China Strings Up the Safety Nets

There is much evidence of a property bubble in China. For example, developers are paying $1,000 to $1,500 per sf for undeveloped land in Bejing and Shanghai. Further, as a centrally managed economy there is likely to be a significant mis-allocation of resources and corruption.

That said, it is far easier to overcome bad economic decisions in a rapidly growing economy. Time and growth are your friends.

Further, China’s leaders appear to be reasonably astute in managing nascent bubbles before they turn into economic catastrophes. They have raised bank reserve requirements, down payment requirements and mortgage interest rates particularly on properties acquired for investment purposes. While these actions may not forestall a bubble collapse, they will provide a cushion to protect the system in the event one occurs. It will be far easier to work out of bad property transactions when 40% of the purchase price was upfront cash, the initial mortgage term was 10 – 15 years and banks are holding $1 of capital in reserve for every $6 to $7 in loans. (Compare this to our scenario of 100%+ debt financing, 30 year mortgages, 30 to 1 reserve ratios, off balance sheet accounting mechanisms and derivative bets that can serve to magnify rather than cushion the effects of a bubble collapse.)

Does China have bubble worries? Yes. Will the collapse in the real estate bubble devastate China’s economy? Who really knows, but at least the Chinese government recognizes the risks and is stringing up the safety nets to cushion a fall if one comes.

Should Home Owners Get a Bail Out?

Should Home Owners Get a Bail Out?  As long as one assumes that we are going through a difficult albeit reasonably typical economic cycle where the forces of greed and excess are purged, irrational behavior punished and prudent behavior rewarded then perhaps the answer is no. 

Without doubt the government programs that help homeowners are also serving to bail-out banks. In doing so these programs create a moral hazard that discourages self-discipline within the financial sector.
 
Perhaps I give them too much credit, but from my perspective the financial industry is the most culpable party in the housing market/foreclosure episode. They created the financial products that enticed homeowners and consumers to engage in reckless behavior. They succeeded in compromising the rating agencies by playing one against the other and by offering enticing fees on mortgage backed security offerings. They succeeded in changing our laws and regulations – effectively eliminating interest rate ceilings, reserve requirements, regulation and oversight. It is wrong from both a free market and in my mind a moral perspective to bail out these firms. To do so promotes all sorts of inappropriate behaviors that will do great harm in the long term.

However, if the economy is not undergoing a severe but never the less typical business cycle, but rather is and continues to be on the precipice of an economic collapse, then these government homeowner programs are perhaps a distasteful but necessary medicine. Chemotherapy for the cancer patient.

Whether or not this is the case depends on the economic consequences. What would be the consequences if the government stepped away and allowed market forces to dictate housing prices, foreclosure levels and banking costs/failures? Would the actions of efficient markets and creative destruction serve to quickly reprice assets, clean out excessive inventories of housing stock and purge the system of irresponsible banking practices so that the economy can once again grow? Or are the excesses of such a great magnitude that the market would excessively over correct on housing prices, force large numbers of responsible homeowners into foreclosure and bankrupt the responsible/well managed banks?

Here is my definition of the difference between a recession and a depression. A recession results in the destruction of poorly managed or inefficient assets (aka “creative destruction”) which is good but a depression results in permanent destruction of the very creative assets that are needed for long term economic prosperity, which is bad.

If the government were to “stand down” on housing and the result was still a recession, then this would be the correct action to take for long term economic growth. However if it resulted in a depression, the consequences might be permanent damage to the economy that would impede long term growth. I personally am not yet confident enough in the long term economic prospects to agree with pulling the plug on these programs.

Until it is more certain that we are not at risk of economic collapse, I would rather see meaningful financial reform to prevent future excesses, honest accounting to identify the failed banks, allowing them to be taken over and unwound, and a continuation of homeowner programs as a measure to avoid permanent long term economic destruction.

Why Would Anyone Invest in Retail Stocks?

Reasons why I cannot see investing in retail stocks.

1) Aging population - the Baby Boomers are now hitting age 65.  It is a fact that old folks buy less of everything except for health care and booze.

2) Population growth is slowing - A good part of past population growth was immigration.  However in the past year, 1 million illegal immigrants returned home and legal immigration is down as well.  The traditional industries such as construction are far from hitting bottom.  These shoppers are not coming back.

3) Household debt - It is at record highs.  Consumers must now pay off the purchases they made during the "good times" rather than buy more stuff today or in the foreseeable future.

4) Credit card interest rates - "Zombie" banks (pretty much all of them) have raised interest rates to as much as 30% as well as hiking many of their fees.  While American consumers have a hard time fighting off their desire for immediate gratification, slowly they are realizing that buying goods with credit cards is a bad deal.  Even for those who will never get it, the compounded interest costs at higher rates of interest will eat up available credit limits rather quickly.

5) Job losses and labor market participation - Not only is unemployment at 10% but another 5% or so have just given up.  There is little indication that these jobs will be coming back for a very long time.  In fact we have yet to reach the point where job losses will stop.  No work, no purchases.

6)  Future tax increases - We all know that we cannot continually run $1.5 trillion dollar deficits.  Taxes will have to be raised or government jobs & purchases cut.  Either way, there will be less spent on retail.  Many are discussing a VAT tax which basically a national sales taxe.  Further, most or all of the Bush Era tax cuts will be allowed to expire and when they do, so will discretionary income levels.

7)  Higher import costs for Chinese goods.  Believe it or not, China is experiencing a labor shortage at its coastal factories.  Wages are expected to rise at least 10% after the Spring Holiday (which just ended).  Further, in spite of their rhetoric against it, China is actively considering increasing the value of their currency, perhaps with a 5% jump and then many smaller increases there after.  Thus the cost of many of the goods sold by retailers will be higher and profit margins lower (unless they raise prices, but this will reduce total sales).

8)  Discretionary income is falling - Due to globalization and the "Great Recession", employees are not able to demand higher wages and thus "real wages" are not keeping up with inflation.  Most consumers have a number of fixed costs that go up with inflation or cannot be adjusted.  Thus lower wages means lower discretionary income means fewer purchases.

9) Oil and gas prices may continue to rise - Gasoline is a major cost for many consumers.  China, the rest of Asia, India, Brazil and even Russia are rebounding out of recession and the pick up in their economies and increased auto sales are resulting in strong demand and higher prices for oil.  Every additional dollar spent to fill up the tank means one less dollar available to buy stuff.  Higher gasoline prices are likely to become a permanent fixture even if demand in the USA falls off.

So my question to you is, "How can retailers grow rapidly, let alone grow at all, when faced with these headwinds over the next few years and perhaps beyond?

So what are your counter arguments?

What am I missing?

The Perils of "Don't Ask, Don't Tell" Banking

There is a moral hazard with “don’t ask, don’t tell” mark-to-fiction accounting principles.

When banks are allowed to hide their losses, presumably because the truth is too painful for the economy to accept, then banks overstate profits. Based on overstated profits, banks provide excessive bonuses and compensation packages. Thus capital that should be reserved to cover anticipated future losses is instead distributed annually as compensation.

But these losses eventually must be disclosed and when they are the question arises, will the banks have sufficient capital to cover actual losses? And if they do not, what happens next? Can the financial industry absorb them or will the U.S. Treasury be required to cover them? If it is the latter what will be the implications on sovereign credit worthiness, interest rates, future taxation requirements?

Perhaps the accounting rules had to be altered last year to prevent a complete market meltdown and because assets could not be fairly valued due to market disruption. However, now that the crisis is over, isn’t it time to restore mark to market accounting and allow market forces to reshape the industry?

Are we not making matters worse by hiding the true financial position of these institutions thus allowing needed capital to shift into compensation?

If we must continue to “protect the industry from full disclosure”, should we not at a minimum impose substantial fees upon the industry to prepare for the ultimate judgment day? Will the $90 billion assessment proposed by the Obama Administration be sufficient?

Why Liberalism Does Not Succeed (and how it can)

Below are excerpts from a guest posting by Paul Brodsky & Lee Quaintance on Barry Ritholtz's The Big Picture blog site. To read the full article go to the website below.


http://www.ritholtz.com/blog/2010/02/we-are-all-austrians-now/

"The Austrian School views economies through the prism of natural economic incentives. It relies on the tendency of people to work for capital and then save it for the goods and services they want to consume. Money itself becomes a store of value.

Government policies and intervention would be acceptable, when need be, but only upon approval of the people. The government’s role would be relegated to protector of laws and property rights. It would also be an honest broker when natural imbalances from capitalism occur, as they always do. However, government would not be preeminent and, as it is today, omnipotent.

Would a society that accommodates a freer economic model be the death knell for today’s working class? No, in fact due to the unfathomable and growing debt assumed by developed societies over the last thirty years, the prospects for today’s working class look far bleaker than they would if the working class could earn and save at a global wage that reflected a global equilibrium.

Liberals should be screaming for such a system because it swings power back to the worker and away from the more successful among us that have access to credit. Conservatives should endorse it too because it encourages a more objective society."
The progressive movement will be more successful once it comes to terms with these concepts. By accepting that there are “natural economic incentives” in the market economy, liberals can then understand how to use these incentives to pursue social values.
One example is the pursuit of livable wages to eliminate poverty. Currently we are using two approaches to increase wages, the Earned Income Tax Credit and increases in the minimum wage. I would assert that the Earned Income Tax Credit (EITC) uses the natural economic incentives of the marketplace to encourage livable wages whereas increasing the minimum wage results in natural economic disincentives towards hiring new marginal workers.
In the marketplace, some workers do not have the education, training or skills that can justify a livable wage. This is simply an indisputable fact. The EITC recognizes this is a reality. It allows the employer to pay wages commensurate with the “value added” by this marginal worker and dictates that society will pay the worker a differential (tax credits) in order to provide the worker and his/her family with a livable wage.
On the other hand, increases in the minimum wage will “price out” a certain number of marginal workers who cannot contribute sufficient value to justify their cost to an employer and thus never gain the opportunity to develop the skills and abilities needed to become self-sufficient.
This is not to say that the minimum wage should be abolished or never increased. Rather it is to point out that there are ways to work in concert with “natural economic incentives” in order promote a strong market-based economic system while also achieving progressive goals. Clearly, the more prosperous the business community, the stronger the economy, the more opportunity there will be for job creation and the more resources (tax revenues) to pay for social initiatives.
There still exists a strong opinion among some within the progressive community that business must be required to pay higher wages irrespective of the economic cost to that business because it is for the common good. Unfortunately, this approach is detrimental to long-term economic prosperity of the businesses who are affected and thus to the general economy.
Once the majority of progressives accept that there are natural economic incentives and disincentives and once they begin to develop policies that are in harmony with natural economic incentives rather than punitive in nature, liberalism will be more successful in achieving its objectives and it will gain greater acceptance among the general population.

Are People Capable of Self Destructive Greed?

Ben Stein opined on Wall Street’s windfall on the CBS Sunday Morning show today. I cannot find his piece on the internet yet. It was excellent.

Stein first discusses the severe hardships and economic fears of the typical American family today, then he points out that the banks were rescued from certain oblivion only through hundreds of billions, if not trillions of dollars in taxpayer bailouts and finally discusses how banks are now rewarding themselves with record bonuses.

Stein then concludes by asking (to paraphrase); "Is this the America that we are asking our sons and daughters to fight for and defend?" "Is this the America that we were brought up to believe in?"

After his piece, I had an epiphany of sorts. Perhaps the greatest error of all in the past for Ben Stein ("everything is OK") and Alan Greenspan ("the markets will self-correct") was an error in judgment regarding the basic integrity and sensibility of people. Perhaps it was an assumption that: "Surely in a democracy no one would ever be allowed to intentionally destroy an economy in the pursuit of self-interests."

I suspect they both now understand that some people will take greed and selfishness to this level of destruction. Further that the political and financial processes can be and were manipulated to where the traditional self-correcting mechanisms of democratic institutions were corrupted and rendered inoperable.

It is mind boggling that we allow these behaviors to continue when they are clearly leading us down a path of self-destruction.

The New Submerging Markets

Banks should be required to mark to market and those that are insolvent should be nationalized and put out of their misery.

It is not too late. Perhaps it would have been unwise one year ago, but today the financial markets have stabilized and will be better able to handle the truth concerning the insolvency of certain banks.

As long as we play this game of balance sheet fiction, we will continue to misallocate capital and generate (literally) false profits by some banks while other banks operate in zombie mode. All the while allowing these institutions to continue the practice of excessive salaries and unconscionable bonuses.

Under the present scenario, the working class is decimated, the middle class is impoverished and the nation's economy as a whole continues to slip to second rate status.

Yet we continue to allow investment banking liberals and corporate management conservatives to game the system and self-justify, rationalize their indulgent and destructive practices.

This will not going to end well.

The United States is rapidly transitioning from being the leader of the world to becoming the leader of the banana republics, where the vast majority are impoverished and controlled by a few ultra-wealthy elite.

We are the antithesis of the "Emerging Markets". The United States now is the leader of a new economic movement. The movement should be called the "Submerging Markets". For we are certainly drowning in our own corruption and greed.

What Were We Thinking?

I agree with those who say that what we are experiencing is climate change and not global warming. The climate always changes. At one time much of North America was covered with glaciers. At another time crops were grown on Greenland.

We do not understand nearly enough about how the various systems interact to accurately model climate change with today’s base of knowledge.

What we do understand is the climate science industry believed in “the end justifies the means” and they have most likely hopelessly corrupted much of the data and scientific work to date.

It has happened before where the global community becomes enraptured with a cause only to wake up and ask, “What were we thinking?” Global fascism in the 30s, global communism in the 60s, global climate-ism today.

Is It Really All Due To CO2?

Humans generally think and react based on the more primitive but dominant emotional sectors of the brain. An example is how fear and greed drive stock trading.

When applied to CO2-based global warming, many people emotionally want CO2 to be the cause of global warming because this conforms with their belief that the human species should conserve resources, stop the spread of urban sprawl, discourage private autos and encourage public transit.

Thus, it is quite possible that climate science has been “directed” towards CO2 as the main cause because of the strong, emotive desire for it to be so by those who awarded grants and performed peer reviews.

Some of the “pre-frontal cortex” facts are:

1) CO2 is a rather minor, rare component of the atmosphere comprising only 3.8 out of every 10,000 molecules.

2) The “greenhouse gas” physical properties of CO2 by themselves cannot cause runaway, devastating global warming. Rather the climate models must incorporate “positive feedbacks”. They model that the increase in CO2 drives increased humidity and cloud cover which ultimately drives the runaway AGW. These positive feedbacks are controversial in the scientific community, are not fully understood and may be offset by negative feedbacks that also are not well understood.

Other variables might play a greater role in climate change than peer reviewed and accepted studies to date have allowed to be determined.

An example is Urban Heat Island effects – Dense urban areas are much hotter than rural areas. This can have two effects on climate science. First, increased global urbanization will play a direct role in global warming from heat radiated off of buildings, asphalt, lack of vegetation, etc. Secondly, many of the land based temperature gages that originally were in rural locations just outside of the urban areas now are located within them due to expanding urbanization over the years. Thus they give false readings of increased temperatures unless they are adjusted and the adjustments are subject to scientific judgment and manipulation.

It is a basic desire of most environmentalists and urban planners to promote dense urban development. Thus there would be cognitive dissonance if a scientific studies were to conclude that urban areas are a significant contributor to global warming. Thus scientists whose work reached this conclusion would most likely never see a second round of grant funding.

Other variables that may have been under-researched/emphasized include solar radiation cycles, solar wind, global land use patterns e.g. forests converted to agriculture, ocean cycles, etc.

Also, many skeptics believe that the consequences of global warming have been portrayed only in the negative. What is not revealed they feel are the increases in food production, the health benefits to the elderly and infirmed from less cold climate and the ability for man and animals to adapt and migrate as temperatures slowly change.

So, all we ask is that you look at climate change with an objective eye and reach your own conclusions after reviewing both sides of the issue rather than accepting the conventional wisdom of a science that potentially has been corrupted by well meaning but nevertheless scientifically dishonest individuals.

I would encourage you to at least read the article by Professor Lindzen from MIT. He is a distinguished professor whose comments you will be more likely to accept than those of bloggers.

http://online.wsj.com/article/SB10001424052748703939404574567423917025400.html?mod=WSJ_hps_sections_opinion

Are We Setting Up a Black Swan Event?

Interest rates are at zero and cannot go any lower. The Federal Reserve has stopped buying US Treasuries and is phasing out purchases of mortgage backed securities. Bernanke has essentially announced that he has done his part and will now wait and see what the results are.

The stimulus money has been allocated out, is being spent and now will taper off for the next couple of years. Obama is calling for governmental agencies to cut their budgets 5 percent and is considering using repaid TARP funds to reduce the deficit.

In my opinion, we are setting ourselves up for a Black Swan Event. My reasoning is as follows.

All of the actions taken to date (ZIRP, QE, fiscal) were insufficient to establish sustained economic growth against the ongoing headwinds of credit contraction.

The measures to date will bring on a temporary spurt of economic activity that will disguise the fact that the broad economy has continued to deteriorate. Thus, the downward path will not become apparent to policy makers until after the temporary growth spurt has played out.

By the time the continued downward trend of the economy is confirmed and acted upon it will be "too late". The economy by then will have "committed itself" to a strong secondary recession.

It will be much harder to engage in additional stimulus measures at that time because there will be a greater global loss of confidence in the US economy and in the ability of our policy makers to take the appropriate steps to extract the economy from the decline.

Further, the declining economy means federal deficit projections will be greater than what is projected today even before a new round of stimulus is contemplated. Even QE may be difficult to undertake if the dollar has weakened significantly in the interim.

In other words, we might not have stimulated the economy enough in the first go around to create sustained growth. If so,embarking on a "wait and see" pause, while perhaps a safe bet politically for Bernanke and the Federal Reserve, might be the worst course of action to take for the long term health of the economy.

I believe we saw this scenario play out last year. You recall the $800 stimulus checks in May - July provided additional discretionary income which encouraged consumption & offset higher gas prices during the summer. However, while this economic activity was being generated, beneath the surface so to speak the housing and financial markets were disintegrating.

Today may not be much different. While inventory restocking and temporary housing and auto measures have generated a bit of economic activity, elsewhere the economy continues on a downward trajectory. Housing starts, CRE, mfg, existing & new home sales, layoffs, small business closures, state & local govt budget deficits, bankruptcies, foreclosures, credit contraction etc. are all eating away at the foundations of the economy like termites.

It would be much better to risk inflation that can be mopped up later after economic growth has been sustained. To think we will go "Weimar" with our structural unemployment and surplus capacity seems unrealistic.

What Hit Us?

I am having serious doubts about our style of economy and for that matter our government. It results in extreme concentrations of wealth, income and power that ultimately leads to its own collapse. It happened in 1929 and it is happening today. But this time we will not have a world war to devastate everyone else so our economy can recover on top.

No job growth at all over the last 20 years. Declining real wages. The middle class was living off of credit that now is gone. Our government is broke. Take away all of the props and our baseline economy is probably only 80% of its former self. No one has any money with which to buy anything. I find it quite perverse that the limousine liberal elite class is practicing trickle down economics on a personal level. Maybe employment will perk up in the Hamptons.

Our future does not look bright. The concentrators of wealth now control both political parties. Greed is pervasive. Stimulus dollars are handed out in a crony fashion that would have made the first Mayor Daley proud. Al Gore is on his way to billionaire status because he invests in a company and, eureka, it gets federal grant funding. We throw away our seed corn. We should be using every available resource to become a more productive and competitive economy, but instead we build up deficit-funded government programs and create deficit-funded bureaucratic jobs.

We are on course to becoming a second rate nation. Our educational system is tragic. Our labor force is coddled and unaccustomed to hard work. You cannot find an employ under the age of 30 who is self motivated, capable of independent thought or who would dedicate themselves first to work, second to play. Our financial markets are bona fide zombies who cannot loan and cannot be trusted. Our natural resource base is stifled by pollyannas who think we can advance our economy with a windmill in the backyard and a solar cell on the rooftop. Our business regulatory system is such that it is hopeless to even consider building a new factory without years of environmental studies, community impact statements, litigation threats. Our nation and our economy simply are becoming increasingly corrupt, clogged and dysfunctional.

I have read much about China, their culture, values, motivations. My conclusion is that they are going to win. They will be the next superpower. When they decide the time is right, they will revalue their currency, display their true economic might and we will not know what hit us.

The Least They Can Do

The 6 largest (Too Big to Fail) Investment Banks have set aside $114 billion in the first 9 months and are on track to award a total of more than $140 billion this year in employee bonuses.

All of these banks have and are continuing to receive subsidies from the government and the taxpayer. Their actions already have cost the average American dearly. Far worse will be the future costs. Costs that will seep through a variety of channels. Higher bank fees and interest charges, higher income taxes, a devalued dollar, higher food and energy costs and greater inflation.

These circumstances beg the following questions:

How much would banks have set aside for bonuses if they were required to use mark to market accounting rule and as a result revealed their true losses?

In other words, how much of what is going to be paid out in bonuses would have been and should be retained as capital to protect against known – but undisclosed – losses?

Who will be put at risk if there is a double dip recession and any of the TBTF banks needs but is unable to raise additional capital? (rhetorical question)

The TBTF banks need to restrict this year's employee bonuses to stock options not redeemable for 3 or 4 years. The $140 billion in cash saved should be used either to cover undisclosed losses or to expand credit and grow the economy. All of the TBTF banks need to agree (or be required) to use similar stock option approaches to lessen employee defections. They need to do this for the good of the Country and for the goodwill of their industry.

Cash bonuses at this point in the fragile recovery of our economy are not wise. They are too risky for the banks and too risky for the economy. Preserving this capital reduces any future need to raise capital. Capital that would be far more costly if it had to be raised out of necessity at a time of weakness.

Stock options would demonstrate that the bankers are in the game for the long haul along with the rest of us. This would show America that the investment banks are part of the team, that they are working to make the economy stronger, that they are not just the greedy, selfish (fill in the blank'ers) that they have been portrayed as by the media.

Banks should volunteer to do this, but if they cannot, will not or need political cover, then the Federal Treasury should mandate it. If Hank Paulson could force a shotgun wedding between Bank of American and Merrill, surely Tim Geithner can get these banks to agree to similar stock option bonus terms.

Perhaps a better analogy: If Hank Paulson could get these same banks to agree to accept TARP money so as to not single out those in greatest need, then Tim Geithner can get them to agree to the same rules on stock option based bonuses so as not to single out those at greatest risk of future taxpayer bailouts. Geithner can argue that retaining this cash is necessary to accelerate the repayment of TARP funds and reduce the federal deficit and that requiring everyone to take the same approach is necessary for employee stability.

This is the minimum the banks should agree to do given the billions of dollars of taxpayer subsidies they all have received in one form or another. Crap at $140 billion in stock option awards, they can even create a large new market trading in future employee stock option awards. (sarcasm)

Lead or Get Out of the Way

Goldman Sachs and the rest of the gang of criminals are not going to know what hit them. Their arrogance, greed, gross manipulation of politicians and government officials is finally reaching critical mass.

It is becoming a "cause celebre" with the Main Street Media. Blankfein's "God's Work" comment is right up there with John Lennon's "The Beatles are more popular than Jesus." remark. It really doesn't matter if it was taken out of context or not. Its arrogance rings too close to the truth. The damage is done.

Outlandish bonuses, unconscionable financial policies and unadulterated arrogance are turning individuals from all walks of life against the investment banking elitism.

Folks who never wanted to know or understand the intricacies of investment banking regulation and the risks of Too Big To Fail banks and hedge funds are beginning to understand how America has been fleeced, who is responsible and why we will risk even worse crashes in the future if something drastic is not done to change the present fraudulent and corrupt system.

A collective realization is developing that nobody is safe as long as the banking system continues to operate in its present form. It is rapidly creeping into the psyches of the ordinary man that something is not right when a bank borrows money for free, charges its customers 30% and our leaders in Washington look the other way. How can they get away with it unless everyone is on the take?

Ordinary folks clearly understand that Goldman Sachs and the other Big Bankers do not help the economy to grow. It doesn't take a genius to understand that one when both bank bonuses and unemployment rates are at all time highs.

While our President and his advisors may not have the courage to go up against the bankers, some of his strongest supporters apparently do. Robert Reich, Arianna Huffington, Maurine Dowd, more everyday are reaching a point of disgust. Perhaps they see the decay within our governmental institutions, the corruption of our officials and the decline in values in our society that banker's greed, money and lobbyists have wrought.

Obama may prove to be too timid to go up against the rich and power folks who hold his purse strings. He may elect to get out of the way and let others lead. Vote "Present". A tragedy because he could have been a contender. He could have been (and still might become) the leader who takes this nation to a higher moral ground. Instead he is proving to be perhaps just another in a long line of Chicago politicians who works the system.

Watch out because the steamroller is gathering momentum. Next you will observe politicians clamoring to get on board, stating that they have supported the break up the big banks all along. They will be calling Geithner up to the Hill and make a public display of castigating him for his obvious failings and lack of courage.

Its going to happen. I can feel the momentum growing.

Stockholm Syndrome

The following position by Geithner is an example of “Stockholm Syndrome”. Who do you suppose per chance has been presenting these arguments to him?

“Treasury Secretary Timothy Geithner has been adamant that creating a standing fund would enhance moral hazard and be viewed by the financial industry as an insurance fund that would insulate it from risky bets.”

To the contrary, a standing fund would provide funding that would allow the government to shut down a bad bank and shift its assets and liabilities to another entity, just as the FDIC does today. A banker who knows the government has the ability to take away their job will be more cautious than a banker who knows that his firm is TBTF.

Geithner could draw this same conclusion, but it would not be in his best long-term interests or future career prospects to oppose the investment banking community. Therefore whether consciously or unconsciously he will follow, he perceives that he must follow, their script.

It is simply not possible for people with conflicts of interest (such as a future lucrative employment opportunity) to effectively regulate an industry.

You know that it must be in the back of Geithner’s mind that he will land a nice job at a prominent financial institution so long as he does not anger them while in public service.

You also know that Summers remembers that $5 million part-time hedge fund gig that he got just before moving to Washington and he must think that future opportunities are certainly in store.

Wall Street bankers are masters at instilling their brand of callous greed in others.

I doubt many of us in Geithner’s position would have the courage to risk everything in order to do what is absolutely right. His attempt to find a way to please the industry while appeasing the public is pretty much human nature given the circumstances he is placed in.

There are very few Sheila Bairs in this world who will stand up for what is right as opposed to looking out first for their personal prospects.

Into The Abyss

Third quarter productivity rose 9.5%. Were that to continue for an entire year it would mean that the nation's businesses could produce the same amount of good and services with 10% fewer workers. Normally this is a very good development. However it is also signaling a protected period of very high and painful unemployment. Maybe as much as 15% by this time next year?

This is very possible. It is also why we conservatives need to tread lightly with the fiscal responsibility rhetoric. Our nation is facing its second Great Depression. It is undergoing a massive adjustment process. We cannot - in this moment of crisis - just let free market forces prevail. To do so will destroy some very important parts of our economic machinery and will ruin the lives of many people who have been playing by the rules.

Instead, please think about how we can stimulate our economy and create jobs in the right way. Tax incentives for capital investment. Domestic energy development. Insist on a level playing field for global trade. Smart investments in public infrastructure to eliminate bottlenecks to commerce.

There will be a time for fiscal discipline. It will be once our economy is on a self-sustaining path and is again growing. Then we will need to cut spending, raise taxes and live within our means. But first let us make certain we have stopped falling into the abyss.

No, This Is Not Envy!

Goldman Sachs and the Investment Banking Community will make record amounts of money this year. Prior to 2008, I would have agreed with the synopsis - it is all about envy.

Heck everyone's boat was rising and Goldman Sachs simply was the brightest of the bunch. The concentration of wealth and incomes was somewhat concerning but when I looked around, it seemed like my neighbors were all doing OK, everyone had a job, lots of disposable income, so I guessed the Ruebens, Greenspans et al knew what they were doing and if the meritorious prospered, so be it.

Fast forward to what we know now. That entire era was a facade. The jobs, the new homes, the disposable income were all the result of excessively risky and irresponsible financial engineering. Much of it undoubtedly developed and or promoted by those smart guys - Goldman Sachs. My neighbors were living on credit being given away by a financial system run a muck.

What have we learned? The infiltration of government, greasing the skids with hundreds of millions in campaign contributions and sprinkling in a few really really nice low rate mortgages to high placed officials allowed GS and the rest and the gang to essentially engage in unlimited risk taking as capital requirements were for all intents and purposes removed.

Today when I look around, my neighbors aren't doing so well anymore. In fact many are slowing dying in financial terms. Living off of what they thought they had saved for retirement. Property theft is up. Local parks are being shut down. And we all have this foreboding that times will only get worse when the 401Ks are drawn down completely and there are no more family members to turn to.

The weaknesses in our economic system are now being exposed and stripped bare. The high incomes at Goldman Sachs and the IB community were not because of some great improvement in the efficiency and effectiveness of capital allocation. rather it was a reckless, wanton act of greed and gambling style operations that destroyed the livelihoods of tens of millions of formerly middle class individuals.

This is so totally different than a Sergey Brin or a Steven Jobs who in the course of amassing enormous sums of personal wealth have also provided permanent wealth and economic gains to society at large. We now understand that the Goldman Sachs simply takes and destroys. They do not add value, they destroy value. They do not make the world a better place in the "invisible hand" free market style. No, their invisible hands are basically the high powered lobbyists who are groping any and everyone with power and influence in Washington D.C. They in essence are stealing the middle class poor in order to enrich.

So, at least in my case, the "envy" is now anger. But more importantly it is a sincere concern, hopefully without sounding too melodramatic, for the very existence of our free market economy, for our values as a society and for our way of life.

I hope I am wrong, but I see that wealth and income has become so concentrated that the rest of society may not have the financial where with all to keep the economy self sustaining at any level near to where it was before. I see a political system that has been so corrupted by greed and self interests that it is no longer capable of governing for the public good. I see a society that is becoming obsessed with "gaming the system" rather than with the rule of law or acting with any semblance of integrity.

I see Goldman Sachs as both the symbolic and in many ways the actual source of the corruption and degradation of our economy, ethics, values, institutions and quality of life.

So my admiration is now anger. My respect has turned into disdain. I can only hope that my change in attitude is shared by enough other people so that real changes will be made to preserve our economy and society before it has been completely ruined. I do not think we have very much time.

Fear & Consequences

We are governed by self-serving individuals who do not see any negative recourse .

If one’s mission is to get re-elected, then one will accept campaign contributions and in return lean towards favorable legislation.

If one expects to land a high paying job in the banking sector after “paying your dues” in public service, then one will tend to be more receptive to banking industry concerns when drafting regulations.

Humans have a strong ability to rationalize in order to justify their actions. Thus these individuals truly do not think that their actions are wrong.

There is always some degree of rationale that can be made for any position on legislation and regulations. Government leaders will simply most often side with the rational that serves the bank’s and thus their own best interests. The banksters are clever enough to understand how the human psyche works and how to play it to achieve their objectives.

We will not get good governance until these circumstances are changed or until fear of consequences over takes self-serving interests.

How can circumstances change? Real campaign reform. Ban governmental employees from accepting positions in private sector firms that they governed over.

How can fear of consequences change behavior? Threaten to vote out all incumbents. Vote for candidates who pledge that they will fire corrupt and self-serving government officials. Let your representative in Congress understand how strongly you feel about this.

During the campaign Obama acted like a statesman. In office though, every indication is that he shares these same self-interest obsessions which may be one reason why the young have become less enthused with him. We really need a leader today who will take the nation’s interests to heart first. I hope Obama will come around, but I do not expect it.

It might be that the government-banking co-dependency is much like an individual who suffers from an addiction. That individual has to hit rock bottom in his life before he is willing to change his behavior. In the present instance, it is likely that our economy will have to hit rock bottom before we are willing to demand the changes in Washington and the banking sector that are needed. If so, it will not be pretty.

Never a Wrong Time

It appears as though the Obama Administration is getting serious about financial reform. Well it is said that timing is everything. Perhaps Obama and his advisors are beginning to understand this.

Or to put it another way maybe they are realizing that if they do not do something soon, losing the mid-term elections just might be the least of their worries.

Many of us are losing faith, not just in politics, but in our present form of government. We wonder if we even have a true democracy anymore.

Is our form of government just a sham to allow the wealthy and powerful to maintain control and prosper at the expense of the common people?

Is nothing being done because greedy self-interests dominate all the way to the top?

Has our culture succumbed to debased values of self importance, narcissism and personal gratification?

Have we lost all ideals of honesty, fairness, equality and equal opportunity?

Are we reverting to a lower form of society where it is every man for himself or is our society and civilization going to advance?

Is it the beginning of the end or is it a new beginning?

This is honestly Obama’s crossroads. This is Obama’s defining moment.

He can attempt to keep his big money campaign contributors on Wall Street happy while appeasing the masses with his “charm”, or he can do the right thing, take the bull by the horns and restore confidence and trust in America’s institutions.

Seriously, if the Obama Administration is about Lincoln, not Mao, what better time is there to invoke the philosophy of the Gettysburg Address: “…and that government of the people, by the people, for the people, shall not perish from the earth.”

Are we a nation controlled by aristocrats or are we a nation of, by and for the people?

Where are Obama’s roots? Who does he really identify with?

Does he represent the people – all of people of this world – who want a better life as is his personal heritage?

Or does he represent his “new found friends” – the limousine liberal ideologues? The elitist class members who have never spent a minute in the real world. Who have no clue what it is like living from paycheck to paycheck. People who have insulated and isolated themselves from the working class but who profess to possess full and complete knowledge on how, where and even why they should live.

People who are self appointed to impose grand ideals on others but only so long as they personally are unaffected and can continue to live selfish, lavish, gilded and hypocritical lifestyles.

Obama, there is never a wrong time to do the right thing. Now is the time.

We Are Simply Too Full of Ourselves

China is taking over the economic leadership of the world and we are simply too full of ourselves to see what is happening. Actually we are just acting as typical humans who look at past events and extrapolate in a straight line into the future. However, this approach misses many key variables of the China Equation that will result in exponential change.

So what are the variables that need to be thrown into the China equation?

China's real GDP is 2 to 3 times larger than what is officially reported when examined on a purchasing power parity basis.

China's savings rate (49%) and foreign account balances ($2 trillion +) are extremely high.

In 2007 when the global economy over heated, China wisely raised bank capital requirements as well as interest rates, thereby avoiding the excessive financial leverage that helped to ruin our economy and thus allowing their banks to expand leverage today. (This is happening while our banks must de-lever and our government must act as the borrower of last resort.) China's banking institutions are growing stronger and more sophisticated while our banks are in a state of severe shock and disarray.

While China's bank loans have been criticized as excessive and creating new bubbles, do you really think they are allocating capital less efficiently than our Federal Reserve and deficit spending programs?

Their people have tasted the good life and are hungry to move up the economic ladder. Their labor force works harder and their students study harder.

China's economic policies are very rational (or "scientific" as their leadership prefers to say). They are not burdened by the bureaucratic regulatory/judicial delay mechanisms that discourage new investments in the Western World. They are not hindered by populist rhetoric, leftist anti-growth policies or right wing "balance the budget at all costs" dogma. They have already shown that they can move quickly to stimulate their economy and can adjust quickly to avoid inappropriate bubbles and excesses from forming.

The population for the most part is compliant - Eastern cultures view their leaders as benevolent "father figures" and defer to the leader's "sound and wise judgment" to care for their best interests. (How else can you explain a nation like North Korea existing)

The Chinese culture has demonstrated excellent business acumen in locations through out the world such as Taiwan, Singapore, Hong Kong, Canada and the United States.

There is huge pent up demand for goods and services. Already China consumes more cars, computers, cell phones, steel, cement, etc. etc. This consumption will only grow. Their domestic market is huge. Their population is over 4x and labor force is over 5x that of the USA.

Already China businesses are taking a leadership role in the manufacture (and design) of many leading edge technologies; Li batteries, LED chips, airplane assemblies just to mention a few.

The value added component of the Chinese economy is growing exponentially. Already China is undergoing a shift where low cost, low skill jobs are moving "offshore" while high skilled, high technology jobs expand.

While the United States is in its period of decline, China is ascending. China will dominate the 21st century and beyond. China has planned for this day for over 20 years although I suspect it has come to pass much earlier than they had expected.

We do not understand and will continue not to know what has hit us until after the fact as these changes(both China's ascent and the United States descent) are occurring too rapidly for us to comprehend. Further, much of this change is hidden under a blanket of improperly valued currencies - the Dollar is valued too high and the Yuan is valued much too low.

At some future point in time, China will rationally assess that it is in their best interests to promote a strong national currency and to transform the Yuan into a global currency.

Why? Because once their technical knowledge and fundamental business/economic/financial infrastructures are well established, and as they continue to consume an ever increasing share of the world's commodities and natural resources to feed and satisfy the consumer demands of their huge population, they will find that a strong currency is in their best interests.

In the meantime China will continue to aggressively establish a domestic demand component to their economy and promote the development of new export markets through out the world that will take the place of the permanently faltered USA consumer. This is already apparent in their actions to purchase and stockpile key commodities and to arrange long term loan agreements in exchange for future oil and natural gas production with emerging market economies.

We are simply too full of ourselves when we think that our problems are going to bring down China.

Yes these problems may put a damper on China's growth in the short-term but if anything they will accelerate China's ascension because, as their co-dependency relationship with the USA falters, they will need to learn to be self sufficient and march forward on their own two feet.

China has clearly shown that have the means and the will to do just that!

Investment Bankers and the "Flip Wilson Defense"

What really irks me is when bankers use the “Flip Wilson Defense”: “Greenspan made me do it. If interest rates were not so low I never would have done what I did.”

If you think back at how weak our economy was after the Dotcom Crash, 9/11, Anthrax Scare, SARS, etc., the economy was growing very slowly, companies had stopped investing and we were truly at risk of a deflation spiral. Now if you also take away the irrational credit expansion of the 30x leverage, the housing bubble and the related consumer binge and substitute in its place rational lending practices to individuals and more capital allocated for property, plant and equipment investments by the private and public sectors, then we would have had a very different outcome - higher productivity, a more competitive economy in the global marketplace, fewer bad investments in housing and commercial real estate, stronger household balance sheets and no financial collapse.

In other words the lower interest rates would have been used for efficient allocation of capital and would have been a “force for good” (as our good friends at Goldman like to say about themselves).

I am no Greenspan apologist. He royally screwed up with his hands off, self-regulation ideology and therefore history will correctly show that he shares in the responsibility for permitting the banks to promulgate a financial crisis.

But too much of the blame is being placed on his interest rate policies. It has become too easy for the banking community to deflect responsibility and to rationalize that it was Greenspan’s interest rate policy and not their own actions of taking advantage of a deregulated marketplace in order to engage in risky and indiscriminate behavior.

Bankers are wrong to say: “Greenspan made me do it.” They would be far more correct if they said: “I convinced Greenspan and the government to let me do it and boy did I screw it up.”