TPC quotes Annaly Capital Management, who uses the following chart:

This chart makes the point that:

The primary function of government now seems to be transferring wealth from one group to another through programs like Social Security, Medicaid, Medicare, unemployment benefits, the new health care system, etc. It’s hard to consider this kind of spending stimulative…

As the federal government’s main reason for existence has evolved from protecting its citizens to that of a Robin Hood, the Top 10% of all earners, from whom all this wealth is “transferred”,  are forced to pay an ever rising burden of the cost of “government”, including the ruling elite’s “commission”.  IRS data on the share of taxes these earners pay allowed us to prepare the following chart.  As the chart indicates, the top 10% earners will soon be tapped out.  Once the pot-of-wealth from which our government transfers runs dry the primary function of this government ceases to exist.

More on this topic (What's this?) Read more on Wealth at Wikinvest

Government jobs now exceed private sector jobs (ht Clusterstock).

ABC News is reporting that on page 432 of Senator Reid’s health care bill, there is a section increasing federal Medicaid subsidies for “certain states recovering from a major disaster.” The section spends two pages defining which “states” would qualify, saying that it would be states that “during the preceding 7 fiscal years” have been declared a “major disaster area.” That language applies to exactly one state: Louisiana.

According to the CBO, those subsidies will cost about $100 million. The bill cannot pass without Senator Landrieu’s support, and Reid is bribing her with $100 million in Federal money to get her vote. This should be ILLEGAL!

Below is the complicated language in the bill. All of it could have been cut down to a few words: “Extra federal funds allocated to the State of Louisiana to BRIBE Senator Mary Landrieu to vote for this bill”.

SEC. 2006. SPECIAL ADJUSTMENT TO FMAP DETERMINATION FOR CERTAIN STATES RECOVERING FROM A MAJOR DISASTER.

Section 1905 of the Social Security Act (42 U.S.C. 1396d), as amended by sections 2001(a)(3) and
2001(b)(2), is amended— (1) in subsection (b), in the first sentence, by striking ‘‘subsection (y)’’ and inserting ‘‘subsections (y) and (aa)’’; and (2) by adding at the end the following new subsection:

‘‘(aa)(1) Notwithstanding subsection (b), beginning January 1, 2011, the Federal medical assistance percentage for a fiscal year for a disaster-recovery FMAP adjustment State shall be equal to the following:
‘(A) In the case of the first fiscal year (or part of a fiscal year) for which this subsection applies to the State, the Federal medical assistance percentage determined for the fiscal year without regard to this subsection and subsection (y), increased by 50 percent of the number of percentage points by which the Federal medical assistance percentage determined for the State for the fiscal year without regard to this subsection and subsection (y), is less than the Federal medical assistance percentage determined for the State for the preceding fiscal year after the application of only subsection (a) of section 5001 of Public Law 111–5 (if applicable to the preceding fiscal year) and without regard to this subsection, subsection (y), and subsections (b) and (c) of section 5001 of Public Law 111–5.

‘‘(B) In the case of the second or any succeeding fiscal year for which this subsection applies to the State, the Federal medical assistance percentage determined for the preceding fiscal year under this subsection for the State, increased by 25 percent of the number of percentage points by which the Federal medical assistance percentage determined for the State for the fiscal year without regard to this subsection and subsection (y), is less than the Federal medical assistance percentage determined for the State for the preceding fiscal year under this subsection.

‘‘(2) In this subsection, the term ‘disaster-recovery FMAP adjustment State’ means a State that is one of
the 50 States or the District of Columbia, for which, at any time during the preceding 7 fiscal years, the President has declared a major disaster under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act and determined as a result of such disaster that every county or parish in the State warrant individual and public assistance or public assistance from the Federal Government under such Act and for which— ‘‘(A) in the case of the first fiscal year (or part of a fiscal year) for which this subsection applies to the State, the Federal medical assistance percentage determined for the State for the fiscal year without regard to this subsection and subsection (y), is less than the Federal medical assistance percentage determined for the State for the preceding fiscal year after the application of only subsection (a) of section 5001 of Public Law 111–5 (if applicable to the preceding fiscal year) and without regard to this subsection, subsection (y), and subsections (b) and (c) of section 5001 of Public Law 111–5, by at least 3 percentage points; and ‘‘(B) in the case of the second or any succeeding fiscal year for which this subsection applies to the State, the Federal medical assistance percentage determined for the State for the fiscal year without regard to this subsection and subsection (y), is less than the Federal medical assistance percentage determined for the State for the preceding fiscal year under this subsection by at least 3 percentage points.

‘‘(3) The Federal medical assistance percentage determined for a disaster-recovery FMAP adjustment State under paragraph (1) shall apply for purposes of this title (other than with respect to disproportionate share hospital payments described in section 1923 and payments under this title that are based on the enhanced FMAP described in 2105(b)) and shall not apply with respect to payments under title IV (other than under part E of title IV) or payments under title XXI.’’.

In a review of Richard A. Posner’s book, A Failure of Capitalism, the following “facts and causes” of the current financial crisis and recession/depression are cited:

… excess savings flowing in from Asia and the reckless lowering of interest rates by the Federal Reserve Board; the relation between executive compensation, short-term profit goals, and risky lending; the housing bubble fuelled by low interest rates, aggressive mortgage marketing, and loose regulations; the low savings rate of American people; and the highly leveraged balance sheets of large financial institutions.

The idea contained in the title of this book is that because these conditions arose, capitalism failed.  So, many people argue, since Capitalism can fail, then perhaps we should try something else: perhaps bigger government and more control, directly or indirectly, of the means of production. Posner’s conclusion is that:

… the pendulum swung too far and that our financial markets need to be more heavily regulated.

But the NYT’s review says Posner goes even further:

We are learning,” Posner writes, “that we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails… Posner thinks laissez-faire economics has nothing relevant to say.

To those who accept Posner’s conclusions, the possibility that government interference in the market economy was the original cause of, rather than the cure of, the current crisis is never mentioned.  The possibility that the current government interference is aggravating the current downturn is also dismissed.  The Wikipedia post on Capitalism asserts that there is “little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and paid employment are elements of capitalism.”

Ok, since there’s “little disagreement” for these elements, let’s start with them.  Based on these, it appears that the idea of Capitalism is really not much more than an ideal similar to the free, non-monopolized, yet, non-regulated markets theorized by economists when they talk about the concept of “pure, or perfect competition”. Thus, for example, Wikipedia’s definition of perfect competition indicates that the economy’s markets, if they were “ideal” and fit the definition of “perfectly competitive”, they would be characterized by:

  • Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price.
  • Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.
  • Perfect Information – Prices are assumed to be known to all consumers and producers.
  • Transactions are Costless – Buyers and sellers incur no costs in making an exchange.
  • Firms Aim to Maximize Profits – Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.
  • Homogeneous Products – The characteristics of any given market good or service do not vary across suppliers

Of course, no economy has perfect competition and… no economy represents the ideal Capitalism.  For example, let’s take “private ownership of the means of production”. If a few individuals, or a few private groups own (or control) all the means of production, we have monopolies or oligopolies. Technically, we might have some vague form of “capitalism”.  But most of us would agree (except the lucky owners) that this kind of “capitalism” is far from the ideal. Also, this version dominated by monopolies and oligopolies, will ultimately, fail.

Now let’s combine the next two items in the list of accepted elements relating to Capitalism: “creation of goods or services for profit in a market” and “paid employment”.  When we combine these two elements, we are merely lumping the return to capital and the return to labor together, for simplicity. Although one might be traditional and include “raw land”, too; both labor and capital are, in fact the main “means of production”.  So the essential elements of capitalism include a return or remuneration to the owners, or controllers of the means of production.  Ok, our ideal Capitalism now involves private owners, or controllers of the means of production (labor and capital) AND, from the previous paragraph, we don’t want monopolies or oligopolies to be the owners or controllers.

To the extent that monopolies and oligopolies control the means of production and to the extent that our government directly owns the means of production (communism), or indirectly controls it, through taxation and regulation (socialism), we don’t have the Capitalism ideal.  Indeed, a growing special interest group that includes the current President of the United States, despises and opposes the very idea of private ownership or private control of the means of production, even by monopolies or oligopolies – unless, of course those oligopolies are subject to the control of the government elites.  To the extent that these groups are in control in our country, we cannot say that Capitalism has failed, since we don’t have Capitalism.

So when our markets lock up, prices go extreme (up or down), and unemployment rises, does that mean that Capitalism, or perfect competition failed?  Duh! We don’t have those things! They are ideals – theoretical concepts – that did not exist to begin with, and cannot logically be said to have failed.

What did fail? Well…how about government? Is it not government that is supposed to prevent special interests from gaining “unfair” monopolistic advantage? Is it not our government that is “supposed” to avoid favoritism between special interest groups? And who are the special interests who have recently obtained so much control that they now effectively control the government itself?  Well…for one, the banks control the Federal Reserve and the Federal Reserve says it must remain free from “government oversight”, meaning it wants to remain a creature of the banks. Recall that Posner said the easy money policy of the Federal Reserve was a major cause of our current predicament. Further, Simon Johnson (among many) argues the banks have captured the government in a “Quiet Coup”. So, government has failed us miserably in fostering Capitalism.  But Capitalism hasn’t failed; it’s government that failed!  Our government has been taken over by the special interests.

One of the best analysts on Wall Street, Josh Rosner muses on the question of recent potentially illegal or unethical activities by financial institutions:

…in a time of national crisis we had institutions that were unwilling to put aside their lobbying, put aside their will to power, and recognize they had a greater obligation to the country. This is part of why I said capitalism in its purest form doesn’t work because they would assert their primary duty is their fiduciary obligation to their investors. However, I would say part of fulfilling your fiduciary obligation to your investors is to make sure there is a playing field on which to bring your ball and bat every week.  Do I think they tried to maximize their returns in this crisis and minimize the losses they would have to recognize? Absolutely, no question. Is that wrong? I’m not an ethicist, so this is one man’s opinion: Yeah, I think in some sense it is wrong. How do we square that circle? That’s for the government to determine. But I do question whether our Founding Fathers intended for corporations to have the same rights as citizens.

Indeed, the government must create a level playing field without bias and payoff…and it has failed miserably to do so with respect to the financial institutions.  But the banks and the ideologues are not the only special interests that control our government and direct it to allow the subversion of practical Capitalism.  Not hardly.  Besides the banks, other large corporations, notably the oil companies, as well as labor unions and political action groups, all have gained so much sway over our government that – until we eliminate that sway – Capitalism will never flourish in the United States.  Indeed, the failure of government to remain free from the special interests is a central argument in favor of laissez-faire economic policies. The Wikipedia post on laissez-faire economics says that the laissez-faire champion, the Chicago School of Economics and other advocates:

…claim to favor a state that is neutral between the various competing interest groups that vie for privileges and political power in a country. They are critical of mixed economies on the grounds that it leads to an interest-group politics where each group is seeking to benefit itself at the expense of another and the consumer… any government intervention such as regulation, protectionism, creating legal monopolies, competition laws, or taxes, interfere with the [market’s judgment] being reflected accurately in the [market] price and the maximization of economic utility.

Laissez-faire assumes the existence of a vigilant, but unbiased government.  The collusion between government and the special interests is possibly many things, but conducive to Capitalism is not one of them. Washington’s blog has a good post which suggests that the partnership of the special interests and the government that is preventing Capitalism in the United States is not really communism, or even socialism, it’s fascism:

Some, however, argue that the economy is more like fascism than socialism. For example, leading journalist Robert Scheer writes:

What is proposed is not the nationalization of private corporations but rather a corporate takeover of government. The marriage of highly concentrated corporate power with an authoritarian state that services the politico-economic elite at the expense of the people is more accurately referred to as “financial fascism” [than socialism]. After all, even Hitler never nationalized the Mercedes-Benz company but rather entered into a very profitable partnership with the current car company’s corporate ancestor, which made out quite well until Hitler’s bubble burst.

Is Scheer right? I don’t know. But Italian historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because “the State pays for the blunders of private enterprise… Profit is private and individual. Loss is public and social” (page 416). This perfectly mirrors Roubini’s statement about the American government’s bailout plan….Remember that one of the best definitions of fascism – the one used by Mussolini – is the “merger of state and corporate power“.

Demonstrators from both the left and the right want to make a shocking point and gain attention by portraying both the previous president and the current one as fascist, but underneath there appears to be instinctive recognition by society of this trend toward fascism .  One can hope so…before it’s too late:

bushhitlerobamahitler

Whatever the name of this demon: Socialism, Communism, or Fascism… it needs exorcism. However, just electing a new party that promises “change” is obviously not good enough. In the recent election, we merely swapped one set of special interests (like oil companies and oil service companies) for another (like unions and socialists).  New laws ARE necessary – perhaps even a change or two in our constitution – to eliminate the control of our government by “partnering” special interests. In general, the sway that special interests now have over our election cycle is pitiful.

Making all campaign contributions from any entity (other than $2500 per individual) illegal would be an awesome step in the right direction. In addition, we need to stop all special interest advertising for six months prior to congressional and presidential elections. Ten year term limits on all congressional seats would also be an excellent way to make the influence that any special interest may gain over any particular congressman or woman to die a natural death when their term expires.

More specifically, the Ponzi scheme that is the Federal Reserve needs to be eliminated.  Our new special interest-free government should be able to take over supervision of the Federal Reserve from the banks that now perform that function.  Indeed, banks regulating themselves just won’t cut it! Further, NO bank or any other firm should be allowed to get large enough to control 5% or 10% of an industry.  We have laws that preclude this sort of thing (i.e. Sherman Antitrust Act and other banking laws) that are already on the books!  But our government has failed to enforce them.  Why? It’s simple: SPECIAL INTERESTS OWN OUR GOVERNMENT.

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Bank bond holder should not come out of a bad bank unscathed.  Jeremy Bulow at VOX submits a viable plan to deal with the banks:

A plan that isolates the bad liabilities rather than the bad assets of the banks, and pays the owners of those claims everything they legally deserve in liquidation but does not fully immunise them from losses, will achieve three major objectives.

  • It will help unfreeze the credit markets by creating healthy banks able to lend.
  • It will assure that depositors are paid in full, and all creditors are paid at least their entitlement.
  • It will make the bailout cheaper for the government, increasing its flexibility.

VOX is on the right track. We believe, for any plan to work it must:

a. Make the bank bondholders pay before taxpayers do, and,

b. prevent CDS’s on bank bonds held by those without an insurable interest from spreading panic. We have previously discussed how this issue can be dealt with through taxation.

This is in line with VOX’s suggesion to focus on the liabilities and not assets.

David Brancaccio interviews Kenneth Rogoff, Harvard economics professor and former chief economist of the International Monetary Fund on NOW on PBS.  Dr. Rogoff says we won’t be back to the same level of GDP as 2008 until after 2011 and that we have to take the big banks “through some form of” bankruptcy…

More socialism through crisis.  Stephen Labaton of the Herald Tribune (NYT) on the Obama administration proposed new regulations of American firms:

One proposal could impose greater requirements on the boards of companies to tie executive compensation more closely to corporate performance and to take other steps to assure that outsize bonuses are not paid before meeting financial goals.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving U.S. government bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. Last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses exceeding one-third of their annual pay.

Beyond the pay rules, officials said the regulatory plan is expected to call for a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire

A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large, troubled companies that are not now regulated by Washington, like insurance companies and hedge funds.

But the administration’s efforts, especially on tighter regulation of hedge funds, are not expected to assuage some European countries. Moreover, the hedge fund industry has significant influence on Capitol Hill and has shown that it can defeat proposals it finds onerous.

It’s not just hedge funds that have influence over the President and Congress – its’ all the bondholders, as a class.  They give much more campaign contributions than taxpayers, as a class.  Apparently, the power to take over failed institutions will only be given if bondholders are kept whole.

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Obama’s budget has much more to do with redistributing wealth than with economic recovery.  Newt Gingrich on Fox’s Hannity show on Friday, March 13  points out that Obama uses a chart prepared by French socialists on page 11 of his new budget document.  The graph was created by Thomas Piketty and Emmanuel Saez, French economists, rock stars of the intellectual left. From Kenneth Davenport’s blog:

“Their specialty is “earnings inequality” and “wealth concentration” — code words for socialist theory designed to validate confiscatory economic policies. It turns out that Piketty and Saez are for Obama what Arthur Laffer was to Ronald Reagan.”

The chart is reproduced below:

socialist_pic

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From NYT

“Top federal regulators say they were taken aback when they learned that a California congresswoman who helped set up a meeting with bankers last year had family financial ties to a bank whose chief executive asked them for up to $50 million in special bailout funds.”

Congresswoman Maxine Waters is the one who earlier told Oil Company executives she favored nationalization – although she couldn’t pronounce it.

When Government owns 100% of an asset, there is zero volatility in its price since there is no market price – it’s not traded.  When government owns a controlling interest of the asset, the volatility of its price is dampened.  However, market price does not rise  as a result of this decline in volatility as might be expected.  This is because liquidity has been reduced – there are less shares traded and those that are traded represent only a minority ownership interest which can never fully realize the full potential value of the asset.  This is the whole reason the IRS allows discounts for minority and undivided interests for estate tax purposes…  For more on the volatility-value question, see at Zero Hedge: Pascal’s Wager For The Neomarxist Generation (Or The Rampant Confusion Among Risk Traders)

More on this topic (What's this?) Read more on Historical Volatility at Wikinvest

Obama calls the NY Times back to say,

“By the time we got here, there already had been an enormous infusion of taxpayer money into the financial system, and the thing I constantly try to emphasize to people is that if coming in the market was doing fine, nobody would be happier than me to stay out of it…. You know, I have more than enough to do without having to worry about the financial system.”

The President agrees that government ownership of banks is socialism, but argues Bush started it and he’s just having to “go along”…increasing the government’s investment several times over in the two months he’s been in office.

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