The 6 Pack Economist

Well it seems that there is a report out that the TARP program could be mismanaged and is open to corruption.  In other news water is wet and Lindsey Lohan is unstable. 

Did anyone seriously think that when the 700 billion dollar number came out that is was going to be spent wisely?   I thought it was joke when I first heard it, a bad one but still a joke.  It turned out that it was a joke on us.  To top it off a few months later we get a gigantic stimulus bill that will also have to be paid for.  Then the regular budget of the government will run into numbers unthinkable.  Who the hell is going to pay for all this?  We are.  The rich will pay for it directly while the poor will pay by inflation.

This whole debacle is just another in a long list of examples of government mismanagement of money.  This not just an American problem, all governments have the same problem.  It has to do with a combination of human conditions.  Greed and Sloth are the most prevalent.  Greed in that the various representatives want to get the money to pay back constituents and their own pockets.  Sloth in the bureaucrats and the elected reps in ensuring the money is spent after due diligence.  The reason they can do all of this is that it is not their money, it is ours.

I really thought I had more to write on this, but so much of it is too obvious.

The current financial crisis is a big example of how nature will always equalize a system.  When the consequences of an action are eliminated the rate of the action will increase.  Eliminate the hangovers and people will drink more.  I would at least.

All things in nature will eventually equalize themselves, because a system imbalance cannot exist for long.  For instance if you eliminate the wolves; the deer will eventually over populate the area and start committing suicide by jumping in front of your car.  I think they miss the wolves too much.  So the system self equalizes. 

Another example of risk and reward system we should all me familiar with is our sex lives.   What do you think would happen if a bunch of 20 something’s were kept on college campus but were told that pregnancy could not happen and STDs could not be caught?   In three months half the campus would be pregnant and the other half would be scratching themselves wondering what is wrong with their pubes.  I am not condemning them.  I would have taken part in such an experiment too (I would have been a whore but nobody wanted to be a whore with me).  So much for memories, either way you should have gotten my point.

The current crisis can be tracked to who ever let Fannie Mae and Freddie Mac to buy very crappy mortgages.  The rest of the funny financials like collateralized debt securities and derivatives were simply the mold that grew from the cesspool of Fannie and Freddie taking risks no one in their right mind would take.   Normally when a private corporation would take unneeded risk it would burn out and die or outside investors would refuse to underwrite the endeavor.  What made Fannie and Freddie different was that they were tacitly guaranteed by the government.  This means that the underwriters had less risk of failure because if worst came to worst the government would take care of everything.  These underwriters, investors or gamblers saw rewards that were better than the risks of underwriting the companies. 

For period of time the imbalance of the system was balanced periodically without crashing the system because the gains and leverage were not great enough to cause the system to collapse.  Housing prices went up and went down for all of eternity.  What made this different was the timing.  Stocks were tanking after the dot bomb debacle (another example people not using their heads) and the Fed was trying to get the economy moving again.  The Fed lowered interest rates making money very cheap.  In any boom and bust cycle there are still winners.  These winners began investing in real-estate. 

Shortly before this time Herb Moses an executive a Fannie Mae was playing hide the salami with Barney Frank.  Barney Frank at this time was in charge of making sure Fannie Mae was doing good business.  He opposed the transferring of Fannie and Freddie oversight from the Department of Urban and Housing development to the Treasury Department.  Granted either one is still a government run.  It seems that a government department whose job is to get people into housing would have a conflict of interest with a company who provides financing for homes.  So if said company will provide additional financing for the department’s projects they would overlook the horrible risks they were taking.  I have no proof that this is what happened.  But it is not too much of stretch to think this is what was going on.  Especially since the ramifications became so clear a few years later. 

Without anyone to watch over Fannie and Freddie and many investors willing to take extra risks because the government would back any risks these organizations ran rampant.  The CEO’s of the companies and the attendant executives began writing bonus rules that had nothing to do with long term viability of the organization.  So the bonuses that were given were for the amount of assets in management (or mortgages owned).  There bonus had nothing to do with the quality of the assets.  Who here can see what is about to happen next?  Raise your hand.

Fannie began taking all the mortgages they could get from the private companies in the market.  These were sold as all kinds of securities and what not.  Investors not knowing what fannie was doing but believing the government would come to the rescue were willing to write checks to fannie.  The private companies realized that they would not hold the mortgage more than a few months to a year would sell the mortgages to Fannie.  The risk was off the private company but they still had the reward of the first year’s mortgage payments and other service fees. 

The price of homes began to sky rocket.  Soon few people could afford a home with traditional methods.  But the private company could make up crazy mortgages that started off with smaller payments.  The buyer could afford these teaser rates in the beginning but by the time the real rates came the mortgage would be owned by another company (usually Fannie or Freddie).  These artificial buyers could only maintain this growth for so long.  Soon the market collapsed. 

In this game of hot potato Fannie and Freddie were left holding the potato.  Which means that the we the American tax payer was actually holding the hot potato.

When they came for cigarettes,  I did not speak up
When they came for porn, I did not speak up
When they came for my beer, I was freaking too drunk to speak anyway.

There is nothing like slaughtering the golden goose.  Oregon wants to raise the tax on a barrel of beer by  about 1900% or something like 2.50 a barrel to upwards of 50.00 a barrel.  If you don’t know a barrel of beer is about 31 gallons or two kegs.  In Pennsylvania a keg will run you about 60 bucks for something descent.  So if this was happening in Pennsylvania it would be an additional 25 bucks or almost a 50% surcharge in the price of keg of beer.  You can decide if you think that this is too much, but for me I think it is just a money grab.

You know that I could not preach about something after this but here goes.  Taxes should never have to increase if they are based on a percentage of something.  By something I mean income, stamps, tea, or beer.  In other words if taxes are taken as a percentage of the cost of something then they will automatically adjust with inflation. 

Unfortunately taxes are taken by a group of people who are not held accountable.  Go over budget and the next year you get more money.  Do poorly with the money you have, just ask for more.  Achieve goals and do it for less then you thought, then you lose your budget to someone who did poorly.  This is why taxes never really go down. 

What really sucks is that for you in Oregon, crying in your beer will cost you a lot more.  Oh and they want to raise the taxes on your cigarettes too.

Living in the northeast super city corridor (Washington DC to Boston Mass) I am used to reading about all the different taxes that get thrown around.  From Philadelphia city wage tax to 12 dollar cigarettes in New York City the region in very tax happy in general.  I am not against taxes.  I think we need them for many community based projects that the private sector simply won’t do or can’t do for a price people are willing to pay.  That being said I hate taxes that are counter productive, like Philadelphia wage tax, or just wasteful like cigarette taxes that go to programs that will be around after everyone finally quits smoking.

My personal and what has been historically accurate view is that government is the most wasteful organization to dump money into.  To list the sheer amount of waste that goes on is too much for a blog read by about 4 people.  Similar things happen in the private sector also but their (used to be at least) consequences to this, like losing your money.  Current bail-out excluded, government usually gets more money for failure then success.  In the government if you run your department more efficiently, thereby reducing your budget, you do not receive a bonus; instead you lose power as some other department takes your budget surplus. 

I have tried to sell the idea of taxes as the purchase price of government services for an area.  So instead of looking at taxes as something that is just taken from you, think of it as the purchase price for government services.  Perhaps if we looked at government more like we look at say Walmart, Target, or Best Buy perhaps we can reward those governments that give us the best bang for the buck. 

Let’s take Philadelphia wage taxes.  Back in the fifties or sixties (I can’t be bothered to look it up) they put this temporary tax on income to build something or other. Back then our economy was based around manufacturing and large labor forces.  So if you wanted access to large labor pools you had to be in the city.  The seventies and eighties changed the standard manufacturing economy (for better or worse).  What replaced it was a service oriented economy and smaller work forces.  Without the need for access to large labor forces companies moved out to the suburbs to avoid the wage taxes (not to mention the oppressive business taxes).

This brings me to the conclusion that when you offer less for the money you have to lower your prices.  This is what happened to Philadelphia, except that instead of lowering their prices to service more customers (residents and businesses) they kept them at the same high rate or only marginally lowered them. The large labor force offered by Philadelphia did not matter, nor did Philadelphia have name recognition like New York City (which is why New York City can run the tax system they do).  The mass exodus of highly paid people and service based businesses soon moved to the suburbs. This began to take its toll on the city. 

I have worked in Philadelphia many times both in the out skirts and center city region.  What I can honestly say is that I have no idea where the wage tax went.  Simple things were not done.  Trash is piled in corners on the streets, abandoned cars on major streets are ignored and just general disrepair is rampant.  Certain portions of the city were great like center city or old city, while other portions just needed general “take care of this crap” to be great.  Of course other areas would require a Marine escort, but we can pretend they are not there like the rest of city hall currently does.   This leads me to the fact that what I get by working in the city or god-forbid starting a business (even more frustrating) in the city is not worth the price paid to do it.