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The Middleman

Over the past 40 or so years, our nation has spent trillions of dollars fighting the “War on Poverty,” and poverty has won.  We have the same problems we had 50 years ago, only now they have become intractable and institutionalized.  We still have children going to sleep hungry, only now we have more of them.   We still have a dilapidated housing stock, only now they are run by the government in lieu of the slumlords who ran the tenements of yore.  The children of the poor are herded into public schools – which are objectively worse than they were 50 years ago – where the primary purpose appears to be to prepare them to operate within another government run institution – prison.

The usual “waste, abuse and fraud” plays a part in it; but even if every dollar of waste abuse and fraud were eliminated, the dire poverty in the world’s richest economy wouldn’t abate.

The spectacular failure of the “War on Poverty” has a second more dire consequence: It creates resentment among those who pay the taxes to fund the monstrosity of social programs and the unintended social ills that they cause.

The “welfare queen” using the EBT cards to buy lobster, or the Section 8 housing recipients who bring the ghetto to the leafy oasis of middle class suburbia, are tales told to manifest the frustration and the dual resentments that working and middle classes have toward both the poor and their government benefactors.

There is a basic rule in economics, which is that “You create what you subsidize,” and its corollary, “You destroy what you tax.”   In the case of our social programs, we have inadvertently done both, with the middle class further refusing to assist the poor, having delegated that responsibility to the government, or refusing to pay more taxes until the government can show results for the money it has already extracted from their paychecks.

The poor have essentially been written off, as non-participants in the economy, having become, in practice, wards of the state.  Meanwhile, the poor continue to exist out of sight, essentially living from check to check, hand-out to hand-out, in a hopeless dreary cycle of monthly survival.  Hope for a better tomorrow, self-empowerment, realization of self-potential, a healthy and nurturing environment for children – these were the first casualties of this War on Poverty.

There is no effort to impart life skills, basic literacy, or a quality education. The pool of talent – including artists, musicians and poets – lies untapped and unfulfilled as still another casualty of the war.  Everything has a cost, and in this case, the cost in terms of contribution to our society is incalculable.

The money taken from our paychecks through the threat of force does not go to help the poor; it is consumed instead by the self-perpetuating machinery of government and the corporations, which benefit from a large population of uneducated consumers to buy their products.  (The largest lobbyists against reforming the welfare state are not civil rights groups or poverty advocates, but America’s largest processed food corporations, convenience store trade groups, and others who benefit mightily from a captive market.)

The real benficiary of the largess is not the poor, but the state and government agencies, convenience stores, processed food merchants, slumlords collecting section 8 vouchers, and civil rights charlatans who rarely lose an election by mixing government aid programs with a mutant form of civil rights.

So the poor remain poor, only more so.  Children remain hungry, only there are more of them.  The politicians promise more, the programs get larger, the poverty gets greater, and the middleman and his minions in the government grow fatter and richer in the process.

Having achieved success as the “middleman” in its war on poverty, the government has spent the bulk of the last 40 years making itself the middleman in every other possible transaction: housing, food, energy, banking; and now the government will come between you and your doctor.

The government is now the ultimate middleman: it takes a vig, a percentage of the take, regardless of the outcome.  Now it promises to do for your healthcare what it has done for the housing market, energy market, and poverty, and that is to get its cut.  The government is the ultimate middleman

Our Economy… A Natural Disaster!

On the scale of natural disasters, few events can match the sheer scale and destructive capacity of a hurricane.  Big, lumbering, and unimaginably powerful; and on average, over 400 miles wide!  Hurricanes have leveled entire cities, changed the direction of rivers and permanently altered the things we, as humans, believe to be permanent.

           In 1900 the city of Galveston, Texas, had grown from a little settlement to an international destination. Its natural deepwater channel made it a prosperous seaport. Its position along the Galveston Bay, proximity to the Gulf of Mexico, and link to the railroads, made it a natural trading point. For a time it was Texas’ largest city. Its wealth and stature at the time rivaled San Francisco and New Orleans. It was considered one of the wealthiest cities in the country. With wealth comes technological development and social refinements. According to The Texas State Historical Association (TSHA), as cited in Wikipedia:

“During this golden era of Galveston’s history, the city was home to a number of state firsts that include the first post office (1836); the first naval base (1836); the first Texas chapter of a Masonic order (1840); the first cotton compress (1842); the first parochial school (Ursuline Academy) (1847); the first insurance company (1854); the first gaslights (1856); the first Roman Catholic hospital (St. Mary’s Hospital) (1866); the first Jewish Reform Congregation (Congregation B’nai Israel) (1868); the first opera house (1870); the first orphanage (1876); the first telephone (1878); the first electric lights (1883); the first medical college (now the University of Texas Medical Branch) (1891); and the first school for nurses (1890).”

           But according to David G. McComb, “Handbook of Texas: Galveston,” the TSHA handbook and also cited on Wikipedia, “With this prosperity came a sense of complacency.”

           Now, Galveston is never mentioned in the same breath as Dallas, Houston or even San Antonio, much less San Francisco or New Orleans. It was, in an instant, obliterated from the map on September 8, 1900, by a hurricane, indifferent to human perceptions of permanence.

           According to the 1900storm.com, it is estimated that between 6,000 to 8,000 people were killed.  “Pictures taken after the storm show empty streets. No people. No animals. No trees. No personal belongings. Only piles of debris that buried families beneath the remains of their homes. Bodies occasionally hang outside the debris piles. But, for the most part, an eerie emptiness paints a picture few words could describe.”

           Galveston in 1899 is much like America in 2012. We have been prosperous to this point, were a nation of many firsts, pioneers in innovative technology and social refinement. And just as the good people of Galveston could not anticipate that unseen forces could permanently destroy their city, Americans, too, are blissfully unaware of their hurricane, a financial hurricane, which is barreling towards our shore.

           Just as the wealthy citizens of Galveston ignored pleas to build a seawall, their wealth having made them complacent to the grave forces churning off their coast, Americans and our political leaders are likewise complacent in tending to our nation’s immense and growing financial problems.

           The first winds of the hurricane have already come to shore in the form of the Great Recession, the housing bubble, the zombie banks, new waves of regulations intended to keep banks from losing money, QE1, QE2, the soon to be announced QE3, the Twist, a misguided effort to lower interest rates even further, insolvent banks buying Treasury notes and a growing storm surge of municipal and state bond defaults.

           Galveston, the day before the storm hit, was a growing and prosperous city, its community, and business leaders, were focused and dedicated to growth and expansion and were enjoying the fruits of wise investments. New trolleys were operating, new causeways were built, new bridges and railroad links expanded its importance.

           The America that is about to be hit with the real winds of the financial hurricane is not so prepared. We are entering into financial turmoil, already insolvent and overextended. Our finances a mess, our cities in decay, our banks propped up by the government; every aspect of our financial lives regulated and administered. The real unemployment rate instills fear and doom. Growth is stagnant, wealth has been destroyed and every major economic indicator is heading south. Stagnant is the new normal.

           It is against this battered shell of our formerly great nation that the sharp winds will begin to pound. The implosion of the euro, the eventual rise of interest rates, the return of high fuel costs, the bursting of the current stock market bubble, the moribund housing market, the major default of a state or municipal government bonds – or all of the above, as well as the usual bevy of unforeseen events – has the potential to do to America what the Storm of 1900 did to Galveston: reduce it to ruin.

           Destroyed by complacency. The dire financial consequences of trillion-dollar deficits are unheeded by the intelligentsia. Run-away government spending. Too big to fail, artificial interest rates, stimulus and billion-dollar bailouts, mete out their inevitable outcomes: a teetering financial system and economy.  A financial system that has been hobbled together with government trickery and schemes, which cannot, at this point, weather even the stiff breezes of a moderate recession, stands little chance of surviving any one of the myriad of potentially lethal financial calamities heading our way.

           The relative calm we have enjoyed since the collapse of Lehman Brothers in 2008 is not the end of the financial crisis, but almost imperceptibly is the eye of the hurricane.  The financial hurricane is slowly churning our way, fed by ignorance and complacency.

           Galveston finally started building a seawall in 1902, too late to prevent the city from being smeared from the map and denied its rightful place in history.  Today in 2012, we have work to do build our economic seawall: Shuttering the insolvent banks and selling of their assets; canceling “too big to fail”; reinstating the Glass-Stegall Act, holding bank officers and directors responsible for criminal activities; forcing those who invested in or sold shoddy mortgage-backed securities into suffering the losses that they deserve; readjusting interest rates from the artificial rate of zero to prevent new asset bubbles from forming; and doing all the things that make first-rate economies. We no longer do any of them.

            Just like Galveston, America has become complacent and soon will pay for its folly of ignoring the signs of the impending calamity. Isaac Cline, a meteorologist, “watched the swells rise, the barometer drop and the winds grow stronger. He rode up and down the beach on his horse urging visitors to go home… but his warnings proved fruitless.” (1900storm.com)

Today, mainstream economists who were wrong in predicting the housing bubble, the Lehman collapse or the euro’s doom, who never saw the financial collapse coming, and whose remedies have weakened us further, are once again complacent. They can’t even see the swells and there is no seawall.

The Government – Too big to fail, too connected to care!

This week’s headlines include a rising unemployment rate, a slowdown in factory orders, and the slow disintegration of the Euro.

As the recession enters its sixth year every trick has been tried as the economy skitters off a cliff.

We have tried stimulus and austerity; we have tinkered with tax incentives and quantitative easing 1, 2 and soon-to-be-announced QE3. We have reduced payroll taxes and lowered mortgage rates to historic lows – and yet the economy refuses to soar, lying there like the soft deflated balloon it has become.

Policy-makers, politicians, and economists bicker about what type of extreme action is necessary to raise our flagging fortunes.

This is not the first time that the economy has had a crisis.  Modern capitalism has suffered panics, bubbles and crashes repeatedly and often.  Part of its genius is that it will brutally reallocate resources from less productive endeavors, cure oversupplies, and staunch irrational exuberance, when allowed.

That is the problem.  The government and the politicians have developed a policy that, once adopted, has drained our economy of its dynamism, and perverted it to a system akin to an old Soviet style 10-year plan.

Every policy and plan developed over the past six years has been developed to stop the economy from crashing once its foundation has been removed.  The government calls it “too big to fail.”

“Too big to fail” is nothing short of the government indirectly seizing control over the economy.  The companies it helps with our tax dollars are free to spent our money as they see fit, with no concern for risk or profitability.  If they win, the stockholders make money; if they lose, we get the bill. It’s a bigger version of the old “Heads they win;  tails we lose.”

Worse than that, the government now gets to pick the winners and losers.  Goldman Saks gets a $10 billion loan; Lehman Brothers, who didn’t kiss the ring of the powers-that-be, gets the boot.   Bank of America gets the President of The United States of America trotting out Warren Buffet to extoll the virtues of its stock, while WAMU is given to JP Morgan Chase in a sweetheart deal with the government.

The economic malaise will continue until failing banks are closed instead of being bailed out, until stockholders are forced to bear the loss of poor risk management, and until the government’s power to pick winners and losers is rescinded.

As a side note, don’t believe the panic mongrels who will tell you it can’t be done. In fact, it was done in the last banking crisis; the resolution trust was created, failing banks were seized, assets were sold to healthy banks, and no performing loans were worked out – just as it’s always been.

“Too big to fail” means too insolvent to prosper and too connected to care.

Why the Middle Class is Dying

A line of late model cars and trucks snaked its way around the low hung block building.  Newer cars of all makes and models stand in an orderly procession around the Las Vegas Mission.  Security guards directed traffic as the morning sun glinted off the windshields.   The procession started at the gate, poured onto the right traffic lane, encircled the entire block and then started to the lap itself.

Radio station promotion?  Tickets to hot a show or a perhaps a celebrity working off community service hours at the soup kitchen?  Consumed by curiosity I flipped a U turn and pulled up the to the guard.  His response left made an indelible mark in my perception of reality.  “They are here for a bag of groceries.”  He began to describe the assortment of foods that were being handed out, but my mind wandered as I contrasted the clean newer model cars to the purpose for which they had been put to use.  This wasn’t a concert or basketball game, it was people in new cars waiting patiently in line at 7:30am for food.  My mind reeled at the implications and each question begot others.

These people at one time had jobs and could afford food, but there they were,  in the richest country, in a wealthy city, people were waiting in line for food.  Not drunks or people off their meds, real working people who probably dropped their kids off at school, or used to live nice middle class lives, in line for food.

It was a modern-day bread line.  It was not like the pictures of the 30’s with smartly dressed men in topcoats and fedoras.  It was our modern version, Toyota’s, and Fords and pickups.  They were suffering alone in the anonymity of their cars listening to the radio, or an iPod and idling patiently for food.

I was appalled.   Not out of some ventricle of a bleeding heart for other more prosaic reasons.   These were people, who when they worked, contributed mightily to the government coffers. Despite the blathering of the news media we all know that the rich and the poor don’t pay taxes.  The superrich, like a giant corporation like GE, earned $70,000,000,00.  ($70 Billion) and paid not one thin dime.  They have the political juice it takes to write the laws to their advantage, before a dime is invested.  While you and I must follow the tax laws, the super wealthy have the unfair advantage of calling upon our elected officials to write the laws as it suits them.  It’s a game that they can’t ever loose and we can’t ever win.

As the mangled tax code allows the rich to escape paying any taxes, it simultaneously rewards the poor for being poor.  Earned Income tax credits, a myriad of social welfare allows the poor to be a permanent and non-tax paying drain on the government coffers.

 That leaves us in the middle class.  Those of us who work and must pay taxes.  The small businesses who are not subsidized by our friends in Washington, those of us who can’t have tax laws written for specifically for us, or who are smart enough to create a sham “green energy” company and get billions in grants and loans from the Federal Government and then close it down with no need to account for the money.

The cops, the firemen, the lawyers the restaurant owners, and furniture stores and all the Mom and Pops across the country, we are forced to pay for the largess of the government which alternatively placates the rich and the poor with our money.

We are the ones who involuntarily have money taken from our checks- not the rich or the poor.   We are the ones who get to keep a more and more meager portion as the rich and the poor make ever-greater demands on our income.  F-35 fighters and free contraceptives and we have to pay for it all.

And should anyone of us stumble in this dismal economy, few are rich enough to last too long, nor poor enough to qualify for government aid.

We must rely on the private sector charities, as the money we contributed has been squandered long ago on bridges in Iraq, $2 million missiles or $6500 electric scooter to someone who refuses to claim a stake in their own health.

The struggling middle class is required to stand in line for food on the outskirts of a glimmering city, where the rich and the poor enjoy the fruits of our forced subsidies.   It is a basic tenet of economics, you create more of what you subsidize and destroy what you tax.   It’s no mystery why the middle class is shrinking and the numbers of poor and super rich are growing.

Time to Worry About The Casinos

Experience has taught me that when people make a concerted effort to convince you that there is nothing to worry about- it’s time to worry.

And everyone who lives in the Clark County should have serious concerns about the local casino industry- not because they are filled with wonderful people, but because they are the economic lifeblood of this city, county and to a greater extent the State of Nevada.  And, as I have said before:  If you live in a one industry town, you better make sure your industry makes money.   Once again two headlines glare out for their incongruity with reality.

Headline 1:     Gaming industry sees profitability making a comeback (Las Vegas Sun 4/8/12.)    This headline makes the claim that because Alliante Station posted a minimal net profit of about $500,000 that somehow this bodes well for the entire casinos industry.    After several paragraphs of hyperbole, the article then goes on to say two very odd things which do not corroborate the headline:

Statement 1: (Paragraph 6) states:  “Station and most casino operators continued to lose money in the fourth quarter. But overall, they lost less.”

Statement 2: (Paragraphs 7 and 8) states: “That report found 41 casinos on the Strip posted a hefty loss of $2.2 billion, the third consecutive annual loss of the recession. But the loss was down from $2.5 billion lost in fiscal year 2010 — and revenue increased 9.3 percent in fiscal year 2011.”

Yes you read that correctly.  If you lose $2.2 billion dollars instead of $2.5 billion dollars- that is somehow described as a “return to profitability.”  Where I grew up a $2.2 billion loss is, well, a $2.2 billion dollar loss.   The fact that revenues went up almost 10% and the casinos still lost $2.2 billion dollars should set off warning bells.  It appears to indicate that every 10% increase in revenue correlates to a $300 million loss reduction.

This is possibly the worst headline and worst financial reporting ever.  This number is so far away from such an archaic concept of say – “breaking even,” that a “return to profitability”  is nowhere on the horizon.   The $500,000 profit reported by Alliante is spit in the ocean of lost money.

Worse yet, under the current industry structure we will never see a return to profitability.   We can’t get there from here.  Why?  Let’s look at headline number two:

In a February 9, 2012 Las Vegas Review Journal article written by Jennifer Robison the headline states:   “Visitor volume rises 4.3 percent in 2011. “   The important part of the article is the following:   ”The final month of 2011 brought nearly 3 million visitors to the local economy, for a yearly total of 38.9 million visitors, the Las Vegas Convention and Visitors Authority reported Thursday. That makes 2011 the city’s second-best year ever for visitor volume.”[Emphasis Added]

So now let’s put these two three ideas together:

1) If Las Vegas tourism had the second best year ever;

2) Casino revenues went up 10%;

3) Casinos lost $2.2 billion dollars.

See the problems?   Despite huge increases in both visitor volume and revenues, the casinos are still losing billions.   So how much would tourism numbers have to increase and revenues expand to stop the torrent of red ink?  Ten times?  7 times?  We would have to see multiples in visitor volume and gaming revenues that the city didn’t see in its biggest boom years.   Add $5 a gallon gasoline, higher airfares and an unshakable recession and that outcome appears unlikely to occur.

Oh yeah, one more thing.  That narrower loss comes almost entirely from Caesar’s Palace. The Company reported a net loss of $666.70 million on $8.83 billion of net revenues for the year ended Dec. 31, 2011, compared with a net loss of $823.30 million on $8.81 billion of net revenues during the prior year.   Now you can really see the problem. Despite the second best year ever in terms of visitor volume, Caesars’ revenues jumped less than 2%.   It narrowed its loss by shaving expenses, (means laying people off, placing full time workers on the part time board, cutting orders to local suppliers, trimming upkeep to its properties and generally cutting any expense possible) That’s a lot less money floating around the local economy, the city, the county and the State.

About Joesph Scalia, Esq.

Joseph A. Scalia II has been practicing law in Las Vegas since 1994.  He holds a B.S. in Economics from the University of Maryland, College Park and a J.D. from the University of Maryland

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