The Rev. Warren Fiasco

For eight years, the United States has been ruled on ideological grounds by a President who promised to be "a uniter, not a divider". Instead of being a uniter, he consistently put ideologues in positions of power and actively sidelined anyone with divergent views. President Bush was not the President of the United States of America—he was the President of NeoConservative Americans and left the rest of us without any leadership at all.

President-elect Obama has chosen a man with views I cannot stand to perform the invocation at his inauguration. Many on the left are outraged at this selection. I think it's a great selection. President Obama is showing that he will be a Democratic President of America, not a President of Democratic Americans.

This inauguration does not belong to Obama or those who voted for Obama. It belongs to every single American, from progressives like myself to fundamentalist evangelicals like Rev. Warren. Everyone has a place at this inauguration.

Liberals who are outraged at the selection are no better than George Bush and Dick Cheney.

Proposal for GM

So I am against a bailout. What's the solution to the problem?

Those supporting a bailout are right about one thing: GM is too big to fail.

The bailout is wrong because it is not a mechanism for keeping GM from failing, only for putting off the failure and dragging out the pain of failure.

GM is a bad company run by incompetent management and burdened by absurd union contracts. It needs to shed its management, rip up its union contracts, and be broken into smaller pieces to succeed.

Bankruptcy won't make that happen. This situation is not the kind of situation in which a company enters bankruptcy, reorganizes, and comes out leaner. This situation is a liquidation event. Either way, good companies that have been serving GM will be put out of business because they won't see a dime of money that GM honestly owes them.

A bailout, however, has two equally bad paths:

1. It will perpetuate bad management practices and leave in place labor contracts that make no market sense. 
2. The government will put strings on the bailout. You know what's worse than bad businesses people managing a company? Government managing a company. 

There is an alternative. A bailout of the workers and vendors that have done nothing wrong while throwing out the management and bad corporate structure that made this situation possible. Here's how we do this:

1. Let GM enter Chapter 11 or Chapter 7. 
2. Any vendor or other creditor who is validly owed money at the time of bankruptcy will receive a government backed loan for all amounts owed by GM to them.
3. Any GM worker laid off will receive 6 months severance from the government.
4. Any GM worker without a college education or who has worked for GM more than 10 years will receive government paid education to re-skill themselves.

As a result, vendors and workers will receive reasonable protections against the bankruptcy, but the company itself will be broken up and its assets restructured in accordance with the market. The market-based restructuring will enable new companies to emerge than can make the US automative industry competitive again.

Let the Big Three Die

All of the consequences of GMs failure that proponents of a bailout use to argue support the bailout idea are true. If GM fails, people are out of jobs, good companies that have done nothing worse than offer services to GM will suddenly be saddled with bad receivables and the prospect of not making payrolls, and the state of Michigan will plummet in despair. 

But those arguments do not justify a bailout. Ford, GM, and Chrysler are poorly run companies with bad products. They have not continued to operate over the last 20 years by innovating and meeting consumer demand; they have remained in business by chaining the state of Michigan to their well-buying and spending money lobbying the US government for regulations that favor the folly of their product offerings.

Few industries have the luxury of seeing a trend coming for 30 years. The auto industry has had that luxury. We have all known that the price of gas would eventually go through the roof (and it will again). Japan, Germany, and the other auto-making countries recognized this and have a number of different products on the road today to match that need.

But not Detroit. 

In the past election, we had a number of silly discussions about "socialism" and "capitalism"—as if a 4% difference in tax rates on the highest 5% of income earners was somehow that dividing line. Bailing out the Big Three, however, is actual socialism. The worst of socialism. It says that employing people is more important than the value they add to our society. It also ignores what we know is a failure of socialism: if you save a job today that should not be saved, you will have to save it again tomorrow, and the next day, and the next day. And they will become less and less worthy of having a job as time goes on.

So, the bailout people have clearly illustrated a short-term impact. It's devastating and real.

Here's the long term outlook:

GM fails and sells off its assets, probably to a foreign car marker or a silicon valley company. Ford fails and sells off its assets. Chrysler sneaks by. Michigan goes into a severe depression and hordes of people leave Michigan for good. The auto-makers no longer control Michigan politicians and, amazingly enough, Michigan finally diversifies its economy. It learns how to survive without the auto-makers and eventually starts to see a prosperity that is actually earned prosperity. Detroit is no longer the cesspool of the nation.

On the other hand, if the Big Three are bailed out, we will save some jobs (there will still be a lot of layoffs), executives will get their golden parachutes, and we will be back in this position again in the future. You know why? Because these are bad companies. They must fail.

And if they truly are too big to fail, they must be broken up.

A Solution to the Financial Crisis

I am increasingly certain the proposed bailout is dangerous.

As long as it is the only solution on the table, however, you cannot throw rocks at it. A lot of people are throwing rocks at it without having the guts to propose an alternative.

Here's an alternative:

• Freeze all ARMs at their current interest rate level or 10%, whichever is lower.
• Pay off mortgages that exceed 80% of the current collateral value down to 80% of the current collateral value (if a home is worth $200K and you owe $210K, the government will pay your bank $50K and bring your balance down to $160K).
• Increase tax rate of 2% on anyone making more than $150K/year who benefitted from the mortgage payoff for 25 years. This extends to people who are not making $150K today but make it in 5 or 10 years; and it is dropped for people who have their income drop below $150K during that time frame.
• Refinance at current prime all mortgages under $250K for people making less than $100K/year and a 2-year history of being no more than 30 days behind on payments.
• Convert all interest-only real-estate loans less than $500K to 30-year, prime loans.
• Ban ARMs and interest-only loans.

The problem with the Bush administration solution is that it is very inflationary, it rewards bad decisions on Wall Street, and does nothing about the cancer causing this crisis—the plummeting home values.

My solution rewards no one. Everyone who took on a mortgage will still have their mortgage. Everyone who made a bad loan is still reliant on the people paying the loans to make their payments. However, everyone gets a free pass on the actual extraordinary event (the financial hurricane): the massive drop in home values.

As a result, many people who were in a bad position because they were underwater on their home values are all OK. The financial institutions at risk because of this situation will have an injection of cash and a reduction in risk profile. This injection of cash will create new capital that can go into the markets (the whole point of the Bush bailout).

Now, just buying out mortgages so they are not underwater does not address other nasty problem: risky loan instruments. If you could not pay your loan payments at 120% you home value, you probably still cannot afford them at 80%. The reason is because banks created goofy mortgage products that were once affordable for these people but have become completely unaffordable. So, the rest of my proposal addresses two key culprits: ARMs and interest-only loans. Turn them loans into loans people can afford. Reduce the risk profile of the institution and let people keep their homes.

The thing that kills home values is foreclosures. This proposal results in:

• A significant reduction in foreclosures (thus preserving home values)
• An injection of cash into financial institutions that can be used as future capital for investment
• Minimal regulation that prevents the greedy lending habits that created this crisis
• Everyone still be responsible for their own decisions—both Wall Street and Main Street
• It should be much less expensive for the government, meaning fewer new taxes and a lower risk of inflation (it is still an inflationary solution)

Analysis of the Economic Crisis

This economic crisis is every bit as serious as its being billed. The bottom line: if nothing gets done about this situation, no one will lend money. Period.

I know there is a minority of anti-fiat money people who think that is a good thing; but the reality is that it is a horrible thing.

You know in the good ole days the ads that said, "Bad credit? NO PROBLEM! You're approved." Today, those will read, "Good credit? DOESN'T MATTER! WE WON'T LOAN YOU A DIME!"

Why?

To put it simply, our lending institutions don't have the capacity to lend any more money. All of these "trash debts" on their balance sheet have diminished their reserves and put them at great risk. They just can't lend any more money unless the following things happen:

1. They increase their cash reserves
2. They decrease their risk profile

So what happens? Perhaps the most critical things are that:

• Big businesses don't have the cash to operate properly
• Small businesses can't get loans to make payroll or expand
• Individuals cannot buy houses or cars

Net result: an economic downward spiral

Individuals stop buying houses because they cannot get loans. Housing values decrease. Loan defaults increase as more and more people are upside down on their mortgages.

Small businesses simply go out of business because they cannot make payroll. New businesses cannot start (as an aside, one of the saving graces of a traditional recession is that people losing jobs start businesses that inject economic growth into the economy; that won't happen here because people losing their jobs won't find capital).

Big businesses that normally can borrow their way through economic downturns suddenly find they have no place to find capital. They cut jobs dramatically or go out of business.

HUGE job losses.

In short, we are honestly talking economic catastrophe. And I don't see where we recover. Eventually, I believe in America and believe we would recover. But this is Depression-style badness.

The Proposed Solution?

Any solution must create a health financial system capable of providing capital for economic growth. In other words, that has to be the end objective to deal with the short-term crisis.

Obviously, a long-term solution needs to include checks against lending the protect against over-exuberant lending to high risk customers as well so we don't end up in the same bucket the next time we have a real-estate bubble.

The proposed solution involves having the government buy off these "trash debts" at a fairly absurd price. For whatever reason, Paulson has proposed buying these things out at above the institution's carrying price (the carrying price is what the bank values the debt at on its balance sheet). The market price is well below that rate. For some reason, Paulson claims the market price undervalues these debts. I think that's bullshit. The market price is the right price.

At any rate, the government buys these debt instruments and then collects the payments. In an ideal world, everyone ends up paying back their loans and the government makes a profit. If the rate of return on the profits exceeds the interest the government is paying to borrow all these money, the US government ends up making a net profit.

In the mean time, the financial institutions are relieved of the burden of these risky debts AND they have money to loan into the economy.

Good news?

Well, three problems:

1. As mentioned above, Paulson is currently seriously overvaluing the debt. As a result, the government will overpay for these bad debts. That means more interest the government is paying on the money it is borrowing, and the harder it will be for the taxpayer not to get saddled with higher taxes to pay off this loss.
2. That's a lot of money being injected into the economy outside normal channels. I honestly fear two things:
   1. Inflation will kick in
   2. The Fed will have to hike interest rates a lot, thus making capital hard to get!
3. The proposal as I understand it now lacks important checks and balances. As a result, there is a lot of opportunity for corruption. If you are a Republican and don't care that Paulson has absolute authority over $700B, keep in mind it could be a Democratic appointee in the near future with that control. Either scenario is untenable. Beyond the risk for corruption is simply the risk of incompetence. Even with the best intentions, $700B in the hands of incompetents without any oversight is a bad thing. And finally, without tying any strings to this buyout, we risk these financial institutions turning around and making the same stupid mistakes.

Who is to blame?

Everyone is to blame. Not simply Republicans and Democrats. Managers and home owners, farmers and financial gurus.

It does start with the relaxation regulations governing financial institutions that began in the 1980s. These regulations were put in place in the 1930s in response to the excesses that caused the Great Depression.

Remember, in the 1920's we had a rapidly expanding economy with little regulatory oversight over financial markets. The result of the two things combined helped cause the Great Depression (among many, many, many other causes).

Fast forward to the 1980's. We relax many of the regulations meant to prevent another Depression. That relaxation continues through the end of the 1990's. In the mean time, we have an amazing period of economic growth.

So, what happens? Lots of capital is sitting in our financial markets as a result of rapid economic growth. Low inflation means that the cost of lending is low. And the lack of oversight combined with phenomenal growth in real-estate values makes financial institutions more and more willing to accept inappropriate loans (the real-estate values are key; they create the illusion that the loans are less risky than they really are).

So, now combine lack of regulatory framework with bad business decisions.

And add to that bad personal finance decisions. People are accepting way too much debt because they believe their home values will double in 5 years or something stupid.

So, we have:

• Lack of regulatory framework
• Rapid economic growth
• Rising real-estate values
• Low inflation
• Bad business decisions by financial institutions
• Bad personal finance decision by individuals

Remove 1 from the mix, and things are likely not so bad. Mix up the cocktail, and BOOM!

Drill Drill Drill?

Here's a thought experiment for you...

Let's say there is this natural resource called "shmoil". There is only a limited amount of shmoil in the entire world, and one day it will dry up. Nevertheless, shmoil is critical to the basic function of our economy and our nation would fall back into the dark ages without access to shmoil.

If you were President of this country, would you:

a) Elect to use the shmoil of other nations while shmoil prices were relatively low, in the mean time working hard to identify replacements for shmoil and thus guaranteeing you have shmoil reserves through the very end?

OR

b) Open up full exploitation of domestic shmoil early on, resulting in your nation being the first to run out of shmoil and thus being at the mercy of other nations at a time when shmoil prices are sky high due to the great lack of supply?

I vote for a).

Here's the cold reality. The USA has 3% of the world's known oil. It has 25% of the world appetite for oil. We need to be prepared to drill all 3% if it comes to it, but we don't want to open everything up  and end up having no oil reserves when the real oil crunch hits.

Ideally, we develop alternate energy resources and don't ever need to fully deplete the Earth of its oil. But we can't plan for the best and ignore the possibility of the worst. We need to manage access to our natural resources so we are guaranteed to be the last nation on Earth with oil.

We need the oil companies to drill using the oil leases they have available today and stop whining about getting access to ones they don't need access to right now.

The Problem with Palin

When liberals "attack Palin", they are not attacking Palin. Liberals are attacking McCain's judgment in selecting someone that, by the McCain campaign's own arguments, must be unqualified to be President.

It's possible for honest people to disagree on what qualifies a person to be President. The Constitution says only that one must be 35 years of age, born in America, and without a felony conviction.

Given two honest people, one can honestly believe Obama or McCain (or both) simply is not qualified to be President; the other can believe they both are. A person who believes that experience in government is important may believe that Obama does not have enough experience and McCain does; but an honest person cannot believe that Obama has enough experience and McCain does not. For someone for whom experience in government is the key qualifier for being President, McCain is obviously your choice.

People like me who support Obama do not disagree with the sentiment that McCain is more experienced than Obama. I believe that experience is overrated, that judgment and leadership are the critical qualifications for being President. I believe Obama has better judgment and leadership skills than McCain.

The problem with Palin is this:

Given that the primary qualification for being Vice President (in fact the only qualification) as stated in the Constitution is that you are qualified to be President, an honest person cannot hold that Obama should not be President because of his experience AND that Palin is a good selection for Vice President.

In other words, Palin's selection as Vice President does two things:

• It negates McCain's experience issue
• It re-enforces Obama's judgment issue
  

Put bluntly, selecting someone for Vice President who you do not think is qualified to be President shows monumentally bad judgment. If the McCain campaign honestly believes its own rhetoric about the importance of experience, it has done just that.

Hillary Clinton's Speech

Hillary Clinton delivered a near-perfect speech last night. 

Then the pundits jumped in.

I switched between CNN and Fox last night and, had I not been paying attention, I would have thought they were analyzing two different speeches. Fox News was talking about all the things Clinton did not say; CNN was talking about all the things she did say. The result: Fox News "analysts" universally determined that the speech was good for her, but bad for Obama. CNN, on the other hand, said she did exactly what she needed to do.

Who was right? Well, Fox News was loaded with right wing blowhards like Bill "Always Wrong" Krystal. CNN was loaded with a bunch of old party Democratic Hillary Clinton ass-kissers like James "Jackass" Carville. Obviously different perspectives were in play.

 The Fox pundits were panning the speech because it did not contain language stating that Clinton believed Obama had the experience to be commander-in-chief. The CNN pundits liked the speech because it drove home the point that, if you really believe in the causes Hillary Clinton represents, then you must support Barak Obama because he will bear that torch for you.

When analyzing the success or failure of a speech, you need to know who the audience for the speech is. The right wingers mistakenly believed they were the audience for her speech. The audience for that speech was people who backed Hillary Clinton during the primary and were considering voting for McCain or not voting at all because Clinton lost a primary in which they feel (rightfully) that the media engaged in overtly sexist behavior and (wrongly) that the process was unfair to Hillary.

In the context of her target audience, her speech was magnificent. She believes the same things they believe about the media and the process. Right or wrong, nothing anyone is going to do will fix those issues. But she can remind them of why they wanted her to be President in the first place. And the truth is, if you care about 

• a woman's right to control her own body...
  
• the ability for everyone to have access to basic healthcare...
• the need for America to engage in diplomacy before war...
• the need for America to become a nation to be admired, not feared...

Then you cannot allow John McCain to be elected President, as he stands for the opposite of Hillary Clinton and Barak Obama on all these things. And she made that very clear in her speech tonight.

There will be plenty of time for Hillary to point out what a good Command in Chief Obama will make to the wider public during the campaign.

Energy Proposal

We have a lot of vague platitudes out there... "We should drill for oil offshore"... "We need an Apollo program for alternative energy"... Blah blah blah.

What we need is a specific energy program. Here's one:

1. Reduce foreign oil dependence

• Place a tax on unused oil leases.
• Make drilling available in the arctic and offshore... conditional upon exhausting 50% of existing, unused oil leases.
• Remove all federal gasoline taxes.
• Place a 33% tax on every barrel of oil imported from abroad.
• Create mild incentives for the use of natural gas and "clean" burning coal.
• Provide R&D tax breaks on seeking out new sources of oil in the USA.

These combined options create a huge incentive to sell gasoline from American wells. Quite simply, American gasoline will be cheaper than foreign gasoline and the market will vote with their dollars. We have to be a bit careful, because we don't want to create so deep an incentive that we overly rapidly deplete our own reserves. They need to last at least long enough to get to hydrocarbon-independence.

This policy will also ensure that before we damage our national treasures in the name of removing our dependence on foreign oil, that we exploit the resources we already have in place.

2. Eliminate Hydrocarbon Dependence

• Allow no new power plants based on hydrocarbons.
• Subsidize the development of nuclear, wind, and solar power plants.
• Remove all tax breaks for energy companies related to hydrocarbon R&D (except as it relates to the specific tax breaks listed in part 1).
• Boost tax breaks for R&D spent on alternative energy sources.
• Remove capital gains taxes on investments in proportion to their expenses related to alternative energy R&D (careful how this is setup, can be a nice loophole for jackasses).
• Mandate that all new vehicles sold after 2015 must get 50 miles/gallon. Allow a very high "gas guzzler" tax for exceptions through 2020.
• Mandate that all new vehicles sold after 2030 must not require hydrocarbon energy sources.
• Mandate that all vehicles on the road must be powered by systems that do not require hydrocarbon energy sources by 2050.

Cheaper oil and gas should never be an objective; it just delays the inevitable—our need to not use hydrocarbons at all as sources of energy. Absent of an incentive like high gas prices, we will continue down the path of least resistence—fueling up at the pump.

And the reality is that we don't want the departure from a hydrocarbon system to be based on the free market. It must be mandated, or it simply won't happen unless the pain in the pocket book is severe enough. We therefore need regulations that establish a timetable for the move away from hydrocarbons.

The Alternatives to Diplomacy

Barak Obama suggests we should engage our enemies in diplomacy; John McCain suggests that to engage our enemies in diplomacy is only to embolden them.

But what is our real objective?

The real objectively, ostensibly, is a peace that supports American interests and carries moral authority.

It turns out that there are two paths to peace: diplomacy and genocide. Perhaps, along the way to genocide, you will bomb your enemy into complete submission allowing for diplomacy entirely on your terms. But when was the last time the USA was engaged in a war in which that happened? World War II? What would it look like for us to bomb Iraq into submission?

But the real issue here is what is going to happen with Iran. And Hezbollah. And Hamas.

Iran is a corrupt government run by bad people. However, most Americans don't realize that Iran has the moral high ground (as low as it is) in its confrontation with the USA. The USA helped overthrow Iran's democratically elected government and installed a pro-Western dictator much worse than many of the dictators we refuse to speak with today. Iran engaged in illegal acts against the USA (the hostage crisis, funding terrorists), but for good reason: Iran has no reason to trust the USA and has every reason the USA has illegitimate intentions towards it.

The Iranian people are also one of the most pro-American cultures in the middle-east. It is the closest thing to a functioning democracy in the Middle East outside of Israel and the people tend to think more positively of the USA than any other nation.

So why won't we talk to the Iranians? Because we don't like the megalomaniac Ahmadenijad?

He's a pretty scary individual. He denies the Holocaust. He would pursue a campaign of genocide against Israel if he had the power. In short, there just is nothing good about him.

But that's not relevant. He is, in fact, the "legitimately elected" leader of Iran. And even if you don't like Iran's style of "legitimately elected", he is the leader of Iran.

So, we have three choices:

1. Ignore him and hope he does not develop nuclear weapons while we cover our eyes and ears and say "LA LA LA LA I CAN'T HEAR YOU"...
2. Launch a pre-emptive war against Iran and hope we can bomb them into submission.
3. Engage Iran in diplomacy and follow Ronald Reagan's sage advice: Trust, but verify.

It's hard to tell which approach McCain really supports. It is either #1 or #2. #1 is the naive approach. It suggests that if we don't talk to our enemies, they cannot grow stronger. On the contrary, we have seen Iran and North Korea grow stronger and stronger when we ignore them. And #2 is, of course, war not peace.

There simply is no alternative to diplomacy.