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

The (un)Likeliest of Consequences

While I was in Haiti recently, I was discussing politics and economic issues with several Haitians at a clinic in Les Cayes. This was early September before the recent calamity in the banking industry took center stage after having a minor billing previously. The signs of the coming economic turmoil were there – it is just plain obvious that when you create a bubble from nothing, back to nothing it must go. It seems that the “smart” people running the show are having a hard problem comprehending this fact.

Back to my real point; I was telling the Haitians that the United States was heading for tough times when really hard choices will need to be made and that I thought that our self-appointed role as world police and shining example to the poor would most likely change for the worse. I explained that we have the current problem but the undercurrents of the larger problems with our entitlement programs are far worse. One of the doctors then asked if the United States could no longer be the world's police force who then would assume our role. He added that he did not think that China or Russia would assume it in our stead.

The question/comment struck me. There are many people in third world countries that look to the United States for many reasons. I am not sure the average American can appreciate the standing we have in the world and how this standing is affected by our actions both politically and economically.

Our own depravity is not only having consequences on Main Street in America but will also have long term consequences for those living in shanty towns throughout the world. The consequences will be felt through fewer charitable contributions to the many non-governmental organizations (NGOs) working in countries like Haiti to less foreign aid from the United States. In countries like Haiti where there is controlled chaos, the consequences of the bubble bursting will be disastrous.

Photo by KCThinker. Women washing clothes in stream, Haiti.

The Stupidity of It All

It is Friday evening. My wife and I both did not feel like cooking so we did the slovenly thing and went to CiCi’s Pizza. I knew from the moment I stepped out of the car that I was going to be depressed. I saw the overweight people going to the feeding trough and caught the reflection of myself in the glass and was reminded that I am one of them. We sat down and I looked around at the people there. What were their lives like? Do they worry about the same things I do? Do they know how bad it really is and how bad it will become? Are they ready for it?

I wish I could be optimistic about the future of this country. I want to have hope for my children. I just cannot. I see what is happening and I think about a car accident one witnesses in seemingly slow motion. You know it is going to happen but there is nothing you can do to stop it except watch and marvel at the ensuing carnage.

Now you may be wondering what the heck I am talking about. I am talking about the economy, the devaluing dollar, the credit crunch, the overwhelming national, state, and local debt, and the understated incompetence of our leaders at every level of government.

I will preface this by saying that I am no economist. But I am a thinker. Here are a few of the issues that I see as bringing us to brink of collapse:

• The government making money cheap for banks to loan out to artificially prop up the housing market.
• The banks making risky loans to people who in all reality should never have been given a loan.
• The government borrowing massive amounts of money to pay for huge spending increases in the wake of a tax cut and an epic military campaign in the Middle East.
• The homeowner who thinks they need it all and subsequently borrow more than their house is worth.
• The pending retirement of the baby-boomers.
• The thousands of bureaucrats whose action or inaction has far reaching consequences that they are either to dim to understand or could care less about the repercussions of as long as they get reelected.
• The falling dollar as a result of foreign investors who see an unsustainable economy and no leadership at the helm of a rudderless ship.
• An education system that fails to produce students capable of competing in a global market.

People are defaulting on their loans. House prices are falling. Banks are losing billions. There is panic in the halls of Congress. “We need to do something” they cry. What do they want to do? They want to dust off a 1930’s program called the Home Owners’ Loan Corporation (HOLC). The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks ... and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury. On the whole this sounds benign enough. But if you were to actually strip the emotion from it and step back and think about it you would come to several realizations: 1) the banks and people should not be bailed out by the government; 2) we have more than $9 trillion in debt and cannot really afford to borrow any more money to bail them out in the first place; and 3) Fannie Mae reported that rising defaults and falling home prices contributed to a $3.56 billion loss in the last three months of 2007 and now we want to put more liability on the taxpayer. None of it adds up. But then again, the politicians are accustomed to fuzzy math; how else could you justify using the Social Security surplus to balance the budget.

The reality is that the housing market was artificially inflated and now we are witnessing the impact of bad monetary policy and piss poor decisions by greedy assholes in the banking sector. Why are housing prices falling? Well in some markets they were hyper-inflated to begin with and in other areas there is too much supply and not enough demand. Hear that? SUPPLY AND DEMAND. Of course falling housing values have other consequences, namely the municipalities that have bet on increasing property taxes to finance public projects will soon find less money in the coiffeurs.

The response from Washington, D.C. is long in thoughtlessness and vote pandering and short in common sense. The sky is falling, the sky is falling. So they pass a $150 billion fiscal stimulus. They talk about things like the HOLC. Not once do they consider the long-term impacts of their policies. Not once do they consider the billions we will have to pay on the $150 billion we had to borrow for the fiscal stimulus. Not once do they consider the long-term impacts of inappropriate measures like the HOLC. They give me the impression that they could care less what shape they leave this country in.

The housing crisis alone would probably not be a deal killer for our country. But the real problem is only a few years away – the retirement of the baby boomers. On the horizon is another fiscal crisis we are not prepared to deal with and that is funding Medicare and Social Security. Add to that the reports that state and local government pensions may be underfunded by $1 trillion or more (Illinois alone has a $40 billion unfunded pension liability). Ouch.

If you want to know why I am so depressed you need to read a book called the “The Forgotten Man: A New History of the Great Depression” by Amity Shlaes. You can literally watch the car wreck that became the Great Depression unfold in front of your eyes. History does not repeat itself but it does rhyme. What we are seeing today is reminiscent of the actions of lawmakers before the Great Depression. I even think the conditions are much worse today than they were back then.

From The Angry Economist:

"I saw a bumper sticker today saying "If you're not OUTRAGED, you're not paying attention". This was on a Toyota Prius, the official automobile of the "Let's Ignore Economics and Do The Right Thing" crowd. I remarked to my wife "I'm outraged, too, but probably not about the same thing. I just want more control over my life." She quipped "Oh, no, they want the same thing as you: more control over your
life."

Photo by KCThinker, alley in Village of Simiane la Rotonde, Provence, France, October 2007