Straight Talk About Bear Stearns

Last week the Fed brokered a deal to sell failing investment bank Bear Stearns to JPMorgan Chase. At the same time, the Fed announced that it would be willing to lend directly to Wall Street brokers.

If you are a casual observer of financial markets, you will be forgiven for believing that the Fed’s move last week was a good one. After all, the stock market—which had been in danger of further losses—has, for the time being, been stabilized; many analysts have lionized Bernanke for making a sound and bold move.

This week Business Week put Bernanke on its cover and added to its headline “Bernanke reinvents central bank to avoid catastrophe.” If only that could be true. What Bernanke has done is to postpone the day of reckoning; and by so doing, he has set the stage for an even bigger crisis.

Last week, legendary investor Jim Rogers pulled no punches when he critiqued the Fed’s move. It is well worth 12 minutes of your time to listen to this very colorful interview.

No, Rogers is not exaggerating—the Fed has indeed bought hundreds of billions of dollars of junk assets. In the JPMorgan Chase case, the Fed has guaranteed $29 billion dollars of losses on the junk mortgage backed securities that Bear Stearns held.

As Rogers points out, none of this is in the Fed’s mandate. As the Fed bails out those who took bad risks, it is destroying the dollar; and it is setting the stage for a true collapse of the economy.

Indeed, it is also true what Rogers said about Wall Street bonuses. In 2007, Bear Stearns’ bonus pool was $2.06 billion dollars. Under bankruptcy laws, had the Fed allowed Bear Stearns to go bankrupt, all of that money would have had to have been repaid by the employees who took those bonuses home.

None of the Fed’s actions are legal, as John Hussman, president of Hussman Investment Trust, points out:

The Federal Reserve decided last week to overstep its legal boundaries – going beyond providing liquidity to the banking system and attempting to ensure the solvency of a non-bank entity. Specifically, the Fed agreed to provide a $30 billion “non-recourse loan” to J.P. Morgan, secured only by the worst tranche of Bear Stearns’ mortgage debt. But the bank – J.P. Morgan – was in no financial trouble. Instead, it was effectively offered a subsidy by the Fed at public expense. Rick Santelli of CNBC is exactly right. If this is how the U.S. government is going to operate in a democratic, free-market society, “we might as well put a hammer and sickle on the flag.”

What is a “non-recourse loan”? Put simply, if the homeowners underlying that weak tranche of debt go into foreclosure, they will lose their homes, and the public will lose as well. But J.P. Morgan will not lose, nor will Bear Stearns’ bondholders. This will be an outrageous outcome, if it is allowed to stand.

Paul La Monica, writing yesterday at CNN Money, observed that already other banks are lining up for a Fed handout:

Now other banks appear to be angling for a spot at the Fed trough. In an interview with the San Francisco Business Times last week, Wells Fargo Chief Executive John Stumpf said his bank “would not be averse to a Fed-assisted transaction” and added that “fixer-uppers don’t bother us.”

Well, who wouldn’t be interested in a fixer-upper if you knew that the Fed would be there to help you deal with all those losses? Heck, I’d buy the house from that Tom Hanks movie “The Money Pit” if a friendly central banker was willing to reimburse me for all the renovation costs.

Not surprising, others are arguing that if the Fed can bailout Wall Street, why can’t the government do more for the homeowner. Proposals are gaining traction in Congress that would forgive the amount that a homeowner is underwater. Congressman Barney Frank wrote this month in the Washington Post:

We propose to tell those who either originated or purchased mortgages that are now extremely unlikely to be repaid that they should write down their existing obligations to a level that represents current market value. After — and only after — the loss is taken, the government would facilitate refinancing mortgages for homeowners who could meet repayment obligations at the new, written-down level.

It is easy to forecast how all of this is going to unfold. More and more extreme proposals will be floated and implemented. When the economy collapses in exhaustion, those who learned nothing will tell us “if only we had done more.” This will set the stage for even more dangerous and draconian measures.

All of this economic madness is, and will be, fueled by the false beliefs that we hold collectively as a society. These beliefs include the ideas that the Fed can prevent economic cycles and that government should manage prices. Until these beliefs are finally examined and seen to be false, the economic carnage that these beliefs will cause is likely to be enormous.

Our Gratitude to America

I’m not buying Barack Obama’s attempt to place the controversy over his pastor, Rev. Jeremiah Wright, in a racial context.

There is no need to repeat here all of Wright’s messages of hate. This one is enough for me: Rev. Wright has said, “No, no, no, not God bless America — God damn America!”

You don’t have to be any particular color, nationality, or ethnic group to share those sentiments. Unfortunately, Rev. Wright is not alone.

David Reynolds has written extensively on gratitude, and he observes: “Gratitude is a natural response to taking a realistic look at the world, including our place in it. We aren’t realistic enough to gain the benefits of gratitude often.” Why not? Reynolds explains that we fail to understand that,

There is nothing that I have achieved without help from others…I keep on wearing clothes others made for me, eating food others grew and prepared for me, using tools others designed and fabricated and taught me how to use, speaking words others defined and explained.

Allow me to extend Reynolds’ remarks. Rev. Wright is practicing freedom of speech because of the sacrifices of blood and fortune of the founding fathers. Because this country was founded on principles of economic liberty, Wright has a standard of living that few on this planet can dream of.

I feel gratitude for this country, not because I overlook its flaws, but because I know how blessed I am. All over the world, many people will go to bed hungry and sick—I eat organic food. Many people by necessity have no time to pursue their passions—I make my living pursuing my passions. Many people throughout the world don’t feel secure in their homes or they feel their basic liberties are not secure—I feel secure in both. Many people experience the bloody horrors of tribal hatreds that have lasted thousands of years—I live in a country where the horrors of tribalism have never taken root.

Rev. Wright’s message of hate is not what the perennial spiritual wisdom teaches. The truth is that there are no self-made men. A leaf on a tree has no life apart from the tree; we all are joined. Ken Wapnick has written that gratitude is a natural reaction when you reflect on spiritual truth:

Gratitude is an experience of humility that comes from the fact that I need you, not in the specialness sense of needing you to complete me or to fill certain lacks in me. It is a need that recognizes that you are a part of me, and if I do not recognize that, then I will not remember who I am…

Much has been written about Rev. Wright’s lies. Reynolds explains why those who don’t practice gratitude routinely lie:

It takes energy and struggle to ignore how much we receive and how little we return to the world. But we grow used to the investment in deceit as we grow older. Ignoring and lying helps us feel better about ourselves.

Helping others feel better about themselves through lies is not worthy of a pastor. A message of deceit and hate doesn’t heal injustice—it feeds injustice. A message of separation pits brother against brother; it splits—it does not unify. A message that lacks gratitude does remind of us our true nature—it blinds us to our true nature. I find it inconceivable that Barack Obama never noticed these differences.

Eliot Spitzer and the Rule of Law

On Monday, after it was announced that New York Governor Eliot Spitzer is linked to a prostitution ring, politicians and commentators alike were universally “shocked” by the behavior of a man who they perceived as a squeaky clean champion against corruption. Yes, many considered him arrogant; but almost all considered him an uncompromising champion of the law. Nothing could be further from the truth.

No one should be shocked by Spitzer’s conduct. Rather than a champion of the law, Spitzer, in recent years, has undermined the Rule of Law. This is how Nobel laureate Friedrich Hayek explained the Rule of Law:

It is the Rule of Law, …the absence of legal privileges of particular people designated by authority, which safeguards the equality before the law which is the opposite of arbitrary government.

In 2005, Spitzer was New York’s Attorney General. How did Spitzer perform on the standard of insuring “equality before the law”? In 2005 John Whitehead, former chairman of Goldman Sachs, related a phone call that Spitzer placed to him in April 2005 after Whitehead defended Hank Greenberg in a Wall Street Journal op-ed. Greenberg is the former head American International Group (AIG). Spitzer had publicly charged Greenberg with fraud, but then Spitzer declined to file criminal charges. When Whitehead decried Spitzer’s abuses, Spitzer phoned him and said:

Mr. Whitehead, it’s now a war between us and you’ve fired the first shot. I will be coming after you. You will pay the price. This is only the beginning and you will pay dearly for what you have done. You will wish you had never written that letter.

In 2005 the president of the U.S. Chamber of Commerce, Thomas Donohue, called Spitzer’s prosecutorial excesses “the most egregious and unacceptable form of intimidation we’ve seen in this country in modern times.”

In 2006 Spitzer was elected Governor of New York. Within months of assuming office, it was revealed that Spitzer had ordered the New York State Police to record the whereabouts of New York State Senate majority leader, Joseph Bruno.

Official abuse undermines the rule of law far more than the behavior of any criminal. It is the job of government to be an impartial umpire, upholding the rule of law. When umpires use the law to further their own ends, our institutions erode in very alarming ways. In other words, judges who take bribes from drug dealers do far more damage to the system than the damage done by drug dealers on the street corner.

It is the human condition to be prone to excesses. When we are in the grip of our ego and cut off from our Source, we seek remedies to drown the existential angst that we feel. We can acknowledge our own humanness; and in that way, we can all feel for Spitzer and his family.

Despots are notoriously prone to excesses. Why? They live more of their lifetime in an egoic state-of-mind. They are trying to control their little corner of the world. They hold press conferences to denounce individuals before they have indicted them. They threaten those who dare to oppose them. They order state police to spy on their enemies.

There should have been calls for Spitzer to resign long before today. He has been out of control for many years. A Course in Miracles offers this advice: “You who cannot even control yourselves, should hardly aspire to control the universe.” Good advice for us all!

The Coming Scuttling of Free Trade

It was 1949. Abraham Levitt and his two sons, William and Alfred, were about to sell their first ranch homes in the nation’s first suburb of Levittown, Long Island. The homes sold for $7,990 and were built on the site of a former potato farm. Thousand of middle class New York City residents eagerly lined up to buy what for them was a fabulous home with new appliances and green space.

On the prairies of America it was another story. Many areas were just, for the first time, receiving electricity. Not every home had indoor plumbing. Life was hard and living standards were comparatively harsh on the rural farms of America. But, it was these same hard working farmers who grew the food that eventually ended up in the new supermarkets that served the residents of Levittown.

Suppose in 1948, a resident of Long Island had argued as follows: Levittown should not be built. We are growing potatoes here on Long Island. If it is built, we will start importing potatoes from North Dakota and that just isn’t right. If we import potatoes, Long Island farmers will lose their livelihood.

The argument might continue with the assertion that competition from North Dakota farmers just isn’t fair. In North Dakota, living standards and environmental standards are less than our standards. Some families out there still use candles and outhouses. Labor is cheap; their children wake-up early to do farm work before they go to school. How can a Long Island farmer compete?

Precisely! Long Island famers couldn’t compete. That is why Levittown came into being. Long Island land was more suited for Levittown homes than it was for potato farms. Of course, there was never a possibility that North Dakota potatoes could have been banned from Long Island because no state can interfere with trade between states.

But nations can and do interfere with trade between nations. Yesterday, at the university where I teach, we were interviewing a candidate for a faculty position. During his presentation, a colleague explained why she was for free trade—but only if it is fair trade. Trade is not fair, she explained, when countries have lax environmental standards, pay their workers lower wages, do not provide health-care benefits, etc.

As I listened to her passionate denunciation of free trade, my mind flashed back to the Democratic debate last week. Both Obama and Clinton threatened to scuttle NAFTA if the agreement was not renegotiated to put in place stricter environmental standards etc.

The standard of living in much of Mexico is not much better than the standard of living was in North Dakota in 1949. To expect Mexico to adopt the environmental standards that the United States has in 2008, before their standard of living matches the standard of living of the United States in 2008, is far from fair. It will never happen. And if now, in 2008, the Mexican government did impose such environmental standards, the standard of living of their people would never reach that of the United States.

Many farms are now abandoned on the North Dakota prairie. Why? Rising standards of living in the cities attracted farmers. In a world of free trade, the lax environmental standards and the sweatshop factories that we see in many countries will also vanish just as soon as rising living standards increase the demand for a cleaner and safer way of life.

In a protectionist’s world, living standards fall. Falling living standards, in turn, increase the amount of environmental damage. Poor people worry about feeding their children; they do not worry about meeting American environmental standards. More than that, a poor world breeds war, and war is the ultimate environmental catastrophe.

Here is the bad news. To have both Clinton and Obama promising protectionism is a harbinger of a political trend. An intensifying debate that focuses on limiting free trade is a leading indicator of difficult economic times. Why? Bull markets call forth feelings of inclusiveness—a brotherhood of man so to speak. Bear markets call forth feelings of exclusiveness—with corresponding feelings of nationalistic pride.

Difficult economic times are coming. Fear increases during difficult economic times, and fear demands scapegoats. Politicians will be all too eager to supply scapegoats. Bet on free trade to be an early one.