Artificial Constructs in the Economy

When I sit back and actually think about the artificial constructs in our economy, I’m not sure if the proper response is screaming or nausea.  You’re probably wondering what on earth is a “artificial construct.”  Well, to put it simply: an artificial construct is a segment of the economy which is not needed nor required in a truly free market.  In other words, an industry or segment which produces nothing of actual value– but yet is basically required by law to exist.

Allow me to start with an “easy” example…  Americans spend more than $300,000,000,000 to get their income tax returns prepared for them.  Can anyone really think that making a tax code so complex that it necessitates such expenditures just to fill in forms can be even vaguely rational?  Why not a flat tax?  No need to divert all those accounting minds away from things like discovering Enron’s malfeasance BEFORE it crashes…it’s more useful to use those minds to prepare 1040 forms….  Right?

Sticking with taxes… what about all the estate attorneys whose sole job it is to protect your wealth from inheritance taxes?  They would not be needed if we eliminate the Death Tax.  But, its not like we could use their help in things like advising prospective homeowners about the implications of 18% home loans or reviewing contracts to prevent bad corporate mergers and deals.  It’s much more useful to put brilliant legal minds to use working out creative ways to avoid paying taxes…  Right?

Think that airplanes are the best way to travel around the country?  Worried about carbon emissions?  Worried about travel safety?  Well, thanks to the Federally funded airport system, most people fly in airplanes…  But who cares that a train can move 1 Ton over 420 miles on a single gallon of diesel fuel (the average car can move 1 ton about 35 miles on a gallon of gas).  Of course, trains can’t be forced to knock down skyscrapers nor do they make appealing terrorist targets–not to even mention the whole thing about how the train simply stops if the engine goes wonky.  But, no one cares about that….  Right?

Then, what about the Federally funded highway system…  shall we even discuss the fuel required to move millions of tractor-trailers around the country since a single train can carry the load of hundreds and hundreds of trucks with a single engine? But, Washington knows that we’d prefer to have our roads full of trucks…. Right?

The list goes on and on, but I’ll stop here for now…  my point is this:  When Congress spends money, it creates artificial constructs in the economy which would not naturally exist–thus de-balancing the system.  Why is it so hard for people to understand that Congress and the President can do NOTHING to help the economy– they can only choose to get in the way or stay out of the way.  And the whole getting in the way thing hasn’t exactly been a success– just take a look at all the mortgages going bad because the CRE (community reinvestment act) encouraged/forced mortgage lenders to make bad loans all in the name of “equal access”.  Well, boys, the piper has come and its time to pay the bill!  What else could that money have been used for….?

Buy a House: Get a Green Card

Here’s a solution to the housing market that both parties can live with!  I heard this idea at a speech last night put on by the Ayn Rand Center for Individual Rights…

BUY A HOUSE: GET A GREEN CARD

Wow!  So simple!  Something for both parties!

Democrats should love it because it allows more immigration and Republicans will love it because the resulting flood of immigrants will be over-documented since mortgage firms require even more documentation than the INS…  The surplus inventory of homes would be bought up by people with money or access to credit–which would re-inflate home prices and drive market growth.

I actually really like this idea as a way to help allow more access to America by foreigners wanting to move here– but it does it in a way which bypasses the typical complaints about “poor foreigners coming to the US to mooch off the welfare state”.  (I’ll avoid the obvious opportunity for me to rail against the welfare state for now…)

Seriously folks!  Let’s look into this…  call your elected officials in Congress!  Let’s create a whole new visa for people looking to immigrate to the US… I’m totally comfortable with anyone who can buy a home being granted a Green Card in return (so long as they’re not a criminal by U.S. standards, of course).

Key Points on “Rescue” Plan From A Healthy Bank’s Perspective

This one came across the desk this morning. It’s a portion of letter going out today from John Allison, President & CEO of BB&T, to every member of the US Congress.

Key Points on “Rescue” Plan From A Healthy Bank’s Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.
2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.
3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.
4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.
5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.
6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.
7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.
8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.
9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?
10. The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.
11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.
12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.
13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.
14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue,” effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?

The System Works

Funny how people are all over television moaning and screaming about the “failures of the American financial markets”.  Um, what are these people talking about?  They’re just flat wrong.

The very fact that investors are losing money and companies are going bankrupt is PROOF that the system WORKS.  The Market does not reward bad decisions.  Eventually, the “invisible hand” smacks down people who attempt to thwart the natural workings of the free marketplace.

All the calls for bailouts are just calls to be absolved of their responsibility for making bad decisions.

If those calls continue to be met, it will only hold off the inevitable market corrections for a little while– and make them worse and more painful in the future.

Good decisions = Profit

Bad decisions = Loss

How much more simple can it be?

Stop wishing to be “saved” from what you rightly deserve–either way.  You made the choice, you will gain or lose according to the efficacy of those decisions.

Your Choice: A Year or A Decade

The chickens are coming home to roost. The bad choices and all the living beyond our means are about to settle in a new reality–one where the market holds us all accountable for those bad choices.

From the people who bought homes far beyond their means to the folks who thought it was ok to keep refinancing over and over again to get every dime of the housing price bubble into their pocket.  From the people who saw credit cards as if they were cash to the credit card companies who think its ok to charge ridiculous interest rates and to mislead borrowers.

Alas, both Presidential candidates are on board with ideas that will lead to a DECADE of pain instead of a year or so.  If we let all these poorly run companies fail, sure it would be painful–but the pain will pass quickly.  By propping up a FAILED system of intervention and Big Government, we will elongate our pain just as FDR did when his supposed New Deal drastically lengthened the Great Depression.

Make no mistake: Depression is caused by GOVERNMENT meddling in the economy.  Recessions are part of a normal business cycle and represent market corrections to bad choices.  The point is that private companies cannot make enough bad decisions at the same time to cause a Depression.  Only through GOVERNMENT regulation can enough companies be FORCED to go down the same wrong path at the same time.

The answer is simple: Tell your elected officials to STAY OUT OF IT and let the market correct itself.  Thankfully, the market doesn’t really care about your politics–it cares about value and substance.  If a company becomes a useless empty shell with no real value (i.e., Fannie Mae and Freddie Mac) through government intervention, the market knows better than to go there.

As I’ve said before and I’ll say again, if you play in the market you’ve agreed to the risk of investing.  Don’t whine when your 401k goes down in value because you failed to research the companies you chose for investment.  The information is out there: read it.  And if its not there, act like an adult and accept the consequences of choosing an investment that went downhill.