I want to humbly express my own deep sadness and concern over the events of the weekend. What happened was nothing short of a tragedy and nothing I say changes that fact.

The thought that this event would quell the shrill voices which perpetuate the left versus right spectacle has sadly, but not surprisingly, proved to be a dream. Many of those who have attempted to use this opportunity to ask for reflective thought have quickly turned such a plea to a bully pulpit to advance their own, not-so-veiled, rhetoric. This is not shocking. This is the world we live in. And this tragedy does not appear to be the unifying event which will galvanize the masses for good.

Now, I did not watch President Obama's speech tonight (I have the CSPAN replay running right now), but I heard via Twitter that it was very good and delivered the "right" tone. That is encouraging, but I expect it to last about 15 seconds. In fact, in channel surfing to MSNBC (note that I very rarely watch FOX News), the focus has not shifted very much from the "blame Sarah Palin" and "take away the guns" message.

There are a few other things that I think we need to put into perspective. While it is despicable that any human being is targeted for an assassination attempt, we must remember that murder and other heinous crimes happen everyday to "normal" human beings. I believe that all life is precious. I believe that all men are created equal. Six people were killed on Saturday and more than a dozen more were injured in the shooting. There is so much focus on this tragedy because of the involvement of Rep. Gabrielle Giffords. There have been six homicides in Indianapolis so far this year, yet we hear very little about these individuals.

The very fact that we focus on the celebrity of our elected officials has an integrated effect on the heated partisan rivalry. It's a viscous cycle which is continually reinforced. The stakes will get higher and higher until they collapse due to the false weight that is placed upon the perceived importance of our elected officials and the propaganda that drives our political conversation. If we want to depart from the nasty politics that so many complain about, we must reject the power that we've allowed the state to absorb and the status that we've anointed to our politicians.

There is a whole other conversation to be had on Jared Loughner. I don't want to dwell on him for a variety of reasons. We should be careful, though, in using the broad strokes of "crazy", "mentally ill", "disturbed" and the like. Loughner, it appears to me, was quite calculated in this act. He no doubt had issues with society. His acts on Saturday are inexcusable and justice awaits him. However, those who question authority and do not fit in nicely with the stereotype of humanity should not be written off as ill.

We should not use the fact that this young man was concerned about the direction of our society and had an inability to express such concerns in a socially normal manner to, in any way, excuse, justify, or explain his actions.

And Now It's Time for a Breakdown

2011-01-07T21:04:00.002-05:00

Cue En Vouge:

Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,
Never gonna get it,

Woo, woo, woo, woo!

That is my message to all of you out there who supported the Republicans this last election and thought they would make a material change to reduce the federal deficit. You're never gonna get it!

All references to 90's R&B groups aside, let's take a serious look at this. We are about ready to have a showdown on the debt ceiling. As of yesterday, January 6, 2010, the federal debt subject to the debt ceiling was just shy of $14T. The current ceiling is $14.294T and we will reach that figure sometime between March and May this year. The date cannot be exactly determined because day-to-day receipts and expenditures are not fixed - just like your own budget. (See this entry from 2009 to get a little more detail on short-term Treasury securities.) But, the showdown is coming; there is no doubt about that.

Now, many fiscal conservatives want to see material cuts in the budget. I'd also venture to guess your average Tea Party Republican is squarely opposed to raising the debt ceiling. These GOP supporters are going to be very disappointed when their House leadership (not to mention, and I'm guessing here, all but a handful of GOP Senators) votes to raise the debt ceiling. It is inevitable and what we'll hear is a bunch of lip service that they've made some sort of grand compromise to get us on the right track.

But, let's face it. All it will be is lip service. Let's take a look at the budget and a realistic scenario of what we might expect the GOP to offer as well as a theoretical balanced budget provided by yours truly.

To start, we take a look at a summary of the budget. We all know that budget deficits have exploded beginning in fiscal year 2009. It should be noted that this is a George W. Bush budget and not an Obama budget.

Next, we look at the growth of the total public debt and that which is subject to the debt ceiling. It is clear that we will reach the current ceiling soon. On a basic trendline forecast, it will happen in March.

So, what actually makes up the federal budget from an expenditure point of view? The next table details the key categories and shows the actual figures from 2004 (fiscal year) through the current projection for 2013 based on Obama's 2011 budget. You can see the details of the explosive growth and also note the key expense categories: Social Security, Defense, Medicare, Interest on Debt, and Medicaid. Those five categories typically make up two-thirds of the federal budget.

Source: http://www.gpoaccess.gov/usbudget/fy11/index.html

What is the GOP likely to offer? As I said earlier, 2011 is going to be a lost cause. Looking at 2012, I've laid out a generous GOP budget offer as well as my own budget proposal. For the Republican budget, I've made the following assumptions (which I think are a best case scenario):

Social Security and Medicare spending stay flat at 2011 levels (4% and 2% respective decreases versus current estimate)
10% decrease versus proposed 2012 spending levels for Medicaid, Food/Nutrition, and other mandatory spending
No change in spending versus proposed 2012 levels for Defense, Interest payments, Veteran's Benefits and Federal Employee Pensions and Disability payments
A return to 2008 spending levels for Unemployment Benefits and non-Defense Discretionary spending (45% and 16% decreases versus proposed 2012)

This scenario would lead to a $3.5T budget. If there are no changes in total federal revenues (i.e. no tax increases or significant growth in GDP), this would still leave a budget deficit of over $500B. In fact, it would only reduce the deficit by 29% which means the debt ceiling would need to be raised by over one trillion dollars from its existing level to get us to October 30, 2012 (right before the elections).

Think about that. Even if the GOP brings its "A" game, I think it's hard to imagine a scenario where they do not have to vote to raise the debt ceiling by over (I'll say it again) one trillion dollars even before we reach the lame duck session of 2012.

Hey Tea Party folks... I think it's time you take a look at the Libertarian Party.

For those of you who are not Tea Partiers... please recognize the current path is unsustainable. We need to dramatically cut the size and scope of the federal government. You should also be looking at the LP!

The Big Tax Cut Debate

2010-12-18T22:40:00.000-05:00

In a shocking turn of events, the federal government has voted to maintain the status quo. That is, of course, sarcasm as the feds have an amazing track record of kicking the can. The "irresponsible" Bush tax cuts have been extended based on a deal cut by the Obama administration with the Congressional Republicans. In addition, unemployment benefits have been extended yet again.

This debate has been somewhat of a false debate. The Bush tax cuts were passed in 2001 with a provision to expire at the end of 2010. Rates would then return to the levels which prevailed during the Clinton administration. The debate and rhetoric on this issue have allowed Washington to shine at its finest.

Take, for example, Rep. John Shadegg (R-AZ) a couple weeks ago on MSNBC's Morning Joe. Shadegg makes two incredulous claims all-too-typical from partisan Republicans.

Of course Republicans don't want to tax the job creators, because that will bring revenue down... Ah, your answer is that spending money drives the economy, and I don't think that's right. It's the creation of jobs that drives the economy. The truth is, that the unemployed will spend as little of that money as they possibly can... Do we want... to continue to ignore the issue of jobs and increase taxes?

In the quote above, Shadegg attempts to make the case that, first, spending doesn't "drive the economy".
Well, unfortunately, that is incorrect. As much as supply-side economists wish to think otherwise, an economy requires spending. If no one is purchasing goods or services, then there are no jobs. Spending (i.e. demand) necessitates the availability and provision of goods and services - which, in turn, requires jobs.Without debating the merits of government-provided unemployment benefits, you cannot dispute that those checks drive spending. While that spending may not "create" jobs, it most certainly helps maintain the status quo and, at least, "saves" jobs.

The second key fallacy in Shadegg's nonsense is his suggestion that raising taxes means less revenue for the government. This assertion is an implicit reference to the Laffer curve, a concept in tax policy. The curve, named after economist Arthur Laffer, suggests that there is a tax rate somewhere between 0% and 100% which maximizes tax revenues. I could get into a lot of math and show some graphs to discuss this, but, on the surface it should be obvious. With a 0% tax rate, there is clearly no tax revenue. It is also suggested, but not empirically proven, that a 100% tax rate yields no revenue since the economy would go completely underground if no income was retained. This makes sense. Obviously there must be an optimal rate somewhere in between.

The Republicans, and far too many fiscal conservatives, always seem to assert that any increase in the tax rate would decrease revenues. This implies that we are already on the downward slope of the curve leading towards the 100% tax rate. A look at the real data (at least from the last two decades) would not suggest such a fact.

Source: IRS. Data in thousands of nominal USD.

Source: IRS.

The table above shows a history of net taxable income by year and total net income tax receipts. The effective rate is the simple percentage calculated between the two. This reflects the net effective tax rate in the U.S. after we account for all the deductions, credits, marginal rates, etc. In the graph immediately above, we look at the relationship between these effective rates and total receipts (now expressed in millions of dollars and adjusted for inflation). There is no clear pattern which suggests that it is impossible to conclude anything of substance from the so-called Laffer curve based on today's tax policy and macroeconomic conditions.

I must make one very important point: this does not qualify as my endorsement for higher tax rates. I personally would have voted against the deal to extend the tax cuts in the absence of massive spending cuts. Today's taxpayers are responsible for electing the officials we have setting the budget today. It is irresponsible to create a larger deficit, increase the national debt, and put our currency at risk for the next generation. It's time that our representatives take a stand to remove our structural deficit issues.

Status Update

2010-12-07T21:11:00.000-05:00

It's been several months since my last substantive post and a while longer since I posted with any frequency. There's been a lot going on!

Last time I posted, I had indicated that I would be serving as campaign manager for Mike Wherry, who ran for Secretary of State of Indiana for the Libertarian Party. I spent about three months in that capacity before I resigned. It was a lot of work and a lot of late hours. After a few weeks of hiatus, I again increased my focus on the 2010 elections by supporting the Senate bid of Rebecca Sink-Burris and helping to organize electioneering activities for the Libertarian Party of Marion County.

I have become increasingly involved in LP politics and plan to continue to do so. I have no desire to support the establishment political parties and feel that I've been able to make a difference in the local LP. It is also clear to me that political activism is a necessary tool in the fight for political causes - in my case, liberty, opposition to government tyranny, and corporatism.

So, it is time to rekindle my writing to create awareness, provide analysis, and educate readers on the causes that I care about. I have not yet decided on the mix of content that I will pursue; this will probably evolve. I will talk about issues here in Indianapolis with increased frequency as well as statewide issues. I will not completely abandon issues of global economics, geopolitics and U.S. policy, but the mix will change.

I thank everyone for reading. I've also set up a Page on Facebook ("Like" me) and a Twitter feed ("Follow" me) to expand distribution and content.

Coming Back Soon...

2010-12-04T13:39:00.000-05:00

We will resume our (not-so-) regularly scheduled blogging soon.

Latest News

2010-04-22T22:16:00.000-04:00

Folks, my limited blogging on this site is likely going to continue. I am going to be the campaign manager for Mike Wherry who is the likely nominee for Indiana Secretary of State for the Libertarian Party. Of course, we will welcome your support since this is the ballot access race in Indiana.

Visit www.mikewherry.com.

The Money Tree

2010-04-03T21:11:00.001-04:00

They say that money doesn't grow on trees. That's true. It grows in banks.

I'm not talking about compounding interest either. I'm talking about creation of money right out of thin air. It is well known and understood that the Federal Reserve (and other central banks) print money at will. What's not so well understood is that regular commercial banks essentially do the same thing. To understand this, we have to explore the nature of money, credit, and the modern banking system.

Money can be described in several ways and has a variety of characteristics.We should begin with the Merriam Webster definition: "something generally accepted as a medium of exchange, a measure of value, or a means of payment." In early simple economies, barter was the principle means of exchange. This ultimately evolved to commodity money. Items which had a useful value on their own, are easily transportable, do not lose value or deteriorate, and are reasonably commonplace would serve as commodity money. Over the centuries, metal coins evolved out of being simple commodity money into serving as government issued currency. Generally, the metal coins face value as issued would be equivalent to the metal's value independently. Of course, governments were notorious for devaluing the coins in a variety of ways.

Commodity money gave rise to modern fiat monetary systems. This evolution came to past after many centuries and after the introduction of paper currency. The United States ushered in the new era in 1971 when President Nixon "closed the gold window" removing the last link between the U.S. Dollar and gold. Fiat currency has its value because the government declares it to have value. Essentially, a U.S. Dollar as issued in paper (specifically, a Federal Reserve Note) is a debt of the Federal Reserve backed, not by gold or any commodity, but by a debt obligation of the U.S. Treasury (notwithstanding the other assets which the Fed has added to its balance sheet since the onset of the Global Financial Crisis).

Let's follow the circle: the U.S. Treasury issues debt (bills, notes, or bonds) which is purchased by investors such as large banks; the Federal Reserve buys Treasuries from large banks in return for freshly printed cash; this cash makes its way out to businesses and consumers via transactions with the banks; the money is used to pay taxes going to the coffers of the U.S. Treasury; and, finally, the U.S. Treasury repays the Federal Reserve on its debt obligation ending the circle with the destruction of the currency. This process is how our money derives its value. This complex circuit is important, but it does not tell the entire story. Much of this process is digital. Who pays their taxes by sending paper currency to the IRS? No one. Bank accounts are increased and decreased digitally by computers throughout this entire circuit.

This is where it gets interesting. Throughout this process, the various entities may also use credit as money. When someone uses a credit card or receives a loan, cash is usually not involved in the transaction. And, as most everyone knows, in our system of fractional reserve banking, banks can and do extend credit beyond their cash reserves. The typical example of how this works goes something like this: Joe deposits $1000 with Bank ABC; Bank ABC then lends $900 to Jane maintaining $100 in reserves; Jane spends $900 at the store who deposits the cash with Bank XYZ; Bank XYZ lends $810 to Jack (keeping 10% or $90 in reserves; ... and so on. This process expands the money supply without the issuance of new cash. Jack still has $1000 which he can spend on goods and services. But, Bank XYZ also has $810, and everyone else on down the chain. The size of the reserve requirement will determine how much money is created via bank credit. If the reserve ratio is 10%, then this process would ultimately create $9000 if exhausted completely.

However, this is not how the real world actually works. This is the important part of the story. Banks do not wait to receive deposits before they lend out new money. A bank does not need to physically have $250,000 on hand (in cash or even in assets) to issue a loan of such size on a house. If a bank issues such a loan, they simply need to ensure they meet their reserve requirement which can be done by receiving a loan from another bank. This chain ultimately goes bank to the large privileged banks who can access funds directly from the Federal Reserve. The Fed is ultimately reacting to this credit creation cycle in its operations with these banks (as described above). If you want to read more about how banks defy common wisdom and create credit out of this air, visit George Washington's Blog and read this and this.

We've already established that credit is, in effect, money. It does not behave significantly different than cold hard cash. Many economists and fiscal conservatives have rightly criticized the Fed and its expansionary monetary policy. But, what is lost in the argument is that the private banking system has been expanding credit for decades. They have been free to do so via the implicit rules and policies of a fiat-currency, fractional-reserve system. The implication is that the money supply, and its impact on inflation, must be analyzed from the perspective of credit expansion - not the expansion of the Fed's balance sheet. The Fed has tried desperately to stave off deflation by "printing money" to buy all sort of dubious assets and monetizing the federal deficit. But, this has had little inflationary impact. Why? Banks are still not expanding credit.

Let's analyze this a little deeper. Why are banks not expanding credit? Largely because consumers are not willing to take on more debt. We have hit the wall. We have had our inflation moment. As we pay down debt (or default) and credit is destroyed, we will experience deflationary forces. Admittedly, this is not the whole story. The international perception of the Dollar is still a major factor in the inflation/deflation debate. But, with the financial challenges of Europe, a Japanese economy which has been stagnant for more than a decade, and no other major economies ready to challenge, the Dollar will reign supreme in the interim.

But, there is another problem with all of this. The banks do have a money tree. They have an implicit license to print money. Sure, they cannot literally print money. But, is this still not counterfeit? Is this still not fraud? They make money on this process by collecting interest. I ask my readers to consider this carefully and study the evidence. If the banking system is engaging in a process that is tantamount to counterfeit, what should be done? This is hardly an example of free-market enterprise. The next time that you begin to reflexively defend banks against reform, vilification, and other abuses in the spirit of free-market capitalism, ask yourself if they deserve such a defense or if they are essentially nothing more than a rouge arm of the Federal government.

Check This Out

2010-03-28T21:36:00.001-04:00

Well, it's been another long hiatus. But, check it out: new site design! Hope you like it.

As for content - I don't have anything of my own to post, but I'd like to invite you to read this post over at Oftwominds. I'm a fan of this blog as the author, Charles Hughes Smith, posts on a variety of subjects from economics/finance, self-help/survival, social evolution, food/health, etc. This particular post provides a detailed look at the economy and the way forward. He's a short-/mid-term dollar bull while bearish on the overall economy. It's chock-full of links to some of his own articles as well as a few other blogs.

Quick Thoughts on Chartalism

2010-03-05T23:54:00.001-05:00

Chances are that you've never heard of chartalism (unless you arrived here because you Googled the word). I've been reading an increasing number of articles which argue certain points which are central to the economic theory of chartalism. This theory is centrally focused on characteristics of a fiat currency regime. The basic assumptions and conclusions are sound although I have not studied it enough to have a fully informed opinion. Further, I disagree on principle with some conclusions on the surface level.

So what is it all about? Basically, the chartalists suggest that the state issues fiat currency via government spending and recoups (destroys) the money via taxation. Thus, fiat issue is no more than printing money and, if the government did not do so, there would be no money for citizens. This extends to a conclusion that the private sector cannot save money unless the government runs a deficit. This is further shown by using simple algebra with the formula for GDP. This reinforces the argument of the adherents.

I see a few basic flaws in this theory. First, if there were no fiat money, that would not destroy economic activity. There would be, at a minimum, barter activity. Second, it seems to ignore debt (or at least under-appreciate its role like most all schools of economic thought). Since private banks issue credit, the state is not the only entity which can issue currency (depending on one's definition).

Nonetheless, this is important. Governments can and do print money. The U.S. Dollar is essentially backed (primarily) by U.S. Treasuries. In other words, the value of the Dollar is derived by the use of it to pay government debt. The point remains that next time you find yourself in a debate about the nature of the state and deficit spending, one can not summarily dismiss the notion that deficits don't matter or the suggestion that the U.S. will not default on its debt. There are shades of gray to this. Again, I don't completely agree with all the assumptions or conclusions of this theory. But, well-informed (and sometimes even well-intentioned) adherents will make good points - specifically that this theory is sound due to its identity relationship from the GDP math.

One of the main goals of Stop Taking Soma! is to educate and inform. Shouting matches between ideological opponents and semi-informed debate participants are a problem in the political environment. If libertarians (small "l" or big "L") or other marginalized political (or economic) groups fail to understand the perspective of our opponents, we will risk continued marginalization and be reduced to nothing more to uninformed noisemakers.

For more on chartalism and its post-Keynesian cousin circuitism, visit the forum on Steve Keen's blog and read this thread. (Full disclosure: I have not yet read it.)

Cool Trilemmas

2010-03-01T21:39:00.001-05:00

I'll admit that my vocabulary did not contain the word "trilemma" until a few weeks ago. It's a natural extension of the commonplace "dilemma" where we have three options. Then, in a span of no more than days, I was exposed to two interesting trilemmas.

The first trilemma that I would like to introduce is the so-called "Impossible Trinity". This hypothesis states that a national economy can only achieve two of the following three characteristics: a fixed exchange rate, free capital movement, independent monetary policy. A nation with a fixed exchange rate is able to maintain a stable currency as it relates to the rest of the global economy. China, for example, maintains a fixed exchange rate by pegging its currency to the U.S. Dollar. Nations with free capital movement allow goods and services to be (relatively) freely traded by private citizens across borders without significant taxes or other restrictions. This is a common feature of globalization. Finally, independent monetary policy implies that a nation's banking system (usually via the central bank) can set interest rates and manage the supply of money without outside interference.

This trilemma is an important one to understand (and I think it is generally accurate) in the context of global political economy. Using the China example again, it is clear that as they open up their economy to freer movement of capital, they have to cede monetary authority in order to maintain their fixed exchange rate. This is one major factor in the accumulation of U.S. debt by China. If they wanted to exert a more independent monetary policy, they would either have to be more restrictive in managing capital flows (i.e. less exports to the U.S.) or abandon their fixed peg to the Dollar.

The second trilemma comes courtesy of Dani Rodrik, a Turkish economist at Harvard. Rodrik suggests that the world economy is subject to the following: we cannot simultaneously achieve a deeply integrated global economy, maintain national sovereignty, and operate democratic governments. We can only achieve two of the three at any time. This argument appears to hold true. If we want advanced globalization while maintaining the nation-state, governments would have to forgo much domestic policy - national policy would be focused on policies which enable global economic integration (this appears to be the general direction today, in my opinion, fueled by financial elite corporatism). The second choice would be to pursue globalization while protecting democratic principles. Such an option would require a global government which could act in the interest of the entire world under a democratic framework. Third, we could maintain democratic government and national sovereignty while settling for less global economic integration. Rodrik suggests that this is what the Bretton-Woods system sought to achieve.

So, in summary, trilemmas provide cool thought experiments. These two are interesting and are good to keep in mind when attempting to understand the working of the global political and economic system.

Twenty-Five Days

2010-02-27T23:07:00.002-05:00

Well, it looks like it's been twenty-five days since my last post. That's pretty bad! My excuses aren't necessarily that great, but it's been a combination of three factors: a) busy work/personal life stuff, b) getting more up-to-speed on local issues/politics, and c) reading some books.

In the meantime, Sen. Evan Bayh (D-IN) announced that he would not run for re-election. This was a bit of a surprise and big news here in Indiana. Bayh timed his announcement well with clear knowledge that no Democrat would be able to get enough signatures to have ballot access in the primaries. This will allow the party insiders to choose the candidate rather than the electorate.

I truly do hope to post more regularly going forward, but I am undecided on how I plan to focus my efforts. I have some desire to focus on more local issues - especially as the 2010 election cycle ramps up and I get more involved with the local LP. This blog may not be the best outlet for that. The national/global/economic scene always interests me, but I probably won't churn out content as frequently and would prefer to focus on analytically-driven essays rather than the news cycle.

I'm open to all comments, feedback, and requests... I'd like to thank everyone who frequents the site and enjoys my ramblings.

A Libertarian View Against the Banks

2010-02-02T23:11:00.001-05:00

There has been much ado over bailouts and socialism, Wall Street and Main Street, greedy bankers and noble capitalists, and a myriad of other related catchphrases and ideological positions when it comes to a discussion of the state of our financial system over the last year and a half. The debate rages on as today former Fed Chairman Paul Volcker testified before the Senate Banking Committee and with Barack Obama's recent call for a new tax on banks. Volcker has suggested a ban on proprietary trading for certain banks. This is a modified reinstatement of Glass-Steagall which served to separate standard commercial banking from hedge fund like behavior.

Lately, the conservative mainstream has taken to siding against such reforms. Typical free market rhetoric has led the way. It's been suggested that a ban on prop trading would over-regulate the banks and inhibit growth. We also hear the usual arguments against corporate taxes which state that it such policies only hurt the end consumer. I'd like to offer an alternative point of view on this subject that I think libertarians (and Libertarians) should consider supporting. I'll present my logic one point at a time.

1. Our System Encourages "Too Big To Fail"

This is a complex and very difficult issue. My free market ideals support a position which would say that companies can engage in any behavior they want and get as big as they want. They should be able to do this so long as they do not engage in fraud and/or stealing. The problem with today's system is that fraudulent behavior is supported. Banks can engage in expanding the money supply at will via credit creation in our fractional-reserve, fiat monetary system. I recognize that there is a legitimate debate to be had on the degree of fraud that such activity constitutes, but banks are allowed (and encouraged) to extend their liabilities well beyond their liquid assets. This creates an environment which is recipe for Too Big To Fail.

2. The Federal Reserve Further Enables Such Behavior

The Federal Reserve is the watchdog of the banking system. Large institutions have a direct line to the Fed in the primary dealer relationship. The liquidity provisions which the Fed has created over the last two years has not only expanded its balance sheet, but it has allowed these large banks to trade potentially risky assets for cash. This strengthens their reserve asset positions artificially and allows for further credit expansion. In the case of the last year, credit expansion has been swapped for asset speculation via proprietary trading.

3. Too Big To Fail Presents a Hazard to the Broader Economy

I wish I had a dollar for every time I've heard Tim Geithner, Ben Bernanke, random talking heads on CNBC, or any other person in power discuss why we had to bail out AIG. I understand their point of view. Most Americans who were opposed to bailout frenzy probably do not truly grasp the meltdown we would have experienced. No one can say definitively how bad it would have been, but it would have been painful. I would posit that Too Big To Fail would not exist in a true free market. That is an ideal which is too far from reality. Poor investments should be liquidated but are allowed to persist and grow in a bubble economy. This should be prevented.

4. Proprietary Trading Serves Marginal Economic Value and Enhances Too Big To Fail

Some large banks also serve as market makers by providing liquidity to investors. This legitimate role was developed long ago to fill in the gaps in the market to make it easier for investors. (More on this in a future post.) However, market making has been extended to significant trading. This is gambling plain and simple. I am not opposed to gambling, but it is important to understand that it serves no economic purpose other than speculation. When several large banks trade in the markets for speculative purposes, they create counter-party risks between each other. So, large banks (and other financial institutions) which participate in such activities ultimately enhance Too Big To Fail regardless of their direct participation in commercial banking. (For more detail, read this at Naked Capitalism.)

5. Too Big To Fail Risks Should Be Insured by Too Big To Fail Institutions

There has been a lot of arm-wringing that certain large banks already repaid their TARP money and should not be further penalized with a new tax. I disagree; although I would not position this policy as a tax. The government has enabled and continues to support Too Big To Fail. This should be ended. However, in the interim, this continues to pose a systemic risk. Failure should not be covered by taxpayers. As the FDIC collects a tax (fee or insurance premium) to build its reserve fund to address failed banks, so too should the government collect a similar tax on Too Big To Fail institutions to protect the taxpayer. (There is also a legitimate libertarian debate against the FDIC, but we'll save that for another post as well.)

It is not a popular position for libertarians to support government intervention in the markets. This is not the issue at hand. We must recognize that there is a close relationship between Washington and lower Manhattan. Our economy has been transformed over the last two decades to one built on financial engineering underpinned by credit expansion and cozy corporatism. This must come to end. It will either end by implementing policies which unwind it carefully or with a spectacular crash which will make last the last year and a half look like a walk in the park.

Obama's Second Chance

2010-01-29T22:23:00.000-05:00

The President "did something unusual" today as he engaged the opposition at the Republican GOP House Issues Conference. I caught bits and pieces on the radio and television, and I plan to record and watch the event in its entirety over the weekend. I have to admit that I'm a bit impressed with Obama on what I've seen/heard thus far.

The GOP House delegation invited Obama for a Q&A today in Baltimore, MD, and the cameras were rolling. In what became an American version of Prime Minister's Questions (of which I am a big fan), Obama took questions from GOP House members. A bit of political wrangling mixed with solid debate led to a few honest answers from Barack Obama which put his intelligence and oratory on display without a teleprompter.

From what I've been able to dissect thus far, both sides scored some points. But, to me, while Obama toed the line between playing politics and denouncing politics, he scored some big points tonight. This is the Obama that I favored over John McCain. This is the Obama I wished we would have seen more of in the last year.

Let's be clear. I'm no huge fan of many of Obama's policies. Admittedly, I've always had an open ear to his anti-Washington populist message. Let's also be clear that I'm not so naive that I'd immediately assume that he has changed. However, his change of tone since the election of Scott Brown opens the door for a second chance.

The President now stands at a crossroads. Despite a poor State of the Union Address and a poor record of deficient action as it is measured against his populist rhetoric, his personality affords him the opportunity to prove Americans (like me) wrong. I'm skeptical of his commitment to cooperation and bipartisanship, his stance against the financial elite and powerful lobbies, and his willingness to support true reform and budget control. I'm very skeptical.

Actions speak louder than words. Let's watch.

Citizens United Decision and Free Speech

2010-01-24T22:44:00.000-05:00

The Supreme Court issued a significant ruling this week on the subject of campaign financing. It is a complex subject and the opinions authored by the Court illustrate this complexity checking in at 183 pages (read here if you dare). I have read most of them and will offer my thoughts.

In the 2008 election cycle, a group called Citizens United produced a film called Hillary: The Movie which was apparently quite an unfavorable depiction of the Presidential hopeful. Citizens United intended to distribute the film as an on-demand pay-per-view on DirecTV. The commercials which supported the film were deemed an "electioneering communication" by the U.S. District Court of the District of Columbia and the film was not shown. Citizen United is a non-profit 501(c)4 corporation which has special non-profit status in that, unlike standard non-profit 501(c)3 charitable corporations, they can participate in the political process via lobbying and and campaigns. If this sounds complicated already, then welcome to the world of campaign finance in the United States.

This decision set up the Supreme Court battle which was decided on January 21. In what appears to be a unique decision, the Court decided 5-4 in favor of Citizens United overturning precedent in previous cases and ruling parts of the Bipartisan Campaign Reform Act (McCain-Feingold) as unconstitutional. The effect of this decision is that corporations (and unions) may now use unlimited funds directly from the general treasury to engage in electioneering communications. However, such funds (still) may not be used to contribute directly to candidates or to other political committees (political parties and political action committees known as PACs). Further, contribution limits and regulatory disclosures are left unchanged in the decision.

An electioneering communication is one that clearly advocates the support or defeat of a particular candidate (follow the link above to get a complete definition) before an election. Corporations and unions were previously prohibited from such communications, but no restriction existed for individuals or various groups such as political committees or "527" groups. This nuance is essentially what led the Court to its 5-4 decision. They felt that Citizens United should not be prohibited from electioneering communications as it restricts free speech and argued that any relaxation of the prohibition must lead to the sweeping decision they ordered.

Justice John Paul Stevens authored the dissent. He lambasted the majority on two key points. First, he felt that the majority overstepped its bounds in the tradition of the Court by providing such a sweeping decision which essentially overturned two previous decisions and a major piece of recent Congressional legislation. Second, he felt that the consequences of allowing corporations to engage in unlimited spending on electioneering communications would be detrimental to democracy and inconsistent with the Founders' vision. Justice Antonin Scalia offered a concurring opinion which focused largely on a rebuttal to the dissent's view of the Founders' intent.

There is a lot of big money in politics. Certainly, the electorate is aware and skeptical of how big money can lead to big corruption. It will be interesting to see how this ruling will change the political landscape of the 2010 elections. The fear expressed by those who disagree with the Court is that this will lead to more corruption and allow corporations to dominate the political discourse. A more philosophical opposition to the decision is on the nature of corporate personhood.

I am not going to devote a lot of effort here to the debate on corporate personhood. However, briefly, we must recognize that corporations engage in contracts, can litigate, pay taxes, and are subject to criminal, civil, and financial liability. Also, corporations are ultimately comprised of individuals. This allows for an interesting tangent of debate which I will not pursue. I will point out that limiting the free speech of media corporations or even non-profit corporations would seem to be anathema to most. I would find it difficult to objectively draw that line to prevent large for-profit corporations from exercising free speech.

Money gives power in many aspects of society. There is no doubt to that. Corporations have a lot of money and thus have a lot of power. Power in the political discourse allows for views and opinions to be expressed, candidates to be laud and vilified. Exercising power also comes with a price. While most of the electorate will be unlikely to monitor great sites like OpenSecrets.org to determine who is paying for campaigns and ads, the disclosure requirements of the FEC enable such organizations to educate and inform. The media, advocacy groups, and interested individuals are empowered more than ever by the internet to report perceived improprieties and report on the relationship between money and politicians.

Our system is not perfect and democracy is a dirty business. Corruption will always exist, but it is the duty of the electorate to be informed and educated in a functional democracy. We cannot force this upon voters, but that should not force us to restrict free speech. This may lead to more corruption or at least the perception thereof, so interested opponents should take steps to counter this.

Be active and hold your elected officials and candidates responsible for their actions. Vote with your dollars if you disapprove of a corporation's political activities. Sell their stock. Boycott their products. Tell others to do the same. Last, but not least, be an advocate for better representation in government. Members of the House today represent about 700,000 citizens on average. Increasing the size of the House would lead to greater accountability, more equitable representation across the States, and less money involved in each race. This would be a far better remedy than restricting free speech.

Thoughts on Scott Brown

2010-01-20T23:09:00.000-05:00

I suppose I wouldn't be much a of a political blogger if I didn't comment on the Scott Brown election. It's certainly the hottest topic in politics today and will have implications on policy and action in Washington until November. In order to take a closer look at the real story behind the election, I'll turn to the data. Rasmussen Reports conducted exit polling last night and I've broken down some of the results in the table below.

Source: Rasmussen Reports

I heard on the radio this morning that health care was the most important issue to voters in Massachusetts last night. We've all heard the talk the Brown's election will likely lead to the end of the currently contemplated health care legislation. This is pretty much true. But, interestingly enough, Coakley had a seven point edge over Brown amongst voters who cited health care as the most important issue. This translates to 30% of the electorate voting for Coakley because of health care and 26% voting for Brown because of health care.

It is more interesting to me that Brown held a five point advantage for voters who believe the economy is the most important issue. This is a marked difference from the 2008 election where Obama dominated McCain 61% to 36% for the 63% of voters who named the economy as the most important issue (visit the link, select Massachusetts as the region and issues for vote preference).

Given that Brown voted for and supports the existing state health care plan in Massachusetts, it seems to me that the economy is the big deal here. (By the way, Brown did a pretty solid job of explaining his views on health care on the Today show this morning.) Brown also had a landslide victory over Coakley amongst the 11% of voters who said that either national security or taxes was the number one issue. Notably, his edge from this small constituency alone accounts for his overall margin of victory.

I see this as a true indication that Obama's support on economic issues has horribly deteriorated. He spent a large amount of political capital on bailouts and stimulus. He has attempted to claim success on the basis of stock market gains and modest GDP growth in Q3. Wall Street and the talking heads care about this; Main Street does not care. Most Americans see huge debt burdens, foreclosures and unemployment. To them, Washington has failed and Massachusetts has sent the message.

When Magic Bullets Fail

2010-01-16T17:41:00.001-05:00

I recently read an article written by former Fed economist Richard Alford over at Naked Capitalism. He focused his criticism on the zero interest rate policy (ZIRP) currently deployed by the Fed under the watch of Chairman Ben Bernanke. There has been increasing noise surrounding ZIRP and more mainstream suggestions that interest rates were too low for too long between 2001 and 2006.

Alford's article gets into quite a bit of detail, but it is worth a read if you enjoy geeky economics stuff. Mainstream macroeconomists believe that the economy can be explained and managed with mathematical formulas. In fact, the formulas are really quite simple and do not capture the dynamics of the millions of "irrational" actors therein. One favorite is the Taylor rule which suggests a target for the Fed funds rate - the key interest rate set by the central bank. Alford points to a Taylor op-ed which states that rates were too low from 2002-2005.

Bernanke has suggested that rates necessarily had to be low (and must stay low) to fend off the threat of deflation. When analyzing Bernanke's definition of deflation, however, Alford suggests deflation was never a threat. Thus, interest rates were lower than they "should have been" for no good reason.

I don't believe that the Fed should be setting short term interest rates or any interest rates at all for that matter. It is fun to watch the various economists who think they have a magic bullet to optimize the economy take shots at each other. None of these men (or women, but mostly men) can outsmart the market dynamics of a multi-trillion dollar economy. All of these men think they are smarter than you. What is worse is that such hubris causes damage.

The Austrian school of economics (which is not accepted in the mainstream) teaches us that low interest rates lead to malinvestment. Malinvestment leads to over-production, inflation, and asset bubbles. These factors ultimately collapse when the rates are raised or, worse, when credit expansion leads to bankruptcies and unemployment.

The Fed has implemented disastrous policies for decades. Big Wall Street institutions who benefit have created a system to lobby and support policy makers in Washington. Our Congress, Executive Branch, and the Federal Reserve have been all too willing to play right along.

Justice for Balloon Dad

2010-01-14T22:25:00.000-05:00

The entire "balloon boy" spectacle was a bit of a waste of time in my opinion. Although, I do admit it was an interesting story. I didn't know about it until a day later and found the family's morning interviews to be a bit disturbing. In November, balloon boy father, Richard Heene, plead guilty to falsely influencing authorities (that's an interesting charge) and began serving his 90-day jail sentence this week. You can read a recent story here from the LA Times.

This story now strikes me as interesting since Heene has come out saying that he only plead guilty to avoid putting his family through a trial and for fear that his wife could be deported. I don't know all the ins and outs of this particular legal situation. If I tried to research it, I'd probably never get around to writing this. But, it just does not seem right. Heene might be innocent; he might be guilty. If he truly believes that he is not guilty and copped a plea out of convenience, then I think something is wrong with our justice system.

I recognize from the article that the prosecution could choose to go forward now that Heene has made this statement. It seems that they will not. I also heard it suggested that Heene also adopted this strategy to avoid the legal fees that he might incur if he were to fight the court battles for himself and his wife.

It seems unjust to me that the legal system has evolved to a point where anyone avoids litigation or defense due to fees. The Sixth Amendment protects citizens by providing what can basically be described as a fair trial. The right to a fair trial is considered widely to be an essential feature of a modern society. The notion of a fair trial may be considered to include a "sufficient and equal amount of legal counsel for all parties" - this is not in the Sixth Amendment.

I do not believe that all lawyers should be considered a public utility. Clearly, some lawyers are better than others and they should be able to command a higher wage for such talent. However, when it gets to the point that wages and other court costs are so high that the average citizen or small business can't compete, then something is probably wrong.

I don't have any solutions on this one. I haven't thought about it all that much. Just seems like interesting food for thought...

Tim Geithner Must Resign

2010-01-09T01:20:00.001-05:00

It is now long overdue. Treasury Secretary Timothy Geithner must resign his post. A story broke earlier this week on Bloomberg which details what appears to be an attempted cover-up by the Federal Reserve Bank of New York and AIG. Let's take a quick trip in the time machine.

On September 15, 2008, Lehman Brothers filed for bankruptcy. This triggered a freeze in the credit markets, which, in turn, exacerbated a brewing crisis at insurance giant AIG. The Federal Reserve stepped in the next day with an $85M loan facility which effectively nationalized the company. This was not the end of the government's largess. Additional credit lines were created by the Federal Reserve and TARP money was used to provide a capital infusion. Tim Geithner was President of the NY Fed during this time.

Two key controversies emerged over the following months. First, AIG awarded large bonuses to employees despite the massive failure of the firm. These retention bonuses were executed despite populist discontent and anti-bonus rhetoric from Obama. However, Geithner effectively shrugged his shoulders and said nothing could be done. Second, AIG settled credit default swap contracts at par (one hundred cents on the dollar). This was controversial since AIG was effectively bankrupt and the counter-parties would likely have received much less in either bankruptcy or any other rigorous renegotiation. Again, Geithner effectively shrugged it off.

It was this second issue which is at the center of the aforementioned Bloomberg article. It has now been reported that the NY Fed suggested that AIG might limit its disclosure in regards to the payouts. Darrell Issa (R-CA) obtained correspondence as part of his investigations on the issue as a member of the House Committee on Oversight and Government Reform. Issa has made the rounds this week on various news shows and penned an op-ed in the Huffington Post. More details and commentary on the story can be read here at Zero Hedge.

The White House has already begun its defense of Geithner (see the press briefing from today). Essentially, the argument is that (so far) none of the emails involve Geithner directly and that he was not aware of the details. However, he was President of the NY Fed. This happened under his watch. He is responsible.

Geithner has used these incidents and the rest of the financial crisis as a call for more government power and control. This should not be a surprise. He is a firm believer in the partnership of government and big business. His first job out of school was with Kissinger Associates. This is a firm founded by former Secretary of State Henry Kissinger, which employs high ranking former government officials and advises large multinational corporations. It is not hard to connect the dots that such a firm is paid big money to use its connections and knowledge to achieve public-private partnerships. Their number one goal is to exploit and expand corporatism. He continued on to serve in various roles in the Treasury Department in the Bush (41) and Clinton years. He then worked for the IMF (where he misreported his taxes) and finally the NY Fed. His entire worldview is based on corporatism and the significant role of the banking elite in world affairs.

Geithner will not change. There are likely more skeletons in the closet. He will continue to defend his actions since he believes that the government and large financial institutions must work together. In times of crisis, this means that the rules don't matter and taxpayers don't matter. His rhetoric may state otherwise, but his actions singularly serve the financial system. He embodies corporatism and cannot survive as Democratic populism strengthens while unemployment stays above 10%. Obama will ultimately have to make a choice between Geithner and his base. While I believe that Obama will continue to kowtow to the financial powers-that-be, he can make Geithner a sacrificial lamb to serve the progressives taste for blood. For this reason, my disapproval of his policies, and his reckless arrogance, Geithner should resign immediately.

Housekeeping

2010-01-08T23:23:00.003-05:00

I am going to write another entry tonight (or at least start it), but wanted to get some housekeeping out of the way first. I haven't been writing much lately. I have a myriad of excuses, but it's time for action instead. So, I'm hoping this will kick off some regularly scheduled writing going forward.

A fair bit has transpired over the last couple of months. Health insurance reform is close to passing, although it is not entirely a forgone conclusion. 2010 is here which means elections for the House and over 1/3 of the Senate. We've had an attempted terrorist attack, more frequent Ron Paul sightings in the mainstream media, plenty of news on the economy, and much more.

The Indiana General Assembly is in session where property tax caps and ethics reform will be at the heart of the debate. The Daniels administration has continued to make cuts as revenues have failed to keep pace with the budget.

I'll cover all this and much more over the coming weeks. Enjoy!

Keynesianism in 2009

2009-12-30T15:24:00.000-05:00

"We're all Keynesians now," stated Milton Friedman in a 1965 article in Time magazine. Friedman, famous for a conservative brand of economic policy, was actually quoted out of context and clarified the record several weeks later. Forty-four years later, Keynesian economic policies have been the subject of much mainstream debate and widely accepted in Washington and on Wall Street.

As the U.S. economy continued to slide at the beginning of 2009 and Barack Obama was set to take office, Nancy Pelosi and Harry Reid set out to craft an economic stimulus package designed to provide a jolt to the economy. The economic orthodoxy was out in full force suggesting that the only way we could stem rising unemployment was to close the output gap by increasing aggregate demand. Paul Krugman, for example, suggested that we could stem unemployment by one percentage point for each $300B of GDP impact.

The debate over the size of the stimulus, the type of "multipliers" that different forms of stimulus would have, and the timing of the stimulus raged on the Sunday shows and in the blogosphere. Meanwhile, the politics of the debate heated up as the GOP solidified their position to vote against the stimulus despite agreeing that stimulus was needed. Meanwhile, post-Keyensians such as Steve Keen and economists of the Austrian school continued to debunk the claims of the mainstream.

The failed pseudo-science of neo-classical economics continues to maintain its mythical status of a robust theory. Multipliers, Okun's Law, and other such theory extend weak statistical correlations to prescribe public policy. What makes this worse is the stronghold that the neo-classical views have in academia and in the government (see here for a detailed account). All of this enables politicians to use the musings of Ph.D. economists as fodder for pork and political gain.

Alas, the forecasts of the economic policy makers were wrong, and the economic policies of the Federal Reserve and the U.S. Treasury enabled the financial crisis. But, as long as heterodox voices are ignored, those with power will continue to spin data and reality to claim success and maintain their positions of influence. We should all remain as Keynesians at our own peril.

Another Kashkari Update

2009-12-21T22:21:00.000-05:00

A mere one day after the Washington Post article which I posted here on the new, rugged lifestyle that the former Interim Assistant Secretary of the Treasury for Financial Stability (that's a mouthful) and "TARP czar", Neel Kashkari, had found, we have new news.

Kashkari has taken a job at PIMCO as a managing director and head of new investment initiatives. PIMCO is a big player in the bond market and is, like other big investment corporations, tightly linked in with the corporatists in Washington. I'm sure he'll fit right in.

The Torture Loophole Preserved

2009-12-20T23:50:00.002-05:00

Two hundred, thirty-three years ago:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights...

We all know that the injustice of slavery clouded the reality of these brilliant words. However, years of progress, and certainly the election of Barack Obama, was to set aside such errors and enshrine equality amongst all people of earth. I believe that these "unalienable Rights" are such that no government nor individual can infringe upon these rights as they are natural to all people. These rights, in my mind, involve life, liberty and property. It is arguable whether rights such as that to a writ of habeas corpus or those granted under the Bill of Rights fall under such classification. That question has been one of significant debate in our federal courts over the last several years.

In the aftermath of September 11 and the invasions of Afghanistan and Iraq, the Bush administration notably expanded the interpretation of provisions which excluded such rights. In the Military Commissions Act of 2006, Congress passed legislation which prevented unlawful enemy combatants from submitting a writ of habeas corpus to the federal courts thus restricting such prisoners to legal recourse via a military tribunal. This was challenged in Boumediene v. Bush with the Supreme Court ultimately overturning the provision allowing for Guantanamo detainees to to challenge their detentions in federal court.

Fast forward to Rasul, et al., v. Myers, et al., where four Guantanamo detainees further challenged their lack of rights. Specifically, they asserted that they were subject to torture and religious abuse while in custody. In response to Boumediene v. Bush, the petitioned the court for a second review (here is the Court of Appeals decision) of the case seeking to extend Constitutional and international law protections against such treatment.

On Monday, December 14, the Supreme Court refused to hear the case thereby affirming the decision from the Court of Appeals. As such, unlawful enemy combatants, and, in particular, these former detainees are denied protection against torture and declared as "not persons" under the Religious Freedom Restoration Act. Further, the Military Commissions Act may extend to U.S. citizens who are determined to be unlawful enemy combatants.

The Obama administration could have swayed the Supreme Court to hear the case. Instead, they fought to uphold the previous decision which effectively allows torture in cases where the is a loophole in legal jurisdiction. Read more on the decision here and here.

Where is Neel Kashkari?

2009-12-06T22:30:00.002-05:00

Find out here. I feel for him.

Senator Bayh's Response

2009-12-05T13:37:00.001-05:00

I received a canned response from the office of Sen. Bayh (D-IN) this week in reply to my email to him asking that he oppose Bernanke's reappointment. While I specifically focused on the reappointment, his response appeared to be his generic response to queries regarding the Audit the Fed legislation (H.R. 1207 and S. 604).

The key point at the end of the response stated that Bayh is "committed to ensuring that the Fed's activities remain consistent with its mission of promoting financial stability, maximum employment and low inflation." If Sen. Bayh is committed to such principles, then perhaps he needs to examine Bernanke's record. The Fed has absolutely failed in promoting financial stability, fostering maximum employment, and maintaining low inflation.

I just happen to be finishing this up just as Bayh began his questioning of Bernanke in the confirmation hearing (watch here - Bayh starts at 1:29:05). He immediately pledges his support despite reservations.

Bernanke Reappointment

2009-11-30T22:26:00.002-05:00

Later this week, the Senate Banking Committee will hold hearings on the reappointment of Ben Bernanke as Chairman of the Federal Reserve. I oppose his reappointment and sent the following email to Senator Evan Bayh (D-IN) this evening. Bayh is a member of the committee and is my Senator.

Senator Bayh,

I would like to take this opportunity to express my position on the pending reappointment of Federal Reserve Chairman Ben Bernanke.

Chairman Bernanke has been a central player in national economic issue for several years and has failed in his duty to oversee the banking system. While Bernanke's policies which have been executed over the past year have provided temporary relief to a distressed system, he has failed to correct structural issues which will continue to impair the economy. Further, he has stretched the authority of the Federal Reserve and has sought to obfuscate critical information regarding collateral for the myriad of new programs which he implemented.

We need real change and new perspective at the Federal Reserve. Please oppose Bernanke's reappointment.

Regards,
Matthew Wittlief
Indianapolis, IN

Let's hope common sense prevails. Please contact your Senators - especially if they serve on the Banking Committee - and voice your position.

Catching Up...

2009-11-29T22:14:00.001-05:00

After the holidays, cleaning, entertaining, decorating,...

I'm finally reading. I don't want to do a disservice by posting anything of substance when I have nothing of substance to post. So, please stay tuned (if you are still there). I'll be back this week. This time, I promise.

More Funky Stuff

2009-11-28T11:17:00.000-05:00

I'm not sure what the problem with this site has been exactly. It seems like it might be working now... hope to get through these technical difficulties soon. The holidays have kept me busy; I hope to still get a post out later today or tomorrow.

Thanks.

Blog Update

2009-11-24T21:47:00.002-05:00

Sometime last week, Google's Blogger service's algorithms thought that this blog was a spam blog. They shut it down. Earlier today, we were reinstated. For better or for worse, I'm back and hope to get a post or two in before the week is done. Thanks for your patience.

Loose Ends... Vol. LXIX

2009-11-16T05:37:00.001-05:00

I´m at the airport in Barcelona, Spain. I´m traveling this week, so posts may be light.

Afghanistan and Veteran's Day

2009-11-11T23:17:00.000-05:00

On this Veteran's Day, while Obama mulls his options for Afghanistan, I figure it's about time that I provide some of my thoughts on the subject. Today, we are supposed to honor our military veterans and thank them for their service. I thank them, but I often feel very disheartened that we do not respect their commitment fully in our military adventures.

Several weeks ago on September 10, Matthew Hoh, an Iraq War veteran and U.S. representative in Afghanistan, submitted his resignation. In his resignation letter, available here courtesy of the Washington Post, Hoh describes in great detail his reasons. Most notably, Hoh feels that our mission and strategy in Afghanistan is not worth the sacrifice of our military personnel:

I fail to see the value of worth in continued U.S. casualties or expenditures of resources in support of the Afghan government in what is, truly, a 35-year-old civil war.

He concludes his letter stating:

The dead return only in bodily form to be received by families who must be reassured their dead have sacrificed for a purpose of futures lost, love vanished, and promised dreams unkept. I have lost confidence such assurances can anymore be made.

This is a difficult pill to swallow, but Hoh makes his case quite well. I strongly encourage you to read the entire letter (it's only four pages long). I truly do not believe that our mission in Afghanistan, which has recently led to the deadliest months in our campaign, is making us any safer. It is time we cut our losses and come home. This is politically difficult - both domestically and on a geopolitical scale. But, it is time.

Afghanistan has had a sordid recent history. Its civil war and the destabilization caused by international interference have allowed factions like the Taliban to exercise significant power. Its geography, history, and culture have created a system of government which, at the moment, is highly decentralized. In an interview with NPR, Hoh described the system as "valleyism" where allegiance is localized - family, then village, then valley. There is an opposition both to invaders and the central government. Listen to any political analyst or government official in the U.S. and you will quickly hear the rhetoric that our problem in Afghanistan is the due in significant part to the lack of a strong central government.

The current Afghan government, while flawed, has characteristics which resemble both early America and my description of ideal governance laid out in this article. Is a strong central government in Afghanistan a necessity for U.S. safety? Do we need to send our military, our friends and relatives, into harm's way to engage in nation building? Should we dictate how Afghanistan is governed? No, no and no.

Loose Ends... Vol. LXVIII

2009-11-08T23:53:00.000-05:00

We have officially hit double-digit unemployment. The BLS provided its preliminary estimate for October employment - the result is 10.2% unemployment. The seasonally-adjusted U-6 rate, which is a broader definition of unemployment, is now at 17.5%. I don't believe that we've hit the peak yet. There is also reason to believe that the current rate should be higher as the "CES Net Birth/Death Model" which seeks to estimate new job creation that is unreported in the official surveys has added over a net one million jobs this year.

The Obama administration has been touting the success of the stimulus package in creating or saving over 600k jobs. We'll see if this strategy pays off. Politically, I think they may have been better off doing/saying less and blaming Bush more. They have claimed enough glory at this point to own the results going forward. There has been nothing done to correct the systemic weaknesses in the economy.

*****

The House passed H.R. 3962, the Affordable Health Care for America Act, by a slim 220-215 margin. Enough Democrats voted for it after a vote on an anti-abortion amendment passed during the floor proceedings. It is now up to the Senate where it will be difficult to get 60 votes. It is much easier to get things like this through the House where the Democrats enjoy a significant majority.

Great Transcender or Great Pretender

2009-11-03T23:10:00.000-05:00

Instead of looking at tonight's election results, I'd like to take a quick look back at the election of Barack Obama one year ago.

I believe that many Americans felt that Barack Obama would be the Great Transcender. Obama ran a brilliant campaign on a message of hope and change. He sent a message that he would transcend politics as usual and change the way Washington works. While I didn't buy this completely, it was the sliver of hope in this message that led me to support Obama over McCain. (I voted for Barr.)

Instead, I think Obama has exemplified politics as usual. In fact, I'd say he is an amazing politician. His oratory, his rhetoric, his team, his demeanor... he's good. But, he transcends nothing. He has embraced Wall Street and the coporatists. He has indulged his base while simultaneously disappointing them. He has made both real and token gestures to the GOP while engaging in classic partisan attacks. He has reneged on his promise to bring transparency to legislation. He stands ready to deploy our military as the world's police. Shall I go on?

He is the Great Pretender.

Move Along... These Aren't the (Droids) You're Looking For

2009-11-02T22:44:00.000-05:00

Despite 308 co-sponsors, H.R. 1207 - the Federal Reserve Transparency Act of 2009 - is functionally on life support. Arguably the single greatest measurable impact from the Ron Paul Revolution, the bill, which has garnered strong bipartisan support due in large part to grassroots efforts from Paul's Campaign for Liberty, has apparently been "gutted" by Mel Watt (D-NC).

Barney Frank (D-MA) who chairs the House Financial Services Committee promised his constituents at a health care town hall on August 27 that the bill would not die in committee and would be brought to the floor (see the Huffington Post article here and a YouTube clip here). Frank has not co-sponsored the bill. Frank held hearings on the bill in a move to begin the process of moving it towards the floor on September 25. Author and Austrian economist Thomas Woods had the opportunity to testify. Watt was downright hostile.

Watt's district includes Charlotte, the home of Bank of America. Since 1989, Watt's largest base of contributors have been from commercial banking. He is the subcommittee chairman for domestic monetary policy and his official House website states:

My service on the Financial Services Committee has been especially important because the 12th Congressional District is home to more banking and financial interests than any congressional district in the United States except the New York district in which Wall Street is located. I use my position on the Committee to listen to and study the interests of financial institutions and the interests of my constituents (their customers and consumers) and to help craft the important legislative balance that must exist between these interests.

As most readers know, Ron Paul (R-TX) mounted an unsuccessful Presidential bid in 2008 where he was largely dismissed by the media and establishment. The momentum which H.R. 1207 has received has been a validation that Paul's message of an out-of-control central bank has reached the mainstream. Unfortunately, the powers-that-be and their minions in Congress (and the Obama administration) want nothing to do with increasing transparency. Despite trillions of guarantees, secret transactions, and money-printing; the Stormtroopers, under the influence of the banking Jedi, are telling the taxpayers to move along. Clearly, there is nothing to see when it comes to the actions of the Federal Reserve.

Loose Ends... Vol. LXVII

2009-11-01T22:34:00.000-05:00

The proposed expansion of the smoking ban in Indianapolis failed to pass earlier this week. The City-County Council did not kill the measure outright; it has been tabled for a future date.

*****

I just caught up on the back and forth between Edmunds.com and the White House this week. Edumunds released an analysis which stated that the "Cash for Clunkers" program cost taxpayers $24k per car. The analysis was based on the estimated incremental sales activity that the incentive generated versus the total payout of incentives. The White House fired back on their official blog with the sarcastic headline of "Busy Covering Car Sales on Mars, Edmunds.com Gets It Wrong (Again) on Cash for Clunkers" touting the impact that the program had on Q3 GDP. Edmunds retorted once more.

Goldman Sachs Defends Bonus Pay

2009-11-01T22:03:00.000-05:00

I've had this article sitting in my browser for about a week now. In the article from the U.K. newspaper The Guardian, the vice-chairman of Goldman Sachs informs the public that it should "tolerate the inequality as a way to achieve greater prosperity for all."

I have no issue with people making money. Some people will always make more money than others. But, we shouldn't pretend that monstrous bonuses being paid at Goldman Sachs (GS) are somehow for our greater good. The company, which is clearly operating with implicit government support and received billions in explicit support via TARP and other bailouts (such as AIG), is on pace to dole out record bonuses this year due, in large part, to its trading operations. GS posted phenomenal trading results in both Q2 and Q3 this year.

The GS trading operations serve a role in the financial markets to provide depth and liquidity. I did some research and attempted to do some of my own analysis to determine the role that large players like GS play in the markets. The basic framework of capitalism and the role of a stock exchange is to allow investors to fund and profit from businesses. The trading operations of most stock market players including large institutions like GS have evolved beyond the capitalist investor. You can think of investors as those who think long-term and traders as those who think short term. Traders are nothing more than gamblers.

Now GS and others will tell you that they serve a useful and important role by trading. I don't dispute this. True investors may arguably have better success in executing a trade when the market is full of players willing to buy and sell at any time. However, those who are in the market simply to buy and sell and not to hold are, by definition, not investors. If you are not investing, then I'd say you are gambling.

I do not have a problem with gambling. But, let's call it for what it is. We should not pretend that traders, from the day trader to Goldman Sachs, serve some higher purpose which is for the benefit of greater society. They are there to take advantage of market inefficiencies, gamble, and make big bucks.

Quick Reflection on the Constitution

2009-10-30T23:48:00.002-04:00

A discussion on the Constitution is one which could consume much time. It's late on a Friday night, but I wanted to get a few thoughts on out this subject. Lately, I've reflected a bit when I've heard comments about the Bill of Rights, our (the citizens) Constitutional rights, government authority, and so on.

I've found that even the most staunch advocates of "conservatism" and "small government" often speak of things such as the First Amendment as if the Constitution itself, and on behalf of the government, grants us rights. This is in direct conflict with the Declaration of Independence, and, to the best of my knowledge, the intent of the authors. I have both the Federalist Papers and the Anti-Federalist Papers in my reading queue, but consider the Declaration itself:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed...

The Constitution is intended to set forth laws for how the government operates. The Bill of Rights is not there to reflect the government's goodwill to its citizens. It is there to reinforce the limits which are imposed on government. We the people naturally have a right to free speech. The government does not give us this right. The Constitution does not give us this right. We have it. The Constitution and its amendments are intended to reinforce our natural rights and ensure that the government cannot take them away.

I would contend that there is no such thing as a Constitutional right. We give the government its power and its our responsibility to ensure that they do not abuse it. I think that we've failed. I think that, over time, the perspective has changed in that most people no longer hold the view that the government receives its "just powers from the consent of the governed," and that the government in its glorious generosity grants us our rights, such as free speech, provided that we don't abuse such rights.

Election Day

2009-10-29T22:52:00.000-04:00

This coming Tuesday is an election day here in Indiana. In my township, there will be two issues on the ballot. Here is a link to the Perry Township, Marion County, Indiana ballot. I don't watch much local television and I don't read the newspaper. I haven't heard too much about these issues.

The first issue is in regards to Wishard Hospital. Wishard is in downtown Indy and is looking to build new facilities. To do this, they seek to issue bonds (get loans). Wishard is part of the Health and Hospital Corporation of Marion County - a quasi-government entity. As such, they can issue bonds which are guaranteed by the local government. Wishard contends that they will be able to repay their bonds with their own revenues; however, they seek government-backed bonds to receive lower interest rates.

You can read about the pro-Wishard position here. You can read one opposing view here (lots of well-informed comments on this post). I will be voting against the referendum.

I only heard about the second issue tonight while I was at my in-laws. My sister-in-law received a phone call to encourage a vote for the referendum. In this issue, the Metropolitan School District of Perry Township also seeks to issue bonds (up to almost $100M) for school renovations. I have not been able to find a good opposition website for this issue; you can visit the site which argues for the referendum here. I will be voting against this referendum as well.

While I admit freely that I do not have the context of the entire issue for either referendum, I am absolutely concerned with a further expansion of local government spending in this environment. I am not totally opposed to all local government spending. However, I do not feel that all options have been explored. Wishard serves the community but perhaps it's time for other hospitals to serve a similar purpose. Perry Township schools may well need renovation, but have we ensured that all other cost savings have been pursued prior to asking for taxpayer funded capital? I doubt it. I'll vote no.

Loose Ends... Vol. LXVI

2009-10-25T23:46:00.000-04:00

I have saved a few articles in my Google Reader which I had thought about using as writing inspiration. Alas, it's time to clean them out with some short commentary. All three articles tonight come from the great financial blog, naked capitalism.

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This first entry comes from Edward Harrison of Credit Writedowns by way of naked capitalism. Harrison lays out many facts of the current economic climate and argues that we are in a depression - not a recovery from a recession. I have to agree with Harrison. While we will likely have a technical recovery in GDP growth in the third quarter, which will be announced later this week, the structural issues of debt in the economy still remain.

I like Harrison, respect his depth of knowledge, and usually agree with him. He generally has a libertarian view on things; however, he has called for more government intervention over the last year. To note from his blog:

From an ideological perspective, I would call myself a libertarian realist. I am a firm believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Often government intervention and oversight is not just wanted but warranted.

I highly recommend this article, but be warned; it is long. This also was one of my first exposures to "chartalism" - a macroeconomic theory which seeks to explain monetary phenomenon by way of a relationship between private savings, government spending, and the country's balance of trade. It's interesting - more in a future article on monetary theory.

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Yves Smith published this next article a couple weeks ago regarding the AIG bonus payouts. Two days later, Neil Barofsky of SIGTARP issued the latest audit report on AIG compensation. From the report (page 13):

... According to AIG officials, individual awards paid in March 2009 ranged from $700 for one File Administrator to more than $4 million for one Executive Vice President... $7,700 was awarded to one Kitchen Assistant... Distribution of the remaining $198 million is expected in March 2010...

Awesome - our bailout dollars at work. "Pay Czar" Kenneth Feinberg ordered significant reduction in pay at several bailed out companies earlier this week. I'm basically for this. These companies only exist due to the taxpayer largess. They can be told what to do.

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We turn back to an Edward Harrison post for the last entry of the night. This article highlights some key decisions happening in the courts regarding mortgage foreclosures. There are a lot of good links in this one to other bloggers who are picking up on the story.

The very interesting decision by the court (in one particular case) is that the bank which claims to hold the mortgage has not met the burden of proof to show this is actually the case. When one receives a loan to purchase a house, the mortgage is actually the security against the loan. The proliferation of securitization has transferred mortgages from one party to another over and over again. When the borrower stops making payments, the mortgage holder moves to foreclose on the property. Increasingly, the mortgage holders have been unable to prove that they actually legally hold the mortgage since the securitization process has been sloppy - at least in terms of following all the necessary and required processes for such a transfer.

Very interesting stuff... could we be seeing the beginning of a massive debtor's revolt?

Blue Laws and Corporatism

2009-10-21T23:59:00.000-04:00

The Indiana General Assembly is not currently in session. In fact, they are hardly ever in session. This past year, they spent a lot of time debating a budget for the state. They required a special session to get that done. One thing they didn't address was Sunday sales of alcohol.

Indiana, like many other states, still has "blue laws" on the books which regulate and/or prohibit the sale of alcohol in various ways. A study committee was established to hold hearings, review and recommend potential legislation for the upcoming session. The Interim Study Committee on Alcoholic Beverage Issues convened over the past several weeks and voted on their recommendations on Tuesday, October 20.

The study committee has voted to recommend no changes to existing law. The two key proposals (which were shot down) were to allow Sunday sales of alcohol (defeated 7-4) and to allow other businesses besides liquor stores to sell cold beer (defeated 11-0). The full story can be read here. I have not been able to locate any sort of formal report at this point in time.

This particular issue and story has several things that I find distasteful. First, there is never a good time to legislate morality. The 18th Amendment was a failure. The purchase of alcohol on Sunday does not harm anyone as a threat to life, liberty or property. That is unless you are a liquor store in Indiana who is protected by government corporatism. That leads to my second point. The liquor store lobby does not want reform because they a) have a protected monopoly on cold beer sales, and b) have lower operating costs compared to their competitors because they stay closed on Sundays. Third, I noticed this vote was pretty much on party line. I'd like to see the final report before I pass judgment on that, but it smells fishy to me.

So, the forces of the nanny state have joined the forces of corporate lobbies to deny Hoosiers the ability to get a cold six-pack of beer at the local grocery store on Sundays. This is not over yet as this was just a study committee. However, I think this is a strong indication that this battle won't be won in the 2010 General Assembly.

Loose Ends... Vol. LXV

2009-10-19T23:36:00.003-04:00

I'm a day late (and a few topics short) for Loose Ends this week.

Indiana University professor Elinor Ostrom was awarded the Nobel Prize for Economics last week. The award was "for her analysis of economic governance, especially the commons." This is a very interesting subject for those with libertarian leanings. I plan on reading some of her work and reporting back here on the blog.

Proposed Smoking Ban in Indianapolis

2009-10-18T21:25:00.000-04:00

Indianapolis already has a limited smoking ban. For the most part, the only places you can smoke are bars which do not employ or allow entrance to anyone under the age of eighteen, smoke shops, and bowling alleys. Smoke Free Indy, an anti-smoking activist group, is leading the charge to strengthen the ban and remove pretty much all existing exemptions.

Proposal 371, which would extend the ban, passed out of committee on October 14. It will go before the entire City-County Council on October 26. Potentially adding some strength to their position, a report from the Institute of Medicine was released the next day which supports smoking bans as an effective tool in improving public health. The folks at libertarian-minded Reason published a response to the report on their blog which questions the strength of their conclusions and provides other good background material.

I think it's pretty clear that smoking isn't the greatest lifestyle choice to maximize longevity. Second-hand smoke (apparently also called "passive smoking") also has an adverse impact on health. We can all make our choices about smoking and, in today's anti-smoking world, spend most all of our time avoiding second-hand smoke if we choose to do so. Smoking is legal. Adults should be able to congregate in public places to smoke.

After spending a few hours of research on this subject, there is reason to be cautious in determining the magnitude of the health risk posed by second-hand smoke. But, to me, that's not really the whole issue. Owners of private property who operate an adult establishment should have the choice to allow smoking. A continuing escalation of smoking bans is an infringement on private property rights and personal liberty.

As an end note, the Marion County Health Department commissioned a report which was released in February 2002 on the economic impact of second-hand smoke in Marion County (Indianapolis). You can read the report here. It estimates that the health care costs due to second-hand smoke in 2000 were over $50M. I find it a bit amusing that in most economic studies, money being spent is equated to creating jobs and helping the economy. I guess there is a difference between good spending and bad spending.

Greed Is... Only Natural

2009-10-16T01:26:00.001-04:00

Ever since the financial crisis exploded over a year ago, there has been plenty of rhetoric in the media decrying greed. Occasionally, you get a rabid capitalist taking the opposite position - reverently quoting Wall Street's Gordon Gekko... "Greed is good!"

Today, I read another article on the subject at naked capitalism. I had been planning on writing on this subject for some time. No time like the present...

What is greed? Wiktionary says: a selfish or excessive desire for more than is needed or deserved, especially of money, wealth, food, or other possessions. It's also one of the seven deadly sins. My basic philosophy of human action is that every decision - whether trivial or significant - is driven by a complex assessment which seeks to maximize the individual's self-interest. I also believe that self-interest is not the same as financial wealth. If I had to describe self-interest as anything, I'd describe is as happiness.

This philosophy of human action extends to the microeconomic theory of utility maximization. Generally utility is measured by money. For some, financial wealth is very important. Perhaps money cannot buy happiness, but money may be equated with happiness. I think of utility and self-interest as much more complex, perhaps "softer", concepts. Why else would one donate to a charity, smell the roses, or even love? These are rational actions which produce happiness.

The unending pursuit of happiness is only natural. So, is a "selfish or excessive desire for more than is needed" bad? There is no way to clearly define "excessive" or "more than is needed" - they are subjective terms. Thus, greed can only be attributed as wrong by one who feels that someone's actions exceed the reasonable pursuit of happiness. Perhaps greed is bad or sinful, but only under a system of morality which recognizes this as such.

The opposition voices to greed seek laws and regulations to control and/or punish greed. But, since greed is a moral issue, a matter of subjectivity, when is it appropriate to use government force? I suggest it is appropriate only when one's greed - the insatiable desire for excess - violates another's life or property.

I believe that humans are sinful. The pursuit of self-interest crosses the line when another is harmed. It is also usually kept in check by fear. This may be the fear of personal loss, but it may also be the fear of getting caught doing something illegal.

If greed is the biggest problem of capitalism, it is only because there is not enough risk associated with fear. I'd argue that this isn't capitalism; it's definitely not a free market. The government has removed this risk for some businesses and individuals which has allowed greed to take over. If you want to find blame for income inequality, high unemployment, and the financial crisis, don't blame greedy capitalists on Wall Street. Blame the government for systematically removing risk and misaligning incentives. Patchwork regulation, inconsistent enforcement, manipulated interest rates, perverse tax incentives, ... all these things serve to distort the greed/fear balance and let ugly human nature wreak havoc.

Money and Credit

2009-10-13T23:17:00.001-04:00

This is a big subject. I've been meaning to post on this subject for some time now, but as I expand my research, it keeps getting bigger and bigger... So, I'll probably address this subject over a series of posts. I want to introduce the key themes here and provide some sources for readers to explore independently.

An any given economy there must be a means to facilitate the exchange of goods and services. Ancient systems were based on barter. This evolved to involve the concept of money where something was accepted as a commonly used medium to enable exchange. Commodity money is the most basic concept of money. Items which have an inherent value as a commodity (such as beads, stones, or gold) would serve a dual-purpose as money. Over the course of a few nuanced evolutions (largely driven by banks), we ultimately arrived at the concept of government-issued fiat money.

The general and basic understanding of monetary history speaks of government-issued commodity money whereby the state would issue currency which was "backed" by a commodity - usually gold and/or silver. One such example is the gold standard. The state would issue currency which would be redeemable on demand in gold. The state (via a central bank) would hold reserves of gold to ensure redemption could be executed.

(It should be noted that private banks have also issued private currency called banknotes. These banknotes may or may not be legal tender - something that has the force of law for resolving debts. While these concepts are important for a thorough understand of monetary history, they are not terribly relevant in this particular discussion.)

In a fiat currency system, the state issues currency which is backed by a variety of assets. Most currencies today are reserved with a combination of gold, foreign currencies, and government issued securities. Up until our recent financial crisis, the dollar has been backed largely by U.S. treasuries. The Federal Reserve issues Federal Reserve Notes (prints money) to acquire assets such as U.S. treasuries (government debt). The money goes into general circulation. Ultimately, the money is collected by the government via taxes and then remitted to the Federal Reserve to pay off the government debt. This ends the cycle.

To a large degree, most classical and modern macroeconomic and monetary theory is based on this view of currency. It is augmented by the phenomenon of fractional-reserve banking where banks expand the money supply (volume of currency/money in circulation) via lending. The traditional example is that the bank has $10M in deposits and can then loan out $9M under a reserve requirement of 10%. The $9M makes it way to another bank who can then lend $8.1M. This continues ad infinitum "creating" new money all the way along.

Unfortunately, these basic concepts upon which most economic theory and policy is based is wrong. Banks don't operate this way. The system is not this simple.

If you want to read a lot more detail, please read the following article. I'll attempt to explain the basic concepts in an upcoming entry.

"The Roving Cavaliers of Credit", by Steve Keen (my new favorite economist)

Loose Ends... Vol. LXIV

2009-10-11T23:55:00.000-04:00

This is the sort of macroeconomic "theory" that burns me up... more from Paul Krugman:

... let's use the Taylor Rule estimated by Glenn Rudebusch at the San Francisco Fed... This rule describes past Fed policy quite well.

Applied to current data, the rule says that the Fed funds rate should be - drum roll - minus 5.6 percent. You can’t do that, of course, so we’re very hard up against the zero lower bound. And if you think the Taylor rule was a good guide to policy in the past, the Fed shouldn’t start to raise rates until the rule starts, you know, yielding a positive number.

I don't doubt that such a rule has historically been a good predictor of the Fed funds rate. But should it? Is the economy really so simple that the proper cost of money can be decided by a simple linear equation involving the distorted government statistics of inflation and unemployment? Has the historical rate actually been correct? (No. No. And no.)

The ruling class of macroeconomists not only think that they can plan and control the economy - no, that's not enough. They use relatively simple mathematics to determine their policies which are supposedly smarter than the dynamic market forces of hundreds of millions of people.

*****

The Nobel Peace Prize for 2009 has been awarded to Barack Obama. You can read the press release here. Nominations had to be received by February 1 which means that Obama had been in office for no more than eleven days before his nomination. However, I did also read that "the Committee may on that occasion add further names to the list, after which the nomination process is closed."

Obama apparently won based on his efforts to change the reputation of the U.S. which festered in the international community under the Bush administration. It appears that it is his promises, not his actions, which cemented the victory. Meanwhile, Obama is mulling an increase in troops in Afghanistan, potentially seeking regime change therein, and has yet to place significant public pressure on Israel, India or Pakistan to sign on to the Nuclear Non-Proliferation Treaty.

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Congressmen Ron Paul (R-TX) and Alan Grayson (D-FL), two of the fiercest opponents of the financial status quo, have submitted a letter to Senator Chris Dodd (D-CT) who is Chairman of the Senate Committee on Banking, Housing, and Urban Affairs.

The letter asks Dodd to delay the confirmation of Ben Bernanke to continue in his capacity of Chairman of the Federal Reserve. This seems like a simple and poignant request. The economy has experienced a major crisis which is almost universally agreed to be triggered by the financial sector. The Federal Reserve has regulatory authority over the banking system. Its monetary policy authority is conducted with the goals of maximum employment, stable prices, and moderate long-term interest rates. Read their mission statement.

While Bernanke has received many rave reviews for saving the economy, he was also in charge prior to the crisis. Regardless of your opinion on what Bernanke has done since the collapse of Lehman, his record in leading the Fed in its self-declared mission is questionable. Further, his creative, yet secretive, and legally dubious actions since Lehman should be investigated before we declare him our savior.

The Petrodollar Hegemony

2009-10-11T15:12:00.000-04:00

Gold had a great week this past week hitting its all-time high of $1062.70 in nominal U.S. dollars. While there are many factors to such a rise in prices, an article by Robert Fisk on October 6 in The Independent, a U.K. newspaper, helped spur some of the action.

The article, entitled "The Demise of the Dollar", has set off something of a firestorm in the financial and political blogosphere. The article suggests that a secret agreement has been reached between key nations to end the pricing of oil in U.S. dollars which would subsequently end its dominance as the world's reserve currency. Is this a true signal of the dollar's collapse? Is hyperinflation around the corner? Or is this just overblown rhetoric and meaningless scaremongering? In order to answer these questions, we have to get a basic understanding of the world's currency markets.

All modern major currencies are fiat currencies and no longer exist on a commodity standard such as gold. Since the currencies cannot be converted into a commodity which has inherent value, the value of the currency is determined by the dynamics of supply and demand. These dynamics play out in the foreign exchange markets (forex) which set the prevailing rates of exchange between international currencies. The forex market accounts for between $3-4 trillion (yes, with a "t") of trading per day! It is the largest of the financial markets - bigger than stocks, bonds, commodities, or any other such market. Currencies are traded twenty-four hours a day for five days of the week. Banks and other financial institutions, multinational corporations, hedge funds and central banks are the biggest players; although, individual investors and many others also play the market.

To understand the value of a currency, one must break down the factors which contribute to the supply and demand for that currency. A currency is demanded when it is required for payment of goods and services or desired as a store of value. In the domestic economy, the fiat currency has its value since the government establishes it as required for payment of taxes. This gives the currency much of its inherent value. Consider a multinational corporation. It must pay its employees in a variety of currencies and may incur other expenses in multiple currencies as well. Similarly, revenues are collected in various currencies as customers generally pay in their local currency. Such corporations establish bank accounts in multiple currencies and execute currency exchange transactions to manage the differences in how their revenues and expenses are denominated. They also trade currencies to mange risks associated with changes in exchange rates.

Banks will also engage in currency trades for similar reasons as the multinational corporations. Banks also engage in transactions with central banks which adds an additional element to the supply and demand dynamics. Central banks issue currency and maintain reserves held against the issuance. Many central banks hold reserves of foreign currencies as assets which "back" the issuance of new currency which is considered a liability. This is a process which deserves its own article, but, needless to say, the actions of central banks and their relationships with commercial banks have an impact on the demand for various currencies.

These are some of the most important factors which impact the demand for a particular currency in the forex market. The supply of a currency is also variable. It would seem that the total circulation of the currency as issued by the central bank would be the most important factor in the supply of a currency. This is not entirely true for a few reasons. First, money supply measures do not fully capture credit money (money "created" by banks) and the potential expansion thereof. Second, and related to the first, leverage is widely used in the forex market. In other words, traders will take on debt to enter the forex market. Third, the supply of a currency in the forex market is dependent on the desire of the trader to not hold on to that particular currency. The currency of a completely insulated national economy with no international trade would have very little (if any) supply in the forex market regardless of the total supply of such a currency.

With this background, we can turn to the oil market. Since the 1970s oil has been (for the most part) priced and sold in U.S. dollars. Oil producing countries seeking to sell oil around the world have demanded U.S. dollars as payment for oil. This, along with other factors, has helped establish the U.S. dollar as the primary reserve currency of the world. Everyone needs oil. Thus, everyone needs dollars. This implicitly creates a demand for U.S. dollars as those who buy oil need to exchange their currency to complete their transactions. This also places dollars in the hands of oil producing countries who can either hold them (as reserves), invest them (by purchasing dollar-denominated assets such as U.S. treasuries or stocks), or exchange them for other currencies.

The term used to describe the dollars earned by these oil producing countries is a petrodollar. When these nations invest their petrodollars in other assets, it is referred to as petrodollar recycling. This recycling process leads to investment. The investment is arguably very favorable to the United States. Since countries such as Saudi Arabia, Kuwait, and Qatar amass large amounts of petrodollars, it enables easy recycling towards U.S. stocks and bonds. If oil were priced in euros or some other currency (or possibly even a new currency), these nations would now hold something other than dollars.

A key question is how such a change would change the behavior of the oil rich nations. If they earned an increasing amount of petroeuros (for the sake of argument), they could either hold them as reserves or recycle them. Holding them as reserves would link the value of their currency more closely to the euro. Recycling would imply either increased investment in euro-denominated assets or utilizing the forex market to sway euros for, say, dollars. It seems clear that if the oil producing nations prefer to hold and/or invest dollars, they would prefer to demand dollars for oil rather than accepting euros only to swap them later for dollars.

According to the Fisk article, China, Russia, Japan and France are involved in the discussions with the oil producing Arab nations to end the petrodollar hegemony. If this is the case, then it implies that these nations would prefer to avoid having to hold as many dollars as they do today. These countries acquire their dollars today via trading relationships, existing currency reserves, and the forex market. Their desire to move away from dollars would indicate an expected decrease in trade with the U.S., a desire to maintain or reduce their dollar reserves, and/or seeking to avoid the forex market. The last one is an unlikely reason since this would imply an expected increase in the value of the dollar.

However, the status of the U.S. dollar as the world's primary reserve currency is due to more than dollar-denominated oil. The U.S. is by far the largest consumer economy and importer of international goods and services. Other economies depend on a health U.S. consumer and, as a result, need the U.S. dollar. The U.S. has also been the leader in technology and other economic expansion which attracts foreign investment; this too creates demand for the dollar. Finally, political stability and military dominance solidifies the dollar as a safe investment. All these factors, in addition to the petrodollar hegemony, ensure U.S. dominance.

Will these things come to an end? Not anytime soon... but, the tide may be well be shifting. An end to the petrodollar hegemony may be an important step towards the end of the U.S. dollar hegemony and, ultimately, the end of U.S. political and military dominance.

For additional reading, see here and here.

Loose Ends... Vol. LXIII

2009-10-04T23:23:00.002-04:00

Now that I have my health care posts behind me, I'll try to get to a more regular schedule. I don't have much interesting to say tonight. We'll keep an eye on Iran, Afghanistan, health care, and everything else this week.

Nicole and I officially took the plunge and joined the Libertarian Party today. We have been both skeptical and critical in the past, but we are hopeful that the Indiana chapter is committed to pragmatism.

Practical Ideas for Health Care

2009-10-03T13:06:00.001-04:00

In my last post, I outlined my thoughts on a more ideal health care system. I recognize that these thoughts describe a system which is much different than what we have today. Justified criticism is often directed towards such ideas for being too ideological, theoretical, or impractical. So, I'd like to close my series on health care (for now) with some ideas which may be more practical. I do recognize that some of these ideas may be politically untenable at this time and also concede that true health care reform requires hours and hours of research beyond what I'm able to provide. Here is my six-point plan for reform.

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1. Authorize and Promote the Establishment of Health Care Subscription Programs

As noted in my thoughts on a more ideal health care system, the idea of a health and wellness subscription service seems like a great idea. Such a service may not be technically illegal today (I have not researched this), but the regulatory system and network of insurance providers are not aligned with such a model. This is not fundamentally different than prepaid health care which is a more accurate description of today's health "insurance" products. I would allow Medicare, Medicaid, and Medicare Advantage plans to use federal dollars towards such programs if the patient chooses to do so.

2. Provide Significant Tax Incentives for Private and Corporate Donations to Non-Profit Health Care Providers

Medicare and Medicaid face significant funding issues in the near future. Our federal budget problems are well known. I think it's important to put more choice in the hands of the taxpayer. As part of a larger plan to create a more democratic and free market system of taxation, I would implement a revolutionary tax credit for health care funding. Individuals and corporations would be eligible for a 50% tax credit for every dollar donated to an authorized, non-profit health care provider. This would include free clinics, non-profit hospitals, medical research centers, universities, and more. I would expect billions of dollars to flow into such institutions. The government would use this flow of funds to offset Medicare and Medicaid spending with the ultimate plan of eliminating the need for direct government aid to these programs.

3. Reduce the Patent Life for New Drugs and Streamline the FDA

Pharmaceutical companies have made major advancements to develop drugs which help patients all over the world with all sorts of ailments. They've made a lot of money doing so which provides the incentives to hire the best chemists and invest in research and development. But, I believe that we must level the playing field a little more. Patents support monopolistic practices and the FDA helps establish a de facto cartel in the drug industry. Both of these lead to higher medical costs. We need a quicker time to market for generics. We also need the FDA to increase competition by encouraging and regulating the expansion of natural medicine. If this requires the establishment of an independent agency to compete with the FDA, then so be it.

4. Implement Tort Reform

Defensive medicine clearly adds cost to the system. The expansion of more inexpensive care via free clinics and other non-traditional health and wellness services may only serve to encourage malpractice suits. This needs to be cut off before it constrains such expansion.

5. Allow Interstate Competition for Health Insurance and Implement Health Exchanges

Insurance products are regulated at the state level which has led to inconsistent rules and low levels of competition. Using the federal power to regulate interstate commerce, we should allow insurance to be sold across state lines with consistent regulation. This is not enough. The current plan to establish a health insurance exchange (with or without the public option) is a good one; however, I have a different twist on it. We have seen the Internet provide great tools to help consumers find what they are looking for. We should provide ten large grants to prospective health exchange providers set up as quasi-government corporations. After a term, they will be spun off as private corporations. As an example, imagine if Google provided a search service to find the best customized health program that meets your needs. The health exchange should help consumers find both traditional health insurance (today's prepaid health care) and local health subscription services as described above.

6. Phase Out the Health Maintenance Organization Act of 1973

The HMO Act of 1973 mandated that employers of 25 or more employees must offer health benefits to an approved HMO. This solidified the link between employment and health care coverage. This should be repealed in a responsible manner so that individuals seek their own health care coverage via the aforementioned exchanges. This could start with applying income taxes towards employer-provided health care benefits while providing a tax deduction for costs incurred by purchasing individual plans. Employers would not be allowed to rescind existing health care benefits without a certain percentage of employees opting out, a two-year notice period, and payout incentive to those who have not transitioned by the end of the two-year period.

*****

I'm sure there are other good ideas which would fit in this framework which is intended to support the evolution of today's health care system to one which I feel would be more effective. Having watched the Senate Finance Committee debate the Baucus plan, I appreciate the complexity involved in drafting reform legislation. I hope you have found this basic set of ideas to be interesting and practical.

Loose Ends... Vol. LXII

2009-09-28T21:25:00.002-04:00

Excuses... The whole family was sick this weekend. I plan to wrap up my health care series this week with ideas for practical solutions to the issue this week. Then, hopefully, I'll get back to a more regular posting schedule.

Loose Ends... Vol. LXI

2009-09-20T23:36:00.000-04:00

Earlier this week, the House convened and voted upon H. Res. 744:

Whereas on September 9, 2009, during the joint session of Congress convened pursuant to House Concurrent Resolution 179, the President of the United States, speaking at the invitation of the House and Senate, had his remarks interrupted by the Representative from South Carolina, Mr. Wilson; and

Whereas the conduct of the Representative from South Carolina was a breach of decorum and degraded the proceedings of the joint session, to the discredit of the House: Now, therefore, be it
Resolved, That the House of Representatives disapproves of the behavior of the Representative from South Carolina, Mr. Wilson, during the joint session of Congress held on September 9, 2009.

The resolution passed 240-179 (10 not voting and 5 Democrats voting "present"). I don't have a fundamental problem with this resolution. Wilson (R-SC) was clearly out-of-line with his now infamous "You lie!" outburst during Obama's speech before the joint session of Congress.

However, having now followed Congressional proceeding more carefully over the last year or so, I recognize how difficult it is to bring bills and resolutions before the House floor for a vote. I think the members of the House could have spent their time on far better things this week.

*****

Former President Jimmy Carter then took the "You Lie" sideshow to a new level when he declared, "an overwhelming portion of the intensely demonstrated animosity toward President Barack Obama is based on the fact that he is a black man."

There is no doubt that racism still exists. It will always exist. We can parse Carter's words or recognize his historical perspective, but this just heightens an already vitriolic level of discourse in today's political debate. Nancy Pelosi (D-CA) did not help the situation by suggesting a parallel between today's rhetoric and that in San Francisco in the time of the murders of San Francisco politicians Harvey Milk and George Moscone.

It's all really a shame. There is so much opportunity for healthy and intelligent debate on the issues we face. Unfortunately, our political system and the mediatainment business both encourage trivialities, name-calling, gotcha politics, and the perpetuation of the two-party duopoly.

*****

Early this week marked the one year anniversary of the collapse of Lehman Brothers. We've seen a lot of ups and downs in the markets, a deepening recession, and (potentially) a technical recovery since that time. I've spent a lot of time reading and learning more about finance and economics. My general thesis for some time is that we will experience both inflation and deflation simultaneously in the future. More on this in a future article, but in the meantime, I'd recommend reading Steve Keen at Debtwatch.

*****

One last piece of financial news... on August 3, the SEC charged Bank of America "for misleading investors about billions of dollars of bonuses that were being paid to Merrill Lynch & Co. executives" when the government helped engineer BoA's acquisition of ML. BoA immediately agreed to settle for $30M. The SEC's press release can be read here.

Noting that the shareholders who were allegedly misled by Bank of America ultimately share the pain of a $30M payout, Judge Jed Rakoff stated:

It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct... the S.E.C. argues that this is justified because "[a] corporate penalty... sends a strong signal to shareholders that unsatisfactory corporate conduct has occurred and allows shareholders to better assess the quality and performance of management." ... [which] makes no sense when applied to the facts here... [it] is absurd.

The entire order can be read here. This is, in my opinion, an important ruling where the Judicial Branch is stepping in regarding the ridiculous Wall Street pandering of the Executive Branch. New York Attorney General Andrew Cuomo has been pursuing a suit against BoA executive on this and related matters of failures to disclose material information to shareholders. Cuomo's office sent a letter to BoA on September 8 - no new developments yet.

This could all lead to penalties against Ken Lewis and other BoA executives. It may also extend to Henry Paulson, Ben Bernanke and Tim Geithner as they were all involved in the acquisition of Merrill. Recall this article.

A More Ideal Health Care System

2009-09-20T13:35:00.000-04:00

This will now be my fifth post on the issue of health care over the last several weeks. I will recap these posts as they establish key principles for a more ideal health care system.

In the first entry, I argued that the business of insurance should not be regulated as a public utility. While the insurance industry may exhibit "too big to fail" characteristics which must be managed, it is a fundamentally profitable business model which does not require a massive initial capital investment like other infrastructure such as roads or a power grid.

The second post then focused on the concept of rights. A government guarantee of health care provision constitutes a positive claim right against either the health care providers and/or those who are forced to fund the guarantee. The state should not support or guarantee positive claim rights as this creates a state without limitless power.

I then turned to the concepts of human needs and the social safety net in my third post. In this I concluded that a social safety net is important to meet the human need of security by protecting those who have from those who have not. This introduces the potential need for state funded health services.

In my most recent post, I presented data gathered from the World Health Organization for a comparative analysis of national health care finances (public and private) as well as services and outcomes. My conclusion is that the U.S. system is inefficient as the costs do not justify the level of service - nor are Americans more healthy as a result.

I now want to turn to the design of a more ideal health care system. I say "more ideal" because I do not want to be so arrogant to conclude that I present would be "the ideal" system. With that in mind, let's start by grouping health care services into three categories: prevention, maintenance, and emergency care. Prevention encompasses wellness and routine check-ups. Maintenance includes health services such as prescription drugs, surgeries, blood tests, and extends to things like extended hospital stays, rehabilitation and chemotherapy. I'll define emergency care as unexpected events which require immediate attention such as heart attacks and accidents - including ambulance services.

Except for the unlucky few who are born with or develop health issues or contract diseases in their youth, most of us go through life relatively healthy. A more ideal health care system would revolve around prevention and occasional maintenance services with access to emergency services. I fall into this category - most you reading this probably do too. Successful prevention should help minimize the need for maintenance and this is a two-way street. Both the patient/consumer and the doctor/provider have a role in prevention. Lifestyle choices such as diet and exercise have a clear impact on prevention; however, the advice and assistance of health care professionals can also aid in prevention. This relationship should serve as the basis of the health care industry.

The design of this relationship should ensure that the incentives for both the individual consumers and the health care professionals are aligned to provide the best care possible. It is thus in the consumer's best interest for the service provider to also want to minimize maintenance services. I would suggest that this can best be done by placing the majority of the cost burden due to maintenance upon the health care professionals. This will force an emphasis on prevention. Recall that this is a two-way street. Thus, the consumer must also have an incentive lead a health lifestyle which aids in prevention.

This structure of incentives leads me to believe that a health care subscription service might be the best fit. In this model, the individual would pay a monthly subscription to a health care provider such as a family doctor, local hospital, or possibly a new type of entity that could specialize in these services. In return for the subscription fees, the provider would offer wellness consultations, preventative services, check-ups, and basic maintenance services such as prescription drugs, blood screening, x-rays, etc. The consumer's subscription fees would be higher or lower based on lifestyle choices, the willingness to opt-in to wellness programs offered by or sanctioned by the provider, the level of service desired by the individual, and the general level of health of the individual.

In addition to providing the basic preventative and maintenance services, the provider would also be responsible for emergency costs and more expensive specialist costs when required. As these costs would be less consistent and more expensive, the provider may purchase insurance contracts which cover them in such events. This may lead to a disincentive for the provider to pay for more expensive, but often necessary, treatments. However, this would lead to a direct impact on customer satisfaction and health outcomes. In a model such as the one described, the consumer would have the ability to shop for the best plan which meets their needs. A third-party regulatory body and/or consumer advocacy groups could publish subscription levels, mortality rates, and other relevant statistics to help consumers find the best value for their money. Further, the doctor/patient relationship would have more meaning and specialization would develop where some doctors would focus more on nutrition or exercise and other may tout alternative medicines.

Another feature that I believe that consumers would demand out of such a system is a sort of price guarantee. Consumers would not want their subscription costs to fluctuate too much or be modified in the case where they develop a condition which requires a higher degree of treatment. The subscription contracts could establish a fixed price over the course of months or even years and allow for renewal at prices which do not exceed a specified price level.

In terms of affordability and emergency coverage, this system would still have gaps. Note that I do not believe that access or choice of a provider service should be linked to employment. The subscription fees should be paid out-of-pocket by the individual so that the consumer has as much control over choice as possible (while also making the costs of health care more top-of-mind). Some people will still not be able to afford such a plan. This needs to be addressed from two points: access to emergency services and provision of basic care. Emergency services can be provided via the same infrastructure as described above since, in times of emergency, service should be provided first before we understand who is paying for the services. Basic care is a bit different.

I truly and emphatically believe that basic care can be provided via non-for-profit organizations funded largely (if not completely) by charitable donations. I have no empirical evidence prepared to support such a claim; however, between private individual donations, corporate donations from health providers (sanctioned and supported by their subscribers), and, in the worst case scenario, a tax on the for-profit health care industry which directly funds not-for-profit basic care providers, I'm sure we could cover it.

There are still plenty of questions which must be asked to determine how such a system would address all the critical issues of a health care system. It would be futile to attempt a comprehensive analysis on this blog. But, I do believe that the system describes addresses misaligned incentives, affordability, and overall cost. I have not addressed senior care or those with chronic conditions. The same framework should extend to such circumstances. Two facts that we must all remember in the health care debate are that we will all die and that health care costs money (just like food, water, clothing and shelter). We cannot expect that there would ever be a system which grants everyone infinite access to all forms of health care nor one where nobody dies.

Acronyms, Acronyms and More Acronyms

2009-09-18T21:46:00.004-04:00

I've come to realize that, for whatever reason, I'm particularly interested in minutiae as it relates to "politics." I like to study the charts that congresspersons use as props when making floor speeches and search through legislation archives looking for bills that pertain to what are, frankly, ridiculous things (like the duties on certain types of pasta products or, one of my personal favorites, improving the management of wild free-roaming horses and burros). I think perhaps I feel that so many other people out there are thinking and writing about the "bigger" political picture (not that this isn't a really good thing), that there have to be some others who are interested in the smaller things. In this vein, there is a particularly minutial issue (indeed, I don't think I should really call it an "issue" at all) that has continued to annoy me for quite a while now--the widespread practice of using rather ridiculous acronyms in the titles of official pieces of legislation.

Here are some examples of some of these acronyms (from the current Congress), but there are COUNTLESS others (I'd be curious actually to see the results of an analysis of legislation from, say, the last 5 Congresses as to the percentage of bills that use acronyms in the title):

H.R. 3379: LOPSIDED Oil Prices Act of 2009 (Lowering Oil Speculation for Infrastructure Dedicated to Economic Development)

S. 1588: STOP Act (Stop Tax-breaks for Oil Profiteering Act)

H.R. 3295: RISE Act of 2009 (Removing Impediments to Students Education)

H.R. 3168: U.S. OUTDOOR Act (United States Optimal Use of Trade to Develop Outerwear and Outdoor Recreation)

H.R. 3222: AWARE Act (Adolescent Web Awareness Requires Education)

H.R. 2932: Stop VULTURE Funds Act (Stop Very Unscrupulous Loan Transfers from Underprivileged countries to Rich, Exploitive Funds)

H.R. 2681: P.R.O.U.D. Act (People Resolved to Obtain an Understanding of Democracy)

H.R. 3583: ASPIRE Act (American Samoa Protection of Industry, Resources, and Employment)

H.R. 3577: EARNED Act of 2009 (Education Assistance to Realign New Eligibilities for Dependents)

I could keep going forever, but I'm sure you get the picture. It's quite likely that I'm just odd, but I honestly find this horribly annoying. It very nearly makes me shudder to think of how much taxpayer-funded work/time went into JUST coming up with these immensely clever (sarcasm) bill titles. I think this is the reason why I'm so interested in digging around to find such seemingly trivial political "issues" -- it annoys the hell out of me to think of all the time spent by our congresspeople (perhaps not directly but via their staffers for certain), and also taxpayer dollars, on such stupid things at a time when there are certainly many gravely significant problems facing our country. So, yeah, it really does bother me that surely a reasonably significant amount of time and effort was put into figuring out how to create a bill title that fit the purpose of the bill and, more importantly, fit to the acronym LOPSIDED (because it's obvious that the acronym came before the actual title). I can't help but think that the time, effort and even creativity spent coming up with these titles could be put to much, much better use...although, at the same time I think I'm probably giving these bill writers too much credit. If I were in Congress, I think I would introduce a bill called the STUPID Act or something like that...it really doesn't matter that I don't know now what it stands for; I'll just leave that to my staffers to figure out.

Loose Ends... Vol. LX

2009-09-13T23:57:00.002-04:00

It's late and the Bears lost, so I'm none too happy.

Here's a good read from the Huffington Post on the relationship between the Federal Reserve and the academic world of economics.

Health Care Statistics

2009-09-13T16:55:00.000-04:00

This will be less thorough and analytical as I had initially hoped. There is so much information out there that could be researched and analyzed. However, I have gathered some key statistics from the World Health Organization which I believe shed some light on the state of health care in the U.S.

We are going to explore some data revolving around two broad categories: health care spending and general health care data. In the first table below, we take a look at government expenditures on health care as a percentage of GDP. The eighteen countries represented include the largest countries in the world as measured by GDP as well as a select few others based on either high per capita GDP and/or the Human Development Index.

Source: WHO Statistical Information System

A few things jump out in this first set of data. The so-called "BRIC" countries of Brazil, Russia, India and China have substantially lower volumes of government spending as compared to the other countries. The BRIC countries aside, the other countries range from 5.8% to 8.8% with a mean of about 7.0%. The U.S. is right in the middle at 7.0%. Incidentally, this places the U.S. at number two (behind Norway) in terms of per capita government spending on health care.

In this second table, we look at private (non-government) spending on health care as a percentage of GDP. This table tells a much different story with the U.S. leading the way at 8.3% and no other country coming even close. It does not take a view of the data to quickly recognize that the U.S. spends far more on health care than any other country in the world. We rank number one in per capita spending, spending as a percent of GDP, and, of course, in total nominal spending.

Source: WHO Statistical Information System

The key difference in the health care infrastructure between the U.S. and the other countries presented (the BRICs excluded) is that while the U.S. government appears to spend an ample amount on health care, there is also more than double the expense coming out of the private sector. This expense would only seem justified if there is either a structural need for higher health care expenses and/or the health care services are much better in the U.S.

This third table looks at some key health indicators for the same countries as above with the exclusion of the BRICs. As you can see, the U.S. has the highest adult mortality rate, mortality rate due to non-communicable diseases, and obesity rate. Our obesity rate is truly off the charts. The U.S. is below average in alcohol consumption and tobacco use. The obesity rate is the only factor of these which may suggest there is a systemic need for higher health care expenditures in the U.S. However, one may argue that the high obesity rate is an indicator of a problem with the system in general.

Source: WHO Statistical Information System; data definitions available upon request.

In the next table, we look at the number of hospital beds and physicians per 10,000 residents as a proxy of the level of service. This is clearly not the only way to measure service, but it does provide a reasonable snapshot of whether or not the higher spending in the U.S. actually results in more bed or physicians. It does not.

Source: WHO Statistical Information System

Health care outcomes are difficult to measure. Life expectancy at birth is lower in the U.S. when compared to the other top countries. If you consider the obesity problem a symptom of poor outcomes (or poor prevention) rather than some sort of disease or epidemic, than that would also point to a less effective system in the U.S. Infant and neonatal mortality rates are higher in the U.S., but so is the adolescent fertility rate which may explain the disparity.

All in all, it would appear that the public/private mix in the U.S. does not appear to provide the level of service or outcomes which would warrant the higher expenses that we have here. Reform is needed in this country as much of the inefficiency, in my opinion, is the result of regulation and legislation.

Loose Ends... Vol. LIX

2009-09-07T09:55:00.000-04:00

Welcome to a holiday morning version of Loose Ends.

Posts were a little slow again this past week, but I am doing research behind the scenes. I also will be traveling this week, so the drought may continue.

I ranted against Glen Beck this past week a bit and want to elaborate on this point a bit. In response to a comment at United Liberty where my article was cross-posted, I further explained my disappointment that Beck has not continued his promising evolution to a true independent, liberty-minded member of the media. It should be noted that Rush Limbaugh has been a guest on his TV show a few times recently. That is no good.

Further, his rhetoric blasting the "radical Marxists" in the White House and the abundance of "czars" is also disturbing. While certain members (and "czars") of the administration very well may be Marxists, this alone does not make them radicals. In fact, basic Marxist principles are quite common. Also, if Marxists are de facto radicals, then what label should be applied to libertarians?

On a related note, Beck's week-long assault on Van Jones may have been a contributing factor to his resignation. Here is the story from Politico. The 9/11 Truth Statement of which Van Jones was the 46th signatory can be read here. Here is the full text of Jones's resignation statement.

*****

Congress will return to session this week.

Glen Beck Leaps Over a Large Fish

2009-08-31T23:35:00.000-04:00

I'm going to take a quick break from the health care discussion tonight to inform you that I have decided to officially remove my support for Glen Beck. While some of you may ask, "what took you so long?", I'm sure there are others who wonder why I'd abandon Beck.

I first saw Beck when he was on CNN Headline News and found him mildly entertaining, somewhat refreshing, and the least bad of the rest of the right-wing talk show hosts. I was cautiously excited when he arrived at Fox News as his neo-conservative rhetoric had recessed. He had also taken to be very critical of the bailouts and expanded his anti-GOP stance.

His emergence on Fox News along with his book Glen Beck's Common Sense both served to increase my interest and support of his show. Yes. He uses hyperbole. He exaggerates from time to time and will take quotes out of context. However, he was asking the right questions and (feigning?) a disdain for the duopoly of our political system.

Then he became obsessed with ACORN. His views became increasingly focused against Obama and the Democrats. Sure, he still makes it a point to say that he opposed Bush on some things and that the Republicans are bad too. However, that has been looking more like grandstanding than his true ethos.

Last week, he dedicated his show to "The New Republic" by asking the "tough questions" that Americans should be asking. A recap is available here. This culminated Friday with his call to action: "In or Out 2010". Let's quickly analyze these five pledges that he asks that we ask our Congressmen.

1. I believe in a balanced budget and therefore will vote for a freeze in government spending until that goal is realized.

Balanced budget: check. I agree on this one. It sounds like a GOP policy.

2. I believe government should not increase the financial burden on its citizenry during a difficult economic times, therefore I will oppose all tax increases until our economy has rebounded.

I'm no fan of taxes. However, my issue with taxes comes primarily due to the fact that I believe spending of all sorts is out of control. I do believe that if the government is spending that we do need taxes (duh). I am opposed to massive deficits and borrowing which is nothing more than inter-generational theft. I regret to admit that I'd prefer tax increases at this point (more on that in the future). This also sounds like classic supply-side Reaganomics.

3. I believe more than four decades of US dependence on foreign oil is a travesty, therefore I will support an energy plan that calls for immediately increasing usage of all domestic resources including nuclear energy, natural gas and coal as necessary.

I do agree that our dependency on foreign oil (and oil in general) is a dangerous recipe for our future. I also support the exploration of alternative energy sources as well as expanding nuclear power and leveraging our existing fossil fuel resources. National energy policy is a subject that is too big to discuss here, but Beck's position is essentially a re-write of the Republican policy. All he is missing is "drill, baby, drill!"

4. I believe in the sovereignty and security of our country and therefore will support measures to close our borders except for designated immigration points so we will know who is entering and why. I will vehemently oppose any measure giving another country, the United Nations, or any other entity power over US citizens.

One of Beck's favorite subjects. In fact, this subject is the one that he and other conservative talk show hosts tend to hang their hat on to show that they are not Republican operatives. I do believe that we must maintain our sovereignty and avoid international legislation. I also believe that illegal immigration is an issue, but it has more to do with the welfare state than anything else.

5. I believe the United States of America is the greatest country on earth and therefore will not apologize for policies or actions which have served to free more and feed more people around the world than any other nation on the planet.

Oh boy. Here we go. Phrases like "greatest country on earth" and "will not apologize" are disgusting. There is no rational basis to support such broad general claims and unabashed arrogance does not help. While the U.S. has done a lot for other countries, we have also done a lot of harm around the world. Further, his comment that we have fed more people around the world stands in stark contrast to his opposition of feeding people in the U.S. using government money. This is not-so-thinly veiled neo-conservative rhetoric.

I think Beck has jumped the shark. Don't get me wrong - I'm glad that he has allowed libertarian voices on his show. However, the more excited he gets, the more he sounds like Sean Hannity crossed with Michael Savage. It's not entirely bad. But, it makes me wonder if it's part of a GOP strategy to co-opt libertarians into the party via a backdoor.

Loose Ends... Vol. LVIII

2009-08-30T23:16:00.001-04:00

Election results are coming in from Japan as they held their elections for the House of Representatives, the lower house in the legislative Diet. It appears the the Democratic Party of Japan has won in a landslide which will almost certainly lead to the installment of Yukio Hatoyama as Prime Minister. This is a crushing defeat for the Liberal Democratic Party who has been the ruling party since November of 1955 (with minor exceptions).

The DPJ appears to have gained 195 seats while the LDP will lose 177 seats (there are 480 seats in the House).

The DPJ ran largely on a platform of reform with a challenge to the status quo. Assembled via the mergers of several anti-LDP parties over the last few years, the DPJ lacks a cohesive political ideology. Instead, they will seek to stimulate the economy, push for government reform, and advocate more socially liberal positions shaking of the stiff and stuffy conservatism of Japan's past.

This will be an interesting story to watch as the new ruling party establishes its international policies - particularly in regard to the United States. It is also worth noting that the Japanese hold a significant amount of U.S. debt. It has been rumored that the new party may be less interesting in buying or even holding such a large volume. With many campaign promises for free government services, a liquidation of U.S. Treasuries may be a strategy for the new government.

Read more here, here and here.

*****

I read this story today about a New Hampshire court ruling that a ten-year old girl must attend public school. This is obviously a discouraging ruling, so I went ahead and read the judge's order. The case is not cut and dry, but it contains some disturbing attributes.

The girl's parents are divorced. The mother currently home-schools the child and the father does not agree that this should be continued. A counselor and a guardian ad litem have concluded that the girl is progressing well in terms of education and aptitude. She already attends public school for some classes, including drama, where she receives social interaction. However, they expressed concern that the girl is too rigid and adult-like in her religious beliefs. She receives religious instruction from her mother.

Since the parents could not agree on schooling and the counselor and guardian ad litem both feel that the child could benefit from increase social interaction (including an exposure to other systems of belief), the judge ruled that the girl must attend public school. This is still distressing. However, it raises an interesting aspect of state intervention which I had not thought of before. When there is a dispute between parents who are divorced, the court can and does intervene in parenting decisions. If the parents were still married, there is no doubt that this would never be an issue for the state unless it could be determined that the child was being harmed.

*****

I have a few more articles which I'll prepare on the health care debate culminating with policy recommendations (instead of just complaining). Nicole is also working on some very interesting research which will be on its way soon!

Human Needs and the Social Safety Net

2009-08-29T19:00:00.000-04:00

This article will be the third installment in a discussion on health care/insurance reform. In this first entry, I argued that insurance, in its true form, is not a public utility. Insurance businesses can become "too big to fail" and thus proper regulation is necessary. That was followed by a discussion on rights and the role of the state in protecting, preserving and granting rights. My conclusion was that health care rights are positive claim rights, and thus it would be dangerous for the state to legislate a right to health care.

Health care is a very important issue. It is full of emotion. People's lives are at stake. This cannot be ignored when analyzing the role of the state in such an issue. While insurance should not be a public utility nor should the state sanction positive claim rights, that, in my opinion, does not close the issue. The concept of human needs must be explored.

When I first began to think about this from a human needs perspective, I asked myself how one could define human needs. My first inclination was to define these basic needs as food (including water), clothing and shelter. My second inclination was to do some research on the subject. After a quick review of the subject area of needs, I found Maslow's hierarchy of needs to be worth a review.

Maslow published his work in 1943 and this is still widely considered as the seminal work in the field. Maslow proposes a hierarchy of five tiers of needs beginning with physiological needs. These physiological needs must be met for human survival. These needs are breathing, homeostasis, water, sleep, food, sex, clothing and shelter. This seems like a logical list and, with a few possible exceptions, the human cannot survive without them. The the next three tiers round out what he describes as "deficiency needs" beginning with safety and security, then social needs such as love and belonging, and finally esteem and respect. Once the individual has met all of their deficiency needs, they seek self-actualization.

Health care can be viewed primarily as a need of safety and security. This, according to Maslow, is one level above the physiological needs. It should be clear that the state should not impede the individual from pursuing their needs. In this sense, there is an overlap between needs and rights. Your right to pursue health care and security or your right to retain your shelter and food would be classified as negative claim rights. The state should protect these rights by not allowing them to be taken from you by another person (or by the state itself).

But, if an individual has a deficiency in one of their physiological needs, what role should the state play to ensure the provision or attainment of these needs? To force another to provide for those with a deficiency would be a violation of the rights of the one who is forced. However, it is important to understand what happens to the individual who does not have their basic needs met. It is not a stretch to conclude that when humans face a deficiency in their needs (especially physiological needs) that they may be more likely to react violently and/or threaten the security of others.

This issue introduces the concept and the need for a social safety net. A social safety net is a set of structures by which those who have a deficiency in their needs can seek assistance in having those needs fulfilled. There is a definitive economic benefit to those who have to provide to those who have not. Putting aside morality and ethics (which are not universally defined and thus should not be legislated), the provision of services to meet the physiological deficiencies of others helps to serve ones need for safety and security. So, does the state have the obligation to provide a social safety net?

My short answer is yes. However, that is not the end of the discussion. This must be a limited function which should only fill in the gaps where the private sector (mostly via charity) is inadequate. It also must not extend past the point where the cost is burdensome to those who simply seek to maintain their security via the provision of such a social safety net. The role of the state must also be carefully limited to those truly in need of the most basic services. While it is tempting to expand the public social safety net to fulfill higher-level needs, the principles of private funding and protection of negative claim rights must remain.

Does public universal health care reach the standard of necessitating state support in the social safety net? No. However, we should ensure that access to basic and emergency care is available to all. We should also strive to find ways to make this inexpensive, effective, and easily accessible. As we cannot expect a social safety net to provide everyone a 3000 square foot house with a half-acre of land, a personal chef, and a free wardrobe from Macy's refreshed annually; we certainly cannot expect the social safety net to provide "high-quality" or "best-in-class" health care for all.

Rights and the Health Care Debate

2009-08-27T00:50:00.001-04:00

A few days ago, we discussed the concepts of insurance and public utilities. In order to advance the discussion on the health care debate, it is important to analyze the proper role of the state in the provision of health care. We'll start with a discussion on rights.

The concept of rights is complex and, unfortunately, somewhat subjective. Western philosophy and political theory have struggled with the concept for centuries. Merriam-Webster's dictionary defines rights as "qualities (as adherence to duty or obedience to a lawful authority) that together constitute the ideal of moral propriety or merit moral approval." That is a mouthful and doesn't help much. It is fair to say that the concept of rights is subject to broad interpretation and can be applied to many things. Thus, it is important to explore different types of rights - especially as it pertains to those which should be granted and/or protected by the state.

The English monarchy established one of the first and most influential documents which pertained to the relationship between rights and the state. This document is the famous Magna Carta which established that the King was bound by the law and that free men had certain rights which could not be violated by the monarch. This laid the groundwork for future constitutional law and an expanded discussion of rights during the Age of Enlightenment.

Arguably the most influential of these philosophers was John Locke. His work on the social contract, natural rights and the relationship between society and state were central themes to the Declaration of Independence. While the document holds no legal authority in the United States, the words express the circumstances and principles under which the nation was founded. As it relates to the concept of rights and the state, no sentence summarizes their thoughts better than this:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty and the pursuit of Happiness.

The United States also ratified the Bill of Rights (the first ten amendments to the Constitution) shorty after ratification of the Constitution itself. The inclusion of such a bill of rights was the subject of much debate amongst early political leaders due, in large part, to the differing viewpoints on whether the federal government needed to explicitly acknowledge rights which were viewed by most as natural.

The theory of rights has been explored by philosophers and political scientists; one such method of distinguishing different types of rights is by the definitions of positive and negative rights. Negative rights are defined as those which prohibit the action of one upon another in regard to a particular right. Positive rights are defined as those which obligate or require the action of one upon another in regard to a particular right.

A simple and relevant example which would describe such a distinction can be explained as follows. A negative right to life would imply that you cannot kill someone else. A positive right to life would imply that you are required to preserve the life of someone else. Notice that negative rights generally prohibit action by protecting someone whereas positive rights generally obligate action.

A different way to describe rights is by defining rights as either claim rights or liberty rights. Claim rights are defined as those which obligate others to support the attainment of the right for the individual. Liberty rights are defined as those which give the individual the permission or freedom to the right. This may seem like the same thing as positive and negative rights, but there is a difference.

To illustrate, one can define rights using both methods. A positive liberty right gives you permission to do something. A negative liberty rights gives you the permission to refrain from doing something. A positive claim right obligates someone to do something for you. A negative claim right obligates someone to refrain from doing something to you.

Let's turn to health care for a moment. Is health care a right? Well, sure. Anything can be a right. However, it's important to understand how one would classify the right to health care. This simple right to health care would imply that no one can prevent you from receiving health care. On the surface, this appears to be a negative claim right. This is incorrect. If health care must be provided, then this acts as a positive claim right on those who provide health care.

Health care is not free. It is a service. The treatment of health care as a right would create a positive claim right on either those who provide the service at no charge or on those who are forced to pay for the service that someone else receives. These are the facts. It is my position that positive claim rights should not be enforced or legislated by the state. If the state is allowed to legislate positive claim rights, then there is no conceivable end to the scope of government.

This is not the end of the debate. My intent in this entry is only to explore the nature of rights and the concept of health care as a right. In my next health care installment, we will review the idea of human needs and the role of the state in fulfilling those needs.

A True American

2009-08-25T23:05:00.000-04:00

I'm watching the health care forum hosted by Rep. Ron Kind (D-WI) and was inspired to transcribe the comments of one of his constituents:

I have three brief points I would like to make.

Number one: I am concerned about a once free people, a once brave people. Never trade freedom for security or you will lose both. Representative Kind, I heard you say that in these debates we should respect one another. With that advice in mind, I would like you tell Nancy Pelosi that we are not un-American. I would like you to tell Harry Reid that we are not hate-mongers. I would like you to tell your fellow Senators and Congressmen that we are not a mob, we are not Nazis, we are not the Ku-Klux-Klan, and we have nothing in common with the likes of Timothy McVeigh. We are Americans simply exercising our Constitutional rights.

Also, please tell your community-organizing President to get used to an organized community.

And finally, point number three, I'm going to quote a very wise man, one C.S. Lewis:
Of all the tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better under robber barons than under omnipotent, moral busybodies. The robber baron's cruelty will sometimes sleep. His cupidity may at some point be satiated. But those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.

-Jerry Brogden, Colfax, WI

Well said, Jerry. It is not un-American to stand up for what you believe in without having to be connected to criminals. Free speech is a wonderful thing no matter your opinion.

Loose Ends... Vol. LVII

2009-08-23T23:59:00.000-04:00

I hoping to be back in the groove with posts and have a full Loose Ends tonight.

I'd like to start off by recommending this article on why the current economic situation cannot be solved with prescriptions from any of the modern economic theories over at Jesse's Café Américain. It's a very good read.

*****

Next, I have two items on Rep. Barney Frank (D-MA). Frank held a town hall meeting (available here) back in Massachusetts this week. I have only seen clips so far and have it recorded on my DVR. Frank usually makes for some entertaining, if frustrating, sound bytes.

And speaking of Barney Frank sound bytes, he was quoted in the Boston Globe this week saying, "I've always said that the American dream should be a home - not home ownership." You can read the entire article here which discusses a shift in the Obama policy away from home ownership. There is a lot of talk on what Frank has said and when he said it. I came across this particular quote in this article on Market Ticker which was accompanied by a video of Frank in 2005. One priceless quote from the video:

But those who argue that housing prices are now at the point of a bubble seem to be missing a very important point. Unlike previous examples, where substantial excessive inflation of prices later caused some problems, we are talking here about an entity, homeownership, homes, where there is not the degree of leverage that we have seen elsewhere. This is not the dot-com situation. We had problems with people having invested in business plans for which there was no reality and people building fiber-optic cable for which there was no need. Homes that are occupied may see an ebb and flow in the price at a certain percentage level, but you will not see the collapse that you see when people talk about a bubble.

It is fun to find quotes from the past where a politician says something that is contradicted or proven wrong at a later point. Frank clearly gets the housing bubble wrong here. However, on the point of home ownership, we should read the next few lines of the same speech:

So those of us on our committee in particular will continue to push for homeownership... I also want to express... a very important point that sometimes gets overlooked. Homeownership is an important part of our policy, but it is not the entire housing policy of the Federal Government; nor is it the entire housing need of the Nation. Some people will never own. There will be people who choose not to own; there will be people who for their economic circumstances will not be able to own. And there is no conflict between promoting homeownership and recognizing that decent, affordable rental housing will also be very important indefinitely for tens and tens of millions of Americans.

While Frank missed the bubble and advocates public policy in favor of home ownership, he clearly stated in this speech that it cannot be achieved by everyone.

Source: THOMAS - Congressional Record, June 27, 2005, Page H5182-H5183.

*****

Sen. Edward Kennedy (D-MA) is very ill with brain cancer. In an acknowledgment of his mortality, Kennedy sent a letter to the powers-that-be in Massachusetts on July 2. The letter can be viewed here.

Kennedy shows the world that he is still a politician by asking that state law be changed to allow Gov. Deval Patrick (D) to appoint an interim Senator in the event of Kennedy's resignation or death. Massachusetts passed a law in 2004 which removed the Governor's authority to make such an appointment.

The text of the law in its current form can be found here. The legislature passed the law with a 2/3 super-majority after Republican Governor Mitt Romney vetoed the bill which was intended to remove his power in case Sen. John Kerry (D-MA) were to defeat George W. Bush for the Presidency.

Insurance and Public Utilities

2009-08-22T14:50:00.000-04:00

As I begin to explore the health care debate, I think it's important to start with a review of insurance. Health insurance is the central point of the debate; President Obama has even modified his language to speak of the need for "health insurance reform" rather than "health care reform." To illustrate, visit the official site of the White House or read this letter from Senior Advisor David Axelrod.

The basic concept of insurance is simple and widely used. As a formal financial product, it is actually relatively new. One can imagine the early beginnings of insurance when a community of citizens would offer to provide mutual assistance to each other if one had a disastrous event such as a fire. If you are interested in the history of insurance, check out this Wikipedia entry.

A simplistic description of insurance products in the private sector can be described as a service to pool risk. A group of people collectively pay a regular fixed amount (or premium) to the insurance provider who agrees to pay the costs of a certain event (or, in some cases a set amount of money). Economically, it makes sense that the price of the premiums would be correlated with the expectation of a payout from the insurance company - measured by the probability of the event happening times the size of the potential payout. There is a whole field of study on this called actuarial science.

Now, let's turn to the concept of a public utility. I have previously discussed my limited support of public spending for large investments in infrastructure which serve a public good and the returns on investment are either difficult to measure or take a long time to be realized. This is often the case in situations which economists call a natural monopoly. Typical examples of such public utilities would be road construction, power grids, and sewage lines.

Should insurance (of any type) be viewed as a public utility? Let's examine the characteristics. Insurance does not necessarily require a large investment in infrastructure up front with long, slow returns. The biggest start-up risk to an insurance provider would be a series of unlikely events which would require significant payouts before reserves could be established through the collection of premiums.

Here's a simple example... let's say that there are a group of people who want insurance to protect against an expensive and unlikely event. We'll pretend there are 100 potential insurance customers who, for the purpose of illustration, must pay $1000 if they roll a 1-1-1 on a toss of three dice every Saturday. The odds of any one given individual in any given week needing to pay $1000 is 1/216. While this is unlikely to happen, the people want to avoid having to pay the $1000 so they seek insurance. The insurance provider offers to pay the $1000 on behalf of their customer in return for a monthly premium of $30. The potential customer will pay $360 year to protect them against a $1000 dollar loss which, over the long run, is likely to happen once every four years. In this simple example, the insurance company has about a 0.1% of going bankrupt (with no other expenses other than those from claims) and will operate with a 25% margin. This hardly qualifies as a public utility nor would it lead to a natural monopoly.

But, they could go bankrupt. Bad luck, tighter margins, or poor risk estimates could all plague an insurance company. And, when an insurance company does go bankrupt, they will not be able to pay out on claims which will leave consumers, who have paid their premiums, without coverage. Should the government backstop this risk? I would say that they should not since both parties entered the insurance contract as a way to manage risk. The consumer should know that there is a small risk that they will not be covered by their insurance if the provider itself goes bankrupt.

The analogous situation in our simple of a community joining together in an agreement of mutual assistance in the event of a disaster would be when the community itself suffers a disaster. If all of the houses burns down, then everyone will have to do the equivalent work of rebuilding their own home. This is, in essence, the same problem as "too big to fail" which has been so hotly debated in the world of financial services over the last year.

In summary, I think it is clear that insurance does not meet that basic description of a public utility as I have defined. This, in my opinion, does not make it a good candidate for public investment. There are risks; there are even "too big to fail" risks. These risks can and should be managed via regulations, competition and/or transparency for consumers and investors. It should not be turned over to the state.

Loose Ends... Vol. LVI

2009-08-16T21:47:00.001-04:00

Nothing tonight...

Wait and See With Skepticism

2009-08-12T23:23:00.002-04:00

I have to admit (again) that Obama is one talented speaker. I'm watching his town hall from Tuesday in Portsmouth, NH. He is smooth, makes jokes, and is very comfortable with the audience. I do promise to weigh-in on the whole health care and insurance debate sometime soon... but not tonight.

There has been a lot of talk on the cost of this legislation. Obama has repeatedly insisted that he will not sign a bill which will add to the deficit or debt. He has also promised not to raise taxes. I cannot fathom how all the pieces of this puzzle can come together without promises being broken.

This has been a fascinating, disturbing and frustrating debate. It will continue for several more weeks if not months. It seems to me that it will be unlikely for things to cool off before this is all over. I wasn't paying much attention before two years ago, but I don't recall a time in my lifetime where the civil divide was this deep.

Loose Ends... Vol. LV

2009-08-09T23:14:00.000-04:00

I hoping posting will return to a more normal rate this week. Here's a handful of thoughts on various items from the week...

File this first one under "Are You Kidding Me?" I just read this story over at United Liberty. A kid had her lemonade stand shut down by the authorities because she didn't have a permit. I don't believe that children should have some special exemption from the law. The article quotes the authorities as saying that the vendor laws must be enforced because "otherwise we'll have people on every corner." Would it be that horrible to allow people to sell things on street corners? Whose rights are being protected by these laws such that is requires government force?

*****

On a similar note, the City Council (of Indianapolis) will be considering an anti-panhandling law this week. I wrote about laws set up to manage people's pet peeves in this post. While it may be annoying to have people ask you for money, are these panhandlers infringing on your rights? Do we need to take their freedom of speech away because they are a nuisance?

*****

I just love this quote:

I expect to be held responsible. But I don't want the folks who created the mess to do a lot of talking. I want them to get out of the way so we can clean up the mess. I don't mind cleaning up after them, but don't do a lot of talking.

These words are from Barack Obama at a recent campaign rally - story here.

*****

How about this one:

There is a lot of disinformation about health insurance reform out there, spanning from control of personal finances to end of life care. These rumors often travel just below the surface via chain emails or through casual conversation. Since we can’t keep track of all of them here at the White House, we’re asking for your help. If you get an email or see something on the web about health insurance reform that seems fishy, send it to flag@whitehouse.gov

Yes, this is from the White House blog. Read it here. Fox News has a story here featuring Judge Andrew Napolitano.

*****

I caught a little bit of an FCC meeting on the National Broadband Plan on CSPAN. Watch it here. There are a lot of details at Broadband.gov. This is a subject I'd like to address in a more thorough article at some point as it is a subject that gets right to the heart of some fundamental questions regarding the role of government such as: public utilities, freedom of the press, education, the democratic process, tax policy and more.

****

Lastly, former President Bill Clinton flew to North Korea and came home with two U.S. journalists who were imprisoned there. They received full pardons. I did not understand at first why Al Gore was at the press conference; then he spoke. I hadn't realized two things: the two journalists worked for Current TV; Al Gore co-founded and chairs the media company. I found that interesting.

One last point on this story... there must have been some good work done behind the scenes (haven't researched this - I'm sure there's plenty out there) as there is no way Bill Clinton would have gone there is failure was a possibility.

It's Happened Again

2009-08-06T22:24:00.000-04:00

Well, as you may know if you've been following, I've been traveling. Posts have been thin lately. On top of the travel, I've been getting increasingly frustrated to the point of not knowing what to say. I feel much like I did last September when I posted "The Silence of Anger" (it's not a hall of fame post).

I promise to gather my thoughts and get some more content out here, but at this point I am flabbergasted at the deplorable state of the media.

I've been watching MSNBC off and on this evening and I'm not sure I can even continue to do that. Their entire evening line-up is so woefully in the bag for the Democrats that it's disgusting. This passes for news in our country. It's not just tonight; it's an instance of the straw breaking the camel's back. The discussion of how the "right-wing extremists" are organized by "big money" and "lobbyists" to create a faux-grassroots ("astroturf") movement against the health care reform legislation is beyond hypocritical.

First of all, freedom of speech is supposed to be protected in this country. So, MSNBC has the right to take such a position. However, it borders on fraud to present yourself as a news orgainization or refer to yourselves as journalists in such circumstances. The people who show up to these town halls have every right to say any stupid or idiotic thing that they want to say as well.

Now, for Fox News... the other side of the coin (and go ahead and throw in most "right-wing" radio hosts - certainly Limbaugh and Hannity). Again, these folks are not journalists nor are they a "fair and balanced" news outlet. Yes, they do "balance" MSNBC, but that's a different story. They are nothing but another operator in mediatainment and both of them are for big government (don't believe what Fox News says otherwise).

One last mini-rant: Glen Beck. He's been getting more irritating lately. He's obsessed with ACORN (which is actually relevant given my issue with MSNBC's portrayal of right-wing activists - ACORN does the same thing on the left) and has been straying from his libertarian-leaning and somewhat anti-Republican rhetoric as of late and moving back toward the typical Fox/Hannity/Limbaugh/GOP garbage that he previously leaned towards before his latest book.

Ok. No links... just a rant tonight. I'm still here.

Loose Ends... Vol. LIV

2009-08-02T23:15:00.001-04:00

I'm way behind on the news of the world, so I don't have much to say here tonight. I'm on a mini-vacation for a few more days which could equate to more or less posts. Not sure which.

Brzezinski on Iran and Israel

2009-07-27T09:13:00.000-04:00

While getting ready this morning, I caught an exchange between Pat Buchanan and Zbigniew Brzezinski (and Carl Bernstein) on Morning Joe. They were discussing the Iranian nuclear threat.

BRZEZINSKI: [if Israel attacked Iran]... we would be drawn into a war with Iran. With all of the consequences which I've already mentioned: more American casualties in Afghanistan, probably renewed violence on a large scale in Iraq, a huge spike in the price of oil - and, therefore, huge burdens on the American people. So, this is something, in my judgment, which to be avoided... [it's] not necessary... One, we do not know if the Iranians are building nuclear weapons. All we know is that they have an ambitious nuclear program... And secondly, we can certainly deter them because we have deterred much bigger countries than Iran...

BUCHANAN: I agree... but the Israeli position is [Iran] cannot be allowed to continue this program and they certainly cannot be allowed to get nuclear weapons. That's an existential threat to the Israeli nation. Now, do you believe? (interrupted by Brzezinski)...

BRZEZINSKI: Look, this "existential threat". What does that mean? The moment the Iranians get their first bomb, they're going to commit national suicide for the pleasure of blowing up Tel-Aviv? I mean that's propaganda; that's not analysis. The fact of the matter is [that] Israel has a nuclear deterrent of its own. If it cannot deter the Iranians, why does it have a nuclear deterrent? In that case, why don't they stage a big propaganda ploy and announce that they'll give up their nuclear weapons if the Iranians categorically and credibly give up their nuclear program if they have a weapons program? The fact of the matter is [that] Israel has a couple hundred nuclear weapons, so what are we talking about here, this "existential threat"? Probably Israel, with its two hundred bombs, is more of an existential threat to Iran than Iran is to Israel.

BUCHANAN: Do you think Netanyahu is bluffing [by threatening Iran]?

BRZEZINSKI: I don't know if he's bluffing... the point I'm making is the American national interest would be very adversely affected. And, thinking about world affairs, my point of departure is the American national interest. And that is also the point of departure for the President, for the Secretary of State, and, hopefully (laughs) for the U.S. Congress...

BUCHANAN: Is that the point of departure for Mr. Netanyahu?

BRZEZINSKI: [No.] So, we have to use whatever leverage we have to make it very clear to him that he shouldn't be damaging American national interest. And I don't think it's in Israel's interest to damage us. Because if we are damaged in the long run, then Israel's future is in jeopardy... without the U.S., Israel would not be as safe as it is today.

BERNSTEIN: What's so interesting about this discussion is how different it is from what we read and see in the press. When you get in to a factual discussion, we see that it is not these ideological, easy simplifications. And, we got to get away from that in our public debate and happily we've done it here. But the print press and television press has got to get away from the simplification.

Great (temporary) display of honesty by the press (Bernstein) and a member of the world power elite (Brzezinski) in discussing the outright propaganda which is spewed from the press and our Congress (captivated by AIPAC) when discussing the subjects of Iran and Israel.

Loose Ends... Vol. LIII

2009-07-26T23:54:00.000-04:00

In the last week, the mainstream media has begun to pick up on the program trading activity which I touched on in my article on Goldman Sachs last weekend. (I know I had nothing to do with it!)

Have a look at this article from London's Financial Times or this one from the New York Times. A lot of the mainstream publicity has come from a report Themis Trading (their blog). As I've noted before, I first learned about this from Zero Hedge.

*****

I'm beginning to formulate my thoughts on health care. I've noticed that the phrase "health insurance reform" is being used instead of "health care reform" lately. While this is an interesting change, you can be sure it is a subtle attempt at propaganda.

*****

I'm traveling again this week, so my posts may be light.

America at the Craps Table

2009-07-26T23:08:00.000-04:00

It has struck me as of late of how much focus is placed on a rising stock market. There is an equal amount of cheerleading focused on the economic recovery. Before I continue, I want to get a few disclosures out of the way. High unemployment is bad. People having their 401(k)s or pensions lose significant value is not a good thing. I want this economy to turn-around and find stability. Unfortunately, in my view, in order to find stability we will have to endure pain. I don't think it is masochistic of me to prefer a painful reset which will pave the way for long-term sustainability.

Before I continue, let me explain a bit further. We have experienced consistent growth in GDP over the years, but over the last thirty years (and especially the last fifteen years) much of the growth has been fueled by debt. There is much to be researched and written on this subject and I will save it for another time. The key point is that debt can only expand so much relative to real economic growth. It is healthy for debt to default leading to winners and losers. We have employed a "kick-the-can" policy which only delays the inevitable and makes the future pain that much worse. This is why I'd prefer to experience this pain now rather than later.

So, what does this have to do with craps? Well, in craps there are two primary bets. One can bet on the "Pass" line or one can bet on the "Don't Pass" line. If you bet on the "Pass" line, then you are betting that the shooter (the person rolling the dice) will win. A bet on "Don't Pass" means that you are betting that the shooter will lose. If you've ever played craps, you'd recognize that people almost universally bet "Pass" and then cheer on the shooter.

There are a ton of other things that one can wager on in craps, but these are the basic bets. When the shooter begins the game, the dice are rolled with three possible outcomes. If a 2, 3, or 12 is rolled, the shooter loses. On a 2 or 3, the "Don't Pass" bets are paid even money; on a 12, the "Don't Pass" bets push with the house (they just get their money back). If the shooter rolls a 7 or 11, then the shooter wins and the "Pass" bets are paid even money. In all other cases, the "point" is made. The "point" becomes the target score for the shooter. The game continues until the shooter makes the point (by rolling the same number as the point) or until he/she "craps out" by rolling a 7. The "Pass" bets are paid even money if the shooter makes the point and the "Don't Pass" bets are paid even money if the shooter craps out.

I've taken the liberty of creating my own little chart to show the probabilities of winning with either a "Pass" or "Don't Pass" bet:

As you can see, the "Don't Pass" bet has a slight edge over the "Pass" bet. While the completely rational decision is to never play craps since the odds are against you, it is more rational to bet on "Don't Pass" than it is to bet on "Pass". Yet, people nearly universally bet on "Pass".

I think it's easy to recognize that this mentality is due to wanting to cheer for the shooter and go with the crowd. We see this with the stock markets where mainstream media commentators and even the President of the United States gleefully cheer for the Dow to go higher. Keep in mind that some people do lose money when the markets go higher and other would like to have stocks stay low so that they can buy low after saving more money.

On a secondary note, most of the stock market activity is nothing too different than gambling anyway. Market participants engage in "trading" where they seek to buy and sell stocks and derivatives for quick profits. A much smaller percentage of market volume is a result of investing.

So, while Wall Street gambles in the markets, most Americans seem to watch or place their bets in a attempt to cheer on an ever-growing market. It's not much different the visitor to Vegas who sidles up to the craps table, places chips on the "Pass" line and cheers on the shooter.

House Leaders Warn Obama on Signing Statements

2009-07-21T22:16:00.000-04:00

George W. Bush received a lot of criticism from a lot of people. That is an understatement. Much of the criticism echoed a sentiment that his administration repeatedly operated with a great deal of hubris. One area where this hubris was evident in his use of Presidential signing statements.

Signing statements have been used by Presidents for a long time. However, it has been recent administrations which have begun to push the envelope. A signing statement is authored to accompany the passage of legislation. Presidents have used them to challenge the constitutionality of legislation as well as indicate the administrations' plans to downright ignore certain provisions therein. This has been viewed by many as an attempt by the Executive Branch to ignore the divisions of power vested in the Constitution.

Well, Obama, who was highly critical of his predecessor's use of signing statements, has, like just about every other President, decided to build upon his predecessors' interpretation of executive power. However, some people, even Democrats are openly critical.

With the passage of H.R. 2346, the famous "Omnibus Bill", Obama issued a signing statement which included the following (full text here):

However, provisions of this bill within sections 1110 to 1112 of title XI, and sections 1403 and 1404 of title XIV, would interfere with my constitutional authority to conduct foreign relations by directing the Executive to take certain positions in negotiations or discussions with international organizations and foreign governments, or by requiring consultation with the Congress prior to such negotiations or discussions. I will not treat these provisions as limiting my ability to engage in foreign diplomacy or negotiations.

Barney Frank (D-MA) and three other members of the House who chair various committees authored a letter to Obama expressing their concern with his use of a signing statement with this bill. Consider the following (full text here):

During the previous administration, all of us were critical of the President’s assertion that he could pick and choose which aspects of congressional statutes he was required to enforce. We were therefore chagrined to see you appear to express a similar attitude.

I'm not going to attempt to render any of my own constitutional judgment to Obama's actions. However, I am very skeptical of any attempt to usurp the Constitution's intended balance of powers. Kudos to the Democrats willing to call out Obama on the same.

For your further reading pleasure, consider Obama's March 9 memo regarding how the administration plans to use signing statements.

Happy Anniversary

2009-07-20T21:43:00.002-04:00

A self-congratulatory "Happy Anniversary" to Stop Taking Soma! Nicole and I started this website one year ago. I'm a bit surprised that we're still going.

Your feedback and comments are welcome as to how we can make this site better. I hope to be able to continue to inform and challenge readers on current events, politics, economics and history.

Thanks to all loyal readers (I know you're out there)!

SIGTARP Report Tomorrow

2009-07-20T21:41:00.000-04:00

Neil Barofsky is the Special Inspector General for the Troubled Assets Relief Program (SIGTARP). That may be difficult to fit on a business card.

Barofsky is making headlines today on two fronts. First, he has released his latest report from the office of SIGTARP entitled "Survey Demonstrates that Banks Can Provide Meaningful Information on Their Use of TARP Funds" - dang, that's another mouthful. The report is forty-four pages long and can be read here. It is difficult to say exactly how TARP funds are used since money is fungible. If I give you twenty dollars and you go to the grocery store and spend ninety dollars, you probably won't be able to tell me precisely how you spent the twenty dollars.

However, Barofsky's report comes with the following summary:

Although most banks reported that they did not segregate or track TARP fund usage on a dollar-for-dollar basis, most banks were able to provide insights into their actual or planned use of TARP funds. Over 98% of survey recipients reported their actual uses of TARP funds.

Barofsky is set to testify before the House Committee on Oversight and Government Reform tomorrow morning. This report, however, is not the bombshell. The news media apparently has an advance copy of his prepared testimony where he states the the total cost of our government bailouts could reach... wait for it...

$23,700,000,000,000.00 - that's $23.7 trillion, almost double the U.S. GDP.

The story can be read here. I'm looking forward to his testimony which I'm sure will be covered on CSPAN.

Now, in the spirit of full disclosure, which we feel is important, it should be noted that this will likely not be the cost of the bailouts. Without seeing the details, I'm sure this covers loan guarantees which will not likely lose 100%. For example, in many cases the Treasury, FDIC, or Fed has provided a loan guarantee for a bank (such as Bank of America or Citigroup). In these circumstances, the government has promised to pay back loans to creditors if the bank is unable to do so. A complete loss on the guarantee would only be recognized if the bank went bankrupt without repaying any of their guaranteed debt. The Treasury Department has been quick to point this out and paint Barofsky's report as hyperbole.

Nonetheless, $24T is outrageous.

Loose Ends... Vol. LII

2009-07-19T22:17:00.001-04:00

Volume fifty-two... almost a year in the books...

Shortly after I finished writing my article on Goldman Sachs earlier today, I came across this article by Paul Krugman of the New York Times. It was written a few days ago and is focused on the large profits reported by Goldman Sachs earlier this week and the large payouts it is giving its employees. I don't often agree with Krugman as frequent readers can attest, but I felt he was fairly spot-on in this piece. There is a place for the big boys of finance in an economic system. But, much of their money is made by operating as a large hedge fund with the special privileges of a government-backed bank.

*****

David Nolan, founder of the Libertarian Party, issued an open letter to the members of the Libertarian National Committee as they prepared to kickoff their meetings this weekend in St. Louis. In it, Nolan challenged the LNC to put aside "internal bickering" and focus on their message. He calls for a return to principles and bold action. The following quote is worth consideration:

As I see it, the Libertarian Party has gone far astray from its original mission. Somewhere along the way, our commitment to being The Party of Principle was replaced by a shallow, opportunistic goal of "winning elections now" -- any election, anywhere. Principles be damned, according to the proponents of this vision. We should back off from "scary" positions, tone down our rhetoric, find out "what voters want," and tailor our message to what they want to hear.

This is, in large part, why I am not a member of the Libertarian Party. There is much talk of the need for the GOP to return to a "big tent" strategy. The LP, already a pretty small tent, has prominent members calling for a smaller tent. The LP is fractured, mismanaged, and desperately in need of either leadership or dissolution.

In response to Nolan, Indiana LP Executive Director Chris Spangle offers a rebuttal on his blog. Spangle offers that if the LP is not interested in applying political science to win elections, then they may as well become a think tank and debate political theory. Well stated, Mr. Spangle. I could not agree more. Based on my own informal research to-date, the Indiana LP is perhaps the most well-organized and practical chapter of the LP in the country. This is the reason why I still may choose to join the LP.

One last point... I find it interesting that Nolan and other prominent members of the LP embrace Ron Paul so much when Paul is a committed Republican. Paul is by no means a radical libertarian in practice. He plays the game enough to get elected. He's willing to compromise staunch libertarian principle and act as a member of a statist party.

Goldman Sachs

2009-07-19T15:10:00.001-04:00

I was twenty-eight years old before I had even heard of Goldman Sachs. In retrospect, I suppose that's a bit of surprise considering they are one of the largest and most influential companies in the world. On the other hand, I never had much interest in the financial markets when I was younger nor any sort of fascination with Wall Street.

Since the beginning of the height of the financial crisis last September, I have become much more aware of both the markets and Goldman Sachs. I've noted before on this site that Goldman Sachs has not only been the recipient of taxpayer largess via AIG but also has a network of former employees in influential government positions. The so-called mainstream media has been relatively quiet on these facts, but the chatter is beginning to pick up.

Glenn Beck of FoxNews and Matt Taibbi of Rolling Stone have recently begun to expose the tangled web of Goldman Sachs to mainstream audiences. This video of Max Keiser, linked via Taibbi's blog, has begun making the rounds in cyberspace. A follow-up can be viewed here. I'll grant you that Beck, Taibbi, Keiser and others who rant against Goldman Sachs may be considered to be peddlers of hyperbole, but the facts remain true.

Beyond the network of power wielded by former Goldman Sachs executives, there is the question of market manipulation. Taibbi's article places much of its focus on their ability to create and/or take advantage of economic bubbles. However, two other stories which I've been watching consider the potential for market manipulation today.

Goldman Sachs participates in what is called program trading. The New York Stock Exchange (NYSE) defines program trading as "a wide range of portfolio trading strategies involving the purchase or sale of 15 or more stocks having a total market value of $1 million or more." The NYSE publishes a weekly report summarizing the volume of program trading and providing data on the top fifteen most active firms. Goldman Sachs is usually number one on the list. In the most recent report, one can see that Goldman Sachs's program trading accounted for 7.7% of all volume on the NYSE. The report which covered activity for the week of June 22-26 was initially missing Goldman Sachs. An NYSE press release explained that the omission was due to "an NYSE system error" which seems a tad implausible to me. This is given that most of the data was correct in the first report (other than missing Goldman Sachs). That week, their program trading activity accounted for 16.9% of all NYSE volume.

The volume of program trading volume was brought to my attention by the blog Zero Hedge. These guys are animals when it comes to following the financial markets and I have learned a lot by reading their blog. I do not know enough about how the markets truly work to know whether or not these volumes of program trading should be a concern. However, another story, which I first read on Zero Hedge, indicates that Goldman Sachs and the FBI are concerned.

Sergey Aleynikov is a former Goldman Sachs employee. He was arrested on July 3 at Newark's Liberty International airport. Aleynikov is accused of stealing "proprietary, high-quantity, high-volume trading" software from Goldman Sachs. As this article from Bloomberg indicates, U.S. Attorney Joseph Facciponte told the court that "[t]he bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways." (More details in this Bloomberg story.)

Now hold on just a second. If this software is in the wrong hands it could be used to manipulate the market? I suppose Goldman Sachs does not use this software to manipulate the market? How can that be determined? This is their own admission! This must be investigated!!

Meanwhile this week, Goldman Sachs reported record earnings of $3.4B in the second quarter of 2009. This is after receiving billions in TARP money, billions more in backdoor bailouts via AIG, massive trading profits from program trading operations using software which might be capable of manipulating the market, and a first quarter profit which was mysteriously missing a month full of writedowns.

Employee compensation at Goldman Sachs for 2009 has risen to record highs with the average employee earning $386,429.

Small Steps to Big Government

2009-07-18T18:28:00.000-04:00

I was out driving today and came to a major intersection. There were several men at each spoke walking up and down the streets, along the medians, between lanes, asking for donations. I'm not sure what they were collecting money for.

I found myself thinking, "this is a little annoying, do they have a permit for this?" Gasp! A permit?! Why should they need a permit? Why do they need the government's permission to try to raise money for their cause.

I quickly realized the error and inconsistency of my thoughts. Sure, I might find it annoying to be bothered while I'm driving. In fact, it was all a bit silly anyways since they did not even "accost" me. They were not doing any harm to anyone. They were not damaging property. There was no violation of basic rights. As such, there is no reasonable need for a permit even if it were required.

There are things in life which may annoy us. But, unless these things are forced upon us and violate our basic rights, there is really no need to create laws or regulations. The overwhelming power of the government and system of laws has become second nature to us. It has come to the point where people are quick to desire a pet law to help manage a pet peeve.

It may seem like a small thing. But, the government has no business with such things. We have allowed government to use force to make our lives easier rather than protect and defend. The U.S. was not meant to be this way. The expansion of democracy through the Progressive Era, a Supreme Court which has endorsed a Living Constitution, and an electoral system designed to protect incumbents and special interests have all contributed to a society which prefers to live by the creation of new laws rather than by freedom and liberty.

Next time you find yourself thinking that we need a new law or that a particular good or service needs to be taxed, take a step back and reflect. Are you trying to manage a pet peeve with a pet law, or are you truly trying to protect your rights to life, liberty or property?

Thinking About Democracy

2009-07-18T12:45:00.002-04:00

The title to this entry suggests a long entry. I'm going to keep this one short. On the way to England, I finished reading H.L. Mencken's Notes on Democracy. It's a fascinating read and I wanted to share some of my thoughts.

Mencken was one of the most prominent journalists of the early 20th century in the U.S. As a resident of Baltimore, he lived through both WWI and WWII as a German-American. His views were often controversial and this book is an amazing piece of work - especially considering it was published in 1926.

I highly recommend this book to anyone; however, I must warn you. First, it is difficult to read. Mencken's prose is very colorful, his vocabulary deep, and the book is filled with contemporaneous references (which are explained well in the notes). Second, it is a scathing attack on democratic principles. He does not necessarily offer alternatives and is quite pessimistic. However, it is eye-opening and well argued.

Read it if you dare.

Loose Ends... Vol. LI

2009-07-13T06:41:00.002-04:00

I'm in the UK right now and just got to my hotel. I'm not sure how much I'll be able to post this week until I get back to the States.

There have been some interesting stories on Goldman Sachs, the progression of the "Audit the FED" bill, and other goings-on. I'll try to at least get some links up to some articles and provide some commentary on this before the week is out.

On Funding Israel

2009-07-12T11:46:00.000-04:00

On Thursday, the House voted on an appropriations bill for the State Department. H.R. 3081 provides funding for the department's operations including foreign aid. It checks in at a healthy 200 pages.

I was not following this bill or the action around it, but did catch Rep. Virginia Foxx (R-NC) on CSPAN later that afternoon. The full text of her remarks follows (courtesy of THOMAS):

Mr. Speaker, the vote that I took this afternoon on H.R. 3081 was one of the toughest votes that I have had to take in this House since I have been here in my 4 1/2 years. The problem with the bill and with the decision that had to be made is because the bill contained funding for aid to Israel, our best friend in the world.
I have always been and will continue to be an extremely strong supporter of Israel. Israel has always been a good friend to the United States, and the people of this country and the people of Israel share the same values. However, the bill had so many flaws that it made it very difficult for a pro-life fiscal conservative such as myself to vote for the bill despite my very strong support for Israel.
The bill, when emergency supplemental funds were not taken into account, was still 32 percent more than the regular fiscal year 2009 appropriations. I am taking the liberty of using some of the figures from my colleague, the gentleman from Georgia (Mr. Price), which were also presented today on the floor in terms of explaining the bill that we voted on this afternoon.
We are facing a fiscal crisis in this country. This administration and this Congress, led by Speaker Pelosi, are spending this country into a terrible, terrible situation. We are mortgaging our children and grandchildren's future with excess spending; and it has to stop somewhere.
Had this bill merely contained the funding for Israel, it would have been very easy for me to have supported it, although I was quite concerned that the bill reduced the funding for Israel by 7.2 percent below last year's funding level and 23.3 percent below the request. But, as I said earlier, the total bill had an increase of 33.8 percent compared to last year.
One of the most troubling increases in this bill was a 20 percent increase to the United Nations Population Fund and a 19 percent increase to International Family Planning. The United Nations Population Fund aids China's one-child policy, coercive abortion, and sterilization. International Family Planning goes to organizations that promote and provide abortion services through International Planned Parenthood Federation and Marie Stokes International.
In addition, the Democrats had rejected four cost-cutting Republican amendments that had been presented which could have made this bill a lot more palatable to the 97 Republicans who voted against it.
Another problem with the bill is that there was a false assumption that the Obama administration will live up to its promise of no more war supplementals for Iraq and Afghanistan. The President has gone back on every promise that he made during the campaign. He has already asked for a supplemental this year, says it was a carryover from last year, but that won't happen again. However, before the ink was dry on the amended full committee report of this bill, the chairman of the Defense Appropriations Subcommittee, Congressman Murtha, publicly stated that another supplemental is necessary to fund the troops because of the low fiscal year 2010 Defense allocation.
So the promise was that all of the money for the war was going to be here and we wouldn't have to do more supplementals. That isn't going to happen.
This bill also avoids making hard fiscal choices about spending abroad while we face a financial crisis here. This is not the way we should be going. We should be funding our friends and our allies. We should be helping Israel which is the only true democracy in the Middle East and who stands by us year after year, day after day. But funding things like abortion and international family planning is not the way to go.

My translation... "Even though I voted against this, I still love Israel. Please continue to fund my campaign despite this vote!"

Interestingly, Foxx is the Republican who Ron Paul (R-TX) most often votes with. He obviously voted against the State Department funding along with 96 other Republicans and 9 Democrats.

The Failures of Central Planning

2009-07-12T01:01:00.000-04:00

The talk of a second stimulus is beginning to pick up. It should go without saying that I do not support any additional "stimulus" - but, regardless of my views on the pros and cons, the whole debate needs to be viewed from a different perspective. Instead of Republicans and Democrats debating policy, or economists discussing multipliers and the GDP gap, we should focus on the failure of central planning.

Let's back up for a moment... We need to begin the discussion with the role of government. On one extreme there is anarchy. On the other extreme there is dictatorship under a collectivist economy. I have previously described myself as a minarchist. I'll concede to the anarcho-capitalists out there that constructing an intellectually consistent argument for even a small government is difficult without accepting some form of central planning. However, the scope of government in the U.S. (and just about everywhere else) goes well beyond my definition of "small" making the minarchist/anarchist debate a trivial one in this context.

Any government beyond the smallest of governments implies a degree of central planning. Government cannot operate on its own. It must extract the wealth of its citizens via taxes to function. Government expenditures then "re-distribute" that wealth towards services or projects which it deems necessary (i.e. for the common good). Please note, I am not equating all government spending with socialism. But, nearly all forms of government spending do involve wealth redistribution. The general populace supports this activity because they consent to central planning provided it has the check of democracy. Volumes could be written to discuss this, but it is not the focus of this article.

Why do we support central planning? There can only be two logical explanations. First, it may be conceded that the government has more information and employs the best personnel in order to make the best decisions. This may manifest in decisions on how to spend or invest money to stimulate or enhance the economy. Examples include the FED managing interest rates, true Keynesian stimulus spending, and all other programs designed to correct the free market. Central planning may also be supported on the premise that the government can do more for the common good than the free market. This implies that individuals will not support the common good and intervention is required to provide charity and overcome issues such as the tragedy of the commons.

Now let us review the economic stimulus package - the American Recovery and Reinvestment Act. $787 billion has been committed to save the economy and drive investment. There has been more exposure lately that it has failed to deliver on its promises. The premise of the stimulus was that it would create or save jobs. This is a difficult thing to prove, but is generally done by examining actual results versus a preset forecast of what would happen in the absence of the action. This is precisely what both the White House and the independent CBO did to analyze the potential impact of the stimulus.

Let's review this graph which was supplied by Christina Romer and Jared Bernstein - the Chair of the Council of Economic Advisers and the Chief Economist to Joe Biden. This came from a report which was provided before Obama's inauguration in advance support of the stimulus package.
Source: "The Job Impact of the American Recovery and Reinvestment Plan" (linked above) with my own markups

This graph and my notes (click to enlarge the graph) provide only two possible conclusions. Either the administration seriously overestimated the impact of the stimulus or they underestimated the severity of the recession and the impact it would have on unemployment. Their estimates (which were echoed by the CBO and the Democratic Congress) indicated that the stimulus would have shaved one-half percentage point off of unemployment by now. Additionally, they estimated that unemployment would be under 8%. Given that unemployment is well over 9%, the latter estimate can be dismissed as error. So, this implies that their original forecast for unemployment was either way too optimistic or the stimulus has failed having a severe negative effect.

Did our central planners fail to recognize the severity of the recession? Or did they implement a stimulus package which has made the economy much worse than expected? They will tell you that they underestimated the depth of the recession. But, does this really make you feel more comfortable? Should this lead us to place more faith in central planning?

This is not a "blame Obama" missive. Administration after administration, Republicans and Democrats alike, have all failed in their central planning adventures.

Politicians Can Control the Weather

2009-07-08T23:24:00.002-04:00

They at least hope that they can control the weather.

The leaders of the G8 nations (Canada, France, Germany, Italy, Japan, Russia, U.K., and U.S.) are currently meeting in Italy for their annual get together. They released a 40-page declaration today which included the following:

We reaffirm the importance of the work of the Intergovernmental Panel on Climate Change (IPCC) and notably of its Fourth Assessment Report, which constitutes the most comprehensive assessment of the science. We recognise the broad scientific view that the increase in global average temperature above pre-industrial levels ought not to exceed 2°C.

Cool. I wish I could control the weather.

Gordon Brown and Spending

2009-07-08T22:47:00.000-04:00

If you are a frequent reader of this blog, you know that Nicole and I like to watch Prime Minister's Questions on CSPAN. If you are not familiar, it's a half hour show where members of Parliament get to pepper the Prime Minister with questions. Lately, I've found it amusing how braggadocios Brown is when it comes to spending.

I found this interchange between Brown and Conservative Party leader, David Cameron, particularly amusing:

Cameron: Will the Prime Minister accept that his own figures show that once the Treasury's own forecast for inflation is considered, that total spending will be cut after 2011?

Brown: No, Mr. Speaker, total spending will continue to rise and it will be at a zero percent rise in 2013-14.

Parliament:

I can't get enough of the laughter. Great stuff.

Gordon Brown is an absolute neo-Keynesian fool. Paul Krugman must be so proud of him. Britain's budget is in worse shape than ours. The deficit is now forecasted to be 12% of GDP (current official estimate in the U.S. is about 9%) and public debt may grow to over 80% of GDP of the coming years. The U.K. does not have the benefit of having its currency as the world's reserve currency either. In other words, printing money is much more dangerous than it is here. Government debt (or the printing of pounds) will only serve to steal potential capital which could be used for investment and stave off long-term fiscal and employment issues.

Brown has also lambasted Cameron and the Conservatives on the basis that they want to cut spending since they believe that unemployment will grow until 2014. He calls them the "party of unemployment" - funny stuff. Ridiculous, of course... but funny. A new report quotes Gordon Brown in advance of the G8 summit saying,

If we do not take the necessary action now to strengthen the world economy and put in place the conditions for sustainable world growth, we will be confronted with avoidable unemployment for years to come.

Now, Brown doesn't state that unemployment will grow until 2014, but he clearly believes that only the government, via massive spending, can take the action to avoid such a calamity. This does sound to me that he does not believe that his own plans for Keynesian stimulus will be enough - he needs coordinated spending efforts from his G8 partners.

Loose Ends... Vol. L

2009-07-05T23:42:00.000-04:00

Indiana passed a budget this week and avoided a partial shut down of state operations. I have not been able to find a nice summary of the budget; I'll keep looking. In the meantime, I'd like to offer the data in the table below.

Source: Bureau of Economic Analysis, Sunshine Review, and Stats Indiana

As you can see, government expenditures have been increasing since 2000. The amount of spending as a percentage of state GDP has also been increasing. Not surprisingly, per capita spending has also been on the rise. This data is in nominal dollars and not adjusted for inflation. I'll keep looking for a good summary of what was passed and how it stacks up related to this data.

*****

California did not pass a budget to close the gap. They have effectively run out of money and are issuing IOU's (registered warrants) instead of cutting checks. You can review the dire situation here at the Controller's website.

This is an important story to follow. There is no comfortable way to close the massive budget deficit in California. They have delayed taking significant steps and are on the verge of default. It's game of chicken between the state and Washington D.C. The talk of California receiving a bailout should heat up soon.

*****

Happy Independence Day! (A day late.)

Have a read of the Declaration of Independence here.

Third and Final Update on S&P Forecast

2009-07-04T17:07:00.000-04:00

Independence Day has arrived. It is the day of reckoning for my S&P 500 forecast. (You can review my last update here which has links to the original post and first update if you are interested.)

The S&P closed yesterday at 896.42 which leaves my prediction as a failure. I was calling for the S&P to trade in the 600-640 range by this time. We hit a low of 666.79 in March and rallied back to current levels. I admit and accept defeat.

The latest version of the S&P earnings forecasts can be found here. The picture is about the same as it was in our last update on Memorial Day. The earnings forecast for 2009 now sits at $55.61. The trailing twelve months at the end of June yielded earnings of just $40.15 which implies a huge trailing P/E ratio of 22.9. It is difficult to say whether this is too optimistic at this point or not.

However, despite all the talk about the economy being in the early stages of recovery, I think we are still in for some tough times. California is bankrupt, commercial real estate is about to implode, the housing market has not yet hit bottom, huge volumes of Alt-A and other adjustable mortgages have yet to reset, and we continue to dig ourselves deeper into debt. This is not a typical recession.

Tegucigalpa, We Have a Problem

2009-07-04T15:23:00.000-04:00

I've been keeping an eye on the situation in Honduras which evolved this week. If you have not heard, there is political unrest due to an alleged coup d'etat in the small nation in Central America. President Manuel Zelaya was captured by the military and exiled on June 28. The action has been nearly universally condemned. Here's what's gone down...

Zelaya was elected on November 27, 2005 and took office the following January. In Honduras, the President is limited to serving just one four-year term. Zelaya is a member of the Liberal Party of Honduras (PLH); the National Party of Honduras (PNH) is the other main party in Honduras and leans to the right. The Honduran Constitution explicitly prohibits amendments which would allow for the President to serve more than one term. Zelaya was calling for a referendum in November to allow for the convening of a Constitutional Convention. Despite his low approval ratings, it was considered to be a ploy by which Zelaya would seek an amendment which would allow for Presidents to serve multiple terms.

Latin America has a history powerful heads of state which rule for long periods of time. These often are formed as or devolve into dictatorships. Conscious of this danger, the Honduran Constitution goes as far to revoke citizenship and remove from office anyone who even suggests such an amendment (Article 42, clause 5 and Article 239; link in Spanish). Zelaya wished to move forward with a non-binding vote on June 28 on such a referendum. The military oversees security and logistics for elections in Honduras and, thus, Zelaya had charged General Romeo Vasquez Velasquez to conduct the election. Vasquez refused on the grounds of its perceived illegality; Zelaya had him removed from command.

On June 28, Zelaya awoke surrounded by members of the military who detained (arrested or kidnapped depending on your point of view) him, put him on a plane, and dropped him in San Jose, Costa Rica. The international firestorm began as reports of a military coup began to surface. Meanwhile, the Honduran Supreme Court and the National Congress both indicated that they had authorized the so-called coup.

There is a whole lot more to the details if you are interested. The Wikipedia entry, as usual, is a good source. Although, the neutrality is currently disputed as the events are unfolding.

I have found it very interesting that the international response has been, as far as I can tell, in unanimous support of Zelaya. The Organization of American States issued a resolution to "condemn vehemently the coup d'etat staged against the constitutionally established government of Honduras" - full text here. The United Nations also passed a similar resolution. The Supreme Court of Honduras has fired back (full text in Spanish) stating that the removal of Zelaya was constitutional and in accordance with the rule of law.

It seems clear to me that questionable measures have been taken by the military and those who have ousted Zelaya. There does not appear to be due process and some of his supporters have apparently been detained. However, the overwhelming international support for Zelaya is nonetheless interesting. I'm not sure what I'm missing. This is a Honduran affair and, despite the use of the military, has been a relatively peaceful change of power (no deaths reported) which appears to be consistent with the law in Honduras. It appears to me that the international community is quick to support any existing head of state provided that the government is deemed to be legitimate on the international stage. The international power structure will likely always favor the status quo in these circumstances.

I also did not know of the Organization of American States. This body has adopted the Inter-American Democratic Charter which

"[recognizes] that representative democracy is indespensible for the stability, peace, and development of the region, and that one of the purposes of the OAS is to promote and consolidate representative democracy, with due respect to the principle of non-intervention."

This sounds quite noble. However, promoting democracy has not always been very consistent with non-intervention - perhaps that is the point of calling both principles out in this introduction. Consider the short description of non-intervention from Wikipedia: "one state cannot interfere in the internal politics of another state." Or consider this more detailed summary from a Chatham House white paper quoting a 1970 UN declaration:

No State or group of States has the right to intervene, directly or indirectly, for any reason whatever, in the internal or external affairs of any other State. Consequently, armed intervention
and all other forms of interference or attempted threats against the personality of the State or
against its political, economic and cultural elements, are in violation of international law.

The United States is a member of the OAS; so is Cuba and Venezuela. It's hard for me to take any of this seriously. The U.S. hardly practices non-intervention. I'm not sure I'd consider Cuba or Venezuela to be sterling examples of representative democracy. In the worlds of politics and international relations, there is no shortage of hypocrisy.

Loose Ends... Vol. XLIX

2009-06-28T23:21:00.002-04:00

Not much to say tonight... rough week for celebrities with Ed McMahon, Farrah Fawcett, Michael Jackson, and Billy Mays all passing away. I am reminded how much Jackson's music rules and awed at his dancing talent. He was a troubled man - that is clear.

Turmoil continues in Iran. I still have more that I want to read before I write much about what's going on there. The health care debate is going to pick up even more over the coming weeks. Despite the House passing ACES (the cap and trade bill), it is far from over since the Senate will likely modify the bill significantly before passing it (if they pass it).

We'll watch and report.

John Boehner's Failed Gambit

2009-06-27T00:33:00.001-04:00

In case you are interested in the decisions being made on Capitol Hill and not too caught up in the Michael Jackson circus, I'd like to provide a summary of a very interesting day in the House. As you may have heard, the House passed H.R. 2454, the American Clean Energy and Security Act of 2009. This is also referred to as "ACES", "Waxman-Markey", or the cap and trade (cap and tax) legislation.

The short summary of the bill says that it will "create clean energy jobs, achieve energy independence, reduce global warming pollution and transition [the US] to a clean energy economy." The official long summary is quite long. The GOP will tell you that it will destroy our economy.

This legislation was officially introduced on May 15, but has been long anticipated since this session began in early January. Nancy Pelosi (D-CA) had vowed to get the bill passed before the July 4 recess in the House. As I had mentioned on this blog a few weeks ago, the bill checked in at 932 pages at the time. Henry Waxman (D-CA), chair of the House Committee on Energy and Commerce, admitted that he had not read the whole bill and hired a speed reader to read part of the bill in a committee hearing in an act of disturbing arrogance. See the link above for more details.

Over the last few weeks, the Democrats have been preparing to get the bill ready for a vote on the floor. It had been reported that the vote would be a close call. That brings us to the events last night and today. The powerful House Committee on Rules published H. Res. 587 late last night (well, early this morning) which laid out the nature of the debate which would be had today on the House Floor.

For those of you not familiar with the Rules Committee, I think it is arguably the most powerful committee in the House - more so than Ways and Means or Appropriations. The Rules Committee determines which bills will go to the floor of the House for a vote. They determine which amendments to the bill may be considered on the floor and the nature in which they may be considered. Finally, they determine the amount of time which will be given to debate for a particular bill or amendment. As you can see, they can pretty much control what gets done. Pelosi knows this (so has just about every other Speaker since the late 1800's) and uses it to its fullest advantage. Oh, if that's not enough, the Rules Committee is the only committee with significantly disproportionate representation from the majority party (9 D's and 4 R's).

So, H. Res 587 was introduced last night for consideration today. They unilaterally adopted an alternate version of H.R. 2454 in the form of H.R. 2998 with an additional amendment submitted by Waxman. They also rejected all alternate versions and amendments proposed by the Republicans except that of Randy Forbes (R-VA) in the form of H.R. 513 as an alternate version to ACES (in its new 2998/Waxman form). Did you follow that?! The full report from the committee can be read here (caution, it is 349 pages).

Why is the report 349 pages? Because it contains the text of the new Waxman amendment which was to be adopted as part of the official version of the bill for vote today. So, if you are keeping track... a few weeks back the bill was 932 pages; H.R. 2454 in its most recent form was 1092 pages; the alternate version of H.R. 2998 was 1201 pages and introduced on June 23 (three days ago); and the Waxman amendment was 310 pages of changes to the 1201 page version and was introduced last night. John Boehner (R-OH), the Minority Leader, indicated that the text became available at 3:09AM this morning.

Boehner, of course, felt this was all ridiculous. I'm not fan of Boehner, and the GOP has played the same dirty tricks in the past when they were in control, but I supported him in his frustration today. As mentioned earlier, the Rules Committee sets the amount of time allowed for debate on the floor of the House. Parliamentary procedures in the House lead to strict accordance to these time limits except when it comes to the Speaker, and the two Leaders. The three leaders are given as much time as they'd like as a matter of custom. For important bills, they usually are given the last word when each side only has one minute of time left. Boehner took full advantage today.

When Boehner began his speech in opposition to the legislation, he attempted to make it clear that voting on a 1200 page bill with a 300 page amendment made available only hours earlier was ludicrous. He made his point by speaking for over an hour reading "highlights" from the Waxman amendment which his staff no doubt had furiously gathered throughout the day. And he read a lot of "highlights" to the point where he addressed text on probably 100 of the 300 pages of the amendment. Waxman attempted to stop the virtual filibuster, but was unsuccessful (view the full 5+ hour debate on C-SPAN here or the Waxman interchange on YouTube here).

Once Boehner finally stopped talking, Pelosi gave a quick speech. The Forbes amendment was defeated, and the revised Waxman/ACES/2454/2998 bill passed narrowly (219-212). The vote details are not yet available on GovTrack - I will link them when they become available. If you can't wait, you can scroll through the details here.

This was an interesting saga, but I have to chime in here with some opinion. I found this episode disgusting. I find it disgusting that the majority had the audacity to push forward a huge bill which could not possibly have been read by those who voted for it. In fact, I would be surprised if even one member of Congress actually read the entire 300 page amendment, let alone the 1200 page bill. Further, having attempted to read legislation like this in the past myself, it is nearly impossible to comprehend legislation like this without having a copy of the U.S. Code sitting nearby since countless references are often made to existing laws.

If you seriously think that your Congress is representing you, then you are sadly mistaken. This goes for members of both sides of the aisle because the culture in Washington is the problem. Both sides have their staff with the assistance of lobbyists and other lawyers of special interest groups draft massive legislation which is not likely read by the members of Congress. Most bills are filled with provisions which are unrelated to the core legislation. There are countless other gimmicks and tricks used to get things done. All of it is played up on a grand stage where the two sides point fingers at each other - usually accusing the other side of intolerable acts which they committed themselves when in the reverse position (i.e. the GOP accusing the Dems of abusing their power as the majority when that is precisely what they did when they had power).

Please, I urge you to reflect on this. I can't square this circle. I can't reconcile how one could honestly think that this legislation was passed with open eyes. This is just one example. The Sunlight Foundation is an organization which is working to fight for more transparency in Washington. One of their initiatives is "Read the Bill" which would seek to urge/require Congress to wait at least 72 hours to vote on a bill after being published. This is not enough, but it is a start. I signed the petition tonight.

Interstate Commerce? Seriously?

2009-06-25T22:28:00.002-04:00

Did you know that one of the areas most significantly affected by so-called "hate crimes" is interstate commerce? Well, according to S. 909, introduced into the Senate by Sen. Ted Kennedy(D-MA) it is. The bill, titled the 'Matthew Shepard Hate Crimes Prevention Act,' states the following as point 6 of Section I:

(6) Such violence substantially affects interstate commerce in many ways, including the following:

(A) The movement of members of targeted groups is impeded, and members of such groups are forced to move across State lines to escape the incidence or risk of such violence.

(B) Members of targeted groups are prevented from purchasing goods and services, obtaining or sustaining employment, or participating in other commercial activity.

(C) Perpetrators cross State lines to commit such violence.

(D) Channels, facilities, and instrumentalities of interstate commerce are used to facilitate the commission of such violence.

(E) Such violence is committed using articles that have traveled in interstate commerce.

First of all, I have something of an issue with the whole "hate crimes" thing in that I don't understand why "hate crimes" have to be singled/separated out into their own legislation. A "hate crime" is still a crime; it's already a crime regardless of the motivation behind it. Sure, it's a horrible thing to beat up, or even kill, someone because you don't like the color of their skin but shouldn't it be horrible regardless? I could even see the case made that nearly all crimes, regardless of type or motivation, are rooted in "hate" in some shape or form.

But that's not really the point of the section I quoted above...I'm of the opinion that if a particular section/item/paragraph in a relatively "scholarly" piece of writing (I would consider written legislation to qualify here) makes you laugh out loud after reading it, it's probably garbage. There are, of course, exceptions--for instance, some things are clearly intended to be funny when read. I feel fairly confident in my assertion that written U.S. legislation is not typically used as a vehicle for overtly humorous statements, so I think it's safe to say that I take what I read in bills from the Congress to be intended to mean what they say.

It is in this light that I would ask the reader to consider the above quoted section--I will say that upon my first reading, I burst out laughing and felt certain that I had misread something. Interstate commerce?? Really? If hate crimes have such a significant impact on interstate commerce for the reasons they provide, I can hardly think of anything that WOULDN'T. I find this particularly interesting given the increasing encroachment of the federal government into the regulation of various activities by throwing out the justification that they "affect interstate commerce." This scares me--if the government can twist the issue of hate crime into something that impacts interstate commerce, there isn't much they can't.

Ooh...a conspiracy?!

2009-06-24T15:45:00.003-04:00

As you may or may not have heard, sometime last week it was reported (although not widely--I heard about it on Glenn Beck) that police in Italy had seized $134 billion in U.S. government bearer bonds from two "Japanese nationals" who were trying to smuggle them across the Italy-Switzerland border in the false bottom of a suitcase. According to the Guardia di Finanza, Italy's tax police, the seizure consisted of 249 "Federal Reserve" bonds of $500 million each and 10 "Kennedy Bonds" of $1 billion each. There hasn't been much else reported about this since except that both the Italian authorities and U.S Treasury have concluded that the bonds are counterfeit, the U.S. examining the certificates first via fax and then via internet images. The Treasury also issued a statement indicating that since there is only $105 million in Treasury bearer bond securities outstanding, $134 billion is obviously not possible. The only other thing I've heard is that the "Japanese nationals" who were caught with the bonds are believed to have been released.

Admittedly, I don't know a whole lot about "bearer bonds" and the accounting process that goes along with these but given that the Treasury says that there are only $105 million in outstanding bonds, it seems pretty obvious that these are indeed counterfeits. What I found even more interesting was Glenn Beck's assertion on one of his programs that he felt that the culprits, for a variety of reasons, wanted to be caught. This seemed strange to me and prompted me to do some more research on the whole situation, out of curiosity, and I happened upon something from the World War II era called "Operation Bernhard," that I had never heard of before. It casts this current situation in a bit of a different light...it's likely nothing but it was interesting nonetheless.

Operation Bernhard was a secret German operation during World War II whose goal was to produce a large number of counterfeit British currency and circulate it through Britain, thereby destabilizing the British economy. According to the wikipedia entry, it is the "largest counterfeiting operation in history" and has been the subject of many books and even a movie. The operation was named after its director, SS Major Bernhard Kruger, who organized it at a concentration camp and "staffed" it with camp inmates. Apparently, the plan was originally to drop the counterfeit notes out of planes flying over Britain but, after it was determined that this would not be feasible, the notes were eventually used by the Germans to purchase items and pay personnel. The entire counterfeiting plan never was fully realized and ended with the closing of the Sachsenhausen camp in 1945, but by this time the Bank of England had become aware of some of the counterfeit notes and called them "the most dangerous ever seen." The wikipedia article again states that by the time of the camp's closing, "the printing press had produced 8,965,080 banknotes with a total value of 134,610,810 pounds" and that the "notes are considered among the most perfect counterfeits ever produced, being almost impossible to distinguish from the real currency."

Reading about this really got me to thinking about what Beck had said about the two smugglers who were recently caught wanting to be caught. I don't know about anyone else, but when I think of "counterfeiters" I think of the mafia or a shady operation in back room somewhere (these could still be "large" operations) who want to be able to "get rich," not a government entity "authorizing," whether implicitly or explicitly, a massive counterfeiting operation with the goal of destabilizing the economy of a rival nation. I'm probably way off, but somehow this seems much more sinister.

So, what about this most recent incident? Well, there is already little confidence in the U.S. economy amongst most of the rest of the world. It seems to me that the discovery of a large-scale operation counterfeiting U.S. currency or bonds, or several large-scale operations--that the U.S. government essentially had no knowledge of--would certainly shake this confidence even further. Of course, there's probably still a great deal more to this story but if the government didn't know much about this before the seizure of the bonds in Italy it certainly seems possible that this counterfeit is likely in circulation in the U.S. already. I don't believe that the intent now would be to flood the U.S. with actual bogus paper bills but that such discoveries themselves would be enough today to help push the U.S. economy "over the edge" so to speak.

I admit that I myself find this unlikely but it's an interesting thought nonetheless. There are certainly some nations and/or governments who would likely have an interest in further disruption of the U.S. economy. And just to be clear, I'm not suggesting Japan--the "fact" that the culprits in this incident were reported to be Japanese has actually not been confirmed and even if they were, it's entirely possible they were working on the behalf of another entity. Anyway, I really just found the whole situation interesting and the new thinking about it that Operation Bernhard prompted. It's probably nothing, but you never know...

World Bank Sinks the Market... Really?

2009-06-22T20:30:00.002-04:00

Today was a rough day on Wall Street - at least for those who want to see stock prices go up. The latest report from the World Bank (a topic for another day) is being "blamed" for the sell off as their view on the global economy was dim.

The World Bank released the Global Development Finance 2009 report stating that global growth in GDP is estimated to be -2.9%. Their previous estimate was -1.7%. You can read today's press release here. The interesting phenomenon is that World Bank President Robert Zoellick had already let the cat out of the bag on June 11 in a speech in Washington. Read the press release here.

So, I'm a bit puzzled. Today's news was not really news. Yet, if you follow headlines like I do, you would think that this report was surprising and catastrophic triggering a stock market sell-off. Maybe I'm overreacting, but I think the media collectively decided to use this as an excuse to explain the lack of green shoots today.

On a semi-related note... if you were the owner of a company and had appointed a CEO to run the company on your behalf, wouldn't you feel a bit slighted, misled, or lied to if said CEO did not disclose that he had a liver transplant while on medical leave for the past few months? I would. But, that's just what happened with Apple CEO Steve Jobs. So much for market transparency.

Quit complaining...maybe give your Congressperson a hug instead

2009-06-22T20:23:00.002-04:00

I admit that I quite enjoy browsing through the GovTrack "Introduced Legislation" feed that I follow in my Google Reader...it's amazing some of the bills I see there (from title alone). Some of them I've pointed out in previous posts. Yesterday, I came across another that, after reading the full text, I feel that I am obligated to share it here in toto. The bill is H. Con. Res. 155 introduced by Rep. Emanuel Cleaver, D-MO.

Supporting the goals and ideals of 'Complaint Free Wednesday'.

Whereas the average person complains approximately 15 to 30 times per day, resulting in roughly 4,500,000,000 complaints spoken every day in the United States;

Whereas complaining keeps people focused on current problems stultifying their innate abilities to seek and create positive, harmonious solutions;

Whereas complaining has been shown by research psychologists to be detrimental to a person's physical and emotional health, relationships, and to limit their career success;

Whereas the 'A Complaint Free World' organization is to be recognized for its efforts to encourage people to redirect their minds toward more positive, constructive, and rewarding lives and for its goal to positively inspire at least 1 percent of the global population (60 million people) to become complaint free;

Whereas thousands of people across the United States, including many students, have already adopted the complaint free attitude; and

Whereas 'Complaint Free Wednesday' will be observed on the day before Thanksgiving, providing each person in the United States a day free from complaining in order to prepare for a day of gratitude: Now, therefore, be it

Resolved by the House of Representatives (the Senate concurring), That Congress--

(1) supports the goals and ideals of Complaint Free Wednesday;

(2) encourages each person in the United States to remember that having a positive life begins with having a positive attitude; and

(3) recognizes and reaffirms the meaning of Thanksgiving by asking each person in the United States to use 'Complaint Free Wednesday' to refrain from complaining and prepare for a day of gratitude.

Sigh...I find it sad that I'm no longer surprised to find this sort of thing as an official piece of legislation introduced in our Congress. A few notes--I found it quite amusing that the text of the bill makes it seem like the 4.5 billion "complaints spoken every day in the United States" is an outrageously large number when, compared with the huge numbers found in the recent relief and stimulus programs, it's really a drop in the bucket. Yes, I realize that there's not really a comparison between "complaints" and dollars but what I'm talking about is the undertone I detect there. Maybe I'm just nuts. I also thought it was pretty darn funny that they're encouraging us to "stop complaining" when I'm guessing the government is behind (in some fashion) most of the things that are complained about!

If you have some time, I'd highly recommend checking out the webpage for the aforementioned 'A Complaint Free World' organization...very amusing.

Loose Ends... Vol. XLVIII

2009-06-21T22:59:00.000-04:00

Another empty post tonight. I was struggling to come up with some meaningful items to discuss tonight. I've spent the last hour or so researching various aspects of the situation in Iran. An attempt to post anything of meaning on this subject tonight would be a dis-service to readers.

Happy Father's Day!

The Return of Doctor No

2009-06-19T21:03:00.000-04:00

Today, we saw the return of Dr. No in the form of Rep. Ron Paul (R-TX). Before the floor of the House today, Paul cast the only "Nay" vote in H. Res. 560; full text follows:

Expressing support for all Iranian citizens who embrace the values of freedom, human rights, civil liberties, and rule of law, and for other purposes.
Resolved, That the House of Representatives--
(1) expresses its support for all Iranian citizens who embrace the values of freedom, human rights, civil liberties, and rule of law;
(2) condemns the ongoing violence against demonstrators by the Government of Iran and pro-government militias, as well as the ongoing government suppression of independent electronic communication through interference with the Internet and cellphones; and
(3) affirms the universality of individual rights and the importance of democratic and fair elections.

On the surface, it may seem that this resolution is necessary to support democracy and condemn state-sponsored violence in Iran. After all, we all know that Mahmoud Ahmadinejad is pure evil (that is sarcasm). Why did Dr. Paul choose to vote against the resolution? Here is the full text of his statement in opposition:

I rise in reluctant opposition to H Res 560, which condemns the Iranian government for its recent actions during the unrest in that country. While I never condone violence, much less the violence that governments are only too willing to mete out to their own citizens, I am always very cautious about “condemning” the actions of governments overseas. As an elected member of the United States House of Representatives, I have always questioned our constitutional authority to sit in judgment of the actions of foreign governments of which we are not representatives. I have always hesitated when my colleagues rush to pronounce final judgment on events thousands of miles away about which we know very little. And we know very little beyond limited press reports about what is happening in Iran.

Of course I do not support attempts by foreign governments to suppress the democratic aspirations of their people, but when is the last time we condemned Saudi Arabia or Egypt or the many other countries where unlike in Iran there is no opportunity to exercise any substantial vote on political leadership? It seems our criticism is selective and applied when there are political points to be made. I have admired President Obama’s cautious approach to the situation in Iran and I would have preferred that we in the House had acted similarly.

I adhere to the foreign policy of our Founders, who advised that we not interfere in the internal affairs of countries overseas. I believe that is the best policy for the United States, for our national security and for our prosperity. I urge my colleagues to reject this and all similar meddling resolutions.

Paul has received the nickname "Dr. No" due to his frequent status as the sole objector to House legislation (often resolutions) while having a medical degree. Today's vote was already the fifth time in the 111th Congress (since January 2009) where Paul was the lone dissenter. A list of the previous four follows:

1. March 11, H. Res. 226 - Recognizing the plight of the Tibetan people on the 50th anniversary of His Holiness the Dalai Lama being forced into exile and calling for a sustained multilateral effort to bring about a durable and peaceful solution to the Tibet issue.

2. March 31, H. Res. 282 - Recognizing the 30th anniversary of the peace treaty between Egypt and Israel.

3. April 28, H. Res. 1243 - To provide for the award of a gold medal on behalf of Congress to Arnold Palmer in recognition of his service to the Nation in promoting excellence and good sportsmanship in golf.

4. June 2, H. Res. 489 - Recognizing the twentieth anniversary of the suppression of protesters and citizens in and around Tiananmen Square in Beijing, People's Republic of China, on June 3 and 4, 1989 and expressing sympathy to the families of those killed, tortured, and imprisoned in connection with the democracy protests in Tiananmen Square and other parts of China on June 3 and 4, 1989 and thereafter.

Flabbergasted

2009-06-17T22:42:00.000-04:00

That about sums it up.

Yesterday, Congress passed H.R. 2346 - the Supplemental Appropriations Act of 2009. Why am I so flabbergasted? Let me count the ways...

First, this bill provides over $100B in supplemental funding to continue the wars in Iraq and Afghanistan. It provides no substantive provisions which would serve as "strings attached" such as a timetable for troop withdrawal. Additionally, it provides (by my quick reading and research) a lot ($75B?) of funding to the International Monetary Fund (IMF) to assist in global bailouts and the like.

Second, I tried to research this bill in more detail so that I would be able to provide quality, objective insight to its details. This thing is a mess. It is long and riddled with changes from the original House version to the Senate version (which appears to be the one which the House agreed to yesterday). I unfortunately do not have the time to dedicate to this type of research.

Third, this thing originally passed the House with overwhelming bipartisan support on May 14. It then passed the Senate (after significant amendment) on May 21, again with overwhelming bipartisan support. Yesterday, the House voted upon the bill as referred by the conference committee. (My understanding of this is that the House voted on the Senate version as-is with no changes coming from the conference committee since there will be no additional vote in the Senate. I stand to be corrected on this point.) This time, the vote was pretty much on party line - passing 226-202. This flip-flop is bothersome. What suddenly drove almost all House Republicans to decide that the bill which they previously supported and received GOP support in the Senate in its current form to change their mind?

Well, that leads me to point number four. The GOP is now (after years of supporting the Bush administration) deciding that we cannot afford more spending on the wars in Iraq. Further, after supporting the IMF under the Bush administration (and in the Senate), the GOP has decided we cannot afford that any more either. Now, I happen to agree with the "Nay" vote, but this is the either the height of hypocrisy or a tacit admission of historical stupidity by many House Republicans.

On a related note, irritant number five is the response by House Democrats. Only thirty-two brave souls stepped away from the party line to oppose this bill. I'd love to spend the time to see how well this group matches up to those who opposed supplemental war funding under Bush. Actually, I'm more interested in seeing those who opposed Bush's requests but now support the same request from Obama. By the way, fifty-one Democrats opposed this bill back in May.

I'm sure there are more things about this that irritate me, but we'll leave it at that. I urge my readers to wake up, recognize that Washington is full of hypocrites who only want to play games and spend your money. Tell your friends. Demand change and vote your representatives out of office.

Loose Ends... Vol. XLVII

2009-06-14T23:13:00.000-04:00

It's now been ten days since Barack Obama's speech in Cairo. I've finally taken the time out to read the transcript - you can read it here. Obama focused on "a new beginning" between the U.S. and the Muslim world. He concentrated on seven key issues...

1. Violent Extremism: Obama stated that the U.S. is "not at war with Islam" and that the war in Afghanistan is a "necessity" while the Iraq War was one of "choice." I'm very concerned with his basic criteria for success in Afghanistan that "we would bring every [troop] home if we could be confident that there were not violent extremists in Afghanistan and now Pakistan determined to kill as many Americans as they possibly can." To me, this is an unachievable goal - especially, considering our policy to be at war in these countries.

2. Israel and Palestine: Obama called for a two-state solution with an independent Palestine living alongside Israel in peace. He called America's bond with Israel "unbreakable" and based upon "cultural and historical ties, and the recognition that the aspiration for a Jewish homeland is rooted in a tragic history that cannot be denied." Well, that makes it clear to me! This is the basis for our alliance with Israel? Despite the special relationship with Israel, Obama did call for Israel to put a stop to settlements in the West Bank. This placed Prime Minister Benjamin Netanyahu in a precarious position which he addressed in a speech this weekend (more below).

3. Nuclear Weapons: Obama, the leader of the country with the largest military budget and most nuclear weapons in the world, dreamed of a world with no nuclear weapons. He acknowledged Iran's right to pursue nuclear energy, stated that "no single nation should pick and choose which nation holds nuclear weapons," but said that Iran cannot have nukes (while not explicitly saying those words).

4. Democracy: Here Obama stated that "no system of government can or should be imposed by one nation by any other." Nice words, but I am skeptical that we will follow through on that.

5. Religious Freedom: Kumbaya stuff.

6. Women's Rights: More kumbaya.

7. Economic Development and Opportunity.

Overall, I thought it was a good speech, but will likely lead to undelivered promises. American relations with the Muslim world has been filled with tension for decades. One speech will not make a difference, but could lead to a new beginning. Obama addressed some of the issues which have led to the tension (such as our participation in the 1953 coup d'etat in Iran), but did not go so far as an outright apology. He also reiterated our commitment to the continuation of policies which have contributed to the tension. We will watch this as it unfolds with great interest.

*****

As noted, Israeli Prime Minister Benjamin Netanyahu delivered an important speech this weekend which addressed the way forward in Israeli-Palestinian relations juxtaposed against Obama's speech in Cairo. The full text can be read here. Netanyahu, generally considered more hawkish towards and less supportive of the Palestinians, stated he would support a Palestinian state. However, there were a lot of conditions which are unlikely. A summary can be read here.

*****

The special session is underway in the Indiana legislature with the key goal of passing a budget. I will try to follow this more closely over the coming weeks.

No smoking

2009-06-11T20:11:00.002-04:00

Today, the Senate voted 79-17 to pass H.R. 1256, AKA the "Family Smoking Prevention and Tobacco Control Act." This vote sends the bill back to the House for a vote there; if it's passed by the House it goes directly to President Obama to sign. The Senate version of the bill is quite similar to the original House version which passed 298-112 (21 no votes) so it seems rather likely that it will pass.

This is the federal government's latest attempt to essentially FORCE people to stop smoking, of course in a roundabout way. Unfortunately, it seems to me that the bill will likely pass and when it does, there will be yet another example of the government butting its way into all facets of our lives and telling us what to do...each passage of such a bill, I think, moves us closer and closer to socialism. And we're already too close...

In the name of "protecting children" and "protecting America," the bill will place tobacco products under the supervision of the FDA, who would be charged with evaluating the content of tobacco products and then ORDERING CHANGES to those deemed "a danger to public health." Note here the extremely ambiguous phrase "danger to public health." That is just begging to be abused...who's to say what is dangerous to public health? I'm also betting the federal government won't label something like Viagra as a threat to public health...they'd lose too many contributions from Pfizer.

The bill also particularly singles out practices by tobacco manufacturers that are said to be geared toward attracting new, young smokers. This includes prohibiting "candy or other flavors" in cigarettes, prohibiting the labeling of cigarettes as "light" or "mild," and restricting advertising in certain publications that are geared toward a teenage audience. In the end, this all leads to giving the FDA the ultimate decision in whether or not a new tobacco product will be allowed to go on the market--if the FDA doesn't approve, then it doesn't happen.

Now, it seems to me that cigarettes, etc. don't really fall under the category of either "food" or "drugs" so it doesn't seem like the FDA has any business regulating tobacco products. The Republican leader of the opposition to the bill, Sen. Richard Burr of North Carolina, proposed an amendment that would create an entirely new agency to regulate tobacco products. I certainly don't like or agree with the idea of creating more government agencies and increasing government regulation but I'm guessing that the opposition saw that the bill was going to pass regardless and attempted to at least make an effort at something less restrictive. That effort, not surprisingly, failed.

In closing, here are a few quotes from the proponents of this bill in the Senate, as well as President Obama--

"This is a bill that will protect children and will protect America. Every day that we don't act, 3,500 American kids -- children -- will light up for the first time. That is enough to fill 70 school buses." --Sen. Dick Durbin, D-Ill.

"This bill may do more in the area of prevention, if adopted, than anything else we may include in the health care bill in the short term." --Sen. Christopher Dodd, D-Conn.

Commenting on the impending passage of the bill, President Obama said that the bill "will make history by giving the scientists and medical experts at the FDA the power to take sensible steps."

More On Chrysler

2009-06-09T23:31:00.001-04:00

If you haven't already heard, the Supreme Court has lifted the stay which had put the Fiat sale on hold. Earlier today, Fiat CEO Sergio Marchionne stated that they would not walk away from the deal. That did not matter however as the high court's decision was unanimous. You can review the actions of the court at SCOTUS blog.

I've heard a little bit today both from the local media and the MSM regarding the issue before the court both before and after the decision was rendered. I have to say that either I'm totally missing something or the media is either dumb or dishonest (I won't rule out both). However, a couple of people I have some respect for as commentators (Abdul Hakim-Shabbaz and Judge Andrew Napolitano) are on the list, so maybe I just don't get it.

I did a good deal of research on the Chrysler bankruptcy (read here), and while I don't necessarily like the outcome, the government-supported-pro-UAW-Fiat-Sale looks to be legal. I'm not surprised that the Supreme Court has dismissed the grievances - especially based on the legal merit of the case.

The 363 sale, as I understand it, has become more common in bankruptcy and occurs outside of the restructuring or liquidation which happens in Chapters 11 and 7 respectively. I'd best describe it as a hybrid of restructuring and liquidation where an outside bidder submits a "super bid" for most of the bankrupt company. As long as a) it is the best available bid, b) the bankrupt company and debtors-in-possession agree to the sale, and c) the value of the assets could decline substantially in the absence of a sale. (Note: Judge Gonzalez's ruling provides a more detailed and accurate explanation and can be read in full if desired - I've linked to it in my previous article linked above. Alternatively, you can Google "criteria for a 363 sale" or something of that sort.) The Fiat transaction meets these criteria.

It is unfortunate that the U.S. government is playing such a heavy hand by financing the Old Chrysler, helping fund Fiat in creating the New Chrysler, and putting pressure on the big name creditors who have received TARP money. But, this is where the Indiana Funds probably lack standing. The notion of standing is one which is bothersome to me in general. I understand why standing is required so that we avoid clogging up the courts with frivolous lawsuits, but it seems that some fundamental Constitutional questions remain unchallenged since no one has standing.

Ok. Anyways... I'd love it if some bankruptcy and constitutional experts happen to come across this post and can chime in. But, as I see it, the senior secured creditors may be losing out in this deal, but it appears to be both legal and their best available option. And, yes, the UAW VEBA is making out quite nicely (on a relative basis), but this is due to an independent deal struck with "New Chrysler" (supported by both Fiat and the U.S. and Canadian governments) and outside of the purview of the bankruptcy itself. The proceeds from liquidating the assets which will remain with the Old Chrysler as well as the $2B paid by the New Chrysler will be paid to the secured creditors under "normal" bankruptcy law (i.e. they are paid before the unsecured creditors or equity holders).

By the way, I do agree that this whole mess will have implications of sort on the desirability of investing in the bond market. However, the 363 sale is legal, has been widely used in other cases, and can "screw" secured creditors. This highly publicized case may place pressure on the future use of 363 sales and/or introduce higher interest rates (and more risk) on corporate bonds.

If you want to read even more details on the ins and outs of bankruptcy, Credit Slips is a very good site. Incidentally, Elizabeth Warren, the chair of the Congressional Oversight Panel for TARP, is a contributor.

Garbage Everywhere

2009-06-09T20:38:00.002-04:00

I'm watching CNBC right now and can't help but become terribly irritated. First, they have an unapologetic Democrat on who does nothing but whine, argue, blame Republicans, and say things like, "is there anything that this President can do that you guys would like?" to her fellow panelists.

Then, you have the pro-business, anti-Obama guy spouting his own rhetoric. He did not irritate me as much, but, that's just because he couldn't get much of a word in edge-wise against panelist #1.

Argh. There is no fact-checking; just a lot of "blah, blah, blah... Democrats suck! Oh yeah, no way! Republicans suck!" Seriously!? Is this our media? (That's rhetorical... I like calling it mediatainment.)

Surprisingly, I haven't heard the phrase "green shoots" yet tonight on CNBC; although, I haven't been paying that much attention.

Just venting...

The Chrysler Bankruptcy

2009-06-08T22:02:00.002-04:00

Earlier this week, I wrote an article which provided some basic education on the topics of capital structure and bankruptcy. This may have been overly simple for some readers, but one goal here is to provide education so that our readers can better decipher the news. With these basic financial principles, we can explore the Chrysler bankruptcy in more detail.

By the middle of 2008, the so-called Big 3 (GM, Ford and Chrysler) were already in suspect financial condition. When the economy began to really flounder in September, it only served to push the already weak companies to the edge of the economic abyss. At the end of September, Congress passed legislation which would provide $25B in loan guarantees to the automobile industry. In November, the circus intensified in the height of bailout fever, when the three CEOs came to Washington to beg for money. Legislation was crafted and passed in the House to provide direct loans to the Big 3; it did not make it out of the Senate. In a legally and constitutionally questionable move, the White House dedicated TARP funds to provide loans to Chrysler and GM. Chrysler received $4B. The Obama adminstration created an auto Task Force which would review restructuring plans provided by the automakers. The Chrysler plan was not enough and they prepared for bankruptcy.

Chrysler is (was) a privately owned company with Cerberus Capital Management owning an 80.1% share of the company and the remaining equity held by Daimler AG. Daimler wrote off their ownership (i.e. determined that the value was equal to zero) in October of 2008. Besides the money which has lent/given by the U.S. and Canadian governments, Chrysler had $6.9B in outstanding senior secured debt. There is another $2B in junior debt held by Daimler and Cerberus; and, of course, there are the TARP loans which are even more junior on the majority of Chrysler's collateral. Additionally, the UAW had set up a Voluntary Employee Benefits Association (VEBA) which holds an unsecured claim against Chrysler. The VEBA was set up to take the responsiblity of health care benefits from the Big 3. Chrysler was obligated to pay $9B to the fund. (More detail on the VEBA can be found in this article.)

Since Chrysler was unable to fund its obligations to bondholders or find investors willing to save them from bankruptcy, they had to proceed with their filing on April 30. Throughout the month of May, the Bankruptcy Court of the Southern District of New York heard the case. The case proceeded with the intent to facilitate a "363 Sale" in reference to Section 363 of the Bankruptcy Code. This allows for a sale of selected assets and transfer to selected debts and obligations to be made while the remainder are either liquidated or restructured. The U.S. Tresuary has indicated that it will provide debtor-in-possesion (DIP) financing to Chrysler to continue operations while in bankruptcy only if a 363 sale could be executed in a "surgical bankruptcy". Enter Fiat.

Fiat, the Italian automaker, has offered "access to competitive fuel-efficient vehicle platforms, distribution capabilities in key growth markets and substantial cost-savings opportunities." A new corporation, New CarCo Acquisition LLC, was set up to be the purchasers of the selected parts of Chrysler in the 363 sale. Fiat has partnered with the VEBA, the U.S. government, and the Canadian government in the form of Export Development Canada as the owners of the "New Chrysler" with a 55% stake going to the VEBA, 8% to the U.S Treasury, 2% to Export Development Canada, and 20% to Fiat. Fiat will quickly receive a 35% share as the deal is finalized with rights to own as much as 51% after the government loans have been repaid. New Chrysler will pay $2B to "Old Chrysler" as part of the sale.

Now, there are objections to this plan. The most notable objection has been made by three Indiana pension funds: the Indiana State Teachers Retirement Fund, the Indiana State Police Pension Trust, and Indiana Major Moves Construction. These three funds purchased $42M of Chrysler debt at 43 cents on the dollar. Additionally, some consumer advocate groups, a group of dealers who will have their franchise agreements terminated, and others have all attempted to block the 363 sale. Last Monday, Judge Arthur Gonzalez denied all objections and approved the sale. His 47 page opinion can be read here. (I have read the whole thing in an effort to understand the details which has been the reason this article is as delayed as it is.)

With the Old Chrysler receiving $2B from the New Chrysler, and essentially no assets remaining in the Old Chrysler of any value, the creditors (bondholders) stand to receive the $2B for the $6.9B in secured debt. This equates to about 29 cents on the dollar. There is a trust which had been established to serve the interests of the senior secured creditors who agreed to this deal in near unanimity. It has been the Indiana Funds who have opposed this most vocally. The U.S. Appeals Court dismissed their objections as well late last week. However, today, the Supreme Court of the U.S. issued a stay on the sale. This stay puts everything on hold until further notice.

My reading of the Gonzalez opinion initially leads me to believe that the sale will go through. I am not a lawyer, so I have no expertise. However, my understanding of the 363 sale allows for the purchasing entity, the New Chrysler in this example, to pick and choose the terms of the sale. This is apparently legal provided that the negotiations are done in good faith (which has received objections from the Indiana Funds and others by claiming the sale was "sub rosa") and provides the best option available for all parties. Expert testimony which was not disputed in a timely manner indicated that the creditors receipt of 29 cents on the dollar would be better than what a liquidation would provide. Further, the court has determined that if the Fiat deal is not consummated, that liquidation is the only other option.

The Indiana Funds have also questioned the constitutionality of the U.S. Treasury using TARP funds to provide financing to Chrysler (both Old and New). This question may or may not be reviewed by the Supreme Court. Both the bankruptcy court and the appeals court have denied reviewing the question because they have determined that the Indiana Funds lack standing. This means that the use of TARP funds has not harmed them so they cannot challenge the action.

You can follow the progress with the Supreme Court at SCOTUS Blog.

Some very interesting analysis of dealer closures can be reviewed here.

This article is more about GM than Chrysler, but is relevant nonetheless. It is a rare occurrence where I tend to agree with Robert Reich.

For more history and context on one of the Indiana Funds, the Indiana State Teachers Retirement Fund, who is having its own issues, you can read the following: ISTA sues the state over school funding, the court's opinion, their website, and a report on the NEA taking over the ISTA.

Loose Ends... Vol. XLVI

2009-06-08T00:26:00.002-04:00

Well, I've been researching the details of the Chrysler bankruptcy in my free time this week and still have not finished writing that article. It should be done tomorrow. Sorry for the delay for those of you waiting...

Given the hour, I'm not going to post much of anything of value here tonight. Here are a few things (without links) which I plan on looking into over the coming days: the GM bankruptcy, Obama's speech in Cairo, and the political climate in the U.K.

Capital Structure and Bankruptcy

2009-06-01T23:05:00.000-04:00

The failure of the U.S. auto industry has been a dominant news story over the last few months. Today, GM filed for bankruptcy and it appears Chrysler will emerge reorganized soon after Judge Arthur Gonzalez rejected opposing arguments. Over a couple of articles, we will discuss some of the basic nuts and bolts of bankruptcy, a few of the key opponents of the Chrysler reorganization, and some general comments on the entire process.

Let's dive in.

One of our goals on this website is to provide education to our readers by explaining some of the background which is often glossed over in the mainstream media. In this article, we'll start by looking at the basic financial structure of a business. When a new business is started, it requires money. This money is referred to as capital and is used to fund business operations and get things going. Capital comes in two basic forms: debt and equity. The combination of debt and equity for a business is called its capital structure.

When an investor provides capital to a business, it comes in one of these two forms. Equity is a form of ownership often called stock. Equity investors become part owners (shareholders) in the firm. As shareholders, they have a claim on the earnings (profits) of the firm in the form of a dividend and have the ability to oversee the firm's operations via the board of directors. Note that if the company does not make any money, then the shareholders will probably not get paid.

Debt is the other form of capital. Debt investors are referred to as creditors - they are essentially lenders to the firm. Creditors have no claim on earnings and no say in the operations of the business. Creditors simply receive an interest payment on their loan; loans which can be traded in the market are called bonds. These creditors are then also called bondholders.

All of the above actually applies to both investors to new companies as well as existing companies. We'll create a fictitious example using a new company. Let's say that we're going to start a business and need $1M to get started. We're able to find some brave risk takers who are willing to take an equity stake in the company for a combined $400k. This will be represented by 4,000 shares at $100 each. The remaining $600k will be funded by bonds (debt). In this example, consider three classes of bond investors - each a little more risk averse than the other. The first $200k goes to the riskiest bonds. They pay a 12% interest rate are not backed by any sort of collateral. This is referred to as unsecured debt. The other $400k comes from bonds issued with a 6% interest rate and a 5% interest rate ($200k each) and are collateralized (secured) by assets the our new business is purchasing such as land and equipment. The difference between the 6% and 5% bonds are that the 5% bonds are "senior" to the 6% bonds.

After a while, our business is in trouble. If we get to the point where we cannot make interest payments to the bondholders, we may choose to file for bankruptcy protection. In some cases, a particular bondholder may force us into bankruptcy if we miss a payment. There are two key types of bankruptcies for businesses in the U.S. Chapter 11 is used for bankruptcy reorganization where the company attempts to strike deals with their creditors and emerge restructured. Chapter 7 is used to liquidate a company - i.e. sell off all the assets and cease to exist.

By the time our little business venture reaches Chapter 11, chances are most of our cash is gone. If we seek to reorganize, we must get our bondholders to agree to a deal. This deal would provide details of how we would reorganize our business to cut costs, raise cash, and/or renegotiate debt. The bankruptcy court has the authority to approve the plan, but the creditors (who invested $600k in our example) would have a major voice in the matter. In many cases, existing shareholders are "wiped out" - their shares are worthless. Also, there may be a debt-for-equity swap, where bondholders are willing to accept newly issued stock in lieu of their existing bonds which pay interest. Since the 5% yield bonds were senior and secured, those bondholders would generally be entitled to the best deal in the restructuring.

If no deal can be reached in Chapter 11, we would be liquidated in Chapter 7. You may hear of bondholders taking a "haircut" or receiving "25 cents on the dollar". If a bondholder gets paid in a restructuring or liquidation, they will not receive full value on their investment. This is called a haircut. If our unsecured bondholders took a haircut and 25 cents, that would mean they would be paid 25% of their original investment of $200k - in this example, $50k.

Ok. So, this article focused on basic education in corporate finance and bankruptcy. Sometime later this week, we'll dig deeper into the Chrysler bankruptcy and apply what we've learned here.