It's Just History Repeating. . .

History loves irony, and right now the Democrats are giving it off in spades. They are repeating obvious mistakes that millions of others before them have made. Yet, like so many Wiley E. Coyotes, they’re shocked that things aren’t turning out the way they expected. In fact, they spent the weekend whining about the unfairness of it all.

Consider the following four issues: the stimulus, the TARP, Obama’s dictator-appeasement plan, and Obama’s mortgage rescue plan. Each is blowing up in their faces like an ACME explosive.


• DeStimulus: The Democrats spent the weekend freaking out both on and off the record that despite all the money they poured into the stimulus, unemployment remains higher than it was before the stimulus began. What’s worse, they think they are now being unfairly blamed by ungrateful taxpayers for running the deficit/debt to dangerously high levels.

But of course, they aren’t the first to do this. Indeed, consider the case of FDR’s Treasury Secretary Henry Morgenthau. Here is what Morgenthau wrote in his diary about their efforts to combat the Bush. . . er, Hoover Recession:

“We have tried spending money. We are spending more than we have ever spent before and it does not work. . . [A]fter eight years of this administration we have just as much unemployment as when we started. . . and an enormous debt to boot!”

Sound familiar? Despite FDR’s mega-stimulus, unemployment fluctuated between 14% and 20% during his first eight years, with the 20% coming later, not earlier. You would think somebody (**cough cough** Obama **cough cough**) might have considered this before they acted, but maybe that’s too much to ask.

Interestingly, FDR raised the top income tax rate so he could keep spending, causing unemployment to spike. The top rate went from 24% under Hoover to 63% to 79% to 90%. In 1941, FDR even proposed raising it to 99.5% on all income above $100,000 -- probably would have worked better if he’d said $250,000. All this did was bring unemployment to an all time high and stretch out the Great Depression an extra 15 years. FYI, Obama wants to raise the top income tax rate so that he can keep spending. Obama’s rates are not as bad, he’s aiming for something in the 50% rate, but the effect will be the same. Geithner’s diaries should make for fun reading someday.


• TARP Monster: Do you remember how the TARP was supposed to save the banking system from the folly of the banks who were too big to fail? Well, it turns out the TARP put the banking system at the mercy of those very banks. Indeed, a recent report from the government’s own TARP watchdog reports that the TARP has hurt smaller banks, who are having trouble repaying the money, and they are now vulnerable to being taken over by the very same too-big-to-fail banks that caused the crisis. Soon, those too-big-to-fail banks will be too-bigger-to-fail.

By the way, the historical parallels to this are legion. For example, every time socialism has been put in place to help the common man or a dying industry, it ended up making living conditions worse, and it ended up wiping out small firms in favor of the large firms that caused the competitiveness problem in the first place. Similarly, for you history buffs, the US government’s attempts to fix (read: “bailout”) abusive and negligent railroads which were putting the whole economy at risk resulted in those same railroads consuming vast numbers of other industries who found themselves at the railroads’ mercy.


• Appeasement: You would think by now that people would understand that you can’t negotiate with dictators from a position of weakness. But the cornerstone of Obama’s foreign policy has been appeasement. He begged forgiveness of Muslims and got only contempt. He surrendered our friends in Eastern Europe to the Russians to get help with Iran. . . the same Russians who will start fueling Iranian reactors this week. And he begged the Chinese to go along with the harshiest, most-non-cuddly sanctions yet on Iran, only to have them flip him the bird and announce last week that they would start buying Iranian oil. His bended-knee effort to get the Iranians to behave appears to have made war inevitable. His kowtowing to North Korea has brought us closer to war with them than we’ve been at any point since the 1950s. And don’t get me started on Cuba, Venezuela, Brazil, Sudan, etc. The fact that begging for respect has never worked, never once crossed Team Obama’s minds.


• Mortgage Failure Program: Finally, do you remember Obama’s mortgage rescue plan, which was supposed to help homeowners by stopping the flood of foreclosures and thereby stabilizing the housing market? It’s not working. According to a special inspector general for the bailout programs, the mortgage plan has not “put an appreciable dent in foreclosure filings” and foreclosures have hit an all time high. In other words, it turns out that giving second chances to irresponsible people does not suddenly make them responsible. And this is forcing down home prices, further hurting the housing industry, and delaying the resolution of millions of inevitable foreclosures, all of which puts more homeowners at risk.


One definition of insanity involves trying the same things over and over but expecting different results. Interestingly, if you add in a little self-pity to that definition, then it seems you’ve defined the Democratic Party.


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United States of America™, Property of Goldman Sachs

In 1873, Mark Twain co-authored a book called The Gilded Age: A Tale of Today, and thereby gave a name to era between Reconstruction and the Progressive Era. Were Twain alive today, he would likely name our present era “The Second Gilded Age.” And nothing illustrates this more than the many-tentacled creature known as Goldman Sachs.

The Gilded Age

Events today read like a repeat of the Gilded Age.

The Gilded Age is generally considered to have begun under the Grant administration. It was an era noted for massive corruption, dramatic social and economic upheaval, and a shocking incestuousness between big business and government. These two became so intertwined that the public came to see government action as nothing more than favoritism, bribery, kickbacks, inefficiency, waste, and corruption. Smart people.

The Gilded Age was the age of robber barons, like Andrew Carnegie, John Rockefeller, Cornelius Vanderbilt, and John Pierpont Morgan -- names that continue to mark our most powerful corporations today. It was the time of Tammany Hall and Boss Tweed, of corrupt local politics and election fraud, of Republican Mugwumps calling for an end to the spoils system in the civil service, of Bourbon Democrats calling for free market reforms, and of national parties ignoring all the cries for reform. And in 1889, this Age gave us the Billion Dollar Congress, an outrage that seems quaint compared to this year’s trillion dollar deficit.

The Gilded Age also gave us waves of immigrants to keep factory costs down, Chinese labor to build the nation’s railroads, and the birth of labor unions. The media too was changing, with the introduction of yellow press journalism, and the abandonment of factual news for sensationalism and sentimental stories. And the economy endured two depressions, the Panic of 1873, caused by the manipulation of the gold market by Jay Gould and James Fisk (“Black Friday”), and the Panic of 1893, a deep depression that ushered in the Progressive Era.

Sound familiar? Try substituting Goldman Sachs, ACORN, Tea Party, Mexicans, infrastructure, Madoff, Stafford, and reading this again.

By the 1890s, the Gilded Age was ending. Spurred on by reformers, the government imposed new regulations in response to corporate excesses, dangerous workplace and consumer conditions, exploitive labor practices, and anti-competitive behaviors. Many of those regulations remain with us today.

Goldman Sachs: The Corruption of the Revolving Door

It seems we are doomed to repeat the Gilded Age. And as history loves irony, the company at the center of this Second Gilded Age is a company formed at the tail end of the first Gilded Age: Goldman Sachs.

Goldman Sachs was founded as Marcus Goldman & Co. in 1869. It was renamed Goldman Sachs in 1882. The company made a name for itself in its pioneering use of commercial paper and it joined the New York Stock Exchange in 1896. Over the next 100+ years, it would grow to become one of the most influential companies in the world.

Now before I continue, let me be clear, I do not believe in conspiracies. There is no small group of illuminati that meet regularly to decide our fates and control the world. That said, I am not fool enough to believe that our government acts in the best interests of its citizens. It should be painfully clear to all of us that the government responds to those who have the most access to it. Thus, where we find access, and we find favored treatment for those with access, we must wonder whether the system is working or not. That is the point to this article.

Nor, is this article an attack on Goldman Sachs per se. Goldman is simply one of dozens of groups with too much influence. I have picked Goldman from the crowd only because they’ve made it very easy lately to see how they use their influence to help themselves at our expense.

How Much Influence Does Goldman Have?

How powerful is Goldman? Said one recent commenter: “It’s Goldman’s world, folks. We just live in it (at Goldman's discretion, of course).” Consider these facts. In October of last year, the New York Times reported that thirteen Goldman employees worked in senior positions with the George W. Bush administration. This included Treasury Secretary Hank Paulson, White House Chief of Staff Joshua Bolten, and the man who would oversee the TARP, Neel Kashkari. The Times called this “Government Sachs.”

The Clinton administration too was staffed with Goldman employees, including Treasure Secretary Robert Rubin. Obama, who received $918,000 from Goldman employees for his campaign, also has hired his share of Goldman alumni. Indeed, in a rather controversial move, Timothy Geithner hired former Goldman employee Mark Patterson to be the Treasury Department Chief of Staff, in direct violation of Obama’s “no lobbyists” policy.

But Goldman employees aren't just in the administration. Goldman employee Robert Zoellick is president of the World Bank. Mario Drahi is the governor of the Bank of Italy. Romano Prodi is the former Prime Minister of Italy. Mark Carney is the governor of the Bank of Canada. Michael Cohrs is the Head of Global Banking at Deutsche Bank. Malcolm Turnbull is the leader of Australia’s Liberal Party. Jim Cramer spends his days talking up Goldman Sachs on his show on CNBC, along with former Goldman alum Erin Burnett. Edward Lampert bought K-Mart in 2003. Ashwin Navin is President of BitTorrent. John Corzine, the former head of Goldman Sachs became a United States Senator and then governor of New Jersey. And there are many more.

Some are in key positions that regulate Goldman itself. Goldman alumnus Stephen Friedman and current Goldman board member, became an economic advisor to President Bush and Chairman of the Foreign Intelligence Advisory Board, before leaving the administration to become Chairman of the New York Federal Reserve Bank’s Board of Directors. . . the agency that regulates Goldman Sachs and which has a significant role in setting interest rates, which affect Goldman directly. Even worse, Friedman received a waiver, allowing him to remain on Goldman’s board during his time on the New York Fed. However, when it was learned in May 2009 that he purchased 52,000 shares of Goldman Sachs in January, he resigned from the Fed “to avoid the appearance of a conflict of interest.” Wouldn’t want that.

William Dudley, a former Goldman economist, was appointed as president of the New York Fed to replace Tim Geithner, who was mentored by former Goldman CEO and Treasury Secretary Robert Rubin. Rubin has been an economic advisor to President Obama.

Goldman executive Gary Gensler became the head of the Commodity Futures Trading Commission, replacing Brooksely Born, who was criticized for failing to regulate the derivatives market. Gensler himself stated that Born, “should have done more to reign in exotic financial instruments that have battered global markets.” What went unmentioned, however, was that Born’s efforts to regulate derivatives were blocked by Goldman alum Robert Rubin, who recommended to Congress in 1999 that the Congress strip the CFTC of its regulatory authority over derivatives. More on Goldman’s role in the derivative issue in a moment.

Goldman's Influence Equals Power

So what has Goldman gotten from all this influence? Remember cap and trade? Goldman Sachs, which gave $4,452,585 to the Democratic Party, has been pushing cap and trade because Goldman dominates the new carbon-credit market. Matt Tabbi of Rolling Stone notes that this

“is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.”

In an interview in July 2009, former Assistant Secretary of Treasury Paul Craig Roberts was asked “Does the US Secretary of the Treasury work for the people or does he work for the banking system on Wall Street?” He replied: “He works for Goldman Sachs.”

Do you remember the bailout? The bailout was designed by former Goldman leader Hank Paulson. Here’s what you might not know:

• Paulson let Goldman competitor Lehman Brothers go bankrupt. The very next day, Paulson established the bailout program.

• Paulson put Goldman employee Neel Kashkari in charge of administering the bailout (TARP) funds.

• Paulson gave $300 billion in taxpayer money to Citigroup, which was run by ex-Goldman head Robert Rubin.

• Paulson gave $138 billion to help Bank of America buy, and thus bailout, Merrill Lynch, then run by former Goldman employee John Thain. According to recent testimony by Bank of American president Ken Lucas, Paulson threatened Lucas to go through with the deal and to pay off bonuses to Thain and others. Thain, by the way, was rumored to be John McCain’s choice for Treasury Secretary had he won the election.

• Goldman/Treasury employee Robert Steel was put in charge of Wachovia, which he turned around and sold to Wells Fargo after a few months, triggering $225 million in golden parachutes that went to a handful of Wachovia executives, including Steel.

Now consider the AIG shell game. As we noted above, Goldman alumnus Robert Rubin stood in the way of the CFTC regulating derivatives. A derivative is basically insurance against a bond defaulting. When the derivatives market took off, AIG became heavily involved. Goldman was the first group to realize that AIG had underestimated the risks in issuing these derivatives and it bought lustily from AIG.

When the market turned and it became clear that AIG had over extended itself and likely could not pay off these derivatives (in fact, the company appeared ready to fail), Paulson stepped in. He not only agreed to bail out AIG to the tune of $85 billion, but he put former Goldman employee Ed Liddy in charge of AIG. Liddy paid $13 billion of these moneys over to Goldman, paying off 100% of AIG’s debt to Goldman. No other institution received 100 cents on the dollar from AIG.

But this is nothing new for Goldman. According to Matt Tabbi, Goldman has been heavily involved in inflating every bubble and then profiting from the bailouts that follow the busting of those bubbles.

Nor is Goldman’s influence limited to the national level. Do you remember Goldman head John Corzine? He’s now the governor of New Jersey. Guess what company floats bonds for New Jersey? More interestingly, in November 2008, it was revealed that at the same time that Goldman was selling bonds for New Jersey, it was telling its wealthiest customers that they should short those bonds. This advice would make those bonds appear riskier than they actually were and would increase the interest rates the state needed to pay on future bonds (and Goldman profits).

At the same time, the Los Angeles Times accused Goldman of doing the same thing in California.

Conclusion

This is not an issue of Republicans or Democrats. Both sides are equally guilty. Nor is this an issue of Goldman Sachs being evil or running the world. Goldman is simply taking advantage of a system that lets people move between government and industry with amazing easy, that lets people profit from conflicts of interest, and that converts our government from a referee into a cash machine. It is time for serious ethics reform to prevent the types of arrangements that make the above possible.


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Federal Power Grab: Executive Pay

Virtually unnoticed, on Friday, the House of Representatives passed a bill giving the federal government the power to regulate executive compensation at public companies. This bill, sponsored by Comrade Barney Frank, passed 237 to 185, largely along party lines.

Not only is this an amazing seizure of power by the federal government, but the bill’s proponents have been misleading the public about what the bill does. They have sought to give the impression that the bill only requires non-binding votes by shareholders and that it applies only to TARP recipients. Neither contention is true.

What The Bill Does

The bill in question is called the Corporate and Financial Institution Compensation Fairness Act of 2009 (H.R. 3269). According to the introduction to the bill, the bill amends the Securities Exchange Act of 1934:

to provide shareholders with an advisory vote on executive compensation and to prevent perverse incentives in the compensation practices of financial institutions.

Note the second clause, after the word “and,” this is the part of the bill the supporters want you to ignore.

Whenever the bill has been discussed, its supports address only the first part of the bill, and in those discussions they make the claim that the bill “only” requires (1) that shareholders be advised of executive pay arrangements and so-called golden-parachutes, and (2) that shareholders be allowed to vote, in a non-binding vote, on whether or not to approve those compensation agreements. And that is exactly what Section 2 does. So what’s the problem?

The problem is Section 4, which they always fail to mention. Section 4 contains the following legalese:

The appropriate Federal regulators . . . shall prescribe regulations that prohibit any compensation structure or incentive-based payment arrangement . . . that the regulators determine encourages inappropriate risks by financial institutions or officers or employees of covered financial institutions that

(1) could threaten the safety and soundness of covered financial institutions; or

(2) could have serious adverse effects on economic conditions or financial stability.

Let’s put that into English. The Federal government can prohibit any pay practice that the government thinks could harm the company, the economy or the financial markets.

And to whom does this bill apply? It applies to any bank that participates with the FDIC, any credit union, any broker-dealer registered under the SEC, any investment advisor, and “any other financial institution that the appropriate Federal regulators. . . determine should be treated as a covered financial institution.” In other words, the “appropriate federal regulators” will figure out who is covered -- and if the TARP and TALF are any indication, a great many non-financial companies will be surprised to learn they are now financial companies.

So who are the appropriate federal regulators: (1) The Federal Reserve, (2) the Office of the Comptroller of the Currency, (3) the FDIC, (4) Office of Thrift Supervision, (5) the National Credit Union Administration Board, and (6) the Securities and Exchange Commission. Together, these agencies regulate virtually every large company in the country.

And for the record, nothing in this bill limits its application to TARP recipients, as Rep. Jeb Hensarling (R-TX) made clear during a CNBC interview.

What The Public Was Told

So what has the public been told? The Chicago Tribune mindlessly echoed the bills supporters, when it stated:

Say-on-pay votes would be non-binding, would take place months after compensation is handed out and wouldn't force companies to alter the payouts.

They failed to mention Section 4.

The New York Times, on the other hand, grasped the second part of the bill, but only after the bill was passed:

The bill, introduced by Representative Barney Frank, Democrat of Massachusetts, enables regulators to ban payments that give workers what the legislation calls “perverse incentives” to take risks that could hurt the nation’s financial system.

The bill gives the Securities and Exchange Commission, among other federal regulators, nine months to propose rules for regulating compensation packages at institutions whose assets total more than $1 billion.

Before the bill was passed, the Times was a good deal less clear on this point, though they did mention it. That article began:

The bill does not set pay limits. Instead, it gives shareholders the right to vote on pay and requires that independent directors from outside of management serve on compensation committees. The shareholder votes would not be binding on company management.

And then way down the page, they added:

The measure also gives regulators the authority to prohibit inappropriate or risky compensation practices for banks and other regulated financial institutions.

Close. But then they added:

Democrats led by Mr. Frank also agreed to . . . reduce[] the authority of regulators by giving them power to restrict only incentive-based pay arrangements instead of any kind of compensation.

This is a stretch. Section 4 states that the regulators may “prohibit any compensation structure OR incentive-based payment arrangement.” An “or” generally means multiple choices, and rarely means “only.” Thus, claiming that only incentive-based pay arrangements could be restricted was not exactly accurate. Also the use of the word "inappropriate" implies that such practices were already improper, not that they would be made improper by the new regulation. Indeed, reading this article, it's not clear that much of anything would be done by the regulation.

In any event, the real lying was left to Democratic Congressmen like Rep. Gregory Meek, D-NY. Meeks told CNBC prior to the vote that all the bill did was to require disclosure of pay schemes to shareholders and require “non-binding” votes by shareholders. . . it does not cap pay or prohibit the use of incentive-based pay in any way, he assured viewers. And he managed to maintain this lie for some time during the interview, until the anchors confronted him with the wording of the legislation itself.

At that point, he dissembled and rephrased his answer to state that the point of the bill was not to cap executive pay or to take away incentive-based pay, and that “most of the votes is [sic] non-binding.” But then, the point of communism was to make a better world, not to kill a hundred million people, as the practice turned out.

So Does Obama Support This Bill?

You would think there would be no mystery about whether or not Obama supports this bill. But on August 1, the New York Times reported that while Obama has advocated nonbinding votes for shareholders, “the White House has not suggested that federal regulators curb incentive-based pay for risk-taking.”

Of course, this contradicts the New York Times’ July 29th report, which stated that the legislation “closely resembled an Obama administration proposal seeking to impose new restraints on executive pay.”

But it played along nicely with the “we haven’t decided” game played by White House spokesman Robert Gibbs, who stated that no decision has been made yet whether the President will support this bill or not. . . apparently he is “not familiar” with the whole bill.

Sadly for Gibbs, Tim Geithner did not get the obfuscation memo, and he rushed out to issue a statement that said of the legislation:

This is a positive step forward to increase accountability and transparency in executive compensation, and to help ensure that pay encourages long-term performance, not excessive risk-taking.

That sounds like support. It also sounds a bit like central planning. . . comrades.

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Obama Saves Jobs. . . From Being Worked

If Obama keeps "saving" jobs, we're all going to be unemployed soon. Indeed, since January, Obama has saved 84,000 jobs, but he's done so at the cost of $719 billion and 3.9 million real jobs. Read on. . .

Obama's Promises Are Nonsense

During the campaign, candidate Obama promised to create five million jobs and to bring peace between the very rocks and the waves. Sounds good, right? Think again.

Unemployment at the end of 2008 was at 6.9% according to the Bureau of Labor. Said differently, of the 155 million “workers” in the United States, 10.6 million were unemployed. Obama’s plan to create five million new jobs, therefore would have translated into a reduction in the employment rate from 6.9% to 3.2% -- two percentage points below what is considered the natural rate of unemployment. That’s not good. Can you say hyperinflation?

Fortunately, times change and so do Obama’s promises. A month later, as Obama assumed the position in the Oval Office, he lowered his claim. Gone was the plan to create 5 million jobs, and in its place was a promise to create or save 3.5 million jobs. This would bring unemployment down to a more realistic 4.5% (if all the jobs were created) or it would leave it unchanged (if Obama favored us only with saved jobs).

Of course, the claim that he would “save” jobs made this promise nonsensical, as Republican Sen. John Ensign pointed out to Treasury Secretary Tim Geithner (pictured left):

"When you use the term 'create or save' you've given yourself complete leverage where you cannot be wrong, because you can take any scenario and make yourself look correct."

And Ensign would be right, except that Obama can’t stop taking credit for everything good he can find. Thus, not only can we analyze Obama's plan, but we can analyze the results he is trumpetting. . . and they blow.

The Obama Plan

Obama told us that he would only shake his magic job-giving beads, if we passed the stimulus bill. The price tag on the stimulus bill was $787 billion (not counting the $152 billion already provided in the Economic Stimulus Act of 2008 or the $700 billion spent on the Troubled Asset Relief Program (TARP), $455 billion of which has already been given to 608 companies).

Thus, depending on what you include, Obama plans to spend either $939 billion or $1.649 trillion to create those 3.5 million jobs. That works out to either $286,285 or $471,142 per job.

(And this doesn’t even address the issue that the $787 billion price tag for the stimulus is understated, with the real price tag being closer to $3.27 trillion -- which would mean we’re paying $1.28 million per job).

How Is Obama's Plan Working?

In the past week, there have been murmurings about the lack of jobs. See, Obama promised to create or save 3.5 million jobs between January 2009 and January 2011. But while we are nearly a quarter of the way to January 2011, he’s only created 150,000 jobs so far -- a mere 4% of the number promised.

Even more troubling, 66,000 of those were short-term summer jobs created by the census department, each of which would have been created even without the stimulus, and each of which will disappear again soon. Thus, Obama's stimulus really created only 84,000 jobs (or 2.4% of his total promise).

To be fair, though, Obama hasn't spent all of the stimulus yet. Indeed, he's only spent $719 billion of the total stimulus so far. . . working out to around $8.6 million per job!

But never fear, Obama has promised to step up his game. He will shake the magic beads again. On Monday, he promised that he would create/save another 600,000 jobs in the next 100 days. Of course, 125,000 of these are part-time summer youth jobs, and 135,000 are public sector education jobs, and 5,000 are public sector law enforcement, but the other 335,000 could well be permanent, private sector jobs.

And while this hardly fits Obama’s state of the union promise that “more than 90 percent of these jobs will be in the private sector,” at least this is a step in the right direction. Indeed, won't adding another 750,000 jobs to the economy will reduce unemployment by 7%, bringing the unemployment rate down to 6.5%? No.

It would have worked that way, if unemployment hadn’t kept increasing. But the May unemployment rate rose to 9.4% or 14.5 million unemployed. Thus, while Obama was busy making 84,000 jobs, the economy lost 3.9 million jobs, for a net loss of 3.8 million jobs!

Moreover, Obama’s promise to create (or save) 3.5 million jobs doesn't look so good anymore. Even if he manages to create all of those jobs, his efforts now will only “reduce” the unemployment rate to 7.2% -- 0.3 percentage points above where it was when he started.

Sweet dancing gnomes! $4.122 trillion in spending and $3 trillion more in loan guarantees under the TARP, and that's all we're going to get?!! Stop Mr. President. . . just stop.

But I will leave you with this little bit of good news. At this rate, it will take Obama 91 years to bring employment to zero in this country. . . just a little longer than it took the Soviets.
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