jim moran on what is wrong with economy

"Right now we've got to get this economy back on its feet," said Rep. Jim Moran (D-VA) (and I swear to God that is his actual name). "And the most de-stimulating part of our economy right now is state and local spending. They're cutting back and in fact in the last three months they cut about 100,000 jobs. In the last two years they've cut over 300,000 jobs. These are people who won't be able to make their mortgage payments, who won't be shopping at stores, who will be pulling the economy down..."

Really?  This moran really thinks the most destimulating part of our economy is lack of state and local spending? Is this in anyway a defensible viewpoint?  But I guess this is what you think when you represent northern Virginia and the only reason there are jobs there is because the huge largess of the federal government which takes money from the productive members of the rest of the country so that people in Moran's district can push some paper around.  Let's look at Exhibit A to see whether job losses in the public sector are a major problem right now.

Exhibit A

So state and local government job losses, which are more than offset by the number of jobs added by the federal government and are only 1.7% the number of losses in the private sector, are the major destimulating factor in the economy?  Look, the House and Senate just passed the $26 billion bailout of state governments.  This is nothing more than a special interest payout to union members by the democrats.  This money was meant for the American Federation of Teachers and the American Federation of State, County and Municipal Employees as payback for the campaigning for democrats the past few cycles.  Their major constituency wanted some cash and they got it.

And I am tired of the staright up bullshit that we have to do it "for the children."  Nothing about this money is going to help children.  These unions don't care about the children.  Now I'm not saying that teachers don't care about their students, but I am saying that the unions don't.  I could go on a rant about how the teacher's unions are the number one reason why are public schools are failing, but I already did, although only partially, here and here.  In short, teachers can't be fired, so once they are hired they continue to educate our kids even if they are horrible.  Why is this acceptable in our society?  Everyone in every other kind of profession is accountable.  And not only accountable for the amount of effort they put in.  They are accountable for RESULTS.  I don't give two shits if you are a teacher who comes in early and leaves late.  If your kids aren't getting the proper education then you should be fired and try a career doing something else.  This is the way it works in the real world.

But alas this is to no avail.  The only study I could find was in 2005 and the U.S. was ranked third in education spending in the world at around $8,000 per pupil (here).  However, that number is way under the actual spending levels as it includes only what is spent by state and local districts directly on the pupils.  It does not include the money that goes into the education bureaucracy or the outlays spent directly by the federal government.  In fact these two recent studies by the Washington Post and the Cato Institute showed that actual per student spending was closer to $25,000 and $19,000 in the school districts in Washington, D.C. and Los Angeles, receptively.  And these are two of the worst schoold districts in the country.  Until we recognize that accountability of educators and not spending it what is needed, public schools will continue to fail.  But don't worry, that moran said that we can alleviate the biggest destimulating section of the economy by giving them tens of billions more!  And I'm sure this money will lead to better results.  Until it doesn't.  And then the teachers demand more money.  And the cycle continues...

why the current financial reform proposals are fundamentally flawed

Last night GOP senators blocked an attempt by the Democratic majority to bring Chris Dodd's (D-CT) financial reform bill the the floor of the Senate so that it could be debated and voted upon.   Majority Leader Harry Reid has already said that he would bring the bill back to the floor for another cloture vote this afternoon.  Democrats are attempting to characterize this GOP opposition as purely political: according to their storyline the Republicare in the bed with the likes of Goldman Sachs and are only attempting to block reform so that they can increase their campaign contributions.  This blatant partisan attack does little more that distract from the substance of the bill, and I have no doubt that the Democratic attacks are designed to do just that.  Anyone who has followed the housing and financial markets over the past decade understands that one of the major causes of the financial crisis were some of the policies enacted by Dodd's Banking Committee and his counterpart in the House, Barney Frank (D-MA).  Obviously neither man admits any of this, and their financial reform bill does nothing to stop many of the practices that led to the housing bubble.  So, in the interest of having a informed debate, rather than one of rhetoric, I will lay out may objections to the current financial reform proposal and explain how I would address the problem instead.

From what I can tell, Dodd's bill has three major sections: 1) The creation of a Consumer Financial Protection Agency that will regulate the so called "predatory lending practices" that dooped so many people into buying homes they couldn't afford and spending to much money on their credit cards; 2) Ends the over-the-counter treatment of most derivative investment contracts (CDOs, MBSs, etc.) by forcing them to be traded on an exchange; and 3) Creating a "Resolution Authority" within The FDIC that would be capable of dissolving banks, bank holding companies and other financial institutions deemed to be a systematic risk if they fail.  Man that is some exciting stuff.  Now you can see why it is so easy for the Democrats to claim that this is major reform because 98% of Americans have no idea what any of these things mean.

Starting with number one, my basic beef with the Consumer Financial Protection Agency is that it even if one was in place prior to the recession, it probably would have done very little to help stop the financial crisis.  We all now agree that many people were taking on more loans that in retrospect they could not afford.  This was based on the faulty presumption that the housing market would continue to climb in value, and that even if borrowers were paying very high interest rates after the teaser rate of a sub-prime or Alt-A loan expired, this imbalance would more than be made up for by the increase in equity owned by the homeowner based on the home's increased value.  Presumably he could use this increased equity to refinance if payments could not be met.  Well guess what?  The market fell out, and now many homeowners owe more than the total equity value of their house.  This makes defaulting a rational decision in many cases. 

So according to the Democratic pundits the Consumer Protection Agency would have stopped these bad loans from happening and all would be well.  BULLSHIT.  If there is one thing that is true about all governmental regulators it is that they are backward looking.  All regulators were created because of some event in the past that caused a large amount of financial hardship.  The regulators attempt to stop that specific type of situation from happening again.  The sub-prime crisis was a novel problem in the financial markets.  The very large majority of people, including many sophisticated investors who are much smarter and more savvy than any potential regulators, did not see it coming and lost A LOT of money.  When people lose that much money, then it is a sign that the downturn was very hard to foresee.  It is easy in hindsight to try and stop things that have happened in the past, but in reality it is impossible to predict the problems that will arise in the future.  The next "crisis" will probably have nothing to do with the mortgage market, and even if it did the CFPA would probably fail to stop it anyway.  This really is about a government power grab, so that the government can set all the applicable rates and provisions of almost any financial deal.  They will outlaw certain kinds of loans, favor others, and basically attempt to micromanage decisions that should be made of individual, case-by-case basis.  As is always the case, lobbyists will have a field day because their clients will want to get tight with the regulators so that their offerings will get preferred treatment over that of a competitor.  This will inevitably lead to crony capitalism at its worst.

Secondly, I really think that derivative contracts have gotten a bad name from all of this.  Yes, I ONE HUNDRED PERCENT AGREE that the proliferation of mortgage backed securities and credit default swaps (which were instruments that were intended to spread risk) led to a situation were counter parties were dependent on each others' solvency.  However, why, fundamentally, is this a bad thing?  Because it leads to "too big to fail" says Paulson/Bernacke/Geithner/Summers.  No it does not.  Period.  No one, and I mean no one, is too big to fail.  Let's look at what happened to Lehman Brothers.  They failed.  They went bankrupt.  Did it have an extremely negative impact of financial markets?  Of course.  Credit was extremely hard to find, people started calling debts and most firms had short term liquidity issues.  Did it lead to the end of the world?  No.  That is because we have a bankruptcy system in this country for a reason.  Just because Lehman was forced to take huge losses and dissolve does NOT mean that the good assets of the company went away.  Lehman provided many profitable services and products even up to and after its bankruptcy.  These sectors were sold off during their bankruptcy to help pay off creditors and finance losses in other business areas.  To this day I am not convinced that AIG/Goldman Sachs/CitiBank bankruptcies would have led to the end of the world.  Are you?  Would things have been bad for a while?  Yes, but they are also very bad right now.  But what happens when you allow of a market correction rather than a bailout is that you get the bad assets out of the system immediately.  Instead, we prolonged the problem and helped pass it on to our kids through ridiculous amounts of debt.  In a non-bailout world, the smart firms who could afford to buy up Goldman's bad assets in  bankruptcy would be the ones with market share today, and the moral hazard of bailouts would be eliminated.  Nothing sends a better signal to market actors to rethink their positions than the knowledge that they bare both the risk of failure and are entitled to the benefits of success.  Instead, we rewarded failed firms that that in retrospect misused many derivatives to the detriment of firms that did not.  No amount of regulation of derivatives would do more to temper there use than allowing firms that use them in ultimately unprofitable ways to fail, just like any other multiparty contracts. 

Additionally, derivatives serve many important roles in the financial system such as providing a hedge to risk.  A lot has been made about Goldman's supposed "fraud."  That type of "fraud" (selling a security to two sides: one side with a long position, one side with a short position) helps drive markets to their true value by increasing total information built into the product prices.  Even if people were using derivatives to bet against the housing market, that is a good thing.  It shows that people believe prices are overvalued, helping to deflate the bubble earlier than it would have been absent the derivative trades.  Rather than forcing all derivatives to be traded on exchanges, counter-party solvency and fear of default would provide enough incentive for firms to contract accordingly.  That is only true, however, if firm failure is an option.

Lastly, and in my mind most importantly, is the resolution authority granted to the FDIC.  First, you just read my take on too big to fail, but that doesn't mean that we currently have a perfect mechanism for dissolving failing financial firms.  We don't.  But the best place to do that is in a bankruptcy court, which can provide at least a little bit of insulation from political interests interfering with the process.  But anyway if all the bill did was to create this resolution authority for the purposes of liquidating of a firm entering resolution, that wouldn't be too bad.  However, the Dodd bill gives the FDIC clear authority to engage in loan guarantees during a crisis for any company deemed to be systemically important to the financial system.  This is a bailout authority for creditors in addition to the resolution authority!!!!!  The FDIC can accept any collateral it chooses to borrow up to 90% of the assets value to provide guarantees for for these companies creditors.  And nowhere in the bill does it say that these guaruntees must be made equally and fairly for all creditors.  WE ARE JUST ASKING FOR THE SAME KIND OF FAVORITISM SHOWN TO CREDITORS IN THE CHRYSLER/GM BAILOUTS.  This is simply unacceptable.  Obviously it makes legislators' jobs very easy to simply leave it to the FDIC to determine how and when to exercise this authority, but this puts the the U.S. taxpayer on the hook for the mistakes of political favorites.  For example, take CitiBank.  If the FDIC had used this authority to bailout Citi's creditors it could have borrowed up to $1 trillion. 

Finally, it is absolutely ridiculous that the role of Fannie Mae and Freddie Mac played in the financial crisis is completely ignored in the bill.  Together the two firms have already borrowed $125 billion from the feds and the Congressional Budget Office predicts they ultimately will drain $380 billion.  This is far more than any of the TARP expenses for all the financial firms and auto makers combined.  And we probably have no chance of ever being repaid.  Almost of these losses were realized because of a misplaced government mandate that Fannie and Freddie provide loan guarantees to spur home ownership among low income individuals.  These companies were a moral hazard in the housing market.  They were implicitly backed by the government and were more than willing to back some of the riskiest loans in the housing market.  But alas, they are ignored in the legislation..  Hopefully, the CFPA will crack down on Fannie and Freddie's predatory lending practices.

gm revisted and how does protectionism affect you?

Since December 2008, GMAC Financial Services, the financing arm of General Motors, has received approximately $12.5 billion in TARP money in an attempt to stabilize the company so that GM could fully recover.  At the time we were told that the money was necessary in order to save the automaker, and that they loans would be repaid once GM recovered.  Well looks like the "repayment" won't be coming anytime soon.  Yesterday the Treasury announced that it was giving GMAC an additional $3.5 billion in order to keep the company solvent.  After conducting a stress-test of the Company a few months ago, the Treasury required GMAC to raise more capital so that it would have enough capital on hand to cover any future losses, which are expected to continue into 2010.  However, GMAC was not able to find any private lenders to fill the void, so it was forced to turn to the federal government for yet another bailout.

Can anyone guess why GMAC could not find financing from the private sector?  Anyone?  It's not really that difficult a question.  Just look what happened to previous GMAC lenders.  They were the secured creditors who were left out in the cold when the Federal Government bailed out GM last year.  Rather than offering the creditors who secured their loans on GMAC's tangible assets a fair price based on the liquidation value of the company, the relative strength of their bargaining positions and contracts upon which the loans were based, Obama catered to the union special interests and made sure that lenders faced much stiffer losses (The union received approximately $10 billion in cash, $6.5 billion in dividend preferred stock and a 20% equity stake in the restructured company for about $20 billion in claims; compare this with $27 billion in claims by secured creditors who received 10-15% of restructured equity and no cash or preferred stock).

Why would anyone in their right mind lend money to GMAC after that?  If the company fails, which in my opinion is more likely than not, you will never get a fair deal for the return of your capital regardless of any contractual terms you negotiate.  This lack of private lending available to GMAC, as well as GM, is the inevitable consequence of the governmental interference in the contracts between lenders and GM.  If a lender cannot contractually guarantee a benefit for himself, then the contract has no value to him, as he now assumes all risk, and the contract will not be made.  Hence no private lending to companies that received federal bailouts.  I have no doubt that Geithner and Obama foresaw this outcome.  However, Obama has no problem nationalizing an industry and sees no problem with continued governmental control.  This was his ultimate goal.

None of this should be surprising.  Obama, although he espouses the virtues of private industry on camera to hide his socialist nature, has consistently funded government intervention and control over what should properly be a private venture.  Just look at Fannie Mae and Freddie Mac.  On Christmas Eve the government announced that it was removing the $400 billion cap on bailouts for the two GSEs.  That's right, they made this major policy announcement on Christmas Eve.  Why do yo think they would do this?  Of course they don't want people to know it.  And the vast majority of our retarded population will never have any idea.  News like this is is just words that get in the way of real news like the coverage of the Tiger Woods "scandal" and the death of Michael Jackson.  The announcement was made on a holiday and I guarantee that 99.9% of the population didn't know it happened.  But once again that's the way Obama roles.

Another example of the government intervening to protect a democratic political ally (once again the unions.  SUPRISE!) was the U.S. International Trade Commissions ruling that chinese steel imports "unfairly damaged" U.S. steel makers by receiving subsidies from the Chinese government.  The first question we should always ask in any antitrust or anticompetitive ruling is what is the goal of such a policy.  I belive that a smartly designed policy would be to ensure the protection of competition, not protection of competitors.  Our goal should be to ensure that access to a free and open market is not compromised, not that all competitors are protected from their own failures arising from rejection of their products in the marketplace.

This is the exact opposite of what occurred here.  U.S. steel makers are the United Steelworkers Union brought the case to the ITC under the dubious claim that the chinese "unfairly subsidized" their own domestic producers at the expense of U.S. producers.  First, what is the competition related problem with a government subsidy, which are often handed out in this country by the way?  How does this affect the ability of the market to function correctly?  It doesn't.  What is wrong with allowing the Chinese government to subsidize U.S. consumers of steel?  The subsidies make it cheaper to produced anything requiring steel at the expense of the Chinese taxpayer.  Sounds like a good deal to me.  There is nothing inherently wrong with that type of price competition.  If however, the Chinese jack up prices after eliminating such competition, that is an blatant predatory pricing violation of both the Sherman and Clayton Acts, and the chinese manufacturers would be subject to the stiff penalties outlined by that antitrust legislation.

However, the real reason for the I.T.C. ruling was to protect the domestic steel workers union at the expense of U.S. steel consumers (read EVERYONE).  They want to continue the status quo of impracticable benefits, unsustainable wages and absolutely no competition among workers.  I for one am sick and tired or it.  Why are the large majority of Americans expected to be productive or lose their job while teachers, government workers and other union members receive huge guarantees in pay and pensions while very little chance of ever being fired even if they are grossly negligent.  This double standard must change, and employees all across the U.S. should succeed based on merit, not political favor.

One final recommendation: to learn more about why protectionism is bad policy and why governmental intervention will almost never result in a positive outcome for the majority of the population please Free to Choose by Milton Friedman.  This rational market view of economics is straightforward, easy to understand and dispels many of the scare tactics and arguments put forward by the socialist apologists.  I still think it is the best book I have ever read (non-fiction).

the gm deal and paying for universal healthcare

The bailout to save a second troubled automaker, this time its GM, is all but finished. Although it is still likely that GM will file for bankruptcy protection on Monday, the details of the deal that were advanced by Geithner and the Treasury Department, are pretty much set, pending final approval by the UAW workers. The UAW and their retirees are the big winners in the deal. The union and the trust tasked with safeguarding the UAW retiree's pension benefits holds approximately $20 billion in claims against GM. In exchange for settling the claims, the UAW will receive $10 billion in cash money, a 17.5% stake in the restructured GM, an option to purchase another 2.5% down the line (but to be fair, it is not likely they will exercise that option because of unfavorable terms in the warrant, so let's just assume it will stay at 17.5%), $6.5 billion in dividend preferred stock paying an astronomical 9% dividend, AND about $2.5 billion in promissory notes. Wow, that is a mouthful. Contrast that deal with the one received by GM's secured creditors, which are owed approximately $27 billion. They will receive a 10% stake in the restructured company and warrants to purchase another 15% in about a decade. So the secured creditors are receiving less equity and no cash for more total claims than a group that is on-par with other unsecured creditors.

Now I understand that this is not a bankruptcy proceeding, but a voluntary agreement, but let's get this straight: it is voluntary in the same sense as the situation where one of the parties threatens to physically harm the other party in negotiations, inducing the party that is threatened to agree to terms. In this sense almost any action can be considered voluntary because the party is voluntarily acquiescing, albeit due to threats of violence. In the case of GM, the large majority of the secured creditors are the major banks, including Citi, Bank of America and the old Wells Fargo (not sure what they are now, Wacovia maybe?). The arbiter is the Treasury Department; the same treasury department that controls many of the decisions that the banks are allowed to make as a condition of their receiving TARP money last year. In other words, since the banks have not yet repayed the TARP money, the Treasury can make their lives very difficult if they do not like what the bank is doing. Therefore, the banks, fearful of retribution by Geithner by way of terms associated with TARP funds, are almost forced to accept less than they could achieve through bankruptcy. If this isn't strong arming I don't know what is. And the Obama administration is playing politics by playing softball with the UAW, giving them a larger ownership share AND CASH FOR HALF THEIR CLAIMS. This supposed to make up for further concessions by the union in their collective bargaining agreement, but a UAW press released claimed, "[f]or our active members these tentative changes mean no loss in your base hourly pay, no reduction in your healthcare and no reduction in pensions." (Link here to read the actual memo released just a few days ago.) So much for concessions that make GM profitable.

So if the UAW is getting 17.5% of the equity, bondholders another 10%, who is going to get the rest of the company? The answer is... you guessed it! The federal government! Does anyone really believe that GM is going to be profitable anytime in the immediate future? Just because they have received a ton of taxpayer money (all told the total amount is projected to be $100 billion) doesn't mean that they are magically going to start making cars people are going to want to buy. A partnership between the federal government and the UAW doesn't seem like the type of ownership that will focus on the cost cutting and efficiencies necessary to get GM out of the red and into the black, once again making it a profitable company. The UAW is going to continue business as usual, sacrificing profitability for more benefits for workers. But don't worry, the unlimited cash cow, the federal government, is their partner so I'm sure there will be plenty of money to go around, regardless of how much the company is losing. Nobody will complain when the tax payer foots the bill, will they? Mark my words, unfortunately the U.S. government is now a majority owner of the largest automanufacturer in the world and they are not going to relinquish that hold anytime soon. For the next few years, GM will bleed money and the federal government will finance the losses. The only bright side is that this may be an issue Republicans will be able to use against Obama and the democrats in 2010 and beyond.

Lastly, although there is more I want to say regarding Obama's recent proposals to finance universal healthcare, I just want to comment one of the ideas. For a breakdown of a few of Obama's proposals check out this Wall Street Journal article. Even Obama admits that the costs of such a program will be huge, and that the feds will have to increase revenue to pay for it. One of the proposals is to make it so that contributions to health savings accounts would no longer be tax deductible. Currently there is very little incentive for insured individuals to curtail their healthcare expenditures. Typically low deductibles and the co-pay amounts do not reflect the actual cost of the services rendered. Therefore the price payed by the consumer does not serve its critical function of relaying the information regarding the costs of the services to downstream users. Since the price is distorted, there is no incentive to only use the service when it is marginally beneficial. Therefore, the services are overused, imposing larger costs on the system as whole. Health savings accounts go a long way in fixing this problem. Typically, they will be employed in combination with traditional catastrophic insurance coverage with a high deductible. Instead of comprehensive coverage, the patient will contribute part of his paycheck into the health savings account for use for future medical services that are below the price of the high deductible. Typically the contributions are partially matched by the employer and are tax deductible, just like other contributions to health insurance.

Under such a system, the patient would have to pay the full amount of any treatments received up to the deductible amount. They will make these payments from their health savings account. Since the patient is allowed to keep contributions to the savings account that are not used, he has a strong incentive to save as much of it as possible. Therefore, in cases where he may or may not have to go to the doctor (like when he has a head cold), he will probably choose not to go if the price of the visit is more valuable to him than the benefits of the visit. There is no such incentive in a system where a doctor visit only costs a $15 co-pay. By allowing the price system to function effectively, costs on the system as a whole are reduced because only transactions that both sides consider necessary and beneficial will occur. However, by eliminating the tax deduction associated with health savings accounts, the Obama administration is attempting to provide fewer incentives for more people to adopt such a system. He would like to replace this capitalist solution with his socialist system where everyone buys insurance from the federal government.

one more year of school

I have finally finished my finals, so I am no officially done with my second year of law school.  Unlike many law students, I am in no hurry to get out of law school because attending school in Austin, Texas is pretty much the best thing ever.  But anyway, I should have plenty of time to blog over the Summer, so hopefully I keep this updated with a bunch of new posts.

First, my roommate Randy pointed out this Peter King article from his weekly Monday Morning Quarterback column.  The article does a good job of breaking down why the Eagles had one of the best drafts in the league in 2009 and is an interesting glimpse at how the Eagles front office approaches the draft.  Obviously I loved the Eagles draft this year: we got better at every offensive skill position, were able to get players with great value for the position they were taken, and added a couple of picks next year.  I am really pumped for the Eagles this season.  I think they have to be the favorites to not only win the NFC East, but the NFC as well.  

On a similar Philly sports note, the Raul Ibanez signing has worked out better than I could have ever imagined.  Nobody is happier about this than my Dad, since now he can constantly remind me how much better Ibanez is playing than former Phillies left-fielder Pat Burrell.  But I must say that Ibanez has been outstanding.  He hit his 14th homer of the year tonight and is hitting over 0.350.  I complained initially after the signing, mostly because of what we had to pay him, how old he was, and we lost our only slugging right-handed bat just to add another lefty.  But the results speak for themselves.  If Ibanez keeps up this pace, he would be the NL MVP.  If the Phils' starting pitchers ever get it together, they are gonna be a tough team to beat.

Game 1 of the Eastern Conference finals just ended in a 107-106 upset win for Orlando.  Very good game.  In the final minutes both teams hit big shots, but the other kept answering.  When LeBron got a huge and one with 25 seconds left to put Cleveland up by two, I thought it was over for sure.  But Rashard Lewis hit a huge three with a hand in his face to give Orlando the eventual win.  I think this is gonna be a tough series for the Cavs, who haven't been challenged at all yet in the playoffs, but I think they still are going to win in six.  Obviously I love LeBron, but I think Moe Williams is the key for the Cavs.  If he can create for himself, that will really open things up for LeBron, and when he isn't forced to do everything himself, he is pretty much unstoppable.  

Lastly, I want to post a letter my dad sent into a bunch of newspapers after the Chrysler bankruptcy agreement was released.  I think he is absolutely right, and the moral of the story is that whenever the government becomes so deeply entrenched in private business, it will be able to unfairly flex its muscles in negotiations and get exactly what it wants.  In this case, they used the TARP bailouts as leverage against several of Chrysler's secured creditors, forcing them to accept the government offer.  Unfortunately, the banks receiving the bailouts may have been Chrysler's largest creditors, but not their only secured creditors.  The smaller bondholders were forced to accept whatever the large banks acquiesced to because the large banks held a large enough amount of the debt to force the smaller creditors to take a raw deal.  The smaller bondholders were ready to force the issue in bankruptcy court, but the big banks decided it was in their best interest to to take a loss in this transaction so that they could continue to receive billions more in bailouts over the coming months.  It is a perfect example of government intervention favoring certain companies over others.  And people wonder why so much is spent on lobbying and special interests seem to run Washington.  When the federal government routinely gets involved in private enterprise, of course the companies are going to lobby both elected officials and government bureaucrats.  They have a huge incentive.  Anyway, below is the text of my Dad's letter.

While the average taxpayer goes about their business the federal government is in the process of nationalizing the automobile industry. As part of their proposed reorganization plan, both Chrysler (which entered bankruptcy court on May 1, 2009) and General Motors have proposed a federal government/auto workers union partnership to “save” these two companies. As part of this plan, the taxpayer is expected to be the piggy bank that finances this partnership.

This is the second major industry (the banking industry was the first) the feds are in the process of nationalizing. The health care and energy industries are next in the sights of our Washington politicians.

If the Obama admistration has its way, the big winners in this arrangement will be the united auto workers. The UAW and their pension fund will own 55% of Chrysler while the bondholders (who are secured creditors in bankruptcy court) were offered less then 10% position. It is obvious that the Obama administration is partnering with the UAW to run the auto industry. The bond holders (lenders who have lent Chrysler billions of dollars) are being asked to take a bath for the benefit of the UAW.

For two centuries the free market economic system in the United States has been the economic engine that was the envy of the world. The free market economic system has allowed a relatively obscure collection of 13 colonies to develop into the most powerful and wealthy economy ever seen in this world. There have been ups and downs in the economy over the centuries but when left alone, capitalism has an amazing self correcting mechanism to deal with its excesses. Limited government, sound money, free markets allowed free people to prosper in a way that had not been seen in this world.

Markets were free and hard work was rewarded throughout American history. Since the new deal was enacted in the 1930’s the federal government has injected itself more and more in the free market economy. More and more taxes and regulations were enacted to draw valuable assets from the private sector into the hands of the government. Along the way, government spending increased to the point taxes were not enough to cover expenses. Massive borrowing, deficit spending and an unsustainable national debt resulted.

Up to now, capitalism has been able to survive excessive taxation and regulation and still return a portion of its wealth to the tax man to finance our welfare society. The banking and auto industry bailouts are the beginning of a movement to nationalize our major wealth producing industries. The government has proven that everything it touches it cannot manage properly and will typically require unlimited subsidies to survive. With the banking, auto, health care and energy industries under government control in the future, these wealth creating industries face a bleak future. And as we move further toward European style socialism, our freedom and our individual and national wealth will gradually erode. The standard of living for the average person will continue to decline as our national wealth erodes.

Once we as a society nationalize and regulate the major wealth producing industries, the wealth will be eliminated from the national equation and we will have effectively “destroyed the goose that laid the golden eggs”. This will have negative long lasting effects on our economic and political freedom (they go hand-in-hand). This will also affect our individual and national wealth and equally important our national security. Our national wealth allows us to have a military that has been the envy of the world and one that is rarely challenged.

What does all this have to do with the Chrysler bailout you say? We as a society have reached an inflection point. We have begun a journey toward socialism. Do we allow our economy to move from a capitalist system to a socialist system? Do we allow the unions along with the government to force out private investors with little or no compensation? Do we remove risk taking and reward from the business equation? Do we eliminate individual responsibility from society and replace it with collectivism? Do we say that society is responsible for the individual and not the individual responsible for themselves? All these broad questions are being answered in the context of the Chrysler bailout.

The Chrysler bailout if executed as proposed by the Obama administration will continue the pattern of opportunistic takeovers by the Obama administration. In a few years we will have our banking, automobile, health care and energy industries owned and/or operated by the US government. Is this the change you wanted? Is this what you were hoping for? Do we want our children some day to ask how did we allow this to happen?

the choice is now

I've been thinking about this for a while now.  For over two hundred years the United States has been a beacon of light in a sometimes dark world.  The reason for this is the hope and freedom America has stood for.  During his campaign President Obama campaigned on a similar message of hope.  But what has been America's "theme" been since its inception?  I think it's been the American Dream: the freedom to pursue your own interests and better your place in society through hard work and free enterprise.  This simple, but remarkably inspiring idea of a society of truly free men, has inspired millions of Americans and immigrants alike over the past two centuries.  While much of the rest of the world has been under the darkness of tyranny, oppression and totalitarian regimes, America has stood up for the ideals of life, liberty and the pursuit of happiness.

Unfortunately, many of these values seem to be eroding away in today's America.  I was inspired to write this post after reading a WSJ commentary entitled "The Real Culture War is Over Capitalism," (thanks for the recommendation Dad) but I think the current cultural class in America goes beyond capitalism, it is over individual liberty and personal autonomy in general.  Yesterday, the preliminary plans for a restructured GM and Chrysler were released to the public.  In each case the government will have large shares of the companies.  In the case of GM, the federal government will receive a 50% stake in the newly restructured company in exchange for $16.2 billion in treasury loans and $8.1 billion in GM debt.  By some estimates,  this could amount to a return-on-investment of up to $0.87 on the dollar.  Current private bondholders of GM stock, who currently own about $27.2 billion in unsecured GM credit, would receive only a 10% stake in exchange for a debt-for-equity swap.  This amounts to a return of less than five cents on the dollar.  How is this fair?  In a traditional bankruptcy both would be considered unsecured creditors, and would be treated relatively equally.  Instead the Government and their chosen "winners" (in this case the UAW who received a 39% stake after concessions in their collective bargaining agreements) make out like bandits while private investors and lenders receive the short end of the stick.  

However, the auto industry is only part of a much larger and more troubling trend.  America is moving away from the idea that hard work and doing the right thing should be rewarded.  Instead we are becoming a country where we think everyone, regardless of how well you planned for the future or took into consideration long term consequences, should prosper.  We want a Utopian society where even bad investments and ideas are rewarded.  That is not the American ideal, and in fact it is an unsustainable model.  Not every investment can succeed, and we can't prop up every failing industry.

There are millions of Americans out there who are doing the right thing.  They are homeowners who saved so that they could put a large enough down payment on their homes so that they could afford their mortgages.  They are small business owners who have made concessions so that they can navigate through the hard times.  They are all the other people who made the right, but unpopular choice.  You cannot have personal freedom without personal responsibility, and by eliminating the responsibilities associated with economic decisions, the federal government is eroding liberty from its citizens.  It may not seem like much now, and to many it may seem like the humane thing to do, but in a society of ordered liberty, any encroachment on these freedoms will cause our society to begin moving down a slippery slope.  If these concessions to our freedoms are ok now, what will be ok in 20 years? 50 years? 100 years?  If our history teaches us anything, once the federal government takes the power to control something, it never gives it back.  If we don't stand up now, then with each day and each concession we make, we move further and further from the ideals of the founding fathers and closer to the centralized planning government so feared in the classic novels 1984 and Brave New World.  

This may sound like a joke to some, but I take my freedom very seriously.  We are fortunate enough to live in the most free and fair society in the history of mankind.  I just want to keep it that way.

bailing out the bees

Now I constantly bitch about federal bailouts for the banking and automotive industries, but I have finally found the worse example of how to spend money.  CNN recently ran this article detailing a plan wherein over £10 million was pledged by a consortium sponsored by the British government for research over what is happening to declining bee population (Thanks Andy for pointing out this travesty).  The U.S. federal government has pledged another $5 million.  

"Now aren't bees important pollinators?" you ask.  "Shouldn't we figure out what's killing them?"  Absolutely not.  And as much as I would like to take credit, I am not the one killing the bees and now just trying to cover it up.  First, you must understand that bees are enemy number one.  More than snakes, more than sharks, in fact more than all other animals combined, bees kill more Americans every year (almost 60) than any other animals.  Not to mention it hurts real bad to get stung.  And there is almost no defense to a bee attack.  You can't out run them, they can fly, and you can't even punch them in the face.  They are simply terrible.

Why should we be using research money to save bees.  Nobody likes them, and nobody ever will.  I pledge that I will do my part and continue the bee genocide, killing any bees that give me the chance.  In fact, I just sprayed a nest on my neighbors porch the other day.  Who knows, maybe one day my children can live in a country where they don't have to live in fear for the next terrorist bee attack.