Suggested Discussion Outline

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johnkarls
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Joined: Fri Jun 29, 2007 8:43 pm

Suggested Discussion Outline

Post by johnkarls »

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Suggested Discussion Outline - “It’s The Economy, Stupid” – Dec. 10th

A. History of the phrase – Bill Clinton’s favorite saying the he kept taped to his shaving mirror for his entire 8 years in the White House.

B. The analysis of our author, Kevin Phillips, in “Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism”

B-1. Starting in the 1980’s, an expansion of mortgage indebtedness, the invention of new financial instruments, and the failure of regulators and ratings agencies to impose order – resulting in total mortgage debt in 2007 three times our gross domestic product, A RATIO THAT SURPASSED THE RECORD SET IN THE GREAT DEPRESSION.

B-2. The notion of “peak production” – that there is only a finite amount of oil and gas in the world, that the production rate has peaked, and that we need to move on to develop other forms of energy.

(Editorial Note: “peak production” first gained prominence in the 1970’s when worldwide production of oil and gas was only 30% of what it is today and, though based on the superficial appeal of the truism that the supply of oil & gas in the world is finite, is very misleading (1) because 75% of the earth’s surface comprises oceans and even though Chevron’s ads at the beginning of each weekday evening’s edition of the MacNeil-Lehrer Report trumpet that oil companies are now able to drill in 25,000 feet of water, the “outer continental shelf” so described is almost a rounding error compared to the area of the earth’s surface occupied by oceans, and (2) because the overwhelming majority of oil & gas present in old and abandoned fields has never been produced and technology is constantly improving there as well to obtain greater production from old and abandoned fields – WE SHOULD “MOVE ON” TO OTHER ENERGY SOURCES FOR MORE IMPORTANT REASONS (GLOBAL WARMING, ENERGY INDEPENDENCE FOR OUR FOREIGN POLICY, FOREIGN EXCHANGE DEFICITS (HOW MUCH LONGER WILL THE CHINESE BE WILLING TO LOAN US $700 BILLION A YEAR TO BUY OIL FROM OTHER FOREIGN COUNTRIES, MANY OF WHOM HATE US), ETC.) – NOT FOR SOME HIGHLY-MISLEADING NOTION!!!)

B-3. America’s “calcified political system” – what we studied last spring under the topic “The Best Government Money Can Buy”!!!

C. Sub-Prime Mortgages – the root of the problem.

C-1. Definition = any derogation of the traditional principles of 20% down and verified ability to repay.

C-2. The Perpetrators = Christopher Dodd (Chair of the Senate Finance Committee) and Barney Frank (his House counterpart) and their Democratic Party colleagues who forced Fannie Mae and Freddie Mac to purchase sub-prime mortgages in order to foster home ownership in inner-city areas – Fannie Mae and Freddie Mac own the overwhelming majority of mortgage loans in America and set the standard for the rest of the industry.

C-3. The vulnerability of commercial banks to losses from holding sub-prime mortgages – typically leveraged at 30:1 (deposits represent 29/30 of their outstanding loans) so losses of any size from any source often spell disaster.

C-4. The vulnerability of the entire banking system to a “classic run on the banks” if large depositors try to withdraw funds in excess of FDIC insurance limits from even sound institutions (“better safe than sorry”) triggering a “fire sale” of banking assets across the country.

D. Bankruptcy

D-1. Review of the basics --

D-1. Definition = (1) an excess of liabilities over assets, and/or (2) the inability to pay obligations when they become due.

D-2. Voluntary vs. involuntary.

D-3. Liquidating (bankrupt not economically viable under any circumstances) vs. reformative (the bankrupt concern is economically viable if, for example, its stockholders are wiped out, its creditors become the new stockholders, its pension liabilities are wiped out (note that except for highly-paid executives, this liability is shifted to the US Government’s Pension Guaranty Corporation), all existing contracts are voidable (for example, to downsize the dealer networks of the American “Big Three” autoworkers by 70% to bring them into line with their market share which is impossible under the laws of most states, and to reduce union contract wages to bring them into line with labor costs of foreign-owned competitors in their plants in the American South).

E. Bail-Out vs. Bankruptcy for Particular Industries/Companies

E-1. Market-makers in the two traditional derivatives (interest-rate swaps and foreign-currency swaps) run like Las Vegas bookies as multi-Trillion (yes, that’s a “T”) balanced books – and the impact on commercial banks that have placed such bets with the bookies, some of whom were now going bankrupt for reasons unrelated to running their books (namely, their having invested in sub-prime mortgages).

E-2. AIG – which issued insurance on investments in pools of sub-prime mortgages while failing to charge adequate premiums for the insurance, failing to provide adequate reserves for having written such insurance, and failing to follow the elementary insurance principle of “diversity of risk” (if you are going to insure a single risk such as homes on the San Andreas fault or investments in sub-prime mortgages, it doesn’t matter how much of a premium you charge because a San Andreas earthquake or a sub-prime mortgage melt down produces bankruptcy for the insurance company – AND, THOUGH IT MAKES “ONE’S BLOOD BOIL” TO HAVE TO BAIL OUT AN INSURANCE COMPANY THAT BEHAVES SO DESPICABLY, THE IMPACT OF A FAILURE TO DO SO ON THE COMMERCIAL BANKS ACROSS THE COUNTRY THAT HAVE PURCHASED INSURANCE FROM AIG FOR THEIR INVESTMENTS IN SUB-PRIME MORTGAGES WOULD BE HORRENDOUS.

E-3. The American “Big Three” Automakers – and whether their long-term viability is attainable only through the kind of reforms that only a Bankruptcy Court can provide, and whether reformation in bankruptcy isn’t the proper “default setting” anyway because of the lack of a broad scale impact on the economy, such as the failure of virtually every bank in America would represent.

F. Conclusions

F-1. Is our policy of keeping the banking system from self-destructing appropriate???

F-2. Should other companies/industries, such as the American Big-Three automakers, be left to reformation in the Bankruptcy Courts???

F-3. In formulating another economic-stimulus bill as will be forthcoming in January, should the emphasis be on traditional public-works projects (roads, bridges, etc.), or should we take this opportunity to spend the money instead on Al Gore’s Challenge to America to Re-Power It Electrical Grid To Rely 100% (except for hydro which would remain in place) on Wind and Solar WITHIN 10 YEARS – in order to (1) comply with Kyoto with 100%-clean electricity, (2) achieve energy independence for our foreign policy, (3) eliminate our balance of payments deficit (borrowing $700 billion/year from China to buy oil from other foreign countries, many of whom hate us), and (4) create American jobs.

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