This is the best representation of historical housing prices, ever.

With alarming swiftness Washington Mutual passed into history. The FDIC seized the thrift and sold off its branch network and deposits to JP Morgan Chase for a cool $1.9 billion. All this was done in a single day. I think it was all done in the afternoon because I don’t recall seeing any news about this when I looked online in the morning.

The remarkable speed is just one component that alarms me. Who negotiates a bank purchase in a few hours? Granted, JP Morgan Chase should have already done their due diligence before because they, along with several other banks, were looking at making a merger offer to WaMu. Even with that financial information I don’t feel comfortable accepting that a deal could be reached so quickly with such a large, complex financial institution.

The other thing that bothers me is the reason the Office of Thrift Supervision pushed the FDIC into seizing WaMu. At first there didn’t seem to be a reason. I searched several news sources and no one was reporting the cause of the seizure; only that WaMu was seized and it was the largest bank failure in US history. I finally found a Bloomberg article that explained it.

Customers withdrew $16.7 billion from WaMu accounts since Sept. 16, leaving the Seattle-based bank “unsound,” the Office of Thrift Supervision said today.

Well sure $16.7 billion sounds like a lot of money, but it had $307 billion in assets. $188 billion of that was in deposits. So WaMu lost 5.4% in assets. Is that really cause to seize a bank? I thought a bank had to actually default, as in not have enough money to pay its obligations, for the FDIC to act. It sounds like this was a preemptive seizure by the FDIC. I did not realize that was legal.

The icing on the cake is that WaMu’s management knew nothing about what was happening. The Salt Lake Tribune, reprinting a NY Times piece, said:

The seizure and the deal with J.P. Morgan came as a shock to Washington Mutual’s board, which was kept in the dark: the company’s newly-minted chief executive, Alan C. Fishman, was in flying from New York to Seattle at the time the deal was finally brokered, according to these people.

Let’s recap. The FDIC planned to preemptively takeover WaMu and negotiated its asset sales to JP Morgan Chase all in secret in a single afternoon. This doesn’t seem shady to anyone? Did the FDIC actually negotiate with any other banks during those few hours, or does Jamie Dimon have a buddy there who “streamlined” the process? Call me paranoid if you like, but this transaction was way too convenient for reality.

Another company fell victim to the credit crisis, but this time it isn’t an investment bank or an insurance giant. Bill Heard Enterprises, the nation’s largest Chevrolet dealer group and thirteenth largest dealer group overall, is closing all thirteen of its stores at the end of business today. This was a company with over $2 billion in revenue last year, gone in an instant.

Why is this happening? Crashing truck and SUV sales certainly didn’t help Bill Heard. A general decline in domestic automotive market share didn’t help either. High fuel prices just added insult to injury. These are all terrible things to happen to a dealership but they wouldn’t have killed this company immediately. No, only a lack of financing could do that. Bill Heard was unable to get financing from GMAC for their floorplan. Floorplan is the cost of all those vehicles kept in inventory. Dealers don’t bring suitcases of unmarked bills to manufacturers to pay for those cars. They finance millions of dollars so they can have the vehicles in stock and ready to sell. If they can’t get financing, they can’t get any cars.

Here the credit crunch has destroyed a formerly productive enterprise. Bill Heard may have been wounded by the weak auto market, but a lack of credit caused this loss of hundreds of sales and service jobs. For those of you who think nothing should be done about this financial turmoil, here is a taste of what’s to come. I’m not advocating a massive bailout, but inaction would be disastrous.

Seven hundred billion dollars is a lot of money to me. I’m not thrilled with the Treasury/Fed’s plan to start buying up distressed loans from troubled financial firms, but I really don’t know what the alternative is. Doing nothing will apparently destroy the financial system. The lack of available credit will force the economy to grind to a halt. Paulson and Bernanke hope that by purchasing these undesirable assets, the banks will no longer have to build capital reserves (or at least not build such large ones) and start lending out the money. The onion in this ointment is that banks may sell these troubled assets to the government and then just save the money out of fear. Then the we end up with the worst of all worlds – a recession caused by tight credit and the government taking on $700 billion in extremely risky debt.

But this plan is being sold as the only alternative. Is that true? I don’t like this idea because it smacks of socialism. I like my government and my economy kept as far apart as I can get them. But how can we keep this economy from collapsing without massive government interference? Since the Paulson Plan has been met with skepticism, I’ve been hearing more about alternative ideas.

• Repeal the Capital Gains Tax

I list this first because it’s my favorite idea. Sure it sounds like a giveaway to the rich, but then how would you describe using $700 billion to buy up risky loans from the rich? The benefit is that it would remove the tax burden from these financial companies. That extra money would strengthen their balance sheets and make more money available to loan. Plus it would also bring more private money into the investment market. I can’t imagine the cost to the federal budget would be anywhere near $700 billion.

• Loans Not Purchases

Some economists think the US should provide collateralized loans to financial firms. Instead of an outright purchase of these distressed assets, they would be used as collateral on low interest loans. This would remove a lot of the risk to taxpayers because they would not have ownership of these assets. If the bank failed, the government would still take on the asset just like it would in the Paulson Plan. Of course the government would also have the option of nationalizing the bank to restructure it and keep those assets off the government balance sheet too.

• Reverse the Accounting Rules

Almost a year ago accounting rules were changed to require companies to adopt a “mark to market” methodology to set the fair value of their assets. This required companies to record the price of an asset as the price they would get if the sold immediately. I know it sounds sensible and fair because companies must record the current value of the asset. The problem comes in moments like these when money is tight and you can’t find buyers. Even though your company has no interest in selling this asset, if another company does sell at some bargain basement price, you are forced to record that price as the value of your asset. If there is no market for the asset, such as with subprime CDOs, then the rule forces you to markdown the asset to zero. This rapid destruction of balance sheet wealth forces companies to raise capital because often they are required by law or by financial covenants to maintain a certain percentage of capital. If their assets just went to zero because of this accounting rule, they have to find cash somewhere. This is why an AIG bankruptcy was a threat to the financial system. If they declared bankruptcy, their assets would have been sold at firesale prices. That would ripple out to all companies, wrecking their balance sheets, forcing them to find more capital or declare bankruptcy themselves.

• Lower the Corporate Tax Rate and Repeal Sarbox

These ideas came from a Newt Gingrich essay I read. Actually the capital gains idea did too, but whatever. They function pretty much the same as the capital gains idea too. The goal is to let companies keep more of their own money so they can increase their spending. Lower taxes mean an improved balance sheet and that means there will be more money available to lend. Keep in mind that the US has the second highest corporate tax rate in the world too, so this idea is something that is worthy even outside of an economic aid perspective. Sarbanes-Oxley (Sarbox) was a law passed during the Enron furor. It has become a huge anchor on publicly traded companies. These regulations have caused accounting departments to balloon, adding huge expenses to all. Companies have been demanding its repeal or amendment long before today’s financial crisis because of these costs. Less red tape would make it more attractive to do business in the United States.

• Buy Mortgages Directly

Some want the government to directly purchase mortgages from financial firms and then restructure them to make repayment easier and lower the numbers of foreclosures. Those who accept a restructured mortgage would have to pay a percentage of their profits from a future home sale.

• Incentivize Lending

The reason for the economic crisis is a slowdown in lending. What we’re trying to do is create an environment where banks will want to lend again. So far the ideas are built around providing more money to banks, with the hope that by simply having more money they will want to lend it. That’s not a guarantee though. Banks may unload their balance sheets and still be stingy with credit. We need to find a way to make banks want to lend. I propose profits made from charging interest be tax free for a set period – say three years. Not only will banks realize a profit, they will realize significant tax savings. The more they lend, the greater the savings. That is their incentive to get the credit markets flowing again.

As I said at the start of this, I do not like government interventions. Markets should be left to take care of themselves. At first I thought Paulson’s plan was the only option, but after reflecting on this for several days I’m glad to have found some alternatives to grease the wheels of liquidity.

If only one thing happens, I want the mark-to-market accounting rule repealed. Go back to the old system for now and let the accountants figure out a better rule to apply in a few years. Mark-to-market is responsible for turning an economic slowdown into a catastrophe. Since this is my wishlist, I would also like to see my idea for tax-free interest profits put into practice because it provides a direct link between lending and increased profits. I’m also in favor of a zero capital gains tax because it will spur more people to invest their money rather than fearfully sitting on it. I can’t imagine doing these three things would cost more than $700 billion, but I would love to see someone respond with hard numbers to prove me right or wrong.

Lowering the corporate tax and repealing Sarbox are worthy goals but I don’t see them as essential to solving this credit crisis. Providing government loans isn’t different enough from the Paulson Plan for my taste. It smacks of interventionism. The idea behind buying mortgages directly is just pointless. The government becoming the national mortgage lender will only lead to a socialized housing market that will become a political bomb as Congress fights every year to throw more tax money at it to buy votes. Besides, foreclosures were only the first phase of this crisis. The problem has spread and crippled the entire credit market. Creating easy mortgages for those under threat of foreclosure does nothing to encourage private lending. People can’t afford any loan terms if they lose their job to a contracting economy.

I think I can sleep better now knowing that there really is an alternative to a massive government bailout. Now it’s only a matter of getting the attention of Congress. Piece of cake.

Rumors about bankruptcy can swirl around any company going through a rough patch. I wouldn’t automatically lend them credence. Chrysler’s troubles are no secret and it’s natural for people to whisper about the chances of bankruptcy.

The rumors of bankruptcy were whipped up recently because Chrysler made use of a line of credit that was negotiated when Cerberus Capital bought Chrysler from DiamlerChrysler. Chrysler borrowed $1.5 billion from Diamler, and $500 million from Cerberus. The act of borrowing made investors swoon with thoughts that Chrysler was having cashflow problems. However this line of credit had an August deadline. If Chrysler didn’t use it, it would disappear. So they decided to borrow now to ensure they had access to this $2 billion in extra liquidity. Explained in that light, it seems like a prudent decision.

But today a little event made me believe Chrysler’s position is far worse than they’re admitting to. To try and allay everyone’s fears they organized a media event/rally to explain the situation. Then I read that Lee Iacocca was brought out at the rally to speak. I guess Chrysler’s management thought Iacocca would add some credibility to the message, but that just implies management itself has no credibility. They have to go draw from the Iacocca well to try to calm everyone down. Resurrecting Chrysler’s Grand Ol’ Man looks like an attempt to distract everyone from the real problems facing the company. Chrysler’s sales are slumping worse than anyone else’s, and they have no good product in the pipeline to try and save themselves with. GM has the Volt. Ford is bringing its highly successful European designs here. Chrysler is circling the drain. Iacocca is there to lull people into thinking everything is okay. He saved Chrysler before and now that he’s involved, he’ll save Chrysler again!

This move smacks of desperation and only convinces me Chrysler is in dire straights. Bankruptcy is looking all the more likely. That may not be a bad thing though. Chrysler has been the weakest American car company for decades. A bankruptcy, done right, could put the company on some firm footings. It would force the UAW to accept massive cuts in labor and wages. I wonder if bankrupt Chrysler would try to eliminate all union workers. A lot of facilities would be sold off, but I wonder if any would be moved to cheaper places. Moving a factory isn’t free so I don’t expect the whole company to move its manufacturing operations to the US south, or to Mexico. You can rule out Asian factories thanks to the higher cost of shipping from expensive oil.

However if there is no bankruptcy, or an inept one, I think Chrysler will become a Chinese brand by 2015. It’s an easy way for an ambitious Chinese company to buy some recognition and a distribution network.

Here’s some news that should make all the energy independence buffs throw their hats to the floor and shout “Tarnashion!” India’s Reliance Industries is building the world’s largest oil refinery. This refinery, scheduled for completion this December, is planned for refined fuel export to Europe and the US exclusively. So by the end of the year we can be dependent on India for gasoline shipments. Gas prices could drop by 60 cents a gallon from this.

How can this lower prices when we’re being told we live in a world of tight oil supplies? It’s actually quite simple. This enormous refinery will process sour crude oil. Sour refers to the sulfur content of the petroleum. Sour crude has lots of sulfur. Sweet crude has little. Removing sulfur from oil is an expensive process, so in the past oil refiners have chosen to favor sweet crude. I was surprised to learn there is actually a glut of sour oil. The extra 200,000 daily barrels Saudi Arabia pledged this weekend to pump is all sour crude. That’s why the announcement did nothing to lower prices. The Saudis will pump more unwanted oil. Iraq has 30 million barrels in tankers floating at sea. They have no destination because no one wants to buy sour crude.

The oil price you see ticking ever higher on TV is the price for West Texas Intermediate crude. That is a light sweet crude oil, and that type of oil is actually in short supply. We’re not finding any new major fields in Texas anymore. The UK’s sweet crude from the North Sea is in decline. Nigeria is another sweet crude producer and thanks to militants in the oil rich Niger River Delta, it’s well below its pumping capacity. Nigeria could pump 3 million barrels a day, but the rebel attacks have cut that by 944,000 barrels. If the rebels were put down, oil prices would plummet.

But remember, No Blood For Oil, so we’ll have to make due with the sour crude no one wants. Well, Reliance Industries will want it by the end of the year. They’re going buy this cheaper oil, turn it into high quality fuel, and sell it to us. They will get even more money because refined fuel commands a higher price than crude, and new jobs from the deal. Construction of the new refinery is employing 100,000 people (not a typo). It will still employ thousands of people when it’s running.

Let this be a reminder that all this energy independence talk is hot air. How can we seriously say we’re going to get away from importing oil, when we’re about to import even more refined fuel!? The US is about to become even more dependent on another country for fuel but nobody cares because doing something (building our own refineries) is impossible. No one is willing to compromise and agree to allow any to be built. Over and over local politicians bemoan the loss of heavy industry. How dare they do that when no one will stand up and offer land for a new refinery. A giant factory that builds cars or TV sets or any widget you choose isn’t going to be any different. Industry is industry and a refinery will be as clean, or dirty depending on your perspective, as any other. Michigan only has one refinery. Indiana has two, and Ohio has four. If they’re hurting for blue collar jobs so bad, let an oil company build some sour crude refineries in those states.

Okay, I’m calling the presidential election now. Yeah I know the two parties haven’t had their conventions yet. I know Obama only just clinched the Democratic nomination days ago. I know we have months until the vote actually happens. Yes I remember being spectacularly wrong last year when I said it would be a Hillary vs. Rudy election. Don’t remind me. That’s not polite. The election has already been decided by last week’s horrible jobs report.

The jobs report itself isn’t that important. Losing 49,000 jobs is bad but not crushing. And a 5.5% unemployment rate is historically excellent for an economy. We’ve just been spoiled in the last ten years. No, what matters here is the coverage of the weak jobs report. The media has painted it as crippling blow to the US economy. The unemployment rate itself isn’t being reported, but rather the 0.5% jump is. It’s now being touted as proof we’re heading into a recession. Nevermind that the unemployment rate is a lagging indicator so it’s only going to tell us about pain we’ve already felt. Nevermind that the unemployment rate is frequently revised so you can hardly trust this report as accurate. Nevermind that the minimum wage is rising next month so some employers may avoid hiring (that 0.5% increase is almost entirely felt by the 24 and under crowd. Hey, don’t a lot of them finish school and look for crappy, low paying summer work in May?).

All that matters is perception. Whereas before we weren’t sure how the economy was doing. We avoided a recession last quarter, but growth was weak. Oil was up but the stock market seemed to be doing well in spite of that. The economy seemed to have leveled off and recovery was a possibility. In that uncertain climate McCain had a chance to be heard. That’s now over. Now we know the economy is in a tail spin. Whenever the economy is tumbling in an election year, the party in power loses. It doesn’t matter who is running. Money woes trump everything. I’m calling it. McCain lost the election on June 6, 2008.

The Wall Street Journal had an eye-opening opinion piece last Tuesday. It explained the work of Kurt Houser, an economist, who noted a very interesting fact about the federal government’s ability to collect revenue. Looking back to 1950, revenue collected by the federal government through taxes remained around 19.5% of GDP. It fluctuated some, but the range appears to be within a percent.

This is economically shocking because tax rates certainly fluctuated far more than just a percent. So last year when tax rates topped out at 35%, the federal government took in about 19.5% of GDP. Back in 1985 when the top rate was 50%, the federal government took in about 19.5% of GDP. Way back in 1960 when the top rate was 91%, the federal government STILL took in about 19.5% of GDP. How can that be? It seems obvious that if the government demands more in taxes, it should be getting more.

There are two things at play here. First, raising the tax rate slows GDP growth because it’s reducing the amount of money available for investment. Second, raising the tax rate encourages more people to hide their income. Both effects combine to reduce government revenue collection. If tax rates go up, it’s possible the government may collect a little more but it will be less than if tax rates were left alone and GDP was left to grow at a faster pace. What’s really fascinating is the 19.5%. Why is that the settlement level?

This information may have been old hat to economists but it was brand new to me, and it’s making me rethink my opposition to a flat tax. Why should we continue to bother with our convoluted tax code? The federal government will end up collecting 20% of GDP no matter what we do. History has proven it. Why not just make all our lives simple. We can do away with all deductions and everyone will pay the same rate. If you want to do something for the poor, you can set a zero tax cut off on income. Maybe everyone who makes less than $25,000 a year pays no taxes. It would save everyone a lot of trouble and it can be designed to be revenue neutral. After all, the outcome (revenue generated) is going to be the same, so why continue with a complicated process?

Real electric cars are finally coming to the USA. I’m not talking about some $100,000 two-seater from Tesla that barely exists. These will be $30,000 and actually for sale. Kleiner Perkins, a venture capital firm, is putting up the money to import 50,000 electric cars from Norway’s Think Global corporation.

The cars would have a maximum speed of 65 mph making them technically highway capable, but only if you never leave the right lane. It would also be 95% recyclable. I don’t see that as a selling point to anyone except people who wear hemp clothing, but generally those people don’t have $30,000. That price is a touch high for me. I think I could swing it, but it really would eat up my monthly budget. I can’t even guess what the insurance would be on this car anyway. Still though it’s a huge improvement over Tesla’s pricing and I really don’t think Kleiner Perkins will have a problem finding 50,000 buyers who can cough up that much money. There are probably enough wealthy people in California, Oregon and Washington State who must show off their green-ness to buy up all the cars.

Think Global produces three different models, but it looks like the Think City is what is being brought to the US. This is a four-seat hatchback. I was originally going to call it a hatchback with virtually no storage, but I soon found that the rear seats fold flat for storage. That’s a pretty nice compromise for a small car. You can carry people, or you can carry groceries, but how often do you really need to carry both? I guess you can’t use it to take more than one person to the airport, but who wants to be called upon for airport runs anyway?

I’m a little disappointed the Think Open isn’t being sold here. That one is a two-seat convertible. I would never buy it for myself but it’s the perfect car for cute women to be seen in. If you’re a woman and 5’4″ or less, you should be driving that car. You will look doubly adorable in it.

I have to wonder what these cars are actually made of. These pictures from Think Global’s website make these cars look like they have plastic body panels. Do they? It would be lightweight, but that just makes the car seem godawful cheap. It passes Euro and US safety standards tests, but plastic is not a word that evokes quality. I think I still like it better than a Smart ForTwo however. The City may look dinky, but it still looks like a car. The ForTwo is a mutant.

A $30,000 car is beyond what I want to spend, even for an electric car, but it’s actually within reach. It’s refreshing to see an attainable goal, rather than some pie-in-the-sky venture like with Tesla. I hope Kleiner Perkins succeeds with this. If it does I’ll bet we get a $20,000 electric car within five years.

All anyone is talking about, on business news anyway, is the airline industry. Delta and Northwest hooked up over the weekend. Jealous Continental and United are eying each other, hoping to show the new Delta that they didn’t need them anyway. And a bunch of little airlines died recently.

I was actually a little sad to see one of those airlines go. Frontier Airlines filed for bankruptcy last week. It could be worse of course. Airlines like ATA and Aloha Air are completely kaput. At least Frontier is still flying even though it’s in bankruptcy. Filing was actually a pretty canny move for them. The crisis was caused by the firm Frontier contracted with to process credit card orders. That firm became spooked by Frontier’s balance sheet and decided it would withhold more credit card money from Frontier. If Frontier did fail, like the other airlines, the credit card processor would be the company that had to make all those refunds. Holding back more money from Frontier is how they cover their own ass. But Frontier decided this made it far too risky to operate and declared bankruptcy. Doing so forces the credit card processor to continue to remit funds at the same rate as before, because the change did not take place before bankruptcy.

The reason I care is that Frontier was a pretty nice airline. I flew on it once for a trip to NYC. You get as little seating space as you do on other airlines, but the planes are clean. I didn’t appreciate that at the time but I sure do now after my last trip on the dreck that Northwest flies. Everything on Frontier is routed through Denver. I’ve had layovers at Denver, Minneapolis and Houston and Denver was the best experience by far. In Minneapolis and Houston I always had to run to a whole other terminal to make my connecting flight. Frontier has all of its connections in the same terminal so your connecting flight is only a few gates away; No anxiety about missing your flight, no lugging your bags across an airport. I really liked the personal TV on the Denver-NYC leg too. It was well worth the $5.

I wish I could have kept flying with Frontier, but their prices were always much higher than the competition. When I priced out my last trip, Frontier was a $100 more expensive. I have to wonder though if it would have been a much less stressful to pay the extra.

But now with the Delta/NWA merger and the likely Continental/United one, airfares are expected to rise. I don’t really believe that though. The idea is that with less competition, the airlines are going to raise prices. This would only work with a monopoly though. If those four airlines merge into two, they still have to compete with each other and also companies like American, JetBlue, Southwest, Virgin America and US Airways. Some less common routes may rise in price of course, but nationally there is plenty of competition. Maybe this will help finally get airlines to stop being these zombie companies that drift in and out of bankruptcy every couple of years.

What would really help the industry in America is allowing foreign companies to operate in the US. The Civil Aeronautics Act, enacted in 1938, and the Federal Aviation Act of 1958 limits foreign ownership of an airline operating in the US to 25%. Virgin America only exists because of some complex governance structure that keeps foreign ownership under that cap. Richard Branson couldn’t just spend his billions on a new US airline. He had to waste time finding US investors to put up money. Thank you government for delaying the launch of an airline I’ve heard great things about from friends. This is just plain, ordinary protectionism. Foreigners have the money and experience to run airlines here but the law coddles our domestic airlines and keeps out competition. If they were allowed in, not only would consumers benefit but so would domestic airlines over the long term. They would be forced to restructure when faced with real competition instead of the continual cycle of bankruptcy filings. The ones who can’t shape up would die, and I say good riddance to them. A free market means we leave business alone to grow or fail. Protecting companies is just welfare.