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RUSH: Now, in looking into the financial mess, as I said at the beginning of the program, who do you trust here? It's simply too massive and there are too many opinions. I mean, you can go certain places and you can find a conservative, say, "I've been talking to the smartest people in the room, smartest people in the room, and they tell me, you know, we gotta do this and we gotta do it now and if we don't do it we're in big trouble." And other people saying, "Well, you know I've been talking to the smartest people in the room here and they say this is a disaster waiting to happen, and if we do this we're going to be paying for this for the rest of our lives and we're going to end up with socialized, nationalized everything," and other people are saying, "I've talked to the smartest people in the room about this, and one thing I have understood, yeah, we gotta be conservatives and we gotta be conservatives first, but this trumps conservatism." And that's the one that got me because, for me, nothing trumps conservatism. There are ways of dealing with this that do not have to include total socialization of the market process or the nationalization of the mortgage industry.
 Now, I went and grabbed a piece today in the Wall Street Journal, and it happens to end up being one of the most persuasive pieces I have read in all of this. It's by Andy Kessler, a former hedge fund manager, and he's the author of How We Got Here, published in 2005. Let me join his column in progress: "Here's what's happened so far. New technology like electronic trading meant that Wall Street's bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves -- lots of them, often at 30-to-1 leverage. The financial products were made 'safe' by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.
"Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street's balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board's mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit. There is a saying on Wall Street that goes, 'The market can stay irrational longer than you can stay solvent.' Long Term Capital Management learned this lesson 10 years ago when it got its portfolio picked off by Wall Street as its short-term financing dried up. I had thought the opposite -- hedge funds picking off Wall Street -- would happen today. But in a weird twist, it's the government that is set up to win the prize.
"Here's how: As short-term financing dried up, Fannie Mae and Freddie Mac's deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company. Taxpayers will get their money back on AIG. My models suggest that Fannie and Freddie, on the other hand, are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far--" and let's not forget that. I thought it was $300 billion, but we've already put at least $200 billion into this whole process. And he said, "For $2 billion in cash up front and some $200 billion in loan guarantees so far, the US government now controls $5.4 trillion in mortgages and mortgage guarantees. Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They're called distressed securities for a reason."
The bottom line is that he says the government, if Paulson is able to buy up all these mortgages -- and, by the way, most of them are not into foreclosure yet. Most of them haven't defaulted. If Paulson, if the Treasury is able to buy up for $700 billion, $800 billion all of these mortgages and hold onto 'em and then sell 'em off as the market value is established on them, this guy's model say anywhere from $1.1 to 2.1 trillion could be realized by the government being in the mortgage business, the government as an investment bank. He says, "My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion -- the greatest trade ever. Every hedge-fund manager will be jealous. Mr. Buffett is buying a small piece of the trade via his Goldman Sachs investment." And, by the way, a lot of people are saying this means we've reached the bottom. When the smart money gets in, the smart money in this case being Buffett -- by the way, I never have trusted a guy named after a smorgasbord. But nevertheless when they're saying the smart money gets in, Warren Buffett gets in, that means we're near the bottom of the market. And that's one of the reasons why the Dow Jones Industrial Average is up a little bit. |
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Now, I have some thoughts on this because this piece makes it clear this is not a bailout. It's a rescue. Now, these things still have some value. I don't know what the value is, and they haven't been foreclosed on. They're pretty close to worthless, but it's not technically a bailout. And of course you're hearing all these warnings if we do this then there's not going to be any credit. Okay, now, what does that mean? Well, it could mean something like this. Now, I'm just giving you an extreme example. It could mean that all of our credit cards, outstanding balances are going to be called in, 'cause there's no more credit. If the credit markets have no cash to lend money, and if the assets that they hold are worthless, then there's no credit, and if there's no credit, there's no expansion. If there's no expansion, there's no growth. Now, this is an extreme scenario, but they're using two things to sell this rescue plan. They're using fear of you losing and everybody losing their credit, and the come-on, "Wow, look how much money the government can make here, $2.2 trillion, can you imagine the debt service that we could --" debt service. Remember the peace dividend? What did they do with it? It didn't even exist. They grew the government. This is the kind of money, if Obama is elected, this is the money that will fund all of his brand-new big-time social programs. There's a lot to think about here.
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RUSH: Okay, here we go. The piece I just read to you, Andy Kessler, I should give you the headline. "The Paulson Plan Will Make Money for Taxpayers." He's a former hedge fund manager, and that's how he analyzes this. He's one of these economists that has commuter models and he's run some projections. Now, if this guy is right -- and who knows? See, we don't know who to trust, and we don't know who's going to end up being right. Our experienced is, "I'm from the government and I'm here to help you," means we're going to get screwed. And we know there's not one single person involved in this I trust with that prediction. There's not a Ronald Reagan here. If a Ronald Reagan was saying, "We gotta do this," I would believe it. There isn't one of those. So you've gotta scrounge around. It's actually a great educational process.
Snerdley came in today and said, "I have never worked harder in my life trying to understand this financial thing. I've been spending more time this past week working on trying to understand this. 'Cause this is all Greek, all this lingo jingo they use, talking about these derivatives and the credit swaps," but it has been an amazing educational exercise. But if this guy, Mr. Kessler, is right; it underscores points made prior to today by me on this program. Number one: that the federal government is nationalizing the financial markets. I don't care what anybody says, this is nationalizing the financial markets. Number two: these loans (he makes it clear in this piece) have not yet defaulted, even if they are risky. Number three: when the market recovers, the federal government will be able to make lots of money selling the undefaulted loans back to the private sector. Even if they're sold below their original value, it will be more than the government paid to take them off the hands of the financial institutions today.
It's made clear by Mr. Kessler in his piece. Also we can conclude since he's a former hedge fund manager and he likes this, that Wall Street's desperate for this to happen so that these financial institutions that are in need of cash can get it and get it fast, whatever price they have to sell their loans for. Cash is king right now, they don't have any, and they need it. They can't borrow. They can't lend. They can't do diddlysquat. The federal government, as Mr. Kessler makes clear, will have a windfall of potentially trillions of dollars -- which, experience tells me, will be used to expand the size of government. I have yet to see a budget one year less than the budget the prior year. I have never seen the federal government with a huge stash of money that it didn't expect, say, "You know what? We might be able to make a dent in Social Security here if we put a little aside. We might make a dent in Medicare. Maybe we could cancel the..."
They come up with new stuff to spend it on. So that's why I look at this as if Obama gets elected, this windfall, if it happens, will pay for all the new programs at the front end. Whether the money is realized or not, as long as we're being told, "Hey, this could generate $2.1 trillion," they're going to start spending it now. Especially if it's Obama. McCain... Let me go on now. Warren Buffett here is posed to make another fortune. He is an Obama advisor. Soros made a fortune betting against the British pound. George Soros in the currency markets, made a billion dollars betting against the British pound. So you watch people who make the money on this thing. Who are the people that are really going to make the money on this? Is it more than just making people whole and able to do business again?
Does it contain a lot of golden opportunities for people to take some of this stash and enrich themselves personally? Now, these are the kind of rules there are going to have to built into this. I'll tell you, as you go through this and you understand it, what becomes clear to me -- and I said at the beginning of this hour, "Who do you trust?" I trust conservatism. Conservatism and free market economies work. It is based on growth. You want to spur Wall Street? You want to give those people some confidence? You want to give 'em some cash right now? Just suspend the capital gains rate. Just end it. It's now 15%. Take it to zero, for a year or two. You watch what happens. You watch what happens to the Dow Jones Industrial Average. You watch what happens with all the money pouring in. "But we'll not get our share in the government!"
Wait a minute. I thought this was more important than anything. We're hearing, "We've gotta do this or it's over". So can't you guys in government maybe do away, just for a year or two, with the capital gains tax? Can't you just look at the upside? You're going to get all these new trillions by taking over all these mortgages. Maybe you could get rid, too, of the corporate tax rate for the same period of time. Try a little conservatism here. We don't have to have this all decided by five o'clock this afternoon so that we can do our debate tomorrow night. Every time I hear, "We don't..." I mean, people have been telling us the fundamentals of our economy are strong. There's no be pro. All of a sudden yesterday, past two days, "If we don't get this done by the end of the week, I don't even want to think about it." Well, whatever else they're going to do, put some conservatism in it. Cut taxes! Spur growth! We know how to do it. It works every time it's tried, and it will generate so much revenue that the $700 billion will not be needed. |
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RUSH: I want to continue analysis of this, because we don't know who to trust. The definition of terms eludes us, default credit swaps, derivatives, all of these things that just got piled and piled and piled on top of each other to the point that there's a debt that nobody can pay except the government. And they can do it because they can cheat.
They can print money. They can say they've got all kinds of money that they don't have, just borrow it or what have you, print it. But here's what, again, just to rehash: What it appears to me has happened here is the federal government is nationalizing the financial markets, at least for a time. These loans are not, as I said yesterday and mistakenly so, worthless. They have not yet defaulted. They're risky, but they haven't yet defaulted. The market will recover. It always does. When that happens, the federal government will be able to make lots of money selling the undefaulted loans back to the private sector, even if they are sold below their original value, it will be more than the government paid to take them off the hands of the financial institutions today.
Number four: Wall Street is desperate for this to happen so that these financial institutions that are in need of cash can get it and get it fast. Whatever the price they have to sell, there are loans for it. They don't have any cash. They can't borrow, they can't lend. They can't do business, and it's not just that. I mean, there are stupid accounting rules. I'm going to get to all that here in just a second. The federal government, as Mr. Kessler, Andy Kessler of the Wall Street Journal today makes clear, the federal government will have a windfall of potentially trillions of dollars if his computer models are accurate -- which they will, I think, use to massively expand the federal government. I have yet to see a massive pile of money show up that was unexpected that's either given back to us or used to reduce debt.
And that takes me to this business that taxpayers "stand to earn a lot of money on this." You see them use that phrase as they try to sell this. "Taxpayers could really score!" Now, don't insult us. They don't mean us when they say the taxpayers could really make out. They mean them, they mean the government. Do you think...? Let's say that this guy is right. Let's say that all of this at the end of the day generates an unexpected $2.2 trillion to the government. Okay, there are maybe 40 million taxpayers. The population is 200-some-odd million. We've got a lot of people in the cash economy, and a lot of kids that don't file tax returns. I'm guessing that it's -- Well, just for an even round number, let's say a hundred million people file tax returns.
So you divide a hundred million into $2.1 trillion, whatever they get, are they going to send us each a check? So how do we stand to profit? Especially if they're just going to use all this new-found money to expand the government? And I guarantee you, if Obama wins the election and this deal gets cut, they're going to think they've got between a trillion and two trillion that they didn't plan on, and they're going to start spending it now on his social programs and all these other promises that he is making in order to enrich Democrats and their electoral chances in the future. Now, the fix for this -- and apparently it's already been taken, it's already been done. We just don't know what it is, but I trust conservatism. When in doubt, I go to conservatism. Growth, growth, growth is the answer. It always is, in economic matters. We need to attract more investment in our country, not less.
We need to take down the obstacles which stand in the way of investment, which are confiscatory taxes on capital investment and successful business activity. We have got to stop punishing success and punishing risk. We need to reward it. Successful business activity is called what? Profits. Our government can't wait to tax 'em. We have the second highest corporate tax rate in the world. That's not going to help us attract new investment. Get rid of the corporate tax rate for a year or two. Same thing with the capital gains tax. Get rid of it. Watch what happens. You watch the investment; you watch the stock market. You watch everything that happens, in terms of growth. Now is not the time to continue to promote, through our tax policy, Big Government and socialism, which is the purpose of high corporate income tax rates and capital gains tax rates. |
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You legitimately pump new money into our economy by getting it out of Washington, and you do that by cutting taxes. I know the cap gains rate is only 15%, corporate tax rate's 35%. You want growth? You want money in the economy? You know, the economy is not just Wall Street. And, by the way, when you hear these clowns talk about, "We gotta make sure we protect Main Street." Main Street has one definition in all this, and that's the people who are holding all of these mortgages that they can't service, that might not be paid back. That's Main Street. Main Street's not the five-and-dime and the building and loan as in It's a Wonderful Life. That's not the Main Street that they're talking about now. So there are things that we can do economically.
Whatever this deal is, it will be compounded as a disaster, if Barack Obama is elected president and has a Democrat House and a Democrat Senate. That's why, in addition to whatever we do economically, we can do some political things, 'cause this is largely a problem caused on the political side of things. This is not a free market screw-up; this is not a capitalism flaw. This was all caused by Democrats in government! If there were a Republican to blame, he would have been found and he would be in jail, or his life would be ruined as the result of never-ending congressional hearings. We have to continue to identify, to expose and punish the politicians who are responsible for undermining the market with political demands for risky loans to risky borrowers -- and they used the power of their positions to force this.
There were loans that were made out to people who were not even asked to explain what they did for a living! There were countless mortgages given to illegal aliens and other minorities, without any concern that they be able to pay it back. This is the "compassion" that Democrats talk about. This is their definition of affordable housing. This is the "good intentions" of their large hearts. Once again, we see their good intentions have totally bollixed up what used to function as a really rational market: the mortgage industry. So we have to do what? We have to punish Chris Dodd by throwing him out of office. We gotta punish Barney Frank by throwing him out of office. We gotta punish Chuck Schumer by throwing him out of office.
Now, these three and others are protected from the national popular will because they are elected from very blue parts of the country. Nevertheless, the people who are responsible for this, even after all this is settled, their roles must be highlighted. Their roles in obstructing the kinds of changes in policy that would have helped lessen the current crisis. There were warnings given throughout this decade about Fannie Mae and Freddie Mac, warnings from George Bush and other places -- and Barney Frank and Chris Dodd and Chuck Schumer and all the others didn't want to hear about it. "It's fine. There's no problem here." They stood in the way of, quote, unquote, "reform." |
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We have to identify what was done as a matter of political and social policy that precipitated all of this, including the creation of subprime mortgages. In the first place they were created and they were hailed as a way of helping people buy homes who didn't have the income to buy homes. Jimmy Carter, Bill Clinton took credit for this when they did it but they are evading responsibility for it now, and the house of cards has collapsed and Clinton's even out there on Good Morning America (while dropping neutron bombs on Obama, by the way) suggesting that he did everything he could to get this whole thing fixed. He's the architect of this! And it must be said over and over.
Now you've got people like Warren Buffett, hailed as a great businessman and other people like him, hovering over all of this, looking for ways to make billions and billions more dollars -- of course with the government's help. They support this massive bailout because they see it as a way to make another fortune. So Buffett buys a big stake of Goldman Sachs, which is Hank Paulson's former firm. He's not doing that out of philanthropy. He's doing it because he knows one day these risky loans are going to one day have value. He wants to be around to profit from them when they have value, which is fine. But it ought not be on the taxpayers' dime, and it's going to be.
We have far too many people who are becoming rich from government policy rather than the give-and-take of the free market. So put simply, based on this article I read in the last hour from Andy Kessler in the Wall Street Journal, the federal government appears to be the only entity capable of coming up with the enormous amount of money it's going to take to take over these loans -- which have not failed yet but which the government itself requires these banks to devalue as assets. Now, they are required to base their value on current prices. This is what mark to market is. That is a change forced on them by the Sarbanes-Oxley accounting legislation, which was a clarifying, typical overreaction to the Enron thing.
So rather than being able to peg asset value down the road, you have to peg it to asset value today. And that's why some of these firms are going under, because the value of what they hold is so little, that their stock prices plummeted, nobody wants to invest in them -- simply because of an accounting change! That's another thing that's gotta be done away with. Go back to the old asset-counting rules, accounting rules, get rid of mark to market. These people in Washington who have never run businesses, who have no clue, who set up things to fail in the first place -- then when they fail, they get to act like they are innocent bystanders and spectators and say, "Well, who screwed this up? We're going to punish whoever did it and then we're going to fix it," and they just bollix it up more and more.
So this accounting rule, mark to market, the banks have to off-load these loans, and what Paulson is saying is, "Okay! (applause) hey, hey, I've got the money. I'll buy 'em at a fire sale, because I got a blank check. Or I want a blank check and I'm probably going to be given one here in a couple days because I've created the necessary panic." So, our government buys them, holds 'em, waits for the economy to pick up -- or rather than wait, primes the economy to pick up through spending and monetary policy, possibly risking inflation (maybe not; who knows?) Anyway, going to drive up the value of these risky loans, then they going to start to sell 'em back to the private sector at a huge profit, and that's where we "taxpayers" supposedly are going to make out like bandits.
I guarantee you we'll never see a dividend check. So the federal government is going to take the trillions or so that it makes of all this and -- if say, Obama is elected -- use it to further massively expand the size of federal government. And they're going to have trillions more to do what they always do, not pay down the debt, not shore up some entitlement program, but expand government. That's what always happens. Another problem with all of this -- and I hear no talk about getting rid of these community reinvestment loans, which started this entire mess, and I hear no talk about eventually getting rid of these government-run companies, Fannie Mae and Freddie Mac. I hear that we need to increase regulations on the private sector! We need to increase taxes on the private sector.
No! We need to get rid of some of these stupid government ideas and institutions that caused this. This is not a capitalist problem. You know, more than ever what we need to do, is we need to dust off old Milton Friedman's proposed constitutional amendment that would limit how much of the national economy the federal government's permitted to consume. His amendment would have limited federal spending to less than 20% of GDP (I think that's what it was) as the best way of preventing the federal government from destroying the economy. If the economy grew, the income to the federal government would grow in absolute terms. If the economy shrank, so, too, would the absolute dollars coming into the federal treasury.
Now, there were severe emergencies like war where the cap could be raised in his constitutional amendment. It's not going to happen. Nothing happens unless and until it becomes part of the national dialogue, and until we see exactly what's happened here, it's going to be difficult to do, you know, on-the-spot analysis of it. Victor Davis Hanson today writing at National Review Online says (summarized), "Hey? Hey, gang? We need a reality check here. Who elected all these shady politicians of both parties? Who fostered the cash-in culture in which both Wall Street profit-mongering and Washington lobbying are nourished and thrive? We citizens did. Red-state conservatives, blue state liberals, Republicans, Democrats alike, we may be victims of Wall Street greed, government excess, but not quite innocent." 'Cause we keep reelecting the same crowd to go back despite knowing all they're doing wrong. He titles this piece, "Dr. Frankenstein's Wall Street." |
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