“Brother, can you spare a vote?”

“You just don’t understand, America is not the big dog in the hunt anymore.”

“Oh really, list for me all the nations on earth with a 14 trillion dollar economy, a navy which can reach into every corner of the planet and an air force that dominates the skies of the world.”

“We’re going down, can’t you see…things are bad all over…in fact, they’ve never been worse.”

“I’ll make you this bet: In 3 years, the US economy will be significantly larger, GDP and productivity will be increasing at a strong rate and the dollar will be quite strong. My $1,000 says so.  Unless, of course, your candidate gets elected, maybe I call the bet off.” Me laughing.

Shakes his head.

“Oh, so it’s too rich for you ?  I’ll make it $100.  What’s wrong ?  You don’t believe in the economic miracle of Obama ?”

Shakes his head.

“Okay, just make it 10 bucks.  Certainly you think Barack is worth a $10 wager.”

Shakes his head again.

So went my conversation Saturday night over Italian pasta and an excellent bottle of Shiraz with my good friend, boating partner and Obama supporter.  Of course, it occurs to me his real wish is for Obama to be elected to oversee the takedown of the American economy and the standard of living we all enjoy.  I didn’t raise that suspicion knowing I would not get an honest answer. 

I’ve lived for 56 years listening to people, Americans, Europeans and others declare the USA is collapsing, failing, spiraling, losing, etc.  This nation has been declared on its deathbed since the first volley immortalized by Emerson thus:

“By the rude bridge that arched the flood,

Their flag to April’s breeze unfurled,

Here once the embattled farmers stood

And fired the shot heard round the world.”

 Here is the truth of our ingenuity, strength and vitality:

Michael Clemens, of the Center for Global Development, has the facts, the figures and the story.  Clemens writes here:

As for whether or not the current financial crisis will make much difference to income growth in the United States over time, have a look at the second graph below. This is the best estimate of real income per capita in the United States since 1820. Over these years we had violent financial crashes of various types, bank panics, piles of recessions and a huge depression, many foreign wars and one enormous domestic war, had a central bank and didn’t, were on the gold standard and weren’t, had governments topple in scandal and multiple leaders assassinated, and what did it all amount to in the medium to long run? In per-capita income terms: Nothing. The overall trend does not bend or shift. Every bad year was followed by a good year that returned us to trend. The US average growth rate of real per capita incomes over the last 190 years has been 1.8% a year, and the same rate over the last 10 years has been…. 1.8% a year.

Yikes.

So here we have a racially-homogeneous group of children in paramilitary outfits, chanting slogans of praise to a charismatic political leader in a state-funded public school.

I think I’ve seen this movie before…

After I discovered the Spengler column I wrote about in the post below,  I noticed M. Simon at Classical Values had also posted on it.  Simon is a writer and software engineer who frequently covers Second Amendment news and issues.  He made the further point that Americans are not only armed, but have been known on the rare occasion to use their weapons against those in power.  He linked to this story which I heard of years ago, but had never read.

It is 1946 and several thousand young veterans have returned to McMinn County, Tennessee to find the recently revived local Democratic Party has seized power in McMinn County and done so in a ruthless and violent fashion.  The once proud and powerful Republican Party has receded into apathy and fear.  A handful, roughly seventy young men, take back their local government by force of arms and ordnance from a gang of political thugs, just as our Founders intended it to be:

Bill White recalled coming home from overseas with mustering-out pay in his pocket: “There were several beer joints and honky-tonks around Athens; we were pretty wild; we started having trouble with the law enforcement at that time because they started making a habit of picking up GIs and fining them heavily for most anything—they were kind of making a racket out of it.

“After long hard years of service—most of us were hard-core veterans of World War II—we were used to drinking our liquor and our beer without being molested. When these things happened, the GIs got madder—the more GIs they arrested, the more they beat up, the madder we got …”

Before the violent saga ended, the following took place in the midst of a hail of gunfire:

The first dynamite was tossed toward the jail; it landed under Boe Dunn’s cruiser, and the explosion flipped the vehicle over on its top, leaving its wheels spinning. Three more bundles of dynamite were thrown almost simultaneously; one landed on the jail porch roof, another under Mansfield’s car, and the third struck the jail wall. The explosions rattled windows throughout the town; leaves fell from the trees, debris scattered for blocks, and the jailhouse porch jumped off its foundation. The deputies barricaded in the courthouse a block away rushed onto the balcony, eager to surrender. The jail’s defenders staggered from their ruined stronghold and handed the ballot boxes over to the veterans.

If David Zucker or any other film industry figure were worth their salt, they would make a movie depicting this incredible and true chapter in American history.  You will never regret taking the time to read the whole thing here.

After editorial-page honcho James Howard Gibbons walked the plank and Cap’n Jeff Cohen reshuffled the Chron’s editorial deck, I had some hope that we’d stop reading endless rehashes of old editorials from the Los Angeles Times.

I was wrong. Today the Chron, um, parrots the LA Times again:

Shiver our timbers — there be pirates afoot. Only today’s pirates don’t sport parrots on their shoulders or hooks in place of hands;

And, unlike the days when the British Royal Navy and the East India Company could be counted on to blast pirate ships to Davy Jones’ locker on sight

Yo ho ho and a bottle of crap.

Cap’n Jeff fires a broadside.

The cranky, mysterious and often irascible Spengler, of the Asia Times, has struck once again with a dagger in the heart of conventional wisdom.  He writes of the Asian capital flight to safety in the midst of world market uncertainties to, once again, the United States.

What does America have that Asia doesn’t have? The answer is, Sarah Palin - not Sarah Palin the vice presidential candidate, but

Change vs US$,
June 2-Oct 2

 

 

 

Currency	%
Thai Baht	-3%
Singapore Dollar	-5%
Malaysian Ringgit	-6%
Philippine Peso	-8%
Indian Rupee	-9%
South Korean Won	-14%

Sarah Palin the “hockey mom” turned small-town mayor and reforming Alaska governor. All the PhDs and MBAs in the world can’t make a capital market work, but ordinary people like Sarah Palin can. Laws depend on the will of the people to enforce them. It is the initiative of ordinary people that makes America’s political system the world’s most reliable.

America is the heir to a long tradition of Anglo-Saxon law that began with jury trial and the Magna Carta and continued through the English Revolution of the 17th century and the American Revolution of the 18th. Ordinary people like Palin are the bearers of this tradition.

Like Alexis d’Tocqueville of the 1800s, Spengler points out those markers in the character of individual Americans which set apart and define the survival of the private and public institutions that form the unique fabric of our culture.  He attempts to explain to his somewhat clueless and bewildered statist friends in Europe the phenomenon of a Sarah Palin:

How, my European friends ask, was it possible for such an an ignorant bumpkin to become a candidate for America’s second-highest office? They don’t understand America.

Provincial America depends on the initiative of ordinary people to get through the day. America has something like an Education Ministry, but it has little money to dispense. Americans pay for most of their school costs out of local taxes, and levy those taxes on themselves. In small towns, many public agencies, including fire protection and emergency medical assistance, depend almost entirely on volunteers. People who tax themselves, and give their own time and money for services on which communities depend, are not easily cowed by the federal government or by large corporations.

The secret of the appeal of a Sarah Palin to the developing world is folded into the basic distrust of governmental organizations embedded in the everyday life of most people.  The centralized command-and-control systems masquerading as emerging democracies in Asia offer no means of appeal or alternate routes to justice for the common man or woman.  The very idea a hockey mom can rise from obscurity to battle and defeat corruption in her state is simply not considered possible in those nations.

It is true that Asian economies depend on American consumers and an American recession is bad for Asian currencies. But why don’t Asians consume what they produce at home? The trouble is that rich Asians don’t lend to poor Asians in their own countries. Capital markets don’t work in the developing world because it is too easy to steal money. Subprime mortgages in the US have suffered from poor documentation. What kind of documentation does one encounter in countries where everyone from the clerk at the records office to the secretary who hands you a form requires a small bribe? America is litigious to a fault, but its courts are fair and hard to corrupt.

And guns.  Yes, Spengler instructs his readers that Americans are armed and dangerous if provoked:

You need ordinary people who care sufficiently about the places in which they live to take control of their own towns and states when required. And, yes, it doesn’t hurt if they own guns. Popular gun ownership places a limit on the abuse of state power.

The education of Europe is a long and arduous task.  Read the entire article here.

Hat Tip: Rod Dreher

The always engaging and frequently brilliant economist, Arnold Kling, sat down last weekend and wrote a fantasy script for a Congressional hearing on the mortgage industry to which he has not been, and yet should be, invited.  It is clear, concise and easy to understand in the style that has made Kling so popular and widely read.

The secondary mortgage market began in 1968, when the United States formed the Government National Mortgage Association (GNMA). GNMA pooled loans originated under programs by the Federal Housing Administration (FHA) and the Veterans Administration (VA) and sold these pools to investors. The purpose of this, as with the quasi-privatization of the Federal National Mortgage Association (Fannie Mae) that took place that year, was to take Federally guaranteed mortgage loans off of the books. President Johnson, fighting an unpopular war in Vietnam, wanted to save himself the embarrassment of having to come to Congress to ask for larger and larger increases in the ceiling on the national debt.

Thus, the first steps toward mortgage securitization were taken in order to disguise financial reality using accounting gimmicks. It has been the same ever since.

Kling describes the shift from home loans offered by savings and loan associations managed by local residents offered to the neighbors they knew in areas they lived in and in which they held a vested interest.  Over a thirty year period this model of American home ownership transformed into a system where bundles of thousands of mortgages were marketed to investment groups and funds as far away as Singapore, Riyadh and Brussels.

There has been a flight to safety in credit markets in recent weeks. What is probably a necessary and significant consolidation in the financial sector has turned into a rout.

Under the circumstances, there are two policy imperatives. First, regulators must sort out the banks that are sound from those that are insolvent. The insolvent institutions need to be merged or closed as expeditiously as possible. Sound banks should be encouraged to make loans to qualified borrowers. Some forbearance of capital requirements may be appropriate in order to ensure that good borrowers do not get turned down. Finally, there may be some banks that are neither clearly insolvent nor clearly sound, in part because of questions concerning the values of their mortgage securities. These banks should be allowed to continue operating, under close supervision, perhaps with loans from the Federal Reserve.

Under no circumstances is it justified to attempt to revive the mortgage securities markets. Resumption of active trading in those markets is neither necessary nor sufficient to address tightness in credit markets caused by the flight to safety.

The author also notes the glaring breakdown of communication between the senior managers and analysts and mid-level executives of their own firms who have been warning of intrinsic problems in the market for years.  Kling refers to two excellent articles by Charles Duhigg of the New York Times detailing the internal problems in Fannie Mae and Freddie Mac.

To illustrate what he calls a suits vs geeks problem, Kling cites the compelling economic commentator, Megan McArdle, who has posted a fascinating parallel between the mortgage security debacle and the results of an investigative study of NASA’s Challenger space shuttle disaster.  The late Nobel Prize laureate and world-renowned physicist, Richard Feynman, served on the Challenger commission and wrote this in his remarks in the final report:

Finally, if we are to replace standard numerical probability usage with engineering judgment, why do we find such an enormous disparity between the management estimate and the judgment of the engineers? It would appear that, for whatever purpose, be it for internal or external consumption, the management of NASA exaggerates the reliability of its product, to the point of fantasy.

Arnold Kling concludes as follows:

Robert Merton, a Professor of finance at Harvard and a Nobel Laureate, suggests that the decisionmakers who I call “suits” need better training in modern mathematical finance. That is one solution. Another solution would be to try to limit the ways in which under-educated “suits” can expose their firms and our economy to risk. As I indicated earlier, I do not believe that the mortgage securities market would have emerged without regulatory favoritism. If such favoritism were taken away, and the mortgage securities market were to fade away as a result, then the communication gap between the suits and the geeks would cease to be a problem.

Read the whole thing here at the Library of Economics and Liberty.

Hey buddy, need a lift? Trade your vote for a bottle of Mad Dog 20/20!

No, you can’t have my bandana!

To quote a phrase from Peter O’Toole’s comedy classic, MY FAVORITE YEAR,  David Zucker’s, AN AMERICAN CAROL, is a “real stinkburger”.  I give Zucker an “A” for intention, but a “D-” for execution. From the lack of production values to the lame story line, this movie should have gone straight to DVD. Yes, it has it’s moments - like when it mocks the MSM’s ridiculous attempts to put Christians on the same par as Muslim extremists, or the spot-on imitation of Rosie O’Donnell’s infamous “first time fire melted steel” drivel. Sadly, however, most of the digs fall flat.

I know, I know, we’re all dying to see something “conservative” come out of Hollywood, especially if it’s funny and sticks it to the libs.  Unfortunately, this ain’t the movie.  Maybe it’s just me, but I don’t find it cute, funny (or conservative) when little kids are fed lines like, “sh_t head” or “ass face” when referring to their Uncle. Even if he is a lefty, Michael Moore-alike.  

If you want to support some brave conservatives in Hollywood, go ahead and see it, but consider it charity.

 

 

 

Juvenal, the Roman poet, is forever immortalized in history for asking the question:  Who will watch the watchers ?

In August, I wrote here of a man’s pilgrimage to his Oklahoma roots and the Chisholm Trail.  His name is Mike Malone and he is a widely read and prominent author and commentator on the high-tech industry, innovation and business.  Malone wrote an essay for PajamasMedia regarding our financial mess and political meltdown of the preceding weeks.  He writes:

From where I sit, the United States government has embarked on two pieces of social engineering in the last few years. One was to make oil expensive as expensive as possible to drive people to greater use of alternative energy sources - because anything less would be irresponsible and destructive to the environment. The other was to enshrine home ownership (i.e., easy-to-obtain mortgages) as a new American right - because anything less would be unequal and racist.

None of us voted on these decisions - indeed, neither was even spoken about directly, much less debated. But nevertheless, both became national policy… and both have sparked national, now international, crises. Then, once they became crises, both were blamed on ‘greedy capitalism’, instead of what they really were: legislative interference into market forces.

and this:

As it happens, out here in Silicon Valley, we have been conducting our own social engineering experiments. Three, in fact, have been at least as sweeping as Freddie Mac’s changing of mortgage eligibility rules. One of them has been to wire the entire world in a huge, high-speed global information grid (the Internet). Another has been to restructure the entire entertainment industry and its pricing model (the iPod). And the third has been to empower the citizenry to form groups based upon common interests rather than the limitations of physical proximity (Web 2.0 - social networks).

Here’s the thing. All three of these multi-billion dollar projects have been pay-as-you-go, driven largely by individuals and companies that assume their own risk, they have instantly rewarded smart decisions and punished bad ones, they are tested every millisecond against human nature (i.e., the marketplace), they are biased towards efficiency over seniority, and most of all, they are voluntary.

Malone is a 21st century free-market optimist who believes we will survive and thrive in the future, not because of government, but because we will circumvent it in new and creative ways:

We will get out this current financial mess - not by government fiat, but because entrepreneurs and smart corporate executives and hard-working everyday people will innovate us out of it. They will come up with the new financial instruments that restructure this debt, the new technologies that will generate the wealth to make up for this loss (as they did after 9/11) and ultimately create more jobs than are right now being lost.

Read the whole, brief essay here.

At the blog, Naked Capitalism, among discussions of the current financial crisis, a reader named FairEconomist left the following comment.  Blogger Yves Smith was sufficiently impressed with the content to feature it in a post and I wanted to share it with readers at LST. 

I don’t expect members of Congress to be economic mavens, but they should be able to apply simple logic to the potential ramifications of the legislation they propose and pass.  Additionally, outside of academia, the federal government employs more economists than any other sector of our society which begs the question: Why did no one mention the very serious effect described below and, if they did, why was this not addressed publically in the debates of the past week ?  The problem described below would seem to be as obvious as the nose on one’s face.  Once again, Washington’s treatment is to kill the patient to cure the disease.

So the market has lost about 2/3s of its ability to convert liquidity to 30-day loans. 90-day is probably similar although there are technical issues with analyzing the chart because 90-day would expire during the end of year crunch so there probably isn’t much demand. Next week we’ll be able to look at 90-days again.

One of the most critical functions of the banking system is converting short-term deposits into longer-term loans for businesses. Much of the working capital market, for decades has come via money market funds (MM). Joe public or Joe CFO deposits money into a MM. That MM loans it to a bank (usually by buying paper, and usually at a medium duration) and then that bank loans it out to business for inventory, payroll or whatever. The MM has converted Joe’s demand deposit into a fixed-duration loan.

The problem we’re having is that people are fleeing commercial MM for treasury MM. Those are buying treasuries and thus converting the money to the desirable medium duration BUT that money is loaned to the Fed, and the Fed doesn’t make working capital loans. So the deposited money that had been made into working capital has been diverted into the Fed and lost to working capital.

The Fed is kind of trying to address this by loaning out money via various auction/discount windows. BUT, those loans have been overwhelmingly overnight - a particularly nasty demand deposit because it goes back so fast. For a bank to convert that to a 90-day loan it’s got to win 90 auctions in a row - a very risky deal with a crunch on. So the Fed undoes the duration conversion, and then some, converting the liquidity into a form that the banks can’t make into useful-duration loans.

Right now we have both commercial and treasury MMs. Deposits have shifted from commercial MMs to treasury MMs, and consequently we have less working capital (a commercial MM product) and better credit for the Fed (a treasury MM product). But, treasury MM rates are now very low and the gap between treasury and commercial fairly high, which creates an incentive for depositors to put money into commercial funds, producing some working capital.

When Paulson dumps out his 700 billion in treasuries it’s going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson’s billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson’s billions divert credit from working capital to long-term mortgages - from where it’s most needed to where it’s most wasted.

Even if the giveaway adequately props up the banks, which I doubt, they still can’t make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.

I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans. It’s not that every economist in the world is an idiot, it’s just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson’s plan falls into the category of very expensive way to hurt ourselves.

In Open Comments last night, I attempted to offer a simpler layman’s explanation of FairEconomist’s commentary and hopefully it will help:

The government issues Treasury Bills to investors to finance the government’s short-term financing needs. They compete with private money market funds. Usually those money market accounts offer more interest to entice investors and offer on demand liquidity for an investor’s cash. However, the private money market funds took a big hit because one of the largest, major money market issuers in the nation declared the other day they would only return on demand $ 0.97 for each dollar invested. This has never happened before and frightened investors took flight and their money to the federal government T-Bills for safety.

Now, to compound this mess, the government will be using the cash from $700BN worth of T-Bills to finance purchasing mortgages from various private institutions. The federal government needs cash so they will have to issue a huge volume of new T-Bills to the public at higher and more attractive interest rates further pulling more scared money away from private money market funds.

As investors continue to shift more and more cash from the private money market accounts to government T-Bills, the available cash typically lent to banks for short term loans to business will continue to shrink. The demand for an ever diminishing pool of money will drive up interest rates. Many small businesses will be priced out of the market for loans or turned down in favor of borrowers who can afford the higher rates. The feds are essentially vacuuming up available cash to fund their bailout. It is a recipe for disaster and a guaranteed way to start a long and ugly recession.

Everyone seems to be asking how much all of the recent bailouts (read socialist policies) are going to cost per household. Cnet came up with a good starting point.

Bailout type	Cost to taxpayers (Source: Reuters)
Financial bailout package approved this week	up to or more than $700 billion
Bear Stearns financing	$29 billion
Fannie Mae and Freddie Mac nationalization	$200 billion
AIG loan and nationalization	$85 billion
Federal Housing Administration housing rescue bill	$300 billion
Mortgage community grants	$4 billion
JPMorgan Chase repayments	$87 billion
Loans to banks via Fed’s Term Auction Facility	$200 billion+
Loans from Depression-era Exchange Stabilization Fund	$50 billion
Purchases of mortgage securities by Fannie Mae and Freddie Mac	$144 billion
POSSIBLE TOTAL	$1.8 trillion+
NUMBER OF HOUSEHOLDS PER U.S. CENSUS	105,480,101
POSSIBLE COST PER HOUSEHOLD	$17,064+

That really doesn’t tell the whole truth though because not everyone pays the same percentage of federal taxes. The National Taxpayers Union has a chart listing who paid Federal Income taxes.

For Tax Year 2006

Percentiles Ranked by AGI	AGI Threshold on Percentiles	Percentage of Federal Personal Income Tax Paid
Top 1%	$388,806	39.89
Top 5%	$153,542	60.14
Top 10%	$108,904	70.79
Top 25%	$64,702	86.27
Top 50%	$31,987	97.01
Bottom 50%	<$31,987	2.99
Note: AGI is Adjusted Gross Income Source: Internal Revenue Service

Let’s combine the two, shall we.

	A.G.I.	Est. Households	Est. Debt Burden
Top 1%	$388.806	1,054,801	$680,716
Top 5%	$153,542	4,219,204	$256,570
Top 10%	$108,904	5,274,005	$241,604
Top 25%	$64,702	15,822,015	$98,146
Top 50%	$31,987	26,370,025	$66,218
Bottom 50%	<$31,987	52,740,051	$1,020

There now. Just look at your AGI from your tax return and you can get a far more realistic view of what your President, Senators and Congressmen did to you in recent months.

Throw the bums out.

Adios, mofo.

Predictably, the Chron’s copy editors fumble the coverage:

The 61-year-old former football faces up to life in prison.

Heh.

Now everyone and their dog loves her!!

Have a great weekend everyone!

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