A couple of important points: Health insurance isn’t the inordinately profitable industry that Obama and his surrogates say it is. By my rough count, the four big public insurers are showing aftertax profit margins of barely three percent.

And their total profits add up to well under $10 billion a year. (Again, I’m excluding the Blues.) Obama tells us that health insurance costs too much because these companies make too much money. But even if he wipes out their profits completely, he’s nowhere near the $1 trillion or more that he’ll need in order to pay for a national insurance plan.

Do you suppose the market is saying that a public-health option is a nonstarter? Look at the stocks of those four companies for this week. They’re all up strongly, as much as 20%. In three days.

Or is the market saying that if the government takes over the low end of the insurance industry, that the private companies will take the top end and become a lot more profitable than they are now? I wish I knew the answer.

About a year ago, all of GM’s common stock put together was worth maybe $2 billion, give or take, depending on the day. Go back three years, when things were merely bad instead of catastrophic for them, and people laughed at me whenever I said that GM was going to die. Back then, the stock was worth about $20 billion. For contrast, Toyota Motor at that time was worth more than $200 billion. That’s not a typo.

What would it have taken to buy GM out of bankruptcy, right now? Three years ago, when I first floated the idea to private-equity guys of my acquaintance, the answer would have been in the range of $75 billion. A few months ago, you could have done it for considerably less, depending on how far you could cram down the debt.

But now, We The Taxpayers have gotten suckered into buying the thing as a turnaround play. Barack Obama solved the debt problem by simply killing the bondholders, so he could have gotten the company for next to nothing, as opposed to the 20 to 40 billion dollars it might have cost a private syndicate. (That’s not to say, of course, that you’d ever find private investors stupid enough to do that.)

Instead, we’ve now put $50 billion in cold hard cash into this pig, with a lot more to come. And that’s to buy an asset the market has recently valued at a tiny fraction of that.

So when Obama says he’s going to sell GM back out to the public “very shortly,” what will the price be? Just to break even on his (actually, YOUR and MY) investment in 60% of the company, it’ll have to be almost $100 billion, and that’s ignoring the time value and opportunity cost. To get any kind of a decent return, it’ll have to be way more than $100 billion.

But who would pay even a little fraction of that much for “New GM,” even cleansed of its pension liabilities and long-term debt? New GM, in all candor, is an electric-car startup. I’d pay no more for New GM than I’d pay for Tesla. (And Tesla, according to the speculation which surrounded a capitalization they recently closed, is worth an absolute upper bound of $10 billion, and probably far, far less.)

Barack Obama is in the process of pulling off the biggest ream-job in financial history. Even worse than Bernie Madoff.

I was wary of saying too much in public because there are indications that some of the plunge in note and bond values was due to technical market factors. The move was echoed somewhat by a fall in the dollar, but gold and oil have been relatively quiet. Corporate bonds have been on fire, with raging demand from a variety of buyers, and swap spreads are compressing rapidly.

The stock market finally got the news yesterday (falling 2%), about the same time as the mainstream press. In general, whenever you see headlines about arcane financial issues, start by assuming the opposite.

The market this morning is showing mild improvement, as it has each day this week in early trading, with yields on midcurve notes and the long bond down about five basis points or so. Yesterday was full of drama, however, as prices for mortgage-related assets (MBS and agency debt) suddenly plunged even after the Treasury completed a decently-received issue of new 5-year notes.

What is happening, in a nutshell, is that…

…market participants have become concerned that the Fed will not be able to keep mortgage rates low. In a highly technical trade, these investors expect that the “duration” of mortgage-backed paper will extend as rates rise, and they hedge against this by selling massive amounts of the 10-year Treasury note. That selling drops the price of the T-note, which raises rates further, which triggers the cycle all over again.

The fact that this technical trading is going on suggests that the market may stabilize for a while at the current much-lower levels. But many people are now starting to chatter about the larger implications of the episode, some of which are political.

The marketplace is full of talk that the Fed will have to really go to the mattresses to support lower interest rates. It reminds me just a little bit of the challenge that George Soros and others made to the Bank of England back in 1992, which tried to support the value of sterling, against the market.

It seems clear enough that the market for medium and long-dated Treasury debt wants to be a lot lower. In other words, investors want much higher interest rates in return for lending their money to We The Taxpayers. But if interest rates go too high, it’s going to choke off whatever hopes anyone had of an economic recovery.

See, now you thought that recovery is coming because of porkulus. After all, that’s what the President says. But in reality, it’s because the Fed has been holding interest rates down. Silly you.

But the Fed only has direct control over the very shortest-term interest rates, the ones on overnight interbank lending (”Fed funds”). How can the Fed hold down the medium and longer-term rates that are critical for economic growth? By doing something they haven’t done since before the Korean War: they’re wading into the market to buy up that debt directly (”quantitative easing”). And they’ve also been buying the mortgage-backed securities and related debt which are now getting decimated.

So far, the Fed has announced plans to do about $1 trillion in such monetizations this year, with $300 billion of that for Treasury debt. The market has apparently decided to play chicken with the Fed. Some people are saying they’re going to need to create trillions more dollars in monetization.

The chatter is very, very sour. As usual, the stock market is insane, always looking for, and finding, a reason to go up. But capital-markets people are looking at the finances of the United States, and saying: “Oh no, baby, this won’t work, what you’re doing. Come up with something better.”

We’re soon going to find out exactly what are the limits of monetary policy at the zero interest-rate bound. The fundamental tension is between an economy that is still suffering from deflationary effects as consumption and investment shrink, and the need of the US Treasury to keep borrowing like crazy to support Barack Obama’s addiction to spending your money.

If things get bad and interest rates head upward permanently despite the Fed’s efforts, the Treasury will finally face a choice that looks a lot like discipline: they will either have to scale back the ambitions of the Federal government, or they’ll have to raise taxes heavily.

UPDATE: As of 10:45am ET, the 10-year note and 30-year bond are sharply higher, with yields down about 8 or 9 basis points. Keep your eyes on the Treasury’s 7-year note auction. Results should be announced shortly after 1:00pm ET.

So what do you do when you’re the latest in a long line of Presidents to pledge fiscal responsibility while spending world-record amounts of money? You borrow the money you need to keep the string going. Obama’s first year in office will see a deficit of almost $2 trillion, about four times the biggest deficit that George W. Bush ever ran.

There are two problems with this, one minor and one serious. The minor problem is that Obama promised us a fiscally-responsible Presidency. He’s on record with a promise that when he leaves office, the Federal deficit will be no larger than 3% of GDP. (His first one will be 12% of GDP.) That’s not a problem because Obama can say whatever he wants and people will believe it. He will certainly claim that he fulfilled this promise, and be given credit for doing so, regardless of reality.

The serious problem is that no one knows what the impact will be of borrowing a trillion or more dollars every year for the forseeable future. Today, the public debt of the US is a bit more than 40% of GDP.  Sometime in the next five to ten years, it will hit 100%. Already there are signs that the bond markets are starting to find it a lot less attractive to lend money to the US Treasury.

The bottom line is that Obama is going to have to find a source of funding for the Federal budget that goes beyond knocking the profitability out of the private sector, and borrowing every dollar he can get his hands on. This is a matter of simple reality, even given current projected levels of Federal spending.

It gets quite a lot worse when you add in the cost of the vast range of new public initiatives that this President and his supporters promise to implement.

So at some point, you’re stuck. You can’t confiscate all business profits because that will leave you without an economy, and you can’t suck out all the private capital because the high interest rates will leave you without an economy. And higher income and payroll taxes are verboten, because you promised to cut those taxes. (And besides, it’s politically expedient to do so.)

There’s only one answer: a VAT, or value-added tax. Europe and Canada have had one for years, and it generates a gusher of revenue because it’s largely hidden from view. What happens is that every business that adds value to a good or service pays a tax on that value. The tax gets baked into prices at every step, so there’s no big ugly percentage that a consumer has to pay, as with a sales tax.

You start off with a tiny percentage, maybe less than 1 percent, and you expand it steadily as you need revenue. In Europe and the UK, it’s gotten up to the high teens now. This of course is in addition to income and payroll taxes.

My expectation was that Obama would wait till after the midterm election in November 2010, and then start sending out surrogates to float the idea of a VAT. After he himself was safely re-elected in 2012, he would come out and champion the idea himself and get it done.

It looks like we won’t have to wait that long. Already, the PR push has started. Eighteen months ahead of what I thought the schedule would be.

Let’s be responsible about this. There’s no possible way we can fund national health care, expanded spending on infrastructure and electrified motor transport, and the still-TBD overhaul of the education system. Unless we the people are prepared to go to the ballot box and say NO to increasing the scope of the federal government, then we’re going to need a VAT. It really is the only way out of the box.

And before you say it: No, that’s not what I’m advocating. I would strongly prefer to eliminate all taxes on capital and business profits, and a credible end to Obama’s personal interference in business. That approach would actually cause the economy to grow.

But I don’t think that’s very likely, do you? If we the people really do choose to embrace state capitalism and a far greater role for the government in the economy, there aren’t any other options. The question we really should be debating isn’t how to pay for bigger government, it’s how big we should let government get.

In case you hear the Administration start bragging about a sudden reduction in this year’s deficit by about $175 billion, here’s what they’re talking about: they’re going to reduce the amount of the TARP outlays by that much.

No, that doesn’t mean they spent less than $700 billion. (Well, actually, a bit less than $600 billion has been spent so far, but they’ll spend the rest and may need more later.)

It means they won’t add the whole amount to what they say the deficit is.

How are they going to get away with that? By accounting for the TARP outlays on a net present value basis rather than as cash outlays. Think about it like this: the stimulus/porkulus funds are different from TARP. The government either borrows or prints money, and then hands it out to state governors to spend on salaries for unionized teachers, bureaucrats, and hospital administrators, and for things like the John Murtha Airport, bike paths to nowhere, and hamster subsidies for Nancy Pelosi.

Those are pure cash outlays. From our point of view as taxpayers, it’s pure waste, money flushed down the toilet.

But the TARP funds are, and always have been, different. Approximately $17 billion of the TARP was used to buy Christmas presents and holiday bonuses for unionized employees of GM and Chrysler (that money was wasted). The rest was used mostly to buy preferred stock (and in Citigroup’s case, common stock) in something like 200 banks and non-bank financial institutions.

As I’ve said from the beginning, these TARP outlays don’t represent a simple expenditure of cash. In theory, at least, they give the government (meaning, ultimately, we the taxpayers) a coupon-payment stream, plus some claim on the assets of the assisted banks.

In short, we should be getting back the money we put into TARP. It’s more of an investment than an expenditure. (Well, actually we should be getting back some fraction of the money, since it wasn’t a very good investment.)

Now the Administration’s budget people are looking at it that way too. They’ve decided to apply some kind of a present-value calculation to the shares that TARP purchased. And they’re going to tell you that the amount of the TARP outlay was less than it actually was by that amount, roughly $175 billion according to news reports.

Now there are obvious PR benefits to this. Obama loudly promises to cut the budget deficit in half by five years from now. He wants you to get the impression that he means he’ll cut it in half by what it was before he came to office, and certainly the news media do nothing to dispel that impression. In reality, he hopes to cut the deficit in half from his own first budget.

But Obama’s very first budget will be in deficit by at least four times as much as the previous record-high deficit in nominal dollars, and at 13% it will be the highest deficit as a proportion of GDP ever in peacetime. If he does reduce the deficit in half in five years, it’ll still be more than twice as high as the previous record.

It’s no joke that Obama would like to see his upturned nose on our currency someday, given how much of it he’s printing.

So to account creatively for the TARP expenditure will reduce his first budget deficit by about 10%.

But is it real? Government accounting is very different from the ordinary accrual accounting that large businesses use. It’s often said that the government keeps its books as if it were a candy store.

But that actually makes a lot of sense when you consider that the government has no use for retained earnings, as a business does. The government prints its own money, and every dollar that it spends simply “appears” in the commercial bank accounts that the Treasury keeps for this purpose. In a mechanical sense, the TARP outlays were accomplished simply by changing numbers in a few computer files.

If you’re a business and you have money left over at the end of the year, you pay taxes on it, and then you save or invest what’s left. If the government has money left over, it simply vanishes from the economy. It makes the most sense for the government to keep its books on a yearly cash basis.

So for them to say that TARP paid nearly $700 billion for securities with some kind of a stable long-term value, and then declare that those securities are now worth $175 billion, they would have to set up a separate capital account for those holdings. (The Federal Reserve, which does maintain a balance sheet, did something roughly similar with “Maiden Lane,” the vehicle that holds the assets taken out of Bear Stearns.)

But you have to match a credit in a capital account with an equal outlay somewhere else. I think they’re playing a game when they say that the deficit was reduced by $175 billion. There has to be an economic impact from the creation of that $175 billion, and someone has to reflect the $175 billion as a liability. If not the Treasury, then who?

You see how phony it is? The traditional way of doing it would be to consider the whole $700 billion TARP plan as a cash outlay (which is what they originally did). And then, as cash flows are realized from the assets that TARP purchased, those cash flows would be treated as cash revenue, offsetting future deficits.

Something tells me, given the “transparency” which is the great stated virtue of the Obama administration, that they’re going to try to have it both ways. They’ll reduce the stated deficit by $175 billion now, and they’ll reduce it again in the future as the TARP assets produce cash. Heads they win, tails we lose.

Now you know that Congress will restore most, all, or more than all, of those cuts. And you know that Obama knows that, too. So obviously, the whole exercise was intended to give him a sound bite and nothing more. But look, that matters tremendously, because from now until the end of his term in office (and beyond), Obama will say that he was the first President in goodness-knows how long to actually cut the budget.

For proof, he’ll have the news headlines: “Obama cuts $17 billion in spending; Starts making the hard choices; Down-payment on Fiscal Responsibility.” Repeating lies endlessly makes them true.

George Bush left office with a record federal deficit of about $475 billion. (It had dipped below $200 billion at mid-decade.) Over the course of his eight years in office, he took our public debt from $3 trillion to $6 trillion.

Obama’s first budget will be in deficit by anywhere from $1.2 trillion to $1.75 trillion. (It will be worse if the economy, employment, and business income remain weak.) Obama promises in every speech to cut the federal deficit in half. He doesn’t mean down to half of Bush’s $475 billion. He means down to half of his own one-to-two trillion dollars. And even that he can only achieve by assuming the economy starts growing by 4% next year, which is not only silly given the banking crisis, but also far above the secular trend in any case.

The President is asking us to grade him on a curve. With one hand he wants to expand government spending far above what it’s ever been in peacetime. With the other, he’s going to trim a few things around the edges and ask to be credited as a fiscal conservative. But Obama will add more to the public debt in the next two years than George Bush did in eight.

Let’s talk about that a little bit. The pledge from this President is that 95% of Americans should pay lower taxes. Almost 50% of them pay no income taxes now, but only payroll taxes. Let’s assume that those people will be getting negative income taxes (which has already started happening). We know that taxes on the top earners will rise “to the levels of the Clinton era, which after all was pretty good for wealthy people.”

Ok, so what do you do now to fix the incredible gap between that small revenue enhancement and what Obama (and Congress) actually want to spend? There will be big-time rule changes on high earners, on businesses, and on capital. (In the latter case, it helps a lot if you de facto control the banks, because they can’t scream as loud.)

There’s no way for productive people and capital to escape far higher taxation in the next few years, even if the top marginal income-tax rate remains below Clinton’s 39.6%. The math just doesn’t work otherwise. Obama, again grading himself on a curve, will tell you that he intends to find some savings in medical spending, so that his trillion-dollar-plus expansion in such spending won’t be quite as large as it would have been otherwise. But again he knows full well that what some people consider wasteful spending, others consider their livelihood. He’s asking us to give him full credit simply for making the effort.

Someone has to say it, starting now: there is a European-style VAT in our future. That is simply the only way to fund a vastly larger government without crippling wealth production, and without a debilitating inflation. Get used to it. The President’s surrogates will start floating the idea after the midterm elections, and he himself will propose it right after election day in 2012.

Before you rush to say it, no, the Chinese weren’t in there buying. But that part is NOT a surprise, because foreigners and central banks generally stick to buying short-dated securities. China stopped buying our long bonds back in 2007.

One of my colleagues reminded me that Britain and Germany had serious failures to sell debt earlier this year. The US Treasury borrows in its own currency, so they have nothing like the constraints that the Germans or the Brits do. At least in theory, the Treasury could borrow at any interest rate necessary to clear the market, because they can print money to pay the interest.

The problem is that if the risk-free rate is extremely high in any particular stretch of the yield curve, it necessarily raises the corresponding interest rates for actual business borrowing, possibly to the point of choking off actual business investment.

But it’s funny, because this whole conversation is the kind you’d have in normal times. These aren’t normal times. Bank credit is exceptionally scarce at any price, for more than one reason. Geithner is already using coded language that suggests to me that he finds this ultimately acceptable, so long as government entities can create credit themselves.

And at the end of the day, it truly is frictionless for the government to create credit. But the problem is that there will be very few organic market signals for allocating it, which is a fancy way of saying that the economy won’t be producing things people actually want to buy.

If nothing changes, then ten years from now, Americans will be telling each other Euro-style things like “I work to live, man, I don’t live to work,” and “as long as I have what I need and my retirement is guaranteed, I don’t really need anything more.”

And Obama will get credit for making America a kinder, gentler place. It’ll be really boring, though.

It’s very far from clear to me that this is a Chapter 11 bankruptcy in any normal sense. For one thing, why is it being announced by the President of the United States rather than by Bob Nardelli?

In reading the news reports, there’s a tremendous number of moving parts here, and no one is being very clear about it. I have at least two very big questions, one of which is public and the other isn’t.

The public question relates to Fiat. Marchionne has been very emphatic that he will put no cash into Chrysler in return for Fiat’s stake, which starts at 20% and could go as high as 51% by 2016. Fiat is giving nothing but access to small-car technology. That can only mean that the government intends to dictate Chrysler’s production mix. That in turn means that the government has chosen to enter the auto business in a forthright and unprecedented way.

The private question relates to the current owner of Chrysler, which is Cerberus Capital Management, one of the most powerful, most wealthy, and most feared private equity groups in the world. They easily have access to billions of dollars they could invest in Chrysler. The fact that they simply don’t want to, tells you that this company isn’t worth investing in, and ipso facto the taxpayers are flushing money down the toilet.

But I want to know much more than that. I want to know exactly what consideration will be paid to Cerberus in return for the common stock that will be ceded to Fiat, to the government, and to the UAW. Are we bailing out a bunch of politically-connected billionaires?

And you can’t say you haven’t noticed how effectively they’ve kept their name out of the news. Whenever you get a chance, ask anyone who will listen: WHY HAS OBAMA NOT TOLD US WHAT HE INTENDS TO GIVE CERBERUS IN RETURN FOR CHRYSLER?

I suspect that the objective of the 11 filing is to give a bankruptcy judge the opportunity to tell all of Chrysler’s unsecured creditors, including debtholders and trade creditors, to go to hell. Among much else, I want to know if the holders of unsecured debt are, first and foremost, the bankers who provided the leverage for Cerberus to purchase Chrysler from Daimler-Benz in the first place.

If so, then how many of those banks are TARP recipients, and therefore in no position whatsoever to tell the US President that they don’t like the deal he’s offered them?

And then there about 40 hedge funds who are said to own much of the outstanding debt. Are they principal lenders to Cerberus and/or to Chrysler? Or are they vultures who purchased Chrysler debt from banks at a heavy discount?

Either way, Obama’s public remarks included a most remarkable statement in regard to those hedge funds: “I don’t stand with them.” Please excuse me if you think this is overheated, but if I’m one of those hedge funds, I’m thinking that Darth Vader just declared war on me.

The question has been asked, whether the US President can tell the bankruptcy judge how to proceed. I’d say that the President, having put $4 billion in bridge loans into this company, with the promise of another $8 billion, can do whatever he wants, including installing a judge that he knows will be compliant with his wishes. After all, who’s going to say no to the President? The media? The voters?

I have to say that the bottom line is probably this: Obama has two objectives in mind. First, he doesn’t want to see massive layoffs at Chrysler and its network of suppliers and dealers. That’s just basic political cowardice and very easy to understand. But second, he’s seeing an opportunity to change the auto industry in his own image and likeness.

And we really need to be asking whether that should be the job of the US President. Nothing could be more important, because this is a fundamental expansion of the scope of government that no one seems prepared to challenge.

Chrysler is small fry. If this is how GM and the largest banks are going to go, we’ve got some very interesting times ahead.

Shortly before 10am this morning, a low-flying airliner buzzed New York Harbor just south of Manhattan, tailed by a pair of fighter jets. In case you weren’t here one dazzling September morning eight years ago, that’s exactly the flight path taken by the airplane that hit the south tower of the World Trade Center.

So what do you do when you hear that sickeningly familiar sound? Of course: you go into near-panic and evacuate all the office towers. That’s pretty close to what we did.

Now, we’ve come to find out what it was all about. If you haven’t heard this story, please brace yourself.

It was one of Barack Obama’s planes. It was one of the 747s used as Air Force One. They flew it past the Statue of Liberty. To snap some publicity pictures.

Why are we hopping mad about this? Because no one bothered to tell us. Apparently, DHS informed the New York police, but then instructed them not to say anything about it. The only thing I can guess is that they were afraid one of our friendly neighborhood terrorists might take the opportunity to fling a shoulder-launched missile at the thing.

So people I talked to (who were there on 9/11) said they heard two really loud flybys, and ducked because the next sound they expected to hear was a big crash. If you’re not from here, it’s hard to explain how sensitive people still are about this.

Why on earth did our President do this to us? Was he just plain thoughtless? Or was the insensitivity willful?

One of my colleagues just expressed the meaning of his life thusly:

“I absolutely LIVE to drive fast.  I work and advance my career so that I can have frakking fast cars.  That pesky little house and other possessions are there merely to facilitate my car habit.”

This statement was remarkable to me, given that I’m a New Yorker (say what you want about that, I’ve heard it all), and more to the point, that I’m not a licensed driver. When I need to go somewhere in a car, I pay someone else to drive me.

But I believe that my friend and colleague’s views on the matter of driving are a lot closer to normal than mine are. And that got me thinking about some important aspects of Obama’s economic blueprint for America.

We conservatives waste a lot of time screaming that Obama is a socialist who wants to take over the economy and end capitalism. Not only is that wrong, but it’s wrong in ways that make us look a little silly when we say it.

Marxism as a principle for economic organization was discredited among the intellectual left wing as far back as the Sixties. (What did they place their hopes in at that time? A radical, revolutionary Maoism. You should thank God every day that that didn’t go anywhere either.)

Obama doesn’t want to take over the economy or to end capitalism. He’ll be the first one to tell you that powerful things happen when ordinary people pursue the profit motive.

Instead, he and his associates want to redirect capitalism, by changing the incentives you and I face in our economic lives. They still want us to pursue profits, but they want to change the rules so that, in pursuing profits, we’ll actually do the things they want done. They want us to do the heavy lifting.

And that’s what brought me to the subject of frakking fast cars.

Every single chance he gets, Obama goes out of his way to say that if we create a green economy, we’ll generate millions of jobs, and vault to economic leadership of the world. (I thought we already were the economic leaders, but forget about that.)

What’s a green economy all about? To Obama, it’s all about building technologies and processes for wind and solar based power, and to eliminate oil, gas and coal. Let’s examine why that might not work so well.

Being very serious, it’s entirely possible and credible for the government to redirect incentives and thus to create economic activity that wasn’t there before. That’s the linchpin of the theory that a government-directed push into green energy will revitalize the economy.

To put it very crudely, Obama wants to spend government money giving you a job working on wind and solar power. You’ll take the job for sure, if there are no others for you, and you’ll be thrilled to have the money.

So far, so good. That part actually works in theory and can even work in practice.

The problem is this: why do you actually want money in the first place? Well, everyone wants to buy food, clothing, and shelter. Once you have the basics covered, what’s left?

Frakking fast cars.

Go back and re-read the quote from my RedState colleague that I started with. If the incentives in your life are all about driving fast cars (or whatever guilty pleasure is your personal favorite), then what happens when you can’t buy them anymore because they’re too expensive, too socially-unacceptable, or both?

The answer is that you won’t bother working any harder than needed to earn the necessities.

Read that sentence again to yourself a couple of times. It contains the fatal flaw in Obama’s plan to remake America by re-tuning our economic incentives.

He wants to give us an economy based on developing wind and solar power. That’s what Obama wants most in life. But if that’s not what you want most in life, then you won’t work all that hard for it. And his plan will fail.

The interesting thing about Fannie Mae and Freddie Mac is that, quite below the radar, they’ve morphed into practically full-faith-and-credit debt issuers. The term sheet under which they were nationalized last September provided that they should divest about one-tenth of their portfolios each quarter, with proceeds to benefit the Treasury, putting them on a glide path to full dissolution in three years or so. Instead their role has only gotten bigger and more systemic.

It’s no exaggeration to say that most new issuance of mortgages in the US (including refis) goes through Fannie and Freddie. But these mortgages are ultimately being funded by people who think they’re buying Treasury paper with a slight yield kicker, not by people who actually want exposure to US mortgages. If the market were to find its own level without this implicit federal support, it would be shockingly lower than it is now.

This is bad for at least two reasons: first, it misallocates economic resources, by definition. We simply have no way to know what desirable and healthy things the economy would be doing with the resources being forcibly directed into keeping housing overpriced.

And second, how do we ever remove the Federal support? No Administration will ever be willing to find out just how low housing values can really go. US housing has been permanently socialized.

To my readers here at RedState: I apologize for my low blogging output in recent weeks. As many of you know, I’m a CEO, and sometimes business gets very busy. I’m happy to say that conditions have been getting noticeably better, at least in the markets I participate in. Once things settle down a bit, I’ll be blogging more again, here and elsewhere.

Thus Barack Obama, on the subject of General Motors. This was in the course of a speech given yesterday, which indeed rewarded poor decisions by giving the company 60 more days to keep operating on taxpayer life-support.

Obama is the Revolution of Circumlocution. Whenever you want to know what he actually means, just reverse his statements 180 degrees.

Under the terms of the deal in which GM borrowed emergency funds from the government last December, the company is required to produce a credible operating plan with sharp cost-cutting measures by March 31, or else face a demand to immediately return the funds (thus triggering immediate moves by creditors to liquidate GM). Those of us with eyes knew at the time just how empty a covenant this would turn out to be.

Today, Obama is putting lipstick on the pig. He’s presenting what is called an ultimatum to GM and Chrysler (the beneficiaries of emergency government funds), to shape up or ship out. And they have 60 days to do it. We don’t really know what Obama actually wants to see happen in 60 days. Characteristically, he doesn’t say, which is your cue to add your own writing to his blank slate.

Why am I so cynical? Because the deal was for GM to restructure or die by March 31. Obama just gave them a sloppy wet kiss in the form of a 60-day reprieve, and he wants us to think he was being tough. The only cost that he imposed on GM was the dismissal of CEO Wagoner, whose departure has long been only a matter of time. And I’m betting that 60 days from now, there will be another big dollop of taxpayer funding for GM, accompanied by more harsh words.

And of course, another opportunity to take stern photographs of our Dear Leader.

Today, the President of the United States is expected to make significant announcements about GM’s warranty policy. No, that’s not a typo, and yes, it’s remarkable. I didn’t say the President of General Motors, I said of the United States.

Since when does an urban agitator and small-time legislator with a law degree think he can run an enterprise with 100,000 employees, thousands of vendors, millions of customers, and operations in every part of the world? Well, that’s one of those questions you’ll just have to ask the people who voted for him last November. I can shed some light on the rest of this.

And there’s another really remarkable aspect here, which speaks either to tremendous political skill or luck among the Democrats: they kept the whole thing out of the news for the last three months.

All signs are now pointing to a significant bankruptcy event at GM, and the departure of Wagoner is the first sign of that. Why? Because for months now, he’s been the one guy saying consistently that GM can not file any kind of a bankruptcy.

There are two reasons why not. First, the public ones. Wagoner has always insisted that GM’s customers would abandon a bankrupt automaker for fear of not getting their warranties honored.

How interesting and convenient it is then, that the new CEO of General Motors, a certain Barack Obama acting ex officio, will announce today in public the formation of a government-sponsored entity, independent of GM and non-defeasible in a bankruptcy, to guarantee performance on GM’s warranties! That’s your other sign that a bankruptcy filing is imminent.

But there is another really important reason why GM has resisted bankruptcy tooth and nail. No one will lend them the money to operate in bankruptcy.

Last summer, the first warnings on GM were sounding as they started running low on cash. They haven’t turned a profit in several years, and the burn rate as of last summer was about a billion dollars a month. That would have had them out of cash by sometime in late 2009.

But then, the bottom fell out of the auto market, beginning in October. Since then, every automaker in the world has felt the pinch of sharply-reduced demand for new cars and trucks. In some months, GM’s sales dropped by no less than half. This is the top line, mind you, not the bottom line! It’s quite incredible, and would be an enormous challenge to even a healthy business.

But GM wasn’t healthy. The out-of-cash event that was originally projected for next fall, instead came at the end of last December. You can go back and read the long series of posts I wrote at RedState for the blow-by-blow.

If a company can possibly operate in a Chapter 11 bankruptcy, they’ll arrange bank financing and work out their issues under court protection from their creditors. But there are two problems: first, you may have noticed we’re in a credit crunch. You couldn’t get a banker to lend you money even to buy Treasury bonds these days. And second, everyone knows GM can’t survive, and has known that for years, so even under normal credit conditions, no one would lend to GM.

So a bankruptcy filing would quickly degenerate from Chapter 11 (restructuring) to Chapter 7 (total liquidation, and the immediate loss of hundreds of thousands of jobs, and a cascade of bankruptcies among GM’s dealers and suppliers).

That might indeed have been the picture last January, had the Treasury not stepped in with a wad of cash from the TARP, which was then supplemented several weeks later.

We all knew the moment of reckoning would come right about now. It matches the amount of bailout cash that GM has received, at their current burn rate of about $5 billion a month.

The wonder is that it’s been kept out of the news so effectively. The rolling flaps over the banking crisis and AIG have provided useful cover for the Democrats, as they’ve beavered away at a plan for nationalizing GM.

But the TARP and all the banking assistance programs (except for AIG) have been about providing support for the capital positions of banks. The public dollars committed in support of those entities have been going onto bank balance sheets. The public has been buying stock in those banks, and you expect to get your money back out when you buy stock.

But the public money given to GM and Chrysler LLC has simply been poured down a rat hole. These companies are bleeding cash, and in a just world they would have failed months ago. Instead, public money is getting fed into them, just like pint after pint of precious blood dumped into a guy who’s hemorrhaging from a dozen bullet holes.

That’s the situation that GM’s new CEO, Barack Obama, is going to perpetuate, as I told you many times last December.

GM are facing bankruptcy because they’re insolvent. They’re built for a high cash-flow world, not a world in which sales contract by anywhere between a third and a half (year-on-year) month after month. GM, like Obama himself, have been pinning their hopes on the kind of economic recovery that will see total annual sales volume in North America shoot back up toward its high-water mark of around 17 million units.

Reality is a lot closer to 9 or 10 million. That’s enough to sustain the number of world-class automakers we have, but GM simply can’t be one of them with its current capital and cost structure.

GM needs a total restructuring of its operations. By rights, every stakeholder in the room should take a lot of pain, and then the company should figure out how to move forward in a world in which the competition is a lot hungrier, the markets are a lot smaller, and access to capital is far more constrained. But that’s a great challenge for American business people, who are still by far the best in the world.

But that’s not going to happen, because some stakeholders are more equal than others.

The common shareholders of GM are going to get wiped out. That’s good, they should. The bondholders are going to get converted to equity at 30 cents on the dollar. That’s good, they should.

Many of GM’s dealers will receive lavish buyouts as an inducement to close their doors, for a total cost in the billions of dollars. That’s disgusting, but it’s required both by GM’s contracts with them and by the welter of state laws that protect the dealers. (If you want to know who the political power brokers are in any given city or town, look for the car dealers.)

This is going to be kept scrupulously out of the news, because car dealers contribute huge sums to every last man and woman in Congress and the Senate. The public was ready to torch the private residences of AIG executives, but they won’t make a peep about paying billions of their own hard-earned dollars to provide a cushy retirement for thousands of already-rich auto dealers.

And then there’s the UAW. They are in fact the beginning and the end of the government’s interest in General Motors. They will come out of this as the big winners. Never mind that the average automaker earns half again as much in wages and benefits as the average American. UAW boss Ron Gettelfinger, with CEO Obama at his side, will announce “deep, painful concessions” to be suffered by the union membership.

But don’t believe a word of it. The union will come out of this nearly untouched, with their exorbitant compensation packages basically intact, and minor changes in work and seniority rules. And you the taxpayers will be paying for every penny of this, because they won’t be earning all that pay in the market. GM in bankruptcy will force every one of its stakeholders to take major pain except the UAW membership.

And their ex officio CEO, Barack Obama, will start forcing them to focus on non-economic electric cars. You see how conveniently that worked out? A more circumspect President would have recognized that it’s not good for government to be in the auto business. We’re going to replay a lot of bad history lessons that other countries learned long ago.

Oh yes, I almost forgot about Chrysler LLC. I can summarize their situation in two words: shark bait.

I’m now hearing stories about employees of Wells Fargo (which took TARP money not by choice but by force) who make $250K (which in my part of the country barely qualifies as middle-class) in total household income. These people will see their year-end bonuses taken away, if the bonus-clawback bill passed by a large bipartisan majority in the House becomes law. We’re not talking about a few hundred traders and executives at AIG anymore.

So, intentionally or not, has the House just created an income cap at $250K that eventually will get spread far and wide throughout the economy? After all, it’s obviously unfair to apply a salary cap only to people who just happen to work for a company that was forced to take TARP money against its will. So the only response would be to abrogate the salary cap altogether (making Congress look even stupider than they look now), or to spread it to many more companies.

Will the Senate be smart enough to see this for what it is when it’s their turn to vote on it?

Let’s leave aside the critically important question of whether the government should force AIG to break the contracts it freely made with its employees, and acknowledge that the public wants a pound of flesh. Even though there is a principled case to be made in favor of the bonuses, principle is something Obama has never known or cared anything about.

It makes more sense, rather, that he decided he’d better turn AIG into the bete noir, or else he’d see the people’s righteous anger turned on himself, heaven forfend. As always with this President, politics trumps policy.

But I need to clarify an important point that is getting thrown around by a lot of people this morning: the idea that a lot of the money that taxpayers gave AIG was actually paid out by AIG to other, perfectly healthy banks and investment firms, and also to some banks that themselves received government assistance.

Perfectly true, and perfectly misleading.

AIG got into trouble because it wrote credit-default swaps, which function like insurance policies on debt securities. When the market moves against a CDS writer, he will always be required by his counterparties to deposit additional collateral with them, in order to ensure performance in case a protected security does default.

That’s what happened to AIG, to the tune of about $75 billion in mid-September alone. Of course this money got paid out to a lot of other companies. Who do you think bought the CDS insurance from AIG in the first place? The whole point of marking collateral positions to market is to make the overall system more stable by ensuring payment on the swaps.

If some of the people commenting on this story got their way, and AIG had not paid on its collateral calls, you’d see suddenly-undercapitalized banks and technical defaults happening all over the world. This is precisely why we have a TARP program: it was proposed three days after the AIG takeover to deal with the fallout from that event. If AIG had failed outright, we would indeed have had a total financial meltdown, instead of the far milder disruptions we actually got.

You may think a global depression and a stock market collapse are pretty bad, but they’re practically nothing, compared to how things might have gone last September. I’m getting very annoyed at the people who are saying AIG should have been left to fail. I’m sure those same people would be mightily exercised if their paychecks were to bounce and their money-market accounts had been frozen.

Yes, indeed, let’s punish AIG good and hard. Let’s even take away their trader’s bonuses. But let’s not misunderstand the gravity of the situation they caused.

Don’t let ANYONE tell you that this is Bush’s fault, or that Obama inherited the decline. The stock market by definition is a leading indicator. It predicts the future for corporate earnings, not the present or the past.

The stock market is saying that with Obama in office, the outlook for business is poor. And with his promises of higher taxes and more regulation, Obama is doing his very considerable best to reinforce the negative perception.

Next time you open your 401(k) or mutual fund statement, try not to flinch at the thought that a great big bear with Obama’s face is looking over your shoulder.

Yesterday, the Senate Finance Committee heard from Treasury Secretary Geithner, who said that it’s the wrong policy choice to “subsidize” oil, gas and coal producers by allowing them to operate as they always have.

Today, Energy Secretary Steven Chu told the Senate Energy and Natural Resources Committee that using the Yucca Mountain underground repository for storing nuclear waste is no longer an option. In fact, the Administration’s proposed budget eliminates all but token funding for the site.

Senator McCain sharply questioned Chu, who replied smugly that “we have better options” than Yucca Moutain (conveniently located in Senate Majority Leader Reid’s state of Nevada) for storing commercial nuclear waste.

The waste storage problem has long been considered a key barrier to the expansion of nuclear power generation in America, and there are no clear alternatives to the Yucca site. Today, America’s nuclear plants store their waste on-site, above ground.

What Chu and his boss, the President, are saying in veiled language, is that they have no intention of allowing nuclear power to stage a comeback. If these guys get everything they’re looking for, America faces a future of much higher energy costs. On top of the powerful disincentives to business investment and expansion that are also contained in the new budget, the net result will be a severely underperforming economy in the years ahead.

The latest one was yesterday in the Senate Finance Committee. He said, get this, “We don’t believe it makes sense to significantly subsidize the use and production of energy sources” that contribute to global warming.

What’s a significant subsidy? Apparently that means being allowed to produce oil and gas in the Gulf of Mexico. So what’s the response? Add a 13% tax on the revenue of a narrow class of producers that should raise $5 billion or so over the next 10 years.

Why is he even wasting his time with this? His job is to find anywhere from one to two trillion dollars every year for the remainder of his time in office.

Geithner is a government guy. He’s not a business guy, a finance guy, a markets guy, or an economist. None of the above. But by talking nonsense, he’s giving everyone a perception that he’s out of his depth.

This is nonsense because it’s either not a tax that’s big enough to matter, or if it is, it will displace the activity it seeks to tax. If the goal really is to displace the activity, then that’s economic nonsense too, at a time when we should be growing the economy as much as we can.

The other thing it could be is a shot across the bow. This could be David Axelrod’s way of putting down a marker that they really mean it about ending the use of low-cost energy in America on climate-change grounds.

That scares me even more. Say what you will about Henry Paulson (and if you knock him for not knowing how to handle the banking crisis, I might even agree, with the caveat that no one else knows either).

But I never once had a sense that Paulson would stand up and speak obvious nonsense that was crafted by the White House to create a political effect. People who have been CEOs learn very quickly that you can’t do that. But I can’t shake the feeling that Geithner does little else.

Forget about he’s one of maybe a million nimrods trying to do the same thing, for the same reason: valuation. Apparently this clown was over in London talking to some other politician, I think he’s named after a color or something, or maybe the other clown came over here or something, and he says, get this, he says that “Profit and Earnings ratios” have now come down to an attractive level for stock market investors that take a “long-term perspective.”

Forget politician, this guy sounds like some snot-nosed weenie that just got his MBA and passed his Series 7 and got a job selling stock in some retail Merrill Lynch office in Jersey or someplace. (Do they even have those anymore?) “Take a long-term perspective” means “yer gonna lose money on this puppy.”

So what’s the profit and earnings ratio this guy’s talking about? It can’t ever be anything but one, can it? Because aren’t profits and earnings basically the same thing? You divide something by itself, you get one, right? Unless it’s a freakin’ mortgage or something. I mean I can see talking about the price to earnings ratio. But that’s no good either because most of the quants I know are talking about another hundred points down on the S&P.

But who listens to politicians? I mean if Bernanke or Geithner or God or someone like that got up and started talking about the stock market, I’d listen. I mean, what they do might actually make a difference. But they’re too smart for that anyway, they know we’ll overreact.

Remember when Greenspan would go up to Congress, and people would buy or sell based on how thick his briefcase was? I mean forget about it, if the guy had a three-decker brisket-liver-’n-onions from the Second Avenue Deli instead of a baloney sammidge in there, the stock market’d go up.

But some politician? Who cares what he thinks?