Saturday, December 13, 2008

A Deal With the Devil

Congress set up criteria to bail out the auto industry and the unions said no. They were unwilling to agree to a date certain where they would reduce their pay to what foreign companies operating in the US are paying their workers. The union seemed to be gambling that Bush would once again ignore capitalist principles and use TARP funds to keep the companies alive, and unfortunately, I think they are right.

In the press release the union president said those evil right wing Senate Republicans wanted the workers to shoulder the entire burden. This would be a reasonable complaint if only it were true. Actually the Republican plan required that all unsecured creditors reduce the amount of their debt by two thirds, costing several billions of dollars and replacing it with equity. If they didn't agree by March 15, the companies would declare bankruptcy (in which case the creditors would get far less, if anything). It sounds like they were shouldering part of the burden to me. The equity holders would get diluted beyond recognition, all but wiped out, because of the plan to replace debt with equity. That sounds like they would have done their share.

OK..So the UAW president lied. Still I have a problem with congress financing any bailout, but the argument may be correct that a chapter 11 bankrupcy is not practical. The argument is with the complexities involved at GM Chrysler and Ford, bankruptcy as a viable option that could create healthy companies (the normal procedure) is all but impossible. It would result in chapter 7 liquidation. Plan B (aka the Republican plan) has congress acting like a bankruptcy judge, and therefore it could work.

But Bush's weakness will undermine that plan getting passed. Unions are betting he will fund the autos with TARP, and the money will flow from the government through the companies to the union. Of course in two or three years and 40 or so billion later everyone will return to the scene of the crime..and they will go bankrupt.

This brings up an interesting question. Do the workers in Detroit live better than those in Mississippi (Mercedes plant) even though Detroit earns 50% more money? The answer is no. Because the cost of living is so much higher in Michigan, their workers probably don't live as well.
The sales tax, state income tax, state corporate taxes that pass through to consumers, school taxes, fees etc. are all higher in the north. People pay more taxes, pay more for consumer goods (because of taxes and regulations foisted upon them), pay more for services (because the service providers pay more taxes), and pay more for health insurance (because of mandates, regulations and their support for trial lawyers).

The point is, if government were more responsible and spent less, a 50% reduction in wages might be acceptable. But under present conditions, given the same amount of money, the lifestyle in Michigan is far inferior to that in Mississippi. This is because long ago the unions chose to throw in with the socialists/ Democrats, and like any deal with the devil, it looked great, had momentary benefits, but now the devil is calling in his note.

Marx and Lenin said the workers should revolt, they have nothing to lose but their chains, and I agree. But the revolt should be against a government that uses its power to tax unconscionably, pick and choose winners and losers, use massive amounts of money attempting to stop the creative destruction of capitalism, thereby inflicting far more pain than would otherwise occur, and in the process squanders the fruit from the labor of millions.

An addendum..Ben Stein weighed in on TV today and said those of us opposed to a bailout are un-American..This from a would be conservative who gave Al Franken money for his senate campaign (now that's really un-American), whose father was an economist but he can not even understand supply side economics. I kid you not. With every financial crisis, or crisis of any sort, he advocates raising taxes, buying into the Democratic insanity that money can be extracted from the economy without any effect. Earth to Ben: The life blood of an economy is capital...raising taxes is no different than bleeding a sick patient. Every economy in every part of the world proved this. It is not only that he is wrong, but he is arrogant and has now slandered those of us who disagree.

Friday, December 12, 2008

Capitalism 101

A few weeks ago Treasury secretary Paulson told the congress that if he didn't have 750 billion dollars that weekend catastrophes would occur. The implication was if he got it, the economic ship could be righted. He got it, and then a couple of weeks later completely trashed the plan he was going to implement, and decided on an entirely new one. Think about it. We were "on the precipice," but had a plan to save the world. Congress appropriated an astronomical amount of money for it, and then Treasury rethought things and decided the first plan wouldn't work, but a new one they dreamed of would....sure..

The economic insanity has reached record levels. Nearly every state, municipality, industry and home owner is looking for a bailout, and every politician, pundit and economist has an idea how to save us from the pain of the recession. None of them have a clue.

There is a history of government action, and it isn't pretty. See Freddie Mac and Fannie Mae for details. They were arguably the start of the cancer that grew into the present crisis.

Do you remember the stimulus package a couple of months ago? I do. I just can't see where it helped.

Although Roosevelt is given credit for bringing us out of the depression, the fact is he and his predecessor, Hoover, caused the severity and length of the depression. Obama's public works initiative is modeled on Roosevelt public works policies, and although suggesting that such policies brought us out of the depression makes for romantic liberal storytelling, the reality is that a stock market crash partly due to a bubble created by 10 to 1 leverage began a recession, but failed monetary policy, trade barriers, and increased taxed got us into the depression. The reversal of at least some of these got us out, not Roosevelt's huge public spending.

No one today knows the effect of the policies they are proposing. The forces in the economy are so complex that we can only make educated guesses. History fails us as a guide for the future because new forces constantly enter the equation, and since we don't understand things very well to begin with, we certainly can't understand things with a constant flow of new variables. If we could get it right, we would all be rich. The attempts to influence the economy through government action can never be proved to have failed either. There is no control group to measure it against, so no matter how bad things go, it can be argued it would have been worse without the action.

In Washington perception is reality. If the auto bailout fantasy is to be believed, it will save millions of jobs, it will create a viable healthy industry that will wean the country off fossil fuels, repay bondholders in full, and possible even profit shareholders. I'd laugh out loud except it is so tragic.

This bailout shows that once congress is involved, political considerations trump everything else. The auto executives told congress what they wanted to hear, not what the industry needed to be profitable. The auto companies were going to concentrate on green cars. Right.. they will sell a lot of them with $1.50 or $2.00 gas.

The congressmen said the unions (their consistent supporters and contributors) have already given up a lot, and shouldn't bear the entire burden. This is code meaning the industry must keep the union wages at twice what foreign manufactures pay for their US labor. That will sure help a lot..Not only can't this approach actually will make a bad business model worse.

Fannie and Freddie are a recent example of government involvement in business. Congress created these monsters under the guise of expanding home ownership. They gave them implicit government guarantees on the money they borrowed. This created a squeeze on other lenders because without a similar guarantee they couldn't borrow as cheaply. Congress then used Fannie and Freddie as a depository for their political cronies. In order to beef up bonuses for the cronies (among others), the companies borrowed far too much, were too leveraged, (it couldn't have happened without that government guarantee.. no one would have loaned them the money), and committed accounting fraud. Franklin Raines, a Democratic political operative (Carter and Clinton administrations), was appointed the CEO of Fannie Mae. During his term earnings were overstated by 2.7 billion dollars, and he earned over 90 million dollars for himself. He settled the civil suit filed against him for a couple of million dollars and gave up his then worthless options. It pays to have friends in high places. But I digress. Congress later passed the Community Reinvestment Act. It said that Fannie and Freddie should make every effort to lend to non creditworthy borrowers, with insufficient equity (down payment). They also said that other banks would have to lend in poor neighborhoods (spell that non creditworthy borrowers with insufficient equity) or they would be prohibited from getting federal approval for mergers. As to profits..well really, what does congress care.

It is laughable that now that the entire thing has blown up, congress accepts no responsibility, and instead invents "predatory lending" as the culprit. This fantasy says that lenders who lost huge sums of money, were guilty of conning poor unassuming honest middle class families into borrowing more than they could afford to repay. The lenders may have been stupid, but predatory? No no..The borrowers may have foolish as well.. but victims? I don't think so.

We don't know where our attempts to solve this will lead, but we do know government action always enlarges the problems and creates new ones rather than solving anything. Let us first do no harm. Get the government out. Nationalizing industries has consistently been disastrous. We may not know what allowing these failures to occur would do, but we do know that although the market place is often painful, it corrects bad behavior as quickly and painlessly as possible. I don't know on what course the market will take us, or how bad it will be. I just know that it is the best choice from an obviously bad menu.

Monday, December 1, 2008

Racism 101

Many people are making the mistake of thinking an Obama presidency will put the race issue to rest, or at least soften the intensity of feelings. They are wrong..

The race hustlers have already staked out their turf, and lest anyone believe that Obama's election reflects racial progress, every black leader from the left is on the record trivializing the election's racial importance. According to them this shows only modest progress, but a lot more is needed. I disagree.

Black race problems are vastly overstated. What racial problems there are, are not much different than normal problems between any two different racial, ethnic or geographic groups. There are real bigots, but far fewer than the left and most black leaders would have you believe, and those bigots have lots of targets, not just blacks.

My children are more important to me than my brother's children. His children are more important to me than my next door neighbors children. American children are more important to me than European children. Does this make me bigoted towards my brother or my next door neighbor or European children? My point is that the more removed someone is from my life, the less concerned I am about him. This is human nature. There is nothing to be ashamed of, and nothing can change it. When we hear about ten Iraqis killed in a terrorist attack, we are less upset than hearing that one American soldier was killed. If a terrorist explodes a bomb in town near where we live and a dozen people are injured, we will be more distraught than if a tsunami kills 500 people in some far away country. These are examples of the human condition, not bigotry.

Lots of jokes are made about blacks. Lots are made about Jews, Irish and Italians. No group is spared. Snide comments are made which stereotype blacks, but Jews do the same to gentiles, and wasps make them about Jews. Every group makes them about every other group. It isn't nice and it isn't pretty, regardless of who is speaking. But it happens to everyone. We should never accept it, but neither should we act as if the only group that it happens to are black. Are blacks more abused than most? Perhaps, but that is no justification for the growth of the cottage industry of black victimization.

The industry leaders include Reverend Al Sharpton, Reverend Jesse Jackson, Reverend Louis Farrakahan and Reverend Jeremiah Wright. In reality they are themselves hate mongers. Listen to their message. The white enemy/ oppressor (Jews are especially guilty) caused blacks all manner of problems, has prevented their social and economic advancement, and continues to do so.

The hustlers claim to find bigotry everywhere. Harold Ford is a black Tennessee politician from a very successful political family. He ran for an open Senate seat in 2006 and lost by three percent. Every pundit and publication in America decided that he would have won were it not for his being black. It was the accepted wisdom. Of course it is patently silly. None of the facts support the conclusion. The last Democrat elected to the Senate from Tennessee was Al Gore. The state even went Republican when their home boy Gore ran for president. Ford is a very likable, skilled politician, ran in a year when Democrats did very well, and so he did better than any Democrat since 1988. He came closer to winning than any other Democrat since Republicans took over congress. So to suggest he lost because he is black flies in the face of common sense, and all of the evidence.

Obama won 97 percent of the black vote, and large percentages of the white vote. Certainly there is more evidence there that blacks voted just because of race (aka racism). I have no problem with why they voted as they did. Still, I have yet to hear any outcry of bigotry coming from this group of leaders.

In our everyday lives we can only make judgments on the evidence available to us, and sometimes there is very little of evidence to go on. If you were walking down a dark empty street late at night and a man appeared carrying a gun, you would be scared to death and try to get off the street. If you were in the middle of a street and on one side was a man in a coat and tie, and on the other was a man who looked drunk, dirty and threatening, you would cross over to the side with the well dressed man. Are you bigoted towards gun toting or shabbily dressed men? I don't think so. I'd say you have common sense. If a black and a white man are on this street and you have nothing to go on but the color of their skin, for the same reason you reacted as you did to in the prior two examples, you would cross over to the white man's side. The black man might be a high class gentleman, and the white man a rapist, but you don't have enough information to understand that or the luxury of time to find out. You can only act on the information you have.

Black men commit crimes at a higher rate than white men. That alone justifies your decision. Obama recounts a story about his grandmother where she says she was gripped by fear when a black man came near her when her surroundings made her feel vulnerable. He offers this up as racism. I would suggest it is another example of common sense.

Instead of the race hustlers making the absurd argument that this is bigotry, perhaps they should tell the black community that they may have been dealt a bad hand, but how they are viewed by others can only change when their behavior changes. Jews are stereotyped as being money hungry and cheap, Irish as drunks, Italians as mafia members etc. Looking at people as groups, the charges may or may not be true. Individually however they are not. As individuals people have to deal with their group's stereotypes. Such is life for everyone, not just blacks. In the meantime those who suffer most from the high crime rate by blacks are blacks themselves. If instead of blaming whitey for some real or imaginary transgression, the leadership pushed the community to improve itself, everyone would be better off.

Preaching blacks are victims has multiple effects, none good. Shelby Steele discusses one. He describes hypothetical black and white youngsters who go into business (individually). They both fail. The white boy picks himself up and thinks, what did I do wrong and how can I do it better. He then jumps back into the fray. The black boy says, I failed because I'm black. I failed because of whitey. He then decides trying again is hopeless. He thinks this way because that is this deadly message the race hustlers have given him all of his life.

The last thing anyone needs is an excuse for failure. If we provide enough such excuses to anyone, rest assured, he will fail. If however he receives the message that there is opportunity, he has the talent to succeed, and that it is up to him to capitalize on it, he has a chance. Perhaps one group has to try harder than another. So what? There are only two choices. Try to get over that higher bar, or don't try and be assured of failure?

One of the hustler's approaches is to argue that slavery is the cause of slower black social and economic development, the government was complicit in slavery, and therefore the government must do something to correct it. Our constitution protects individuals, not groups, and individuals, not groups, have rights, one being redress. There are no individuals alive who were slaves. Therefore no one is entitled to redress for slavery. Being born with less opportunity than someone else does not create an entitlement. If it did, anyone could find a reason to justify a petition for help. What every citizen is entitled to is equal treatment under the law, and we must be diligent to insure that.

Obama thinks differently. He says he does not support reparations (payment by the government to descendants of slaves) but he does say that special programs need to be set up for blacks because of slavery. What he means is that cash payments to blacks should not be made, but special services and programs for blacks should. It sounds like "in kind" reparations to me. But the scary thing is he doesn't understand the harm such a policy does to the very group it intends to help. It reinforces the fictional and hurtful idea that blacks are less qualified, they need and are entitled to help. Does anyone think affirmative action has helped anyone other than a very few individuals. I can't get into that here, but affirmative action is not only unconstitutional, but like reparations, like blaming whitey for black individual failures, like anything where the government treats people differently based on race, it hurts everyone, and especially the people it is trying to help.

The race hustlers make their living fanning the fire of racial discord. For those who think Obama's election will ease the problem, just remember, these professional agitators are at the core of his constituency.