A Clunker of a Program

Have you gotten your $4500 Cash for Clunkers rebate from the government yet? I bet you haven't.

Why?

Because you probably didn't buy a gas guzzler that qualifies. So how does it make you feel to know that you and the rest of your fellow taxpayers are subsidizing people who made the bad decision to buy one of those Clunkers. If you're like me, you think it's a blatant rip off.

Some of the defenders of this program tout the improved national fleet mileage and resulting reduction in gasoline and green house gas emissions. But even under the most optimistic assumptions, the impact is truly negligible, about the same as what the U.S. burns every 22 seconds. And this is at a cost to the taxpayers that is about seven times what "Cap and Trade" carbon permits trade for in Europe.

Proponents of this giveaway also cite the great public response to the program which is jump-starting the sales of new cars.

Sure. People will gladly accept a $4500 gift.

Auto sales that were postponed while this program was being debated and those which were planned for the future are being consummated now, making it pretty likely that sales will drop once the program expires. Additionally, there are a bunch of negative effects. One, for example, is the impact it's having on the car repair and aftermarket parts industries, which are being badly hurt by the decision to scrap the clunker cars instead of repairing them.

This program is just one more example of the government picking winners and losers. While advocates of more government intervention tout how programs like this and other "stimulants" are enhancing the economy, to me it's just the government distorting the free enterprise system.

Whether it's Cash for Clunkers, subsidies for underwater mortgage holders or any of the other government interventions implemented recently, the negative impacts often outweigh the positives.

Also, let's be real. There's no free lunch. Somebody has to pay for all this massive spending. That somebody is us, our grandchildren, or even better, now that I think about it, China.

Psst...Wanna Buy Some Stock?

If I wanted to buy some stock in an auto company, I could have easily done it. However, my government has decided that they should do it on my behalf.

 

Where in the Constitution does it say that this is the role of government?

 

The US auto industry is composed of domestic and foreign controlled companies. All of the auto companies, whether foreign or domestic controlled, have public stockholders located all over the world. So what difference does it really make to the average citizen (who is not a member of the United Auto Workers union) whether Chrysler or GM survives in its pre-2009 form? As long as it is profitable, cars will be designed and manufactured in the US, employing US workers. Whether the paycheck comes from Toyota, GM or some new startup really is of little consequence.

 

This seems to be OK for other industries, but not the auto industry. I just don't get it.

 

I wrote some time ago (November, 2008 and December, 2008) that the solution for the ailing US car companies was a pre-packaged bankruptcy. This is exactly what is happening with Chrysler. The ironic upshot of the present plan is that the company is actually being kept alive by the government's infusion of billions of our dollars so that it can be taken over by Fiat. Didn't someone notice that the headquarters of Fiat was located in Italy?

 

By the way, it really irked me when I heard President Obama rail about the private entities that did not go along with the government's plan in which the private entities get pennies on the dollar for their secured Chrysler debt. It seems to me that they have every right under our system to plead their case in court if they think this will result in a better outcome.

 

The bottom line is that the government is not interested in the bottom line. It is a political institution that responds to political pressures. It should exit itself from this mess as quickly as it can.

Alphabet Soup Spells Blah

I'm getting lost. There's old programs like the FDIC insurance program to protect bank depositors. There's the new Obama Stimulus Package. And then there's TARP, TALF, EIEIO (no, wait, that's a song from kindergarten), along with seemingly dozens of other new catchy-named programs emanating from the nation's capital. All are intended to reverse the economy from its current downward death spiral.

 

Yesterday, Warren Buffett was pontificating on CNBC that the economy had "fallen off a cliff" but would eventually recover. Well, duh ... yeah, even Jimmy Buffett could have said that.

 

There's universal agreement that the stock market is a leading economic indicator. It almost always starts its recovery six months prior to economic upturns. So the question that I would have liked Warren to answer is "When will the recovery take place?". Once we know that magic date, a monkey could throw darts at the stock market listings and pick winners, just as long as he tosses those darts six months earlier.

 

An old stock market adage is: "They don't ring a bell at the bottom (or top)". This is really too bad; it would make things a whole lot easier. As I write this, the stock market has just rallied for the first time in weeks. Is this the bottom or just a "dead cat bounce"? Who knows? Check back in several years and we'll be able to figure it out.

 

So what's the average investor to do? Just listen to the experts and when you think that enough of them agree on a common course of action, immediately do the opposite.

 

Failing that sure-fire piece of advice, it seems to me that the Obama Administration and Congress can help jump-start the economy and the stock market with one simple action above all others. Reduce or eliminate the taxes on dividends and long term capital gains. This single action will pump huge amounts of cash into start-ups and the stock market, revitalizing the economy and creating jobs.  Obama is scaring the bejesus out of potential investors worldwide because he's talking about raising these taxes instead of lowering them.

 

One other thing. It might be a good idea to hold gold or some other hard assets in your portfolio. While I know that the current concern is deflation, at some point, the massive creation of money is going to set off a jumbo-sized round of inflation.

 

No! I don't have any idea when that magic date will occur. I sure wish I did.

 

Money For Nothing - Part 3

I've ranted about "money for nothing" several times before. If, by chance, you missed it, or you just want the sheer joy of experiencing it again, you can read it here, here and here. But last week, it actually was literally true: The U.S. government auctioned $32 billion in four-week T-bills at 0% interest Tuesday, the lowest auction rate ever. In the after-market, the price rose, and people bought T-bills at a negative rate of interest, apparently extraordinarily gleeful to lock in their losses.

 

This insanity is a result of the fear that investors have of taking any risk at all. For nothing is seen to be safer than T-bills, which will be repaid in their entirety with new, crisp, freshly printed, dollar bills. If the government needs some more dollar bills, it simply prints more of them. No limit. No questions.  Pretty clever, eh? (as our Northern neighbors might say).

 

Well, all this leaves me completely baffled. Normally when a government runs its currency printing presses overtime, the inflation rate soars and suddenly wheelbarrows are required to haul around all the paper needed to purchase a loaf of bread. But it seems that every country in the world is hyperactively churning out paper money. Nobody's money is worth more than the next. You don't bail out of the dollar for Yen, Euros or Pounds because they're devaluing too. Even the Chinese are printing and spending like mad.

 

So, what does this all mean? Apparently, that there's no limit to the size of the government stimulus (sounds erotic, doesn't it?) programs that suddenly are now possible. Both namby-pamby Democrats and hard-hearted Republicans can hardly contain their excitement.

 

The U.S. has made commitments so far of upwards of $8 trillion in an attempt to halt the economic slide. Is there an upper limit? Beats me. Even the Bush Administration is now saying they are ready to pump untold billions into the moribund US Big Three auto companies before the Obama Administration gets their wack at doling out more of the cash.

 

By the way, Detroit seem to be pretty scared of using the word "bankruptcy". What's all this nonsense about getting the government to negotiate with the "stakeholders to share the pain" so they can avoid bankruptcy? Sharing the pain is just what a bankruptcy judge does in a chapter 11 filing. The difference is that the judge is doing the pain sharing pursuant to the current law, while the government actions being proposed don't pass my smell test for legality at all. They're more akin to simple extortion that's probably unconstitutional anyway (The Fifth Amendment). 

Anyway, back to the topic, in bankruptcy the auto companies continue their day to day operations. They, along with all their employees, don't disappear overnight. It's pure hogwash to say that people won't buy cars if the manufacturer is in bankruptcy. Anyone who has been paying any attention at all to the pleading on bended knee in Washington knows by now that the Big Three are in serious financial doo-doo. 

And, if you'll allow me just one more "by the way," I heard a great line which referred to the $8 billion General Motors paid last year for retirees' and current workers' medical bills. The talking head on CNBC said: "General Motors is a health care company that just happens to make cars."

 

I also recently read an  economist's apparently serious proposal to revive the housing market (remember, this is what the whole mess is about) that struck me as something Lenin would adore. He proposed that the government just buy everyone's existing mortgage and refinance it at a 1% interest rate. The government would also offer new mortgages to new buyers at the same rate. 

While we're at it, how about if the government solved the auto companies' problems by offering auto loans at 1% interest to anyone who had or could obtain a driver's license? Why stop there? How about 1% loans to buy computers and networking gear so Silicon Valley doesn't implode? You get the idea. Since the money is for nothing, nothing is off limits. Just propose it and it happens...money is no object.

 

Palin's Victory Tour

I was all set to write about the wretched economic situation and Detroit's plea for a bailout. Then, out of the blue (or is it red?), up pops Sarah Palin and suddenly I'm right back in Palinmania.

 

Did you catch any of her "victory tour" this week? It seems to have started in her kitchen in beautiful Wasilla. There she was, being  televised to the world, orating in her peculiar vernacular, while simultaneously whipping up a batch of moose stew ( do you "whip up" moose stew?). I bet you thought it would be hard for her to walk and chew gum. Not for our hockey mom. She was as smooth as a fresh sheet of ice. 

Her week continued with interviews on CNN, NBC and Fox, among others. The tour culminated with a rousing speech to the gathered Republican governors in Miami, eager to learn from Palin just how the party would be reassembled into anything that might have any chance of winning a national election again in their lifetimes.

 

Wait a minute! Did I just say that the Republican party didn't win the last election? Oops, yes, that's what happened all right. Obama did win both the popular vote and the electoral college vote. That means McCain and, I assume, Palin, must have lost.

 

Well, then how do you explain Palin taking a victory tour?

 

You can't. Unless your logic flows like Sarah's syntax.

 

Just to remind you, here's an example of "Sarah Speech", as reported by Maureen Dowd last week in the New York Times:

 

"My concern has been the atrocities there in Darfur and the relevance to me with that issue as we spoke about Africa and some of the countries there that were kind of the people succumbing to the dictators and the corruption of some collapsed governments on the continent, the relevance was Alaska’s investment in Darfur with some of our permanent fund dollars."

 

I guess that's clear enough. Even George W. would be proud to have uttered that particular string of words.

 

Re-reading that little ditty, it's easy to see why she has garnered a 98% name recognition among the great unwashed masses. Yes, of course, they like the fact that she's a hard working super-mom; and her looks, ideas and logic are simply captivating. But, most of all, they can't get enough of her folksy way of speaking. Her fans say that they would feel comfortable with her in the White House because she's just like them.

 

As Sarah herself would say, "this should result in a loud shout-out to the country's educators that they'd better get on the ball and plow through those glass doors that may be open just a crack". 

So therein lies the lesson for today:  there's a new day dawning, and it's all about teaching our children to speak with a clarity that every "Real American" (not those wussy Northeastern and West Coast elitists) can understand.

 

Oh, and one more thing. The government would be crazy to throw any money into the coffers of the big three automakers unless it's part of a pre-packaged bankruptcy proceeding in which: the management is replaced; the labor contracts are renegotiated; critical suppliers are paid so they don't go bankrupt; the common shareholders are wiped out; outstanding bonds are converted to common equity; and the government money is injected as preferred stock or senior bonds.

A New Beginning

The presidential election is over. The people have spoken. Obama clearly deserved the win. He had by far the better organized, financed and focused campaign. McCain's, by comparison, was disjointed and reactionary.

Oh, one more thing. Obama got the financial system to freeze up (or is it melt down ?) at exactly the right moment, thereby eradicating McCain's overwhelming strength on national security just weeks before the election.

 

How he pulled that exquisite piece of timing off is a mystery befitting Obama's ever expanding "walk on water" reputation. 

 

Obama's main selling point on why he would be better at solving the economic crisis was that he wasn't a Republican. Since it happened on their watch, it must have been the Republicans who got us into this mess. The voters' logical response was to throw the bums out. McCain's post convention bounce rapidly disappeared and Obama never lagged in the polls again.

 

With his election, the rest of the world appears ready to give America another chance to become good guys again. The fact that he is an African-American certainly demonstrates that Americans are willing to move past the old racial divides. Muslims worldwide, but especially in the Middle East, must have noted that Obama's middle name is Hussein. Africans surely noted that Obama's father came from Kenya. Asians probably noticed that Obama resided for a time with his mother in Indonesia. And Europe undoubtedly has paid attention to Obama's "spread the wealth" taxation and "consult with our friends" proclivities. 

 

So we wish the new president well. He will have his hands full, what with the economic mess, two wars and an eager Democratic congress straining to be unleashed.

One final comment: I will miss watching SNL and Tina Fey as Sarah Palin. It sure is hard to tell them apart. All things must come to an end, and so too must this. Alas. 

Are We Becoming Bluer?

The good ship McCain continued to take on water this week. A potential tide-turning event was the third and final presidential debate on Wednesday. McCain heaved up a "Joe the Plumber" bomb in his latest attempt to change the trajectory of the campaign. This follows his previous failed Hail Mary attempts: choosing Palin as his VP and a temporary suspension of his campaign to rush back to D.C. to rescue the economy. But the focus on the scary economic mess rather than on national security continued to help Obama.

 

According to America's most respected newsman, Jon Stewart, all Obama had to do to win the last debate was refrain from jumping up and saying "Where are all the white women at"? The Chosen One resisted that temptation and thereby maintained his momentum.

 

More bad news for McCain was that a number of Republican luminaries, reading the growing pile of tea leaves, scampered off the ship. George Will, Peggy Noonan, David Brooks and Colin Powell all bailed out.

 

The week did have some positive moments for McCain and Palin. McCain won the hilarious battle of the roasts at the Alfred Smith annual dinner. He looked like the straight talking McCain of yore and was seen having fun for the first time in the last two years.

 

Similarly, Palin finally made her anticipated appearance on Saturday Night Live. The first of the two skits was pretty lame. The second skit, however, was clever. Amy Poehler, who looks like she must be at least 10 months pregnant, rapped out a tune that had Palin swinging in her seat. The Governor came across as a good sport.

 

All the polls say Obama and Biden (remember him?) are gliding to victory. At this point, their strategy should be to just play it safe, not get drawn into any nasty name calling, avoid any memorable gaffes and pray like heck that the Dow doesn't suddenly rise 3000 points.

 

Perhaps the best tactic at this point for McCain/Palin is to jettison all pretenses of serious political talk. They should concede the boring wonkish policy stuff to Obama/Biden. The populace can't really evaluate whose plan is better and will just blame the Republicans for the economic mess since it occurred on their watch.

 

Instead, MCain/Palin should continue to do comedy for the remainder of the campaign. This will pick up the voters who base their decision on whom they want to have a beer with. But even if they lose the election, both McCain and Palin will burnish their resumes and improve their chances for future gigs during the Republican diaspora. They should have lots of juicy material resulting from observing the Democrats' attempts at dealing with the economy.

Money For Nothing - Part 2

Counting the $700 billion the congress and the president just authorized the Treasury department to use, almost $2 trillion has now been committed by the federal government to get the financial system functioning again. Several of our friends are also pitching in. The combined commitments announced by the US, Europe and Japan exceed $4 trillion.

The government politicos say "trillion" like it's an everyday number that just slips right off your lips. I can't really get my mind around such a staggering number. $4,000,000,000,000. I don't know about you, but all those digits look really scary to me.

Where does all this money come from?

I admitted in a previous post that I really don't understand money very well, but here goes. I assume that the Chinese and friendly OPEC nations will continue to lend a bunch of it to us by buying treasury bills and bonds. The rest will be created magically by just printing more of the paper variety we're used to seeing and by making some entries in an exotic "grand ledger in the sky".

This will increase our national debt to over $10 trillion. Some people think that this is really bad because our kids and grandkids will have to pay this back. But that never seems to happen. They may just pass the debt on to their kids and grandkids. In economic theory, I think this strategy is called "kicking it down the road".

Another possibility is that we'll experience a case of serious inflation (kind of like serious indigestion, but on a national scale). Thus, while we pay back the stated amount, it will not be worth very much in real money (whatever that is).

Just where does this leave us? In dire straits, where the money is for nothing (and the chicks for free). Hmm... I seem to remember something similar to that a while ago on MTV .

Perils of Paulson

I bet that most Americans know that Henry Paulson is the Secretary of the Treasury. I also bet that they had no clue who he was two weeks ago. I also guess that most Americans have no idea what the Treasury's role is in our system of government, but I'm pretty sure that they know that Paulson is the man behind the $700 billion government bailout. This is one heck of an expensive cram course in civics for Mr. Average Taxpayer. Even Stanford wouldn't have the cajones to charge this much.

Something like 90% of the population consider Paulson's plan to be a bailout of Wall Street. But, as discussed in the previous post, the cause of the crisis that is gripping the financial system is not just Wall Street's doing. There's plenty of blame to go around. It's now Paulson's job (along with all the political leaders) to sell the plan that has emerged this weekend as a bailout of the nation's economy, not just a bailout for the fat cats on Wall Street. This will not be easy. It's far simpler to scapegoat the unpopular rich guys. Both Obama and McCain did just that in their first debate two days ago.

Paulson's plan was two and one half pages long when he presented it to the President and Congress. After a week of work, the Washington politicos have renamed it the ‘‘Emergency Economic Stabilization Act of 2008’’. It has grown just a bit (by Washington standards) to over 100 pages of legalese gibberish. And it doesn't even cover the details of how the government will determine the price of the toxic assets it will be buying from the private sector.

Congress is set to vote on this bill this week. It appears that both political parties have come to understand the risk of inaction and are likely to pass the proposed legislation on to the White House. I wonder if they'll have the usual signing ceremony. Will Bush sign it using a bunch of pens which he will then hand to the smiling politicians who will be in the signing photo, or will it be done in the dead of night, with no one wanting any part of the whole mess? It should be fun to see which one happens.

As a free market guy, I'm pretty dismayed that the government is doing this. Sure, I like French food, but I don't sure don't like French economics. However, when I see Bush and both political parties agreeing on something smack in the middle of an election campaign, it must be darn necessary. So you can reluctantly count me in. Although it's not like anyone asked you or me.

Bailouts, Bankruptcies and Bloated Blather

Well, it's been quite a week in the money world. Bailouts, bankruptcies and bloated blather dominated the news. The talking heads on cable went wild on the subject, while each of the presidential candidates were especially inane in their varying pronouncements during the week.

Even though the seeds of today's crisis may have been sown well before they took over the reigns of government, who would have thought that a Republican administration would turn our financial system into one that emulates France? The details are still being worked out, but the rough estimate is that the overall government commitment to staunch the bleeding for awhile is approximately $1 Trillion (yup, that's Trillion with a capital T). And I say for "awhile" because no one really knows the full extent of the cost that will ultimately be incurred. History suggests that the amount the government will commit will probably rise substantially.

The basic cause of the financial meltdown that almost occurred this week was a lack of trust. Namely, trust that if I did a transaction with you, you would be around to honor your part of the bargain. In this environment, sane people (and organizations) simply stop doing business with the untrusted party. If nobody trusts anyone, all transactions cease. In the financial world, that's called Armageddon.

The lack of trust all fundamentally stems from the home mortgage debacle, in which scads of money was loaned to people who, put simply and crudely, just couldn't pay it back. Whether it's the creative capitalists on Wall Street who packaged the mortgages into ever more arcane securities sold around the world to organizations stretching for higher yields; or the unscrupulous mortgage banks and brokers who pushed money on hapless people who suddenly and unquestioning were able to live in homes valued at more than their wildest dreams; or the crazy accountants who demanded that the banks holding the mortgage-backed securities value them at unreasonably low prices; or the credit rating agencies who suddenly woke up to discover that their AAA ratings were just a tad overblown; or the government regulators who had no clue what to regulate; or lobbyists who somehow forced the government to bend over in an unseemly manner; or any other organization I've neglected to mention who had the slightest participation in creating the real estate bubble, the problem is real and darn serious.

So, at this point, it seems to me that Treasury Secretary Paulson and Fed Chairman Bernake, flying blind and having properly scared the pants off of the President and the leaders of Congress, are proposing some sensible actions selected from a steaming pile of rather unsavory options. Where and how it will end, no one knows. In this environment, the conventional wisdom still applies: just stay diversified. It's likely, given the strength of the US economy, that this will work out the best through the various ups and downs that are sure to follow.

By the way, it's really interesting that, even in today's highly sophisticated society, most financial transactions still take place based on just trusting the other person's voice (or mouse click) in the transaction. That's the way business has been done since money was invented (except for the mouse click part).

Kabuki at the Car Dealer

I just bought a new car. It's the first one I've bought in over ten years. The experience hasn't changed very much in all that time.

Perhaps the only difference is that I was a little bit more informed about the pricing and features of the various choices since I was able to get the information on the web. But the actual Kabuki dance at the dealer was pretty much the same.

My wife and I arrived at the lot and the group of salesmen hanging around the entrance checked us out. Somehow they decided whose turn it was to approach us. Then, I asked for the fleet manager. He didn't exist, according to the salesman who had won us.

Then, since we already knew which car we wanted, I looked at the MSRP price sticker and asked him how much the dealer wanted. He responded by asking how much I would offer. I gave him a ridiculously low offer. He asked for a very high price. I said that was too much. He invited us to step into his office where we could wait while he said he would try to convince the manager to lower his price. After a suitable time, the manager entered and announced that since he really wanted us to join their family of extremely happy customers, he would lower the price $500.

I said that was insufficient and that we were too far apart to continue to bargain. I thanked them for their time and we got up and left the dealer showroom. When we got to the sidewalk, the salesman ran after us and pleaded with us to reconsider, saying he really needed the commission. He promised that he would extract a better deal for us if only we would come back inside.

We returned to a good cop/bad cop routine and, after a series of final, final offers from each side, we agreed upon a price. Now, it was off to the finance office to sign paperwork.

By now, the salesman had become our closest friend. The finance guy was just the opposite. Icily detached, he could care less if we ever got the car. He shoved paper after paper in front of us for signatures, briefly explaining what the documents were about when we dared to inquire. His biggest challenge was not falling asleep during the process.

The final steps were actually fun. The car was inspected by a highly qualified technician (so we were told), washed and brought to us. We rode with the salesman to the gas station where he filled the absolutely empty gas tank up to the tune of $85. Then, the salesman explained how to set up all the features and bade us a good day. There's no one on earth who could remember what all the instructions were if they didn't have prior experience with similar electronics.

We drove off, happy but exhausted, in our new car. I wonder what it would be like if all purchases in our lives followed a similar process. The economy would probably grind to a halt.

All in all, it's an interesting ritual.

The Airline Business

I wonder what it is like to run an airline. The industry is only a little less unpopular than George W. Bush, your friendly cable company and the IRS. Whatever you do, people complain.

They have one heck of a business model. They are selling all their seats (been on a flight with fewer than 99% of seats filled recently?) and they are still losing money. They have to do something. Well, here's what they are doing.

1. Sell fewer seats. This must be a good idea, I guess, since they're all doing it. At the logical extreme, they each sell no seats at all. Then, the seats can be priced infinitely high. The only minor snag is that there are no planes flying and no seats available to sell. They're obviously assuming that the public will quickly adjust to this minor inconvenience.

2. Unbundle service. Well, first of all, to call these unbundled items "service" is a slight stretch. The list of "services" they are now charging for includes checking a bag, getting a reservation for a seat, being served food or beverages, and, ...well, you get the idea. I suppose the airlines could charge extra if you want a guarantee that the plane will actually land in a specific city that you choose ahead of time. It would be a heck of a lot less bother for the airlines if they could just fill up their planes as passengers arrived at the airport and fly them to wherever was most convenient.

3. Complain to Congress. It used to be that the airlines were regulated. The most successful airlines employed hoards of lawyers with the proper political skills and made lots of money. The downside was that the government decided who could fly a specified route and what price they could charge. Maybe they should return to those days again. There must be hundreds of unemployed lobbyists available now that Obama and McCain have banned them from their campaigns.

I'm sure that there are many more creative ideas that the airline executives could use. Feel free to post any that I've missed. They may pay you if they adopt your idea (although you'll probably have to sue them first).