Kudlow’s Line in the Sand Against Bailout Lasts For Two Days
In a CNBC description that ran on Thursday, Sept. 25, popular free market analyst Larry Kudlow had said he wouldn’t support the Paulson Plan if it contained corporate equity for the government or meddled with executive pay. Kudlow said:
If the bailout bill allows executive pay-caps and government ownership warrants for all buying or selling institutions, I must withdraw my support for the bill.
There is no clear information yet on this crucial topic. CNBC is reporting that Sen. Chuck Schumer is telling people that pay-caps and ownership warrants will be included for all banks and others (Fidelity-type investment managers, KKR-type private-equity firms, etc.) that either buy or sell the toxic paper.
The Treasury Department does not want this simply because it knows it would be unworkable. In other words, giving up pay-caps and warrants would probably mean that only the most dire, down-in-the-mouth banks will sell, and they’ll sell the very worst imaginable paper. Meanwhile, no reputable institution is gonna buy the paper if they have to give up ownership or compensation rules.
So it would be stupid for Congress to write this kind of thing into the bill. It would go beyond France into pure socialism. It would represent a huge first step into government interference everywhere. And it would sink New York way down the list of world financial centers. London and Hong Kong would pass us by in the blink of an eye.
But, after two days, Kudlow is back on board. In his National Review piece on Saturday, September 27, he opens with:
The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.
After explaining that the taxpayers will enjoy the cash-flows generated by the mortgage-backed assets, as well as the capital gains when they are sold back to private owners, Kudlow wants to make sure we see just how great a deal this is:
I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.
Actually, for taxpayers, it’s a win-win-win-win.
Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.
Now what Kudlow never even addresses is, “Why doesn’t Warren Buffett or a bank in Dubai sweep in and buy up these MBS, if they are such an attractive investment at current prices?”
Last point: In this later article, Kudlow goes over six conditions that House Republicans want, before they will sign on. So presumably Kudlow is endorsing a bailout that obeys these conditions. As far as I can tell, the list makes no mention of executive compensation. So apparently Kudlow changed his mind in two days, on whether he could support this thing. His warnings against socialism were dropped when Hank Paulson got him to believe the taxpayers were going to profit from this scheme. Riiiight.
Pat Buchanan: Foreigners Behind the Bailout!
Buchanan has a great piece up today at LRC. He stresses an aspect of The Great Bank Robbery of 2008 that I hadn’t considered:
Since Americans save nothing and have to borrow from abroad to finance our trade and budget deficits, wars and foreign aid, what the secretary proposes is this: that Congress authorize the Treasury to spend $700 billion to buy up the toxic paper on the books not only of U.S. banks, but of foreign banks operating in the United States. According to The Washington Times, the Treasury would also be authorized to buy up securities backed by rotten auto loans, student loans and credit card debts.
Thus America would be borrowing from China, Japan and the Middle East to tidy up the balance sheets of the banks of China, Japan and the Middle East. And all the rotten paper will be offloaded onto U.S. taxpayers, who hopefully will be able to recoup some of their losses, because some of the paper will be good.
Up till now, I am embarrassed to admit, I had been thinking in terms of American power players. But now I realize that this is global in scale.
Clearly the politicians in various democratic countries aren’t really running the show. If they ever really crossed their big funders, then at best they would serve out the remainder of their term, and then lose re-election. What is worse, they would forfeit the unofficial golden parachute that they surely must get from staying friendly with these groups while in office.
As Buchanan says, the US empire is clearly cashing out. And so the parasites are getting ready to jump ship, maybe to Dubai but my guess is China, which will soon be (probably within 20 years) the dominant world power once again. (If you don’t believe me, just ask Jack Bauer’s dad.)
The parasitic power elite (and I still don’t have any idea who these people are) have sucked the US system dry. When its government was relatively small, the country was extremely prosperous. But it made more sense to “overfish” it, and run it into the ground after a hundred years of a rapidly growing State.
At this point, though, they have apparently decided it will be more profitable to concentrate on fleecing the Chinese or Russians. Those economies have a much better long-run future.
And that is why their point man, Hank Paulson, is trying to steal as much as possible before being chased away by the natives.
Conservatives Should Oppose Corporate Welfare
So I tell the great Americans at Townhall. An excerpt:
The free market is a superior economic system to central planning. This superiority demonstrates itself during normal times but especially during an economic crisis, when resources must be rearranged before regular growth can resume. By embracing massive corporate handouts and other socialist measures, the Bush Administration discredits capitalism and delays economic recovery.
U.S. Mint Halts Buffalo Gold Coin Sales
Robert Wenzel told me that Free Advice readers are taking action; the U.S. Mint had to suspend sales of its 24-karat American Buffalo gold coins because inventories had been depleted.
Free Advice Warning Issued Friday, September 26, 2008: Bank Panic May Be Imminent
I had just assumed the Paulson Bailout was a fait accompli. Yet as I write, it is still uncertain whether this heist will go through. The House Republicans gave Paulson a surprising stick in the eye. The longer the delay, the less urgent the crisis seems, and the closer the election–some figures say the public is writing Congress 9-to-1 against this thing.
And yet, the Paulson Plan involves such fantastic sums of money, surely they can just buy it. We’re talking about voting themselves an extra $700 billion, and that’s just for starters! Since the public easily tolerates cost increases of oh, say, 200%, that means with the precedent value, etc., this should yield $3 trillion easily over the next five years. If the federal money flows evenly over the whole period, it has a PDV of $2.7 trillion if we discount at 5%.
Now, there are 535 members of Congress (100 senators plus 435 “representatives”). But there are also lots of other interested parties. For simplicity, assume there are 1,000 members of the creme de la creme who stand to pocket this money.
The size of the pot allows them EACH to get $2.7 billion, yes with a B. You object and say I’m overlooking all sorts of slippage, the need to buy off newspapers and TV networks to give friendly coverage, blah blah blah. Fair enough, we’ll bump it up to 10,000 people who will split the loot.
Hmm, that still works out to $270 million per person. How many people in Congress would be willing to lose the upcoming election for $270 million? I’m betting a lot.
But don’t worry, you troubled politicians. Just ask the remaining big guns on Wall Street to engineer a run on the banks, so that President Bush has to actually close them.
The public will give you permission to spend $2 trillion before Christmas once they have a few days–with closed banks–to think about what they did.
Of course, the people running Goldman and JP Morgan will demand a bigger cut, in order for them to put on a good show. But it’s worth it, right? You can easily get $100 million apiece, down the road when the dust settles.
Back to Free Advice readers: Folks, I am not formally predicting that the above will happen. But it seems entirely plausible to me; look at what these rulers did after 9/11, how they took advantage of that situation. Well with the Paulson Plan, they would get far more power over the economy; it’s not just about the money.
I realize I will look foolish if nothing like this happens, but nonetheless, I urge everyone to get at least a few hundred dollars worth of silver coins. And I’m not talking about hunks of metal with the imprint of Napoleon. No, I’m talking about things like US quarters from 1964 or earlier, that are composed of 90% silver.
I do not think the entire financial infrastructure is in any danger of collapsing. The government wants you to think that, just like they want you to be in constant fear of another 9/11. It’s no fun taking over a country if the monetary system doesn’t work.
So let’s be clear, I am not urging the accumulation of silver coins because I’m predicting the dollar will cease to circulate as money anytime soon. What I am saying is that, if the banks are closed for a few days–with no ATM withdrawals allowed either–some of you might avoid a real pinch, if you have a few hundred dollars in “real” money. It’s true that you will have to find someone else knowledgeable about the silver content of pre-1965 US quarters, but people can use Google. They will learn up pretty quick if the banks are all closed.
The Mises Institute "Bailout Reader"
For those who want to immerse themselves in Austrian articles relating to the current financial crisis, here is a reader.
Murphy vs. Paulson Bailout
To paraphrase Michael Corleone* when Kay says she is taking the kids, “Henry, don’t you know it is an absolute impossibility that I would allow you to engineer this bailout? Don’t you know I would do everything in my power to stop you?” (Of course, Michael Corleone was in a much stronger position when he said it.)
Here is the mp3 recording of my Friday morning interview with Mark Carbonara on station KION in California. And here is the link to my Thursday op ed in the San Diego Union-Tribune, “Wall Street plan won’t aid recovery.” An excerpt:
The government itself has made it rational for each bank to continue stringing along its investors. After all, why should an investment bank announce the full extent of its shoddy mortgage-backed assets before its competitors do so? For the past 13 months, the government has been announcing steadily more generous measures to resuscitate Wall Street. The largest holders of these toxic assets played a game of chicken, betting that they could survive long enough to get a massive bailout from the government. And last week, Treasury Secretary Henry Paulson rewarded their foot-dragging with the promise of hundreds of billions in taxpayer dollars.
The ban on short-selling is also counterproductive. First of all, speculators perform a vital service by signaling to the public which stocks are overvalued. The reason the “vultures” attacked Bear Stearns and Lehman Brothers was that these firms were heavily leveraged in dubious mortgage derivatives. Not even New York State Attorney General Andrew Cuomo – who is making a big fuss about market manipulation by short-sellers – would suggest that Exxon could have been brought to its knees by mere rumors.
* I have recently watched The Godfather I and II. It will take about a week to cycle through my system.
"Credit Markets Mostly Frozen on Stalled Bailout"
Well that headline proves my point, which I reiterate below. And by the way, is “mostly frozen” kinda like how Wesley was only “mostly dead” after Prince Humperdinck unloaded on him in the Pit of Despair?
From my LRC column from Monday this week:
Just stop and reflect on what the government has done, even in the last few weeks. It has literally seized (the press’ word, not mine) companies tied to trillions of dollars in assets. Furthermore, these seizures were truly a “hostile takeover.” For example, the common shareholders of Fannie and Freddie were quite simply robbed. The government came in and assured injections of capital to keep the firms afloat. In exchange, it acquired “senior preferred equity” shares, placing it higher on the totem pole vis-à-vis the original preferred equity shareholders, in the case of losses. However, if the real estate market turns around and the share prices of Fannie and Freddie start rising, then the government will exercise its warrants giving it ownership of 79.9% of the common stock. (Note how people are speculating that the government might make money on the deal.) Before, shareholders of Fannie and Freddie knew they were probably going to lose everything, but there was still a sliver of hope. Now there is no hope.
And yet, there is no rhyme or reason to the government’s decisions. Lehman Brothers was allowed to fail. In essence, you’ve got a massive beast stalking the financial markets. This creature has many trillions of dollars ultimately at its disposal, and oh yes, I should add: It is not afraid to send armed men to your house if you should ever really cross it. In this environment, is it any wonder that the credit markets are “frozen”? When the SWAT team bursts into your kitchen window, you freeze up, right? Why should things be so different on Wall Street?
The government is not promoting stability. The markets now whipsaw more than 2% either way, depending on the latest burp from Paulson. This would have been mind-boggling volatility a year ago, but now it is commonplace.
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