Saturday, February 28, 2009

The Soak the Rich Myth

I once worked for a very wealthy man. He was the kind of guy who would make the interns, who were already working for free, take the company car over to his house to clean his swimming pool. He was the kind of guy who once had an employee load a bale of hay into the back of his brand new pick-up truck, drove around town showing off his new truck, only to have the employee unload the truck upon his return. He had no other use for the hay bale. He was the kind of guy who, after downgrading the employee retirement plan, bought a prize steer for $25,000 and invited his friends over for a bar-b-cue. As grandma might have said, he was a piece of work.

He bought a new Cadillac every year. He owned at least three homes that I knew of; his house on the hill in the swankiest neighborhood, a well appointed "cabin" in the mountains, and a home in Hawaii. Every December he would leave for Hawaii and not return until the spring thaw in March, while those of us who were gainfully employed kept his income stream going through the sub-zero Colorado winters. Needless to say, there was a little grumbling among the employees from time to time.

One of the nice things about working the night shift is that if you hustle through the first seven hours, you can put your feet up for the eighth. On a January night, a few of us were sitting, listening to the wind howl, watching the snow "fall" from left to right, wondering if our cars were going to start, when we began grumbling. After a while, one guy who had been sitting quietly looking out the window, said to no-one in particular, "Ya' know, if I had his money, I'd be in Hawaii right now too." Good point.

What brought this memory back this morning was an article in Pajamas Media by Jennifer Rubin, about the latest tax plan.
A taxpayer in the 35% bracket gives a gift to United Way of $10,000. Under the current rules he can reduce his tax bill by $3500. Under the Obama plan he can only reduce his tax bill by $2800. In the Obama scheme, then, that United Way contribution now costs the taxpayer $700 more. The obvious result: give less to United Way so the higher tax bill can be paid. To be blunt, the government is discouraging charitable giving. It is hard to think of any worse tax policy or any one more harmful to the needy.

If there is one thing that I can say with absolute certainty, it's that we all want more than we have. Everybody has dreams. If I only had $1,000 I'd get this; $5,000 I'd get that; $50,000, and I'd definitely buy one of those. Well, what if you did? What if you lived a lifestyle that allowed for Christmas in Hawaii, springtime in the Rockies, and five figure checks to a variety of charities? Where would you cut? Would you tell the wife she’ll have to do her Christmas shopping in sub-zero weather, or shave a little off the donations? You could take those $10,000 checks down to $9,000 and still make it to Hawaii. $9,000 is still a lot of money. You could tell yourself that you're still being generous, and you'd be right. Just a little bit less here and there, and you won’t have to tell your friends that instead of prized-steer ribs, this year you’ll be serving mutton. Be honest with yourself. Which would you choose? Really?

Wednesday, February 25, 2009

Real Trust Requires Real Capitalists

Plowing through the hyperbole that the financial sections have become, one can sometimes find a little perspective. Rob Kirby writing in Financial Sense looks back on the road we have traveled:
Banks in the 19th century were owned by real capitalists and the equity capital of banks was about 60–80% of their balance sheets: bankers were lending or investing their own money, so they were responsible and did not accept excessive risks.

The 19th century also had what were called "wildcat" banks. These were often owned and operated by thieves and counterfeiters. They were located throughout the country, but were especially prevalent in the territories. They were characterized by the fact that they only had enough money to convince the locals that they had more. Today, we call that "a low reserve ratio".

Following a succession of bank panics, the central banking system was created in 1913 and called the Federal Reserve. And here is where it gets really interesting. The reserve ratio was set at 3%-12% depending on the size of the bank. What only a year before had been considered dishonest at best and criminal at worst, was now institutionalized as the norm. Shortly after this, the honest banker disappeared. The gold standard became a political football, before being phased out. With no cultural pressures, and no system of measurement, the wildcats could run free.

The required reserve ratio at the Fed is currently 10% on transaction deposits (checking and savings), and zero on everything else. Homes, cars, credit cards, entire businesses, have all been financed with nothing. And what of those savings accounts? Of course, there are plenty of exemptions and waiver rules included for favored political donors. Mr. Kirby continues: accurate and logical accounting of where we are would amount to a confessional by the powers-that-be, punishable by law.

I don't see that anything is punishable by law. Inaccuracy and illogical accounting is the law. The lack of trust we see today is only the widespread realization that the money center banks are insolvent. They have been for a very long time. The banks are broke and everybody knows it. If the banks had been built on real wealth, regaining trust would be quick and easy. As it stands, what's to trust?

Sunday, February 22, 2009

Leeches On the Back of Society

A universal constant in the world of the rich and powerful is that they will always do what is in their own self-interest. It's how they became rich and powerful to begin with. I have no problem with that, but anytime one of them says something that ordinarily would not be in their own self interest, I have to wonder; What's the game?

The Drudge Report carried a story from Reuters about "renowned investor" George Soros, saying:
the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Really? It's more likely that Soros Fund Management Inc. has effectively disintegrated and there's no near-term resolution to George Soros' crisis. But, it gets even better:
...the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union.

Let's take a deep breath and calm down for a minute. Hedge funds have been taking an even worse beating than the New York banks. Hedge funds borrowed from the banks to buy the toxic assets that are causing all the problems. The banks are in trouble, not just because they too own some toxic assets, but because the hedge funds can't pay off the loans for theirs.

Soros Fund Management, located in the Cayman Islands (where else?), is a group of hedge funds. The largest of these funds, Quantum Fund, plays the currency markets. Mr. Soros and his ilk take the money of the rich and move it from country to country, going long on strong currencies and short on weak currencies. If you can talk enough rich people into letting you manage their money, you can do what Mr. Soros did.

In 1992 he bet the whole wad on shorting the English pound. The attack on the pound was so overwhelming that it became a self fulfilling prophesy. It broke the Bank of England and caused a devaluation in the pound. Mr. Soros and his wealthy clients walked away with billions, while the English working class saw the price of everything go up. Later in the decade, he nearly destroyed several Asian currencies. The farmers, the fishermen, the shopkeepers, all paid the price for the fame and fortune of Mr. Soros.

So what's the game today? I'll take a wild shot in the dark and say that Soros Fund Management needs a big government intervention; not only to help their currency positions, but in applying the Treasury Dept.'s magic eraser to all those toxic assets sitting in the Cayman Island offices.

But not to worry, Mr. Soros and his wealthy clients are philanthropists. They help all sorts of working class people with all sorts of problems. In other words, they destroy the working class, so they can help them. This is how the rich get richer, the poor get poorer, and the powerful solidify their grip. This kind of game is beyond mere hypocrisy, it's beyond even simple BS. It's dangerous.

Tuesday, February 17, 2009

Deconstructing the Lost Decade

There has been much talk of Japan's "Lost Decade" recently. In the IBD this morning, Robert Samualson lays out a few pertinent facts.

First and foremost is that, historically, government stimulus has a mixed record. Sometimes it works and sometimes it doesn't, and nobody knows why. Each situation is different enough that there is no conventional wisdom that applies to all.

Today, on one side of the argument, President Obama warns of a Japanese style stagnation; on the other, conservatives argue that the Japanese government instituted eight stimulus packages, none of which accomplished anything. They are both right and wrong at the same time. The Japanese experience has little to do with what we are going through now for the simple reason that we are not Japanese.

Japan has what Richard Katz, editor of the Oriental Economist, terms a "dual economy." On the one hand, export industries (autos, steel, electronics) are highly efficient. They face intense global competition. On the other, many domestic industries (food processing, construction, retailing) are inefficient and sheltered from local competition by regulations or custom.

Since the early '80s, U.S. economic growth has depended on a steady rise in consumer spending supported by more debt and increasing asset prices (stocks, homes). Just as the mid-'80s signaled the end of Japan's export-led growth, our slump signals the end of upbeat consumption-led growth.

The problem in both cases is, once the formula has played itself out, where to find new areas of growth. Our government has been driving out manufacturing, or inviting them to leave, for decades. Americans really don't make much anymore. Now that consumers are staying home, we don't buy much anymore either. If we don't make anything or buy anything, then what are we doing?

This problem is bigger than any stimulus can solve. If we bring back the factories, we'll bring back the jobs, and bring back the growth. Anything less is wasted effort.

Sunday, February 15, 2009

When Subs Collide

The Sun newspaper is reporting that a British nuclear submarine collided with a French nuclear submarine somewhere in the north Atlantic. There doesn't appear to have been a breach of the hull in either vessel and no loss of life.

My dad served as a sonar man on a submarine in the north Atlantic during WWII. When I was a kid, I would ask him if he ever saw any action. Did he ever sink any Germans? He would calmly reply, "Heavens no, being 300 feet underwater with 100 drunken sailors was dangerous enough."

I wonder if the British Navy still serves rum rations?

Saturday, February 14, 2009

Economic Fascism?

I'd been thinking about this subject for a while now, and this morning Michael Ledeen had an article on it. Is what's going on in Washington socialistic, fascistic, or just plain bad policy?

It has always been easy to tell the difference between capitalism and communism. They are divided by property rights and the means of production; capitalists have them and individual communists don't. But economically speaking, there are no clear lines of demarcation between capitalism and socialism, or capitalism and fascism. These three "isms" all allow some degree of property rights and some degree of government intervention, but are largely social constructs with no clear economic distinctions.

Hitler's Germany is a good example of the lack of distinctions, as the NAZIs never gave much thought to economics. There was no NAZI economic policy that I've ever found. They tended to do whatever worked best in supporting the military machine and left it at that. Mussolini's Italy is a little better, but even there they were heavily militaristic with no clear economic philosophy. Industry was directed to the betterment of the state, whether nationalized or left in private hands.

Wikipedia may not be the best source, but I did find this:
Historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because "the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social."[26]

Sound familiar? I don't know what we are heading towards, but whatever it is, it makes unbridled capitalism look pretty good by comparison.

Thursday, February 12, 2009

New Improved Zombies

There is a new phrase being coined regarding a perceived impending disaster that is our economy. It is the "Zombie Bank". I vaguely remember this term being used during the Japanese banking crisis in the 1990's. It's origin may be older, but I'm beginning to see it used in the US financial pages more often now. It's loosely defined as a bank that the market (us) sees as obviously insolvent, that the government central planners (them) refuse to allow to go naturally. Andy Kessler, writing in The Wall Street Journal gives an example:
Despite over a trillion in assets, Citigroup is worth a meager $18 billion, Bank of America only $28 billion. The market has already figured out that the banks and their accountants haven't fessed up to bad loans and that their shareholders are toast.

Citigroup, having had a $25 billion infusion from Old Uncle Larry, is set for round two with Tim Geitner. Like a young Dr. Frankensteen, Geitner is sure to have a pocket full of treats, as he leads the Citigroup Zombie through "Puttin' on the Ritz". I know I'm mixing metaphors here, but the question of the day is this; How well can the Citigroup Zombie sing and dance? Simply eating the flesh of the living just isn't going to be good enough anymore. We need zombie banks that can carry a tune; and if not dance the Tango, at least a saltzy Texas Two-Step to please the crowd.

And to think, the only price of admission is a fistful of toxic assets. Be sure to keep them in your pocket, you may need to show them later. They'll also make a nice souvenir for your memory book. So, sit back and enjoy the new improved zombie banks doing the high step down the avenue while singing, "We're All Keynesian's Now!", and prepare for the zany hijinks of the hit comedy of the season; "Honey, I Shrunk the Capitalists".

It's going to be quite a show. If not a Golden Age of Zombie Bank entertainment, certainly a Copper/Zinc Age.

Wednesday, February 11, 2009

The Individual Power Station

Scott Adams, the Dilbert cartoonist, has identified a basic modern problem, and the beginnings of how to solve it.
One of the frustrations people have with the current economic downturn is feeling they are helpless to do anything about it. We are told by the media that only the government is big enough to fix our problems.

Remember after 9/11 how President Bush told us to just go about our business? It was as if to say, "Move along folks, nothing to see here, just move along." Why doesn't the government ask anything of us? Isn't it strange that they don't?

It wasn't so long ago that President Kennedy said, "Ask not what your country can do for you. Ask what you can do for your country." 300 million individuals working towards a common goal could accomplish anything. But, nobody's asking us. Apparently, at some point between Kennedy and Obama, we stopped offering. So, leave it to a cartoonist to have the best idea yet.
Suppose President Obama ordered the power companies to make one change in policy. Not only would they credit the bills of customers who have solar panels on the roof when they generate more power than they use, as is the current situation, but they would actually pay customers cash for any energy created beyond the limit of their own monthly bill. That would make any home with a Southern exposure a potential generator of electricity. The President could ask citizens to invest in solar panels, as an act of patriotism, knowing the payoff would take years, but the collective benefit to the country would be great. It would stimulate the economy, create jobs, and drive down the cost of solar panels. And your neighbors could see your new solar panels and know you were doing your part.

Imagine tens of millions of clean energy companies run by private individuals. Each one energy independent, with at least the beginnings of a multiple income stream, and the costs to the poor being only in the distribution. Think of the effect on Nevada property values.

If the people in Washington DC would look at the governed as something other than a potential threat to their power, they might think of something like this. As things stand now, we are left with presidential decree's, legislative pissing contests, and the idle musings of cartoonists.

Sunday, February 8, 2009

The Comedian's Craft

A confluence of events yesterday led me to Barnes & Noble bookstore to spend my Christmas gift card. One of the books I bought was "Born Standing Up" by Steve Martin. It's a very readable book about his early years and has quite a few surprises.

The biggest surprise is the story itself. When Steve Martin burst on the scene in the mid-seventies, we all thought he was a new comic. In fact, what we were witnessing was a performance artist at the end of the road. Weaving music, magic, salesmanship, and just plain entertainment, all the while taking classes in philosophy, psychology and art at Long Beach and UCLA, Mr. Martin developed his craft for the better part of two decades. This is the story of a guy who was willing to lay it all on the line for two dollars a show in near empty rooms.

Another thing I really liked about this book is there's not much name dropping. The names are largely unfamiliar; Magicians at Disneyland, theater actors at Knott's Berry Farm, and nightclub managers in San Francisco. Occasionally, he meets someone I'd heard of before, but not often. It was a tough life. It's the kind of life only the most dedicated romantic could stay with.

Mr. Martin also includes some pretty personal stuff about his family. This is not a tell all, but as he explains it"...a complicated childhood can lead to a life in the arts. I tell you this story of my father and me to let you know I am qualified to be a comedian." For all the silliness of his stage act, Steve Martin is a serious, logical thinker. This heartfelt telling of his own story shows a complicated man struggling to create something new, and once created, walking away from it to create something else.

Saturday, February 7, 2009

Broken Windows and the Unseen

I happened across an interesting chart earlier this week. With all the back-and-forth about the next Great Depression one is tempted to look at the years 1930 to 1940. What is really instructive are the years 1941, '42, and '43. We might conclude from this chart that WW II was a wonderful time.

And, why not? Employment was at an all time high; anyone who wanted a job could get one. Real wages rose as a large part of the labor force was directed into unproductive endeavors, never to return. Exports were, well, booming. (Pun intended). There are some who say that war is good for an economy; and the bigger the war the better. These people, needless to say, are idiots. Economics, like everything else, is ultimately about people. Numbers are only a reflection of the lives people are living, and sometimes that reflection can be a poor one.

Another trail I followed led to Frédéric Bastiat and his Broken Window Theory. Briefly, it is the story of a shoemaker's son who one day breaks a window at the shop. All the neighbors agree that fixing a broken window has many benefits, one of which is that it provides a job for the glazier. Left unseen, is the productive use the money paid to the glazier might have gone to. Bastiat goes on to argue that any ruler can immediately double employment simply by cutting off the right hand of everyone in the kingdom. (I need to find out more about this guy).

Today, there is general agreement that the Bush bank bailout was an unproductive use of our national wealth. The folks in Washington seem determined to try something similar in other areas. All manner of numbers are being tossed around to "prove this, and "prove" that. No doubt, there are some bridges that need fixing, and reducing the long term energy costs of government buildings seems reasonable enough. Still, those of us who continue to "stand athwart history yelling stop" can only look on in sadness. Our leaders have been foolish. There are precious few left to count the unseen costs of fixing our country's broken windows. Who will ask, "What future improvement will be left undone because we used our money recklessly today?"

Tuesday, February 3, 2009

Chinese Automakers Outsell US

For the first time in history, the automakers in China have outsold their US counterparts. January auto sales fell to 9.8 million, compared to China’s estimated selling rate of 10.7 million. With our rising unemployment, one has to wonder when China will start shipping jobs over here to take advantage of our cheap labor.

Emily Kolinski Morris , Ford’s senior economist is quoted as saying, “There are some faint signals emerging that we may be nearing the bottom.”

I doubt it. The Obama Administration seems determined to repeat the mistakes of Herbert Hoover by raising taxes and dishing out money we don’t have to the states for infrastructure. The good news is, that Hoover increased federal spending by 30% in 1930, while President Obama is only planning a 25% increase in 2009. I suppose we can call that progress.