Archive for category Financial Crisis
“Stimulus or Sedative?” Thomas Sowell Never Disappoints
Posted by Tom in Business, Centrally Managed Economy, Democrats, Economics, Financial Crisis, Government Regulation, Monetary Policy on March 9, 2010
Sowell opens his succinct RCP post with an Abe Lincoln story: President Lincoln asked an audience how many legs a dog has, if you call the tail a leg? Some shouted “Five” but Lincoln corrected them saying that the answer was four. “The fact that you call a tail a leg does not make it a leg!”
The professor uses that tale to drive home the truth about the “stimulus” and the “jobs bill.” The idea behind stimulus, for example, is to get investors to invest, lenders to lend, and employers to employ. Prime the pump, put a little bit of water in to get the well flowing. That little bit of water, the government money, was never meant to restore the economy by itself, but to get the private business sector going. What has happened?
- After the Bush-started stimulus in 2008–business spending fell by 28%.
- Durable goods spending fell by 22%.
- Four months after the TARP billions–large TARP banks made 23% fewer loans.
- The velocity of money fell faster than at any time in the last half century.
- The WSJ reports the “sharpest decline in lending since 1942.”
Why would banks lend when, “from the White House to Capitol Hill, politicians are coming up with all sorts of bright ideas for borrowers not to have to pay back what they borrowed…” Why would investors invest when a substantial number of the consumers are unemployed? Why would employers employ when faced with higher taxes and more Obamacare mandates? In short, the outlook is uncertain and certainly more big government than private sector oriented.
Sowell points out that none of this is new: during the Great Depression of the 1930s, money velocity, lending, investing and employment were all lower than they were in the 1920s. The anti-buisness rhetoric and anti-business policies did not inspire any more confidence then than they do now. “In an atmosphere where nobody knows what the federal government is going to come up with next, people tend to hang on to their money until they have some idea of what the rules of the game are going to be.”
Economists have estimated that Roosevelt’s New Deal prolonged the depression by several years, how long will Barack Hussein Obama, Reid and Pelosi prolong our current difficulties?
Tom Motherway
the Spending Limitations Amendment would eventually put us on a sustainable path
Posted by Tom in Centrally Managed Economy, Congress, Constitution, Deficit, Financial Crisis, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Statism on March 6, 2010
Even without any more stimulus, bailouts, Obamacare, or cap and trade the US is on a course to bankruptcy. Consider:
- In the past five years federal spending has increased 42% to nearly 25% of the economy, the highest level since World War II.
- The deficit has exploded from $318 Billion in 2005 to $1.4 Trillion, a 400+% increase, equal to the entire accumulation of debt from George Washington to Bill Clinton.
As James Antle points out in his American Spectator article, Amending the Spending, “this will be remembered as a golden era of fiscal responsibility compared to what is to come.” Again I emphasize, this is even without Obamacare, added stimulus, bailouts, etc. With demographic certitude, as baby boomers retire, social security, medicare, and medicaid as we know them will be bankrupt. THE PUBLIC DEBT WILL EXCEED 110% OF THE ECONOMY IN 2026 AND CLIMB PAST 200% BY 2040! Again, this is without Obamacare, added stimulus, bailouts, etc.!
Three congressmen, Mike Pence (R-Ind.), Jeb Hensarling (R-Texas) and John Campbell (R-Calif.) have proposed a constitutional amendment to cap federal spending at 20% of the U.S. economy. The limit would be waived only when an official declaration of war is in effect or by two-thirds majorities of both houses of Congress. 20% is the historic average share of the economy consumed by the federal government.
The backers admit that Republicans are just as spendthrift as Democrats. They are not naive about getting it passed, 5000 amendments have been offered and only 27 enacted! But the mood of the country seems to be shifting to a serious concern for the current fiscal insanity.
If they’re correct, and the amendment has some legs, the country can get off the current unsustainable course and onto a path that’s fiscally sustainable.
Tom Motherway
What’s Obama Up To?
Posted by Tom in Centrally Managed Economy, Deficit, Democrats, Economics, Financial Crisis, Individual Freedom, National Character, National Debt, Nationalized Health Care, State Finances, Statism, Taxation on March 5, 2010
On paper Obama appears to be a smart guy and reasonably well informed. I suspect he knows:
- We face $1.4 Trillion annual deficits for the next decade.
- Our current national debt is $12.3 Trillion and will grow by $1 Trillion a year.
- Estimated unfunded liabilities from social security and medicare are $107 Trillion.
- States with aggregate deficits of $350 Billion, debt of $1.9 Trillion, and unfunded liabilities of $1.4 Trillion are asking for federal handouts.
- Unemployment is 9+% with private sector growth stalled.
Why then would he promote a radical takeover of healthcare with 10 year costs of $2.3 Trillion that adds $1.86 Trillion to the deficit over the next 20 years, that creates employment taxes and mandates, each discouraging private sector employment, and that fails to solve the demographically certain failure of medicare, social security and medicaid? We’ve proven our inability to handle two, no three if you include medicaid, major entitlements, why add another? And why would he risk his party’s control of Congress and his own ability to govern to attain this goal that a majority of Americans don’t want?
Obama is smart enough to know that Obamacare will exacerbate the financial straights of the United States. It’s uncertainty will decrease private sector employment. It’s taxes will decrease private capital for investment. It will cede financial and technological leadership to other countries. In short, we will be worse off tomorrow than we are today. Why would he risk that…want that?
It is clear that he knowingly intends to drive us further to the brink. It is also clear that given his apparent intelligence he has an end-game in mind. Take our admitted crisis, you know the “never-let-a-crisis-go-to-waste” kind, explode it into a gigantic, off-the-clff catastrophe, then come up with a one-of-a-kind, popular solution that involves “shared pain” and if we are all lucky, someday “shared gain.” Call it a Cloward-Piven Strategy on steroids. (See: Cloward-Piven Strategy: Is It Obama’s? and references cited therein.)
As Larry Kudlow said in NRO, One Giant Government Leap Backwards,” One of the most galling features of this plan is a taxpayer-subsidized government-insurance entitlement for people earning up to 400 percent above the poverty line, or nearly $100,000 for a family of four. In other words, a middle-class health-care entitlement that will add millions of people to the federal dole. It’s all too reminiscent of the political dictum of the old New Dealer Harry Hopkins: tax and tax, spend and spend, elect and elect.”
So will Obama’s “Fiscal Responsibility and Reform Commission” turn out to be the VAT Commission with a European 12% sales tax on top of the income tax, excise tax, etc. And those on top of the various state sales, income and property taxes? All this to finance BIG GOVERNMENT? If so, we will then all have the advantage of being “in the same boat,” “equal,” and “happy” in an ever declining country and economy.
So for the literarily inclined, Obama wants us on Hayek’s Road to Serfdom where we will encounter Orwell’s Animal Farm with 1984’s Big Brother in control. As Obama recently said in response to a push-back, “we won the election.” And win the next election and the next, he aims to do with the creation of more and more dependency on him and less and less individual responsibility.
I won’t be around to witness the outcome but I hope the next generation will become informed and engaged, lest our grandchildren and great-grandchildren suffer horrible consequences.
Tom Motherway
IT’S THE SPENDING, Stupid!
Posted by Tom in Congress, Deficit, Economics, Financial Crisis, Financial Policy, National Debt, State Finances on February 20, 2010
John Mauldin’s letter this week follows last week’s Greek tragedy with the “pain in Spain” and future of the Euro. How long will the Germans support the spendthrifts?
He then again brings the same spendthrift problem back across the pond concluding with a reference to Dan Henniger’s WSJ February 18th Wonderland column, It’s the Spending, America. Dan treats the runaway spending which has only accelerated under Obama, Reid, and Pelosi. This despite economists of all stripes saying it is unsustainable. I wanted to comment on the column but couldn’t get the graphic. John Mauldin supplied it and here it is:
“We’ve been grinding toward this moment since 1932. It has always been a question of political physics just how high government could go in the U.S. before it arched over and down. Now we have Washington, California, New York, New Jersey and others all arriving at the same time of reckoning. And all for the same reason, public spending by the public sector—its politicians, its unions, its massive schools of pilot fish.”
This blog has previously railed against Dual Bankruptcies-Federal and State which will indeed occur unless the entitlement spending is reined in and reined in hard. Obama’s deficit reduction commission will wind up a side show unless Social Security, Medicaid, and Medicare are substantially cut, painful as that definitely will be.
Social Security should be means tested and stopped for the upper quartile earners after payments into the system have been returned with some small rate of interest. Cost of living increases should not occur unless the CPI growth exceeds 5% for the year. Retirement age should be lengthened for those under 50 and premiums be increased. Medicaid should be limited to cover only serious illnesses not every sniffle and scratch. Medicare should be means tested and again limited to serious illnesses not every sniffle and scratch; premiums should be increased.
Political will and guts is hard to come by these days. But is seems we should at least be able to expect the current administration to cease its expansion of spending, Obamacare being the prime example followed closely by cap and trade.
Hey, Barack, Harry, Nancy–what part of UNSUSTAINABLE don’t you understand?
Tom Motherway
Greece…A Prelude!
Posted by Tom in Centrally Managed Economy, Congress, Deficit, Democrats, Economics, Financial Crisis, National Debt on February 13, 2010
“Beware of Greeks bearing gifts,” sang Virgil. I fear Greece is today’s Cassandra of mythology, so beautiful that Apollo granted her the gift of prophecy yet, when she did not return his love, cursed her so that no one would ever believe her. Some gift!
John Mauldin’s Weekly E-Letter, which I highly recommend, treats the Greek debt crisis and its causes and consequences. He starts by positing the oft neglected truism of our path-dependent world. Namely, the choices you have made in the past restrict, sometimes drastically, the choices you now have before you. The “if only(s)” and “if I’da(s)” have occurred to all of us as we confront a new situation often forcing a choice of the lesser of two evils.
John traces the creation of the Euro noting the weak Euro nations like Greece got a bit of a pass and an uptick in the translation of the national currency. The local currency overvaluation meant that Greek consumers could buy products previously out of their reach. The government could borrow at lower rates. Spend they did and borrow the government did so that deficits ballooned. National debt is now 254 Billion Euros; Greece needs to borrow 64 Billion, 30 in the next few months.
Other European nations have pledged support, “but!” Germany is calling the shots but so far there is no checkbook out. Imposition of “austerity” conditions, severe ones, portend depression, serious recession, and inflation for generations. The unionized socialist nation will be little tolerant of “austerity.” Strikes have already ensued and are likely to get worse.
For Germany and France a contagion conundrum gets worse. Behind Greece standing in line are Portugal, Italy, Ireland and Spain, the lot known as PIIGS in financial markets. The solvent nations of Europe cannot afford to rescue all the laggards. Moral hazard raises its ugly head once again. Sound familiar?
Then there is the fear of collapse of the banking system. The BIS reports that the largest holders of Greek debt are the French, Swiss and German banks. This is another banking crisis in the making. And it is not just a write down of Greek debt but a mark-to-market of sovereign debt! It’s likely the accounting rules will be rewritten to soften that blow. As you would guess, money is flying out of Greece and the tax avoidance, already 30% of the economy, is accelerating.
As John points out: this is not just a Greek problem. Debt and out of control deficits are a problem all over the developed world. The US is one of the worst with Obama deficits, Obama debt and the unrecognized and never discussed unfunded liabilities. And Obama wants to ADD TO THE DEFICIT with his Obamacare proposal. He has a tin ear to reform of Medicare and Social Security first.
John Muldin concludes: “We are in the fullness of time approaching the End Game. …choices that have been made over the last decades will yield a Greek situation, where there are no good choices. And the longer the hard choices are put off, the more difficult they will become.”
Obama, Reid, Pelosi, the Democratic leftist hear but don’t listen and those of the pseudo-intellectual elite who listen don’t believe. Cassandra, your prophecies are tragic indeed. More so by the immorality toward our grandchildren and unborn great grandchildren.
Tom Motherway
Just Say No
Posted by Tom in Congress, Deficit, Democrats, Economics, Financial Crisis, Financial Policy, National Debt, Taxation on January 25, 2010
Facing $1.4 Trillion in annual deficits for the next decade, current national debt of $12.3 Trillion and 2009 estimated social security and medicare unfunded liabilities of $107 Trillion, Obama endorsed a bill that would set up a bi-partisan deficit-reduction commission.”These deficits did not happen overnight, and they won’t be solved overnight,” Obama said in a statement. “We not only need to change how we pay for policies, but we also need to change how Washington works. The only way to solve our long-term fiscal challenge is to solve it together — Democrats and Republicans.” Is this just another Obama promise like “no earmarks” or “negotiations on CNN?” Or, is it designed as a set up for the Republicans to cover the Democratic Congress’ and administration’s spendthrift ways?
Let’s see, we’re up in discretionary spending by 8% in 2009, the third such consecutive year since the Democrats took control of the Congress, that’s 25% from $873 Billion to $1.090 Trillion. The non-defense discretionary programs got an 8% bump in 2009 and again in 2010 not even including the $311 Billion in additional “stimulus.” The omnibus 2010 appropriations bill includes: a 120% increase in low income energy assistance, a 30% increase for the corporation for national and community services (SOUND FAMILIAR?), a 22% increase for the essential (?) (read rural congressmen’s) air service, and, of course, a 9% increase for Amtrak. (See Heritage Foundation report here.)
Does anyone remember the inflation rate? How about public employee salaries? Well then, try Congressional junkets? Surely then, the recession, the unemployment rate and our belt tightening? Enough said!
Problem is that these discretionary increases add to the “baseline” for future years!
Why should Republicans participate in the inevitable tax and tax solution that the Democrats have in mind? As demonstrated, they will not cut and cut, the only correct solution.
There are two reasonable alternatives to put to these out-of-control fools: one, tell them to repeal all non-defense discretionary spending enacted in the last three years and start with a zero baseline budget, and two, tell them NO, HELL NO! Let them clean up their own mess!
The second is easier to explain to America. Some of us still have our wits about us and would appreciate it! Say HELL NO!
Tom Motherway
America’s Lost Decade(s)-Complements of Obama, Bernanke and Geitner
Posted by Tom in Deficit, Democrats, Economics, Fed, Financial Crisis, Financial Policy, Monetary Policy, Real Estate, Uncategorized on January 25, 2010
Japan’s “lost decade” was caused by hiding bad assets, inflating values, and failing to recognize losses. “Hide the problems.” “Kick the can down the street.” Bank capital was suspect because bank assets were suspect. This societal attempt not to “lose face” resulted in a stagnant decade and higher interest rates for Japanese borrowers.
Fast-forward to the U.S. today. Fannie and Freddie, the efficient government instigators of the subprime residential debt bubble, are government toxic waste dumps. Tim Geithner in a little publicized Christmas Eve surprise, removed the $400 Billion in federal bailout limits from Fannie and Freddie. Currently the government, that’s your tax dollars, are behind everything these toxic twins do, without limit!
Why worry? What do they do? One thing is HAMP, the Home Affordable Modification Program. This is the $75 Billion program to keep people in the over-leveraged, over-priced homes that they can’t afford. It supports the inflated values of mortgage assets on the books of the banks so they won’t be required to write down the value of these assets with the corresponding hit to capital. As previously reported, including Christmas Eve Time Bomb, the program is a dangerous tilt at windmills! It only postpones the inevitable day of reckoning.
What happens to the Fannie-Freddie mortgages once made? Well, the majority go into the secondary market in packages against which bonds are issued, mortgage backed securities, MBS. Well, you argue, the market should fairly price these instruments. Unfortunately the Fed is the market, at least the great majority of the market, 75-80%. Where does it get the $1.45 Trillion to do this? Well, it prints the money. Yes, the Fed has doubled the monetary base.
Why then don’t we now have runaway inflation? Most of that excess liquidity is sitting on the banks’s balance sheets as bank reserves. The banks have not started lending it into the commercial market. There is little increase in the velocity of money, little economic activity. When the economic recovery gathers steam, inflation will raise its ugly head–on steroids!
To control that inflation the Fed would normally sell assets sitting on its balance sheet, typically government bonds. Problem is that now a lot of the securities sitting on the Fed’s books are the Fannie-Freddie toxic waste. Who’s going to buy that crap? And, at what price?
In an intriguing NRO post today, Fed Hedge, Stephen Spruiell points out that whoever the next Fed chairman is he will fail. He will have no where to turn when the stuff hits the fan. We will face runaway inflation with no exit, no remedy. Defaults, foreclosures, double-digigt interest rates. Borrowing will stop, business will atrophy.
So it really doesn’t matter who the next Fed chairman is. This gives populist bent Senators cover to oppose Bernanke’s confirmation. When the inevitable explosion occurs, they will say “told you so!”
Tom Motherway
Barney Frank, a Reformed Crap Shooter?
Posted by Tom in Centrally Managed Economy, Deficit, Democrats, Financial Crisis, Financial Policy, Real Estate on January 22, 2010
I got all excited when I read this morning’s headline to the effect that Barney Frank would recommend replacing Fannie Mae and Freddie Mac. (Bloomberg January 22nd article here.) Recall that Barney was the Democrat arguing to “roll the dice” with Fannie and its foray into subprime loans. As it turned out this gambling with your tax money was a proximate cause of the financial debacle we are still feeling the effects of.
Well my excitement lasted about a nanosecond. “We’re going to look at the whole question of housing finance…sorting our the function of promoting liquidity in the market and also the secondary market in general but then also doing some kind of subsidy for affordability.” Frank continued, “I don’t know anybody who thinks Fannie and Freddie should continue!”
In other words we’re going to create a whole new government home finance scheme! To bring Fannie and Freddie “on budget” following the recent $291 Billion Fannie-Freddie bailout would cost another $99 Billion according to the CBO. Looks like our $1.4 Trillion 2009 deficit will only go up! A federal debt increase follows as sure as night follows day! (WSJ January 22nd article here.)
When will these socialists learn that government has no role in housing finance? This is not a proper function of government. The market can best handle capital allocation decisions, including home financing. The government has proven it can’t handle them, over and over again. Our children and grandchildren will suffer as a result!
Tom Motherway
Obama Makes Positive Step in Bank Regulation
Posted by Tom in Democrats, Financial Crisis, Financial Policy, Government Regulation, Wall Street on January 21, 2010
Today Obama took Paul Volcker’s advice and proposed new restrictions on the size and activities of big banks. Depository institutions will be barred from proprietary trading, that is making bets with depositor money, part of which is insured by the FDIC. The administration will seek tighter limits on the size and concentration of depository institutions; the new restrictions would go beyond the 10% of insured deposits limit. Also these banks could not own, invest in or advise hedge funds or private equity firms. See the January 21st WSJ report here.
While stopping short of Glass-Steagall which would require the complete separation of commercial and investment banking, this is a good proposal. Hopefully it will force some divestitures among the behemoth financial institutions. In any case the taxpayer will be better protected.
Little wonder serious restrictions are necessary. The liberal giant Goldman Sachs, darling of the Democrats, announced fourth quarter earnings today of $4.95 Billion on revenues of $9.62 Billion–that’s an embarrassing 51%! We taxpayers helped them get there!
Taxpayer bailouts of Wall Street firms should never be allowed to happen again. Firms should be forced into bankruptcy, allowed to fail. A few good healthy failures would put a lot more discipline back into the market and go a long way to eliminating moral hazard.
Obama’s proposal took political courage because he is offending his Wall Street bosses. Financial stocks were down in today’s market. Obama should be applauded for this stand.
Tom Motherway
Finally, Some Sense In Financial Regulation?
Posted by Tom in Financial Crisis, Financial Policy, Government Regulation, Wall Street on January 20, 2010
Perhaps, we will see. But a late item in the January 20th WSJ indicates that Obama is finally starting to listen to experienced voices in the White House, specifically that of Paul Volcker, the former Fed Chairman who has been advocating the separation of commercial banking from investment banking.
As covered in my January 14th post, commercial banks are connected with various deposit guarantees to the government but correspondingly traditionally regulated by bank examiners. Investment banks are advisors, underwriters and traders all involving unregulated risk in the traditional sense. Since the Glass-Steagall repeal in 1999 the two systems have merged big time and we taxpayers have taken it in the shorts as a result. The simple solution is to re-initiate Glass-Steagall and break ‘em up, as was done with ATT and others, successfully!
If today’s WSJ post is correct, Obama doesn’t go far enough but seeks to capture the “spirit of Glass-Steagall.” This half step is certainly in the right direction but still leaves the “too big to fail” nightmare intact and the taxpayers footing the bill.
If we are merely willing to structure regulation so that failure can occur, we will return discipline to the financial system. Because the failure will most likely occur on the risky investment banking side where the worldwide banking system will not be at risk. We will avoid moral hazard. And we will save our children and grandchildren from the debilitating deficit bailouts we have recently suffered.
Let’s hope Obama is more willing to forsake his Wall Street money backers than he has been his union employers. And let’s hope continues to listen to Volcker and separates commercial banking from investment banking. We should support him in this effort.
Tom Motherway