Madoff: Not the Biggest Ponzi Scam Ever

Sure Bernard Madoff ripped people off for more than $50 billion. In one of the largest Ponzi schemes to date Mr. Madoff bilked investors ranging from individuals to charities (yes, even charities – what a scum bag) out of large sums of money. The losses which will likely be more than $50 billion, are more than the MCI Worldcom and Enron debacles.

But Madoff’s Ponzi scheme is not the largest, nor the most nefarious scam ever. I would argue that the largest, most expansive Ponzi scheme is the United States of America. That Ponzi scheme will cost trillions upon trillions of dollars. Why do I say that? Quick answer: TARP (isn’t it funny how something like a blue piece of plastic used as a temporary measure to keep water out after roof damage is used to name the bailout plan?). Long answer: Deficit spending – taking money from others (children and future generations of Americans in the form of debt) to pay for current programs.

The United States has been unsustainable for some time. Many financial bubbles have been created in the past, only to burst or slowly deflate. I contend that each bubble is a sort of Ponzi scheme. The credit bubble has been one of the worst and the resulting “rescue” plan will only make matters worse. The invented money (speculation on real estate and bad loans) led to more invented money etc. We have seen the effects of that now. All the building and real estate speculation was not sustainable. So now the federal government will “stimulate” the economy to create (invent) jobs and consumer demands etc. in an attempt to keep the bubble from deflating even more. Eventually the bubble created by that will also burst. It seems that the majority of pundits, politicians, and economists fundamentally do not understand or want to accept that there needs to be a severe retraction before everything can start again (even now they are scratching their heads wondering why the infusion of hundreds of billions is not helping – silly humans). Maybe there a good automotive analogy would be flooding the car – you have to wait a bit before trying to start the car again.

By trying to reverse something that was invented we are just setting the system up for yet another failure. Mr. Madoff could not reverse his Ponzi scheme unless he actually invested that money and had real returns on that investment. The federal government will not get away with its own Ponzi scheme unless it rights the fiscal ship. We simply cannot continue to borrow heavily against the future to pay for the present.

Other good reading: Congress in a Glass House

Photo by KCThinker, Blue Door, San Juan

Under Cover of Darkness...

Disgust and revulsion are only a couple terms that come close to describing how I feel about the Emergency Economic Stabilization Act of 2008, also known as the “bail out plan”. This terribly crafted and short-sighted legislation is being rammed down our throats. Thankfully, a good number of democrats and republicans voted against the “bail out plan”. Please thank your representative for voting against it if they happen to have done that. If your representative voted for it, well you know what to do on November 4, 2008 to show your “appreciation” for their stupidity.

The same President Bush that cried out that Iraq was a major threat to the United States came on the radio this morning on my drive to work and claimed the sky is falling. He claims we need to implement immediate measures or we will suffer dire consequences. You really have to question his motivation here. So what if the Dow dropped 777 points in one day (an estimated $1 trillion in paper money – all I hear are crickets chirping); it went back up 485 points the next day. The markets are based on emotion not reality and not a good indicator to base economic policy on.

Most folks in the know look at the London Interbank Offered Rate (LIBOR) to determine how the credit markets fair. The LIBOR is the interest rate at which large international banks are willing to lend each other money on a short-term basis. Many home equity lines of credit, small business loans and student loans also use LIBOR as an index, and this interest rate has been increasing which makes loans more expensive.

I do not believe President Bush. How can you trust Secretary Paulson after what is coming out with regard to the AIG bailout? Speaker Pelosi is utterly clueless. I have no faith that Senator Reid knows what he is doing. They are politicians first and foremost and care more for their own backsides than what is best for America. This is a housing bubble of an estimated $8 trillion of which only $4 to $5 trillion has been lost – meaning more losses to come. We should be very skeptical and extremely suspicious of anyone using the argument that we will make money from this deal. They screwed up and we are supposed to look the other way and pick up the stinking pile of crap they left for us? No thanks.

Dean Baker from the Center for Economic Policy Research was on C-SPAN talking about the failed bail out. He penned a plan that makes more sense than what Bush and company are proposing. There is absolutely no reason to rush into this. Most reasonable economists agree and would rather see a fiscal stimulus such as investing in infrastructure and direct intervention by trying to work with home owners on the edge rather than sending hundreds of billions through the financial institutions. Let the failed financial institutions hang.

Now the Senate is set to vote on their plan (read: push their failed policies) on Wednesday, 1 October 2008. The Senate will call up H.R. 1424: Genetic Information Nondiscrimination Act of 2008, the text of which will be substituted with the economic rescue plan (a Dodd amendment which must have the consent of both the Majority and Minority Leaders).

Other than the bailout, what does their plan include?

• Raises federal deposit insurance (FDIC) limits to $250,000 from $100,000
• Adds a set of popular business tax breaks
• Adds legislation to prevent more than 20 million middle-class taxpayers from feeling the bite of the alternative minimum tax

A little bit of sugar with a whole lot of poison. Please call your senators and send them a message loud and clear that we do not like this plan and would rather see it defeated.

Photo by KCThinker, Butterfly - Omaha Zoo

The Bail Out to End All Bail Outs?

Soon our elected representatives will vote for an extremely large plan to help the struggling financial markets in the United States. The urgency has been made clear by Treasury Secretary Paulson and President Bush. It is obvious that such a plan is needed in order to make sure that businesses can continue operating as intended. However, there should be sufficient concern with the haste that this plan is being put together. Through this urgency and typical partisan politics a great opportunity to make sure we do this the right way the first time will surely be missed.

The bail out must contain, at a minimum, the following four key items:

1. There should be crystal clear transparency into how this money is used and to what companies this money goes to. This is a gamble with an extraordinary sum of money that our children and grandchildren will be beholden to pay off. We cannot afford to let it be used without knowing how and why and where.

2. There should be no compensation (i.e., golden parachutes) for the executives that have been at the helm of any companies receiving government-funded help. They were the leaders and they should be held accountable for their actions. Through their actions they will also likely cause thousands of Americans to lose their jobs. There should be no reward for landing their companies in the positions they are in.

3. If any profits (highly unlikely) are realized from this venture they should, first and foremost, be used to pay down the national debt, which is almost $10 trillion. No profit should be used to justify more spending or tax cuts or more risky government programs. The only place that profits shall go is to reduce the debt burden on future generations of Americans.

4. The government should enforce the existing rules and regulations or create new ones to prevent this from happening again. The idea that everyone should own on a home is a good one, but we need to make sure that people buying homes can afford them, can prove that they can afford them and understand what they are getting into. This crisis has been largely created as a result of congress men and women letting politics cloud judgment. The full extent of the law should be used to prevent discrimination of race, religion, etc. being used to prevent someone from securing a home loan. However, this notion has been abused to the extent loans are given to people who simply could not afford them.

The bail out will likely happened whether the majority of the American people are pissed off by it or not (it’s torches and pitchforks time people!). In my opinion we are propping up a bubble built with made up money with more made up money. The end result may be far worse than if we had just let the bubble burst to begin with. Something about this whole situation just plain stinks and makes me feel dirty.

I am not sure most Americans understand the gravity of the situation. We are at a key turning point in this country; we may not recover from the fine mess Congress and the President has created. More than the executives of these failing firms, we should blame our elected officials for allowing this to occur in the first place. While playing politics like kids play house they failed to realize what is more important than being a democrat or republican and that is being an American.

Photo by KCThinker, Passage in San Juan, Puerto Rico

Are you disgusted? I am.

The recent bail outs of financial giants are unconscionable. The government should not be bailing these institutions out of the mess they created. By providing this support the government delays the necessary and painful correction that must occur. All that is being done is propping up a house of cards with used toothpicks. Reckless, short-term policies and the interference with the natural evolution of such things are creating the conditions for a major collapse that will have dire consequences. There is no such thing as an institution that is “too big” to let fail.

Instead of investigating steroids in baseball, maybe our elected officials should be investigating how we got into this mess and measures to prevent it from happening again. Where are the emergency sessions that spotlight the financial mess? Of course such an investigation would also point the finger at them for allowing lax lending practices in the first place for the misnomer of home ownership for everyone regardless if they could really afford it. Such inquiries would also inevitably shed light on the thousands of dollars of political contributions received by politicians from Fannie Mae and Freddie Mac (The Clinton administration's White House Budget Director Franklin Raines ran Fannie Mae and collected $50 million. Jamie Gorelick — Clinton Justice Department official — worked for Fannie Mae and took home $26 million. Big Democrat Jim Johnson, briefly on Obama's VP search committee, has hauled in millions from his Fannie Mae CEO job). They probably know that these skeletons will have disastrous consequences shortly before an election which is why I fear that nothing is being done but putting the proverbial finger in the failing dike. Unfortunately, I, like many other Americans, are tired of the divisive politics that permeates Washington, D.C. We want solutions, not half-measures and more political pandering.

It is time our "leaders" stopped thinking about themselves and their political careers and started thinking about the country and its citizens. They need to stop thinking about themselves as democrats and republicans and instead see themselves as Americans first. Continuing down this road of billion dollar deficits and billion dollar bail outs will be the end of this country. You are probably aware of the testimony of David Walker, former Comptroller General and his forecasts of tens of trillions of dollars of unfunded liabilities. Maybe they should turn Sarbanes-Oxley on the financial books of the United States government. Where is the accountability? Stop pointing fingers at one another and start with constructive governance.

I sure hope they can sleep at night knowing that our children and grandchildren will suffer in debt bondage due to the actions and inactions of selfish politicians and greedy bankers.

Photo by KCThinker. Street side in Les Cayes, Haiti.