Archive for category Financial Policy
The World’s Policeman Has Become the World’s Enabler
Posted by Tom in Defense, Deficit, Democrats, Entitlements, Europe, Fed, Financial Policy, Fiscal Policy, Foreign Policy, Military Policy, Statism on January 1, 2012
It can’t continue. It has got to stop. Since the end of WWII we have been the western world’s policeman, unpaid despite the sacrifice of our blood and treasure. We rebuilt Europe and Japan following the war then we paid for and continue to pay for their defense. As a consequence we have enabled the socialistic welfare states of Europe to increase their welfare. Now, to the point where the weaker ones are bankrupt. To top that off our president is taking the country in the same welfare state direction and the Fed is attempting to continue helping Europe kick the can down the street supporting the zombie European nations.
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!
“Bailout-er” of Last Resort–For Europe?
Posted by Tom in Economics, Europe, Fed, Financial Policy, Monetary Policy, National Debt on December 28, 2011
Jerry O’Driscoll penned a dynamite op-ed in today’s WSJ. It raises serious questions about the Fed’s role and is reprinted below:
The Federal Reserve’s Covert Bailout of Europe
When is a loan between central banks not a loan? When it is a dollars-for-euros currency swap.
By GERALD P. O’DRISCOLL JR.
America’s central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.
The Fed is using what is termed a “temporary U.S. dollar liquidity swap arrangement” with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or “swaps” dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.
Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman’s collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.
The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books. A currency swap with the ECB is not technically a loan.
The ECB is entangled in an even bigger legal and political mess. What the heads of many European governments want is for the ECB to bail them out. The central bank and some European governments say that it cannot constitutionally do that. The ECB would also prefer not to create boatloads of new euros, since it wants to keep its reputation as an inflation-fighter intact. To mitigate its euro lending, it borrows dollars to lend them to its banks. That keeps the supply of new euros down. This lending replaces dollar funding from U.S. banks and money-market institutions that are curtailing their lending to European banks—which need the dollars to finance trade, among other activities. Meanwhile, European governments pressure the banks to purchase still more sovereign debt.
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The Fed’s support is in addition to the ECB’s €489 billion ($638 billion) low-interest loans to 523 euro-zone banks last week. And if 2008 is any guide, the dollar swaps will again balloon to supplement the ECB’s euro lending.
This Byzantine financial arrangement could hardly be better designed to confuse observers, and it has largely succeeded on this side of the Atlantic, where press coverage has been light. Reporting in Europe is on the mark. On Dec. 21 the Frankfurter Allgemeine Zeitung noted on its website that European banks took three-month credits worth $33 billion, which was financed by a swap between the ECB and the Fed. When it first came out in 2009 that the Greek government was much more heavily indebted than previously known, currency swaps reportedly arranged by Goldman Sachs were one subterfuge employed to hide its debts.
The Fed had more than $600 billion of currency swaps on its books in the fall of 2008. Those draws were largely paid down by January 2010. As recently as a few weeks ago, the amount under the swap renewal agreement announced last summer was $2.4 billion. For the week ending Dec. 14, however, the amount jumped to $54 billion. For the week ending Dec. 21, the total went up by a little more than $8 billion. The aforementioned $33 billion three-month loan was not picked up because it was only booked by the ECB on Dec. 22, falling outside the Fed’s reporting week. Notably, the Bank of Japan drew almost $5 billion in the most recent week. Could a bailout of Japanese banks be afoot? (All data come from the Federal Reserve Board H.4.1. release, the New York Fed’s Swap Operations report, and the ECB website.)
No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments. It is difficult to count the number of things wrong with this arrangement.
First, the Fed has no authority for a bailout of Europe. My source for that judgment? Fed Chairman Ben Bernanke met with Republican senators on Dec. 14 to brief them on the European situation. After the meeting, Sen. Lindsey Graham told reporters that Mr. Bernanke himself said the Fed did not have “the intention or the authority” to bail out Europe. The week Mr. Bernanke promised no bailout, however, the size of the swap lines to the ECB ballooned by around $52 billion.
Second, these Federal Reserve swap arrangements foster the moral hazards and distortions that government credit allocation entails. Allowing the ECB to do the initial credit allocation—to favored banks and then, some hope, through further lending to spendthrift EU governments—does not make the problem better.
Third, the nontransparency of the swap arrangements is troublesome in a democracy. To his credit, Mr. Bernanke has promised more openness and better communication of the Fed’s monetary policy goals. The swap arrangements are at odds with his promise. It is time for the Fed chairman to provide an honest accounting to Congress of what is going on.
Mr. O’Driscoll, a senior fellow at the Cato Institute, was vice president at the Federal Reserve Bank of Dallas and later at Citigroup.
O’Driscoll Post: End of Euro?
Posted by Tom in Europe, Financial Crisis, Financial Policy, Fiscal Policy, Monetary Policy, National Debt on November 9, 2011
Jerry O’Driscoll”s post on the Cato blog today will get your attention; it follows verbatim:
“Global equity markets are falling, with the Dow Jones Industrial Average down around 250pts. A benchmark 10-year Italian government bond is yielding 7.4%. Every country whose sovereign debt went over the 7%-mark has required a bailout. I was in Italy a month ago, and the yield was under 6% (still pricey for a developed country).
A bailout of a country Italy’s size would be a gargantuan task — probably a larger effort than heretofore. It is beyond the capacity of the EU. Italy’s debt is just too large. I doubt China would purchase any real assets until labor-market reforms and pension reforms were enacted. China actually wants a return on its investments.
If the IMF gets involved, it would require massive new funds for which the US taxpayer would be on the hook for around 18%. I wonder how that would go over in the US House or even the Senate? That doesn’t mean the Obama administration won’t try to organize a rescue. The Fed has been backstopping the EU banks for some time.
Will the Euro survive? Will the global financial system survive?”
Jerry’s email answer to the last two questions was: “probably and possibly!” I’m not sure of the order he intended.
But see Italy Bond Attack Breaches Euro Defenses today on Bloomberg.com. The simple answer is that monetary governance without fiscal governance does not work. The sooner that is realized, the sooner sovereign bailouts will stop, and the sooner the European nations can begin a healthy recovery.
Sinking With Europe?
Posted by Tom in Economics, Europe, Fed, Financial Policy, Fiscal Policy, Foreign Policy, Monetary Policy, Welfare on November 2, 2011
The following is a republication of Jerry O’Driscoll’s op-ed in today’s WSJ, Why We Can’t Escape the Eurocrisis. The article also had lead position in today’s Real Clear Politics.
Why We Can’t Escape the Eurocrisis
EU and U.S. debt are interlinked through the banking system.
By GERALD P. O’DRISCOLL JR.
When is a bailout not a bailout? When the bailor is short of funds. The recently announced debt plan in the European Union comes up short in almost all respects.
The debt crisis is not just an EU problem, but a trans-Atlantic financial crisis. The overwhelming debt problems on either side of the pond are interlinked through the banking system.
First to the EU. The underlying dilemma is that governments have promised their citizens more social programs than can be financed with the tax revenue generated by the private sector. High tax rates choke off the economic growth needed to finance the promises. Economic activity gets driven into the underground economy, where it often escapes taxation.
Nowhere is this truer than in Greece, which has a long history of sovereign defaults in the 19th and 20th centuries. There is a bloated public sector, and competitive private enterprise is hobbled by regulation and government barriers to entry. Successive Greek governments ran chronic budget deficits, and the Greek banks lent to the government. Banks in other EU countries, such as France, lent to the Greek banks.
In Greece and elsewhere in the EU, the banks support the government by purchasing its bonds, and the government guarantees the banks. It is a Ponzi scheme not even Bernie Madoff could have concocted. The banks can no longer afford to fund budget deficits, yet they cannot afford to see governments default. Governments cannot make good on their guarantees of the banks.
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Details differ by country. In Ireland, problems began with an overheated property sector that brought down the banks. The economy went into depression, which threw the government’s budget into deficit. Further aggravating the deficit was the government’s decision to guarantee bank deposits, converting private, financial-sector debt into public-sector debt. The details differ from Greece, but the linkage between the government and the banks is the common factor.
France’s growth is weak to nonexistent. Germany’s economy has performed well since the recession, but concerns are growing regarding its banks’ exposure to greater EU risk. And U.S. banks and financial institutions are exposed to EU banks through funding operations, issuance of credit default swaps and unknown exposure in derivatives markets.
The Federal Reserve has engaged in currency swaps with the European Central Bank to support the dollar needs of EU banks. The ECB deposits euros (or euro-denominated assets) with the Fed and receives dollars in return. It promises to repay dollars plus interest.
The Fed maintains they cannot lose money because the ECB promises to repay the swaps in dollars. And yet, with the world awash in greenbacks, it is unclear why the Fed and the ECB even needed to engage in these transactions—except that it suggests funding problems at some EU banks. And if neither EU banks nor the ECB can secure enough needed dollars in global markets, there is a serious counterparty risk to the Fed. The ECB can print euros but not dollars. Sen. Richard Shelby (R., Ala.), ranking member of the Senate Banking Committee, was correct to raise concerns about the Fed’s policy last week. Losses on the Fed’s balance sheet hit the U.S taxpayer, not EU citizens.
The sad fact is that there is not enough money in the EU to pay off the public debts incurred by the governments. Most countries have long since squeezed as much tax revenue from their citizens as they can. That is why they have toyed with a tax on financial transactions, the one remaining untaxed activity in all of Europe.
Greece is the first of other sovereign defaults to come. With last week’s bailout, the EU leaders might have bought time, perhaps a year. But at some point, the ECB will cave and monetize the debt, leading to euro-zone inflation.
The debt calculus changed dramatically this week with the announcement of a Greek referendum on the bailout agreement next January. If voters reject the agreement, the ultimate outcome is unpredictable.
Americans must not be smug about the suffering of Europeans—our financial system is thoroughly integrated with theirs. Moreover, the International Monetary Fund will most likely be involved in the event of future bailouts and will likely need large funds from its members, which ultimately means the taxpayers.
And, of course, the U.S. has its own large and growing public debt burden. We have not gone as far down the road to entitlements, but we are catching up. If you want to know how the debt crisis will play out here, watch the downward spiral in the EU.
Meanwhile, expect more volatility in financial markets. U.S. traders in particular simply have not grasped the enormity of the EU debt crisis.
Mr. O’Driscoll, a senior fellow at the Cato Institute, is a former vice president of the Federal Reserve Bank of Dallas and later Citibank.
U.S. Taxpayers Pay For Europe’s Socialist Implosion
Posted by Tom in Banks, Centrally Managed Economy, Corporate Welfare, Financial Policy, Wall Street on October 24, 2011
Remember the Dodd-Frank’s nod to the Volker Rule? That’s the rule designed to prevent Wall Street Banks from shooting craps with taxpayer money, that is, engaging in high-risk proprietary trading while guaranteed by the taxpayers. The Volker Rule would not be necessary if the Glass-Steagall Act, which separated investment banking (trading, etc.) from commercial banking (deposits and loans) had not been repealed by Congress and signed into law by President Clinton. But Glass-Steagall was repealed and investment banks and commercial banks joined businesses under the taxpayer umbrella. Well, we had the sub-prime debacle with Fanny/Freddie and the taxpayers paid. Then we had the dynamic duo foist the Dodd-Frank Act on the U.S. taxpayers. This law was supposedly to guard against “too big to fail” taxpayer bailouts. FORGET ABOUT THAT.
Today’s WSJ editorializes, So Much for the Volker Rule. Seems that the lawmakers couldn’t quite define the Volker rule, so they passed the job to the bureaucrats. The bureaucrats, obviously influenced by the regulated Wall Street banks, are having trouble defining the Volker rule. They’ve used 298 pages, 1,347 questions, to state that they can’t define it! DO YOU SUPPOSE THAT THE BANKS DON’T WANT THE VOLKER RULE?
This would be so much humorous prattle if it weren’t so frickin serious. Note well this October 18th article in Bloomberg, BofA Said to Split Regulators over Moving Merrill Derivatives to Bank Unit. The derivatives are CDS (Credit Default Swaps) to Europe’s zombie banks covering European sovereign debt. That’s right, we taxpayers will be guaranteeing the Greeks! (Makes you want to Occupy Wall Street!) This is no small deal, over 20 Trillion Dollars in notional value; even at 20 to 1 discounting, this is a Trillion Dollars, your dollars!
The simple answer is to elect a conservative president and Congress, then to reinstate Glass-Steagall thus separating risky investment banking from the more conservative commercial banking. The remaining monstrosities of Dodd-Frank can be dealt with individually.
What Happens When the Euro Plumets?
Posted by Tom in Economics, Financial Crisis, Financial Policy, Monetary Policy, National Debt on May 21, 2011
The prime concern of knowledgable financial analysts has been the Euro, its probable collapse, the consequent effect on the EU and, in turn, the world economy. I read and heartedly recommend John Muldin whose last articles lay out the all too obvious concerns. (See http://www.johnmauldin.com/frontlinethoughts. The basic subscription is free and very good)
In sum, the situation is that the ECB has been buying debt of the bankrupt nations, Greece followed by Portugal, Ireland and perhaps Spain in order to support the EU and more to the point the banks in each EU nation, including those of France and Germany. If ECB support is withdrawn, the banks holding the worthless paper at par, will no longer be solvent! This is the equivalent of Lehman Brothers bankruptcy on steroids!
Assuming the worst for the sake of argument we must ponder the consequences in Europe. Runs on banks are real but probably unnecessary as the currency has no consistant value. Gold, diamonds and high value commodities work as mediums of ad hoc exchange. A barter economy ensues. Europe-dependent international trade at best slows and at worst pauses until enough mediums of exchange can be agreed upon.
The dollar, as the ready-albeit unjustified-medium surges to bubble proportions. US exports become dramatically more expensive for any remaining buyers. US export sales and production slow to deep recession levels. Layoffs ensue. GDP plumets. Federal and state government entitlement demands rise with no ready relief.
The Fed initiates QE3 flooding the economy with more (depreciated in real terms) dollars by buying increasingly worthless US debt.
Will the US which has enjoyed the dumb-fat luxury of being the world reserve currency since Bretton Woods follow the EU and fold? Will there be another substitute world reserve currency? Are all central banks becoming political animals or fiscal policy proxies? How will world trade right itself?
All that said, what’s the effect on your family, your business, your community, your nation and your investments? Is “guns and gold” the mantra of the day? Something to consider!
Obama’s Government By Fiat
Posted by Tom in Banks, Centrally Managed Economy, Fed, Financial Policy, Government Regulation, Statism on March 16, 2011
In one of his most effective attempts to show he is strong, Obama appointed Elizabeth Warren, the leftist Harvard law professor to…..well… ‘er he couldn’t actually appoint her to head the Consumer Finance Protection Bureau (CFPB), the Dodd-Frank finance reform, which he wanted to do. Bi-partisan opposition assured her of rejection as head of any legal, statutory regulatory agency. So what did Obama, lawyer himself, do? He appointed her to a “special position” at both the White House and Treasury with the job of staffing the bureau, setting its direction and implementing the CFPB law, which:
- 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.”
Cartoon View on the Fed’s Obsession With Deflation
Posted by Tom in Economics, Fed, Financial Crisis, Financial Policy, Fiscal Policy, Monetary Policy on February 26, 2011
Ireland Exports Its Future……Will America?
Posted by Tom in Banks, Entitlements, Financial Policy, Fiscal Policy, Welfare on February 24, 2011
Irish Remedy for Hard Times: Leaving, reads a page one headline in today’s WSJ. Another Potato Famine? No, but almost as bad, and familiar a story: One of the EU’s peripheral favorites, Ireland got “free lunch” benefits and used them to attract industry including that dependent on low taxes and favorable treaties. This promoted a boom accompanied by social welfare benefits. The real estate boom followed then turned into a bubble and burst leaving banks saddled with bad debt. Rather than let shareholders take the losses due them, the government stepped in and, yes, guaranteed the underwater banks. If this sounds familiar it’s because it is.
“However, by 2008, as Ireland’s banking crisis triggered a deep recession and unemployment soared to 13%, the tide turned again. Ireland’s Central Statistics Office predicts that 100,000 people will emigrate over the next two years, more than twice the number that left in 2009 and 2010. That comes to about 1,000 per week, and exceeds the last peak in emigration in 1989 when 44,000 people moved away.”
“And while demographic data on emigrants is scarce, many of those leaving are believed to be well-educated professionals—precisely the people Ireland needs to lead a recovery. “In a modern, knowledge-based economy, dense, diverse cities full of highly-skilled people are a critical competitive advantage,” says Mr. McHale. “If the most enterprising people leave, you undermine that advantage.”
So in essence, Ireland exports its future. Some argue the austerity necessary to right the financial ship is to blame. But without it, there is no hope of recovery at all. No, the EU “free lunch” and government policies are the cause and the remedy is painful but necessary. The Celtic Tiger is brought low; it now occupies as unenviable position as one of the EU’s PIGS! Again, there is no such thing as a free lunch.
Could it happen here? Certainly the continuing welfare state with its ongoing deficits and unsustainable debt build up could drive us to a sustained depression. But would our “best and brightest” leave for greener pastures, exacerbating the situation? Would they vote with their feet? Is Atlas Shrugged feasible?
I don’t profess to know the answer. I suspect some would and that other countries and industries would welcome this young talent that was once our future. As Asia grows its appetite for entrepreneurial talent will grow.
While solutions to our unsustainable welfare system may seem painful now, they will be exponentially more painful later. We simply can’t continue kicking the can down the road. That road has a big “dead end” sign posted right in front of our eyes.
Inflation Is Coming
Posted by Tom in Economics, Fed, Financial Policy, Foreign Trade, Monetary Policy on January 27, 2011
Alvaro Vargas Llosa has an excellent RCP post today, The Specter of Inflation. A senior fellow at the Independent Institute, he experienced the hyper inflation of the 1980s in Peru and is now concerned with the “frenetic printing of money going on in the world.” In Britain the CPI is approaching 4%, in China 5%. Emerging markets like Indonesia, South Korea, Thailand, India and Brazil are all experiencing inflation at the consumer level.
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!