Cash for Clunkers Crash and Burns

The New York Times reports that car dealers in New York have pulled out of the government's cost-shifting program to aid automakers in Detroit under the banner of environmental awareness. But dealerships are simply unable to pay employees or normal maintenance costs with the majority of their reimbursement requests still unapproved.

One dealership owner explains, “The bottom line is the bad outweighs the good,” Mr. Wondergem said. “I had to make a decision to stop participating because of the stress and the risk. This program has really consumed my life. "

The waits are so widespread that GM is now offering to deposit a temporary infusion of cash in order to shore up dealership's accounts and keep them participating in a program that has allowed the auto maker to raise production.

Meanwhile charities are hurting as vehicle donations suddenly drop, used care dealers are complaining about low inventories, and repair shops worry about the difficulties they will face when looking for spare parts.

Where Were These Guys a Few Months Ago?

At a recent town-hall meeting, Federal Reserve chairman Ben Bernanke said he had to 'hold my nose' over bailouts. I wish he had expressed some of those misgivings when lobbying for the bailouts last year, instead of the "do it now!" testimony he actually gave.  (On a side note, here is a video of Bernanke in 2005 saying there is no housing bubble, housing prices would not decline, and in 2006 that housing would not have a drag on the economy, while car sales would climb; and in 2007 that the subprime market was not a problem.  Just point this out because a lot of intelligent folks seem to trust Bernanke's judgment more than their own).

In a similar story, Treasury Secretary Tim Geithner insist that the path to economic recovery is through lower deficits. It is too bad that earlier in the year, he was advocating that the path to economic recover was through a $787 billion in a deficit-funded stimulus bill.

Thanks guys.

Tax Code Helped Cause Financial Crisis

Budget & Tax News reports on a new study on the effect of tax policy on the financial crisis.

[Author Sam] Eddins also addresses the issue of credit default swaps, one of the more controversial financial instruments, which many economists argue played a role in bringing on the credit crisis. Eddins shows those swaps were influenced by tax policy.

“The purpose of debt securitization products, when viewed through a TAFT lens, is not only diversification and partitioning of risk but also tax minimization,” Eddins writes.

“Credit default swaps are revealed to be a massive tax arbitrage that shifted government tax receipts to Wall Street bonus pools and necessitated the creation of massive quantities of low credit quality debt,” Eddins continues. “The structure of this trade ‘insulated’ Wall Street agents from the credit risk while allowing them to arbitrage the tax savings of their clients as long as counterparties remained solvent.”


The central failure of the credit crisis was not with the market, according to Eddins, and individuals in the markets acted consistently and rationally given the circumstances.

“Rather it stands as an example of the unintended consequence of a tax policy that distorted incentives within the free market system. Regulation cannot control investors from acting in their self interest,” Eddins writes.

The full study is here.  It is complex, but adds one more reason to the list of ways government caused the financial crisis.

Bailouts and the Press

History has a way of repeating itself and all these comparisons between today's recession and the great depression are sometimes eerily similar.

Economic conditions and the popularity of the internet have devastated the newspaper industry. This past winter Philadelphia Inquirer chief executive officer Brian P. Tierney, asked Governor Rendell for a $10 million bailout. No bailout came, and in February Philadelphia Newspapers L.L.C., which owns The Inquirer, filed for chapter 11 bankruptcy protection.

In the 1930's declining revenues successfully prompted government intervention with disturbing consequences. While FDR didn't offer bailouts, he did use the Reconstruction Finance Corporation to lend $1 million to David Stern, owner of the democrat Philadelphia Record. FDR also endorsed an IRS investigation of Stern's chief rival Moses Annenberg, the owner of the republican Philadelphia Inquirer and a harsh critic of the president.

In 1942 Moses Annenberg died in prison and in 1947 the Record went out of business.

For more about the new deal then and now click here.

Financial Bailout Oversight & Transparency - Failure

Story from CNN Money covers testimony from the special inspector overseeing the TARP program, i.e. the financial bailout (HT Brian Ellis):

Barofsky said his top concern was that Treasury continues to ignore his suggestion that TARP bailout recipients detail exactly how they're using their money. He said that two banks, Bank of America and Citigroup, have made efforts toward such disclosure, but "otherwise it hasn't come to pass."

Further, Barofsky said, when Treasury released more bailout money to troubled insurer American International Group this month, neither the company nor the government would say what it would be spent on. ...

The report, which was released on Monday, offered a close inside look at the government's handling of the bailout. It revealed that Barofsky's office had 20 criminal investigations and six audits into whether tax dollars are being pilfered or wasted.

And some still wonder why the million or so Americans who gather in "tea parties" are mad at they way government is spending their money.

The Sunspot Recession Crisis

According to NASA, we are in the midst of the greatest sunspot recession since 1913. Analysts believed the sunspot recession had hit bottom in 2008, but activity has continued to decline, leading the government agency to proclaim, “This is the quietest sun we've seen in almost a century.”

How has the government responded to this sunspot crisis? Surely, they must be working on a plan to somehow stimulate sunspots and lift us out of this recession. Actually, the country’s leading scientists have chosen to do – nothing (gasp).

In the mid-1800’s, scientists discovered the existence of a sunspot cycle, a natural series of recessions and booms in sunspot activity that repeat over time. These recessions even have financial benefits, such as increasing the lifespan of satellites, saving millions of dollars.

Despite the fact that Adam Smith noted the existence of similar natural forces in the economy nearly 100 years before the discovery of the sunspot cycle, the government continues to interfere with the natural ebb and flow of the market cycle. Economic recessions, like sunspot recessions, serve a purpose. They naturally correct market behavior, allowing weak companies to go bankrupt and allowing new, stronger (or simply more efficient) companies to take their place.

FASB Eases "Mark to Market"

The Federal Accounting Standards Board voted to ease "mark to market" accounting rules, which forced financial firms to markdown the value of their assets.  This is pretty wonkish, but its kind of a big deal.  If some firms were selling off "toxic" mortgages at bargain prices, other firms would have to lower the reported value of the mortgages they held, even if they had no intention of selling them in the near future.

This represents the first "deregulation" of an over-regulated financial sector in a long time.  More from Competitive Enterprise Institute, Heritage, and Free Market Politics on the reform. 

You will note that ending "mark to market" was one of the Free Market Alternatives to the Bailout outlined here in Sept.  It takes a long longer for good policy ideas to percolate than bad ones (e.g. bailouts, stimulus, bonus taxes, etc).

Bailouts and Bull

John Stossel's latest 20/20 special on bailouts and bull debunks numerous big-government myths, including the bailout mentality.  Stosell also tackles toll road privatization, universal Pre-K, medical marijuana, the border fence, and other issues.  It is good television.




Stossel also talked with Reason TV on defending the market from within the liberal media click here for a transcript of that interview or go here for video/podcast.

Roots of the Crisis

FreedomWorks has a great looking redesign of their website.  

They also have a new feature article on the "roots of the financial crisis", which is full of good information and revealing charts.

How Government Created the Financial Crisis

John Taylor in the Wall Street Journal on how Government created the financial crisis:

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom. ...


Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Scott Powell also tackles the myth of "deregulation" causing the financial crisis in Barrons.

The Bush administration made many mistakes, but deregulation was not one of them. Not only was there no major deregulation passed during the past eight years, but the Bush administration and a Republican Congress approved the most sweeping financial-market regulation in decades.

The bipartisan Sarbanes-Oxley Act was enacted in 2002 to prevent corporate fraud and restore investor confidence after the collapse of Enron and WorldCom. It failed to prevent the accounting fraud and influence-peddling scandals at Fannie Mae and Freddie Mac. And even after those scandals were widely understood, regulators sent Fannie and Freddie back into the market to continue buying subprime loans, lending and borrowing with implied taxpayer backing.

Across the government, the Bush administration supported new regulations that added almost 1,000 pages a year to the Federal Register, nearly a record. If this is insufficient regulation, it's hard to imagine a scope that would be effective.

We are in this mess largely because critical thought and moral judgment have been subordinated to the politicization of our economy, resulting in regulatory gaps and excessive controls of the wrong kind.

 Even though we made these points on the failure of government and the myth of deregulation, the media continues to repeat the myths.  At least, the media that is hopeful Governor Rendell will bail out their failing newspaper.

Bailout for the Porn Industry?

I knew this was coming: Porn industry seeks federal bailout.  The Internet and globalization have hit Penthouse and Girls Gone Wild Pretty brands pretty hard.

A bailout for the Porn Industry makes just as much sense as one for the Big 3, Boscov's, investment banks, or state governments - which is to say, none at all. But given lobbyists for those business/government have been successful (or seem to be on their way) to convincing Washington politicians to award them taxpayer funds, there is no doubt that every business should see that as a winning business model. 

Big 3 Bailout vs. Free Market Solution

In his blog today, John Micek offers some criticism of Mark Hendrickson's commentary on the auto-makers bailout, which we ran today.  Micek points to the lack of "solutions" presented in the article, and that the free market can't "solve the problem" because the market created it.

Micek's argument that free-market conservatives should be for policy alternatives, not just against things, is well taken - that is what the Commonwealth Foundation exists for.  With the financial bailout, we (both the Commonwealth Foundation and the larger community of free thinkers, witness BeyondBailouts), outlined a number of alternatives.

However, I think in the case of the Big 3, it pretty obvious that the government should do nothing.  The Big 3 have to fend for themselves.  I know, the initial reaction I get is that that sounds "cold-hearted". In fact, that is exactly the response I got from a friend until I explained that 

1. Bankruptcy doesn’t mean the Big 3 cease to exist – it gives them the opportunity to restructure and fix their problems, and compete in the free market.  See Don Boudreaux's op-ed in the Wall Street Journal today on the bankruptcy option.
2. Even if they did liquidate, you would not see the dramatic job losses they claim – consumers will still want cars, and replacement parts for their cars.  Other car companies, or even new companies, will pick up the slack.

The government can’t keep the Big 3 afloat so long as they have a failing business model (well they can, just as the Soviets continued to manufacture cars, but that is hardly a remedy). Government intervention to help the Big 3, as Dr. Hendrickson’s piece describes, harms successful car companies (including those which are expanding in the US), along with taxpayers.  This is the subject of Matt's Capital Domes post as well.

The free market allows for "creative destruction" – which I discussed previously in my post on the Boscov’s bailout.  About 90% of the original Fortune 500 companies are no longer on that list (most have been bought out or went out of businesses).  Stagecoach makers and blacksmiths were once prominent occupations, but are no longer.  It may have sound cruel at the time to let these industries fail, but looking back – seeing how everyone transitioned into new jobs, new companies emerged, and the economy grew – it seems naïve to suggest a Blacksmith bailout.

So yes, the free market can "solve the problem" all on its own, and the federal government best serves the country by doing nothing.

78-Group Coalition Demands Greater Bailout Transparency

The Commonwealth Foundation has joined 77 other organizations in calling for greater transparency for taxpayers in the numerous bailouts being handed out with little oversight.  From the news release:

The letter notes that nearly half of the $700 billion committed to the Troubled Assets Relief Program has already been distributed with very little transparency and almost no oversight -- in addition to another $800 billion being spent by the Federal Reserve. The letter recommends requiring that the Department of the Treasury, the Federal Reserve, and other government entities involved in the bailout collect and make available to the public information on certain aspects of how bailout aid is being spent by recipients.

BailoutTransparencyLetter

Is Greenspan to blame for the financial crisis?

Over at the Cato Institute, there seems to be some disagreement over to what extent Alan Greenspan and the Federal Reserve contributed to the present financial "crisis".

Some scholars say the Fed's power is limited, others say that the Fed fueled the housing bubble, and their latest paper asserts that Greenspan's policies (along with the actions of Fannie Mae and Freddie Mac, HUD, the FHA, and the CRA) were at the root of the financial trouble:

The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. These poorly chosen policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.

They all agree with the idea that we should end the Fed, whether that means a gold standard or Friedman's idea to replace political decision-makers with a computer.

Bailouts cost more than WWII, 10 times cost of New Deal

A friend passed along this blog post looking at the cost of recent bailouts compared to the inflation-adjusted cost of other major government expenditures:

If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

The Boscov's Bailout

I am quoted in Brad Vasoli's Evening Bulletin article on the Boscov's Bailout (related stories in the Times-Tribune and the Citizen's Voice). Let me expound upon my comments.

First, the fears of Boscov's failing is overstated. As with the automakers - for which bankruptcy is a better option than a bailout - Boscov's needs to find a business model which is sustainable. Bankruptcy allows them to restructure and do that; it does not mean every employee, or every supplier of products, will lose their job. And even if Boscov's, or the automakers, did need to liquidate (i.e. go out of business), that isn't the end of the world either. People will still want to shop, and people will still need cars (or some other form of transportation) - some other business will have to step up to fill in the void left by Boscov's or the "Big 3" if they fail.

This is the process of creative destruction. Only 71 of the Fortune 500 companies in 1955 were on the list in 2004. As the article in the Concise Encyclopedia of Economics notes, "In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete." It would seem silly to suggest that government should have "bailed out" the blacksmith industry a century ago, because it was "too big to fail," but that is no different than proposal to bail out failing businesses today.

Second, what is unseen is the effect these bailouts have on the overall economy. Many stores competing with Boscov's have done quite well, but despite their successful business plan Boscov's gets reward with taxpayer-backed loans. If lawmakers continue to reward failure and punish success, the consequence is that there is little incentive to run an effective business, but great incentive to put more into lobbying for taxpayer funding.

As I pointed out, seeking bailouts for failure has proven to be a good business model for some firms and now we are starting to see that model being followed. Alex Charyna wonders if there is no firm that isn't "too big to fail" (and also wonders when Governor Rendell will ask for a handout - hate to tell you, but he's been begging DC for weeks) Bailing out failing businesses may help failing businesses, but is harmful to our overall economy.

Do you support limited government?

Jay P. Greene explains why anyone who believes in limited government and free markets should support the Commonwealth Foundation.

Not directly, of course, but his conclusion is that support for the Commonwealth Foundation (not to mention the Manhattan Institute, where he is a senior fellow, and the Cato Institute, which quickly picked up on his comments) would be more advised than sending your money certain other places.

Greene argues that the financial bailout represents the attempted murder of limited government and free markets.  He then notes some free market think tanks were accomplices to the attempted murder, and supported a massive expansion of government.  These groups are also well-funded by limited government conservatives (I will add that John McCain and George W. Bush also supported the bailout, and contributions to their campaigns dwarf donations to any of the think tanks mentioned - which is why I call for a focus on ideas, not politics).    Notes Greene, "If those donors really do wish to support huge expansions in government involvement in the economy, then I guess they are giving to the right organizations."   

Here are our posts the week of Sept. 21, I think you can see how we feel about the bailout and free market alternatives to it.

Don't bail out out our state!

The Commonwealth Foundation has joined with 58 other groups (led by the NTU) sending a letter to Congress on why a bailout of state and local governments is a bad idea, and only encourage more misspending of taxpayers' dollars.  The full letter is below, or click here.  For more on why federal bailout of states are a bad idea, check out South Carolina Governor Mark Sanford's testimony to Congress or op-ed in the Wall Street Journal

NTU's Andrew Moylan also has a roundup of bailout-related links - beginning with a clip comparing the bailout to a Family Guy joke that isn't funny, except that it goes on too long - including a new site, BailoutSleuth which has been tracking where the $700 billion is going and all those sorts of minor details.

One recent applicant for the bailout money is Americans for Tax Reform head Grover Norquist - who applied for the full $700 billion.  He wants to use to to cut the corporate income tax from 35% to 15%; cut the top individual income tax rate from 35% to 15%; eliminate the death, capital gains, and dividend taxes; and allow companies to fully-expense capital assets purchased the first year.  If that last one doesn't seem nearly as sexy as the others recall - it takes that many tax cuts to equal $700 billion.  No chance he gets the money of course, it makes too much sense.

L081117_NoStateBailout

No UAW Bailout

IBD Editorials writes that a bailout of the automakers is a misguided idea, aimed only at protecting their current union contracts (which are largely to blame for their demise):

Filing for Chapter 11 protection under bankruptcy law is the normal way a company stays in business when facing an unmanageable financial situation. It keeps creditors at bay while the company reorganizes under court supervision and settles its debts. In recent years it has served as a refuge for major airlines (Delta and United) which, you may notice, continued to fly while in Chapter 11 and, post-bankruptcy, fly today.

Bankruptcy protection also frees companies from union contracts. Could this be why it seems to have been taken off the table as an option, at least among Democrats? We can only surmise, but it's clear that a bankruptcy process would be rough going for the United Auto Workers.

The New York Post echoes this sentiment:

Chapter 11 bankruptcy would allow the Big Three to operate while their ruinous labor contracts are renegotiated to reflect 21st-century economic reality.

Michael Barone adds that the automaker's bailout plan does nothing to make their firms viable - "No one in the private sector is willing to pony up a dime for this business plan."

Finally, Dan Mitchell notes that such a bailout rewards a business model based on lobbying, while also rewarding mismanagement.  Of course, offering such perverse incentives will only end badly:

The money devoted to influence peddling in Washington would be better spent on improving quality and finding ways to reduce a bloated cost structure, but both management and UAW have decided that fleecing taxpayers is a better option.

A taxpayer bailout would be a terrible mistake. It would subsidize the shoddy management practices of the corporate bureaucrats at General Motors, Ford and Chrysler, and it would reward the intransigent union bosses who have made the synonymous with inflexible and anti-competitive work rules.

Trashing Friedman’s Economics

Crain's Chicago Business speculates that "failure of the free market" and "deregulation" will harm the reputation of the University of Chicago's School of Economics and of any influenced by Milton Friedman.

One market meltdown later, the department is suddenly on the outs. The collapse of lightly regulated financial institutions and the most extensive government intervention in the economy since the New Deal have dealt a serious blow to the U of C's influence on economic policy and its standing in academic circles. …

Many critics blame the Hyde Park institution's free-market theories for the collapse and see stricter regulation, abhorrent to Chicago School thinkers, as the way forward.

Are they joking? Clearly we have not had the "unfettered free markets" that the article blames for the meltdown, and the financial institutions can hardly be called "lightly regulated". Furthermore, despite the influence of Milton Friedman, almost no deregulation of financial markets occurred, but over-regulation certainly did.

In fact, had the advice of Milton Friedman and the Chicago School been adhered to, the Federal Reserve would have been replaced with a computer, and would not have been able to lower and raise interest rates to manipulate the economy (which contributed both a housing boom and then to the rise in mortgage defaults). Government-sponsored enterprises Freddie Mac and Fannie Mae would have been privatized years ago, and thus would not have been pressured by the federal government to buy up subprime mortgages (with the implicit backing of taxpayers) to encourage homeownership. Certainly the Community Reinvestment Act would not have been used to force lenders to issue subprime loans.

Milton Friedman won the Nobel Prize, in part, for documenting how government intervention caused (or at least worsened and prolonged) the Great Depression. It won't be long before another economist earns the award for demonstrating the role of government in creating the mortgage crisis – and I expect how the bailout(s) resulted only in worsening our economy.