Even After All They Have Done

The weekend before the election, I was talking to a retired university professor. We just met for the first time, and he was sharing with my wife and me how the recent collapse in stock prices would influence his retirement. I told him that things could get a lot worse. He looked at me with alarm (perhaps over his retirement and perhaps over panic that he was sitting next to a “kook”); and with that, he was not really interested in extending the conversation. He ended our conversation with a puzzled question: “Even after all they have done?”

He didn’t wait for my reply; as he uttered “even after all they have done,” he was moving away to get some food. In reflecting on his comment, we can begin to understand why for the foreseeable future, more will be “done.” The belief that our government institutions can fix our problems is still widely, almost universally, shared.

He doesn’t read my blog; but I would like to review a few of the more recent things “they have done.”

A few weeks ago the New York Times told the story of a homeowner in suburban Los Angeles who had one of those “name your own payment” home loans. Those were the loans where you didn’t even pay the interest due each month on your loan—the principal kept increasing, and the theory was that eventually rising home values would bail you and the bank out of your mutual lunacy. In any case, the homeowner now owes $350,000 on a house worth only $150,000. He has already cashed out, and presumably spent, $200,000 of his “home equity.” He has stopped paying his loan so that he can qualify for a new mortgage which will write down the $350,000 to $142,000. In the Times article, he freely admits to fraud saying, “I guess they are forcing me to deliberately stop paying to look worse than I am.”

Now, if this loan modification was a voluntary business transaction between the bank and the homeowner, I would not be writing about it. However, the Fed has infused billions of dollars into banks; and all of us will be paying the bill. Today, Citibank announced they will be spending at least $20 billion on such loan modifications; this follows in the footsteps of J.P. Morgan Chase who will be spending $70 billion. Today too came news of a massive new effort by Fannie Mae and Freddie Mac to modify the terms of millions of loans.

If you still think this is a good way to spend taxpayers money, Sandra Hamilton gives a concrete example why it is not :

Several years ago I bought a house. I had an option for the financing; I could take a rather high interest rate (for the time) that was fixed or I could put nothing down and pay nearly nothing for an adjustable rate mortgage. I decided not to gamble. I knew interest rates can and do rise. I opted to pay a lot more for my house and to have the security of a fixed rate loan. That decision cost me a lot of money over the past five years, but it was supposed to save me money when the tide turned.

Now, I am paying for that decision. I am paying for my neighbor’s house down the road who did not want to pay more at the time. I am paying so that my neighbor and yours, who took out a mortgage with no down payment and paid next to nothing for the past five years, can get his mortgage reduced with my money. How is that fair?

My next-door neighbor decided to take out a huge chunk of change by refinancing when housing prices were high. He spent nearly a hundred thousand dollars fixing up his home and buying new cars and boats. He has a lovely new kitchen and a bathroom to die for. Now he will be bailed out by the government because his house is in foreclosure. He will get a new loan, a nice low fixed rate (even lower than mine) and he will have a significant chunk of his principle reduced. Who pays for that? Me. Why? Because the government doesn’t have a dime and all money it gives to Mr. Smith it must take from Mr. Jones. (You and I are Mr. Jones in this example.)

Today’s news also told of how yesterday, Obama pressed Bush to provide massive new aid to the automobile industry. Nowhere in the stories about Obama’s request is there even a hint that Toyota, Honda, Hyundai, Subaru, and BMW are happily and profitably building cars in the United States. They are just not building their cars in Michigan with union workers or providing their executives with obscene salaries.

Please don’t let anybody tell you that the success of foreign automobile plants in the United States is on the back of the workers. Auto workers at GM earn about the same hourly salary as autoworkers do at Toyota. The big differences are in executive pay. In 2006, Toyota’s CEO, Hiroshi Okuda, earned $903,000; while GM’s Rick Wagoner earned almost $10 million dollars.

Perhaps Obama can explain—if Toyota builds a better, safer, more reliable car than GM—why should the taxpayer be forced to spend billions of dollars to subsidize Michigan’s overpaid auto executives and unionized automakers? They are no more entitled to your tax dollars than any other business who fails to satisfy your needs. Don’t expect a reporter to pose that question to Obama anytime soon.

When supermarkets replaced the corner grocery store, when Wal-Mart replaced K-Mart, when Starbucks replaced your local diner, did the economy collapse; or did it grow?

If you long for the standard of living Americans had when corner grocery stores provided much of our food, then by all means, support giving away billions of dollars to the big three automakers. If you think this is a good idea, ponder this question: If GM took out an ad in the newspapers announcing the “save the GM fund,” how many taxpayers would voluntarily write a check? When you answer that question, you will understand why GM will force the taxpayer to write a check. Let’s not call this a bailout or a rescue—this is theft, pure and simple.

One more recent thing that “they have done”—when you are forced to cut back on your holiday gift giving this year, you can be thankful that at least the bankers at Goldman Sachs will not go without. Goldman Sachs, who has already received about $9 billion in taxpayer money, plans on giving out about $11 billion in bonuses to their employees.

Indeed, after “all they have done,” we can be thankful that the American economy is as resilient as it is. Eventually, anything reaches the breaking point; even the resilient US economy will collapse after “all they have done.”

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15 Responses to Even After All They Have Done

  1. ibrahim jillani says:

    A message to the WHITE President:
    Excellence is not a destination;
    It is a continuous journey that never ends.

    C-H-A-N-G-E—- W-E—–N-E-E-D

    A future paradigm shift maker and a beacon of hope for US and the rest of the world’s despondent nation, fighting for a better change has come true- as the change has come to the United States. The world has the habit of making room for the man whose actions show that he knows where he is going. Paradigms are powerful because they create the lens through which we see the world.

    All personal breakthroughs begin with a change in beliefs. So how do we change? The Bantu socializing with the whites; the elimination of racial discrimination, you must feel deep in your gut that not only has this belief cost you pain in the past, but it’s costing you in the present and, ultimately, can only bring you pain in the future. As a result you have been chosen above all the ethnicity and for a true democratic process, irrespective of all tribes, clans, color and races, then you must associate tremendous pleasure
    to the idea of adopting a new, empowering belief which is the necessity of the world’s nation today.
    Mr. President-elect YOU ARE NOT A MERELY PRESIDENT AS THE PRESIDENTS BEFORE, YOU ARE GOING TO MARK HISTORY! Since you have great challenges ahead waiting for you to combat than ever before in the history! Life is constantly testing your for your level of commitment, and life’s greatest rewards are reserved for you when you demonstrate a never-ending commitment to act until you achieve. This level of resolve can move mountains.

    It is recognize that the power individuals have to change virtually anything and everything in their lives in an instant. It is learned that the resources we need to turn our dreams into reality are within us, merely waiting for the day when we decide to wake up and claim our birthright.

    You may not control what happens to you, but you can control your attitude toward what happens to you, and in that, you will be mastering change rather than allowing it to master you. You have gained the mandate for a better change!

    IF YOU DON’T LIKE HOW THINGS ARE, CHANGE it! YOU ARE NOT A TREE.

    Ibrahim Jillani

  2. James D. says:

    So the question becomes, how far will things go before the pendulum swing eventually slow and start to swing the other way? How far into socialism and communism will we vote ourselves (remember, Hitler was voted into power)? How long will “We the People” continue to permit our government to rob those of us trying to do it right to bail out those who did not? When can we even pray that the insanity will end?

  3. Ibrahim,

    It seems like your comments may be generic and not about my blog post. I can agree with quite a bit of what you say such as “All personal breakthroughs begin with a change in beliefs” yet I read in your post the belief in the “great man theory of history”–the theory that great men who do great deeds move society. The alternative belief is that the spontaneous actions of free people moves society forward. Clearly your views are reflected by many who see Obama as some sort of savior. This mindset frightens me.

    Jim,

    There is no end in sight. This will go on for many years to come until our society is ready to change.

  4. Tesh says:

    The scared professor demonstrates an all too common belief that his “investments” should be secure. The stock market is a gamble, pure and simple. Betting your retirement on a house of cards, whether it’s on Wall Street or in the Luxor, is foolish.

    As I’ve noted, I’m no economist, nor am I a “financial advisor”, but I know math and I understand risk. I look at the fundamentals of an economy and where my money goes, and we do indeed have a long way to go (mostly down) before the economy is healthy again. I’m not pessimistic, I’m realistic; fraud can only go on for so long, even if it’s fraud that makes me feel all warm and fuzzy (so long as I don’t look too close).

    Everything that the government has done to “fix” the problem has made things worse. The trouble is, We the People either give it our blessing (“save our retirement!”), our ignorance, or the government ignores our input (how many citizens opposed the bailout bill?). We can make a difference on a local scale, but when our leaders are bound and determined to destroy us or worse, to “save” us, our options are somewhat limited for enacting real change that needs to take place.

  5. E says:

    I don’t agree with any of the measures now being peddled. From loaning GM $25BB or $3BB to American Express. The line that stretches in front of the Treasury building now includes GMAC and everyone else clamoring for “safe harbor”. If ever there was a moment in history when the United States turned into a socialist machine, this is it; because essentially, we’re shifting the cost of doing business onto the general population. I don’t understand how anyone who has been in business, or been in charge of a business structure at any level, could see this as otherwise. We are essentially “spreading the wealth” by “spreading the risk” and having everyone in America pay for bad decisions (of GM, of MasterCard, of GMAC finance, etc.). The one thing I wanted to ask you (and this is not meant to be voire dire challenge) is, with all due respect, have you ever been in charge of a business? Ran a division? I just wanted to ask because, like the retired professor, I’m curious to know if you’re writing this blog from the safety of an ivory tower or from business experience. (I remembered asking this to a professor in law school, about his notions of IP, and he said, “I ran XYZ-Big-Hollywood studio for five years and we used to see actors come in and demand property rights on their image, and the issue was always….”)

  6. Tesh,

    Excellent points; our “leaders” and those corporate interests who they help to steal from us are capitalizing on this ignorance!

    E,

    Not from an ivory tower but from my bunker in NH.

    I have never run a business but I successfully teach leadership seminars to business. “Those who can do, those who can’t teach”. You do believe in the division of labor, don’t you?

  7. Tesh says:

    Wow. That series of comments in the Cliff Hilton link start out good, but some of those people later on scare me. They voted for Obama because he was inspiring… but they disagree with his positions? No wonder the election went the way it did. People picked the next American Presidential Idol, not someone who can actually do the job.

  8. E says:

    If we actually voted for someone who could “do the job”, we would have voted for the person who gave it to us straight — “The US is $10TT in the hole; which is about $40,000 for every man woman and child in this country… and the only way out of this debacle is to raise everyone’s taxes, reduce services, get rid of $47TT worth of unfinanced off-the-book commitments — including $7TT in Social Security and $40TT in expanding Medicare/Medicaid expenses — so that we can stop the depreciation of our currency and stop having to pay 25% of every dollar collected as interest payments.” But I didn’t see a candidate out there who was stating that case (so maybe, like in a team sport, what you really need sometimes is a truly inspirational leader and not, say, the best running back). We, as a people, are only going to change the system when we have to buy bread and milk with bricks of $20 bills; or when Americans have to go to Europe or India to find jobs as laborers. Until then, people keep wanting to hear the “cut taxes” mantra.

  9. I always enjoy your posts although so skeptical and pessimistic they are….they do make me think openly.

    As a rebuttal on bad home loans and “no down payment” – I’ve already purchased two homes with no money down just paid closing costs and if I didn’t have that choice at that time my choices now would be less. For the starting “investor entrepreneur” without much money (the typical american entrepreneur) without such options getting your first start would be incredibly hard. I do agree STRONGLY that if you were a customer and used a bad loan, refinanced, and now in foreclosure/bankrupty YOU should be forced to pay it all back or at least what you still owe. I 100% agree on that, but I still believe some buyers even with small incomes still can obtain great prosperity with the chance of buying their first property with little money, take care of it, live in it, rent it out, sell it down the line for a profit (assuming the economic wave is at a higher high 5-10 years + inflated prices).

    You complain about Obama “Change We Need” – well if he does only one thing which I want really bad and which I’m willing to pay for which is better transit systems. If he pushes light-rails everywhere then I’m 100% with him (energy issue).

    I don’t agree with bailot and bad business getting money because its an “old money big american business” (GM, FORD, CRYSLER), but we live in “the land of opportunity” and that is why those lawyers in congress and companies get paid millions of dollars to cheat “us” the dumb tax payers as you stated with the other professor you met who “choose” not to be enlightened, take charge, and really change laws so when companies are not worth being in business and lose billions of dollars they will go out of business and new/existing better businesses will take over.

    That ISN’T how America works sadly as you romp and pout about in your postings, yet still most enjoyable written though! We are still a young country, money hungry I should add so naturally our goverment + big business “act the part” accordingly.

    -fn

  10. P.S. can you write a few posts on “solutions for the problems”. You make well made excellent points, but can you offer in your own opinion real thought out solutions rather then playing the blame game?

    Running the economy is a huge job, but in your opinion exactly what needs to be done to get America on right course. I’m sure you have a list in mind.

  11. E,

    I would disagree with you about the raise taxes part–cut spending instead in actual dollars not the fake cuts that politicians put forward (i.e. growing the budget 8% instead of 12 % is called a cut). You are correct–if we don’t get it, the end will not be pretty.

    Ninja,

    I’m glad you spelled out your core misconception–the president does NOT run the economy. The problem is that people think he does. The president does NOT have any money to spend that he does not take from someone else. The problem is that people think he does. Spelling out the fundamental laws of economics is not negative.

    Solutions I have talked about already:

    No bailouts
    Slash spending
    Abolish the Fed
    Restore the gold standard
    Eliminate subsidies to ethanol, nuclear etc.
    Free trade but no foreign interventions

    Of course there will be serious adjustments, but the alternative is far worse.

  12. E says:

    We also need to rework the tax code. As someone who’s actually read much of it (should have gotten an LLM in tax) and looked up exception to the rule to the exception to the rule (for example), it needs to be reworked (a copies of it, all highlighted, sit in my reference area both at work and home). I keep reading people who gripe “corporations need a tax cut because they pay so much as it is”, and I roll my eyes. If only you knew how many loop-holes there were in the tax code. Though Sect 61 begins promisingly enough defining gross income as from “whatever source derived”, the rest of the code gives everybody with enough money outs — terms like “includible for taxable year”, “constructively received”, “actually deferred”, “recognized”, “realized”, “control of receipt”, “earned”, and so on and so on. I always said that if I were a farmer, operating on Indian lands, with a sugar company, supporting 50 kids, had an oversea branch, getting “paid” from a Plan Trust, I’d be paying zero taxes.

  13. E,

    Precisely! This is one reason that I disagree with you about raising taxes.

  14. E says:

    Well, we’ll disagree then on raising taxes. I postulated raising taxes because of the math involved. You can’t just strip every expense out of the $3TT federal budget (even then, there are unfinanced expenditures). Assuming you cut down to bare minimum for defense, General Welfare (i.e. areas covered under General Welfare, Uniformity sub-clauses of the Taxing and Spending Clause of Constitution, as well as Sixteenth Amendment) and operational costs, the “size of the iceberg” is still relatively huge, and will require enormous commitments out of the budget for years. You can construct the mathematical model as fluid as you want, but the issue is that we’ll be hard pressed to pay this sucker off (over sixty years in the making). Interest payments and compounding interest alone will outpace the Federal Government’s ability to pay (to say nothing of the shrinking portion expendable income of the financial balance sheet as this thing grows). I don’t see it. As someone who’s done this sort of thing, at some point, you either (1) write off all the bad debts, (2) make concerted commitment to pay off the debts, (3) renegotiate/restructure debts, (4) Brady Bond the problem (Nicholas Brady’s restructuring of third-world debt instruments), or (5) seek Bankruptcy protection from creditors as you try to bring profitability back to the organization.

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