Thursday, October 02, 2008


The bail out bill is likely to pass the house on Friday. The bill will include billions of dollars worth of wasteful spending.

Last night, after unloading the pumpkin truck at church, two friends and I discussed the cure for what ails America. It would seem that if three guys off the pumpkin truck "get it" then surely the congress can as well.

During our discussion, the cry went out for reducing the federal deficit. I invoked the ghost of Milton Friedman, one of the greatest economist of all time. Milton was not as worried about the deficit as about how the money was spent. Most people understand that borrowing money for a productive reason is not a problem. Businesses and individuals make rational decisions to borrow money every day. The business that borrows at 7% to earn 15% makes wise use of these resources. The individual that needs a refrigerator, today, makes a rational decision to borrow. Sure, he should have had an emergency fund, but he didn't. Rather than eating out for the rest of his life and rather than taking a 10% penalty for withdrawing from a retirement account, it even makes sense to make a short term 18% credit card loan.

US citizens together have a net worth of 58 Trillion Dollars, we produce another 13 Trillion Dollars worth of goods and services each year, our common debt is about 9 Trillion Dollars. Bring the above numbers down to a scale that does not blow our minds and you have a family with a net worth of $580,000 which earns $130,000 per year and has a total of $90,000 in debt ( this family has total assets of $670,000, debts of $90,000 and net worth of $580,000). America is in sound financial condition. The myth that the interest on the debt is killing us is obviously false. Year after year, our increase in income averages more than our increase in interest payments on the debt and our net worth grows by more than the debt.

Arguments can be made on both sides of the above numbers. The total net assets do not include hundreds of millions of acres of land and trees and many other resources. The 9 Billion in debt does not include unfunded liabilities such as social security payments. The fact remains that, financially America is very sound.

However, the family with a net worth of $580,000 will not remain financially sound if it starts giving all its friends annual checks of $1,000 each. The passage of the bail out bill concerns me, but not for the obvious reasons. The most disturbing part is that additional wasteful spending was added. Our legislators are hooked on spending. They could not even pass an "emergency bill" without adding pork barrel spending. Every person in America, poor and rich, will subsidize billionaire T. Boone Pickens as a result of this bill. T. Boone had the money to spend on advertising needed to help the lefties sell 30 cent on the dollar subsidies for expensive wind mills.

We need an ATTITUDE INTERVENTION! The house members who voted against this bill the first time are being rolled. As Dick Armey said this morning, this congress is like the fellow who would not date a girl that had acne and is now being asked to date a girl with leprosy.


Because this bail out was carefully timed, it will "work". The prices of the great majority of houses across the country have already fallen to their clearing prices. New construction has virtually ceased. Dramatically lower priced fuel, money, and housing costs has made houses once again very affordable. The average citizen will see a significant "tax cut" in the next few weeks as his price of gasoline falls to $3 or less. The savings on energy will allow mortgages to be paid or taken over by stronger hands. Mortgage backed paper that has been written down to 40 cents on the dollar will prove to be worth 85 cents, giving the government room to buy this paper for 55 cents and to make the public a profit when it is resold for 65 cents. This monstrous problem, created with the complicity of Democrat Congressional Leaders, will make heroes out of the same leaders. Those whose bias favors big government over big business will see these leaders as the saviors of democracy.

The FOMC and other central banks have already taken their feet off the the brakes and jammed the accelerators to the floor. The FOMC needs to lower the Fed Funds Rate by one half of one percent to put it in line with what the FOMC is doing in the market place. Right now, the FOMC is like the fellow who has his house up for sale. He has suddenly lowered the price in multiple listing but he has not yet put the reduced sign in his yard.

Investors should take advantage. Buy several regional banks and hold on for a nice ride.


The Youtube link I sent earlier is a good link to spread around. We need to get the story out.

It is a complicated story but between now and the election, it is a story that needs to be told and retold. Chris Dodd and Barney Frank were among those that pressured Fannie Mae and Freddie Mac to loan to unqualified buyers. Chis Dodd with the support of Barry Obama blocked reform in 2003. Dodd and Obama were well "paid" for their "service" with massive campaign contributions. Yesterday, Harry Reid held up Dodd as the great one for steering the bail out bill through the Senate.

It is clear that the republican minority in the senate can be rolled. The senate needed a negative vote of 40% to block the pork included in this bill, the pressure was just too great, because the people back home support those who bring back local pork. A fifty percent vote is needed in the house and republicans start out in the minority.

My friend Al, says that pork is the wheel grease that makes the legislature roll. It certainly appears to be the case. Not even an "emergency" can be addressed without adding wheel grease.

Humans make mistakes. We ban together to protect and support one another but the bigger the grouping the bigger the potential mistakes. The best way to prevent massive wasteful spending is to keep the government coffers bare. Keep the money flow to congress lean and the only choices congress will have is to cut spending or to borrow to spend. They will do both. The borrowing will not cease but they will be forced to cut the worst of abusive spending.

The tried and true "method of democracy" is to "muddle through". The founders, knowing that power corrupts, had the good sense to provide numerous checks and balances. We have reached the difficult situation where there are more people who are net recipients from the government than there are net contributors to the government. The recipients are using the power of the majority vote to take more. The results are apparent in the current financial crisis. The question remains, do enough people understand that it was excessive government intervention, trying to turn government from a "service organization to a charitable foundation" that was the root of the problem? If not, the next bail out will be a monster.