Wednesday, November 26, 2008

Why Buy the Cow...

when you can get all of the sour milk and an 8% 'steak' for almost the same price?

Another day, another taxpayer bailout of a poorly run financial company.  You would think I was used to it by now, but watching the underpinnings upon which our country was founded get shredded anew each day just never gets old.

This time its Citigroup (C), another firm whose managment made terrible investments in an attempt to compete with other firms making terrible investments, following the lead of terrible government policy.  We've been over this before, but the absurdity keeps reaching new levels.  (Just wait until the socialists are making ALL the decisions!)  

C's market cap, the amount you or I could theorectically buy the company for on the open market, is around $33 Billion.  We as taxpayers are giving C $20 Billion in cash and then guaranteeing around $300 Billion in 'distressed' assets.  'Distressed' is code word for 'crap', a technical financial term meaning taxpayers will end up paying $300 Billion more before its all said and done.  And what do we get for it?  An 8% stake in the company and some vague language about executive compensation.  There should be NO compensation for running a $2,000 Billion company down to $33 Billion.  I do not advocate private ownership by the government, but for the sake of argument in this crazy post-capitalist world, they could have at least owned the entire company for what they are paying. 

This deal is messed up on so many levels.  When you decide that you are no longer going to allow bad businesses to fail, you have to be prepared to deal with the consequences.  Unfortunately, we have an ever growing segment of government that gets absolutely giddy over situations like this.  They can artificially sustain a bad idea, while at the same time getting to berate the executives responsible for the failure on CSPAN and then blaming it all on the free market.

Folks, the free market had nothing to do with this.  Don't let the talking heads convince you otherwise.  The free market would have buried these banks long ago.  The free market would have never allowed these bad mortgages to be made in the first place.  This is the direct result of socialist policy at work and the outcome will be the governement's demand for more of it in the name of cleaning it up.  

Citigroup, its your turn to walk through the Tunnel of Affirmation...

Saturday, November 22, 2008

Living In An Obama-Nation

A good friend of mine sent me this video and it got me to thinking about what the next 4 years will really be like from an economic perspective.  I am generally not a gloom and doomer, conspiracy theorist, or all around crackpot...ok, maybe a gloomy conspiracy crackpot, but definitely NOT a doomer theorist, besides, doom science is beyond the scope of this blog.  I do, however, think we need to plan accordingly for what may be a major shift in our economy as a result of significant policy overhauls.

The transformation to socialism has been ongoing since the day President Reagan left office, but the rate of change has accelerated in recent months and will now be full steam ahead without any free market capitalists left in government to put the brakes on.

The automaker bailout failed this week because an odd alignment of interests occured.  The few free market republicans left on capital hill are still around until this lame duck session ends and are doing the right thing in opposing this nonesense.  The dems on the other hand were offended that the CEOs all flew in on their own private jets and so they wanted to stick it to the rich guys by wagging their fingers and telling them to come back in two weeks and beg again.  Had the executives all carpooled from Detroit in a hybrid they would have left on Friday with fat checks in hand.  Be rest assured that after January 20th, the money will freely flow, but in exchange for big government consessions, either in the form of even more regulatory oversight or outright control of the companies.  

And that is only the beginning.  The level of government intrusion into our lives will reach levels not seen since FDR and the New Deal.  Why?  Because the very people responsible for this mess in the first place are the ones now in control of everything.  They refuse to look in the mirror and simply chant their mantra "failed policies of the last 8 years...", implying this is all President Bush's fault.  

The facts are that the first 6 years of the last 8 were a remarkable illustration of the power of free markets.  Across the board tax cuts led to an investment cycle that pulled us out of the mire caused by the market instability in the aftermath of 9/11.  Revenues to the government INCREASED as a result because economic activity increased the tax base.  Unemployment was at record lows. During this time however, government spending outpaced revenue growth. Republicans, in an effort to shake the media created image of cold conservatism, joined the democrats in creating all kinds of new things to spend money on.  

How we got here...

Combined with a low interest rate environment and 'free' government money, getting a mortgage was as easy as talking Nancy Pelosi into a facelift, leading to the latest investment bubble: the housing market.  FannieMae and FreddieMac were at the forefront of the lending craze, using their government endorsed powers to fan the flames.  FNM and FRE were run by democrats that gave money to Chris Dodd and Barney Frank, more democrats, who repeatedly blocked attempts to control the risks assumed by FNM and FRE.  Remember, FNM and FRE are goverment sponsored entities, not private companies, so the backing they recieve from the government gave them an unfair competitive advantage over other financial institutions.  Due to a combination of this artificial edge and the pressure people like Barney Frank put on banks to make riskier loans in the name of "fair housing", led to overleveraged portfolios which were packaged and sold as securities to investment firms like Bear Stearns, Lehman Brothers, and Merrill Lynch.  Do any of those names sound familiar?  This has caused a withdrawal of available credit because other firms have stopped lending in an effort to shore up their own balance sheets.  Its a domino effect that has led to less capital flowing through the marketplace, which has caused people to sell stocks to raise cash or to head off future capital gains tax increases, which has led to a 50% decline in the stock market. Domino after domino falling, all started by the first domino pushed over...government interference in the lending marketplace.  Yet no matter how clear the evidence is, politicians continue to grandstand in front of the cameras, blaming everyone but where the blame should be...squarely on their own shoulders.

Where do we go from here?

Since those that presided over all of this are still in power, now strengthend by larger majorities and a president that will rubber stamp anything they want to do, we need to be ready for some hard times.  I am an optimist in general, so I am not one to say the sky is falling.  But we need to expect a tighter labor market, higher prices, and tighter credit.  Labor will be tight because higher taxes on corporations and small businesses will lead to smaller growth and fewer new hires.  Prices will increase because input costs, including taxes, energy and labor will rise.  With less reinvestment capital available, the crunch on credit will continue.  When the supply of credit decreases, interest rates rise, causing borrowing to be more expensive.  This adminiatration's stated goal of eliminating the coal industry by making it unprofitable, its unwillingness to drill domestically, and its refusal to pursue nuclear energy will by default lead to higher energy prices.  This recent decline in oil prices is a direct result of the public outcry to produce more energy and the expiration of the offshore drilling ban combined with the overall slowdown in demand.  No doubt this ban will be reinstated and Washington DC is now going to be full of deaf ears beholden to the radical environmental lobby.  Their solution will usually include some type of price controls or "windfall profits tax" which will lead to shortages.

The result of all of this will be much higher unemployment, double digit inflation and mortgage rates, and long lines at the gas pumps.  We haven't had things that good since Jimmy Carter was president! Now, don't get me wrong, I hope none of this happens.  I hope that Obama changes his socialist ways and promotes the benefits of the free market.  I hope that Nancy Pelosi and Harry Reid will stop trying to tear down the system that has created the greatest economy in the history of the world and replacing it with a system that has failed every time its been tried.  I also wish I had washboard abs, but we can't have everything we want.  Maybe I could get a referral for Pelosi's  surgeon...

With all of this gloomy conspiracy crackpot talk, you may be asking yourself what a guy like me is doing to plan for this...mainly so you can do the opposite.  I think its extremely important to get out of debt as soon as possible.  Build up an emergency fund of a few months of living expenses in case there is any interruption in employment.  Do not use credit cards for Christmas. Use creativity instead of cash (unless you are sending me a gift, then cash is acceptible).  Live within your means...a novel idea untried in America for quite some time.  I am just offering these as suggestions for making the transition from liberty to socialism as seamless as possible.  It is by no means complete nor is it meant to instill fear or panic in you.  Now excuse me while I go buy guns and canned food before its all gone.

Tuesday, November 11, 2008

Is it just me...

...or are the Obama yard signs a little creepy?

I know he doesn't have a lot of experience as a politician, but you can't just model your campaign after any old poster design...people might get the wrong idea.

Saturday, November 8, 2008

Free Markets in Under 30 Minutes Or Its...Well, Free!

I found a video that is absolutely phenomenal. It is the most concise argument for limited government that I have seen. It is also older than me, proving that the ideas I espouse are not things I dreamed up one day to keep a thumb on the unwashed masses. It really ties in with my last post on selfishness only he explains it like someone who won a Nobel Prize for his efforts. It is just under 30 minutes long, but well worth the time spent. Dr. Milton Friedman touches many topics I plan to discuss in detail over time on the blog, including Social Security, the minimum wage, and rent control, among other things. So grab a cup of coffee and have a look, if nothing else you will be able to sit back and be thankful that you chose not to wear your hair like the host of Open Mind, and that intro music is no longer that creepy!

Saturday, November 1, 2008

Selfishness Is a Virtue

I know you just said to yourself, "Self, this guy must be crazy to say that." But just hang with me for a moment as I attempt to convince you of my meaning.

With only a few days left before the election, there has been a lot of talk about the candidates' positions on the capitalism-socialism scale. Before I go any further let me just say that BOTH candidates are not true free market capitalists, which is what I am (as if you couldn't tell already). They have both advocated socialist policies in one form or another that hurt the economy. There is only a distinction between how extreme one is to the other. After the "spread the wealth" comments by Obama to Joe the Plumber, the public (with no help from the media) has begun to ask just how far down the socialist scale he really is. Well, I am not a rocket scientist, and I didn't even stay at a Holiday Inn Express last night, but my mom did tell me once that you could tell the soul of a person by who they associate with. After 20 years of listening to the anti-capitalist rants of Rev. Jeremiah Wright, hanging out with the anti-capitalist (and terrorist, but that is irrelevant to this discussion) William Ayers, mentoring under the anti-capitalist Frank Marshall Davis when he lived in Hawaii, and his love of the works of anti-capitalist Saul Alinsky, my mom would say you can get better than even odds in Vegas that he is a socialist, regardless of what he said in his infomercial.

When challenged on this he simply said he was not a socialist, only he doesn't think "selfishness is a virtue". By this I guess he meant that free market policies are selfish, and by extension, socialism (which he does not believe in, just in case you don't like socialism) is not selfish. I would argue that the evidence shows both are selfish, but for different reasons and vastly different results.

Capitalism IS selfish. That is how it was designed and also the inherent beauty of it. We live in a fallen world, full of selfish people, so a system that actually channels that selfishness into a flow of capital that benefits other people while fulfilling the goals of the selfish individual is brilliant. For example, you want to provide for you family, so you selfishly start a business that sells widgets. In the process you had to hire other selfish people who only wanted a paycheck to provide for their families. They work to produce high quality widgets because they selfishly understand that they will get more money from you if you sell more than your selfish competitors. The widgets are bought by other selfish businesses run by selfish people who use your widgets in their contraptions. They only buy your widgets because they want to make a profit from their contraptions. Those contraptions are sold to selfish people who use them for their own selfish enjoyment. Never does the business owner make the widgets for the sole reason of employing people. The contraption makers never once thought of buying widgets in order to put food on the widget maker's table. The contraption buyer is interested only in one thing...high quality contraptions. However, through all of this selfishness, many people are employed, many families are fed, and contraption enjoyment is at an all time high. Life is good.

Socialism is also selfish, although it claims not to be. From each according to his means to each according to his needs. To some this may sound like a noble way to provide for everyone. Certainly it doesn't sound selfish. But if we look deeper into the consequences of such a policy we see plenty of selfishness at work, and it benefits no one but the selfish. If you know that someone who works harder and achieves more will be there to provide for you, what is your incentive to be successful? If you achieve success you will have to involuntarily give it away to those who choose not to. So the achievers become selfish by producing less so as to pay less while those not as successful become selfish by expecting to get something for nothing. Those who administer this redistribution of wealth know that the only way they can keep this system in place is to have a large enough group of unsuccessful people to keep voting them into power. Keeping others down so as to ensure your own success is certainly the epitome of selfishness. In extreme cases, such as communism, the only way to get anyone to produce wealth that can then be confiscated is to remove all choice and force them to do so with the threat of violence. In all cases, these policies lead to reduced productivity, lower wages, unemployment, less charitable giving that truly helps those in need and the destruction of the human spirit which was designed to achieve. This has been the case everywhere centralized command and control economies have been implemented.

So, which version of selfishness is better? Just look at the standard of living, levels of charitable giving, resources provided to those in need, and opportunities to move from poverty to wealth between countries with free market policies and those with socialist ideals. Which is virtuous?