Happy Anniversary!

We designated conservatives must be a light in the darkness, wherever we may be.

I live in a one-party neighborhood in a one-party community. All local elections are settled in the Democratic Party primary, not in the general election.  The last Republican to hold local elective office here was booted out more than 20 years ago.

Am I discouraged?

Send a Message: Vote “No!” on the proposed Washtenaw County Intermediate School District’s “Enhancement” Millage

VICTORY UPDATE: Washtenaw County’s Taxation without Representation

To our liberal, teachers union friends who spouted gloom and doom if this WISD millage failed:

24,114 residents of Washtenaw County voted for the WISD millage for public schools yesterday.  Now, this designated conservative suspects that they were voting for a tax hike on the assumption that other “rich people” would pay the bill, but in the hope that they were willing to put up their share I offer the following suggestion:

If all 24,114 “yes” voters each donated just the $200 per year that they said the tax would cost the average county homeowner, they alone would provide over 80% of the $30,000,000 that this new tax was projected to provide to the schools.  Considering that this voluntary method would minimize collection/administration costs associated with the tax process, I suspect that their voluntary contributions would actually provide MORE funds to the schools than any tax.  Come on “yes” voters – it’s time to get your checkbooks out and support the schools!

THANK YOU!

To all our designated conservative friends in Washtenaw County, thank you for coming out yesterday in overwhelming numbers to say “NO!” to the flawed WISD “enhancement millage!  Thank you to all those that spearheaded the “Vote No” campaign!  Great job.

Now comes the hard part:  It’s time for designated conservatives to step in and lead our local public schools away out of the slow-death spiral the Michigan Education Association (MEA)-sponsored “leaders” have created for our children and grandchildren.

This Designated Conservative encourages like-minded folks to write to your school board members, district superintendents, and elected state representatives and tell them the unaccountable tax-and-spend, “this is the way we’ve always done things” mentality is no longer acceptable if we are to have a strong and vibrant public school system in Michigan:

GM to Public: Mercury Switches in GM Clunkers ‘Not Our Problem’ Anymore

I understand that bankruptcy laws provide strong protections for the “new” GM against obligations incurred by the “old” GM, but this is ludicrous and short-sighted.

Perhaps the folks collecting “old” GM-manufactured mercury switches from these “cash-for-clunkers” cars should simply deliver the switches to the “new” GM HQ at the Renaissance Center in Detroit…. Either that or drop them off at local GM dealerships.

A little adverse publicity, and I suspect that it wouldn’t take long for the “new” GM to reverse course and be a good corporate citizen again!

A “new” GM spokesperson is quoted below as saying that GM (the “new” one) “has never produced vehicles with mercury switches and has no mercury switch responsibility under the terms of the bankruptcy court order.” That’s a statement only a lawyer or a government bureaucrat could love.  Unfortunately for the future of the Motor City (and the “new” GM), General Motors is now owned by the federal government and run by lawyers….

“I therefore solicit for your co-operation….”

The Designated Conservative received this “Urgent” email today.  After reading it, I must admit that this does sound serious, and the author certainly comes across as a sincere public servant……

Unintended Consequences – MYSTERY SOLVED VIDEO UPDATE

UPDATE:  Here is another great article highlighting the Law of Unintended Consequences as applied to the financial crisis:

The Formula That Killed Wall Street by Felix Salmon for Wired

Mathematician David Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees… (click here to read the entire article)

Perhaps the noted economist Dr. Chicken Little really was right….?  More importantly, between…

• the deliberate actions of Dr. Frankendodd, et. al. in the Democrat Congressional leadership to take down the home mortgage industry;
• the constant barrage of cyber-attacks on U.S. Defense Department computers – all traced back to Communist China;
• the multitude of federal government “bailouts” and related actions by the Democrat-controlled Congress and Obama Administration that have suddenly made $Trillion deficits “normal”;
• the Wall Street financial tycoons’ failure to pay attention to what their hedge fund and derivative “whiz kids” were doing in the basement; 
• AIG’s fraudulent “insurance” of credit swaps and other exotic financial deals; 
• the appointment of a bumbling and ineffective Treasury Secretary who failed to notice the dangerous banking activities going on under his nose at the NY Fed;
• Communist China’s predatory efforts to use their huge reserve of U.S. dollars (that we funded through deficit spending) to build a worldwide economic empire; and
• (re-Imperializing) Russia’s saber-rattling decisions to sell missile and nuclear technology to Iran and forward deploy strategic bombers (andmore importantly – electronic reconnaissance aircraft) to our southern doorstep in Cuba and Venezuala – …

 …this Designated Conservative is beginning to wonder, “Are we at war?”

UPDATE 2:  This video below shows some of the unintended(?) consequences of the Democrat Congressional leadership’s propensity for ramming through giant spending bills that cannot possibly be read by anyone in the time allowed before a vote (much less actually debated).  It makes one wonder exactly for whom Senator Chris Dodd of Connecticut believes he is working….  Maybe the better question is, “What did Senator Dodd know about what Senator Dodd was doing, and when did he know it?

 

ORIGINAL POST:

The following is another extended excerpt from John Mauldin’s email financial newsletter.  As usual, he gets right to the core of all things financial.  His conclusion is that much of our current financial crisis (and related mess at AIG) is the result of unintended consequences from a poorly-thought-out rating system for mortgage securities and the federal government’s (read AIG’s former Congressional friend(s), “Dr. Frankendodd“) post-Enron “mark-to-market” accounting rules: 

Thoughts from the Frontline Weekly Newsletter:  The Law of Unintended Consequences

Rules have consequences….  If I told you that the US government was going to give multiple tens of billions of taxpayer dollars to hedge funds and private investors, you would justifiably not be happy. I think the word angry would come to mind. But that is exactly what is happening, as a result of rules that were written for a time and place seemingly long ago and far, far away….

In the beginning there were ratings agencies, and they rated corporate bonds from the very highest of credit quality (AAA) down to junk (CCC). Now AAA means that the chances of losing money are very, very low. With each level of increased incremental risk comes a lower rating. If a corporate bond was at risk for losing just one dollar, it was rated all the way down to junk. And that was fine. Everybody knew the rules of the game.

But then investment banks asked the agencies to rate a large group of home mortgages in a pool known as a Residential Mortgage Backed Security (RMBS). The investment bank would divide the pool (the RMBS) into various tranches. The highest-rated tranche would be given a rating of AAA. Let’s say that the AAA tranche was 92% of the loan pool. The AAA tranche would get the first 92% of all monies coming into the pool before the other investors were paid (again, really oversimplified, but that is the net effect). That would mean that the pool could have 16% of the home loans default and lose 50% of their value before the AAA tranche would lose even one dollar.

We all know now, though, that some of those AAA-rated tranches are in fact going to lose money. And the rating agencies are now writing down the ratings on the former AAA tranches….  What I am writing about today are plain vanilla mortgages grouped together in securitized pools.

I wrote three weeks ago, “The downgrades by Moody’s today of 2,446 different classes of Residential Mortgage Backed Securities will be a real blow…. Fitch and S&P are also piling on with downgrades. Most of them see RMBS’s go from AAA all the way down to junk. This has some very bad unintended consequences.

Let’s say a bank has a loan portfolio of 1,000 individual mortgages valued at an average $200,000, for a total portfolio value of $200 million. The loan officers were not very good, and it turns out that 18% of the homes went into foreclosure and lost an average of 50%. That means 180 homes went into foreclosure and that the bank lost an average of $100,000 per home, or $18 million overall. The bank was charging 6% interest, so in a few years it would at least have its original investment back, although the losses would eat into capital.

Note that the remaining 82% of loans are still performing and are carried on the books at full value (again, oversimplified). There is real value in the remaining loan portfolio. But what if the bank invested in a RMBS that was rated AAA, and 18% of the loans in the security went bad? Remember, the AAA tranche gets the first 92% of income. The loss to the RMBS is 9% of capital. The losses to the AAA tranche are only 1%. Hardly a catastrophe. Annoying, but something you can deal with.

Except for some very nasty rules. Remember, a bond is downgraded to junk if it loses even $1. Now, let’s take it to the real world. Say a bank buys a $1-million AAA portion of that large RMBS. It can use that AAA debt in its capital base, and can actually lever it up about five times, as the rules only make the bank take a 20% “haircut” on an AAA bond. But if the bond goes to CCC, the bank must now move the entire bond to its “risk-impaired” portfolio. And because most institutions cannot buy junk paper, there are very few buyers out there who will want to buy it — mostly hedge funds and private capital. The price on that paper might easily drop to $.50 on the dollar because of the potential for a 1% loss.

The accountants, being conservative and living with new mark-to-market rules, make the bank take a $500,000 loss…. If they have to sell to get the capital required to follow the regulations, they will lose $500,000. And they lose this on an asset that the rating agencies say might lose $1 ten years from now. Again, at the risk of oversimplification, if they keep the security that also means that the bank loses roughly $10 million in lending capacity. They have to reduce their loan book or raise more capital.

Here’s the truth. That bond should never have been rated AAA to begin with, and it shouldn’t be rated CCC today. The ratings agencies took a perfectly fine corporate bond rating system and tried to bootleg it onto a security that has an entirely different set of circumstances….

While I can’t go into specifics, I have looked into these bonds with some real interest. Let’s assume that you can actually buy an AAA tranche of an RMBS at $.60 on the dollar. That means that 80% of the mortgages would have to go into foreclosure and lose 50% before you would ever lose a penny. There are AAA bonds selling at steep discounts that are composed of mortgages with 80% loan-to-value in 2005, a 7% interest rate, and 90+ percent performing loans. These loans are being called in as mortgagees take advantage of lower rates and refinance….

If you buy the loan at $.60 on the dollar, and it gets refinanced, you get an immediate capital gain of almost 50%! If it keeps on being paid, you get an effective rate of about 10%. So, why wouldn’t there be a lot of institutions standing in line to buy such a dream investment? Because banks fear the danger that the security will get downgraded, just like the thousands of such instruments that have already been downgraded, and then their regulatory capital will be impaired. The technical banking term is that you would be screwed. So (banks) don’t buy what would be a very good performing asset, because of the rules.

So, who can (and does!) buy? Hedge funds and private investors with liquidity. But these “vulture capitalists” (among whom are many of my friends) know that the sellers are operating from a position of weakness. And because there are not enough of them to buy the bonds on offer, the prices of these bonds are very low. Smart money managers are raising money to exploit these distressed sellers.

So, in effect, we are giving banks taxpayer money while forcing them to sell assets that might be worth $.95 cents on the dollar in a less-stressed world. We are shoveling money in the front door while it is being pushed out the back door to my friends at the hedge funds….

Some simple rules changes would solve a lot of this problem.

• First, let’s recognize that the root of this particular problem is the ratings system. …the Federal Reserve should call in the rating agencies and have a “come to Jesus” meeting. They are at the heart of the problem, and they need to fix it. They need to change their ratings system for packaged securities like RMBS’s. 
• …if you modify the rules so that banks and other institutions can use those bonds (with an appropriate haircut) as part of their regulatory capital, then you immediately get a large number of buyers into the market, and that will make prices go up and mean that banks will need less taxpayer money…. 
• Marking assets to market when there are no markets is illogical. I have spent some time looking at these securities. Like kids, they are all different. And some are really different. Yet we make a bank mark an asset down because one that is in the same broad class is impaired. Like giving every 13-year-old in school an “F” in math because one kid failed…. 

We do not need zombie banks. For whatever reason, the Obama administration seems to be afraid to use the “N” word (nationalization). If a bank is insolvent, yet deemed too big to fail, then take it over, repackage it, and sell it back to the private market with some options that will allow for taxpayers to at least have the potential to get their money back. But do it quickly rather than dithering, as is happening now, because that will just cost more in the long run.

But as a start, change the accounting rules so that we stop shoveling taxpayer money in the front door to banks and out the back door to hedge funds. That can be done quickly if the administration simply says “do it.”…

This cycle needs to be broken. Mary Schapiro? Tim Geithner? Are you listening?”

John Mauldin
(John@FrontLineThoughts.com) Copyright 2009 John Mauldin. All Rights Reserved 


John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore.

Obama Grants U.S. Land to China as Collateral for US Debt? No, but it makes you think…

UPDATE:  Like all breaking web-stories that are in their early hours of existence, it can be difficult to separate fact from rumor and hoax.  The following story has proponents and detractors.  Some insist it is a hoax (I hope so!), while others insist it’s accurate (please, no…).  

Isn’t it terrifying that the mere idea of the Obama Administration taking such an action is even remotely plausible?!!

UPDATE 2:  This story/hoax/rumor apparently originated from a Bloomberg Business News story entitled “China Needs U.S. Guarantees for Treasuries, Yu Says“ (excerpt below)

China should seek guarantees that its $682 billion holdings of U.S. government debt won’t be eroded by “reckless policies,” said Yu Yongding, a former adviser to the central bank. …

China may voice its concerns over U.S. government finances and the potential for a weaker dollar when Secretary of State Hillary Clinton visits China on Feb. 20, according to He Zhicheng, an economist at Agricultural Bank of China, the nation’s third-largest lender by assets. … 

“In talks with Clinton, China will ask for a guarantee that the U.S. will support the dollar’s exchange rate and make sure China’s dollar-denominated assets are safe,” said He in Beijing. “That would be one of the prerequisites for more purchases.”

UPDATE 3: The American Thinker has posted additional background on this issue on their website (click here).

UPDATE 4:  Leave it to the folks at World Net Daily to get the straight scoop.  The Secretary of State’s office says no way – this is so untrue (or words to that effect).  I’m glad to hear it.  However, I’m still left with my earlier troubling thoughts - Isn’t it terrifying that the mere idea of the Obama Administration taking such an action is even remotely plausible?

ORIGINAL POST:

This is truly insane, if true: (hat tip to Atlas Shrugs and  LiveLeak.com for this)

FEDS GRANT EMINENT DOMAIN AS COLLATERAL TO CHINA FOR U.S. DEBTS!
Beijing, China

Sources at the United States Embassy in Beijing China have just CONFIRMED to me that the United States of America has tendered to China a written agreement which grants to the People’s Republic of China, an option to exercise Eminent Domain within the USA, as collateral for China’s continued purchase of US Treasury Notes and existing US Currency reserves!

The written agreement was brought to Beijing by Secretary of State Hillary Clinton and was formalized and agreed-to during her recent trip to China.

This means that in the event the US Government defaults on its financial obligations to China, the Communist Government of China would be permitted to physically take — inside the USA — land, buildings, factories, perhaps even entire cities – to satisfy the financial obligations of the US government.

Put simply, the feds have now actually mortgaged the physical land and property of all citizens and businesses in the United States.  They have given to a foreign power, their Constitutional power to “take” all of our property, as actual collateral for continued Chinese funding of US deficit spending and the continued carrying of US national debt.

This is an unimaginable betrayal of every man, woman and child in the USA.  An outrage worthy of violent overthrow.

I am endeavoring to obtain images or copies of the actual document but in the interim, several different sources both in the US and in China have CONFIRMED this to me.

More details as they become available. . . . . spread the word ASAP.

This designated conservative has a hard time contemplating such a betrayal of our national sovereignty by a sitting President and Secretary of State as an actual fact.  I sincerely hope that there is nothing to the story, because if true such an action absolutely meets the U.S. Constitution’s definition of “high crimes and misdemeanors.”  

Such an agreement would be unconstitutional, treasonous, and an impeccably  impeachable offense.  Of course, so is deliberately trashing the U.S. economy (the Generational Theft Act of 2009, universal health care, $Billions for ACORN, the Pork-Laden Omnibus Spending bill, and the nearly $4 Trillion 2010 Budget proposal), damaging national security (withdraw from Iraq, cutting defense spending, Illegal Alien Amnesty II, etc. etc.), and the rest of the rush-to-implement Democrat Party agenda.  

The Great American ship of state is being deliberately steered into the path of a huge Depressocratic iceberg of economic ruin. by an unqualified President who cannot even confirm his constitutional eligibility to hold the office!  This is what happens when we hand the keys to the government to children! (sigh)

Even as we bask in the remarkable success of the Chicago Tea Party movement this week, we can easily contemplate the ship of state sinking beneath our feet….  

As Captain Obama, First Mate Pelosi, and crewmates Reid, Schumer, and Dr. Frankendodd push passengers from the “flyover state” class aside in their rush to the lifeboats, can’t you almost hear the choir of designated conservatives singing that old lament, “The Buoyancy of Experience“?….

Need more? Click here to get access to all future updates from the Designated Conservative.     

  

Related Post:  THE USURPERS ARE WINNING, CHICKEN LITTLE WAS RIGHT

Chicken Little was Right, Unfortunately

This Designated Conservative has occasionally been accused of being optimistic, even about the state of the economy.  We in the Great Lakes State of Michigan led the country into this recession, after all – why not lead the country out of it?  Why not, indeed….  

It seemed for a moment or so last month as I talked with folks ‘in the know’ that it was possible – just maybe possible – that Michigan had finally hit bottom and was starting up towards a better day economically.  The signs were small, but there.  

Then along came President Obama’s economic dream team and NooVoodoo Obamanomics.  The great savior of American liberalism, Chief Mage Barack Obama, steps in to ‘rescue capitalism’ and properly socialize America with the culture of entitlement.  Optimism in the DCON household is now swirling down the drain of socialism….

Like many, the Designated Conservative thought that President Obama would move carefully, feigning a moderate/center-left approach to governing while moving ‘under the radar’ to implement his socialist agenda.  

O how wrong we were, folks.  O how great the lamentation and gnashing of teeth going on among us designated conservatives who seek to be responsible, struggle to manage ever increasing tax bills, and scramble to keep our mortgage payments current!

We now stand all amazed as the Great American ship of state is deliberately steered into the path of a huge Depressocratic iceberg of economic ruin by First Mate Pelosi and Captain Obama’s crewmates Reid, Schumer, and Dr. Frankendodd.   

If the federal government had done nothing, lifted not a proverbial finger to bail out the Big Banks and Wall Street firms, the resulting wave of Big Bankruptcies would’ve been painful but recoverable.  After all, many banks in the U.S. and virtually all of the Canadian banks did not get mired into risky investments like derivatives.  They will survive and even prosper under such circumstances, while those that created the mess would suffer the worst consequences.

If the “Too Big To Fail” banks and investment firms that helped to create this economic mess had been allowed to fail, eventually other banks and investment firms (from the financial “farm teams” as it were) would take their place.  We would feel the pain, but wouldn’t be paying their bills for them as we are now under Bailout Nation.

Unfortunately, paying out and suffering consequences is what we will be doing for years to come.  Even (still communist) China and (formerly-communist-and-now-re-Imperializing) Russia understand this simple fact – their leaders are upset that our Democrat Party leadership does not!

The Federal Reserve is now printing money with the financial taps wide open (a.k.a., the Zimbabwe Method).  This too has consequences:  As Glenn Beck from Fox News points out in the video below, the Crash is Coming…

Tell your family and friends – this a forewarning.  The Obamaconomy is coming, and will effect everyone worldwide.

How quickly the wheels come off the vehicle of government when voters hand the keys to children!    

Need more? Click here to get access to all future updates from the Designated Conservative.

Related Post:  THE USURPERS ARE WINNING

Reaganomics Redux 2010 – Newt’s Prosperity Plan

The Designated Conservative has been enjoying a little light bedtime reading this evening from Newt Gingrich:  

12 American Solutions for Jobs and Prosperity

Washington solutions of more money for more government, more power for politicians, more debt, and more bureaucrats will not lead to real growth in jobs and prosperity.

We need a clear and decisive alternative that creates jobs and rewards work, saving, and investment.

Payroll Tax Stimulus.

• With a temporary new tax credit to offset 50% of the payroll tax, every small business would have more money, and all Americans would take home more of what they earn.
• A tax credit that offsets 50% of the payroll tax would put close to $1,500 in the pocket of the typical worker making $50,000, with the same amount going to the employer.

Real Middle-Income Tax Relief.

• Reduce the marginal tax rate of 25% down to 15%, in effect establishing a flat-rate tax of 15% for close to 9 out of 10 American workers.
• Reducing the marginal tax rates for these middle-income earners would lead to income increases for middle-income workers, just as reducing excessive marginal tax rates for higher-income workers did, going all the way back to the Kennedy tax cuts of the 1960s.

Reduce the Business Tax Rate.

• Match Ireland’s rate of 12.5% to keep more jobs in America.
• Owning or operating a business is hard and expensive. Our government should not make it harder and more expensive. Lowering the business tax rate would create and keep more jobs in America, instead of exporting them to other countries.

Homeowner’s Assistance.

• The housing crisis stems from the fact that there is an excess supply of housing. This abundance of houses on the market significantly decreased demand for housing and caused defaults to rise sharply.
• Reducing the existing supply of housing by providing a tax credit to responsible home buyers, reduces defaults by slowing price decline.

Control Spending So We Can Move to a Balanced Budget.

• A government of the people, by the people, and for the people is one that is responsible with the people’s money.
• Restoring fiscal sanity and accountability to Washington also means eliminating wasteful pork-barrel spending. The budget process must be both honest and transparent, and spending should never be a result of insider connections in Washington.

No State Aid Without Protection From Fraud.

• The Government Accountability Office recently released a report that shows over 10 percent of Medicaid payments were improper in 2007, or $32.7 billion in one year. In just New York along, over $5 billion a year is wasted as a result of fraud.
• When government decides to spend our tax-dollars, we must demand honesty, transparency and accountability. Therefore, states must be required to adopt best practices, such as moving to electronic records, if they are to receive any taxpayer money.

More American Energy Now.

• We have more energy resources than any country in the world, yet we are sending billions of dollars every year to foreign dictators to meet our energy needs. That is bad for both our economy and our national security.
• We can begin to solve this problem by drilling for more of our own oil and gas.
• By making the transition to clean coal technology, we can utilize our vast resources of coal (27 percent of the world’s reserves), dramatically reduce carbon emissions, and become a worldwide leader in green technology.
• A Manhattan project to stimulate advances in renewable fuels and alternative energies will allow us to eventually produce safe, clean, efficient and inexpensive fuels here at home.

Abolish Taxes on Capital Gains.

• Match China, Singapore and many other competitors. More investment in America means more jobs in America.
• The current tax on capital gains constitutes double taxation, to which no American should be subjected. Already taxed on income, if an individual decides to save or invest his or her money then the government taxes it again.

Protect the Rights of American Workers.

• We must protect a worker’s right to decide by secret ballot whether to join a union, and the worker’s right to freely negotiate. Forced unionism will kill jobs in America at a time when we can’t afford to lose them.
• Workers have had the right to a secret ballot since 1935, to ensure that they would have a vote free of coercive pressure.

Repeal Sarbanes-Oxley.

• This failed law is crippling entrepreneurial startups.  Replace it with affordable rules that help create jobs, not destroy them.
• It has been six years since Congress passed the Sarbanes-Oxley Act after the devastating accounting irregularities of Enron and WorldCom. While the intent of the law was to prevent corporate fraud, there is growing evidence that it has done more harm than good, and is undermining the venture-capital industry in Silicon Valley.

Abolish the Death Tax.

• The “Death Tax” is an unfair double taxation that hurts working families. The assets that working Americans earn or produce over their lifetime have already been taxed once.
• Not only does the “Death Tax” undermine savings and investment needed for small business growth, these taxes undermine the promise that hard, honest work will be rewarded.

Invest in Energy and Transportation Infrastructure.

• This includes a new, expanded electric power grid and a 21st century air traffic control system that will reduce delays in air travel and save passengers, employees and airlines billions of dollars per year.
• Though we often take modern transportation systems for granted, the development of effective transportation technology and infrastructure is one of the prime factors behind our individual and national prosperity.

In the midst of the news cycle filled with Obamanation and Noovoodoo Obamanomics, I’m grateful for a buoyancy of experience moment from an experienced Washington politician – reminding us designated conservatives about what actually has worked and will work again for our economy.  If you need more sanity, click here or get it directly from Newt’s mouth below:

Need more? Click here to get access to all future updates from the Designated Conservative.

Related Posts:  NOOVOODOO OBAMANOMICS

NooVoodoo Obamanomics

UPDATE 2:  Apparently at less than two months into Obamanation, the bloom is coming off the Obama rose….  David Bloom of the New York Times and some of the other self-described “moderates” who were enthralled with the notion of an Obama presidency are beginning to experience buyer’s remorse! (imagine that).  Click here for more….

ORIGINAL POST:

If you live long enough, all things old become new again.  President-elect Obama and his newly-seated Democrat-controlled Congress are pushing for quick approval of the all new, revamped for the 2009 model year, Voodoo Economics II:  The Rise of Obamanomics!  

What deja vu!  Thinking about today’s news takes me back to Michigan’s hot summer of 1980, when republican presidential candidate George (H.W.) Bush first coined the term “voodoo economics” in the heat of a tough primary battle against former California Governor Ronald Reagan.  The U.S. was in the midst of the Carter-era malaise of stagflation and the misery index.  Reagan’s plan for re-energizing the American economy included four key elements:  income-tax cuts, new expenditure priorities, monetary restraint, and regulatory reform.  

The intent of “Reaganomics” or “supply side economics” was to jumpstart economic growth through reduced income tax rates, providing strong incentives for individuals and businesses to produce and invest more.  The term “voodoo economics” disappeared from G.H.W. Bush’s vocabulary once he became Reagan’s running mate and Vice-President.   As the 1980s proved, Reagan offered not voodoo, but rather successful economic solutions for an ailing U.S. economy.

The Un-Voodoo-ed Truth of Reaganomics

Reaganomics worked, and proved to be overwhelmingly successful in creating the conditions for the strong U.S. economy of the 1980s.  Despite ongoing budget battles and pork-barrel spending by a Democrat-controlled House of Representatives, Reagan’s economic plan:

1.  Brought inflation under control and turned Carter’s lingering economic recession into the longest period of economic expansion in American history;

2.  Cut federal marginal income taxes rates from over  70% (high income earners under Carter saw 70 cents or more out of every dollar earned go to the I.R.S.) to a maximum rate of 28% (a rate that crept back up under Bush I and Clinton to close to 40%); and

3.  Reduced the size of the federal government  and cut burdensome federal regulations to provide a significant boost to productivity, reduce unnecessary costs to U.S. businesses, and eliminate obsolete, duplicative, and unnecessary programs, departments, and jobs.

The True Voodoo of Obamanomics

Fast-forwarding to 2009, we now are witnesses to the true master sorcerers at work conjuring up a new, truly voodoo economic plan, dubbed by incoming Chief Mage POTUS Barack Obama as the “American Economic Recovery and Reinvestment Act” (more accurately referred to as the Generational Theft Act of 2009 by Michelle Malkin).  Sorcerer Speaker Pelosi, Obama, Reid, Dr. Frankendodd, and the rest of the Democrat leadership have truly unleashed all of their liberal notions with this one.  

Obama’s economic stimulus plan includes three key elements, expansion of government, targeted tax rebates to those that pay little or no federal income taxes, and massive pork barrel spending.  The Obamanomics Plan would:

1.  Result in increased federal pork barrel spending from mere “hogs at the trough” to the truly astronomical level of “Pigs in Space,” with surreal trillion-dollar budget deficits becoming the norm! 

2.  Offer those famously “targeted income tax rebates” from Obama’s campaign that would be limited to those at the lower end of the income scale, while allowing the Bush tax cuts to quietly expire (effectively increasing the income tax burden for our most productive citizens).

3.  Further bloat the size of our federal government by adding as many as 600,000 new federal employees to the payroll!

I’m no MBA and I’ve never taken an accounting class, but I’m certain that if I balanced my checkbook and ran my business using Obamanomics, I would quickly find myself explaining my actions to a bankruptcy judge!

How do Designated Conservatives “Undoo” the “NooVooDoo” of Obamanomics?

As David Limbaugh recently asked in his column, where are the Republican supply siders?  Fortunately, we have a cadre of conservative republican members of the House of Representatives, including Michigan’s own Rep. Pete Hoekstra, who have spoken out against Democrat excesses.  However, they are small in number and need our help!  As designated conservatives, it is up to us to wade into the heady, free-spending party atmosphere in Democratic Washington and do our best to take the keys to the treasury away from Pelosi, Reid, Frankendodd, and Obama.  

Support the designated conservatives in Congress!  They are all that stand between us and the Democrat’s dream for America.

UPDATE:  Where are the supply siders?  At the Heritage Foundation, of course.  Nathaniel Ward recently posted a great article outlining the same topics covered in “NooVoodoo Obamanomics,” but in a much more erudite manner.  Check it out here.

Related Posts:  COLD TURKEY – QUITTING THE INCOME TAX HABIT

The Velocity of Money

In a recent article entitled “The Velocity of Money,“author  John Mauldin, takes on the daunting task of explaining how the speed and frequency with which money moves from person to person and business to business affects the health of our economy.  

The flow of money works like this:  Money circulates locally when I pay my mechanic $200 to fix my car, he uses that $200 to invest in tools from a hardware store, and the store owner uses the same $200 to pay one of his employees.  The employee then uses the same $200 to buy groceries for his family, and the grocer uses the $200 to have his delivery van serviced by the mechanic.  

The effect of that money on the local economy is multiplied each time it moves from hand to hand.  If money isn’t circulating because people and businesses are hoarding cash because of worries about layoffs or recession, then the whole local economy grids to a halt.

With the recent $700 Billion financial bailout, this seems like a good time to learn more about how our country’s economic plumbing works.  For the sake of blog brevity, the following is a “Reader’s Digest” version of Mr. Maudlin’s original article:

When most of us think of the velocity of money, we think of how fast it goes through our hands – and with Christmas looming, the velocity, at least in terms of how fast money seems to go out the door, seems faster than normal.

In this week’s letter we talk about what most market observers are not seeing, and why you should be paying attention.

I cannot overly stress how important this is. If you want to understand the markets, the dollar, gold, and more, you have to have this information down. You will need to put on your thinking cap, as much of what I am writing is counterintuitive and certainly not considered as received wisdom in much of the financial-commentator media.

What is the velocity of money? It is the average frequency with which a unit of money is spent. Let’s assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 worth of flowers from you. You in turn spend the $100 to buy books from me. We have created $200 of our “gross domestic product” from a money supply of just $100. If we do that transaction every month, in a year we would have $2400 of “GDP” from our $100 monetary base.

Gross domestic product is a function not just of the money supply but how fast the money supply moves through the economy.

Now, let’s complicate our illustration just a bit. Let’s assume an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island would be $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.

But what if our businesses got more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers, etc.; and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses buy and sell the same amount every month. There are no winners and losers as of yet.

Now let’s complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP potentially goes to $14,000,000. But, in order for everyone to stay at the same level of gross income, the velocity of money must increase to 14. Now, this is important. If the velocity of money does NOT increase, that means (in our simple island world) that on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply times velocity. If velocity does not increase and money supply stays the same, GDP must stay the same, and the average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000.

Each business now is doing around $80,000 per month. Overall production on our island is the same, but is divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall.

It is basic supply and demand.

Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, plus some more for new population, and you have to factor in productivity. If you don’t then deflation will appear. But if the central bank increased the money supply too much, you would have too much money chasing too few goods, and inflation would rear its ugly head.

Within a few quarters, we will be facing outright deflation. The Fed is going to monetize at least a portion of what will be a $1+ trillion dollar US deficit. They have announced they are going to purchase $800 billion in mortgage-backed and other types of consumer loan assets. That will be a direct infusion of dollars into the economy. That is serious monetization.

We will soon see which additional deflation-fighting policies the Fed will adopt. It is quite possible that we will see the Fed start to set rates on longer-term bills and even bonds in an effort to pull down longer-term rates for corporations and individuals.

There will come a time when the Fed will have to “take back” some of the liquidity they are going to provide. That means we could be in for a multi-year period of slow growth after we pull out of this recession. And this recession could easily last through 2009.

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week.

For more information on John or his FREE weekly economic letter please click here.  To subscribe to John Mauldin’s E-Letter please click here.

Sing Those Depressocratic Economy Blues!

Disclosure:  There are those bloggers who write with eloquence and a depth of factual foundation on economic topics.  I am not going to be one of them today.  I’m feelin’ it.  It’s so hard.  I’ve got those hardly workin’, overtaxed, DepressionDemocratic Meltdown Economy Blues….

The DepressionDemocratic Meltdown Economy we are “enjoying” in the United States is not a naturally occuring, cyclical event as some economics have said.  Here in Michigan, our stagnant economy turned into a one-state recession thanks to the leadership of our Governor and a DepressionDemocrat Party-led monster business tax increase.  Now, our national DepressionDemocrat Party leaders, including the inestimable Nancy Pelosi, Chris Dodd, and Barney Frank, are about to manage to turn our one-state recession into a national depression.  

It is a feat of political and economic ineptitude worthy of awe, if it wasn’t that I am too busy watching the value of my IRA spiral downward!

Ahhh…  Barney Frank and Chris Dodd.  Architects, along with President Clinton, of the 1995 changes to Freddie Mac and Fannie Mae that disconnected the brakes from the mortgage loan market.  This action alone is one of the primary root causes of the financial meltdown.  Thank you, Dr. FrankenDodd! 

Along with our fearless Republican Senate leader Mitch McConnell, FrankenDodd has most recently led the charge towards creating the largest blank check and biggest transfer of political power to a single unelected bureaucrat in American history.  As a congressman who enjoys the fiefdom you’ve created, how do you champion a bill that hands the keys to the cashbox to the Treasury Secretary with a note saying, “just don’t spend it all in one place!”

The worst part is that this same FrankenDodd is part of the crew that is presently trashing the American auto industry based upon outdated information about a disastrous union contract that has long since been replaced by a massive union giveback to the companies.  Only a truly un-self-aware buffoon could agree to buy up to $700 Billion in worthless debt securities without conditions or oversight one week, and lecture American manufacturers the next about how the federal government cannot possibly provide a temporary bridge loan totaling less than 4% of the financial giveaway until the companies come back with a turnaround plan!  

A plan?!!  The Congressional DepressionDemocrats wouldn’t know a plan for making wise use of public money if it jumped out of the Tidal Basin and bit them on the tush.

…at least I can still sing the blues tax-free, right?....

Stop Governor Granholm before she plans our economy again!

Nick over at RightMichigan.com recently posted the following news item:

Unemployment rate hits 9.3% (!!!) while 74,000 Michiganders lose their jobs

Remember back during the 2006 campaign when Jennifer Granholm and John Cherry traveled the state telling folks they had a plan and they were “working that plan and we’re working it and we’re working it and we’re working it?”

Whatever that meant.