GEITHNER IS TOO CLOSE TO THE STREET

Up until now I had the attitude that Secretary Geithner needed all the support we could give him. The country needed to have a solid voice that could implement plans without creating a sense of uncertainty. However, I now believe the time has come for him to go. His recent plan to deal with the “toxic assets’ is fatally flawed. It is based upon the assumption that the markets have undervalued the assets and government guarantees will get the private sector to buy them. The problem with this approach is that it relies upon the banks being willing to sell the assets at the price the market is willing to pay. The private sector which has already priced the assets at extremely low levels and the Geithner plan expects it to miraculously start buying at inflated prices due to government guarantees. There is not even an assurance that the banks holding the assets will sell them at anything less than face value.
In addition, if the assets prove to have little worth, the US government, read you and me, will have to pay off the guarantees. It would be a lot cheaper to the taxpayer if we nationalized the illiquid, read that as insolvent, banks, let the assets mature, and pay back the taxpayer to the extent that the maturing assets will allow. We, in aggregate (government), have a much greater capacity to wait out the market than do profit making institutions. In the long run a single “Bad Bank” will have a greater capacity to renegotiate loans, the disruption to the market from bank bankruptcy will be mitigated, and the costs to the tax payer will be lower.
Mr. Geithner appears to be too obsessed with preserving the current insolvent banks rather than solving the problems facing the financial system. I believe that in his role as President of the Federal Reserve Bank of New York he may have gotten too close to the “Movers and Shakers” who caused the problem to begin with. This makes him overly amenable to their approaches that are design to preserve their own positions. Once again the economics of greed is winning out over Adam Smith’s “Enlightened Self Interest”

MATERIALITY AND THE AIG BONUS PROBLEM

When I was reading about the AIG bonuses I was as outraged as anyone else. The first thing that came to my mind was “How could Geithner let them get away with this?” Then I stopped and thought about the days when I managed a half-billion dollar portfolio. Number in the thousands didn’t seem very significant. The problem arises from the fact that large numbers contain a lot of digits. Most people working with large numbers drop several digits due to what accountants call immateriality. For example: Most company financial statements have (000) written under the title of the individual financial statement and all of the numbers are in thousands of dollars. So, $1,985 is really $1,985,000. We’re talking millions of dollars, not thousands and hundreds of dollars get lost in the shuffle.
So, how did Mr. Geithner miss $250 million? It is easy to do when the bailout is in the billions. Simply, most of the numbers crossing Mr. Geithner’s desk were probably written in billions. The bailout package to AIG was probably written as $185 instead of $185,000,000,000. This means that the bonuses would have been written as $0.165. This is a number that looks insignificant in the overall scheme of things and could easily be missed. Especially by a person who is dealing with a national debt number in the trillions. Let’s face it, if all day long you’re seeing number like $9,654.4 which is the national debt, $0.165 looks like peanuts. That fact that the true numbers are $9,654,400,000,000 and $165,000,000 gets become obscured.
What is needed is to have people working with the Treasury Secretary and the Fed Chairman who understand that apparent small percentage numbers have a high impact when read as whole numbers. People in the rarefied air of Washington and New York do not realize that the AIG bonuses could eliminate the debt of many smaller cities and pay for the complete budgets of many school districts. I do not blame Mr. Geithner for missing the impact news of the Bonuses would have on the public. I do blame the loud mouthed critics who would have claimed that the Obama administration was destroying the capitalist system if the bonuses had been blocked. Once the bonus contracts were written, it became a lose-lose situation for the Obama team.

THE ARROGANCE OF AIG

About 15 years ago, when I was working in corporate treasury, my company’s insurance broker asked me to write a letter to him expressing my experience in dealing with AIG as the carrier of our Liability and Workers Compensation coverage. My response was that the AIG representatives behave in such an arrogant manner that one would think that you were dealing with the Department of Motor Vehicles. The recent announcement that AIG would be paying in excess of $165 million in bonuses convinces me that nothing has changed.
Remember, AIG is a company that has required tens of billions of dollars in bailouts from the government in order to avoid cascading failures to the world economic system. In addition, AIG’s losses have been larger than the GDP’s of many medium countries. Yet, the executives of AIG have the arrogance to believe that they are entitled to huge bonuses. Yes, I said entitled. Executives at AIG believe that they entitled to receive a form government transfer payments similar to the welfare system. However, these payments go to those who are well off: Welfare for the rich. The executives will claim that government money isn’t paying the bonuses. If that is the case then AIG doesn’t need the $165 million and the government payments should be reduced by value of the bonuses.
I fear for the future of the United States. We have gone from a country where Adam Smith’s enlightened self interest has changed into the arrogance of greed. I cannot think of any behavior which could do more to convince Americans that there is something wrong with the capitalist system. The executives’ actions could not do more for advancing socialism than they could if they were on the payroll of the Socialist or Communist parties.

REPUBLICAN GOVERNORS ATTEMPT TO TURN US INTO EUROPE

The Republicans tell us that President Obama is attempting to adopt European socialism in the USA. However they are actually trying to establish European separatism as an alternative. Let’s face it; Europe is an amalgam of over 20 separate countries with few mechanisms for coordinated Fiscal Policy. Monetary Policy is centralized through the European Central Bank in the same manner that our Monetary Policy is centralized through the Federal Reserve System. However, Europe does not have a strong central government to design and implement fiscal policy. As a result, even the Europeans have doubts about their ability to recover. Each country is pretty much on its own regarding stimulus issues. That means if Italy tries to increase spending and create jobs the result could be that the new spending ends up creating jobs outside of Italy. This would happen if France decided not to stimulate its economy. As a result wages, and therefore, prices would be lower in France and the Italians who were hired under the stimulus would buy French goods. This would result in sporadic growth in Europe and a prolonged recession.
American governors who refuse the stimulus money would be placing our country in the same boat a Europe. The lack of spending in their own states would lead people to relocate to states where the stimulus money is working. The result would be a continued recession in their own states and a delayed recovery in the country as a whole as unemployed workers cross state lines. The only reason to seek this type of scenario is to be able to say: “See the stimulus didn’t work so vote Republican.” The Republicans are willing to see the country suffer so that they can regain power. It is this selfish approach which can threaten the state of the Union. The Republican Governors are traitors who have stronger loyalties to their party than to the country.

Warren Buffett Has It Right

The more I read Warren Buffett’s comments regarding business and economics the more I believe that he has more practical sense than all of congress combined. Today on CNBC Mr. Buffet stated that it is time to treat our economic problems as if we were at war. In doing so our congressional political parties have to put their partisan differences aside and treat our president the way we would in a full scale war situation. In an all out war, the people need to believe that we will win and the president must be commander in chief. Buffett (along with Krugman, Stieglitz and most economists) stated that confidence is necessary for an economic recovery to take place. As long as the congressional Republicans fight everything President Obama tries to accomplish and the Democrats try to add pet projects to every piece of stimulation legislation, the public will have serious doubts about the prospects for recovery.
It is time to end the fighting if we are to preserve the nation. Recovery is a matter of national security and we should all be a part of it. The problems that will arise from the tactics used to stimulate a recovery are far more manageable than the slide that will turn into a plunge if we do not act. Monetary Policy has done well at preventing a full scale plunge. However, monetary policy has reached its limit because we are now in what economists call a liquidity trap. It is time to let Fiscal Policy do its job.

Treat Banks As You Would Treat a Heart Condition

People often ask me why we can’t let banks and organizations such as CITI and AIG just fail. The answer is simpler than most of us would expect. First it is important to think of the economic system as an organism comprised of a series of interrelated systems similar to the human body. The banking system is the circulatory system of the economy; Money is the blood of the economy. If an artery, such as a major bank, gets clogged some other major organ may fail or be severely impaired. We can equate the failure of major financial institutions to the clogging of arteries that lead to cascading organ failure. Clogging of the renal artery can lead to kidney failure. We can survive with one missing kidney but a loss of both will kill the organism. A bad kidney can lead to a bad liver which can affect other organs. CITI or AIG going under can lead to a cascading collapse of other banks and financial institutions to the extent that the whole organism we call an economy can die. Therefore it is necessary to prevent the total failure of these organizations.
However, this does not mean that we must preserve the plaque that got us into trouble to begin with. Just as arteries can be opened using stints and plaque can be reduced with Statins, financial institutions may need a complete change in the clogging agent known as outdated management. In addition, a pacemaker (regulatory agency) and regular check-ups (audits) may need to be added to keep the system healthy.

REAGANOMICS AND FISCAL RESPONSIBILITY

Whenever I hear the minions of the Republican Party, and the right wing goofballs such as Rush Limbaugh, screaming about the Democratic Party’s lack of fiscal responsibility I am dumbfounded by their self deception. The fact is that history shows our worst years of fiscal responsibility have occurred under Republican Administrations. Data on the Federal Debt as a percentage of GDP, generated by the OMB, demonstrates this.
From 1960 through 1980 there was a general decline in Federal Debt as a percentage of GDP from 56% to 33.1%. However, with the beginning of Reaganomics in 1981 we can see a sharp increase in this percentage. It continues to grow sharply throughout the Reagan and Bush senior years. As stated earlier in 1980 the debt was 33.1% of GDP. Republican prolificacy led the percentage to top out at 67.3% in 1996. Throughout the balance of the Clinton years the value dropped. In 2002 it was down to 59.2%. With Bush junior’s ascendance to the presidency there was a sharp increase in debt until it is projected to reach 67.5% when the final figure for fiscal 2008 is in.
Somehow the Republicans have managed to deceive the press and the public into believing their myth of Fiscal Responsibility. I guess they have learned well from Joseph Goebbels: If you tell a big enough lie often enough people will begin to believe it. When will the press start doing its job and start challenging the deceptions of the right?

HAVE WE LOST CONFIDENCE IN OBAMA?

If you read the current press or watch television news you may have heard that Americans have lost confidence in President Obama's ability to engineer an economic recovery. This is despite the fact that he is very popular. The real problem is that the media in their stupidity has given credence to the latest scam of the obstructionists from the right.

The over-riding issue is that the right wing, who believe that government has no role to play, has spent so much time talking about how Obama's plans couldn't work that the economically ignorant press has begun to believe them. If Obama’s plans fail it is because the right has been obstructing so much of anything he tries to do that the people have lost confidence not in him but in the whole political process. When Rush Limbaugh says he wants Obama to fail and Rick Santorum, a light of the "Right" agrees, we find we are all in trouble. The right has learned that expectations have an awful lot to do with how an economy operates. If they can destroy positive expectations then the failure of the recovery can move the right into power in 2012.

Rush and his ilk are traitors. They are more interested in their regaining power than they are in the health of the country. Their governors’ refusal of stimulus funds borders on criminal behavior and implications that they can refuse to follow laws they believe to be unconstitutional is a step toward cession and a new civil war. They would rather see a failure of the republic than allow their opponents any semblance of success.