Fed Audit and Greece Bailout

The Senate passed a bill calling for a one time audit of the Federal Reserve to scrutinize the $2 trillion in emergency loans that the Fed provided to some of the nation’s biggest banks.

The bill was a very watered down version of bill that passed in the House, which would have enabled the Government Accountability Office (GAO) to audit every item on the Fed’s balance sheet, including all credit facilities and all securities purchase programs. An amendment to expand the Senate bill to match the House's failed to pass. Still, this is a good first step as it would enable the GAO to audit at least some Fed actions for the first time in history.

The government's bailout of Wall Street points to a huge problems in our financial system and even larger problems with the control that Wall Street has over politicians in both parties.

Conceptually, Wall Street exists to support the needs of other businesses. When businesses need capital to start up or expand, they can get the money in one of three ways: A.) from their own savings, B.) through borrowing (debt), or C.) by selling a portion of the business to others (equity).

What does this have to do with derivatives, credit default swaps, or even the whole concept of "selling the market short"??? The short answer is nothing whatsoever. All of these things are nothing more than gambling. Goldman Sachs and their ilk have turned our financial system into Las Vegas. Like Vegas, the system is rigged so that the House wins 98.5% of the time.

The one difference between Las Vegas and Wall Street is when a casino in Vegas goes belly up, Washington doesn't rush in with our money to bail them out.

Unfortunately, the situation is about to get even worse. The U.S. government is taking part in the $1 TRILLION Greek bailout both through the IMF and also through the Federal Reserve, which is shipping dollars to Europe to help stabilize the Euro. Of course the money won't be used to put the country on the right path. Instead, it will be given to lazy union members who'd rather sit arounding sipping Ouzo, while bad mouthing America, than work.

I've been to Greece a couple of times. It's a beautiful country that has been completely destroyed up by decades of political corruption.

Why is it our responsibility to pay for their mistakes? Oh, because the country might "melt down". GOOD. The country SHOULD melt down because maybe then the politicians will be forced to confront their problems and eliminate the costly welfare state that has been sucking the life blood out of their country.

We have our own problems too. They are on a much grander scale than Greece's.

17% of our workforce is unemployed or under employed. Our official debt has reached $13 trillion, which is a whopping 90% of GDP -- almost as bad as Greece's. Unfunded entitlements in Social Security, Medicare, Obamacare, and government pension plans top $130 trillion -- more than $438,000 per person. Government spending at all levels is approaching 40% of GDP, which is not far behind "socialist" France at 44%.

With all of these problems confronting us, how dare the politicians hand our money to Greece. How dare they?

Greece and the rest of the PIGS (Portugal, Ireland, Greece, and Spain) caused their own problems. It's time for them to deal with it.

We created our own problems too. It's time for us to boot the SOBs out of office who are making things worse.

Car 2.0

The recent turmoil among the Detroit auto manufactures has finally surfaced into a “national crises” with the CEOs of GM, Ford, and Chrysler begging for taxpayer dollars so they won’t have to make tough decisions about the companies they run. I’ve blogged here before about the decades long incompetence of the U.S. automobile leadership. There is a lot of history among the U.S. auto executives with regards to not understanding their markets, ignoring quality, producing poor designs, and many other issues. The so-called "leadership" of the UAW is equally culpable for Detroit’s decline for hiding their heads in the sand for three decades while foreign competition decimated their market share and jobs.

Over the last 30 years, the challenge to Detroit from Japanese, Korean and German manufactures has been about incremental improvement within the realm of how the basic automobile business model works – you build cars people want to buy and your dealer network sells them.

Over the same 30 years, the computer industry has faced a lot more disruption than the auto industry. Many of the companies that helped define various stages of the industry are no longer with us. Think about Digital Equipment Corporation (DEC) whose CEO couldn’t figure out why anyone would want a computer in their home!

What would happen if Detroit faced the kind of innovation and disruption the computer industry has endured? They may be about ready to find out.

Shai Agassi was a software entrepreneur. One of his companies was acquired by German software giant SAP. He soon became an SAP wunderkind, and was poised to take over as CEO of SAP. The incumbent CEO decided to stay in place, so Shai left the company.

Shai applied his computer industry background to the auto industry and came up with a plan to radically change the auto market. His new company -- Better Place – aims to build a standards-based electrical vehicle network comprised of charging stations and automated battery swapping stations where you work, eat, and shop. If you want to have lunch, charge the battery. If you’re in a hurry, swap it. Of course you can charge the battery at your house overnight.

The business model for a Better Place works a lot like the mobile phone industry. The electrical vehicle network provider will subsidize the cost of your car and you’ll pay for what you use, but instead of paying for minutes, you’ll pay for miles. Forget about the traditional auto industry and think about AT&T, T-Mobile and Verizon. Basically, it’s Car 2.0 -- a proven business model applied to a different industry.

Do you think that Detroit could have thought of this with their inbred, hidebound leadership? No way. In fact, GM snubbed Agassi while Nissan and Renault partnered with him.

25 years ago, IBM was run by a lifer – John Akers -- who ran the company into the ground. Lou Gerstner was brought in from outside the computer industry to save IBM. Perhaps, it’s time for someone from outside of the auto industry to come in and help save it.

George Bush: Socialist Nincompoop

This morning as I was getting ready for work, I watched in horror as George Bush explained how the government “investing” in banks is somehow not socialism.

There are three important points to make here:

First Bush claimed that this was only temporary and that at some point the future, government would sell their “investments” and all would be back to normal . Sorry Georgie but to paraphrase Ronald Reagan: the closest thing we’ll ever see to eternal life on earth is a government program. These “investments” will only grow in time to the point where the government will eventually have nationalized the entire financial system.

Second, Bush claimed that these “investments” are part of a well thought out plan. What a joke. A few weeks ago, the Bush administration was arguing against a similar British plan. Here’s the problem: the stock market had its worst week ever after Bush signed the $700 billion bailout bill that the administration claimed would calm people’s fears. Now they are just twisting in the wind. There isn't any plan. They are making things up as they go along, and spending your money in the process.

Third, by definition government ownership is socialism.

I’ll say it again, the Bush family has ruined the Republican Party that Reagan built. Now they are ruining the country. Enough is enough. I’m not the only one who understands this. Christopher Buckley, who is the son of the late William F. Buckley, the founder of the modern conservative movement, has now also abandoned the GOP, resigned from the magazine his father founded, and endorsed Obama. This is what he said:

While I regret this development, I am not in mourning, for I no longer have any clear idea what, exactly, the modern conservative movement stands for. Eight years of “conservative” government has brought us a doubled national debt, ruinous expansion of entitlement programs, bridges to nowhere, poster boy Jack Abramoff and an ill-premised, ill-waged war conducted by politicians of breathtaking arrogance. As a sideshow, it brought us a truly obscene attempt at federal intervention in the Terry Schiavo case.

So, to paraphrase a real conservative, Ronald Reagan: I haven’t left the Republican Party. It left me.

I couldn’t have said it better myself.

Wall Street Bailout: Welfare for the Wealthy

Sorry that I’ve been away for a while. I’ve had my own challenges at work which have occupied most of my time recently.

I felt that I needed to take some time today to comment on the Wall Street Bailout bill. My view is that the bailout will only make things worse. Quite frankly, it could be a potential disaster that could push us into another depression.

The main thing to remember is that the government created the mess that we’re in today. Here's how they did it:

First, the government passed legislation to pressure Fannie Mae and Freddie Mac to provide home loans to people who couldn’t afford them. Remember, Fannie Mae and Freddie Mac are quasi public companies that were created by the government. Most of the debt problems in housing market can be traced to government interference in the mortgage market.

Second, the government has greatly inflated the money supply over the past decade to artificially lower interest rates. The artificially low interest rates have caused an unprecedented amount of reckless borrowing and spending.

Third, the government itself has gone on a drunken orgy of spending over the last 8 years. In the process, they've turned a $155 billion annual surplus into a $500 billion annual debt. The national debt has doubled over the last 8 years to a whopping $10 trillion. That $10 trillion does not include the unfunded liabilities in the Social Security and Medicare systems that are ready to hit us in a big way as the baby boomers start to retire.

So, the financial crisis is all about bad debt caused by the government promoting excessive borrowing. The $700 billion bailout will only make matters worse because the government doesn’t have $700 billion to spend. The government is already running a $500 billion a year deficit. The government will have to borrow more money and incur more debt to fund this program. This time, the Chinese and Japanese aren’t going to fund the borrowing by buying T-bills. The money is going to come right from the Federal Reserve further inflating the money supply, which will very likely lead to Jimmy Carter style inflation and interest rates. The wholesale price index has already increased by over 9% in the last year, which is the worse inflation in 27 years. It's only going to get worse.

The end result could be another Great Depression along with hyperinflation. Remember, that’s precisely the scenario that led to Hitler’s rise to power in Germany. In my view, the government has already put many of the mechanisms in place to support a dictatorship in the name of fighting terrorism.

So, what should the government really do??? Here is my four point plan for getting us out of this mess:

First, immediately cut government spending and balance the budget. If the government gets out of the credit markets there will be plenty of credit left for the private sector. Remember, we had a balanced budget in 2000. It’s not that hard to get there again. It only takes some political will to do so.

Second, reign in the Federal Reserve. The Federal Reserve helped cause the Great Depression. They’re doing it again. There are a lot of approaches that can be taken to do this. Regardless of which approach is taken, one thing is certain -- we can no longer allow faceless, unelected bureaucrats to have absolute and largely secretive decision making power over our money supply.

Third, we have to make America the best place to invest and innovate once again. The first thing that we need to do is streamline our Byzantine tax and regulatory systems. A much harder task is fixing our abysmal government monopoly school system, which is protected by cowardly politicians who’d rather destroy our kid’s future than stand up to the teachers’ unions.

Fourth, don't try to block the recession. What is a recession? It’s a corrective period where bad investments and debt are discounted or liquidated. Doing this frees up resources for other, more productive economic activities. Attempts by the government to prolong the inevitable will only make things worse. Much worse. So let it happen. It will be quick. Let’s come out of it with a more rational fiscal and monetary environment to get the country back on track.

Anyway, politicians of both parties have created this mess. Anyone who thinks that these same people will fix it is not living in the real world.