It Is Time to Believe Again

February 23, 2009 7 Comments

“The path we have chosen for the present is full of hazards, as all paths are. The cost of freedom is always high, but Americans have always paid it. And one path we shall never choose, and that is the path of surrender, or submission.”

-John F. Kennedy

We are a nation of pioneers, of revolutionaries, and of dreamers. A people who seize opportunity, work hard to build better lives for our families, and let nothing short of excellence satisfy us. Our heritage is rich with the courageous, and marked by people who have overcome. We were born out of Revolution, when people desiring freedom and opportunity won the most improbable war against the world’s foremost superpower. We subdued a wild continent, ventured West, and were both pioneers and pilgrims. We overcame a brutal Civil War, defeated the dark forces of Nazism, and brought about the beauty of civil rights to a nation long overdue. We emerged from The Great Depression to lead the world economy, became the standard bearer of democracy and freedom, and rose as one from the shadow of September 11th. gadsdenflagThis is the Land of Opportunity, of “Go West, young man,” “I have a dream,” and “Life, Liberty, and the Pursuit of Happiness.” This is our heritage; it is the lifeblood of who we are. We have always believed that the future will be better than the present, and that there is nothing we cannot overcome. Courage, passion, optimism, and dogged patriotism are woven into the fabric of our nation. But where are they now?

Too quickly we are letting the difficulty of the times cloud our judgment. Today’s headlines are wrought with stories of Wall Street’s downturn, an economy in turmoil, and millions of jobs lost. And where have we turned for safety? Where have we looked for rescue? The government. We now believe that a bailout is tantamount to the market, and that government handouts trump personal responsibility. The cloud has darkened so much that we think the only way out is for the government to nationalize private industry, pay off sinking mortgages, and buy up toxic assets. Our President, who promised hope and change, and brought the mantra of “Yes, we can,” has since turned to call this an uncontainable crisis, that “we may not be able to reverse,” and will quickly become equivalent to the Great Depression. And now, despite our heritage, we are being told we need to change everything. The free market and private industry that have driven us to the greatest standard of living in the world suddenly must be thrown away. The values of personal responsibility and persistence have quickly been replaced by a victim mentality clamoring for handouts. The American Dream that became reality for so many, that anyone can become anything through personal industry and perseverance, suddenly is just a dream. What changed?

On the one hand, this persistent doom and gloom is a product of both political and media opportunism. Fear and sensationalism sell newspapers. Nobody wants to read about the sunny and safe day at Disneyland-it is the broken roller coaster that zooms off the tracks that gets headlines. The murderers make news, not Joe Average who spent a simple day at work and came home to his family. Politically, fear is an incredibly powerful tool. It allows you to accomplish things you otherwise would not be able to accomplish (see The Obama Stimulus: A need for sober judgment). If the American people believe that they will sink into The Second Great Depression if they do not pass an $800 billion stimulus bill, they will pass the bill no matter how much waste is in it. A crisis environment drives and justifies action because the status quo becomes patently unacceptable. And if you paint a dark enough picture early on, you cannot be blamed when things do not improve. It is the classic case of under promise, over deliver. If things don’t work out, it wasn’t your fault anyway.

But it is time to push political and media opportunism aside, and to return to the roots of this great country. Great leaders inspire those who follow them, and motivate belief in the ability to overcome. What we have right now is not a crisis of economy or of the financial markets, but a crisis of confidence. We have lost the identity that makes us American. And since the markets are fundamentally predicated on the confidence of consumers, investors, and entrepreneurs, crushing this confidence only accelerates the downturn.

More government control means less faith in the people. What we need right now is less bailout, less handout, and less government. Cut taxes to spur growth and place faith in the people to produce and consume out of the crisis. Move out of the way of private enterprise, and encourage fresh industry. Most importantly, demonstrate belief and inspire confidence in the citizens of this great nation. It is time to regain confidence and remember who we have always been: Pioneers; pilgrims; revolutionaries; entrepreneurs; dreamers; patriots–Americans.

The foundation of our country was fastened with individual liberty, opportunity, responsibility, and courage. We have never been a people dependent on our government, or doubting in the future. We faced down Soviet Russia, reached the moon, and became pioneers of science and titans of industry. We are a nation that proudly waved the Gadsden “Don’t Tread on Me” flag, not the white flag of surrender. It is time for our country to remember its heritage, and for our leaders to renew their belief in our people. It is time to believe again.

-Matt Benchener from TruPolitics.net

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The Financial Crisis: Understanding the Causes

February 11, 2009 6 Comments

 Many people know and hear about the recession, but do not understand how we got to this point. This post seeks to provide a concise high-level account of the key factors contributing to the downturn.

The current financial crisis has been the focus of nearly all media attention, policy debate, and popular conversation for the past five months. Both the depth and ferocity of the downturn makes this a truly historic time, and the decisions made to solve the crisis will have an enduring impact on both our financial system and national economy. In order to frame these discussions properly, it is important to have an understanding of what happened and how we got to this point.

The Housing Bubble: The root cause of the crisis can be traced back to the burst of the housing bubble, which began by most estimates in early 2006. The build-up of the bubble was, like all bubbles, based on the façade of massive profit with little regard to risk. Banks were offering the now famous NINJA loans (no income, no job, no assets) to people who were at a high risk to default, and sub-prime mortgages swiftly became the norm. These banks were chasing the enormous profits inherent in bulk loans, but with shockingly little regard to the enormous risk they were taking on. When the bubble finally burst, and no one was able to pay their mortgages, the banks got stuck with all of the bad debt you now hear so much about.

Wall Street Doubles Down:  Behind the scenes of the mortgage defaults was wide spread investment in complex financial instruments called Collateralized Debt Obligations (CDOs). Essentially, a CDO is a type of asset-backed security–a bond backed by a mortgage in this case. The problem with CDOs is that the originators of the loan retain no risk for the poor loans they make, but still collect the interest on those loans. Simply put, a bank would make a sub-prime loan, give the mortgage risk to an investor (passing the risk to the investor), and still collect the loan payments.

With housing shooting through the roof in the early 2000s, Wall Street investors invested heavily in CDOs, essentially doubling down the risk on the sub-prime mortgages. This was all exacerbated by mismanaged rating from credit agencies, who undervalued the risk inherent in these complex financial instruments. The bottom line is that Wall Street doubled down on the heavy risk the banks were already taking. Everyone wanted the profit grab from the bubble, and nobody seemed to care about the risk.

The Bubble Bursts: When you loan people money who shouldn’t be loaned money, they will default. Millions of people were given mortgages $100,000 to $200,000 more than they could actually afford, and eventually they weren’t able to pay. Finally, the housing bubble burst. When this happened, revenue the banks had relied upon from mortgage payments and interest was no longer there, and Wall Street’s CDO investments all crumbled almost overnight. With commercial banks struggling to cover losses, and Wall Street investment banks taking hits from CDOs and mortgages, the market began to collapse quickly.

financial-crisis6

Credit Crunch: The massive losses in both commercial and investment banks created a classic credit crunch, meaning that banks were unwilling and unable to loan money out to investors and consumers. Since credit forms the basis for much of the market’s function, the freeze meant a halt to nearly all significant investment. Essentially, banks now had to pay for the risks they had taken, so they could not afford to loan out any money. The lending system forms the foundation for our economy, so a credit and liquidity crisis meant a full stop to investment and growth.

Consumer Fear: The sharp downturn decimated millions of 401(k)s and portfolios, and brought fear into the marketplace. Consumer spending declined sharply as people worried about job loss and their rapidly shrinking portfolios, and justifiabily sought to save to cover losses. Consumer confidence reached a 30 year low at the end of 2008 and job loss accelerated quickly in a stalling economy (2.6 million lost in 2008 alone). Combine low confidence, falling wealth (from investments), and massive job loss, and the economy moves rapidly into a classic recession.

A Vicious Cycle: Unfortunately, as you can see from the chart, we are in a terrible cycle. Recession and job loss only further accelerate mortgage defaults, which fuel the credit crisis and so on.

-Matt Benchener from TruPolitics.net

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Walking a Dangerous Line

February 6, 2009 Leave a comment

Ken Lewis - B of A

Ken Lewis - Bank of America

Lloyd C Blankfein-$68.5 million; Kenneth D. Lewis-$24.8 million; James Dimon-27.8 million; John Mack-$800,000. These are the CEOs of Goldman Sachs, Bank of America, J.P. Morgan Chase, and Morgan Stanley, respectively-all companies that have taken significant aid from the government’s TARP program. And those huge numbers represent their total compensation packages from the past year, even as their companies posted a combined $52 billion decline in year-over-year earnings. With that kind of disparity and excess, many Americans have expressed disbelief and anger that these CEOs are being paid so much with so little apparent return to shareholders.

In response, the Obama Administration recently enacted executive compensation caps of $500,000 for all “senior leaders” whose companies take significant funds from TARP (the government’s relief bailout program). This is a well calculated political move, in that it speaks directly to the public outrage surrounding these men, but may have devastating long-term ideological and practical consequences. Are these men overpaid? Probably. But the question should not be whether or not these men are overpaid, as has been the focus of so much media and political attention. Rather, the debate should focus on who should decide the compensation packages of these men: The free market or the government? Whenever the free market collides with partial regulation, unintended consequences result.

Consider the following:

Let’s say the Baltimore Orioles, Cincinnati Reds, and Oakland Athletics all had such terrible records and attendance last year that they are on the verge of bankruptcy. Knowing that the loss of such historic franchises would greatly damage Major League Baseball and its fans, the MLB officials decide to bailout each team with a large infusion of money. The terms of the bailout, however, require that no player on any of the three teams make more than $500,000 per year. If the teams are losing so many games, and aren’t generating revenue, why should any of the players make a fortune? Consider also that the average salary for a top MLB player is approximately $5 million per year. The next season, all of the teams’ top talent come up for free agency, and leave to go to other teams in the league that can pay them their true market value. The three bailout teams were already terrible-now their best players have left to go to teams willing and able to pay them. Soon after, with continually poor records and declining fan bases, all three teams fold.

Limiting executive pay sounds like a great idea on paper, but in the end it sets a dangerous precedent, and only further hurts struggling firms. We are already seeing this with TARP companies. AIG, for example, has seen a well documented outflow of its senior talent to competitor firms, and is now struggling to weather the crisis. This pattern will repeat again and again if applied. Whether it is human talent or industrial goods, the market will always guide the greatest supply to the greatest demand.

This is not to mention, of course, that CEOs all answer to a board of directors and a mass of shareholders. If they want to compensate their leaders at such high rates, it is their choice. If an owner of a baseball team wants to pay a player a huge salary, even overpay him, it is the owner’s choice. If the fans don’t like it, they can stop going to the games. If the shareholders don’t like it, they can sell the stock or elect a new board of directors.

Finally, it has become popular to say that since taxpayer money is funding these men, the government has the right to intervene. But that’s simply not true. Taxpayer money is funding the capital, credit, and toxic assets on the books of these companies, not employee salary. And if we are comfortable saying the CEOs are overpaid, what about the mid-level manager who makes $100,000 a year and is also seemingly under-performing? Should we slice his salary in half? I certainly understand and share the outrage at the excess-especially with $80,000 office rugs and multi-million dollar private jets-but we walk a dangerous line when we want the government to control company spending.

We can debate the merits of each leader, and chronicle spending indiscretion endlessly. But the fact remains that unless you impose a nationwide salary cap, the merits of which wilt under any capitalist consideration, the plan will only hurt shareholders, and eventually the country.  It is not for us or the government to decide what these men should be paid. Is the public outrage justified? Yes, but it is misplaced. If you think these men are overpaid, blame the board of directors and the shareholders that elected them, not the government.

-Matt Benchener from TruPolitics.net

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The Obama Stimulus: A need for sober judgment

February 2, 2009 6 Comments

With a political environment and public calling for action, and a party and President in command of nearly all policy intiatives…what would you do if you were in power?

The current economic downturn, wrought with daily headlines decrying financial crisis, has created a political environment starving for action. Coupled with the sweeping popularity of the newly elected President, the state of the economy provides a powerful opportunity for the Obama Administration to get something done. This is nearly always true for Presidents in a time of perceived or actual crisis—the status quo is never acceptable for voters when the world seems to be falling around them, so movement in any direction is immediately popularized. People often forget, for example that over 75% of Americans supported the Iraq War in the weeks prior to invasion, largely because it was so closely positioned to 9/11. And, regardless of political preference, most people believe that some action needs to be taken to reverse the downturn. In short, we are a nation ready to be lead, ready for movement, or even change.

“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.”

-Rahm Emanuel, White House Chief of Staff

 It is also clear that the Democrats control the House and Senate by a wide margin, and have plenty of political capital to spend behind one of the most popular newly elected Presidents in our nation’s history. So, with a political environment and public calling for action, a party and President in command of nearly all policy initiatives…what would you do if you were in power? What they have done with the recently proposed $825 billion stimulus is not terribly surprising given the political opportunity, but it is deeply troubling. The “stimulus” is anything but, with only 23% ($90 billion) going toward a growth stimulus package (tax cuts plus infrastructure investment), and the other $735 billion going toward various political agenda items. Among the most egregious pork-filled agenda items:

 

1. Nearly $4 billion to ACORN (the far-left group that helped President Obama get elected); 2. $2.4 billion for carbon-capture demonstration projects (a hot button environmentalist agenda item); 3. $400 million for global-warming research; 4. $20 billion for food stamps and $36 billion for expanded unemployment welfare (welfare expansion policies long hoped for by Democrats); 5. $50 million for the National Endowment for the Arts; 6. $150 million to the Smithsonian museum.

 

Those items are simply the tip of the iceberg, and represent what the Wall Street Journal so adeptly called “A 40-Year Wish List” for the Democratic Party. Will $150 million to help update the Smithsonian’s collection help thaw Wall Street’s credit freeze? Will $2.4 billion for a controversial environmentalist carbon-capture program bring back the housing market? Will $4 billion to the extremist group ACORN spur business investment and job growth? This is not to mention the vast expansions of welfare programs, which have been shown to have a direct inverse correlation to job rates and economic growth.

 

Here, it is not important to discuss the merits of many of these proposals in and of themselves–some of them might even be important in the long run. However, at a time when the nation needs a serious answer to a complex financial problem, there is simply no justification for these line items. They certainly do not deserve to fall under the touted umbrella of a stimulus or economic rescue plan.

 

What we are seeing is a troubling display of partisan politics in a time where the country needs sober judgment and unifying leadership. If President Obama wishes to be the great unifier he spoke so much about, he will need to realign his policy to reflect the needs of his country, not the wishes of his party. This is something both Democrats and Republicans can agree upon.

 

-Matt Benchener from TruPolitics.net

 

 

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