Washed It!

Mises Daily by Karen De Coster | Posted on 5/22/2009

The last remnants of the American free-market system are experiencing a quick death by strangulation. Perhaps the most disturbing casualties of government intervention are General Motors and Chrysler, two disgraced automakers that have gone from private ownership to the public trough virtually overnight. The US government has effectively grabbed a financial stake in each company while attempting to control the reorganization process without any constitutional authority to commence such actions.

The takeovers, which have occurred at breakneck speed, are alarming. A defining characteristic of economic fascism is the control of private property and business through a government-business “partnership.” This public-private alliance, while permitting private business ownership, is an arrangement that allows government to control and plan private industry. What we are experiencing from the schemers in Washington, DC is a planned capitalism, or soft fascism, that is being rolled out at an unprecedented pace.

One of the more disturbing actions on the part of the Washington establishment has been the blatant disregard for property and contract rights. First, consider the case of Chrysler. The government, while coming to the aid of a dying Chrysler, lobbed offers to its lenders, the bondholders. A group of dissident bondholders spurned the government’s offer that would have given them a minuscule stake in the company while the UAW received a majority ownership position.

In response, the president denounced the bondholders, publicly proclaiming their obligation to sacrifice and referring to them as “vultures” because they insisted on maintaining their rights as senior creditors. Chrysler’s bondholders, by law, are secured creditors, and they hold a senior ranking above unsecured creditors or shareholders in a bankruptcy or reorganization. Yet they were vilified and bullied for refusing to agree to a shoddy deal. Some of the holdout bondholders finally did buckle under; they dropped their legal challenge and agreed to the government’s lowball offer, but only because they were strong-armed by Washington’s bully tactics. Thomas Lauria, the attorney representing the group, stated that his clients weren’t able to “withstand the enormous pressure and machinery of the US government.” Thus the senior creditors were plundered while ownership was redistributed to the UAW, whose members are junior creditors. This makes a mockery of US securities law.

The bailout and ensuing appropriation of General Motors is no less tragic. The current restructuring plan calls for the US Treasury Department to have controlling interest in General Motors, which amounts to absolute nationalization. In GM’s headquarters in Detroit there is a cluster of bureaucrats from the government’s task force telling GM how to run its business. The task force, assembled by the White House, has the power to exercise significant control over product decisions. According to a GM news release, the Treasury Department will have the power to elect all of GM’s directors and control the vote on matters brought before the stockholders. Additionally, the bondholders who have funded the company are being offered a paltry piece of the equity of the reorganized company — another major blow against the sanctity of contract.

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Furthermore, the White House fired General Motors Chairman and CEO Rick Wagoner. When the executive branch intervenes in a private business and ousts management, bailout or not, it is a staggering violation of the American ideal of free enterprise. This sets a precedent for unlimited government trampling over the private sector. On March 30th, Obama said, “Let me be clear. The United States government has no interest in running GM. We have no intention of running GM.” If that’s the case — and we know it’s not — then why scoop up majority ownership?

The revolving door between Wall Street and the bowels of Washington are getting a workout. It’s the guys from Wall Street who run the government and the guys from government who run Wall Street. Only the guys from Wall Street – especially Goldman Sachs – who have taken over the Treasury Department are now taking over control of the domestic auto industry. You know what happened when they tried to run their own company, Goldman Sachs. How in the heck did I miss the part in the Constitution where powers were granted to the Treasury Department and its hired hacks?

Another notable abomination is the use of taxpayer dollars, on the part of the political establishment, to grant preferential treatment to one group of constituents — the unions — at the expense of each company’s creditors, the bondholders. Not only is this an illicit use of the executive office for political pandering, it’s a deliberate redistribution of wealth. It’s also a handsome payoff to the loyal unions, who have long been big supporters of the Democratic Party.

The GM and Chrysler takeovers are orchestrated political restructurings aimed at serving the larger interests of the US government. The apparatchiks on the Potomac have the authority to coordinate production in a manner that compliments their political and social agenda. The White House has not been shy about its ambitions for green policy and the future of American-made automobiles. This coup paves the way for big government to get its tentacles into an industry that will allow the feds to ram their socialist-totalitarian, green agenda down all of our throats.

Moreover, the Obama regime already announced that it is buying 17,600 green vehicles (hybrid sedans) from Detroit’s Big Three by June 1, using $285 million from the $787 billion stimulus bill. Representative Sander Levin, a Democrat from Michigan, stated, “The federal government’s purchase of thousands of hybrids and other fuel-efficient vehicles from the Big Three shows that our domestic auto industry will weather this current crisis and build the cars of the future.” But certainly, it shows nothing. If the car companies were capable of building the cars of the future that consumers want to buy, no bailout would have been needed, and the government would not have to place an enormous, personal order for automobiles in order to keep the assembly lines moving and inventory lots turning over. The only thing the mega-purchase “shows” is Detroit’s inability to sell its automobiles at bloated prices in the free market, thereby leaving the government to spend taxpayers’ money on goods they refused to buy on their own.

In fact, giving the kiss of life to two dead horses, GM and Chrysler, illustrates the futility at work here, considering that both companies have just announced there will be a considerable number of dealership closings all over the country. Chrysler plans to close about 800 dealerships while GM will trim back 2,600 dealers by 2010. The fact that GM is cutting back its dealerships to the tune of 42 percent speaks volumes about its bloated, bubble-fueled predicament. The government has been pouring billions into each company’s bailout bin in order to keep these inefficient, surplus dealerships around so that they could continue on their path of chasing invisible customers and not selling cars. The misallocation of resources has been staggering. Half-baked investment decisions, like these, are what we can expect from a politically anointed task force that will centrally plan the manufacture of automobiles.

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As the Chrysler resuscitation continues and GM morphs into Government Motors, we can expect that the government will prepare to churn out its environmentally correct greenmobiles that the market has rejected over and over again. Freedom, choice, and capitalism will pay a dear price because a group of government bureaucrats, on the receiving end of political favors, will run a major sector of the US economy and foist a prescribed lifestyle upon American consumers.

The funeral bell is ringing a reminder of capitalism’s mortality. And I won’t dare touch on what happens when government-run automobile manufacturers perform like the post office or the DMV.

By chris.thompson - The Big Money

That’s what CEO Eric Schmidt told the Financial Times yesterday. In an extensive Q&A with the newspaper, Schmidt reveals that Google (GOOG) seriously considered either buying a newspaper as a for-profit enterprise or hiring a pack of smart lawyers to reconfigure the paper as a nonprofit venture. He doesn’t name which paper, of course, but the Financial Times reporters pointedly remind their readers that the hedge fund Harbinger Capital Partners offered Google its twenty percent stake in the New York Times. Ultimately, however, the company decided that going so far as owning an outlet that actually produced copy, rather than simply aggregating and organizing it, would be “crossing the line” between a content company and a technology company. Wall Street Journal writer Jessica Vascellaro argues that this position is growing increasingly flimsy. After all, she writes, both YouTube and Google’s Book Search project are awfully close to resembling content production.

The real reason may be twofold. First, as Schmidt readily concedes, the targeted papers are either far too expensive or burdened with too much debt and liabilities. Second, the advertising model for general news reporting is obsolete, and Google’s execs have decided instead to work with papers such as the Washington Post (the parent company of which also owns TBM) to come up with a new model that can subsidize serious general news gathering. The days when general display ads would float on the page, contextually disconnected from the substance of the stories, are over. But who wants their ads tied to stories of Gitmo torture? Unless the business model radically changers, there will be no revenue stream that props up the most serious and important news stories.

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So what does Schmidt have in mind for the Washington Post? “It seems to me that the newspaper that I read online should remember what I read. It should allow me to go deeper into the stories. It’s that kind of a discussion that we’re having.” In other words, the paper will store and archive a catalogue of the stories you read, steer more stories along those lines to your eyeballs, and keep you coming back for more by knowing what you’re most interested in. Google already remembers what you search for, in order to more accurately match ads to your search screen. Now, it seems, Schmidt would like to apply this technique to news gathering.

In other news, Schmidt flatly refused to share more revenue with newspapers whose headlines Google aggregates. He argues that the traffic Google steers toward media outlets more than makes up for the ad revenue it gets from collecting headlines. And he’s probably right. If you want to read the entire Q&A, click here.

The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration’s efforts to stabilize the housing market.

The increase in the number of such “underwater” borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

For instance, fewer will qualify to take advantage of a key component of the Obama administration’s plan to stabilize the housing market. Under the plan, announced in February, as many as five million homeowners whose loans are owned or guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac can refinance their mortgages, but only if the mortgage loan is a maximum of 105% of the home’s value.

Government officials are considering an increase in that limit. “It’s a question that we’re looking at,” said James Lockhart, director of the Federal Housing Finance Agency, which regulates Fannie and Freddie.

Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter.

“What’s going on here is that you don’t have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks” of communities where home prices have fallen, said Stan Humphries, a Zillow.com vice president.

Borrowers who owe far more than their home is worth may also be less likely to participate in another part of the government’s housing plan, which provides incentives for mortgage companies to modify loans to make payments more affordable. Thomas Lawler, an independent housing economist, said borrowers who owe 30% more than their homes are worth are far more likely to walk away from their property than those who owe just 5% or 10% more and expect prices to rebound. More than one in 10 borrowers with a mortgage owed 110% or more of their home’s value at the end of last year, according to First American CoreLogic.

There are some recent indications that the housing market could be beginning to stabilize. The National Association of Realtors pending home-sales index, for instance, increased 3.2% in March.

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Just how many borrowers are underwater is a matter of some dispute, with the answer depending in part on assumptions regarding home values and mortgage debt outstanding. Variations in home-price estimates can make a major difference in the number of borrowers who are underwater. In addition, borrowers who are already in the foreclosure process may be counted as being underwater if the title to their property hasn’t changed hands.

Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said underwater estimates can be too high if they use price data that includes a large number of foreclosures. Foreclosed homes tend to sell at a discount, he said, making it appear that prices have fallen more than they actually have.

Moody’s Economy.com estimates that of 78.2 million owner-occupied single-family homes, 14.8 million borrowers, or 19%, owed more than their homes were worth at the end of the first quarter, up from 13.6 million at the end of last year.

Part of the reason Zillow’s numbers are higher may be that it looks at mortgage debt taken out at the time the home was purchased and doesn’t adjust for any payments since made toward the outstanding mortgage balance. It also assumes that borrowers who took out home-equity lines of credit at the time of purchase have fully tapped the amount they can borrow. That approach can overstate the portion of borrowers who are underwater, Mr. Zandi said.

Mr. Humphries of Zillow calls his methodology conservative and said Zillow’s use of pricing for individual homes provides a better measure of home valuations than Mr. Zandi’s approach, which relies on market-level estimates of home values. He adds that Zillow doesn’t include foreclosures in its pricing models.

Write to Ruth Simon at ruth.simon@wsj.com and James R. Hagerty at bob.hagerty@wsj.com

As states and Congress move to make e-tailers collect sales taxes, Overstock.com and eBay oppose them while Amazon.com calls for uniformity

By Olga Kharif

Amazon tax fever is spreading. In the months since a New York State law took effect that imposes sales taxes on products promoted through Web sites based in the state, other governments have moved to get in on the action, and online retailers aren’t happy.

Last year, New York became the first state to pass legislation requiring large Web-based retailers, including Amazon.com (AMZN) and Overstock.com (OSTK), to collect state sales taxes on products promoted through affiliated state-based Web sites. Cash-strapped states across the country are mulling similar legislation and a federal online-sales tax bill that may be introduced in Congress could be signed into law as early as this year.

The growing impetus for taxes on online goods has touched off a flurry of lobbying activity and lawsuits from online retailers hoping to defeat legislation that would take away some of the price advantage they enjoy over brick-and-mortar retailers. “”We’ll do everything in our power to assist our sellers so they are not harmed,” says Tod Cohen, deputy general counsel and vice-president for government relations at eBay (EBAY). “We want to make sure than small businesses aren’t strangled in their cribs.”

State Sales tax collections are down

States and local governments hope sales taxes would help them recoup part of the revenue lost amid a recession that has diminished property values and crimped demand for items sold in stores. In the fourth quarter, state sales tax collections dropped 4%, the steepest decline in 50 years, according to the Nelson A. Rockefeller Institute of Government. Online sales taxes could help states generate at least $52 billion in added revenue over the next six years, according to an Apr. 13 study conducted by three University of Tennessee professors. Requiring virtual stores to collect taxes, even in parts of the country where they don’t have physical operations, would also place e-tailers on a more even footing with brick-and-mortar stores such as Wal-Mart (WMT), which collect sales taxes on in-store as well as online purchases.

Companies that sell products over the Internet say the taxes would hamper growth. “The introduction and passage of an Internet tax bill would have adverse effects on e-commerce,” George Askew, an analyst at Stifel Nicolaus , wrote in a recent note. After New York’s law was passed, Overstock.com says it had to terminate agreements with some 3,400 Web sites that once promoted the closeout retailer in the Empire State.

Overstock ceased operating in New York altogether, says the company’s president, Jonathan E. Johnson III. After losing a court battle seeking to repeal the law, Overstock plans to file an appeal in the coming weeks, Johnson says. “These states are signing up for a lawsuit, or for businesses to pull out of their states,” he says.

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Cover the E-Tailers collection costs?

Overstock, along with eBay, is leading the charge against efforts on Capitol Hill that favor online sales taxes. Senator Mike Enzi (R-Wyo.) and Representative Bill Delahunt (D-Mass.) are expected to introduce a bill aimed at overturning Quill vs. North Dakota, a 1992 Supreme Court case that concluded states can only require retailers to collect state taxes in territories where they have offices or stores. If passed, the legislation could require all but the smallest retailers to collect sales taxes in the 23 states that are part of the so-called Streamlined Sales Tax Project, which unifies states that have agreed to simplify their sales tax laws. The number of states in the Project is expected to rise rapidly in the coming months.

Under the bill, which is still being drafted, the states would compensate e-tailers for the cost of collecting taxes, and would agree not to prosecute them for tax errors, removing much of the liability, says Neal Osten, federal affairs counsel at the National Conference of State Legislatures, which is helping to draft the bill. Stifel analysts are skeptical that the bill will pass, though they believe it will make more headway in the current Democratic-controlled Congress. “The effort appears to have a somewhat better chance than in prior Congresses,” Blair Levin, managing director at Stifel, wrote in a recent report.

Laws that vary by state would no doubt be a headache for companies that sell products online across the country. In the coming days, Minnesota’s House of Representatives is due to consider a bill introduced by Representative Jim Davnie that would levy a sales tax on digital downloads of e-books, music, movies, and even ringtones. The tax would affect a wide range of tech companies, including Microsoft (MSFT) and Apple (AAPL). “There’s clear opposition from the IT industry,” Davnie says. “Apple, Microsoft have been in my office.” Microsoft declined to comment for this story. Apple couldn’t immediately be contacted.

Amazon.com Wants Tax Uniformity

Some Internet players oppose pro-tax efforts by local governments too. Priceline.com (PCNL) has about 50 lawsuits pending that involve various cities and counties trying to impose local hotel occupancy taxes on the site’s customers, says Darrel Hieber, partner at law firm Skadden, Arps, Slate, Meagher & Flom, which has represented Priceline in such cases since 2004.

While Amazon.com opposes the New York State law, it supports efforts to impose taxes in a uniform manner. “We’d be O.K. with a mandatory collection requirement as long as the states’ tax systems were truly simplified and the collection evenhandedly applied,” Amazon.com spokeswoman Patricia Smith writes in an e-mail. Many small businesses are also making peace with the notion. “We think it’s fair for people to collect sales taxes on the same terms [as brick-and-mortar small businesses],” says Todd McCracken, president of the National Small Business Assn. “There’s a need for a comprehensive, national approach to this. There’s got to be some final resolution to this because these issues have been festering for years.”