Friday, May 29, 2009

Hear Hear for Big Government... Let the Taking Begin!

" A Government Big Enough to give you everything you want is Strong Enough to take everything you have".

That quote by former president Thomas Jefferson, the author of The Declaration of Independence, was a warning about the danger to our freedom and liberty inherent in Big Government, by a man who was well acquainted with the tyranny of big government. Having disregarded Jefferson's advice, we now bare witness to the very real threat to our liberty that unbridled big government has now become .

The weak Federal government created by the founders, whose primary role was to protect our rights and guarantee our freedoms, has been superseded over the years by a powerful central government that has lost sight of it's raison d'etre . The raw power of big Government was clearly on display in it's handling of the automaker's bankruptcy negotiations. Their actions served to upend bankruptcy law and defraud bondholders of their private property rights. When a private citizen steals another's money and is caught he goes to jail; which is where Bernie Madoff resides for his participation in a scheme to defraud investors. When government officials steal from investors they go to Hollywood to tell their supporters what a great job they are doing, I think the line was "Los Angeles, you ain't seen nothing yet," then they ask for additional campaign contributions.

This is not the sort of behavior one expects from government officials. Just ask the teacher and police unions of Indiana, whose retirement accounts have been pilfered by this same auto task force. I don't think this is the change they voted for, but what the heck, it is change, and as we've been reminded, they did win! As unfortunate as it may be, you expect the administration to demonize Wall Street as merchants of greed and bash the Hedge Funds types, but cheating one group of union employees out of their retirement savings in order to fill up another group of union retiree's accounts? How do you square that one? Has someone's campaign contribution envelope been a little light lately? What else might explain it?

You can't chalk this outcome up to the fact that the task force followed the rules and one group came out on the short end of the stick. They have been breaking the rules right from the start. The TARP legislation doesn't authorize money to be spent on non financial institutions like the automakers in the first place. The rules in bankruptcy court, where Chrysler is now and GM is heading don't allow the judge to show favoritism towards a group of unsecured creditor's claims over another group of secured creditors, even if the Judge is a latina women, which Judge Gonzales is not. In my reading of Article II of the Constitution of the United States, which defines the power of the executive branch , I can't find the power which gives the President the authority to buy an automobile, let alone the whole automobile industry!

Lucky for the UAW that where they are concerned the rules are meant to be broken, and broken they have been. Just ask anyone who's been in the unfortunate position of having to negotiate with them and the political thugs for hire who do their bidding. I don't Blame the UAW; they paid good money for these services, they may be brutish, but they can only talk tough. Besides it's not Uncle Vito who's doing the knee cappings in the auto wars; believe it or not it's Uncle Sam. All these years I've labored under the false impression that Uncle Sam's wrath was reserved for folks like the Nazis, the Commies and the Terrorists. I guess we can add law-abiding retirees, bond holders and car dealers to the list of undesirables .

So, there you have it. After every investor who evaluated an investment in the bankrupt US automakers dismissed the idea, concluding they would not return to profitability, Big Government in its infinite wisdom jumped into the breach with a sack full of your Franklins. Flexing it's muscles in an unprecedented take over of the weak sisters from Detroit, it thumbed it's nose at the wisdom of the investors, instead forcing it's citizens, whom it claims to represent, to fund these unprofitable enterprises through increased government taxation.

"Hear Hear for Big Government. Let the Taking begin!"

Wednesday, May 20, 2009

"Smarter Government that Focuses on What Works" ...... When's that Going to Start?

Tuesday, the President announced his new cafe mileage standards and the world rejoiced. Well, maybe not the whole world, not even all of the automakers, but the ones on the government's life support system were wildly enthusiastic. In announcing the new standards for the industry, Dear Leader has shown them the way forward and has divined a new "Path to Prosperity". This "Change that he believes in," is a future where Detroit produces tiny little green cars; the kind you can plug into a wall outlet, get a good night's rest and be ready in the morning for your next trip into town. If this is what he truly believes, I believe he's crazy.

The Detroit Two and a half are in the mess they are in today partly as a result of cafe standards, which forced them to produce domestically small unprofitable cars. How will making these standards more difficult and costly to achieve do anything but make their situation worse, although at this point it's hard to imagine the auto companies in worse shape. The new standards mean the Auto manufacturers will need to produce ever lighter (smaller is lighter) and costlier automobiles (technology is expensive ) than they do now. The great leap forward in autos is here, or is it?

That technology is going to cost big money , which shouldn't be a problem for the Detroit Two and a half who are, after all, flush with profits from a decade of phenomenal sales and record earnings. Only kidding... sorry about that... I mean bankrupt . Where will the money come from to finance the new technologies needed? I think you already know the answer to that question: it will come from you and me. Taxpayers will fund the auto industries next, almost certain to fail government mandated attempt to sell little green econo-boxes that no one wants. This isn't change! This is what they have been doing for years, losing money on little cars people didn't want. The difference is, this time it will be your money they're losing. In my book, that's failure!

So the President, who said he didn't want to run the Auto industry, having dipped his toe into the water, in order to give a beat down to the folks who had previously financed the automakers, and finding he liked it, now stands hip deep in the nationalization pool, wading towards the deep end and a government purchase of GM in a "surgical" bankruptcy proceeding. Making his next big splash with your money, he'll top off GMACs coffers with another $7.5 Billion dollar bailout, without missing a stroke.

This example of smart government is very similar to the tiny little "Smart Car" already available. It's great if you don't want to take too many people very far, but if your ambition is to save the entire US Automobile industry, you're gonna need a big car and a private sector willing to finance profitable automakers. The President's actions of late bode poorly for the future on both counts, and shows that when it comes to autos, he seems to be in over his head.

Tuesday, May 12, 2009

Grand Theft Auto The Political Version

The popular video game, Grand Theft Auto, has seemingly exploded off the video screen in recent months, and is being played out in real time by the Obama Administration. Like the video game, it enables "political players" to take on the role of a criminal enterprise, roaming freely around fictional cities knocking over banks and insurance companies, sacking CEO's, intimidating Hedge Fund Managers, threatening Bondholders and anyone else who gets in their way, in order to score political points and win the game.

Just as in the video version, the players have names: the Ring Leader Barry, his number two man and enforcer Rohmie, and the assortment of ethically challenged, tax- dodging cronies Timmy, Tommy, and Katie.

The action in the video game takes place in make-believe cities that represent New York, San Francisco and Miami. In the real life version, the action is mainly centered in make-believe cities like Detroit, the Utopian Labor City on the hill, Washington D.C., the Financial Nerve Center of the World, and New York City, the Penal Colony for Greedy Bankers and Nefarious Wall Streeters.

Points are scored by doing the dirty work of local community organizers and running political protection rackets for liberal groups. In the video game, players steal one car at a time; in the much grander real life version, plundering the entire auto industry for the UAW is done in one fell swoop, scoring countless political points in the process. A new feature of the game is the Boeing 747, available if you want to swing by Lady Liberty and score some additional style points, while taking cool snaps to impress the guys back in Chi-town.

Unlike the video game, the real life version lets you score big by shooting up the health care industry, bullying doctors and roughing up Blue Cross and Blue Shield executives. Points can even be had for stealing vouchers from school children trying to get an education, and shaking down taxpayers to fund all sorts of shovel- ready projects (gamer code for political make- work jobs).

The sound track in the latest version of the game enables you to censor radio stations, so that you can filter out the Limbaughs, Hannitys ,Becks and other radio personalities who don't agree with your vision for America. Instead, a continuous loop of elevator- type background noise emanates from the likes of MSNBC, CNN and NBC.

In an unusual twist, considering the game is mostly played by Liberal types, there are no points awarded for being carbon neutral. It's been reported that grumbling can be heard from inside the little green hybrid/electric cars, as they hurry from issue to issue, dishing out change we can believe in, something about how cramped these little tin boxes are, and couldn't we just one time carjack one of those roomy SUV's? Apparently, a carbon tax is being written into Grand Theft Auto 2.0, assuming that release makes it past the voters.

Monday, May 11, 2009

...As Fed Fights The Last Depression Is It Losing The Inflation Battle?

General Bernanke and his Federal Reserve now find themselves hip deep in the time honored military tradition of fighting the last war, and as with all armies who fight the last war General Bernanke is in danger of losing his current battle with inflation. While fighting a deflation with an increase in the money supply is a correct policy action, seeing a deflation where there is none, the Fed Chairman reveals that he has read his history of the Great Depression and learned the wrong lessons from it.

This problem of seeing falling prices as deflation and not the result of economic contraction can't be helped as long as he views events through the lens of a Keynesian Economic Model. Keynesians see only inflation and deflation. In their economic world view they don't grasp the differences between contraction and deflation, nor expansion and inflation .

The problem he faces is similar to that of a fireman who doesn't understand the difference between the paper fire in a kitchen trash can and the grease fire on a stove. Dousing both with water, he puts one out but intensifies the other.

Had the economy actually been in a deflation, the extra liquidity the Fed added would have been the correct monetary lever to bring relief . The problem for the Fed was that we were not in a deflation, but a contraction, which can also be marked by falling prices, but will not be fixed by additional monetary ease. As a result, even with the Fed's massive expansion of it's balance sheet, prices continued to fall.

The sharp contraction of the economy, ignited by a breakdown of the loan securitization market, helped to cause falling prices. The financial hardship of falling home and securities prices, while painful to many, was providing the economic cure to the recession by once again rationalizing market prices. This, in turn, would bring private capital back to the markets in search of newly created value. The Fed, in trying to prevent the deflation that wasn't, by injecting additional liquidity into markets that didn't need it, took exactly the wrong course of action. The Fed's misstep is resulting in a fanning of the sparks of a new inflation that, along with the recovery, is just now getting underway.

As the economy slowly continues to show signs of a recovery, the Fed needs to quickly do an about face and withdraw it's monetary surge, or the battle to tame inflation will be long and hard fought, but ultimately a losing one. The Federal Reserve should then play it's part in securing our economic future by once again fixing the value of the dollar,thereby eliminating the risk of inflation and assuring economic actors that the profit negotiated in today's contracts will not be diminished by the hidden tax of inflation. Economic growth and a return to a sound currency would unwind a lot of the negative effects of the increased liquidity the Fed has produced.

What was, and is still needed, are incentives to encourage risk taking by investors and entrepreneurs. Increasing the after tax returns to capital for successful risk takers is the road to an expanding economy that will create real jobs in the private sector. Economic expansion, along with the growing profits it produces, would also provide the additional revenue the Treasury seeks. Instead, we hear talk of higher taxes, closing loopholes, and hiring additional IRS agents to beef up enforcement . None of these are pro-growth policies. Unfortunately, pro-growth incentives will probably not be forthcoming from this Congress, as Government is firmly stuck in the muddied Keynesian view that the economy is suffering from a "shortfall in aggregate demand", which in their construct can only be addressed by additional government spending when the private sector retreats.

My guess is that when the economic history of this period is written, the Feds policy of fighting a contraction with monetary stimulus, coupled with the unusually large government interventions in just about every aspect of the economy, will show that it actually resulted in prolonging the depth and breadth of this recession .