Archive for October, 2008

“Redistributive Change” – Translation Please!

October 29, 2008


It seems to have taken 18 months of a campaign for someone to look into some of the actual communications of Sen. Obama. The Senator is a slick guy, and his friends and associates are keeping their mouths shut. The rest of us have to listen to the Obama of today, who is only saying what all politicians say, anything they can to get elected. Obama has made his entire economic plan about his so called tax plan, which has little or nothing to do with economics or taxes. Obama has a theory that he finally explained to “Joe the Plumber”: take wealth from those that have it, spread it around to those who don’t, and everyone will be able to hire “Joe” to fix their pipes. Joe’s answer was, “That doesn’t sound right to me.” Indeed.

The idea of redistributing wealth is as old as wealth itself. The Roman Emperors redistributed wealth the old-fashioned way, they killed the rich Patricians they didn’t like and gave their stuff to their soldiers and other supporters to secure power. Mao, Lenin and Stalin did the the same thing. Robert Mugabe is the latest addition to this method of redistribution.

Western societies are based on a much milder form of redistribution of wealth based on governments spending of lots of money on who and what they see fit, and taxing people according to their ability to pay. We all accept this form of redistribution of wealth because we all get some benefit from the government and we all pay taxes. That is, until George Bush took office. Today a large percentage of the public, people on the low end of the pay scale, pay NO income taxes. That is the unspoken truth the Bush tax plan.

Sen. Obama is now pushing for more redistribution. But until now it was unclear why Obama would favor giving people even more money from the wealthy. He has said he is doing this to be fair, not to stimulate the economy. I think “Joe” called him on that one. So what are Obama’s real motives? I think these came to light only this week with the release of a tape from a professorial exposition on local public radio. A short uncut quote:

If you look at the victories and failures of the civil rights movement and its litigation strategy in the court, I think where it succeeded was to invest formal rights in previously dispossessed peoples, so that now I would have the right to vote. I would now be able to sit at the lunch counter and order as long as I could pay for it I’d be okay. But, the Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in the society.

This passage, and the elaboration that followed, can be difficult to understand because it contains lots of euphemisms that liberals use to disguise what they mean. Let me translate:

As a result of the civil rights movement courts let black people vote, but that isn’t enough. They should have taken money and power from white people and given it to black people to even things out. Unfortunately, the Constitution got in their way. I think we should pass some laws to fix that.

I can’t wait for the Department of Social and Economic Justice. Just don’t rename the Justice Department: “The Man”.

A Three Point Plan to Get Us Back on Track

October 16, 2008

Before we embark on another round of stimulating our economy by reducing taxes or printing more money and giving it away, we should get our economic system back on track. The instability in our system that manifested so dramatically a few months ago with the collapse of Bear Sterns has caused our banking system, our money system, to freeze with indecision, fright, and paralysis. The issue now seems to be somewhat understood: there are too many worthless or bankrupting assets in the hands of the institutions that control our money. The problem must be fixed before we can hope to stimulate the general economy into prosperity. If the problem is not fixed, no amount of stimulation will help.

I would like to propose a simple three point plan to get us back on track:

  1. In the short term, the government should pay the mortgages for foreclosed properties to get them our of arrears. This might seem like welfare but I’m looking at it from another perspective. If we invest $1 into a bank it can only get $9 from the Federal Reserve Bank. That is 10:1 leverage. If we pay $10,000 to get a house out of foreclosure, then the whole original value of the house is available for the bank to borrow against. That is perhaps a 100:1 leverage, at least in the short term. 100:1 leverage means that we would have to put up $70B instead of $700B to get the same effect. What happens to the money we put in? We get equity in the properly in proportion to the owner of that property. So, for example, if the owner of a foreclosed property had $100K equity in that home, and we put in $10K, we would get 9.1% equity in the home.
  2. Go to court and establish that so-called “default swap” derivative contracts, and other derivatives are illegal gambling and therefore unenforceable. This might set off a bunch of lawsuits and accusations of fraud, etc. but that might be good in the long term. Eliminating the cloud that a default swap might come due and kill a bank or insurance company (the “fuckle finger of fate”) would bring confidence in lending, a crucial step in restoring faith to our money system. I had proposed a more complex system for the long term that would allow gambling for financial institutions, but in the short term, let’s just get off the juice.
  3. Since paying the mortgages of foreclosed properties would be prohibitively expensive in the long term, the government must set up a system to sell these properties (we all have an interest in these properties). If the real-estate market recovers, then this will result in good yield, but if that growth is slow, which it will be, then we need to find investors to take on the challenge. The easiest way to encourage new investment into real-estate (or any business) is to offer a tax incentive. Perhaps if the capital gains tax is eliminated for any gains in any foreclosed property, whether one lives in it or just uses it for investment, that would be incentive enough.

Eliminating the current credit crunch by using the most leveraging methods, eliminating gambling masquerading as securities, and providing tax incentives for long term investors that step up to help solve our current problems is the best solution to our money crisis. Relying on the government to invest $700B or more of our dollars and simultaneous attempt to stimulate the economy will add even more instability to the system, something that none of us need.

A Solution to the Financial Crisis

October 11, 2008

Let me preface this post by saying that I have no idea what I am talking about. That said, I think I understand the root cause of our current financial crisis and I would like to propose a solution, or a class of solutions, to the problem.

First, let me explain my view of the problem: gambling masquerading as investment. The financial universe has become two separate worlds, one that is used to finance economic activity and the other used to gamble large amounts of money on a global scale. The second world has become much larger than the first and has leaked into the first. When you have a huge pot of crap that drips onto a much smaller cup of soup, everyone ends up eating shit. That is what we have now. The ultimate solution to this problem requires separating the gambling from the investment and putting different lending standards on these two activities. For example, a bank should be able to loan money for investment purposes but not for gambling purposes.

Even separating what is investment from what is gambling can be difficult for some. For example, is a mortgage on a house to someone who will never be able to pay it back an investment or a gamble? I would call this mainly a really bad investment. Why? because you always have the underlying house which is a real property with real value. Now, if I insure a mortgage on a house to someone who will never be able to pay it back, that is a gamble because either I get my money back or I get nothing depending on what someone else does. Sounds like gambling to me. Does that make the entire insurance industry gambling? Maybe, but perhaps one could say that something like life insurance or car insurance or fire insurance isn’t a gamble because of the history of probabilities involved. Still, covering one gamble with another gamble is really just gambling. How about options trading? I would call that 100% gambling. I am not against gambling, but I wouldn’t loan money to someone to do it. Gamblers all have the same underlying drive, when things are hot they can’t quit. Eventually they get cold and lose it all and then some.

One general rule for differentiating between an investment and a gamble is that an investment will have an influence on the outcome of that investment, while a gamble will not. For example, if I were to invest $1B in Cisco, the odds that I will get a good return (because they can use the money to grow the company) are much better than if were to invest $1. On the other hand if I were to gamble a $1B on a coin toss the odds of winning are no better than 50/50, same as if I were to gamble $1. This is not the sole distinction between gambling and investment, but I think it is a start.

So here is my solution: all public companies should be reviewed by an accounting firm that assigns a new class of shares for that company. We can call that class the “I” class for investment. Everyone owning shares in a company would be able to trade so many regular shares for so many “I” shares depending on the “gambling index” for the company. A company that has no gambling assets would have 100% “I” shares. An investment house or other company that has 50% regular assets and 50% gambling assets would split its shares 50 I and 50 regular. The “I” shares would then trade on a separate basis. The margin requirements for the “I” shares would be higher than for the regular shares just to make sure that banks don’t get too much into gambling.

I don’t think that evaluating the risk of an investment is anything new to the financial world. That is what rating agencies like Moody’s do for a living. In fact much of the current mortgage problems have been caused by rating agencies assigning AAA ratings to complete crap. Before my scheme could work these companies would have to abandon their current rating schemes and adopt a new one based on the gambling index.

I realize that any real solution is probably 1000 times more complex than what I have proposed, but the principle is there. Let people gamble if they like, but let’s not let gambling leak into our economic system.

700 Billion

October 1, 2008

This week the news is all about the $700 billion bailout/rescue proposed by Treasury department to fix a perceived “credit crisis.” We all look to the stock market to see the health of our economy and the stock market hasn’t looked good. But, the market hasn’t looked horrible either, certainly not anything that needs a $700B bailout bill. In fact, the market goes up, goes down, goes up, goes down. This isn’t tell us anything. If the Government wants to explain the crisis it has to find something simple, like the Dow Jones average, that shows the problem. I haven’t seen that yet. I don’t know if it exists.

$700 billion came up a few weeks ago, too, in ads from T. Boone Pickens. The $700 billion that we are massively pissed off at giving to Wall Street is the same $700 billion (according to Pickens) that we will pay, every year, to Saudi Arabia, Venezuela, Russia and lots of other corrupt, antagonistic, and socialistic countries for their oil. Apparently socialists don’t care so much about global warming or drilling. They like the money we give them.

T. Boone Pickens is a tricky guy. His plan is to use CNG, compressed natural gas (not a “green” solution by modern green standards), as a transportation fuel instead of (in addition too, actually) oil. We have lots of natural gas, but we use it for generating electricity, so he needed to find an alternative energy source for generating electricity. He picked wind. That was the tricky part. You see, by picking wind he is appealing to the “greenies,” our newest religious fanatics. I think T. knows that wind energy will not work, but he figures that showing commercials with windmills will get much more exposure, if not approval, for his plan than showing plumbs of burning natural gas.

Right now there are only two credible transportation fuels (oil and natural gas) and three credible electricity producing fuels (coal, natural gas, and nuclear). The other so-called alternative energy sources do not and cannot produce electricity reliably enough for a modern industrial nation.

The biggest irony of the $700B bailout bill that “taxpayers” are going to have to repay is that only a small number of “taxpayers” are going to pay it. Why? because only a small number of people actually pay the majority of income taxes. On the other hand, the $700B (or whatever the real number turns out to be) in extra gas prices will be paid by everyone, every year, until someone steps up to sell the U.S. public the truth – the only energy source that will bring cheap and clean energy back to the U.S. is nuclear power.