Our Alcoholic Economy

I am not an alcoholic, nor have I ever been addicted to anything more damaging than Massive Multiplayer Online Games, so take everything that follows with a salt shaker or two.  However, I have known a number of alcoholics in various stages of the spectrum, from denial to recovery.  Those that were actively working on their recovery had a common theme when asked when they decided to stop drinking:  they all hit bottom.  Not the “If I take another drink I am going to puke my guts out” bottom.  Most of these people did that nightly, spending many hours praying at the “porcelain altar.”  I am talking about really hitting bottom…the kind of place where you realize you have destroyed everything and everyone you held dear to you and there is no point in living another hour.  What does this have to do with the economy you ask?

Our economy is addicted to debt.  Ever since we went off the gold standard in 1933, our economy has been entirely based on debt.  Don’t believe me?  Think I am exaggerating?  Pull out a dollar and look at the inscription on the front: “This note is legal tender for all debts, public and private.”  Sounds innocent enough.  However, prior to 1933, it would have read: “Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank.”  Notice the difference?  What are our current dollars redeemable for?  Nada…zilch…nothing!  It used to be that if someone owed you money for a debt, you could actually require them to pay you in gold or silver instead of paper money.  However, that “legal tender” statement on the front of our current money means that you no longer even have that option.  Our money is not backed by anything.  Why does this matter?  And how does this relate to alcoholics?

Let me take one more detour before I finally tie all these things together.  What causes inflation?  The Federal Reserve is tasked with keeping inflation in check, and I know we have all heard that they do this by adjusting interest rates up or down, but how does that really affect inflation?  In a fiat currency system (one where currency is not backed by anything of intrinsic worth), inflation is the result of too much cash being in circulation.  When this happens, the value of one unit of currency (henceforth, I will just say dollar, but understand it works the same way in other currencies as well) declines.  When the supply of money flowing into a community or country outstrips the supply of goods, merchants will have more people than ever before looking to buy their goods.  However, they do not have the supplies to meet the demand, so prices will inevitably go up.  When the Fed sees signs that this is happening, they know there is too much money in the system.  Therefore, they raise interest rates, which in turn makes it more expensive to borrow money, and thus there will be less money pouring into the system.  They can also buy or sell Treasury bills on the open market, thus increasing or decreasing the amount of money in circulation directly.  There were four measures that the Federal Reserve would publish to let people know how much money was in circulation.  The M0 rating was just the number of dollars the Federal Reserve had directly printed and were in circulation.  The M1 measure was M0 plus checking account deposits, the M2 measure was M1 plus savings accounts and money market funds held by personal investors (things which could readily be converted to cash).  In 2005, the Fed decided to stop tracking the M3 measure, claiming no one used it anyway.  However, Congressman Ron Paul claimed that “M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation.”  What did M3 track, you ask?  Among other things, the loans made to large corporations, like the ones receiving bail-out money.  I believe the Fed stopped reporting the M3 statistic because it knew what was coming…not in a conspiratorial sense, but rather in a “we have our fingers on the pulse of the economy” kind of way.

Will you get to the point about the alcoholics already?!?

OK, not-so-patient reader, you have endured enough of my A.D.D. moments, I will finally get to the point.  I believe that our economy, just like an alcoholic, must hit bottom before the federal government will be forced to make the painful changes.    I believe a lot of companies are going to fail and a lot of people are going to be out of work.  While I will point a lot of the blame in the direction of George W. Bush, this problem started much earlier.  In my opinion, it traces its roots back to the Great Depression.  What were some of the milestones along the way that should have sent up warning flags?

  1. Going off the gold, and later the silver, standard.
  2. The founding of an unconstitutional national bank, the Federal Reserve.
  3. The rampant, uncontrolled government spending placing us further and further in debt.
  4. The growing power of labor unions driving U.S. companies to become less competitive on the world market.
  5. The shift from America as a land of production and innovation to a land of consumerism.

The governments (both the Bush administration and the incoming Obama administration) are trying to soften the blow.  They are trying to give us just enough of the picture to get us to take the next step without realizing the full extent of the danger we are in.  They don’t want us to actually hit bottom.  Instead the government is hoping that we can cushion our landing.  What’s wrong with that, you ask?  Everything!  Without hitting the bottom, the problem just gets worse.  All of the well-meaning friends of the alcoholic who try to convince him that he doesn’t have to quit drinking just cut back, that try to find him a new job, or introduce him to a girl they know, are not letting him hit bottom; they aren’t letting the drunk see that the only way for things to get better is to CHANGE!!!

The government doesn’t want to have to change.  They started off with the bail-out of AIG and news that they would offer funds and loan guarantees to help with the buy-out of Bear-Stearns.  Then came the mind-blowingly large $700 billion bail-out bill in Congress.  But, as some of us warned, that was just the tip of the iceberg.  How much are we really on the line for?  Please sit down before reading this link (and for those that skipped it, please go back and read it…it will likely make you feel sick, but again, it is part of hitting bottom).  That’s right folks, $7,700,000,000,000.00 ($7.7 trillion)!!!!!!!!!  And the truly frightening part is, we aren’t done yet.  Today, they announced that Citibank was receiving bail-out money.  Why is that significant?  Because Citibank was considered one of the most solvent banks (one least likely to need a bail-out).  If they need cash, the rest of the banks are only a question of when, not if.

And what about the rest of the economy?  What about the automakers?  Should the government throw cash down that rabbit hole?  In my not-so-humble opinion…NO!  Did you know that the average assembly-line worker at G.M. makes over $70 per hour?  Did you know that the person doing the same job at the American Toyota plant makes less than $45 per hour?  Is it any wonder that G.M.s cost more than Toyotas?  Also, G.M.’s pension liability for 2004 was $89 billion.  Again, I consider this a major problem with labor unions, especially in the auto industry.  If G.M. could file for bankruptcy, no matter how painful that might be, it could give them a way to renegotiate some of these burdens.  However, I don’t expect that the government will let that happen.  Instead, I predict that Obama will bail them out (if Bush doesn’t beat him to it).

How much longer do you think this downward spiral of endless government spending can continue?  How much longer will it be before China and the rest of the world refuse to buy any more Treasury bills that are only backed by “the full faith and credit of the U.S. government”?  How long before the credit rating companies downgrade our government’s credit rating, making it vastly more expensive to borrow money?  Guys, I hate to be the one to break it to you, but the plane is losing altitude and there is a mountain range looming ahead of us.  All of the government tricks are only postponing the inevitable.  The plane is going to crash, the only questions are when and how hard.

Published in: on November 25, 2008 at 1:15 am  Comments (5)  
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Obama to Abandon a Sound Idea

On page 42 of President-elect Obama’s Plan for Change, I found a piece that I actually agreed with.  This is his support for a PAYGO system (i.e., pay as you go).  The idea is that if Congress or the President wants to raise spending, say on Medicare for example, they must pay for that increase by either raising taxes sufficient to cover the cost or by cutting another program or agency, such as the Department of Education.  This way, the budget is supposed to be balanced.  I am all in favor of that, and would love to see it implemented.  After all, as Obama has pointed out, under President George W. Bush, the national debt has gone from $5,700,000,000,000 ($5.7 trillion) to $8,800,000,000,000 ($8.8 trillion).  And of course, that doesn’t even factor in the debt that isn’t listed in that particular set of government books nor does it include the $700 billion from the bail-out bill.  I know, everyone pick your jaws up off the floor; I actually agreed with Obama on something.  Before you sink too deeply into shock, don’t worry – he found a way to get around this particular plank in his plan.

Imagine my “surprise” when I saw the following Reuters headline: “Obama says aiding economy trumps budget deficit.”  Some quotes from the article from Obama:

The consensus is this, that we have to do whatever it takes to get this economy moving again, that we have to — we’re going to have to spend money now to stimulate the economy.

And (consensus is) that we shouldn’t worry about the deficit next year or even the year after; that short term, the most important thing is that we avoid a deepening recession.

I wonder if when he says “…do whatever it takes to get this economy moving again…”, he considers the possibility that what it might take is to get Washington politicians out of the way ?!?  Of course not.  To paraphrase the Bible, “The government giveth, and the government taketh away; blessed be the name of the government.”  And also, always be very afraid when politicians speak of “consensus.”  There is no such thing in most fields!  There isn’t consensus on whether humans cause global warming, there isn’t consensus on whether the federal government can do anything positive for the economy by throwing money at it, heck, there isn’t even consensus over whether Pluto should be classified as a planet!

Am I the only one that remembers the bail-out bill?  Treasury Secretary Paulson went before Congress and in essence told them he was out of tools to stabilize the housing crisis.  He begged, pleaded, and cajoled to get them to pass the bail-out bill without the normal debate.  Paulson’s original plan was only three pages long.  However, it was defeated in the House.  When the Senate ramrodded through a version of the proposal, it had swelled to over 450 pages in just three short days.  Paulson’s plan had been to buy distressed mortgages from banks.  The theory was that if the government bought them, they could do so at a discount, hold them to maturity, and then “turn a profit” when the loan was refinanced or paid off.  This would restore “liquidity” to the credit markets.

Does it surprise anyone that Secretary Paulson has not used one dime of the bailout maoney to purchase a single bad mortgage?  Instead, he decided, without any oversight (since Congress and the President have not moved to fill those roles), that he would buy shares in banks, thereby beginning the process of nationalizing our financial institutions.  Now there is talk of bailing out the “Big Three” automakers.

I had really hoped that the Obama administration was going to at least make an effort, however half-hearted, to balance the budget and end these government give-aways.  No such luck!  The PAYGO system is dead in the water for at least two years.  And with the way this presidential campaign played out, that will be just in time for Obama to trot it out again for the next campaign!

A friend sent me the following.  While fictional, it still has the ring of truth to it.

How a bailout plan works

Young Chuck, moved to Texas and bought a Donkey from a farmer for $100.00.
The farmer agreed to deliver the Donkey the next day. The next day he drove
up and said, ‘Sorry son, but I have some bad news, the donkey died.
Chuck replied, ‘Well, then just give me my money back.
The farmer said, ‘Can’t do that. I went and spent it already.
Chuck said, ‘Ok, then, just bring me the dead donkey.
The farmer asked, ‘What ya gonna do with him?
Chuck said, ‘I’m going to raffle him off.
The farmer said, You can’t raffle off a dead donkey!
Chuck said, ‘Sure I can, Watch me.. I just won’t tell anybody he’s dead.
A month later, the farmer met up with Chuck and asked, ‘What happened with that dead donkey?
Chuck said, ‘I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $898.00.
The farmer said, ‘Didn’t anyone complain?
Chuck said, ‘Just the guy who won. So I gave him his two dollars back.
Chuck now works for the government as a top advisor on the bailout Plan!

Published in: on November 18, 2008 at 10:39 pm  Comments (5)  
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Obama’s Plan for the Economy (part 3)

Tonight, we look at the next phase of Obama’s plan for the economy.  This part deals with home ownership and the mortgage crisis that sparked the government’s bail-out efforts (I refuse to call it a “rescue plan”).  Without further ado, I give you…

Plan to Protect Home Ownership

  • Protect and Promote Home Ownership

There are two parts to this part of his plan.  I will lay out my comments on both parts, then summarize my views on them taken as a whole.

  • Create a universal mortgage credit.

OK, I have already (in previous posts) expressed my dislike for refundable tax credits.  However, of all the tax credits I have reviewed so far, this one bugs me the least.  I understand that one of the big “advantages” of purchasing a home vs. renting is being able to write off the interest paid.  I do love the language of this section, though.  Here are the parts that chap my hide:  “…most of whom earn under $50,000 per year…” and “…primarily wealthy Americans benefit [from the existing deduction]”.  Is he trying to define those who make $51,000 per year (and who itemize their deductions) as being “wealthy”?!?  OK, so overall, I am leaning towards this part of his plan being OK…until I look at the pricetag.  He estimates that this proposal would give 10 million Americans an average refund of $500.  Doing the math:  10,000,000 x $500 = $5,000,000,000 (five billion dollars).  OUCH!  And of course, that money will have to come from somewhere…now let me see, there is nothing in Obama’s plan about raising taxes, so…hmmm…where could it come from?  I also love how this part ends: “This tax cut will provide direct relief to many homeowners who are struggling to maintain their mortgage payments.”  OK, let’s get real here, is $500 over one year going to do diddly to help them make their mortgage payments?    Even if the homeowner were diligent enough to put that $500 in the back and only take out 1/12 each month, that would put less than $42 per month in his or her pockets.  Yeah, I am sure they are feeling so much better about making their mortgage payments now!

  • Close Bankruptcy Loophole for Mortgage Companies

OK, I admit it…I know nothing about bankruptcy laws.  I have been pretty poor my whole life, but I never seriously considered bankruptcy, so I never looked into it.  I will assume that Obama’s claims are accurate about multiple-home-owners being allowed to renegotiate their mortgages and single-home-owners not being allowed to.  Again, this seems to fall under my definition of unfair (see my last post).  I think people should be able to renegotiate bad mortgages in bankruptcy, especially if it is their primary residence.  I think it should be strictly monitored by the judge presiding over the bankruptcy hearings to insure the new mortgage is fair to both the homeowner and the lender.  The one thing I disagree with Obama on is his unwillingness to place any blame on the homeowners who signed bad loans: “…regardless of whether the loan was predatory or unfair.”  Did I miss something here?  Last time I checked, mortgage brokers did not bring a gun to the signing.  These people signed these STUPID “125% of value, no-money-down, no-need-to-prove-your-income, balloon-payment-due-after-4-years” loans of their own free will!  If the bankruptcy judge determines that there is no equitable solution for the lender (while still being as fair as possible to the borrower), then they should lose the home.  As cruel as this sounds, it does not come from a mean-spirited feeling.  The government (and yes, I mean government, not banks, although they played their part as well) took perfectly good renters and turned them into terrible homeowners.  I rent an apartment instead of buying a house for many reasons, but one of the biggest is because I know it would stretch my income to the limits.  If any little unforseen expense came up, I wouldn’t be able to pay the mortgage.  I am not foolish enough to take one of these scam mortgages just to get into a house I really can’t afford.  But even if I did, I WOULDN’T COME CRYING TO THE GOVERNMENT TO BAIL ME OUT IF I COULDN’T MAKE THE PAYMENT!!!

<Taking a deep breath now to calm down…>

OK, my views on how well these two points meet their stated goal of protecting and promoting home ownership…They don’t (on either count).  The only home ownership they even attempt to protect are those filing bankruptcy…a little late to help out, if you know what I mean.  And promoting home ownership?  Among who?  The people that are really looking forward to their extra $42 per month in tax credits?!?  Give me a break!

Prevent Future Crises in the Housing Market

Again, he has two subpoints under this part.

  • Mandate accurate loan disclosure.

He suggests creating some akin to the APR (annual percentage rate) so home buyers have a better way to compare mortgages so they can get the best deal.  I think it is a good idea (don’t fall off your chairs…I am trying to be fair here, but it has been very hard wading through this much Marxism).  However, I do have one concern with his idea.  Just as there are people who will finance cars at 14% interest because they have bad credit, you will still have people who have no business buying a house (because of bad credit) who will sign stupid mortgages even if they were mandated to have a flashing neon sign on them that said “You are getting ripped off!”  To quote Forest Gump, “Stupid is as stupid does.”

  • Combat mortgage fraud and subprime loans.

Mortgage fraud is a pretty serious charge, carrying a penalty of up to 30 years in prison.  However, when I looked up mortgage fraud on Wikipedia, most of the examples involved the borrower commiting fraud against the lender, not the other way around.  As the Wiki article points out, “Mortgage fraud is not to be confused with predatory mortgage lending, which occurs when a consumer is mislead or deceived by agents of the lender.”  Obama sponsored the STOP FRAUD act back on Valentines Day 2006, but it never made it out of Committee.  In fact, his speech introducing the bill is the only mention of it in the Congressional Record (he really faught hard for it, didn’t he?).  In addition, it didn’t deal with subprime loans at all.  As best I can tell, mortgage fraud did not cause the housing crisis.  What did, you ask?  Well, let me shed a little light on the subject for you…

The problem (which, you will notice from the first article’s language, was not perceived as a problem) started under the Clinton administration (don’t worry, I am going to bash Bush too in a minute).  Clinton’s HUD had raised the “target” for Fannie Mae and Freddie Mac to having 47% of their assets in loans to people making below the median (middle) income, or in other words, to the people in the lower half of the income scale.  President Bush didn’t do a whole lot to help either.  In 2003, helping Latinos become homeowners was all the rage.  I love a section from that story:

Some Latinos who are self-employed or accustomed to paying for goods and services in cash do not have established lines of credit or documented income, both significant requirements for being considered qualified to buy a home, group officials said.

To help people with nontraditional financial histories, the program has enlisted lending institutions that will look at other means of assessing an individual’s credit history.

Washington Mutual, which is part of the housing initiative’s advisory committee, is one of the lenders that has implemented a loan program that takes into account bills for utilities and mobile or home telephones as an indication of an individual’s financial track record, said Peter Villegas, a vice president with the company.

What a great idea!  Take people with no credit history but who have a home phone, and lend them $250,000.  Can they repay it?  Who knows…they don’t have to prove their income either!  In 2004, the Bush administration pushed the targets even higher.  The article claims they were trying to slow the growth of Fannie and Freddie by making it tougher for them to buy more loans.  Doesn’t seem like it worked too well.  Finally, in 2005, the problems started to become apparant.  John McCain and other Republicans introduced a bill to try to reign in Fannie and Freddie, but it never made it to a full vote.  So how did the mortgage giants respond to the rising targets?  Did it slow down their growth?  Of course not.  They just found a way to keep on lending.  And that, boys and girls, is how we ended up in the mess we are in.

Published in: on November 14, 2008 at 12:16 am  Comments (4)  
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Obama’s Plan for the Economy (part 2)

In this section of his economic plan, Obama lays out his tax cuts for working families.  The first thing I want to point out is the irony of claiming that people who earn the most money somehow are not “working families.”  THEN WHAT THE HECK ARE THEY?!?!?  Anyway, on to his policies…

Plan to Provide Middle Class Americans Tax Relief

  • Provide a tax cut for working families.

OK, his plan in this section hits one of my pet peeves.  He claims his plan, “…will restore fairness to the tax code…”  OK, I am still trying to get the concept of “fair” explained to my four-year-old son, so I will take the same approach here.  If the same thing happens to everyone, that is fair.  If one person has something bad happen to them while another has something good happen to them, that is unfair.

Our current tax system is UNFAIR.  The top marginal tax rate is currently 35%.  The lowest tax rate is 10%.  Millions of people in the lowest couple of tax brackets end up paying no tax whatsoever, and because of refundable credits, they actually are paid money by the government.  By contrast, the typical American family has to work from January 1st until April 23rd just to pay Uncle Sam.  This is known as Tax Freedom Day.

A “progressive tax” like the income tax penalizes success; the more you make, the more they take.  While progressive taxes may be viewed as “fair” by those who want to redistribute wealth to those that have not earned it, it nevertheless falls under the definition of unfair I gave to my son.

The opposite of a progressive tax is a “regressive tax.”  A regressive tax taxes people more who have less.  Liberals love to claim that sales taxes on food are regressive.  Now, if you and I each go to the store and buy the same amount of groceries, we pay the same amount in sales tax.  How is this regressive, you ask?  Well, if I make half as much as you, then each dollar of sales tax I pay represents twice the percentage of my income as it does relative to your income.  However, the definition of regressive tax does not make any reference to percentages of income.  If there were any regressive taxes in the U.S., these would also fall under my definition of unfair, but to the best of my knowledge, there aren’t any.

In between progressive and regressive taxes are “proportional taxes.”  These taxes are a fixed percentage, like the sales tax example given above.  If a proportional income tax were implemented, everyone would pay the same percentage of their income as everyone else.  In my book, this is the only kind of tax that does not penalize success.  This tax is also the only one that fits my definition of fair.

All of that is a long way of getting to why I don’t think Obama’s “Make Work Pay” tax credit is “fair.”  By his own admission, it would only cut taxes for a portion of “working families” and would result in no taxes being paid by an additional 10 million people.

Remind me later to tell you the Halloween analogy.

  • Create the American Opportunity Tax Credit.

Now Obama wants to provide a $4,000 refundable tax credit for college tuition.  I have two main problems with this:

  1. Refundable credits are paid to people meeting the criteria even if they do not have to pay any taxes. This means that for low-income people, this turns into taking money away from successful, hard-working families and giving it to those that have not earned it.  There is no mention in his proposal as to whether the recipients would have to actually pass their classes nor a cap on how long they could go on receiving this credit.
  2. The government owns you.  The requirement is that each person receiving this credit “…will be required to conduct 100 hours of public service a year, either during the school year or over the summer months.”  OK, in my case (I am an independent PhD student), this means that I would do some form of community service over the summer, when (in theory) I am not in school.  However, if I were an 18 year old freshman still being claimed on my parents tax return, does this mean that my mom or dad would have to work an extra hundred hours in free labor to pay for my tax credit?  And don’t drunk-driving offenders often get less community service than that?
  • Expand the Child and Dependent Care Tax Credit

My main beef with this is that they want to make it refundable, but have it only pay up to 50% of the first $3,000 of care expenses.  Why not leave it non-refundable, and make it cover 100% of the first $3,000?

  • Simplify Tax Filings for Middle Class Americans

In theory, I have no problem with this, except make it simpler for ALL Americans; I loved Steve Forbes’ idea of a flat tax with a postcard-sized tax form.  However, in practice, this sounds like a nightmare.  His suggestion is to have the IRS prepare your taxes for you.  They would send you pre-filled-out forms for you to sign and pay.  “Experts estimate that the Obama proposal will save Americans up to 200 million total hours of work and aggravation and up to $2 billion in tax preparer fees.”  OK, but how many extra staff will the IRS have to employ to make sure the forms are filled out, stuffed in envelopes, and mailed to us?  How much will all those stamps cost?  How many hours will they have to work to customize approximately 150 million tax forms?  How will we know they are accurate or filled out in the way that results in the lowest legal tax burden to us?  How much will all of those extra government salaries cost us?  I am betting more than $2 billion.

  • Eliminate Income Taxes for Seniors Making Less than $50,000

Let the pandering begin!  Oh wait.  The wording on this one is confusing.  He claims that this plan will result in 7 million seniors not having to pay taxes.  But then, he states “…27 million American seniors will also not need to file an income tax return.”  Does this mean that 20 million seniors will owe taxes, but not have to file a return?  How would they know how much they owe?

Also, note that in his proposals, he has now estimated that 17-37 million more people will not be paying any taxes.  So who will be paying for all of these tax credits and new programs Obama is proposing?  Oh yeah, that is the part he left out of his tax plan: the tax increases on those already paying the most taxes!  The top 1% of income earners already pay 39.4% of the total tax bill, despite the fact that combined they only make 21.2% of the nation’s income.  In fact (if you care to pick one of the many numbers Obama threw out on the campaign trail), if he only raises the taxes of the top 5% of income earners (who currently pay nearly 60% of the taxes), he will have to raise those taxes significantly just to make up for all the tax cuts and credits he has proposed.

The Halloween Analogy

I know, you thought I forgot about this.  I wanted to save it til the end because it sums up my dislike for the “redistribution of wealth” aspect of Obama’s whole tax plan.

Imagine if you will that you are taking your kids (or grandkids) trick-or-treating on Halloween night.  As you approach a door, a teenager, who claims his costume is that of a teenager (i.e. no costume at all), approaches the same door.  As you wait for the homeowner to answer, you notice that the teenager doesn’t have any candy in his bag; by contrast, your kids have been at it for a couple of hours and have quite a bit of candy.  When the homeowner opens the door, he glances into everyones bag.  Without saying a word, he then reaches into your children’s bags, takes out 1/3 of their candy, and dumps it in the teenager’s bag.  He then smiles at you and tells you that your children could afford to give more to support those that don’t have enough.  Gut check time…how would you react?

This is precisely what the government is doing and what Obama plans to vastly expand.  I am not saying I don’t sympathize with the poor (heck, right now I am one of them), but this country was founded on equality: equality of opportunity, not equality of outcome.

I end with the creed of Dean Alfange:

I do not choose to be a common man.  It is my right to be uncommon.  I seek opportunity to develop whatever talents God gave me — not security.  I do not wish to be a kept citizen, humbled and dulled by having the state look after me.  I want to take the calculated risk; to dream and to build, to fail and to succeed.

This is the spirit of American free-enterprise, and something our government should not seek to stifle.

Published in: on November 12, 2008 at 1:35 am  Comments (1)  
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