Merry Christmas

I lied. I had to write another blog before the end of the year, particularly because of what's going on in D.C. with TARP money.

Treasury guru and tax cheat Tim Geithner is proudly puffing his chest proclaiming victory, as bank after bank lines up at the door to pay back TARP funds they received earlier this year. After all, this prevented a meltdown of epoch proportion and saved us all from financial ruin. And banks have stepped to the plate by paying us back, right?

Hold on Timmy. Let's re-visit the whole TARP debacle in the first place.

Those funds were issued to save failing banks and prevent insolvency, so in that respect, yes, the financial system was saved. Additionally, consider the fact that the FDIC is unable to make good on the deposits at Citi, Wells or Bank of America should one of them collapse. In this sense, TARP prevented the treasury from having to loan the FDIC another $500 billion (adding to our debt, of course.)

However, TARP funds were explicitly given to stimulate the economy through one of two methods. Banks were supposed to use the money to LEND - both to businesses and consumers. That ain't happening. The other proposal was to have banks use the funds to write off the debts as bad debts and start from scratch. That isn't happening either. If you have any doubt, just see how many foreclosures are going on nationwide and business closing are occuring.

In short, banks aren't lending anymore today than they were a year ago.

Instead, banks used the funds to prop up their balance sheets, or in some instance (cough...cough... PNC) buy weaker banks at a 0% interest rate.

Now the banks are proudly stepping up to the plate to payback those funds! Yippee skippy! This is good, right?

Maybe not. The reason Citi, Wells and BOA are so happy to payback the TARP funds is because if they don't, they will have their compensation capped. (cue 'crickets chirping in background noise' here....)

Yep. We're passing legislation that caps compensation to firms that accepted TARP or TALF monies. So what is any good CEO and/or board of directors to do? Pay the damn loan back, that's what! Otherwise, bonuses become obsolete and second homes need to be sold, girlfriends need to be dumped and yachts need to be crashed into the rocks.

So Citi and others are paying at back. They're doing it, of course, by issuing more worthless shares of stock that for some reason, investors are purchasing. Can't anyone read a balance sheet anymore and realize that banks are supposed to make money by making loans? Think about it for a minute. If Krispy Kreme stops selling donuts, is their stock worth very much? So why would BOA, Wells, etc. be worth anything if they aren't making quality loans or they haven't written the bad loans off and basically started over?

The irony, of course, is that we still proclaim victory and that the banks are acting admirably. That's crap and everyone knows it. Tax payers gave them free money for a year and now that they are demanding retribution, the banks are more than ready to give something back to the community. Give me a break.

Please do me a personal favor this Christmas. Take a small sum out of your large bank (if they accepted govt. money) and place it in the local bank that actually knows your name and address - one that didn't accept funds from Tim Geithner. You know the one. The bank president probably sits next to you at church or your kids plays soccer with the VP of lending's kid on Saturday. Stick it to the big banks.

Now they want to take the extra $200 billion and create jobs. Here's a novel concept. Give it back to me and my buddies who fronted it in the first place. Best estimates show that about 150 million of us pay taxes annually. Split the $200 billion up and mail us each a check. That way all of us would get a NON-TAXABLE check for about $1300, or $2600 for a married couple. It's our money anyway. Imagine how far $2600 would go for your family. I know ours would enjoy a much merrier Christmas, as we'd... GASP.... SHOP. Stimulating the economy on our own without the help of D.C.

This is bad, folks. Even for a professor who is supposed to be enjoying his month vacation. My blood pressure is almost above normal which isn't good for a guy that's trying to be Jimmy Buffett.

Stimulate this

So Congress is set to throw another $900 billion into the crapper on a stimulus package.

I'd like to spend the next few paragraphs explaining how this stimulus, designed to help Americans, is actually going to have a negative impact.

The stimulus, while containing some details, has one really significant piece of data that shows up - any company taking funds from the stimulus and/or tarp will be required to utilize products and services from American companies. This is being done as a way to create jobs.

Here's where I'm going to get in trouble, especially living in the rust belt.

It's going to KILL the economy rather than stimulate the economy. Here's why.

If a company, let's say Caterpillar, decides to take stimulus funds they are now immediately handcuffed to American suppliers, regardless of price. As a result, and through a really miserable few quarters, the American suppliers will not be required to go through competitive bidding to ensure they are a low-cost provider and high quality provider. This will result in higher priced materials going to Caterpillar.

Now Caterpillar, while certainly concerned about consumers, has also suffered in the past few quarters. Do you think that they will actually swallow the added costs associated with dealing with only a few suppliers? Yeah right. That cost will be passed on to the consumer through higher prices. (this is what we economists and finance folks call "Inflation.")

Given our current unemployment levels of about 7.5%, most real folks would have a hard time swallowing higher prices; especially since they, or someone they know, are probably unemployed.

Now, let's bring in the REALLY big issue with this stimulus. How would you feel if America did this and you were, oh, I don't know, China? Remember that little country that is home to nearly a third of the world's population? Oh yeah. By the way. The own a lot of our debt.

The Chinese Government probably wouldn't take too kindly to not being able to bid on American projects. And while I'm sure they'd like to play nicely together, maybe they'd decide that they would stop accepting bids from American companies. This is not a good scenario, but it is highly likely.

Also likely is the fact that they could literally deflate our currency by 25-40% overnight by simply selling the debt we owe them back into the market. This would create "hyper inflation," which is as scary as it sounds. Think "inflation on steroids" and you'll see my point.

Imagine walking into your grocery store today and paying $1 for a loaf of bread. Three days from now that same bread might cost $1.35. Next week it could be $1.60.

Finally, a good rule of thumb with regard to printing money and giving it away (that's what we're doing) is this: $1 trillion of new debt equals about $3000 per person additionally owed to pay back the national debt. We're currently paying over $1 billion per day in interest on this debt. Guess who gets to pay that? My kids. The cost to a family of four is about $126,000

Leave them alone. They are currently on the hook for about $33,000 (each) toward the debt.

Can't we show SOME responsibility and begin taking control of our financial lives? You CANNOT create consumer demand and solve financial issues by creating additional debt. For crying out loud, that's what got us into this mess in the first place!!!

If this makes you as angry as it makes me, check out the Adam Smith Institute blogsite to learn more about taking control of government finances.

And call your congressional representatives. Don't write them. Call them and wait to talk to a live voice. Tell them enough is enough and to stop spending your kids money.