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.

DO WE DESERVE THIS?

Someone once said that we get the government we deserve. My problem is that I cannot fathom what grievous harm we’ve done to the world to get the congress we have today. We have both Republicans and Democrats screaming that we have a spending program instead of a recovery program on the table. My guess is that all of them failed their Introductory Economics course or they decided that nothing in the field developed after 1899 has any relevance. Our illustrious elected leaders seem to forget that spending is economic stimulus. When Republicans complain that the New Deal took too long and we needed WWII to get out of the depression, they are ignoring the fact that it was the stimulus spending for WWII that finally ended the depression. Even FDR had a tough time spending enough to end the disaster. Now Republicans and some conservative democrats are complaining that President Obama is spending too much. These naysayers are going to end up extending the problem through under spending.
I can understand why the Republicans might want to do this. They believe that they can win the mid-term congressional elections if they make sure that a recovery doesn’t take place. They are willing to see the country go down the tubes in order to gain an electoral victory in 2011. They bring out the old saw of giving money to business to get the economy moving. They believe in something called “Say’s Law” which states that supply creates its own demand. The problem is that nobody in his/her right mind is going to produce goods in the absence of demand. Without an increase in demand, reducing the cost of labor merely increases business profits without increasing employment.
It is time to get tough and call the obstructionists to the carpet. I would use their old saw and state that they are threatening the security of the United States. I would not hesitate to call them traitors who are more interested in lining the pockets of the internationalist multi-national corporations than they are in the security of America. Progressives have, for too long, been too timid in their pursuit of their goals. They have tried to appeal to the mind. It is now time to use the tactics of the conservatives and start appealing to the gut. In 1932 the USA could have gone the way of Germany and Italy or the way of Russia. We found a third way through FDR and the new deal. If the conservative have their way, I’m afraid that our fate will be to resemble Mussolini’s Italy.

THE CONSERVATIVE AGENDA

Now that President Obama has submitted a stimulus package I am struck by the fact that the Republican in have returned to their standard of trying to stimulate business through tax breaks and tax credits. They use the excuse that businesses will hire more people if government would only give businesses tax credits for every additional person they hire. The problem is that this is pure bull ****. The demand for labor is derived from the demand for the goods and services businesses sell. When businesses get stimulus credits they are only applying for money based upon people they would have hired anyway. They believe that they are not doing anything wrong because they feel that the money is going for hiring people and since they’re hiring, why shouldn’t they get the stimulus money. The forms that are completed merely move numbers around to prove that the stimulus got them to do the hiring. It is a shell game on a massive scale.

To understand what I’m talking about you only need to look at the CFO.com article of Sept. 24, 2005 entitled “Tax Breaks Don’t Boost Investment.” This article looked at the effect of tax credits on business investment and found that the companies with tax breaks cut their investments by 22%. The article concluded that investment was based more on the demand for a company’s goods than on the cost of making the investment. In other words, the demand for any production input is based upon the demand for the goods and service the inputs produce not on an artificially reduced price of the input. The only effect of the incentives is to increase after tax profits. Investing in tax credits for hiring will get you the same returns as you would have earned with Bernie Madoff.

On Proportionate Responses

The recent actions by Israel have been condemned by many churches and governments. Their main complaint is that the Israeli actions are out of proportion to the Hamas offenses. They imply that they would not be condemning Israel if the responses had been proportional. We need to look at this issue in light of the facts:

1. Hamas launches rockets into Israel specifically aimed at civilian targets.
2. Hamas places its leadership and military centers specifically in civilian locations
3. Hamas locates rocket launchers in or near schools, hospitals, and civilian neighborhoods
4. Israel tries to target only Hamas leadership, military, and launching sites

Given these established facts, we can only conclude that:

1. Hamas doesn’t make a distinction between civilians and combatants unless it meets its political agenda
2. This agenda places Palestinian civilian at risk intentionally.
3. Hamas wants to increase Palestinian civilian casualties because it makes Israel look bad

Given these fact and conclusions I have to conclude that the criticizing governments and churches want the following actions that would be proportional responses:

1. Israel should start lobbing rockets into civilian neighborhoods regardless of whether Hamas has facilities there
2. Israel should make elimination of any concept of a Palestinian State a part of its political goals in the same manner that Hamas has the elimination of Israel on its agenda
3. Hamas fighters captured in battle should be held without notification of their being held.
4. Bodies of Hamas fighters killed in battle should be held and implications made that they are alive and will be returned if certain concessions are made by Hamas.

Do the churches and governments really want proportional responses? If they do, they will be instrumental in perpetrating a higher level of civilian suffering than has been seen to date.

STOP BLAMING FDR

Paul Krugman and other economists have been attributing the 1937 recession to actions by FDR. They say he was merely following advice regarding the attempt to cut spending and balance the budget. However, whatever FDR did, there still would have been a recession. This is because the Fed, which is independent of the executive, raised the reserve requirement substantially during the same period. From 1917 until August 1936 the Central Reserve City Banks had a reserve requirement of 13% Starting if August of 1936, through May if 1937 , the Fed raised the rate to 26%. The rate for Reserve City Banks went from 10% to 20% an d for country banks the rate went from 7% to 14%.
The reserve requirement is the percentage of deposits that banks are required to hold at the Fed. This is money that cannot be loaned out. If the reserve requirement is raised banks have to either gather in a large number of new deposits and/or reduce lending. Given that the recovery was still ongoing, substantially increasing deposits was problematical. Instead, given the substantial increase in the Reserve Requirement, banks had to virtually halt all new lending. This alone would have caused what we now call a recession. (Note: I believe that FDR coined the term "recession" as a description of a slowdown in economic activity at this time)

So stop blaming FDR.

WHAT WERE THEY THINKING

When I read all of the complaints by people and organizations that have lost everything investing in Bernard Madoff’s Hedge Fund, I think about a recent Country song titled “…What Was I Thinking…” People who invest should know four basic principles:

1. Never place all of you investment in something where you have no idea how it will be used. Madoff never described how his Hedge Fund worked. This should have been a clue that something was fishy in on Wall Street.
2. Never put more than you can afford to lose in any one investment. Usually this means no more that 5% of you total investment. Endowment Funds, Pension Funds, and Financial Institutions should know this. In addition, individuals who are investing their pensions should follow the same philosophy.
3. If something is too good to be true it probably is. Madoff was consistently paying steady returns no matter what happened to the market. Markets are volatile by their nature. As a result, it is almost impossible to have steady returns over time.
4. Higher returns are the result of higher risk. 25 Years ago the President of my firm asked me to invest with a firm that was offering 75 to 125 basis points above market for Repurchase Agreements. I refused, saying that there must be a risk that hadn’t been identified. I only kept my job as Treasurer because the CFO backed me. Several months later local school districts and municipalities lost millions when the seller went under.

These four items may not make you rich however; they can help you from ending up poor. Individuals have to be especially careful in regard to these principles because people have a harder time recovering than organizations.

I firmly believe that the Trustees of the Charities that lost all of their endowments were lax in following their fiduciary responsibilities. While I feel for the beneficiaries of the charities; I don’t have sympathy with the managements or trustees. What were they thinking?

IS DON QUIXOTE BERNANKE FIGHTING WINDMILLS WITH HIS LOYAL SANCHO PAULSON BY HIS SIDE

Once Again I read the newspaper and I am astounded by the cluelessness of our economic leadership. Today there is talk that the Fed will again lower the interest rate at which banks lend to each other (The Federal Funds Rate). You would think that by now Mr. Bernanke would realize that the country is in a liquidity trap where the traditional tools of Monetary Policy are ineffective. This is evidenced by the fact that both Mr. Bernanke and Mr. Paulson have been pouring liquidity intro the systems and the banks have responded by buying other banks, paying dividends, and funding bonus pools instead of making loans with the new found liquidity. Attacking an economic crisis with monetary tools when the country is in a liquidity trap is akin to tilting at windmills in the hope of killing a dragon.

The time has come to start using Keynesian aggregate demand based economics instead of the pump priming of liquidity enhancement. The pump is primed; the liquidity is there. What we need now is someone to start demanding the water. This can only be accomplished by a government spending stimulus package that is large enough to turn the economy around. This means that we need to spend as if we were fighting a war. All of the criticisms of the New Deal boil down to the fact that even FDR was too timid in his spending proposals. Alan Greenspan set the precedent of a Fed chief commenting on Fiscal Policy. It is now Mr. Bernanke’s turn to push Paulson toward a fiscal stimulus. At a minimum this should be a set of loans to GM and Chrysler that would stave off a shrinkage in demand. These two firms will eventually have to file for bankruptcy, but the inevitable can be delayed until the economy is better able to manage it and congress has time to arrange a post filing financing package which will mitigate the worst effects of a filing.

What Fools the Conservatives Be

The title of this piece is very misleading because, for one of the rare instances in my life, I find that I am actually in agreement with the conservatives regarding the Detroit Bailout. The conservatives are calling for a “Structured Bankruptcy” in- stead of the bailout that is being proposed by democrats. In a November 26 letter to the editor of the “Allentown Morning Call” I outlined the advantages of a structured bankruptcy without using the term.

So, why am I calling the congressional conservatives fools? The problem lies in the fact that politics was once called the art of the possible. (I wish I could remember where the quote came from) The Republican leadership seems to have forgotten this. They are so intent on getting their own way that they appear to be willing to let the country slide further into the abyss of depression rather than agree to a program, which although flawed, has a possibility of passing. Eventually, GM and Chrysler will have to go for a structured bankruptcy. However, just letting them go into Chapter 11 now, without a government financed structure, would throw innumerable Americans out of work and exacerbate the economic downturn. Getting a bankruptcy plan passed under current conditions is impossible.

There is a time for principle and a time for action. Sometimes they do not coincide. This is one of those times. Conservative obstructionism may insure that Republican congressional representation remains out of power for another 40 years as happened in the mid 20th century.