Let California Fail

It is ironic that the federal government is substantially meddling in the financial affairs of other entities given the dilapidated state of Washington’s own finances.  First, there were the banks, investment houses and insurance companies – the most notorious being AIG.  Then the auto companies weighed in getting their piece of bailout funds from Uncle Sam.  Now, it seems the states will be next to tap the national treasury for funds that do not exist. 

There is a saying, “As California goes, so goes the rest of the nation.”  How true these words have become since both are completely bankrupt.  With the defeat this week by voters in the Golden State of ballot initiatives that would have drastically raised taxes to close a $24 billion budget gap, the state is on course for a complete financial collapse by July.  Unlike the national government, California can’t print money to buy more time either – no pun intended.  It must find a way to raise the funds otherwise millions of Californians will not receive checks.

But, not to worry, Governor Schwarzenegger, Senator Boxer and other Golden Staters are putting the squeeze on Treasury Secretary Tim Geithner to guarantee emergency loans that California needs to meet its obligations.  With the state’s credit rating in the toilet, some analysts believe federal backing is California’s only hope to secure the loans it needs to pay its bills.   The proposal would collateralize U.S. taxpayer funds to guarantee private lenders that they would be repaid if California defaulted.  The concept is to take the risk out of lending to California for banks and place it squarely, again, on the shoulders of American taxpayers.

Of course the leverage state officials are using on Geithner is that California is “too big to fail.”  They claim if the state were to go belly up it would send ripples through the rest of the country and even the world.  Further, if Washington allowed the collapse to take place imagine what that would do to the confidence the rest of the world has in us to lead economically.

Clearly the feds are in a totally unenviable position.  If they don’t bail Sacramento out they will look really bad given their enormous generosity towards unscrupulous bankers, and inept carmakers.  Since most of the money California needs to borrow will go to ordinary folks, teachers, cops, government workers, Washington can’t be seen again to favor the interests of Wall Street over Main Street.  Thus, I believe there is no question that the Obama Administration will bailout California.  Naturally, this is a big mistake.

In the first place, if Washington succumbs to the “too big to fail” ploy with California, then what happens if say Wyoming asks for bailout funds.  Can it be denied because its economy is not nearly as important as California’s to America’s health?  Is it proper to favor one group of Americans over another simply by virtue of where they live?  I realize we do that now with things like highway funds, but saving one state and letting another go is a horse of a different color.  What about Wyoming’s portion of the federal bailout funds for California?  If Washington submits to Schwarzenegger’s request it will open up an array of ethical and legal questions pitting states against each other.

Then there is the “moral hazard” that would result with a California bailout.  Given that politicians are not very courageous when it comes to making touch choices, state bailouts by the feds would allow state officials to manage state funds even more irresponsibly.  California is a perfect example.  The statist politicians there have overpaid public employees, spent generously on social services, and overregulated business and the environment.  Bankruptcy is the perfect solution to their reckless spending.  It is what ended socialism in Eastern Europe; it should be used to end socialism in California.  Without it, politicians of all stripes will believe that Uncle Sam will catch them when they fall.  This will impede economic recovery and perpetrate the myth that Washington has a bottomless bank account or a bank account at all.

Which brings us to the question of where does California think the feds are going to get this money anyway?  Our leaders have become oblivious to our financial condition.  When you can’t pay your bills you are bankrupt.  Washington has been bankrupt for a long time, but again has had the means (printing press) to put it off.  And put it off the politicians have.  That is why we now face the economic situation before us – a lower standard of living, mountains of debt both personal and national, and a gigantic task of rebuilding our industrial base so that we can compete again.  You see the politicians since at least 1971 have mortgaged our future; those bills have come due; and we don’t have the money to pay them.

So, California is not alone.  “As California goes, so goes the rest of the nation.”  Both entities are broke.  Perhaps instead of groveling to Washington to bail them out with funds Washington doesn’t have, the politicians in Sacramento can set an example for Washington to follow – deregulate, end the welfare state, disband public unions, and live within your means as a society.  Wouldn’t it be nice if California led the nation in a positive way for a change?

Trouble in Paradise

March 30, 2009

All relationships hit rough patches.  There is no better proof of this than in our schools.  One day the happy young couple is oblivious to the rest of the world as they are lost in each other’s loving gaze.  By the next day, usually after the boy has done something stupid, all bets are off on whether the relationship was ever meant to be.  Yelling, screaming, and a blatant rejection of the boy’s physical advance are telltale signs that there is “trouble in paradise.”  Unfortunately, it seems the United States is playing the part of the boy in a similar scenario with its economic partners.

It is no secret that the Federal Reserve and/or the Treasury Department has printed or committed over $12 trillion to “stimulate” the economy.  Of course, no one should expect that the government is done with its spending binge.  All signs point to more massive expenditures, albeit in more creative ways, in the future.  Janet Yellen, president of the San Francisco Fed and a voting member of the U.S. central bank’s policy-setting Federal Open Market Committee in 2009, told the Forecasters Club of New York, “I’m convinced this is no time to relax our efforts.”  In fact, recently, Bernanke and his central economic planners, announced that the Fed would purchase (print money) more than $1.25 trillion in government bonds and mortgage backed securities – all in an effort to lower interest rates further, unfreeze credit markets, and get Americans to spend like drunken sailors again.  Naturally, the Keynesian’s believe this is the award winning recipe to produce a prosperous economy.  Apparently, they have not been paying attention to the world economy since the 1930s.

But, some folks have been paying attention to that economy for the last eighty years or so and know that the answer to solving our current crisis is not more of the same Keynesian policies that got us into this mess.  Ironically, some of these folks know more than our policymakers even though they come from traditionally command economy societies.  Take Czech Prime Minister and current European Union president, Mirek Topolanek for instance.  Last week, at an EU gathering he characterized U.S. government economic plans as “a road to hell” claiming that Washington’s massive stimulus packages and banking bailouts “will undermine the liquidity of the global financial market.”  According to Topolanek, “We need to read the history books and the lessons of history and the biggest success of the EU is the refusal to go this way.”  These remarks, coming from a man who use to live in a centrally planned society, speaks volumes about how Washington is pursuing the wrong course of action by attempting to spend our way out of the economic crisis.  In any event, the sharp comments of Toplanek may indicate trouble in paradise ahead for the U.S. and her European trading partners

The slights to U.S. economic policy did not stop there.  While Topolanek railed against overuse of the printing press by the Fed, the Chinese central bank proposed replacing the U.S. dollar as the international reserve currency with a new monetary unit not connected to any country.  The Chinese have become very concerned about what American inflation will do to the value of their assets ($800 billlion in reserves) and they are also sick and tired of the reckless fiscal and monetary policies of the U.S. government in the last year but also since President Nixon closed the gold window thirty-eight years ago.  It is obvious that Uncle Sam has become addicted to the Chinese financing our never ending debts.  This was made abundantly clear when Secretary of State Clinton practically begged the Chinese government to continue buying treasury bonds on a recent trip to that country.  Make no mistake about it, the Chinese have performed the role of enabler to the U.S. government’s spending sprees for some time.  Only now have they realized the peril they put their economy in doing so.  Given Washington’s penchant for spending and Beijing’s apprehension that the plan will work to revive the economy, the relationship between the world’s two superpowers seems to be headed for a falling out – trouble in paradise.

By agreeing to accept the U.S. dollar as the international reserve currency through the Bretton Woods agreements, the whole world essentially bought into a Ponzi scheme known as the U.S. government.  With authority granted by the U.S. government, the Federal Reserve Bank has always been there for us.  It has artificially lowered interest rates to keep phony booms from ending.  It has bailed out insolvent banks to protect our assets.  It has printed money and issued bonds to foreigners in order to preserve our standard of living.  Never mind that we have piled up a mountain of debt in the meantime.  Keynesians tell us that huge debts don’t matter anyway.  Tell that to our trading partners.  It might restore the peace and end the trouble in paradise.

Bankruptcy over Bailout

November 21, 2008

Congress is getting so much pressure and hearing so many tall tales these days that it’s akin to unscrupulous telemarketers battering the simple minded to buy their product.  It is getting to the point where Congress will need to pass legislation to protect itself from money grubbing shysters.  First, it was the Paulson/Bernanke Crime Syndicate (their specialty is counterfeiting) that told Congress they needed a cool $700 billion or the sky would collapse on the United States.  Now, it is the poor automobile industry (that just got $25 billion from Congress in October) that needs another $25 billion lest the unemployment rolls in this country will swell by 13 million or 4 million (they haven’t decided on a number yet).  Next month, Congress will probably hear from the airline industry and how it needs billions.  After that, look for the agriculture sector to weigh in and then who knows, cigarette companies?

The fact is, soon there will be no end in sight to the steady stream of industries and groups that will lobby Congress for federal largess unless they put an immediate halt to the giveaways.  Congress has a golden opportunity to do just that right now by saying no to the automobile industry.  No matter what the costs, Congress must say in the words of Roberto Duran “no mas” to billions in bailouts for Detroit. 

For one thing, all of these bailouts are unconstitutional and thus illegal.  Article 1 Section 8 of the U.S. Constitution clearly specifies the powers delegated to Congress.  Nowhere in those roughly 17 powers is Congress given the authority to transfer money from one constituency to another.  Nowhere in there does it say Congress can use the federal Treasury to prevent corporate bankruptcies.  Critics of this position will say, “but what about the general welfare clause in the same section?”   The answer is, if the general welfare clause gives the Congress the power to bailout corporations with taxpayer funds then why did the authors of the Constitution not delineate that power among the 17 powers in that section of the Constitution?  Why did they delineate any powers at all if the general welfare clause includes any power?  According to the general welfare clause logic of the statists, the Congress can do whatever it wants under that one clause.  That is why we are in the mess we are in.

Another reason Congress must put an end to its handouts is because it is investing in losing propositions.  The Big Three automakers are a perfect example.  Their stock has plummeted by 75 percent since the beginning of the year and all three are on the brink of bankruptcy.  If investors are bailing on the Big Three in droves and each has one foot in bankruptcy court and the other on a banana peel, why in the world would our elected representatives even consider putting billions of dollars in them.  Would you?

Of course there is a good reason why the carmakers are collapsing.  Like other industries that have disappeared from the American landscape, the automobile companies have been the victims of collective bargaining laws passed by Washington and the State of Michigan.  It has been estimated that the average GM worker makes $81.80 an hour in wages and benefits.  In comparison, non-union Toyota pays $48 per hour in wages and benefits. The legalized extortion that the UAW is allowed to hold over GM puts the company at a competitive disadvantage costs wise by about $1000 per vehicle produced.

So, if Congress should not bail out these broke companies, then what should be done?  The same fate should befall the automakers that should have befallen the failing banks.  They should be allowed to go bankrupt.  “But they are too big to fail.”  “Many people will lose their jobs, their homes, and their healthcare.”  The bottom line is that the Congress cannot solve our economic problems by throwing good money into unsustainable enterprises.  The more than $2 trillion the government has already injected into the economy has proven that.  Besides, at the right price, entrepreneurs will buy the assets of the bankrupt firms and start a new American auto industry.  There is a market for cars in the U.S. and it is only a matter of time before some American(s) fills that market need.  Then the millions of workers who lost their jobs with the Big Three bankruptcies will have an opportunity to work for a competitive company.