Gluttonous debt

From Dr. Mercola's website:

...from the moment of the U.S. constitutional birth in 1789, the debt accumulated by the federal government did not hit $1 trillion until 1981.

It took 183 years to incur the first trillion dollars.

It only took 20 years to grow that debt to $5.7 trillion, and a mere seven years to reach $9 trillion.

How on earth will increased government spending, more corporate bailouts, and stimulus packages aimed at getting American’s to open up their pocketbooks like we used to, actually make matters better?

The ship is already sunk - stop bailing!

Some interesting thoughts on the potential bailout of GM:
Many of the Big Three's problems are self-made. The contraction of demand is just the latest dark cloud, and a problem that affects all industries, not just autos. Thus, if Detroit should get a bailout, why not help America's home builders, coal miners and masseuses, too?

Detroit's problems predate the financial meltdown. Management and labor consigned the Big Three to a future of troubles when they agreed to preposterous work rules, requiring management to pay workers at 90% of their salaries when they were laid off. Those rules compelled General Motors in particular to keep pumping out vehicles in the face of shrinking demand earlier in the decade, ushering in the period of "0% financing" for five, six and seven years. Because labor costs were locked in, it made more sense to keep producing and selling at below the full cost of production.

Management also gave labor the "Cadillac platter" of health and retirement benefits, all of which substantially increased the cost of producing vehicles at unionized plants in America. Management and labor always assumed that the U.S. government would come to the rescue when the chickens came home to roost over this inefficient, uncompetitive cost structure.

Those were only the beginning of the industry's economic sins. On the demand side, Big Three management demonstrated an egregious failure of imagination, if not downright dereliction of duty, in assuming that large pickup trucks and SUVs would never fall out of favor. When SUVs and trucks are excluded, Big Three offerings barely make the list of the country's top 10 selling cars of the decade. None has been a top five seller. Shouldn't producers try to make things that people want to consume before scapegoating their failures and seeking bailouts?

Whole article here.

Let's hear it for regulation!

The right kind of regulation, that is. From DownsizeDC:

Often, the repeal of a government regulation will result in the restoration of free market regulations that are far stronger.

Free market regulation comes in several forms. One involves customers taking their business elsewhere when a company fails to provide a good product at a good price. Businesses are regulated by their customers.

Please notice that the government operates under different rules . . .

If the government charges you too much to do too little, then too bad. The government continues to extract money from you, even when it performs poorly.

* You can't fire the government!
* You can't take your business elsewhere.

In this sense government is almost completely DE-regulated.

But the free market also regulates businesses in other ways. Indeed, the free market imposes the strongest possible form of regulation . . . bankruptcy.

We must recognize that the politicians are in the process of repealing bankruptcy. Companies are being rescued from bankruptcy by the Big Bailout.

This is the correct way to think about things . . .

* The current economic downturn is a free market attempt to regulate bad business practices (many of which were fostered by government banking and housing policies)
* Bankruptcy equals the strongest possible form of regulation.
* Bailout equals the strongest possible form of DE-regulation.
* The Big Bailout equals Big DE-regulation.

See the whole article here.

On the other hand...

Here's an interesting take on the current recession and why we shouldn't be so afraid of it.

Excerpt:

Most people will profit from the current slow-down, and also from any recession that may follow.

How can this possible? It is possible because most of the pain felt in economic corrections happens at the margin, hurting some people badly, but making things better for most people, overall. Think about it . . .

Businesses will suffer lower profits, but most of them will re-think and re-engineer their operations, emerging better and stronger than they were before, while those businesses that fail will see their assets moved to more productive firms, paving the way for greater societal wealth in the future.

Those who are close to retirement, and stayed in the stock market too long, may have to delay their retirement for a year or two. But if they refuse to panic by selling out now, they too will likely emerge better than before.

The greatest pain will be felt by those who lose their jobs. This pain will only impact, even if we have a severe recession, about one out of ten Americans. This is too much pain suffered by too many people, but the fact remains that . . .

Roughly 70% to 90% of all Americans will suffer NO economic pain at all. Instead, they will actually BENEFIT from the correction, because the cost of living will drop, and new investment opportunities will be available at bargain prices.

Hmm, what to think?

I like this article

This website is pretty weird looking, but I really enjoyed this article about the current economic crisis. It blended a very easy-to-follow explanation of our ponzi-scheme economy with a meditation of what it means for our civilization and human relationships in general. Pretty cool. He's writing from a new-agey point of view, but I didn't find that incompatible with my Christian way of thinking, such as it is.

Here's the first part:

Suppose you give me a million dollars with the instructions, "Invest this profitably, and I'll pay you well." I'm a sharp dresser -- why not? So I go out onto the street and hand out stacks of bills to random passers-by. Ten thousand dollars each. In return, each scribbles out an IOU for $20,000, payable in five years. I come back to you and say, "Look at these IOUs! I have generated a 20% annual return on your investment." You are very pleased, and pay me an enormous commission.

Now I've got a big stack of IOUs, so I use these "assets" as collateral to borrow even more money, which I lend out to even more people, or sell them to others like myself who do the same. I also buy insurance to cover me in case the borrowers default -- and I pay for it with those self-same IOUs! Round and round it goes, each new loan becoming somebody's asset on which to borrow yet more money. We all rake in huge commissions and bonuses, as the total face value of all the assets we've created from that initial million dollars is now fifty times that.

Then one day, the first batch of IOUs comes due. But guess what? The person who scribbled his name on the IOU can't pay me back right now. In fact, lots of the borrowers can't. I try to hush this embarrassing fact up as long as possible, but pretty soon you get suspicious. You want your million dollars back -- in cash. I try to sell the IOUs and their derivatives that I hold, but everyone else is suspicious too, and no one buys them. The insurance company tries to cover my losses, but it can only do so by selling the IOUs I gave it!

So finally, the government steps in and buys the IOUs, bails out the insurance company and everyone else holding the IOUs and the derivatives stacked on them. Their total value is way more than a million dollars now. I and my fellow entrepreneurs retire with our lucre. Everyone else pays for it.

This is the first level of what has happened in the financial industry over the past decade. It is a huge transfer of wealth to the financial elite, to be funded by US taxpayers, foreign corporations and governments, and ultimately the foreign workers who subsidize US debt indirectly via the lower purchasing power of their wages. However, to see the current crisis as merely the result of a big con is to miss its true significance.


Here's the whole essay.

Ron Paul vs. the Bailout

Here are a couple of brief statements Ron Paul made yesterday to the Financial Services Committee and the Joint Economic Committee. Great explanations of how government intervention was primarily responsible for this mess and why the proposed bailout (i.e., more government intervention) is the wrong thing to do.

Ecology vs. Economy?

This is interesting. Many people advocate population reduction as being important for the environment, but how many people understand the implications of shrinking population on the economy - specifically the financial well-being (or even just survival) of the elder generations? In this interesting article, a German writer discusses this problem:

"There is nothing complicated about finance. It is based on old people lending to young people. Young people invest in homes and businesses; aging people save to acquire assets on which to retire. The new generation supports the old one, and retirement systems simply apportion rights to income between the generations. Never before in human history, though, has a new generation simply failed to appear."

Yikes!

I don't like his statement towards the end that "free markets give them the sort of economy they deserve." I think I understand what he means, but I don't like people referring to what we have as a "free market". When you've got an intrusive centralized Federal government like ours, we definitely don't have a "free" market.

"Sub-prime" mess

As a follow up to yesterday's post...if you, like me, have had a tough time understanding what this "sub-prime" thing is, here is a great explanation from DownsizeDC.

The current housing crisis, and all that flows from it, comes from two main sources, both deriving from Washington.

First, Congress passed something called the "Community Reinvestment Act" in 1977, resulting in the creation of bureaucratic regulations designed to encourage, or even compel, financial institutions to make loans to people with lower incomes. These regulations were then amended in 1995 and 2005 to create different rules for institutions of different sizes, so that various kinds of institutions would be better able to meet the government's goals for fostering home ownership in lower income communities.

Second, the Federal Reserve starting making loans available to the banking system at extremely low interest rates.

Third, steps one and two combined to make cheap housing loans available to people who could not have afforded or qualified for them before. This caused an increased demand for housing that sent home prices spiralling upward.

Fourth, mortgage lenders managed the risk involved in making these loans by selling their mortgages to other companies, which in turn thought that they were managing their own risk because they had a wide variety of mortgages, from many different types of borrowers, in their portfolio.

Fifth, these decisions about how to manage the increased risk created by the "Community Reinvestment Act" were all in error, because the Fed's policy of easy money had falsely inflated the value of ALL homes. This meant that good mortgages could not be used to manage the risk involved in questionable mortgages, because the value of ALL homes was falsely inflated.

Sixth, as with all inflationary booms, increases in home prices finally absorbed the increased purchasing power provided by the Fed, leading to a slow-down in home purchases. When this moment arrived everyone realized that the homes they had purchased weren't really worth what they had paid for them. The defaults and foreclosures then began, along with the collapse of the financial institutions that owned these unsound mortgages.

Now, the complicated, multi-part scenario described above has been simplified in popular reporting to just two words: sub-prime loans. These two words, combined with the idea that lenders took advantage of poor unsuspecting customers, are supposed to explain everything. But this explanation is both simple and simply insufficient.
A study by the Mortgage Bankers Association tells the true story. In the third quarter of last year fixed rate mortgages accounted for 45% of foreclosures, while sub-prime ARMs accounted for only 43%.

Read the rest here.

Economic turmoil

Of course, this dramatic and distracting economic news had to happen at the beginning of Great Lent. It's challenging to figure out how to pay just enough attention to things like this, without getting completely absorbed. If you are interested...here are a couple of articles today on some of the historic economic events going on right now...

"Why aren't we furious?" by William Norman Grigg

and

"Musings from the Titanic" by Steven LaTulippe

Interesting numbers

From DownsizeDC:

In 2007, over 53% of the federal budget went to mandatory entitlements and welfare spending, and 20% to the Department of Defense. About 9% went to interest payments on the national debt. And just 18% went to Everything Else, from the FDA to Homeland Security to foreign aid. Source: Congressional Budget Office

To clean up America's fiscal mess, we will have to think about entitlement reform and a new, more efficient national security strategy. Steep budget cuts for Everything Else will help, but only a little. There's a better reason to cut Everything Else: these departments and programs tend to do more harm than good. A lot more.

Here are just a few examples. Ethanol subsidies increase the price of food. Non-violent drug offenders waste away in federal prison when they could be in the workforce. Public education has deteriorated greatly as the federal government has assumed more and more control. And then there's the cost of regulation . . .

As Clyde Wayne Crews of the Competitive Enterprise Institute wrote last year, federal regulations cost the economy $1.14 trillion in 2006. That is more than what individuals paid in income taxes that year. It was more than total corporate profits. And it cost the federal government just $41 billion to administer and police the regulatory state. Source: Competitive Enterprise Institute

That is to say, for every $1 the federal government spends writing and enforcing regulations, it destroys $25 that could have been generated in the economy. The cost of regulatory compliance hurts small businesses especially, destroys competition, and drives up prices.

But the worst part is, "we the people" generally have no say. In 2006, 321 bills were passed by Congress and signed into law, whereas unelected bureaucrats in regulatory agencies issued 3,718 final rules and added almost 75,000 pages to the Federal Register.

The Constitution requires that Congress, not executive branch agencies, make the laws. If the people's representatives in Congress can't or won't sweat the details of writing complicated regulations, then why should the people have to sweat the details of complying with them?. If Congress had to write all laws and regulations, only the most necessary would pass, and the number of unnecessary and burdensome regulations will drop dramatically. To restore the Constitutional Separation of Powers, increase the freedom of the people, and revive the economy, DownsizeDC.org has introduced the Write the Laws Act.

Hard money, inflation, and your wallet

Economics can be dry to some people, but there is a serious economic crisis that has been brewing for some time and is rapidly coming to a head, and it already affects us tremendously. Here are a couple of good youtube clips of Ron Paul speaking with the Fed Chairman this morning. He briefly covers some of the concerns that we should all be aware of.

Stagflation

From an AP article:

Worries grow for worse 'stagflation'
By JEANNINE AVERSA, AP Economics Writer
1 hour, 9 minutes ago
WASHINGTON - It's a toxic economic mix the nation hasn't seen in three decades: Prices are speeding upward at the fastest pace in a quarter century, even as the economy loses steam.
Economists call the disease "stagflation," and they're worried it might be coming back.

Already, paychecks aren't stretching as far, and jobs are harder to find, threatening to set off a vicious cycle that could make things even worse.

The economy nearly stalled in the final three months of last year and probably is barely growing or even shrinking now. That's the "stagnation" part of the ailment. Typically, that slowdown should slow inflation as well — the second part of the diagnosis — but prices are still marching higher.

The latest worrisome news came Tuesday: a government report showing wholesale prices climbed 7.4 percent in the past year. That was the biggest annual leap since 1981.

But nowhere in the article is there a discussion of one of the fundamental problems: the government's ability to print money out of thin air, rather than have it backed by gold. Yet another issue that Ron Paul stands alone in talking about.

Update (2/28/08): Pres. Bush and Fed. Chairman Bernanke assure us we are not headed for a recession or stagflation. Phew! Okay, everybody go back to watching American Idol. But seriously...I hope they are right, but I'm not comforted by the government's track record on being right.

Free Market?

From an excellent article by Jeffrey Tucker of the Mises institute, "How Free is the 'Free Market'?"

begin quote:
The argument goes like this:

Until now we've lived in a world of laissez-faire capitalism, with government and policy intellectuals convinced that the market should rule no matter what. Recent events, however, have underscored the limitations of this dog-eat-dog system, and reveal that simplistic ideology is no match for a complex world. Therefore, government, responding to public demand that something be done, has cautiously decided to reign in greed, force us all to grow up, and see the need for a mixed economy.

All three claims are wrong. We live in the 100th year of a heavily regulated economy; and even 50 years before that, the government was strongly involved in regulating trade.

The planning apparatus established for World War I set wages and prices, monopolized monetary policy in the Federal Reserve, presumed first ownership over all earnings through the income tax, presumed to know how vertically and horizontally integrated businesses ought to be, and prohibited the creation of intergenerational dynasties through the death tax.

That planning apparatus did not disappear but lay dormant temporarily, awaiting FDR, who turned that machinery to all-around planning during the 1930s, the upshot of which was to delay recovery from the 1929 crash until after the war.

Just how draconian the intervention is ebbs and flows from decade to decade, but the reality of the long-term trend is undeniable: more taxes, more regulation, more bureaucracies, more regimentation, more public ownership, and ever less autonomy for private decision-making. The federal budget is nearly $3 trillion per year, which is three times what it was in Reagan's second term. Just since Bush has been in office, federal intervention in every area of our lives has exploded, from the nationalization of airline security to the heavy regulation of the medical sector to the centralized control of education.

With "free markets" like this, who needs socialism?
-end quote
read the whole article here