Sunday, December 28, 2008

So Uncle Sam, Is it OK to Reject this Loan?

The recent brouhaha over Bank of America’s denial of a line of credit is a precursor of things to come. Late last year B of A, refused to extend a line of credit to the Republic Windows and Doors company of Chicago. Immediately there were howls of protests. Now disgraced Illinois governor Rod Blagojevich threatened to suspend all state business with the bank. Jesse Jackson – as usual – showed up protesting and passing out turkeys to workers who had started a sit in at the factory because they had been laid off without adequate notice as required under the law. Jackson stated that “This is the beginning of a larger movement for mass action to resist economic violence.”  Even more ominously Barack Obama voiced support of the workers saying that their actions were justified in demanding their benefits and pay.

So what was all the fuss about? B of A had received $25 billion in federal bailout money which in the minds of Blagojevich, Jackson, Obama and the workers meant that it was obligated to support the company. Never mind that B of A said that the company was not viable. Never mind that this was a bad loan. Never mind that the company apparently could not tap other sources of funds. B ob A was obligated  to make the bad loan because it itself was bailed out.

What was interesting is that the B of A and not the company was the object of the protestors. The company said that it could not pay the workers the benefits and pay required by the law because it was out of money. It asked B of A to extend the credit line which Bo A rightly refused to do. So in essence, the company cannot pay back its debt to the bank and the bank is vilified for not making a bad loan.

Bank of America issued the following statement “As a creditor of the company, we continue to honor all of our agreements with the company and have provided the maximum amount of funding we can under the terms of our agreement. By any objective measure, Republic Windows and Doors is unable to operate profitably given the challenges of the current economic climate and its industry. Public statements by management of the company have made this clear. When a company faces such a dire situation, its lender is not empowered to direct the company's management how to manage its affairs and what obligations should be paid. Such decisions belong to the management and owners of the company. Bank of America has worked with the company and shared our concerns about the company's situation and its operations for the past several months. It is unfortunate that the company has been unable to reverse its declining circumstances.”

Well B of A blinked. One week later it announced that it would extend loans to the company to settle the employee claims.  It also announced that the loan would not be large enough to reopen the factory. In other words, the bank just knowingly threw money away. Stockholders should rise up and protest. Executives should be fired. But this is simply a precursor of things to come. If you accept the government’s money you are subject to this type of nonsense. Get used to protests, cave-ins, and ultimately the government telling the banks to make bad loans. I know some will say that “weren’t bad loans what got us into this mess in the first place?” The answer is yes and no. Yes the loans were bad ex post. Those loans when granted were good loans. Its hard to make a bad loan in a market that is appreciating by 20 percent per year. The difference is that now the banks will be forced to make loans that are bad when they are made.

Don't get me wrong. I have little sympathy for the bank for taking the government's money in the first place. I have less sympathy for them now. However, this is a warning shot across the bow of all the banks.

Sunday, December 21, 2008

Dream Cabinet

Lets have some fun. Obama has named his cabinet so I decided to announce mine. Mine is diverse and probably unique since all those named have some expertise in their fields. John Bolton would be great at State as would Sarah Palin at Interior and Schwartzkopt at Defense. My Tennessee bias shows with the selections of Bill Frist at Health, Bob Corker at Commerce and Marsha Blackburn at Transportation. Since Bob Mueller heads the FBI, he should be a natural at Homeland Security. Sanford Bishop has experience on various agricultural committees and I have always admired his level headedness. Miguel Estrada should be on the Supreme Court so Justice would be a great consolation prize. Steve Forbes at Treasury despite his support of the Bush bailout. Tom Sowell is my only living hero so he has to go somewhere. Bob Woodson would reshape HUD as would Michelle Rhee (who is doing a wonderful job transforming the DC schools) at Education. Castro-Wright is CEO of WalMart so he's my pick for Labor. Boone Pickens at Energy would push for all energy sources not just the trendy ones that are so expensive. Ann Dunwoody is the first four star woman general. Enough said.

The Cabinet Dream Team





Hillary Clinton


John Bolton


Ken Salazar

Sarah Palin


Tom Daschle

Bill Frist


Bill Richardson

Bob Corker

Homeland Security

Janet Napolitano

Robert Mueller


Tom Vilsack

Sanford Bishop


Robert Gates

Norman Schwartzkopf

Attorney General

Eric Holder

Miguel Estrada


Timothy Geithner

Steve Forbes

Economic Council

Larry Summers

Tom Sowell


Shaun Donovan

Bob Woodson


Hilda Solis

Eduardo Castro-Wright


Arne Duncan

Michelle Rhee


Steven Chu

T. Boone Pickens


Ray LaHood

Marsha Blackburn

Veteran Affairs

Eric Shinseki

Ann Dunwoody

Friday, December 12, 2008

Where is the Beef?

All the auto executives should be fired by their boards of directors. Given the opportunity to present their case to the American people why their companies are failing, they instead were seen begging before the Congress. It is ironic that the day of their begging for a handout, Honda was opening a new assembly plant in Indiana. Somehow this was lost on the auto executives, the Congress, the press and the American people. Why is it that the foreign auto makers suffer less losses in the United States and the US automakers make money abroad? Instead of addressing these fundamental issues, the automakers just pleaded for more cash. Does anyone really think that this infusion will be anything other than a temporary patch and then they will come back for more? The Congress looking down their noses pontificated that Detroit would get the money if they made hybrids and electric cars - cars that few of us want to own. Hybrids are expensive and make no economic sense for those of us who aren't on a guilt trip about global warming (actually global cooling). Electrics have virtually no range and the batteries are expensive to replace and will constitute a landfill nightmare. Surely, the manufacture of these turkeys will not put the American auto industry back in the black. Congress has an agenda to get the automobile off of fossil fuels and onto more expensive alternatives - the public be damned. Instead of the auto execs forcefully making their point to save their companies by getting the regulations imposed by Congress off their backs, reducing their labor and benefit packages aggressively by seeking significant concessions from the unions and aggressively restructuring their industry, instead they were just a bunch of toothless eunuchs. They have failed their stockholders and their customers. If any company takes a penny of federal money, I suggest that all their executives get paid at the federal pay scale for the senior executive service for they will now be minions of the state.

Tuesday, December 9, 2008

I Told You So (Part 2)

In the Knoxville News-Sentinel on December 2, 2007 I had the temerity to question global warming (that article is posted below as an "older post"). It evoked a firestorm of criticism. The one that I remember best said that I might be right but the world could not take the chance that I was wrong. My sin? I simply questioned the global warming models. Indeed, one climate scientist remarked that it was as likely to have global cooling or no climate change as was likely to have global warming. As one who makes his living constructing and testing models, a model that yields equally conflicting results is of no value at all. What I learned from my heresy was that no evidence can change the minds of the proponents of global warming. It has become like a religion and is now an article of faith rather than fact. What is interesting that when I started thinking about global warming I had a completely open mind - although I was naturally suspicious about any issue backed by Al Gore. As my students know, my philosophy is "if you prove me wrong, I will adopt your position." Well my readings have led me to the position that global warming is a hoax. Isn't it interesting that the same alarmists who twenty years ago were warning about global cooling are now warning about global warming? As one of my students remarked, given the recent evidence which some go so far as saying have invalidated global warming to where no self respecting scientist would now embrace it, it is now fashionable to now warn against climate change. So now comes the report that 2008 was the coldest year in the past decade. Of course, the global warming crowd will say that although 2008 was cold, it would have still been warm to Dickens (presuming that Dickens could be still around at a robust age of 196 - see However, for the rest of us was the following article in the Boston Globe (how apt) by Jeff Jacoby.


Br-r-r! Where did global warming go?

Email|Print|Single Page| Text size  +By Jeff Jacoby
Globe Columnist / January 6, 2008

THE STARK headline appeared just over a year ago. "2007 to be 'warmest on record,' " BBC News reported on Jan. 4, 2007. Citing experts in the British government's Meteorological Office, the story announced that "the world is likely to experience the warmest year on record in 2007," surpassing the all-time high reached in 1998.

But a funny thing happened on the way to the planetary hot flash: Much of the planet grew bitterly cold.

In South America, for example, the start of winter last year was one of the coldest ever observed. According to Eugenio Hackbart, chief meteorologist of the MetSul Weather Center in Brazil, "a brutal cold wave brought record low temperatures, widespread frost, snow, and major energy disruption." In Buenos Aires, it snowed for the first time in 89 years, while in Peru the cold was so intense that hundreds of people died and the government declared a state of emergency in 14 of the country's 24 provinces. In August, Chile's agriculture minister lamented "the toughest winter we have seen in the past 50 years," which caused losses of at least $200 million in destroyed crops and livestock.

Latin Americans weren't the only ones shivering.

University of Oklahoma geophysicist David Deming, a specialist in temperature and heat flow, notes in the Washington Times that "unexpected bitter cold swept the entire Southern Hemisphere in 2007." Johannesburg experienced its first significant snowfall in a quarter-century. Australia had its coldest ever June. New Zealand's vineyards lost much of their 2007 harvest when spring temperaturesdropped to record lows.

Closer to home, 44.5 inches of snow fell in New Hampshire last month, breaking the previous record of 43 inches, set in 1876. And the Canadian government is forecasting the coldest winter in 15 years.

Now all of these may be short-lived weather anomalies, mere blips in the path of the global climatic warming that Al Gore and a host of alarmists proclaim the deadliest threat we face. But what if the frigid conditions that have caused so much distress in recent months signal an impending era of global cooling?

"Stock up on fur coats and felt boots!" advises Oleg Sorokhtin, a fellow of the Russian Academy of Natural Sciences and senior scientist at Moscow's Shirshov Institute of Oceanography. "The latest data . . . say that earth has passed the peak of its warmer period, and a fairly cold spell will set in quite soon, by 2012."

Sorokhtin dismisses the conventional global warming theory that greenhouse gases, especially human-emitted carbon dioxide, is causing the earth to grow hotter. Like a number of other scientists, he points to solar activity - sunspots and solar flares, which wax and wane over time - as having the greatest effect on climate.

"Carbon dioxide is not to blame for global climate change," Sorokhtin writes in an essay for Novosti. "Solar activity is many times more powerful than the energy produced by the whole of humankind." In a recent paper for the Danish National Space Center, physicists Henrik Svensmark and Eigil Friis-Christensen concur: "The sun . . . appears to be the main forcing agent in global climate change," they write.

Given the number of worldwide cold events, it is no surprise that 2007 didn't turn out to be the warmest ever. In fact, 2007's global temperature was essentially the same as that in 2006 - and 2005, and 2004, and every year back to 2001. The record set in 1998 has not been surpassed. For nearly a decade now, there has been no global warming. Even though atmospheric carbon dioxide continues to accumulate - it's up about 4 percent since 1998 - the global mean temperature has remained flat. That raises some obvious questions about the theory that CO2 is the cause of climate change.

Yet so relentlessly has the alarmist scenario been hyped, and so disdainfully have dissenting views been dismissed, that millions of people assume Gore must be right when he insists: "The debate in the scientific community is over."

But it isn't. Just last month, more than 100 scientists signed a strongly worded open letter pointing out that climate change is a well-known natural phenomenon, and that adapting to it is far more sensible than attempting to prevent it. Because slashing carbon dioxide emissions means retarding economic development, they warned, "the current UN approach of CO2 reduction is likely to increase human suffering from future climate change rather than to decrease it."

Climate science isn't a religion, and those who dispute its leading theory are not heretics. Much remains to be learned about how and why climate changes, and there is neither virtue nor wisdom in an emotional rush to counter global warming - especially if what's coming is a global Big Chill.

Jeff Jacoby's e-mail address is

Monday, December 8, 2008

Economic Stimulus

I really hate to say "I told you so" but I told you so. My March 2008 article in the Knoxville News-Sentinel stated that the then proposed economic stimulus package proposed by President Bush would have little impact on the economy. True to their type, the politicians led by President-elect Obama are pushing for a new economic stimulus package. Again, it will do little good but at least it gives the impression that the politicians are doing something. However, it will do harm in that it adds to the already oppressive burden of growing Federal debt. But more on that later. For now, here is the News-Sentinel piece from March 3, 2008.

The economic stimulus package has been enacted adding further evidence that our national politicians have crossed over to the dark side. The package is supposed to keep the country out of a recession. The question is will it work? The answer is no. First and foremost, no package of transitory and temporary measures has ever been effective in stimulating economic growth. Even the politicians know this. Historically the only stimulus measures that have had a lasting impact have been those that are more permanent such as decreasing marginal tax rates and cutting the corporate income tax. Recent research shows that if the Bush tax cuts were made permanent, $76 billion would be added to GDP creating 709,000 jobs. That these measures were not considered shows that Congress wants a thankful electorate with their hands out rather than seriously addressing our economic ills.

It is interesting that our Tennessee politicians in Washington covered the spectrum of choices. One of our senators embraced the package and the expansion by the senate to include seniors on social security and disabled veterans while the other rightly referred to it as a political not economic stimulus package. One of our representatives walked deftly down the middle of the road, voting for the package and then co-sponsoring a bill to reduce the corporate tax rate by 10 percent.

Yet make no mistake about it, this bill would have never been enacted if this were not an election year. First, the size of the package is $168 billion which amounts to about 1 ½ percent of GDP. I have yet to hear how such a small injection is enough to keep the economy out of a recession. Second, a large part of the package is in the form of checks sent to households earning less than $150,000. Research on the impact of a similar tax rebate as part of the 2001 stimulus package shows that the rebates were mostly saved or used to reduce debt burdens rather than spent. Given the impact on consumer’s balance sheets of the recent fall in home values and increasing debt burdens, consumers are not likely to use the money to increase spending. Third, the 2001 stimulus package was enacted with the government running a budgetary surplus. That is not the case today.

Therefore, one thing is certain, there will be a negative long term impact – an further increase in the deficit. This is because the government can raise the money for the package by either borrowing it, increasing taxes or by printing it. All are bad. As pointed out by our senator Bob Corker, it will all be borrowed with a cumulative effect of growing the deficit by over $700 billion in two generations. In effect, our grandchildren will pay for the folly of this Congress.