Finally, a sensible look at bailouts

Political economy is one of my passions. As a radio host and syndicated columnist I get several free books a month. They are usually unsolicited and not of much interest, every once in a while I get one that is worth reading and spreading the word on. "Too Big to Save?" by Robert Pozen is just such an example. The book's subtitle is "How to Fix the US Financial System" and it offers an agenda to do that and so much more. It offers sanity in an industry that has lost its moral compass and he provides direction going forward. His book is filled with some important facts that cannot help but wake one up to the causes of our financial crisis and how to solve such problems in the future.

Pozen is a refreshing voice on the issues surrounding the bailout. Most of the analysts of the subject have pure academic backgrounds or mere activist experiences. The former cannot have any real idea how such things happen and the latter believes everything requires more government control in order to avoid some from making a profit. Pozen has serious academic credentials. He holds degrees from Harvard and Yale. Furthermore, he is on the faculty of Harvard University. What is more important is that he has an understanding of business and the financial system. According to his website, he "is Chairman of MFS Investment Management®, which manages over $200 billion in assets for over five million investors worldwide. This represents an increase of 50% from the first half of 2004 when Bob was named to his current position."

The book is filled with common sense arguments that are built on the idea of restoring the integrity of financial institutions, rather than promoting political agendas. Furthermore, it points out several important factoids that are designed to simply make you think about where we are and how we got here.

• Up until 2008, no housing slump in any country had ever caused a worldwide financial crisis.
• Until mid-2008, the Federal Housing Administration offered loans that required just a 3 percent down payment. In spite of this low sum, many nonprofits sprung up (and funded by construction developers and home builders) to cover the cost. It was a house of cards waiting to fall.
• The stock market crash became even worse after Congress authorized the Treasury to spend billions of dollars "resolving" the financial crisis. Many rightly argue that the worse is yet to come.

Pozner's solutions to the problems surrounding the financial are refreshing and filled with common sense. The crisis we have today is rooted in "geniuses" with political, social and even profit agendas rather than sound financial principles. Pozner points to the better way:

• He argues for the restoration of loan securitization as a key to economic and housing recovery. The reason housing had never been a source of major financial catastrophe in the past is the integrity in the process, like due diligence and monetary "skin in the game" that proves one to be a worthy candidate of a home loan.
• The federal government's efforts to buy "toxic assets" are not viable and poorly designed to meet goals. A great example is the use of such for loan modifications. To date, 80 percent of all homes that experienced a modification are again in foreclosure.
• The federal government has been wild and indiscriminate in it recapitalization of financial institutions. It has bailed out many large banks that did not want the assistance, over 500 small banks that are anything but "too big too fail," and many insurance and credit card companies without explanation.
• Far reaching legislative restrictions of executive compensation have clearly made the situation worse. For example, limits on "golden parachutes" have generally increased the cost of most terminated packages. Furthermore, in order to be competitive, companies forced to have strict limits on bonuses have, instead, dramatically increased base salaries. This means the executives can enjoy higher rewards with lower performance.

Pozen's excellent book goes on to evaluate the potential restructuring of the financial industry, the importance of fair value accounting, and the huge downside government actions in the financial industry has had on taxpayers. It is an excellent book and really "must reading" for anyone interested in serious answers to our current financial crisis.

Kevin Price is a nationally syndicated columnist and host of the Price of Business on CNN Radio. Learn more about him and his activities at www.PriceofBusiness.com.

The Bad Ride in the Markets and Main Street

Since September the federal government has been busy. Very busy. But it has very little to show for all its efforts when it comes to Wall Street's and Main Street's reaction. Back in September, when Congress got together to roll up its sleeves and to heal the economy's woes, Wall Street was worried by the volatility of the market. Back then, the market strongly worried investors as it stood at the brink of going below 10,ooo points. Slightly 4 months later and we are threatened by a market that could (and likely, should) go below 7,000 points. The irony is that the plummeting market was a direct response to the government's "best efforts" to placate Wall Street's concerns. Instead of getting better, it has gotten markedly worse and has now reached 11 year lows.

Main Street has responded in a similar fashion. 2008 began with unemployment at a remarkably low 4.9 percent, which many economists describe as "full employment," when you consider seasonal and other factors that make "zero unemployment" an impossibility. Unemployment hovered around 5 percent through much of the year until about a month before the huge minimum wage increase (yes, there is a connection), in which it solidly went into the 5 to 6 percent area around that time. By September it had broken 6 percent and showed no interest in going back. This rise in unemployment joined the drop in the Market in leading to Washington coming "to the rescue." Main Street has responded to the massive bailouts of September and the "stimulus" of January by laying off even more people -- over 500,000 in the last couple of months alone. Main Street has responded to the Obama agenda by casting a new ballot -- pink slips -- and now unemployment is squarely in the 7 percent area and is moving its way towards double digits.

So why have both Main Street and Wall Street reacted so negatively? It is because both of these sectors are in the arena of enterprise. They fundamentally know that the more government controls things, the less efficient and productive those things become. The Bank of America is now on the brink of having 40 percent of its ownership be in the hands of government. Banks running like typically inefficient government institutions have done little or nothing to bolster consumer, financial, or business confidence. Fundamentally, I believe that at some level Americans know better. Free enterprise, limited government, and private property -- the founding principles of this Republic -- are better values than government control and ownership. There is a very good possibility that the businesses today are suffering from rather serious buyers remorse. I hope the government gets that message.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

New Bank of America Logo, Sign of the Times

I often wonder what goes into the decision making of some of America's companies. The American people have felt as though they have been mugged by the federal government as it confiscates their income in an attempt to bailout Wall Street's fiscally irresponsible financial institutions. One of the biggest beneficiaries of that bailout, and a company that has just this week gone back for more, is Bank of America (requesting and going to receive an additional $20 billion, adding to the billions it received and making the bank the biggest beneficiary of the bailout at $45 billion).

In the last couple of days I was driving home and I noticed something different about the Bank of America branch just a few blocks from my home. It was entirely trimmed in red! The blue "Bank of America" words are now floating in what looks like a red ocean. It is actually a very ominous sign of the times.

For the millions of Americans who are offended by mega corporations receiving bailouts, this seems like a very odd memorial to the debt ("in the red") we are all in. The Bank of America seems to be celebrating this financial blood bath. It is the Bank of America's way of thanking us taxpayers for the tens of billions it has received in a bailout.

That leads to another issue. So the Bank of America has hit hard times. They line up like all the other financial institutions, car companies, porn executives, and other white collar free loaders at Capital Hill, and actually receive billions of dollars. Among the first thing they do is change their signs? I would think that would be expensive for the many branches. Following this expenditure they turn around and ask for more? You have to give them credit for their audacity! But the person who was behind this new sign decision should really be looking for another job.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Is the Federal Government about to Create a Consumer Bank?

Back in September, when Wall Street suffered a horrible meltdown, we were told that $800 billion being pumped into financial institutions through taxpayer dollars would get the "economy moving again." Four months later and we could not be more amazed by the delays in the process. Essentially, the major banks have enjoyed a massive gift that make them more secure, but they have done nothing for the average consumer.

As a result many Members of Congress in both the House and Senate are up in arms and are about to declare that they will not take it any longer. The way I believe they may respond, is by taking the $300 billion plus left from the first bailout and additional dollars from the $1 trillion in being proposed by President-Elect Obama, to create a government based, consumer lending bank.

I don't believe they will make these banks "within" banks or even attempt to run the programs through credit unions, but will make them separate, government run, institutions. They no longer trust the banks to be altruistic, which I think was foolish to believe they would be in the first place. Banks are largely successful because they are self interested and run on the profit motive. Banks are only behaving like banks.

That leads us back to the new, government driven, banks that I believe are right around the corner. These new institutions will run with the efficiency of most government bureaucracies, which means they will continuously be running deficits, will be unresponsive to consumer needs, and will possibly undermine the competitiveness of private banks because it is very hard to compete against free or cheap money.

Since Wall Street is so dependent on private banking, the possible rise of these lending institutions will only further drive stock market fears. These banks will create ever more unpredictable investment environments and further drag the economy into despair. Although it is true that many bankers have made horrible decisions (mainly driven by political pressure from organizations like ACORN), such poor decision making would become standard with government run banks. Instead of making investments based on possible returns, they will be based on altruism and political pandering. If you ever wondered what the expression that the "road to hell is paved with good intentions" means, wait until you see these new banks.

Government leaders continue to seek short cuts and political solutions to our economic situation. Members of the US House of Representatives will all be fighting for their political lives in just two years and the President is not that far behind with his four year term. With these type of election cycles, the pressure is on to improve thing immediately, even if the consequences are potentially harmful in the long run.

A good doctor would allow some of these economic woes to run their course and not keep applying quick fixes to long term problems. Our financial institutions, like the economy in general, need a time to heal and not so called "reforms" that promise to have devastating long term consequences.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

The Gift of Ronald Reagan for Christmas

As a parent I love to watch my children enjoy the presents they receive. When you have as many kids as my wife and I, gifts to one another are simply not a priority. The most memorable gift I may have received was from a couple we know (Archie and Robin Arredondo). There is a huge group of friends that participates as "secret Santas" made up of a families we know. Archie was my secret Santa. We know around Thanksgiving who has who. A few weeks ago, Archie and Robin asked my wife what I like. Wisely, she said "anything with Ronald Reagan." She naturally thought -- as would I -- that I might get a great tribute book (like my daughter gave me a couple of years ago) or a T-Shirt (like my sons gave me on a Father's Day). Archie would have none of it, he went on a quest at eBay.

What I received was a Ronald Reagan action figure. Move over GI Joe, here comes the Gipper. Okay, it was more like a talking doll with a push button instead of a string, but it was one of the most thoughtful gifts I have ever received and it is the type of gift that keeps on giving. Americans, everywhere, should be familiar with the quotes of Reagan and this gift was full of them. The following are a few examples from the "Great Communicator."


* "Above all, we must realize that no arsenal, or no weapon in the arsenals of the world, is so formidable as the will and moral courage of free men and women. It is a weapon our adversaries in today's world do not have."


The statement was even more powerful when delivered two decades ago when our primary enemy -- the Soviet Union -- had become weakened after decades of brainwashing and lies from its bloodthirsty regime.



* "Entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States."


Where was wisdom such as this when the federal government decided to bailout Wall Street, while taxing the backs of Main Street?



* "Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free."


Bravo! Most parents enjoy giving their children the fruits of our freedom, but are not doing enough to pass it on to the next generation. This is a message that must be conveyed.


* "The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."


One of my favorite Reagan quotes.


When I was a kid the "in thing" was a GI Joe action figure. I think every child should be given a Reagan action figure so we can raise another generation of adults who enjoy freedom. A Reagan action figure is the gift that keeps on giving.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

The Year of the Bailout

I consider myself the perennial optimist. I always try to view things from a "half full" versus "half empty" perspective. But 2008 was a challenging year. It is a year where it appears that we made a paradigm shift when it comes to the role of government in the economy.

I believe that future history books will call 2009 the year the United States became the "bailout nation." We saw more of such today with GMAC Finance receiving $6 billion from the federal government. Democrats defied the image of being for "the little guy" that they worked so hard to maintain by leading the effort for bailout for major banks and corporations. There was far more reluctance by Republicans to bailout these fat cats, but in the end, I am sure the media will find these bailouts the complete fault of the GOP if they fail and will be seen as an act of courage by Democrats if they are interpreted as successful. The reality is, we already know they have "failed" because we had to abandon the ideas of limited Constitutional government to make them happen and the hangover effect of them may not be felt for years.

What is almost as negative as the Constitutional and policy implications of these bailouts is the view they project of what is important to us a country. In the United States we have a safety net for the poor, we bailout the super rich, and we obliterate the engine that creates more than 80 percent of the jobs in the country through excessive taxation, regulation, and licensure law. The highest income groups are not nearly as influential as those rising up the economic ladder in creating jobs, yet we sacrifice the entrepreneur at the altar of the mega corporation.

Those who have eaten at the trough of bailout are extremely vulnerable in the future. The government never "gives" without demanding more. Many of the task masters in government that have fed these companies, have advocated the nationalizations of industries. The hubris to think they will not be vulnerable is unbelievable.

The United States has been successful because of its long term commitment to economic freedom. This freedom includes the right to succeed and fail. Moral hazard is an important element in economic freedom. There has to be consequences to failure in order to avoid those mistakes in the future. The government is replacing this system with one that will eventually force the failure of many entrepreneurs and create a new welfare class of the mega wealthy. Let's hope 2009 sees a reversal of such a trend.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.