Economics 101
The New Economics?

As we all know by now, there is a credit crisis. Who is at fault will be a political football for months to come. Congress gave treasury $700B to solve the problem. After changing course several times, Treasury opted for the European way as a first step. That is, capital was injected into the 9 largest banks in the country. There are conflicting reports about the willingness of the banks to go along, but it is a done deal. Thus, the American banking system is now partially nationalized and the first checks go out today.

There is much hooha about this being an attempt to save capitalism, not take over capitalism. Now, it is true that the London Interbank Offered Rate [Libor], the rate banks charge each other to borrow money has been trading way above three month Treasury bill rates. And, when this is the case, no one lends. It creates anxiety because no one knows if they are lending to the next Lehman Brothers. So, money floods the safe haven of treasuries. Until the rate spread [the TED] narrows money will not come out of treasuries and to borrowers. It is too risky. So, by injecting capital, the Treasury hopes to create lending in spite of the TED.

Is this a good idea? Well, consider this. The palookas in Congress who got us into the credit mess by changing the requirements for mortgages will now have some say in our largest banks. Can they resist the type of meddling that Congressional types like to engage in? When things get better will the government want to get out? Wells Fargo announced they are looking for capital to repay the government pronto because they want no part of government ownership.

In Saturday’s Wall Street Journal there was a report of Democrat Senators such as Schumer wanting more controls over this money going to banks to make sure they make loans. What type of loans? Hopefully not the risky ones pushed by Congress that are now under water. And, was not the dividend to be paid on the preferred stock issued in exchange for the loans what the government was to receive? We were assured they were not getting into the banking business.

All of this new socialism in banking may just be a precursor to more socialism in general. Joe the Plumber has been made into a media star by the GOP and a villain by the Dems. But, he did extract a real issue…….redistribution of wealth which is a tenet of socialism as an economic system. The Speaker has already signaled a new stimulus package of $300 M is on the way. Pile that onto Bear Sterns, AIG, TARP, $ to auto makers and everything else in the pipeline and you have enormous government intervention into the marketplace. What will it be like when Dems control Congress and the Executive? The invisible hand of Adam Smith will be replaced by the visible hand of the government.

Remember when the Paulson/Bernanke/President/Democrat Congress warned us that if the stimulus package was not passed there would be Armageddon? Since its passage the Dow has dropped another 2000 points. The mortgages in trouble have yet to see TARP relief. The stock market may not yet have fully absorbed the full brunt of the recession. Stocks are wonderful bargains today, but investors are skittish because of not knowing the government’s next step. All things economic are in turmoil. Welcome to the Twilight Zone of the New Economics!

Election 2008
Debate Season Over….Finally

I don’t know about you but I am glad the debate season is over. They were yawners by and large. BO was the Teflon man…deflecting everything with his mantra that we “can’t afford 8 more years of failed Bush policies.” McCain was choppy in his answers and never went for the throat when given the opportunity. I heard some wag during this whole process say the both acted like senators, not presidential candidates. Neither inspire as leaders. BO is just trying not to lose; McCain is just trying…..

It seems pretty clear that barring a catastrophic event…BO will be the next POTUS. I have repeated many times to many people, whomever is elected with be a one termer. The problems are so large and systemic that the next POTUS will have grave difficulty in forging solutions. Look at the credit crisis. How much more can the government do? The Fed can cut rates again, but it will take a great deal of time to melt the lending ice jam. And, the economic crisis is still coming with a recession of who knows what magnitude upon us. The next POTUS can undoubtedly make things worse will ill advised policies, but I have a hard time seeing how he can make things better.

There will be some unfortunate outcomes of BO as POTUS. Here are a few:

1] There will be much gushing about how we have so progressed in this country by electing our first African American POTUS. I cannot remember a POTUS election cycle where the media, electronic and print, have so wanted on candidate to win. While I believe a lot of it is hatred of Geo. W. Bush and identifying McCain with him, there is a fair amount of rooting for a history making election. Why? So all the journalists can say I was there when it happened and write books about this new chapter in American history. Moderator of the VP debate anyone? In many ways this sociological factor outweighs who would be a better governor of the country.

2] With the Democrats in charge of the Executive and Legislative the investigation of the credit mess will lay the blame squarely on Wall Street ignoring the Dodd/Schumer/Frank Trinity who forced the risky lending principles on the banks and the public. These guys were big on the $700B bailout because they hope these funds can be used to cover their dirty laundry. CEOs will be correctly castigated and some many even make a visit to the Big House. But, it will be difficult to get the full picture and expose all the Congressional shenanigans in hearings controlled by Democrats and with an administration of Democrats.

3] The SCOTUS will not be changing its composition. With BO as POTUS we will have expansionist interpreters of the Constitution replaced by like minded folk. So, the 5-4 decisions will continue and there will be continual chipping away on strict construction. And, heaven forbid if one of the strict constructionists dies and has to be replaced while BO is President. Then, there will be change….and maybe that is what BO means with his change talk.

4] Another outcome of Democratic control of Executive and Legislative will be the increase of tax and spend policies. That is a tandem that goes together in policies of Democrats. And, BO’s tax breaks to 95% of the population…those earning <$250k…is actually the biggest move to income redistribution in decades. Between 35 and 40 % of Americans do not pay taxes today. So, their tax break would be to receive money from the government as a tax credit is not a break to one who does not pay taxes. And, where does that money come from? Taxpayers…which is why McCain [awkwardly] tried to make the “Joe the Plumber” connections in last night’s debate. This is what BO meant in his comment to Joe that BO wants “to spread the wealth around”.

5] The Acorn voter fraud story will be buried. As it now stands, BO looks to win decisively and if he does, there will not be any further inquiry into what happened in registering voters in what were to be key battleground states. Like the shenanigans in Congress with Fannie/Freddie and housing for all, what really happened probably will not come to light. And, the Acorn operatives will be at it again in the 2012 election instead of putting it to a stop now.

It will be interesting to see what happens over the next 19 days. No one wants any more untoward events, the kind that could swing the election, but they are always possible. With BO ahead, the economy and credit markets in the tank, and the unpopularity of the present POTUS, BO is as close as there can be to a shoe in 3 weeks before an election. Circumstances not controlled by McCain have swamped McCain. The same could be the fate of BO the next four years as POTUS.

Escape From Reason
Surrender to Despair

Modern man has given up his hope of unity and lives in despair—the despair of no longer thinking that what has always been the aspiration of men and women is at all possible.
Francis A. Schaeffer, Escape From Reason

Economics 101
Credit is also Debt

Credit has been way too easy to obtain is this country. Who does not get dozens of credit card applications in the mail each year? Mortgagees have mortgages they cannot pay. Mortgagors have granted loans they have no business giving. Consumers have credit card debt so huge they can’t pay the interest! Lenders have been leveraged 20-30-40 to 1. Credit has been abused.

Now credit has dried up. Banks will not even lend to other banks because no one understands the extent of the risk involved. Credit has a significant place in our economy. Companies borrow money daily to make payments banking on the receipts they will be obtaining. Now, no one wants to take the risk that their borrower can pay. Grandpa Kriner always said do not buy something you cannot pay for in cash. Darn good advice for the consumer because it keeps you out of debt.

For some reason, many believed there would never be a deflationary impulse in housing in spite of the overbuilding that was evident all over the country. But, now houses in many places are worth less that they were last year…even last week. But, the big mortgages taken against those houses still have to be paid. Another thing Grandpa said: “When you have a mortgage the bank owns your house.” The situation with the current crisis: lots of debt; decreasing equity; no place to turn to refinance or pay the debt.

We have been witnesses to the circus in Washington trying to solve the credit problem encouraged by the same clowns who made this possible. That is not excusing greedy lenders who tried to come up with fancy new ways to make mortgages that were of questionable value into securities. Yet, without the attempt to make home ownership an entitlement, the sub-prime mortgage mess would never have occurred. But, the real question is what this all means to you?

Get out of debt when you can…as soon as you can. If the government does enter the banking market as appears to be the case, expect more mucking about. Why? What free enterprise action does the government do better than the market? You get the idea. Your share of the bailouts of Bear Sterns, Freddy & Fanny, AIG and whatever is next will be sufficient debt for you. Remember whatever all these governmental actions are called, it is now attempting to unfreeze the credit markets. Credit must flow for the economy to work. But, also remember, credit is also debt. You will be saddled with more of it by your government; so avoid it on your own.

Escape From Reason
Changed Thinking

The mass of people have received the new way of thinking through the media without analyzing it…It is not merely that they think different things. They think differently. Their thinking has changed in such a way that when you say Christianity is true the sentence does not mean to them what it means to you.

Francis A. Schaeffer, Escape From Reason