How Big is the Bailout really? ...So far?
Written by Hank Brock, CPA, MBA, CLU, ChFC
Thursday, 04 December 2008 10:47
As more and more come to the Fed begging for cash, the costs are adding up... According to Barry Ritholz, author of The Big Picture, total federal aid (including the Citi bailout) now equals $4.6 trillion – making the credit-crisis rescue the largest government project in history.
Unfortunately, there are four major concerns I see with the analysis below. First, expenditures from the old "New Deal" of 75 years ago haven't ended yet, and so the figures below are grossly understated, and we are facing an expansion of them once again in economic policy. We still have the agencies, authorities, laws, programs, regulations, and other expenditures and drag on economic growth that has perpetuated since those days. Repeated economic studies have shown that The New Deal actually exacerbated the depth and prolonged the length of The Great Depression.
Second, when we consider where and how to deploy assets today, we must look at the period of increasing regulation and tax rates during the 1960's and throughout the 1970's, resulting in a stagnant economy for over 15 years. The increasing regulatory environment probably killed business growth more than did the high tax rates. This is pendulum swing-back is facing us again today.
Third, one program left out of the costs below would the the 2nd war launched by President Johnson, simultaneous with the War in Vietnam, and that is the War on Poverty. It would be interesting to see what the cost of these entitlement programs have totaled. Some would say the War on Poverty, along with Medicare and Social Security, are simply a continuation of The New Deal Keynesian economics, which ultimately blow-up because they are based on a pyramid scheme of ever-increasing newcomers into the bottom level of the pyramid. This worked fine after WWII, until the baby boomers stopped having children. Fortunately, the U.S. is not in the position of Europe and Japan, where their social programs are causing the government to go bust because there is a declining population, and the pyramid is inverted with more retirees at the top than there are workers to support them.
Fourth, while this study attempts to equalize the cost of these programs by adjusting them into today's dollars, it would be interesting to see the cost of these programs if those dollars had been invested into the private sector, and instead of growing the dollars at the inflation rate, growing those dollars at the growth rate of the stock market, the businesses that create real wealth in an economy, and that hire and employ people off the streets. That might give a different cost to these items. To this end, these expenditures need to be categorized into a column for investments (such as the Louisiana Purchase and perhaps NASA), versus wars which are purely consumptive (not to say they aren't necessary), versus expenditures that fall somewhere in the middle, like the Marshall Plan and the New Deal.
At any rate, it is interesting to put the cost in perspective. James Bianco of Bianco Research calculated the inflation-adjusted costs of other large government programs throughout history. The current bailout is bigger than the following nine programs... combined. Total cost: $3.925 Trillion.
| Program | Cost | Inflation-Adjusted Cost |
| Marshall Plan | $12.7 billion | $115.3 billion |
| Louisiana Purchase | $15 million | $217 billion |
| Race to the Moon | $35.4 billion | $237 billion |
| S&L Crisis | $153 billion | $256 billion |
| Korean War | $54 billion | $454 billion |
| The New Deal | $32 billion (est) | $500 billion (est) |
| Invasion of Iraq & War | $551 billion | $597 billion |
| Vietnam War | $111 billion | $698 billion |
| NASA | $416.7 billion | $851.2 billion |
| Total Inflation-Adusted Cost: | $3.925 trillion | |
| Current Bailout Cost: | $4.6 trillion |
Hank Brock is president of Brock and Associates, LLC, a financial consulting firm specializing in asset protection and generational wealth preservation.
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No Surprise With Newest Citi Bailout
Written by Hank Brock, CPA, MBA, CLU, ChFC
Tuesday, 25 November 2008 08:44
Do you remember the three big banks I named in the Brock and Associates’s “Making $ense” newsletter back in March-April? (See our newsletter “Archives”.) And the three banks that hold one-third of the $516 Trillion in derivative bets out there? And all those derivative bets out there that were non-disclosed “off balance sheet” transactions? Well, read below about Citibank, JP Chase Morgan, and Bank of America.
For months I have been saying that it will take 2 years for the news to report all the “surprises” out there, and that until all the dirty wash is hung out to dry, the economy will not hit bottom. Well, there’s still a lot to come, and it will take a couple of years.
--Hank Brock
The Citi Bailout: What Do You Believe?
by FOX News Crews
By Adam Shapiro, FOX Business Network correspondent
http://onthescene.blogs.foxnews.com/2008/11/24/the-citi-bailout-what-do-you-believe/
It all boils down to one simple question: do you believe them?
The numbers count, but nothing is more important than the faith of consumers, investors and citizens to believe statements from Citigroup and the US government about the most recent bailout to save the financial system, western civilization and “Big Nick’s” on New York’s upper west side (which serves the best burgers north of “Times Square” and to my knowledge has not asked for a bailout). Trust me, Big Nicks is a part of this, but regarding CITI and Uncle Sam, do you believe them? Standing outside CITI Group headquarters on a cold New York day and listening to all of the experts - remember it was the experts who got us in to this mess - my answer to the question is no, and I hope to be proven wrong.
The 306 billion dollar FDIC insurance plan to save CITI covers a pool of trading account assets, which CITI says totals 458 billion. (See slide 17 from the CITI Town Hall Presentation given Nov. 17)
Here is the problem: the same trading account assets are 520 billion at JP Morgan Chase and 429 billion at Bank of America. So, will they now knock on the bailout door? What is different about those trading assets at CITI compared to the assets at JP Morgan Chase and Bank of America? Do you believe the FDIC, FEDERAL RESERVE and US TREASURY - which issued a joint press release saying, “With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy”? What do they know that we don’t about those assets at other banks? Or, do you think they will have to step in to help JP Morgan Chase and Bank of America?
CITI insists that its future losses will not exceed 29 billion dollars and that the FDIC will not have to spend one penny to save them. Really? Do you believe them? Just last week CITI said, “CITI has a very strong capital and liquidity position….” Really? Then why did CITI just get an additional $20 billion from the US Treasury? Did CITI fail to understand its own exposure, or did they simply forget to include the $29 billion in potential future losses from the nifty Nov. 17 town hall pep talk that CEO Vikram Pandit gave CITI employees. It was at this time he notified them that CITI was cutting 50,000 jobs. Great way to motivate the troops. Seriously, can you believe this stuff is happening?
Finally, this deal does not address the $1.2 trillion off balance sheet assets that CITI insists pose no threat. (Add loads of sarcasm here) REALLY? We’ve heard that before, and remember 667 billion of that off-book asset are mortgage backed securities. CITI CFO Gary Crittenden says “CITI has enormous capacity to absorb credit losses.” Those off balance sheet assets “are likely not to have a significant impact on CITI over time.” But FOX Business anchor Alexis Glick asked Crittenden what guarantees CITI could give us that those 1.2 trillion wont impact CITI’s balance sheet, and that was a question he did not answer. So, do you believe them?
Which brings me to Big Nick’s on New York’s Upper West Side. I am really hungry, and a Big Nick’s burger right now would be a lot easier to swallow than what the FDIC, Federal Reserve US Treasury and CITI are serving the American public.
Visit FOX Business Network for the latest news and exclusive coverage on the CITI bailout.
Hank Brock is President of Brock and Associates, LLC, a fee-based financial planning firm specializing in asset protection and generational wealth preservation. For more information on how to protect yourself during these volatile times, schedule a free consultation.
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Romney's Advice to President-Elect Barack Obama
One of our readers sent us a link to this article last week. We feel it provides some sound commentary on the economy. This article was originally published on November 7, 2008 in Fortune Magazine. The article can be found here.
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Romney: Obama must be 'educator-in-chief'
Former presidential candidate Mitt Romney offers his advice to Barack Obama, and his views on labor unions, federal bailouts, Detroit, protectionism, and America's debts.
November 7, 2008: 9:47 AM ET
NEW YORK (Fortune) -- Mitt Romney, former Massachusetts governor and co-founder of private equity firm Bain Capital, is often mentioned as a GOP contender for 2012. He spoke with Fortune's Jia Lynn Yang.
Any management advice for the next president? How does he rally a depressed nation to meet the challenges we face?
He should forget entirely about reelection and focus solely on helping the nation at a critical time. He should dismiss the people who helped him win the election and bring in people who are above politics and above party. He should surround himself with statesmen and economists, businesspeople and leaders. In some ways it would be beneficial if our presidency consisted of only one term. That way the President would think about his legacy and the future of the country rather than reelection and partisanship.
How likely do you think that's going to happen?
In his second term, President Clinton made an effort to govern more from the center than from the extreme wing of his party, and by doing so, found greater support and greater political success. Perhaps it's a paradox, the less political the agenda, the more political success one enjoys. But now is not the time for partisanship opportunism.
The unions have helped Barack Obama. They will hope to be paid back. I'm particularly concerned that organized labor would call on Barack Obama to pass the card check program. This removes from American workers the right to the secret ballot in deciding whether or not to accept a union. This legislation would do more to harm America's long-term competitiveness than almost anything I can imagine. It would be a partisan payback for organized labor but it would come with devastating consequences for the nation.
Do you have any concerns that the massive government intervention on Wall Street will have unintended consequences?
"The bailout of Wall Street" was a terrible choice of words. No one wants to bail out anything, especially Wall Street. The objective of the legislation, however, had a much broader purpose: to stabilize our financial system, to keep it from complete collapse. Sometimes that broad purpose may require saving individual companies, as with AIG (AIG, Fortune 500). But we just can't have government running around the nation looking to bail out companies in trouble.
Given your Michigan roots and what your father accomplished turning around the American Motors Corporation in the 1950s, what do you think is the future of the auto industry?
Right now, the auto industry is on life support, and its prospects look extremely dim. But they don't need to be. The industry could be turned around. There is no inherent reason why America can't build and sell cars to Americans at least as well as the transplants are doing. Any effort to help the auto industry has to be made as part of a comprehensive strategy. Before the government issues loans to the auto industry, as has been authorized by Congress, it should insist on seeing credible and independent strategies that will return the companies to long-term sustainability. Government should not finance ongoing losses and declining market shares.
What concerns you the most about the economy right now? Any dangers lurking in the global economy that we didn't hear much about during the campaigns?
Far too little attention was paid to America's long-term competitive position during the campaign. I see four major economic strategies at play in the world today: the first is ours. It combines freedom and free enterprise.
The second is China's. It combines free enterprise with authoritarianism.
The third is Russia's. No longer is Russia's plan for dominance based upon industrial capacity but rather upon controlling energy throughout the world. Hence Russia's cozy relationship with Iran and Venezuela as well as its belligerent entry into Georgia. Russia's strategy is based on energy and authoritarianism.
The fourth strategy is represented by radical violent jihad. The intent of the jihadists is to cause the collapse of the other three, such that the "hidden Imam" or the Caliphate remains the last man standing.
The real challenge for America is how to strengthen our competitive position so that our economy outperforms those of the other three. If we're successful, freedom will be preserved for the world. If we're unsuccessful, the results are unthinkable.
When you talk about making America more competitive, what do you have in mind?
First, America must substantially improve our education system. We've fallen behind, particularly in areas of math and science.
Second, we're going to have to remedy our disproportionate health care cost disadvantage. America spends far more than any other nation as a percent of GDP on health care. This effectively is an enormous tax on the economy and on our businesses.
Third, our national debt is excessive and our entitlement obligations pass a massive burden onto the next generation.
Fourth, tax and regulatory policies weigh down our ability to compete. Specifically, our products carry an embedded tax which makes American goods less competitive abroad and at home.
Fifth, America's apparent retrenchment from the concept of open, free and fair trade could put us further behind other nations that are aggressively seeking trade relations around the world.
Sixth, our lack of an effective energy policy drains our economy by approximately half a trillion dollars a year.
And, finally, the blow that Wall Street has taken may make us less competitive in financing entrepreneurship.
There's strong populist sentiment against free trade deals. Given that, how does an American president move forward on this?
I can only hope the President abandons the populist current, which seems to be growing in our country. An effort to block foreign trade will only hurt America. Ultimately products in this country would become uncompetitive. Look what happened to the Soviet Union. Its cars, its watches, its goods became a joke.
The only way to remain the leading economy in the world is to be successful on a level playing field around the world. Some individuals, at the behest of special interests, seek to prevent trade with other nations by imposing America's labor requirements and other peculiarities. That is a disguised form of protectionism.
Do Americans need to save more and adjust to a lower standard of living? In other words, should be buying houses we can actually afford?
I think a President has to be an educator- in-chief as well as a commander-in-chief. The American people need to understand the challenges we face. And the American people need to understand that they, like the nation, need to live within their means. Both have been spending more than they have been taking in. It puts the nation at risk. And it puts families at risk.
There's a period of adjustment that's occurring right now as American families deleverage and employers deleverage. It's time for the government to finally address our severe debt burden, before it leads to even more severe consequences. I'm referring not only to our annual deficit and national debt but also to our obligations under entitlement programs like Social Security.
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Threats to Your Economic Future
Written by Hank Brock, CPA, MBA, CLU, ChFC
What is ahead? Let's take a look:
Increased psycho-media risks. Select industries may be sacrificed in order to sell newspapers and magazines. If your industry or company gets in the cross-hairs, you are dead. More on psycho-media risk in future posts.
Class warfare. We have an increasing risk of a wealth tax, increased income taxes on the most productive in society, and riots and strikes incited for political gain by closed organizations. Those who went to college -- who got training and education, took risks, worked hard, saved money -- may be targeted by those who did not.
Increasing natural disasters. Drought, hurricanes, earthquakes, and blizzards may cause company and geographic shutdowns, resulting in increasing volatility in investment markets as well as shortages of food and the supply of raw materials.
Spiraling budget deficit. Spiraling inflation and volatility in the financial markets may cause capital to dry up as investors are unwilling to finance the budget except at super-high interest rates.
Diminished financial incentive. Inflation, a confiscatory tax structure, and instability may result in diminished financial incentives to grow a business, hire employees, and take risks.
Curtailment of freedom and economic incentive. Stifling government regulations, red tape, and involvement in a myriad of complex laws will cause those who would invest in a company to look elsewhere.
Tort risks. The average American already pays more than $1,000 per year in the increased cost of goods and services to pay the unnecessary costs of frivolous and exorbitant lawsuits, claims, class-action suits, and damages. Everyone is at risk, and everyone pays for it.
Sin taxes. Taxes will be increased to cover the increasing costs of social programs gone awry and the natural consequences of lifestyle: We will be financing increased numbers of latchkey children, teenage mothers, prisons, AIDS carriers, and substance abusers. While most people despise drug dealers, the entertainment industry (rock bands, Hollywood sitcoms, etc.) are usually subtle, but occasionally overt in their role as the new drug pushers to children. The additional taxes paid by those involved in the societal shifts cannot begin to pay for the increased governmental programs or costs to society.
Diminished productivity. An increasing number of people simply do not know how to work. And people who do not know how to work are vulnerable in a layoff.
Debt. Those in debt will be especially vulnerable to economic volatility, unemployment, or loss of their homes. What do we do as individuals if our highly leveraged economy hits a flash point and begins a domino collapse? What might cause such a flash point? Perhaps another president who re-ignites inflation, causing investors to begin selling their government bonds. Do you recall when the Mexican peso collapsed in late 1994 and the United States stepped in with $20 billion to support their economy? Unlike Mexico, there is no economy in the world large enough to save us.
A society without laws. At this writing, a new threat called "jury nullification" is gaining ground. The press is presenting it as though it has broad support. It says that jurors should vote however they want in determining guilt, regardless of whether facts prove a law has been broken.
(Proponents call this "vote your conscience.") An article in the Yale Law Review argues it is the "moral responsibility of black jurors to emancipate some guilty black outlaws," and that the slum drug dealer or thief who robs a wealthy white family should be acquitted. Their argument is that these criminals are actually victims of unfair laws. Sophisticated lawyers know how to stack a jury. The rule of law is lost. Where there is no consequence, there is no law. Anarchy reigns. No one is safe. The laws of our elected representatives are rendered impotent.
Isolationism. Without free trade, our standard of living is suppressed. That is not all: Isolationists are more prone to war. History shows those countries with a closed society are more apt to be the aggressors in pursuing the wealth of their neighbors.
Closed organizations. These secret societies have learned to manipulate a sympathetic press and society with their agenda. Without discernment, their rumors, "facts," sophisticated arguments, "rights," and "calculated courtesies" become social norms and are foisted upon the unorganized majority. They distort, disrupt, deceive.
They talk about the rights of owls, children, and anything else that cannot accept responsibility. The result? Diminished rights for everyone. By detaching rights from responsibility, they rob freedom from those who are responsible citizens. Rights can only belong to those who can be responsible, because without one you cannot truly have the other. (The correct relationship of responsible citizens toward those who cannot accept responsibility is that of sacred stewardship.)
Closed organizations are subtly promoting most of these threats to our future.
Covetousness of the idle. People who will not work -- but who want the same things as those who will -- will lead to increased crime, threats, robbery, rioting, and class warfare.
Usurping power from the governed. Increasingly, the governed are being led to believe that they get their rights from the government. The opposite is true: The government gets its privileges from the consent of the governed. Regulators write regulations with the force of law (legislative function), execute their enforcement (executive function), and adjudicate resolutions (judicial function) without any checks and balances. They have become all-powerful dictators over their serfdom.
Insidious taxes. Tax on wealth lays a heavier burden on the backs of the productive while the unproductive reap the benefits. Natural economic laws dictate that this system proliferates the poor. You simply can't give people incentives not to work, then expect them to work. By the same token, you can't punish the workers and expect increased productivity and an improved standard of living for all.
Divorce. If you want to kill your financial program, security, and growth, get divorced. The traditional family will always be the most efficiently designed and supreme economic unit, unequalled in its power to yield a superior standard of living.
Speculation. A something-for-nothing attitude causes increased volatility in the financial markets. This get-rich-quick mentality is promoted in the financial press, magazines, on late-night television, and elsewhere because it sells magazines and appeals to the greed motive.
Ignorance. As our schools have issued revisionist history books, they teach politically correct attitudes about society, yet leave untaught the founding principles upon which our nation was established. Our children are left ignorant of their heritage of freedom. They don't understand true economic and political principles about our inalienable rights and responsibilities as citizens. As a result, they will be left unprepared to counter the onslaught of sophisticated arguments.
How can you be prepared for the future?
Simple: Put your own house in order. You may not be able to influence political, social, or economic trends, but you can do things to prepare your own financial security. When you are prepared, you will not fear.
Those intent on self-destructive lifestyles always destroy themselves. That's the natural result of breaking oneself against correct principles.
But if you make correct principles work for you, you will survive. Those correct principles include freedom, prudence, balance, conservatism, savings, self-reliance, work, and all other laws that naturally yield money happiness, security, success, and peace of mind.
The economic principles discussed here are natural economic laws. They occur just as surely as the sun rises in the morning. In their pursuit of power and gain, closed organizations will use whatever means necessary to achieve their ends, which includes usurping the rights of free people. The economy will never grow in the absence of free specialization and exchange. Wealth cannot survive without economic incentive and freedom. And no individual can be completely secure without adherence to correct principles.
For more ways to insulate yourself from these volatile times, schedule a time to meet with our qualified financial consultants.
Hank Brock is president of Brock and Associates, LLC, a personal and business consulting firm specializing in asset protection and wealth preservation. Portions of this post were taken from "Your Complete Guide to Money Happiness," written by Hank Brock and published in 1997.
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Who Can Really Veto the President or Congress?
Written by Hank Brock, CPA, MBA, CLU, ChFC
While the American public thinks economic policies are determined by the President, Congress, or the Federal Reserve Board, there is a select body of voters that maintains virtually instantaneous veto power. They aren't elected, and many are citizens of other nations.
They are those people who finance the U.S. deficit by buying government bonds. They come from all around the world; many are Chinese, Japanese, and middle-easterners. Because of them, we are able to live in our excesses without re-igniting inflation. (Foreign buyers of government bonds are the major reason we haven't had our day of reckoning with our massive deficit.)
But if our government proposes unwise policies that will drive up inflation, chances are world bondholders would swiftly begin selling their bonds, driving bond prices down and interest rates up, perhaps even plunging the country into recession. They can be tough disciplinarians.
In the early 1990s Sweden saw how swiftly this could occur. After a particularly unwise bill was signed into law, their bond market rapidly drove interest rates up to almost 200 percent on government bonds, forcing the government to reverse itself.
The U.S. bond market is four times the size of the stock market, with trillions of dollars of government debt. With our enormous deficit, bondholders are rightfully concerned about inflationary spending policies.
Currently, interest on the national debt is about one-fourth of the federal budget. What would happen if interest rates doubled within just a couple of years, as they did 1979-1981? Our economy is more highly leveraged today than it was then. The U.S. government has engaged in short-term borrowing (Treasury bills) to finance long-term projects. This mismatch means rising interest rates are felt more quickly as it rolls over its debt.
Corporations and people understand that you don't borrow short-term to invest long-term. That is like buying a home with a one-year mortgage. So what happens? If government spending exceeds the government's ability to tax or borrow, all it can do is turn on the printing press and inflation skyrockets.
Hank Brock is President of Brock and Associates, LLC, a fee-based financial planning firm specializing in asset protection and generational wealth preservation. For more information on how to protect yourself during these volatile times, schedule a free consultation.
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