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Archive for the ‘Bailouts’ Category

Subprime Loans are Back Again

Posted by Steve Markowitz on March 21, 2015

It was just six years ago that the world was at the brink of economic Armageddon.  The crisis was brought on by the cheap loans made available to borrowers including those rated as subprime with credit scores below 640.  The cheap mortgages to those with limited assets helped create a huge bubble in the housing market.  When the economy slowed down and home values began to depreciate, many borrowers began to default on the mortgages, which placed at risk major financial institutions worldwide that invested in these bundled mortgages.

Banks and others that owned the collateralized mortgages then required bailouts from the government to stave off failure.  This did not eliminate the debt, but merely moved it from the private sector to governments; i.e. taxpayers.  In addition, the bailouts inordinately benefited companies and their shareholders who made the imprudent loans.  Without the bailouts they would have encountered substantial financial losses.

There is also been a more incipient result of the bailouts of investors who made imprudent loans in the subprime market.  Without suffering losses investors have had short memories and in fact they are back bailoutsat it again in the subprime financing business, once again supported by low interest rate central-bank policies with interest rates worldwide remaining at artificially and historic lows.

Last month, the Wall Street Journal highlighted the growth of subprime loans in an article titled Borrowers Flock to Subprime Loans.  Today, subprime loans are not in the housing market, but in consumer goods.  The Journal published the following:

  • Subprime loans are at the highest level since before the 2008 financial meltdown.
  • Approximately 4 out of every 10 loans for autos, credit cards and other personal borrowing in 2014 were in the subprime category.
  • During the fourth quarter of 2014, total US household debt increased by over $300 billion.

The Federal Reserve’s low interest rate policies are pushing investors to greater risk as they seek returns.  This, coupled with the availability of cheap capital has offered incentives for nontraditional lenders to enter the credit markets.  For example some venture backed funds are fueling the growth of subprime lending, such as Lending Tree, Inc., an online auto loan marketplace.  These lenders are not regulated and are likely to use leverage and other financial games to pursue even more subprime lending, a repeat of the actions behind the 2008 financial crisis.

Subprime lending is fueling economic unsustainable growth.  For example US auto sales topped 16.5 million in 2014, a nearly 6% increase from the previous year and up nearly 60% from 2009.  When the inevitable slowdown occurs, an increasing number of subprime borrowers will be unable to repay their loans, a repeat of what led to the 2008.

History has demonstrated that booms and busts, and yes bubbles, are at normal part of economic cycles.  However, major macroeconomic bubbles have generally been a once in a generation occurrence that is self-correcting and serves as a reminder to that generation of the pitfalls of imprudent economic behavior.  The collapse of 2008 was different with many investors being bailed out and equity markets returning to their highs within a relatively short period of time.  This has shortened capitalists’ memory who are now once again making imprudent loans in search of returns.  This will lead to another significant downturn in the relatively near future, a probability that investors are ignoring in the belief that when it occurs the government will again come to the rescue.  However, this time the government and the Federal Reserve are themselves deep in deep.  It remains to be seen how this huge sovereign debt will affect the outcome.

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Posted in Bailouts, Bubbles | Tagged: , , , , , | 1 Comment »

Bank of America Settles with US Justice Department for $17 Billion

Posted by Steve Markowitz on August 21, 2014

The Wall Street Journal reported that mega-bank, Bank of America, has agreed to pay a $17 billion fine for its role in the mortgage crisis that led to the 2008 financial meltdown. This is only a piece of the nearly $60 billion the bank paid during the last five years to settle legal problems.

Those who cheer the huge Bank of America fine are missing the larger picture. Certainly many banks used dubious tactics and business practices that help lead to the 2008 economic meltdown. However, willing partners included the US government that pressured banks into giving mortgages to individuals who could not afford them, and the Federal Reserve whose easy money policies were major factors in creating the housing bubble. These issues, along with banker greed and borrowers, were significant factors in creating the bubble and subsequent meltdown.

How did the government respond to those largely responsible for creating economic calamity? First they bailed out large banks and other companies. Then they bailed out some individuals who borrowed too much money.

Perhaps the biggest problem relating to the huge monetary settlements between large banks and the Department of Justice is that the penalties are not placed on the perpetrators of wrongdoing. No executive or bank employee has been charged criminally by the DOJ. This is not by accident. Further, the current fines will be paid by shareholders including pension funds who had nothing to do with creating the problem.

The Department of Justice understands the misplaced logic behind the large penalties imposed on banks today. However, this populist action not only protects those in the private sector responsible for the bad behavior, but deflects attention from the government’s own role in creating the economic problems.

Posted in Bailouts, Banks | Tagged: , , , , , | Leave a Comment »

Cypriot Parliament Rejects European Bailout

Posted by Steve Markowitz on March 19, 2013

Yesterday we posted Cyprus Bailout Taxes Bank Deposits that reviewed the proposed bailout of Cypriot banks by the European Union.  The entire banking system in Cyprus is insolvent and requires a bailout from the European Union, which means from Germany.  Germany has a case of bailout fatigue after the bailouts of Ireland, Greece and Portugal.  Prior to agreeing to the proposed Cypriot bailout, the EU placed some unique demands on Cypriot bank depositors in the form of taxing the deposits.

Today the Cypriot Parliament not surprisingly rejected the bailout plan with not one politician voting in favor of it.  Even if taxing bank deposits was reasonable, no politician could survive in a democracy by agreeing to such terms.

The European Union and its Central Bank should have understood the political realities of their proposed Cypriot bailout, but instead with arrogance proposed a plan that could not be approved by the government.  There is a more dangerous aspect to this error than merely bad judgment.  Should depositors in other European banks fear for the safety of their deposits, contagion could result in runs on banks far outside of Cyprus.  Should that type of panic begin it is hard to determine where will end.

It would not be surprising to see upward pressure on the price of gold as a result of the Cypriot bailout fiasco.

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Cyprus Bailout Taxes Bank Deposits

Posted by Steve Markowitz on March 17, 2013

Cyprus is a miniscule part of the 17 country European Union accounting for only 0.2% of the EU’s total economic output.  Its total economy is valued at only €18 billion.

Cyprus has become the fourth EU country requiring a bailout after Ireland, Portugal and Greece.  Spain has so far avoided an official bailout, but its banks have been given assistance by the European Central Bank.  Other countries are not far behind including Italy with a much larger economy.

This weekend the European Union announced a bailout of Cyprus that includes an unusual requirement.  In return for €10 billion, CNN reported that all depositor accounts in Cyprus’s banks will be taxed a one-time fee on Tuesday.  Those with less than €100,000 in deposits will pay a tax of 6.75% and those with over €100,000 will pay 9.9%.

Not surprisingly citizens of Cyprus have responded with panic, mobbing ATM machines in attempts to withdraw deposits.  However, the banks placed a limit on withdrawals of only €400 and it is reported that there is a shortage of cash.

After making the announcement, Cyprus’s President Nicos Anastasiades justified the action Sunday saying, “A disorderly bankruptcy would have forced us to leave the euro and forced a devaluation”.  In other words, Anastasiades offered the same Progressive doubletalk that the steps were required to protect the people.  However, this justification will be more difficult to accept given the tax levied on depositors.

The reality of the Cypriot bailout is similar to bailouts that have occurred for banks and sovereign debt throughout the world in recent five years.  These actions were taken to protect the banks and their investors, both private and sovereign investors. These flawed policies have also resulted in economies worldwide jumping from one crisis to crisis in a downward spiral.

Attempting to pay for bailouts by taxing bank depositors is a ratcheting up of wealth redistribution towards the financial sector, protecting large banks and fiat currencies.  While the policies may have some success in the first two goals, this move in Cyprus will increase the pressure on fiat currencies.  It is only a matter of time until fear contagion spreads.  If the Cyprus can take money from bank depositors to pay for the irresponsible behavior of others, it is only a matter of time until other countries take similar steps.

In justifying bailouts and irresponsible government spending, those supporting these actions often refer to the learned economist John Maynard Keynes who was a proponent of government spending to offset slowdowns in the private sector.  However, such rainy day Keynesians ignore the second half of Keynes’ theory that requires governments to save for a rainy day during more vibrant economic times.  This part of the equation has not been met in decades.

Economist Keynes was well aware of the dangers of inflation and the related issue of governments debasing a fiat currency.  Keynes’ written below in a 1919 essay says it all.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some…. Those to whom the system brings windfalls… become “profiteers” who are the object of the hatred…. the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Posted in Bailouts, European Union | Tagged: , , , , , , | 2 Comments »

General Motors is Rigging the Numbers

Posted by Steve Markowitz on July 22, 2012

The Daily Caller posted an article indicating that General Motors has been fixing the numbers in order to make itself and the government that bailed them out look good.  The numbers are being manipulated via two methods:

Overbuilding – GM has built more automobiles than the market requires.  In the short run this inflates profit margins as overhead costs are spread over a greater number of units resulting in a lower per unit cost in the short term.  While GM has admitted to overbuilding, it justifies the move based on some supposed future plant closings.

Channel Stuffing – GM has also over shipped automobiles to dealers.  Since sales are booked on shipments, this offers a short-term boost while the inventory grows.  A class-action lawsuit in New York has been initiated concerning this GM tactic.

Both overbuilding and channel stuffing have led to GM having robust second quarter financial results.  However, these tactics will hurt the Company’s quarter results, according to a Standard & Poor’s analysis.  It should come at no surprise that the third quarter figures will not be released until after November’s presidential election.

President Obama promotes his bailout of the auto industry a major success for his administration stating two weeks ago: “When the American auto industry was on the brink of collapse, more than one million jobs were on the line, Governor Romney said we should just let Detroit go bankrupt.  I refused to turn my back on communities like this one.”  A reality check tells a different story:

  • What about the ultimate cost to taxpayers?  GM stock currently sells for about $20 per share.  According to the Reason Foundation, the stock would have to sell for $55 per share in order for taxpayers to be repaid in full.
  • How about the disadvantage to GM’s competitors?  Why shouldn’t more successful companies like Ford, Toyota, Hyundai, Honda, etc. have replaced the failed General Motors?
  • GM’s bailout did not come from thin air.  Successful companies of all types that paid their taxes were penalized for their success in order to bail out the failed General Motors.

The bailout of General Motors was ill advised and cannot be justified by economics.  It once again showed Progressives propensity to reward failure and penalize success.  Just as grotesque, the bailout was payback by the Obama Administration to organize labor in return for future political “favors”.

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Spain/Europe Approaching Tipping Point

Posted by Steve Markowitz on June 10, 2012

What started with bubbles, particularly in the real estate markets, morphed into a larger international  banking crisis in 2008.  Interventionist governments including the United States acted quickly in bailing out the banks and other financially dysfunctional corporations and individuals.  These radical steps in essence bailed out reckless borrowers at the expense of more prudent ones were enacted in the name of saving the world from economic Armageddon.  Nearly 4 years later the worldwide economy is once again heading towards the brink.  Clearly these policies have failed.  But that will not stop the governments from throwing more good money after bad.

The inevitable and huge costs of the bailouts were hiding from the People by using printed money to purchase the bad debt.  This did not eliminate the debt, but instead increased and moved to it to various countries’ balance sheets.  These countries then went about selling bonds to cover this massive debt and forcing their commercial banks, especially in Europe, to purchase these toxic assets.  This has played a large role in creating the banking crisis raging in Europe. with Spain currently being at its epicenter.

Yesterday Spain announced it would accept a $125 million European bailout, the fourth and largest European country to require a bailout in the ongoing sovereign debt crisis.  It is unlikely that this bailout will be any more successful than previous European attempts to stop the economic bleeding.  Already the politicians are bracing for more problems.  After announcing the bailout, Spain’s Prime Minister Mariano Rajoy told The Associated Press: “This year is going to be a bad one.”  Given that 25% of the Spanish workforce is already unemployed, this is an ominous statement.

Jens Boysen-Hogrefe, Kiel Institute for the World Economy economist said of the bailout: “It’s a calming signal at a time when calming signals are badly needed.  The uncertainty is still high and bad news can pop up anywhere in the euro area.  This is not a final solution.”  Translation; the can has once again merely been kicked down the road a bit.

This weekend, Nouriel Roubini and Niall Ferguson published an op-ed in the Financial Times that put Europe’s economic crisis into proper perspective.  Roubini, an American economist and professor at New York University’s Stern School of Business, predicted the collapse of the housing market and subsequent massive recession before these events occurred.  Ferguson is a British historian who specializes in financial and economic history with specific expertise in hyperinflation and the bond markets.  These well respected experts stated in their op-ed titled One Minute to Midnight?:

“We fear that the German government’s policy of doing ‘too little too late’ risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid.”

“…….  Fixated on the nonthreat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent.”

“But now the public is finally losing faith and the silent run may spread to smaller insured deposits.  Indeed, if Greece were to leave the eurozone, a deposit freeze would occur and euro deposits would be converted into new drachmas: so a euro in a Greek bank really is not equivalent to a euro in a German bank.  Greeks have withdrawn more than €700m from their banks in the past month.”

“More worryingly, there was also a surge in withdrawals from some Spanish banks last month.   ….   This kind of process is potentially explosive.”

“Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union.  If they are still not convinced, they must understand that the costs of a eurozone breakup would be astronomically high – for themselves as much as anyone.”

“Ultimately, as Angela Merkel, the German chancellor, herself acknowledged last week, monetary union always implied further integration into a fiscal and political union.  But before Europe gets anywhere near taking this historical step, it must first of all show it has learnt the lessons of the past.  The EU was created to avoid repeating the disasters of the 1930s. I t is time Europe’s leaders – and especially Germany’s – understood how perilously close they are to doing just that.”

Roubini and Ferguson are indicating that the European crisis is a game changer that will require commensurate game changing strategies.  The nickel and dime approach of kicking the can down the road cannot work.  Just as significant, time is running out for such halfhearted approaches.

Many financial experts agree with Roubini’s and Ferguson’s thesis that Europe will require decisive action, and sooner rather than later.  This includes financier George Soros and Nobel Laureate Joseph Stiglitz, among others.

The problem of excessive debt, not only in Europe, but in the United States as well, is the most pressing problem facing the world today.  Governments use of printing presses for problem resolution over the years has made many citizens oblivious to this reality, including some very smart people.  Just last week France’s new President Hollande incredibly lowered the retirement age in his country from 62 to 60 years old.  This will exasperate France’s debt problems.

In the United States debt has been growing at an alarming pace for the past 30 years with it significantly quickening under the tutelage of Barack Obama.  Instead of concern for this serious problem, many Americans focus self-serving economic and social issues.  Unless the Country is on stable financial footing, all Americans will be weaker and have less rights.

Economists John Mauldin said of the financial crisis in Europe that: “Europe has no good choices, only a choice among very distressing and expensive options.”  This same conclusion can be made of all countries with excess debt.  Sovereign debt is an immoral methodology whereby future generations are demanded to pay for the good life of the current generation.  Pulling the plug on this false economic high, like any addiction, is painful.

When a country deleverages, i.e. pays down its debt which ultimately must do, is an unpleasant experience.  Initially, special interest groups attempt to use political leverage to shield themselves from the pain.  This only can continue until a full-blown crisis hits.  That is the status of current Europe and other countries including the United States are not far behind.  Either a country takes corrective action, a difficult task for any democracy, or the cruel and unbending hand of supply and demand will enforce its own corrective actions.

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Federal Housing Administration to Run Out of Reserves in 2012

Posted by Steve Markowitz on February 14, 2012

The Wall Street Journal reported that the Federal Housing Administration (FHA) will run out of reserves this year for the first time in its 78 year history.  Since the FHA has budget authority, it can go directly to the U.S. Treasury for funds without making a request of the Congress.  This is another example of government spending of the People’s money without Constitutional authority.

The FHA was established by the US government during the 1930’s to help facilitate homeownership in America.  This agency does not make housing loans, but instead insures lenders who make them.  Since the housing meltdown, the FHA has had its charter substantially expanded, insuring borrowers who only can afford down payments of even less than 5%.  While this type of intervention may have initially propped up the housing market in recent years, its easy and risky mortgages is cajoling buyers into making an economic decisions.  Specifically, it offers incentives to low-income buyers to purchase homes that are likely to continue depreciating some years.  This not only puts at risk the FHA’s (the People’s) money, but the underwater houses are a long-term financial burden for buyers.

Instead of recognizing the growing problem at  the FHA, President Obama is again attempting to expanded its charter.  Earlier this year the President proposed allowing underwater homeowners to refinance their mortgages through the FHA.  This will place additional risks on the taxpayers since many of the refinanced homes will continue dropping in value with their mortgages ultimately becoming the responsibility of the U.S. Treasury.

People who cannot afford to pay their mortgages and whose home values are significantly underwater need to get out from under this financial burden and that will only occur by walking away from the homes, as distasteful as this is.  The banks and government agencies that made the inappropriate loans need to eat those losses now so that the housing market can bottom and a true recovery can began.  These losses to the banks and government agencies will also be a strong incentive to not repeat similar errors in the future.  It also ensures that those that made the bad loans pay the price, not the bulk of Americans who stayed clear of imprudent financial behavior.

The problem with the housing market is an imbalance between supply and demand.  Any government intervention merely prolongs the downturn as they do not address the imbalances.  In fact they end up creating even more imbalances.  Adding insult to injury, the FHA has become an important player in the mortgage and housing markets in recent years.  When this agency ultimately retrenches in the housing market, as it ultimately must, its negative consequences on the economy will be huge, likely requiring an even large bailouts.

The FHA is another example of a failing governmental agency.  While many private companies run into economic challenges and some even fail, their failure should be viewed as the market’s cleansing of inefficiency.  While such occurrences are unhappy for the failed companies’ owners and employees, it is a healthy process for the overall economy.  This reality was understood by Americans until we started down the slippery slope of bailouts that began before the Obama came to power.  With these bailouts increasing in frequency and scope, it is easy to see that the path is unsustainable.  However, like an addictive drug, stopping the juice is a painful process and politicians are willing to offer the medicine.  The patient will have to get a lot sicker before appropriate treatment will be implemented.  That day of reckoning is coming.

Posted in Bailouts, Housing Market | Tagged: , , , , | Leave a Comment »

The Paradox of Bailouts

Posted by Steve Markowitz on January 7, 2012

Since the failure of Lehman Brothers, governments worldwide have responded with bailouts and flooding the market with liquidity, i.e. printing money.  These radical actions have been justified with the claim that without them, financial Armageddon would have occurred.  It is not possible to now determine if that was the case.  However, it is clear that these actions enabled those who made bad financial decisions to be rescued at the expense of others who acted more prudently.

Unsaid by those who favored the bailouts and other related policies were the potential repercussions of these radical actions.  Some of the repercussions have already been felt, most notably the ongoing sovereign debt issues in Europe and the unemployment rates in the West that remain stubbornly high.  Other lurking issues include new asset bubbles yet the pop and the potential for significant inflation.  Whether each of these possibilities occur is not the issue.  However, there will be costs associated with the alchemy inflicted on the economy by these actions.  The fact that those who implemented the policies refuse to even acknowledge the downside potentials and instead advocate even more intervention is a clear indication of the dangers lurking.

Recently, Dr. John P Hussman of hussman funds.com, posted his New Year’s greeting with his hope for 2012, included below.  These brief comments asked the right questions and points appropriate solutions for the paradox of bailouts.

John P. Hussman, Ph.D. (hussmanfunds.com)

Happy New Year.  We enter 2012 with a great deal of hope, but our hopes are not for more bailouts, or money printing, or any of the myriad policies that investors seem to hope will save bad investments and sustain elevated valuations.  Instead, our hope is that in 2012, the market will finally “clear,” in the sense that bad debt around the world will be recognized as bad and restructured; that overleveraged financials will be taken into receivership instead of forcing austerity on every corner of the global economy in order to make them flush again; that rates of return will rise enough to compensate and encourage saving – and high enough to encourage borrowers and other users of capital to allocate the funds productively.  Of course, in order to restructure bad debt, someone has to accept a loss.  In order for rates of return to rise, valuations must decline.  In short, our hope is for events that will unchain the global economy from an irresponsible past and open the gates toward a prosperous future.  Maybe that is too hopeful, but we are not entirely convinced that bailouts and ‘big bazooka’ will be as easily procured in the year ahead as a confused public has allowed in recent years.”

Posted in Bailouts, economics | Tagged: , , , | 2 Comments »

US Banks’ Earnings Significantly Up

Posted by Steve Markowitz on November 22, 2011

Federal Deposit Insurance Corporation (FDIC) released a report on U.S. banks earnings that indicates overall profit levels are the highest they have been in four years.  While the  government may trumpet this as a sign that their interventions and bailouts have succeeded, a broader look says otherwise.  Here are some of the figures released:

  • The banking industry earned $35 billion in the last quarter, up from $24 billion in last year’s Q3.
  • The FDIC currently considers about 11% of U.S. banks as financially problematic, marginally down for the same period last year.
  • The very large banks made the bulk of the earnings increase.
  • These very large banks accounted for about $30 billion of the industry’s $35 billion in earnings for the third quarter.

The FDIC’s fugues are telling and indicate that the very large banks like Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, the very banks bailed out by the U.S. taxpayers, are now making most of the banking profits.  In addition, these banks are not making the profits by lending money in the quantity needed, but rather by taking nearly interest free money from the government and then loaning that money back to the government at a huge profit.  Ludicrous.

It has become evident through hindsight that the bailouts of the large banks benefited the banks themselves, not the overall economy.  A question remaining is whether the bailouts were the result of mistaken policy or the government’s purposeful attempt to assist fellow elitists in the banking industry.

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Teachers, Tenure, NFL and Wall Street

Posted by Steve Markowitz on October 31, 2011

Discussions relating to the challenges state and municipal governments face often include the cost of education.  While most Americans agree that the educational process needs repairs, proposed actions are debated.

Those on the Left often express the belief that the educational system can be improved by throwing more money at it.  For example, President Obama suggested including billions more for “public school modernization” in his latest jobs plan.  This is in the time-honored Progressive tradition that proffers that any societal ill can be cured by government spending.  If only it was so easy!

The main school of thought is that America’s education problems are more systemic that include a breakdown of family and a corrupt philosophy within unions that rewards teachers for years of service, rather than performance.  This Blog adheres to this view.

Hall of Fame quarterback, Fran Tarkenton, retired from the NFL (National Football League) in 1978 after 17 terrific years.  He has since been an entrepreneur and adviser on small business education.  Tarkenton published an op-ed in the Wall Street Journal some weeks ago titled What if the NFL Played by Teachers’ Rules? that looks into the problems of public education.  To make a point, he interposes the method of compensation and promotion for teachers and NFL players saying: “Imagine the National Football League in an alternate reality.  Each player’s salary is based on how long he’s been in the league.  It’s about tenure, not talent.  The same scale is used for every player, no matter whether he’s an All-Pro quarterback or the last man on the roster. … “.  The result of such lunacy is easy to understand.  Under such a system the NFL would at best offer a mediocre product that few would be willing to purchase and the league would ultimately disappear.

For those like President Obama who claim that more money can address the problem of education, Tarkenton offers the following statistics in rebuttal:

  • Inflation-adjusted spending per student in the Unites States has tripled since 1970.
  • America spends more per student than any other Western country except Switzerland.
  • Spending on buildings and equipment for schools has doubled since 1989, even after being adjusted for inflation.

Tarkenton correctly concludes that one problem with America’s educational system is the method by which its employees are compensated.  Teachers are not rewarded on results or efforts, but merely for years on the job, have little incentive to excel.  Worse, poor teachers who have no fear of being terminated for performance continue to teach to the determent of students.

America’s corruptive compensation practices are not only found in public education and the problem is broader than the way unions demand compensation for members.  For example, there is rightfully much angst being expressed by the Occupy Wall Street movement relating to Wall Street’s compensation for some of the same executives that helped create the Country’s ongoing financial mess.

The federal government played a role in creating Wall Street’s outrageous compensation packages.  First, starting in the late 1990’s, it and the Federal Reserve bailed out Wall Street with historically low interest rates every time the economy slowed down.  This led to bubbles and a belief on Wall Street that there was little risk in their increasing risky behavior.  Had the government let the recessions occur, i.e. required market corrections, during this ten-year period, Wall Street banks would have had poor profit years that would not only have tempered compensation packages, but more importantly tempered their willingness to make what were outrageously risky investments.

The government’s response to the 2008 financial meltdown was even more outrageous, bailing out the very people who caused the crisis.  However, instead of making these capitalist pay the ultimate price for their gross failures, the destruction of their companies, the government bailed them out.  That allowed the same executives to retain their jobs with outrageous compensation packages at the expense of the American taxpayer.  This grotesque crony capitalism started under the Bush Administration and continues under Obama.

Examples of compensation inequities in America are many.  These inequities have intensified in recent years not because of greed or capitalism, but because of peoples’ ability to act on that greed.  This increasing ability to act on greed has been enhanced by unnatural market manipulations that range from union demands for government workers, to governmental bailouts of huge banks and companies.  Unless these unnatural market manipulations are addressed (stopped) the problem of the inequities will continue.  Unfortunately those that govern will instead likely create still more interventions to repair their earlier interventions, which will only exasperate the problems.  This madness will continue until a transformational leader emerges with the guts to break the ties between power groups and those that govern.

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