Is Bernie Madoff a Heroic John Galt?

Bernie Madoff deprived the super-wealthy of $50 billion, without resorting to the Estate Tax (a/k/a the Paris Hilton Tax) or armed robbery.

According to Republican economic theory, we should be throwing roses at his feet.

By fleecing the wise uber-wealthy folks of some $50 billion, he had provided a supply-side burst of incentive to those fine people to regain their former wealth. Those captains of industry are now incented to the tune of $50 billion, just to get back to where they thought they were a couple weeks ago. Better yet, he accomplished his gift of incentive without spending the money on wasteful government programs such as school lunches or welfare that simply disincentivize the poor. And BEST yet, he did it in a fashion that owes its existence to the under-regulated market the the Republicans have made a fetish of.

The bedrock of Republican "Economic Theory" is that incentives for the super-wealthy are critical. The wealthy - not lazy unionized workers, pampered teachers in our schools, or grossly inefficient government civil servants - are the supermen who, with their finely attuned, market-sensitive, invisibly guided wise hands are the ones must be allowed to keep their billions and billions of dollars, so that they remain incentivized to create more wealth. Taxing the wealthy hurts us all, they claim, because the wealthy will no longer feel the incentive to work, and we will all suffer in their absence.

The timing could not have been better, either. With Obama's election, rightwingers were beginning to darkly (inappropriate pun intended) mutter about the "John Galt Option" or "Going John Galt
", in a reference to a character in a very bad novel who withdraws his productive force from the economy when the unproductive "looters" seek to tax his fortune. Rightwingers were threatening to slow down their productivity in the prospect of having to pay for the war they supported.

Dr. Helen, in a pre-Madoff meditation on the possiblity of an Obama administration, sets out the thought process that motivates those who would imitate John Galt:

Perhaps the partisian politics we are dealing with now is really just a struggle between those of us who believe in productivity, personal responsibility, and keeping government interference to a minimum, and those who believe in the socialistic policies of taking from others, using the government as a watchdog, and rewarding those who overspend, underwork, or are just plain unproductive.

Obama talks about taking from those who are productive and redistributing to those who are not -- or who are not as successful. If success and productivity is to be punished, why bother? Perhaps it is time for those of us who make the money and pay the taxes to take it easy, live on less and let the looters of the world find their own way.

If Republican incentive-based economic theory is valid, then Bernie Madoff was the right man at the right time to boldly create incentive in an economy that was going to hibernate until a new administration of deregulation, no watchdogs and deficit spending could reverse Obama's plans. Instead, thanks to the heroic Bernie Madoff, the John Galts of this world are waking up to find themselves in a $50 billion hole in an economy that needs more of their "wise" investments. They now have the incentive to rejoin the economy.

Mayor's Forum on Financial Preparedness

Yesterday morning, concerned Kansas Citians gathered at the auditorium of the Liberty Memorial Museum for a conversation just as bleak as the weather outside. The structural imbalance of Kansas City's budget and the crazed tax-giveaways of the Barnes years have left us facing a $84.9 million dollar shortfall which will grow to a $111.5 million shortfall if current trends continue. The short answer, brought home by Deb Hermann, Mayor Funkhouser and the consultants who spoke, is that current trends cannot continue. So what are we going to do about it?

In a nutshell, we failed to come up with workable solutions. The ideas that seemed to have the most support all placed the misery squarely on the average city worker or average citizen, and involved little or no sacrifice for the ultra-wealthy Kansas Citians who spoke out at the meeting. "Charge for trash" and "cut back on city workers" were the strongest suggestions offered up by the multi-multi-multi-millionaires who grabbed the microphones before going back to their taxpayer financed enclaves. Funny how nobody even suggested graduating the earnings tax, or even delaying Payments in Lieu of Taxes so we get a year's worth of interest on the money we are paying to finance their castles. Indeed, one of the wealthiest men in the state openly scoffed at any thought that some of the problem could be solved on the revenue side of the equation. The suffering, it was clear, belongs to the peasants.

That said, I'm glad I showed up and participated. Almost all the smart councilmembers attended, and it was wildly impressive to see 60 of Kansas City's heaviest hitters show up on a frigid Monday morning in Christmas week. Notably absent were Wayne Cauthen, Kay Barnes or Steve Glorioso. Also, no Federal, State or County politicians attended - we're in this on our own, Kansas City.

While we didn't solve the massive budgetary problems we're facing, the morning was time well-spent. We all learned a little more about the issues, received a briefing on the consultants' report (available for download here), and we got to think a little and brainstorm on ways out.

Perhaps most valuably, we got a flavor of the political realities faced by our elective representatives. On the one hand, we had the uber-wealthy loudly and jealously guarding their advantages, while we also faced fantasy-land fossils grumbling about free trash promises from generations ago, and calling for repeal of the earnings tax. We heard ill-informed, reckless suggestions tossed out by those without a clue on implementation, and we heard earnest, factual statements about the financial unsupportability of doing nothing.

Walking out after 3 hours of financial bad news, it was hard not to feel a strange sort of optimism. We have some great people in this city, and the City officials who showed up are focused and smart. Deb Hermann did a great job of presenting, and Funkhouser did a great job of getting everyone's attention focused on the problems we're facing.

Not Everyone Under Water is Drowning - Why John McCain's Erratic Homeowner Bailout is Unnecessary

McCain's debate performance was stylistically stronger than I anticipated, but it was more troubling than I ever dreamed. One of the things that scares people about McCain is his tendency toward erratic behavior (erraticism?). At the debate, during a time of international financial turmoil and domestic near-panic, McCain announced a crazed new plan to throw money at people who have demonstrated their lack of financial acumen - he wants to buy the mortgages of houses that are "under water". If you have a mortgage with a value higher than the market price of your home today, John McCain wants to buy your mortgage from your bank and give you a new one with a reduced value.

It's this sort of erratic over-reaction that concerns me about John McCain. That's not maverick, that's manic.

For those of us who view houses as homes, and not commodities, the relative value of our mortgage to our home's market price is not a burning issue. If you're not selling and you're not buying, it doesn't matter if you're underwater. If you're not in the market, the short-term market price isn't really all that big a deal.

I don't really know what the market value of my house is today. I don't have a precise number for how much we owe on it, either. Why should I care? The real number I focus on is how much I need to pay every month for my mortgage - and that does not fluctuate according to the market place. Even if I had an adjustable rate mortgage (which I don't, because I realized what the A in ARM stands for), I wouldn't be focused on the value of my house, I would be focused on the cost of my mortgage. If I have enough current income to service my mortgage, I don't need to focus on my long-term capital value.

Those of us who own one home, and live in that home, can swim underwater quite happily for a long time - at least until we need to sell. I don't need lifeguard John McCain to bail me out with your tax dollars.

For most of us, our home is our most significant capital investment. As with any capital investment, we hope it appreciates, but cyclical changes in value are only unrealized gains and losses, unless we choose to sell.

While there may be some economic rationality in walking away from a mortgage that is going toward the purchase of a home with a mortgage value greater than its market value, the truth of the matter is that most of us are not going to do that if we still have current income to service our mortgage. That's just not how real families work.

For real families, a house is not an investment to walk away from while you have enough income to pay the mortgage. Our children sleep in the bedrooms. We cook in the kitchens, and relax in the living rooms. The sense of "home" and stability is more important than what an appraiser says my building is worth. Even if it weren't, the hassle of moving and potential destruction of my credit rating would keep me from walking out.

But John McCain wants to use tax dollars to bail me out, even if I don't realize that my market value may be less than my mortgage value.

Like so many issues in America, this is a hidden class battle. John McCain owns multiple houses, so he doesn't share the same concept of "home" that the rest of us do. He has a portfolio of houses - somewhere between 8 and 13 diversified units that he holds largely as tax-favored investments. For him, it does not make even a tiny bit of sense to pay a million dollar note on a house that is worth $990,000. To him, that's the same as paying yesterday's value on a stock that has dropped one percent - it is an economical irrationality, and a crisis that must be solved with taxpayer money.

For most normal Americans, the housing crisis will not be a crisis unless we start losing our jobs. John McCain's proposal to inject massive amounts of tax dollars into the mortgage industry is not designed to save jobs - it's designed to save capital. Real estate does not employ people.

The average American family does not even have an accurate, up-to-date valuation of its home. The crisis does not exist in the possible gap between mortgage value and market value - the gap that John McCain wants to spend hundreds of billions of dollars to address. The crisis exists only in the possible gap between mortgage cost and current income. John McCain's plan ignores that gap.

That's the gap keeping America awake at night worrying, John McCain. "That one."

The Real World Between Cynicism and Optimism

A couple weeks ago, I posted a piece suggesting that readers contact their congressional delegations to voice their opinions on the bail-out bill. First up in the comment section was Kansas City's Best Blogger and nonvoter Meesha, advising me with all his world-weary wisdom that "it will happen anyway".

Sure enough, it happened anyway.

So, was my call to action an exercise in futility? I don't think so, and neither do the millions of people who now will gain access to mental health coverage with their insurance. 24 million taxpayers will get relief from the Alternative Minimum Tax. A lot of changes were made to the bill, some of which were good, some of which were transparent gifts to special interests. The fact remains, though, that our calls got their attention, slowed down the train, and got us at least a more palatable bill.

Total victory? No. Total defeat? No, but dangerously close. Worth a few phone calls? Absolutely.

Financial Services Crisis Explained at My Poker Table

First off, if you want a good, solid explanation of what in the world is going on, go here and read this brilliant and relatively concise explanation. It has the statistics, the names of the legislators and the economic terms laid out in a readable article - unlike anything you would find in your newspaper or other the dead-tree media which, not coincidentally, are suffering through a different financial crisis.

But even that article is so mind-blowing that I need help in bringing it down to my own terms. I've never seen a trillion dollars, a billion dollars or even a million dollars. I don't really understand how, one day, the economy is trudging along with nothing more than the typical clouds on the horizon (Republican deficit, energy prices, stagnant Bush stock market) and then suddenly, with nothing changing in my world, we're talking about a trillion dollars for companies that don't even make anything. It's the metaphorical piano falling on a pedestrian. Where the heck did that come from, and why?

On the other hand, I do understand friendly nickel ante poker games, and, believe it or not, this whole thing can be put into those terms. Here goes:

It's a Friday evening, and I invite a few of my buddies over for nickel ante poker. It's the same old game as always - we all know and like each other, and at our stakes, we're looking at maybe winning or losing $10 or $20. Most importantly, though, this game is not taking place at a casino, with all their strict loss limits and regulations - my dining room table is like the financial services industry in a post-deregulation Republican administration.

Now, everything is going along great, but I start having a bad run. Next thing you know, I'm almost out of chips, and I start what looks like it will be my last hand with only a couple bucks left. Sure enough, I get dealt a great hand - a natural royal flush. Unbelievable! And there's no way I can stop betting on this hand with only a couple bucks in the pot. So, I look to my buddy Les, and say "float me". He knows me well enough to know I'm good for it, so he nods and I'm in for the rest of the hand. He doesn't need to actually put the chips in - the other players know he'll cover if I lose. I bet the limits, win the hand, and the game continues on.

What Les gave me was the equivalent of a credit default swap. They are like crack cocaine, crystal meth and Skittles rolled into one - an addictive jolt of energy that can destroy a poker game or an economy.

Now that the concept of "floating" has been introduced to the game, the game gets a little wilder. First off, why do we really need bet limits? In a normal game, we hold ourselves to quarter bets, with a limit of three raises, but that seems a little too tame now, so we agree that we can play no-limits.

Second, the "float" grows in popularity. I did it when I had a great hand, but Jim saw that it worked, and that doing the transaction actually enhanced my credibility. So, the next time he wants to bluff, he puts all his money in and asks me to float him another $10. I do it, the others fold, he wins, and his bluff never even gets discovered.

Here's where it starts getting crazy. Another guy gets a hand, smiles, and puts all his money in. Then he looks at me and asks me for a hundred dollar float. A hundred dollars is a lot of money to me, and my wife will kill me if I lose it, but I'm not going to leave my buddy hanging, so I nod. Then another guy raises him, and gets a float from Jim. Suddenly, there are hundreds of dollars being traded in floats around my little, unregulated, nickel ante poker table. The hundred become thousands quickly, since there's no real cap on money we're not really holding.

And we all know that we can't afford this nonsense. But we're all in over our heads at this point, and the first one to admit it will be ruining the game and exposing himself to be a fraud.

So we continue on. It's late. My wife comes in around midnight after a night with her friends and asks how I'm doing. "Umm, fine," I murmur, but I'm not really sure. It's tough to keep track of all the floats we've been using. Jim owes me $5,000, but I owe Les about the same. I honestly don't know who's backing Jim, but I'll be alright if Jim is able to pay, which I know depends on the ability to pay by the guy who is backing him . . .

Folks, in a nutshell, that is the crisis that is going on right now. The financial service industry has been giving each other floats, and it got crazy. Right now, those floats total to more than the GDP of the entire world! Nobody can pay up, and everybody knows that the game has to end sometime soon.

So now the American public is being asked to pony up. We weren't invited to the game. We sure as hell weren't going to be given a portion of the pot had the game continued. If the bill winds up being only a trillion dollars, that is $3,278 for your share. If you're married, your spouse is in for the same amount. If you have children, they're in for the same amount. Your old mother, trying to get by on a fixed income? Yeah, she is on the hook for the same amount, too.

Supposedly, this game is too big to simply break up, and let the players absorb their losses. Personally, I'm not convinced.

But, for Bush and Treasury Secretary Paulson, these are their friends playing the game. And that's no metaphor - the people who have done this are their actual friends - the people they yacht with and travel with and went to Yale with, and they've been asked by their friends to do a float. And they want to do it with your money.

Are you all in?

Call Congress Today - NO to Bail-Outs

I can remember a few years ago when the Bush Administration was begging for authority to act rashly, and the case to support the action was wrapped in secrecy and fear. Congress went along, and America has suffered because of our trust.

Now, the administration wants to launch the most expensive program EVER, without time for debate and without explaining its plans.

Does it make sense to pay higher than market prices for bad assets purchased by people who ought to know better? Is anyone else struck by the handwringing and lack of empathy from Republicans when we were talking about extending unemployment benefits, in contrast to the rush to compassion for the country club Republicans we're seeing now? Why do our schools need bake sales, when $700 billion was available for a compelling need like broke bankers? Why was this money unavailable for the uninsured?

It's bad policy. But it's going to happen if you don't pick up the phone and call Congress and tell them you don't want this to happen.

Here is a site that gives you the contact information for your elected representatives. I will be calling mine today - and, to make it even easier for you, here are the numbers for:

Kit Bond: (202) 224-5721
Claire McCaskill: (816) 421-1639
Emanuel Cleaver: (816) 842-4545

Do NOT assume that any of these individuals will vote the way you expect or hope they would on this matter. In fact, each of them has shown a tendency to favor banking interests over Missourians in the past. They need to hear from you today. Be polite, but be clear. We do not want to shower $700,000,000,000 of our tax dollars on an undisciplined financial services industry.

Big Money

Years ago, some brokerage outfit used to run ads with a curmudgeonly old man in a clubby atmosphere bristling with patrician condescension intoning, "We make money the old fashioned way; we EARN it."

It was probably the most effective ad ever done by a brokerage house. Using an old white male to voice the superiority of those who live off investments, the ad was a nuclear bomb in the class wars of America. Who doesn't earn their money? Those lower class peons and welfare queens, with their silly concepts of labor and taxes chewing away at the edifices of capital. How is money properly earned? Through investments, of course. Investing, you see, is "hard work". Old fashioned work, for old money.

This week, as in the weeks preceding and following, financial powerhouses are dropping like hotdog stands on a rainy day. Unlike hotdog stands, though, the Big Money Players aren't content to close up shop and go find another way to make a buck. Instead, they are turning to the rest of us and begging for help. And, because they make their money by holding on to ours, they have us over a barrel. Bail them out, or face macro-economic fallout that we cannot begin to fathom.

Kruschev told us "We will bury you". For a while, it seemed we had proven him wrong. But now, the West is controlled by men who use torture in secret gulags. Now, the West is controlled by those who spy on their own citizens, and seek to detain people indefinitely without charges. Now, the world financial struggle is controlled by those who happily seek state bail-outs and even nationalization.

When Kruschev threatened to bury us, most of us thought he was speaking on behalf of the proletariat. We were fools. Kruschev never represented the working class. He represented the same class of person that Cheney and Bush represent. And, folks, we're being buried. The old fashioned way. By big money.

Renting, Buying, and the Joy of Being a Kansas Citian

Google "housing prices" (without the quotes), and the search engine returns over a thousand news stories about bursting bubbles, plummeting prices and tumbling townhomes (alright, I made up that last alliteration).

Here in Kansas City, home prices never did boom the way they did on the coasts. Similarly, they seem to be avoiding the declines seen on the coasts.

Yesterday, I read an interesting analysis of "buy vs. rent" at my favorite macroeconomics blog (don't we all have our favorites?), The Big Picture. Looking at the ratio of home prices to rent costs, the ratio here in Kansas City stayed near the historical average of between 10 and 14, while it skyrocketed to over 30 in the hot markets.

Looks like we missed out on the boom, and we'll miss out on the bust. If real estate speculation is your game, Kansas City must be a boring place to live.