Saturday, December 13, 2008

Madoff Case Proves Danger of Trusting Government

Bernard L. Madoff's Ponzi Scheme Loses $50 Billion of Investors Money

. . . And Illustrates How Government Regulation Creates/Enables Financial Fraud

Ambulance-chasers who exploit this financial-fraud train-wreck for a power-grab to increase the government regulatory burden fail to understand history and human nature.

Ivar Kreuger "The Match King" created a post-WWI, massive, international Ponzi scheme including mortgage/asset-backed securities that finally imploded during the Great Depression. (hat tip: Energyecon)

  • Regulators created the Securities Act of 1933, the Securities Exchange Act of 1934, and the Section 4 Securities and Exchange Commission (SEC) as more "never again" empty promises that were supposed to prevent another Kreuger but failed to prevent Enron, Madoff, etc.
  • Regulators created the 1934 SEC and Glass-Steagall Act of 1933 to prevent more financial fraud/collapses but failed to prevent Madoff even during the red flags (or whistleblower Harry Markopolos' complaints dropped in the SEC's lap) in 1992 and 1999 (before the alleged deregulations of pro-regulation George W. Bush (pro-SOX, pro-TARP)).
  • Regulators created the post-Enron Sarbanes-Oxley Act of 2002 (SarbOx or SOX) as another "never again" empty promise that failed to prevent Madoff or any of the housing/financial-bubble fraud or the current global financial crisis.
  • Regulators not only failed to stop Madoff but instead the SEC lavished him with a special privilege named after him, the "Madoff Exception" (hat tip: Trader Walt):
    Madoff Exception mentioned in: "Regulation SHO, Rule 202T – Temporary Rule related to Establishment of a Pilot Program"

    "The SEC’s Short Sale Rule (Exchange Act Rule 10a-1) states that a listed security must be sold short at a plus tick price or at a zero-plus tick with two exceptions (the equalizing exemption (Exchange Act Rule 10a-1(e)(5)) and the Madoff exception). Rule 2O2T is a temporary rule that creates procedures for the Commission to establish a Pilot Program to analyze the necessity and effectiveness of current tick test restrictions. The Pilot Program established will exclude designated securities from the requirements of the tick test (or any other SRO-specific price test) from May 2, 2005 until April 28, 2006." (CHICAGO STOCK EXCHANGE, INC. MARKET REGULATION DEPARTMENT INFORMATION MEMORANDUM, MR-05-6, 4/27/05)
The SEC's Madoff Exception is a classic example of how government creates/enables fraud by granting ANTI-free-market, ANTI-competitive powers to special interests, even criminals.

Madoff paid political contributions to officials including (home of Wall Street) New York Senators Chuck Schumer and Hillary Clinton.

"SEC Official Married into Madoff Family"
"Madoff boasted of his 'very close' relationship with a SEC regulator, chuckling as he said, 'in fact, my niece even married one.'" Former SEC assistant director of the Office of Compliance Inspections and Examinations Eric Swanson married Madoff's compliance lawyer, niece Shana Madoff.

The SEC then insulted the American public by, after the SEC shepherded the fraud's "stunning . . . duration" through 2 decades of inaction or rewarding Madoff, boasting that it was moving "quickly and decisively":
"Our complaint alleges a stunning fraud -- both in terms of scope and duration," said Scott Friestad, the SEC's deputy enforcer. "We are moving quickly and decisively to stop the scheme and protect the remaining assets for investors." ("Bernard
Madoff arrested over alleged $50 billion fraud," Edith Honan and Dan Wilchins, Reuters, 12/12/08
Why Government Regulations Fail To Do What They Promise:

When the Insider Trader IS the Government Regulator: HUD/Feds Knew Subprime Mortgage Danger 1 1/2 Years Ago [2005/2006].

Federal Reserve Blind to Housing Bubble: BLS OER V. Case Shiller HPI.

Did Government Create Mortgage Securities Mess? Is It about To Repeat Its Mistake?

SEC NRSRO Causes Asset Mispricing?

New Deal, Sarbanes Oxley (SOX), Homeland Security, Resolution Trust Corps (RTC) Recidivism: Financial Regulation Stupidity Roundup.

FDIC Fails. WaMu Bank Refuses to Cash Federal Check.

Abolish the Federal Reserve Central Bank: Declararation of Financial Independence.

Detroit Big 3 Bailout Misses Supply-Demand Big Picture

Rescue Chrysler/GM = Kill Ford

Auto Dealerships Offering Buy-One-Car-Get-A-Second-Car-Free Expose Bailout's Folly

The people crying that the automobile industry is X-million jobs or X-percent of the economy should have bought a controlling interest in GM a decade ago and reformed it, instead of trying to rob the public today.

The odds that every single job would evaporate are remote.

There are 2 basic possibilities:

1. If bankruptcies collapsed production below demand, other companies would hire new employees or contract new parts suppliers to pick up the slack. Jobs could shift to a remaining US legacy company (Ford?-which said it does not need the bailout), or Toyota (in America), or new electric vehicle (EV) startup companies such as Tesla Motors, or new industries not anticipated by the Luddites.

2. If current capacity/supply/production is higher than demand, then a reduction in production is welcome and a reduction in producers is understandable (actually, even with higher production, it is better to make more things with less labor—have you noticed that 98% of Americans are not farmers (not in an agricultural job of the labor force)?). Treating the current automaker size or number as a static, sacred, magic number is ridiculous. People allege that autos and “related” companies take-up 1/7 of the economy—but trying to freeze that number in a dynamic economy can damage you and the whole country if the proper, wealth-maximizing proportion is only 1/21 of the economy (1/3 of the current size).

Weeks of public debate overlook the main point:

GM exists to provide cars to consumers, not jobs/health-care/pensions to employees.

If we have an automobile oversupply (do not need new cars):

  • Making more unwanted cars is a waste of resources, including unnecessary pollution and oil depletion for the workers to drive to work to waste resources.
  • Any car sale that the government guarantees for Chrysler or GM probably steals that car sale from Ford.
  • Any Chrysler or GM job the government saves probably takes a job away from a Ford worker.
Automobile Oversupply Indicators:

We already have an oversupply. Why build more? Why bailout Chrysler/GM by killing Ford?

If Detroit had a solid plan to make and sell good cars at a good price, it would attract private investors (dismiss the "only government can do it" ploy and look at the dollar amount of money on the sidelines that pumps even a +1% stock-market rally).

Imagine if Detroit’s auto executives and the United Auto Workers (UAW) union spent as much time trying to build good cars as they spend trying to break into your bank account for a bailout.

Thursday, December 11, 2008

Big Lie of "Credit Crunch"

Market Says We Need LESS Credit but Government Continues Its Force-Feeding to Cram Debt Down Your Throat

The Wall Steet Journal's 12/11/08 "Freight Haulers Slam on the Brakes --Expecting the Weakest Year in Three Decades, Truck, Rail and Ocean Shipping Firms Are Cutting Back" (hat tip: CR):

“In a normal year, Gordon Trucking Inc. might replace 20% of its fleet of 1,500 big rigs with new trucks. But given the bleak outlook for the freight business, the Pacific, Wash., hauler doesn't intend to buy a single new truck next year.”

“’We're settling in for nuclear winter in the first half of 2009,’ says Steve Gordon, operating chief for the company, which hauls everything from paper products to electronics.”

"Some industry executives and analysts predict that 2009 could be the worst year for freight-transportation volume in three decades or more." (emphasis added)

Less VOLUME is less DEMAND.
  • The companies do not NEED more trucks.
  • The companies do not NEED more credit to buy trucks.

Business-investment increases typically signal economic recovery but the current investment reduction is healthy because demand for trucks is less.

  • The problem of business overinvestment (overcapacity) is solved by less investment.
  • The problem of overconsumption is solved by less consumption.

American consumers apparently do not need to replace their 30" TVs with 35" TVs after all.

Government/media propaganda about “lack” of credit is false.

We need LESS credit SUPPLY because we have LESS credit DEMAND--as in truck companies needing less credit because they need fewer trucks because they have less freight to move.

This is not rocket science.

We DO need transparency and price discovery, which is the exact solution that the government bailouts are designed to prevent.

Saturday, December 6, 2008

Obama=Bush: Infrastructure Alternative-Energy Bubble Economics

Obama Essentially Pledges To Be Bush’s 3rd Term and Perpetuate Bushonomics "Guns & Butter" Bubble Economy

Barack “Bubbles” Obama follows his bellicose, chest-thumping "We will kill bin Laden. We will crush Al Qaeda" announcements to escalate the “Global War on Terror” and order his own troop surge in Afghanistan and raise a massive "civilian national security force that’s just as powerful, just as strong, just as well-funded [as the military]" with a hundreds-of-billions-of-dollars deficit-spending “infrastructure” stimulus to perpetuate the ponzi bubble economy at all costs and bury you in hyper-debt.

Old Wine in New Bubble:

Obama Incubates a New Host for the Ponzi Parasite

Do you believe “it’s different this time” as long as we say “infrastructure” and “alternative energy”?

Bubbles Obama seems intent on copying FDR’s folly of wasting scarce resources on parks and wall murals while people starved.

The New Deal failed to end the Great Depression.

The Greaty Society failed to end poverty.

Entombing Japan in concrete failed to end Japan's 1990s "lost decade" (more like 2 lost decades now).

Why would anyone believe today's Keynesian stimulus-addicts who promise, "but this time it's different"?

Obama's concrete will build America's mausoleum.

  • The solution to a debt crisis is NOT a spending spree.
  • The solution to a debt problem is NOT more debt.
  • The solution to a bubble is NOT another bubble.
Is spending less money, both as an individual and as a nation, such a crime that Obama will destroy America’s finances to avoid the “horror” of spending less?