Thomas Jefferson on the Bailouts and Fed

“I consider the foundation of the Constitution as laid on this ground that ‘all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states or to the people.’ To take a single step beyond the boundaries thus specially drawn around the powers of  Congress, is to take possession of a boundless field of power, not longer susceptible of any definition.”

—Thomas Jefferson (Opinion on the Constitutionality of a National Bank, 15 February 1791)

Call Your Congressman

Here are the numbers… We beat it once, but the second time is always the hardest.

Sen. Bayh: 202-224-5623 or 317-554-0750
Rep. Burton: 202-225-2276 or 317-848-0201
Rep. Buyer: 202-225-5037
Rep. Carson: 202-225-4011
Rep. Donnely: 202-225-2915
Rep. Ellsworth: 202-225-4636
Rep. Hill: 202-225-5315
Sen. Lugar: 202-224-4814 or 317-226-5555
Rep. Pence: 202-225-3021
Rep. Souder: 202-225-4436
Rep. Visclosky: 202-225-2461

Here is a script from Dave Ramsey:

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while
working with the borrower-again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion-a small fraction of the current proposal.

II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks-and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous-and immediate-liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.

Give the Taxpayer Second Tier Loss, not First

I swear, I could almost teach an econ course after the last two weeks. I will be so glad when politics goes back to less complicated issues, like lipstick and guns. One of the issues I worry about with the Paulson Plan is the actual execution of the plan. Are we really going to let a low paid government worker with no vested interest manage trillions of dollars? We are begging for corruption, and a lack of focus. We are asking for another massive governmental failure that will cost us more. So let Wall Street manage it. Bill Gross of Pimco has offered to manage this, and he is a highly respected and successful guy.

I also highly recommend reading some of the papers over at Cato, found here. Arnold King’s article is a must read, or listen to a podcast here or below.

I would like to introduce a second plan that some economists are backing, and politicians are rejecting. I have copied and pasted from here.

A Matched Preferred Stock plan for government assistance

by Charles Calomiris

The US government is considering broad-based assistance to stem the financial crisis. Hank Paulson, Treasury secretary, and Ben Bernanke, Fed chairman, have proposed the establishment of an entity that would purchase subprime-related assets from troubled financial institutions.

A broad-based approach is needed, but this is not the best way of achieving policymakers’ objectives. Government injections of preferred stock into banks, advocated by Senator Charles Schumer, inspired by the Reconstruction Finance Corporation’s policies in the 1930s, would be a better choice. Pricing subprime instruments for purchase would be very challenging, and fraught with potentially unfair and hard-to-defend judgments. If the price were too low, that could hurt selling institutions; if it were too high, that could harm taxpayers. Who would determine how much should be purchased from whom in order to achieve the desired systemic risk reduction consequences at least cost to taxpayers? How would the purchasing entity dispose of its assets?

Preferred stock assistance would leave asset valuation and liquidation decisions to the private sector, but would provide needed recapitalization assistance to banks in an incentive-compatible manner to facilitate banks’ abilities to maintain and grow assets. If executed properly, it would limit taxpayers’ loss exposure, and leave the tough decisions of managing assets, and deciding on how to allocate capital assistance from the taxpayers, to the market.

Preferred stock assistance would work best if it were required to be matched by common stock issues underwritten by the private sector, which would ensure the proper targeting of assistance, and force private parties rather than taxpayers to bear first-tier losses. Banks in need of capital would apply for Matched Preferred Stock (MPS) assistance. Initially, say for three years, there would be no dividend paid to the government on MPS. That subsidy would increase the net worth of the recipient and facilitate raising additional capital via common stock.

Any US-based financial institution could apply for US government-held MPS (foreign-based banks could also apply if foreign governments were willing to provide MPS financing). To ensure that MPS is only supplied as truly needed from a systemic standpoint, and to limit any abuse of the taxpayer-provided subsidy, the private sector would also be required to act collectively to help recapitalize undercapitalized banks, and share the risks associated with recapitalizing banks.

Specifically, to qualify for MPS assistance from the government, a bank would have to first obtain approval from “the Syndicate” of private banks (including the major institutions who would benefit from the plan as well as others who would benefit from the reduction in systemic risk) to commit to underwrite common stock of the institution receiving MPS in an amount equal to, say, at least 50 per cent of the amount of MPS it is applying for (at a price agreed between the Syndicate and the bank at the time of its application fro MPS). The Syndicate would share the underwriting burden on some pro rata basis. To support that underwriting, the Syndicate would have access to a line of credit from the US government (and from other countries’ governments, if non-US banks participate in the MPS system). By making the government’s underwriting support senior to the Syndicate, the taxpayer would be protected by the aggregate resources of the private financial system. For banks participating in the MPS plan that are based outside the US, foreign governments would have to provide the MPS investments. Presumably, those foreign governments would also provide the credit line commitment to the syndicate for its underwriting of common stock.

Crucially, matching ensures first-tier loss sharing by the private sector (in a properly diversified way), which in turn ensures that unless the bank is worth assisting for systemic purposes, and viable upon receiving assistance, it will not receive assistance. This arrangement also protects taxpayers (since they only bear second-tier losses – that is, the risk of loss on preferred stock, which is senior to the old and new common stock). First-tier private sector loss sharing alongside government assistance is a time-honored tradition, which incentivizes the private sector to limit its requests for government assistance. In 1890, for example, the Bank of England was willing to assist in the bailout of Barings only on condition that the London banks bore the first tier of losses resulting from such assistance. In the US today, the FDICIA legislation of 1991 required that any bailouts of uninsured depositors or bank creditors must be paid for by a special assessment on surviving banks, as a pro rata share of their deposits.

Additional safeguards would also be needed. Any bank receiving MPS must suspend all common stock dividends for the period that the MPS is on its balance sheet (shockingly, the Japanese banks receiving preferred stock injections in 1999 continued to pay common stock dividends). Any bank receiving MPS would also devise a “capital plan” within six months of receiving MPS. The capital plan would be a plan for reducing leverage and credibly limiting risk taking during the period in which the MPS is outstanding. This capital plan would have to be approved by the Syndicate and the Treasury Department (as the government’s representative in this transaction). If a capital plan cannot be agreed within six months of receiving assistance, then the MPS would be payable immediately. Making the MPS callable would also be desirable; by doing so, and by limiting dividends and requiring a capital plan, banks would have an incentive to retire their MPS as soon as possible after the crisis passes.

Charles Calomiris is Henry Kaufman Professor of Financial Institutions at Columbia Business School

 

Comments

 

 

  1. Willem Buiter: This would appear to be an excellent scheme for recapitalising banks. One problem I can see is the membership of the “Syndicate”. Clearly, any bank (and insurance company with investment bank habits?) that thinks it may have to use the facility would be part of the Syndicate. But what about banks that are viewed as systemically important but don’t want to be part of it? Could some public authority compel participation?

I would also stress the point that, from a longer-run perspective, we may well want less capital in the banking sector. The banking sector in the US and in the rest of the North Atlantic area should shrink quite signficantly after expanding to ridiculous proportions in the past couple of decades, and especially since 2001. While capital ratios may well have to rise, deleveraging in the banking sector should occur to the point that less capital is necessary overall.

Consolidation is overdue in the banking and shadow-banking sector. Capital needs to be shifted from the losers to the winners in the banking sector, through the liquidation of the inefficient, through mergers and takeovers.

The matched preferred stock scheme also does nothing to address the illiquidity problem of the lower tail of the RMBS markets. Perhaps nothing can be done: high-risk mortgages should simply not be commoditised/securitised and made tradable but should be held to maturity by the originator. I am not (yet) convinced of this. Perhaps a publicly financed Toxic Asset Dump (TAD) of the kind proposed by the Treasury and the Federal Reserve could, using reverse auctions as a price disovery mechanism, help to re-establish liquidity to RMBS and other ABS markets, as well as assisting the recapitalisation of the banks

The Party is Over

Pat Buchanan has a column you should read today. You’ve got to read the entire article, but:

“Seizing on the crisis, the left says we are witnessing the failure of market economics, a failure of conservatism.

This is nonsense. What we are witnessing is the collapse of Gordon Gecko (“Greed Is Good!”) capitalism. What we are witnessing is what happens to a prodigal nation that ignores history, and forgets and abandons the philosophy and principles that made it great.

A true conservative cherishes prudence and believes in fiscal responsibility, balanced budgets and a self-reliant republic. He believes in saving for retirement and a rainy day, in deferred gratification, in not buying on credit what you cannot afford, in living within your means.

Is that really what got Wall Street and us into this mess – that we followed too religiously the gospel of Robert Taft and Russell Kirk?

“Government must save us!” cries the left, as ever. Yet, who got us into this mess if not the government – the Fed with its easy money, Bush with his profligate spending, and Congress and the SEC by liberating Wall Street and failing to step in and stop the drunken orgy?”

Check This Out

I haven’t had a chance to watch this yet, but it seems like a video most of our audience would be interested in. This is a note from Melyssa Donaghy:

Greetings Friends,

I write to you only because I know you are liberty minded and can think independently. 

I recently watched a documentary by Aaron Russo (producer of “The Rose” and “Trading Places”).

For a time he had a friendship with Nick Rockefeller, who arrogantly spilled his guts during several talks and was part of the inspiration for the documentary. Russo ended their “friendship” before he died of cancer in the fall of 2007. The documentary is linked on the HOOSIERS FOR FAIR TAXATION blog and is copyright free.  It is Aaron’s gift to the world. .
 
The documentary needs to be viewed, shared, and discussed in as many forums as possible, both on line and in real time. 

Moreover, a plan for Indiana needs to be agreed upon.  We will need all our lawyers to step forward and work together and put politics, religion, and differences aside.

The cartel that owns the Federal Reserve want us to fight — dems, reps, libs, independents.  As long as we think these “issues” between the parties are all so important, we ignore the fact that the federal reserve is not controlled by our our government and that a cartel illegally controls the money. The scams are so deep, they are mind blowing. I hope by now you all understand that the feds are a private banking cartel intent to control the global population and its wealth. Have you heard?  They now own pretty much own all the mainstream media. 

Bush is getting ready to sign the national ID card into law any minute now.  It will likely be done by Monday morning after he’s done with his daughter’s wedding in 90 degree Texas heat.  You will have to have this card and its RFID chip in order to travel. This is just the first step before the rest of the technology that already exists is implemented up to and including human micro-chipping.  We’re very close.
 
The Feds already have plans to put RFID chips in the cash very soon.  Have you noticed how much our currency is changing?  They can do RFID now as small as a grain of sand or a dot on an “i” printed on your cheap paper money.   Get ready to have your every move tracked.  It’s coming before you know it.  The more people focus on the divides between the reps, dems, and independents…the better they like it.  People divided, rather than united…that’s the goal for they are easier to conquer.
 
Read your history and learn the U.S. and Indiana Constitutions while there is a shred of them left.

Listen to guys like Andy Horning, Sean Shepard, RJ Tavel, Tim Maguire, Mike Kole, Ken Gividen, Mark Rutherford, Dan Drexler, Brad Klopfenstein, Ed Angleton, Steve Keltner, Todd Singer, Chris Spangle, Ken Morgan, and Dave Bond.  Better yet…help get some of them elected. 

Every single one of us need to work together and look far beyond party affiliation.  What we unite to do for Indiana right now is critical.

The dudes behind the Federal Reserve don’t care which one of the three presidential candidates get elected.  So why do any of you?

In Faith,
Melyssa

THE VIDEO YOU NEED TO WATCH IMMEDIATELY

Look for an Enormous Market Crash

http://www.thestreet.com/story/10407955/1/jpmorgan-chase-to-buy-bear-stearns.html

Last Thursday, Bears was worth $50, and now it’s worth $2?

Uh-Oh.

That means that J.P.M.C./the Fed took a look inside Bears when they offered to bail-out Bears on Friday, and it’s bad. And if one of the largest investment banks in the U.S. is bad, then there may be more banks that are in serious financial trouble. Even if there aren’t, the market will probably react as if other banks may be the next Bears. Trading between banks will slow to zero. The Fed doesn’t meet until Tuesday, where rates will be cut. The rate they cut is on the bank to bank loans, not bank to consumer rates. Those rates are up to the lender/bank.

Tomorrow could be Black Monday, and the markets will probably tumble.

Any one on the over/under of the close of the Dow? I say -500 points unless the Fed cuts rates tomorrow.

Tips on Saving Gas

Two summers ago, gas hit $2.50 to $3.00, and have never looked back. During that summer, there was a panic. Drive-0ffs at gas stations went through the roof, so now almost all gas stations are Pre-pay only. Siphoning theft went through the roof. Credit Card debt is going through the roof. Most of it is all a result of the drag that increased fuel prices cause on our economy.

It’s going to be even worse this summer, so you need to prepare. I’ve done afew things to increase my Miles Per Gallon. I have a 2006 Chevy Cobalt that has a little gauge on how long before I run out of fuel, and how many MPG I am getting at that moment. I am currently getting  390 Miles Per Gallon, and running 36 to 40 Miles Per Gallon on the interstate.

Here are some of the things I’ve done to increase my MPG, and to save a little money.

– There is no magic fuel additive that will add a hundred miles per tank. But several are effective. I recently put in the Lucas Oil fuel additive, and noticed a significant jump in my MPG (Miles Per Gallon.) I’ve used a lot of the others, like Prestone and STP, and I don’t think they’ve really done much to help.

– Don’t add octane booster, and try to buy regular as often as you can. The higher the octane, the faster the fuel burns in your engine. The faster it burns, the more you’ll use. A lot of GAS COMPANIES tell you the the additives in their fuel will clean your tank, but you’ll be fine if you use a fuel additive. That may be true, but long term, just buy regular. BUT! Check your owners manual to see what fuel they recommend.

– Get a locking cap for your gas tank. During the summer of Petrol Panic, I had bought a locking gas cap at Autozone for $10. My step-dad had not. Guess who had an entire tank siphoned in the middle of the night? We live on a cauldesac! And he was parked in the driveway, while I was on the street. So he was out $40 because he didn’t spend the $10. Gas thieves will strike anywhere, and an unexpected empty tank is not the way to start a day.

– Buy a K & N air filter. It’s double the price of a standard air filter, but it’s resuable. You can wash it off when it gets dirty, so you’ll only have to buy one. But the difference in fuel savings has been tremendous. It’s probably the biggest reason I am able to hit 40 MPG on the interstate. You can buy them at any Autozone. You also save money by not replacing it every few months.

– Rotate and balance your tires after every oil change.

– Have your exhaust system checked.

– Get your alignment checked. With all these potholes, not only can they damage your tires, but a misalignment can make a big dent in fuel costs.

I hope this helps!

Please Pay Here

You work at Burger King. It’s pay day Friday. Every two weeks, you earn $500. This BK pays in CASH. No withholding! That doesn’t mean you won’t be paying taxes. As you exit the building, there is a small booth where the IRS will look over your Cash, and take what it needs. Luckily, they have a fancy formula so you won’t get screwed more then the other BK Lounge workers. They need $100 from your pay. Now they hand you back your money, all $400 of it.

If this is how we paid taxes in America, there would be a revolt. But lucky for us, our politicians gave themselves the gift of Whithholding. You can learn more about withholding here: http://www.cato.org/pubs/journal/cj14n3-1.html

Pay attention to that pay stub! And make sure your W-4s are in order!