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) ....you 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.

Wednesday, March 4, 2009

Kindle 2

I got the new Kindle 2 for my birthday (thank you Restless Resident Alien). It's pretty f-ing outstanding. I am getting the NY Times (I know, liberal rag) and I am totally happy paying $0.50 a day for otherwise free content based on the delivery vehicle. I have also bought more books in a week than I would normally in a month. These fellas over at Amazon are no dummies. They are going to provide content on Apple's handheld platforms and some are shocked, but I will guarantee they are dead on giving the first bump for free, or almost free. Works in schoolyards.

If you have the means, I would not hesitate to get one. For those of you who live in proper cities with public transportation, it is a must-have. The text-to-speech jobby doesn't sound totally Steven Hawking, but is a whistle/bell I could do without, given I am sighted. The experience very definitely makes you forget you don't have a real book in your hands.


Jeff Bezos, I'll take a modest 10% on all residuals sold through this medium. I am pretty influential. You're welcome.

Gamma Claims: Nixon, Reagan - Not Capitalist, Favored Redistribution

First, I will start off with a quote of my own:

"There is no reason why in a society which as reached the general level of wealth which ours has attained the first kind of security should not be guaranteed to all . . . . [B]ut there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody." 

The Road the Serfdom,  F. A. Hayek.

Adhering to these principals, the Nixon administration first proposed the earned income tax credit.  This Republican-created tax policy rewards work  and discourages welfare-induced sloth.  At its outset, the EITC was touted as a superior alternative to either welfare, or increases in the minimum wage:

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.

2) It rewards work.  The earned income tax credit ensures that a person working even the most humiliating, minimum wage job will have a higher standard of living than those surviving on welfare alone.  In order to be eligible for the credit, you must have a valid SSN, you must work, and you must pay taxes.

3) It rewards income reporting.  In order to receive the credit, a person has to report income and pay taxes just like everyone else.  This encourages people into legitimate labor pools and discourages cash-only, non-incoming reporting jobs.

Reagan liked the program so much, he pushed for and obtained an expansion of the EITC in 1986.

Now, under a Democratic president, a similar expansion is being touted by some as redistributionist, socialistic, and anti-capitalist.  Sadly, these folks have strayed from the ideals and policies of their political and ideological heroes. 

To the extent GG alleges that an EITC expansion amounts to people voting themselves benefits from the public treasury, the argument lacks perspective.  The EITC costs a modest $36 billion a year; whereas "the majority" helped themselves to ten times that much worth of tax cuts in 2004.  But when Republicans vote themselves largess, it's virtuous; when Democrats do it, it's a step on the road to tyranny. 

So let's forget that the Bush tax cuts cost us $2 trillion.   Let's forget that the war in Iraq (not a war of necessity, but a war of convenience) cost us $3 trillion.  Let's forget that the final tab for the Bush years is going to run us $10 trillion.  The real threat to our democracy is embodied in a $36 billion per year program that gives up to $4,000 in tax credits to a family of 4 earning less than $38,000 a year.  

What is really at work here is the need to mitigate the complete stagnation in real wage increases for the vast majority of Americans.  Take a look at the graph below:


This charge tells at least two stories:  First, it explains the increased tax burden for high earners (they were earning a lot more money than the rest of Americans).  Second, it illustrates that the middle and lower classes obtained very little wage growth during the Bush years.  In the absence of real wage growth for many of these Americans, the EITC is an effective tool for adjusting real wages and is preferable to increasing in the minimum wage.  Don't take my word for it:  conservatives consistently made this argument in the age before Obamanomics.  So why value consistency and intellectual honesty when it's so easy to vilify and tar the policies (which conservatives created and once championed) as redistributionist?

GG's argument focuses on federal income taxes, which ignores the fact that 36% of Federal revenue comes from payroll taxes.  If one takes all federal taxes into account, then the top 5% of earners (whose income started at $224,850 and who took home 32% of all income in 2008) will end up paying 44.8% of all federal taxes (which also includes corporate and estate taxes).  Meanwhile, the bottom 40% (those with incomes of $37,257 and below) earned 11.4% of all income and actually did pay federal taxes to the tune of 3.4% of the total.  If those poor people weren't so poor, they would pay more taxes. 

In summary, the EITC expansion is not socialism; rather, it attempts to achieve acknowledged and legitimate social goals using  a Republican-created policy device that conservatives supported for decades.  The relative cost of the expansion is modest and is dwarfed in comparison to the credits the GOP heaped upon their wealthy constituents. 

Tuesday, March 3, 2009

Re: Obama comes out swinging in weekly address

Aztec, you seem to have a low threshold for awe at rhetoric. That quote from Obama rings of boilerplate populist nonsense. I wouldn't be surprised if that was plagiarized from one of Hugo Chavez's notoriously long-winded populist tirades.

Even a progressive such as yourself must realize the silliness of his claim that he will defy "special interests and lobbyists". His budget was a laundry list of special interest and lobbyist favors. The only change has been the flavor of the favored parties - the conservative pet projects are out, the liberal pet projects are in - but the government trough continues to expand to feed the favored set of interests.

I want to take special issue with this fiction about tax cuts "for most families while raising them on a few".

Look at this chart. For all of Obama's rhetoric about cutting taxes for the poor and middle class, as it is, 32.6% of households pay zero in federal income taxes. How exactly is Obama going to cut these taxes? He's not. Rather, he is going to give them money - a negative tax rate. In the old days of capitalist America, this was termed "income redistribution".

Also look at the chart below.

The top 5% of income earners are already paying over 50% of the tax base (and for all the hatred of Bush and his tax cuts, this progression actually expanded during his time in office). The top 50% are paying 97% of taxes, meaning that the other half of the population is getting a smorgasbord of services essentially for free. This is a recipe for long-term disaster.

I will leave you with my own quotation, which I would argue has stood the test of time and has much more depth than the empty populist blather you offered from Obama.

"A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship." -Alexander Tyler 1747-1813

Obama has taken us one step farther down this road.

Sunday, March 1, 2009

Obama Comes Out Swinging in Weekly Address

Love the escalating rhetoric here. 

via Matthew Yglesias by myglesias on 2/28/09


In 1936, Franklin Delano Roosevelt delivered an important campaign speech in Madison Square Garden, saying among other things:

For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away. Nine mocking years with the golden calf and three long years of the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent. […]

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me‹and I welcome their hatred.

For some time now, I think many progressives have been waiting to hear something similar from Barack Obama. And in today's edition of the weekly YouTube address, I think we get something like it. Talking about a budget that will cut taxes for most families while raising them on a few, increasing federal aid to college students while reducing federal aid to private sector student loan writers, and boost health care coverage while reducing subsidies to health insurance firms, Obama says:

I know these steps won't sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they're gearing up for a fight as we speak. My message to them is this: So am I. The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I don't. I work for the American people. I didn't come here to do the same thing we've been doing or to take small steps forward, I came to provide the sweeping change that this country demanded when it went to the polls in November.

I'm not sure whether or not this kind of feisty presidential rhetoric and leadership is actually as decisive as some liberals think, but it is nice to hear.