Lawson for Congress

This is a rather long post. Here’s the executive summary:

Practically speaking, what should we do? As unpleasant as deflation sounds, collapsing our currency is worse. We must not collapse our currency to bail out corrupt institutions who benefited from unsound practices. A bailout attempt must not tip us over into a run on the currency. With an existing $9.7 trillion debt and $53 trillion in long-term entitlement liabilities, we are not the world’s best credit risk to abruptly increase our borrowing.

If pain is inevitable, how can we temper the economic turbulence to come?

Here is a plan that I would support:

1. Eliminate capital gains taxes on real estate transactions to encourage existing private capital to buy underlying real assets.
2. Affirm that all voluntary barter transactions between two individuals (human individuals, not “corporate persons” or legal entities) are tax-free, regardless of the medium of exchange.

The first step will help stem the fall in real estate prices without increasing debt or bailing out irresponsible borrowers or lenders.

The second step will restore a more reasonable balance of power between individual Americans who have been pistol-whipped in this economic mess, and the corporations who benefit from an unsustainable system.

Together, they will reduce near-term economic dislocations, while providing a platform for sustainable community-based growth over the long term.

This moment in American history calls for principled leadership by an irate minority in Congress who is willing to stand up for the American people. The human people, the individuals — not corporations who already run Washington through their lobbying machines.

Now for the rest of the story:

Nouriel Roubini has an excellent summary of reasons that the Paulson/Bernanke bailout plan is a bad idea. Key quote:

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.

It’s also important to note how bailing out poorly-run banks and financial institutions negatively impacts well-run banks, such as BB&T. I’ve banked at BB&T ever since CEO John Allison took a principled stand against financing development projects resulting from land seizures like Kelo v. New London. Based upon the values demonstrated at BB&T, I was not surprised when I read the thoughtful letter (available here as a .pdf) that Mr. Allison sent to Congress. While everyone in this debate has their own perspective and interests to protect, the letter makes some excellent points:

We think it is important that Congress hear from the well-run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.

There is no panic on Main Street and in sound financial institutions. The problems are in high risk institutions and on Wall Street.

While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly-run financial institutions. It is extremely important that the bailout not damage well run companies.

Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well-run companies.

This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk of the total financial system.

Mr. Allison presents a balanced perspective, although his statement “The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction” can be read as his asking for government support for BB&T’s residential and construction loans.

The bottom line is that Paulson’s proposed plan, and the bailouts done to date, have been for the benefit of well-connected corporations and the individuals who profit from them. That’s corporate socialism. But as BB&T illustrates, there are well-run institutions whose values and business practices are built to last. We must not rescue institutions whose irresponsible behavior has left then vulnerable to this correction. Any  attempts to “save the system” should eliminate the institutions that failed in the process, and allow good institutions to prosper.

Given the strength of the interests involved, I believe we will see a bailout plan out of Congress. Time will tell if any “bailout” allows owners and managers of failed institutions to suffer the consequences of their actions. Regardless of the final plan, however, no bailout will be able to prevent further economic suffering.

Why? We are truly between a rock and a hard place. This crisis resulted from way too much lending, which created way too much money out of nothing, and resulted in irresponsible people, governments, and businesses accumulating way too much debt.

How can we cure too much borrowing with yet more government borrowing, the proceeds of which are given to banks to allow them to lend more, when we’ve already borrowed TOO MUCH and can’t service the debt we have?

For a graphical illustration, check out this blog post:
http://ukhousebubble.blogspot.com/2008/09/crushing-truth-about-us-household-debt.html

For another graphical illustration, consider this image:

Debt on this chart is defined as all U.S. debt (sum debt of federal and state & local governments, international, and private debt, including households, business and financial sector debts, and federal debt to trust funds).

We cannot borrow our way out of debt.

We cannot borrow our way to prosperity.

Collectively, we have borrowed so much that by 2016, the interest on our debts at 6% interest will be greater than the total consumer income. Those who think we can bail out the lenders without considering the collective balance sheet of our nation are ignoring reality.

Where are we going to get the money for a trillion dollar bailout? Will foreign investors recycle another trillion dollars into new bonds issued by our Treasury to pay for it?

As evidenced by the chatter from abroad, Europeans and Asians are not willing to fund our continued largess. Attempting to “monetize debt” by having the Federal Reserve print the money required for a bailout would lead to loss of confidence in the dollar, and potentially catastrophic collapse of our currency.

So we have two choices — collapse of corrupt financial institutions with deflation, or preserving the dominance of corrupt institutions while collapsing our currency  with inflation or hyperinflation.

Practically speaking, what should we do? As unpleasant as deflation sounds, collapsing our currency is worse. We must not collapse our currency to bail out corrupt institutions who benefited from unsound practices. A bailout attempt must not tip us over into a run on the currency. With an existing $9.7 trillion debt and $53 trillion in long-term entitlement liabilities, we are not the world’s best credit risk to abruptly increase our borrowing.

So if pain is inevitable, how can we temper the economic turbulence to come?

Here is a plan that I would support:

1. Eliminate capital gains taxes on real estate transactions to encourage existing private capital to buy underlying real assets.
2. Affirm that all voluntary barter transactions between two individuals (human individuals, not “corporate persons” or legal entities) are tax-free, regardless of the medium of exchange.

The first step will help stem the fall in real estate prices without increasing debt or bailing out irresponsible borrowers or lenders.

The second step will restore a more reasonable balance of power between individual Americans who have been pistol-whipped in this economic mess, and the corporations who benefit from an unsustainable system.

Together, they will reduce near-term economic dislocations, while providing a platform for sustainable community-based growth over the long term.

This moment in American history calls for principled leadership by an irate minority in Congress who is willing to stand up for the American people. The human people, the individuals — not corporations who already run Washington through their lobbying machines.

Our country’s ultimate source of strength and resilience is a self-sufficient community that can feed itself, clothe itself, house itself, educate itself, and trade its surplus production with its neighbors. Today, our communities and individuals have never been more dependent — as evidenced by consumer sentiment, unemployment, foreclosures, and even tent cities in hard-hit areas.

In this moment of crisis, individuals need to be free to help each other, and themselves. We need to level the playing field between corporations (who enjoy “legal personhood” and limited liability) and individual Americans.

People must again have the ability to serve each other as individuals to recreate the wealth that is being destroyed all around us.

This entry was posted on Friday, September 26th, 2008 at 11:24 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.