Best Thing I've Read on the Financial Meltdown

This is the best thing I've read on the financial meltdown, (Thanks Cato) and if you are brave enough to read it, I'd ask you to consider a similar line of thought on healthcare.  Start by going back to WWII and the freeze on wages when companies figured out they could add insurance, write it off, and still dodge the freeze, which eventually led to Medicare, which eventually led to rising rates, which eventually led to...

Hat Tip: Instapundit

Cato: Perfect Storm of Ignorance

Where Have I Seen This Before?

So Barack Obama wants to sit down with Republicans and talk about healthcare. Thirteen months into his presidency and after shutting them out for the entire time, he wants to open a dialog. What ever happened to: “We won. Sit down. Shut up. We will clean up your mess. But we don’t want to hear from those who made the mess!”? Meanwhile, over at the House, Nancy Pelosi has announced that they are just going to bend some rules and ram the Democrat health bill into law with “reconciliation”, a ploy meant for budgeting and not major social engineering. Meanwhile in the Senate, Harry Reid has his own plan for sneaking his bill into law. This begs the question for Republicans; who is really in charge, and is there a credible partner for negotiating?

All these shenanigans remind me of what Israel goes through with the Palestinians. The Israelis make a deal with the elected leader of the Palestinians, who winks and nods to the militants, and they go and blow up a pizzeria or a bus. This cycle repeats on and on until finally the Israelis realize that there is no point in talking because no one is in charge! But they have to talk, because if they don’t, world opinion will turn on them even more than it already has for being a prosperous nation amidst all that Arab poverty. Besides, they get blown up whether they talk or not, so they might as well talk.

The Republicans, if they stay true to the Constitution and keep winning elections, will have learned a lesson that the Israelis have known for a while; Talk softly, but carry a big friggin’ stick!

Obama Really is the Messiah!

Barack Obama truly is The One, The Messiah, or at the very least, a major Prophet. He has managed to do something that hasn’t been done since slavery. No, not the American kind, I’m referring to the biblical Egyptian variety, back when Moses was The One they’d been waiting for. Like Moses, Obama has managed to unite the people and start them on their journey to salvation, and just like biblical Egypt, the people have found comfort in their founding principles and are heading back to the Promised Land. Unlike ancient Egypt, this time the people got united by accident.

But are we really united? Are we not a seriously divided nation? Yes, we are divided in many ways, but I believe we may be more united than we think. In fact, I’ll bet you a gazillion dollars that regardless of your political views, for roughly half of the last 2 years, you had zero trust in the guy in the White House, thought he was lying through his teeth, thought he was doing unconstitutional things, and were sick of seeing him on your TV. Does that describe you? Are we not united here? The point is, no matter who we trust or don’t, or who we vote for, roughly half the time, the other guys are in charge! And it’s not like the ones we mistrust ever go away. There are still laws on the books from Washington (yeah, that loser.) Heck, we still have that useless Louisiana Purchase Jefferson stuck us with! You think, your cool guy is in, and the other jerk is out? Think again.

Our government is like a giant nightmare version of the Garden of Eden that has never been pruned. Sure, it started out simple and beautiful when all we had was our Constitution, but along the way we bit the apple, and now anything can be justified as Constitutional. The Garden is an overgrown mess. When the Constitution can be anything, it becomes nothing. It’s as if everything ever planted in our Garden of Eden, good or bad, constitutional or unconstitutional, by every administration, has just grown, and grown, and grown, unchecked. How many federal programs, agencies, taxes, or laws can you name that have ever been phased out? Not many, right? Do you really want all those weeds clogging up your once heavenly Garden? Wouldn’t it be great if we could agree to do some trimming and weeding and get back to that Promised Land of Constitutional Government? See, we really are united!

After the State of the Union Address, Peggy Noonan, who writes a weekly op-ed in the Wall Street Journal, pointed out that Obama’s message was essentially (and I’m paraphrasing) “Washington is hopelessly broken, but if you allow us to control your entire life, we’ll make sure all your healthcare, energy, climate, automotive, banking, defense, housing, food, drug, and employment needs are satisfied.” Yeah, right. It’s laughable on its face, especially when you realize that half the time, the people in charge of your entire life will be the untrustworthy, lying, stupid, jerks you voted against! And say what you will, none of that is in the Constitution.

Unwittingly, Barack Obama has become our savior. I’m not suggesting that he is doing anything right, in fact, by being so spectacularly wrong, he has become the Prophet his followers promised. Look around. Everywhere you turn the pendulum is swinging back and this swing is bigger and more profound than any in the past. Of course, the pendulum is always swinging. Remember how after Bill Clinton’s “character” issues, the pendulum swung to Bush 43 who ran on bringing dignity back to the oval office? And after Bush’s lack of brains and communication skills, the pendulum swung to a much smarter guy? Notwithstanding the fact that he thinks there are at least 57 states, can’t pronounce Corpsman, and needs a TelePrompTer to talk to school kids; he really does sound smart most of the time.

(Not to get sidetracked, but speaking of sounding smart, when Obama talks about economics or defense in particular, he reminds me of a character in “Fast Times at Ridgemont High”. Remember Mike Damone, the sleazy cool kid who talks a slick game about the ladies, but eventually gets exposed as a complete novice and fraud? Here’s some dialog I clipped from IMDB:

• Mike Damone: I mean don't just walk in. You move across the room. And you don't talk to her. You use your face. You use your body. You use everything. That's what I do. I mean I just send out this vibe and I have personally found that women do respond. I mean, something happens.
• Mark Ratner: Well, naturally something happens. I mean, you put the vibe out to 30 million chicks, something is gonna happen.  
• Mike Damone: That's the idea, Rat. That's the attitude.
• Mark Ratner: The attitude?
• Mike Damone: Yeah! The attitude dictates that you don't care whether she comes, stays, lays, or prays. I mean whatever happens, your toes are still tappin'. Now when you got that, then you have the attitude.

Anyway, Obama reminds me of a pseudo-intellectual Mike Damone. Yeah, it’s a stretch, so what, who cares?)

Getting back to the pendulum, this swing started long before Barack Obama became President. Don’t you remember feeling helpless as Bush was shepherding the tragic TARP bill through? You probably had the same feeling when congress unanimously passed the first stimulus bill and Obama was not President then either. Ditto when Bush expanded federal control over education and prescription drugs for Medicare. Yeah, this swing of the pendulum has been going for a hundred years and it’s about the Constitution and its demise as a check on federal power.

I realize this is a familiar charge. Whenever we don’t like what a politician does, we yell “Unconstitutional!” Remember the outcry over Bush’s warrantless wiretaps? It’s the oldest charge in the book, but can you ever remember it getting traction before? Why now? And why is Obama the Prophet if he didn’t even start the pendulum swinging?

Because Obama gave the pendulum such a huge push! Nobel Economist Milton Friedman used to refer to the “Frog-in-the-Pot” analogy when discussing the shredding of The Constitution. That’s the classic analogy about dropping a frog in a pot of boiling water only to see it jump right out. Put that same frog into a pot of cool water, slowly bring it to a boil, and you’ll soon have a happily poached frog. In this case, we are the frog, and the flame cooking us is being stoked by the bi-partisan enemies of The Constitution.

Obama has turned up the heat so much in such a short time, that the frogs are jumping in droves. Would there have been Tea Parties if McCain had won the election? I doubt it. John McCain would have been almost as much an enemy of the Constitution as Obama. He wanted many of the same things. Heck, Obama hasn’t been overturned by the Supreme Court as far as I know! That’s an honor few can share with John McCain. But still, I think we would have behaved quietly as we did under Bush. We would have just enjoyed the warm bath like the compliant frogs we are. But instead we see this today:

                      Photoshop Hat Tip: www.humblelibertarian.com via www.michellemalkin.com

So what changed with Obama?

• For one, we are supposed to be a nation of Laws not Men. Our Constitution is supposed to be our guiding light, not our leaders. Then along comes Obama with his Messianic shtick and personality cult and it just goes against the grain of who we are.
• Second, The Constitution allows for the government to collect taxes, and over the years, the government has devolved into a virtual redistribution machine. The constitution does not say that the government can directly redistribute wealth, and that’s been a line few politicians have crossed. Then Obama came along and woke us up.
• Third is his rhetorical assault on The Constitution itself. He has made no secret that he holds The Constitution in contempt and this is a bit too much for those of us who think it is the very thing that made this country what we are. (Not that any document is perfect. But we say, if you’ve got a problem with The Constitution, there’s an app for that; it’s called an amendment!)
• Fourth, is the sheer audacity of his redistributionist agenda and its unprecedented assault on future generations.
• And finally, there is the perception that he is not engaged as Commander in Chief; a job at the Constitutional core of our executive branch.

Yes, absent Obama we’d still be dozing off in that pot waiting to become frog soup, but his brazen Coup d’état woke us up. (Yes, I think you can call it a Coup even though we elected him. And the “p” is silent like in Corpsman for those keeping score.) In this case, it's The Constitution, not the government which Obama and the Anti-Constitutionistas seek to overthrow. Luckily, we are now awake.

Thanks to the Obama awakening, concerned Americans are protesting in the street by the millions. Massachusetts, of all places, just ended a super-majority in The Senate. The Obama Administration is retreating on every single one of its agenda items. No incumbent from either party is a sure thing unless viewed as a strict Constitutionalist. John McCain is being challenged in his home state from within his party. Atlas Shrugged is a bestseller. People are once again reading the Constitution, The Declaration, The Federalist Papers, and reviewing American history. For Chris sakes, one of the highest rated cable news shows is a guy teaching American history at a blackboard at 5 O’clock!

These are nothing short of miracles. Barack Obama is indeed the Messiah.

Anyone Else Think This Toyota Thing is Creepy?

I don't mean to sound like a paranoid conspiracy guy, but does anyone else think this Toyota thing is creepy? Think about the timeline: 

 

1. Non-Union Toyota of Japan  passes Union GM of the US as the world’s largest auto maker.
2. Union support of Barack Obama helps him win the Presidency of the US.
3. GM goes bankrupt and gets bailed out by the US government which hands a huge chunk of the company to the UAW UNION.    
4. Toyota is accused of  unanticipated acceleration, a dangerous problem that is very hard to prove.  Toyota cites floor mats and issues warning.
5. Complaints persist and the US government insists on a recall.   
6. Toyota is forced by the US government to cease selling those models, an unprecedented move in automotive history.  
7. Non-Union Toyota sales and stock crash.
8. Union and US owned GM sales rise nicely.  

If you were around when Audi was practically forced out of the US based on a similar charge, you know that there may or may not be a real mechanical reason for un-anticipated acceleration. In the Audi case, the whole thing turned out to be bogus at best, and at worst, a coordinated attempt to take-down Audi, complete with a scary "60 Minutes" segment!  Now, I know the Toyota case involves fatalities and therefore requires serious treatment, and I also hear that there is a suspect part, but until the problem is scientifically solved, I remain suspicious of this weird coincidence of Government Motor's biggest competitor being smeared by such a ubiquitous claim as unanticipated acceleration...

 

UPDATE:  Oh, and I forgot that $1,000 "incentive" GM is now offering Toyota owners to switch brands.  Where does a bankrupt car company, owned by the US government, get $1,000 checks???
UPDATE II:  Oh, and did you know that Toyota closed its only UNIONIZED plant in 2009???

Anatomy of a Myth III – Markets are Partisan!

On October 14th 2008, three weeks before the presidential election, The New York Times published the eye-catching chart below: (follow link for full size version)
Full sized NYT Chart

The chart graphically shows how since 1929, Democrats in the White House were far better at producing positive stock market returns than their Republican counterparts, and clearly the message was that a vote for Obama was a vote for galloping prosperity while a vote for McCain was a recipe for financial disaster.  Oh my God, run for the hills!

They say that if you torture data enough you can eventually get a confession, and this chart proves it - Khalid Sheikh Mohammad got better treatment! And yet there is not a single number I dispute on the chart. No, the problem is not one of accuracy, but rather of timing and the very premises on which the chart is based. The fact is, by appropriately correcting just the timing problems I was able to reverse the conclusion of The Times, but unlike the Grey Lady I would not suggest that you invest a single dime based on these more relevant results.

First to the premises: In order for there to be some relevance to this chart, one would have to assume a minimum of five dubious premises:

   1. Party affiliation is the determining factor in a President’s economic policies.
   2. Presidential economic policies are isolated from congressional policies.
   3. Political parties have had consistent economic policies throughout history.
   4. Markets live in the moment and are not in the habit of discounting the future.
       &
   5. Markets were either irrelevant or not measured before 1929.

Not a single one of these premises is strong enough to hang your hat on, let alone bet $10,000!

To wit:  Were JFK’s economic policies anything like Barack Obama’s? Were Nixon’s anything like Reagan’s? How about the idea that Presidential policies are isolated from congressional policies? Was Bill Clinton the same President before ’94 as he was after? And how about parties being consistent over time.  Is that valid?  Hoover, a Republican, was a protectionist and Clinton, a Democrat, was a free-trader; what about Reagan vs. Obama on the same issue?

As for the 4th and 5th premises, they are just laughable but correctable, and to that end I reworked the chart. To account for the fact that markets are forward-looking I used equity values from 6 months prior to Presidential elections when markets are poised to react to the political calendar and when Presidents are referred to as “lame-ducks”. The Times chart uses values from the exact date of inauguration which assumes that the market has made no adjustment for an incoming President's expected policies. Anyone who follows the market knows that it is concerned with little else but the future!  Finally, to account for the fact that there is nothing magic about only going back to 1929, I went back to 1900 which coincides with the dawn of statistical movements in the Standard and Poors Index for which there is data back to 1871.

Here’s what I found:

                        
                                                     S&P Data Source: Yale Professor, Robert J Shiller

1. From 1900 to today, Republican Presidents yielded average annual returns of 4.66% and Democrats 4.05%, and that includes Hoover!

2. Even since 1929, excluding Hoover, Republicans beat Democrats by 7.13% to 5.03%!

3. The only way to get Democrats to beat Republicans is to start with Hoover (as the Times did) and then it’s Democrats, 5.03%, to 3.51% for the Republicans. Whew!

4. Many like to use the post-war period as an investment benchmark: Since WWII Republicans have whomped Democrats by 7.13% to 3.66%!

So, what does this prove? Absolutely nothing - except that you really shouldn’t pay too much attention to The New York Times for investment advice! For one, the correlation between parties and markets is too weak. Second, there is too much “noise” for a reliable correlation. And third, there is still the problem of the first three premises!

In short, vote for the guy or gal you prefer, and base your investments on other factors.

A Contrarian on Bernanke

Listen to any Ben Bernanke detractor and they’ll sing basically the same tune, which goes something like this: “Ben Bernanke is a an excellent academic economist and an honorable guy who performed well this past year as Fed Chairman, but he was right there at Alan Greenspan’s side in the early 2000’s when interest rates were kept too low for too long. Those low rates helped cause the housing bubble which eventually burst and collapsed the global financial system in 2008.  That kind of negligence should not be rewarded with a second term.”

I have trouble disagreeing with much of that, except that there is a far better and more compelling reason to lay some blame for the financial collapse with Fed Chairman Bernanke. I haven’t heard the following argument from anyone in the economic press, so that could either mean I’m out of my mind, or everyone else is missing something. Read on, and judge for yourself.

First a little history: Below is the Fed Target Rates for the last 10 years. The period most Bernanke detractors are focusing on is the period of low rates from roughly 2002 through 2004 when he was Alan Greenspan’s right-hand man.

Ben Bernanke became Fed Chairman February 1, 2006 when the Fed Target rate had already been raised by Greenspan to 4.25%. The day Bernanke became Chairman, he raised the Target Rate to 4.5%, but he didn’t stop there. He kept raising until July 1, 2006 when the Fed Funds Target hit 5.25%. So from July 1, 2004 to July 1, 2006 the Fed raised it’s Target Rate from 1.00% to 5.25%, an increase of 425% in 24 months.

What effect did all those rate increases have on the yield curve and why would that matter? Well, as most economists will tell you, nothing screams recession quite like an inverted yield curve (when long term rates are lower than short term rates) and forcing one is economic poison.

In January, just before Bernanke became Chairman, the yield curve was essentially flat with a slightly positive bias, but that quickly changed. Bernanke’s first raise to 4.5%, resulted in a slightly negative yield curve and again, he kept raising the Fed Target all the way to 5.25% by July 1, 2006. By November 2006, there was a clear downward trend in yields. (see chart below).

Why did Ben Bernanke keep raising interest rates in the midst of a housing bubble, with an election coming up in November 2006, and a yield curve already threatening negative by late 2005? Why did he persist and force the yield curve decidedly negative by mid 2006 which threw us into recession and crashed the housing market? No one but Ben Bernanke knows for sure, but in my humble opinion, if there is a smoking gun against him, it is this and not the period from 2002 to 2004, before he was even Chairman!

In Hebrew, Shalom, which is Bernanke’s middle name, can mean Hello, Goodbye, or Peace. I say Goodbye, and leave us in Peace, but I don’t see that actually happening. In a political and economic climate where a tax cheat can get Senate approval to be Treasury Secretary, a reckless but honorable Fed Chairman is virtually a shoo-in.

Magic Bullets Part VII – The Tax Ammendment

If you could wave a magic wand and make one amendment to the Constitution all by yourself, what would it be? Would you impose term limits? Would you rename the country after yourself? Would you make “Pants on the Ground” the national anthem? I know what I’d do: I’d end hidden taxes and get every person to participate.

My theory is that just about everything that is systemically wrong with our country stems from the fact that we don’t really know what it all costs and we don’t all share in those costs. This is of course, no accident. Politicians have been expert at two things, hiding the costs of their duplicity and getting re-elected. If we were to eliminate stealth taxes and get everyone to share the costs, profligate politicians would have their plans blow-up in their faces and the only ones re-elected would be those lowering costs and improving the efficiency of their enterprise.

Here’s how I would end stealth taxes and give everyone “skin-in-the-game” with one amendment to the constitution: The amendment would read as follows – “All federal domestic revenues shall be collected directly from the people and all taxpayers will pay the same rate and receive an identical pre-bate.”

The first question you may have is; (*feel free to use Larry The Cable Guy accent here) “What’s a pre-bate?” A pre-bate is a nifty way to not impact the poor while at the same time giving everyone skin-in-the-game. The way it would work is this: At the start of every tax period, an amount equal to the taxes paid at the poverty level would be sent to every taxpayer. This would in effect establish a zero bracket for the poor and a graduated net tax rate for those earning more than the poverty level. After that, every dime would come directly out of the pockets of the people. And there would be a single rate for every person with no deductions, period.

Here is an example of the tax system that would result. Incidentally, this could work for a system based on Income Taxes, Sales Taxes, or any combination of the two. The rates are for illustration purposes:

Tax rate = 40 % (This could be split roughly between 20% income and 20% national sales tax, for example.  Yeah it’s high, but it has to be to pay for what we’re now spending!)

Poverty rate = $15,000 income per year for this example.

Pre-bate = $6,000 per year or, $1,500 per quarter.

Using this example, everyone of age, who is legal, from Bill Gates to a homeless person, would get a $6,000 annual pre-bate.

A poor person would be able to earn and spend up to $15,000 and effectively pay zero taxes due to the pre-bate. Bill Gates, on the other hand, would burn through the $6,000 in a blink and end up paying an effective rate of 40% with no deductions. A person making $30,000 and spending it all would pay $12,000 in taxes, minus the pre-bate, resulting in $6,000 total taxes for an effective net rate of 20%.

So that’s how the pre-bate would work to graduate net tax rates despite there being only one rate and everyone participating. You may be asking; “Doesn’t everyone participate now?” To that, I’d have to answer yes and no. The fact is, some 50% of Americans are getting an illusory free-ride. The reason I say “illusory” is because many people incorrectly believe they pay no taxes. After all, many get a big rebate check in April and the politicians are always telling them they are going to tax only “the rich”. Eventually, people start to believe it. This is borne out in election after election when people are told that someone else will pay for their big entitlements like free healthcare, subsidized housing loans, extended unemployment benefits, and so forth. But there’s a problem: economies have a way of leveling these costs and spreading them around to the point that the cost becomes built into everything we buy and everything we earn. The notion that costs for huge new entitlements will be borne by someone else is like trying to pump water from only the deep end of the pool; if your pump is fast enough, there may actually be a moment when it will appear like the shallow end is unaffected, but trust me, that will not last!

Back to the wording of the amendment: “All federal domestic revenues shall be collected directly from the people…” By directly taxing only the people, there would be no more indirect taxes like payroll taxes and business taxes of any kind. Now, you may be thinking; “What, no business taxes? That’s crazy! Why give Corporations a free ride?” My answer: because businesses already pay no taxes. Sure, businesses do remit taxes, but only after collecting the exact amount from their customers and employees. In other words, all corporate payroll taxes, income taxes, fees, etc. are actually just hidden taxes on individuals. These hidden taxes distort voter behavior and obscure the necessary transparency of our exploding public sector.

Put another way, a business is just a bunch of individuals, formed into a team and working toward a common goal. The team itself gets no vote and does not exist except as a legal entity. Taxing a business violates the very rule on which this country was founded: Taxation without Representation. Of course businesses do get represented, but only through money and lobbying. If we eliminate all business taxes and collect everything directly from the people, we are properly aligning taxation and representation. Of course, business lobbying will still go on to fight for regulatory and trade consideration, but the power will shift measurably towards the people.

So would this be simple to implement? All I can say is, it’s hard to conceive of a tax regime as complicated as what we’ve got. So yes, this would be simpler, better, and more efficient. Of course we’d still have to have some agency like the IRS that would administer collections, pre-bates, compliance, business rebates, and the like. That’s one dragon we can’t slay with this magic bullet.

What we would gain though is a population directly aligned with their government and a likely return to our founding principles of Constitutional Democracy. We’d once again have what Lincoln referred to as a: “Government of the People, by the People, and for the People.”

Kennedy’s Second Victim

We all know Edward Kennedy’s first victim, Mary Jo Kopechne, who tragically got in the car with a reckless and drunk senator from MA and paid for her mistake with her life. Today, after the special election in MA, we will likely meet the second victim, the Obama/Pelosi/Reid Democrat Party. Just like the first, they too hitched-up with the late Senator from MA who drove them off a bridge and now they too may pay the ultimate price.

The irony of the dream of socialized medicine dying along with one of its biggest sponsors is almost too rich to fathom. You’d think that by now everyone would have understood the dangers of being seduced by Uncle Teddy.  As the old saying goes: “Fool me once, shame on you. Fool me twice, shame on me.”

Interestingly, the first sound blaring out of the PA on the west lawn of the Capital when they held the big healthcare rally this fall was The Who, and everyone at that rally sang along and pumped their fists; “We won’t get fooled again!” At least the descendants of another Massachusetts legacy, The Boston Tea Party, refuse to be victims.

My Kid's Better Than Your Kid!

If he wasn't the stronger of the two candidates, I'd have to support Scott Brown anyway based on this: Ayla Brown Sings The National Anthem.  As far as I know, Martha Coakley has no kids, which is probably a good thing for her as it avoids comparison...

When Do We Stop Laughing???

When do we stop laughing???

John Brennan, the top counterterrorism official in the Obama administration actually said this weekend that there was "no smoking gun" in the Christmas Day panty-bomber incident! Huh? Is there a better description than "smoking gun" to describe a male terrorist who attempts to commit mass murder by barbecuing his genitals? I wish I could say the rest of Brennan's statements were less ridiculous. Sadly, they were not.