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“You never want a serious crisis to go to waste.” Rahm Emanuel, Nov 2008.

Like Machiavelli in “The Prince” (published in 1532) none of this is anything new, but it’s rare that someone actually says it out loud. Government creates, sustains, and basically exaggerates problems in order to implement their desired solution. i.e. To pass their particular political agenda.

Obama did it immediately after taking office, exploiting the economic crisis to pass his “recovery” plan to funnel tax dollars to his constituents. He did it again early this year to pass health care “reform”, and he’s attempting to do it today with the oil spill – using it to advance his carbon “cap and trade” and “alternative energy” agenda.

BTW – This isn’t just me bashing Obama, ALL governments do it. Obama isn’t even particularly good at it. GWB was the master.

Bush II was adept at exploiting the crisis du jour. Is there any doubt that Bush took advantage of 9/11 in order to finish off the Hussein/Bush Family Feud once and for all? There was never the slightest connection between Saddam and 9/11, but Bush – along with his lackey Colin Powell – did their best to scare the crap out of everyone to make them think Saddam was Hitler II.

How about the way Bush used 9/11 to implement his version of security – which is way closer to Hitler’s Gestapo and SS than Saddam ever dreamed of doing – called the USA PATRIOT Act?

I swear I’m not making this up – it’s official name is the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001″. Everyone knows it as the Patriot Act, and it’s has done more to strip fundamental rights rights away from Americans than anything that Bin Laden or Saddam could ever dream of doing.

Basically every single article of it that’s made it to the Supreme Court has been ruled unconstitutional. Eventually, the whole thing will be thrown out, but that takes years of court battles – and someone with the balls (and money) to challenge the law – instead of meekly doing whatever the Gestapo tell them what they are allowed to do.

Bush also used 9/11 to implement the gigantic, overblown, over-funded, mismanaged, best-example-of-big-government-gone-awry-since-LBJ’s-Great-Society, stupidity-enshrined-in-law-monstrosity-that-we-call-the “Department of Homeland Security”.

I mean really, WTF are we all doing standing in lines at airports so federal agents can be voyeurs to enable them to find and take away those fingernail files and 3.6oz tubes of toothpaste that we’re going to use to take over the plane and crash it into the Podunk State Fair?

And then there’s the $700 billion bailout of the banks (aka TARP) that Bush pushed through as he was leaving office. I could write hundreds of pages about the stupidity and ultimate uselessness of that alone.

And please don’t forget one of the most obnoxious and intrusive laws ever imposed on Americans – the Sarbanes-Oxley Act of 2002. SOX was passed in response to the Enron fiasco. AFTER Enron had already collapsed. The free market, on it’s own, without government doing a damn thing, had already corrected the problems with Arthur Andersen and other accounting firms cooking the books and basically making up numbers. The bad companies disappeared and their stockholders lost money – precisely what should have happened. No additional regulation required.

SOX reporting requirements have sucked hundreds of billions – if not trillions – from companies over the past decade. How many millions of productive workers could have – would have – been employed with that money instead?

I gotta give credit where credit is due though – Bush II (or King George II, whichever moniker you prefer) was even able to take something which was a “good thing” and turn it into a crisis. He inherited surpluses (they were fake, but no need to get into that here) “as far as the eye can see” into the future, and turned them into the largest deficits ever known in the history of man.

He did this by convincing people that the “surpluses” were simply the government taking away their hard earned wealth and squandering it. Seriously. Look up his acceptance speech when he won the nomination. He said “Some say that growing federal surplus means Washington has more money to spend. But they’ve got it backwards. The surplus is not the government’s money; the surplus is the people’s money.”

In the first place, there was no surplus, but more importantly, IF there had been a surplus, it should have been used to pay down the existing debt. Bush seriously thought he could cut taxes AND increase spending AND pay down the debt AND everything would be just fine. He was – and is – a world class moron.

Instead of paying down the (approximately) $5.6 trillion in debt he inherited, Bush II fricking doubled it during his term. In just 8 years, Bush II increased our debt as much as ALL PREVIOUS PRESIDENTS COMBINED!

This is so hard to comprehend that I’ll try saying it another way. During the first 212 years (from 1789 until 2001) that the US had been in existence, we accumulated about $5.6 trillion in debt. Total. The first 42 US Presidents combined spent a total of $5.6 trillion more than they collected via taxes. Got it?

Now Bush II becomes President. Starting with $5.6 trillion in debt. With his budget for 2009, he left us over $11 trillion in debt. I can spend money, but DAMN, that boy was good! Even a drunken sailor has to stop when he runs out of money. Bush didn’t.

Can you tell that I think Bush II was (and still is) the Worst. President. Ever? He even beats Carter who previously held that title in my opinion. (Hmmm… I may have to rethink this. Carter couldn’t even successfully exploit the numerous crisis he had (oil embargo, Iranian Hostage, giant swamp rabbit, etc), so it’s conceivable that he was even dumber than Bush…. I need to ponder this at length sometime.)

Anyway, Obama isn’t doing anything that previous Presidents haven’t done as well, but that doesn’t mean I like it. Just because your predecessor sucked, and you happen to (in the immortal words of a team member) “suck less” doesn’t mean I like it. It doesn’t mean I think you’re doing a good job either.

Just because I think Obama “sucks less” than Bush II doesn’t mean I agree with his policies. As with Bush II, I can name a dozen areas where I disagree with Obama. And Obama obviously learned from Bush – he isn’t going to to let a crisis go to waste. Betcha thought I’d never get back to that point, but I did.

So he’s going to use the Gulf Oil Spill crisis to impose restrictions on drilling, and oil companies, and to impose new taxes to “punish” those responsible, and whatever else he thinks he can get away with to advance his agenda.

While I totally support “alternative energy” I do not agree with his agenda. I am a HUGE proponent of wind and solar power, and I would cover my south facing roof with solar panels and put a wind turbine in my backyard tomorrow morning – IF it made economic sense to do so. It does not.

The ONLY way it could possibly make economic sense (to individuals like me) at this point in time would be to tax the hell out of traditional power sources. Which is stupid. If I actually need to explain WHY that would be stupid, then you are too stupid to understand it.

Seriously. Read a Econ 101 textbook (or better yet, read Henry Hazlitt’s “Economics in One Lesson” (http://jim.com/econ/chap01p1.html) particularly “The Lesson Applied”) then ask me to explain it if you still don’t get it.

When alternative energy sources become economically viable – either by the price of them dropping or by the price of traditional sources rising via free market forces – I won’t be the only one buying and using them. Everyone will want a “cheap energy thingy” in/on their house. And they’ll have one.

Just as petroleum based kerosene displaced whale oil as fuel for lights, and gasoline beat out electric and steam powered automobiles in the early 1900’s, when “alternative” energy costs drop below the cost of fossil fuels, everyone will use it. No government interference, regulation, increased taxes, “cap and trade”, or whatever else they what to call it is required to make that happen.

Leave the market alone (no subsidies for anyone – oil companies or ethanol producers or corn growers or solar panel factories or wind turbine generator manufacturer’s or biomass methane producers or hydro wave action scheme of the day, etc.) and everyone will do what makes cents (I know it’s a bad pun, but I’m bored) for them to do.

That’s what a free market does best. No government policy can change that. And crisis management – or management by crisis – will have no lasting effect. Unfortunately, we’re not doing that.

I read somewhere that “you can sway 1000 people by emotion faster than you can convince one with logic” – or words to that effect. The problem is that those thousand people can be “swayed” back to the opposite viewpoint the next day by a new demagogue. The one who you convinced with logic will stay convinced.

Hopefully, I’ve given enough examples, and used enough logic to convince the 2 people who actually read through this rant that they shouldn’t blindly agree with the proposed solution(s) to the crisis du jour.

Please think about it. Think it through. Think about the implications of the new policy. Not simply what it means today, or what feels good, or makes you feel better because you (or your proxy the government) are sticking it to “the man”, but what the new policy will actually accomplish.

There, I feel better.

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This is from an old (sometime in the 1980’s) Dave Barry column, but I ran across it today and I still find it funny.  It’s about the difference between Democrats and Republicans.  Unfortunately for our country, it’s pretty close to the truth….

“The Democrats seem to be basically nicer people, but they have demonstrated time and again that they have the management skills of celery. They’re the kind of people who’d stop to help you change a flat, but would somehow manage to set your car on fire. I would be reluctant to entrust them with a Cuisinart, let alone the economy. The Republicans, on the other hand, would know how to fix your tire, but they wouldn’t bother to stop because they’d want to be on time for Ugly Pants Night at the country club.”

Republicans spend too much on defense, bailouts of inept corporations, and in new programs designed to show people that they’re really good guys, like the prescription drug bill.  Democrats spend too much on everything.  Neither is willing to raise taxes enough to pay for their spending.  The only time in the last 50 years that spending has been kept somewhat in check is when we had a Republican congress and a Democrat as president.

For 6 years – from January 1995 through January 2001 – Republicans controlled congress and Clinton was president.  Spending was kept in check and we almost had a balanced budget.  I know Clinton claimed surpluses, but he lied.  The “surplus” came from Social Security payments and the total federal debt increased each and every year, so there wasn’t actually a surplus – but it was as close as we’re ever likely to see from here on.

Obama is making Bush’s budget busting spending look like child’s play.  This year alone, we’re spending twice as much as we’re collecting in taxes.  We’re effectively borrowing money from the Chinese to make interest payments to the Chinese.  It’s the same as using your Visa card to make minimum payments on your MasterCard.  How long do the idiots on Capital Hill think they can continue this Ponzi scheme?

gk

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The S&P 500, DJIA, and NASDAQ are all up about 40% from their lows on March 9th.  Why?  Has the economy (and earnings) rebounded that sharply?  Or were the March lows an aberration?  It’s been a while since I talked about the stock market or the larger economic picture, so it’s time to revisit those themes.

First, the economy.  From the data to date, it appears that the broad US economy is shrinking less rapidly than it was just a few months ago – but it’s still shrinking.  The GDP shrank at a 6.3% rate in the 4th quarter of 2008, and it shrank at a 6.1% rate in the 1st quarter of 2009.  These are the revised (as of May 29th) numbers straight from the BEA here.

Passenger: “The GDP is better than it was before Captain – can we start the party?”

Captain: “Ummm, let me think….  The ship is still sinking….  But it’s sinking at a slightly slower rate.  Re-arrange the deck chairs again, maybe that will help.  Party on dude!”

Ok, so the economy isn’t growing – what’s behind the 40% rise in stocks?  Could it be earnings?  Maybe companies have laid off enough workers, and streamlined operations enough so that their profits are 40% higher than last quarter?  Let’s look at the numbers….

With 99.43% of the Q1 2009 earnings reported, the total earnings of the S&P 500 adds up to $7.61.  That’s certainly a lot better than the negative $23.25 the S&P 500 earned during Q4 2008!  Keep in mind that Q4 was the first time ever for “negative earnings” for the S&P 500.   And another word for “negative earnings” is “losses”.  Or “deficit”.  As in “the US Government has $1.85 trillion in negative earnings for fiscal year 2009.”

Anyway, $7.61 in earnings must be a good thing if that has caused the stock market to surge about 40% in the past 3 months right?  According to Standard and Poors latest spreadsheet, no.   Except for last quarter’s losses, As Reported earnings haven’t been this low since Q4 of 2002.  And the Operating Earnings (currently $10.15) haven’t been this low since Q4 of 2001.

Ok, so actual earnings aren’t driving the market higher – what if the earnings are low, but beating the estimated earnings?  In other words, what if company earnings suck, but they suck less than investors expected them to suck?  Sorry Charlie, according to Howard Silverblatt, S&P Senior Index Analyst, “actuals are -24.3% off estimates, and -43.5% behind last year”.

Of course, Howard goes on to say that the “Operating vs As Reported (top down vs bottom up) varriance enormus; out of the woods or the Island has moved.”  I’m not sure what it means when the Senior Index Analyst at Standard and Poors can’t spell “variance” or “enormous”, but it can’t be A Good Thing.

In the same note, Howard also says “189 issues beat est, but only 87 beat last years earnings; 290 missed with 72 beating last years EPS” which translates (seriously) to “189 out of the 500 companies in the S&P 500 beat their earnings estimates.”  189 out of 500 is about 38% – that means that 62% of the S&P 500 MISSED their earnings estimates.  And yet the stock market is 40% higher.

Ok, so maybe the forward PE ratio is finally coming down to reasonable levels?  It was at a record 60 to 1 at the end of Q4, it must be better now….  Or at least when we look at the estimates for the rest of the year….  Right?

Wrong.  The current PE ratio for the S&P 500 is 114.77, another record high.  And it gets even worse when you look ahead.  Here are the current estimated PE ratios for the S&P 500 for the rest of 2009.

• Q1 – 132.22
• Q2 – 3513.31 !
• Q3 – Negative 301.52 (first negative annual PE in history)
• Q4 – 33.46

To sum it up, I see no reason for the current level of stocks.  Zero.  The S&P 500 index (currently at 944.74) is too high relative to earnings – and in the long run, stock prices are based on earnings.  This minibull may continue for awhile, but prices WILL eventually adjust to the low earnings.  And from where I sit, that means stocks will drop back down to at least the March low sometime this year.

The only possible way I can see stocks continue to rise is inflation.  Specifically, inflation caused by the enormous amount of money the Fed is printing out of thin air and injecting into the money supply.  In that case, stocks can – and will – go higher.  But the actual price increase will be close to zero when adjusted for inflation.  And if you want to maintain your purchasing power, gold and silver (in your physical possession, not an ETF!) are, in my humble opinion, much better inflation hedges than stocks.

I could go on and on about how Geithner, Helicopter Ben Bernanke, a willing Congress anxious to be seen as “doing something”, and Obama are making the mess worse – just as Greenspan, Bernanke, Bush, and a willing Congress created the problem – but that’s another story for another day.

gk

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Timothy Geithner is either really stupid or he’s simply lying to buy time.  I left work early today and I heard this quote from Rush Limbaugh on the way home (I used to listen to him regularly, but his shtick is getting old – how long can he blame everything on the Democrats and Clinton?  Bush had power for 8 years, and borrowed as much money as ALL previous presidents combined – I didn’t hear Rush bitching about spending then.)  so I had to look it up.

Rush is right on this one – here’s a quote from a Bloomberg news story: “It will be helpful if Geithner can show us some arithmetic,” he said.

“He” is Yu Yongding, a senior researcher at the government-backed Chinese Academy of Social Sciences and a former central bank adviser. “The Chinese public is worried about the safety of its foreign- exchange reserves,” Yu said in an e-mail.

Yup, that would sure be “helpful”.  I’m still trying to figure out how we (the US) can borrow as much as we collect in taxes this year and next year and still Geithner can state “No one is going to be more concerned about future deficits than we are”. I’d like to see the math on that.

To put it bluntly, Geithner is either really, really dumb, or he’s simply lying. I think he’s lying.

According to a Reuters story about the visit A major goal of Geithner’s maiden visit to China as Treasury chief is to allay concerns that Washington’s bulging budget deficit and ultra-loose monetary policy will fan inflation, undermining both the dollar and U.S. bonds.

That sounds good – I too would like to be reassured that my savings aren’t going to be worthless because of the incredible amount of money being printed.  But guess what?  Words mean nothing – it’s what they actually do that counts.  And what the Obama administration is doing is driving the final nails into the coffin that is the US economy.  Bush dug the hole, and Obama is pushing us into it.

The really sad part of Geithner’s statements is that even the Chinese know that he’s lying.  According to the same Reuters story when Geithner said “Chinese assets are very safe,” it  drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

Towards the end of the Bloomberg story, it says “I will, of course, make it clear that we are committed to a strong dollar, that we are committed to bringing our fiscal deficits down over the medium term to a sustainable place, to a sustainable level,” Geithner said in the briefing May 27. “We believe in a strong dollar. A strong dollar is in the U.S. interest.”

That’s pure bullshit and I think Geithner knows it.  He can’t really be that stupid.  No deficit is “sustainable” over the long run – every year simply puts you further and further behind.  At some point you must pay the debt off.  And in order to pay ANY debt off you must have a surplus.  That’s simply not in the cards for the US.  Medicare and Social Security are soon to run huge deficits – and where will we get the money to pay that?

gk

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I’ve seen dozens of stories tonight about how the Tea parties are a protest against Obama and how they are protesting high taxes.  Bullshit.

A few high profile Republicans such as Sean Hannity, Newt Gingrich, and Dick Army hijacked the Tea Party concept for their own political purposes.

The Tea Parties are not anti-Obama.  The Tea party movement is a protest against bailouts and government spending and regulations in general.   They were originally non-partisan until some neocons hijacked them.

I am against big government in all it’s forms.  I am against privacy violations as much as I’m against bailouts and higher taxes.  The Republicans are lying scumbags – GWB created more federal debt than all previous presidents combined – and for them to act self-righteous now makes me sick.

Don’t get me wrong – anything that stirs up resentment against more government interference in our lives is a good thing!  But I’m sick of the media turning the events of today into a Republican VS. Democrat protest, because that diminishes the impact of the protests.

gk

Just after I posted this I read another article that says it better than I did.  Check out how E. Thomas McClanahan said it in the Kansas City Star.

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I’m not kidding.  The title of this post is what the Republicans are calling their budget blueprint.  You can read the whole 19 pages of it here.  Go ahead and read it – it won’t take long and you may get a few good belly laughs from it.

There’s no way to call it a budget proposal, because it doesn’t have any hard numbers in it.  There’s a lot of criticizing of Obama’s budget proposal  (and there’s a lot to criticize in that!) from the same party that doubled the national debt in just 8 years. It’s the pot calling the kettle black.

As a libertarian, I think the Republicans say some good things, like proposing “a simple and fair tax code with a marginal tax rate for income up to $100,000 of 10 percent and 25 percent for any income thereafter” and “dropping the two lowest rates by 5 percent to provide every taxpayer with a tax cut” but not a word on what they’d cut to make up for the lost revenue.

Don’t get me wrong, I fully support any and all tax cuts, but I’m not naive enough to realize that low taxes come with a price.  That price is either reduced spending or larger deficits.  There is no third option.  Since I think our debt is already unsustainable, we need to dramatically cut spending now.  Yes, I want to do what the moron Keynesian economists accuse Hoover of doing – too bad Hoover didn’t do them.

I especially like section 3, entitled “The Republican plan controls the debt”.  It’s subtitled “Republicans want to end the bailouts, protect taxpayers, and provide a transparent recovery process. Republicans support maintaining the cost of living after witnessing the booms and busts triggered by loose monetary policy.”

It goes on to say that “Republicans want to ensure that this crisis never occurs again, protect taxpayers and provide a transparent recovery process that does not favor those that have made unsound business decisions.”

I like the way they say “want to” and “Republicans support” on every other page.  Hell, I “want to” end all poverty, and I “want to” end world hunger, and I “want to” make $72 million per year, and I “want to” produce all our energy by putting a 65 watt wind turbine on every streetlight pole.  The fact that these things aren’t possible just because I “want to” and “support” them doesn’t matter.  I fully support these ideas.  There.  Problem solved.

Never, ever forget that these are the same morons who doubled the national debt when they had control.  No, I don’t think they’re necessarily worse than the Democrats, but they are not any better, and I’m already getting sick of them becoming budget hawks in the last 60 days.  Don’t forget that these same people passed Bush’s $700 billion bailout in October.  Now they’re acting like we can’t remember that far back.

Unfortunately, it seems that most people can’t remember what happened just 6 months ago.  A couple of guys I know are constantly complaining about the spending Obama is doing, but they never said a word when Bush spent more in 8 years than all the other presidents combined spent in the previous 212 years.  Obama has a good shot to bust Bush’s record spending all to hell, but he’s got a long way to go.  So shut up.

Anyway, I yearn for the good old days of gridlock.  It seems that the only way we can keep the government out of our lives is to have a congress run by one party, and a president of the opposite party.  The Democrat controlled Congress and White House will probably prove to be just as bad as when the Republicans controlled them.

I don’t like either one spending money we don’t have.  I “want to” fix the problems, so I’m spending hours writing this blog in the hopes that eventually enough people will get the message  – so that we can throw the bums out (all of them) and get back to using some common sense in government.  I doubt that this will ever happen because a majority of the voting public seems to want bread and circuses, but dammit, I’ve got to try.

gk

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George Bush was – by far – the biggest budget busting president of all time.  In just 8 years he racked up almost as much debt as the previous 42 presidents did in the previous 212 years of the United States combined.  To put it another way, Bush almost doubled the national debt in just 8 years.  The national debt when Bush took office was $5.7 trillion, and when he left office it was $10.6 trillion – an increase of $5 trillion in 8 years.

Barack Obama – while vastly different  on other policies – is doing his best George Bush impersonation when it comes to fiscal responsibility.  According to a report issued by the Congressional Budget Office (link will open an Excel spreadsheet) today, Obama’s projected budgets will result in a national debt of $15.5 trillion in the next 8 years – an increase of $5 trillion.

Keep in mind that these are budget projections, and the CBO always relies on extremely optimistic economic scenarios.  For example, when Bush took office, they estimated that the national debt would be paid off by 2010, and that obviously isn’t going to happen.

If you open the spreadsheet in the CBO link above (select the tab labeled “Federal Debt), you’ll see that the 2009 deficit is estimated at $1.39 trillion (cell E24) and that is projected to drop to “only” $636 billion in 2010 (cell F24).  By 2013, the CBO is projecting the deficit to be “only” $42 billion (cell I24).

Does anyone actually believe that?

In just two short months, Obama passed a $700 billion stimulus package, and the Federal Reserve has said it will “expand it’s balance sheet” (a euphemism for printing money) by $300 billion by “purchasing” Treasury debt.  That’s $1 trillion in additional debt in just two months!

Predictions:  The actual 2009 deficit will exceed $1.6 trillion, and the increase in national debt in 2013 will be at least $1 trillion – many orders of magnitude higher than the rosy $42 billion currently projected.  And the 2010 debt (currently projected to be $636 billion) will be well over $1 trillion.

Update – 8:15 pm ET:  Crap, the numbers above are already out of date.  The CBO just released new figures, estimating the 2009 deficit at $1.7 trillion and the 2010 deficit at $1.1 trillion.

The new estimate on the cumulative deficit (the amount added to the national debt) is $9.3 trillion through 2019 – roughly $1.3 trillion more than the last CBO estimate in January.

The new CBO estimate does not include an estimate for the total national debt, so I’m unable to be more precise than the numbers above.  But with each passing day, Obama is getting closer to perfecting his George Bush financial folly impersonation.

If he really wanted to impersonate Bush, Obama would start proposing things like wiretaps, locking people up without charges, etc.  Then he could trample on our rights as well as our wallets.  And be just as bad as George.

I don’t think Obama will get that bad – I sure hope not – but he’s not starting off well by inviting these comparisons with the worst president ever.

gk

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WTF is Bernanke smoking?  Is “Helicopter” Ben Bernanke looking at the papers – or using them for rolling papers?

According to a story on MarketWatch, Bernanke is quoted as saying “We have been encouraged by the responses to these programs” and “I think the actions that were taken prevented a much-worse situation — a meltdown that would have led to a catastrophic and long-term low level of activity“.

Which markets has he been watching?  We’re having a meltdown right now, and I think we’re in about the 3rd inning of a 9 inning game.  The Fed’s interference in private markets – especially propping up bad banks – is making the “catastrophic” situation worse long term.  I think his actions in part created the current problems, so why in hell are we thinking he knows how to fix them?

The current mess is easily traced back to government interference in private markets, starting with a Clinton administration policy of pushing banks to give loans to those who would otherwise not qualify.  It was greatly exacerbated by Alan Greenspan’s cheap money policy instituted after the tech bubble and 9/11.  And it’s gone to hell in a hurry because of the trillions in bailouts under Bush/Obama.

Here’s a listing of how the $9.1 trillion in bailout money (as of last week) has been wasted.

A friend of mine posted this on a Facebook page earlier today, and I’m going to shamelessly steal it to emphasis how much of our money Bernanke (under Bush/Obama) has blown.  I haven’t verified any of these numbers, so let me know if any are wrong and I’ll correct the post:

People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

TOTAL: $4.6165 Trillion dollars

But yet Bernanke says “So far, so good!”

He’s a bigger idiot than his former boss – and that’s tough to beat!

Another quote from the MarketWatch story.  “And we are using whatever means we have to overcome what has been an enormous blow from this financial crisis.”

Evidently “whatever means we have” includes destroying the free market system, converting us entirely into a welfare laden socialist state, and inflating the dollar until it’s worthless.  Intended are not, Bernanke’s actions will have consequences.  And they won’t be good.

gk

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Hey, maybe someone will eventually be held accountable for Bush’s flaunting of the constitution!  Here’s a Reuters report on a possible Senate inquiry.

A U.S. “truth commission” should investigate Bush administration policies including the promotion of war in Iraq, detainee treatment and wiretapping without a warrant, an influential senator proposed on Monday.

Democratic Senator Patrick Leahy, chairman of the Judiciary Committee, urged a commission as a way to heal what he called sharp political divides under former President George W. Bush and to prevent future abuses.

He compared it to other truth commissions, such as one in South Africa that investigated the apartheid era.

It’s about time!  Some of us have been bitching about Bush’s toilet paper treatment of the constitution since it started as soon as he quit hiding right after 9/11.  It’s probably too much to hope for, but maybe we could get him a few years in jail with no charges being filed…. 

gk

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It looks like the Senate is attempting to allow the banks to sweep their problems under a rug.  A MarketWatch.com article this evening says “an accounting regulation that some bankers and lawmakers complain is a key contributor to the financial crisis might need to be temporarily changed or restricted. The rule, known as mark-to-market, requires corporations to adjust the value of their assets four times a year to reflect the fair market price.”

In other words, this accounting rule (known as FAS 157) requires banks to state the actual value of the assets they are claiming.  Before this rule took effect, most banks used a “mark to model” method (many refer to this model as “Mark to Myth), which pretty much allowed them to make up a value and claim it as an asset.  You can read about FAS 157 on the FASB site here.

Many are blaming the financial meltdown on FAS 157, because it became part of Generally Accepted Accounting Practices (GAAP) in November, 2007, which happened to be the same time we started seeing the huge write-downs.  But FAS 157 isn’t the problem – the crappy mortgage derivatives the banks are claiming as assets are the problem.

Before FAS 157, the banks could pretty much claim any value they wanted for the mortgages and derivatives they owned.  Investors didn’t have a clue regarding the real value.  Mark to Market changed that.  Now the banks had to own up to the shenanigans.  No longer could they claim a $500,000 mortgage was worth $500,000 if the borrower was late or in default.  They had to value that mortgage at what it was really worth on the open market.

The problem is that no one knows what anything is really worth until someone buys it and establishes a price.  And there was (and still isn’t for the most part) anyone who wanted to buy a bad mortgage for anywhere near face value.  So the banks didn’t like FAS 157, because they had to write down the value of their crappy assets to reflect the real world.

And when they wrote down these assets, it increased their leverage ratios.  So when the government required them to have $1 in assets for every $12 they had loaned out (the standard until Bush changed it in 2004) suddenly they were under-capitalized.

They were caught between a rock and a hard place.  They either needed to raise more capital, or call in their loans.  They really had no choice – they couldn’t call in their loans because the loans were made to other banks (who counted them as assets and had borrowed against them) so most banks couldn’t maintain their required capital ratio of 33-1 (which is what the Bush administration changed it to – read about that part of this mess here.) so they had to raise capital.

That’s fine and dandy, but who would give an inadequately capitalized bank more money?  Pretty much no one.  Which is also as it should be.

So here’s what should have happened.  The banks who made the crappy loans, the banks who bought those crappy loans from the original bank, the rating agencies who rated the crappy mortgages and derivatives as investment grade, the insurers (mainly MBIA and AMBAC) who insured the crappy mortgages and derivatives against default, and those who purchased stock or bonds from any of these companies should all lose money.  Most would go broke and disappear.  But someone would buy those crappy assets at the bankruptcy sale (thus establishing a true market value for them) and use that true market value as an asset.

And it would truly be an asset at that point, the write-down having taken place when the original company went bankrupt.  But our idiot government could let that happen.  So we starting re-capitalizing banks (and others like GMAC and GE) with tax dollars.  Which obviously hasn’t worked very well because they still want more money.

These write-downs will happen someday – the crappy mortgages are still crappy and won’t be paid back – so all we’re doing with the trillions in bailouts is delaying the inevitable.  And causing those who saved their money and didn’t over-leverage to go broke in the process.

Changing or eliminating the mark to market accounting requirement doesn’t actually change a damn thing – it simply allows the financial institutions to sweep their problems under a rug.  The problems are still there, but everyone is allowed to pretend that they’ve gone away by claiming they’re still worth just as much as they were two years ago.

Idiots.

gk

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