We never knew how many of us were there.  The powers that be denied us permission to use the Mall, so it was difficult to compare the size of the crowd to that present for the recent inauguration.  There were other groups who were given permits, though.  Many marchers clogged Constitution Avenue and Pennsylvania Avenue almost to the White House.

Here’s a picture of me, uncomfortably resembling Wilford Brimley, with my sign which was made and designed by my missus.  Its lackluster message is my own, and had far less vitriol and humor than many of the signs I saw there.  The sign itself was described by one of my new friends whom i met during the Party as ‘elegantly frugal’.  Anyway, my attendance at the Party was completely of my own design.  I was not part of any organized movement.  Like most of the folks I met there, I came out of concern for my country and the direction in which it seems to be moving.  I am convinced that the vast majority of citizens that I met there came of their own accord, on their own nickle, and without sponsorship.  They came from all over.  I met folks from Texas, Tennessee, Florida (One group of guys I met came up on the Silver Meteor, and were returning the same way – a 30+ hour round trip!)  So don’t let anyone tell you that this was an ‘astroturf’ movement.  These folks were real, concerned, and not managed – I can assure you that.

The 6:20 Amtrack train was packed with people heading for DC.  As I walked in from the parking garage, a dozen or so people waved from across the parking lot to me with knowing smiles of purpose and determination.  We clearly all had the same objectives, although we had arrived at them independently.  On the platform, we showed each other our signs. And although I had resolved to take pictures for the folks back home, the idea occurred to me that perhaps I should use those pictures to illustrate a blog article.  That idea began to take shape as we boarded the train.

The Second Amendment Advocates

Because the field was so crowded and it was difficult to move around, I spent much of the program with 2 ladies who were Second Amendment evangelists.  Terri, the president, comes from Michigan and is very friendly, passionate and articulate about the right to bear arms. A very likable gal, we didn’t get to know each other as much as I would have liked because of the commotion in the crowd, and the fact that her companion was stationed in between us.  Leyla is the Virginia coordinator for www.secondamendmentmarch.com, and seems to be able to anticipate Terri’s thoughts. Leyla was interesting from my point of view because she immigrated from Russia 10 years ago.  She has an excellent command of English, and speaks with a very slight trace of an accent.  It was she who pronounced my sign ‘elegantly frugal’.  She saw the changes that are being proposed in this country as reminiscent of conditions that prevailed in Russia before she left.  She couldn’t understand why a country as prosperous and steeped in the tradition of freedom as ours was would even consider taking the various paths that now seem to be proposed: government run health care, nationalization of industry and finance, taxation and manipulation of energy prices, etc.  I didn’t have an answer for her.  Both of these women ‘got it’ and are committed to the same ideals that everybody else at the Tea Party espoused: freedom, and the prevention of further intrusion in our lives.

The Georgia Gals

These are the Georgia gals, who rode the bus all night from Norcross Georgia.  Georgia was very well represented at the Tea Party, with pilgrims from all over the state in the thousands.  These folks were standing obliquely behind me, and were very generous offering to share their seats (what we in NJ call soccer-mom chairs), and their food.  The one on the left is a Redsox fan and a free market fan, important concepts which we share and hold dear.  The one on the right, I think, is a Wilford Brimley fan. During the day, I met dozens of people all sharing the same concerns for our country and our freedoms.  People sharing their water, snacks and good will.  It was quite an experience – it was like Woodstock, but with clothes!

Bruce O’Hara

Bruce is a hard-bitten contractor who hails from Havre de Grace, Maryland.  His business, not surprisingly, has been a little slow this year.  He’s a Sarah Palin fan, but, aside from the several Tea Parties he’s attended, he would not describe himself as a activist. We met at Union Station, where we both happened to come for lunch at about the same time. Although there were plenty of tables available at the Buffalo Grill, we decided to share one, even though we were strangers.  Such was the mood of camaraderie which prevailed at the Tea Party.  Union Station is an imposing structure virtually across the park from the Capitol.  It is essentially the same building as it was in 1861 when Abraham Lincoln arrived in drag for his inauguration (to thwart expected assassination attempts).

The Cosgroves

Boarding the train with me were 3 very nice families from the neighboring town to mine.  As they were friendly and photogenic, I thought they would be excellent subjects for the article.  During the ride, I asked two of them if they would participate.  Receiving a positive answer, we agreed to meet at the end of the platform on our arrival in DC, and I would set up a picture using Washington as a backdrop.

Brian is about 11 years old, and is a bundle of energy and enthusiasm with a huge heart.  Brian burst on the DC scene running outside Union Station, and found about  1/2 dozen homeless men sleeping on the benches.  One or two had camo pants on, and he ran back to me asking if I thought they were vets.  ‘Can you see his face?’, he asked.  ‘Do you think he’s a vet?’ ‘How ’bout THAT one?’  His mom, Eileen, told me that he had brought money down he had saved to give to homeless vets.  He had heard that a former Navy cook was homeless in DC, and Brian wanted to help.

Eileen and Brian had one sign, but it had a message on either side. One side said ‘Represent us or get out of “OUR” House’.  The other side said, ‘Support Our Troops, NOT ACORN’, and it had a small picture of a Marine on it.  Eileen had also brought a bag with about 1/2 dozen flags in it.  I mentioned that I wished I had also brought a flag, and she encouraged me to take one of hers.  She said I could have any one, but not the Marine Corps flag. So I did take one, and you can see it in the opening picture.
Well here’s the picture of Eileen and Brian.  I thought it a nice story that a busy, obviously professional woman would devote a valuable Saturday, and bring her kid down to Washington to march in a demonstration.  Good determination on the part of the Mom, great lesson in freedom and democracy for the kid!

Then I learned that the picture of the Marine on their sign was a picture of Brian’s older brother, Christopher.  I also learned that Chris had sacrificed his life for his country last year in Iraq.  He had finished his tour of duty, and was scheduled to come home.  But he had volunteered to stay on and train replacements, which was when his luck ran out.  I spoke with her just a little about the sadness of his sacrifice, and it was clear that the family still lives with it.  But it was just as clear how proud she was of her son.  Seeing her there that day with Brian, I am sure that Chris would be just as proud of her.  What started  as a nice picture turned into something that moved me deeply.  I decided to keep the flag on my desk to remind me of his sacrifice and the sacrifices of others who gave their lives and limbs for their country so we could live free.

In response to the credit crisis last fall, the government embarked on an all out campaign to flood the market with lquidity (the fed bought debt instruments of the U.S. Government on a grand scale).  This had the effect of putting money in banks, enabling them to lend it to their cuetomers, like GMAC, or GE Credit, in an attempt to encourage consumer demand and stimulate the ecomony.  Here’s a table from the Fed released just a few days ago which shows the magnitude of the changes in the money supply over recent periods.  M1 refers to mainly currency in circulation, travelers checks, and the amount in checking accounts.  M2 is a more reliable series, which includes M1 plus savings accounts, CDs, and money market funds.  The late Milton Friedman, who pioneered the study of the money supply and its effects on the economy, wrote that a steady 2-3% growth in the money supply was the growth level to be targeted for optimum performance in the economy.  As you can see, recent growth rates are substantially above that level.

Percent change at seasonally adjusted annual rates    M1                    M2

3 Months from Jan. 2009 TO Apr. 2009                     4.1                   2.6
6 Months from Oct. 2008 TO Apr. 2009                   15.9                   9.2
12 Months from Apr. 2008 TO Apr. 2009                   15.9                   8.5

In the past, deviations from Friedman’s target level have resulted in demonstrable changes in the inflation rate, as well as in the level of economic activity.  Sharp contraction of the money supply during the ’30s resulted in the great depression.  On the other hand, large increases in M2 during the Ford and Carter years resulted in high interest rates, huge inflation, and tough times.

In our recent case, even though the Fed made credit available, the banks did not aggressively promote loans.  In fact, in the early part of the period, they hoarded the excess liquidity for several months.  There’s another factor in the equasion for changes in money supply and its effect on the economy – the velocity of money.  That’s the number of times per year a dollar is turned over – or how fast people spend their money.  In recent months that’s been pretty slow. A lot of folks are out of work, and those who aren’t are very cautious, and tight with the buck.

But the artificially low short term interest rates are creating other problems.  The dollar has fallen 10% against the euro since its low of a few months ago, and long term interest rates (on government bonds) are beginning to climb.  Those trends alone signal trouble.  The cost of imported goods will start to rise, as will mortgage rates and the cost of long term borrowing.  More importantly, as demand increases from it’s current low level, so will the velocity on money.  Many respected economists feel that this turn of events will set the stage for a return of double digit inflation.

Taxes are another problem.  The government is adamant about raising income tax rates for financially successful people.  Some of those taxes are going to subsidize those less successful.  This results in a disincentive for the successful people to invest and take risk (because their return is guaranteed to be less), and a disincentive for the less fortunate to acquire new skills (why work harder when the government is giving you more purchasing power?).  In addition to increasing marginal rates by nearly a seventh, there’s a plan afoot to eliminate some of the deductions traditionally allowed.  This raises the effective increase even more that it would appear to be at first glance.  But the frenetically ambitions desire from the new government to overhaul and expand social programs argues very forcefully that additional taxes will be required, probably from the very people who were promised before the election that they would be getting a tax break.  Now there are trial balloons about taxing soft drinks, and adding a VAT  (a value added tax, or national sales tax of 10% to the purchases of all goods and services).  So if I am in the 35% tax bracket now, my effecting tax rate will go to 44& with the income tax increases, and it I spend 50% of my income, the VAT will clip me for another 5%.  Now don’t forget the states.  They’re hurting too.  You can surely count on them to add a percent or two on their income tax rates and sales tax rates.  Before you know it, my combined income tax rates (not counting VAT and soft drinks) have gone from 42 to near 50%.  Don’t forget the proposal to tax health care insurance for those who get it from their employers!  That’ll add another $10K of expense.  All of this taxation removes money from the system.  People who are taxed more will spend less.  It’s that simple.

It’s the function of a market to ration the limited supplies of goods among the available buyers.  I can afford a certain number of material goods, in the long run, consistent with my income.  I can buy, for instance, a Ferrari and nothing else, or a Ford Taurus, kids’ education, toothpaste, TV, food, etc – you get the idea.  That’s the way goods are allocated in a market economy.  With a government run healthcare system, it is my fear that that allocation process will be abandoned.  Instead of my choosing to allocate money to health insurance, the government will tax me and they will become the providers of the care.  They will choose the doctors, the procedures, and arbitrate the diagnoses in some cases.  I a very direct way, they will be able to dictate the compensation of those doctors.  In the longer run, with doctors’ compensation regulated by the government’s health care plan, fewer talented people will become physicians, choseing, instead a more lucrative profession.  Currently, I can choose a high priced health care insurance provider that will provide me with the level of healthcare that I choose.  (Remember I can spend more, because I chose NOT to purchase that Ferrari!)  It is the cost of that healthcare plan that rations its purchase in the market.  And, because I have that plan, I can go to the finest doctors and get the best care.  There are not enough of the best doctors around, so they have to ration their time among those who can afford to pay.

In the new U.S healthcare plan we have heard so much about, it will be the government, not the market, who decides who gets treated and what level of treatment they will have.  England and Canada have a similar system, and by all accounts there is widespread dissatisfaction.   The government cannot possibly provide ALL of the healthcare that any of its citizens demand – it will bankrupt the country.  So it will have to decide who gets what.  Older folks will not get that heart transplant paid for by the government – it’ll be more cost efficient for the government to grant it to a younger guy.  Or, there will be a huge wait for the government insured service, during which time, the marginal patient will die.

Adam Smith was a Scottish Philosopher in the Age of Enlightenment.  In 1776, the same the year the Declaration of Independence was written, he published ‘An inquiry into the Nature and Causes of the Wealth of Nations‘.  It was an astounding book at the time, and laid the foundation for the school of economic thought called ‘enterprise economics’.  That body of thought contended that if market participants were free, their choices guided by their own self interest would produce the most efficient and optimal use of the country’s resources.  He contended that efforts by the state to promote social goals would be ineffective, and would result in a consistently suboptimal result.  This economic point of view is commonly referred to as ‘the invisible hand‘, from Smith’s contention that under his laissez-faire theory of economic allocation, goods, utilization, and consumer satisfaction would be optimized as if by an ‘invisible hand’.  In Das Kapital, published in 1867, Karl Marx formulated his theory that the greatest good could be had from state control of the means of production.  We spent the bulk of the 20th century observing which theory worked best.  I hope we do not forget those lessons.

Throughout my lifetime, and that of my parents, economic prospects and growth were always a direct function of the availability of money and credit, and the expectations of the participants in the local and [more recently] the global economy. If money was easy to obtain, and businessmen or farmers were optimistic about the future, and felt that they could make a good profit, they would invest in their businesses, and buy new equipment or technology to make more product, or to manufacture more efficiently. They did this because they were confident that their investments and the return on them would eventually flow through the bottom line of their businesses back to them.

Things are backwards now for several reasons. First, since the new administration came to power in the U.S, the government has taken over large swaths of the economy, much like the British labor governments of the ’70s. The automobile, banking, energy, and healthcare industries are cases in point.

What would you do, if you took over an automobile company, and like ‘The Producers’ you wanted to make sure it would fail?

First, you would stock the upper management with people who had no previous experience running a car company.  Check.

Then you would make sure it was strangled in regulations and accountable to no one but yourself. C heck

Then you would make sure it produced cars that were expensive, impractical, and that no one wanted. Check.

Then you would make sure that the unions, who, in large measure, were responsible for the company’s previous prohibitively expensive cost structure, would be given a strong voice in the day-to-day operations of the company. Check.

Then you would take the company through bankruptcy and allow the unions to take precedence over the bondholders. That way, you’d make sure that further issuance of debt would be prohibitively expensive. Check.

Speaking of bondholders, the government is steamrolling them in the case of GM to accept a lower order of precedence than the unions in the impending bankruptcy. It’s the little guy who’s getting screwed because the institutional holders of the bonds have already bought swaps which will pay off when GM enters bankruptcy. Smaller holders have no such insurance, naively believing that their bond covenant would protect them with priority as the company’s assets are liquidated. News just out suggests that 54% of the bondholders agreed to swap their stake for 10 % common stock in the reorganized company, plus warrants. This is a bad deal for the minority bondholders.  And already the Treasurer of the State of Indiana has threatened to exclude new bond purchases from other companies who have a union presence.

I’ll address the other government run industries in a moment. But I would like to note that I can’t find an example of a successful American company that has been run by either the government, or the unions. The proposed configuration is bad for both GM and Chrysler, but also for Ford, who must now compete with the two other companies with substantial government investment. Don’t forget: the government owns the board, and the game.

The U.S. government also has a substantial ownership in the financial industry. The original stimulus plan forced the nine largest banks to accept government money in return for preferred stock. Healthy as well as unhealthy banks had to accept the deal, under the guise of protecting the weaker banks from disclosure that would further weaken them. Goldman, Merrill, SmithBarney, Wachovia, and MorganStanley were among the top investment banks that were included in the deal along with Bank of America, WellsFargo, JPMorgan and Citigroup.

For many of these banks, it’s like being partners with the mob. The syndicate lends you money, but does not allow you to pay it back. Paybacks must be at the convenience of the government, along with the associated interest. And, by the way, compensation to the highest earners in the firms are subject to government approval. This, of course, leads to an exodus of talent to other, non government controlled firms, creating a ‘brain drain’ which is another name for fleeing of intellectual assets from these ‘beneficiaries’ of government largess.

Even today I have found that jumbo CDs bought from the ‘favored few’ were quoted at up to 100 basis points less that those offered at smaller S&Ls or Credit unions. There’s no security premium on these either, as each offers the same level of FDIC insurance in case of bankruptcy.

The government doesn’t own any energy companies per se, but creates an endless series of regulations which ties the industry in knots. For all the energy shortages in the past several years, one would think that the government would be encouraging exploration and drilling. Not the case. No new offshore leases have been granted for years. I n the past, the leases were sold in packages. The winning bidders would take their package and drill on the sites they thought would produce oil/gas. The rest would be abandoned as unprofitable. There are currently huge tracts of oil and gas deposits on the California, Gulf, and Atlantic coasts which contain huge amounts of deposits, but which are untouchable because the government refuses to allow drilling. The coast of California has been off limits for 30 years now, depriving that state of the revenue it needs to balance its budget now.  And in the meantime, China has made a deal with Cuba to drill for large oil deposits in the Strait of Florida.

The same is true for huge natural gas deposits in the ANWR region of Alaska, the midwest, not to mention the shale oil deposits available in Colorado.

Now there is a plan to impose a ‘cap and trade’ tax on energy production in this country, under the guise of improving the environment. That will assuredly bankrupt several Appalachian coal producing states, in addition to giving many of us a 50-100% increase in the cost of our electricity.

The prominent proximate causes of our current economic situation all can be grouped into one:  unsupervised speculation on a grand scale using other people’s money.  Used to be that local S&L institutions accounted for the majority of home lending.  Little S&Ls like Mr. Potter’s in ‘It’s a Wonderful Life’ would assess the credit worthiness of a local homeowner or farmer, and lend its capital to fund the endeavor.   They knew the borrower, and could keep tabs on his ability to repay.  It was the S&L’s money, so if the borrower faltered, the lender could step in immediately and sell the property and recoup their assets, or help the borrower to make good on his load.  More importantly, the lender, because his own money was at risk, took particular care to see that this was a good investment for him!  Over the past 20 years or so, somebody got the idea that the banks and S&Ls could bundle those loans, and sell them on the open market.  That would allow the S&L to make more loans with the proceeds, and if the market for these mortgages were liquid enough, the investment banking community could make money trading those packages of loans.

Once upon a time, the investment banks were all private partnerships:  Bear Stearns, Goldman Sachs, Merrill, Paine Webber, Kidder, Drexel Burnham, Lehman Bros, – all of them were partnerships, capitalized exclusively by the wealth of the partner-owners.  Starting roughly in the 1980s, those partnerships began to disappear, as the enterprises needed more capital to fund the expansions of their forays into the capital and private equity markets.  Junk bond trading added leverage to the mix, and soon these guys were making money like never before.  There was so much money to be made that lucrative arrangements were made withthe traders, who carried home at the end of each year, a significant portion of their profits, aided by the leverage and access to capital provided by their employers.

Enter stage left, the government.  Under the Community Reinvestment Act, passed under President Carter, and later augmented by President Clinton, the government embarked on a program to extend home ownership to people with lesser amounts of capital.  The mortgage packages referenced earlier that were sold by the local S&L institutions were guaranteed by Freddie Mac, and Fannie Mae.  And, as a matter of fact, the executives of these quasi government entities had their compensation arrangements changed, so that they were paid based on the volume of loans they processed, rather than on the profits of their institutions.  The Fed made the cost of capital cheap by keeping interest rates low.

So now we have a perfect storm:
A whole new class of buyers are enabled and rush to buy houses with cheap, almost guaranteed mortgages using other peoples’  money.
This creates a significant inflation in the value of houses.
The housing inflation attracts speculators like sharks who buy multiple houses to flip them for a profit – using other peoples’ money.
The housing inflation prompts other homeowners with a little more capital to take out homeowner loans and buy Cadillacs or whatever- using other peoples’ money.  They are enabled by the artificial and temporary increase in the valuation of their homes.
The S&Ls and making money hand over fist- lending money to anyone who can fog a mirror, then flipping those mortgages through Freddie to the investment banks – laying offtheir risk to other people.
The investment banks are trading up a storm and making a ton of money- using other peoples’ money.  And so are the traders- using other peoples’ money.

And even us guys sitting in the bleachers are pleased as punch to see the value of our houses soaring.  We’re high-fivin’ each other at our kids’ soccer games and at cocktail parties – all thinking about how smart we were….

Until housing prices peaked, and Bear and Lehman failed.  (Technically only Lehman failed.  Bear was ‘rescued’ by a shotgun marriage.)  Those events brought about the credit spasm in September 2008, and have set the stage for further disasters to come.

The credit crisis has now spread into other industries – housing, investment banking, banking, mortgage, automotive, applicance, etc.  And now that the housing market is 20-50% below where it was just a few years ago, there are many houses ‘under water’- that is worth less than the money advanced to buy them.  In some cases, homeowners are abandoning their houses rather than pay their mortgage.

The key question now is how to untangle this mess.

Should unwise buyers be protected?  The arguments for this are that liquidating the houses under water at fire sale prices would depress other adjacent housing values, and that these are the least able to afford a foreclosure.

Should the mortgage holders be protected? The arguments for this are precedent, and the rule of contract law, which is the basis for business transactions around the country and around the world.

Should BOTH be protected? Should the government use taxpayer funds to bail out certain holders. This will cause a huge burden on the treasury, and on the obligations of our children and grandchildren.  And it would set a very bad precedent.

Choices 1 and 3 will inevitably lead to a longer and more protracted, though not as deep housing slump.  Choice 2 will lead to a sharp decline in housing prices, as a large ownership migration takes place almost immediately.  But all other things being equal, there should be a sharp rebound in housing values once the flush is completed.  But then again, other things rarely ARE equal.

A similar quandry is being faced by the GM bondholders at this moment.  Should they step aside and settle for a small percentage ownership of GM, or should they assert their right of precedence in the liquidation of GM?

I hope they choose the later.  Because if they do not, it will deal a cruching blow to our credit markets.  If they are steamrolled into abrogating their rights under the debt covenants they hold, the markets appetite for corporate bonds will dry up like a raisin in the sun.  Already the treasurer of Indiana pension funds is thretening to unload and refuse to buy the bonds of any company with a union presence.  That would be a VERY disturbing omen!