The war in Iraq is funded largely by deficit spending. Would you have preferred we raise taxes to pay for it?

Brian, thank you again for posting my essay. It is interesting that you describe my comments on government workers as "demeaning." It certainly wasn't intended that way but I now see how it might be perceived that way. I, however, will not retract the comments; rather I stand behind the statement that our government is not the answer to all our problems. Indeed, those comments were based on statements that I have heard on more than a few occasions: "That the government should step in here and fix the problems because they cannot make it worse." I completely disagree with this notion -- THE GOVERNMENT CAN MAKE IT A THOUSAND TIMES WORSE. This is especially true after watching how Congress has acted in the last 6 months.

I would also observe that I do not believe it is demeaning to say that the best and brighest minds do not work at the government (obviously, there are exceptions). But from a practical standpoint, those with a lot of I.Q. points tend to enter the private markets. From my own personal experience with private and government workers, private workers tend to see business a lot differently, or dare I say, more realistically.

But those comments are a small part of the essay and I hope readers do not get sidetracked on the larger points.

$, I would have preferred we never started the war in Iraq -- I was strongly against it. In terms of deficit spending, I think as a general rule we should fund all government programs with current tax revenues or not to do it. In certain emeregency situations (like our current crisis or a real war, not a made-up one like Iraq), we may have to spend money we do not have. But again, deficit spending in an emergency is not a license to waste our money -- I just want every dollar to count.

According to Martin Breen workers in the EPA, NASA, and the NSA are suspect because they don't work in private industry.

Let me guess, you work for a private business?

Martin,

I agree that AIG should be allowed to fail.

I believe you meant to refer to Free Market Economy and not Capitalism. They are two different things.

I have to ask: do you believe that either system should be promoted at all costs, even at the risk of a threat to the well-being of the American people or their national security?

Science, great name, after all how can anyone win an argument with a person named "Science?� I will start by observing that you are very clever as you took part of my words and twisted them into your own conclusion. I believe that’s called the art of manipulation. Instead of telling me what I meant (or what I think), why not just ask?

Again, my original premise is that “the government is just not equipped to handle this current financial crisis.� I did not say that Astronauts are idiots as your message implies.

I do find it interesting that the three agencies (the examples being the EPA, NASA & NSA) given in your response have nothing to do with the economy. Indeed, if astronauts were allowed to assist on the current crisis, I would actually feel a little better about the whole thing.

GS,

I will do my best to answer your questions but before I do so I am not really sure what you mean by "promoted at all costs?� And, would you give me an example or two of the threat to the American people. I think you are asking me about regulation but I am not sure.
AIG is a train wreck that let itself become so overleveraged that it ultimately failed. So the government steps in and rewards this failure and the bad conduct (i.e., excessive risk taking) by pouring taxpayers’ money into it.

I know the government tries to scare us into believing that certain companies are too big to fail but I do not agree. Indeed, in terms of failures, I would argue that the government lets certain players fail everyday without any intervention. Has Treasury bailed out even one small business? “Too big to fail� is a headline designed to scare us into capitulation. Since small businesses represent over 50% of our economy, how about too small to fail?

So some government workers are more equal than others? You really think astronauts are well equipped to handle the credit problems at AIG and other banks?

I am not sure how being an astronaut prepares someone to handle derivatives. But I get it, you think government workers are stupid, and the problem is too many low IQ government workers are in charge of the economy.

The threats are already showing up in the news.
Russia has announced it will begin rearming and modernizing its armed forces and will begin develop new generations of nuclear weapons.

A solid case can be made that Russia (and to an unknown extent, China, India, Brazil and others) are doing so, at this time, because the US's economic meltdown makes it unable to stop them through traditional economic pressure & incentives.

If this is the case, then the catalyst is the banking failure that's led to the meltdown. The banking failures are a direct product of either (1) an under-regulated banking system or (2) an over-regulated banking system.

So my question does have to do with regulation. If the USA faces a rising military threat due to massive bank failures, do you advocate abandoning all banking regulations?

I take it you are not a big fan of FDR and the New Deal?

Animal Farm,
No, I do not think astronauts are well equipped to handle our current economic crisis. I am new to blogging so perhaps I need to be more explicit when I am trying to be humorous. So, it was a joke.

I also do not believe that government workers are stupid – those are your words. I do, however, believe that the government is not very good at managing resources in an efficient manner. And, during this crisis, we need every dollar to count and maximum efficiency. While private markets may make mistakes (i.e., the excessive risk-taking at financial institutions), those mistakes will usually be quickly purged. It’s the purge that is being interfered with here. In short, the government is a poor allocator of resources. And, problem-solving, including this current economic crisis is all about resource management.

GS,

A very interesting topic. I am in favor of reasonable, well-managed and adaptable banking regulations. Of course, if you over-regulate them then you are interfering in the free market and if you under-regulate them, you risk bad conduct, such as what we are experiencing now. However, as a general matter, I would prefer to be closer to under-regulation as the free markets will self-correct. Using two examples, the repeal of the Glass-Steagall Act (which prohibited commercial banks from offering investment banking and insurance services) and the failure to regulate the financial derivative market during the Clinton and Bush years are both significant causes of how we ended up where we are today. If Congress would have adapted to the changing market once it observed that the financial derivative market was multiplying at incredibly dangerous rates and decided to regulate it, it might have saved some of our banks from themselves. (I know that these beliefs may contradict free market sentiments but given the current state of capitalism, that is what we have to do – I will elaborate on this in a later essay).

Where that line is drawn is impossible for me to say on this blog given word and time constraints. Suffice it to say, I will know it when I see it. I will add, however, that because of the stranglehold that lobbyists have on our elected officials, it is, at current, nearly impossible to achieve reasonable, well-managed and adaptable banking regulations. We would need to fix the current lobbying situation in order to ensure regulators are not paid off to look the other way or to rig the system in favor of only a few companies.

On Russia, yes, they are clearly a rising threat but whether that is due to the banking crisis seems a little bit of a stretch. I am certainly not an expert but my understanding is that Russia has been “on the rise� for several years now using it vast energy and oil resources to fund its aggressive agenda. It seems to me that the best way to deal with this threat is to stop funding Russia by buying oil. Put simply, it really is a national security problem so weaning ourselves off our dependence on foreign oil is critical.

Martin,

So you're not as much an economic extremist as you suggested in your earlier posts...that's good.

I fully agree that by removing the wall between bankers and investment brokers we set ourselves up for failure. You're correct that regulations didn't keep up with the fast-talking bamboozlers that quickly infected the market. But much of our slowness to keep up was due to obstacles from Congress and its culture of de-regulation that started back in the 1970s, not due to any basic problem with the Market itself. An analogy would be a promiscuous guy that decided to stop practicing safe sex in hopes of having better sex. Congress deliberately tossed the regulatory condom, hoping to generate more growth, and got infected instead.

Can you imagine anyone deliberately disabling their firewalls and anti-virus protections just so they could surf faster? That's what Congress did.

As for boycotting Russian oil. That's an example of an economic tactic we can't use because of our economic meltdown. During the 1990s we did very well cooperating economically with Russia and extending them trade & banking favors. That pretty much ended during the past five years...partly due to Bush's animosity to anyone who didn't leap into Iraq with us but mostly due to a shrinking US economy that couldn't keep up with oil-exporting Russia. Russia and others have clearly taken advantage of the US's doldrums to strike out on their own, economically AND militarily.

Martin, do you feel that government regulations of executive compensation have perverted incentives in the private sector? Namely, laws that were passed that resulted in high individual tax rates for large cash compensation, but which then created an incentive for businesses to then convert compensation to long-term capital gains, mainly in the form of stock options. Following the law of unintended consequences, in their attempt to limit executive compensation the government seems to have instead simply changed the way compensation is structured. Worse, this has resulted in an incentive for most executives to focus on manipulating stock prices, since it greatly impacts their personal income. Which, in turn, creates an incentive to pursue short-term gains that might have long-term consequences, or to take on more risk in order to maintain a high rate of growth in revenue and profits.

Do you have an opinion on this? Do you think rules governing executive compensation played a role in the excessive risk taking by large financial companies, ultimately leading to their downfall?

This has nothing to do with capitalism. Ask anybody in the home loan business three years ago. The lending geeks saw it coming. They were making as much money as possible before the bust. A.I.G. didn't care. They didn't plan on paying. They knew the Republicans would help them. I am sure they are laughing right now on how easy it was to trick the new kid.

Here's the fix:

A.)
Tell A.I.G.'s creditors they are probably only getting pennies on the dollar down. Yet right now we have 30% of what is owed. Take it or leave it.

B.)
Wait for a better time to sell A.I.G.'s property casualty business.

C.)
Let the other banks fail. Any funds given out should go to "The People that didn't profit from these crimes. No scumbag home loan officers, no executives at financial institutions ect..

Elton Gallegly knows 168 million is nothing compared to what the tax-payers are paying out. The Republicans worked this deal out with A.I.G.. The Democrats are left to manage this mess with all these landmines.

GS, I like your second analogy better than the first. And, to answer it, I cannot imagine any rational-thinking person disabling their firewalls to surf the net faster given the danger of hackers and identity theft pirates (another good analogy to some of the Wall Street Types). Which leads me to the conclusion that Congress (has long ago) stopped acting rationally. Through either self-indulgence or corruption, Congress has failed to protect the interests of ordinary Americans for far too long. The “business as usual� must change in Washington D.C. in order for us to fix our problems. Although, there is an argument that the “rot� is so deep in Washington that it cannot be fixed but must be torn down and rebuilt.

On Russia, I am not advocating an economic boycott of oil. Rather, just a decent 10 – 20 year plan to develop alternative energy resources. (I know President Obama is attempting to do this but again because of past corruption, I am not sure Congress will ever do it.) This will do more, in my opinion, to slow down Russia (and Iran) than anything militarily.

Bubba Kidd,

A very good question and it is hard to answer. Therefore, before I directly attempt to answer it, I will make some general observations. Government regulation into the market place (even now during this crisis) should be limited and as short term as possible. In other words, if you are going to interfere into the free markets, you should do so clearly (in a well-defined way) and quickly so the markets can react naturally and adapt.

But from a “pure� market forces perspective, government regulation has perverted incentives in the private sector. It, however, begs the question whether in practice these regulations ended up causing the bad conduct or rather just became part of the bad conduct. In other words, there is a strong argument that the bad conduct would have occurred regardless of these regulations on executive compensation.

So to answer your last question, no, I do not believe that that the rules governing executive compensation played a role in the excessive risk-taking. Rather, I think other forces were at work that had a far more profound impact on how these managers and companies acted. I hate to stop here without further elaboration; however, my next essay entitled “Money for Nothing� deals directly with those other forces. As a quick “tease,� I will say that Wall Street has never been anything but a means to create capital as opposed to the actual creation of capital and value. Somewhere along the way, we have confused the means with the ends.

Nobody,

I partially agree with your suggestions. Again, as stated above, I would have rather let AIG fail completely because they actually did fail and now we are saving them. And, by saving them, we will have all these odd results, like crazy bonuses for failure and Goldman Sachs getting 100% on the dollar thereby rewarding its own bad conduct and excessive risk-taking. Again, this is the main point of my essay; there will be unintended consequences when you venture into the free markets. My concern is the consequences we do not know about yet.

While I enjoyed reading your comments, I do not agree that the “Democrats� have been left holding the bag for problems created by the Republicans. Everyone in Congress and the Executive Branch created these problems since the late 70’s. But at this point, I am not interested in affixing blame; rather, I am more interested in fixing the problem. I am also tired of hearing the President say he did not create these problems. We all know he did not personally create the current problems. He, was, however, hired to fix the problems and he knew full well when he took the job that the problems were huge. I may disagree with some of his current policy choices (like printing another $1 trillion dollars of paper money) but I remain convinced, he is the right person for the job. Let us just hope, he starts listening to some of the economists that do not agree with the current plan (and there are many).

Businesses that are "too big to fail" should never have been allowed to get that big in the first place. There is no free market in the absence of competition. Mega-mergers and the lack of anti-trust legislation have warped our democratic republic into one that more resembles fascism except that it is not the state laying out the terms of doing business with the government but rather business and the corporation dictating to the government "offers that they can't refuse". Adam Smith is turning in his grave.

Rjlebeck,

Although, I do not buy into the notion that any company is “too big to fail,� it is funny that DOJ allowed merger after merger (thereby allowing these companies to get this big) and now they are too big to fail. I seem to remember when they were touting these mega-mergers and how they were going to save the consumers tons of money and solidify the workforce. Clearly, none of these things happened. Indeed, the lesson learned here might be that at a certain point “economies of scale� may increase risk, not reduce it.

To your point about companies dictating terms to the government, I do not believe that that is what’s really happening. Rather, I would suggest that government is just not sophisticated enough to handle these complicated transactions. One example is that when everyone’s favorite billionaire, Warren Buffett, acquired preferred shares in Goldman Sachs he demanded that Goldman pay 10% percent; taxpayers are only getting back 5%. These two deals happened within 2 months of each other. I would also add that the value of the preferred shares that we are getting for these massive infusions of cash, are about two-thirds of the cash. Put simply, whoever is negotiating these deals on behalf of the taxpayers is giving away our money.

First, I make no claims on being an authority on economic matters.

With that being said, while I favor the notion of free and unfettered commerce, it seems to me that capitalism, like government, if left unchecked, results in a corrupted and dangerous outcome. Without the proper regulatory mechanisms and a method for recirculating wealth by way of taxation, free markets over time will no longer serve to liberate the creativity and entrepreneurial spirit of the masses. Over time, because money is equated with power, concentrations of wealth can become as enslaving to a democratic people as any autocratic dictator.

If I may use Halibuton as an example.

Because the military has thouroughly outsourced many of its non-combat functions entirely to the likes of Haliburton subsidiary KBR, and because KBR enjoys a monopoly in providing such services through "no-bid" contracts, the government has unwittingly(?) provided these companies with enough leverage to shield it from oversight and regulation in even the most egregious cases of criminal negligence and fraud. When the government started to investigate the deaths of several soldiers who were electrocuted by faulty electrical wiring in KBR-constructed showers or sought to find out what happened to taxpayer money for the construction of non-existent FOB's (Forward Operatin Bases), KBR's response was to threaten the government with pulling out of Iraq and leaving our soldiers high and dry without food, water, laundry services, etc.

The result of this extortion? The government backed off from its investigation and billions of dollars remain unaccounted for and continue to be siphoned and wasted in Iraq.

Unless capitalism is tempered by civic duty and ethical behavior or criminal and civil sanctions, the soldier, the laborer, and the most vulnerable in our society will constantly be at risk from Captains of Industry that have no allegiance but to themselves and the almighty dollar.

In my opinion, rather than a blind faith in capitalism, Adam Smith's invisible hand must be materialized from time to time to slap down those who would profit from the misery of others and the depletion and the ruination of the country.

While it is debatable whether the house of economic cards should be allowed to fall. I think we both agree that shoring it up with a trillion more cards is a foolhardy proposition and bound to fail without a cultural transformation within companies that are "too big to fail" and a government that abrogates its own authority out of fear of offending the rich and powerful.

Rick, Martin,

Did either of you two support the Clinton Administration lawsuit against Microsoft alleging that they were a harmful monopoly?

Hey all you beautiful people. I'm hoping to meet new friends here so drop me a note when you
get a chance.

I hope to make some quality posts soon but first I have to look around the forum and
familiarize myself with everyone.

Bye for now. lol