Shattered Delusions

Lately, I've been thinking about what a year 2008 was. You think of the monumental years out of the last 100: 1914, 1929, 1939, 1945, 1968, 1989, 2001. You have to agree that 2008 is in that lineup and in my lifetime, could be the most important. What did we find out? Wall Street, and US banks turned out to be a scam run by incompetents. Manufacturing giants like GM and GE weren't making money by producing things but through financial schemes. We were in Afghanistan for seven years and the Taliban were popular again. Pakistan is falling to the "terrorists." Communist China leads the capitalist world. Despite pumping in trillions of dollars and making Iraq a "democracy," the people made a hero of the man who threw the shoe at Bush.

In other words, we woke up to our delusions. I've put many core beliefs that I held under review. I'm trying to view the world with fresh eyes.

On this note, I saw this interview on Charlie Rose, with Joshua Cooper Ramo about his new chaos theory and new way of thinking. I don't agree with everything he says, and I don't agree with some of his "new thinking." But I think he has the germ of an idea here. The world has been turned upside down and our old ideas about analyzing it might be out of date. (Press play to view, it is 16 minutes.)

Bankruptcy and Bailout Money for Chrysler?

The shell game in Washington continues on the bailout front. I've been reading this and trying to understand the agreement. The Feds get Chrysler to declare bankruptcy to get rid of annoying creditors and then they pour in billions of bailout money? I don't understand. Doesn't that screw the creditors completely? The Detroit News reports:

Washington -- Chrysler LLC filed for bankruptcy protection Thursday afternoon and announced it has reached a partnership agreement with Italian automaker Fiat SpA.

The filing in U.S. Bankruptcy Court in New York is an effort to quickly wipe clean Chrysler's balance sheet, backed with $8 billion in U.S. government financing, in the hopes that the company will emerge in 30 to 60 days.

The White House forced the move Thursday after talks between the Treasury Department and some of the Auburn Hills automaker's creditors failed to reach an agreement.

"It will be efficient. It's designed to deal with those last few holdouts, and it will be controlled," President Barack Obama said in a 12-minute address from the White House. "It will not disrupt the lives of the people who work at Chrysler or live in communities that depend on it. ... I have every confidence that Chrysler will emerge from this process stronger and more competitive."

Under the plan the administration outlined Thursday, the Treasury Department will provide Chrysler with up to $3.5 billion in debtor-in-possession financing, and the Canadian and Ontario governments will provide around $800 million and get 2 percent of Chrysler's equity.

Obama confirmed Thursday that Chrysler and Turin-based Fiat reached a deal outlining the company's partnership agreement -- as well as confirming Chrysler will need a stay in bankruptcy court to erase some of its debts and liabilities and trim its dealer network.

I'm a layman when it comes to finance, but isn't this unfair to the creditors? The article also mentions that Chrysler pensions will remain intact. What is going on? How can they pick and chose who gets what? Where's the method?

UPDATE: At least one creditor feels ripped off:

At all times in the negotiations, OppenheimerFunds sought fair treatment for the shareholders of our funds and we were willing to make very significant sacrifices to reach an agreement. Along with more than 20 other secured creditors, OppenheimerFunds rejected the Government’s offers because they unfairly asked our fund shareholders to make financial sacrifices greater than those being made by unsecured creditors. Our holdings in secured Chrysler debt are entitled to priority in long-established US bankruptcy law and we are obligated to our fund shareholders to support agreements that respect these laws.

The Stimulus Plan

Better be despised for too anxious apprehensions, than ruined by too confident security.

-Edmund Burke

Congress in Action

Here's a cringe worthy youtube of Representative Maxine Waters, member of the House Financial Services Committee. This is what you get when governments run businesses? My God! I'm not even poking fun here, she seems to have health, perhaps senility issues.

PJ O'Rourke: What Would Adam Smith Think Today?

As usual, PJ hits the ball out of the park. The Financial Times has this new commentary. Don't let me get in the way, just read it:

How then would Adam Smith fix the present mess? Sorry, but it is fixed already. The answer to a decline in the value of speculative assets is to pay less for them. Job done.

We could pump the banks full of our national treasure. But Smith said: “To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, by obliging them to keep an nnecessary number of kitchen utensils.” [440]

We could send in the experts to manage our bail-out. But Smith said: “I have never known much good done by those who affect to trade for the public good.” [456]

And we could nationalise our economies. But Smith said: “The state cannot be very great of which the sovereign has leisure to carry on the trade of a wine merchant or apothecary”. [818] Or chairman of General Motors.

Read the whole thing.

"Big Bang" Financial Madness

Diane Francis in the Financial Post has speculation about how crazy the stimulus and bailout mania might get this year with the Obama administration. When I read this it's equal parts anger and panic. (read)

-Washington is going to bail out all homeowners in the United States. The U. S. government will guarantee all residential mortgages involving owner-occupants, including mortgages that are dramatically higher than the value of the underlying property.

-In return for removing mortgage loan credit risk, Washington will require banks to stretch out principal repayments to owner-occupants so that they do not exceed, on a monthly basis, more than 38% of family or owner incomes. When values or incomes go up, presumably, adjustments will be made. This will provide a floor to property values, a form of welfare to the unemployed and another unfreezing of bank credit.

This is a double punch to the stomach. People who got mortgages that they couldn't afford are going to get bailed out? All of them? That means there's no value anymore. There's no such thing as buying and selling if there is no risk. It's outrageous that cautious people who waited while the bubble rose, are going to pay for other people's homes. While they rent. Wow!

Bush Apologists Suddenly Outraged By Big Spending and Debt

Mark Steyn, writing for the National Review gets blue in the face angry about Obama's out of control "stimulus" spending. Fair enough. I think it's huge mistake as well. Steyn had been a Bush apologist since 2000, so I didn't expect him to criticize Bush's ridiculous bailout spending. But oh boy, this Obama spending package will never do!

So now no politician demanding immediate government action wants to come off like Doctor Evil and invite instant derision by urging some nickel ’n’ dime billion-dollar boondoggle. In the bright new dawn, “ONE! TRILLION!! DOLLARS!!!” is the kind of price tag that commands respect. Congress is planning, at the time of writing, to double domestic discretionary spending. At the time of reading, I’m confident they’ll have quadrupled it. The Khmer Rouge proclaimed Year Zero; for the incoming Obama administration it’s the Year of Twelve Zeroes.

No, 2008 was the Year of Twelve Zeroes. There was a precedent. This is a detailed article about boondoggle including this line: "that the tab for the bailout by November 24 was already $4.6165 trillion." I tallied the score of how many times he mentions Obama, and Bush. The score for this lengthy screed?

Mentions of Obama: 7
Mentions of Bush: 0

Hell even John Kerry got one mention. It's like this was invented by Democrats a month ago. Obama has been in office for fourteen days.

These partisan pundits are too late for this outrage. Six months ago Peter Schiff had the one liner: "Trillions are the new billions." It's old news.

I don't agree with what Obama is doing, but most of the damage was done by Bush already. At the time Steyn was writing about how the "surge" was working in Iraq or that Sarah Palin was a great pick for VP.

Backlash to Government Fiscal Stimulus

Terence Corcoran gives a clear eyed look at the Tory's planned fiscal stimulus package in the Financial Post today. (here)

Except for one problem: What if it's not true? What if, as a wide and growing school of economists now suspect, the government spending and stimulus theory is a crock that is shovel-ready to be heaved out into the barnyard of economic waste?

The Prime Minister, in his comments on Friday, seemed to be riding right into the barnyard. He said the government would be simply "borrowing money that is not being used" and "that business is afraid to invest." By borrowing that money, and turning it over to all the groups and interests looking for part of the stimulus spending, he would be jump-starting activity while the private sector got its legs back.

Even disciples of Keynes, such as Harvard's Greg Mankiw, recently highlighted economic studies that show government spending binges -- shocks, they are sometimes called -- don't seem to help the economy grow. They might even make it worse.

We're now seeing the effects of the Coalition's attempt at a coup. The Conservatives are taking advice from likes of the NDP and putting together this ridiculous budget. How Layton railed that the Harper government "wasn't doing anything." Boy, I wish Harper stuck to not doing anything.

Way Too Late For This

The Washington Times reports that the Republican National Committee are coming out against bailouts:

Republican Party officials say they will try next month to pass a resolution accusing President Bush and congressional Republican leaders of embracing "socialism," underscoring deep dissension within the party at the end of Mr. Bush's administration.

Those pushing the resolution, which will come before the Republican National Committee at its January meeting, say elected leaders need to be reminded of core principles. They said the RNC must take the dramatic step of wading into policy debates, which traditionally have been left to lawmakers.

We can't be a party of small government, free markets and low taxes while supporting bailouts and nationalizing industries, which lead to big government, socialism and high taxes at the expense of individual liberty and freedoms," said Solomon Yue, an Oregon member and co-sponsor of a resolution that criticizes the U.S. government bailouts of the financial and auto industries. Republican National Committee Vice Chairman James Bopp Jr. wrote the resolution and asked the rest of the 168 voting members to sign it.

There is less than a month that Bush has left in office, and the bailouts have been doled out. Now they are coming out with this?

GMAC Bailout: Creating More and More Bad Debts

The almost daily, non-Congressionally approved bailouts continue. Now it is for GMAC Financing. The first paragraph of this New York Times article made me slap my forhead:

GMAC, the automobile financing company, said Tuesday morning that it would immediately resume financing to a wider range of car buyers, a day after the Treasury Department injected billions of dollars into the lender.

In otherwords, make more risky loans. Hmm, now how can this be a bad thing?

Under the financing deal, the Treasury will buy $5 billion worth of preferred equity shares in GMAC, which used to be the financing subsidiary of General Motors and is now owned jointly by G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler.

A Treasury official said on Monday night that the deal had already closed and that GMAC already had the money. In addition, the Treasury said it would lend General Motors $1 billion so that it could purchase additional equity offered by GMAC.

Remember how heavily debated the 1979 Chrysler Bailout was? It was only $1.5 billion dollars. How quaint does that seem?

Hitchens: Is the US Turning Into a Banana Republic?

Christopher Hitchens, in a Vanity Fair piece, rails against the recent developments from bailouts to an impotent Congress, from a leftist point of view. I respect him, and some of the arguments he makes are universal, no matter what your stripe. What is happening now is an incredible blow to the credibility of the United States. (read)

And still, in so many words in the phrasing of the first bailout request to be placed before Congress, there appeared the brazen demand that, once passed, the “package” be subject to virtually no more Congressional supervision or oversight. This extraordinary proposal shows the utter contempt in which the deliberative bodies on Capitol Hill are held by the unelected and inscrutable financial panjandrums. But welcome to another aspect of banana-republicdom. In a banana republic, the members of the national legislature will be (a) largely for sale and (b) consulted only for ceremonial and rubber-stamp purposes some time after all the truly important decisions have already been made elsewhere.

...

Now ask yourself another question. Has anybody resigned, from either the public or the private sectors (overlapping so lavishly as they now do)? Has anybody even offered to resign? Have you heard anybody in authority apologize, as in: “So very sorry about your savings and pensions and homes and college funds, and I feel personally rotten about it”? Have you even heard the question being posed? O.K., then, has anybody been fired? Any regulator, any supervisor, any runaway would-be golden-parachute artist? Anyone responsible for smugly putting the word “derivative” like a virus into the system? To ask the question is to answer it. The most you can say is that some people have had to take a slightly early retirement, but a retirement very much sweetened by the wherewithal on which to retire. That doesn’t quite count. These are the rules that apply in Zimbabwe or Equatorial Guinea or Venezuela, where the political big boys mimic what is said about our hedge funds and investment banks: the stupid mantra about being “too big to fail.”

It's incredible what is happening right now and people are starting to wake up to it. People should be fired, people should be jailed.

The Decade is Almost Over

It's amazing to me that we're heading into the final year of the decade. Jonah Goldberg from the National Review takes a pass at making sense of it.

As flawed as the American habit of dividing our history into decades may be (the ’60s didn’t get started until the ’50s ended around 1964), it’s always made at least some intuitive sense. For instance, the popular conception of the ’70s — self-indulgent, tacky, kind of gross — closely jibes with my memory of it, even thought it didn’t begin until the end of the Vietnam War and died soon thereafter. The fatal blow was probably the “Disco Demolition Night” riot in Chicago’s Comiskey Park in the summer of 1979 (even staunch law-and-order types have to admire anti-disco riots), and it ultimately staggered to its death about the time of Ronald Reagan’s election.

Likewise, the 1980s and 1990s felt like real decades, whether you hated them or not. Reagan and Bill Clinton, through force of personality alone, helped give the ’80s and ’90s a coherence.

But it doesn’t feel like we can say the same thing about George W. Bush’s oughts, in no small part because Bush showed neither the interest nor the ability to dominate the culture.

Neither the pro-Bush nor anti-Bush segments of society seemed to control the commanding heights of the popular culture. After 9/11, the Bushian forces seemed to dominate — freedom fries, 24, the Dixie Chicks’ implosion — but that didn’t last long. And, with the exception of a brief counter-Bush surge led by the lefty blogosphere, Jon Stewart and the re-imagined coffeehouse rock version of the Dixie Chicks, the battle for decade dominance has been between a fizzle and a deadlock.

There was a gigantic shift in the "noughts". On a pop culture/style level, it may not be clear to define yet, but politically it has been dramatic: The Florida recount, 9-11; Bali; Afghanistan; Iraq; London 7-7; Madrid; video of Saddam getting hung; the bizarre 2004 Kerry v. Bush campaign. Continuing: An actual Conservative PM in Canada; the epic deterioration of the Bush administration; Obama Mania; the financial sector collapse; and the now developing bailout swindle.

Incredibly interesting to be alive in these times. Remember in the 90's when the major issue was the laughable Clinton impeachment?

Niall Ferguson: US Is Not Completely Down the Toilet

Popular historian Niall Ferguson thinks the financial situation is disastrous for the US. On the bright side, it's worse for other countries.

Emerging markets, too, have been hammered harder by the crisis than the "decoupling” thesis promised. In the year to the end of October 2008, the U.S. stock market declined by 34 percent. But Brazil’s was down 54 percent, China’s 58 percent, India’s 64 percent and Russia’s 66 percent. When Goldman Sachs christened these four countries the BRICs, they little realized that their equity markets would one day be dropping like bricks. These figures are scarcely good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow.

The financial crisis is especially bad news for energy exporters: not only belligerent Russia, whose leaders yearn for a reconstituted Soviet empire, but also those other thorns in the side of the United States, Iran and Venezuela. Any oil price below $94 a barrel is bad news for Venezuela’s fragile finances; any price below $55 spells trouble for Iran.

In any case, is even the fastest growing of America’s rivals really a credible alternative to the United States? Rapidly though it is growing, China is bedeviled by three serious ailments: demographic imbalance, environmental degradation and political corruption. China’s military is not remotely ready to mount a serious challenge to American dominance in the Pacific. And, crucially, it is far from clear that China is ready to wean its manufacturing sector completely off the U.S. export market. After three years of very mild renminbi appreciation, the People’s Bank of China seems to be contemplating renewed intervention to keep the currency weak relative to the dollar. That means China will continue to sell renminbi for dollars, further enlarging its already large portfolio of U.S. bonds.

Read it all.

All Recipient Banks Can't Account for Billions of Bailout Money

In the rush to push through the "emergency" bailout for financials, dim-bulb or crooked Treasury Secretary Henry Paulson forgot to ask how the money was going to be spent. Congress passed the spending without knowing either.

The answers highlight the secrecy surrounding the Troubled Assets Relief Program, which earmarked $700 billion — about the size of the Netherlands' economy — to help rescue the financial industry. The Treasury Department has been using the money to buy stock in U.S. banks, hoping that the sudden inflow of cash will get banks to start lending money.

There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill last month and implored them to lend the money — not to hoard it or spend it on corporate bonuses, junkets or to buy other banks. But there is no process in place to make sure that's happening and there are no consequences for banks who don't comply.

"It is entirely appropriate for the American people to know how their taxpayer dollars are being spent in private industry," said Elizabeth Warren, the top congressional watchdog overseeing the financial bailout.

But, at least for now, there's no way for taxpayers to find that out.

Pressured by the Bush administration to approve the money quickly, Congress attached nearly no strings on the $700 billion bailout in October. And the Treasury Department, which doles out the money, never asked banks how it would be spent.

"Those are legitimate questions that should have been asked on Day One," said Rep. Scott Garrett, R-N.J., a House Financial Services Committee member who opposed the bailout as it was rushed through Congress. "Where is the money going to go to? How is it going to be spent? When are we going to get a record on it?"
...

Garrett, the New Jersey congressman, said the nation might never get a clear answer on where hundreds of billions of dollars went.

"A year or two ago, when we talked about spending $100 million for a bridge to nowhere, that was considered a scandal," he said.

You have to think Paulson is dirty. Like a con-artist who implores you to hurry up and buy now or you'll lose the opportunity, he managed to appropriate $350 billion without accounting for it. Unbelievable.

Well we know where $1.6 billion went:

The 116 banks that so far have received taxpayer dollars to boost them through the economic crisis gave their top tier of executives nearly $1.6 billion in salaries, bonuses and other benefits in 2007, an Associated Press analysis found.

That amount, spread among the 600 highest paid bank executives, would cover the bailout money given to 53 of the banks that have shared the $188 billion that Washington has doled out in rescue packages so far.

US Congress Becoming the Roman Senate: No Real Power

I was wondering how, a week after the Senate shot down the bailout for the automotive industry, the Bush administration went ahead and bailed them out anyway? George F. Will takes notice in this Washington Post piece:

On Friday the president gave the two automakers access to money Congress explicitly did not authorize. More money -- up to $17.4 billion -- than had been debated, thereby calling to mind Winston Churchill on naval appropriations: "The Admiralty had demanded six ships: the economists offered four: and we finally compromised on eight."

The president is dispensing money from the $700 billion Congress provided for the Troubled Asset Relief Program. The unfounded assertion of a right to do this is notably brazen, given the indisputable fact that if Congress had known that TARP -- supposedly a measure for scouring "toxic" assets from financial institutions -- was to become an instrument for unconstrained industrial policy, it would not have been passed.
....

For decades, imperatives of wars hot and cold, and the sprawl of the regulatory state, have enlarged the executive branch at the expense of the legislative. For eight years, the Bush administration's "presidentialists" have aggressively wielded the concept of the "unitary executive" -- the theory that where the Constitution vests power in the executive, especially power over foreign affairs and war, the president is immune to legislative abridgements of his autonomy.

The administration has not, however, confined its aggrandizement of executive power to national security matters. According to former representative Mickey Edwards in his book "Reclaiming Conservatism," the president has issued "signing statements" designating 1,100 provisions of new laws -- more designations than have been made by all prior presidents combined -- that he did not consider binding on him or any other executive branch official.

A healthy Republic needs its Legislative Branch. Lame Duck Bush is spending unprecendeted amounts of the public's money, seemingly illegally and law makers are standing by without comment. Is anybody paying attention? Does anybody care? Where are the checks and balances?

Banana Republic North: Newfies Expropriate Company's Assets

I can't stand Newfoundland Premier Danny "Despite the Oil Profit Windfall, I Still Want Dole From the Rest of Canada" Williams. Now he's acting like a third world tough guy:

In an escalating war of words between Mr. Williams and the multinational company, Mr. Paterson describes Newfoundland and Labrador's seizure of its assets as “confiscatory and hostile actions” that could damage the province and Canada.

“The legislation is an entirely unfounded and unscrupulous attack by the province of Newfoundland and Labrador,” it says.

“The legislation, which is without precedent in Canada, and is reminiscent of decrees emanating from jurisdictions with less democratic traditions, shocks common sensibility.”

Rule of Law is taking a beating in Canada lately.

A Lesson In Humility

It's painful reading this from the creditors of the United States. In the Atlantic, Gao Xiqing, president of the China Investment Corporation, dishes out his opinions and advice to the US. Unfortunately, you have to listen to your meal ticket.

The simple truth today is that your economy is built on the global economy. And it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money.

Talk to the Chinese! Talk to the Middle Easterners! And pull your troops back! Take the troops back, demobilize many of the troops, so that you can save some money rather than spending $2 billion every day on them. And then tell your people that you need to save, and come out with a long-term, sustainable financial policy.

...

The current conditions can’t go on. It is time for the new government, under Obama or even McCain, to really tell people: “Look, this is wartime, this is about the survival of our nation. It’s not about our supremacy in the world. Let’s not even talk about that any more. Let’s get down to the very basics of our livelihood.”

These reflections are about as welcome as a kick in the teeth. But this is what happens when the debt piles up. Expect more of this kind of talk.

No Surprise: Bush Bailing Out GM and Chrysler

It didn't matter that the Senate blocked the bailout, Bush is dipping into TARP for an immediate $13.4 billion:

With these loans, Treasury will have committed virtually all of the $350 billion of that fund that it can hand out without additional authorization from Congress. Once Congress releases the other $350 billion, the two automakers will be able to borrow an additional $4 billion.

GM will get $9.4 billion from the first allocation of federal loan money, while Chrysler would get the other $4 billion.

GM has a total market cap of $2.4 billion. The loan is over three times the entire worth of the company.

This is just in time for Chrysler workers' one month paid vacation. I hear Cabo is nice this time of year.

What a disgrace.

Harper Planning a $30 Billion Dollar Deficit?

Damn. I had a feeling this was going to happen. Canada tightened up and climbed into the best debt to GDP ratio in the G7. It looks like we won't hang on to the title.

Break out the boondoggle!

A federal economic stimulus package will likely lead to a deficit in
the $20-billion to $30-billion range for the 2009-10 fiscal year, a Prime
Minister's Office official told CBC News on Thursday.

Ah Harper, where is that small government, 'Alberta Way' guy I voted for? You've chickened out.

If the Economy Could Speak

I am dying with the help of too many physicians.

- Alexander the Great