Sunday, September 28, 2008

Paul Krugman Writes...

"Troubled financial institutions, by definition, don’t have capital gains to tax."

Response: They do now, Paul

"Despite some real scandals at Fannie and Freddie, they played little role in causing the crisis: most of the really bad lending came from private loan originators."

Response: Fannie and Freddie are the biggest reason for the crisis. Although they didn't originate bad loans, they purchased the bad loans. They owned sup-prime and Alt-A loans well in excess of their capital. Without these GSEs more, smaller institutions would have owned the loans, some of them would have been smart, some would have been dumb, some would have failed, and some would have thrived. Instead the mortgage market was totally dominated by the terminally flawed business model of Fannie and Freddie, and that business model was artificially supported on the backs of the taxpayers.

"Barack Obama seems well informed and sensible about matters economic and financial."

Response: Are you kidding? 

Handout Plan Limits On Executive Compensation Have No Teeth

First of all, this bill gives essentially unchecked power to Henry Paulson. It does establish an oversight board, but Paulson is on the oversight board. Ben Bernanke, who is on record saying we should overpay for troubled assets is also on it. Furthermore, even if the oversight board were legitimate, the standards that Paulson must adhere to are so vague that he’ll be able to do whatever he wants. “As determined by the Secretary” are common words in this bill. So while there are some words to the effect of preserving retirement funds and protecting homeowners and other nice-sounding rhetoric, Henry Paulson will be able to solely determine what actions meet those ctiteria.

Paulson will be able to buy equity or make loans or buy troubled assets directly. Limits on executive pay only apply while the government has an equity or debt stake, which means the banks can simply wait until that stake is sold to make exorbitant compensation payments. In addition, limits are only provided for NEW contracts. Executives who made the bad decisions that put these institutions in danger will still receive bonuses galore. In fact, this bill makes it more likely that they get exorbitant bonuses because the purchase of assets by the government will drastically increase profits and trigger bonus payouts. The only work done to earn those bonuses will have been lobbying for this bill to pass. Moreover, companies will have a 2-month window to establish contracts for executives that pay high bonuses. There is absolutely no way that any executive of a financial institution is going to be one dime poorer under this legislation.

I wish I could scream this from the top of the world: Any nominal limit, be it 250 billion, 700 billion, or any other number is completely meaningless. The bill states that any limits apply to aggregate purchase price paid for “all troubled assets held.” This means that troubled assets sold (possibly at a huge loss) no longer appear in that aggregate.

By the way, under other provisions, Paulson could easily justify selling assets at a huge loss to free up space under the limit because he is directed to use his discretion to hold those assets that do the most “good.” Who determines which assets are these? Well, it aint Barney Frank.

If Congress passes this legislation, it is nothing short of a theft from the American people. Worse still, once it is passed it leaves Congress inept to affect administration of its provisions. Congress is handing power to Henry Paulson and washing their hands of it. I have no doubt that this is intentional. When the light of day hits the results in a few months, they’ll tell us they are not to blame. It’s Paulson’s fault, they will tell us. He didn’t implement it properly. Don’t blame us.

Remember, this is the same Congress that declared war on Iraq, yet passes all the blame for that disaster on to W.

One last thing. They keep saying this thing is urgent and necessary to unfreeze credit markets. So I ask you to ask yourself a few questions:

Has my credit card company told me to stop making charges? Am I still receiving credit card offers in the mail? How long would it take me to find internet ads for low-interest mortgages or refinancing? How many people do I know that really need a car loan in the next few months anyway?

Please call each of your 3 Congressional representatives, register your opinion, and withhold your vote pending their decisions on this bill. Tell them as well that you will not vote for their party’s presidential candidate if he supports this bill. If you are a member of one of the political parties, it is especially important to hold your own party to account.

Saturday, September 27, 2008

Issue Almost Addressed in Debate

Moderator Jim Lehrer was the big winner last night as he effectively asked the candidates that one question that should always be asked of politicians who make policy proposals: What do you want less of?

He didn’t quite phrase it in those words, but he did recognize that the federal handout to banks would restrict the ability to put resources to use elsewhere.

Barack Obama was so confused by the question that he responded with a list of things he wants MORE of: energy independence, alternative energy, fuel-efficient cars, fixes in the health care system, education, investments in technology, something about the Chinese spacewalk, affordable college, roads, bridges, broadband lines, a new electricity grid. Later, he added early childhood education.

John McCain did a little better, saying he would eliminate ethanol subsidies. He also acknowledged the out-of-control nature of defense spending.

But neither really got at the issue that Lehrer was trying to address: $700 billion spent on near-worthless mortgage assets is $700 billion made unavailable to productive uses elsewhere in the economy.

McCain did finally blurt out: “How about a spending freeze on everything but defense, veteran affairs and entitlement programs?”

I hope he takes that idea back to the handout negotiations. I would have liked to have seen Lehrer press them even more on this.

Overall, from the financial portion of this debate, McCain seems to me the least of the evils. He showed a slight, albeit very slight, propensity to restrain spending; whereas, Obama talks like there is an infinite pile of cash that he can spend without consequence.

Though I do disagree with McCain about earmarks, I admire the fervor with which he opposes them. He said that earmarks have tripled in the past 5 years to $18 billion. I don't know if that is true, but if he is right and that continues, we can expect $54 billion in 2013, $162 billion in 2018, $486 billion in 2023, and a whopping $1.46 trillion in earmarks in the year 2028. Ah, the wonders of the exponential function.

Unfortunately, it was downhill from there for old John. As the topic switched to the Iraq occupation, McCain reminded us all that he lives in a fantasy world. He sung the praises of “the surge,” and declared that we are winning in Iraq. McCain has been repeating this mantra for months, but has not yet offered support for this evaluation. I’d love to know what he means when he says the surge is working. In its first report (September 2007) on the surge, The Government Accountability Office (GAO) determined that “The Iraqi government met 3, partially met 4, and did not meet 11 of its 18 benchmarks.,” and used phrases like “violence remains high” and “It is unclear whether sectarian violence in Iraq has decreased." The GAO’s June 2008 report offers little evidence that the surge or any other aspect of our occupation could be referred to as successful.

Stupid Statements By Candidates and My Responses, Second Edition: John McCain

1. “[This package] has to have options for loans to failing businesses”

Response: John, what kind of idiot lends money to failing businesses? Oh, right…

2. “Here is … Ahmadinejad, who is now in New York, talking about the extermination of the State of Israel, of wiping Israel off the map,”

Response: This is just a bald-faced lie, and an egregious one at that. The president of Iran is probably a very bad man, but he has never talked about the extermination of the State of Israel. I can only guess that your ridiculous lie has its its origins in the October 2005 speech from which Ahmadinejad was widely misquoted. The media and politicians have continued to blatantly mis-represent him, often claiming that he “calls for the destruction of Israel” and that he “threatened to wipe Israel off the map.”

My friend, the idiom “wipe (something) off the map” does not even exist in the Persian language. Juan Cole and other experts have debunked this lie, yet you and others continue to use it to justify your ridiculous assertion that Iran is a threat to us.

What Ahmadinejad actually did in that speech amounted to predicting that the Israeli government would fall in time. He didn’t threaten the people of Israel; he is talking about regime change.

Why is it, by the way, that you fail to mention that the official position of the Iranian government toward Israel is that of the Arab League: that Israel should exist peacefully alongside a sovereign Palestinian state?

I have no intention of defending this man, but I must defend the truth. It is an embarrassment for the American people that you would make such a ridiculous, belligerent, and ignorant statement. In a presidential debate watched by people all over the world, no less.

Stupid Statements By Candidates and My Responses, First Edition: Barack Obama

1. “$700 billion, potentially, is a lot of money.”

Response: Aint no potential about it, Barack

2. “the root problem here has to do with the foreclosures that are taking place all across the country.”

Response: This is evidence that you do not understand the problem. Please don’t try to fix it. The root of the problem is that interest rates were artificially held too low for too long, leading to mis-pricing of risk in the marketplace. This led to an over-supply of loans (including, but not limited to home loans), which in turn led to massively inflated home prices. The net result is we had people who couldn’t afford a $200,000 house paying $400,000 for a house with a true value of $300,000.

We cannot undo the mistakes of the past. They will be paid for one way or another. Keeping a family in a house they cannot afford solves nothing. It makes the problem worse. Home prices have further to fall, and they will fall, no matter what you do.

There is life after foreclosure. We have enough housing in this country to put a roof over everyone’s head and then some. A person who outspent his means may need to downgrade, but that is not a catastrophe.

3. “this is a final verdict on eight years of failed economic policies promoted by George Bush.”

Response: More evidence that you do not understand the problem. No one is more critical of Bush’s policies than I, but little if any of the blame rests with him. There is plenty of blame to spread but it starts with the failed monetary policies of Alan Greenspan and Ben Bernanke and trickles down to bankers who foolishly allowed independent brokers to sell mortgages to anyone with a pulse.

To the extent that Bush is culpable, you sir share that blame as a member of the political class which keeps promoting the farce that the American dream can be had by anyone without cost or sacrifice.

Shame on you for exploiting this very real problem to score a purely political low blow.

Note: Good lord, that’s only the first of 27 pages of the transcript.

Friday, September 26, 2008

Bank Handout Plan is NOT limited to $700 Billion

"The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time."

This statement is taken directly from Henry Paulson's original proposal. Whether it survives the bipartisan consensus I cannot predict, but it is a scary, scary authority.

Keep in mind that Secretary Paulson and Fed chairman Bernanke have already testified under oath that they intend to drastically overpay the banks for their "troubled assets."

One may me tempted to focus on the $700,000,000,000, but the real devil lies in the words "outstanding at any one time."

If this provision passes, Paulson will have the freedom to allocate much more than $700 billion of our money to this so-called crisis. For example, he could buy $100 billion of assets from Goldman Sachs, then sell it to Morgan Stanley for $5 billion. He could buy $700 billion of assets, then write the value down close to 0, then buy another $700 billion. He could even continue a buy high - sell low scheme infinitely or until he judges that banks are "adequately capitalized."

Would Henry Paulson abuse this power in such a way? I don't know. But he would be able to do it . And let us not be naive. There is a reason behind Paulson's inclusion of this other provision in his proposal:

"Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency."

Will Government Purchase Artwork in Bank Handout Plan?

Lindsay Pollock of Bloomberg reports that "Kathy Fuld, the art-collecting wife of Lehman Brothers Holdings Inc. Chief Executive Officer Richard Fuld, is selling a $20 million set of rare Abstract Expressionist drawings at a November auction, according to two art dealers."

Could she be positioning herself to benefit from incipient Congressional handouts?

As I think it through, I'd rather have her artwork than the worthless trash our inept Congress is planning to overpay for.

Thursday, September 25, 2008

CEO Pay Restriction is a Smokescreen

Although opposition to the banking handout appears to be widespread among taxpayers, Congressional Democrats are lining up to support it. Of course, they took the opportunity to criticize the Bush administration. No argument there. But rather than tell Treasury Secretary Henry Paulson that his Wall Street buddies will have to fend for themselves, the Dems agree to hand over our money. In return they want CEO compensation and that of other corporate executives limited.

Neither the government nor its financiers (that is, we the people) have a financial interest in the pay of a private or publicly-traded company's employees. That is for the shareholders to decide.

Don't get me wrong, I agree that executives who implement failed business strategies should not be rewarded, and that even those who are successful are probably overpaid, but if the money doesn't come from my pocket, then it is someone else's problem.

It's an interesting topic to be sure, and no one can fault Americans for having an opinion about who is overpaid; however, we should not allow our elected representatives to prey on these emotions. After all when inflation really hits home and one banana costs $5, will any of us truly take solace in the fact that Lloyd Blankfein (current Goldman Sachs CEO) is only making $7 million per year?

The Democrats would serve us better to focus on one particular (former) Wall Street executive, Treasury Secretary Henry Paulson. He is the principal architect of the failed business model that has thrust the investment banks into insolvency. Bear Stearns and Lehman Brothers fell apart while following the lead of Paulson's Goldman Sachs in over-leveraging their capital. We now know that Paulson's failure to balance risk and reward, and his failure to consider negative consequences have doomed Goldman Sachs. He even tells us that his actions threaten our entire economic system. Though he cannot seem to offer any explanation as to how his dire predictions would actually come to pass.

The story gets worse. He tells us that he is the man to solve the problem. The initial proposal he sent to Congress would have made Henry Paulson the most powerful person in the history of the world. I am not exaggerating.

But it is not only his tenure at Goldman Sachs that is being exposed as a failure. Since joining the government he has been wrong about everything and every action he takes makes the problem worse. Yet members of congress take his statements at face value. No one has asked him (or forced him) to give a real assessment of the problem as he sees it, he has not made the case that the handout will provide tangible benefit, and there is not one shred of evidence that this man has spent any time considering the costs of his plan.

If Democrats really want to negotiate this plan in the interest of the American people, they should not start with CEO compensation. They should insist on a new Secretary of the Treasury.

Post-script: I heard Jack Welsh, former General Electric CEO, tell an NPR interviewer, that we should all be happy that Henry Paulson has agreed to work for us at the low salary that public officials are given.

So I did some checking. In reality, we the people gave Paulson an effective $200 million signing bonus in the form of a tax-break on his sale of Goldman Sachs stock.

Turns out it's not so much of a sacrifice to take that government job after all.

More Thoughts on the Federal Handout to Banks

1) Hank Paulson (already) wants to expand the program to car loans, credit cards, and other “troubled” assets. I am finding it increasingly difficult to willingly suspend my disbelief.

2) Unintended consequence alert: Debtors now have increased incentive to default as it becomes cheaper on the margin for creditors to seek recourse from the government as opposed to spending resources on collection. Collection agencies may falter as the new and improved Treasury moves in on their business model. Perhaps there is opportunity in facilitating planned defaults. Put It Back In The

3) Money market funds have been breaking the buck on a regular basis over the past 12 months; it just so happens the parent companies have all stepped in to bail them out. They did not legally have to do that, so it should have been clear that the time when one firm finds it in its best interest to let the fund's Net Asset Value drop below $1 per share would come. Anyone (in the financial industry) unprepared for this was simply not paying attention.

4) The banks are not going to take their new found wealth and lend it to a waitress who wants to buy a view condo. They’ll buy treasuries and head for the beach. The big picture is this: A large amount of financial capital is being forced to chase bad debt. Real economy capital expenditures will have to take a hit. Ironically, the broader economy may follow the banks in contracting their operations. Whole Foods will become a cheese shop. Starbucks becomes a bring-your-own-latte joint. “We supply the ambience.” Airlines will stop giving us water.

Excuse me, that last one is the result an unrelated economic crisis.

These pagliacci may well succeed in causing the very infection they claim to be saving us from.

5) Ultimately, foreigners will have to demand higher nominal returns. One would think this would be the bamboo shoot that breaks the panda's back, but maybe they hold out a bit longer. Soon enough, interest rates will soar or the Federal Reserve will significantly expand its balance sheet or a combination. If I had a lot of money to invest long-term, I’d put half in gold/oil/wheat and sell short long-dated treasuries with the rest.

6) There’s another meaningful contrast to the Japanese crisis (in addition to the vastly divergent savings/consumption cultural attitude). It is one thing for domestic banks to hoard cash; it is altogether different to expect foreigners to do the same. I’m guessing but I don’t think JGBs were bought up by foreigners. Isn’t the yen carry trade, in fact, the exact opposite?

7) What are the chances that the dictatorial powers in the initial proposal are designed to divert attention from the actual theft of taxpayer money, making the final version a “compromise?” I want to sell short the bipartisan consensus.

Risk and Money Market Funds

My first reaction after initial research is this: Money Market funds had no business buying or holding Lehman's commercial paper after March 15 (Bear Stearns’ failure). Even if it officially met their standards, the managers had to be aware of the huge risk. People who supply their money to the money market are agreeing to slightly more risk than a savings account. My position two days ago would have been that the account holders signed up for this risk, but now I'd say they have a case for negligence on the part of managers. Those funds should have begun a process to wind down exposure to Lehman on March 17. The money market is just not an appropriate place for Lehman to borrow. Yes, I'm sure this would have created a supply-demand imbalance and returns for the MM accounts would suffer in the short-run, and the managers probably thought their hands were tied, but this is what they mean by "picking up pennies in front of a steamroller." This aint rocket science.

I'm sure some would make the argument that the Bear Stearns rescue created an implied guarantee for Lehman commercial paper. More evidence that it is the government intervention that creates the ripple effect. So holders of Lehman paper pay the price for Bear Stearns' failure. There should have been some work done to re-price Lehman's debt. The MM funds could have communicated with Lehman and given them a chance to find a (more expensive) way to finance themselves. This could have happened in an orderly way and the risk could have been shifted to those more willing to bear it. Instead they all sat around doing nothing because they believed Uncle Sam and Uncle Ben would take care of them.

Tuesday, September 23, 2008

The Illiquid Asset (fiction)

I have quite a few illiquid assets in my closet and my basement. One such asset is an old pair of running shoes. They don’t look very good, and it is unhealthy for me to run in them. I know they are illiquid because I have tried to sell them to four people I know and seven strangers with no takers. I have an excel spreadsheet that says the value of the sneakers is $57.

Sometimes I find it enjoyable to lend money to friends and colleagues. For example, Joe wants $50 to buy a present for his son, but right now I don’t have the capital to support that. Since Joe’s problem is a human-interest story, I tell Vanessa, thinking she might now buy the sneakers for $57 (I’m willing to accept 55). I believe my exact words to her were ``Illiquid assets are choking off the flow of credit that is so vitally important to our economy. As illiquid footwear assets block the system, the clogging of our financial markets has the potential to have significant effects on our financial system and our economy.''

Now it gets interesting. Vanessa has the crazy idea that my sneakers couldn’t possibly be clogging anything. She says the real problem is that I actually don’t have money to lend. “Maybe you should get out of the lending business,” she says, “Stick to what you’re good at, like matchmaking for busy under-caffeinated professionals.” I don’t think she gets it. I also don’t think she cares at all about Joe’s problem, but she did mention something about simply lending him the $50 herself. Clearly she fails to understand the complexity of our sophisticated markets. So I hold an auction but no one buys the sneakers; this is a catastrophe for people like Joe. There must be some entity willing to do the right thing and free up this sneaker-constrained capital…

To be continued

It's Not a Bailout, It's a Handout

The Congress and other key members of the federal government are busily negotiating what is commonly referred to as a bailout of the financial system. In fact this is no bailout. It is a handout to certain individuals, a transfer of wealth from the many to the few, some of whom are quite wealthy already.

Moreover, the handout does not address the very real, but manageable, problems of the financial system. The proposal is backward-looking, forcibly diverting money from productive pursuits and using it to chase bad loans down the garbage disposal. The damage from the bad loans cannot be undone, and they and their associated bad assets can make it down the drain without taking taxpayer money along.

On the subject of bad assets, Congressman Barney Frank would have us believe that the taxpayer stands to make a profit from this program. Impossible. Treasury Secretary Paulson and President Bush have been very clear that they intend to buy the worst financial assets available. Due to the complex securitization of mortgages and the hesitancy of the assetholders to write them off, many of our coming purchases are already worth zero, with no hope of ever appreciating in price.

Former Speaker of the House Newt Gingrich recently told NPR’s Melissa Block that “I was just reading an analysis by a very sophisticated person who said that there's been at least one leak from a congressional staff briefing by Secretary Paulson, in which he clearly indicated he intended to buy assets at above their market value.”

If the assets were in fact undervalued, as Barney Frank says, then there are people with money who should be happy to buy them of their own free will. Investors are willing to do the work needed to separate good from bad. This is the work needed to drag the system through, but it cannot happen if the Treasury hands people the opportunity to exchange nothing for something.

The Congress and the Treasury are acting in a state of panic. President Bush says that they have no choice. Secretary Paulson says this is better than the alternative. One has to wonder what “alternative” he has considered because there are plenty of better options to choose from.

One perfectly viable alternative for Congress is to do nothing. We already have a bankruptcy system that is equipped to deal with this. Banks that are insolvent should be forced to go through the bankruptcy process. There is no such thing as “too big to fail.” These banks have already failed. All that remains is to determine who will bear the consequences, those responsible for the failure or those of us who had nothing to do with it. I think I can speak for us all when I say we taxpayers have our own problems.

They tell us that inaction will lead to a complete financial meltdown, but there is no justification for this claim. Yes, there is counterparty risk, but there is no reason why it would increase if bankruptcies take their course. What’s more, those counterparties knew (or should have known) the risks and they entered into those counterparty agreements freely.

So what would happen if we say no to this handout. Shareholders of insolvent banks would lose their investment. Bondholders would lose some or all of their investment as their claim is reduced to the proceeds of the bankruptcy proceedings. This is a bad outcome for those people, but it is no catastrophe.

There is no reason to believe that economic losses would extend past the stock and bondholders. Counterparty obligations would still be met and customers need not lose because strong banks will rise up to serve them and the viable portions of the failed banks would be preserved and taken over by more competent managers.

Stocks and bonds represent ownership stakes in a risky endeavor. Gains on those stakes exist because the possibility of loss exists. These assetholders have already agreed to accept the losses in the event of failure. This has always been true and it must remain true. If we proceed with this handout, the only results will be financial loss for hard-working Americans and a windfall profit for a select few.

American People Must Stop The Bailout

The current proposal to bail out portions of the banking industry will be a disaster for the American people, and we must act immediately to prevent it from becoming law.

The plan does not do anything to address the structural economic problems we face; in fact, it exacerbates them. It does, however, transfer massive amounts of wealth from taxpayers and savers to those who made poor investment and business decisions, many of whom count themselves among the wealthiest of Americans.

Here are some important things to keep in mind when considering this plan:

1) The absence of an overt tax increase does not mean you are not being taxed. A $700 billion expenditure is a $700 billion tax. We don’t yet know how it will be collected, but it will be collected. Options include direct tax increases in the very near future or an increase in inflation which devalues savings accounts, bonds, money market accounts, social security payments, hourly wages, and salaries. The inflation tax will disproportionately hurt the elderly and those who have little bargaining power with employers.

2) The devaluation of the dollar makes it much more likely that foreign holders of U.S. dollars and dollar-denominated assets will flee the U.S currency. Foreign investors may also pull back on investments in the U.S. economy. Our system is highly dependent on foreign credit and foreign investment and a sudden massive decrease in foreign participation is a much greater risk, with much more dire consequences, than large bank failures.

3) On the subject of bank failures, there is no evidence that the losses of banks will cause economic disaster. Our policy officials and the banking executives have repeatedly claimed that the consequences of inaction would be severe, yet not one has offered any justification for this prediction. Henry Paulson even walked away in silence rather than answer a reporter’s question about this issue.

4) It is a myth that this, or any other bailout plan, will increase the value of homes or stop any declines in home prices. Real home value is a function of the stream of benefits that a home provides. Shelter, storage, family camaraderie, a place to watch TV, a yard for children to play, etc. Market prices fluctuate, but will ultimately settle at points that reflect homeowners and potential buyers’ valuation of these benefits relative to other goods and services. Home prices need to decline in order for the housing market to stabilize.

5) High home prices are bad for almost everybody, yet the political rhetoric used to justify this bailout rests heavily on the desire to prop up housing prices. Subsidizing the housing market makes homes more expensive, not more affordable. Even current homeowners gain little or nothing from appreciation because a home sale usually is coupled with a purchase of a different home. Home price appreciation is not an increase in income. Then, of course, there are property taxes, which increase with the “market value” of a home, making ownership more expensive still.

6) There are well-run banks out there. Most of them are small and mid-sized banks that did not get caught up in outsized risks. When the poorly run banks fail, the well-run banks will rise up to take their place. Of course it will take time to clear out the dead brush, but if we allow bad banks to fail and good banks to survive, the broader economy can only benefit.

This bailout does the opposite. It artificially strengthens the weakest members of our banking system and allows their poor decisions to infect the entire system. The weeds can then choke down the trees and prevent them from growing into a strong stable forest. The allowance for failure is the cornerstone of free market capitalism. If we allow this to go forward, we have no business calling ourselves a free market. Bailouts do not exist in a free market.

7) Government bailouts are not an exception; they are built into the business model of the banking system. An individual bank, under uncertainty, takes actions to maximize its own expected profit. It does not consider the overall expected welfare of society. Believing that government will backstop losses, the bank takes on more risk than is fiscally prudent. This exposes the bank to greater potential profits while exposing taxpayers to more potential losses.

Aggregated over all banks, the outcome is certain. Due to randomness some banks will win, some will lose, but the system is rigged to lose money as a whole. If we bail them out now, we will be bailing them out again. We cannot be fooled by rhetoric that tells us we must stop the bleeding now, then reform the system. The only way to reform the system is to let it sink on its own, and the only opportunity to do that is now.

8) Bailout mania is still in its infancy. Taxpayer exposure to bank losses will spiral out of control. This program will expand well beyond $700 billion. The Fannie Mae / Freddie Mac bailout will balloon from $200 billion to well over 1 trillion. And of course there will be more emergent “crises.” One need only look back at the past year’s worth of comments from Bush, Bernanke, and Paulson to see that they have systematically underestimated the level of losses in the banking industry. In March, we were told that a $29 billion loan to JPMorgan Chase would be the extent of taxpayer exposure.

9) Our politicians have no idea what they are doing. In all honesty, we should not expect them to. They are experts in getting people to vote for them, not in effective economic policy. Most of their policy advisors are experts in getting votes, not effective policy. Barack Obama, John McCain, Chuck Schumer, Barney Frank, John Boehner, and George Bush repeatedly expose their collective ignorance when they speak about this issue. They are very smart people to be sure, but they are not equipped to be reacting to this problem. The same is true for almost all of the Congressional members. They don’t even understand the problem; we should not empower them to solve it.

In a rare moment of clarity, Harry Reid did say that “no one knows what to do.” Unfortunately, he was promptly criticised by other politicians. But Reid is right. Harry Reid, you are the Senate majority leader and neither you nor your colleagues understand this, and you know it. You must fight this proposal and all Americans should stand behind you on the issue.

As noted above, even those who are supposed to be experts, Bernanke and Paulson, have shown a complete lack of competence. They are recklessly throwing our money at a problem they clearly do not understand.

This is an important time for our country and its people. We are in an economic downturn for sure and it is likely to get worse. We have spent years creating economic problems and there will not be an easy fix. Some suffering is inevitable and politicians cannot deliver us from our troubles no matter how well they can speak. But all is not lost. We can learn from mistakes, re-allocate resources and continue with strong economic growth. The human race has endured for a long time and will continue to prosper. This is not a catastrophe and we should not panic.

The problem is that the downturn hit us at the worst possible time – during a presidential election campaign. The reaction is therefore politically motivated and highly inappropriate. But there is another side to that coin. We the people have a unique capacity to veto this course of action. Every member of the House of Representatives can be fired this November, 33 senators can be sent home, and we are not limited to Obama or McCain in the White House. On November 5, 2008 100% of the power will rest with 435 representatives, 100 senators, and one president. Our time to affect policy is now.