Everyone has known for a long time that the only way in the world that California can hope to ever balance its budget is to expand off-shore oil drilling, and get healthy on the royalties that it would receive.
Now recall Candidate Obama deriding Sarah Palin's "drill, baby, drill" slogan, saying that off-shore drilling would not save Americans any money. Now he has changed his mind about this, and will support drilling in the Gulf and the east coast, and in Alaska. Great. Look for Arnold to press for drilling off the California coast. This could easily be done using parallel drilling from existing platforms.
Now recall Teddy Roosevelt and his successful efforts to acquire lots of land in the western states, creating lots of national parks, reserves, and monuments. He was a great progressive. Let's just say, without cynicism, that this was his only motivation in buying up the western states. The federal government owns virtually all of Nevada and Utah. The government owns a great deal of Colorado and Wyoming. It's true that there is great natural beauty in the west. But that's also where the nation's natural resources exist, including oil. The government owns very little land east of Colorado.
Now recall Maxine Waters threatening the nations oil execs by saying that she would not be opposed to nationalizing all the oil companies in the country. Recall Hillary Clinton screaming about the oil companies' "obscene" profits, and calling for a large tax increase on their "excess" profits.
Recall that a lot of countries have nationalized their oil resources. These include not only the OPEC countries, but also Mexico and Venezulea, among others.
Although President"s plan for drilling is quite modest, it is a sign that something else is afoot: A plan to gain additional federal revenue from oil. Not by nationalizing the industry, at least not at first, but to gain revenue from royalties by expanding drilling on federal lands, and taxing the increased profits of oil companies.
Only a Democratic president can get this off. The environmentalists will be quieted by the fact that this kills two birds with one stone: Decreasing reliance on foreign oil, and solving the federal government's deficit problem. And throw in "job creation" as a rationale.
President Obama reluctantly got in the automotive business, the student loan business, the insurance and banking industries. Now watch him get in the oil business. Why would he do this? For the same reason that Willie Sutton robbed banks, and that middle-class tax increases are inevitable: Because that's where the money is.
Wednesday, March 31, 2010
Monday, March 22, 2010
PRESIDENT OBAMA SAYS RIDICULOUS THINGS ABOUT HEALTHCARE
President Obama, in his remarks following the House vote on the Senate healthcare bill said that that this bill was a "common sense" reform. If this was the case, why did it take more than a year to get it done? Why was it is so contentious? Why was it passed without a single Republican voting in support? Had it been a "common sense" reform, none of this would have been true.
He also said the passage of the bill was not a "top-down" effort, but came from the bottom up. How can that be said when every poll taken reflected overwhelming opposition on the part of the American people? This was most definitely a top-down process involving pay-offs and arm-twisting like we've never seen.
He also said the passage of the bill was not a "top-down" effort, but came from the bottom up. How can that be said when every poll taken reflected overwhelming opposition on the part of the American people? This was most definitely a top-down process involving pay-offs and arm-twisting like we've never seen.
Saturday, March 13, 2010
ARE THE ECONOMIES OF CHINA AND THE U.S. CO-DEPENDENT?
In a word, yes. For now.
Generally, every national economy in the world is dependent of the health and success of the U.S. economy. The current global economic problems have their roots in the U.S. What happens here doesn't stay here. As the U.S. economy goes, so goes the world. This is true for many reasons, not the least of which is that the U.S. dollar is the world's reserve currency. Every nation has a stake in the dollar's maintaining its value.
It seems like a long time ago, but there was a time when the U.S. was a creditor nation. Other nations owed us money. We were the world's banker. China was a debtor nation. They were poor. Now, the reverse is true. The U.S. is a debtor nation, and China (and Japan) is our banker. We have to borrow lots of money from them because Americans consume far more government services than we are willing to pay for. China has been willing to finance our consumption because their economy, since some capitalistic principles have been embraced, is generating a lot of money which has to be invested somewhere. Like a lot of other nations around the world, China decided that the U.S. offered safety and a good return, so they have invested heavily in U.S. government securities.
China's economy is export-driven. They sell a lot of goods in U.S. markets. In order to keep the prices of their goods low, the Chinese have for years suppressed the value of their currency. The U.S. has mixed feelings about this. On one hand, the artificially low value of the yuan creates an unfair advantage for the Chinese as the U.S. competes with them internationally. On the other hand, America really needs to import cheap goods. So while we sometimes complain about China's currency not being allowed to float toward its true value relative to other currencies, we don't really mind.
So right now, it goes like this: We buy tons of cheap Chinese goods, and they invest their profits in U.S. government securities. But how much longer can this co-dependency go on?
The Chinese government understands that, in the long term, their economy must become less export-driven and more consumer-based. That is to say that more and more of their goods must be sold to their own citizens. Right now, they have too many eggs in the export basket. Being one of the most populous nations on earth, their potential consumer base is massive. But, at present, the citizens of China are too poor to be a better market for Chinese goods than citizens in the rest of the world.
At some point in the future, China's expanding middle class will be able to buy the kinds of goods that are currently exported. This will diversify and stabilize their economy. Also, at this time, there will be no reason not to allow the yuan to find its own level in currency markets. When the yuan becomes stronger, the costs of Chinese exports will increase for consumers around the world. America will no longer enjoy the cheap prices we currently have at Target.
How much longer the Chinese will continue to finance our government is an open question. Very recently, Chinese government officials asserted that they have no intention to abandon the U.S. debt market. This statement was made despite China's having recently sold some of their debt holdings in the secondary bond market.
So, for now, the Chinese and American economies are co-dependent. China's long-term plans are to de-couple from the U.S. This may take a long time, but the U.S. will have to adjust to China's long-term economic policies.
Generally, every national economy in the world is dependent of the health and success of the U.S. economy. The current global economic problems have their roots in the U.S. What happens here doesn't stay here. As the U.S. economy goes, so goes the world. This is true for many reasons, not the least of which is that the U.S. dollar is the world's reserve currency. Every nation has a stake in the dollar's maintaining its value.
It seems like a long time ago, but there was a time when the U.S. was a creditor nation. Other nations owed us money. We were the world's banker. China was a debtor nation. They were poor. Now, the reverse is true. The U.S. is a debtor nation, and China (and Japan) is our banker. We have to borrow lots of money from them because Americans consume far more government services than we are willing to pay for. China has been willing to finance our consumption because their economy, since some capitalistic principles have been embraced, is generating a lot of money which has to be invested somewhere. Like a lot of other nations around the world, China decided that the U.S. offered safety and a good return, so they have invested heavily in U.S. government securities.
China's economy is export-driven. They sell a lot of goods in U.S. markets. In order to keep the prices of their goods low, the Chinese have for years suppressed the value of their currency. The U.S. has mixed feelings about this. On one hand, the artificially low value of the yuan creates an unfair advantage for the Chinese as the U.S. competes with them internationally. On the other hand, America really needs to import cheap goods. So while we sometimes complain about China's currency not being allowed to float toward its true value relative to other currencies, we don't really mind.
So right now, it goes like this: We buy tons of cheap Chinese goods, and they invest their profits in U.S. government securities. But how much longer can this co-dependency go on?
The Chinese government understands that, in the long term, their economy must become less export-driven and more consumer-based. That is to say that more and more of their goods must be sold to their own citizens. Right now, they have too many eggs in the export basket. Being one of the most populous nations on earth, their potential consumer base is massive. But, at present, the citizens of China are too poor to be a better market for Chinese goods than citizens in the rest of the world.
At some point in the future, China's expanding middle class will be able to buy the kinds of goods that are currently exported. This will diversify and stabilize their economy. Also, at this time, there will be no reason not to allow the yuan to find its own level in currency markets. When the yuan becomes stronger, the costs of Chinese exports will increase for consumers around the world. America will no longer enjoy the cheap prices we currently have at Target.
How much longer the Chinese will continue to finance our government is an open question. Very recently, Chinese government officials asserted that they have no intention to abandon the U.S. debt market. This statement was made despite China's having recently sold some of their debt holdings in the secondary bond market.
So, for now, the Chinese and American economies are co-dependent. China's long-term plans are to de-couple from the U.S. This may take a long time, but the U.S. will have to adjust to China's long-term economic policies.
Friday, March 12, 2010
THE STUPIDEST LOANS BANKS ARE MAKING RIGHT NOW
The stupidest loans banks are making right now are home mortgage loans at rates fixed at 5 to 5.5% for 30 years. Think about it.
Sunday, February 28, 2010
THE DEVIL IN THE DETAILS IS GOLDMAN SACHS, PART II
Like I said in Part I, all analogies will collapse if pushed far enough. That still goes, so give me a break.
Say you are Goldman, and I am Sachs (or vice-versa). We own a bank. We have a rep for being able to solve anyone's financial problems. It is also well known that we are extremely risk averse, so our fees are high, and our profits must be assured.
Mr. Zorba comes to us having a real bad problem. He wants to join a very exclusive club whose members are all snobs of European descent. The people in the club don't think you're rich unless you hold Euros. The club has high admission standards, and requires potential members to prove that they have short-term debts of no more than 3% of their annual incomes, and long-term debt of no more than 60%. Zorba explains that he can't meet either standard, and he needs to put some cash on the books, because he wants to join the club real bad.
Zorba says he's heard that we helped his acquaintance, Salvatore, get into the club in the past. We can neither confirm or deny this, but we say that if Zorba gives us the ugly truth about his finances, we'll see what we can do.
Zorba's financial statement shows that he holds a lot of real estate, and recently bought a parking garage in Little Tokyo. To buy the business, he borrowed Yen. To buy real estate, he borrowed Dollars. Interest costs are eating him up.
We explain to Zorba that his interest expenses on his debt could be reduced if it were expressed in Euros, but while this would be good, he couldn't really put any cash on the books by a break-even transaction in the present spot currency market.
And so...
We suggest that we could pick out an historical exchange rate that would be quite favorable for him, and we could acquire his debt at that rate, paying him in Euros. But he couldn't tell anyone. This would give him the equivalent of $1 billion right away, and maybe $9 billion more in the long term. Of course, he'd have to pay us back with a balloon payment in 15 or 20 years. This sounds good to Zorba.
Then we go see an insurance agent named Otto. He charges us $200 million for a policy insuring us against Zorba's default on the $1 billion. Of course, Zorba has to pay for our credit risk. That would only be fair.
With Zorba's balance sheet now looking pretty good, he applies for admission into the club. He gets in, and is very happy.
Now all we have to do is sell Zorba's debt to somebody else, and, you know, "buyer beware". This won't be too tough, because, after all, he just got into a very exclusive club, and everyone in the world knows that to get in, your financial statement has to be in great shape. Besides, the "currency swap/loan" was off the books. He'll have to deal with all the deferred interest payments the best way he can, if he can. Not our problem. We got him in the club, and we're off the hook. Plus we made money.
This is basically how Goldman Sachs helped Greece get into the European Union by falsifying its balance sheet and concealing its true debt levels. Then they underwrote Greek debt and sold it, knowing it was shaky.
Say you are Goldman, and I am Sachs (or vice-versa). We own a bank. We have a rep for being able to solve anyone's financial problems. It is also well known that we are extremely risk averse, so our fees are high, and our profits must be assured.
Mr. Zorba comes to us having a real bad problem. He wants to join a very exclusive club whose members are all snobs of European descent. The people in the club don't think you're rich unless you hold Euros. The club has high admission standards, and requires potential members to prove that they have short-term debts of no more than 3% of their annual incomes, and long-term debt of no more than 60%. Zorba explains that he can't meet either standard, and he needs to put some cash on the books, because he wants to join the club real bad.
Zorba says he's heard that we helped his acquaintance, Salvatore, get into the club in the past. We can neither confirm or deny this, but we say that if Zorba gives us the ugly truth about his finances, we'll see what we can do.
Zorba's financial statement shows that he holds a lot of real estate, and recently bought a parking garage in Little Tokyo. To buy the business, he borrowed Yen. To buy real estate, he borrowed Dollars. Interest costs are eating him up.
We explain to Zorba that his interest expenses on his debt could be reduced if it were expressed in Euros, but while this would be good, he couldn't really put any cash on the books by a break-even transaction in the present spot currency market.
And so...
We suggest that we could pick out an historical exchange rate that would be quite favorable for him, and we could acquire his debt at that rate, paying him in Euros. But he couldn't tell anyone. This would give him the equivalent of $1 billion right away, and maybe $9 billion more in the long term. Of course, he'd have to pay us back with a balloon payment in 15 or 20 years. This sounds good to Zorba.
Then we go see an insurance agent named Otto. He charges us $200 million for a policy insuring us against Zorba's default on the $1 billion. Of course, Zorba has to pay for our credit risk. That would only be fair.
With Zorba's balance sheet now looking pretty good, he applies for admission into the club. He gets in, and is very happy.
Now all we have to do is sell Zorba's debt to somebody else, and, you know, "buyer beware". This won't be too tough, because, after all, he just got into a very exclusive club, and everyone in the world knows that to get in, your financial statement has to be in great shape. Besides, the "currency swap/loan" was off the books. He'll have to deal with all the deferred interest payments the best way he can, if he can. Not our problem. We got him in the club, and we're off the hook. Plus we made money.
This is basically how Goldman Sachs helped Greece get into the European Union by falsifying its balance sheet and concealing its true debt levels. Then they underwrote Greek debt and sold it, knowing it was shaky.
Friday, February 26, 2010
THE DEVIL IN THE DETAILS IS GOLDMAN SACHS, PART I
All analogies break down when pushed far enough. I know this. But bear with me.
Say my name is Goldman, and you are Sachs (or vice-versa). We recently bought a house for $165,000 cash. The fair market value is $200,000. Our friend, Lehman, wants to buy it, but he's making $400/month payments to his brother for a car loan that he got on a handshake deal, and he can't make a 20% down payment. We tell him we'll take 5% down, and we'll finance the balance with interest payments he can afford. We require a financial statement from him which leaves out the part about the car loan. We close the deal.
Then we take all the mortgage papers and Lehman's financial statement to another friend, Mr. AIGner, who is an insurance agent/bookie who thinks he knows something about real estate finance. We tell AIGner (with tongue in cheek) that although we know we have made a very solid loan, we'd like for him to sell us a kind of insurance policy against Lehman's possible default. AIGner examines the documents,and goes for it. We agree to pay premiums of $100/month for a $200,000 "policy'.
Then we put the word out that we have a golden mortgage loan for sale. Lots of people who trust us want to buy it. The more we talk it up, the greater the demand to buy it increases. We decide to sell the loan at auction. The bidding is frenzied, and our other friend, Stearns, pays us $210,000 for the note. We transfer it to him. We no longer on the hook as a lender.
But we still own the "insurance policy".
So when Lehman defaults two months later, we have $419,800 in bank (which we also own), and everyone else is screwed and tattooed.
This is how credit default swaps work. This is how Goldman Sachs hyped crummy mortgage paper (that they knew was crummy), sold it to people who should have known better, and put AIG on the hook for all of it.
Say my name is Goldman, and you are Sachs (or vice-versa). We recently bought a house for $165,000 cash. The fair market value is $200,000. Our friend, Lehman, wants to buy it, but he's making $400/month payments to his brother for a car loan that he got on a handshake deal, and he can't make a 20% down payment. We tell him we'll take 5% down, and we'll finance the balance with interest payments he can afford. We require a financial statement from him which leaves out the part about the car loan. We close the deal.
Then we take all the mortgage papers and Lehman's financial statement to another friend, Mr. AIGner, who is an insurance agent/bookie who thinks he knows something about real estate finance. We tell AIGner (with tongue in cheek) that although we know we have made a very solid loan, we'd like for him to sell us a kind of insurance policy against Lehman's possible default. AIGner examines the documents,and goes for it. We agree to pay premiums of $100/month for a $200,000 "policy'.
Then we put the word out that we have a golden mortgage loan for sale. Lots of people who trust us want to buy it. The more we talk it up, the greater the demand to buy it increases. We decide to sell the loan at auction. The bidding is frenzied, and our other friend, Stearns, pays us $210,000 for the note. We transfer it to him. We no longer on the hook as a lender.
But we still own the "insurance policy".
So when Lehman defaults two months later, we have $419,800 in bank (which we also own), and everyone else is screwed and tattooed.
This is how credit default swaps work. This is how Goldman Sachs hyped crummy mortgage paper (that they knew was crummy), sold it to people who should have known better, and put AIG on the hook for all of it.
Tuesday, February 23, 2010
PAUL KRUGMAN DISTORTS HISTORY
Liberal economists like Paul Krugman have always tried to sell the story that conservative politicians have a very sinister agenda: to intentionally erode the government's fiscal position to such an extent that social welfare/entitlement programs would have to be eliminated in order to reconcile the national budget. Most recently, Krugman claims that President Reagan's tax-cutting program was the mechanism through which which he attempted to accomplish this evil goal. That's not how Krugman and others portrayed Reagan's reputed "strategy" at the time. Back then, liberal economists insisted that Reagan's spending on military and national security initiatives (remember the Star Wars debate?) was secretly designed to take so much money out of the budget that there would be no choice but to eliminate welfare and other entitlements.
A couple funny things happened, though. Instead of the arms race bankrupting the U.S. economy, it bankrupted the Soviet economy. It was their government that was "fundamentally transformed" by Reagan's military spending, not ours. Also, if it had been Reagan's intention to ruin the nation's balance sheet by cutting taxes, he failed miserably. Revenues went up. Does anyone, even Krugman, really believe that President Reagan was disappointed in that result?
A couple funny things happened, though. Instead of the arms race bankrupting the U.S. economy, it bankrupted the Soviet economy. It was their government that was "fundamentally transformed" by Reagan's military spending, not ours. Also, if it had been Reagan's intention to ruin the nation's balance sheet by cutting taxes, he failed miserably. Revenues went up. Does anyone, even Krugman, really believe that President Reagan was disappointed in that result?
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