Since the first day of his Administration President Obama has fully exploited a recirculating funding and campaign support system with public employee unions that has no equivalent on the Republican side.

The system is simple:  Democrats pass legislation to fund or subsidize states and municipalities that then hire more employees, who then pay more union dues, a portion of which is contributed to Democrats.  Today we see this system in action.

Congress was in recess for the entire  month of August.  But Speaker Pelosi called the House of Representatives back to Washington for two days to pass an “emergency” bill that will provide Billions to shore up employment in state and local governments whose tax revenue has declined in the recession.  President Obama signed it into law immediately.

In a press release Gerry McEntee, president of the Association of Federal, State, County and Municipal Employees (AFSCME) previewed his union’s plans to reciprocate:

We are set to launch a robust field plan across the country during the month of August, including advertising and grassroots events.  We intend to highlight the clear choice Americans will make in November between Democrats who are working to protect jobs and move the economy forward and Republicans who are willing to wreck the economy for political gain.

Mr McEntee apparently believes the only jobs that matter are public sector jobs.  As we demonstrated here the Democrats have utterly failed to prevent the loss of millions of private sector jobs since they took control of Congress in 2007 and the White House in 2009.

President Obama and the Democrats claim today’s emergency vote in the House of Representatives is vital to prevent layoffs.  But all across the country public employee unions have refused to negotiate concessions that would reduce costs and thus prevent layoffs.  The Milwaukee school district is in financial crisis with no options left other than layoffs.  Yet the teachers union has gone to court seeking to force the insolvent district to provide free Viagra to its members.

It seems that public employee unions believe they are owed unlimited bailouts from Congressional Democrats and do not have to agree to less generous benefit packages in order to save the jobs of their own members.  And, it seems the President and his party agree.

We know from studying the lessons of past recessions that climbing out of any recession, especially one as deep as this one takes some time. the road to recovery doesn’t follow a straight line

But the President and the Democratic Congress have implemented a series of measures that defy  the lessons of past recessions, especially 1981 that was, by some measures, worse than this one.

Ninteen months ago President Obama inherited a deep recession.  The center-piece of his response was the so-called Stimulus, $887 Billion in extra borrowing and spending, over and above the government’s already bloated budget.  Obama promoted the stimulus aggressively, promising that it would, in his words “immediately jumpstart job creation.”  Additional responses to the recession were to

• Expand the bailout program begun under the Bush administration;
• Enshrine as explicit government policy the theory that some companies, such as GM and Chrysler are deemed too-big-to-fail and will always be rescued from the consequences of their own mistakes, especially if their workforce is unionized;
• Offer The “cash for clunkers” subsidy to new car purchasers
• Subsidize blue-sky energy schemes that are too expensive and unreliable to survive in the competitive marketplace;
• Schedule tax increases on small businesses and investors to begin in 2011;
• Continuously threaten employers with hyper-regulation, new health care mandates, and an artificial energy shortage imposed by government.

Like President Obama, President Reagan inherited a deep recession as he took office in 1981. By some measures it was worse than the current downturn.  Reagan’s economic program, based on his commitment to liberty, was the opposite of Obama’s:

• Reduce regulation and government intervention in the economy;
• Enact sweeping tax cuts that were phased in over three years.  Each of the 16 income tax bracket rates were reduced by at least 25%.  The top bracket rate was cut from 70% to 50%.  Tax cuts left capital in the hands of those who had earned it and were best equipped to invest in job creating enterprises;
• Release the creative and productive energies of The People from the yoke of imperial government.

The upper chart shows the job market recovery is faltering at best, after 31 months of Bush/Obama policies.  There are 8 million fewer Americans now employed than in December, 2007.

The results, in the lower chart, speak for themselves.  Reagan’s policies turned the job market around after 16 months of losses. The Reagan economy grew continuously for 90 months, creating a total of 21 million new jobs, or a 24% increase in the number of Americans who were employed.

During his meeting with the Oversight Panel Secretary Geithner gave strong assurances that he and his bureaucrats could manage the whole economy, would eventually “think through” incredibly complex issues, and finally develop workable processes and standards, more than seven months after the government began handing out Billions of TARP dollars.

But then, after the Oversight Panel meeting, he spoke at another event where he was asked about the latest Treasury Dept. scheme, a plan to form partnerships with private investors to buy the bad mortgage assets from the banks.  The deal, as announced, requires the private investor to put up only 7%, with government loans and guarantees compiling the remaining 92%.

Why, Geithner was asked, were private investors necessary?

Instead of quoting his answer, we provide this 83 second video in which Geithner expresses – with some considerable passion – his belief that the same government bureaucrats and regulators he claimed were ready and able to manage all the banks and “the whole economy,” were incapable of determining the value of groups of mortgages and would, without the participation of private investors, “substantially overpay.”

This meeting serves as a textbook example of why America’s founders wrote the Constitution to charter a government with a few, limited powers and functions.

Those powers did not – and still do not – include bailing out failed financial institutions. Further, this hearing demonstrates why the attempt to replace liberty with the exercise of vast government power is sure to fail.

Oversight Panel members asked Geithner several questions about TARP policies in dealing with banks and institutions.  Each time his answer, phrased several different ways, was that their questions were irrelevant or unanswerable because his job was to restore “the economy as a whole,” rather than consider specific institutions.

For example, panel member Sununu asked what criteria would be used to determine if an individual bank would be permitted to repay the TARP funds it had received:

GEITHNER: They’re going to have to make that judgement.

SUNUNU: Who’s going to have to make that judgment?

GEITHNER: The relevant federal banking regulatory agency will make that judgement…

SUNUNU: We’re going to ask the regulators [government employees trained to interpret banking regulations] to make a subjective judgment about whether or not our national system of credit and lending is working?

GEITHNER: No, I didn’t mean to imply it that way.  They’re going to have to make a judgment if it’s tenable or makes sense for that institution.  I was just trying to underscore the fact that the basic objective, guiding what we do, is to make sure the system is working as a whole. I understand your concern.  Everyone wants clarity and objectivity and because they’re working through this now, I can’t tell you today whether they’re going to meet that test [clarity and objectivity] but you’ll know that relatively soon.

Secretary Geithner finished up his answer by telling Sununu that the bureaucrats who were still trying to work these issues out – Seven months after the start of this program – were:

…careful, thoughtful, pragmatic people and they’ll get it right.

Geithner has disclosed that after seven months and nearly $700 Billion dollars have been handed out, he and the gang of government regulators still do not know what they’re doing, and still have not developed objective criteria or procedures!

Since the only assessment he considers valid is “the economy as a whole” then he is effectively unaccountable, because there is no predetermined standard “the economy as a whole” is supposed to meet.   If the economy improves he will take credit, or, if it gets worse he will claim it would have been much worse without his TARP program.

We citizens and taxpayers have no option but to trust Geithner to direct all the major banks and assess the state of the whole economy.  There is no competition when government runs things.  You can’t take your business elsewhere.

President Obama intends to run the nation’s health care and energy sectors the same way, with government bureaucrats chaotically evolving the rules and procedures as they go along.

On Main Street success is measured in satisfied customers and profits.

In the Washington establishment success is measured in contributions from special interests, accumulated political power, and media attention.

To achieve success in the automobile business the first step is to offer products that lots of customers are willing to pay for.

To achieve success in the Washington establishment the first step is to offer political results that special interest constituencies are willing to pay for.

The Wall Street Journal reports that Congress may authorize the government to buy equity shares in GM and Chrysler.  Apparently, the goal is to give politicians  authority over company operations through an appointed “auto czar.”  Some in Congress want to force these companies to discontinue SUVs, full size pickups, and all but the smallest, highest mileage cars. On Meet the Press, President-elect Obama echoed the mindless, political-media opinion:

…U.S. automakers have made repeated strategic mistakes.  They have not managed that industry the way they should have, and I’ve been a strong critic of the auto industry’s failure to adapt to changing times–building small cars and energy efficient cars that are going to adapt to a new market.

The data in this table, and the facts below demonstrate the foolishness of the opinions coming from Congress, Barack Obama and media commentators.

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FACTS:

• Ten of the twenty top selling vehicles, adding up to 49% of total units sold, are made by the GM, Ford and Chrysler.   The Detroit Three are making vehicles that plenty of we the people want to buy, even if politicians and the green lobby don’t like those vehicles.
  

• Even though ten different models are available in America with EPA ratings of 30 MPG or higher,  only one of those has unit sales high enough to make this top 20 list.  The Detroit Three would not, as Barack Obama claims, be in better financial condition today if they they had years ago abandoned larger vehicles to make even more small ones to compete with the ten that already saturate that market segment.

• Twelve of the top twenty, including five Japanese models, representing more than half of unit sales,  are EPA rated 24 MPG or less.  Almost 97% of unit sales, including nine Japanese models are rated at less than 30 MPG.  In the real world, we the people base our buying decisions on several considerations, only one of which is gas mileage.  Only in surreal Washington politics is it assumed that all of us should drive virtually identical, small sized, high gas mileage cars.
  

• Only four of the top selling twenty, representing 21% of unit sales, meet or exceed the government’s arbitrary fuel consumption standard, based on political rather than engineering considerations.

• Seventeen of the top selling 20, including seven made by Japanese companies, consume more fuel than the government standard. Called Corporate Average Fuel Economy, or CAFE, the standard is 27.5 miles per gallon.  For the models that don’t meet the standard manufacturers must pay penalties to the government of $82 – $633 for each vehicle sold.

The political-media establishment scorns Detroit’s “business model,” because it isn’t consistent with the political goals of the elite. They call it “mismanagement” and “strategic mistakes” when these companies build cars that customers want and are willing to buy, including larger sedans, full sized pickups and SUVs.

Following politially motivated advice from Washington, to abandon top selling vehicles and try to compete in the already saturated small car segment, would destroy rather than revive the Detroit Three.

The so-called “debate” over this issue has been a classic example of how ignorant and out of touch with reality the Washington media-political machine has become.  The continuous flow of ignorant opinion and misinformation showcases the utter laziness and sloth of the elite media.  It appears that nobody who steps in front of a camera has bothered to consider even the most easily understood facts and data.

It appears that decisions that will ultimately cost taxpayers $38 Billion, or probably much more, will be based on myths and folklore, rather than genuine facts and data, and therefore will lead inescapably, to even bigger problems than  the auto makers already face.

Consider this exchange between TV reporter Tom Brokaw and President-elect Barack Obama on Meet the Press yesterday:

MR. BROKAW:

One of the great concerns in this country, of course, is additional job loss, which would be considerable if the Big Three in the auto industry in this country–GM, Ford and Chrysler–were to go down…Do you think the Big Three deserve to survive?

PRES.-ELECT OBAMA:

Well, I, I think that the Big Three U.S. automakers have made repeated strategic mistakes.  They have not managed that industry the way they should have, and I’ve been a strong critic of the auto industry’s failure to adapt to changing times–building small cars and energy efficient cars that are going to adapt to a new market.

Obama is merely regurgitating the establishment chant we hear every time we switch on the TV, that the Detroit auto makers are in trouble because they don’t produce “small, energy efficient” cars.

Let’s see if the data supports this assertion.   We’ll compare General Motors, the company currently suffering the most criticism, with Toyota, the company most admired by the political-media Elite.

GM’s two models with the highest gas mileage are the Chevrolet Aveo and Cobalt both with an EPA rating of 27.  Toyota offers three modles that exceed GM’s highest mileage cars:

• The Prius Hybrid with an EPA rating of 46 MPG
• The Yaris with an EPA rating of 32 MPG
• The Carolla with an EPA rating of 31 MPG

FACT: As of November, sales of these thee models add up to 596,802 units, or 4.8% of all vehicles sold in the US this year.  That means, of course, that 95.2% of all vehicles sold, including hundreds of thousands sold by Toyota, are rated at less than 31 MPG.

On the other hand, the three GM vehicles with the lowest gas mileage are

• Suburban SUV
• Tahoe/Yukon SUV
• Sierra/Silverado pickups

FACT: As of November, Sales of these three GM vehicles add up to 765,701, or 6.1% of all vehicles sold in the US this year.

So in this, the worst year ever for GM, with gasoline prices spiking to record highs, It’s three lowest mileage vehicles are still outselling Toyota’s three highest mileage vehicles by 27%.

FACT: Toyota’s best selling model, is not one of those three highest mileage vehicles.  It’s the somewhat larger Camry, rated at 25 MPG.

FACT: GM’s Chevrolet Malibu, comparable to the Camry, is also rated at 25 MPG.

FACT: GM’s best selling car the larger Chevrolet Impala with a rating of 22 MPG,  has had sales of 231,841 units as of November.

FACT: Toyota’s Avalon, is comparable to the Impala, is also rated at 22 MPG and has had sales of only 37,852 units as of November.

How could someone who actually looked at the data conclude that GM’s problem is that it’s vehicles are not small enough?  Or, not fuel efficient enough compared to the competition?

Obama says GM’s decisions over the past 20 years to continue selling large SUVs, pickups, and sedans were “strategic mistakes.”  What if GM had, instead, done what the politicians and media favor, switch all production over to small cars like the Toyota Corolla?   The answer seems pretty obvious: GM would have ceased to exist and Toyota, with it’s full line larger vehicles and full size pickups would now have a 30%+ market share instead of 17%.

GM management has certainly made mistakes.  Some of those mistakes were made decades ago and still haunt the company today.  But producing vehicles that customers want to buy is NOT a “strategic mistake.”

The biggest “strategic mistake” of all will be a big taxpayer investment in the auto companies that gives politicians a seat at the management table, and the power to veto product lines based on political considerations.

It would cost the taxpayers less, and ultimatley save more auto company jobs if Congress would just hurl the $18 Billion into the Patomic, and let the companies go through Chapter 11 bankruptcy reorganization.

The executives submitted to scores of stupid questions, and endured many hours of ignorant opinions from Senators and Congressmen, most of whom have no real business experience, and certainly no comprehension of the massively complex and intensively competitive automobile industry.

What was conspicuously absent from these star chamber hearings was any of the facts leading to the obvious conclusion that much of the cause of Detroit’s financial crisis was green politics in Washington, with blame falling squarely on Congress.

A favorite criticism from the political-media elite is that General Motors has stupidly continued to make cars “nobody wants to buy.”  But, since the early 90s GM has made some of the most wanted vehicles available in America:  Large pickups and large SUVs.

GM didn’t invest Billions on world class engineering and design of these vehicles out of stupidity.  They did it to meet consumer demand – demand that was so great that Nissan began offering similar vehicles.  Toyota, a company that basks in the glow of political-media-green admiration, invested Billions in engineering and a new plant in Texas, to introduce a new product, just one year ago, that competes directly with GM in the large, V8 powered, pickup market.

Through October of this year, even with gasoline prices spiking to record highs and a financial crisis that has disqualified half or more potential buyers from auto loans, General Motors has still sold over 1.2 million of these popular vehicles including:

• 67,000 of America’s largest SUV, the Chevrolet Suburban and it’s nearly identical cousins, the GMC Yukon XL and the Cadillac Escalade EXT.

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• 141,775 of GM’s slightly smaller but still large SUVs, the Chevrolet Tahoe and GMC Yukon and Cadillac Escalade.
  

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• 1,009,069 full sized pickups, including the Chevrolet Silverado and Avalanche, and the GMC Sierra.

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A lot of politicians are chauffeured around daily in the huge Suburbans and Escalades.     But, political-media establishment opinion leaders have always been opposed to large vehicles for us common people.

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When politicians say “nobody wants to buy” an SUV or large pickup, listen between the lines for the real meaning: the environmental lobby that rules Washington these days doesn’t want these vehicles offered for sale, because too may customers like them and buy them.

For three decades the government has attacked Americans who want or need large vehicles through a regulation called Corporate Average Fuel Economy, or CAFE.  CAFE imposes an arbitrary fuel consumption standard, based entirely on political rather than engineering considerations.  Currently, the standard is 27.5 miles per gallon average for all cars sold by a given company.

If too many of us customers defy the elites and  buy larger pickups and SUVs instead of tiny sedans, the auto company’s CAFE average falls below the standard and it must pay a penalty.  And who does the penalty cash go to?  Not to customers to help pay for gasoline.  It goes to the government, of course.

How much is the penalty?  Currently, the penalty is $5.50 per car for each tenth of a mile per gallon under the 27.5 MPG standard.  So, if  Joe the Plumber buys a Chevy pickup for his business with an EPA rating of 17.5 MPG, GM must pay the government $550.

GM can pay cash or, theoretically, it could offset the penalty on the pickup by selling small cars that exceed the 27.5 MPG standard.  But this is can’t happen in the real world.

To understand the problem, consider this tiny car called the Yaris,  made by Toyota, the company most favored by the “green” blowhards.  It’s rated at 31 MPG.  So, in order to avoid penalties for selling 17.5 MPG pickups, GM would have to develop a car like the Yaris and sell three of them for each pickup.  But there are not nearly enough customers who actually want to drive a Yaris-sized car to make this equation work.

Besides, the limited market for miniature cars is already saturated with models from foreign companies, many assembled in American plants, that have a huge competitive advantage in that they do not have burden of the United Auto Workers Union.

On top of the CAFE penalty are decades of relentless political pressure from Congress, adverse publicity from the know-nothing media, and continuous attack by “green” activist groups.

GM does offer several, newly engineered, world-class quality cars that are roughly the same size, and achieve the same mileage ratings as the Camry, the most popular car sold by politically favored Toyota, with ratings from 24 to 26 MPG.  But GM gets no political or media praise for these cars because it continues serve American customers who wish to drive Pickups and SUVs.

If the Senators and Congressmen really wanted to help they could start by killing the politically motivated CAFE law that punishes families and businesses who need large vehicles, and punishes the companies that provide those vehicles.

But that won’t happen because their first allegiance is to the “green” lobby, not to the auto companies, not even to the union workers they claim to care so much about.

Various financial publications have come up with estimates ranging from $3 Trillion to $7 Trillion for the total amount of cash and backstop guarantees the government has hurled at problem financial institutions in just three months.

One might expect the new administration to distance itself from this reckless misadventure, but President-elect Obama has embraced and supported these measures.   He has even appointed Tim Giethner, President of the New York Federal Reserve Bank, and one of the three bailout decision-makers in the current administration, to be the next Secretary of The Treasury.

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Wisdom & Ingenuity Vs Courage & Sacrifice

During a recent press conference Mr. Obama offered assurances that we’ll “get through” the economic crisis because he has confidence in:

• “the wisdom and ingenuity  of my economic team (a group of veteran, Washington-Wall Street operatives)”
• “the hard work, courage, sacrifice of the American people.”

So in Obama’s mind, the “wisdom and ingenuity,” the thinking, planning, and economic decision making for 300 million Americans is better managed by a dozen august officials in Washington, and then forced upon the rest of us by the government.

On the other hand, the “hard work and sacrifice” that will be required to reconcile all that ivory tower “wisdom and ingenuity” with the realities of the marketplace will, of course, fall upon us less enlightened slugs out here on Main Street.

Mr. Obama seems not to understand that this is more of the same, anti-liberty hubris that brought us to this point of economic crisis.

Politicians and government officials, attempting to be the source of wisdom and ingenuity for all of us, used laws and regulations to force mortgage lenders to issue subprime loans.  Then they empowered government sponsored Fannie Mae and Freddie Mac, to seek out sub-prime borrowers. They did this, even though there already were private sector lenders that specialized in sub-prime mortgages, putting their own resources at risk.

Now, tens of millions of Americans are suffering serious financial setbacks, and having to exhibit “courage and sacrifice” to endure misery caused by politicians in Washington.

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Too Big To Fail

On a parallel track, a history of Federal Reserve and Treasury bailouts of financial institutions, over several decades, established the concept that some companies are “too big to fail.” The leaders of those companies were thus encouraged to purchase or insure risky mortgage backed securities it now appears they didn’t even understand!  Now, we the taxpayers are funding bailout after bailout of these “too big to fail” institutions, which will soon include General Motors, Ford, and Chrysler.

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A Path To Disaster

America has started down a dangerous new path.  Government is rapidly becoming THE major source of capital and credit, pushing aside private sector sources. This means politicians and bureaucrats, most of whom have no relevant experience or qualifications, are beginning to use the power of government to substitute their judgment for that of entrepreneurs and investors in deciding which enterprises, products and services are worthy of the resources to start up or expand, and which are not.

President-elect Obama seems to be fully supportive of this trend and prepared to accelerate it as soon as his administration begins.  It’s time for those of us who prefer Liberty to the “wisdom and ingenuity” of elite government officials to begin demanding a halt to this madness before our nation is driven into economic stagnation and misery.

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Constitutional Amendment

We have a humble proposal:  A Constitutional amendment that prohibits future bailouts.  The Constitution has never authorized these bailouts, but Congress has done them anyway.  Now, the American People must put the politicians and the Executives and managers of all businesses and financial institutions on notice: In the future they will be totally accountable for their actions and will not be given access to any government funds if their decisions bring down their companies.  No company is too big to fail.

Clearly, investors are not confident that Congressmen, Senators, and Treasury officials have the insights to resolve the credit crises any more rapidly or decisively than the market forces they seek to subdue.  There was a brief rally leading up to election day, but the downward spiral resumed the following day.

1. Government seizes Fannie Mae and Freddie Mac.
2. John McCain moves ahead in the polls.
3. Lehman Brothers Bankruptcy.
4. Government seizes AIG.
5. Bush Administration announces bailout plan.
6. Federal Reserve Chairman Brenanke and Treasury Secretary Paulson testify on Capital Hill on bailout.
7. Barack Obama pulls ahead in the polls.
8. Barack Obama, John McCain and Congressional leaders meet with President Bush to negotiate terms of the Bailout.  Meeting ends in disagreement.
9. Washington Mutual becomes largest thrift failure in history.
10. House votes down first version of bailout legislation.
11. Senate passes, and President Bush signs revised bailout.
12. Barack Obama explains to Joe the Plumber that he will hike taxes on small businesses in order to “spread the wealth.”
13. Joe Biden warns the nation that Barack Obama will face a “generated” foreign crisis during his first six months.
14. Treasury Dept. announces bailout funds have been invested in bank stocks instead of mortgage backed securities.
15. Barack Obama elected President.
16. Chairman Brenanke and Secretary Paulson testify before an angry, Disappointed House Banking Committee.
17. Auto Executives Come to Washington with tin cups.
18. Auto Executives go back to Detroit empty handed.
19. Barack Obama announces his intention to appoint Tim Geithner as Treasury Secretary.

The announcement at 3PM Friday that Tim Geithner would be appointed Treasury Secretary transformed what was shaping up to be another down day on Wall Street into a spectacular, final hour rally.  For the day the Dow was up $494, or 6.5%, and the Nasdaq was up $68, or 5.2%.

Mr Geithner, who is currently President of the New York Federal Reserve Bank has served both Republican and Democrat administrations for almost two decades.  In recent weeks he has worked closely with Secretary Paulson on bailout decisions and thus brings a measure of continuity through the transition to the new administration.

Investors were thrilled to learn that for this post President Elect Obama had decided to go with experience instead of delivering on his campaign promise of “change we can believe in.”

Perhaps President-elect Obama can make the rally last longer.  He can announce that he will permanently cancel his plans, and renege on his campaign promises to:

• Punish small business with tax increases
• Hike the capital gains tax on investors who take the risks and make the investments necessary to jump start the economy
• Implement a crushing new tax on carbon
• Appoint Supreme Court justices who are hostile to liberty and private enterprise

Click the boat to see all articles in Big Bailout Series

Treasury Secretary Henry Paulson and Federal Deposit Insurance Corp. Chairwoman Sheila Bair testified before the House Banking Committee today.

Paulson gave a vague summary of how bailout funds have been deployed so far..  The Congressmen on the committee were dissatisfied because there has been no direct intervention to prevent foreclosures.

Paulson tried to pacify the Congressmen by listing various government initiatives that encourage lenders to voluntarily make concessions to borrowers, but Committee Chairman Barney Frank cut him off, complaining that these preexisting measures were largely ineffective and were not a substitute for using Bailout funds to directly help borrowers.

Sheila Bair described a “proactive program of loan modifications” being conducted by Indymac Bank, which became a ward of the government, managed by her agency, after it failed last June. Indymac offers borrowers a combination of temporary and permanent changes in interest rates and terms to reduce the monthly payment, but does not reduce loan balances.   Most of the Congressmen were enthusiastic supporters of this program.

As a 26 year real estate investor in a region with one of the highest foreclosure rates, I humbly offer insights the media and most of the politicians don’t seem to understand.

Foreclosures most often occur when the loan balance exceeds the market value of the home.  Borrowers who can not afford their payments and know they have to give up their properties will sell if they owe less than they will receive from a buyer.

But, when the net proceeds of a sale, after paying commissions and closing costs will be less than they owe, they have an incentive to just walk away and let the lender foreclose.  Why bother with a sale if you won’t receive any cash?

Even borrowers who can afford their payments have a strong incentive to walk away when they see neighboring homes selling for less and less and the gap between their market value and what they owe growing larger and larger.

In a speech to bankers back in March Federal Reserve Chairman Brenanke agreed with this assessment and warned his audience:

“In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure…A recent estimate based on subprime mortgages foreclosed in the fourth quarter of 2007 indicated that total losses exceeded 50% of the principal balance, with legal, sales, and maintenance expenses alone amounting to more than 10% of principal,” Bernanke said. “With the time period between the last mortgage payment and…liquidation lengthening in recent months, this loss rate will likely grow even larger.”

Brenanke added that lenders and those who own the securities backed by the at-risk mortgages are likely to lose more through the foreclosure process than they would through reducing what homeowners owe.

He was right.  Market values in the worst regions, including California, Florida, and Ohio, have fallen at least another 15% since March, and here in Northern California, values have fallen more than 50% since the bubble burst in three years ago.  Losses to lenders are indeed even larger, just as Brenanke predicted.

This is a textbook supply-demand scenario, with the continuously increasing supply of foreclosed properties for sale driving market values ever lower, leading to more foreclosures, more supply and even lower market values.

Generally, we at Liberty Works oppose any government intervention in what should be free markets and private sector business and lending relationships.  In this previous post we described how government pressure on private lenders and reckless malfeasance by the two Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, led to writing tens of millions of mortgages that can not be repaid, leading to the current, intractable crisis.

To be sure, there were also bad actors on Wall Street, abetting the process of bundling  these subprime mortgages into securities and selling them to pension funds and financial institutions worldwide.  But, had the government not thrown its massive weight behind the practice of granting mortgages borrowers could not reasonably be expected to maintain there would have been far less exposure on Wall Street and the pain would have been limited to a few of the most irresponsible of financial institutions, who would be driven out of business.  There would be no massive spill-over, and no need for Government to, in Secretary Paulson’s words “rescue the financial system from an imminent melt down.”

Reluctantly, we conclude that because government caused this crisis, government has a moral obligation to do what only government can do to stop the foreclosures.

While politicians and government officials have generated a lot of publicity around their various measures to “keep people in their homes and avoid foreclosures,” these programs have been largely ineffective because they usually increase, rather than reduce principal balances.  Thus, wave after wave of foreclosures continue, each a reaction to the most recent drop in market values.

If the foreclosures are to be stopped, government intervention must come in the form of principal reductions to a point below market values where borrowers can realize some cash after paying sales expenses.

Some officials have proposed plans that lower balances but then deprive borrowers of part or all of their equity if they sell in the future, redirecting that equity back to the lenders or to the government.  This concept, if implemented, will fail because it doesn’t solve the problem of the borrower’s incentive to walk away and let the lender foreclose.

Government currently has the power to reduce the pain it has caused, either by ordering lenders to lower loan balances to below current market value, or by changing bankruptcy law to permit the courts to order the balances lowered.  A bankruptcy law change would give lenders a powerful incentive to come forward and offer borrowers substantial balance concessions in order to avoid a worse outcome in bankruptcy court.

What’s the alternative to systematically lowering balances?  Those same lenders and millions more Americans will suffer even greater losses.

When systematic balance reductions become reality the decline in market values will cease immediately, as buyers who have been waiting on the sidelines for prices to bottom out will rush in to snatch up all the remaining foreclosures.

Toyota began building cars in America in 1984.  Their non-union plants offer competitive wages and benefits and they have no trouble attracting enough American employees.  Their business philosophy encourages every employee to be a partner in a relentless effort to improve quality and efficiency.

Volkswagen, Porsche, Mazda, Hundai, BMW, Mercedes, Toyota, Honda, and Nissan have all followed Toyota’s lead and opened assembly plants in America.  All are successful and profitable here.  Their total labor costs are less than half those of the unionized Detroit auto makers, but their employees are content and satisfied.

How did the United Auto Workers Union respond to emerging competition from Asian and European companies?  They maintained bitter, adversarial relationships with their members’ employers, and obstinately demanded ever more costly work rules, higher wages and more lavish benefits, putting those employers at an ever greater competitive disadvantage.

Just last year, the UAW finally reached an agreement with General Motors to change the pension system for future retirees, replacing the promise of a fixed retirement income  with company contributions to individual retirement accounts owned by the employees.  The union also agreed to a deal that calls for GM would make large lump sum payments to the pension fund in 2010 and the UAW to assume financial responsibility for supporting several hundred thousand current retirees.  But, it now appears that it will be impossible for GM to raise the money to make those payments. The UAW was twenty years too late in agreeing to these changes.

Its unlikely that hurling Bailout cash at the Auto makers will keep them in business for more than another year.  Then, they’ll be back for more cash.  Eventually, they’ll have to submit to reorganization in a bankruptcy court that will cost workers and retirees dearly.

The UAW claims to represent the best interests of its members.  If that were true, it would have advised them two decades ago that competition from foreign owned, American plants would surely threaten their future employment.

The union would have best served its members by becoming a more cooperative partner with their Auto Company employers.  Union boses should have educated the members on the massive changes in the Automotive marketplace and the need for them to scale back wage and benefit increases and relax work rules to prevent their employers from becoming non-competitive.

Instead, the union betrayed its members who have followed their union boses over a cliff, sacrificing long term job and retirement security for short term gains.

On the Left side of the war are collectivist ideas, backed by labor unions and Democratic politicians, and the public education establishment.  On the right side are the ideas that informed the founding of America, and made us the most successful, prosperous society in human history: liberty, individual responsibility, free enterprise, limited government.

The American auto companies of Detroit, General Motors, Ford and Chrysler, were once  known as The Big Three, because they manufactured almost all (90%) of the cars sold in America.    In The fifties and sixties General Motors’ market share hovered just below 50%, and “The General” was under constant threat of government attack as a monopoly.

Those were the good old days.  Today, we should call GM, Ford and Chrysler The Desperate Three.  This year, the three of them combined will produce about 40% the cars Americans buy.  It now seems certain that General Motors, and maybe Ford as well, will be forced into Chapter 11 bankruptcy/reorganization within weeks if Congress doesn’t come through with bailout cash.

The political big gorilla in the room is, of course, the union, The United Auto Workers (UAW).   The Desperate Three employ 239,000 people in North America.  But the cost of current workers is only the beginning of the UAW’s tab.  Long term union contracts have increased the burden on The Desperate Three over several decades, to the point where they  now support 775,000 retirees and surviving spouses with monthly pension and medical benefits, AND provide health insurance to an additional 985 thousand Americans!

To the Political Left these numbers are as they should be.  In their doctrine “a good job” is an entitlement and it should be a program of total economic security for the employee and his family.  The Desperate Three’s union contracted high wages, strict work rules, generous benefits and fabulous retirement programs have been the standard by which The Left seeks to measure all jobs.

The unions and the Leftist establishment had hoped their new President Obama combined with the Democratic Party’s increased majority in Congress would harness the power of government with new, pro-union laws and regulations to reverse the three decade decline in union membership and usher in a new era of union expansion and dominance.  But, non-union workers will be even less interested in tying their futures to the union movement if the Desperate Three are forced into chapter 11 bankruptcy/reoganization, resulting in major wage and benefit concessions ordered by the court.

The UAW has been a pillar of Democratic Party financial support for eight decades and now demands a hefty return on it’s investment.  Congressional Democrats are under immense pressure to come up with something to preserve the myth that unionization can milk endless benefits out of an employer with no downside consequences.

On the Liberty/Free enterprise side is the argument that Chapter 11 is the appropriate solution to this problem, with all stakeholders, including the union, making concessions to restructure General Motors into a healthy, competitive enterprise.

GM is selling several high quality products, has a world class engineering shop and a network of thousands of dealerships.   Without the burden of excessive debt and 775,000 retirees to support GM would instantly be transformed into a vibrant, profitable company.  The bankruptcy court is one of the few government services mandated by the US Constitution, and it has the means and authority to help GM turn around.

Of course there will be pain.  Any court ordered restructuring will surely force union employees and retirees to accept substantial reductions.  This is the unavoidable consequence of so many years of meeting excessive union demands.

A cash bailout from Congress, without major concessions from the union, will only delay the inevetable demise of GM.  In a few months we’ll be right back here again.  And again, the impulse from the Democrats in Congress will be to find some way to keep alive the fiction that this company can survive without the UAW accepting major cuts in wages and especially in benefits and retiree payements.

The case of Detroit’s Desperate Three Auto Makers leaves no doubt:  The Left’s economic ideas are immoral and unworkable.

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Sixty days ago Treasury Secretary Paulson and Federal Reserve Chairman Brenanke warned Congress and the public of imminent financial calamity that would engulf the entire economy.

According to the Paulson-Brenanke-government brain trust, the only thing that could save us from this fate was the immediate purchase, by the federal government, of “toxic” securities that were backed by mortgage loans of Indeterminate value and quality.   Congress was implored to authorize these purchases with the utmost urgency. After two weeks of politics Congress finally passed the famous $700 Billion bailout package.

That was sixty days ago.  This week the Treasury Secretary announced he has invested the first $190 Billion in stocks of banks and financial institutions, and that he will not be buying those mortgage backed securities after all.  Why not?  Here’s an excerpt from Secretary Paulson’s announcement:

As credit markets froze in mid-September, the Administration asked Congress for broad tools and flexibility to rescue the financial system. We asked for $700 billion to purchase troubled assets from financial institutions. At the time, we believed that would be the most effective means of getting credit flowing again.

During the two weeks that Congress considered the legislation, market conditions worsened considerably. It was clear to me by the time the bill was signed on October 3rd that we needed to act quickly and forcefully, and that purchasing troubled assets, our initial focus, would take time to implement and would not be sufficient given the severity of the problem. In consultation with the Federal Reserve, I determined that the most timely, effective step to improve credit market conditions was to strengthen bank balance sheets quickly through direct purchases of equity in banks.

Secretary Paulson’s actions and explanation does not inspire confidence.  Back in September when he asked for authority to buy mortgage backed securities he acknowledged that the process of pricing and buying the mortgage backed securities would be complicated and time consuming, taking many months.  Now he’s asking us to believe that a delay of only two weeks made the difference?  A better explanation is that he and his staff of smartest-people-on-earth don’t really know how to deal with this crisis.

In the six weeks since the President signed the bailout bill, the Dow has gone down 20% and the Nasdaq has declined 23%, both in very volatile trading.   These are staggering losses in a very short time, a vote of no confidence in the political establishment.

The best way to resolve this crisis and prepare for a new era of prosperity is for government to minimize its intervention, allowing markets to work.  There is more than ample proof in economic history that markets are smarter and more efficient than politicians and government officials, no matter how qualified.  And Secretary Paulson is certainly qualified.

Unfortunately, allowing markets to operate is only idea Congress is sure to reject.  Instead, we’ll see many more months, or maybe years, of frantic actions by government, diverting Trillions of Dollars from the productive private sector,  to back stop unproductive, financial institutions selected by political processes.

Fasten your seat belts.  As helpless citizens, at the mercy of politicians, we’re in for a long, bumpy ride.  And when it  gets really awful, look up the Constitution.   You’ll find that it doesn’t authorize the government actions and programs that got us into this mess.  Nor does it authorize Congress to seize resources from taxpayers to prop up businesses that should be allowed to fail due to their own mistakes.

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]]> http://libertyworks.com/big-bailout-frantic-changes-in-strategy/feed/ 2 http://libertyworks.com/big-bailout-20-the-rescue/ http://libertyworks.com/big-bailout-20-the-rescue/#comments Sat, 04 Oct 2008 17:16:49 +0000 BoomerJeff http://libertyworks.com/?p=1236 Taxpayers Lose Now,

Big Government Wins Later

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The Big Bailout…um “rescue” has finally been signed into law.  Now we can all now breathe a sigh of relief – until the next government caused crisis emerges, calling for yet another government rescue, which will in turn plant the seeds of a future crisis.

This is as good a time as any to point out a blatant deception that has been woven through the melodrama of the past two weeks.

During House and Senate Debates speaker after speaker has referred to the taxpayers being partially or fully reimbursed or even making a profit, as the government resells the toxic mortgage securities it will be buying under the authority in this bill.

It’s certainly true that the securities will eventually be sold, perhaps even for more than they will cost.   In fact, the chances of the government turning a profit are reasonably good.

But anyone who’s kept track of politics in recent decades knows the beneficiary will never be “the taxpayers.”  When, in a year or two or three, proceeds from the sale of these assets begin to flow back into the treasury, the political-media establishment will conspire to plant a name for them in the collective consciousness. That name may be something like “government dividends” or  “government windfall” or “a return on investment,” by a wise Congress.

The usual government-media spokesmen will insist that this “extra” money, sloshing into Washington without raising anyone’s taxes, should go to government programs for “struggling families,” or “alternative energy” or “climate change” or whatever is the latest political fad at that time.  The money will disappear a little faster than it comes in.

Even though today’s party line is that somehow “taxpayers” will be reimbursed, nobody currently in government contemplates sending checks to the 45% of Americans who pay all the personal income tax.  There certainly won’t be any distribution to the companies that pay the corporate income tax.

The ultimate beneficiaries will be those factions and causes that manage to prevail in the never-ending game of horse trading and influence peddling in Congress.

Shame on politicians in both parties for promising that “taxpayers will be repaid.”

Government to Fix The Crisis Government Caused

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In a nation where the people are supposedly free, and masters of their own destinies, we the people are hopelessly ensnared in the government’s web of corruption, hubris and stupidity.

We can only watch and wait while the self-appointed Smartest People in The World, including some of the very same politicians who are accountable for the crisis, presume to be clever enough to manipulate global financial markets with their brilliant words and legislation, but without causing new problems due to unanticipated consequences.

The Senate will vote today on a revised Big Bailout, recently renamed “Rescue.”

So far, the Senators don’t trust us, the voters who elected them and the taxpayers who will get stuck with the tab, enough to make the revised legislation public.   But Senators have told reporters that there are “tax breaks” and an increase in the Federal Deposit Insurance that guarantees bank deposits from $100,000 to $250,000.

LibertyWorks will provide updated information as it dribbles out from the sanctums of the Most High Masters of Our Fates.

Update:

The just released text of the Senate’s 451 page “rescue bill” is here.  One wonders how many of those Senators who will be voting today have read and completely comprehend all the consequences of every page of this bill, which apparently was just pubished this morning.  Barack Obama just parachuted in from the campaign trail this afternoon, and has already given a spirited speech on the Senate floor in support of the bill.  Has he read read and does he completely comprehend all the consequences that will result from these 451 pages?

Update 2:

The Senate has passed Bailout 2.0, an enhanced version of the bill that failed in the House Monday.  Tomorrow (Thursday) it goes back to the House for another vote.