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September 30, 2008

THE GREAT REJECTION - IT'S NOT ARMAGEDDON

 

As Published On
The Out-Lawyer’s Blog: http://www.jaygaskill.com/blog1
And
The Policy Think Site: http://www.jaygaskill.com
All contents, unless otherwise indicated are
Copyright © 2005, 2006, 2007 and 2008 by Jay B. Gaskill
Permission to publish, distribute or print all or part of this article (except for personal use) is needed. [Permission for use in group discussions is almost always routinely given.]
Please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com

 

Tuesday September 30, 2008

 

THE GREAT REJECTION OF SEPTEMBER 29, 2008

 

It was a legitimate populist eruption.  The End of the World is not at hand.  But the end of the “boomer” domination of American politics is within sight.  To them, it just seems like the end of the world.

 

THE “GREAT REJECTION” IS JUST THE BEGINNING OF A POPULIST BACKLASH

In today’s New York Times, a moderate voice, speaking reason and truth to panic and obfuscation about yesterday’s failed “rescue”, slipped into print under the editorial radar. 

Titled, “An Alternative to Armageddon”, the piece came from a new web based addition to the NYT’s business section.  

Some key pull quotes will follow and I follow them with the web link.


 “The failure of the United States government to emerge as a willing buyer for hundreds of billions of dollars of toxic assets will accelerate the painful process of de-leveraging, bringing with it more bank failures. That, in turn, will shrink the size of the private sector balance sheet that consumers and companies have come to rely upon.”

After discussing the rescue of  Washington Mutual and Wachovia, and the adroit employment of F.D.I.C. guarantee mechanisms to sweeten the pot for the acquisition of these institutions, the author (“Rob Cox”) added that –

“These deals — along with JP Morgan’s acquisition of Washington Mutual in another F.D.I.C.-brokered deal on Thursday — show that willing buyers can be found for distressed institutions with the government mechanisms that are already available. The more the government helps, up front or through some sort of insurance, the less risible the price a savior will offer.

And he closed the piece with this:

“As the credit spigot dries up further, it will be harder for companies to borrow and invest in their businesses, despite the Federal Reserve’s separate efforts to flood the system with money. It will cost more for consumers to mortgage their homes or gear up their car purchases. But the additional pain of living without the [Bailout] could be beneficial in the long run, if it brings more reliance on sound market principles.”

HERE’S THE LINK TO THE ENTIRE PIECE:
http://www.nytimes.com/2008/09/30/business/economy/30views.html?_r=1&scp=2&sq=alternative%20to%20armageddon&st=cse&oref=slogin

The bottom line: We’ve been addicted to a toxic credit-based finance system; withdrawal from the addiction is very painful but not Armageddon.

AMERICAN POPULISM

 

In 2006, 2007 and earlier this year, I posted some observations about a resurgent American Populism.  A brief reprise:

 

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Here’s the deal:  We’ve evolved two cooperating political elites, each of which runs one of the two parties and shares three common traits: (1) high education levels, (2) important wealth (3) a distrust of the populist vote bordering on fear.  Winning elections for each requires a periodic courting ritual during which the populist vote (on which success depends) is earnestly sought, followed by a measure of post-election betrayal.

 

The corporate country club conservatives and the Lexus limousine liberals have so far succeeded in achieving a rough division of the populist center: social populists on one side, economic populists on then other. 

 

But conditions are rapidly changing. 

 

THE COMING POPULIST REFORMATION

 

As the conservative and liberal elites grapple with the implications of coming populist reformation, everyone should remember that the main populist strands of opinion, concerns and perspectives are not the only such threads in American politics, just the ones most often neglected by the elites of the left and right. 

 

This is why populism tends to erupt from time to time, instead of congealing around a particular party or set of interest groups.  The center of gravity of American populism is located among those who are too busy working, earning and living real lives (elites would say “mundane” lives, here) to become political junkies.  They periodically awake -- like the mythical sleeping giant – only when provoked by prolonged policy neglect or irritated into sufficient anger by repeated disregard of their core values and concerns. When the elites forget who really serves whom for long enough, there is hell to pay. 

 

Populism has a sharply different look and feel in the USA as opposed to – say- Venezuela or Iran because the American middle class is so well entrenched and numerous that its numbers overwhelm those who cling to hereditary privilege.  While ours is not a fully “classless” society, its various divisions tend to be blurry and membership levels very fluid as people and families migrate from hardship to wealth and back again.  This is the country where the less wealthy can reasonably aspire to wealth and the wealthy can reasonably worry about losing everything. 

 

In this milieu, there are only two great “class” divisions in the populist mind that really matter:  those who work, create value and struggle to make productive things happen for themselves, their families and the community at large, and those who manipulate the former group.  In the populist mind, the manipulative class includes the idle rich, the idle poor, and the political and cultural leaders who exploit the productive “class”.

 

The coming populist reformation will be driven by the events and exigencies of the next few years because these challenges will bring the failures of elites of right and left to address the core populist values and concerns into sharp relief.

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This is just the beginning.  Stay tuned…

 

JBG

 

 

September 29, 2008

Why Congress has Indigestion --Feeding the Dragon

Link to PRINT VERSION in HTM :

http://jaygaskill.com/TheDragonFeeds.htm 

 

As Published On

The Out-Lawyer’s Blog: http://www.jaygaskill.com/blog1

And

The Policy Think Site: http://www.jaygaskill.com

All contents, unless otherwise indicated are

Copyright © 2005, 2006, 2007 and 2008 by Jay B. Gaskill

Permission to publish, distribute or print all or part of this article (except for personal use) is needed. [Permission for use in group discussions is almost always routinely given.]

Please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com

 

MONDAY

 

CONGRESSIONAL INDIGESTION

By

Jay B. Gaskill

 

As I write this, Speaker Pelosi’s strong arm tactics have run afoul of the public opinion polls.  The approval level for this bailout hovers close to that of the congress itself.  

 

The house did not approve the package. 

 

Only 205 voted in favor -- 228 against.

Democrats:        140 for --- 95 against.

Republicans:        65 for --- 133 against.

 

 

There are two obvious, but under-discussed problems with the now stalled bailout package:

 

[A] Almost unlimited power to allocate appropriated moneys is vested in one office – that of the Treasury Secretary, but Mr. Paulson, the person (who frankly sometimes looks like someone about to go into cardiac distress) is a lame duck.  A sum of money that amounts to a significant fraction of the entire GNP and enormous power is being handed over, not just to Mr. Paulson, but to his political replacement, identity unknown.

 

[B] The authorization process (by a congress under extreme duress) has an eerie resemblance to those high pressure real estate bidding war-driven sales. In effect we are witnessing writ large the recapitulation of the same high pressure real estate deals that ignited the hyper-inflated home price inflation bubble. The Congress is reenacting the drama that lurks at the heart of the current mess.  Thousands upon thousands of homeowners have been through that brutal home buying experience: Bid now, bid high or you can’t stay in the game! And do it quickly! Yes, we know it’s a bit too much money – but you can’t lose.

 

Except, of course, we “common” Americans know that you can and do lose…

 

The credit crisis has exposed that the emperor is far, far more naked than any of we “common people” ever dreamed. 

 

We thought, for example, that the US money supply was firmly under the control of the Central Bank, whose prudent shepherds would let just enough money into the stream of commerce to promote healthy economic activity, but not enough to set off unacceptable inflation. 

 

But all this time there was a covert second money supply, even larger than the “official” one.  It is private “paper” in the form of all of those mysterious financial instruments traded among lending institutions.  Private paper is not backed by the fed in the same way that US currency is backed.  Private paper is generated by a sort of financial sleight of hand from money borrowed and re-borrowed, loosely tied to assets that may or may not be assets. 

 

Credit instruments are the “new cash”, and their markets currently dwarf all the rest.  When America slipped into a “credit economy”, who called attention to the fact that this new system was the giant dragon that could devoir all the rest? 

 

Negotiations will no doubt continue, because an actual credit infarction would be nearly fatal to a system so dependant on the second tier currency of private paper.  

 

Credit liquidity is essential because there is no near term prospect of going cold turkey.  But are we really expected to allocate the better part of a trillion dollars to the control of same credit structures, institutions and elite managers who brought us to this impasse? Must we really trust a single bureaucrat, however expert, to buy our way out? 

 

We are witnessing the biggest game of chicken in the last 75 years.

 

Stay tuned…

 

JBG

September 26, 2008

Bail Out 2.0 - Folk Wisdom & Commonsense Economics

As Published On
The Out-Lawyer’s Blog: http://www.jaygaskill.com/blog1
And
The Policy Think Site: http://www.jaygaskill.com
All contents, unless otherwise indicated are
Copyright © 2005, 2006, 2007 and 2008 by Jay B. Gaskill
Permission to publish, distribute or print all or part of this article (except for personal use) is needed. [Permission for use in group discussions is almost always routinely given.]
Please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com

BAIL OUT 2.0 ?

FOLK WISDOM

AND COMMON SENSE ECONOMICS

I’ll never forget walking in almost complete darkness in a New Zealand cave next to a cataract of falling water – the only barrier was a tiny, symbolic railing that would never pass OSHA or ADA standards in the states.   The cheerful Kiwi guide said, “Be careful mates, we can’t pick you up if you fall in.  And careless people don’t get to file lawsuits here.” 

We were very, very careful….

PRACTICAL ECONOMICS 101

As the USA lurches towards a massive transfer of money – truly staggering sums from public, tax supported funds to private finance – we can only hope that adult supervision prevails.  It doesn’t appear to be coming from POTUS or the democratic leadership at the moment.  

At this writing, it seems that Senator McCain has lined up most of the quavering, cranky republicans, getting them to hold fast long enough to wring out some bailout concessions that might mitigate the scale and severity of this money transfer, and reduce, however minimally, the risk of an intolerable drain on the public treasury. 

As I wrote in my last post, most of us are strongly predisposed not to send good money after bad… at least when we have a moment of sober reflection.  In this crisis atmosphere, sober reflection is measured by a single night’s fitful rest between frantic negotiating sessions.

As this parody of posturing - punctuated by occasional flashes of common sense – unfolds, it is well to remember the basic economic rules that never fail to operate. Their iron grip on any monetary exchange dynamic is why economics has been called the “dismal science”.  The hard messages of economic laws continue to disappoint the naïve, the unrealistic and the unprepared.

Here are three rules of money creation everyone should know:

(1) Money is a commodity.

(2) Like any other commodity, the value of money is governed by supply and demand.

(3) Ever since the gold standard was abandoned, money is measured only by what it will buy in the general marketplace, which is a function how much money is set loose in the economy chasing how many goods and services whose sellers are willing to take it in an  exchange.

If that picture suggests a circular measure of value, you are on the right page.  The fed can create money out of thin air, but its actual value is always determined by larger, utterly impersonal forces.  The desirability of owning American money is a function of its utility in a huge circle of purchases and sales the very center of which are those specifically American goods and services (including our overvalued real estate) that people, business and countries are willing and able to buy at a given price.  The fed can pump money into the economic system virtually at will, but it cannot create the goods and services on which its desirability and utility depend, nor create demand for them.

Here are three rules of public policy that everyone should know:

(1) All innovative development involves the risk of failure; without some risk taking, economies and civilizations stagnate and decline.

(2) Risk takers are driven by the hope of reward and are willing to accept the cost of failure; and paradoxically this remains true even when failure is several times more likely than success.

(3) When policy makers take away the rewards of those whose innovations were achieved at risk (by heavily or differentially taxing them), or significantly mitigate the costs of those whose innovations failed (by subsidizing them), there are always negative consequences; innovation dries up, the economy begins to stagnate and decline.

Nothing I’ve just said applies to the economic predators who attempt to game the economic system to grab short term profits without having developed any useful or valuable innovations, except more clever forms of theft.  No system is more open to predatory gaming than one that is infected with politically manipulated subsidies.  The prospect of punishment tends to deter greed only to a point.  Better still – scrub the process of all the greed opportunities, taking care not to confuse the rewards to legitimate risk takers as predatory.  To the contrary, risk taking innovation, writ large, is a form of natural altruism kept alive by the prospect of an occasional legitimate jackpot.

BOTTOM LINE

There is a very strong case for letting the lending institutions involved in the current crisis to actually fail and for injecting the money necessary to restore the damaged credit system on an as needed basis to an entirely new set of lenders who are forewarned by the collapse of the bad lenders: Be prudent - we will not pick you up if you fall.

JBG

September 23, 2008

Bailing Who? Why? How Much?

As Published On
The Out-Lawyer’s Blog: http://www.jaygaskill.com/blog1
And
The Policy Think Site: http://www.jaygaskill.com
All contents, unless otherwise indicated are
Copyright © 2005, 2006, 2007 and 2008 by Jay B. Gaskill
Permission to publish, distribute or print all or part of this article (except for personal use) is needed. [Permission for use in group discussions is almost always routinely given.]
Please contact Jay B. Gaskill, attorney at law, via e mail at law@jaygaskill.com

 

 

POPULIST ECONOMICS 101- The Reckoning Has Arrived

 

As I write this, the federal establishment is trying to contain the economic spillover damage from the collapse of a huge real estate pyramid scheme that has entangled itself with the banking and credit systems such that many large scale lending institutions must either be allowed to fail or somehow must be “rescued” by a massive infusion of public funds on the order of a trillion dollars (all told).  

 

How Big is Big?

 

First let’s get a handle on the scale. 


The US GNP for 2007 was about 13.8 trillion dollars and the current national debt is about 9.7 trillion.  For the first half of this year, the federal deficit was reported by the Treasury Department at about .311 trillion. 

 

News flash: Our debt/deficit was growing before the proposed bailout but that was nothing compared to what we are about to see…

 

For comparison purposes, as recently as 2000, our GNP was only 10.5 trillion, compared with Japan’s 4.8, Germany’s 2.2, Britain’s 1.5 France’s 1.5, and China’s 1.3 (all approximate numbers).  In 2004, China’s GNP (an unreliable number) was about 1.67 trillion. [Accurate later numbers for China are even harder to come by.]

 

I’m employing some rough and ready arithmetic and just to arrive at an appreciation of the scale of the current bailout proposal. Here are some scale elements to ponder:

 

  • The total national debt is about 70% of the Gross National Product.
  • The current federal deficit (if below .4 trillion as reported) is still less than 3% of the GNP.  
  • To retire only 50% of the current debt over the next 10 years would require a budget surplus of about .7 trillion dollars every year and – obviously – a complete halt to deficit spending.
  • The Chinese and other foreign interests own an embarrassingly large percentage of the national debt.
  • The pending .7 trillion bailout is about twice the size of the current deficit and about 5% of the entire national debt.  It would have been almost 10% of our country’s gross national product in the year 2000.

 

Political and Economic Toxicity

 

The leaders who are attempting to sell the federal bailout are describing it as a purchase of “toxic” assets. This is an adroit way of distracting us from the fact that the real estate bubble was a giant pyramid scheme. As you can see from the scale discussion above, it was a very large scam in which the “assets” to be purchased – mortgages secured by hugely overvalued real estate – are the “bag” that pyramid scheme dupes are left holding when the entire investment house of cards falls down on them.  But the “dupes” to be rescued in this catastrophe are not the home buyers-in-default. No, we are to rescue the allegedly hapless lenders who should have known better and probably did.  The parties to be rescued are the very architects of the scheme.

 

So why should we support this particular bailout?  The case is being presented that the damage to the ready flow of money in the form of credit lending capability in the US will be so impaired that consumer spending and business investment will wither, driving the country into recession.  This an argument based on scale, one that could (but will not) be restated thus – “This was such a huge crime that we have little choice but to hire the same criminals to repair the damage”.

 

I believe that the claim that we cannot rescue the flow of credit in the US economy without buying up the bad mortgages for the institutions foolish enough to have acquired them is just not true.  The impact on credit liquidity could be redressed in other ways, using second tier lenders, for example, that are not tainted by participation in the “toxic” scheme. 

 

Underwriting a Pyramid Scheme

 

This whole mess began two decades ago when federal policy makers decided to promote home ownership with an enthusiasm that violated the rules of common sense. In effect federal policy underwrote and promoted a massive pyramid scheme based on a mythical, never-ending real estate boom, supported by the myth of forever secure jobs and endlessly rising incomes.

 

When the government effectively forces lenders to provide purchase money for poorly qualified buyers under conditions and circumstances so unrealistic that a brutal correction is inevitable, there really will be a correction and it really will be brutal.  Overvalued assets are still subject to the laws of supply and demand because demand is always constrained by income.  A postponed reckoning for short term profit taking defines a pyramid scheme. The reckoning has arrived.

 

Populist Rules

 

Here are three populist rules that any elected public official ignores at great peril:

 

  • The political elites who appropriate the money of the people to bail out miscreant / negligent elites are accessories to the original crime.
  • The experts who couldn’t see the train wreck coming until too late who promise, “Trust me this time, I really know how to fix this,” cannot be trusted.
  • Those who advocate throwing good money after bad are almost always fools.  If it doesn’t work in the slot machines and gaming tables, why will it work better when you start adding the zeroes? 

 

JBG

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