Did the Gummint Make Money on the AIG Bailout?

This has been the subject of some debate over the last day or so. The Treasury announced it had made an $18b profit. Watchdog Neil Barofsky and blogger Henry Blodget got into a little Twitter spat over it, leaving completely unsatisfied. Dreading the task of attempting to look into it more deeply, I instead partook of various diversions such as a the Yankees-Red Sox game and red wine.

I'm happy to report though that physicist Steve Hsu has accepted the premise (that the AIG bailout was profitable) and that's good enough for me. But that then conjures up a disturbing paradox.

Intuitively, one feels that bailing out blood-sucking financial institutions (like AIG and the banksters) is a bad thing, while bailing out actual goods-producing firms (like GM) seems rather virtuous. But it looks like bailing out the vampire squids is actually profitable - or at worse break-even - while rescuing the manufacturers has led to losses.

Hsu expected the AIG bailout to be profitable because the tendency of markets is to both overshoot - and undershoot - value. So at the depths of the depression, when the bailouts were instigated, financial assets were generally undervalued, thus providing a good buying opportunity for the Treasury. And especially in the meltdown, financial assets were in a state of complete chaos valuation-wise - no one really had a clue about their intrinsic value, as no one had a clue about what could be paid off and what couldn't. But with financial assets, liquidity in and of itself can stabilize financial assets and thus raise their value (assuming the reduced value is due to lack of liquidity).

But with manufactured goods, far more of their value is built into the goods themselves (at a minimum, scrap value). Sure, the value of any good will be depressed during a recession due to the demand curve, but the value of a car is not dependent on who has possession of it at a given time. A mortgage, on the other hand - or a CDS - is indeed entirely dependent on the specific counterparty. Thus, bailing out GM does not ipso facto increase the value of their manufacturing plant nor of their cars. By the same token,neither did the poor fiscal shape of GM affect its intrinsic value.

In a pure bankruptcy, GM's liabilities would have been abrogated and it's assets sold at auction. Assuming GM cars would have any marketability, it's inconceivable that it would not have survived as an auto-manufacturing concern. What could not have survived is the U.A.W.'s role in the new G.M. That is what Obama bailed out - not GM, but the UAW, which is why there will be no GM-bailout profit.

Obama's Awesome Recovery Will Doom Romney!!

That seems to be the attempted meme Obama surrogates are trying to spread. Today in the NY Times an op-ed (or maybe more accurately a blog post) makes such a claim. He provides a rather strange graph that attempts to illustrate this. What he's showing are total jobs created by each president - but for Obama only, he eliminates his first year. He then plots these total jobs on a graph (that has no numeric value on the X-axis) and proceeds to draw lines connecting the dots as if it were a time series. Rather bogus, I'd say - but the man is a History professor, apparently, so I guess we shouldn't expect him to be even minimally competent working with numbers.

Yes, it's true, Obama inherited a very dire situation, but that should have made it easier for him, not harder. When a recession is shallow (as in 2001 and 1991), you're not going to get very dramatic levels of job growth coming out of it. But when lots of people are thrown out of work in a deep recession, that's when you can make real hay on the jobs front. This is what happened in 1983 after the brutal 81/82 recession when unemployment exceeded 11% (it barely went over 10% this time around) - the economy roared. So let's compare Obama's recovery to Reagan's to see just how awesome this recovery really is:

Not even close. But it's even worse than that. Today, the population (non-institutional adults) is 36% greater than it was then - so job growth should be stronger. In fact, job growth hasn't even kept up with the growth in population. A look at job growth net of population growth is downright shocking:

There's just no putting lipstick on this pig - this is one ugly recovery.

Poverty of Ideas

The upcoming NY Times Magazine features a long piece on poverty whose main point appears to be that Barack Obama has been really good for the poor because there's so many more of them now than when he took office.

And so in 2009 and 2010, the Obama administration put a tremendous amount of money, very quickly, into the hands of low-income Americans. As part of the Recovery Act, the administration extended the eligibility rules for existing programs like food stamps and unemployment insurance, and the combination of the collapsing economy and the more generous rules meant the programs grew quickly. The number of individuals receiving food stamps rose to 45.1 million in 2011 from 27.4 million in 2007. From 2008 to 2010, an additional 6.8 million people, mostly children, began receiving Medicaid. Temporary changes in the eligibility criteria for various tax credits, including the earned-income tax credit and the child tax credit, produced tax refunds for millions of low-income workers, often totaling thousands of dollars a year.

That's all good news, by the way, in case it wasn't clear.

Still, the article does a decent job of at least touching on the pathological nature of today's poverty - except that it's racial component is never acknowledged. But went I reached the lengthy article's penultimate paragraph, I was completely dumbstruck by the author's blindness. After profiling a burly male social worker - a "good guy" clearly - and his interventions with a young man named Damien whose getting D's and F's in school, the author provides what he apparently feels is an upbeat outlook for the kid:

On a Friday night, he invited me to a YAP graduation celebration held in the basement of a Baptist church. Damien received a plaque, and he gave a little speech to his peers and mentors. He has two babies now, he said, and it’s hard, but he also has a high-school degree and a job at a shoe store. [Emphasis added]

That's the 18 year old - he has two babies! No problemo! Actually, there is a problem, as the author explains earlier - but it's not Damien's!

“From a child-development point of view,” Shonkoff told me, “we know that being a child in a family at the bottom end of the disadvantage scale means that you’re going to be less likely to get the kind of parenting or other care-giving that will lead to good outcomes and more likely to face the kind of adversity that leads to bad outcomes.”...a critical factor perpetuating poverty from one generation to the next is family dynamics and their effects on child development. This means that if we want to improve social mobility, we need to find a better way to help disadvantaged parents and their children. [EA]

Yes, that's right, "we" need to find a better way.

NY Times: Romney Ain't All Bad

The New York Times's vetting of Mitt Romney is so thorough that their research sometimes compels them to publish mildly flattering portrayals. The article's headline, In Real Estate Deal, Romney Made His Loss a Couple’s Gain, seemed lurid enough to suggest some sort of untoward kickback scheme, but as it turned out was more about Romney being just a good ole' Mormon softie. It's a quick read, and a good opportunity for the Times to promote its objectivity. But what stands out to me is the intensive scrutiny the paper is applying to this candidate for president - which is of course entirely appropriate - in stark contrast to the - well, not mere indifference to any examination of Obama's background, but outright hostility to any efforts to examine it at all.

He Gave an Order

A cyber-attack program, aimed at Iran's nuclear development capabilities, initiated in the Bush administration and developed by a small group within military intelligence, owes its effectiveness to the astonishing leadership abilities of President Obama. That's according to a lengthy article in the NY Times. Obama Order Sped Up Cyberattacks Against Iran crows the headline.

When one of the "worms" the program had developed escaped into the general cyber-community and became known in 2010, Obama grabbed the reins.

“Should we shut this thing down?” Mr. Obama asked, according to members of the president’s national security team who were in the room.

Those lucky guys in that room, getting to witness greatness at work before their very eyes - the leg tingles. And don't discount the momentousness of the President's vision.

Mr. Obama, according to participants in the many Situation Room meetings on Olympic Games [the code name for the program], was acutely aware that with every attack he was pushing the United States into new territory, much as his predecessors had with the first use of atomic weapons in the 1940s, of intercontinental missiles in the 1950s and of drones in the past decade.

You see, Obama's helmsmanship is up there with Truman and Eisenhower - don't kid yourself. Well, I don't want to ruin it for you - read the whole thing - there's more, much much more. You don't want to miss this gripping tale of decisiveness, boldness, and penetrating vision. A story about espionage, code-breaking, immense technical hurdles, rogue agents, multi-agency and international cooperation and intrigue and unintended consequences - why would you think it would be about anything besides Obama?

O's Foreign Policy

He has escalated an unwinnable war in Afghanistan. He has pulled the rug out from underneath friendly regimes in North Africa only to usher in God knows what in their place. He has antagonized Russia, a major nuclear power, over their internal affairs. And yet his policies are still fare saner than Romney's.

OK So It's Not a Tax

It seems clear from the SCOTUS arguments that the "individual mandate" is not a "tax". So therefore it is a mandate - meaning the federal government is indeed requiring U.S. citizens to do something. This is, outside of conscription, wholly unprecedented. And since our recent experience with precedent is that it will inevitably lead to extreme policies, then it must be nullified.

There simply is no basis for exempting this particular mandate from any other mandate that congress may in the future dream up. How about requiring everyone to to go to college? Or get a physical every year? Or attend a Diversity Training course? Why not? What could possibly stop Congress from mandating such activities? Nothing. Only the understood constitutional limit on federal power that forbids Congress from requiring people to do anything other than pay taxes, serve on juries and join the army prevents it. If we lift that last constraint, there will be no limit to Congress's intrusion into our lives.

Let's hope Justice Kennedy remains steadfast in the face of Comrade Obama's Stalinist admonishments.

Is This an Obama Epiphany?

I seriously doubt it, but hearing Obama talk about GM provides at least a glimmer of hope that he just might be getting it. "If all of us are doing our part, then this restructuring, as painful as it will be in the short term, will mark not an end but a new beginning for a great American industry" the President proclaimed. Yes, but why isn't what's good for General Motors good for America? Why does he think the country does not need a painful resetting, but instead just needs some big fat government spending?

I suspect in Obama's mind GM is a plain-old business (which of course it is), and so he's a lot more comfortable with the notion that it ought to sink or swim like any business, while he's rather intimidated by those financial institutions with their mysterious Doomsday powers. Thus the banks and AIG get bail-out after bail-out despite being far more irresponsibly run than G.M., which is mostly suffering from a double-whammy shock of a tripling of gas prices followed by, once the gas prices went back down, a major recession.

Still, maybe there's some hope that Obama will hear his own words and actually recall and understand them next time the financial industry steps into his view. Perhaps he will realize that there's lots of "haircuts" and compromises that could be going on there as well. Maybe the thought will pop into his head that Goldman Sachs doesn't have to be paid in full on every deal they've ever entered into - particularly not when taxpayer dollars are on the line.

How Will It Play Out?

A year from now, how will things look? Here's some ideas:

• The Obama stimulus package has revitalized the nation's economy, leading to a surge in consumer spending. China and Japan are so impressed with this performance, and now look so favorably on America's plans to invest in wind and solar energy and education they eagerly buy up all new Treasury issues rather than pump money into their own domestic economies. America is clearly on the rebound, and Americans are optimistic about the future.
  
• Due to widespread civil unrest, including some high-profile self-defense shootings re-labeled as hate crimes, President Obama has declared Martial Law across most of the country, deploying National Guard and even regular armed services personnel in most large cities to quell rioting.
  
• Unemployment has reached 15%; many of the most familiar and venerable companies have ceased to exist; most retail stores and restaurants are shuttered; pension funds are largely liquidated; several states and a number of cities have defaulted on their bonds; meanwhile, in Washington, President Obama has convened an "Education Summit" to look for "common ground" on ideas for reforming our education system.
  
• Citing a national emergency like no other in our nation's history, a group of military officers have taken control of the government and instituted emergency measures in order to halt the hyperinflation that has decimated the dollar in the wake of China and Japan's dumping of U.S. Treasuries to fund their own stimulus measures.
  
• Barack Obama is still president, but his position is largely ceremonial as a small group of senators and congressmen have formed, with the implicit backing of most of their colleagues, a de facto executive council governing the country via a novel use of the appropriations process, rendering Obama's vetoes useless and ensuring cooperation of departmental executives.
  
• Due to a string of failures in the banking and insurance sectors, forced consolidation has resulted in only two or three banks and two or three insurers remaining. The Obama administration exercises tight control over their operations, and they effectively act as arms of the executive branch. In fact, most of the economy is now running under the authority of federally-mandated "councils" consisting of coalitions of financial, labor, and community organizations who direct employment, location, supply and pricing decisions for firms. Shortages are common and unemployment remains high, but otherwise conditions are stable and no widespread panic or hunger is in evidence. Health care is effectively nationalized. The Ways and Means committee passes a new tax bill raising rates on wealthy taxpayers earning over $80,000 a year.
  
• Due to a dramatic policy reversal about 8 months ago, when President Obama, under intense congressional pressure, announced an end to bailouts, forced a complete reckoning of the financial health of all troubled firms, instituted tough financial regulatory reform, and proposed a revised, austere budget with a small deficit, unemployment has been in reverse, business activity has grown and investors have returned to the markets with fresh new vigor. The recovery appears to be in full swing with no sign of retrenchment in the foreseeable future.
  

Any thoughts on which of the above is the least likely?

We're Goin' Down, Down, Down, Down

After Friday's astonishing lows, the markets really shot its load today, just crashing through any of the support levels that anyone imagined existing just a week ago. Meanwhile, we (i.e., us Americans) are throwing another $30 x 10^9 AIG's way. As the Dow approaches 6000 and the S&P 600, the meltdown of our economy appears inevitable, without even the remotest suggestion from Washington that the bailouts will even be rethought, never mind end anytime soon. This is working out more serendipitously than Obama could have ever dreamt.

What, you say, I'm crazy? Why would the president of the United States want to see his nation's economy implode? Why would he wish to see his grand plans for a greener, more educated, more health-insured, more economically-just America jeopardized by its going bankrupt?

Now I'm not saying this is part of some grand plan. I'm not even sure Obama realizes what's happening. But clearly he does not consider imploding markets a cause for concern. As far as he's concerned, he's already taken care of that. He signed an $800b stimulus package. He's proposed a budget to vastly increase spending on education - we all know that education pays for itself multiple times over (sometimes 10 times!). And of course all that energy "investment" in the budget - that will solve our industrial problems.

So this market-crashing stuff is just a temporary distraction - a bunch of rich whiners throwing a little tantrum. Besides, if things don't pick up as expected, we can just throw another $800b out there. The only real danger to the economy right now is that people are trying to save money - that's always been the problem, in fact, all that net worth greedy people like to build up, which only serves to further disadvantage those who have a different approach to personal finance.

Standing stalwart behind the president are the titans of the media. To help sell his prescriptions he can count on the New York Times, Washington Post, Time, Newsweek, NBC, CBS, ABC, CNN, and NPR. These organizations - and many more across the country - will be certain not to let a single credible, skeptical voice intrude on their cult-of-Obama storylines. To be sure, they will talk to various Republican and pseudo-conservative tools who blabber on incoherently about tax cuts and saving the housing market. But they won't talk to a single person who will actually discuss what's actually wrong with the financial system and what must be done to set it right. As far as the opposition like Fox and WSJ? See the above re: tools.

Indeed, the stars couldn't be more perfectly aligned for the triumph of Obamanomics. The market crash is wiping out people's 401k's as well as any pensions that might still be out there. Then between the stimulus package(s), the various bailouts and the super-budgets, the dollar will be next to dive as neither China nor Japan will be able to afford to fund them. This will serve to wipe out whatever cash savings these saps will have attempted to protect. Ownership of gold, of course, can simply be declared illegal.

And so with existing savings effectively wiped out and further savings impossible (due to their being no safe place to invest), Americans will have no trouble funding Obama's dreams. Yes We Can indeed. The persistence of a few huge zombie banks, completely dependent on the Obama administration for their existence, will provide the streams of "capital" to fund administration-approved "private" ventures - the various health "insurers" and green "entrepreneurs" that will spring up in Obamaland. Any income that might have been dumped into savings in the past will now be redirected to "investments" in education and infrastructure. (Can I use any more scare quotes?)

Granted, this was not Obama's precise plan back when he and David Axelrod decided he should become president. Obama envisioned that as POTUS he could harness this incredible wealth-making machine that is the USofA to accomplish all the things he would have liked to have accomplished as a community organizer if being a community organizer didn't totally suck. You know, like back when he was still talking about how "white folks' greed runs a world in need". So what to do when the white-greed machine blows a serious gasket? How do you redistribute money that's disappeared?

Well, for one thing, there isn't so much inequality anymore. The meltdown is much harsher to those with positive net worth - they've seen much of that disappear. If you have no savings, you've got nothing to lose. If you bought a house you couldn't possibly afford, and you had a crappy credit rating to begin with, you walk away. That helps. But if you can keep insolvent firms operating with bailouts, you can then also control the disposition of their revenues. Favored constituencies can continue to get "loans" regardless of ability to pay, salaries can be capped (or reduced by eliminating bonuses, which are really just a variable salary component). Private firms looking for funding will also need to play by the rules, such as locating in the right places, hiring the right people, supplying the right amounts to right locations. And why not?

You can't really argue that America's resources have been well allocated over the last 20 years. Who's to say that Obama's ideas aren't as good as anyone else's? All those quants working on Wall Street were not just wasting their talents - they were being used to wreak havoc. Put them to work developing new energy sources, designing mass transit systems, or send them off for a year of community service in the cities. And the rest of us not-so-mathematically gifted technocrats? The new age will have lots of rules and will require careful management - there's a vast bureaucracy to man (or person). We still need to work, only we'll just have to work a decade or two more than we might have thought. But that's okay - we'll have lots of vacation time, and there will be lots of part-time jobs.

So, as you watch the markets collapse, ask not why Obama doesn't do anything, but why should he?