Monthly Archives: September 2008

The Stench of The Politicians

Nancy Pelosi strides to the podium to deliver her plea for votes for the Bailout Bill and tears into the Administration and Republicans with a vehemence and bitterness that almost defies belief. The Republicans, being a party of principle, use her speech as a reason not to vote for the legislation whose sole purpose is to save our economy.

Many in Congress voted against the bill because they felt that their re-elections would be placed in doubt by angry constituents. Put another way, given an opportunity to vote for the national interest, those brave politicos opted to vote the way the angry crowd demanded. The abyss awaits.

To those who would say that a NO vote was a matter of principle, I would ask for evidence in past voting records which indicates that the majority of these ‘principled’ politicians held to a higher standard. The evidence will be lacking in most cases.

Our elected fatcats effectively hold a sinecure, prospering personally while spending freely and without consequence. Opposition, principled or otherwise, cannot force change because of gerrymandered districts that effectively reduce competition while ensuring a lifetime of ‘service’ in Washington and state capitals. The over-riding purpose of office-holding seems to be the continuation of same, often at any price or the sacrifice of any principle. Venality, then, becomes the operative function. The rewards come in the form of edifices erected with the condition that they carry the name of the still alive politician, real estate opportunities, and other income generating deals needed, apparently, because the income earned in the service of the people is not sufficient.

Maybe, just maybe, this latest fiasco will cause us to reclaim the right to elect good people to do good things. I sure hope so….

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"A Democracy is Always Temporary in Nature"

Belmont Club quoting Andrew Tytler.

“a democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”

Sobering words as the earmarks pile up, the politicians promise ever more benefits that enervate our capitalistic ideals, and the citizenry spends madly the credit it does not need.

“A Democracy is Always Temporary in Nature”

Belmont Club quoting Andrew Tytler.

“a democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”

Sobering words as the earmarks pile up, the politicians promise ever more benefits that enervate our capitalistic ideals, and the citizenry spends madly the credit it does not need.

Just Listen

There’s enough partisan mud-slinging to turn even the most hardened partisan’s attention elsewhere, but C-SPAN has proven to be a treasure trove of clips that capture the dynamics of the Freddie and Fannie debacle.

Here’s something to make you think, if you’re willing to donate 8:37 minutes to some perspective on the issue….

The Bail-Out…….Why We Need It

I subscribe to a daily email from Rich Mullings, who generally writes about the Washington scene. This morning’s communique had this pearl of wisdom, that explains the crisis just about as well as anything your scribe has seen/heard/read thus far.

As a further note, a link to the draft legislation is here. Enjoy:

By the time you read this, the House might have already voted to pass the bill House Speaker Nancy Pelosi described as “not a bail-out, but a buy-in.” The President will probably already have spoken and a good number of House Republicans will defied their leadership and voted against it.# I know a lot of MULLINGS readers are against this bill as well, and as you know I am not its biggest fan, but I think it is a must-do. To over-state the metaphor: If your boat is taking on water, and you are opposed, in ideological grounds, to bailing it out, it will sink and you will drown.

Let’s forget about Merrill Lynch and Washington Mutual and Lehman Brothers. Let’s look in, as the ad goes, YOUR wallet. What do you have in there; three credit cards? Four? Six? Come on. Come clean.

I will. I have two Amex cards – one for business use one for personal – a Visa ATM card and a MasterCard. Four. Which, according to an article in the San Jose Mercury News is the number the average American has in his or her wallet.

In fact, there are just short of a BILLION Visa, MasterCard and American Express cards in circulation in the US representing a total debt a little shy of a TRILLION dollars.

Ok. Enough of the data. Now to the point of all this.

Credit cards have been the fuel behind the extraordinary growth in the US economy which has been largely based upon consumer spending. Hold that thought.

Let’s say the total debt of all of your credit cards is about $10,000 – which would put you just about at the average. Credit card companies generally require a minimum payment of about 4% of your balance on each card each month. $10,000 x .04 = $400. Each month.

With me so far?

Banks and other issuers have to have the funds to pay the merchant (less a fee) when you charge something. In order to do that, THEY have to borrow money. And they use your credit card debt is their collateral.

Twenty billion dollars not being spent means businesses can’t keep as many people doing whatever they were doing before. That means layoffs. More layoffs means more people unable to pay their debts – credit cards or mortgages. More defaults and foreclosures means an even slower economy leading to a spiral which could result in a 1930’s style depression.

I’m not suggesting that will be the result of the Congress not passing the Bail-out/Buy-in Bill, but I wanted to point out that the situation is not limited to keeping Wachovia in business.

It comes down to you and me and our ability to get through the month.

I get it.

I'm In…

From Larry Kudlow, writing in the Corner a report of a rescue plan to sounds good to me:

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Here’s the key point: Any loan package bought by the Treasury will be 100 percent taxpayer owned. Period.

Let’s walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount — say $100 billion — of loans that banks will sell. The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive. In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (e.g., an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers.

In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers.

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

I have been in conversation with leading House Republicans all day. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson a few days ago. But now the actual reality is sinking in.

Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable. Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets.

Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt — 100 percent. Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary’s request for $700 billion is regarded as way too high.

Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor’s mortgage-bond insurance program. I think it’s a good package that would be great news for stock and bond markets that are now ailing badly. It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers, and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.

I’m In…

From Larry Kudlow, writing in the Corner a report of a rescue plan to sounds good to me:

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Here’s the key point: Any loan package bought by the Treasury will be 100 percent taxpayer owned. Period.

Let’s walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount — say $100 billion — of loans that banks will sell. The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive. In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (e.g., an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers.

In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers.

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

I have been in conversation with leading House Republicans all day. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson a few days ago. But now the actual reality is sinking in.

Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable. Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets.

Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt — 100 percent. Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary’s request for $700 billion is regarded as way too high.

Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor’s mortgage-bond insurance program. I think it’s a good package that would be great news for stock and bond markets that are now ailing badly. It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers, and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.