Archive for category Economics
Barney Frank Admits the Truth
Posted by kyle in Centrally Managed Economy, Congress, Democrats, Economics, Financial Crisis, Financial Policy, Statism on August 21, 2010
This is beyond amazing.
Barney Frank, co-author of the housing bubble and the subsequent financial crisis, calls for the elimination of Fannie Mae and Freddie Mac!
“August 21, 2010
Barney Frank Comes Home to the Facts
By Larry Kudlow
Can you teach an old dog new tricks? In politics, the answer is usually no. Most elected officials cling to their ideological biases, despite the real-world facts that disprove their theories time and again. Most have no common sense, and most never acknowledge that they were wrong.
But one huge exception to this rule is Democrat Barney Frank, chairman of the House Financial Services Committee.
For years, Frank was a staunch supporter of Fannie Mae and Freddie Mac, the giant government housing agencies that played such an enormous role in the financial meltdown that thrust the economy into the Great Recession. But in a recent CNBC interview, Frank told me that he was ready to say goodbye to Fannie and Freddie.
“I hope by next year we’ll have abolished Fannie and Freddie,” he said. Remarkable. And he went on to say that “it was a great mistake to push lower-income people into housing they couldn’t afford and couldn’t really handle once they had it.” He then added, “I had been too sanguine about Fannie and Freddie.”
When I asked Frank about a long-term phase-out plan that would shrink Fannie and Freddie portfolios and mortgage-purchase limits, and merge the agencies into the Federal Housing Administration (FHA) for a separate low-income program that would get government out of middle-income housing subsidies, he replied, “Larry, that, I think, is exactly what we should be doing.”
Frank also said that any federal housing guarantees should be transparently priced and put on budget. But he added that the private sector must be encouraged to re-enter housing finance just as the government gradually withdraws from it.
Some would say Frank’s mea culpa is politically motivated in advance of an election where bailout nation and big government are public enemies No. 1 and 2. Of course, poll after poll shows that the $150 billion Fan-Fred bailout, which the Congressional Budget Office estimates could rise to $400 billion, is detested by voters and taxpayers everywhere.
In fact, these failed government agencies are in such bad shape that they can’t even pay Uncle Sam the dividends owed under the conservatorship deal reached two years ago. That’s right. In order to pay a $1.8 billion dividend on Treasury department stock, Fan and Fred had to borrow $1.5 billion from — you guessed it — the Treasury.
Then there’s this head-scratching detail: In an absolutely outrageous move last Christmas Eve, President Obama signed off on $42 million in bonuses for the top 12 Fannie and Freddie executives, including $6 million apiece for the two CEOs. (Hat tip to attorney Stephen B. Meister.)
Voters are on to all this. So politics may indeed be motivating Barney Frank’s turnaround. But I’m going to credit him with more than that.
I think Chairman Frank watched these government behemoths descend into hell and then witnessed the financial catastrophe that ensued. And I think he has come to realize that the whole system of federal affordable-housing mandates that was central to the real-estate collapse — including the mandates on Fannie and Freddie and the myriad bad decisions made by private banks and other lenders in response to the government’s overreach — simply needs to be abolished.
Noteworthy is the fact that Treasury Secretary Tim Geithner has come to a similar conclusion. Geithner told a recent Washington conference on the future of housing finance that the system needs fundamental change. He said, “We will not support a return to the system where private gains are subsidized by taxpayer losses.”
Of course, the withdrawal of housing markets from government programs, and the onset of a reinvigorated private sector for providing mortgages, must be done gradually over a period of years. But it is possible that the federal mortgage madness is coming to an end.
We will have to see if Congress really does say goodbye to Fan and Fred, as Republicans like Jeb Hensarling are advocating. Equally important, we will have to see if the federal affordable-housing mandates created by Congress and implemented by HUD and banking regulators are similarly repealed.
And then we will have to see if reformed federally guaranteed housing insurance includes larger down payments, stricter underwriting standards and greater reliance on private capital markets, lenders and insurers. In other words, we need to see if housing will be restored to a market-based system and removed from the government-backed system that has proved so disastrous.
The broader lesson here is that government planning doesn’t work. And if left to their own devices, market processes will work. I don’t know if President Obama gets this. But my hat goes off to a man who does, Chairman Barney Frank.”
Geithner: Transfer Payments Create Wealth!
Posted by Tom in Centrally Managed Economy, Economics, Taxation on August 5, 2010
Larry Kudlow calls it “The Washington War on Investment.” Taxpayer Tim Geithner said that extending tax cuts for the wealthiness Americans would imperil the fragile economic recovery, would harm growth; this because the wealthy save more of their tax breaks than do others.
So, according to Geithner, savings and investment are bad; and the corollary, transfer payments from the government to the unemployed are good. Let’s take a simple case of the dollar in question, the one that winds up as investment or tax. The dollar of tax goes through the government collection machine and comes out at 80 cents, then it goes to the state in need (most of ‘em) so that it can be distributed to the long term unemployed worker or about to be unemployed teacher (bloated administrative bureaucracies don’t get laid off) who receives about 70 cents. He or she spend that 70 cents at the supermarket producing 70 cents of revenue and a penny of profit. The penny of profit nets a half penny of income for the market, half of which as dividends may get invested by the market’s shareholders. Note that none of that dollar went to reducing the deficit and debt that Hussein and Taxpayer Tim loaded on our children and grandchildren.
Alternatively, the dollar not taxed is either saved as Taxpayer Tim would argue or spent. On the save side, that dollar is invested for an economic return. It may go to stocks, bonds, real estate, start-ups, small businesses, etc. But it is invested in expectation of an economic return. It produces, technological advancement, new business, growth, and yes indeed, taxable income! It goes into expected productive investment at best case 100 cents or worst case 92 cents covering transaction costs. So here for growth we have 92 cents versus one-quarter of one cent!
If the dollar is spent instead of invested by the wealthy American, and this is contrary to Taxpayer Tim’s hypothesis, it produces 100 cents of revenue, that is GDP. So here the comparison is 100 cents versus 70 cents for the tax and transfer case. In either case, Hussein Obama and Taxpayer Tim are wrong. And their position will drive this country into ruin.
Larry Kudlow says it better and I recommend a full read of the article: “The great flaw in the thinking of the Democrats is that they are ignorant of the economic power of saving and investment. Saving is a good thing. Stocks, bonds, bank deposits, money-market funds, commercial paper, venture capital, private equity, real estate partnerships — all that saving is channeled into business investment. And whether that capital goes into new start-ups or small businessesor large firms, it finances the kind of new investment in plants and equipment and software and buildings that ultimately creates jobs and family incomes. And that, in turn, spurs consumption.
“But pulling out just one dollar from the private sector and rechanneling it through the government as a transfer to someone else creates nothing. At best it’s a safety net. At worst it may damage private-business activity and actually reduce employment. Without saving there can be no investment. And without investment there can be no enhanced productivity, which is the ultimate source of long-term prosperity and wealth.”
Would that there were there just some modicum of economic intelligence in Hussein Obama’s administration!
July Hayek Dinner: State of the Economy
Posted by Tom in Centrally Managed Economy, Deficit, Economics, Employment, Financial Crisis, Financial Policy, Government Regulation, Individual Freedom, Monetary Policy, National Character, National Debt, Statism, Yucca Mountain on July 21, 2010
Our thanks to Tom Cargill for the excellent presentation last evening and to Jerry O’Driscoll for arranging the meeting in my absence.
Jerry opened with a snapshot on employment trends from selected countries since 2008. The US is at the bottom of the pile and trending down!
Tom picked it up from there with a quick look back on the first decade of this century focusing on four remarkable points: 1. US homeland is vulnerable to attack since 911; the first since the war of 1812. 2. Critics of the market are strong despite the increase in standard of living in the last quarter century. 3. Failures of the welfare state notwithstanding, the US is moving toward socialism. And, 4. the political force toward socialism can be traced to our current great recession.
Technically, the recession is still in full force. The question is what kind of recovery will come, weak flat “U” or “J,” or a double dip. Ten key points are apparent:
- the US has not seen more economic, financial, and political distress since the Great Depression.
- our recession was not caused by market failure but mainly by government failure, both monetary with low rates too long and fiscally with housing policies of Fannie-Freddie.
- yet, the public hypnotized by Obama rhetoric believes market failure was the cause.
- admittedly, the $700 billion financial bailout was necessary to prevent a liquidity crisis.
- but the five “stimulus” packages ignored history and had a negative effect, negative Keynesian multiplier, on the GDP. Wasteful spending directed to leftist programs.
- while we now see some GDP growth, the private sector is not creating jobs and budget pressures will force a decline in public sector employment.
- the private market is not creating jobs due to the great uncertainty of the rules of the game; we are going to state directed allocation of resources not market directed allocation.
- Adam Smith calls man an economic animal, “truck, barter, and exchange” but the uncertainty of the rules creates inefficiencies that lower growth potential.
- the economic game becomes even more uncertain because of the greater role of government; what happens to the chess game if it is announced in the middle of the game that there will be a rule change; Obama is regularly announcing rule changes to come!
- QED, the most likely “recovery” is a flat “J” over the next several years with a chance of a double dip.
Tom now thinks the chance of a double dip is 50/50, an increase from his earlier thinking. Potential economic shocks which will push toward a double dip are: the dramatic increase in taxes next year, and the questionable stability of the European Union. The current divergence in fiscal policy between the overspending US and the rapid austerity in Europe may well be a third negative shock. Tom concluded saying that only a change in the US congress and administration will offer hope of a solid recovery.
We thank Beth Powers and her crew for her comments and patriotic efforts with LibertyInAmerica.org. Please consider a donation to help continue the fine bus treck.
John Dunn provided a positive report on Yucca mountain efforts, see NV4CFE.org.
Finally, our thanks to Mike Herring for treating the group to dinner and drinks, this an an inducement to make contributions to Sharron Angle’s campaign to retire Dirty Harry.
Steve Wynn on the Leftist Democrats Killing the Economy
Posted by Tom in Business, Centrally Managed Economy, Congress, Democrats, Economics, Government Regulation, National Debt, Statism on July 21, 2010
This CNBC interview with Steve Wynn is well worth your time:
Paul Ryan: Fork in Road
Posted by Tom in Business, Centrally Managed Economy, Economics, National Character, Statism on July 16, 2010
You can’t say it any better than Paul Ryan.
America’s Twilight? Or, Is There Anyway Out?
Posted by Tom in Defense, Economics, Foreign Policy, Military Policy on July 8, 2010
Niall Ferguson’s discussion of the Future of America’s Economy was recently given at the 2010 Aspen Ideas Festival. It is brilliant and I would embed it here but am unable to do so, thus I link it and strongly commend it. As a financial historian teaching at Harvard, he asks whether the Western Ascendency is finished. He reviews the empirical evidence supporting that proposition. And, it is strong.
“My working assumption is that the financial crisis that began in the summer of 2007…has accelerated a fundamental shift in the economic balance of power. Even before the crisis, Jim O’Neill and his team at Goldman Sachs were forecasting that China’s gross domestic product would exceed that of the United States in 2027 at half past four on October the 15th, which is just a little pinch of salt to remind you that all such projections need to be taken with a pinch of salt. Still, whether it’s 2027, ‘28, ‘29 or ‘30, the interesting thing is the first time they made that projection, they thought it would be 2040. Every time I see Jim, I say, “Have you moved the date forward yet?” because he made that 2027 call before the financial crisis.
“The financial crisis unquestionably has hit the United States much harder than China. Their stimulus worked much better than ours…The first point I just want to put out there is: it’s hard to believe, under these circumstances, that the acceleration, the shift, if you’d like, from West to East hasn’t been speeded up by this crisis.
“The second point is: Of course, power is not just about GDP. It’s not just about the economy. Power is also about the ability to project hard power through military means. And some people in Washington like to comfort themselves by saying, “We can still do that way more than they can. Count their aircraft carriers, count ours.”
“But one point that follows from the financial crisis which is terribly, terribly important is that by combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead. Because as the debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent, a fifth of all the taxes you pay, within just a few years. The item of discretionary federal expenditure most likely to be squeezed is, of course, defense. And there are lots of historic precedents for that. So, I fear that the financial crisis doesn’t just impact on the economy. It actually impacts on American power in the hardest sense.”
This is just a taste, and he does offer some hope, so I won’t spoil his offering but suggest you link to the talk.
Art Laffer’s Lesson in Economics
Posted by Tom in Centrally Managed Economy, Deficit, Economics, Entitlements, National Debt, Stimulus/Bailout on July 8, 2010
Hussein Obama wants to borrow another $50 Billion on the backs of our grandchildren to extend unemployment benefits. Hasn’t worked so far but Obama wants to keep trying! Art Laffer says it reduces incentives to find work.
In a well-reasoned WSJ op ed, Unemployment Benefits Aren’t Stimulus, Laffer shows that welfare makes work less attractive. Historically he charts the unemployment rate against the unemployment benefits:
“While the unemployed may spend more as a result of higher unemployment benefits, those people from whom the resources are taken will spend less. In an economy, the income effects from a transfer payment always sum to zero. Quite simply, there is no stimulus from higher unemployment benefits.
“Given the massive inefficiencies the government creates in securing resources from the private sector, there may also be a large negative income effect over wide ranges of stimulus spending. This is the proverbial “toll for the troll.” These massive inefficiencies could lead to lower output.
“To see these effects clearly, imagine a two person economy in which one of the two people is paid for being unemployed. From whom do you think the unemployment benefits are taken? The other person obviously. While the one person who is unemployed may “buy” more as a result of unemployment benefits, the other person from whom the unemployment sums are taken will “buy” less. There is no stimulus for the economy.”
Art concludes by saying the $3.6 Trillion already spent would have better been used as an 18 month tax holiday! I disagree with this, time limited tax relief begets time distorted economic activity. Permanent entitlement cuts along with permanent tax cuts are what’s needed to restore economic and fiscal sanity.
Incentives Work
So do disincentives. The truism is well illustrated in Art Laffer’s WSJ article, Tax Hikes and the 2011 Economic Collapse. In it he uses history to illustrate the adverse effect of our upcoming tax changes.
“Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.”
“The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.”
The article is too important not to read and understand in its entirety.
Posted from Golfito, Costa Rica.
US Deficit-Debt and the European Debt Quiz
Posted by Tom in Deficit, Economics, Europe, Financial Crisis, Financial Policy, Humor, Monetary Policy, National Debt on May 27, 2010
It’s rare to see a thoughtful economic comment in the liberal NYT, but David Einhorn penned one yesterday with Easy Money, Hard Truths. In it he suggests that our grandchildren will not need to face the day of reckoning caused by our unmanageable deficits and debt simply because we will face it ahead of them. The future, though, is no less grim for them.
“Public sector jobs used to offer greater job security but lower pay. Not anymore. In 2008, according to the Cato Institute, the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker; the disparity has grown enormously over the last decade.
“The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?”
A rather humorous take on the question is given by a couple of Aussie satirists, John Clarke and Bryan Dawe, who take on a timely quiz show Q&A on the European debt crisis.
Remember those last words, “laughing as you sink!”
Did You Really Think Your Investment in “Solyndra” Was a Good One?
Posted by Tom in Deficit, Economics, Energy Facts & Policies, Stimulus/Bailout on May 26, 2010
Didn’t know you invested in Solyndra? Well if your if you are one of that small class of current taxpayers, or you have children, or grandchildren who will be smothered by Obamadebt, you have indeed invested in Solyndra.
You should perhaps know a few facts about Solyndra: It is a solar-panel manufacturer in Fremont, California. It has a new partially constructed facility that will provide 3000 temporary construction jobs in Fremont and it is expected to provide 1000 production jobs. It has accumulated debt of $557 million and paid for the new plant with $535 million of last year’s $787 billion stimulus package. Oh, by the why, Price Waterhouse & Coopers the auditor questions its ability “to continue as a going concern.”
Now, do you expect an equity return on that investment? That is a return commensurate with the high risk nature of the investment? You shouldn’t because while you have supplied the bulk of the capital it is in the form of debt. If anything you will get a debt return despite your equity type risk. The real return if any is ever made will go to the equity investors.
Now, a couple more facts: The sun doesn’t always shine on solar panels. To date solar panel generated electricity needs taxpayer subsidy to make any economic sense whatsoever. (So you and yours will also subsidize Solyndra’s customers, for which you will only get billed!) And, I saved the best for last: Hussein Obama visited Solyndra’s plant today, as an adjunct to his trip to generate bucks for Barbara Boxer’s senate campaign. (See: Debra Saunders’s The Obama Mantra: Bill, Baby, Bill in the May 27th RCP.)
Still feel good about that investment?