Wednesday, December 30, 2009

GammaBoy's 10 Outrageous Predictions for 2010 - PART 2

Sayonara 2009! Considering the financial turmoil that accompanied your arrival, you were a comparatively gentle and unremarkable year. You gave a frenzied welcome to our first black president and a frenzied goodbye to our first sort-of-black, sort-of-white, sort-of-alien pop star, but between those high and low moments, you kept Americans convinced that, despite their woes, everything was just about to get better. Alas, in the view of future generations, you will be little more than a footnote, a year of quiet, stubborn hopefulness than unleashed a torrent of outrageous and mostly unhappy events in 2010.

As I mentioned in my 2009 report card, I think some of those predictions were not wrong, but early, so I won't bother to reiterate them. Fortunately, that gives me the freedom to crow about any successes come December 2010 without having to explicitly admit the failure, or rather, continued delay, of the rest.

Now then, 2010 in an outrageous nutshell....

U.S. stock markets put in new lows

You heard it here. The stock market will give back all the gains of 2009 and more, as a second and more sinister wave of the still continuing financial crisis comes ashore. My guess is that when the decline gets going, it will be faster and scarier than anything we saw in late 2008 or early 2009. The essential problem is that none of the issues that led to the decline in 2008 have been fixed. They have been papered over with government largesse and the loosest federal credit in history, but these salves will actually make things worse as the U.S. Ponzi economy begins to unwind. Many other markets, such as most commodites, will join in the selling, and we may see new multi-year lows in crude and even gold. Mid-level luxury goods will get wiped out, as the few extraordinarily rich benefactors of administration policies reach new heights of consumption even as the other 98% of the population gives up any hopes of ever leasing a Beemer and is simply thankful they can afford a single family car at all.

Saudi Arabia catches fire

The Saudis finally get their due. Pinched between the Iran/Israel conflict, which will likely go hot, and accompanied by more general Shia/Sunni violence, Saudi will get bombed by somebody. U.S. protectorate or not, the Saudi will discover that the love for the sheikhs from its many poor serfs does not run deep, and when the going gets tough for Saudi, the people will stand down and watch things collapse. The event might lead to a short-term pop in energy prices, until people realize that cheap energy is a necessity for the world economy, and the world economy tumbles down a staircase with energy prices sliding along in its wake. The worst case scenario is that the events that unfold in the Middle East in 2010 lead to World War III. Hopefully, saner minds will someow prevail, but the dominos are certainly set up to make 2010 a more likely candidate for world war than any of the previous twenty.

U.S. Bond Market Failure

The U.S. bond market is completely out of control and will come to a head in 2010. There is simply not enough money in world to fund the deficits that are envisioned, and one of two things will happen. Either interest rates will rise precipitiously, destroying any hope of a short-term U.S. recovery, or the Federal Reserve will be forced to print money to buy bonds from the Treasury to extend the Ponzi scheme, thereby setting off very real fears of hyperinflation. I've given up trying to understand the machinations of the Treasury and the Fed, so let's just say that any way it plays out, it will be bad.

Real unemployment touches 25%

The current official unemployment rate is hovering around 10%, but if you use the calculations that were in use in the U.S. up until a series of beautification adjustments were made by the Reagan and later administrations, the comparable unemployment rate is already closer to 20%. The unemployment rate will get worse, and the effect will get more noticeable as more people are no longer eligible for unemployment insurance. The federal government has been working to extend this insurance, but the bond issue listed above will stymie their efforts. Moreover, many state unemployment funds have been emptied. Unemployment is much less of a social problem when you are able to keep people on some sort of income, but there is no money left in the kitty, and we are about to see how people behave when the government is no longer writing them emergency checks.

Many cities and several states either default on bonds or declare bankruptcy

Municipal budgets are in the worst shape in recent history, and for many municipal entities there is no way to make the math work. Potentially, the federal government will sweep in with its unlimited checkbook and bailout these states and cities, but short of that, there will be a wave of defaults and bankruptcies. The biggest issue for most of these places is spiraling health care costs and the absurdly generous deals that were inked with public unions in better times. Most of these deals, laden with sizable salaries, free health insurance, and ridiculously sweet pensions, are simply untenable, and there will be increasing conflict between these unions and the taxpayers being asked to pony up. The defaults will force the issue into the public, and it will get very rancorous.

Domestic terrorism re-emerges

Keeping with my failed riot call for 2009, let me double down with a prediction that there will be one or more serious domestic "terrorist" events this year. These will be completely unrelated to the Islamic terror threat and more in line with the Timothy McVeigh kind of threat. An assassination of a major politician would also fit into this prediction.

Republicans have a very good mid-term election

This isn't particularly outrageous, as the out-of-power party historically always does well in mid-term elections. But I think this cycle will be particularly dramatic, as the above events will crystallize a lot of anger and lead Republicans to make significant inroads on the Democratic majorities.

Many major retailers fold

A few retailers folded after the crappy Xmas season of 2008, but I think the numbers will be much worse in the first half of this year. Headline numbers for Xmas 2009 have been touted in the media as pretty solid, but I think beneath the headlines, the numbers were actually quite weak. Look for a lot more open storefronts in your local mall. In fact, some malls will close down altogether, and you will see stories by the end of the year suggesting using some large, previously commercial, space such as malls as emergency housing for many of the emergent poor.

Severe violence in the UK, Italy, and China

As the global economic crisis progresses, you will see severe domestic violence emerge in a number of nations. The UK is ready to blow at any moment, as the economy there is a full-blown disaster and the Islamic population is restive and a convenient target for native anger. Look for the BNP to strengthen. In fact, as Europe goes down the tubes over the next couple of years, the BNP might emerge as the most reactionary group in Western Europe. Italy has similar disfunctionality, but unlike a resurgence in the UK, Italian disfunction has a long history. Nonetheless, 2010 seems like a good year for some of the tension in that country to explode. China is the most interesting and dangerous of the three. China's economy is in an amazing bubble at the moment, with virtually every company and many individuals involved in real estate development. When the bubble explodes, which I am guessing will happen in 2010, there will be a lot of angry people in the cities to get violent alongside the already various rioting rural populations. Since the Chinese government is much more ruthless than its Western counterparts, it's difficult to guess how things will play out, but some sort of violence seems assured.

The United States wins the World Cup

With all the deeply pessimistic predictions above, I figured I throw in one outrageously optimistic prediction. The U.S. squeaks out of the first round, shows sparks of brilliance in victories in the rounds of 16 and 8 and then shocks Brazil in the semis before soundly trouncing a stunned Spanish team in the finals. Seriously, though, isn't the World Cup a prime potential target for terrorism? I mean, how good can the security really be in South Africa? I was thinking that if I was an ambitious Al-Qaeda group, and I was scanning the global calendar looking for targets, the World Cup would look like a jackpot. Western celebrities, global audience, and a deeply third-world civic administration. So as a pessimistic footnote, I'll add the potential for a Munich style terrorist act against a Western squad.

GammaBoy's 10 Outrageous Predictions for 2010 - PART 1

2009 is coming to a close, so I thought it was time to give a report card on my predictions from 2009, and notwithstanding the mediocre grades, forge ahead and make some more predictions for 2010.

First, in this post, the report card....

A major riot in a U.S. city
The populace was chastened by Obama's election, government goodies, and a levitating stock market. There was some turmoil surrounding various state government cuts, like education in California, but even prime candidate Detroit has been relatively quiet. I underestimated the government ability to appease its citizens over the short-run, but I am not giving up on this prediction in 2010.

Shortages of Goods/Supply Chain Breakdowns
The credit turmoil of late 2008 and early 2009 subsided and everything held together. The only shortage I know of was Xmas superstar Zhu Zhu pets and that was certainly not what I had in mind when I wrote the prediction. I take some solace in the failure of this prediction in the massive revocation of credit cards facing many Americans, but it is still an epic fail.

Pensions are the #1 financial crisis story
Mortgages and foreclosures still seem to have the limelight as financial crisis story #1, probably followed closely by unemployment. Nonetheless, the visibility of the coming pension debacle has been raised during the year, and if you were one of the many Delphi retirees who awakened to see your pension benefits slashed by the PBGC, you are feeling it directly. This manner of failure of this prediction seems to be shared by many others in that I assumed the effects of the continuing financial crisis would become obvious much more quickly than they have. That does not change my underlying belief that this will happen. I prefer to consider myself early, rather than wrong. Dangerous for a trader, but no so much for an wannabe oracle with nothing more than pride on the line.

Inflation/Deflation mix
My Maslow theory seems to be holding up, although with so many different markets flashing different signals, it is difficult to assess this prediction precisely. Prices on many high-end goods have been slashed dramatically even as prices for more basic things like energy and food seem to have flatlined or increased. This will continue. It will be very visible in the real estate market, where homes above $1 million are basically unsellable right now, even as bidding wars have erupted for low-end foreclosures. Further, there is a core cultural change taking place in Americans' willingness to buy shit they don't need.

Russia goes nuts
To be honest, I threw this prediction in here, so I would have a necessary tenth prediction, although in retrospect, 9 predictions for 2009 would have had a nice ring to it. Anyway, it failed. Russia has been active undermining Ukraine and Georgia and throwing their heft around in the Middle East, but they have done it quite calmly and methodically. Going forward, I expect Russia to be more visible in efforts to capitalize on American weakness.

The Euro crumbles
The Euro ran roughshod over the dollar this year, but I still stand by my statement that "2009 will be the beginning of the end of the Euro as a functional currency". The very beginning admittedly, but the Euro is starting to slide, and I expect it to keep sliding throughout 2010. The debt situation, especially in East Europe, will start to pull pieces apart. And whispers have started of the possibility of countries leaving the Euro, although to be fair, Greece was not on my radar as an initial possibility.

Crude trades above $100 again
FAIL, but not EPIC
$100 did not happen, so strictly speaking I was wrong, but my basic sentiment was right: "my sense is that the recent fall in crude prices is a short-term anomaly and prices will rise again. Along with all other commodities actually." I am now leaning the other way and think commodity prices will test or blow through their recent lows. The world economy is in that bad a shape.

War and more war
Plenty of war as always, but no more than usual, with the tension in Mexico and Obama's expansion of Afghanistan potentially saving me from the "EPIC" modifier. Again, I think I was early here, rather than wrong. Actually, since these were predictions were for 2009, I was wrong, but you get what I'm saying.
Bonus prediction: Crime levels explode in the United States.
Crime has apparently decreased, not increased, despite our economic woes. I find that a bit of head-scratcher, but I completely underestimated the ability of the government to appease people with goodies.

Ron Paul movement strengthens
Finally, I can claim unabashed success. RP went from a fringey also-ran to a frequent guest all over television news, and the Tea Parties and their resulting controversy made it clear that Ron Paul ignited a more substantial political movement. It still remains to be seen if the GOP rejects this movement, embraces it, or is overwhelmed by it. Two interesting Congressional candidates that will help decide this question are Rand Paul, Ron Paul's son, who is leading in Kentucky's primary as a rank party outsider, and financier and fellow doomer Peter Schiff in Connecticut, who is trying to steal the party's nomination as they collectively assault scumbag Chris Dodd.
The party hierarchy loathes both candidates, and it will be curious to see if strong grassroots support for these candidates will be able to upend the party machine.

Secession discussions
Another success, even if I would have bet against it compared to some of my failed predictions. Texas was the first to gain notoriety for such blasphemous ideas, but in the wake of the health care legislation, "autonomy" movements have blossomed in a couple of dozen states. It's still all very fringy, but the talk will become louder as debacles in 2010 unfold.

All in all, a mixed bag. The prediction I was most certain about, a riot, was an abysmal failure, while the biggest reach, talk of secession, actually happened. Not that even complete failure would stop me from setting myself up for more failure in 2010.

Sunday, August 2, 2009

The Hypocrite-in-Chief

I could go on for days about the hypocrisy of the messiah, the chosen one - Barack Hussein Obama. Just for starters, see the transcript below from Randi Rhodes' radio broadcast on Air America. The program aired on November 22, 2004. It featured an interview with then Senator-elect Obama.

BARACK OBAMA: ...When you rush these budgets that are a foot high and nobody has any idea what's in them and nobody has read them.

RANDI RHODES: 14 pounds it was!

BARACK OBAMA: Yeah. And it gets rushed through without any clear deliberation or debate then these kinds of things happen. And I think that this is in some ways what happened to the Patriot Act. I mean you remember that there was no real debate about that. It was so quick after 9/11 that it was introduced that people felt very intimidated by the administration.

Sound familiar?
Intimidation by the administration?
Rushing huge bills through Congress without sufficient debate?
Where is the "Change we can believe in?"

Tuesday, July 28, 2009

This Settles It, Right?

When the editors of the National Review announce that Barry was born in the USA, that should be the end of the story.  Fortunately for all real Americans, the denizens of the Free Republic message board refuse to drink the kool-aid. 

  • No, it is not a distraction, it is something that the cult of personality seems to have swept into the trash bin … It is called the LAW. This is just another reason why I no longer subscribe to the National Review.
  • I actually don't care where he was born as he is not a "natural born citizen" since his father was Kenyan.
  • Gibbs said yesterday obama was a citizen; He did not say he was a 'natural born' citizen.
  • it is all part of the same web of lies that the POSOTUS is fabricating. This Kenyan buttwipe needs to realize he may or may not be legaly the president….but if he tries to touch the constitution with his criminal touch (he did promise to obey and protect and follow the constitution) he will be in a world of hurt….and wind up losing states to secession, and where that will follow.
  • Hey! We have all been screaming for the msm (controlled media) to get onboard on the BC story—so here it is! They all want a piece of the pie now—didja think they were going to take the Patriot side of the issue? Fat chance—they are just going to cloud the issue even further now. The state gubmint in Hawaii is going to glorify him now. At least Rush and Glenn Beck are spelling the truth out to the American people now (not We The People—the wee sheeple), on other issues that is. On the other hand, GB has not attacked the real issues lately—that I have heard anyway—y'know, the BC issue, of course, and those "camps", ML, etc. Who knowa? perhaps he too will wake up…???
  • The National Review is a periodical that I have done without for over 30 years. I began to fall out of love with the magazine about the time William F. Buckley joined Jimmie (the Geek) Carter in pushing for the giveaway of the Panama Canal which is currently operated by interests of Communist China.
  • Once again the National Review lets down the conservative movement. Lowrey is a naive boob. Goldberg is unreadable. And when will he apologize to Ann Coulter?
  • which is why I think he was primed for this position for over 20 years and those behind the scenes have been planning on taking the country since Ayers stopped his bombing. He knew it would never work and as Marx and Hitler said or realised. We cannot further our agenda by violence it has to be done by getting into positions of power and influence. What better position than the presidency. He has no clue but they have covered his background up, they set his background up by the two books instead. There are so many questions and yet the media sit there and say , nah he is an America he had something in the paper or he had a thing on a website. All he has to do is show the damn thing. All the media have to do is go to Kenya and ask why two of his family say they saw him born there and ask why they are charging tourists to see bozo's birth place in Kenya
  • It's easyh to believe this editorial was written by "The Editors". It appears that different editors wrote different paragraphs and they never got together to compare.
  • Yes, BS is an undocumented worker residing at 1600 Pennsylvania Ave. Certain groups can't govern themselves. Look at the Bahamas - Burned out ends of Grand Bahama Island are a testament to the fervor of certain groups when they feel empowerd.
  • National Review was sinking but they have hit rock bottom. It seems like it all fell apart after Bill died. Sad. We keep hearing the "let's move on" or "let's forcus on…" - it takes 5 minutes to provide the long form BC. It does not distract from anything.
  • If you send a Letter to the Editor of NR, you get an Out of Office reply from them. Hmmmm?
  • I think National Review is almost out of business. The print magazine may no longer exist. Rich ?? forget his name left and Lucianne's son was running it but he really is not up to the task. I guess they don't get the Saudi money like Huff Po or LGF. Maybe they decided to start taking it.
  • I National Review "Editors" smarter than you, come down from on high and ask you to "please move along" nothing to see here citizen. I will not reveal to you that we expended no money or resources, hired no investigative journalist to support the band wagon conclusion that BO is your new official and certified master.
  • Coulter is a disappointment. Where is HER plan? What is SHE advocating to save our country. Just shooting her mouth off on TV is entertaining but what has she done any different from us? We make noise. She makes noise and Democrats continue to destroy our America. Anne, run for the Senate. If Franken can win, so can you…..

Wednesday, July 22, 2009

23% Annualized Return for the American Taxpayer

Not too shabby.  Goldman buys some positive PR at a time it desperately needs it and W gets some post-White House credit.    

Monday, May 4, 2009

Audit the Fed

If anyone is feeling politically active at the moment, I would like to ask you to contact your local Congressional Critter to request their support of HR 1207, a piece of legislation which would require the first audit of the Federal Reserve since its creation in 1913. You can google the name for plenty more info.

The bill is a Ron Paul creation, but I honestly don't see this as a remotely liberal/conservative issue. It is rather astounding that with all the power the Fed has, Congress currently has virtually no oversight power of its activities. I have long considered the Fed completely unconstitutional, and while this legislation is a small step, it would at least shed some light on the what the Fed does with its massive and virtually unchecked power. I would think both liberals and conservatives could agree on that value of some accountability.

So write an email or make a 2-minute phone call. It's not sexy legislation, but it's important.

Sunday, May 3, 2009

On Chrysler's Bankruptcy

I haven't been monitoring the Chrysler situation all that closely, but what I have seen, I find pretty disturbing.  Most pundits' reactions have had a flavor similar to Restless' take...
...but nonetheless it seems to me that this is likely the best solution for essentially everyone, with the glaring exception of the bondholders.
Mark me as a hopeless finance romantic, but from my perspective, the mistreatment of the bondholders by the government is a pretty serious issue.   The bondholders in question hold senior debt, which means under the rule of law, they have senior rights to the company's assets.  But under the rule of Obama, that seems to no longer be the case, as some union benefits, which should be junior to the bondholders in the pecking order, have been elevated to equal status by Obama fiat.   This is a wonderful political gambit by Obama, thrilling to to his constituency, even if leaves tired, old, rule of law cranks like me feeling chill.   I am guessing any potential lenders in the future will share my queasiness.  Why loan anyone money if the government can wipe out your claim at its whim.  I thought Obama was trying to revive the credit markets, not suffocate them.

As far as the bankruptcy itself goes, I have already demonstrated by inability to comprehend bankruptcy law, and I'll leave it to the smarter legal heads on KP to sort out mysteries like section 363 of the bankruptcy code.

Finally, if you haven't read any of the allegations concerning intimidation by the Obama administration, you absolutely need to take a gander at this.   Pretty lively stuff, and while it is purely he-said-she-said at the moment, you must be well into your second pitcher of the Kool-Aid not to believe this type of thing is going on.

UPDATE:  I found a nicely presented argument from a hedge fund manager echoing some of my thoughts above.   It's hard to pity hedge funds or their managers, considering some of the astronomical bonuses that have been received over the last decade, but before you give Obama a giant huzzah and gleefully throw those greedy hedge funds under the bus, at least consider their point of view.

More on Swine Flu

I find it remarkable that so many commentators are playing down the swine flu. I have heard several comparisons to Y2K - as if that "bust" of a crisis means that all future crises will be busts. Yes, at the moment, the swine flu is not all that dangerous here in North America. It is not flu season, and the survivability of the virus is limited under these conditions. But the virus is just starting to pop up in the Southern hemisphere, and it could gain traction there. Also, a bit of history on past pandemics is useful.

In each of the four major pandemics since 1889, a spring wave of relatively mild illness was followed by a second wave, a few months later, of a much more virulent disease. This was true in 1889, 1957, 1968 and in the catastrophic flu outbreak of 1918, which sickened an estimated third of the world's population and killed, conservatively, 50 million people.

There is good news.   The current swine flu does not have some of the genetic elements of more fatal flus, and our ability to spot and respond to outbreaks is much better than it was during any previous pandemic.  But there is also worrying news.  They have confirmed human to swine transmission in Canada, which means the flu may bounce back and forth and have additional opportunities to recombine.   More importantly, this virus has a novel genetic makeup, so existing treatments may not work if it mutates into a more virulent form.  

There is an additional factor to consider.  We survive on resources that are provided to us on the tail-end of global, low-inventory, just-in-time, supply chain system.    While this supply chain gives us access to a remarkable array of goods at low prices in good times, it is not clear how it would respond to the stress of a truly dangerous pandemic.   My read is that any serious disruption would lead to wholesale breakdown.   Your local grocers have sufficient inventory to feed the populace for about three days.  The government certainly has more resources, but post-Katrina, I have a little confidence in the government responding well, especially when the significance of a virulent pandemic would dwarf Katrina.

In short, the odds are that this will not be a catastrophic flu pandemic, but on the other hand, if the virus happens to mutate to a truly virulent form, the consequences could be far worse that most people are predicting.  The good people of recommend you have sufficient foodstocks to last you three months in an emergency.    It's an annoying expense, and odds are, you will be donating most of it to a food bank sometime down the road, but it's a matter of risk management.   

Personally, I am building that inventory and hoping it all goes to waste.

Saturday, May 2, 2009

On Facebook and other Existential Questions

I must begin by apologizing for my neglect of KP. All kinds of things going on, including buying a car, a house and lots of comings and goings at my day job. I wanted to get us up to speed with a couple of issues being widely commented upon by the MSM, several on several of which I have a different perspective or need the Occam's Razors of this forum to clarify my thoughts.

1) Swine/Mexican Flu

About 10,000 people apparently die from the flu in Mexico in a normal flu season, I haven't seen a number for the US. Sounds like a lot, but it's less than 0.01% of the population there. Normally the unfortunate victims are the elderly or the very young (even more tragic) but my point here is that we are definitely not talking crazy numbers on this swine flu thing yet, and likely won't be. The measures taken by the Mexican government are nothing short of amazing. They identified this strain with very, very few deaths and have made extraordinary economic sacrifices to contain the contagion. They should be given a medal, not subject to the rantings of the jackass, Jay Severin, in Boston (shocking, really, to find racism there) on the radio. I'd leave that schmuck in his underdrawers, with $100-bills taped to his body and a kilo of heroin shoved up his rump (and info to that effect posted on, in the worst neighborhood in Tijuana and see if he could get home to Boston intact. He want "criminaliens", we got "criminaliens". F-ing lowlife.

I also wanted the - ahem - less liberal members of KP to comment on Hong Kong's approach to quarantine. WWRPD?

2) Chrysler's bankruptcy

Very, very interested in everyone's take on the structured bankruptcy of the Littlest of the Big Three. Fiat? Giggles ensue, but nonetheless it seems to me that this is likely the best solution for essentially everyone, with the glaring exception of the bondholders. From my years in Argentina I am pretty immune to feeling bad for bondholders. What are we talking about anyway? It's not like it's a loan, or something. It's an investment that went south, right? Tee, hee, tee, hee.

3) The Mainstream Media - aka Ourselves

How much do we like to scare the shit out of ourselves? Generally, a fair amount, no? Discuss.

Monday, April 27, 2009

Thoughts on the Mexican Flu

Last time I can remember having Mexican fever was watching Salma Hayek in From Dusk til Dawn.    I am much less excited about our contemporary version.   Technically, they both involve rather gruesome deaths, but at least battling vampires is scary in a fun way, whereas my new boogieman, the cytokine storm, is just hide-in-the-basement terrifying.

When something freaks me out, I tend to read about it incessantly.  The additional knowledge, even if dispiriting, at least gives me the illusion of control.   To that end, I recommend the site    

In particular, I want to point you at this thread here (nerd alert!  this is extra nerdy stuff).  I found the discussion fascinating.  The fact that this level of detail is available this quickly is simply amazing to me.   I am a layman, obviously, so this might be old hat to the researchers among us, but I guess the fact that this data, and accompanying analysis,  is actually available to a layman like me is part of what amazes me.

Now I have a question for the researchers of KP.  On one of the other blogs I read, a couple of commenters made the argument that it is just a matter of time before this Mexican flu strain ends up infecting someone that is also hosting one of the virulent Asian flu strains.  A couple of recombinations and other genetic hoodoo later, and they stated that it was virtually a certainty that a virus emerges with the unique genetic code of the Mexican strain combined with the virulence of the Asian strains.    The discussion on the thread above obliquely suggested a similar conclusion.   So KP brains, is that a reasonable conclusion?  Is this destined to turn into a superflu next winter after some Asian tweaking or is it more likely to join the pantheon of false alarms flus?

While we're at it, let me pose another question.   The whole cytokine storm thing really bothers me.   Not only am I smack in the middle of the 20-50 age range that takes the brunt of cytokine storm fatalities, but philosophically, I'm annoyed that my own immune system would go Benedict Arnold and betray me.   I'm defending the Alamo here, and I look over to see my artillery men doing shots with Santa Ana as they turn their cannons on me.    Thanks, dicks!

My question, and I actually mean this seriously, is whether, in the face of a known flu pandemic where otherwise healthy people are getting capped, it makes sense to purposefully degrade my own immune system.  If a stronger immune system leads to a heightened risk of a cytokine storm fatality, shouldn't I greet the news of a serious flu pandemic with all-night sessions of Marlboro Reds, bottom-shelf tequila, and Ho-Hos?

Wednesday, April 15, 2009

Not so outrageous any more

Well, the least likely of my outrageous predictions has shown some legs.   To recap...

Secession discussions begin
Of all the unlikely happenings suggested above, this is by far the least likely, but it will eventually happen, just maybe not in 2009. As it becomes increasingly apparent that the federal government cannot meet its obligations, or conversely, as the tax load required to meet those obligations explodes, there will start to be discussions in states about secession. At first, it will be quackery, but as the situation worsens, it will gain traction with people. It is unlikely to actually happen, but the thought alone that people might start to take the idea seriously is by itself remarkable. The most likely candidate, of course, the Republic of Texas.

You scoffed and rightly so.  But read this.   Very surprising, especially from a governor.

Monday, April 13, 2009

More on tax revolts

Between his various ad hominem attacks, Aztec actually made an interesting comment regarding tax revolts...

Now, it's nice to see that GG is concerned about civil servants' pensions because she doesn't give a shit about the pensions of union members. And I really hope all of the traders really do take to the streets in full scale tax revolt. Surely the general public will understand the OUTRAGE of having to pay an additional 4% of income tax on ever single dollar earned above $375,000. How will Obama sleep at night knowing that poor hedge fund managers will be forced to liquidate their Hampton beach houses because soon they will be taxed not at the capital gains rate, but at normal income tax rates? Yes, please let them REVOLT at the mere thought of being treated just like everyone else.
Aztec is probably correct that Obama's tax increase on the "rich" is unlikely to ruffle many feathers. The targeted population is small enough and generally well-educated and conservative enough that they won't start brandishing torches. If anything, Obama's policies might lead to a slow-motion capital strike ala Atlas Shrugged, but it will be difficult to separate that behavior from the overall recession.

But Aztec is missing the point by focusing on federal income taxes. The anger behind the tax revolts is focused on two separate problems. One, the federal government is spending like crazy, and most Americans are smart enough to understand that this will translate to a heftier tax burden down the road. Two, and this is much more visceral, is the anger at rising state and city taxes, particularly property taxes. Mish coincidentally just discussed the problem, and I have personally seen multiple examples over the last week. A friend in Hoboken, NJ just saw his property taxes raised from $4K to almost $12K. Add to that the increases in NJ income taxes, and you have the recipe for an angry electorate. Many other states are doing similar things. Rather than cutting spending to reflect recessionary conditions, they are raising taxes on an already strapped middle class.

As an aside, I also want to address one of the most unjust but least talked about side effects of rising property taxes, the forced sales of properties by elderly people. I know of three cases personally of elderly individuals living on fixed incomes who are being forced to sell their properties because they cannot meet the rising tax burden. One couple in NY bought their home two decades ago for less than $150K, but they now face an annual tax bill above $20K a year. They have to sell. Another woman I talked to today is putting her MD property of 30 years on the market because she can no longer keep up with the tax obligation.

These are people who own their homes outright and have for years. For the state to essentially force them to leave is immoral and ought to be criminal, but it is happening all over the U.S. now has governments looks for new sources of revenue.

A nationwide tax revolt is coming. It might not reach critical mass this year, but it is just a matter of time.

In any case, I will be marching April 15th. And not for my 4% as Aztec smugly suggests, but because out of control government spending threatens the basic values of life, liberty, and property, and apparently the only way to stop it is to take credit card from the politicians' hands.

Saturday, April 11, 2009

Pavlovian Aztec

Ah, Aztec. Thanks for proving yourself to be as predictable as always. I knew we'd get that link out of you; arch-typical, straight out of the playbook, knee jerk leftist crap.

1. My link was a response to your pathetic Sarah Palin attack link, which was in poor taste, required zero research, and less relevant than BO's bow/denial. The fact that you responded to GB's callout with such venom says a lot.

2. I always hated the fact the the Bushes and their clan are so tight with the Saudis. Unlike you, I am not a hyperpartisan automaton, incapable of criticism of those toward my side of the political spectrum. My post wasn't about Bush. It was about Obama and his administration's denial of the obvious. He should be honest with the people rather than following the Clintonian playbook. Of course, I never would expect you to admit that a simple admission of a misstep would have been a better response from BO.

3. I love how I can poke you in your leftist cage and you come out smearing anything on the right. The condescending tone is a nice touch, too. Especially when you don't even address the issue. I'm surprised you haven't tried to get a job on one of BO's hit squads.

Wingnuts Angry That Obama Didn’t Suck Off Saudi King, Like Bush Always Did

This is why I wish Hoss would post more often.  Responding take no research (except the ocassional Snopes check) and let's me feel less guilty about reusing Wonkette posts wholesale.  It also obviates the need to cut and paste portions of the Freeper message boards. 

Keep posting Hoss.  Don't let the crypto-objectivist/libertarians dominate the right wing discussion on KP. 

BTW, can some of the KP vets post on the Gates Budget?  Voodoo, I'm looking at you.

via Wonkette by Ken Layne on 4/8/09

Faggots.Oh noes the wingnuts are very, very upset! Why? This street negro, Barack Obama, allegedly kowtowed to the Saudi King while meeting said Saudi King at the G-20. (The White House says, "Uhh, Obama is a lot taller than that old dwarf, so he bent down to look at him.") It is shameful for an American president to politely bow one's head while being presented to a Saudi Prince/King. You are supposed to smooch him up and hold his hand and walk him around your ranch and then give him a loving blowjob, like George W. Bush Junior always did! Let's remember the good times, together.

We'll have a gay old time!See, black people nod politely to the Royal Head of State Monarch, while white people romantically caress the fat old dude's hand — foreplay, it is called — and then robustly lick his ass for a few hours.

And then you just get in close with that Grecian-formula goatee and jam that tongue in there, old school:
Just For Men.
Thanks, Wingnuts! Without you people, American might've forgotten the proper way for an American president to deal with the Arab Monach: just cold suck on his peter.


Friday, April 10, 2009

Obama - Abdullah's Bitch

What a disgrace. What is even more disgraceful is the response of the administration - total denial. I would have a lot more respect for the adminstration if Obama would simply acknowledge his error. Next we'll probably hear that it is Bush and Cheney's fault.

Maybe next time he'll drop completely to his knees.

Obama's a bitch. Only Jimmy Carter projected more weakness as President.

Wednesday, April 8, 2009

Ron Paul on the 15-year Depression

From the FT.

Fifteen years sounds about right to me.  I tend to be a believer in historical, generational cycles, from the Kondratieff wave to even some of the sort of tin-foil literature on cycles like The Fourth Turning (which I have not actually read).   While I can understand skepticism of this kind of analysis, I am of little doubt that national psychology seems to go through huge generational shifts.  For example, virtually ever one I know whose grandparents suffered through the Great Depression remember them as pack rats, storing stuff that would strike us as disposable.   Most of the generation is now dead, and their experience largely forgotten.  

The approach of that generation towards "stuff" is basically the polar opposite of our generation's willingness to junk something at a moment's inconvenience to buy a new one, but I think we are witnessing the very beginnings of a shift to that generation's mentality.  Over the last few months, I've noticed a pronounced tendency in the media to celebrate the coolness of being frugal.  The hipness of frugality will subside as things worsen and frugality becomes a requirement rather than a fashion statement.    I'm afraid that when our generation emerges in the 2020s, we may not think so differently than our grandparents, and, unfortunately, that kind of polar shift in psychology can only come as result of severe national trauma.  Which, as you know, I am forecasting.

The optimistic counterpoint is that might see a renaissance for our republic as people start to spend less energy debating the American Idols on TV and more debating the American Idles in Congress (god awful pun copyright Gammaboy 2009).    Perhaps we might actually see more from real political thinkers in Congress (RP to start) rather than the daily idiocies of clowns like Barney Frank.

Tuesday, April 7, 2009

Pension update

There have been about a dozen different important threads that I have been meaning to link and expound on, but I haven't had the time, so I am afraid many of them are lost in the ether of good intentions.    Since I just railed on Aztec's posts with proper invective (surprisingly alcohol free),  I thought I would add an update to my prediction concerning pensions.   I still think the pension crisis will be one of the big headlines come year-end, and frankly, the situation looks worse than I had imagined.   Read this story.  

As far as other big picture economic data, everything has been coming in disastrously, the current stock market rally notwithstanding.  I have actually been quite long stocks all year and think we probably have one more leg up in this rally through early May before things really start to go downhill this summer.   April 15th should be interesting.  I am hoping, rather desperately, that the various tax protests taking shape will get some footing, but I frankly think turnout will not be big enough to be more than a footnote on the evening news.   Regardless, once the government starts counting its dough in the weeks following, I expect the deficit to come in significantly worse than expected, and the financial crisis to begin its next calamitous chapter.   The summer of 2009 certainly has the possibility of becoming one of those landmark periods in American history like '68.  Interesting times, as per the Chinese.

I'll also reiterate my possibly eyes-wide-open, possibly I-am-taking-crazy-pills, suggestion that everyone have some place well-stocked and far from the urban streets to flee should things get, well, crazy.  I realize the notion has a survivalist-tinged ridiculousness to it, this being America and all, but just in case, do yourself a favor and have a plan.   It costs nothing, and with full knowledge of the future mocking I risk should this (hopefully) prove to be hyperbole, it might literally save your life.

Saturday, April 4, 2009

The Gift that Keeps On Giving

Remember the heady days with Sarah Palin gave the GOP its own dose of much needed energy and hope?  As it turns out, Palin was a gift to the Dems that keeps on giving.  How many meth dealers, cat burglars, and bundling teens can one extended family have?

Obama's Bitch

Mark Stanford is Obama's bitch.  He took the money even though he still doesn't have his state legislature's promise to use state funds for debt relief. 

Tuesday, March 31, 2009

More on Treasury looting

I continued to be amazed at the disconnect between the blogosphere and the MSM on this Geithner plan. The blogs have made excellent arguments that the whole Geithner plan is basically a scam, created to steathily move massive losses from a handful of banks and funds to taxpayers. Mish has another good rant on the subject, but I particularly wanted to highlight a post from Steve Waldman, to which Mish himself linked. The first two sentences particularly capture my sadness at the way this looks like it is going to play out.

I am filled with despair, not because what we are doing cannot "work", but
because it is too unjust. This is not my country.

I think that critics of the Geithner plan are missing some of its tactical
brilliance. My guess is that behind the scenes, Geithner has arranged a kind of
J.P. Morgan moment.

I don't think the scandal of the Geithner plan is going to turn out to be
the subsidy to well-connected investors embedded in the non-recourse loan put
option. On the contrary, I think that Treasury has already lined up participants
for the "Legacy Loans Public-Private Investment Fund" and persuaded them to
offer prices so high that despite the put, investors will expect to take a major
loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the
world, the asset managers who do well by "shaking hands with the government",
will agree to take a hit on relatively small investments in order first to help
make banks smell solvent, and then to compel and provide "good optics" for a
maximal transfer from government to key financial institutions.

Why would PIMROCK go along with this? Because they feel it is their
patriotic duty to work with the government for the good of the financial system,
even if that involves accepting some sacrifices. And because they hold $100B in
J.P. Citi of America bonds, and they've received assurances that if we can get
the nation out of the financial pickle it's in, there will be no haircuts on
those bonds. "Shaking hands with the government" means that nothing ever has to
be put in writing.

The caveat here is that this is just Waldman's theory. But there are several other plausible theories out there, and they all suggest that however exactly this plays out, connected players are going to game the hell out of the system. You (and your children aand their children) will be paying down debt for years to ensure bondholders get fully paid and bankers get their bonuses.

Saturday, March 28, 2009

Ron Paul Dominates Level Playing Field

Hoping to make him look ridiculous, the liberal MSM is constantly setting traps for Ron Paul. But as this clip shows, when you give Rep. Paul a level playing field and let him debate his intellectual peers, he can really shine.

Thursday, March 26, 2009

Bankruptcy Primer

Conceptually, there are two types of bankruptcies: liquidation (Chapter 7) and reorganization (Chapters 11, & 13).  Liquidation occurs when the debtor surrenders all of its assets, which are then sold and the proceeds distributed to the creditors.  After the completion of liquidation, all of the debtor's debts are discharged (i.e., the debtor no longer owes any money to its creditors) and the creditors end up with pennies on the dollar. 

In a reorganization, the debtor becomes a debtor in possession, which not only allows the debtor to hold on to its assets during the bankruptcy, but also allows it to temporarily suspend debt payments.  During the reorganization, any interested party can propose a reorganization plan, which may include modification of certain lending agreements or rejection of pre-bankruptcy contracts (think union or pension contracts here).  In the event that creditors cannot agree upon or "confirm" a reorganization plan, then the bankruptcy court may unofficially step in and modify the plan in an effort to obtain confirmation.  Modification may include changing or restructuring the terms of preexisting contracts.  After the plan is approved, the debtor emerges from the bankruptcy with all of its assets and creditors end up with (a) new payment terms, (b) something more than pennies on the dollar, or (c) jack shit (see e.g., unions members and pensioners).   If it turns out that the debtor's income or assets cannot support any reasonable reorganization plan, then the court may convert the reorganization into an involuntary liquidation.

Now, to clear up some confusion: Friedmanite: While it is true that homes are protected in personal bankruptcies, that is a result of state and federal homestead protections and preferences (in the non-legal sense) given to secured creditors.  If a debtor stops making all its credit payments, but keeps its mortgage payments current, then the court isn't going to touch the home.  By the same token, the Court and the Chapter 13 Trustee are going to give the debtor some breathing room, amortize the arrerage, and try to deal with the unsecured creditors. But, bankruptcy provides no protection in the event that a debtor defaults on bankruptcy plan payments. 

What the Obama plan does is apply the reorganization bankruptcy principles to debtors seeking to prevent foreclosure on their home.  If a person files for bankruptcy, lenders would be forced to reach commercially viable compromises with homeowners.  If the lender and homeowner can't agree, the court may step in and present proposals of its own.  Of course, lenders are going to take a haircut - but they almost always do in bankruptcies.  And in the event that the homeowner's income can't reasonably support a revised loan or if the homeowner stops making payments on the revised loan, then the lender may liquidate through foreclosure. 

Nothing in the Obama plan would provide state court judges with the power to alter contracts.  The proposal is simply a change in existing federal bankruptcy legislation. 

The new legislation is unlikely to affect future lending.  First of all, the amendment is limited in time.  It won't affect new mortgages and will only affect mortgages created in past few years. 

Second, even secured creditors have to renegotiate existing contracts in Chapter 13 cases.  The legal and conceptual framework exist for the Court, Trustees, and creditors to work out issues such as market values and market rates.  The assets you typically see involved are large trucks or construction equipment.  Modifying existing contracts to protect a distressed borrower is really the core concept in Chapter 11 and Chapter 13 cases. 

Third, even if the change to the bankruptcy code were to affect new mortgages, lending institutions absolutely know how to account for bankruptcy risk and know how to factor a potential reorganization into their lending decisions.  To the extent that that the new laws create any market externalities, they are know quantities and are unlikely to present any major issues.  GG -  this is why these new laws will not freeze home lending.  If the potential for bankruptcy reorganization really did present as grave a risk to lending as GG foresees, then there would have been no commercial lending over the last 100 years.

What will likely happen is that the new laws will mitigate against moral hazards and help promote better lending decisions.  The moral hazard in this instance is that current bankruptcy law makes the home mortgage a unique type of secured lending that is almost completely insulated from bankruptcy risk.  The ability to lend without the risk of a potential reorganization creates much looser lending standards for home mortgages than for small business or commercial lending.    Go out and find someone who has actually applied for a individual commercial loan and ask them to compare the lending process with the home mortgage lending process.  I guarantee you that no one has ever provided a commercial loan based on a stated income application.  The availability of reorganization plays into the difference in the loan making process.  If the elimination of speedy home foreclosures means the elimination of the liar loan, then we will all be better for it. 

Third and finally, the new bankruptcy rules will eliminate the perverse lending incentives created by real estate booms.  If prices are steadily rising, lenders may have an incentive to create products that encourage default and foreclosure.  Take the ever-popular 5-year, interest only loan.  This is a product with a ridiculously high balloon that seems specifically designed to get people to move into houses they cannot afford.  Now, the lender knows the borrower's purported income and knows that the borrower is unlikely to be able to afford payments on a refinanced 3-year ARM in year 6.  Why not make the loan, buy the MBS, or the CDO but for the fact that you would likely make more money if the borrow defaults and you sell the house at a higher price?  The prospect of having to renegotiate the loan in bankruptcy court helps to reduce the incentives behind this type of lending speculation in boom markets. 

Tuesday, March 24, 2009

And you thought this recession sucked...

I'm always a little freaked out by stories like this. With plenty of "real" things to worry about, phenomenon like this seem like a waste of mental energy, but then there seem to be a quite a few phenomenon like this that occur every few hundred years (Tunguska). At some point, the laws of probability will catch up with us.

In the meantime, my greater fear is a Bruce Willis/Ben Affleck movie coming out of this.

Sunday, March 22, 2009

TALF = Total, Apparently Legal Fraud

If all of you are suffering from outrage fatigue, I am sympathetic. Outrage is exhausting, and with banks and the Administration working overtime designing creative and opaque new policies to deal with existing outrages, while inevitably, inadvertently, through the law of unintended consequences, create a dozen new outrages, it is tough to keep up. Personally, I have began about a dozen posts over the last year that were intended to shred the latest government proposal, but I usually gave up after a few sentences, certain that the exhaustion I felt at detailing the outrage was probably only slightly greater than the exhaustion you would feel after reading it. Everyone gets numb to the drumbeat of bad news after a while, so I wanted to save my bullets.

I am using one now. The latest Treasury plan as I understand it constitutes the single biggest fraud and theft of taxpayer dollars I can remember. The leaders of Treasury, especially Geithner, are either galacticly stupid, or alternatively, should they actually understand what they are creating, bigger criminals than anyone in Nixon's posse.

Let's begin with the basics. Here is the plain vanilla news story explaining the upcoming announcement of the program. Try to read it. My guess is that your eyes will glaze over within a couple of paragraphs. I fear that is completely intentional.

The fact is that this may be the single greatest opportunity to game the system that the government has ever created. There are probably several dozen different ways banks and hedge funds can game this legislation to basically create a heads-I-win, tails-you-lose arrangement. In essence, if the assets under discussion appreciate, banks and hedge funds will make windfall profits. If the assets continue to depreciate, the taxpayer will bear virtually all the losses.

Here is some relevant discussion from the blogs...
Zero Hedge: The Amazing TALF bait and switch
Naked Capitalism: One would have to be a criminal to participate in this

Even Krugman, the Keynesians' chirpy pet parakeet, hates the plan.

If you care at all about fairness, justice, your tax dollars, etcetera, etcetera, you should be writing an email to your local Congressmen right now trying to stop this plan.

On the other hand, if it passes, you might as well buy bank stocks. If your tax dollars are going to be used for a wholesale bailout that saves shareholders and bondholders, you might as well share in some of that upside, because you are definitely in for lots of downside.

Saturday, March 21, 2009

Why South Carolina Doesn't Want 'Stimulus'

This is from the Wall Street Journal. Italics are mine...

Why South Carolina Doesn't Want 'Stimulus'
Columbia, S.C.

America's states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we've found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.

A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.

President Barack Obama recently signed a "stimulus" bill that will spend about $2 billion through "programmatic means" in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.

Here's the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn't spend money we don't have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.

If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.

One of Mr. Obama's central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed "an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."
This idea connected with millions of voters, myself included. I've always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina's presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.

Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.

Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don't believe a problem created by too much debt will be solved by piling on more debt. This doesn't strike me as an unreasonable or extremist position.

Nevertheless, the White House declined my request for a waiver yesterday afternoon. That's unfortunate. But in coming months we'll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we'd all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.

Mr. Sanford, a Republican, is the governor of South Carolina.

Friday, March 20, 2009

Gams Pedictions Part I

Not exactly food riots, but...

Tuesday, March 17, 2009

I have detailed files

I'm pretty sure this is how Skynet started. In any case, it sounds mind-blowing.

Monday, March 16, 2009

An educational 30 minutes

I know my drumbeat of bearish news probably gets old, but if you can stomach it, I strongly recommend this interview with Jim Rogers. He pretty much echoes my read on the situation (or probably more correctly considering his stature, I have been echoing his read).

You'll notice he thinks the bailouts are as damaging as I do. I'll go a bit further and tie in the recent infuriating news about AIG. If AIG had been allowed to die as it should have, none of those bonuses would have been paid, nor would we have the spectacle of taxpayer money flowing to banks, both domestic and more troubling, foreign.

The bailouts need to end. Insolvent banks need to die. Insolvent insurance companies need to die. Insolvent auto companies need to die. A recession is capitalism's natural way of clearing out the dead wood. The longer we wait to allow that to happen, the bigger the final inferno is going to be.

Conservatism and minorities

Shelby Steele has a very well-written and thoughtful column in today's WSJ about conservatism and minorities. More than thoughtful, actually. Landmark. It really is a must-read. I have been trying to decide which paragraph to quote, but there are at least a half-dozen worth repeating. Please, please, read the column.

I have some thoughts, but I am curious to see everyone else's reactions first.

Re: Contracts

Aztec, another good post and Friedmanite, good response.

Aztec, your post notwithstanding, I stand by my statement that Obama is undermining contract integrity.

But let me first confess my ignorance about the connection of TARP funds and mortgage restructuring. I didn't realize the policy was restricted to TARP recipients. I would agree that if a bank comes hat in hand to the government, there is a reasonable quid pro quo in making changes at the behest of the government. The only problem is that many of the TARP recipients did not need the money nor want it. Many were essentially strong-armed into taking the money, and now, aware of all the strings attached, are now furiously trying to return it as fast as possible.

Regardless, my complaint is not with bankruptcy law. Unless I'm mistaken (again), Obama's plan for mortgage restructuring is unrelated to whether or not someone declares bankruptcy. That would make sense. For the most part, foreclosures are completely separate from bankruptcies as they are non-recourse loans. Anyone can mail in their keys at any time, and the banks only recourse is to take the property. I would wager that the vast, vast majority of home owners who are facing foreclosure will not declare bankruptcy.

Absent a bankruptcy, as far I know, courts have never rewritten the terms of mortgages. Why would they when the bank can always take the collateral? If Obama wants to change the rules of mortgage lending, as you suggest, that's up for discussion, but it shouldn't be allowed ex post facto. If he wants to screw up the mortgage market going forward, he's welcome to do that, but to unilaterally change existing contracts is disgraceful, and as Friedmanite points out, it will put a massive chill on any future lending. Why would I ever lend money to anyone when all they need is a good sob story for the government to step in, change the rules, and revoke my rights?

To again echo Friedmanite, your point on moral hazard makes no sense. When a bank forecloses, they take the property. If housing prices have dropped, they take the loss. The only loss to a previous homeowner that put zero down is a blotch on their credit record. To the extent that the bank lent "with little or no risk", it is only because they immediately sold the mortgage to another bank or investor. But someone at the end of the transaction is taking the loss, and it is not the homeowner. Banks will be much more cautious in the future without any threat of renegotiation. Adding renegotiation as a risk will just push them from caution into complete inactivity.

Finally, regarding the Big Three, I don't support bankruptcy because I want to punish workers. I support bankruptcy because the Big Three cannot function as profit-making companies under their current structure. The only thing keeping them alive is government help, which means government money is basically being funneled through zombie car companies to workers. This is a waste of money and unsustainable. In the long-run, workers will be better off working for a restructured, profitable company rather than depending on government largesse.

Finally, just to distill the point, bankruptcy is the proper channel to handle an insolvent company. It is also the proper channel to handle an insolvent individual. But it is has nothing to do with home foreclosures, which are a separate, non-recourse transaction. If Obama intends to comingle bankruptcy rules with foreclosure rules, he is making a grave mistake.

Sunday, March 15, 2009

Gamma: Some Contracts Are More Equal Than Others

GG writes:

The Obama administration is focusing on the short-term pain of families losing their houses and neglecting the long-term costs of undermining the integrity of contracts.

This mischaracterizes what the foreclosure plan does.  First, it allows millions of homeowners to refinance.  Second, it uses TARP funds to provide liquidity to lending markets.  Third, it sets guidelines for modification of sub-prime loans.  Now this portion of the plan does require payment reduction and caps on monthly payment amounts, but these mandatory guidelines apply to institutions that receive assistance from the federal government.  If you're a lender that doesn't want renegotiate your sub-prime loans - fine: stop taking taxpayer money.  Seems like a reasonable quid pro quo.

But GG's primary beef is with loan modification as part of a bankruptcy proceedings, then he just doesn't see eye to eye with the framers of the constitution.  Article I, Section 8 of the Constitution gives Congress the power to establish uniform bankruptcy laws throughout the United States.  This explicit grant of power is in the same section of the Constitution that give Congress the power to coin money, organize and provide for a military, and declare war.  From this, one can infer that the Constitutional Convention found the provision of national debtor protection laws was less controversial that say, the freedom of expression, religious freedom, or freedom of the press. 

Since then the US has had a long history enacting pro-debtor laws that have benefited not only individuals, but also large corporations.  In fact,  lenience for corporations with debt problems is one of the hallmarks of American bankruptcy law.  This tradition is codified in Chapter 11 of the Bankruptcy code and is called reorganization.  While not unique to the US, the idea that a debtor can hold on to its assets, renegotiate credit terms, and continue to operations without the immediate threat of liquidation or foreclosure is a truly American legal tradition.  Under Chapter 11, if the creditors and the debtors can't find mutually agreeable terms for restructuring the debt, the Court may step in and create terms that would allow approval of the restructuring plan. 

Therefore, for at least the last 125 years, commercial lenders have always entered into lending agreements with the understanding that a court could rewrite the terms of the loan agreement.  Yet American credit markets have grown through these years and America's companies have been able to borrow plenty (perhaps too much).  Thus there is ample evidence credit markets can function and grow, even with the threat that a bankruptcy judge may not honor the "integrity" of the original contract.

Now, over the years, Chapter 11 reorganization has been available only to companies and high net worth individuals.  The average person couldn't file for bankruptcy and hope to hold on to their home.  The Obama administration means to change this by providing all Americans with the same protections afforded to corporations and the rich.  Of course, if the debtor is unable to meet its restructured obligations, all bets are off and the lender can foreclose.

Ironically, the absence of any means for an individual to renegotiate home loan terms in bankruptcy may have created a moral hazard wherein lenders (using the faulty assumption that home values would always rise) could offer sub-prime mortgages with little or no risk.  Lenders could extend credit with confidence knowing that if the borrower did default, they could quickly foreclose on the house and never have to deal with the borrower again.

With this change to the bankruptcy laws, lenders will have to be more cautious in lending with the knowledge that the terms may have to be renegotiated and that easy foreclosure is not an option.  

What is hypocritical here is that just months ago, GG was demanding that the Big Three be placed in bankruptcy so that a judge could rewrite the terms of union and labor contracts.  Apparently, there is no need concern ones self with the "integrity" of contracts when average working folks are the ones getting the shaft.  But God forbid using the same laws for the benefit of average working folks if it means lenders may have to renegotiate terms of some of their more boneheaded loans.  


Saturday, March 14, 2009

The myth of tax brackets

I'm basically just venting here out of frustration, but I am hoping someone, somewhere with a bigger platform than KP will eventually start to discuss the myth of tax brackets. Tax brackets exist, certainly, but the endless layers of different tax credits and phaseouts pretty much moot their value for any sort of relevant discussion. For example, this opinion piece defending Obamanomics, which I frankly do not recommend reading unless you are prepping for a nap, makes quite a fuss about tax brackets and their historical fairness. At first glance, it makes a strong argument that tax brackets have not changed that much over the last couple of decades.

The problem is (and here I turn to personal venting) tax credits and their phaseouts skew the tax burden immensely. For example, GammaGirl and I have been thinking about buying a home, and we got pretty excited about the $8000 tax credit available to first-time buyers. But then we read the fine print, and as with every other tax credit , we are phased out....

Are there any income limits for claiming the tax credit?
Yes. The income limit for single taxpayers is $75,000; the limit is $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The phaseout range for the tax credit program is equal to $20,000. That is, the tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.

The flip side is that someone with zero tax liability gets sent a check by the government...

I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.

For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
This is just one example. There are a multitude of tax credits out there. I would guess that with enough of them lumped together, someone with a minimum tax liability could probably "earn" themselves a check of close to $15-20K from the government. How is that not income redistribution?

Weekend reading

If you have twenty minutes and a cup of coffee this morning, may I suggest this post as an excellent educational companion on the way banking works.

[Warning: The piece is not hysterical, apocalyptic or sensational. It is actually borders on textbook boring, but it is totally suitable for a curious mind on a quiet morning, and I am guessing even the MBAs in our cohort will learn something. I certainly did.]

Wednesday, March 11, 2009

Google doesn't kill people; people kill people

I can't imagine there is any chance of this inane legislation passing, but stranger things have happened.

It's interesting to hear the same kind of arguments trotted out for this legislation as are trotted out for gun control. Liberals want to restrict guns; this goofy Republican wants to restrict Google Earth. Both arguments are dopey (although I will gladly concede that this idea is considerably more dopey than most well-meaning but completely wrong-headed attempts at gun control).

The biggest crook in history?

I think this scumbag may earn the title of biggest crook in the history of the world. I am looking forward to the media savaging him like they have savaged Madoff.

P.S. To the lawyers on KP, is there any existing legal mechanism to clawback seemingly undeserved bonuses like this?

Tuesday, March 10, 2009

Dear Gold

Dear Gold,

We have had a wonderful run together, and I still take heart in the bits of you I keep safely stashed away in case of a very, very rainy day, but to be honest, I've lost that loving feeling.

It's not you. It's me. Or more precisely, it's all the articles like this I have been reading lately. I liked you when you were the uncool outsider, but over the last couple months you have been on everybody's lips, and it's made me very uncomfortable.

I will always keep mementos of our time together hidden away in a dark corner of the closet, but I won't invest any more of my time (or money) with you. It's certainly possible that in a couple of years I will deeply regret ending things like this, but as long as everyone else loves you, I can't.

And yes, since you asked, I have started flirting with both oil and natural gas. I feel the beginnings of a beautiful relationship with both.

More on Mexico

US military chief backs counter-insurgency for Mexico

...In talks with top Mexican defense and military officials, he said he emphasized the Pentagon's readiness to provide new intelligence, surveillance and reconnaissance help, such as unmanned drones to spy on armed drug gangs, especially along the U.S. border.

...The admiral said he and his Mexican hosts did not discuss the possibility of placing U.S. troops on the U.S.-Mexican border, an idea suggested by Texas Gov. Rick Perry.

Technical assistance for counter-insurgency. Call me paranoid, but doesn't this sound very similar to the baby-step-by-baby-step escalation we have seen in the past from the U.S. government in other countries (I am guessing there were almost identical statements in the early stages of our involvement in Vietnam).

If some American citizens end up murdered as a result of the spiraling violence, particularly if they happen to be on U.S. soil at the time, look for the next baby step - calls for U.S. special forces to assist in "training".

Some apologies are in order

The media, Europe, and Hollywood were apoplectic for much of Bush's second term about Guantanamo Bay, and the sheer injustice of Americans imprisoning innocent goat herders and whatnot. Somehow, I doubt we are going to hear many apologies now that evidence is mounting that the cries of injustice were utter nonsense.

Unintended consequences

Here is an interesting post from Naked Capitalism, which exposes some of the unintended consequences that inevitably pop up every time the government gets involved in bailing out an entity. When this is all said and done, I expect there will be many dissertations written on the game theory involved in sorting out this mess.

Conversation or Gibberish?

The message board conversation is funny but completely irrelevant...let's go with irreverant.

"Investors: Ok, per our agreement, I am going to foreclose on the propertyand you will be clear. I may take a loss, but at least this albatross will beoff from about my neck."

How many investors do you know who want to foreclose today? I don't know any. They want a bailout as much as the lendees. In fact, if lendees could be assured of being free and clear (check your HELOC terms closely), most would likely jump at it. The lenders would be crying foul as they incur significant transactional costs to then put the property on the market and maybe get 0.50 on the dollar. They would also simply go bankrupt at that point; the trustee could then incur further transactional costs and sell the property at 0.25 on the dollar.

Let's be realistic. The lenders need and want the current lendees to keep paying whatever they can. They will not get the "contracted" for rates, but they will be happy getting anything. And yes, they are to blame as much as the idiot who signed the loan. (Assuming the idiot is the bus driver trying to buy a million dollar home, and not the poor Bear Stearns manager who clearly is not facing this problem and deserves better.)

Monday, March 9, 2009

A Conversation on Mortgages

I am blatantly copying this from a msg board (hat tip ucodgen), but I thought it was illuminating and worth sharing...

Investors to Home-purchaser: I will loan you money to purchase the property
using the property as security for the loan. If you can’t pay, I’ll take the
property since, after all, it was I that really paid for it. Since I will
have taken back the property, you will owe nothing else at that point. When
you have paid off the loan, the house will be yours free and clear. Since
house prices always go up, the principal is guaranteed.

Home-purchaser to Investors: Sounds good, This way I
can avoid being priced out of the market. Since house prices always go up, I
can sell it to cover the principal if paying the mortgage might be too
difficult. I may even exit with a profit

(looks like two guilty parties here )
From a month to a few years later..

Home-purchaser: I can’t pay the current mortgage and I can’t sell the property to get clear– for whatever reason

Investors: Ok, per our agreement, I am going to foreclose on the property
and you will be clear. I may take a loss, but at least this albatross will be
off from about my neck.

ObamaAdmin to Investors: Oh no, you can’t do that. Who cares about contract
law. We can’t deny people their dreams, their wants, no matter how unrealistic
it is for them to be buying a million dollar house on a bus driver’s salary.

Investor1 to ObamaAdmin: It was my money that was loaned to buy the

ObamaAdmin to Investor1: Tough, you are rich. You should stop exploiting
the poor people.

Investor1 to ObamaAdmin: If I am forced to take an additional loss and therefore to take a risk greater than specified on the original lending agreement, why should I ever loan money out for people to buy houses?

ObamaAdmin to Investor1: Tough, you are rich and have the money.. besides,
the government will take care of everybody so everybody has what they wish..
except the rich.. and if there are any problems, well figure it out later..

Investor2 to ObamaAdmin: What about us? We are not rich, but are running a
pension fund for retirement and health benefits. What happens if we can’t pay
out what has been promised?

ObamaAdmin to Investor2: If they have a pension fund, they must be rich. If
there are any problems here, we’ll figure it out later.

Sunday, March 8, 2009

End the War on Drugs

In this week's issue, The Economist has a good opinion piece on the value of the ending the war on drugs. Worth reading.

From the opposite end of the spectrum, I think I caught Fox News floating a bit of a trial balloon this morning about Mexico.

Even by their own standards, Fox News has been remarkably sensationalistic about the violence in Mexico. Last week, Bill O'Reilly spent a good half hour ridiculously trying to terrify parents into banning their kids' spring break jaunts to such murder hotspots as Cancun and Cabo.

This morning, the host was talking to an "expert" on the violence in Mexico, and I caught this tidbit of dialogue (I Tivoed it to get it right):

Expert: ...The fact the military is stepping in and taking control of this fight shows you how little trust the public down in Mexico has in the police. And it also shows you the seriousness of the problem that they have to bring the military in.

Host: Well, we might have to bring our military in too. A lot of people saying, hey, we might need a surge like we did in Iraq and Afghanistan. Put our own troops there....

I'm not sure who the "lot of people" are, as this is first I have heard anyone seriously suggest any value in putting U.S. troops in Mexico. Expect more chatter in the coming days - it feels like Fox is going to push this idea and force other media outlets into a debate.

One final question for Aztec and others - I am hearing anecdotally that gun sales in places like Houston are through the roof. A fellow trader based in Houston told me it is now virtually impossible to get a new handgun in Houston; there is a six month backlog. Any truth to that tale?

Thursday, March 5, 2009

Uh oh

I thought I was about as bearish as they come. But Karl Denninger has topped me. He is always a bit hyperbolic in his writings (like yours truly), but from the beginning, he has been a pretty good forecaster of the crisis. I warn you not to click on the link unless you are prepared to be scared shitless.

From an optimist's POV, writing like that suggests we may have actually hit bottom in this crisis. The pessimist would answer with one of the oft-repeated quotations from the Great Depression - "just when we thought it was over, it turned out it was just beginning."

Put me in the pessimist camp sadly.


Aztec, that was one of your best posts ever. Solidly researched and persuasive. It was also an excellent example of a favorite, if disingenuous, tool of debaters -it was a red herring. I never mentioned the EITC at all.

As it happens, I agree with you completely on the value of the EITC. Of course, I would go much further. I would personally prefer a 100% EITC for everyone (i.e. no federal income tax at all on business or individuals). That's a total separate argument, so I'll spare everyone a Ronpaulesque journey into that topic.

So like any poor debater, I am going to allow myself to get sucked into your false rebuttal for the moment, to point out why your arguments for the EITC prove my point exactly.

1) It is less expensive. It is much less expensive for the government to forgo $2000 or $4000 in tax revenue from a working family than it is to flatly support an entire non-working family.

This is true. Unfortunately, the situation is not as simple as your present it. Instead of an EITC or government support, we currently have both. The government is forgoing the revenue and it is supporting additional services. The EITC might be great, but when packaged with a whole host of other government programs, it loses its value.

2) and 3) must pay taxes.

You must pay taxes. Maybe in its original intent the EITC was structured that way, but all you have to do now is file a tax return. For the 32-some percent I mentioned before, there are no taxes paid at all. The credit was never originally structured to exceed the amount of taxes paid, but that is now how it works (i.e. income redistribution).

But to reiterate, my problem is not with the EITC, even in its current bastard form. The problem is the amount of government services that are being provided at essentially no cost to a huge portion of the population. One ironclad rule of economics is that when you begin providing a service for free, demand skyrockets. We now have developed a structure where a significant minority of the population gains access to all kinds of services without having to contribute any skin in the game. The natural result of this dynamic is ever louder clamoring from this group for additional services. Why not, it's free. Democratic policy seems to be founded on a) expanding the number of services available and b) expanding the group eligible for such services at little or no cost. This leaves a shrinking set of people the responsiblity to fund the cost, which with both expanding services and an expanding set of beneficiaries, grows at a nearly geometric rate.

This has been a recipe for disaster. The costs of all these government programs long ago outpaced incoming revenue, leading to almost perpetual deficits. So we now have a shrinking portion of the population that is responsible for both the growing service cost as well as a growing interest cost to fund the debt of all the previous years of too many services. That has accelerated the geometric growth rate.

Check out this chart...

Notice how the green line has a vaguely exponential shape. It would actually be much worse if the full present value of all future obligations (Medicare, prescription drug benefit, etc.) were included. Notice the blue line keeps pretty good pace. This is partly due to the exceptional productivity increases our country has enjoyed and partly due to the accounting fiction shown in the graph below.

Notice that "Social Insurance and Retirement" (i.e. Social Security) is included as tax receipt and makes up a significant portion of federal income. In essence, we are spending Social Security contributions to cover current expenses. If those were properly set aside, the deficit would be much larger (i.e the slope of the blue line would be much less than that of the green line).
The point is that government costs are growing exponentially, revenues are not nearly keeping up, and every attempt to accelerate the increase in costs through expanded services, while shifting that burden onto a smaller portion of the population just makes the problem (exponentially) worse.

To make the picture even bleaker, this dynamic existed even before the current economic crisis this year. Tax receipts are going to fall off a cliff this year - the purple and blue areas above are going to shrink dramatically.

With his current budget, Obama may be solidifying his voting base by expanding its number of members and the value of the services they receive, but his policy goals are completely disconnected with the realities above. Unless something changes dramatically, either a drastic cut in spending levels or (hope hope) some dramatic and exceedingly unlikely leap in worker productivity, it is a mathematical certainty that the above dynamic is going to end in disaster.