David Merkel submits: There has been a significant shift in bailout psychology over the last week or two.  The grand shift has been to make the cost of receiving money from the U.S .government smaller, which gets “banks” to line up for…

Everyone has a chance now to buy gold and/or silver. Today right now, dump cash, dump stocks and t-bills and own gold. Gold is at a very low bargain price right now and perhaps near it’s bottom. Gold does not get whacked in this global market. If you stick with equities and paper securities based on the US dollar, you are going to get whacked big time in the next year. So twelve months from now please don’t act surprised your dollars got hammered down to nothing.

Mark
editor@dgcmagazine.com

Stepping back a bit from the immediate situation and looking more philosophically, I would say we have not had a good balance between free markets and regulation. I think George Soros said it best that markets work well most of the time but are inherently subject to self-reinforcing booms and busts, so need regulation to prevent the extremes. Maybe I read you incorrectly, but I think you are more inclined to let the markets work and take the busts that are not made even worse by government attempts to avoid them.

I don’t think that will work in a democracy. A free market inherently favors the rich. The rich get richer and the rest fall further behind. When the downturn comes, the rich get by quite well but the poor suffer. In a country like China or North Korea (not that they are free markets), the suffering masses can’t do anything about it, but in any democracy, the people who would intervene get elected. A truly free market can’t survive in a democracy because the busts hurt the masses too much. The answer is finding the right amount of government intervention so that the gap between rich and poor grows slowly ( it will grow in any case because the rich have the advantages) and there is enough support for the poor and middle class so recessions are tolerable. A democracy requires a strong middle class. That means the rich have to pay more, because they are the only ones who can afford it.

Look at the democracies of the world. They are mostly more socialistic than we are. Look at the recessions of the past in any democratic country. The ruling party is thrown out of office.

How much government intervention is needed? It is hard to say in real time, just like when trading, but I think there are empirical indicators. Besides the obvious economic indicators like unemployment, an important indicator is the gap between rich and poor. Under Clinton, every income group gained when the economy grew. In the last eight years, the richest got richer and the workers lost ground, even as the economy grew. That’s not good for a democracy. So Obama will turn that around.

But as a political independent, I do have some concern that we will go too far to the left. But unlike you, I think Obama is way better than McCain. He is smart and deliberate and balanced. (Do you know that as the first black elected as president of the Harvard Law Review, at a time when affirmative action was a hot political issue, he did not use his position to appoint black editors as he was expected to do; he picked the best people.)

I’ve written on unions in the past. They generally kill the industries that they serve. Non-union steel in the US is cheap and highly productive. They killed most of the unionized steel industry. It wasn’t foreign competition — it was Nucor and the like.

The same thing is happening now with autos. Non-union companies are beating the pants off of GM, F, and Chrysler. And, their employees are paid well. The history of the decline and fall of the automakers begins with the pension and healthcare promises made, and the accounting semi-fraud that allowed them to hide the boom for years, particularly in the 90s, when the market went up like mad.

So, the unions have to give up a lot here, or, they will lose a lot more. Economics can be fought in the short run, but it eventually bites with compound interest in the long run.

I am puzzling over the same thing. I am looking at US Government I-Bonds as a tool to preserve capital. I am not looking at the purchase as an investment but more as a means to preserve savings in a “semi-liquid” format. I will give up the prior quarter’s interest as a penalty if I can simply have 100% of my funds back after 12 months of holding through the redemption date in the far future. I consider that I can easily lose money due to inflation.

However I feel the money is safer in an I-bond than in banks which can have runs and Money Markets whose gov’t insurance ends @ December 18.

Also since FDIC is running out of funds, in the event of banks simply shutting their doors (think Iceland) it could be a while before access to FDIC backed funds is made available.

I’d say you are right in most cases, but this one may be (gulp), different this time.

I get the impression that you think the government should be deleveraging (or at least not adding more debt) right now. If that is indeed what you are saying, how do you respond to those who are arguing now is not the time to worry about national debt? To those who believe deleveraging is only something the government should do during economically robust times? It seems to me, as egregiously large as the US’s debt is, that there is something to be said for the government acting counter-cyclically. That being said I’m no expert.

GM needs to fail in Chapter 11. Since AIG has moved away from insurance business model and moved into a Ponzi scheme, AIG needs to fail in Chapter 7.

Instead, AIG has its loan renegotiated (lower rates), reduced, and partially replaced by equity capital (a gift from you and I). Where is the justice?

Why are traders at major Wall Street bank remnants, who lost several years worth of income, still getting $300,000 bonuses (funded by equity injections from tax payers)? Where is the justice?