toxic assets

More Government Waste, Corruption, and Corporate Welfare, Thanks to the Obama Administration

by Hans Bader on June 14, 2009

in Odds & Ends

Rapidly-rising Medicare spending already threatens “to crush the federal budget,” and much Medicare spending is wasteful, yet the Obama Administration claims it can somehow save money by creating Medicare-like programs to cover all Americans. In the New York Times, economics professor Tyler Cowan calls it “the new voodoo economics.” Washington Post columnist Robert Samuelson concludes that Obama’s health-care plan “is naive, hypocritical or simply dishonest. Probably all three.”

Obama is firing an inspector general who exposed wrongdoing by one of his supporters, and previously uncovered millions of dollars in waste and fraud in the troubled AmeriCorps program, whose budget is being dramatically increased by the Obama Administration. Inspector General Gerald Walpin was fired after he uncovered misuse of Americorps funds and sought to keep the wrongdoer from accessing federal “stimulus money.” The recently-passed stimulus package repealed welfare reform, and it subsidizes waste and corruption.

Congress is moving towards passing a “cash for clunkers” bill that would give people tax credits, but only if they own an old gas-guzzler that they are trading in for a new car. So if you bought a fuel-efficient car in the past, your tax dollars will be used for welfare for people who bought inefficient cars (cars with less than 18 MPG). The bill will increase the national debt (and thus future taxes) by billions of dollars. As Mike Budnick notes in the Wall Street Journal, “This type of legislation rewards people who have made poor decisions and penalizes only people who have already made good choices. Not the kind of incentive that we should propagate. Let the market work.”

Taxpayers are being ripped off to the tune of hundreds of billions of dollars to enrich wealthy buyers of so-called “toxic assets.” Meanwhile, the Obama Administration’s $787 billion stimulus package is actually killing jobs and shrinking the economy.

Congress passed an FDA tobacco regulation bill, but not without adding insidious provisions that will reduce competition in the tobacco industry, and actually make it harder to introduce products that reduce the harms and health risks of tobacco, notes the Wall Street Journal. We earlier described the bill’s pitfalls and counterproductive provisions. Obama has said he will sign the bill into law.

Billions of tax dollars are being spent on bailing out carmakers, but the primary beneficiaries of this corporate welfare are not the car companies themselves, which could have survived without federal bailouts by simply abrogating their collective bargaining agreements and dealer-contracts in a standard bankruptcy-court reorganization, but the United Auto Workers Union, which spent millions electing Obama and is now calling the shots. Taxpayers and pension funds are being ripped off to enrich the UAW, which enjoys wages much higher than the average American.

A similar government bailout of the auto industry actually backfired in England in the 1970s, destroying its carmakers by leaving them with excessive wages, inefficiency, and political meddling in car design.

Now, even liberal commentators are questioning whether the mushrooming auto bailouts pass constitutional muster, such as Charles Lane in today’s Washington Post. (Lane is so liberal and pro-government that in a front page article in 2003, he characterized the Supreme Court’s 2003 decisions as collectively being great for “civil liberties,” even though he admitted that the Supreme Court had rejected free speech claims in 7 out of its 8 First Amendment cases that term, largely because Lane approved of its decision upholding the University of Michigan Law School’s race-based affirmative action plan — even though legally permissible affirmative-action plans are a discretionary government function, not an individual right or civil-liberty).

Conservative columnist George Will also has a column today criticizing the auto bailouts. He points out that the Administration’s current claim that it can use TARP bank-bailout money for an auto bailout is at odds with the Treasury Department’s past admissions to the contrary: “Last September, Treasury Secretary Henry Paulson testified to the Senate that TARP money was necessary for ailing ‘financial institutions.’ Nowhere in the bill’s 169 pages was there any reference to government funding of ‘automobile’ or ‘manufacturing’ companies. In November, Paulson told a House committee: ‘I’ve said to you very clearly that I believe that the auto companies fall outside of [TARP's] purpose.’”

Earlier, commentators like the Heritage Foundation, Clinton Administration Labor Secretary Robert Reich, and liberal journalist Andrew Sullivan all agreed that the auto bailouts are illegal or unconstitutional.

GASPing at the Geithner-Summers Plan

by Fran Smith on April 7, 2009

in Bailout Watch, Economy

Like the acronym for the Geithner and Summers Plan — GASP — in the article by Laurence J Kotlikoff and Jeffrey Sachs. And “gasp” is indeed the reaction to the $1 trillion plan to deal with financial institutions’ toxic assets.  As Kotlifkoff and Sachs note, the plan can easily be gamed by participants:

The situation is even worse that it looks, however, since the GASP can be gamed by the banks that own the toxic assets to boost the purchase prices for their bad assets even higher than has been suggested to date.

Markets Rally on Hopes of Regulatory Relief

by Hans Bader on April 2, 2009

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Global Warming, Precaution & Risk, Regulation, Stimulus to Nowhere

The stock market has gone up by 280 points so far today, fueled by FASB’s vote to relax rigid mark-to-market accounting rules, which require financial institutions to value assets at their current fire-sale prices, and magnify boom-bust economic cycles.

The market may also be getting a boost from the Senate’s earlier vote undercutting the Obama Administration’s proposed $2 trillion cap-and-trade carbon tax, which would impose burdens on the economy akin to Herbert Hoover‘s disastrous 1932 Revenue Act at the beginning of the Great Depression.

The market’s rise contrasts with its fall in the weeks after passage of Obama’s $800 billion stimulus package, which Obama falsely claimed was needed to avert “disaster” and “irreversible decline.” Obama made that claim even though the Congressional Budget Office, controlled by his own Congressional allies, admitted that the stimulus package would shrink the economy over “the long run.”

Many commentators have called for relaxation or repeal of mark-to-market accounting rules to stem the financial crisis, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee.

While pushing through $8 trillion in bailouts, and trillions more in debt from massive budget increases, the Obama administration has until recently ignored inexpensive possible ways of mitigating the financial crisis like reform of “mark-to-market” accounting rules.

The Obama administration’s footdragging on accounting-regulation reform is inconsistent with the rationale for its trillion-dollar toxic-asset buy-up program, which defies mark-to-market concepts in a much more extreme way than a mere relaxation of mark-to-market accounting rules. The Treasury Secretary claims taxpayers won’t lose a full trillion under Obama’s toxic-asset program, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why did he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules were right — in which case taxpayers will end up losing a trillion dollars — or they were wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).

It’s not even clear that all these bailouts are needed. As William Seidman, the banking official who helped clean up the S&L Crisis as head of the RTC, notes, the government’s $170 billion AIG bailout was absurdly expensive and wasteful. “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do.”

That includes a huge unneeded windfall for the investment bank formerly headed by Treasury Secretary Paulson, Goldman Sachs, a major donor to liberal politicians, which received billions of dollars from taxpayers that it did not even need, through the AIG bailout.

Obama’s record-breaking tax and spending increases violate his campaign promises to enact a “net spending cut” and not to raise taxes “in any form” on anyone making less than $250,000 a year.

Ironically, Obama’s “cap-and-trade” carbon tax might have the perverse effect of increasing, rather than reducing, greenhouse gas emissions. Cap-and-trade is a pernicious “form of tax farming.”

“Robbery of the American People”

by Hans Bader on March 31, 2009

in Bailout Watch, Economy, Energy, Environment, Global Warming, International, Politics as Usual, Stimulus to Nowhere

“Nobel Prize-winning liberal economist Joseph Stiglitz points out that the Treasury Secretary Tim Geithner’s plan to have the government subsidize investments in ‘toxic assets’ creates a serious moral hazard: Private investors will pocket any gains, while the federal government promises to cover virtually all potential losses: ‘Quite frankly, this amounts to robbery of the American people.’”

It’s the London Telegraph that’s reporting this, though. U.S. newspapers are too busy running puff pieces about Barack and Michelle Obama — and describing critics of Obama’s $800 billion stimulus package, which the Congressional Budget Office admits will shrink the economy in the long run, as being opposed to what the papers dishonestly refer to as the “economic recovery plan.” (With a few exceptions, the press did not report the CBO’s finding that the stimulus will actually shrink the economy, which contradicts Obama’s false claim that failing to pass the bloated stimulus package would lead to “irreversible decline.”)

Although many economists oppose the Administration’s policies, the newspapers make it sound like only right-wingers object to the Obama Administration’s bailouts. They do that even though the liberal Nobel Laureate and economist Paul Krugman, a big Obama supporter, admitted that Obama’s trillion toxic-asset buy-up program is a rip-off best described as “heads I win, tails the taxpayers lose.”

The result is that although Obama has proposed record budget deficits (expanding deficits by $4.8 trillion to an eye-popping $9.3 trillion, despite tax increases of $1.9 trillion), public opinion polls show 52% of the public approves Obama’s handling of the deficit.

In 2008, Obama explained to the San Francisco Chronicle that electricity bills would “skyrocket” under his Administration due to its global-warming regulations. But the press by and large wasn’t interested in reporting it, since it would have hurt Obama’s chances of getting elected.

Now, the Obama Administration is backing a two trillion-dollar cap-and-trade carbon tax. But that, too, is getting little press coverage — as are Obama’s broken campaign promises, like his pledge of a “net spending cut” if elected.

The U.S. press has barely mentioned Treasury Secretary Geithner’s role in the destruction of the economy of Indonesia, a major oil-producing nation of 200 million people, in the 1990s (even though Australia’s long-time Prime Minister Paul Keating has been scathing in his criticism of Geithner).

Given their unwillingness to print interesting — but ideologically inconvenient — news, it’s no wonder that lots of newspapers, like the Seattle Post-Intelligencer, have folded in the past year. Biased coverage is boring coverage not worth paying for.

Geithner Seeks More Power to Ruin Our Economy

by Hans Bader on March 26, 2009 · 6 comments

in Bailout Watch, Economy, Politics as Usual, Stimulus to Nowhere

Treasury Secretary Tim Geithner wants a “vast expansion” of his power over the financial system. This is the same guy whose bungled $170 billion AIG bailout gave billions of dollars to wealthy AIG clients like Goldman Sachs, which admits it neither needed nor expected the money it got from taxpayers.

Back in the 1990′s, Geithner, working with the IMF, destroyed Indonesia’s economy, by prescribing disastrous economic policies. The result was massive increases in child malnutrition, riots, and mushrooming poverty, in a major country that once boasted annual economic growth rates of 7 percent. Australia’s long-time Prime Minister Paul Keating has chronicled Geithner’s central role in this disaster repeatedly, but to no avail (Keating was the leader of his country’s Labor Party, so he’s not exactly a doctrinaire conservative. And his rule was marked by economic growth.).

Now, Geithner wants more regulatory power in his own hands, even though unregulated financial institutions (like hedge funds) are doing better than regulated ones, so much so that unregulated financial institutions are being relied upon to bail out regulated financial institutions in Geithner’s toxic-asset buy-up program!

Geithner sent the dollar tumbling yesterday by foolishly suggesting that the dollar might be losing its role as the world’s reserve currency. The head of the European Union yesterday called the Obama Administration’s policy of unprecedentedly massive deficit spending the “road to hell.” The prominent liberal economist Jeffrey Sachs says that the Administration’s toxic-asset buy-up program will “rob the taxpayer” by “buying up toxic assets from the banks at far above their market value.”

Historian and engineer Clayton Cramer has a fascinating analysis of how the mortgage crisis was spawned by regulations adopted under the Community Reinvestment Act, and special interest groups that learned how to game those regulations, like ACORN (a group Obama long worked with). ACORN, a beneficiary of the stimulus package, helped spawn the mortgage crisis by promoting “liar loans.” It has also engaged in extensive financial fraud and vote fraud. The Obama Administration has chosen ACORN to help conduct the 2010 census, which will be used to reallocate seats in Congress.

Obama Chief of Staff Rahm Emanuel received $320,000 while asleep at the switch as a director of the mortgage giant Freddie Mac, a fraud-ridden GSE that helped spawn the mortgage crisis and ended up being bailed out by taxpayers at a cost of over $100 billion.

James Piereson has insightful comments about Geithner’s demand for new regulatory powers (and unnecessary bailouts) here. He also notes that Fed Chairman Ben Bernanke has been essentially refighting the last war, applying remedies that might have been helpful in the Great Depression but are positively harmful now.

Perhaps Bernanke’s most controversial policy has been to print vast sums of money to buy up government bonds, under the rubric of “quantitative easing.” Congressman Ron Paul says this policy, and the massive bailouts, are an inflationary disaster, and that it would have been better for the government to do what it did in response to the sharp 1921 recession — nothing. “He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. ‘No one remembers that one. They’ll remember this one, because it will last’” much longer, because the “government just won’t allow the correction the economy needs.”

The 1921 recession speedily ended, without any bailouts or government intervention, although it started out as a very nasty recession, with suffering much worse than in the early days of the Great Depression. The 1921 recession was followed by an economic boom, including 6 percent annual growth rates in the 1920s.

The Obama administration has never explained why such vast powers should be bestowed on Geithner, who cheated on his taxes, lacks expertise in economics, and receives a failing grade from economists. Yet it has relied on him to sell its economic policies, such as its proposed budget (which will add $4.8 trillion in additional debt), $8 trillion in bailouts, a trillion dollar toxic-asset buy-up program, and an $800 billion, economy-shrinking “stimulus” package, all of which contradict Obama’s campaign pledge of a “net spending cut.”

Obama’s Policies Are “A Road to Hell,” European Leader Says

by Hans Bader on March 25, 2009 · 3 comments

in Bailout Watch, Deregulate to Stimulate, Economy, International, Regulation, Stimulus to Nowhere

“The president of the European Union on Wednesday slammed U.S. plans to spend its way out of recession as ‘a road to hell.’ Czech Prime Minister Mirek Topolanek, whose country currently holds the rotating EU presidency, told the European Parliament that President Barack Obama’s massive stimulus package and banking bailout ‘will undermine the liquidity of the global financial market.’”

There’s “one small problem with Geithner’s plan: It will bankrupt the banks,” says analyst Henry Blodgett, triggering a chain reaction of write-offs. Unless, that is, the Treasury Department deliberately and massively overpays for the toxic assets, fleecing the taxpayer, as other commentators predict. The reason is mark-to-market accounting rules, which require financial institutions to write down assets’ value when similar assets are sold by other institutions at fire-sale prices. Many commentators say these regulations should be repealed, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, and Newt Gingrich.

Congress is now moving to enact a $6 billion “national service” boondoggle. Similar spending in the past has been used to hire young people to lobby for rent control and against anti-crime legislation, such as “three-strikes” laws and victims’ rights bills.

It’s hard to understand why the government is wasting money on such things, when it already will incur $4.8 trillion in additional debt from Obama’s proposed budget, and $8 trillion for bailouts (not counting another trillion dollars for the toxic-asset buy-up program) and $800 billion for the economy-shrinking “stimulus” package).

So much for Obama’s broken campaign promise of a “net spending cut.” Even his two trillion dollar “cap-and-trade” energy tax won’t begin to pay for all the new deficit spending.

$2 Trillion Tax from Obama: Hidden Costs of “Cap-and-Trade” Scheme

by Hans Bader on March 24, 2009 · 3 comments

in Bailout Watch, Economy, Energy, Environment, Global Warming, Politics as Usual, Regulation, Stimulus to Nowhere

Obama’s proposed “cap-and-trade” carbon tax on energy use and utility bills is expected to raise up to $2 trillion, more than the $646 billion the Administration earlier estimated. The Washington Examiner‘s Tim Carney explains how this hidden tax works.

(Before his election, Obama explained that electricity bills would “skyrocket” under his Administration, but the press by and large wasn’t interested in reporting it).

The $2 trillion raised by Obama’s cap-and-trade scheme may be dwarfed by the money made, at consumers’ expense, by well-connected corporations that have learned how to game such schemes.

It won’t put much of a dent in the $4.8 trillion in additional debt resulting from Obama’s proposed budget, or the $8 trillion in spending commitments incurred by the Obama Administration (not counting another trillion dollars for the toxic-asset buy-up program and $800 billion for the economy-shrinking “stimulus” package), all of which contradict Obama’s campaign pledge of a “net spending cut.”

But you sure will notice it in your electric bills if it becomes a reality.

Toxic-Asset Buy-Up: “Pure Plunder”?

by Hans Bader on March 24, 2009 · 1 comment

in Bailout Watch, Deregulate to Stimulate, Economy, Politics as Usual, Regulation, Stimulus to Nowhere

People who have actually read the fine print of the Administration’s trillion-dollar toxic asset buy-up program don’t like it. One calls it “pure plunder.”

Both liberals like Nobel Laureate Paul Krugman, and conservatives like Chris Stirewalt, sum up the program as “Heads I win, Tails the Taxpayers Lose.”

Others argue it provides “public subsidies” for hedge funds that don’t need them, and for “zombie banks” that ought to be shut down to cut the taxpayers’ losses.

Even Harvard business law professor Lucian Bebchuk, who once advocated buying up toxic assets, now says that taxpayers may end up being fleeced by the toxic asset program, and that it would have been better and cheaper to let AIG go bankrupt rather than spending $170 billion bailing it out.

In essence, the U.S. Treasury will “become the new AIG. In order to get hedge funds to buy up toxic debt, Obama is proposing that the Treasury provide loans up front and insurance against potential losses on the back end.”

The Administration claims taxpayers won’t lose a full trillion, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why does it continue to enforce accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules rightly value assets — in which case taxpayers may end up losing a trillion dollars — or they are wrong — in which case the rules should be repealed, so that banks, not taxpayers, can take on the risk of holding the assets. (If these rules, known as “mark-to-market” accounting, had been in place in the 1980s, “every major commercial bank would have collapsed.” As we noted earlier, many banking officials, economists, and lawmakers support junking those accounting rules).

Many bailouts, like the $170 billion AIG bailout, have been grossly wasteful, as former banking regulator William Seidman notes. For example, “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do.” That includes paying billions to AIG customer Goldman Sachs, which Goldman readily admits it did not need to survive.

Don’t trust politicians who say their spending programs are needed to avert disaster. Obama claimed the $800 billion stimulus package was needed to avert “disaster” and “irreversible decline.” But the Congressional Budget Office admitted that the stimulus package would actually shrink the economy in the long run.

In the Asia Times, Martin Hutchinson notes Fed Chairman Ben Bernanke’s role in spawning asset bubbles and the current financial crisis, his refusal to face his mistakes, and his inflationary policies, which now threaten to erode the dollar’s status as the world’s reserve currency (impoverishing America in the process).

LibertyWeek 35: Dodd Man Out?

by Richard Morrison on March 24, 2009

in CEI Projects, Podcast

Your hosts Richard Morrison and Cord Blomquist welcome back special guest co-host Michelle Minton for Episode 35 of the LibertyWeek podcast. We begin with a celebration of human achievement and a peek into the realm of secret government documents. We then investigate how the White House is going to waste another $1 trillion of your money and how the British beer tax has managed to kill off 20,000 jobs. Finally we focus on the history of the scandal-addled Sen. Dodd of Connecticut and the future of U.S. Olympic glory.

BONUS BOOK FEATURE: We congratulate our good friend Steve Milloy on the publication of his new book, Green Hell: How Environmentalists Plan to Ruin Your Life and What You Can Do to Stop Them. The book is a one-of-a-kind, comprehensive takedown of the entire environmental movement that will open your eyes to a looming threat to our economy, our civil liberties, and the entire American way of life.

Toxic Asset Rip-Off

by Hans Bader on March 23, 2009 · 3 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Features, Politics as Usual, Regulation, Stimulus to Nowhere, Zeitgeist

That’s how analysts describe the trillion-dollar toxic-asset buy-up program proposed this weekend by the Obama Administration: “the president is putting forth his idea to have the Treasury become the new AIG. In order to get hedge funds to buy up toxic debt, Obama is proposing that the Treasury provide loans up front and insurance against potential losses on the back end. It’s what Paul Krugman called ‘heads I win, tails the taxpayers lose.’ By the way, it may cost another $1 trillion.”

The Treasury Secretary claims taxpayers won’t lose a full trillion, because the assets aren’t as worthless as their current market prices suggest. But if that’s true, why does he continue to insist on federal accounting rules that force banks to value their assets at the current depressed market prices? Either the accounting rules are right — in which case taxpayers will end up losing a trillion dollars — or they are wrong, amplifying financial panics — in which case the rules should be repealed, so that banks, not taxpayers, will be able to take the risk of holding the assets. (If these accounting rules, known as “mark-to-market” accounting, had been in place in the late 1980s, “every major commercial bank would have collapsed,” wiping out the economy).

It’s not even clear that all these bailouts are needed. As William Seidman, the banking official who helped clean up the S&L Crisis as head of the RTC, notes, the government’s $170 billion AIG bailout was absurdly expensive and wasteful. “We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do.”

That includes a huge unneeded windfall for the investment bank formerly headed by Treasury Secretary Paulson, Goldman Sachs, which received billions of dollars from taxpayers that it did not even need, through the AIG bailout. As James Piereson notes,

“Goldman wound up receiving $12.9 billion in December from AIG in an initial payout from the TARP money. Thus, taxpayer funds were used not so much to bail out AIG, but rather its “counterparties,” including Goldman and a dozen or so other major banks. Now, in an interview with the press on Friday, Goldman’s chief financial officer has declared that the company was never in jeopardy from a collapse of AIG — that it held some $7.5 billion in collateral against its AIG account and that it had hedged the remaining $2.5 billion in its net exposure using credit-default swaps with other parties. . .David Viniar, Goldman’s chief financial officer, insisted that the company would not have been damaged if AIG had been allowed to collapse. Even so, the company profited handsomely from the payout from AIG, courtesy of the American taxpayer. Goldman could not turn down the payout without damaging its shareholders, Mr. Viniar said. In other words, if the U.S. government — via AIG — was going to offer a gift, Goldman was not in a position to turn it down. Which raises the question: What then was the point of the AIG rescue? The claim by Paulson et al that a collapse of AIG would bring down the international financial system was entirely unsubstantiated. Congress passed the bailout bill under pressure from the financial authorities that they had to act to ‘save the system.’ It turns out that this was far from being true. The lesson from this is that everyone — most especially members of Congress — should look skeptically upon claims that this or that institution is ‘too big to fail’ or that a catastrophe awaits of a major financial institution is not bailed out.”

Politicians frequently claim the sky will fall if their proposals are not implemented, even when they know that is not true. Obama claimed the $800 billion stimulus package was needed to avert “disaster” and “irreversible decline.” But the Congressional Budget Office, controlled by his own Congressional allies, admitted that the stimulus package will shrink the economy over the long run, in reports released both before and after the bill’s passage.

While pushing through $8 trillion in bailouts, and trillions more in debt from massive budget increases, the Obama administration has ignored inexpensive possible remedies for the financial crisis like reform of “mark-to-market” accounting rules. Many commentators are now calling for relaxation of those rules in order to stem the financial crisis, including former FDIC Chairman William Isaac, Congressmen Ed Perlmutter (D-CO) and Paul Kanjorski (D-PA), the Wall Street Journal, John Berlau, Jeff Miller, Holman Jenkins, Newt Gingrich, and the Republican Study Committee

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