Fraud of Historical Proportions

Treasury Secretary Henry Paulson should be placed behind bars. He is bailing out of the bailout, yesterday announcing his intention to provide funds to financial institutions holding credit card and student loan debt obligations. (See New York Times ) Congress is not in session and the lame-duck President is... well, ducking; and not one single step has been taken to put in place audit and oversight for the first half of the $700b bailout package. (See Washington Post )

Citigroup shares will soar on the news that they'll be getting more billions on top of the $25b they received in the first of the handouts to banks. You may remember from previous posts that it was Citigroup lobbyists who pushed for the Gramm-Leach-Bliley Act of 1999, removing regulations and restrictions that set the stage for the derivative market in the first place. Citi lobbyists steerheaded the more than $100 million in incentives to congressmen and senators to get the bill passed; thus enabling Citibank to merge with Travellers Insurance to form Citigroup. This same Citigroup issued 40% of America's credit cards and 60% of American student loans.

If this isn't the biggest fraud in history, then what is? There is little hope that Obama and the Democrats in the House will be able to do anything to get the economy on anything like an even keel. The only hope for sanity in all this is for the G20 to play America's game and begin cashing in their US Treasury bills and dumping their US dollars. After all, America can't go to war against everybody.

Taking the Piss

Treasury Secretary Henry Paulson continues to spend T.A.R.P. bailout money, announcing additional loans to A.I.G. today. Was it just a couple of weeks ago that the giant insurer pronounced themselves secure? It seems that $85 billion, the entire GDP for New Zealand last year, was not enough. So its been doubled.

The amount of taxpayer money given to A.I.G. alone would provide health insurance for every child in America, rebuild every school in America and provide 120,000 teachers, with enough left over to build 2 million affordable housing units. God only knows how far this money would have gone providing health care, water, and housing in the Third World.

Is anyone out there doing the math? Does it not seem strange that this $700b (oops, $850b) never seems to shrink. Every day tens of billions are earmarked for this, or that, but somehow the original figure stays at $700b. The first tranch of $250b has only $60b left. The next lot of $100b needs the President's signature. The $300b left over requires Congressional oversight.

Wells Fargo Chairman Dick Kovacevich was rewarded for his purchase of Wachovia by being kept on, past the company's manditory retirement age. And why not. TARP money paid for half of the purchase price. More importantly, a recent story in the Washington Post indicate that Wells Fargo's recent $25b quarterly losses will be absorbed by the taxpayer too. While everyone was looking at the bailout package, Henry Paulson announced changes to the IRS tax code (Section 382) that would permit companies to write off tax obligations against losses in companies absorbed in mergers and acquisitions. Effectively, this doubles the taxpayer bill for those Investment banks that were bought out.

In the end these numbers boggle the mind. It seemed absurd when the Fed bailed out Chrysler for $5b in 1979. Today's figures are surreal.

Economic Recovery - Begin with the Foundation

President-elect Obama is taking the wheel of a ship of state in danger of sinking. From a global perspective, the world outside the United States will no doubt suffer an economic depression that may last the rest of this decade. Rightly, comparisons are being made between The Great Depression and the current meltdown. I expect historians will use our current calamity as the benchmark to compare future downturns.

The World hitched their stars to the US economy and if America is to recovery its predominance in world economic affairs, they will have to lead the way out of the mess - and lead by example. This means that the world will need evidence that the USA is suffering worse than the rest of them. Bubbles and recessions are a part of life, much like the seasons, they provide opportunities for fresh vegetation to grow. It would be easy to blame Alan Greenspan for the mess we are in: He judged people to be adult enough to not eat too much ice cream; and instead, watched as hitherto responsible people gorged their way to obesity and diabetes. But in truth, the problem probably started when the United States and the G7 abandoned the Gold Standard and tied their currency to a US dollar valued by their Gross Domestic Product. This may have made sense when American factories powered the economy, during and after WWII, but made little sense after America stopped producing and became a consumer-based economy.

When the G20 meet in Washington, I expect quite a lot of the discussion will be about the failure of Bretton-Woods II. I doubt whether decisions will be made, this year, concerning a return to the gold standard, or a re-valuing of world currencies based on precious metals, but such discussions will become more prolific as the Global Depression deepens. Interesting, that even after 70 years, economists cannot agree on why the last Great Depression happened. Troubling, that bailouts and other solutions currently being instituted, are exactly what Hoover did in the 1930's.

If Obama is going to rebuild America, "brick by brick", as he said in his acceptance speech, he best make sure the foundation is firm enough to hold more than a ranch style bungalow. The foundation needs to be strong enough to support a skyscraper. This means immediate work at finding a base value for the US dollar, one not based on the greed of a nation, but one based on something tangible. Only then can the real asset value of banks and financial institutions be ascertained and measured against each other. And only then will the world's economies have a solid basis from which to trade with each other and measure their progress.

Limited use of Nuclear Weapons

Rogue states need to be policed somehow. One decries the use of limited strikes using nuclear weapons, but there is no disputing their effectiveness. Hiroshima and Nagasaki were regrettable in the loss of life to innocent people, but there is little doubting the effect they had in bringing a quick end to the war in the Pacific. Today, Japan is the second strongest economy in the world after the US. Their trading relationship with Japan is a strong bilateral tie that binds the two nations. The use of nuclear weapons there did not affect the future potential for economic and cultural ties.
North Korea is a country that is holding the rest of the world hostage with their on-again, off-again goal of producing nuclear weapons. Indeed, the state of war between North Korea and the Alliance that fought against them is still in effect. Should North Korea persist in developing a nuclear capability while their people starve, then their military and atomic infrastructure should be eliminated with a requisite number of low-yield nuclear strikes.
And can there be any doubt that nuclear weapons produced by Iran would not find themselves in the hands of fundamentalist Islamic factions that are in a state of war against Israel and the West? In the case of Iran the decision to use nuclear weapons is strategically easier. No doubt their case-hardened manufacturing and processing facilities are located in the desert, away from population centers. With a reported 3,000 centrifuges producing fissionable isotopes this should be a watershed moment for the argument of diplomacy over force as a way to solve disputes. I believe talks should be held and serious efforts to sway the Iranians from developing a nuclear capability. No effort should be spared: However, if talks should not bear fruit, then their capability to produce weapons should be stopped with nuclear strikes on production sites. The residual radiation alone would ensure they could never be used again. This would also serve to l'encourage les outres'.

The Dark Continent

If there is a Hell on earth it is Africa. Rwanda, Somalia, The Sudan, The Congo, Zimbabwe, and South Africa - to a lesser intent, are diseased, starving, and awash in tribal conflict. When the final story about the United Nations is published, its failure to bring peace and prosperity to a continent rich in culture and mineral wealth will be the context of the story.
Those without a soul might advocate cutting foreign aid completely and letting nature take its course. But the world cannot continue to turn a blind eye to a corner of the world where men and women are trying to keep their families safe. The recent case of a 13 year old girl in Somalia touched my heart. After being raped by three men she was proclaimed an adulterer and stoned to death in a sports stadium.
If there is a moral case for war anywhere in the world it is Africa.

Moral Hazard

As US trade and debt deficits mount the day will come when the only thing left to trade will be geo-political allies isolated in cash-rich parts of the world. China owns an increasingly large amount of American consumer debt. Can the day be far away when they forgive that debt for a free shot at getting back Taiwan? If it were to happen, then how much would it be worth middle America to stop aid and arms shipments to Israel in return for Middle East wealth? If oil is indeed the reason for war these days, it makes more sense for the US to carry the fight to Central and South America.
Abandoning the Middle Eastern oil markets will eliminate the need for ever sending troops there and surely a war in the Americas would be cheaper to run. The supply lines would be shorter and there are enough hispanic Americans to make communicating with people easier. Surely there would be a hue and cry from Jewish Americans, especially in Florida, but this is easily offset by engaging Cuba in battle and repatriating those lands for the massive Cubano population in the Sunshine State. With peak-oil past the threshhold, especially in the Arabian Penninsula where oil fields are fast approaching the used by date, the time to cut and run seems ripe.