Friday, August 17, 2012

GM and Fannie & Freddie and Spain

The taxpayer stepped up to the plate in the fall of 2008 to underwrite General Motors and FNMA and FMAC requiring a commitment of $ 250 billion plus.  We are now approaching round two.  Government Motors, as most people now call GM, is rapidly on a glide path to another bankruptcy, which will cost taxpayers approximately $ 50 billion and require, at a minimum, another $ 25 billion to protect the unions' juicy benefits.  Fannie Mae and Freddie Mac have an unlimited lifeline and their losses, now over $ 200 billion, are essentially unlimited.  But both GM and FNMA and FMAC have created many more millionaires as government-appointed bureaucrats, lawyers and accountants feast at the taxpayer's expense.  This is what happens when the government gets involved.

Europe has its own version of this.  Propping up banks in Spain, France and Germany has simply made matters worse in the Eurozone and has weakened, not strengthened, the banks.

GM and Fannie and Freddie and the European banks should have been permitted to fail.  By now, a new automobile company financed and organized by the private sector would have emerged and would be competing globally in a way that GM will never be able to.  Propping up Fannie and Freddie has prevented a housing recovery and cost the taxpayers hundreds of billions of dollars.  Had there been no bailout (and no Dodd-Frank), housing would now be in its second year of a strong recovery.  Pretending that Spain's banks are saveable has cost the Spanish government and European taxpayers several hundred billion euro -- so far.  Meanwhile unemployment in Spain surges past 25 percent.

Simply letting companies fail when they make bad decisions or when they are the victim of bad luck is the proper response.  Getting government into the act has never worked and it never will.  It only makes matters worse.

Thursday, August 16, 2012

Free Markets or Bureaucratic Dictatorship

Much of the political debate today is simply a question of whether one thinks capitalism is a good idea or not.  Many westerners seem to believe that the profit motive is fundamentally evil. Defenders of free enterprise are often thought to be morally suspect.  This is where the real struggle is being waged in today's politics.

The discussion about Bain Capital brings into sharp focus the debate on the merits of capitalism.  Should people risk their own capital to make money or should, instead, the government take people's wealth and 'make investments' with it.  That is what this debate is really all about.

A similar debate about free markets rages about health care.  Should a panel of educated and enlightened people appointed by polticians decide on your health care or should you purchase the health care and the insurance that you need and make such decisions yourself with consultation with health care professionals?  That some people are poor seems to weigh heavy in this debate.  But, this argument applies to everything, not just health care.

At the end of the day, this is an argument about whether free markets are going to survive.  Obamacare tosses out what is left of free market health care for a mandated system that forces every American to do what Obama wants or else.  Making your own health decisions is not an option under Obamacare.

The idea is that there is an enlightened elite that knows what all of us should be doing, what we should buying, what should be our energy sources, our health care providers, our bankers, and on and on.  That enlightened elite can do this better than the free market is the argument.

Has this been tried before?  Yes.  The Soviet Union, the China of the twentieth century, modern Cuba, modern Venezuela, modern Argentina are excellent examples of how an enlightened elite can perform.  Except for the governing elite, these societies were free of inequality (and greed, one supposes).  The governing elite, of course, lived (and lives) in palaces.  After all, the enlightened who guide us, should live well and they do.  As for the rest of us, we should be comforted that everyone else is as miserable as we are.  That seemed to be the ethos of the old Soviet Union.

How do people get to this bizarre idea?  Poor people are almost never in the vanguard of the movement to eradicate capitalism.  Friedrich Engels and Karl Marx lived luxurious life styles, certainly compared to the mass of their contemporaries.  Only from the rarified environment of the London Museum could Marx have concocted the absurd idea that a 'dictatorship of the proletariat' could bring anything worth having to anyone.  Real folks in the real world know that this is ridiculous.

Rich folks, movie stars and academics can engage in the luxury of dreaming that by imposing their views on everyone and substituting their views for individual freedom and free markets, the world will be a better place.  Everyone else is too busy trying to find a job and support their families to indulge in such nonsense.

Saturday, August 11, 2012

Romney Shows His Serious Side

By picking Paul Ryan, Mitt Romney has elevated the national debate.  Whether one agrees or disagrees with the Ryan budget plan, it is the only serious plan put forth by any elected official in the US.  Ryan is courageous and smart.  This has to change Romney's image with his conservative base.

One wonders if the Democrats will continue to look for irrelevant issues -- Bain, for example, or Romney tax returns for another -- or will the Democrats finally engage on the real issues of our times.

This election will become a true test for the American electorate.  I suspect Americans will rise to the occasion.

Friday, August 10, 2012

Debt Isn't The Only Problem

Even if there was zero sovereign debt in Europe, Europe's economic troubles would not be over.  Unemployment would still be high and the Euro-economy would still be mired in stagnation.  It is very hard to start a business in Europe and hiring workers is just plain stupid.  Since you cannot legally fire employees in most countries in Europe (as a practical matter), there will always be very, very high unemployment across the European plain.  Unemployment is a way of life in Europe and is becoming a way of life in the United States for pretty much the same reason.

It is very expensive in Europe and in the US to hire an employee even if the employee were willing to return every dime of their take home pay back to the employer.  The mandated costs and potential litigation make an employee, especially those of relatively low income, uneconomic.  This fact will be a persistent and continual drain on the economy of the US and Europe.  The antidote for this, according to most politicians, is bigger government which further sucks the life out of free markets and makes the body politic more and more beholden to government and less interested in promoting free enterprise.  What you end up with is modern day Greece. 

Few Greeks today believe in free enterprise.  Instead most Greeks believe that somehow magically by taxing the rich they can live a life of leisure with high per capita income and little or no work effort.  Why not? It has worked that way for the last two generations.   If only the rich would pay higher taxes!  So, the Greeks vote for increasingly polarized political parties of the far left and far right.  Either a neo-nazi or neo-communist regime is likely the political future of Greece.  Democracy hasn't much of a shot because it cannot deliver an economy that works.  So voters look for someone else who can deliver the good life and there are plenty out there who claim that they can do just that.

It is very difficult for free markets to survive in an open society.  People see problems and they want to fix them.  The fix is always bigger government, more regulations, less freedom.  Eventually, free enterprise is simply overwhelmed and economic stagnation takes over.  That's where we are.

So, debt is one thing but by no means the biggest thing.  People go bankrupt and live to rise again and so do countries.  But snuffing out hope for the future through big government, through excessive regulation and taxation can keep a country from returning to true prosperity.  That's where we are.  If all the US and Europe suffered from was excessive debt, then the future would be bright indeed.  Unfortunately overwhelming sovereign debt is not even remotely the biggest issue that is bedeviling the economies of the western world.

Wednesday, August 8, 2012

Bain, Private Equity and All That

What is the economic role of private equity?  Private equity firms buy or invest in businesses, mostly private businesses, sometimes public companies.  The usual pattern is that a private equity investment helps a fledgling company expand by providing funding and often management expertise.  For public companies, private equity is often the source of turning a poorly run company into an efficiently run business.  With rare exceptions, private equity enhances shareholder value.

Absent private equity, private and public businesses alike are less valuable.  Why?  Because private equity funds are a source of equity capital, a liquidity provider (through the sale of a company to a private equity fund), and an enhancer of value (by providing management and consulting expertise).  Because of the existence of private equity funds, business large and small are more valuable.  More valuable businesses hire people and are the engine of economic growth in a free enterprise economy.

Politicians who have nothing else to brag about have been attacking private equity as if there is something evil about the industry.  If you despise free enterprise and prefer government control of business, then you probably will not like private equity.  But, if you like free enterprise, job creation and a health economy, then you will love private equity.  President Obama has made his views clear.  He is no fan of private enterprise, job creation, or free markets.  It is hardly a surprise that Obama does not like private equity.

Tuesday, August 7, 2012

Buy Bonds -- The New Cure for Government Excess

Markets and politicians are clamoring for the Fed and the ECB to buy sovereign bonds, presumably to make it easier for absurd debt levels to get to even more absurd levels.  Great policy.  It's almost reassuring to see Tim Geithner in support, since he has a perfect record -- he's never been right once regarding economic policy.

So what is the logic behind asking the Fed and ECB to buy sovereign debt?  Basically, to make it easier to sell more of that debt by increasing the demand.  Where will the Fed and ECB get the money to buy the debt?  Ah, that is the question.  How about -- out of thin air!  What we used to call the printing press.  In modern times, the printing press has been replaced by digital creation, but is there any real difference?

So Europe and the US are reduced to hoping that running the printing press to put more money into circulation will rescue their stagnant economies.  Let regulatory overkill, oppressive taxation, and massive government bureaucracy continue unabated.  Instead, let's just print dollars and euros.  That's the new policy for the Geithner-Obama-Monti-Draghi generation.

The only thing we know for sure is that inflation -- a lot of inflation -- is in our future.  For Europe, inflation will be accompanied by economic and political chaos reminiscent of the German situation in 1923.  For the US, it could be the same.  The US has an alternative available in November.  But, if that comes and goes, the US will follow the European route.

Re-instituting free markets and reducing the reach of government are the only tickets to economic expansion.  Printing money, as a cure-all, simply exposes the desperation of the modern politician who has run out of bullets.

Christie Delivers

New Jersey Governor Chris Christie, with bi-partisan support, has delivered once more for the average citizen in New Jersey.  Yesterday Christie signed a law that finally begins to put some accountability into the public schools in New Jersey by requiring annual reviews for public school teachers and makes it easier to remove incompetent teachers.  Naturally the unions fought this reform, preferring incompetence and unaccountability to a successful future for New Jersey children.  Together with Scott Walker of Wisconsin and Bobby Jindahl of Louisiana, Christie has shown what can be done when you try -- even in states that are normally heavily Democratic.

Contrast the leadership of Christie, Walker and Jindahl with that of McDonnell and others who take no political risks to help the average citizen.  McDonnell's conservatism seems to stop at the church door.  He actively opposed having employees contribute to their own retirement during his first year in office, a position exactly opposite that of Christie in New Jersey.  McDonnell has never shown any inclination to take on the VEA, Virginia's public school teacher's lobby.  Quite the contrary.  McDonnell seems to have placated the VEA at every turn.  McDonnell's main legacy is likely to be his aborted attempt to remove the first female president of the University of Virginia in its history, while pretending to stay aloof from the process.

Republicans and Democrats alike are beginning to wake up to the fact that empty rhetoric and no action do not produce reform -- reform that almost every state in the United States desperately needs.  The fiscal problems and public employee largesse, issues that are intertwined, need to be addressed.  Courageous leaders address them.

Thursday, August 2, 2012

Waiting on the ECB

Markets are focusing on the ECB this morning, wondering if Draghi really has some plan to resolve the European insolvency crisis.  One thing for certain: whatever plan Draghi can produce will not involve any government expenditure reductions or government revenue increases anywhere in the Eurozone.  Absent either of these two measures, sovereign debt in Europe will only continue to move catastrophically higher.

Shifting the deck chairs on the Titanic is the Draghi model, one supposes.  Having the ECB buy Spanish or Italian debt may spur a one day market rally, but cannot possibly put a dent in the real crisis.  In fact, it only makes matters worse by encouraging the political forces in Spain and Italy to continue to avoid real reform in the vain hope that somehow, somewhere things will improve.  They won't.

The solution to the problems in Europe is obvious:  reform.  But, reform is not on the table -- never has been.  The left is so addicted to entitlement and bureaucracy, both in Europe and in the US, that they refuse to see where this is all headed.  Keep an eye on Illinois and California.  This disaster is headed our way for pretty much the same reasons.

Wednesday, August 1, 2012

How To Destroy Opportunity

Senator Jim Webb of Virginia and others have introduced a bill in Congress to raise the minimum wage from the current $ 7.25 to $ 9.80.  Why stop there?  Why don't they cut to the chase and raise the minimum wage to $ 20 per hour?  After all, people need more money don't they?  In fact, I would think that $ 100 per hour would solve all of our problems.  At $ 100 per hour, we would no longer have to worry about problems like poverty or inadequate income.

We should probably look into other things like guaranteed paid three month leaves of absence for all employees.  Put that on top of guaranteed health care.  How about free transportation to and from the office?  A day care center free for the children of employees?  There must be some more things that we can mandate.  This is very progressive thinking!

Great ideas!  Way to go Jim Webb!!