It’s been another interesting week in the economy with reality beginning to really take its toll on people’s lives. We’re seeing things happen that we’ve never experienced before. It looks like GM and Chrysler are on their last breath and the banks are having to fess up to where they really stand, which I have a feeling is going to be another big shock should they tell the truth. The foreclosure and bankruptcy rates continue to grow. More jobs are being lost and we’re seeing more and more bizarre episodes of murder and suicide while crime continues on the rise and people are getting angrier.

The talk in Great Britain now is about raising its’ income tax rate to 50% and the speculation is that the US is not far behind. Financial institutions are raising their rates on credit cards to all sorts of ridiculous levels, especially since there will be new rules in place by the middle of 2010, so they better continue to quickly take advantage of people while they still can.

I was reading this week about Russia and how, for about 60 years, the Russian economy and the rest of the Soviet Union operated on the basis of a centrally planned economy versus a state by state driven economy. Economic policy was made according to directives from the Communist Party, which controlled all aspects of the economic activity. And the bottom line is it didn’t work.

Since the collapse of the Soviet Union in 1991, Russia has tried to develop a market-based economy and achieve consistent economic growth. In the early 1990’s  it experienced difficulties in making the transition but starting in 1999 has accomplished its’ goal posting consistent GDP growth for the last 10 years. Russia is currently the fastest growing economy in the G8.  

If you haven’t noticed, our state and local governments are having serious problems as a result of the housing collapse, causing massive declines in tax revenue. So I wonder who is going to have to help the states and local municipalities through the crisis? Could it be that the federal government is going to be taking over greater control, kind of like they’re doing with the banks? If Rick Perry, the Governor of TX has anything to say about it, that will never happen and has no plans of accepting any money from the Govt.

Do you find it at all enlightening that Russia has turned their economy around by moving from a centrally planned economy to a market based economy while the US is now attempting to do just the opposite.
Another fact that I find a bit disconcerting is that Russian arms sales have increased to the point where Russia is first in the world in the sale of weapons. I wonder if any of those weapons have ended up in the hands of any of our enemies? Possibly Iran or Syria?

I mention this because we have really painted ourselves into a corner, with the financial crisis dominating our every waking moment and every bit of our energy at a time when our focus and attention would ordinarily be on other serious domestic and world issues. Every terrorist country in the world is pushing our buttons and we’re spending inordinate amounts of time and money chastising the CIA and previous administrations for cruel punishment of terrorist prisoners who were responsible for killing 3000 Americans on 9/11.

As we attempt to juggle so many challenges, some of the larger banks like JP Morgan/Chase and GS are scrambling to pay back their TARP money because it’s not turning out quite like they had expected. The problem is that the Government is not so accommodating when it comes to the rate of interest that they are charging and also, whether or not they will even accept the money back. Each bank must now meet a stress test approved by the Government to see if it even qualifies to return the money. I wonder how much of their stress will arise from the Government arranged purchases of the failing financial institutions?

I love the fact that the Government has imposed an interest rate amounting to approximately 60% on the banks for the TARP money should they return it and the banks are screaming bloody murder. Now isn’t that a shame when these same caring benevolent banks have been ripping peoples’ eyes out with their loan sharking methods for years.
Listen carefully to what is happening with the banks. They’ve gotten caught between a rock and a hard place since having allowed the Government inside their sanctimonious tower of deceit.

The Government helped JP Morgan/Chase purchase Bear Stearns and WAMU. It also helped B of A purchase ML and Countrywide. It helped Wells Fargo purchase Wachovia. It allowed GS and MS to become banks to save them from their demise. It saved AIG by injecting 150B and it saved Citigroup from going under  also with huge cash injections and all of this was done not in a matter of years or months but in a matter of a few weeks, even days no questions asked.  Never have we seen anything approaching this in the history of our country and the word anti-trust has never been uttered.

OK so the Government supposedly helped all these guys out, in return for warrants on their stock. This gives the Government the option to own all of them should the Government choose to exercise the warrants.

Let’s take a closer look at what has transpired. The Government has structured each of these financial institutions into mega giants. And remember that when the Government structured these deals, they did it at a time when the stock values of each of these banks and financial institutions was deeply depressed and in a crisis mode.

Since, each of them has been supported through cash infusions, they’re earnings are starting to improve. The more they improve the more money the government and the country make should the Government choose to own them. Is the word nationalization starting to come to mind? If you recall, the Government was going crazy, panicking the country that if we didn’t pass trillions of dollars of stimulus overnight, the financial system would collapse. It was almost like a self-fulfilled prophecy driving the prices of all of these companies to distressed levels through fear tactics while the Government came to their aid.

What’s amazing is that this is going to end up a windfall or a bust depending upon who owns what in the end. Are you beginning to understand why JPM and GS want to give the TARP money back? Being in bed with the Government might not be so lucrative after all.

What they’re facing is the following: One, give the money back and pay 60% or keep the money and enjoy their new bed buddy. Not a great choice. A quick calculation 60% of 25B is 15B. I love it. The wolves in sheep’s clothing being one upped by the Government. Not bad.

Just imagine what the executive compensation is going to look like when the Government is through making a few adjustments. I’d love to be a fly on the wall in Jamie Dimon’s office when that happens.

Do you remember how it was suggested early on, rather than spend trillions of dollars bailing out the financial institutions that they ease the mark to market rules which would increase their available assets and ease the immediate cash crunch. Instead the Government gave them multi-billion dollar cash infusions in return for ownership. I wonder how much of this was calculated given that they have now decided to ease the mark to market restrictions enhancing their earnings after the fact.

Ok so let’s take this another step and make the following assumptions. First that the Government owns and controls the banks, some of the largest insurance companies i.e. AIG and we haven’t seen the end of the credit default scenario as it relates to other major insurance companies, also Wall Street as it was once known, the mortgage industry including Freddie Mac, FNMA and Countrywide and most importantly the printing press, that at least for the time being, is keeping them all alive. Second, the Government is going to tax the wealthy at a very high rate. Let’s talk Great Britain at 50%. Third, the Government will control the future job market through infrastructure, IT and green technology. Fourth, they nationalize the health care industry. Fifth, through green technology, they dramatically reduce or even eliminate the need for foreign oil. And, sixth, they create an even larger subsidized low cost housing system that provides housing for the lower class. Keep in mind that a lot of the disappearing middle class will be in the lower class.

What ultimately happens is that we turn into a social state where the government will create trillions of dollars of wealth as the value of its’ stock ownership appreciates many times over while at the same time the very wealthy in America through increased taxes will end up paying down the budget deficit and support those on welfare.

And here we thought the Government didn’t know what it was doing. Actually it knows exactly what it is doing. It’s transforming the country at light speed into big government, big business, nationalized housing and healthcare, government controlled jobs and welfare, and much higher taxes, and they are doing it right before our eyes as Congress has given them an open checkbook.

And that’s this week’s straight talk!