Archive for category Financial Policy
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.”
Are Low Rates Counterproductive?
Posted by Tom in Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt on August 12, 2010
John Michaelson’s WSJ post, “The High Costs of Very Low Interest Rates,” presents the dark side of the Fed’s current policy. In it he makes the following points:
- low rates mean low earnings on savings giving consumers less to spend,
- folks close to retirement need to save more to get expected earnings,
- corporate pension plans need to fund more to make up for low earnings, which reduces money available for investment, and
- banks can borrow at zero and buy US bonds at a risk free return, so they do not lend to businesses for investment and job creation.
What’s sad is that the Fed has not learned from Japan’s lost decade experience. In 1990 following the burst of the credit bubble, Japan dropped it rate to an unprecedented .25% It’s government then borrowed to create massive “stimulus.” This froze out private borrowing, investment and consumption creating the lost decade.
Does any of this sound familiar?
I recommend the full article linked above.
Deflation, A Self Fulfilling Prophesy?
Posted by Tom in Business, Centrally Managed Economy, Deficit, Fed, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Taxation on August 3, 2010
When Bill Gross, the bond guru manager of Pimco Total Return Fund, says “it’s happening,” he brings credibility to the deflation first scenario, that is deflation before inflation. According to yesterday’s WSJ article many fund managers are loading up on US Government bonds and hedging stocks. Others expect the Fed to come to the rescue. The Fed has limited options since it has interest rates near zero. According to another WSJ report these options are “unorthodox!” As the Fed mulls these, it may spook investors and highlight the weakness in the economy. So when the Fed is playing offense in trying to reflate the economy, savvy investors might conclude as Gross did that it’s time to play defense. Typically these “unorthodox” measures mean increasing the money supply by buying bank assets good and bad, bonds and mortgage backed securities. Problem is that there are not too many bullets left in the Fed’s arsenal.
To cap matters off, vis a vis the “self fulfilling prophesy,” today’s WSJ leads the front page with “Fed Mulls Symbolic Shift” that is using cash from maturities to buy additional assets instead of letting its portfolio shrink to a stable economy level. The Fed’s $2.3 Trillion portfolio has nearly tripled in size since 2007!
So, what to do? If prices are going to be lower tomorrow, why buy today? And this, ad infinitum! Couple this with Hussein Obama’s proposed tax increases, the pile on of entitlement deficits from Obamacare, and the great uncertainty posed by the regulatory bureaucracy, and you get a bleak picture.
Hope I’m wrong!
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.
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!”
Obama Budget Cuts
Posted by Tom in Deficit, Democrats, Financial Policy, National Debt, Obama Budget & State of the Nation on April 23, 2010
Monthly Reno Hayek Symposium Dinner
Posted by Tom in Deficit, Economics, Financial Crisis, Financial Policy, Symposium Notes on April 21, 2010
Last evenings Symposium Dinner was a double-header first with an excellent presentation by Howard Fletcher whom Bob Skach sponsored for the dinner. Howard brought his extensive credentials in international business to bear in discussing the current economy from a big picture, 50,000 foot perspective. Detailed statistics backed up the main lesson, that our over leverage, over consumption, and under savings caused this “balance sheet” recession. Different from an “inventory” recession because it is caused by inflated values yet constant high debt levels, while the inventory recession is a simple temporary unbalance of supply and demand. The problem here is the lingering nature of the downturn and slow recovery, in this case exacerbated by government mistakes. (What’s new!) Again in this case given the multiple deficit levels, concomitant debt and horrendous unfunded liabilities at all government levels the future is dire short and near term. But Howard does forecast a start-stop recovery in the second half of the decade.
Our second speaker, Tom Cargill presented his provocative thoughts on the Fed’s anticipated exit from its unprecedented free money policy. This both in terms of zero interest rates and historic, dramatic expansion of money supply (M2). The $12 Trillion of deficits and debt was shockingly illustrated with Federal Reserve graphs. Tom made the point that the political pressure to keep the status quo will not abate. Next, the so-called “independence” of the Fed is ofttimes illusory in face of that pressure. Thus the only issue is the Fed’s political will to use its ample tools to start removing the punchbowl from the party.
After the presentations those in attendance undertook a lively exchange which was at times very telling, at least in the sense that each participant knew what the conclusions were. We face a dismal immediate future. Leaders from both parties tend to get bit by Potomac fever and avoid proper but hard decisions. There is a good chance of a revolution in the two upcoming election cycles as a strong majority of the electorate resent big government. The role of the government is the issue. Given agreement that it is too all-consuming, the question is how to effectively keep restricting and diminishing it.
I want to thank Howard and Tom for a thought provoking evening and great fodder for future discussions.
O’Driscoll’s Shot at Crony Capitalism
Posted by Tom in Economics, Financial Policy, Government Regulation on April 19, 2010
Our own Jerry O’Driscoll has in his April 20 WSJ article given an economist’s perspective on “crony capitalism,” An Economy of Liars. He argues that the current “reform bill” simply multiplies regulations in a failed regulatory environment. One reason for the failure is the incestuous relationships between regulator and regulated. Examples of regulatory failure abound. Causes are more subtle. Jerry argues for a more common law approach, an affirmatively duty to correctly represent. Let the free market and its pricing mechanism work. His article linked above is well worth the read.
Wall Street + Democrats = Crony Capitalism at Taxpayer Expense
Posted by Tom in Centrally Managed Economy, Deficit, Democrats, Economics, Financial Policy, Government Regulation, Unions, Wall Street, Welfare on April 18, 2010
In 2008 to elect, inter alia, Barack Hussein Obama and other Democrats, Goldman Sachs contributed $4,463,788; that’s 75% of its total contributions to the Democrats, the party of Wall Street. Also the party of public employee unions and unions in general. Also the party of trial lawyers. These three groups together with sundry “rent seeking” corporations like GE have cost the U.S. economy, particularly the taxpayers, billions of dollars. A little money buys a lot from Democratic whores like financial perks to Goldman from selling structured phony investments, more government employment union dues for union bosses, and contingency fees for trial lawyers from phony lawsuits. The economic cost hurts us in inflated deficits and debt, higher capital costs and exploding taxes and higher medical costs from inflated malpractice insurance rates.
The Wall Street payoff continues with Sen. Dodd’s financial ”reform” package. It is a bailout at taxpayer expense waiting to happen. With Obama and Democratic lips moving in support of the Dodd security blanket for Wall Street you know the denial of future bailouts is bold face lie. What Dodd has done is to institutionalize future bailouts garnering more power to the federal (DEMOCRATIC) regulators. Just another step in big government. Just another money getting lever for the Democrats. Just another vote buying lever for the leftists.
The problem is twofold and all bad: One: More control of the economy, main street as well as big business, because the general economy works with the financial lubricants provided by the financial industry. More control means bigger government. More control means more opportunity for rent seeking behavior and less competition. More control means more incumbent power.
(Definition: rent seeking behavior is the business behavior to obtain unfair competitive advantage from government regulation, subsidy, or taxation against competition without such advantage. Examples: subsidy of environmental devices, ethanol, and government bond agency.)
Two: Just as bad from an overall economic perspective is the moral hazard enshrined in the Dodd bill. Moral hazard is the real or imagined sense that there is a safety net protecting business from adverse risk. If I feel the government will always be there to bail me out, I will take more and more undue risk to gain greater profit because I have nothing or little to lose in the process. This is a guaranteed bubble generator and when the s__t hits the fan, the necessary cleanup will fall on the taxpayer. Fannie and Freddie are perfect examples of this phenomena.
As a recent WSJ editorial notes the Dodd bill is improving draft by draft at a glacial pace so we still have hope. But the mindset of the Obama control freaks is opposite the welfare of the American people.The solution is to separate high risk businesses like proprietary trading from government guarantee businesses like bank deposits or alternatively, eliminate all government business guarantees. We must have the freedom to fail as well as succeed without government interference in either case. That is what makes us competitive and what has made us great.
Welfare be it individual or corporate only makes us dependent in a world that will not tolerate dependence. It puts us near the end of the road to serfdom.
Will China Fall Off the Seesaw?
Posted by Tom in Centrally Managed Economy, Financial Policy, Foreign Policy, Foreign Trade, Monetary Policy, National Debt on April 2, 2010
In the second of three major Stratfor’s geopolitical updates Peter Zeihan treats, China: Crunch Time. (Note: last month’s predictions on Germany were prescient. See: Germany’s Upcoming Remake of the European Union.) In this analysis of China Zeihan discusses the rebalancing that the major commercial nations are currently undergoing and indeed striving to attain.
China’s economic system is inherently unstable. It is closed, highly regulated, overly export dependent, without private capital allocation, and dependent on a controlled currency. Historically this is much like Japan and East Asia in the ’90s. China “funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers…It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share.” The consequent effects include: inefficient capital use, a large number of property bubbles, regional disparity, a tiny consumer base, and over-dependence on exports, foreign consumption.
A major structural factor in the global economy that has the past 30 years protected China is also a core tenet of U.S. foreign policy: Bretton Woods. Bretton Woods was essentially an agreement between the U.S. and the Western allies that gave the allies near duty-free access to American consumers in exchange for the right of the U.S. to call the shots in security and foreign policy of the rebuilding allied nations. “In essence, the Americans took what they saw as a minor economic hit in exchange for being able to rewrite first regional, and in time global, economic and military rules of engagement.” Thus was the USSR contained. China eventually benefited.
The Obama administration is rethinking Bretton Woods, ostensibly to update the global financial system, but in reality the National Export Initiative is much more mercantilist calling for the doubling of U.S. exports in five years and targeting countries like China. While the NEI is vague as to method and optimistic in aim, it spells a policy shift. Trade policy will no longer be subordinate to foreign and military policy but potentially “a beast unto itself!” Zeihan gives the 1980s Japan as his perfect analogy, not a good outcome for China.
China has no good options. “China, which unlike Japan is not a U.S. ally, would have an even harder time resisting should Washington pressure Beijing to buy more U.S. goods. Dependence upon a certain foreign market means that market can easily force changes in the exporter’s trade policies. Refusal to cooperate means losing access, shutting the exports down.” China’s only recourse would be to stop purchasing U.S. debt which is unlikely: a. Beijing can’t safely invest in China’s undeveloped capital markets. b. And the bond purchases largely fuel U.S. consumers’ ability to buy China exports. We are China’s market with more disposable income than all China’s other markets combined!
“STRATFOR sees a race on, but it isn’t a race between the Chinese and the Americans or even China and the world. It’s a race to see what will smash China first, its own internal imbalances or the U.S. decision to take a more mercantilist approach to international trade.”
For another somewhat similar perspective see the Economist article, Hope at last.
This report is paraphrased in part and republished republished in part with permission of STRATFOR. I highly recommend becoming a member.