It's the Economy, it's Stupid!

This post is partly a response and analysis to Matthew and Bradley Haupt's Allied Tax Planners Special Report. I see in a number of analyses of the economic situation, what caused it, and what might cure it that contain contradictory statements and misfired deductions. I definitely enjoyed this report, and I encourage you to read it; however, while in spirit it has a lot of really well-founded conclusions, it misses the mark in a number of important ways. It does contain some good overview information of what has happened in the last year or so financially, and it provides a great bird's eye view of the economic turmoil.

For the record, the best way to describe my own educational filter on what is happening in the economy is that I follow Mike Shedlock's views. He has consistently correctly predicted the stages of the economic fallout, and his analysis is quite understandable and educational.

I'll address the report in a non-linear fashion, so this will not be point-by-point. For best reading, I suggest reading their report, and then come back for my comments. I'll refer to the Haupt's article as the ATP from here on out, for brevity.

Are we going into a depression?

This question almost essentially relies on one additional question: will we hit at least 10% unemployment officially? If so, then we most certainly will look back on this time as a depression. If not, then we'll probably have just considered it a bad global recession. Where are we currently? The latest governmental figure for October 2008 pins us at about 6.5% unemployment. That doesn't seem high, except for the fact that we haven't seen those numbers in a while, and the announced-but-not-implemented-yet layoffs are quite high. It is not inconceivable that we'll hit 7% by the end of the year. At the current pace, we're looking at somewhere around 8-9% by the end of next year. If it doesn't slow down by late 2009, we might just cross that ill-fated depression finish line. One interesting note is that while official unemployment is 6.5%, if you count all disaffected workers such as part-timers who want full-time work, those who gave up looking, and those whose unemployment benefits ran out, we're actually at a whopping 11.8% unemployment! This figure came out of the same goverment report that had the 6.5% number. If we hit 10% official unemployment, we're probably looking at 20% real unemployment. That is very, very bad.

ATP writes, "This is, in Alan Greenspan's own words, '...a once-in-a-century credit tsunami,' which could have been prevented, but, like all other crises before it, will pass." This is totally true, it will pass. However, the speed at which is passes by us is what is interesting.

The Causes

The first problem: ATP states that,

"The lesson here is that when government appears to be operating in the best interest of “the people,” they often are not. Free markets work only when they are free from tampering, whether or not the tampering is well-intentioned."

This is 100% correct. Government intervention, except for policing criminal activity, tends to have negative unintended consequences (as well as a few negative intended consequences). It doesn't work, and we agree on that. However, they then go on to say,

"We feel that the Bailout Bill (or “Rescue Plan” as it is now being called) was a good move, IF IT WORKED THE WAY IT WAS SUPPOSED TO and here’s why: as these companies are going bankrupt, the companies and institutions that hold their stock or bonds or other securities are not sure what they are worth anymore, if they are worth anything at all. So these companies suddenly are not sure how much cash they can raise for expenses, to meet obligations, or especially, if they are a bank, how much cash they can lend. The Bailout Bill allows the government to step in as a buyer of last resort of those securities. So for the companies that hold these securities, they can suddenly sell them to the government (yes, for pennies on the dollar, but something is better than nothing) and have cash to invest in other securities, or lend to make interest on their money. Liquidity would have been restored."

But herein lies the problem. You can't advocate that tampering by the government is bad, even if well-intentioned, and then state that a taxpayer-funded bailout would work, even if the intended functioning took place. The bailout was a stupid idea on a great many fronts, but here are a few reasons why:

• This isn't a liquidity problem. This is a solvency (capital) problem. Liquidity means there isn't enough money to go around, or that money isn't moving around. Money isn't moving around because the banks and businesses don't have enough capital anymore. The Fed has been flooding the markets with liquidity lately, and guess what? It hasn't done a dang thing. The banks are hoarding the money, because if they had to reveal their cards, they would be bankrupt immediately.
• The bailout's intended functioning is to fleece taxpayers and consolidate power among the largest banks in order to keep the US financial hegemony over the rest of the world. In other words, this is US Secretary of the Treasury Hank Paulson doing his friends a giant favor, at taxpayer expense.
• Taking money from taxpayers, either by taxes or by the potential whiplash inflation that could result, just devalues assets of the average people of the US whose savings are providing what precious capital the banks have. In other words, if you water down taxpayer's monetary power, you starve the banks of the very capital that would actually put them on firmer footing.

ATP then also states the following about what was done during the Great Depression and then more on the bailout:

"But a lot has changed since the Great Depression, and policies have been put in place so that a lot of things that happened then can never happen again. For example, the stock market crashed massively in 1929, the Dow Jones losing about 42% of its value, in large part due to margin trading (trading stocks with borrowed money). Margin trading has been amended and changed so that it doesn’t push the market down like this anymore. Short selling rules have been changed. At the time of the Great Depression, the government did not do enough to restore confidence, but this time, in order to conserve confidence in the economy, the Legislative Branch passed the Rescue Plan to buy up the assets of bankrupt institutions (such as auction-rate securities, subprime lending issues, collateralized mortgage obligations, structured investment vehicles, etc.). Later, when the market has stabilized, the government will sell these assets on the open, potentially making billions of dollars of profit; so this bailout will not end up costing the taxpayers $700 billion in the end."

Unfortunately, the basic functioning of free markets has not changed since the Great Depression. The assertion that "the government did not do enough to restore confidence" in the Great Depression is erroneous. They're blinded by Fed Chairman Ben Bernanke's academics (but I don't blame them, that's an easy trap to fall into), because he says the same thing. He claims he was a student of the Depression, yet he is making precisely the same mistakes the government did back then.

Here is the mistake: the Great Depression was caused by excessive debt, not a lack of liquidity. The loss of confidence, and the ensuing difficulty in restoring it was because, in a very real sense, the whole stinking world was in a giant debt hole. As long as prices kept climbing (inflationary pressures), the big ponzi-scheme party kept up and the music kept playing. It was fueled by easy money (low interest rates and large amounts of liquidity from the Fed), and as soon as one even marginally important bubble popped, the whole scheme came crashing down.

When you have a nation built on extreme debt, the only way out eventually is for the debt bubble to pop and for there to be large defaults. People think that the stock market crash of 1929 was the beginning of the Great Depression (Black Tuesday). But it wasn't. It was housing, and it started in 1928 or so when house prices started to plummet. The stock market was a symptom. During the depths of the Depression the stock market had rebounded and appeared healthy, yet the economy hobbled along for years after that. Ask Japan how that feels in a modern world. But if you hold on for very long, you'll get to see it for yourself.

But why did it hobble along? Was it that the government didn't do enough to restore confidence? Did they not provide enough liquidity? The answer is simple: they did too much. President Hoover made a number of strategic mistakes, but he was smart enough to know that he needed to not meddle too much and let it take its course. People blame him for causing it, but I think that if his policies had continued the Depression would have ended sooner (and wouldn't have taken a war to re-energize the economy). The fatal mistake that made it drag out forever was made by our beloved FDR. The government under his watch began doing exactly what our government is now doing: meddling, and trying to inflate its way out of a deflationary collapse. Another way to look at this is that debt created the Depression, and they threw more debt at it to make it go away. I believe it was Einstein that told us that insanity is applying the same wrong solution to a problem expecting a different outcome each time. Our government is obviously insane.

All these interventions did during the Depression was lengthen it out, as the much-needed correction was hobbled in its ability to take its course quickly enough. Then, the interventions didn't produce the hoped-for 'recovery,' and confidence dipped ever lower, hobbling recovery even more. Does this sound familiar? The government has had unprecedented interventions in the last 18 months in the economy, as have foreign governments. What has it bought us? Nothing, except a giant bill that our future selves and children will have to pay for. We now have a crashed stock market (43% down from peak), a crashing housing market (around 25% down from peak, and falling), crashing manufacturing, rising exports (which is deflationary), crashing commodity prices, crashing retail sector, crashing auto sector, etc. Government intervention does not work.

ATP also points out that we have successfully bailed out institutions before. I don't buy it; this does nothing but create the oft-mentioned moral hazard that will plague free markets. If the government bails anybody out, then they have less incentive to do the right thing, because they get rewarded for bad and stupid behavior. One group he mentions are the S&L institutions (the Savings and Loan crisis of the early '80s). Let it be known that the S&L bailout was hardly 'successful' as far as the taxpayer is concerned. They properly shut down the failing S&Ls, and liquidated their assets. That was good. The problem is that the very same investors who drove the S&Ls into the ground turned around and bought the fire-sale priced assets, and then made a killing off of them starting up a new set of S&Ls. The real problem? The markdown hit was taken by taxpayers. In other words, they ran things into the ground making incredible profits with risky investments, cried to the government, who had the taxpayer take his lumps, and then bought the really cheap assets back and began fleecing savers all over again. They fleeced savers on the way up, and taxpayers on the way down. Good work, if you can get it.

What do we do now?

ATP gives some advice, much of it very sage. Don't panic -- yes, panic only tightens the downward spiral. But be careful...if everyone else panics, and you don't, well, they end up with their money out and you don't. Which means you lose. So, keep your ear to the ground, and be deliberate, and watchful, but yes, don't actually panic.

The next bit of advice -- "Now is the time to buy." Hogwash. This is a form of bottom-calling. The bottom in the housing market over the last two years has been called about once per month, each time the housing data comes out. Guess what? There's no bottom in sight. Same goes for the stock market: it's very volatile, but according to many theories, there is a real chance it'll break it's supports around 8000 points in the DOW. If it does, who knows where it'll bottom out at. Buying now is like catching a falling knife. If you're not a professional and aren't properly equipped, then trying it is really not smart. Of course, the same goes for not selling: hang on to your assets long enough, and you might just finally panic and lock in your losses. You can get some gains back later, but it's hard, so be careful.

ATP notes that Warren Buffet has been buying lately, and to follow his pattern to diversify. This is good advice. However, Warren Buffet was recently heard on the media telling people to "buy now, even I'm buying!" If he says that, then don't walk, run to the exits. He is a master at this, and if he tells you to buy, he'll buy a little, and everyone will jump in the spree, and once everyone is buying, he is selling and screwing all the buyers. He isn't worth the billions he is for nothing.

ATP's subsequent 5 important lessons are spot on. Take them to heart.

Discrimination revisited

In my previous post I noted that I had observed a vocal few (that I called outliers) making some very harsh accusations against supporters of Proposition 8. My sentiment is shifting however to be that I don't think these are outliers. I am observing a surging trend among those who oppose Proposition 8 to resort to discriminatory language themselves and fear mongering against their perceived enemies.

Singling out the LDS Church

Let's start with the protests in LA at the LDS temple:

http://www.latimes.com/news/local/la-me-protest7-2008nov07,0,3827549.story

First, let's correct a number of errors in what many of the protesters were saying:

1. The LDS Church did not donate $20 million to the Yes on 8 campaign. The Church donated about $2300 or so to the Protect Marriage Coalition, to reimburse them for travel expenses when a few leaders of the Church met with leaders of the coalition. In other words, Protect Marriage paid for the travel, and the Church didn't make them foot the bill in the end. That is all the Church directly contributed, and it doesn't amount to a hill of beans. Some have implied the Church donated millions of dollars, but it did not.
   
2. Some have estimated that members of the Church have donated, collectively, as much as $20 million in support of Proposition 8. This could be right, but examining all the donors trying to guess at their religious affiliation sounds a little questionable. There just isn't enough information. What if the real amount is really more like $5 million, out of more than $35 million total? Does that change their attitudes towards the Church?
   
3. The protesters claim that the LDS Church is really the driving force behind the direction that the Yes on 8 folks took in their ads and their strategies. Many members certainly offered their time, but there was already strong leadership in place from the Protect Marriage Coalition. From what I understand, it was well after it was gaining momentum that a Catholic bishop invited the LDS Church leadership to take an active role.
4. The protesters claim that the LDS Church strongly encouraged or even forced members to donate their money and time. This is pure hogwash. There was an official encouragement for about 2 minutes on one Sunday, for sure, but nobody who chose not to contribute is being threatened with excommunication or any other punishment. In fact, I personally thought the encouragement was almost too soft; I expected more than what they said. They were very understanding about those who could not or did not want to donate. Anybody who asserts that members of the Church are just robots or are fearful and do whatever they're told, is wrong. I have never, ever heard leaders of the Church tell people that they should just obey, and not go find out for themselves the truth. In fact, it is quite the opposite; the Church is entirely based on people having a personal conviction, attained on their own and confirmed in their hearts and minds by God directly that what they are doing is right. This is a deeply held tenet of the Church.
   

With that out of the way, I'll divulge my own story regarding the issue. It is public record that I and my wife both contributed to the Yes on 8 campaign. I was not actually at church the day that the letter regarding the Church's support of traditional marriage was read (even though my wife was), but I have since read the letter. In any case, we were not asked directly by anybody to contribute at that time. My wife and I were unable to do so until around September, and then we both decided together without anybody pushing us that we should. We researched the issues, we prayed about it, and felt very strongly that supporting Proposition 8 was the right thing to do.

We decided on how much we thought we could contribute, and also decided we would go ahead and do it. That same day, our bishop independently asked us if we wanted to contribute. He didn't say we had to, nor did he ask for an amount, and he made it clear that this was not mandatory at all. But when he was asking us if we wanted to, I got that same "yes, this is right" feeling all over again, and it felt like a confirmation that it indeed was time to do it. So we did. And we did again later in October, with no urging from the Church. It was all us.

I don't regret contributing one bit, nor do I regret the content of the ads that my contributions helped produce. The opponents of Proposition 8 have called the Yes on 8 ads 'lies,' 'hate-filled,' 'bigoted,' 'wrong,' 'unfair,' and 'intolerant.' Funny thing, those terms; if you read my last post, you'll see why using those terms is, ahem, a real stretch, if not intolerant in and of itself. The Yes on 8 ads' claims were based in case law in Massachusetts, Department of Education regulations in California, laws already passed in California, and actual events that have occurred in both states. There are both things that have been noted in the media that everyone knows about, and there are parents who have told us about their own experiences with their children's schooling in the last year that give very clear creedence to what the Yes on 8 ads were saying. After reading the documentation behind the ads, I realized that not only could a reasonable person conclude that the possibilities raised in the Yes on 8 ads are real, but that in some cases the scenarios cited have already occurred. They call this 'fear mongering,' but I think it's just plain arguments based on researched data. It jives with what people are reportedly already experiencing with the schools (yes, multiple public schools) in the SF Bay Area where we live.

How the No on 8 campaign can call these 'lies' is beyond me, unless they are trying to redefine 'lie,' just like they apparently want to redefine 'tolerance,' 'discrimination,' 'bigotry,' and 'sex' (gender) as noted in the California Constitution. Again, see my previous posts for more background on these definitions, as they merit a discussion by themselves. This sort of molding words to fit a political agenda is very dangerous; double-speak only results in suppression of information and the truth.

The Protests

And now we find ourselves turning full circle. The opponents of Proposition 8 are still out in front of the Los Angeles LDS Temple as I write this, screaming epithets such as as 'bigots!' and claiming the LDS Church somehow took away their rights in a display of religious power-grab. This is demonstrably not the case (the LDS Church didn't force those 5+ million voters to pass Proposition 8!), and to lump all LDS people together as hate-filled, discriminatory bigots is a bigoted act itself. The protesters are by their very actions demonstrating their bigotry towards members of the LDS Church.

Way to go, guys. Your cause is suffering from a teensy bit of something called hypocrisy.

The Church has been on the receiving end of this kind of thing before, though; so don't worry, the members won't get scared like the protesters would like them to. In fact, I'm quite sure most members will view this singling-out of the Church as confirmation that what they are doing is right, and it will only strengthen their resolve to stick to their standards. What's even more interesting, is the protesters basically allege that the Church is what caused Proposition 8 to pass. I suppose it is probably true that if the members didn't donate as much as they did, there is some chance that the word wouldn't have gotten out as effectively, and perhaps it wouldn't have passed. But to state that as if it were conclusive, and then place all of the blame at the feet of President Thomas S. Monson and 'Mormons' everywhere and host a protest about it, well, that's just disingenuous.

Even beyond that, I don't see them protesting against the 7 out of 10 African Americans that voted for Proposition 8! Or how about the more than half of all Latinos who voted for it! Never mind that members of the Church comprise perhaps 300,000 of the voters or so, and the margin of win for the vote was more than 500,000. If all of the members of the church moved out of the state 2 months ago and didn't vote, it still probably would have passed. I'm sure that members of the LDS Church don't mind taking some credit, but please, let's spread the congratulations around a little to the other 5 million people who favored it, shall we?

Racial Discrimination

Now, the African Americans and Latinos who voted for it aren't getting protested at, but in the media they are still getting smeared some. I have seen more than one article now (one of these was from an article at cbs5.com, I can't recall which article though) as well as comments from the protesters that essentially stated that those minorities who voted for the proposition were "church-going uneducated people." Excuse me? Did they really mean that? If so, I smell true bigotry right there (unless the definition changed in the last week, in which case I apologize for sounding so...old fashioned). Hm, a teensy bit more of hypocrisy creeps in. Way to go, guys.

Me, personally, I just think that African Americans and Latinos actually have values, and are less afraid to vote their conscience. Their motivation to vote the way they did was their principles.

What's even more alarming is that the No on 8 group has tried diligently to compare their plight to that of the Civil Rights Movement, and to the interracial marriage issues of the past (which were really awful, by the way). The two are not comparable, and the comparison just muddies the waters. Homosexuality is driven by a difficult choice (an inconvenient truth for homosexuals, but truth nonetheless), the other issue was based on discrimination ultimately due to part of a group of people's actual DNA. Take the following example:

Put on one side of a line an African American man, and a white man. Put on the other side of the line an African American woman, and a white woman. Under interracial marriage rules in the past, they would only let the white man and white woman match up for marriage, and ditto for the african americans. This is clearly discriminatory, because the only substantive difference between each man is a few genes (not a whole chromosome), and the only difference between the two women is a few genes as well. There is no good reason to prohibit the matching to occur diagonally across the line, and so interracial marriage prohibitions were rightly struck down. Remember, marriage in this case is a union of the opposing sexes for the purposes of procreation and family.

Now, if a man on one side of the line is homosexual, he still has his choice to marry either one of those women (if they like him, of course). The man next to him who is not homosexual has the same choice. Neither has an advantage above the other. Same is true for the women; if one is lesbian, she can still choose a man on the other side of the divide of either race. She misses no opportunity. Marriage is about the appropriate union of the opposing sexes (genders) into a construct that makes them into something greater than the sum of their parts (this is called a family). If a homosexual doesn't want to marry someone across the line, then fine; they have their choice, and nobody is taking that away. Trying to make a match without crossing the gender line is, plain and simple, not marriage. No rights have been removed, because everyone on all sides have always had the chance to marry someone of the opposite sex. Whether they choose to do so or not is their own business.

Claiming they have the 'right' to marry someone of the same sex is an expansion of rights, and one that is clearly not welcomed by the majority of the population. Many rights are inherent to human beings and should be treated as such (right to life, right to a fair and speedy trial after being accused, right to the pursuit of property, right to free speech, right to make choices that do not impede others' liberty, etc.), but many other opportunities that some people like to call 'rights' are really 'privileges,' which are only to be granted by circumstance and approval of society. In other words, one can get married if they fulfill the conditions pertaining to it, and society blesses the action because the conditions are fulfilled. If the conditions are not fulfilled, then no amount of yelling and waving signs will make something that is not marriage suddenly become so.

A final note on discrimination: the California Constitution has several protected classes that are illegal to discriminate on the basis of each. They include race, ethnicity, sex, and religion. The CA Supreme Court extended 'sex' to include 'sexual orientation,' and that is pretty much the whole basis for overturning Proposition 22 on May 15 of this year. Hm, 'sex' in this case very clearly is just a synonym for 'gender', e.g. whether you have a Y chromosome or not. Sexual orientation or sexual preferences have absolutely nothing to do with 'sex' in this context. This wasn't even stretching a definition, this was just plain making stuff up. Supreme Court judges are not stupid, and they knew full well that they were making one monster of a leap with their decision. There is no 'sexual orientation' class protected by the constitution, and thus there is no protection under that document for striking down laws defining marriage as between a man and a woman. Proposition 8 simply was meant to peg that definition back to its true, historical meaning.