Tag: bailout

Defined Benefit Pensions: A Failed Experiment

Post author By David
Post date January 22, 2010
11 Comments on Defined Benefit Pensions: A Failed Experiment

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photo credit: inspecie.co.uk

After the town hall meeting I attended on Wednesday I have been thinking about pension plans generally. The state of Utah is looking at changing their pension offerings for new employees to save the state from future financial ruin. I have seen other companies go through that process already. As a nation we have seen the cost of defined benefit pensions contribute mightily to the downfall of GM and Chrysler as well as having a hand in the struggles throughout the airline industry not so many years ago.

As I thought about all these examples I realized that even a fully funded defined benefit pension program is a gamble for any organization. Employees like the security, but it is an inherently risky proposition to offer such a plan.

Tags bailout, economics, Elevated, health care, money, Utah

General

Too Rich to Go Bankrupt

photo credit: Stowe Boyd

By “too rich to go bankrupt” I don’t mean someone so rich that they never will go bankrupt. What I mean by that is someone so rich that them going bankrupt would destabilize our economy and thus they deserve a bailout if bankruptcy ever threatens them. (Think Bill Gates plus Warren Buffett plus everyone who gets a paycheck from Google.) More on that later . . .

In discussing the role of the federal government in an economic recovery Ronald Hunt and Charles D. brought up the issue of the role of corporations. Charles was good enough to provide links to a 2-part article by Richard Grossman from 1998 (Part 1, Part 2) that did a good job of discussing how corporations have turned into very unwieldy masters over “we the people.” I was amazed when I first realized that these articles, which are so pertinent to our situation of bailing out “too big to fail” institutions was written more than a decade before our massive Bush bailouts.

I especially enjoyed a couple of quotes from the second part of the article:

the Supreme Court of Georgia, in Railroad Co. v. Collins, wrote: “All experience has shown that large accumulations of property in hands likely to keep it intact for a long period are dangerous to the public weal. Having perpetual succession, any kind of corporation has peculiar facilities for such accumulations . . .” (emphasis mine)

And from the end of the first part:

In Richardson v. Buhl, the Nebraska Supreme Court in the late 19th century declared: “Indeed, it is doubtful if free government can long exist in a country where such enormous amounts of money are… accumulated in the vaults of corporations, to be used at discretion in controlling the property and business of the country against the interest of the public and that of the people, for the personal gain and aggrandizement of a few individuals.” (emphasis mine)

Tags bailout, economics, Elevated, government, KVNU FTP

National

A New Federal Role in Economic Recovery

Post author By David
Post date December 4, 2009
15 Comments on A New Federal Role in Economic Recovery

My post on fundamental assumptions generated some good discussion which began waxing economic in flavor. As part of that discussion I had a new idea about a more reasonable approach the federal government could take to soften economic hard times without outright manipulating our expectations of reality as they do now.

I should start by clarifying my perspective on what the federal government does and what is economically realistic. Economic realism insists that we recognize the inevitability of economic downturns. They are going to happen. Unfortunately the assumption at the federal level seems to be that we must strive for perpetual economic growth – we might tolerate one or two quarters of a mild contraction but anything beyond that is unacceptable. As proven by our significant and now two year old recession sometimes the economy needs to undergo a much harsher adjustment – especially after the government has been pumping the supposedly healthy market with perpetual stimulus for years. (I know, they have not called anything they did stimulus until the stimulus bill in early 2008.)

Personally I think a better approach to the federal government smoothing the rough spots out would be to establish a baseline – let’s say 5% unemployment – where any state meeting that baseline would not receive any federal economic assistance to combat unemployment. Then they would look a the spread between the unemployment rate of various states and be allowed to give economic aid to any state with at least 5% higher unemployment than the state with the lowest unemployment. The upper limit of that aid would be equal to 1/3 of the difference in unemployment between the higher of 5% and the unemployment rate of the state with the lowest unemployment with the limitation that government aid cannot help one state leapfrog another. Let’s show what that would mean with current (October 2009) numbers.

The state with the lowest unemployment is North Dakota at 4.2% so any state with more than 9.2% unemployment could get aid from the federal government to help lower their unemployment. For the October 2009 numbers that would mean that only 21 states could get any federal assistance rather than having the federal government trying to jump start the economies of all 50 states. Of those 21 states Arizona, Missouri, and Washington (at 9.3% unemployment) could receive aid equal to 0.3% of their respective economies (they would not be allowed to leapfrog Idaho and new York which have 9% unemployment and cannot receive this federal aid because they are within 5% unemployment of North Dakota’s unemployment rate). In fact, 12 of the 21 states would receive enough aid to bring them equal to the 9% unemployment rate of Idaho and New York because that would be less than 1/3 of the difference between their actual unemployment rates and the magical 5% unemployment. At the other end of the scale Michigan, with the highest unemployment would have their rate cut below 12% from their current 15.1%.

If every state had unemployment rates over 5% the new benchmark would be the lowest unemployment rate of any state. If we imagine that lowest unemployment rate was 6.5% (adjusting all states up to 6.5% and leaving states with higher unemployment where they are) only states with unemployment over 11.5% would receive aid, six states in all, and only Michigan would get the full 1/3 of the difference between their rate and the base rate of 6.5% (leaving them with 12.2% unemployment).

If all states were below 5% unemployment or if they were all clustered between 3.5% and 8.5% unemployment then the federal government would not give unemployment assistance to any of the states. If anyone is curious to see them, I have all my numbers in a spreadsheet that you can download.

The fact is that of the economy of the entire nation is slumping then no government program can provide a solid foundation to real economic growth – all it can do is produce the illusion of economic stability. Real economic growth can only be build on fundamental economic change, not on the illusion of stability provided by printing money and manipulating interest rates. While committed free marketers would likely hate my proposal just like they hate the current government intrusions in the economy and while those who don’t object to socialism will find my suggestions very harsh on downtrodden regions of the nation, I think that my idea is much better at providing a cushion for the hardest hit areas while allowing the economy to shrink or grow towards whatever the realities of our national economy are which the government tries so hard to mask right now as if our perceptions were the only economic reality worth considering.

Tags bailout, economics, government, KVNU FTP, money

General

Stretching Our TARP

photo credit: wolfheadfilms

When the TARP bill was first being discussed I made a statement that I would like to repeat about the TARP money:

[T]his should not be used as a windfall by Congress to fund some pet projects.

We have come to the point now where Congress is faced with the question of whether to extend the program past the initial time of authorization. From the earliest versions of the bill (not including the 3 page version written by Sec. Paulson) to the final version the program was authorized only until 2009 with the option for Congress to extend it as far as two years from the day it was enacted (October 10, 2010 being that two year mark). Faced with the reality of this first deadline there are people who are absolutely opposed to those members of Congress who have indicated a desire to not extend the program.

I stand by my response to what I called “my favorite section” of that first version of the bill:

Of course I won’t hold my breath that it will die in two years or less.

Indeed, Sec. Geithner testified before Congress yesterday that:

he would not support a permanent extension of the program, but . . .

(emphasis added)

Tags bailout, Bob Bennett, Elevated, money

National

Economic Recovery

I was listening this morning to a story on NPR about rising unemployment when an interesting thought struck me. The story was talking about the negative feedback loop of rising unemployment leading to lower housing prices and more economic uncertainty. These factors then dampen consumer spending and keep unemployment high and even encourage more unemployment.

I know it’s a very perverse perspective, but my reaction to that news was that maybe there is an outside chance that our economy will actually undergo the correction that it obviously requires despite the best efforts of Bernanke and Geithner to prevent the necessary correction. If the economy continues to defy the stimulus efforts it may yet reach a solid foundation – but I won’t hold my breath on that.

Tags bailout, economics, NPR

National

Banks Giving Back

While it is good news that 10 banks will be allowed to repay billions in bailout funds I would be much more excited if I didn’t already know what was likely to happen as a result.

The banks were deemed strong enough to leave the Troubled Asset Relief Program, or TARP, after months of lobbying and strong performances on recent stress tests. The banks are expected to return about $68.3 billion to the Treasury Department, more than double the administration’s initial estimate of about $25 billion in funds to be returned this year. The timetable is also earlier than government officials originally intended.

. . .

The $68.3 billion represents about a quarter of the TARP money given to banks.

That last figure tells me that we still have over $200 billion illegally given by our government to our banking system.

My lack of enthusiasm for this news comes from two concerns. First, the administration will use this news as evidence that the bailouts are working better/faster than expected. The truth is that the banks have been working furiously to find a way to get rid of that money ever since they read the regulations that came with it. Second, having that money will be used as a way to help fund other illegal activities by the federal government such as propping up the UAW by buying GM (the money being returned covers everything we’ve put into GM so far) and even worse than that is the possibility that some smart government people might take the news as an excuse to say, “hey, we have $68 billion more than we expected,” and then go on to fund another $58 billion in projects that they did not dare to fund previously. That’s like buying a $500 LCD monitor when you can only afford $100 and then buying an $80 printer when the $100 rebate arrives early.

So the banks are giving back more and earlier – that’s good for them (and “good for them” is what they are paid to do) but that does not mean there’s a chance that the government will start giving back or being financially responsible in any way.

Update @1:20pm: Here are a few words from the president today confirming my claim that the administration would use this to show that the bailouts are working better than planned:

Several financial institutions are set to pay back $68 billion to taxpayers. And while we know that we will not escape the worst financial crisis in decades without some losses to taxpayers, it’s worth noting that in the first round of repayments from these companies the government has actually turned a profit.

. . . We’re restoring funds to the Treasury where they’ll be available to safeguard against continuing risks to financial stability. And as this money is returned, we’ll see our national debt lessened by $68 billion — billions of dollars that this generation will not have to borrow and future generations will not have to repay.

He says that the money is being returned to the treasury, but I’m confident it will find a way to sneak out again like a good rebellious teenager despite the president’s best efforts to keep it at home where it belongs. 😉

Tags bailout, deficits, government, New York Times

State

Too Little Too Late

I was not sure whether to gag or chuckle when I heard the news that Senator Bennett wants to prevent the use of TARP money for the auto industry. To me that just sounds like he’s shutting the barn doors after the cows have escaped while insisting that there’s nothing wrong with leaving the stalls open.

Bennett said he also adding wording that would ban using Troubled Asset Relief Program (TARP) bailout money to help bankrupt car makers.

“The TARP money was sold to the Congress as acquiring assets, not as acquiring stock positions in various companies, particularly not in acquiring stock position in a bankrupt manufacturing company,” Bennett said.

“When we approved TARP the first time around, we did it with the understanding that it was dealing with the credit crisis,” he said. “Instead, the TARP money has gone into these bankrupt companies.”

It’s clear to see that Bennett is doing everything he can to show his opposition to federal overspending and government overreaching in the economy while maintaining his position that the original bailout was necessary. I don’t see any reason to even begin to pay attention until he has come out and directly stated that his vote on TARP was absolutely wrong from the beginning. Even if he does, he is wrong if he things that his TARP vote is the only thing dragging on his chances for re-election.

Tags 2010, bailout, Bob Bennett, Deseret News, legislation, senate

National

GM Surprise (or not)

Back at the end of March David Brooks made a prediction for GM in the New York Times that came due today. I have been waiting to check in on that. He started with this background of the situation as it stood that day:

The Bush advisers decided in December that bankruptcy without preparation would be a disaster. They decided what all administrations decide — that the best time for a bankruptcy filing is a few months from now, and it always will be. In the meantime, restructuring would continue, federally subsidized.

Today, G.M. and Chrysler have once again come up with restructuring plans. By an amazing coincidence, the plans are again insufficient. In an extremely precedented move, the Obama administration has decided that the best time for possible bankruptcy is — a few months from now. The restructuring will continue.

But this, President Obama declares, is G.M.’s last chance. Honestly. Really.

No kidding.

With that background, Mr. Brooks’ reactions was this:

The most likely outcome, sad to say, is some semiserious restructuring plan, with or without court involvement, to be followed by long-term government intervention and backdoor subsidies forever.

Looking at the relevant news today (also from the New York Times) we find that the result is a restructuring plan with court involvement and long-term government intervention including continuing subsidies – initially at least the subsidies are anything but backdoor.

American taxpayers will invest an additional $30 billion in the company, atop $20 billion already spent just to keep it solvent as the company bled cash as quickly as Washington could inject it.

The imagery is all too apropos – like Fannie, Freddie, AIG, and the economy in general GM is and has been addicted to shooting up with public money to feel like a real free-market enterprise. Conveniently too many of our elected leaders are equally addicted to intervening in the markets in order to feel like they are performing a real job for the American tax payer.

Mr. Brooks called the President the “Car Dealer in Chief” in his predictive essay, and now that is more true than before:

Mr. Obama is taking several risks under the plan. None may be bigger than the decision that the United States government will take a 60 percent share of the stock in a new G.M., leaving taxpayers vulnerable if the overhaul is not successful. (Canada, for its part, is taking a 12 percent stake.)

“We don’t think that after this next $30 billion, they will need more money,” one senior administration official said. “But the fact is there are things you don’t know — like when the car market will come back, and how much Toyota and Honda and Volkswagen will benefit from the chaos.”

This is G.M.’s last chance. Honestly. Really. We hope.

Tags bailout, economics, government, money, New York Times, Obama, unconstitutional

National

Two (or more) Wrongs Don’t Make a Right

Post author By David
Post date March 20, 2009
No Comments on Two (or more) Wrongs Don’t Make a Right

I was listening to Peter Schiff’s Wall Street Unspun for this week and he said something that cemented a change of perspective I had been considering regarding the AIG bonuses. I had been thinking about this idea of taxing the bonuses at 100% and relizing that it amounted to an ex post facto law – which is specifically forbidden in the Constitution. What Peter said was that Congress was wrong to bail AIG out in the first place and that if they hadn’t AIG would not be able to pay these bonuses now. Secondly, he said that if they had wanted to stop the bonuses they should have done so up front by making it a condition of receiving their bailout money. (He also accurately pointed out that the excuse that these bonuses should not be necessary to reatain AIG employees in this economy – few people would leave their jobs in a climate of rapidly rising unemployment and smart companies should be avoiding the employees from the division that crippled a company the size of AIG.)

Between the Constitution and the logic of Peter Schiff I realized that as much as I dislike the fact that these bonuses are being paid I cannot support Congressional action to tax them back after the bonuses have been paid and after the bailouts have been given. Simply stated, Congress is acting immorally anytime they try to change the rules after making their promises – it’s solid proof that they should not have made those promises in the first place.

Tags bailout, change congress, money, taxes, unconstitutional

National

I Missed An Option

When I listed the options yesterday for how to deal with the AIG bonuses I obviously missed one. One member of the house thought up the idea that we could tax AIG bonuses at 100 percent. The beauty of his bill is that it is written to apply to large bonuses at any company receiving TARP funds. I like the concept because it leaves private businesses (meaning those not being propped up by Uncle Sam) free from any new restrictions in compensation and id does not affect the people getting small bonuses (the ones least responsible for the problems). The biggest change I would have made to this idea would be to lower the threshold from $100,000 to $25,000 or less.

Tags bailout, legislation, money, taxes