More Awful Truths About Republicans

September 6, 2008 at 7:59 am · Filed under Uncategorized, coup d'é·tat in America, Corporate Power, 2008 Election, Executive Fiat, Land of the Free?

As the economic debacle facing Americans continues to materialize, those responsible are running for cover with ten Republican senators refusing to attend their own national convention. Four years ago we observed that the so-called “Republican philosophy” of small government, sound money, and balanced budgets was illusory in terms of the history and then-current policies of the Republican Party.[1] However, even we would never have guessed how awful the Republican Party economic policy would become. From mere mercantilism, the Republican Party is now flirting with comprehensive socialist economic policy and another Great Depression.

The Republican Party was founded on big government and economic intervention with roots in the economic platforms of Federalist icon Alexander Hamilton and Whig leader Henry Clay. Indeed, the term “New Deal” was coined in 1865 to characterize Lincoln and his Republican Party economic platform. Republicans became the “mercantile” party of big business, big government, external protection, centralized monetary control, strong restrictions on immigration, and aggressive foreign policy.

From FDR’s New Deal to LBJ’s Great Society, Democratic policies forced many free-market activists into the Republican fold. People like Robert Taft, Barry Goldwater, Ronald Reagan, and of course Ron Paul, represent this free-market faction in the Republican Party. For example, free markets, deregulation, and balanced budgets became the Republican mantra (if not reality) during the Reagan administration. The orchestrated marginalization of Ron Paul is just one indicator that the free-market faction has been routed and that the mercantilists are firmly in control. In fact, as we endure the current economic malaise, we can note that the Republican-dominated Congress (1994–2006) and the administrations of George W. Bush have morphed Republican-style mercantilism into corporate socialism.

Harmful military spending, unbalanced budgets, fiscal irresponsibility, protectionist and monopoly handouts to friends is the old style Republican playbook. The new style is audacious, unprecedented, and truly awful for the economy. It begins with the Republican-controlled Federal Reserve, which, under Alan Greenspan and Ben Bernanke, has flooded the economy with money and credit and bailed out every economic crisis since 1987. Greenspan’s admonitions against “irrational exuberance” apparently were not intended to restrain the Federal Reserve’s irresponsible monetary policy. Who in their right mind could honestly say that the Fed had nothing to do with the housing bubble after driving the nominal interest rate to 1% and proclaiming that the mortgage market was well regulated?

But an insidious form of “market-based policy” is also a real culprit in the current mess. In 1999 a bill was passed by a Republican Congress and signed by Democratic President Bill Clinton that rescinded the Depression era’s divorce of commercial banking activities from investment banking, called the Glass-Stegall Act of 1933. That opened a floodgate of “creative” financial instruments backed by notes and other commercial paper. Much of the banking regulation of the Roosevelt administration — including abandonment of the gold standard — made absolutely no sense, but markets can fail with dire short-run consequences under a fiat monetary system. With Glass-Stegall, Congress put its finger on and mitigated the tendency and temptations of banks to create massive costly externalities to society, in this case, by holding bundled mortgage-backed securities which were deemed safe by rating agencies but which ultimately failed the market test.

The Financial Services Modernization Act of 1999 would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance; but in the world as it is, this “deregulation” amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly. Such government privileges are nothing new to Republicans — consider the effective subsidies to the pharmaceutical, sugar, and steel industries — but this particular gift to financial institutions is what allowed the credit bubble to expand to such absurd proportions, because it allowed banks of all types to engage in increasingly risky transactions and to greatly expand the leverage of their balance sheets. As the crisis unfolds, credit continues to contract, the risk of bank failures increases, and the possibility of far more serious economic consequences become more apparent. The S&L crisis cost the taxpayers a few hundred billion, but this crisis has the potential of saddling the taxpayer with several trillion in bailouts.

So far, the Republican solution has been to bail out lenders — wealthy financial-industry professionals for the most part — who made unwise market decisions with subsidies and election-year subventions. With Hank Paulson, the former CEO of Goldman Saks, as Secretary of the Treasury and the big banks on the Board of Directors of the New York Fed, it should not be too surprising that the Fed has been listening only to Wall Street while ignoring Main Street.

But the real problem is that their policies will lead to the nationalization of much of the mortgage-real-estate market. On July 30, 2008, President George Bush signed a bill into law that bails out Fannie Mae and Freddie Mac to the tune of an estimated $25 billion dollars in taxpayer losses, according to the Congressional Budget Office (CBO). The bailout is intended to stabilize the short-term economy, but this ill-conceived nod to socialism will have disastrous long-term effects. First, according to most economic estimates, the bill that taxpayers would have to eat is laughably small. Economist Don A. Rich has calculated the possible losses at as low as $1.3 to $1.6 trillion given likely housing price declines and as high as $2.5 trillion (if the housing price fall mimics that of the Great Depression).[2] The fallout from either of these scenarios would be catastrophic as the Federal Reserve accommodated (within the fiat money system) the taxpayer-backed debt. The real debt would be inflated away and America’s real income could be reduced by as much as twenty percent.

The expansion of Federal Reserve authority is almost as alarming as nationalizing the mortgage industry. While the bailout includes the typical reductions in the Federal Funds Rate and the Discount Rate, it also includes the unprecedented moves to auction off discount rate loans, accept mortgage-backed securities in exchange for the Fed’s Treasury Notes and the financing of J.P. Morgan’s takeover of Bear Sterns. In May, the Fed began to allow investment firms to draw emergency loans directly from the central bank, and in July, it began to allow Fannie Mae and Freddie Mac to do the same even though such lending privileges had traditionally been restricted to commercial banks that have been subject to stricter regulatory supervision. All of this is predictable given the repeal of Glass-Stegall, which expanded the bad business practices that now “require” an expansion of the bailout.

But we see an even more insidious long-term economic problem, if that is imaginable. Moral hazard is endemic to this Bush-backed scheme to “relieve” an election-year economy. While the bill passed in late July does include some tighter regulation for the mortgage companies, it undeniably increases incentives for market participants — buyers and sellers — to engage in risky behavior. That is one of the products of financial socialism under a fiat monetary system — a system that mainly benefits wealthy lenders. Heads you win, tails you do not lose.

Further, every incentive by profit-seeking lenders and asset-poor buyers will be in place for a continuing or recurrent mortgage debacle. Financial institutions will not only have mercantile “protection” from the federal government in terms of regulations; they will become social arms of that government. While Democrats certainly facilitated these economic actions as fellow travelers, Republicans, most especially George W. Bush, acquiesced. (His only objection was a $4 billion grant to states and cities to “refurbish” foreclosed homes). The economic choice is clear: either maintain a fiat-money-creation system and reinstate the asset proscriptions of the Glass-Stegall Act or abandon or modify the existing system of money and banking altogether, possibly including elements of a gold standard. Without some basic alteration in rules, the entire economic system will continue to be at risk, as will America’s predominance in the world of finance.

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Robert Ekelund is eminent scholar emeritus at Auburn University. Send him mail. Mark Thornton is senior fellow at the Mises Institute. Send him mail. They are the authors of Tariffs, Blockades, and Inflation: The Economics of the Civil War. Comment on the blog.

Notes

[1] Robert B. Ekelund and Mark Thornton, “Republican Redux,” Review: Milken Institute (Third Quarter, 2003): 5-7 and Robert B. Ekelund, “The Awful Truth about Republicans” (March 25, 2004).

[2] Don A. Rich, “The Real Cost of a Full Bailout” (August 22, 2008).

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the Fannie and Freddie Bailout Real Cost: At Least $1.3 Trillion

August 23, 2008 at 6:37 am · Filed under The Financial Crisis, The Make Believe Middle Class, Leadership - not bureaucrats!, Executive Fiat, Liberty and Justice For All, Land of the Free?

A recent study from the Congressional Budget Office (CBO) has zero credibility. It pegged likely taxpayer losses in the Fannie Mae and Freddie Mac bailouts at $25 billion. For those with a sense of history, it is worth remembering that the S&L bailout had a $160 billion price tag. The numbers diverge so far from reality as to be laugh-out-loud funny. Funny, that is, except that the CBO estimate demonstrates a willful disconnect with the actual consequences of federal government actions.

As demonstrated below, the real cost of the bailouts will easily exceed $1.3 trillion. In fact, the real cost is likely to range between $1.3 trillion to $1.6 trillion, and is not unlikely to reach $2.5 trillion.

Between 2001 and 2007, Fannie and Freddie purchased or guaranteed $700 billion of Alt-A and subprime loans. Given the default rates on these loans — and the fact that the price of the housing that is the ultimate security of the loans will, for reasons demonstrated below, fall by at least thirty percent — this alone implies a loss for Fannie and Freddie on the order of $210 billion.

Fannie and Freddie acknowledge already-impaired loans on the balance sheet of $19 billion, which they have used creative accounting to avoid deleting from the shareholder equity account. This means that Fannie and Freddie have a maximum of $64 billion in capital remaining.

Given the inevitable losses on the Alt-A/subprime portion of their portfolio, it must be the case that if the federal government, as it is doing, guarantees Fannie and Freddie’s solvency, the difference between the loss and the capital to be made up by the government (i.e., the taxpayers) must equal, not $25 billion but $147 billion.

That alone would mean that the CBO is blowing smoke with their estimated cost figures, and if you think back to the S&L cost of $160 billion, this is not a surprising result. The real picture is so much worse that it is pretty obvious the CBO is flat out inventing figures just to get the politicians through November.

The real story is simple. We have witnessed the largest asset-price bubble in US history, making the tech-stock bubble seem like an overdone weekly rally.

When you look at the graph of the Case-Shiller residential real-estate index, an index dating from 1890 to the present and an index which measures the cost of housing in comparison to other goods, the first thing you see is that the 2001 to 2006 bubble stands out like a fifty foot saguaro cactus in a patch of daisies. There simply has never been anything like it before.

When you know what you are looking at — the biggest bubble in history — it is scary.

To be precise, the Case-Shiller Index in its entire 110-year history had never crossed 140 until the recent bubble. In 2006, it reached 210. Every single real-estate bubble in the past has at best been followed by a fall back to at least the 110 level in the postwar era, although the bubble preceding the Great Depression witnessed a fall to 60.

What this means is that in the best-case scenario, real-estate prices have to fall in the medium to long run by almost half.

Now consider Fannie and Freddie. Just looking at their portfolios on the balance sheet without the guarantees, let us accept (for no particular reason other than a desire that the reader sleep better at night) that real-estate prices only fall by thirty percent.

Well, since Uncle Sam is now committed to “doing whatever it takes,” that is a loss right there of $1 trillion. This committment to keep financial markets open as usual is made in spite of the overwhelming evidence that what we have been taught is usual is in fact delusional, given that Fannie and Freddie own $3 trillion and change of mortgages.

The CBO is not fence-post stupid, so obviously just as in the S&L fiasco in 1988, they are outright inventing figures so that the politicians can slither into November and then announce, Whoops! our numbers were a little low.

The more realistic scenario is actually worse. Fannie and Freddie own and guarantee a total of more than $5 trillion in mortgages.

Given the long-run historically plausible equilibrium values of residential real estate as embodied in the Case-Shiller Index, that means that the taxpayer loss definitely reaches $1.3 trillion, easily ranging up to $1.6 trillion.

Unfortunately, that is the good news. The bad news is that if real-estate prices were to replicate the Great Depression (as would surely occur in the case that hedging instruments of Fannie and Freddie were to catastrophically fail due to counterparty failure — and given the absurdly low risk premiums on credit-default swaps at the height of the bubble, such an event cannot be considered unlikely) the Case-Shiller Index tells us that the loss to the taxpayers could exceed $2.5 trillion dollars.

I don’t know what those people in Washington are taking to sleep at night after all their electorally driven accounting and finance exercises, but I can tell you what they will be doing to keep the government open for business: printing a whole lot of money.

Chairman Bernanke has the discount window open to any collateralization not worth the paper it is written on, so in effect he has the helicopters ready to drop hundred-dollar bills over Wall Street — as he once famously described the ultimate policy instrument of a fiat-money system.

Of course, if he does that, we will have to change his nickname from Helicopter Ben to Hyperinflation Ben, which answers the question of who picks up the tab of bailing out Fannie and Freddie: anyone owning dollars.

Produce a lot of something, and it becomes worth less. And given the losses at Fannie and Freddie, the taxpayer guarantee, and the ongoing initiation of Boomer retirement, only the inflation tax will work to pay for keeping Fannie and Freddie afloat.

Like it or not, we are about to enter interesting times, and it is too bad our supposed professional civil servants at the Congressional Budget Office have failed to tell the emperor the truth: that he is buck-naked bankrupt and getting ready to take a lot of people with him.

Our only hope is to (1) accept up front a twenty-percent fall in American living standards for a people living beyond their means for the past twenty-five years on the delusions made possible by fiat money, and (2) simultaneously discipline the creature from Jekyll Island, a.k.a. the Federal Reserve System, not to create new money just to prop up asset-price bubbles.

Don A. Rich is an instructor of economics, finance, and political science at Montgomery County Community College in Blue Bell, PA. He also teaches economics, government, and history at Delaware County Community College in Exton, PA.

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The Market, Part 1

August 14, 2008 at 6:14 am · Filed under The Financial Crisis, Corporate Power, The Make Believe Middle Class, Study History-Avoid Failure, Leadership - not bureaucrats!, Executive Fiat

by Ludwig von Mises

  1. The Characteristics of the Market Economy
  2. Capital
  3. Capitalism
  4. The Sovereignty of the Consumers
  1. Competition
  2. Freedom
  3. Inequality of Wealth and Income
This article is excerpted from chapter 15 of Human Action. Robert Murphy has written a study guide for this chapter, available in HTML and PDF. This chapter follows “The Scope and Method of Catallactics.”

1. The Characteristics of the Market Economy

The market economy is the social system of the division of labor under private ownership of the means of production. Everybody acts on his own behalf; but everybody’s actions aim at the satisfaction of other people’s needs as well as at the satisfaction of his own. Everybody in acting serves his fellow citizens. Everybody, on the other hand, is served by his fellow citizens. Everybody is both a means and an end in himself; an ultimate end for himself and a means to other people in their endeavors to attain their own ends. This system is steered by the market. The market directs the individual’s activities into those channels in which he best serves the wants of his fellow men.

There is in the operation of the market no compulsion and coercion. The state, the social apparatus of coercion and compulsion, does not interfere with the market and with the citizens’ activities directed by the market. It employs its power to beat people into submission solely for the prevention of actions destructive to the preservation and the smooth operation of the market economy. It protects the individual’s life, health, and property against violent or fraudulent aggression on the part of domestic gangsters and external foes. Thus the state creates and preserves the environment in which the market economy can safely operate.

The Marxian slogan “anarchic production” pertinently characterizes this social structure as an economic system which is not directed by a dictator, a production tsar who assigns to each a task and compels him to obey this command. Each man is free; nobody is subject to a despot. Of his own accord the individual integrates himself into the cooperative system. The market directs him and reveals to him in what way he can best promote his own welfare as well as that of other people. The market is supreme. The market alone puts the whole social system in order and provides it with sense and meaning.

The market is not a place, a thing, or a collective entity. The market is a process, actuated by the interplay of the actions of the various individuals cooperating under the division of labor. The forces determining the — continually changing — state of the market are the value judgments of these individuals and their actions as directed by these value judgments. The state of the market at any instant is the price structure, i.e., the totality of the exchange ratios as established by the interaction of those eager to buy and those eager to sell. There is nothing inhuman or mystical with regard to the market. The market process is entirely a resultant of human actions. Every market phenomenon can be traced back to definite choices of the members of the market society.

The market process is the adjustment of the individual actions of the various members of the market society to the requirements of mutual cooperation. The market prices tell the producers what to produce, how to produce, and in what quantity. The market is the focal point to which the activities of the individuals converge. It is the center from which the activities of the individuals radiate.

The market economy must be strictly differentiated from the second thinkable — although not realizable — system of social cooperation under the division of labor: the system of social or governmental ownership of the means of production. This second system is commonly called socialism, communism, planned economy, or state capitalism. The market economy — or capitalism, as it is usually called — and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed either by the market or by the decrees of a production tsar or a committee of production tsars.

If within a society based on private ownership of the means of production some of these means are publicly owned and operated — that is, owned and operated by the government or one of its agencies — this does not make for a mixed system which would combine socialism and capitalism. The fact that the state or municipalities own and operate some plants does not alter the characteristic features of the market economy. These publicly owned and operated enterprises are subject to the sovereignty of the market. They must fit themselves, as buyers of raw materials, equipment, and labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws of the market and thereby depend on the consumers who may or may not patronize them. They must strive for profits or, at least, to avoid losses. The government may cover losses of its plants or shops by drawing on public funds. But this neither eliminates nor mitigates the supremacy of the market; it merely shifts it to another sector. For the means for covering the losses must be raised by the imposition of taxes. But this taxation has its effects on the market and influences the economic structure according to the laws of the market. It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption. Thus the market, not a government bureau, determines the working of these publicly operated enterprises.

Nothing that is in any way connected with the operation of a market is in the praxeological or economic sense to be called socialism. The notion of socialism as conceived and defined by all socialists implies the absence of a market for factors of production and of prices of such factors. The “socialization” of individual plants, shops, and farms — that is, their transfer from private into public ownership — is a method of bringing about socialism by successive measures. It is a step on the way toward socialism, but not in itself socialism. (Marx and the orthodox Marxians flatly deny the possibility of such a gradual approach to socialism. According to their doctrine the evolution of capitalism will one day reach a point in which at one stroke capitalism is transformed into socialism.)

Government-operated enterprises and the Russian Soviet economy are, by the mere fact that they buy and sell on markets, connected with the capitalist system. They themselves bear witness to this connection by calculating in terms of money. They thus utilize the intellectual methods of the capitalist system that they fanatically condemn.

For monetary economic calculation is the intellectual basis of the market economy. The tasks set to acting within any system of the division of labor cannot be achieved without economic calculation. The market economy calculates in terms of money prices. That it is capable of such calculation w-as instrumental in its evolution and conditions its present-day operation. The market economy is real because it can calculate.

Continue at : http://mises.org/story/3029

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I.O.U.S.A. LIVE!

August 9, 2008 at 6:58 am · Filed under The Financial Crisis, The Make Believe Middle Class

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It’s The Economy, Stupid!

August 7, 2008 at 5:52 am · Filed under Stupid!, The Financial Crisis, The Make Believe Middle Class, Surviving In NJ

Today I thought I would try my hand at economics, but not without some hesitation. I subscribe to the rule that it is good to stay close to home on the big subjects about which I know pretty much nothing, at least formally. But as I see the inescapable consensus forming everywhere that our economy is teetering on the edge of breakdown, as a part of the whole I feel entitled to my say.

Besides, we are given two serious presidential aspirants: the Republican, whose life has been government, government, and government, makes no bones about knowing nothing about economics; and the Democrat, whose life has been activist, activist, activist, kind of like a Bono who can’t sing, is a lawyer. So not knowing anything about economics is clearly not a diriment impediment to throwing in two cents, as long as you can live with embarrassment. Come to think of it, now I think that I am beginning to see why politics and economics go hand in glove together.

As I understand it, our economy is melting down because of a crisis in the credit markets. Too many people are in over their heads for buying too much stuff with too little money to pay for it. One or two houses, one or two cars, a trip to the mall when you’re feeling blue, a 40, 50, 60 inch TV to catch the action on QVC should you be laid up in bed with the flu; this is the stuff that people wanted, this is the stuff they bought on time, and this is the stuff they haven’t time in their lives to pay for if they live to be a hundred. The reason is that the miracle of compound interest played backwards is a nightmare; a nightmare times 40 or 50 million, and I’ll leave that for somebody else to describe.

At any other time we would all be blaming The People and there would be tent meetings going on with preachers preaching about envy, gluttony, whatever and whoever. This is not any other time. This is an election year. You don’t blame The People in an election year. If you blame The People in an election year, the other guy gets elected. It is as simple as that.

But we do need to talk blame because otherwise we will not be able to find any pleasure in this crisis at all. Who else is there to blame? Fortunately for The People and the politicians, there are others. Even more fortunately, there are others who can be blamed with justice.

Take for example Uncle Sugar the strawman, his own august self. Finding himself equidistant between two giant mountains of guns and butter, over the years he has been choosing both very happily. Of course this means to pay for his gluttony he had to dip into the credit markets of China, Saudi Arabia, a few other such places, but our resourceful Uncle had a trick up his sleeve that has not been made available to the People at large, yet. Uncle deflated the dollar about 30 or 40%. Now those dollars if they are going to have any value have to come home where the People are bust and not buying stuff any longer.

The whole mess sounds almost like it was cooked up by New Jersey wise guys. If any group of thugs knew how to exploit weakness and make weakness keep on paying, it was New Jersey wise guys. They would give high interest credit to their losers so they could keep on losing. When the losers tapped out, the wise guys then took their businesses for a run through those credit lines. They would buy a couple of truckloads of stuff, send it out the back door, play until credit ran out, and everybody in the end busted out but the wise guys. The problem is that in the current situation I can’t figure out who are the wise guys. Everybody seems to be busting out.

I can’t say that I ever thought very highly of Bill Clinton when he was President. But he was a kind of Arkansas wise guy until recently when even he busted out. When he talked economics, he knew what he was talking about. It really is “The Economy, Stupid.” He never was emphasizing the second word. It was always about the third. Slick Willy understood The People back then.

——————

Jim Dooley at NJ Voices

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N.J. should support offshore wind farms

August 7, 2008 at 5:40 am · Filed under Beautiful NJ, Because We Can, A Clean Energy Future

The federal government should go forward with plans to lease sea bottom off the coast for weather studies.To reach Gov. Jon Corzine’s goal to produce nearly a quarter of the state’s electricity from renewable sources, wind-generated power must be expanded.In the draft energy master plan by the Corzine administration, the goal is to generate at least 22.5 percent from renewable sources. Yet, if the state can meet more of the state’s energy needs with this clean power, or with solar, it should support efforts to do so.

The U.S. Minerals Management Service is preparing to lease the sea bottom in six areas off the New Jersey coast to energy companies who would gather weather information and assess the suitably of building wind farms.

Some people raise legitimate concerns about the farms possibly disturbing marine life or perhaps adversely affecting the state’s strong tourism industry. Yet, New Jersey already has wind farms on land generating electricity, and there have not been major problems reported.

Tim Dillingham of the American Littoral Society, which is dedicated to conserving the coast, told a Gannett New Jersey reporter that officials should review regulations to protect the shore before moving ahead with the studies.

State and federal officials should weigh these concerns, but it is time to move forward on developing renewable energy. In terms of the environmental and economic effect, wind farms should be a net plus for New Jersey.

Replacing fossil fuels with wind power can significantly reduce air pollution and ease the drain on the economy from sending dollars overseas to pay for foreign oil.

With energy demand rising worldwide, it is clear that a significant shift to clean, renewable energy is needed to protect our lifestyle as well as the planet.

New Jersey may be a small state, but its shift to renewable energy can help clean up the world and take the pressure off energy prices.

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N.J. transportation bill could save key programs for seniors, disabled

August 5, 2008 at 5:51 am · Filed under The Financial Crisis, The Make Believe Middle Class, The Suffering Poor

Local advocates for the disabled and elderly are urging state officials to pass a bill that would increase funding for statewide transportation programs facing budget cuts in January.Dottie Cullen, a Vineland resident who sits on the county’s Transportation Advisory Council, said Sunday that an imminent $60,000 cut to the county’s Cumberland Area Transit System, or CATS, will affect hundreds of local senior citizens and disabled people who use that service every day.

“It’s just unbelievable,” Cullen said. “We have people with disabilities who are productive citizens. Our drivers get up at five in the morning, pick them up, take them to work, to dialysis, doctors, counselors, everything. Sure, I know the economy is bad. We all know it. But in this country, we shouldn’t have to beg.”

The program is funded entirely through the Casino Revenue Fund, which allocates 7.5 percent of its annual revenue to fund transportation programs across the state. Since decreased casino revenue has translated into decreased funding, a bill working its way through the Legislature, A-2046 and S-1830, would increase the funding percentage by one point, to 8.5 percent.

Misono Miller, executive director of the Cumberland County Office of Aging and Disabled, said Sunday that the small boost would be enough to hold off a transportation catastrophe.

“That increase would probably reinstate most of the reductions in all the counties,” Miller said. “It would prevent a major crisis that transportation systems are facing in New Jersey.”The $60,000 loss, Miller said, makes up about 11 percent of the CATS 2008 budget. It will translate, however, into two eliminated positions, one of which would have to be a driver.

Theresa Van Sant, project director for the CATS service, said the system makes 500 to 700 trips per day, averaging about 130,000 per year. The loss of those two positions, Van Sant added, would be keenly felt by the system’s users.

Both Miller and Van Sant added that rising gas prices have also become a source of concern for CATS.

“I think the gas costs have doubled in the past two years, and there’s a serious situation in how to maintain systems operations without any disruption,” Miller said.

According to Cullen, the bills being considered by the Legislature have been floating around in Trenton for a number of years, ever since transportation officials suspected that the 7.5 percent Casino Revenue Fund allocation would eventually become insufficient.

In the state Senate, the bill has moved somewhat briskly, and was referred June 9 to the Budget and Appropriations Committee. In the Assembly however, it has lagged in a tourism and gaming committee, where it was sent in June after being introduced in February.

Cullen said she has threatened lawmakers with organizing a march in Trenton, akin to the ones farmers held in April when they protested at the Statehouse in their tractors. For this issue, Cullen said, maybe she’ll invite all her disabled and wheelchair-bound friends to gather in Trenton.

“County transportation is a critical need,” she said, adding that she felt it saved her life after her stroke 10 years ago. “People don’t realize. Here in this country, we shouldn’t have to beg. I don’t know really what else to tell you. These are people who need to go to dialysis to survive.”

E-mail John Martins:

JMartins@pressofac.com

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The State of the Union

August 3, 2008 at 8:14 am · Filed under The Financial Crisis, Corporate Power, The Make Believe Middle Class, The Authentic American Right, 2008 Election, Study History-Avoid Failure, Read and Weep!, Executive Fiat, Because We Can, Liberty and Justice For All, Land of the Free?

CARTOON CAPITALISM
by Bill Bonner

Last week, purely in the spirit of mischief, we brought up a sore subject: America’s largest mortgage finance companies, Fannie and Freddie. The two have so much water in their lungs it will take at least $25 billion of the public’s money to save them. Possibly $300 billion. Were it up to us, we’d leave them on the beach.

But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins - gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.

In America itself, how this came to be is the subject of little concern. But despite the lack of interest, it is the subject of the next 500 words or so.

At a speech in Vancouver, James Kunstler seemed positively delighted. Finally, gasoline over $4 a gallon was going to do what generations of artistic scorn could not - destroy Fannie and Freddie’s collateral. Kunstler’s critique of American suburban vernacular architecture is that its products are not real houses at all - but “cartoon houses.” They have porches that look like real porches from a distance, but they are too narrow to sit on. They have shutters too - nailed to the wall, making them completely useless. They may have “picture” windows…looking out on nothing…or no windows at all. And they wouldn’t exist at all were it not for cheap credit and cheap gasoline.

Of course, the same may be said of America’s - and Britain’s - entire economies during the last 20 years. The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but they are essentially perverse, consuming wealth rather than creating it.

For proof, we return to Fannie and Freddie. Here were two companies that appeared to be helping Americans own houses. But since they were created, homeowners’ equity - that portion of the house actually owned and paid for by the homeowner - fell from 70% to below 50%. Currently, Americans’ total equity is lower than their mortgage debt. As a whole, the nation’s homeowners are “upside down,” in other words. Nearly 9 million Americans have zero or negative equity already - and house prices are still falling.

How comes this to be? The answer is simple: lenders lent more than the houses were worth to people who couldn’t pay it back anyway. This Looney Tune approach to finance radiated to all points of the economy. People pretended that they earned more - spending more and more money to buy more and more goods and services - but wages did not really increase. Then, they bought houses - believing the roofs over their heads were investments, rather than consumer items. With no down payment, no proof of income, and zero interest loans - for most of the new buyers, home ownership was merely a dangerous conceit. Now that the roofs have caved in, it is a staggering burden.

The “consumer economy” was always a mockery. No serious economist ever suggested that you could get richer by consuming wealth. But that didn’t make consumerism unpopular. The more people consumed, the more GDP went up. GDP measures output, not wealth creation; but who could tell the difference? In a cartoon economy - no one. Besides, spending made people feel as though they were getting richer.

Then, whenever the consumer threatened to come to his senses, the feds rushed to “stimulate” him - by giving him more of what he least needed, more credit. More spending kept the cartoon economy running - allowing the consumer, the businessman and the speculator to add to his burden of debt. In 1971, when the United States went off the gold wagon, household debt was less than 50% of GDP. Now, it is more than 100%. And now, the poor consumer’s knees buckle; he will be forced to work the rest of his life just to keep up with his debt burden, let alone pay it off.

Even the rentiers were bamboozled by their own claptrap. Stocks rose from ‘82 to 2000…fell heavily to 2002 and bounced back. For the last 10 years, shareholders have gotten little for their effort. In July of ‘98, the FTSE hit a high of 5,458. This month, it has reached 5,625. And in America, if stock prices were quoted in gallons of gasoline, the Dow would take the driver no further in 2008 than it did 40 years ago.

The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year - during a period in which the companies lost almost $5.2 billion - not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn’t wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.

What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism - run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

http://www.dailyreckoning.com/

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