Posts tagged ‘tarp’

Wherein I Almost Agree With Thomas Friedman on a Climate Issue

Thomas Friedman outlines what he would do first to attack climate change

Well, the first thing we would do is actually slash income taxes and corporate taxes and replace them with a carbon tax so we actually encourage people to stop doing what we don't want, which is emitting carbon, and start doing what we do want, which is hiring more workers and getting corporations to invest more in America.

Friedman is a bit disingenuous here, as he proposes this in a way that implies that deniers (and probably evil Republicans and libertarians) oppose this common sense approach.  Some may, but I would observe that no one on the alarmist side or the Left side of the aisle is actually proposing a carbon tax that 1:1 reduces other taxes.  The only person I know who has proposed this is Republican Jeff Flake, who proposed a carbon tax that would 1:1 reduce payroll taxes.

As I said back then, I am not a big fan of taxes and think that the alarm for global warming is overblown, but I could easily get behind such a plan.  Payroll taxes are consumption taxes on labor.  I can't think of anything much more detrimental to employment and economic health.  So Flake's proposed shift from a consumption tax on labor to a consumption tax on carbon-based energy sources is something I could get behind.  I probably would do the same for Friedman's idea of shifting taxes from income to carbon.  But again, no one is proposing that for real in Congress.  The only plan that came close to a vote was a cap and trade system where the incremental payments would go into essentially a crony slush fund, not reduce other taxes.

Of course, since this is Friedman, he can't get away without saying the government should invest more in infrastructure

 the federal government would borrow money at almost 0 percent and invest it in infrastructure to make our cities not only more resilient, but more efficient.

In TARP and the stimulus and various other clean energy bills, the government borrowed almost a trillion dollars at 0% interest.  How much good infrastructure got done?  About zero.  Most of it just went to feed government bureaucrats and planning studies or ended up as crony payments to well-protected entities (Solyndra, anyone?).  The issues with government infrastructure investments, which Friedman has never addressed despite zillions of articles on infrastructure, are not the borrowing rate but

  • The incentive and information problems the government has in making investments of any sort.
  • The vast environmental, licensing, and NIMBY factors that make it virtually impossible to do infrastructure projects any more, at least in any reasonable time frame.

Our Political Opponents Believe Whatever We Say They Believe

I can think of two groups with whom I have some sympathy -- the Tea Party and climate skeptics -- who share one problem in common:  the media does not come to them to ask them what their positions are.  The media instead goes to their opposition to ask what their positions are.  In other words, the media asks global warming strong believers what the skeptic position is, without ever even talking to skeptics.  It should be no surprise then that these groups get painted with straw men positions that frequently bear no resemblance to their actual beliefs.

Paul Krugman provides an excellent example.  He writes:  (shame on the blog author for not linking Krugman's article, here is the link)

Or we’re told that conservatives, the Tea Party in particular, oppose handouts because they believe in personal responsibility, in a society in which people must bear the consequences of their actions. Yet it’s hard to find angry Tea Party denunciations of huge Wall Street bailouts, of huge bonuses paid to executives who were saved from disaster by government backing and guarantees.

This is really outrageous.  I am not a Tea Partier because they hold a number of positions (e.g. on immigration and gay marriage) opposite of mine.  But to say they somehow have ignored cronyism and bailouts is just absurd.  TARP was one of the instigations, if not the key instigation, for the Tea Party.  As I have written any number of times, the Tea Party and Occupy Wall Street actually shared a number of common complaints about bank bailouts and cronyism.

David Harsanyi has more here.

By the way, it is Hilarious to see Krugman trying to claim the moral high ground on Cronyism, as he has been such a vociferous proponent of the Fed balance sheet expansion, which will likely go down in history as one of the greatest crony giveaways to the rich in history.

Words That Have Been Stripped of Any Meaning: "Spending Cuts" and "Austerity"

I have already written that the supposed European austerity (e.g. in the UK) is no such thing, and "austerity" in these cases is being used to describe what is merely a slowing in spending growth.

Apparently the same Newspeak is being applied to spending cuts in the US.  How else  can one match this data:

With these words from President Obama (my emphasis added)

"If we're going to raise revenues that are sufficient to balance with the very tough cuts that we've already made and the further reforms in entitlements that I’m prepared to make, then we’re going to have to see the rates on the top two percent go up"

Seriously?  The only small reductions in the budget were because some supposedly one-time expenses (like TARP bailouts, war costs, and stimulus spending) were not repeated.  Allowing one-time costs to be, uh, one-time does not constitute "tough cuts."

Tough cuts are when we knock government spending back down to 19-20 percent of GDP.  Clinton level spending in exchange for Clinton tax rates.   That's my proposed deal.

Bailed Out Banks Take On More Risk

I found this fascinating, if unsurprising, via Zero Hedge:

Ran Duchin and Denis Sosyura of the University of Michigan looked at the U.S.’ Capital Purchase Program. You may recall that this became the centerpiece of TARP once Hank Paulson decided that the money would be better spent directly buying into the banks as opposed to overpaying them for dodgy asset-backed bonds. (Mind you, other parts of TARP were spent overpaying for dodgy asset-backed bonds.)

The CPP lasted a little more than a year and invested $205 billion of taxpayer funds into various qualifying institutions. Not every bank that filled out the 2-page application was successful in gaining access. Others were approved but ultimately decided not to take the funds (probably because of the attached restrictions on pay and on paying out dividends.) In the end, 707 financial institutions received the funds.

Duchin and Sosyua looked at a sample of 529 public firms that were eligible for CPP and slotted them into categories based on whether they applied, whether they were approved and whether they ultimately took the money. They controlled for non-random selection (via measures of the banks’ financial condition, performance, size and crisis exposure); for changes in national and regional economic conditions; and finally for potential distinctions in credit demand.

They then viewed the banks’ CPP participation status in comparison with their subsequent risk appetite as demonstrated by (1) their consumer mortgage credit approvals or denials (viewed on a risk-profile controlled, application-by-application basis); (2) their participation in syndicated corporate loans for riskier credits and; (3) the risk profile of their investment asset portfolios. What did they find?

They found more risk, across the board.  There is a lot of detail, so I will leave it to you to go to the source for more, but Zero Hedge concludes:

The bail-out itself increased our chances of having the bail the banks out all over again. Moral hazard is no longer in the realm of the abstract

A few months ago I went through an unbelievable hassle refinancing my loan.  Based on current appraisals, my loan to value was less than 50%, but I still ended up coming to the table with more equity to reduce the new loan size.  I was staggered at how hard it was to close what should have been a dead-safe loan, given the LTV and my income and credit history.  The study actually has a finding related to that:

For mortgages the bailed-out banks increased their risk–

“after CPP capital infusions, program participants tilted their credit origination toward higher-risk loans by tightening credit standards for the relatively safer borrowers and slightly loosening them for riskier borrowers.”

–while at the same time ensuring that they didn’t trip off any alarms

“This pattern would be consistent with a strategy aimed at originating high-yield assets, while improving bank capitalization ratios, since the key capitalization ratios do not distinguish between prime and subprime mortgages.”

This is a fascinating sort of metric manipulation.  Having my loan go from 45% to 40% LTV does nothing, really, for the overall safety of the bank, but it improves their averages and makes them look safer, while all the way they are actually engaging in more risky behavior.

Auto Bailouts and the Rule of Law

Todd Zwicki has a great article on the auto bailouts.  Here is a brief excerpt of a long and very comprehensive article.

Of the two proceedings, Chrysler's was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the "absolute priority" rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company's secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.

Moreover, in a typical bankruptcy case in which a secured creditor is not paid in full, he is entitled to a "deficiency claim" — the terms of which keep the bankrupt company liable for a portion of the unpaid debt. In both the Chrysler and GM bankruptcies, however, no deficiency claims were awarded to the wronged creditors. Were bankruptcy experts to comb through American history, they would be hard-pressed to identify any bankruptcy case with similar terms.

To make matters worse, both bankruptcies were orchestrated as so-called "section 363" sales. This meant that essentially all the assets of "old Chrysler" were sold to "new Chrysler" (and "old GM" to "new GM"), and were pushed through in a rush. These sales violated the longstanding bankruptcy principle that an asset sale should not be functionally equivalent to a plan of re-organization for an entire company — what bankruptcy lawyers call a "sub rosa plan." The reason is that the re-organization process offers all creditors the right to vote on the proposed plan as well as a chance to offer competing re-organization plans, while an asset sale can be carried out without such a vote.

In the cases of GM and Chrysler, however, the government essentially pushed through a re-organization disguised as a sale, and so denied the creditors their rights. As the University of Pennsylvania's David Skeel observed last year, "selling" an entire company of GM or Chrysler's size and complexity in this manner was unprecedented. Even on a smaller scale, it would have been highly irregular: While rush bankruptcy sales of much smaller companies were once common, the bankruptcy laws were overhauled in 1978 precisely to eliminate this practice.

At first, the fact that the companies' creditors (and especially Chrysler's creditors, who were so badly mistreated) put up with such terms and waived their property rights seems astonishing. But it becomes less so — and sheds more light on how this entire process imperils the rule of law — when one considers the enormous leverage the federal government had over most of these creditors. Many of Chrysler's secured-bond holders were large financial institutions — several of which had previously been saved from failure by TARP. Though there is no explicit evidence that support from TARP funds bought these bond holders' acquiescence in the Chrysler case, their silence in the face of a massive financial haircut is otherwise very difficult to explain.

Indeed, those secured-bond holders who were not supported by TARP did not go nearly as quietly.

By This Definition, the Entire Administration is Full of Terrorists

Via Politico, from the liberty dollar trial

Attempts to undermine the legitimate currency of this country are simplya unique form of domestic terrorism,” U.S. Attorney Tompkins said in announcing the verdict.

“While these forms of anti-government activities do not involve violence, they are every bit as insidious and represent a clear and present danger to the economic stability of this country,” she added. “We are determined to meet these threats through infiltration, disruption and dismantling of organizations which seek to challenge the legitimacy of our democratic form of government.

My guess is that QE2 and TARP and the stimulus did a lot more to undermine the US dollar than any efforts by Bernard Von NotHaus.  I would rather accept his silver dollars than, say, the script handed out by the State of California last year when they ran out of money.

TARP Funds

This is old, I think, but I had never seen it.  Where TARP funds went.

State Bankruptcy Prediction

There seems to be discussion in Washington about creating a legal framework for state bankruptcies.  My guess is that any law that might be passed will simply be a Trojan Horse.

A lot of people (including myself) would like the idea of the tough provisions applied to individuals who are bankrupt being applied to states.  Unfortunately, it is wildly unlikely that this is actually what we will get.  Any such law would likely just be a bailout program renamed "bankruptcy" to make it more palatable to the public, a transfer of obligations from state to federal taxpayers without any real imposition of discipline or cleanup of long-term obligations like pensions.  Heck, this is exactly what happened at GM, and that was just a private company.

Some might assume that a Republican House would be loathe to support bailout provisions for California, but two thoughts come to mind.

First, California, despite being a blue state, has plenty of red Congresspersons who will scream support for a bailout (for a parallel, think ethanol or farm subsidies, where grain state Republicans are among the first to break ranks with their brethren to support government interventionism).

Second, it is not clear that the Administration even needs the Congress any more to dish out money.  It has found so many extra-Constitutional ways to appropriate money without actually having to go to Congress (e.g. use of TARP funds for about anything, use of the Federal Reserve, etc.) that it should be no problem to do this without the House.  Take just one idea -- Imagine California issues a $100 billion in 0.0000005% 100-year bonds that the Fed then buys at face value with printed money (as they have been buying US securities).  Instant bailout, no Congress.

Outright Fraud

I was suspicious of GM's announcement that they were paying off government loans quickly, an action that was attached to a clear PR message that can be boiled down to "taxpayers did the right thing giving us billions."  I was suspicious because I had thought most of the money GM got was an equity infusion as well as certain guarantees, such as of the UAW mention and retirement medical plans.  As such, I suspected that a small debt repayment was trivial and just a token PR move.

I was wrong.  Well, actually, everything I wrote above is correct.  But I was wrong in that I underestimated how fraudulent this announcement was.

The issue came up yesterday at a hearing with the special watchdog on the Wall Street Bailout, Neil Barofsky, who was asked several times about the GM repayment by Sen. Tom Carper (D-DE), who was looking for answers on how much money the feds might make from the controversial Wall Street Bailout.

"It's good news in that they're reducing their debt," Barofsky said of the accelerated GM payments, "but they're doing it by taking other available TARP money."

In other words, GM is taking money from the Wall Street Bailout "“ the TARP money "“ and using that to pay off their loans ahead of schedule.

"It sounds like it's kind of like taking money out of one pocket and putting in the other," said Carper, who got a nod of agreement from Barofsky.

"The way that payment is going to be made is by drawing down on an equity facility of other TARP money."

Translated "“ they are using bailout funds from the feds to pay off their loans.

Un-freaking-believable.   And as an aside, I know that we traditionally have a 5-year waiting period, but can we go ahead and add TARP now to the hall of fame of worst legislation?

Update: It turns out it is even worse.  More Here.

Facts vs. the Narrative

The narrative is that small business credit markets are frozen.  John Stossel argues the facts say otherwise?

More melodramatic prose from today's Washington Post: "White House moves to free up lending for small businesses."  "Unfreeze the markets." "Free up lending." Given such language, I would think that loans to small businesses have stopped. The market must be broken, right?

... lending to [small] companies has fallen. Federal data show that lending to small businesses by community banks declined by about $8 billion, or 2 percent, between September 2008 and September 2009.

A decline of two percent. TWO PERCENT. That constitutes a credit "freeze"? Considering the rash of bank failures from 2008 - 2009 due in large part to bad loans made by banks, a decline of two percent in loans to small businesses strikes me as a prudent response.

So does our science-based President address the narrative or the facts?  Here is a hint:  narratives can affect elections, while facts are often ignored.  Therefore, Obama is proposing to use $30 billion of TARP money to so something about the $8 billion drop in small business lending.

The Most Negative Leading Economic Indicator

Will we look back on 2009 as the tipping point where productive resources began to spiral faster and faster into the government black hole?  A few stories that have caught my eye the last few weeks:

Federal salaries exploding, from USA Today via Q&O

The number of federal workers earning six-figure salaries has exploded during the recession, according to a USA TODAY analysis of federal salary data.

Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession's first 18 months "” and that's before overtime pay and bonuses are counted....

The trend to six-figure salaries is occurring throughout the federal government, in agencies big and small, high-tech and low-tech. The primary cause: substantial pay raises and new salary rules.

The highest-paid federal employees are doing best of all on salary increases. Defense Department civilian employees earning $150,000 or more increased from 1,868 in December 2007 to 10,100 in June 2009, the most recent figure available.

When the recession started, the Transportation Department had only one person earning a salary of $170,000 or more. Eighteen months later, 1,690 employees had salaries above $170,000.

Government Employment Rising, via Glenn Reynolds

goodsgovtgraph

Government services rising as a percent of the economy (from the Heritage Foundation via the same Glenn Reynolds link above)

entitlements_03-580

Capital to private firms is increasingly allocated by the state -- the new Corporate State.  First, Representative Paul Ryan in Forbes:

Thirty years later, this crony capitalism is back with a vengeance, accelerated by an aggressive program by President Obama and the Democratic congressional leadership. It is wreaking havoc on economic recovery and fueling continued resentment among the American people.

The actions taken at the height of the financial panic last fall, with credit markets frozen, succeeded in preventing a systemic--and catastrophic--collapse. Since bringing us back from the precipice however, the Troubled Asset Relief Program [TARP] has morphed into crony capitalism at its worst. Abandoning its original purpose providing targeted assistance to unlock credit markets, TARP has evolved into an ad hoc, opaque slush fund for large institutions that are able to influence the Treasury Department's investment decisions behind-the-scenes. No longer concerned with preserving overall financial market stability, Treasury's walking around money continues to be deployed to reward the market's Goliaths while letting its Davids suffer.

Further, via Reuters:

U.S. banks that spent more money on lobbying were more likely to get government bailout money, according to a study released on Monday.

Banks whose executives served on Federal Reserve boards were more likely to receive government bailout funds from the Troubled Asset Relief Program, according to the study from Ran Duchin and Denis Sosyura, professors at the University of Michigan's Ross School of Business.

Banks with headquarters in the district of a U.S. House of Representatives member who serves on a committee or subcommittee relating to TARP also received more funds.

Political influence was most helpful for poorly performing banks, the study found.

"Political connections play an important role in a firm's access to capital," Sosyura, a University of Michigan assistant professor of finance, said in a statement.

The Government has gained new power to allocate capital in the future. This was perhaps one of the most under-reported stories of the last few months (mea culpa as well).

To close out 2009, I decided to do something I bet no member of Congress has done -- actually read from cover to cover one of the pieces of sweeping legislation bouncing around Capitol Hill....

The reading was especially painful since this reform sausage is stuffed with more gristle than meat. At least, that is, if you are a taxpayer hoping the bailout train is coming to a halt.

If you're a banker, the bill is tastier. While banks opposed the legislation, they should cheer for its passage by the full Congress in the New Year: There are huge giveaways insuring the government will again rescue banks and Wall Street if the need arises....

Here are some of the nuggets I gleaned from days spent reading Frank's handiwork:

-- For all its heft, the bill doesn't once mention the words "too-big-to-fail," the main issue confronting the financial system. Admitting you have a problem, as any 12- stepper knows, is the crucial first step toward recovery.

-- Instead, it supports the biggest banks. It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes. So much for "no-more-bailouts" talk. That is more than twice what the Fed pumped into markets this time around. The size of the fund makes the bribes in the Senate's health-care bill look minuscule....

But don't worry, trust Congress to get at the heart of the financial meltdown

The bill calls for more than a dozen agencies to create a position called "Director of Minority and Women Inclusion." People in these new posts will be presidential appointees.

Fannie & Freddie Officially Declared Bottomless Pits. GMAC Not Far Behind

While private banks are paying back their TARP money, Fannie and Freddie have been given a new blank check:

It's a favorite government trick to announce bad news on a Friday afternoon, so it appears in Saturday's paper, the least likely edition to be read. By Sunday and Monday, it's old news. The Obama Treasury just went one better, announcing on Christmas Eve that they were uncapping the amount they believe will have to be invested in Fannie and Freddie. The Bush Treasury first estimated the government-sponsored enterprises' (GSEs) losses at $100 billion each. The Obama administration, which has been using the GSEs to stabilize the housing market by reducing their underwriting standards, upped the ante to $200 billion each. Now the administration has thrown in the towel completely, and dropped a large lump of coal in each taxpayer's stocking"”it won't even try to estimate the total losses of Fannie and Freddie.

For extra special bonus style points, Fannie and Freddie executives will apparently receive multi-million dollar pay packages that the pay czar will be denying to many private banks.

But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009.

In other news, the Feds are also propping up another quasi-governmental agency with more cash

GMAC, the ailing financing arm of General Motors, is set to receive around $3.5 billion in government aid, ABC News has learned. The funds would be the third infusion of federal support for the troubled lender.

The latest government aid would bring the total federal assistance for GMAC to $16 billion when combined with the $12.5 billion that the lender has already received dating back to December 2008. Due to its prior cash infusions, the government already owns 35 percent of GMAC.

GMAC continues to lose money because every time it gets more taxpayer money, it starts offering zero percent financing deals.

Immediately after GMAC became eligible for TARP money, GM reduced to zero the interest rate"¦ on certain models. This, of course, penalizes GM competitors, including Toyota, Honda and other "transplants" whose cars are made in America by Americans for Americans, and Ford, which does not have the freedom of maneuver conferred by TARP money because Ford is not taking any"¦

GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723"¦

This perhaps might explain why GM, unlike other banks with low stress-test scores, was unable to get any private capital.   Because lenders know GMAC will just hand the money over to car buyers with little prospect for getting any value back in return.  Incentives for GMAC to take losses to sell cars, always an issue under GM's private management, will only increase as the Administration looks to create some evidence - any evidence - that their GM investment isn't a total dog.  Witness $3 billion in cash for clunkers funds that went to buy $1 billion of used vehicles.

Postscript: Related news, the 10 most ridiculous uses of stimulus funds. Seems like there would be a lot of competition for this award.

The Next Crisis-Emergency-Rush

I have been trying to find a word to describe the legislative style we have seen prominently over the last 9 months (though it was used long before this administration -- the Patriot Act comes to mind).   Unable to think of any other name, an in homage to "murder-death-kill" in "Demolition Man,"  I am going to call it Crisis-Emergency-Rush.

TARP was a Crisis-Emergency-Rush.  As was the Stimulus bill, Waxman-Markey, and now Health Care.  (The last two are particularly hilarious when one needs to evaluate the need to rush.   Waxman-Markey is implemented over decades, and the health care bills as currently written don't really begin to take effect until 2013).

So here is my prediction for the next Crisis-Emergency-Rush:  Raising taxes.  Obama already has his boys out sending trial balloons about new taxes, even beyond those required in Waxman-Markey and to fund the health care bill.  Having spent over a trillion dollars on useless spending to support favored political constituencies, Obama will now declare a fiscal crisis that can only be solved by increased taxes on his non-favored constituencies.

The Thugs Win

Via Zero Hedge:

A group of Chrysler creditors opposing the carmaker's reorganization is likely to disband after two more investment firms withdrew from its membership, a person briefed on the matter told DealBook on Friday.

The withdrawals of OppenheimerFunds and Stairway Capital Management will likely drop the group, calling itself the Committee of Non-TARP Lenders, below 5 percent of Chrysler's $6.9 billion in secured debt, this person said. That would almost certainly eliminate the group's standing in federal bankruptcy court.

Ever since the group made public last week, its membership has shrunken by the day as it faced public criticism from President Obama and others. That continued withdrawal of firms led Oppenheimer and Stairway to conclude that they could not succeed in opposing the Chrysler reorganization plan in court, the two firms said in separate statements.

Just another step closer to a Mussolini-style corporate state.

Update: David Skeel argues the Chrysler bankruptcy settlement is a sham sale of the sort that was outlawed in 1938.  Except, of course, when the President does it, I guess.

And So It Begins

So what may be the most important Chapter 11 proceeding in modern history has begun -- important not just because it is large, but because the court in a sense is being asked to validate or invalidate the unprecedented power grab by the Obama administration.  The results of this trial may well slow or accelerate America's devolution into a European-style corporate state where political pull rather than costs or products determine corporate success.  It also will have a lot to say as to whether the rule of law has any meaning any more, at least as far as President's go.

The first salvo, by the non-TARP secured creditors that Obama was unsuccessful in beating down, has been fired:

Just hitting the Chrysler bankruptcy docket is an objection filed by W&C on behalf of its clients, objecting to the 363 asset sale. The filing is attached below (and linked here). Some very harsh language with regards to Uncle Sam in there...

The summary of the grounds for the objection:

1. The Proposed Sale Constitutes an Illegal Sub Rosa Plan that Redistributes Value Among Creditor Classes.

2. The Proposed Sale Fails the Requirement of Section 363(f).

3. The Sale Is Not Proposed In Good Faith.

4. The Taking of Collateral through a Direct or Indirect Use of TARP Authority is Unconstitutional. (This one is Huge as it sets a case law precedent.)

Over the weekend, there was a lot of back and forth with W&C (White & Case) senior attorney Tom Lauria, who said that one of his clients gave in to the restructuring when threatened by the Obama administration with having its reputation destroyed by the White House press office.   Both the White House press office and the client in question denied this account of events, but never-the-less Obama was indeed vilifying the holdouts, though in a general rather than specific way.

This is probably only the tip of the iceberg.  I think if creditors start to see that the bankruptcy judge is unwilling to automatically roll over for the administration, more such revelations will emerge.  The blog Finem Respice has a doozy, though it is unsourced and so must be treated with caution.

Paying Back TARP

Apparently a number of the lenders to Chrysler were recipients of TARP money, and thus were especially susceptible to Obama Administration blackmail to take less money for their Chrysler debt than they would normally get in bankruptcy court.   In effect, Obama is asking for partial payment for the TARP money in the form of concessions to Chrysler's other parties in the bankruptcy, mainly their unions.

But the TARP money is MY money.  And I don't want to get paid back this way.  If these lenders have the ability now to pay out billions of dollars (in the form of forgiven loans) then I would rather see them returning this money to the Treasury rather than sticking it in the pocket of the UAW or propping up a zombie auto company that hasn't made a car I would even consider buying in over 10 years.

TARP is going to turn out to be the greatest tool ever invented for increasing the power of government in the economy and accelerating the development of the American corporate state.  And Obama can laugh all the way to the bank(s) knowing that it was a Republican administration that handed him this power.

Postscript: I thought this was funny, via Instapundit:

And though I'm not a gearhead, I'm a little surprised to hear the administration saying that Chrysler is going to be saved by"“Fiat's world-class engineering.

All the more so given that Daimler couldn't help.

Did Obama Cross the Line Yesterday?

I am starting to wonder if Barack Obama crossed the thin red line between traditional American liberalism and socialism yesterday.  Traditionally, liberals in the US have taken pains to generally argue that the rich need to pay for their programs because theyare most able to pay.  This differs a bit from socialists, who would argue that the rich should pay because they are guilty.    For a libertarian like myself, it tends to be a pretty subtle difference, but I think it is important -- are taxes on the rich enforced charity, or are they reparations?

I woke up this morning profoundly depressed, which is unusual for me.   I have a good friend who is having some personal problems, so it is hard for me to separate effects in my mind, but I really feel like Obama stepped over a line yesterday.  TARP pissed me off, but we have bailed out companies before (though not for this much).  The stimulus bill absolutely offended me, but we have seen stupid pork spending insanities before (though not for this much).  But Obama's plan to remake tax law and the budget began with this paragraph:

This crisis is neither the result of a normal turn of the business cycle nor an accident of history, we arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C.

From the rest of the rhetoric in this document, and that of Obama and his supporters, the overriding message is that "the rich are being taxed more because they have sinned.  This is pennance."  This is all the more amazing to me because Obama (and to be fair, his predecesors in the Bush administration) have gone out of their way to interrupt the normal market processes that punish failed behavior.  Normally, if you take out a mortgage you can't afford, you default and lose your home, and are hopefully wiser the next time.  If you lend to someone who can't pay, you lose your principal.  If you make products no one wants to buy, you go bankrupt.

But every one of these market mechanisms are being interrupted.  Its as if Obama and the feds not only want to hand out penance, they want to have a monopoly on the process.  No longer will the market dictate winners and losers -- we in Washington will.  It's thoroughly depressing.

Postscript: I guess I am the last person in America to believe it, but I DO believe that this is "a normal turn of the business cycle," or at least that it started out that way until everyone from Paulson to Obama worked to convince folks otherwise.   It is clear that there was an international over-exuberance of lending that goes far beyond just CDO's as the culprit, or even mortgages in general.  And such bubbles do occur from time to time.

PPS: It will be interesting to see which race is tighter -- Obama's race to spend money so he can take credit for a third quarter recovery which is going to happen anyway, or Obama's race to put in CO2 limits in time to take credit for the global cooling cycle many solar observers are starting to predict.

PPPS: I really didn't want to open global warming discussions in general with the last bit of snark.  I have a whole website for that.  I have a subtle enough understanding of the issue to know both that 1) CO2 is causing some warming 2) warming estimates are likely way overblown, for a variety of reasons that include feedback assumptions and 3) behaviors of temperatures over decade-long periods are not necesarily indicative on long-term trends.  If we want to talk about climate modeling and model accuracy vs. current trends, see this post or this post.

A Failure of Nerve

October 2008 was a failure of nerve.  As so often happens, folks who normally support letting failing institutions fail when times are good tend to lose their nerve when the crisis is at hand, and find some way to convince themselves that somehow, this time is unique and different.  But it is not.   Only later is there remorse.  I won't want to pick on Megan McArdle too much, if for no other reason than she is generally the first person on the planet to admit she is wrong, but you can start to see some of the remorse here:

We're now making many of the mistakes that Japan did.  I know, I know--I supported TARP I.  But I did so because at the time, there seemed to be a reasonable possibility that the funds could stop a liquidity crisis from turning into a solvency crisis.  But if liquidity crises go on long enough, they become solvency crises, so whatever we had then, we now have a badly crippled banking system.  More of the same isn't going to help.

We need a plan that is going to force the banks to recognize and write down their bad loans, restructure dysfunctional borrowers, shut down the banks that are too far gone, and inject substantial capital into the banks that are strong enough to pull through.  But that kind of radical action is scary.  And whether they decide to do it by nationalizing bad banks, or by injecting capital into good ones, the political cost is going to be very high.  So we get baby steps and vague promises of major leaps forward down the road.

Another political problem is that recapitalizing the banking system involves, in the initial stage, conserving capital (read: cutting credit limits), and writing down bad loans means unpopular actions like restructuring failing companies (read:  layoffs) and foreclosing on hopeless borrowers.  One of the major arguments against bank nationalization is that a government-owned bank will find it harder, not easier, to do those things.  The temptation to keep large employers on life support will be large, and every congressman will have a list of firms in their district that can't be allowed to go bust.

I have tried to have this and other bailout arguments with a number of folks.  This is often a hard conversation, because people have trouble separating in their minds the productive assets of these companies (factories, investments, systems, deposits, trained people) from the institution itself.  So when we talk of bankruptcy of, say, GM, they think if GM goes poof, then all those factories and cars go poof.

But that is absurd.  Remember the huge gas shortages that resulted from the loss of the Enron gas trading desk and transportation infrastructure when Enron went bust?  Yeah, neither do I.  That's because all of Enron's productive assets flowed through the well understood chapter 11 (or was Enron Chapter 7) process to new owners.

By the way, by management, I mean something broader than just the CEO or the top tier of managers:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

Bankruptcy is a scary term, but here is what makes it beautiful -- it takes assets out of the hands of failed management, failed business plans, failed management cultures, etc. and puts those assets in the hands of new owners and managers.  These new owners and managers are not guaranteed to be better at managing the assets, but the odds are they will be since the performance bar set by the last management team is by definition so low (ie, they went bankrupt!)

When we interrupt the bankruptcy process and bail out a failing company, we do two things:

  • We leave the productive assets of the company in the hands of the same failing management (again, with this term defined broadly as above) that got the company into the current straights, rather than putting the assets in the hands of new owners
  • We focus the country's limited investment capital (via taxes or government borrowing that crowds out private borrowers) towards what are by definition among the worst managed institutions in the country.   If someone asked you to invest a billion dollars either in the top 10 most successful companies or the bottom 10 least successful, where would you put the money to create the most jobs and growth?  In the top 10, right?  But the government is doing EXACTLY the opposite.

Here is the true economic miracle of the 80's and 90's:  Not Reagan's tax cuts or Clinton's economic plan or Alan Greenspan in the Fed.  It was the fact that the government, with the American economy sweating under some very difficult conditions (worse than they are today, but you would never know it in the press) and under strong threats from Japan and Europe, basically did ... nothing.  There was all kinds of pressure to create an American MITI  (seriously, it seems like a joke today, but the push was strong).  We did not.  The American economy was allowed to restructure itself.

This is why our recessions tend to be shorter than those in Japan and Europe.  These other economies are generally more of a corporate state, with a major goal of the government to maintain the incumbents in the corporate world.   I would argue that the key determinants to recovering from a recession quickly are asset, capital, and labor mobility.  Japan has many structural limitations on these, and it dragged their recession out for years.  In the name of trying to avoid the problems Japan has faced, we are repeating the exact same mistakes.  Every step we have taken so far to deal with the "crisis" have reduced the asset, capital, and labor mobility the economy needs to right itself.

Repeating Mistakes Over, and Over, and Over...

I have come to the conclusion that politicians believe Americans all have Alzheimers.  And, given the lamentable state of the media, they may be right.

Example 1

We can argue about stimulus and the Depression all we want, but I had, until the last few days, thought the absolute one thing we all 100% agreed on is that the Smoot-Hawley tariffs and the trade war they sparked were one of the leading causes of the worldwide economic death spiral in the late 20's and 30's.  Or not:

The stimulus bill passed by the House Wednesday contains a controversial provision that would mostly bar foreign steel and iron from the infrastructure projects laid out by the $819 billion economic package. A Senate version, yet to be acted upon, goes further, requiring, with few exceptions, that all stimulus-funded projects use only American-made equipment and goods.

Here is a nice story of another "Buy American" steel fiasco.

Example 2

Last year -- I am talking about just 3 months ago -- I thought it was fairly clear that the immediate cause for the financial meltdown for which the TARP bailout was being crafted was the systematic relaxation of underwriting standards that led to large numbers of loans (and their lenders, securitizers, etc) going belly-up.  Folks could argue whether this was because of deregulation or greed or government distortions and interventions, but I thought there was not doubt that poor credit judgment and excessively free credit were at the heart of the problem.  Or not:

House Financial Services Committee Chairman Barney Frank said President Barack Obama will require banks receiving government aid to lend more to businesses and consumers, saying the Bush administration "made a mistake" by not setting stricter rules for institutions getting funds from the $700 billion financial-rescue package.

"I think you're going to see the Obama administration, having learned from that, push for much more lending," Frank said today on ABC's This Week. "There are going to be some real rules in there."

So Frank and Obama are upset that the bailout of banks that were overgenerous on credit did not include provisions to force them to be more generous with credit?

Final thought: At the end of the day, businesses and individuals have a felt need to deleverage.  That is going to cause a recession, end of story.  The Congress's and Obama Administration's obsession with short-circuiting this sensible desire to reduce debt is not only counter-productive, it is offensive.  Banks are sensibly trying to strengthen their balance sheets, but the government wants to stop them.  Individuals are trying to cut back on spending, reduce debt, and save more.  Again, the government wants to stop them, by going to debt and spending for them if consumers won't do it on their own.

This Is Change?

Under Bush:

  • Iraq Invasion:  Hurry, we need this, emergency, rush, no time to argue, trust us
  • Patriot Act and Related Legislation:  Hurry, we need this, emergency, rush, no time to argue, trust us
  • TARP I:  Hurry, we need this, emergency, rush, no time to argue, trust us

Under Obama:

  • TARP II:  Hurry, we need this, emergency, rush, no time to argue, trust us
  • Stimulus bill(s):  Hurry, we need this, emergency, rush, no time to argue, trust us

Change we can believe in.

On a related note, Greg Mankiw looks at this graph in the TED spread:

ted-spread

And says:

[The TED spread's] decline suggests that the TARP is working and is certainly good news

Really?  You get all that from this chart?  I am not an economist, but I would have said the TED spread spiked up and came back down quickly in a very similar manner to any number of fear-induced price spikes, and had already fallen a fair ways before TARP was approved and had fallen a lot before the first dollar flowed (it is hard to read the chart, but by October 24 it had fallen to around 2.5).  This strikes me as pretty post hoc ergo propter hoc reasoning.  One could as easily say that the recent fall in oil prices was due to the most recent energy bill from Congress, but I am not sure even the most hard-core statist could say that with a straight face.

The longer-term history of the TED spread shows many such spikes, all of which came to earth quickly without a trillion federal dollars:

ted-spread-500x363