I was impressed with Ed Crane’s comment in a WSJ op-ed on Ron Paul that the U.S. spends more than the rest of the world on defense–in essence defense of the western world! ”…an overreaching military presence around the world is inconsistent with small, constitutional government at home. The massive cost of these interventions, in treasure and blood, highlights what a mistake they are, as sensible people on the left and right recognized from the beginning. Of course we want a strong military capable of defending the United States, but our current expenditures equal what the rest of the world spends, which makes little sense. It is futile to try to be the world’s policeman…”

My point is that to the extent we overspend on defense, Europe doesn’t need to spend. Their taxes to the extent paid go to increase statist expansions and welfare in countries like Greece, Portugal, Italy and Spain.

To top that off, our Fed seems to think it legitimate to help finance Europe’s profligate ways. Jerry O’Driscoll exposes Bernanke’s covert effort to bail out the ECB in his recent WSJ op-ed highlighted in our blog. This is clearly ultra vires, beyond the legal power of the Fed and against what its chairman has publicly stated.

In effect we have given Europe the leeway to expand its welfare state beyond its capacity to pay for that expansion. Our president who has no concept of economics admires the European model and seeks to expand our own welfare state beyond its capacity to pay for the expansion. His statist stimulus expenditures were nothing more than payments to increase the size and scope of government. His Obamacare takeover of medicine is nothing more than an unsustainable entitlement addition to the already unsustainable entitlements of Medicare, Medicaid, and Social Security.

We have enabled Europe’s welfare/statist addiction at a time when we can’t afford our own addiction. That latter addiction is theft from our grandchildren. Immorality par excellence! It must stop!

When he heads home to the US he focuses on his home state of California which is essentially bankrupt. First to fail though will not be the state government but the local municipalities the worst of which is Vallejo which filed for bankruptcy in May of 2008. There is, of course, more to come. Here’s a brief interview with the author:

• has without Congressional oversight jurisdiction over credit institutions,
• is not subject to annual Congressional appropriations,
• sets its own budget by taking up to 10-12% of the Fed’s earnings,
• can call on an added $200 Million more per year from Congress,
• and, which can issue rules contrary to the Fed, IRS, Comptroller of the Currency and Treasury Secretary.

This is frightening stuff. Government by fiat! A bureau staffed by leftists like the former AFL-CIO counsel David Silbermann, answerable to no one! Today’s WSJ editorial, President Warren’s Empire, calls it a “bureaucratic rogue,”  and concludes:

“This is no way to run a government, especially not one that Madison envisioned. The consumer bureau is essentially a bureaucratic rogue. We’d like to see Congress kill the agency entirely. But at the very least Congress should remove it from the Fed, make it part of the Treasury and subject it to annual appropriations. No one elected—or even nominated—Elizabeth Warren.”

Now, this is an economic fact of life. That it was caused in the main by government policies complements of Fannie, Freddie and the Fed, is of no import to the economic remedy. That remedy as in past downturns is economic improvement which can be accelerated by abolishing economic uncertainty caused by over regulation and by reforming the big tax and spend government, cutting spending, and reducing the deficit and its corresponding debt load.

With an improving economy homeowners who can will pay their mortgages; those who can’t will default and as in normal times suffer foreclosure. Banks will resell the foreclosed homes to new buyers who can afford the homes and who believe they have bargain prices.

The economic principle here is that before a market can rebound, it must hit bottom. The psychology here is that new buyers do not want inflated prices; they want bargains.

So, what is our brilliant Obama administration trying to do? At best, it is trying to delay the market from hitting bottom. At worst, it is trying to prevent that bottoming out from happening at all! Obama and crew have tried a number of things to insure this dis-economy:

A while back in 2009 there was the Home Affordable Modification Program, HAMP for short, a forced principal write-down program that was supposed to keep borrowers in the homes that the couldn’t afford in the first place! According to yesterday’s WSJ editorial:  “Instead, the program swamped mortgage servicers as debtors rushed for the goodies, gummed up the foreclosure process and left some borrowers worse off. Special Inspector General for the Troubled Asset Relief Program, Neil Barofsky, said in January that Hamp falls “dramatically short of any meaningful standard of success.” Perhaps the effort should have been more appropriately termed “HEMP,” the kind that is smoked, because the designers certainly must have been “high” to have come up with it!

That didn’t prevent home valuation declines so these geniuses in the Obama administration hit upon several minor glitches in the foreclosure process and along with attorney generals from several states and the ever-present parasitical tort bar sued to bring foreclosures to a standstill. Now, they want to force the defendant banks into a $20 Billion principal write-down as part of a global settlement! Mark my words…a large part of that will go the the parasites!

This has further delayed foreclosures and the rebound likely to follow. It will also in the process further damage bank balance sheets with no relationship to the economic collateral value realizable in foreclosures. And to top it off, $20 Billion would not be a drip in the bucket of the $740 Billion in underwater loans. What are these numskulls thinking?

It’s hard to pick the leading genius in this folly but the Journal hears rumors that Elizabeth Warren, the ex Harvard prof who is now the illegal head of the new Consumer Financial Protection Bureau is the culprit. Recall, she’s the one Obama could not get confirmed so he appointed her as a shadow or titular head to run the bureau. Who said anything about “rule of law?” These leftists continue to ignore economics, misallocate capital, and delay a market rebound. Hopefully, they will wake up soon……but I doubt it!

For a related article see: Foreclosure Silliness Equals More Economic Drag, published back in October.

Let Them Eat Chips

February 24, 2011

by Jerry O’Driscoll

In today’s Wall Street Journal, David Wessel (“Capital” column, A5) revisits the question of whether current Fed policy is inflationary. He correctly states the Fed’s position is that inflation is caused by expectations. Inflation will stay low if people expect it to stay low.  He quotes Fed Chairman Bernanke: “The state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.”

The Fed chairman of course has the causation precisely backwards. Fed policy systematically shapes inflation expectations. His statement is the product of the focus on the short-run and ephemeral over the long-run and permanent. In that, Ben Bernanke follows a long line of central bankers.

In A History of the Federal Reserve, Volume 1: 1913-51, Allan Meltzer summarizes the central bank mindset from the banking school writers like Thomas Tooke down to the Fed. Tooke “denied that money, credit, or base money bore any consistent relation to prices. Most Federal Reserve officials remained in this tradition in the 1920s. They denied that their actions affected prices” (57-58).

Unfortunately for defenders of Fed policy, today’s paper is filled with stories of rising inflation. In Singapore, consumer price inflation is running at 5.5%. In Vietnam, consumer price inflation is running at over 12%. There are food riots in India. In yesterday’s Wall Street Journal, George Melloan detailed the linkage between economics and turmoil in the Middle East. Consumer price inflation in Egypt rose to 18% annually in 2009 from 5% in 2006. In Iran, inflation rose from 13% in 2006 to 25% in 2009. As Melloan wryly observes, “about the only one failing to acknowledge a problem seems to be the man most responsible, Federal Reserve Chairman Ben Bernanke.”

Monetary policy is not the sole culprit in food price inflation. There have been supply shocks. Central bankers always point to supply shocks to explain rising prices. But it is not just food prices rising, but most commodity prices. Plus, as noted, broad measures of consumer prices around the world are signaling rising inflation.

The Bernanke’s response is two-fold. First, he questions the linkage between his policies and what is happening to global prices. Second, he argues other central banks are in a better position to mitigate the effects of Fed policy. Both arguments are disingenuous.

Commodities, plus most traded goods, are priced in dollars. The Fed creates base money. The more base money, the higher the dollar price of goods globally.

The Fed Chairman argues that foreign central banks can offset the Fed’s policy. As discussed here recently, this is true only to a limited extent if at all. Small, open economies have great difficulty in offsetting inflows of the global currency. If these central banks raise domestic interest rates and appreciate their currencies, they are likely to attract additional capital flows. If not, they risk sending their economies into recession.

Bernanke’s defense amounts to a restatement of Treasury Secretary John Connally’s quip to Europeans during the Nixon prequel to current dollar policy: “It’s our currency, but your problem.” The Fed inflates, and other central banks must mitigate.

Consumers purchase daily and weekly the goods whose prices are increasingly rapidly: food, energy and clothes. The goods whose real prices are falling, such as consumer electronics, are purchased infrequently.  But they keep measures of consumer prices subdued. Marie Antoinette famously remarked that the French peasants rioting over bread prices could eat cake. Policymakers apparently believe US consumers can do the equivalent of eating microchips: stop eating and driving, and just buy more electronics.  In reality, US consumers face the prospect of a falling standard of living.  They can’t eat chips.

Thanks to Jerry O’Driscoll

He attributes the major cause to “quantitative easing,” the artificial creation of money as a way to spur full economic recovery. Theoretically this is supposed to lift spending and thus lift businesses; in essence it’s supposed to prime the pump.

“What really happens is that the money first goes to the financial markets, whose players mostly create bubbles by investing in whatever is fashionable. The reason is twofold. One, financial players expect to make quick money. Two, families and businesses reeling from the credit excesses of recent years are not ready to borrow as much as their governments say they should (the personal savings rate has trippled in the U.S. since 2007) and banks are probably not willing to lend as easily as they used to.”

“For a while, then, it looks as if more quantitative easing is necessary because consumption remains insufficient and unemployment high. So central banks print even more money. To justify themselves, sometimes they point to (highly unrepresentative) consumer price indexes that show low inflation. Until, of course, it is too late and the symptoms begin to show up everywhere.”

Llosa points out that even the Fed’s efforts are being discovered for the fraud that they are. Ten year Treasury yields have shot up, despite efforts of the Fed to keep them low by printing money. This is of course dishonest. “What governments, particularly in the United States and Europe, are doing is attempting to whittle down their huge debts by debasing their currencies while continuing to borrow scandalous amounts of money. They are also hypocritically using the devaluation of their currencies brought about by quantitative easing to compete internationally — while accusing others, with good reason, of manipulating their own money to keep up their export machines.”

Watch out, the endgame will be painful, perhaps worse than the Carter years!