From the Editors at National Review Online:
That $700 billion rescue package for the banks is in danger of turning from a safety net into a slush fund. The scent of money has attracted lobbyists for every interest group in Washington. Now comes word that Treasury secretary Henry Paulson might dip into the fund to bail out struggling automakers GM and Chrysler. If car companies can qualify for a piece of that $700 billion, then there are no theoretical constraints on its use.
GM has many expenses, so one could imagine why they feel motivated to get a piece of the bailout. How else will they pay their lobbyists and car show models?
Of course GM also employs thousands of American workers, but those folks should consider the consequences of their employer becoming a ward of the state. It will save their jobs in the short term, but unless GM fixes the fundamental problems with its business model (not making cars people want to buy) then a bailout will just delay the inevitable and saddle American taxpayers with more debt.
More broadly, we can’t let American capitalism, the engine of our growth and the growth of economies around the world, be corrupted into a hybrid form of socialism. We can’t allow companies to reap all the benefits of profit without taking the lumps that come with failure—capitalism for the gains, but socialism for the losses. Sometimes businesses, even really big ones, need to go out of business to allow for renewal and sustainable business growth.
The brilliance of capitalism is that it recognizes that economies change. Technologies makes some products obsolete and superior managed companies can drive mismanaged firms out of business. It’s a lot like evolution. Bad business practices, just like ill-adapted creatures, simply go away. Their bad practices are eliminated from the system, making us all richer in the process. Bailouts simply keep those bad practices around.
For more on GM and its request for a handout, read the rest of the piece at NRO.
Some people are hopelessly boring. They save money, live within their means, don’t buy too much house, pay their bills, and contribute to the community. Then there are wastrals, who spend and borrow wildly and expect others to clean up after them. The U.S. government is funded by the former but obviously spends an increasing amount of its time catering to the latter.
Reports the Washington Post:
Negotiators for the Treasury and Federal Deposit Insurance Corp. are nearing agreement on a plan to have the government guarantee the mortgages of millions of distressed homeowners in what would be a significant departure for the federal rescue program, which has so far directed relief exclusively to banks and other financial institutions.
The plan, which sources said could cover as many as 3 million homeowners in danger of foreclosure and cost $40 billion to $50 billion, would go well beyond previous government and private-sector initiatives. Critics say these have attracted too few lenders or offered too little aid to homeowners to stem the foreclosure crisis.
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Normally corporate dividends–or executive salaries–should not be a matter of government concern. But how about when the feds are forking over taxpayer money to encourage borrowing? It turns out that the banks have taken the money (some more enthusiastically than others) and, well, used it for other things, such as buying other banks and paying dividends. This has reduced the White House to whining that they are supposed to be getting out there throwing money at borrowers, any borrowers.
But there are dividends to pay. Reports the Washington Post:
U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.
The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don’t serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.
Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends — or conversely, why banks that need government money are still spending so much on dividends.
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Despite some recent good news—like stocks recovering some value—politicians continue to believe they can solve the housing crisis through economic gimmicks. The latest: a proposal to have a 90-day moratorium on home foreclosures.
The last thing that anyone wants is more folks kicked out of their homes. But if banks don’t recover some capital now, won’t the crisis simply deepen?
Just as much as struggling home owners want to stay in their homes, banks want those folks to stay in their homes. Banks like it when people are paying their loans and only foreclose on homes only as a last result as it is—they’re better at brokering loans than real estate.
If taking control of a home and selling it on the market is already something banks are trying desperately to avoid, why impose a moratorium? If the proponents of these plans believe that folks would get back on track with their loan payments if only given 90 days, they don’t need to pass a moratorium. Banks already avoid foreclosure until absolutely necessary.
But sometimes foreclosure is necessary. Some folks just aren’t going to make their payments, no matter how much time they’re given. Their homes should be sold to someone who can, or else we risk draining more money from our financial institutions—money that will no doubt be made up by the taxpayer in another bailout plan.
You can’t take a 90 day vacation from economic reality. We shouldn’t risk hobbling a broken system even more right now; doing so would hurt the banking system, hurt credit markets, and in the process hurt the very consumers such a moratorium is trying to protect.
Even if you vote for Obama, you’re still probably a racist, according to Harvard law professor Charles Ogletree, in his remarks at recent events like a panel discussion at my alma mater. Ogletree, Obama’s top advisor on race issues, explains that since Obama is “biracial,” his election won’t prove that racism has receded. White America won’t vote for blacks, Ogletree argues, and Obama’s election is possible only because he’s partly white. The ABA Journal predicts that Ogletree, who has long advocated race-based reparations, will be the Assistant Attorney General in charge of the Civil Rights Division during the Obama administration.
Ogletree has blamed America for 9/11. Legal commentator Walter Olson notes that Ogletree has attracted controversy over his association with Al Sharpton and history of plagiarism.
On October 31, the Washington Examiner declared Charles Ogletree a “dim bulb” for his racially-charged remarks.
Ironically, Nation of Islam leader Louis Farrakhan, who has effusively praised Obama, had a different take on Obama’s white ancestry.
Thee Federal Reserve lowered its key rate to 1%. Convinced that inflation is no-longer a problem, the Fed believes this is the time to help stave off a recession. This policy didn’t work well when Greenspan tried in 2001 – it helped the jump in oil price and drove the dollar to fall against other currencies – oh and it made lending for home super cheap.
Combined with aggressive lending from the Federal Reserve, a Fannie and Freddie newly reflushed with cash to buy up mortgage backed security , and the federal government going on a mortgage buying spree…
Does this sound like 2002-2006 all over again, just a bit bigger? Are our policymakers really this dense….this is truly criminal.
Last week, the German government said that Switzerland should be placed on the international blacklist for tax havens. Really? That is, according to Peer Steinbruck (German finance minister):
Speaking to reporters in Paris after a conference on measures to combat tax avoidance, Steinbrück said Switzerland deserved to be on the list being drawn up by the Organization for Economic Cooperation and Development because Swiss investment conditions encouraged some German taxpayers to commit fraud.
The French budget minister, Eric Woerth, even raised the prospect of ‘retaliatory measures’ (these are FATF’s, who knows what the French’s are) against “territories that refused to exchange tax information” with the money police in other countries, from international code thought up by the OECD.
France and Germany are determined to raise the pressure on countries that refuse to exchange tax records. They believe the financial crisis, with calls for market regulation and a downturn in tax receipts, will inject political impetus into the OECD’s hitherto technical efforts to clampdown on uncooperative tax havens.
Countries like France and Germany are looking to put increased pressure on countries–who provide a financial service to their citizens–participating in what they claim are “harmful tax practices.” Here is a bit from OECD’s Centre for Tax Policy and Administration that sums up their alleged ‘reasoning’:
Competitive forces have encouraged countries to make their tax systems more attractive to investors. However, some tax practices are anti-competitive and undermine fair competition and public confidence in tax systems. OECD and non-OECD economies are working together through the Global Forum to address harmful tax practices by improving transparency and establishing effective exchange of information.
That sounds eerily familiar and a bit contrived.
Unfortunately for them, as I have pointed out in an earlier post, tax avoidance is not exactly a crime in Switzerland–and Swiss law interprets tax crime differently than most.
Swiss banking and tax laws make Switzerland a desirable place for those who don’t like being robbed by their governments to keep their money or even relocate to. Along with the other so-called tax havens, Switzerland is now being targeted for being good at what they do. And of course ‘blacklisting’ these countries gives those bureaucracies obsessed with appropriating people’s money an excuse to try and do an end-run around sovereignty.
More good reads in the WSJ today. Mary Anastasia O’Grady in her column in the Wall Street Journal provides a sharp contrast between the two presidential candidates in their approach to international trade.
As O’Grady notes, Senator Obama views trade — not as an economic artivity — but as a tool to pursue other social goals, such as labor and environmental standards.
Mr. Obama says he would change the way the U.S. negotiates trade agreements. Instead of focusing mainly on removing barriers to the movement of goods and services, he would use the agreements “to spread good labor and environmental standards” to the rest of the world. He voted against the Central American Free Trade Agreement (Cafta) in 2006 and says he will oppose others that do not have strong-enough labor and environmental provisions.
On cutting agricultural support, O’Grady also points out that Obama co-signed a letter to President Bush asking him not to “cut farm subsidies as part of Doha.” That, as many know, was a major contentious issue that helped doom progress on the Doha Round agenda.
Here and here are some articles and op-eds that CEI has published about the value of more open trade. Fred Smith just this week debated a senior advisor to the Obama campaign, where trade was a major issue. Here’s where you can listen to an audio recording: “SAIS Hosted Debate on Economic Policy Agenda for New U.S. President on October 27.”
The Wall Street Journal today has an insightful article by George Newman, “an economist and retired business executive.”
Newman brings up a new rationale for the steep drop in the stock market — that investors have already priced in a likely Obama victory.
The valuation of an individual stock reflects the collective expectation of investors about a company’s future profits, dividends and appreciation, and the same is true of the market as a whole. These profits, in turn, are greatly influenced by government policy on taxes, spending, subsidies, environmental and other regulations, labor laws, and the corporate legal climate. Investors have heard enough from both candidates in the last month or two to conclude that prospects for a flourishing, competitive, growing and reasonably free economy in a McCain administration are bad, and in an Obama administration far worse. (In fact, the market’s bearish behavior over the last couple of months pretty closely tracks Barack Obama’s gains.)
He provides some questions that investors may ask themselves as they make their decisions. Here are just a few:
- Have you thought of what a gradual doubling (and indexation) of the minimum wage, sailing through a veto-proof and filibuster-proof Congress, would do to inflation, unemployment and corporate profits? The market now has.. . .
- Have you thought of how a Treasury Secretary George Soros would engineer the double taxation of the multinationals’ world-wide profits, and what this would mean for investors (to say nothing of full-scale industrial flight from the U.S.)? The market now has.. . .
- Have you thought of how a Health and Human Services Secretary Hillary Clinton would fix drug prices (generously allowing 10% over the cost of raw materials), and what this would do to the financial health of the pharmaceutical industry (not to mention the nondiscovery of lifesaving drugs)? The market now has.. . .
- Have you thought of how the nationalization of health insurance, the mandated coverage of ever more — and more exotic — risks, the forced reimbursement for excluded events, and the diminished freedom to match premium to risk would affect the insurance industry? The market now has.
- Have you thought of Energy Czar Al Gore’s five million new green jobs — high-paying, unionized and subsidized — to replace, at five times the cost, what we are now producing without those five million workers, and what this will do to our productivity, deficit and competitiveness? The market now has.
Great questions, all. Read the whole article for the complete catalog.
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