massachusetts

Much has been said and will be said about the senate vote in Massachusetts, but in reality the outcome was not unexpected. Especially not in light of what happened earlier in Virginia and New Jersey. And even less so when you hear the talk inside the beltway. Democrats are bracing for a loss of up to 30 seats in midterm elections. Clearly they know something is up. Some of the more prominent ones have already preempted a defeat by declaring they won't run again.

There is no doubt that this string of losses is a rebuke to Obama. The new president's popularity is low compared to that of his predecessors. He barely tops Carter and comparisons with Carter are sure to follow. Unfortunately a lot of it is of his own doing.

The keys to defeat lie in the unrealistic expectations that were only topped by the even more unrealistically high fundraising. Both are coming home to roost.

I agree with Krugman at the NY Times that Obama made serious mistakes. The stimulus was too small and it did not reach the intended beneficiaries. The bankers got bailed out without so much as a slap on the wrist, while middle class families are losing their homes, their retirement, and their savings. It is obvious Obama is in bed with Wall Street. I pointed this out before and predicted it would cause major problems.

I also agree with the Rutten at the LA Times that the administration did not do a good job explaining healthcare. While it addresses the 30 million uninsured, it appears to offer little or nothing to the 270 million who have insurance. All they can see is more deficits that they know they will have to pay for. Never mind that their coverage could lapse, that they might be bumped when they need it, or that they will find out it does not cover their expenses. For now it appears to them that things are OK.

But Rutten goes further. He points to the anger that he says is due to the fact that American middle class families are worse off than their parents. Some of that may be a factor. The American economy is not so much a wealth creator as it is a wealth shifter. It has shifted massive amounts of wealth from the poor and the middle class into the hands of the few. In doing so it has bankrupted over half the population. The shifting is running out of resources to shift.

Everything was done by deceptive means. US style capitalism appeals to people's worst behaviors such as greed, lust, pride, envy and gluttony while making fun of altruism, cooperation, and moderation. It pits people against their friends and neighbors. It uses fear and anger and preys on feelings of inadequacy and inferiority. It relies on illegal immigrants and workers on job-related visas that have no bargaining power and can be used to undercut the wages those who seek a decent living. It uses layoffs to boost quarterly earnings, and promote job-insecurity in workers.

It has promoted women, not because it believes in feminism, but because additional lower paid workers helped create an environment that is aversive to organizing, unionizing, and bargaining power. It also helped create a false sense of wealth and that drove more consumption.

It uses open markets and tax payer subsidized oil to bring in items from abroad, where labor laws are lax and environmental issues of no concern. It treats many parts of the world as colonies to be stripped of resources and valuables.

Furthermore, the unfortunate situation is leading to a country that is becoming ungovernable. The State of California has already reached that impasse. Soon the nation will follow. Like Rome before it, the American republic may soon become a dictatorship or go down in anarchy.

why the rich get richer

Capitalism is a funny system. Suppose you all start out at the same time with the same resources. As soon as someone gains a small advantage, their position improves. It becomes easier for them to amass even more resources. At the same time the others struggle more to stay in place. Suddenly, the ones with an advantage are the favored party to amass more.

It is like the little rivulets in the park. I was hiking the other day in an South Bay park and noticed how erosion had changed the trail from my previous visit. There was a section of trail in a wide swooping turn that was angled downward. Throughout little rivulets carried water across the trail into the canyon below. At one point, all rivulets were of nearly the same size and all must have carried about an equal amount of water.  But in my absence something happened. Suddenly one or two of the rivulets became bigger and they "grabbed" the water from the adjacent ones. Now the trail was largely flat with two or three big gullies instead of an undulating surface with 20-30 little streams.

Today it was announced that the Oracle of Omaha, aka Warren Buffett had made an investment of $5 billion into Goldman Sachs. First, we note that Warren has connections to the firm, granting him wide access to executives and information. Second, we note that he got a sweet deal with 10% extra interest and options to buy more shares on the cheap. 

Goldman did not have much choice, they need the money. Also, Buffett knows his way around at Goldman. Thirdly, giving it to Buffett almost guarantees the value will go up. In times of crisis people look for heroes and saviors. And if there was ever a savior of capitalism, Buffett is the man. It is almost a self-fulfilling prophecy. 

The name Buffett makes it so the investment will attract other money and hence go up in value. And with the government poised to follow, Buffett is sure to become a major beneficiary of tax payer money. And nobody will feel he didn't deserve it. I.e. we are going to pay Warren well and rather quickly too. That should ensure him a 40%+ annualized return.

No such luck for the ones who are left behind. They will pay the bill instead. Like the tiny rivulets supplying water to the growing gullies, while drying out themselves, we will make Warren even richer than he already is. That is how capitalism "creates" wealth. It shift resources from the masses to the few. The few who will then put the others to work to create even more wealth -mostly for themselves, mind you.

This system has no internal checks and balances. It keeps flowing until a few rivers are left. Rivers so wide that the trail will ultimately collapse. Unless us smart people intervene to save the day.

catch-22

You probably heard about the bail-out package. The $700 billion that is needed to "stabilize" the market. The $700 billion that will buy worthless debt "instruments" and straddle tax payers with excess pain for decades to come. But what you may not know, or may not have thought off is that this package will do nothing for struggling home-owners. It will do exactly nothing about the source the mess, the mortgage crisis.

What it will do, is allow banks to write-off or remove from their balance sheet, worthless paper. Toxic debt is the technical term. That will make the bank look better, and up its credit rating. That will make it so the bank can get more money and won't have to raise funding to shore up its collateral.

However, the plan can only work when two things happen. Things that nobody really wants to happen. Or at the very least, things that nobody should want to happen.

The first is the CEO's and other C-executives will walk away with millions in bonuses, severance, and other platinum or diamond-studded gold parachutes. All rewards for "a job well done." And there is nothing you or I or anyone else for that matter can do about it. Because those greedy executives will not sign on to a plan that forfeits their "packages." 

Guess what will happen to bank X if its CEO has to sign on to a plan that wipes out his/her package in order to rescue the company? If you said, he/she will let it go under, you win! Because that is exactly what will happen. No CEO will voluntarily give up their "benefits" in order to do his/her fiduciary duty or protect the shareholders. CEO's are eager to fire workers to protect the shareholders and boost margins, but don't touch their money!

The second is that the Fed will have to pay way too much for all that debt. If the Fed values the debt for what it is worth (nothing), then the cure won't work. Even if the Fed pays a more reasonable rate, the rescue won't work. The cure can only work if the Fed buys worthless paper for its over-inflated and unrealistic face value.

So here you have it. A package that buys useless paper at enormous cost with your money and rewards incompetent executives for their greedy misbehavior over the past five to eight years.

And what will this marvelous package do? It will restore confidence. It will make it so banks don't fail and so credit does not dry up. It will save the financial sector. It will do nothing, absolutely nothing for housing, mortgages, home-owners or anyone else. They will be left to pick up for themselves. It will do nothing about the next wave of upcoming foreclosures. It will do nothing about crashing housing prices, or lost jobs.

The banks sold everyone mortgages that they could not afford and then they packaged these mortgages with plenty of excess fat into investment "vehicles," that are now worthless because the collateral is not there (i.e. the house). So the bank has a problem, and guess what, we will bail them out.