And Now It Begins!

In our book, The Great Recession Conspiracy, we warned that politics would interfere with sound business judgment by managers in companies that the U.S. Government now owns.

Well, it didn't take long and every taxpayer just lost money because of it. Here is the story;

The U.S. Government owns a 34% stake in Citigroup and can use that stake to demand management actions of which the Treasury Department approves. Now Citi owned a subsidiary named Philbro that was dedicated to trading comodities. Philbro was hugely profitable for Citi and it was run by a man named Andrew Hall. Hall had a contract with Citi that rewarded him handsomely for achieving big results. And last year, Andrew Hall performed brilliantly! In fact, he did so well that Citi owed him a $100 million bonus.

And therein lies the rub. The government could not let Citi pay Andrew Hall a bonus of $100 million because it would look bad. But on the other hand, if they didn't pay him, he would go to court and win his case because he had really tight contract.

So how did the Treasury Department solve this problem? They forced Citi to sell Philbro so somebody else would have to pay the bonus. Well, Occidental Petroleum stepped up as the only buyer and took over Philbro with a payment of $450 million. Well and good, except for one thing. $450 million was just about the level of profits that Philbro generated for Citi every year.

Basically, Citi got ONE years profits for Philbro and absolutely nothing else. Any private sector manager who made such a bad deal would be fired on the spot. However, the Secretary of the Treasury does not work in the private sector so he can get away with it.

Just wait until the government weighs in with similar decision making at GM, Chrysler, et al.

Pay Caps? A Truly Stupid Idea

It is truly amazing how the White House and Congress can, given a choice, always pick the wrong solution. The problem is not excessive pay (yes, I know it can be grotesque), but it is the conditions that allow it to occur that are at fault. Here are the conditions;

1) Wall Street Bankers can gamble with borrowed money because if they lose their bets, the U.S. government will cover their losses.
2) Wall Street Bankers are encouraged to gamble by taking short term risks because the pay out is short term.

End of story. Instead of capping pay, the government should do this;
1) Limit the amount of money used for short term gambling by increasing reserve requirements.
2) Pay bonuses in company stock awarded in 20% increments over the next five years so that very quickly individual managers have a huge stake in the financial success of the bank over time.

The last thing we need is the U.S. government meddling with the pay systems of private companies. That is a truly stupid idea.

And by the way, did you notice which Wall Street Bank was excused from the pay caps?

If you said Goldman Sachs you would be right again.

Goldman Sachs Redux

In our book, The Great Recession Conspiracy, we speculate that Goldman Sachs actually runs the U.S. Government. In today's New York Times, Frank Rich comes to exactly that conclusion (using a lot of our arguments).

Read it for yourself at nytimes.com.

The Deficit Numbers Are In

The U.S. is facing a record deficit and here is the reason why;

$113 Billion spent on the "Stimulus" package (assume for a second that it was all spent on programs that created jobs or extended unemployment benefits)
$154 Billion was spent rescuing Wall Street Banks.
$96 Billion was spent buying out Freddie and Fannie

So $250 Billion went to banks and less than half that amount went to ordinary citizens.

Now do you understand why there are huge bonuses for Wall Street Bankers and record (almost) unemployment for everyone else?

And it doesn't stop there. Since the FED has lowered interest rates to nearly zero, banks can borrow almost unlimited funds to buy highly risky financial products and so make huge profits.

Does this sound familiar? Does anyone still believe that Wall Street banks do not run Congress?

The Reports Are In!

The White House has released the figures for the jobs created or SAVED in the last nine months due to the Stimulus bill. The grand total is 30,000 jobs!

To put that nine month total in perspective, 39,300 Californian workers lost their jobs in the past MONTH!

The U.S. economy has been losing roughly 250,000 jobs a month and they want you to believe that 30,000 is important progress???

And now it gets worse. The White House says that these 30,000 in nine months show that the stimulus package is well on its way to creating 3,500,000 jobs by the end of the year. Good grief! Do they think none of us can add or subtract?

And now it is beginning to get really ugly. In the third quarter, there were 937,840 foreclosures on homes, a 23% increase over the third quarter 2008. At the beginning of the recession, most of the foreclosures were on toxic, liar loans, but now the most foreclosures are on fixed rate loans to people with good credit ratings, e.g., people who have lost their jobs.

No question, the worst is yet to come!

Goldman Sachs Strikes Again!!

In the third quarter of 2008, Goldman Sachs needed billions of your tax dollars to avoid bankruptcy. Then we bailed out AIG and the largest share of those billions went directly to Goldman Sachs.

Now we have completed the third quarter of 2009 and Goldman Sachs have just recorded quarterly profits o $3.03 Billion!

Conspiracy anyone??

Recovery? Not Yet!

Over 15 million Americans are currently unemployed and another (roughly) 15 million are under employed or have given up looking. In September, 2009, over 200,000 jobs disappeared. Official unemployment is just under 10%.

The recession will be over when the demand for goods and services begins to grow and the economy begins to expand. That is unlikely to happen in the forsee able future. Here are the numbers to demonstrate the problem.

Typically, our economy is supported by about 20% in government expenditures, about 10% in business expenditures and the remaining 70% is represented by consumer spending. Consumer spending is slightly overstated because rent from your own, owned house is imputed as rent, but never mind. The point is the same. Our economy is driven by consumer spending and therein lies the problem.

U.S. households are carrying a huge amount of debt which they are correctly paying down now, but that is money they can't spend. Household savings are now in the 6-8% range and that is a good thing long term, but a bad thing in the near term.

In addition, we have all of those unemployed people who are not spending anything they don't have to spend. Now add in the people whose unemployment benefits are about to run out. Then add in all the people who are wisely limiting their spending because they might lose their jobs.

When you add all that up, you can make your own estimate of when the recession will end.

Maybe This Time

In our book, The Great Recession Conspiracy (available at scribd.com/doc/16864582/The-Great-Recession-Conspiracy), we point out that the fastest way to get out from under the huge number of impending foreclosures is to give Bankruptcy Court Judges jurisdiction over those loans. Single family, owner occupied, home mortgages are the ONLY mortgages they can not rule on.

A bill to make this change recently sailed through the House but was defeated in the Senate 45-51 last spring. Now Dick Durban, the senior senator from Illinois, is attaching such a provision to any bill he can find, and he thinks that this time is will pass.

Let's hope so. Last time, the multi-millon dollar contributions from the Wall Street Banks stopped it cold. See our book for details.

Too Big To Fail

Gary Stern was the President of the Minneapolis Federal Reserve Bank until recently. In 2004, he and Ron Feldman wrote an important book called Too Big To Fail. They demonstrate clearly that allowing banks to become to big to fail is an extremely wasteful idea. You can hear an extremely insightful interview with Gary Stern at econtalk.org/archives/2009/10/gary stern on t.html.

Who Is Elizabeth Warren?

She is;
*A professor on the Faculty of the Harvard Law School
*She is the Chair of the Congressional Oversight Commission
*She is the ONLY person in Washington you can believe
*She is your ONLY friend in Washington

Meet Elizabeth Warren at www.washingtonpost.com/voices-of-power.

Goldman Sachs AGAIN!!

Now you have to follow the bouncing finger here. First, CIT is a huge financial company that specializes in lending to SMEs, and CIT is in deep financial dodo, tottering on bankruptcy actually. In June, 2008, CIT negotiated a $3 Billion financing deal with Goldman Sachs to keep CIT going.

Without disclosing it, the U.S. Treasury bought $2.3 Billion in CIT preferred stock using TARP money last fall.

If CIT goes into the tank, which is extremely likely, Goldman Sachs will get a $1 Billion payout, plus their original investment. Since the preferred stock which you own will be worthless, your money will be transferred directly to Goldman Sachs, once again!!

However, if you owned Goldman Sachs stock, you can smile all the way to the bank.

Cash for Clunkers Redux

In July, we pointed out that all the Cash for Clunkers program would do is shift automobile sales forward. Now the evidence is in. U.S. auto sales for September were 745,997, down 41% from August and down 23% compared to September 2008. Are there no economists in Washington who have heard of, and understood, Price Elasticity??