Treasury to Pump Up To an Additional $30.1 Billion into General Motors after Bankruptcy

General Motors will file for bankruptcy tomorrow morning. A smaller GM will come out of the reorganization with union workers protected nicely. Unsecured bond holders do not appear to be in the same shape.

The U.S. Treasury is prepared to provide approximately $30.1 billion of financing to support GM through an expedited chapter 11 proceeding and through the transition to a new GM, a senior Treasury official told reporters tonight on a conference call that I participated in.

The Treasury does not anticipate providing any additional assistance to GM beyond this commitment. The Governments of Canada and Ontario will participate alongside the U.S. Treasury by lending $9.5 billion to GM and New GM.

In exchange for funds already committed by the U.S. Treasury and the new injection of $30.1 billion, the U.S. government will receive approximately $8.8 billion in debt and preferred stock in the new GM and approximately 60% of the equity of the new GM. The U.S. Treasury will also have the right to appoint the initial directors other than those that will be selected by a newly established VEBA and the Canadian government.

The new GM will establish an independent trust (VEBA) that will provide health care benefits for GM’s retirees. The VEBA will be funded by a note of $2.5 billion payable in three installments ending in 2017 and $6.5 billion in 9% perpetual preferred stock. The VEBA will also receive 17.5% of the equity of New GM and warrants to purchase an additional 2.5% of the company. The VEBA will have the right to select one independent director and will have no right to vote its shares or other governance rights.

As of tonight bondholders representing only approximately 54% of GM’s unsecured bonds have agreed to exchange their portion of the Company’s $27.1 billion unsecured debt for their pro-rata share of 10% of the equity of new GM, plus warrants for an additional 15% of the new Company.

Curiously, all secured GM bondholders will be paid in full this time, unlike in the Chrysler reorganization plan. There is one difference, however, this time compared to the Chrysler reorganization, a person familiar with the situation stated. In the Chrysler situation the secured debt was held by hedge funds and other undesirables, this time the secured debt is held by banks. Do I hear Jamie Dimon clapping in the background? It sure wll be nice to see a copy of the secured bondholder list, which should eventually surface out of the bankruptcy court.

The goal of the new GM will be to lower its breakeven point to a 10 million annual car sales environment, people famliar with the situation said. Before restructuring, GM’s breakeven point was in excess of 16 million annual car sales.

Even during the bankruptcy process, employees will get paid in the ordinary course, including salary, wages and ordinary benefits. Assuming the process moves forward as expected, Pension Plan and VEBA funding will be transferred to New GM.

The Treasury and White House continue to promote this as a situation where as a common shareholder, the government is a "reluctant shareholder" that will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions.

Yet, when asked, a senior White House official said that despite both GM and Chrysler now headed through the bankruptcy process and out of it within two to three months, "On a go forward basis, the staff of the [auto] task force will remain active."

"There's plenty[for the task force] to do," he said, before heading off to meet with the President.

The Big Collapse Could Be Very Near

The Federal Reserve appears to be increasingly nervous about the long term bond market. This is serious. How panicked are they? After leaking a story on Friday, they are back at it on Sunday.

The Federal Reserve leaked to CNBC's Steve Liesman on Friday that they weren't targeting long rates. Why such a leak? Probably because the Fed did not want to appear impotent in controlling the long rate. So they put out the word through Liesman that they weren't targetting the long rate. Can you imagine what would happen to the markets if it sensed long rates were beyond the control of the Fed?

The Fed can of course print money to buy up every Treasury bond in existence, but the inflationary ramifications would be Zimbabwe like, and crush the dollar on international currency markets. Are we near the phase where all hell breaks loose? I have never even answered, maybe, to this question before. It's always been, "no." Now it's maybe.

What really has me spooked is another article out this afternoon (on a Sunday) that Drudge has even picked up. It's a Reuters story by Alister Bull. The headline: Federal Reserve puzzled by yield curve steepening.

Translation, the Fed doesn't know what is going on, but they are really scared.

Here's more from Bull:

The Federal Reserve is studying significant moves in the U.S. government bond market last week that could have big implications for the central bank's strategy to combat the country's recession.

But the Fed is not really sure what is driving the sharp rise in long-dated bond yields, and especially a widening gap between short and long term yields.

Do rising U.S. Treasury yields and a steepening yield curve suggest an economic recovery is more certain, meaning less need for safe haven government
bonds and a healthy demand for credit? If so, there might be less need for the
Fed to expand the money supply by buying more U.S. Treasuries.

Or does the steepening yield curve mean investors are worried about the deterioration in the U.S. fiscal outlook, or the potential for a collapse in the U.S. dollar as the Fed floods the world with newly minted currency as part of its quantitative easing program. This might be an argument to augment to step up asset purchases.

Another possibility is that China, the largest foreign holder of U.S. Treasury debt, has decided to refocus its portfolio by leaning more heavily on shorter-term maturities...

An obvious culprit for the move in bond yields is the country's record fiscal deficit, which will generate a massive amount of new government issuance.

The U.S. Treasury must sell a record net $2 trillion in new debt in 2009 to fund a $1.8 trillion projected fiscal deficit, resulting from falling tax revenues, an economic stimulus package and sundry bank bailouts.

It's the Chinese, and any other Treasury bond buyer who follows the markets, that have pulled away, to varying degrees from buying Treasury long securities. No one wants to be the last one holding bonds, where the new debt about to be issued is in the trillions.

Bull continues with the part of the message the Fed really wanted to get out:

With officials still grappling to divine the factors steepening the yield curve, a speedy decision on whether to ramp up the Treasury debt purchase program or the related plan to snap up mortgage-related debt seems unlikely.

"I'm in wait-and-see mode," said one Fed official who spoke on the condition of anonymity. "We laid out the asset purchase plan and we're following it. That is going to have some affect on various interest rates, but together with a hundred other things. So I don't think we should be chasing a long-term interest rate," the official said.

It's the same message as Friday. The Fed does not want to spook the world into thinking that it can't push long term rates down, so it says it is not trying. But if rates continue to climb, a panic out of Treasury securities is a very likely scenario. And Bernanke has only one play to force long rates back down, buy every long bond in sight, which of course is highly inflationary and puts upward pressure on rates. How's that for a dilemma?

The end of the current financial system, as we know it, maybe iminent. If you would have asked me even two weeks ago if collapse was imminent, I would have said it was highly unlikely, now I am saying it is possible. Bernanke may be able to patch things up short-term, if he is lucky, but long term the U.S. financial structure is in serious trouble. There is just too much Treasury debt that needs to be raised. An international panic out of Treasury securities, even a slow controlled panic, means the Fed will be the major buyer. This will ultimately mean record inflation.

And keep this in mind, we have never seen a collapse of a currency like the dollar. Even the hyperinflation during Germany's Wiemar Period can not serve as an example. Since the dollar is the reserve currency of most of the world, a panic out of the dollar means more dollars will return to the U.S. shores than any country has ever experienced.

Other countries have had collapsed currencies, but never in the history of world of finance has so much currency been held outside a country of issue that could come flying back, almost on a moments notice. If the panic out of the dollar starts, even if Bernanke stops printing money (unlikely), all the dollars flying back into the U.S. could cause a huge price inflation all on its own.

I Hope Mario Rizzo Has His Tongue in His Cheek

I have been puzzling over a Mario Rizzo post for a few days. Rizzo is generally a pretty solid economist. He's not Hayek, but who is?

In the puzzling post, he asks the question, What Ended the Great Recession?

He lists three possibilities:

1. Fiscal Stimulus

2. TARP Lending to Banks

3. TALF and Securitized Lending

Is Rizzo saying that one of these government actions is what commentators will say ended the recession? Does he actually think one of these ended the recession?

Rizzo doesn't really say. Maybe there is some kind of inside joke I'm missing. To me, Rizzo's post is very poorly worded, at best. At worst, he's about as Austrian as Paul Krugman.

For the record, the "recovery" is a result of the Fed reversing monetary policy in late September 2008. From M2nsa money growth under 2.0% in the summer of '08, Bernanke completely reversed engines with money growth at double digit rates for months.That'll goose any economy.

Rizzo does mention the coming inflation, so may be he gets the money printing and just assumes it is understood.

I'm baffled.

Now, Euro Money Supply Out of Control

Following in the steps of Federal Reserve, the European Central Bank has joined the out-of-control money printing bandwagon.

M1 euro money supply growth rose sharply in April, from 5.9% to 8.4%, with the 6 month rate at 9.1% and the 3 month rate at 11.9%, reports Stefan Karlsson In August last year, annualized euro was as low as 0.2%.

Gold is going up for a very good reason. There's a near global severe price inflation ahead.

Niall Ferguson Smashes Paul Krugman

The NYT columnist and Nobel Prize winner, Paul Krugman, has been body slammed by historian Niall Ferguson. Writes Ferguson at NYT:

Most commentators were unnerved by [the recent increase in long term Treasuery rates]... coinciding as it did with warnings about the fiscal health of the US. For me, however, it was good news. For it settled a rather public argument between me and the Princeton economist Paul Krugman...

A month ago Mr Krugman and I sat on a panel convened in New York to discuss the financial crisis. I made the point that “the running of massive fiscal deficits in excess of 12 per cent of gross domestic product this year, and the issuance therefore of vast quantities of freshly-minted bonds” was likely to push long-term interest rates up, at a time when the Federal Reserve aims at keeping them down. I predicted a “painful tug-of-war between our monetary policy and our fiscal policy, as the markets realise just what a vast quantity of bonds are going to have to be absorbed by the financial system this year”.

De haut en bas came the patronising response: I belonged to a “Dark Age” of economics. It was “really sad” that my knowledge of the dismal science had not even got up to 1937 (the year after Keynes’s General Theory was published), much less its zenith in 2005 (the year Mr Krugman’s macro-economics textbook appeared). Did I not grasp that the key to the crisis was “a vast excess of desired savings over willing investment”? “We have a global savings glut,” explained Mr Krugman, “which is why there is, in fact, no upward pressure on interest rates.”

Now, I do not need lessons about the General Theory . But I think perhaps Mr Krugman would benefit from a refresher course about that work’s historical context...

Of course, Mr Krugman knew what I meant. “The only thing that might drive up interest rates,” he acknowledged during our debate, “is that people may grow dubious about the financial solvency of governments.” Might? May? The fact is that people – not least the Chinese government – are already distinctly dubious. They understand that US fiscal policy implies big purchases of government bonds by the Fed this year, since neither foreign nor private domestic purchases will suffice to fund the deficit. This policy is known as printing money and it is what many governments tried in the 1970s, with inflationary consequences you do not need to be a historian to recall.

No doubt there are powerful deflationary headwinds blowing in the other direction today...But the price of key commodities has surged since February. Monetary expansion in the US, where M2 is growing at an annual rate of 9 per cent, well above its post-1960 average, seems likely to lead to inflation if not this year, then next. In the words of the Chinese central bank’s latest quarterly report: “A policy mistake ... may bring inflation risks to the whole world.”

The policy mistake has already been made – to adopt the fiscal policy of a world war to fight a recession. In the absence of credible commitments to end the chronic US structural deficit, there will be further upward pressure on interest rates, despite the glut of global savings. It was Keynes who noted that “even the most practical man of affairs is usually in the thrall of the ideas of some long-dead economist”. Today the long-dead economist is Keynes, and it is professors of economics, not practical men, who are in thrall to his ideas.

If anyone wants to stand up for Krugman's side in this debate, put your retirement money in long term Treasury securities. Go ahead, I dare you.

Week End Chart: Initial Claims for Unemployment Insurance

Initial claims for unemployment insurance is a leading indicator of the direction of the economy. It varies from the actual unemployment rate, which is a lagging indicator. News headlines rarely differentiate enough between the two numbers and the difference between their leading and lagging characteristics. If you want to understand where the economy is headed, keep an eye on initial claims and forget about the actual unemployment rate.

Billionaires Meet in Secret; Oprah As Oligarch?

Some of the world's leading activist billionaires met in secret recently. News of the meeting is starting to leak out, thanks to initial reporting from the internet site, IrishCentral.com.

Warren Buffett was there, so was Bill Gates, Michael R. Bloomberg , George Soros, Eli Broad, Ted Turner, Peter G. Peterson , Julian H. Robertson Jr. and, get this, Oprah Winfrey.

NYT reports that:

Even as details trickled out...participants steadfastly refused to reveal the content of the discussion. Some cited an agreement to keep the meeting confidential.

Bill Gates and Warren Buffett, along with David Rockefeller, were the catalysts for the meeting, according to ABCnews.com.

Ostensibly, the meeting was about philanthropy. But these billionaires are activist philanthropists. There's a lot of giving by other billionaires, who are quiet and traditional in their giving. This group is not.

Patricia Stonesifer, senior advisor to the Gates foundation's trustees, Bill and Melinda Gates and Warren Buffett, told ABCNews.com that the discussion "ranged from emergency relief efforts to scholarship efforts, to U.S. education efforts to global health." Hmmm, isn't President Obama planning a big healthcare push? And, just what kind of education are we talking about?

Said ABCnews.com:

There remain as many questions about the meeting's details as there are about the logistics behind its organization. How did some of the world's most public figures coordinate their schedules, travel, and security with no one in media knowing about it?

A meeting of the country's top philanthropists is "extraordinary" and "really unusual," said Stacy Palmer, editor-in-chief of the Chronicle of Philanthropy.

According to NYT:

The gathering started at 3 p.m. on May 5, a Tuesday, and lasted through dinner at the private residence on the Rockefeller campus of Paul Nurse, the university’s president, while he was out of town, said Joseph Bonner, a spokesman for the university.

The university became involved after the elder Mr. Rockefeller, its former longtime chairman, requested the university to provide space for the meeting, Mr. Bonner said. “Our role was just to provide a site for those people to meet,” he said.

There is something very strange going on in America right now. First secret meetings of newspaper publishers, an aggressive new President who desperately wants to stamp a big picture FDR type change on the country, and now secret meetings by the wold's most activist billionaires.

$50 Billion Tucked Into Legislation for Auto Makers

If this sticks, Goldman Sachs is going to be jealous

Robert Reich's policy recommendations, if implemented, would be disastrous, but at least he sees what is going on now, and he is connected enough to know where some of the multi-billion in gifts are buried:

America now has a full-blown industrial policy. But it's an odd one -- a combination of lemon socialism and taxpayer-financed regulation.

Consider GM and Chysler. To what purpose are our taxpayer dollars being put as we bail them out? Apparently only to help them survive, even as pale shadows of their former selves. Steve Rattner, the Administration's auto expert, explained last month that the government was "making an investment decision. We're not running these auto companies. We are helping them restructure and reposition themselves for the future." Which raises the question: Why bother at all, if a huge portion of their employees and those of their dealers and suppliers are losing their jobs?

This week the Administration announced new fuel economy targets. But auto buyers aren't particularly interested in fuel efficiency now that gas prices are low. So how are GM and Chrysler to pay the costs of achieving the new targets? One way, according to GM, will be to build lighter cars and trucks abroad. Even then, the new standards will raise costs. So tucked into the latest version of climate legislation unveiled this week by the House Energy and Commerce Committee is a provision that doubles to $50 billion loans to help auto makers comply.

What's Up Between Mankiw and Feldstein?

Greg Mankiw is not known for in your face attacks at his blog, unless provoked, e.g., Paul Krugman.

I'm not sure completely what's going in one Mankiw post, but reading between the lines, it doesn't sound nice. Here's the full post:

Marty leaves AIG

The Crimson reports that after 22 years, Marty Feldstein is leaving the AIG board of directors, where he served "on the board’s finance and risk management committee as well as the regulatory, compliance, and public policy committee."

This will give Marty more time for his work on President Obama's economic advisory panel.

For the record, a question I ask other economists when I meet them is some form of the question, "Do you know what the current money supply growth is?" Not many know. I saw Marty in Los Angeles last summer, when I asked him, he hesitated a bit and then gave me the exact number off of that week's Federal Reserve H.6 report. Marty's watching the numbers, which is probably why he is more concerned about inflation than Mankiw.

Former GE Chairman Jack Welch Has the Twitter Bug

NYT's Joe Nocrea writes:

So I’m at the Red Sox-Mets game at Fenway Park on Friday night, and who do I bump into but fellow Red Sox fanatic Jack Welch, and his wife Suzy, author (most recently) of “10-10-10.” Jack, who is 73, turns out to be a big-time Twitterer. “It’s great,” he rasps at me when I express my skepticism at the value of Twitter. “Instant feedback. I love it.” Then he pulls out his BlackBerry, and starts to tweet:

“In suite with NYT star business columnist Joe Nocera. He wrote about Ford today. Any questions for Joe?” And boy were there ever. Within seconds, the questions were pouring in, which Suzy later e-mailed me so I could write a blog about them. “Blogging,” laughed Jack. “You’re so old-fashioned.” Yes, I am.

To follow me on Twitter, follow this link.

FDIC Restricts Interest Rates Banks Can Pay

In the continuing encroachment on free markets, the FDIC is now dictating in certain circumstances what interest rates banks can pay out.

The FDIC voted to bar a bank with insured deposits from paying interest rates that "significantly exceed" prevailing market rates if the bank is deemed not well capitalized.

The new rule requires the FDIC to post a "national rate" on its website, which bankers would have to refer to in deciding whether their offered rate qualifies as reasonable. If a bank feels that local conditions require an adjustment, it can appeal to its regulators for an exemption.

This is simply another control point for the FDIC. A bank that is not in the good graces of the FDIC can be squeezed by telling it that its rates "significantly" exceed prevailing rates, on the other hand it can let the higher rate slide for a favored bank.

Only in a free market, without the moral hazard of FDIC insurance, can it be deemed what is and is not a free market rate. There may be circumstances that a given type of bank in a certain location where the free market will support a higher rate.

The regulation march continues.

On Peter Boettke, From An Outside Observer

I don't personally know Peter Boettke. I have never met him. And, I am not big on most awards that are handed out. However, I note that Boettke was named George Mason University's Faculty Member of Year by GMU's Alumni Association.

As an outside observer, watching the way Boettke promotes his students and the way his students praise his mentoring, the award appears richly deserved. I suspect a few other Austrian profs, past and present, who could have used a bit of the Boettke touch.

Sontomayor On Law Making

There's a clip circulating the internet of Supreme Court nominee Sonia Sontomayor as part of a panel where she says law is made at the Appeals Court level. The clip is being circulated as an attack piece.

The textbooks, of course, say only Congress can make law. Still there is something very real world about what Sontomayor said.

Indeed, Sheldon Richman has a very thoughtful comment seeming to take Sontomayor's view on the matter.

Secret Meeting of Newspaper Publishers

A friend tells EPJ that newspaper publishers met secretly just outside Chicago (near the airport) on Thursday.

Attending the meeting were senior executives from: The New York Times, Hearst, Scripps, McClatchy, Advance, Gannett, MediaNews Group, Philadelphia Media Holdings, Lee Enterprises, Freedom Communications, and the Associated Press.

On the agenda, declining revenues, and the internet.

The meeting was organized by the Newspaper Association of America.

There also appears to have been an earlier secret meeting in San Diego.

Can a reach out to government for tweaking of this rule or that rule be far behind?

As Adam Smith said:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

Pravda: America's Descent into Marxism is Happening with Breath Taking Speed

Pravda, Russia's leading news organization, has reprinted an article that originally appeared at the Russian blog, Mat Rodina. Does the average Russian understand what is going on in America, better than the average American does?

Here are key excerpts:

It must be said, that like the breaking of a great dam, the American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people...

The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been a record setting, not just in America's short history but in the world. If this keeps up for more then another year, and there is no sign that it will not, America at best will resemble the Wiemar Republic and at worst Zimbabwe.
..

......the very thieves ,,,[with]l their thefts, loses and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more then ordinary street thugs, in comparison...

These men, of course, are not an elected panel but made up of appointees picked from the very financial oligarchs and their henchmen who are now gorging themselves on trillions of American dollars, in one bailout after another. They are also usurping the rights, duties and powers of the American congress (parliament). Again, congress has put up little more then a whimper to their masters.

Then came Barack Obama's command that GM's (General Motors) president step down from leadership of his company. That is correct, dear reader, in the land of "pure" free markets, the American president now has the power, the self given power, to fire CEOs and we can assume other employees of private companies, at will. Come hither, go dither, the centurion commands his minions.

So it should be no surprise, that the American president has followed this up with a "bold" move of declaring that he and another group of unelected, chosen stooges will now redesign the entire automotive industry and will even be the guarantee of automobile policies. I am sure that if given the chance, they would happily try and redesign it for the whole of the world, too. Prime Minister Putin, less then two months ago, warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster. Apparently, even though we suffered 70 years of this Western sponsored horror show, we know nothing, as foolish, drunken Russians, so let our "wise" Anglo-Saxon fools find out the folly of their own pride...

The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker.

Again, the American public has taken this with barely a whimper...but a "freeman" whimper.

In other news, the Rasmussen daily tracking poll shows 59% of voters say they at least somewhat approve of the President's performance so far.

The poll for Friday shows that 37% of the nation's voters now Strongly Approve of the way that Obama is performing his role as President. Twenty-seven percent (27%) Strongly Disapprove giving Obama a Presidential Approval Index rating of +10.

(HTdrudge)

Fed Not Targeting Long Rates

The Federal Reserve has leaked to CNBC's Steve Liesman that it is not targeting interest rates on long bonds.

Liesman reports that the $1.2 trillion in mortgage assets and $200 billion in Treasury securities bought by the Fed was an attempt by the Fed to backstop the troubled credit market and was not designed to impact rates, according to his sources, which if it isn't Bernanke, is at a minimum a leak cleared through Bernanke.

Like I have said, over the next ten years, you are going to be able to make a career out of shorting interest rates. There is no way bonds stay where they are, their is too much money that needs to be raised, and although the Fed will be in the market sopping up some of it, it will be much too inflationary for them to buy enough to maintain rates at the current low levels.

If you have borrowed long term, or plan to, make sure you have the rates locked in on a non-callable fixed rate basis. Chances are that rates this low will not be around again for a long time.

Jeffrey Tucker Is Not Going to Like This

President Obama's nominee for the Supreme Court, Sonia Sotomayor, does not appear to take the view of Jeffrey Tucker and the anti-free market extreme left on intellectual property, i.e. what you create with your mind is also mine.

As WSJ's John McKinnon puts it, " Judge Sotomayor's private-sector experience suggests she would bring a certain sympathy for protecting the rights of copyright and patent holders."

The full WSJ piece is worth reading as it suggests some logic to Sotomayor's judicial rulings, at least in the field of intellectual property.

The Sotomayor rulings that WSJ cites do not give Sotomayor much room for applying or indicating she understands my view on IP protection for all who arrive independently at a creation versus those who arrive first, but there is no indication that she has IP views beyond somewhat traditional IP protection.

Oil Prices Hit Six Month High

Oil prices today rose above $66 a barrel, a six-month high and heading for their biggest monthly gain in more than 10 years.

Abdalla El-Badri, Opec’s secretary general, said prices could rise to $70-$75 a barrel by the end of the year. “The outlook is improving,” El-Badri said over, reports FT.

Given the amount of dollars Bernanke has printed El-Badri is likely being conservative. Oil will eventually be back over $100 a barrel.

Bernanke as Mad Scientist

I am really beginning to see Fed Chairman Ben Bernanke as a mad scientist who is using the economy as his personal laboratory.

In early 2008, we had money growth (M2nsa) at a 12% annualized growth rate. During the summer of '08, he slowed money growth to as low as 1.2%.

In late September of '08, he again hit the gas pedal taking money supply to 15% annualized growth. Over the last month, he has started to slow money growth, again. Three month annualized growth has fallen to 6.4%.

Given the amount of Treasury securities the Fed will have to buy, I don't expect the growth rate to stay this low, but I have never seen such whipsaw action in money growth, never. And I have pretty much looked at all money growth since the inception of the Fed.

Either Bernanke is scared as hell because he knows how much money printing he will have to do, so he slips in a breather every once and awhile, or he is truly mad, and is experimenting with the economy with various "tools" that are jerking money supply all over the place.

In either case, it is not healthy and the jerking around of the money supply will also, of course, jerk around of the economy.

Geithner to Put on a Comedy Show in China

At a Treasury briefing this morning, a senior Treasury Department official told reporters that Treasury Secretaty Geithner will urge Chinese officials to create an economy where consumers spend more and save less.

"The efforts China could take would be efforts to strengthen the comfort that Chinese households have in spending, which largely involves reducing or addressing the reasons why they feel such a great need to save for precautionary purposes," said the senior Treasury official.
By "comfort" the Treasury official indicated that means encouraging Beijing to offer more generous health-care, retirement, welfare, educational and other benefits in order to persuade the average Chinese citizen that spending now doesn't mean starving later.

If the Chinese have any sense, they should enjoy Geithner's one act play for what it is, sheer madness. They should thank him for making the long trip, feed him lots of won ton soup and fortune cookies and graciously seem him off when he is ready to leave.

The U.S. is in serious financial trouble because of the exact policy recommendations Geithner is going to deliver to the Chinese. Does he realize this? And, just what business is it of Geithner's to be telling the Chinese how to run an economy that seems to be doing quite well?

Does he realize the inflation this will mean at the U.S. consumer level in the unlikely event he is successful in convincing the Chinese to compete for consumers goods against American consumers? Further, saving less will mean less money available to buy U.S. Treasury securities. Does the Treasury Secretary understand this? He honestly would be making more sense if he went over there and told the Chinese that the Treasury was going to start putting Mao's picture on long term bonds, and the Great Wall of China on the one hundred dollar bill.

John Maynard Geithner, aka Tim Conway, is scheduled to arrive in Beijing on Sunday for performances Monday and Tuesday.

More Obama Outrage, Partisan Auto Dealership Closings

Welcome to Obama Country, where you better be wearing an Obama button if you want to operate here.

The latest news from the Washington Examiner:

Evidence appears to be mounting that the Obama administration has systematically targeted for closing Chrysler dealers who contributed to Republicans. What started earlier this week as mainly a rumbling on the Right side of the Blogosphere has gathered some steam today with revelations that among the dealers being shut down are a GOP congressman and closing of competitors to a dealership chain partly owned by former Clinton White House chief of staff Mack McLarty.

The basic issue raised here is this: How do we account for the fact millions of dollars were contributed to GOP candidates by Chrysler who are being closed by the government, but only one has been found so far that is being closed that contributed to the Obama campaign in 2008?

Florida Rep. Vern Buchanan learned from a House colleague that his Venice, Florida, dealership is on the hit list. Buchanan also has a Nissan franchise paired with the Chrysler facility in Venice...

Also fueling the controversy is the fact the RLJ-McCarty-Landers chain of Arkansas and Missouri dealerships aren't being closed, but many of their local competitors are being eliminated. Go here for a detailed look at this situation. McClarty is the former Clinton senior aide. The "J" is Robert Johnson, founder of the Black Entertainment Television, a heavy Democratic contributor.

A lawyer representing a group of Chrysler dealers who are on the hit list deposed senior Chrysler executives and later told Reuters that he believes the closings have been forced on the company by the White House.

"It became clear to us that Chrysler does not see the wisdom of terminating 25 percent of its dealers. It really wasn't Chrysler's decision. They are under enormous pressure from the President's automotive task force," said attorney Leonard Bellavia.

Obama, by the way, attended two Hollywood fundraisers. Reviewing his record to date, he told one of the audiences:

Los Angeles, you ain't seen nothing yet.

The Gifting of Washngton Mutual to Jamie Dimon, Part 2

I have previously detailed my belief that Washington Mutual was gifted to JPMorgan Chase (Jamie Dimon).

I questioned Assistant Treasury Secretary for Economic Policy under Henry Paulson, Phillip Swagel, about any capital gains that JPMorgan Chase may have enjoyed as a result of the acquisition of WAMU. He said he hadn't seen any numbers on it.

Now some of the numbers are being released publicly. In a story titled, JPMorgan’s WaMu Windfall Turns Bad Loans Into Income, Bloomberg writers Ari Levy and Elizabeth Hester report:

JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

There's your answer to why JPMorgan Chase was not required to raise any additional capital by the government following the stress tests.

Just as I suspected the WAMU acquisition had a lot to do with it. Remember, future income was used as part of the formula, and counted as incoming capital, during the stress tests. Of course, $29 billion can relieve a lot of stress. There's a bit of hocus pocus to the accounting going on here. You write down the loans dramatically, then you recognize the money coming in on what you wrote down as income which then increases your future capital for stress test purposes and viola, who needs to raise additional capital? Not JPMorgan Chase.

In truth, as John Hempton points out, the loans should never have been written down in the first place. Thus, based on the way banks are measured these days (which I believe is inaccurate, but still the way they are all measured) WAMU was not in any worse shape than most other banks. Or as Hempton puts it:

Washington Mutual was never insolvent and should never have been confiscated.

The $29 billon was a gift to Jamie Dimon.

There's more to know about any WAMU assets JPMorgan sold off and what they received for those. The same goes for the Bear Stears takeover by JPMorgan, another billion dollar gifting to Dimon.

If Dimon doesn't have Hank Paulson, Timothy Geithner and FDIC chairman Sheila Bair in some group photo doing some very unnatural acts, I will be very surprised.

UPDATE: As I continue to think about how outrageous this entire picture is, what I see that went on is that $29 billion in loans were written off as bad, and they were not. However, this justified the supposed fact that WAMU was in serious trouble (more so than other banks).

Because these loans were not bad, these loans are going to be paid off. They go on the books as profit and further, given the way the government calculated capital, the poorer quality loan asset was turned into stream of income first tier capital.

Denver, Dallas and Charlotte Housing Stabilizes

One month does not make a trend but it is instructive that Charlotte metro area housing prices were up 0.3% in March versus February. The Dallas metro area was flat and Denver metro area prices climbed 0.1%.

All other top 20 metro areas continued to decline in March, according to the Case-Schiller report (pdf).

Showing the largest declines percentage wise in March were Minneapolis with a 6.0% drop, Detroit with a 4.9% drop and Phoenix with a 4.5% drop.

In addition to cyclical problems, Detroit is likely suffering from long-term secular decline, and Phoenix is suffering from overbuilding,but will recover.

Interest Rates Continue to Climb on the Long Bond

Treasury yields and mortgage rates surged Wednesday to their highest levels since November.

The yield spread between two-year Treasury notes and 10-year notes widened to 275 basis points, its highest ever. This makes it extremely profitable for banks, investment banks and anyone else who can do it, to borrow short term and lend long term.

The huge, approximately two trillion, in Treasury financing expected this year is what is putting pressure on the markets. That and the fact that Asian countries have stopped aggressive buying of Treasury securities.

Soon the markets will also wake up to the fact that the Social Security Trust Fund is winding down its huge Treasury security buying program and that by 2016 it will turn into a net liquidator of Treasury securities.

More Details Emerging on New Regulatory Structure

WSJ is reporting on the changes in regulatory structure, which we have been focusing on for some time.

As we have reported, Treasury Secretary Geithner is expected to announce details of the new plan within a few weeks. It appears that there will be one super-regulator.

What's new in the WSJ reporting is a few details:

The new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the Federal Reserve and the
Federal Deposit Insurance Corp.

The Fed and the FDIC would gain other powers, though, as White House officials want the Fed to be able to oversee systemic risks in the economy. They also want the FDIC to have new powers to take large financial companies that aren't banks into receivership.

Put simply, regulations are always bad. Regulations designed by a group that is anti-free market can suffocate the regulated sectors.

Further, the money players, Goldman Sachs, the Carlyle Group etc. already, I'm sure, are working Congress so that their special niches are not only protected but advanced. Aside from the headline news, the details will contain breaks for the inside players and obstructions for those not on the inside.

There is a road to serfdom and Obama, Goldman Sachs, the Carlyle Group, the UAW and the AFL-CIO, Congress and crazed leftist are leading the way.

Staying Out of Trouble with The Man, When You Dial 911

Here's my self-help tip for 2009, coming via Peter Hubel.

I never thought about this before, but Hubel writes:

The 911 operators are trained to redundantly try to get you to incriminate yourself so don’t play their game.

In other words, if you need the help of the police or an ambulance and need to call 911, tell them the location and a very, very limited general overview of the situation, then let them get there and figure out the details for themselves.

Hubel says:

Don’t ever answer any questions other than name and address and if you need police or an ambulance.

If you are somehow directly involved, Hubel suggests you have a neighbor, or someone else, call 911 so your voice won't be on tape.

Ron Paul on the New Supreme Court Nominee

I am not familiar with the thinking of President Obama's Supreme Court nominee, Sonia Sotomayor. Congressman Ron Paul calls her nomination, "scary."

From the little I am gathering, she is anti-business, has no problem with government meddling in the economy and not only does it appear she doesn't understand the business cycle, she doesn't understand basic economics, either.

Congressman Paul discussed the nomination with Neil Cavuto, here.

IRS Revenues Plunge

Federal tax revenue plunged $138 billion, or 34%, in April vs. a year ago — the biggest April drop since 1981, according to a study released by the American Institute for Economic Research. The decline is a result, of course, of the recession. It's a stunning number.

Given the huge spending, this certainly signals even more borrowing that the Treasury will have to do. As AIER points out, the deficits have largely climbed as a result of increased spending. Now, they are being pushed higher from the spending and revenue side. Outside of Ben Bernanke, who is going to buy all this debt?

AIER's Richard Ebeling discusses the numbers on FOX News, here.

Geither to Meet with the President of China and the Chinese Premiers

A very top level meeting for Secretary Geithner in China.

During his trip this weekend, Geithner will meet with senior Chinese officials,, including President Hu Jintao, Premier Wen Jiabao and the Premier Wang Quishan. He will also deliver a speech on U.S.-China economic relations at Peking University.

What can Geithner say to get China to continue to buy U.S. securities aggressively? Nothing.

This will be Geithner’s first visit to China since taking office.

How High Gold?

Given the incredible Fed money printing, gold is going much higher. How high? It is impossible to put an exact number on it, but I am certain most forecasts are underestimating how high gold will go.

Bob Murphy asked me to take a look at the charts on gold to see what the price action in gold is looking like. Here's what I found. (I hasten to add that there is a lot of mumbo jumbo in the technical world and that the only technical analysis that should be used is that which is grounded on an analysis of human action.)

Gold is currently trading just under $1,000 an ounce. Near round numbers, especially a number like 1,000, there is always a lot of technical resistance before a stock or commodity seems to be able to break to higher levels. This is because a lot of traders set their price targets at the round number, "Oh, I will sell my gold and take a profit at $1,000."

A second resistance point is a previous high. For gold it is roughly in the $1002.80 to $1030 area on the futures exchange. But at the daily London fix, gold still has not traded above $1,000. So we can safely say that once gold at the London daily fix is above $1030, that gold has broken through all overhead resistance. The resistance at old highs occurs pretty much for the same reason resistance occurs at round numbers. There are traders who will say, " I sold last time at price X (the old high) so this time I will also sell at X and buy it back later at a lower price."

Now lets look at the charts. Both the one year chart for gold and the five year chart show reverse head and shoulders formations (on the five year chart the formation is roughly a three year formation). If you look you can see that the formations look like an upside down head and shoulders. The book Technical Analysis by Edwards and Magge explains in detail the behavioral action behind the cause of this formation. But for purposes of this post, I'll just point out that the right side of the formation shows that buyers are willing to pay up a bit more for gold during downtrends and thus each new low is higher than the previous low.

This is a very powerful formation because it sucks out the sellers overtime and puts gold into the hands of strong holders, i.e., holders who are not going to sell for a quick profit but are much more willing to hold for long term gains. Again, see Edwards and Magee for details on how I am making this conclusion.

Once a breakout is made above the head and shoulders formation, the move upward is generally very strong, couple this with the round number breakout at $1,000 and the new high breakout, just above $1,000 and you have a lot of technical forces set to push gold much higher. And given that Bernanke has been printing money at double digit rates to fuel the rise, I would not be surprised to see days when gold trades up by $100 an ounce. I am not going to put an upside target on gold because it depends a lot on what Bernanke does from here. That said, $2,000 gold is very likely and $5,000 is not going to surprise me, if it gets that high.

Sterling Hits $1.60 Versus Dollar

You know the dollar is in trouble when the pound sterling is hitting news highs against the dollar.

Sterling rose above $1.60 for the first time in nearly seven months.


The dollar was also weak against oil. The front-month July Brent contract on London's ICE futures exchange hit a peak today of $62.29 a barrel, a six-month peak.

Private Equity Method of Bank Acquisitions Disclosed?

There has been much speculation over whether the Office of Thrift Supervision's willingness to allow non-banks to acquire banks may be a signal that the Federal Reserve regs requiring only registered banks from taking a large position in banks may be thrown out in the not too distant future.

OTS approved the leveraged buyout firm, MatlinPatterson Global Advisers LLC’s purchase of Flagstar Bancorp Inc. in Troy, Michigan, and may allow similar takeovers.

The Fed has told private-equity companies it won’t permit a firm that isn’t regulated as a bank to own a majority stake in a bank.

Now comes word that a third regulatory body, the FDIC, may issue guidelines on private equity acquisitions. Writes Dealbook:

Private equity firms looking for bargains amid the nation’s ailing banks got some encouraging news Thursday when the Federal Deposit Insurance Corporation announced that has agreed to allow a consortium of buyout shops, including WL Ross, the Blackstone Group and the Carlyle Group, buy the failed lender, BankUnited Financial... the F.D.I.C., which is expected to face further bank failures in the coming months, indicated that it might soon release policy guidelines for potential private equity investors seeking to buy failed banks.

“Due to the interest of private-equity firms in the purchase of depository institutions in receivership, the FDIC has been evaluating the appropriate terms for such investments,” the agency said Thursday. It added it would be giving guidance on eligibility and other conditions for private-equity investors in the near future.

It took them awhile but PE appears to have figured out its preferred mode of entry, through approval of the FDIC. Now, on to the spoils!

Bernanke as an Austrian Economist, Luskin as a Con Man

Today's posts brought out the heavy hitters, with deep analysis.

Jeff Harding emailed me to point to an article he wrote this morning for The Daily Capitalist. His email was in response to my post earlier today commenting on Bernanke sounding like an Austrian economist, i.e. Hayek and Mises.

Harding picked up the same exact theme. What's more, I simply commented on the snippet that appeared in WSJ. Harding has a much longer quote taken from the speech itself, which suggests that Bernanke may really be having second thoughts about whether he can actually forecast the economy and manage the money supply correctly. Harding's piece is well worth reading for you deep Austrian followers in the crowd.

Stefan Karlsson also weighed in today with a comment at my post on Donald Luskin calling William Anderson a thin-skinned idiot Austrian Mafia capo.

Karlsson did a little digging and found that Luskin took a quote about Peter Schiff out of context.

Karlsson then puts the quote back in context, on his blog, and writes:

Would anyone interested in being honest and sincere to his readers really have viewed these following sentences as being irrelevant? I think not, confirming again that Luskin is nothing but a con artist.

The Bank Nationalization: It's Worse Than You Think

Although headlines have focused on the 19 banks that have undergone stress tests, the government's hand in forcing changes in bank management is omnipresent throughout the banking sector.

Reports FinCri Advisor

Examiners have become much more aggressive in demanding that bank boards conduct lightening quick reviews of management, sometimes by requiring the bank to hire an outside consultant and occasionally with an eye toward outright replacement of the CEO or other senior staff..

"Examiners are getting as concerned about the management of banks as about the assets," says banking consultant L.T. (Tom) Hall of Atlanta. Most often, the demand to conduct a management review is made by FDIC in Cease & Desist (C&D) orders. But even banks without C&Ds are being told to conduct such studies if an enforcement action is likely, he says...

Plus, the number of such orders is skyrocketing. There were 56 C&Ds in the first quarter of 2009, including 26 that required a management report and another three that directed the board to replace the CEO outright. By contrast, FDIC issued 19 C&Ds in Q1 2008, only nine of which required a management report...

While OCC has issued fewer enforcement orders than FDIC, its regulators also are increasingly focused on management questions. The agency issued just 11 C&Ds in Q1, but seven (64%) required a management report or replacement of the CEO. In Q1 2008, OCC issued three C&Ds, none of which required a management report...

Former Fed examiner Pat McElroy Jr. of Risk Management Partners in Dallas, says he has been hired by several banks recently to write management reports required by regulators. Typically, the report comprises interviewing the management team and board members to assess their knowledge, experience and skills; evaluate the organizational structure; identify issues and shortcomings; and - sometimes - recommend the removal of officers or additional hires, he says... "The regulators have such broad powers to make their own determination," McElroy says. "It's not just a function of a percentage of capital to assets any longer. It's more of a subjective view of regulators."

Clearly, the potential for politicizing the banking sector through management changes is here.

Not only will banks in the future be required to finance some politically favored sector (regardless of whether it makes business sense) but banks will have to have management that believes in the politically favored sector.

We aren't completely there yet, but the route has been decided upon, and Obama is looking at the map.

WLI Growth At 35-Week High

One more indicator that has been showing that the worst is over for the economy, for this round of the cycle, is the Weekly Leading Index of the Economic Cycle Research Institute.

The ECRI href="http://www.businesscycle.com/news/press/1438/">said its weekly index edged up to a 29-week high of 111.1 for the week ending May 15.

The index's annualized growth rate reached a 35-week high of minus 11.5 percent from last week's rate of minus 13.6 percent. It was the highest yearly growth reading since the week ended September 12, when it stood at minus 11.4 percent.

"With WLI growth rising steadily to a 35-week high, it is increasingly obvious that the 'green shoots' will blossom this summer," said Lakshman Achuthan, managing director at ECRI.

The WLI peaked at 140.2 in October 2007.

Bernanke Almost Gets It

During a , commencement address Friday at the Boston College law school, Fed chairman Bernanke told the graduating law class that:

Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect. In some ways, predicting the economy is even more difficult than forecasting the weather, because an economy is not made up of molecules whose behavior is subject to the laws of physics, but rather of human beings who are themselves thinking about the future and whose behavior may be influenced by the forecasts that they or others make.

This comment could have been written by F. A. Hayek or Ludwig von Mises. And is only about one step away in thought from Bernanke realizing that he can't successfully control the money supply, because of all the independent decisions made by human beings .

Get Your Popcorn Ready

Bill Anderson puts in a mild defense of Peter Schiff from a snide Donald Luskin comment.

Luskin comes back and calls Anderson a thin-skinned idiot Austrian Mafia capo.

More Infiltration of the Anti-Fed Movement

Just yesterday I posted a comment, I Smell A Trap, warning about the potential infiltration, of the sponsors of the Fed bill introduced in to Congress by Congressman Ron Paul to audit the Fed, by leftists prodded on by Dean Baker. This morning LRC publishes a Gary North column, False Flag Infiltrators: Gold-Hating Fiat Money Inflationists Inside the Libertarian-Conservative Movement, with pretty much the same warning about another group led by Ellen Brown.

I wrote, yesterday:

Ron Paul's House bill calling for an audit of the Fed is getting support from the strangest places... If Democrats start signing on to the bill in heavier numbers, it may be a sign that an audit may come, but it will end with a restructured Fed controlled by left wing radicals, who believe money is for handing out and who have no fear of inflation.

North writes:

Ellen Brown is a lawyer. She is anti-Federal Reserve. So, she gets a hearing in conservative circles. This is unfortunate. There is nothing conservative about her. She is an apologist for statism and the United States Treasury (a wholly owned subsidiary of Goldman Sachs)...She is in the tradition of Gertrude Coogan and the other 1950's greenback inflationists whose footnote-free books are kept in print by Omni Books. They all have this in common: they want the American money system to be run by Congress.

North nails it. This is from Brown's web site:

Just as we need publicly-operated police, courts and laws to keep individual and corporate predators at bay, so we need a system of truly national banks, in which the power to create the money and advance the credit of the people is retained by the people.

And it doesn't get more bizarrely inflationist then this from Brown's web site, again:

A government with a properly designed and monitored system of publicly-issued money could fund itself without taxes, debt or inflation.

An end the Fed movement is fine, as long as it is tied to an alternative such as a gold standard. An audit of the Fed may simply provide the opportunity for all kinds of statists and interlopers to restructure the Fed so that it becomes even more inflationist.

Personally, I think the intricacies of how central banks work and how the money supply works is not understood well enough by the masses. Thus they can be very easily manipulated into false solutions that may be even worse than the current situation.

I really wish Congressman Paul would work on more clearly defined issues that can help now with the potential for less misunderstanding by the public.

I Smell A Trap

Ron Paul's House bill calling for an audit of the Fed is getting support from the strangest places.

Lew Rockwell today links to a column by Dean Baker who now supports an audit of the Fed.

The problem with Baker's column is that he doesn't quote Ron Paul. He doesn't even mention that Paul introduced the bill. He does, however, mention Elizabeth Warren, who heads a congressional oversight panel, dealing with bailout money.

I've discussed Warren before, her oversight committee went so out of bounds that two members of the five member panel dissented. She is a big time Obama operative. You don't want columnists using Warren as a signal flag to support Paul's bill.

Why?

This what Baker would like to see come from an audit:

The proposal for a GAO audit of the Fed is a first step towards reasserting democratic control over this institution...In a democracy, it is difficult to justify a situation in which the most important economic policy making body is, by design, more answerable to the banking industry than democratically elected officials.

I hope Congressman Paul knows what he is doing, to me it sounds like this may evolve into a power play over who controls Fed money rather than an investigation into whether the Fed should be printing money in the first place. If Democrats start signing on to the bill in heavier numbers, it may be a sign that an audit may come, but it will end with a restructured Fed controlled by left wing radicals, who believe money is for handing out and who have no fear of inflation.

Further Comments on Richard Fisher's Observations

I commented briefly below on WSJ's Mary Anastasia O'Grady's interview with Dallas Federal Reserve chairman Richard Fisher. My comments were limited to the feedback that Fisher received from the Chinese with regard to the dollar. The Chinese thinking about the dollar is obviously a very important global matter at this time. However, Fisher touched on a number of other topics in the interview. PEU Report/State of the Divison has linked to the Fisher story in a comment below, in an effort to get me to dig further into Fisher's comments. So here goes. The O'Grady/Fisher's comments are in italics:

I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program.

I don't know what Fisher means by "assist the private markets", the Fed has, to use a favorite Bernanke term, only one real "tool" , i.e. the ability to print money. If you are assisting in this fashion, you are " monetizing fiscal largess, deficits or the stimulus program." This, to me, appears to be one of those talk a good game, but print money anyway comments.

In September he told a New York audience that "rates held too low, for too long during the previous Fed regime were an accomplice to [the] reckless behavior" that brought about the economic troubles we are now living through. He also warned that the Treasury's $700 billion plan to buy toxic assets from financial institutions would be "one more straw on the back of the frightfully encumbered camel that is the federal government ledger."

I concur and would only add that the government bailout has done nothing but shoveled funds to the privileged elite.

In a speech at the Kennedy School of Government in February, he wrung his hands about "the very deep hole [our political leaders] have dug in incurring unfunded liabilities of retirement and health-care obligations" that "we at the Dallas Fed believe total over $99 trillion."

$99 trillion is the largest estimate I have seen. I suspect he is arriving at this number by estimating the present value of the future stream of social security and medicare costs. While I believe social security and medicare are disasters waiting to happen, the present value method of presenting the crisis is a bit deceiving. It is the same as taking a 20 year old's future stream of rent payments and saying his rent obligation is 12 (months) times 45 (years) times the rent, then discount to the current value and reach a "rent obligation" number of one million dollars. Well yeah, but tell me what the monthly rent is so I can judge that versus cash inflow.

The $99 trillion number standing alone is as unhelpful as the $1 million "rent obligation" number.

Fisher says that part of the bubble comes as a result of the fact that

the regulators didn't do their job, including the Federal Reserve

This is true in the sense that the Fed economists didn't have a clue. But the further point that Fisher doesn't understand, or neglects to mention, why should we expect regulators to "do their job"? What makes them different as human beings that they, for example, will be able to see bubbles that others can not. The answer is they do not have super powers. In fact they are constrained by politics. Market maintemance should be left to the markets so that everyone is not herded in one direction, which occurs when government regulation kick in. Further, the big herding was done by Federal Reserve money printing where Fisher sits as branch president and occasional policy voting member!

This is really like a fox bitching he doesn't have enough input over the design of the hen house.

He says, there was the 'mathematization' of risk." Institutions were "building risk models" and relying heavily on "quant jocks" when "in the end there can be no substitute for good judgment

The quants weren't the ultimate cause but they were an extenuating factor.

What about another group of alleged culprits: the government-anointed rating agencies? Mr. Fisher doesn't mince words. "I served on corporate boards. The way rating agencies worked is that they were paid by the people they rated. I saw that from the inside." He says he also saw this "inherent conflict of interest" as a fund manager. "I never paid attention to the rating agencies. If you relied on them you got . . . you know," he says, sparing me the gory details. "You did your own analysis. What is clear is that rating agencies always change something after it is obvious to everyone else. That's why we never relied on them." That's a bit disconcerting since the Fed still uses these same agencies in managing its own portfolio.

Isn't this nothing more than saying the private sector knows how to sift out BS and the government doesn't?

I want to make sure that your readers understand that I don't know a single person on the FOMC who is rooting for inflation or who is tolerant of inflation.

It should be made clear that there are two types of inflation, monetary inflation and price inflation. Monetary inflation is responsible for the business cycle. Price inflation is the definition of climbing prices. You can have monetary inflation without price inflation, which is pretty much the current situation (although price inflation is starting to edge up). Given that Fisher tells us that the Fed is concerned about "inflation", he has to mean price inflation, since monetary inflation is currently out of control. But, if he is not focusing on monetary inflation, then he doesn't understand its destructive consequences.

This he confirms as he continues his comment:

...by price stability I mean that we cannot tolerate deflation or the ravages of inflation.
Hans Hermann Hoppe clearly shows that deflation is not such a bad thing.

Throughout history," he says, "what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can't let that happen. That's when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can't run away from it.

This from a man who is a key member of a central bank that has been printing money. up until recently, at a 15% annualized rate!

A Peek at My Book on Intellectual Property

There's quite a bit of give and take in the comment section of my post on Jeffrey Tucker's latest article on Intellectual Property. In particular, I want to bring to the top here, two important questions left by Erick which address some key points I will be making in my book.

Erick writes:

@Robert,

Who gets the copyright/patent when two people invent something
independently?

Are thoughts alienable?

These questions, especially the first, go to what I believe cause much confusion in current IP thinking.

Let's take care of the second question first:

Are thoughts alienable?

Of course, they are!

What is a management consultant, a financial consultant, a doctor, a nuclear physicist or a computer programmer doing but selling specialized thoughts?

Now to the first question:

Who gets the copyright/patent when two people invent something
independently?

One of the problems with current IP thought is that it is generally viewed within a statist framework, and there is further aggregation of IP protection that is not necessary.

Who gets the copyright/patent when two people invent something independently?

This question implies the aggregation trap which I am going to address in detail in my book. But, the short answer is they both do.

If they both invent something independent and are not stealing from each other, then why shouldn't they both have the right to their creations?

Thus, the great hullabaloo about someone inventing the wheel and thus having patent protection on the wheel in perpetuity and that person not allowing anyone use of wheels becomes nonsense. Since anyone who has the thought of a wheel is free to create such. This eliminates the problem where government patents take and always award a patent to just one monopolist.

Now, some may ask, "What if a person didn't independently think of an invention but simply saw it and now is claiming independent creation?"

This would have to be solved in the courts. ( I don't plan on discussing here or in my book the types of courts, private sector or public. That's another debate.) I would suggest that in such courts Innocent until proven guilty and beyond a reasonable doubt would hold, thus something such as the invention of the controlling of fire and the invention of the wheel, which seemingly could have by more than one independent inventor would hold that no patent infringement occurred.

On the other hand, if someone walked around selling copies of the The Old Man and the Sea after Ernest Hemingway had already written the book, and there was evidence that Hemingway has already written the book, then it would be absurd to believe that this second individual had independently written the book, and as such he would be guilty of theft.

There's obviously many more details I am working out in the book, but this is the direction I am taking. Rather than the current system of whomever is first in line gets copyright/patent protection. It is whomever, beyond a reasonable doubt, has independently done the creation.

And, I must add, that it is not impossible for more than one person to simultaneously come up with some very complex thought. After all, the discovery of marginal utility was discovered independently by Jevons, Walaras and Menger nearly simultaneously.

In the modern age of the internet, if say someone is working on a cure for the common cold and is fearful someone else may be working on the same project, then dated emails to himself can serve as evidence of his independent thinking on the subject, if someone else publicly announces the discovery of a cure at a near simultaneous moment. Thus, they would both receive patent protection. If someone under my system claims, in modern day, discovery of a complex string of thought, but does not have proof of the on going thought, through, say, a string of emails, then his claim should not be accepted as independent discovery.

British Bankers Fed Up with the Long Reach of U.S. Government

Government regs are so thick and complex these days that no one individual knows fully knows what is in them. There's a combnation of special interest legislation and further power grabs by government.

Brits, for example, are up in arms over recent a new international tax proposal. Some are thinking of pulling out from doing business with Americans. What's in a U. S. proposal that could possibly cause an uproar across the pond?

Reports the UK's Telegraph:

President Obama's proposals are built on the so-called Qualified Intermediary system which was intended to ensure Americans paid the correct tax wherever they were domiciled. Foreign financial institutions that handle American money have to fill in a US tax form on behalf of the client that has to be audited too. In return, the banks receive a QI seal of approval as a qualified intermediary.

The British Bankers Association and London's Association of Private Client Investment Managers and Stockbrokers had a meeting with European counterparts 10 days ago to discuss the crisis. A delegation is set to meet the US Treasury's Internal Revenue Service in June to demand the requrement be deep sixed.

A Special Shout Out to EPJ Commenters

As I mentioned in a twitter post yesterday, I was interviewed by the Wall Street Journal's Kelly Evans for a story she is doing on econ blogs. I have no idea what she will put in her story, but at one point she asked me why I started the blog, I gave her a number of reasons including that it provides a way to be officially on record with my forecasts, and also a place to showcase my views without having to worry about an editor killing a story.

I then told her there is also an unexpected benefit that I didn't realize would occur when I first started blogging, i.e., the comments left at this blog, and in private emails sent to me as a result of the blog, are overwhelmingly first class, intelligent comments that I learn a lot from. So commenters, give yourselves a quick round of applause and keep the comments coming

Breaking Down the Social Security and Medicare Problems

Bruce Bartlett has done an excellent job of detailing the Social Security and Medicare problems. Here's his conclusion:

In summary, we see that taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP. This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.

It should be noted that the projected point, by the Social Security Board of Trustees, at which tax revenues will fall below program costs comes in 2016 -- one year sooner than the estimate in last year’s report. This means that although the fund does not become exhausted, by Trustee projections, until 2036. In 2016, Social Security stops being a net buyer of Treasury securities and becomes a net liquidator, with smaller and smaller net new quantities purchased leading up to 2016 . Currently, Social Security buys approximately 25% all Treasury securities issued. Who is going to make up for that shortfall, especially since Social Security will not only stop buying, but will be a net liquidator? It's not going to be the other major Treasury security player, the Chinese. They are trying to slow their purchases now. So in addition to the Social Security and Medicare crisis for the elderly, this funding crisis will have a major impact on Treasury funding above the 81% increase in Social Security and Medicare that Bartlett has identified.

That light you see at the end of the tunnel is a train heading toward us, soon you will hear it roar.

As the Fear Subsides, the Real Crash Begins

Treasury Secretary Geithner said it himself, yesterday. The rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

The recession resulted in a flight to "quality", i. e., dollar denominated Treasury securities. This flight halted a declining dollar and concern about the ability of the Treasury to raise funds at reasonable rates. Now that the recession is winding down, the flight to "quality" is reversing, and the trends for the dollar and Treasury securities are headed down again, and this time they will get an added push from the $800 billion in new money (M2) that Fed chairman Bernanke has created since January 2008.

What will all this mean:

A crashing dollar.

A crashing bond market.

Huge inflation down the road.

It's not going to be pretty.

A Fed Bank President in China

Dallas Fed Bank president Richard Fisher just returned from a trip to China. He told WSJ:

Senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature.I must have been asked about that a hundred times in China.

The Chinese are clearly concerned about dollar inflation, which suggests that they will not be aggressive buyers of U.S. debt, if they on net buy any at all.

Given that the deficit is climbing, this is not a good sign for the long-term Treasury market. As I have said before, over the next decade, you could make a career out of shorting the debt markets.

When Will the NBER Label This Recession Over?

Don't wait around for the NBER before you start buying stocks. Mark Perry provides some great perspective on the NBER business cycle dating process:

The last recession ended in November 2001, but the official announcement by the NBER didn't come until July 17, 2003, almost 20 months after the recession was over.

The 1990-1991 recession ended in March of 1991, but the NBER official announcement that the recession ended was not released until December 22, 1992, almost 21 months later.

Let's be optimistic and assume that the recession ends in the middle of 2009, and let's pick June 2009 as a possibility. In that case, given the past record of the NBER, we wouldn't know officially that the recession ended until February or March of 2011.

The State of the Intellectual Property Debate at LRC

I continue to do research for my book on intellectual property. It's a fascinating topic, and I don't think much insightful work has been done on the topic from a libertarian perspective since the brief comments on the topic by Murray Rothbard.

The advances that I believe I will be able to make on the topic will have to wait for the book. That said, I continue to be astonished at the direction Jeffery Tucker is attempting to take the debate.

In his most recent defense of what's your writing is my writing, he pulls out of the hat this gem, about a book owner who won't sell him rights to a book:

...he is clueless about the social value of the book

Social value? What the hell is social value? From an Austrian perspective there is no such thing. Here's Ludwig von Mises on the subject:

He who seeks to judge actions from the point of view of a pretended "social value," i.e., from the point of view of the "whole society," and to criticize them by comparison with the events in an imaginary socialist system in which his own will is supreme, has no use for economic calculation.

And, hey, it's Mises linking the term "social value" to a socialist system, not me, but it fits.

From there Tucker bitches that the book owner won't take the "market price":

... the "owner" of the IP – even though he is clueless about the social value of the book – cannot be persuaded to let it be published at a market price.

If an exchange is not conducted, how does Tucker no what the market price is?

Here's Mises again:

It is nonsensical to evaluate in money objects which are not negotiated on the market and to employ in calculations arbitrary items which do not refer to reality.

Again, the only "market price" is one where an exchange takes place. Tucker may call something else a market price (In this case, perhaps, two people who neither have the book to buy or sell would like to do a transaction), but it is clearly not the market price, since the owner is unwilling to sell at that price. The market price is where the owner is willing to sell. Does Tucker think the book owner wouldn't sell rights for, say, a billion dollars? I think Tucker is just underestimating the "market price" and bitching about some theoretical price which obviously doesn't fit the facts.

I hasten to add, for those who may raise the question, "What if the owner won't sell for a billion dollars?" Well, then the answer is simple, the owner values his book more than a billion dollars. However, I suspect that if Tucker offered the total stash tucked away at the Mises Institute, the owner would go for it.

On a happier note, I note that it appears that Lew Rockwell himself is backing away from the what's my writing is your writing madness. He recently turned against giving away at least some intellectual property, i.e., trade secrets and computer code:

Former federal prosecutor Bob Barr, the Libertarian presidential nominee last year, has joined Ralph Nader to call for...more federal intervention in the economy. Thanks, boys, we needed that.

That is, Messrs. Barr and Nader would use the federal cluster bomb to force car companies to reveal their trade secrets to every Tom, Dick,and Harry repair shop. This is called the "right to repair." Well, you certainly have the right to repair your own property, or other people's by contract, but not the right to steal the computer codes, etc. of Toyota in the name of "fair competition." That's always a synonym for the SWAT team.

Good points, Lew.

Geithner Calls for ‘Very Substantial’ Change in Wall Street Pay

Treasury Secretary Timothy Geithner called for major changes in compensation practices at financial companies and said the Obama administration’s plan to help realign pay with performance will be rolled out by mid-June.

“I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” to be aired tonight and over the weekend, reports Bloomberg. “We’re going to need to see very, very substantial change.”

A government structuring of compensation means one thing, directing compensation toward those who deliver on governments pet projects.

We have picked up the pace on the road to serfdom. From a crawl, we are now jogging.

Oligarchs Gain Control of Bank United

What banks the government isn't nationalizing, they are directing into the hands of the oligarchs.

A group including Blackstone, Carlyle, and WLRoss have acquired BankUnited.

Blackstone founder Pete Peterson was instrumental in getting Treasury Secretary Geithner his position at the New York Fed that led as a stepping stone for Geithner to his Treasury post. Carlyle founder, David Rubenstein, plays tennis with President Obama's top economic adviser, Larry Summers.

It's a small club.

The deal includes a loss-sharing agreement on $10.7bn of the bank’s $12.8bn in assets. The government will take 80 per cent of the first $4bn in losses and 95 per cent of any remaining losses, people familiar with the transaction said, according to FT. Sweet, very sweet.

The federal government will receive some warrants giving it a share of any future upside.

Dollar Hits Five-Month Low

The dollar has dropped to a five-month low against a basket of currencies, today.

The dollar index, which tracks its value against a basket of six major currencies, dropped 0.2 per cent to a fresh low for the year of 80.349.

The dollar also fell 0.4 per cent to a five-month low of $1.3941 against the euro, eased 0.1 per cent to a six-month low of $1.5839 against the pound and lost 0.2 per cent against the yen.

An Economic Miracle in the Desert

We have, on our hands, a mini-economic miracle in the desert of Iraq.

Bob Murphy has posted a column written by Edward M. Gonzalez who served active duty in the United States Marine Corps from January 2004 to August of 2008.

Gonzalez recounts his experiences in a village in the Al Anbar Province of Iraq, where he spent seven months as an advisor to the Iraqi Army.

Gonzalez likens the American military money spending in the village to Federal Reserve money printing in the U.S. When the money spending stopped, the village suffered what can only be described as a recession.

Gonzalez, who it appears understands more about the business cycle than most advisers currently around the president, used his sound understanding of economics to nurture the village back to a prosperous region where villagers even warn the Marines of planted IEDs.

The Gonzalez column is must reading.

As a footnote to the "Economic Miracle in the Desert", I hasten to point out that the only time miracle and economics has been used together is when free markets have been allowed to thrive in what were otherwise dire situations. There is, of course, the German Economic Miracle and, also, the Panamanian Economic Miracle (Davd Saied, who was instrumental in bringing about the Panamanian Economic Miracle, has promised to detail the history in a column here at EPJ).

FDR's New Deal slowed the economy for a decade and no one calls it a miracle, and no one is calling what is going on in the economy here now a miracle.

Only the freeing of markets seems to generate the sense of an economic miracle. Further, it is not just free market economics that seems to be near these miracles, but it appears to be the hard core, uncompromising, Austrian school strain of free market economics that provides the necessary theoretical backbone to get the job done.

Gonzalez is clearly influenced by the Austrian school, so is Saied, and Ludwig Erhard, who was instrumental in launching the great German economic miracle, was influenced by the economist Wilhelm Roepke, who was in turn influenced by the great Austrian economist Ludwig von Mises.

Eye Opening Bank Bailout Documents Released Under FOIA Pressure

A friend has brought to my attention some recent news out of Judicial Watch (JW).

JW, the conservative oriented public interest group that investigates and prosecutes government corruption, announced that it recently forced the release of documents about the October 13, 2008, Treasury Department meeting that coerced major banks into taking government bailout money.

Among other details, the documents confirm former Treasury Secretary Hank Paulson told the CEOs of nine major banks that they had no choice but to allow the government to take equity stakes in their institutions. The documents show Obama Treasury Secretary Tim Geithner, FDIC Chairman Shelia Blair, and Fed Chairman Ben Bernanke attended the meeting with Paulson.

JW filed a Freedom of Information Act (FOIA) request about the bankers meeting on October 16, 2008. After months of stonewalling, a FOIA lawsuit was filed against the Obama Treasury Department on January 27, 2009. On February 4, get this, the Treasury responded that it had no documents about the historic meeting. Pressure from JW forced Treasury to reevaluate its response, which resulted in this document release. Included in the documents are:

"CEO Talking Points" used by former Treasury Secretary Hank Paulson confirming that the nine bank CEOs present at the October 13 meeting had no choice but to accede to the government's demands for equity stakes and the resulting government control. The talking points emphasize the muscle warnings Paulson should giv ethe banks that "if a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance."

There's probably more dirt surrounding the Talking Points but edits of the Talking Points suggested by Tim Geithner, then-New York Fed President, were not released to JW.

"Major Financial Institution Participation Commitments" signed by the nine bankers on October 13. The CEOs not only hand wrote their institution's names but also hand wrote multi-billion dollar amounts of "preferred shares" to be issued to the government. You have to see this doc to believe it.

An email documenting that, on the very day of the meeting, the Chief of Staff to the Treasury Secretary and other top Treasury staff did not know the names of any of the banks that would be in attendance.

An email showing Treasury officials wanted to use the Secret Service to help keep the press away from the CEOs arriving at the meeting.

An email showing a public relations effort, run in part out of the Bush White House, to tamp down public concerns about "nationalizing the banks."

An email showing that Paulson was able to brief Barack Obama about the bankers meeting almost immediately, but could not reach Senator John McCain.

The CEOs present at the October 13 meeting were Vikram Pandit of Citigroup, Jamie Dimon of JP Morgan, Richard Kovacevich of Wells Fargo, John Thain of Merrill Lynch, John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs, Robert Kelly of Bank of New York, and Ronald Logue of State Street Bank.

"These documents show our government exercising unrestrained power over the private sector. Despite promises of transparency, the Obama administration tried to cover up the very existence of these smoking-gun documents. And the cover-up continues, as the Obama administration protects Timothy Geithner by withholding a key document about his role in this infamous bankers meeting," stated JW President Tom Fitton.

Here is the full document dump:

Documents Part 1
Documents Part 2
Documents Part 3

G8 Meeting to be Held in Lecce, Italy

The Treasury today announced that Treasury Secretary Geithner will travel to Lecce, Italy to attend the G-8 Meeting of Finance Ministers June 12 – 13, 2009.

Grilling Phillip Swagel

Phillip Swagel appears to be a bright nice guy. Picture a younger version of the late Mr. Rogers, sans the sweater, and wearing a suit instead.

Nevertheless, this mild mannered man is a major league technocrat for the state. Picture a guy sans the sweater who can justify any financial or economic position, if it will help justify the acts of the evil doers and, in turn, they promote him to a position that will enhance his resume.

Swagel was Assistant Secretary for Economic Policy under Henry Paulson at the Treasury Department from December 2006 to January 2009.

He served as chief of staff at the White House Council of Economic Advisers from July 2002 to February 2005, and was a senior economist at the Council from August 2000 to July 2001.

Swagel was also previously an economist at the Federal Reserve Board and the International Monetary Fund.

Swagel spoke at a luncheon today before the Washington D.C. based National Economists Club. I was there and had the opportunity to ask Swagel a couple of questions.

After his prepared remarks, I asked him:

I'm curious about your thoughts on the change in the way the Bear Stears situation was handled versus the Lehman situation versus the Citigroup situation versus the Washington Mutual situation. Further, I have noticed that JPMorgan Chase was involved in two of these situations and that they came out of the stress tests without requiring any further capital. How much capital were they able to gain as a result of the acquisitions of Bear Stearns and Washington Mutual?

As for the differences in the different deals, he gave the standard reply. There were different circumstances for each. Blah, blah, blah.

As for what capital contribution benefit JPMorgan Chase received as a result of the acquisitions of Bear Stearns and Washington Mutual, he said he didn't know and that he hadn't seen any data on it. I replied, "I haven't seen any data on it either. Do you know where I can find it?"

An awkward silence. He said he didn't know but he would try to find out for me.

He finally went into total retreat and said this was finance and he was an economist. My reply, "Well, then let me ask you an economics question. Was there any concern at the Treasury about the slowdown in Fed money growth during the summer of 2008?"

He tried to answer with, "Well the Treasury is always in touch with the Fed and we are always monitoring every aspect of the economy."

I wouldn't let him get away with it. I pushed, "Do you know what money growth was in the summer of 2008?" His answer. "No." I pushed, again, "Do you know what money growth was in the first half of 2008?" His answer. "No."

I remind you this was the Assistant Secretary for Economic Policy at the Treasury Department during this period. Money growth dropped from a 12% annualized rate early in the year to 1.4% during the summer, in the midst of a housing crisis.

Clearly, Swagel was not at the Treasury to monitor the economy. He was a tool used to come up with the justifications for the machinations of the real insiders, e.g., Paulson.

Paulson didn't care what caused the downturn. He cared about how to shovel money to Goldman and JPMorgan. And when it comes to justifications for why all that occurred, Swagel has microscopic details (pdf).

After the formal luncheon broke, I pushed a little more, privately. I asked if there were any memos at all in the Treasury by anyone raising the question of why Bernanke had slowed money growth to 1.4% during the summer of 2008. He said, he hadn't seen any.

If no one at the Treasury was looking at something as simple as the dramatic drop in money supply, then how can anyone conclude anything other than that they were all there to find props for Hank Paulson theft?

Still on the sidelines, I pushed once more. "Given that JPMorganChase did not need to raise any capital after the stress tests, don't you think an investigation should be conducted to see how much the acquisitions of Bear Stearns and Washington Mutual resulted in an increase in capital for JPMorganChase?", I asked.

There was a bit of dancing around the question, but I persisted and I think he finally nodded, and, under his breath, I think he said "yes."

UPDATE: The answer to the question, of how much of a capital benefit was the takeover of Washington Mutual to JPMorgan, appears to be at least $29 billion.