Archive for category Financial Policy
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
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
Government Competency–An Oxymoron!
Posted by Tom in Democrats, Financial Policy, Government Regulation, Real Estate, Wall Street on February 12, 2010
Government residential real estate finance is the subject. Whether that is a proper role for government is one question; another is whether government is the dumb patsy that makes the smart guys rich. Let’s start with a video Ron Tomsic sent me yesterday, The Indymac Slap in Our Face, on the Think Big Work Small website, which tells of the profitable, rent-seeking relationship between the Federal Government and a Goldman Sachs/George Soros bank, OneWest Bank. Since these fellows are playing fast and loose with your money, please link to the video before reading on.
To verify the government locked in profit given to these Obama fat cats, I checked with Mark Toomey, our real estate finance expert. Mark’s comment:
“I’ve seen this video at least twenty times this week. Sadly, it’s pretty accurate. The $75,000 note from the consumer may reflect a judgment against the borrower for a non purchase money second and if that’s the case, I highly doubt they’ll ever collect it; more than likely, it will be included in the inevitable BK the consumer is headed toward.”
Worse yet seems to be the regulatory snafu our bureaucrats at Fannie/Freddie, the Fed, and HUD have caused with conflicting regulations the incidental benefit of which will be to keep the trial lawyers in business. Another Democratic constituency!
Mark continues: “Honestly, I think the bigger story is one the media will not pick up on for another two weeks. Residential lending has been virtually shut down in the last week now that the new GFE regulations have been fully enacted. Three dueling regulatory bodies have merged in to the perfect storm. My weekly conference call with the fixed income guys at Blackrock have turned in to a death watch of sorts; the scenario’s I laid out to them in December (ones at which we all laughed) have now come to pass, and we may very well be looking at the last decent funding month for residential mortgages nationwide. The pre-pay speeds have dropped off the table in the last ten days, and it is getting worse. Kiss getting a VA loan good bye.”
(Definitions: “GFE” means good faith estimate typically dealing with all essential and non-essential elements of a real estate closing. “Pre-pay speeds” mean the anticipated rate of pre-payments assumed by secondary market buyers of mortgage pools.)
Mark concluded with his dark Irish humor: “Greece today, New York tomorrow. Guns and gold, Tom, guns and gold.”
When government gets into businesses it shouldn’t be in the opportunities for incompetency and fraud are multiplied exponentially. The favored fat cats of the liberal left, Wall Street, trial lawyers, unions, etc. profit and all from your tax dollars! Truly a wonderful system we have.
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
Challenge: Agree With A Liberal
Posted by Tom in Centrally Managed Economy, Financial Policy, Government Regulation on January 14, 2010
In the spirit of open-mindedness and good fellowship I think it is right that we look for a liberal position with which we agree. So this is my contribution for the year, so far:
In the January 13th WSJ’s “Tilting Yard” Thomas Frank pens his oped entitled, Bring Back Glass-Steagall. Recall that Glass-Steagall was the depression era act that separated investment banking from commercial banking. Commercial banking is what we’re most familiar with our checking accounts, saving accounts, auto loans, and home loans; for businesses this would include inventory loans and general working capital loans. This commercial banking is highly regulated at several levels and since the depression has federal government guarantees associated with it.
Investment banking, on the other hand, has to do with securities, underwriting, advising, and trading. Old firm names like Rothschild, Lehman, and Solomon were the traditional investment bankers. They had little regulation and no government guarantees. These firms advised companies, brought them public often taking equity positions in them, and financed their bond issues by underwriting their debt; they also developed very profitable trading operations in securities and commodities of all types. Wall Street investment banks pioneered new forms of finance involving security assembly and packaging, derivatives, and multi-jurisdictional tax and security laws. Again, there was little regulation and no taxpayer guarantees.
In 1999 with both Republicans and Democrats supporting the legislation, Glass-Steagall was repealed. President Clinton signed the legislation which became law. Combinations were off to the races. Old bank names fell by the wayside and behemoths like Citi and Bank of America handled all things financial! You don’t hear commercials for the old money center banks anymore. Chase Manhattan is now JP Morgan Chase; Mellon National is Bank of New York Mellon; Boatman’s Bank of St. Louis is now Bank of America. You get the picture.
With the repeal of Glass-Steagall we find a dangerous mixture government guarantees and significant private risk taking. This simply doesn’t mix. Fannie and Freddie are a good analogy. Shareholders get the upside, taxpayers get the downside. This is what we have today. This is to a large extent why we are in trouble.
So when the liberal Thomas Frank calls for the return of Glass-Steagall, I agree with him. He is in good company with nobel laureate economist Joseph Stiglitz and former Fed Chairman Paul Volcker. The simple principle is that we don’t need private enterprises gambling with taxpayer money ever, no way!
Now, at the risk of being too long in this post, I have a challenge for you: Try to find the separation of commercial banking and investment banking in any of the financial regulation bills being proposed in the House or Senate. Try to find Obama advocating any such thing. Try to find any proposals to liquidate Fannie and Freddie being sponsored by Reid, Pelosi, Baucus, Dodd, Frank, or Durbin. You won’t. Hint: Wall Street funds the Democrats and the Democrats are the party of Wall Street. Fannie and Freddie are some of the drugs that help keep Democrats in power with taxpayer financing for non-qualified home buyers.
Tom Motherway
Bernanke’s Defense of Greenspan-Bernanke Free Money Doesn’t Wash
Posted by Tom in Centrally Managed Economy, Economics, Financial Policy, Government Regulation on January 11, 2010
Bernanke mounted a defense of the Greenspan-Bernanke free money policies at the recent economic conference in Atlanta. He blames the housing bubble on lack of regulation. But nowhere can he account for the 50% rise in home values versus the 21% rise in the CPI over the 2000-2007 period. He uses core inflation measures in evaluating Fed performance, but neglects the almost 50% decline in the dollar and the 230% rise in gold in the 2002-2006 period; today it would be a 400% gold price increase from 2002!
Judy Shelton’s report in the January 9th WSJ says it well: “His assertion that “regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices” hints at a possible scapegoat for the housing bubble that presaged financial calamity. Yet nowhere in his 34-page apologia does the Fed chairman fault Congress for inflicting Fannie Mae and Freddie Mac on the home mortgage industry; nowhere does he attempt to analyze the damaging influence of government intervention in the private sector, or its distorting impact on market assessments of risk-and-return tradeoffs.”
For a live assessment from John Taylor of Stanford, watch Larry Kudlow’s discussion with John Taylor here.
Methinks our Fed Chairman protests too much.
Tom Motherway