the LYNCH report

The US Senate is set to pass a so-called “bailout bill” that amounts to $838 billion. To give that some sort of perspective, you’d have to spend a million dollars a day for two thousand, two hundred and ninety-five years to spend an equivalent amount. Of course, that doesn’t include the interest which will accrue on that staggering debt.

How will this gigantic tab be paid? It’ll by paid by the US taxpayer: $6,2,36 per taxpayer, to be precise. That, of course, is on top of the $13,500 each taxpayer is already on the hook for via the original TARP money, the bailout of AIG, Lehman, et al. New total: $19,736 for each and every taxpayer, on average, plus interest.

There’s an additional downside: money invested in the government bonds to subsidize this massive spending is, of course, money which will not be otherwise invested in the economy for such things as actually spurring economic growth: for every dollar invested in a government bond, there’s one less dollar available for private companies looking to grow and expand.

The total amount borrowed for “bailout” spending to date? $2,651,797,108,408.

The Globe and Mail reports¹ the total cost of a so-called bailout of the “Big Three” by the Canadian government, which has committed to 20% of the US government bailout, to ultimately cost Canadians between $15 billion and $25 billion.

What’s that mean for the individual Canadian taxpayer?

According to Statistics Canada, there were 9,275,765 full-year, full-time earners as of 2005². That’s a pretty good proxy for the number of income taxpayers. So, let’s take the conservative figure of a bailout cost of $15 billion. That puts each full-year, full-time worker in Canada on the hook for $1,617.

Of course, if you personally believe in supporting the “Big Three”, there’s nothing preventing you from voluntarily using $1,617 of your income to either buy their products or their shares. Unfortunately, the government’s bailout proposal removes that choice from the taxpayer and forces the issue, whether any individual agrees with spending $1,617 of their income to support three private companies or not (and would perhaps prefer to spend $1,617 of their hard-earned money to bail themselves out instead)…

Here’s a copy of Roll Call 690 – Auto Industry Financing and Restructuring Act. This lists how every member of the House voted on the bailout legislation.

Auto Bailout Votes – House

Dear President-Elect Obama and your fellow Democratic lawmakers,

I run a rather large company. We are currently on the threshold of bankruptcy due to the “credit crisis”. This bankruptcy would cause numerous job losses, so as you can imagine, we need help.

Here’s a bit of background on our operations:

We produce a product the general public doesn’t much care for. They can find a better product from our competitors, often at a much better price.

We also pay our employees considerably more than the competition does; about 80% more, in fact.

About a third of all our sales are to our own employees, at heavily discounted prices. Since they’re paying considerably less than the general public, their decision to purchase our products distorts the competitive pressures which would normally exist and which would force us to produce products that the general public would buy.

We’ve faced substantial competition for many years now – decades, actually. But we believe in a consistent business model, to the exclusion of profitability, agile adaptibility and long-term success and viability.

We’re not exactly at the forefront of innovation, but we promise to get there. Maybe. We’ll see.

Our competitors – evil, foreign-based companies – have been moving their plants to the United States. We have countered this invasion by moving our jobs to foreign countries. There, we can overpay our workers too.

Our success is critical to the US economy. After all, just look to history and you’ll see America once had a booming horse and buggy industry. They were allowed to fail when superior competition emerged. The economy has clearly never been the same since.

We need taxpayer money, and lots of it – at the current rate we’re burning through our cash, we’ll be broke soon. We need to be able to burn through taxpayer cash too. And, frankly, if the taxpayers won’t buy our products, we think we should nonetheless take their money. I’m sure you’ll agree that’s reasonable.

As you can see from the points I’ve outlined above, there is clearly nothing wrong with our business model – the robust way in which we do business should not be measured by profitability or long-term viability; nor should the fact no lending institution or investors will lend us money to continue our business as it currently is run be taken to reflect poorly on our management decision and overall strategy. It’s just this “credit-crisis” thing that’s causing us a whole lot of grief. Without that thorn in our side, we’d no doubt be a viable, healthy company.

If you give us the money we are seeking, we’re sure it’ll all turn around – the staggering loss of market share we’ve experienced over the course of the past couple of decades is quite obviously an anomoly which will blow over in due course. Hopefully soon. Hopefully very soon.

Thank you in advance for this bailout. You’ve made the difference between all our workers being laid off and most of our workers being laid off.

Sincerely,

One of Three

Get ready for an interesting Monday in the world of share prices.

Despite the high hopes attached to the US government’s various bailouts (so far totalling around $1,014,000,000,000, or about $7,546 per taxpayer, as we wrote in a previous article), the world’s markets continue to drop.

Asian markets are uniformly down, and signficantly – here’s a glimpse of Asia’s markets as at 5:50am eastern:

Asian markets as at 5:50am eastern, Monday Oct. 6, 2008

The situation is much the same in Europe. Again, courtesy Yahoo, and also as at 5:50am eastern:

European markets follow suit. Also as of 5:50am eastern, Monday Oct 6, 2008

The herd psychology appears to be in full swing, with a wholesale migration out of the markets.

Hold tight for a bumpy ride: the more governments throughout the world bailout failing banks/insurers/etc., the more the taxpayers (read: consumers) get burdened with debt, and the farther away a recovery becomes…

Here’s the complete list of the members of Congress who voted in favor of the bailout bill:

Roll Call for Bailout Bill Vote

FINAL VOTE RESULTS FOR ROLL CALL 681

(Democrats in roman; Republicans in italic; Independents underlined)
H R 1424 YEA-AND-NAY      3-Oct-2008      1:22 PM
QUESTION: On Motion to Concur in Senate Amendments
BILL TITLE: Emergency Economic Stabilization Act of 2008

—- YEAS    263 —

—- NAYS    171 —

As we previously wrote, the current crisis in the financial markets could not have happened without Freddie Mac and Fannie Mae: by guaranteeing undocumented, high-risk mortgages, Freddie and Fannie made investments in the mortgages a sure things for Wall Street.

Now, the New York Times has published an excellent background article on how Freddie and Fannie got into the position whereby they were guaranteeing these mortgages, and the fingers point to the usual suspects: with Democrats pushing Freddie and Fannie to insure ever riskier loans, under the guise of “helping” low-income, minority and high-risk applicants on one hand, and Wall Street pushing Freddie and Fannie to do the same, thereby enhancing Wall Street’s profits, the US taxpayer never stood a chance.

This could never have happened in a free market. In such a market, Freddie and Fannie would have been forced to charge insurance premiums commensurate with the risks they were assuming, not on the basis of some sort of “altruistic”, government-induced charity mission. Investors in the mortgage bundles guaranteed by Freddie and Fannie would have likewise been forced to scrutinize Freddie’s and Fannie’s ability to take on such risks. As it was, it was essentially known the government would back up Freddie and Fannie. That removed any risk to investors.

The article cites Democrats such as Barney Frank of Massachusetts and Frank Reed of Rhode Island encouraging Freddie and Fannie to take on ever more risky mortgages to support their ideological goals.

The Bush White House, which has shown itself to be more Democratic than any Democratic White House since Roosevelt (as measured by government interventionism in the economy and growth of government spending), made matters worse, by changing the lending standards applied to Freddie and Fannie, thereby allowing them to take on an additional $40 billion in sub-prime loans.

The lenders, meanwhile, threatened to take their business elsewhere unless Freddie and Fannie took ever more risky mortgages off the lenders’ books.

You can find the excellent New York Times article here.

Among all the drama on TV and in newspapers about credit “disappearing”, all in support of a taxpayer financed bailout, here’s a look at some of the actual numbers, courtesy forbes.com:

U.S. Bank Loans (Billions of Dollars)

As you can see, consumer lending is still going strong, business lending actually increased and even real estate lending is significantly up over last year.

While it makes for good ratings and sells newspapers and serves as a convenient excuse for the growth of governmental economic interventionism, in reality the numbers don’t show any crisis.

You can see the source article here.

In a week of shocking developments, including a defeated bill which sought new government spending in excess of the defense budget (and, in fact, any single item of the general budget), Senator John McCain blew a golden opportunity to put his well advertised but difficult to discern “maverick” reputation on the line on behalf of the majority of american people.

While the Democratic party, and Senator Barack Obama, and President Bush and many Republicans believe artificially increasing the supply of credit by way of government intervention at the expense of more than $7,000 for every taxpayer (and with all the urgency of a stick up artist poking his gun in your ribs and demanding your wallet) is a prudent idea, the bulk of the US population believe otherwise.

They’re right.

Contrary to virtually all media reports, government interventionism led directly to the current “crisis”. Despite this, the only solution proposed revolves around additional government intervention. Media “pundits” notwithstanding, “Main Street” understands the profound hypocrisy at play here. Unfortunately, in an election year featuring one candidate deeply commited to government interventionism and another candidate desperately commited to the idea that a leader should be seen to be doing something, even if that something is the wrong thing, the majority of americans have no one representing their views, or their pocket book.

John McCain has shown a shocking lack of courage in not standing up to the special interests who support the proposed government bailout. These same special interests, who routinely espouse the merits of free enterprise (but only when free enterprise works to their advantage) and are now calling for government intervention on a scale never before seen. John McCain supports their pleas.

There was another path for Mr McCain to take. He could have, for example, told the american people that the solution was for the government to get out of the business of guaranteeing low-quality loans. He could have said that the time for government to subsidize irresponsibility, be it on a personal level or institutionally, has long since passed. He could have made the case that picking the pockets of the people on so-called Main Street to subsidize Wall Street is profoundly un-american. He could even have put forth the (shocking, these days) notion that government is not, in fact, the solution to each and every problem. Instead, he seems to have charted a course intended to appear as “leadership”, but which leaves angry, financially threatened americans with no alternatives among Presidential candidates on the critical issue of a government bailout.

This is an issue with profound implications. Not just for americans today, but also for their children and grand children. In a country which espouses the freedom of the individual above all, but which increasingly proves the concept to be lip service at best, the populace has a choice of a “change agent” or a “maverick”, both of whom lack the courage to plot anything resembling a new course.

Land of the free? Home of the brave? Not anymore…

In a stunning and unexpected vote, the Wall Street bailout bill (with no ultimate price tag attached, and hastily put before the House of Representatives within a week of its conception) was defeated by a vote of 228 to 205.

It appears a majority of Congress listened to the pleas of their constituents, who were overwhelmingly opposed to the bailout – in some cases the phone calls against the oddly-named bill (“To amend the Internal Revenue Code of 1986 to provide earnings assistance and tax relief to members of the uniformed services, volunteer firefighters, and Peace Corps volunteers, and for other purposes”) outnumbered the calls in favor of the bill 200 – 1.

What happens now? Well, for starters, the US markets reacted as expected: the Dow Jones dropped 6.98%; the S&P 500 fell 8.79% and NASDAQ plummeted 9.14%. The hyperbole was in full force all day: the market had its “biggest point drop in history” read one news service’s headline, cleverly avoiding expressing the concept in more meaningful percentage terms (in which case Black Monday – October 28, 1929 – trumps today’s losses: the market fell 13% on that one day. Today’s drop, in percentage terms, does not even make the top 10 worst percentage drops of all time).

What’s more, it’s almost certain additional banks will fail, credit will get even tighter and the economy will contract.

And that’s not a bad thing at all. In fact, it’s necessary, far more necessary than the artificial supply of credit the US government sought to create via the bailout bill.

As we previously wrote, the government-created surplus of credit, dating back to the 1938 creation of Fannie Mae, caused the problem in the first place. We’re not alone in that assertion: in fact, 166 academic economists signed a letter protesting the bailout – you can read Harvard’s Senior Economist Jeffrey A. Miron’s reasoning here. In order for the economy to correct itself, that artificially created excess credit needs to disappear. Who provides credit? Banks, for one. Banks closing down is part of the solution, not the problem.

What about consumer spending, you ask? Well, consider this: it’s often said that consumer spending is the “driver” of the US economy. The only problem with that statement is that it’s completely backwards: a healthy economy drives consumer spending, not the other way around. Think of it this way: it’s not until businesses flourish that more people get paid more salaries and therefore have more money to spend. The populace does not suddenly get more money from nowhere.

Only that’s exactly what happened: starting with the creation of Fannie, then Freddie, and exacerbated by Alan Greenspan’s monetary policy, people suddenly did get money from nowhere. Well, almost nowhere: in fact, it was the artificial guaranteeing of substandard mortgages by Fannie and Freddie that sealed the otherwise impossible (in a free market) deal. If the economy is only growing because people are spending more, there’s something fundamentally wrong with the economy – the entire flow of money is inverted.

To correct that inversion, consumer spending has to become re-tethered to income, rather than being a function of artificially inflated equity increases in real estate, against which people borrow to provide for their spending.

Expect all things which fall into the “optional” category of spending to be very hard hit. These include luxury items, entertainment, dining out, gambling, vacations, perfumes, novelty items, etc. Obviously stocks in companies which provide such things will also be particularly hard hit.

Expect oil prices to drop, as the people of the world’s largest oil consuming country tighten their belts.

Expect vehicle sales, in particular, to plummet under a triple whammy of high fuel prices, a cash (and credit) strapped consumer base and an inability of automakers to secure necessary credit when they need to invest in building smaller autos.

Expect this to last for a while.

But also expect that it will not last nearly as long as it would have, had the politicians gotten away with pouring gasoline on the fire by manipulating the supply of credit via the bailout bill. There’s at least $700 billion dollars out there to be invested which would otherwise have gone to buy the Treasury bills sold to finance the bailout.

And the people on Main Street are off the hook for at least $5,000 (but probably much more) in future tax obligations, which would have made recovery all the more difficult.

And a giant bureaucracy attempting to arrive at a “fair price” for assets which the market says are near worthless didn’t spring up to further confuse a market place already uncertain of the underlying value of assets.

And that means there’s a light at the end of the tunnel after all…