Thursday, February 26, 2009

Borrowing Is Taxing

I stole this from Greg Mankiw's blog. I don't know where he stole it from.

The excellent point it makes is that federal borrowing is taxation. It's just that federal borrowing further obfuscates who's paying the tax and when.

Wednesday, February 25, 2009

Deeds, Not Words, Will End Up Mattering

This article from the WSJ is a "wish I'd said that" piece.

You Can't Borrow What Hasn't Yet Been Produced And Saved

Do a little mental experiment with me. Imagine that we don't use money to help us exchange goods and services. Imagine, hard as it is, that we exchanged goods and services with each other through barter alone. Put aside for a minute that we do use money, and forget for a minute about the fact that not using money to facilitate exchange would be mightily inefficient. None of that matters for the point I want to make.

Now, with money out of the picture, could you borrow something that had not yet been produced and saved? Clearly, you could not. Guess what; when you put the money back into the picture, that basic truth is not altered even one iota. You cannot borrow what has not been produced and saved.

But once we have a banking system that can create money independently of production of real goods and services, it SEEMS like you can borrow what has not been produced and saved. But you cannot, and I suspect that anyone reading this instinctively understands that point.

Through the magic of fractional reserve banking, one seems to be able to borrow what has not been produced and saved. Fractional reserve banking makes it seem like aggregate borrowing can exceed aggregate saving. But it cannot. Once you define the scope of the system---whether a country or a trading region or the whole planet---aggregate borrowing cannot exceed aggregate saving within that system. Saving, by the way, is producing something that is not consumed. What we save is called capital.

Capital, not borrowing and credit, is what drives the economy, drives its maintenance, and drives its growth. The media, BHO, and most of the supposed experts of finance are all telling us that it is more credit that we need. It is the paucity of credit that is the problem. If that strikes you as insane, you are correct. It is not more attempts to borrow that which has not been produced that will save us. It is saving some of that which has been produced that will rescue the economy.

The Last Word on Obama's Stimulus Plan

John H. Cochran has written it. If you have the tenacity and intelligence to read his master piece here, you are entitled to understand what's going on, why it's going on, and what will be required to return to a healthy economy.

If you have neither the tenacity nor ability to read and understand Professor Cochran's analysis, then you are doomed to limiting your understanding to the fabulous oratory of BHO himself, or the incredible density of Barny Frank.

May the force be with you.

Friday, February 20, 2009

How the Stimulus Plan Works

An old friend from my childhood sent me the following description. She is not an economist, but she definitely understands more about economics than BHO and his touted advisers.
Shortly after class, an economics student approaches his economic sprofessor and says, "I don't understand this stimulus bill. Can you explain it to me?"

The professor replied, "I don't have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I'll be glad to explain it to you." The student agreed.

At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool. They both went out back to the pool, and the professor handed the student a bucket.

Demonstrating with his own bucket, the professor said, "First, go over to the deep end, and fill your bucket with as much water as you can." The student did as he was instructed.

The professor then continued, "Follow me over to the shallow end, and then dump all the water from your bucket into it." The student was naturally confused, but did as he was told.

The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, "Excuse me, but why are we doing this?" The professor matter-of-factly stated that he was trying to make the shallow end much deeper.

The student didn't think the economics professor was serious, but figured that he would find out the real story soon enough. However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad.

The student finally replied, "All we're doing is wasting valuable time and effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you'll really have accomplished is the destruction of what could have
been truly productive action!"

The professor put down his bucket and replied with a smile,"Congratulations. You now understand the stimulus bill."
I think that just about everyone understands what's going on, actually. I think that ordinary people understand instinctively that deficit spending by the federal government and money creation by the Fed will not and cannot cause greater production---just higher prices.

FDR's New Deal showed over nearly a decade the worthlessness of make-work projects financed by deficits and higher taxes. One really has to wonder how dense our elected leaders can be. But then, one also has to ask why we elect them in the first place.

Thursday, February 19, 2009

BHO's Wiggle Words

Greg Mankiw writes,
Now that the stimulus bill has been passed and signed, we might ask: How will we know if it has worked? Full article here.
Professor Mankiw hits the nail on the head yet again. The correct answer to the question, which BHO is certainly clever enough to know, is that we will not know. He's counting on it.

We might be able to detect that the Pork Pool Bill, er ... , Stimulus Bill has failed. If we continue in recession beyond the middle-to-end of 2009, lots of people will be saying BHO's economic advisers need to be replaced; trust me. BHO will not be blamed, though. It will be easy enough to say he inherited a really tough hand that just takes more time to play.

As I tell my students constantly, Presidents do not and cannot direct or manage the economy. They should be neither blamed nor praised for the state of the economy. The best BHO could do is exhort Congress and the Fed to quit gumming up the necessary processes that will be necessary to enable the economy to return to growth.

Showing that the massive deficit spending the federal government has embarked on ended the recession is beyond possibility. To do that, one would also have to show that other factors were not responsible. Economists have been working on sorting this kind of thing out empirically for quite a while; unsuccessfully, I might add. Robert Barro's work comes as close as anyone's to sorting it out.

I hope that other factors do end the recession, because I am persuaded that massive deficit spending will not. I've offered those arguments in this space before, so I won't repeat them now.

Spending does not generate jobs; production in the private sector generates jobs. Jobs will be generated when private businesses believe that it is reasonable to go back into the water. Businesses will not believe that until they see investors willing and able to take equity positions in their companies. Investors will not be willing to do that as long as they believe the Fed is flooding the world with new dollars created from nothing.

Investors are currently hunkered down waiting for the nationalization mumbo jumbo to stop, and waiting to see who will take it in the neck for the losses on toxic asset that have already occurred. How far toward socialism are we really going to go? That's what the market is waiting to see right now. Forget the Pork Pool Bill. It really won't matter, except to benefit the recipients of federal spending and cost taxpayers who will ultimately finance the largess of Congress.

Wednesday, February 18, 2009

To Start Rescue, Fix Regulators

These authors propose sun setting Fannie Mae and Freddie Mac. What a thought.

How about sun setting regulation of all kinds? Voluntary exchange under rule of law that prohibits violence, fraud, and other forms of compulsion from others is what works for people. Singapore is the world's poster child for that prescription. Laws with definite and harsh punishment for violations, but no regulation, and lots of voluntary exchange.

Laws tell people what they must NOT do, and at least in western jurisprudence, the law assumes that the vast majority of people will obey the law. People are presumed innocent until shown to be guilty. When they are shown to be guilty, they are punished. We hope that punishment deters at least some law breaking.

Regulations tell people what to do, how to do it, when to do it, and how they must report to bureaucrats what they did already, and what they're planning to do in the near future. I know this because I've consulted with three large federal bureaucracies (EPA, FDA, and USDA) for about half of my professional career. I know this further because I am a Registered Investment Advisor, and I know first hand how the SEC and FINRA go about their business. They can't detect Madoff, but they will certainly pull my license immediately and fine me if I miss a reporting date.

Regulators assume that the vast majority of people will break the rules. Regulators further assume that they are charged with oversight, prescription, and prevention of breaking the rules.

If regulation worked, we wouldn't have the mess we have right now. The SEC, the Fed, state bank examiners, the FDIC, and other financial market regulators have all failed as regulators. That's not because they are bad people, it's because regulation cannot work and never has.

Imagine for a minute how it would be if we expected the police to behave as regulators. It's against the law to steal. But if the police were to behave as our society seems to expect regulators to behave, the police would have to try to keep thieves from stealing! Could they do it?

The police would evidently need to require that we all inventory our possessions annually or more frequently, document where the stuff came from, fill out reports (reports that couldn't possibly be read), and submit to random searches of our homes to make sure we didn't have stolen stuff.

Does that strike you as absurd. It should, but that's exactly what government, and evidently we folks who elect government, expect regulators to do. It is absurd. The police do not and cannot prevent crime. Regulators do not and cannot prevent bad behavior either. Regulators can impose huge costs on the rest of us and gum up the works, though. We've have lots of evidence about this, some of it rather recently in financial markets.

I say up with law, down with regulation.

Fed Recognizes Sharp Contraction in Economy!

from The Wall Street Journal
Feb. 18, 2009

Citing a "continued sharp contraction in real economic activity," the Federal Open Market Committee on Wednesday said it is expecting GDP to contract by up to 1.3% in 2009, a larger drop than it had forecast in October.

The Fed's latest projections also show the FOMC expects unemployment this year could rise as high as 8.8%, higher than its October projection of 7.1% to 7.6%. January's unemployment rate hit 7.6%, according to the Labor Department.

Separately, the Fed said in the minutes from its meeting Jan. 27 and 28 that members saw no indication that the housing sector was beginning to stabilize.
First, who cares what the Fed is forecasting? Does it really matter what they are forecasting?

Second, the Fed caused the recession in the first place by making it possible for literally millions of people to buy houses they couldn't afford. The Fed did this by expanding credit and the money supply beyond all reasonable correspondence to real economic possibilities. The Fed had the help of Congress, which did everything but hold a gun to the heads of bankers and near banks to get them to extend mortgage loans to people who couldn't afford to buy a house. But you have heard all this before, right?

Third, why would the housing sector improve? The government and the Fed are doing everything they can think of to keep housing prices from falling further. Until the over supply of houses on the market diminishes, the housing market cannot improve. What can bring supply of housing back into balance with demand for housing?

The demand for housing will have to increase, since the supply of housing is already in place at too large a quantity. What will increase the demand for housing? Lower real prices, or inflation so rampant that the elevated nominal prices of housing are lower, after adjusting for inflation.

Inflation is the friend of the federal government. It's also your friend, so long as your income can keep up with the rise in the average level of prices, and so long as your investment portfolio is inflation-protected. Do you fit into that category? Me neither.

Inflation is a tax on every dollar you hold, and on every dollar-denominated asset you own whose value does not keep up with inflation. Enjoy your tax, especially if you voted for the same member of Congress in your district who has been in office for more than four years.

Stock Market Plummets Again

The stock market is a giant voting machine. Just about every day, it votes on the future outlook for the economy.

Guess who's losing the vote just now. I hope the 545 are paying attention.

Here's Your Pork Pool Tax Cut, Folks

Marginal Tax Rates Will Rise
David Henderson
How much will marginal tax rates increase? The Wall Street Journal gave the data today. For single taxpayers (the WSJ says "workers" but I'm not sure you need to work to qualify) , the rebate phases out after $75,000 of income by $20 for every additional $1,000 of income. The tax credit for singles is $400. So for singles in the income range from $75K to $95K, marginal tax rates in income will be two percentage points higher. For married taxpayers, the tax credit is $800; it phases out after $150,000 of income by the same $20 per $1,000 of income. So for married taxpayers with income between $150,000 and $190,000, marginal tax rates will be two percentage points higher. Of course, singles making between $75K and $95K and couples making between $150K and $190K are among the most productive people in the country and, therefore, in the world. Full article here.
And you thought that just because BHO said it eloquently with a confident, emotion laden voice that we were going to get a tax cut? And we the people were heard mumbling softly in the background.

When Congress raises marginal tax rates on the most productive citizens, guess what those productive people have a new incentive to do. That's right; you got it.

Is Creating New Money Immoral?

by Michael King | Posted on 2/18/2009 12:00:00 AM
Just as my students sense something is wrong, many of those who are certain something is wrong sense we may be witnessing the death throes of the current world monetary system.[1] The question on many minds is, what comes next? Although it is likely that what comes next will be worse than what we have at the moment (the audacity of distrust, you might call it), it is imperative that people come to understand that a nation's money system is, at its core, dependent upon justice, ethics, and, yes, morals. Full article here.
Economics as science does not and need not speak of morality. But political economy---the intersection of political and economic institutions---cannot avoid it.

I teach my students that one act and only only one act is immoral. Compelling or coercing another human being to do one's will is immoral. This proposition is something akin to Kant's Categorical Imperative, but perhaps not exactly.

If I compel you to give me your property at the point of a gun, that's immoral. If I deprive you of your life by killing you, that's immoral. If I defraud you of your property, that's compelling you through guile; it's immoral. For me, the simple, clear imperative "do not compel" divides all that is and is not immoral.

Of course, one and only one exception must be admitted. Compelling another human being is not immoral, if and only if one compels another human to prevent that person from intentionally compelling another.

That's why voluntary exchange in markets is moral and why laws and regulations that prohibit or interfere with voluntary exchange are immoral.

When government operating at any level compels citizens, government is acting immorally---except when government compels to prevent compulsion of one by another. That's why creating and enforcing a monopoly on money creation is immoral and leads to other immoral acts. The Fed has a monopoly on money creation in the United States. Moreover, because the U.S. dollar is the world's reserve currency, that's especially troubling.

When the Fed creates new money, that new money is a claim over any and all resources, goods, and services. The initial recipient of the new money (a borrower, since that's how new fiat money is created by a central bank; click here if you have time to learn more) is enabled to purchase real goods and services with the money created by the Fed (with the full support and authority given the Fed by Congress and the the Federal Reserve Act of 1913, as amended by the 1977 Act).

Isn't creating new claims on another person's production, and doing it by force of law, immoral? It would not be immoral to voluntarily exchange something one has produced to acquire another person's production. But creating new money to acquire a person's production is surely immoral, regardless of how remote and obscure the process has become with central banking.

Guess who is doing lots and lots of borrowing just now (all the bailouts, TARP, TALF, Son of TARP, Son of TALF, Schmalf, the "Pork Pool," ... er, stimulus bill. That's right, the federal government (545 real people with real names and faces). Guess where the borrowing is coming from. That's right; money creation by the Fed. Wait! Doesn't the Treasury borrow from people who already have the money? No; not as long as the federal government has outstanding debt and future obligations for Social Security and Medicare that actually dwarf the current federal debt of about $7 trillion. It's all new money.

If that sounds like stealing to you, that's because it is. Is that immoral? You decide.

Do You Like the Left Better Than The Right?

by Llewellyn H. Rockwell, Jr. | Posted on 2/17/2009 12:00:00 AM

"... both sides of the political aisle represent a grave threat to liberty — though each of a different sort. It is like two people tugging at a turkey's wishbone: the turkey is liberty, and you are the bone.
We've lived through eight years of the threat from the Right. It was all about nationalism, militarism, war, torture, state secrets, attacks on privacy, the use of tax funds to subsidize "conservative values," the outsourcing of government in a fascistic business-government partnership, the banning of products and services that government doesn't like, the regimentation of educational life, government impositions in the name of security, and so on.

... In two short months, however, that ethos has subsided, and it has been replaced by a threat from the Left. It is tragic that Obama should be president at all. If we had a position called "national well-wisher," "national greeter," or "national symbol of accomplishment," he would be perfect for the job. He is elegant, graceful, and articulate, and he inspires people in an unusual way. As chief policymaker, however, he has revealed himself as nothing more than a two-bit socialist.

After all the ghastly statism of the Bush years, you might think that the Left would back off from using power to achieve its aims. Instead, they have learned nothing. The Left has been lying in wait for its chance. As the Obama people entered the White House, it was as if they found a closet labeled "failed ideas of the past." They opened it and the contents spilled everywhere. They started grabbing things and putting them in the regulatory books and in legislation." Full article here.
We really have been down this road before. Study history. Think about it. Do we really need to repeat the mistakes of the past? It look like we are going to, whether we need to or not.

I'm glad I live in the mountains amongst people who believe in the second amendment. We will survive, regardless of what they do in Washington.

GM's Hand Is Still Out

Gee, what a surprise. Who would have guessed it?

from The Wall Street Journal

Feb. 17, 2009

General Motors plans to ask for access to an additional $16.6 billion in federal aid. The company said it will run out of money by next month without additional aid. GM also said it would close 14 U.S. plants, five more than previously planned. GM also would cut 47,000 global hourly, salaried jobs.
Will our Congress ever get it? Will the sheeple who keep voting for these morons ever get it? Has anyone in the Congress studied economics?

I fear and despair that the answer to all of the questions above is "no."

Some wise person said "If you keep doing what you've always done, you will keep getting what you've always got." That applies to Congress in spades. Every member of Congress who voted to extend the bailout to GM should be turned out (regardless of how much pork that person brings to the district that elects the idiot).

There is a story about a goose and golden egg. The BHO administration and the Congress are going after the goose, even as I write. Save yourself; Congress and BHO will not.

Monday, February 16, 2009

Cut Taxes?

Yes, if we do it the right way and for the right reasons.

Robert P. Murphy says,
In their zeal to oppose the lunacy of the so-called "stimulus" plan, many radio talk show hosts and other pundits have fallen into the Keynesian trap. Rather than the politicians spending nearly a trillion dollars, they argue, it would provide much more stimulus if the government gave massive tax cuts. This would "put money back in the pockets of average Americans" and they would go to the mall and "get that money into circulation and boost the economy." Read the article here.
More spending than we're already doing can't happen unless we produce more first. That's true in spades for spending financed by more credit. In your heart, you know it's true.

Are Banks Involvent?

From Steve Randy Waldman, New York magazine
Illiquidity = "If you owe someone a dollar and you don't have on, you are illiquid."

Insolvency = "If you owe someone a dollar and you don't have one, and if you sold everything that you own and you still wouldn't have one, you are insolvent. (But as long as you own something that's hard to put a value on, no one can prove that you're insolvent. Upon this [foundation] stands the entire financial system.)"
For decades we economists have been teaching the naive students who trust us that the Federal Reserve System is the bulwark of our banking system. Created by Congress and charged "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," the Fed is also the regulator responsible for ensuring stability of the banking system and financial markets.

I guess it's fair to say the Fed has failed. The prescription? More money and credit from the Fed, more regulation, and more government control of financial markets. Wish the Fed, Congress, and BHO good luck. They're going to need it.

Pronunciation: lay-zay fair
Function: noun

Etymology: French laissez faire, imperative of laisser faire to let (people) do (as they choose)
Date: 1825

1 : a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights 2 : a philosophy or practice characterized by a usually deliberate abstention from direction or interference especially with individual freedom of choice and action
We should give this a try. It couldn't possibly work out worse than the heavily regulated economy we've had since 1913.

Saturday, February 14, 2009

Just to Keep the Record Straight

" ... fearmongering may be good politics, but it is bad history and bad economics. It is bad history because our current economic woes don't come close to those of the 1930s. At worst, a comparison to the 1981-82 recession might be appropriate." Article
If you're like me, you have any number of friends who repeat economic "facts" that just aren't true. They hear the "facts" in some news clip and accept what they heard without blinking. The favorite "fact" of our time is that our economy is in grave peril of repeating the Great Depression. It must be true; BHO says so, right?

A second popular "fact" just now is that the financial crisis and the recession are "proof" that private enterprise and voluntary exchange don't work---the free market has failed. That means we need more regulation and more federal control of just about everything, right?

Even so much as a slight glance at the record shows the vacuousness of that proposition. In fact, the failure is that of federal intervention and regulation of private enterprise. For the past 75 years our economy has been anything but a free market. That's particularly true for financial markets---the source of our current economic distress.

The financial services industry (securities trading, commercial banking, consumer finance, investment banking, mortgage banking, and insurance) is the most regulated industry in America. It has been so since at least 1933. Check the history. To now claim that the failure of financial markets is a failure of free markets is simply absurd.

It is possible that we are on the brink of repeating the Great Depression. But if we are, let's at least be clear about what is happening. Really bad monetary policy and regulation of free trade precipitated the Great Depression. Put aside which political party is responsible for it. That won't matter if we repeat the Great Depression. What's critically important is understanding what causes recessions in the first place. As I've argued here before, recessions are the collapse side of a credit expansion cycle caused by the unholy confluence of actions of the Fed and Congress.

The Fed created the housing bubble with credit and money expansion that dwarfed real production of goods and services. The Congress created regulations and laws that undercut sound mortgage underwriting standards (zero down liar loans). The Congress also created an income tax code that encourages debt financing of everything over equity financing---for both consumers and corporations. So let's at least keep the record straight.

Now we're all supposed to believe that massive deficit spending---spending for just about everything and anything but infrastructure---coupled with even greater credit and debt will be our economic salvation? Be honest; does that really sound right to you? If your economic bones are telling you that smells fishy, trust your bones.

Friday, February 13, 2009

And What of Contract Law?


The nation faces a foreclosure crisis of historic proportions, and there is an understandable desire on the part of the federal government to "do something" to help. House Judiciary Chairman John Conyers's bill, which is moving swiftly through Congress (and companion legislation introduced by Sen. Richard Durbin) would allow bankruptcy judges to modify home mortgages by reducing both the interest rate and principal amount on the loan. This would be a profound mistake. Click here for the article
Since when did judges have the right to void any contract? Is this still America, or have I waked up in some strange place where laws mean nothing at all?

A mortgage is a contract. How is it that a judge should have the power to set the contract aside? If it's okay to set aside contract law, which law will it not be okay to set aside?

Thursday, February 12, 2009

Change We Can Believe In

Draw your own conclusions.

When the federal government spends money it hasn't taxed away from households, it must borrow the money by selling Treasury bills and bonds. Who buys those bills and bonds (i.e., who is lending the Treasury money)? Three broad categories of lenders exhaust the possibilities:

(1) Americans (which includes the Fed)
(2) Foreigners
(3) Other U.S. government agencies (e.g., the Social Security Administration); the Fed is not a federal agency; technically, it is a closely-held private corporation owned by member banks.

When repayment on the Treasury bills and bonds is due, the U.S. Treasury must pay back the principal plus interest. Is it a good idea to finance federal spending this way? To understand the technical details of that question, one really needs to study a bit of economics and finance (for many, that would be something like torture, so let's not do that here).

Instead, let's consider a different sort of question. Who benefits and who bears costs when we finance federal spending this way. Only the federal government gets to do this; states are allowed to borrow only for explicit capital projects.

When Americans are doing the lending, federal borrowing means "we owe the debt to ourselves." Since it is "ourselves" who will both pay the debt and receive the payment plus interest, the only real issue is which part of "ourselves" ends up receiving the benefit and which part of "ourselves" ends up paying higher taxes in the future than they otherwise would have. Careful research might ferret out an answer, but when Americans buy federal Treasuries, what we get is a transfer of tax liability within America, among Americans.

When foreigners are doing the lending (Japan has been the largest foreign buyer of U.S. Treasuries in the past) we get to use the savings of foreigners for a while. It's clear that foreigners benefit from interest paid and that Americans pay the costs of higher taxes in this case.

If the money borrowed generates greater American benefit than the value of the interest paid, we Americans get a good deal, and so do the foreign lenders. Lots of folks might agree that building bridges, roads, and other long-lived capital projects with foreign-borrowed money makes sense. Even financing a higher level of American education---thereby building human capital---probably make sense. But does foreign borrowing to finance American Social Security payments make sense? You decide.

When other U.S. agencies finance federal debt, it's pretty much moving the money from the hip pocket to the front pocket of government. Except for the interest paid. The interest payment has to come from somewhere. Guess where it comes from. That's right, future tax payers get to pay higher taxes than they otherwise would have, to cover the interest due.

Is that a good idea? It might be if future tax payers enjoy benefits equivalent to the interest paid. Whether they will or not depends on what the borrowed money goes to finance in the present day. Again, long-lived capital projects---building physical or human capital---might make sense, if the capital projects yield benefits for future generations.

When the Fed buys the U.S. Treasuries, it does so by creating new money. Who benefits and who bears costs from that? The plot thickens.

First, the Fed itself benefits, because it earns interest to finance its annual operations. That includes agreeable salaries and digs for Fed officials and employees. The Fed takes what it decides is agreeable enough from this pool of interest payments and remits the rest back to the Treasury. So, the Fed and the Treasury clearly benefit. They get to command real goods and services with money just created out of nothing. That's truly a "free lunch" to the Fed and the U.S. Treasury. But basic economics assures us there is no such thing as a free lunch. So who bears the cost of this particular lunch? See if you can guess.

If the quantity of real goods and services available to be bought is fixed, the new money created by the Fed causes some of those real goods and services to go to the Fed and the Treasury instead of going to the private sector---households and businesses. If that happens, Americans have paid for the Fed's and the Treasury's free lunch by not getting to use the real goods and services themselves. Just which Americans paid for the lunch depends on issues far too complex to sort out here. It could be you and me, though.

If the expenditure of the new money spent by the Fed and the Treasury somehow causes additional real goods and services to be produced, which otherwise would not have been produced---then Americans enjoy greater income than they otherwise would have. The dollar value of production is equal to the dollar value of income during a year. That's a good thing, but does that happen? Again, that depends on way too much to sort out here.

A second category of beneficiaries of the Fed's buying of U.S. Treasuries is owners of banks and other non-bank financial institutions (like insurance companies, hedge funds, and finance companies). Banks taken together are able to increase the amount of new money injected by the Fed by a multiple of about 10. Technical details of how this works are part of the torture we agreed not to inflict. Banks don't have to make new loans, but they usually want to, since banks earn interest income for their shareholders by making new loans.

Just now, because so many loans made in the past have turned out to be really stinky loans (e.g., toxic assets), banks are not as eager as they usually are to create new money using the high-powered money the Fed has made available. That's the so-called "credit crunch." Slower credit right now might be a good thing. Depends on what borrowers do with the money, doesn't it?

Finally, we get to a sort of bottom line. If new money created by the Fed and the banking system do not increase production of real goods and services beyond what otherwise would have been produced, and if the new money is actually spent on available real goods and services, we get inflation. If the new money is just sucked up and held by the banking system or by households or businesses or foreigners, we don't get inflation. So which is it? Do we get inflation or don't we?

We're finally down to a nub of the whole stimulus spending issue. Will the Treasury's deficit spending just cause inflation, or will it cause greater production of real goods and services than otherwise would have been produced over the same accounting period (say the next two or three years). The correct answer to that question is "no one knows for sure." That includes BHO's economic advisers, all the other economists in the world, and all the media wags (especially the media wags).

That's not a satisfying answer, but it goes a long way toward explaining why federal deficit spending remains a political issue, and probably always will.

Now I will offer a humble observation. Since no one knows for sure whether federal deficit spending stimulates the economy, and since the beneficiaries and bearers of costs created by federal deficit spending are ambiguous at best, maybe we American citizens shouldn't allow the federal government to deficit spend on anything except bona fide capital projects---much like the states.

Politicians will definitely not like that idea; neither will banks and non-bank financial institutions. Now that you've read this, see if you can understand why they won't.

Wednesday, February 11, 2009

Government Ownership Is Frightful to Private Investors

Alan Reynolds explains why here. Why is this difficult to understand? Where is the mystery?

Stimulus That Will Definitely Work

Put away the political one liners, regardless of source. Put away the economic journals and their mathematical models. Put away the college text books and their antiquated Keynesian-Classical-Neoclassical-New Keynesian debates that never reach a conclusion. Put them all away and think, just think for a minute.

Consider these simple, straightforward, transparent statements. Decide which you think are true.

(1) Economic prosperity requires production of real goods and services that people want.

(2) Businesses, small and large, produce real goods and services; production of real goods and services is the only real source of real jobs.

(3) Government produces almost no goods (see if you can name a good that government itself produces; I haven't been able to think of one just now), but when legislatures direct spending, government can cause goods to be produced by businesses.

(4) Government does produce several services we all want (e.g., national defense, police services, the justice system, and lots of others) and other services not everyone agrees that we want (e.g., regulations and the bureaucracies needed to make them up, Amtrak, the Post Office, and lots of others).

(5) Businesses produce real goods and services that people want only if businesses believe households and other businesses will buy them; businesses have to take on the risks of production before households will have an opportunity to buy; businesses that do this well succeed; business that do this poorly fail.

(6) Households will buy goods and services they want if they have current income to do so, and if they believe their future income streams will continue in the anticipated future; households do not just take a wild hair all of a sudden and simultaneously quit buying goods and services, even though that's the usual explanation offered up for why a recession begins.

(7) If households have more disposable income, they will spend most of it on goods and services they want; current income households save instead of spending will end up rather quickly in a loan to either a business or the government, either of which will spend it rather quickly (it will not end up in the mattress, for the most part).

(8) For the most part, households know best what to spend their current income on.

(9) For the most part, when government decides what to spend money on, some people are happy about it and other people are not happy about it.

(10) Because we have about 130 million households, putting additional current income in the hands of households will result in more and faster spending on goods and services that households want---much more and faster than putting additional money in the hands of government bureaucrats; an added benefit is that households spend on goods and services they want.

If you agree that all 10 of the statements above are correct, then permanent tax cuts that require a dollar-for-dollar reduction in government spending would be the logical economic stimulus that will work most efficiently and fastest to restore the economy to growth. Whether the tax cuts are income tax cuts or payroll tax cuts is worth thinking about. A choice between the two taxes has implications for which households would have what additional income to spend.

If you don't agree that one or another of the 10 statements above is correct, then by all means, replace it with a statement you do think is true. But whatever you believe is true, follow the combination of those statements to a logical conclusion about what will restore the economy to growth.

Quit listening to politicians and economists alike. Think for yourself. Good thinking.

Let the Markets Work, Please.

Why Markets Dissed the Geithner Plan

One of the cool things about being Treasury Secretary is that you get your signature on dollar bills, giving them authority, defending their honor. Timothy Geithner's plan to save the struggling banking system probably does the opposite, throwing good money after bad to a banking system struggling under the weight of its own mistakes. The markets don't like it. The Dow dropped 382 points while bonds rallied as a port in a continuing storm. Read the full article here.
As Mr. Kessler points out, the market is telling us what Citi and BOA are worth. Just who is it that thinks they're so smart and wise to say the market's valuation is wrong? Mr. Geithner? Give us a break; he evidently couldn't figure out how to use Turbo Tax.

Mr. Kessler goes on to propose an attractive plan that lets the market work.
Mr. Geithner should instead use his "stress test" and nationalize the dead banks via the FDIC -- but only for a day or so.

First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.
Of course, banks and politicians won't like this plan. Banks won't like it because it would force the pain and costs of their bad decisions on current bank managers and shareholders. Politicians won't like it because it would make it clear that politicians can't remove the pain and costs of the bad decisions and because politicians need to appear to be "doing something." Politicians also want control. Markets give control to the people.

Let the markets work, please. The longer we do not let the markets work, the longer we will continue to waddle about in recession and stagnation.

The Importance of Failure

Tyler A. Watts reminds us that failure is a necessary part of success.
There is much discussion these days about bailouts. Are they needed? Are they just? I say no on both counts. Yet many economists, politicians, and businessmen tell us that bailouts are needed to prevent catastrophic economic collapse. Without commenting on the justice of bailouts, they warn that we are facing massive economic pain if we stand aside and let markets run their course. Bailouts can staunch this pain, they claim, and restore order and calm to the economy.

I don't buy the probailout folks' predictions of impending economic chaos. But what if they're right? What if the short-run pain in store is just too terrible to endure if we don't start bailing out key industries? After all, we're talking massive unemployment, a new wave of foreclosures, a shrinking economy — in a word, recession. If the dire forecasts of the bailouters are correct, we'd be stupid not to do it; we'd be like a beaver caught in a trap: slowly dying, yet too timid to chew off his own foot to escape.

Capitalism depends on three highly complementary, yet distinct, institutions: prices, property, and "profit and loss." Classical-liberal economists have demonstrated the essential role of these pillars of prosperity for centuries. These fundamental institutions of the market economy are like legs of a stool. If we gradually weaken one leg, we will eventually bring the stool toppling down — economic collapse.

In this light, the implications of bailout are clear. Bailouts are designed to insulate people from the effects of bad decisions. When market prices change dramatically, exposing yesterday's poor investment choices, bailouts come "to the rescue," promising those left holding the bag that they won't have to endure the full cost of their errors. Read the full article here.
The question is not whether someone must bear the pain and costs of bad decisions already made; there will be pain and costs. Government cannot remove the pain and cost, but it can redirect them away from the people who made the bad decisions and spread them across all Americans.

The Dow Jones dropped nearly 400 points following Mr. Geithner's press conference precisely because he made no clear, unambiguous statements about who would bear the pain and costs already in the pipeline. Someone must take the losses expected from the so called "toxic assets." Until the government quits stoking the uncertainty about who that will be, neither the market nor the economy will be able begin a recovery.

Redirecting the pain and cost will only perpetuate the bad decisions already made. Bailing out sick financial institutions and failed business models will only make them sicker. One does not cure a cancer by spreading it across the whole body; one removes the tumor if possible. Private enterprise will remove the tumor, if we can get beyond politicians' promises of something for nothing.

Private enterprise and voluntary exchange are very robust institutions. Those institutions gave us the quality of life Americans enjoy today. If we allow government to change the rules of the game when it goes badly for the wealthy, failure that is necessary for future success will be short circuited.

It's time to allow those who made bad decisions to bear the pain and costs themselves. What's going on now with the full support and cheer leading of BHO is not "change we can believe in."

Tuesday, February 10, 2009

Will the Stimulus Work?

from The Wall Street Journal.

February 10, 2009
Financial stocks led a broad move down in the market on the heels of Geithner's unveiling of the Treasury's bank-rescue plan and Senate passage of the stimulus measure. The Dow Jones Industrial Average dropped by roughly 350 points, or 4.2%, reaching its worst levels of the day in midafternoon trading. Bank of America and Citigroup experienced double-digit percentage losses.
I guess the market just voted.

Will the Stimulus Work???

From wiser heads than mine.


How much will the stimulus package moving in Congress really stimulate the economy?

The evaluations to date have been incomplete, so we looked at the likely stimulative effect from the spending parts of the House and Senate bills -- over $500 billion -- and assessed the quantitative effects of four basic factors. Click here for the article
We've seen all these ideas before, but they bear repeating.

Monday, February 9, 2009

Will the Stimulus Work?

The Skeptical Optimist writes,
On Capitol Hill, it's those damn deck chairs again: nobody can agree how they should be arranged. Partisanship continues to trump statesmanship. Even though the $800 billion package is called "stimulus," everyone seems to be paralyzed by old, worn-out talking points. Click here for the article.
I wouldn't hold my breath waiting for politicians to say something other than talking points. What else could they say? They are not financial geniuses, and it's a rare politician that seems to understand even basic economic principles.

Steve, I love your blog, but I will have to disagree with you on this issue. Keynesians are not right. History and economic logic both tell us that additional spending is not the way out of a recession. Neither FDR's new deal spending, nor WWII spending per se ended the world-wide recession. We can't buy what hasn't yet been produced. Increased production ends recessions. What WWII did was show businesses, consumers, and investors a believable future–one that engaged millions in greater production.

Keynesians focus on spending when it's really production that ends recessions. Hayekians correctly observe that governments don't produce much in the way of real goods and valuable services; the private sector does.

What few people seem to be talking about is what causes insufficient spending from the private sector in the first place. Until the causes of insufficient private spending are removed, recession will not abate, quite regardless of how much deficit spending the federal government does.

If more real goods and services are not produced, increased government spending will result in inflation or crowding out.

I'm really quite amused by all the talk about "velocity." Velocity adjusts to become whatever it needs to be to allow spending people want to do, given however much money exists, however much real production we have, and the average price level.

In the equation of exchange, M*V=P*Y, V and P are the only two variables that can change over a period of just a few months.

Real output Y takes many months to change, even when there is excess capacity. M takes many months to change, even if the Fed does manipulate the monetary base. Lots of prices are sticky over periods of even several months because they are contractual. What's the big changer when expectations about the future change? Velocity, of course. If the Fed really believes they can do something in response to changes in velocity, then we really have to questions its thinking.

Without additional production, additional federal spending must be accomplished though more money or higher velocity, higher prices, or some combination of all three. So what? Additional federal spending, in and of itself, will not foster additional production, per se.

What's causing the recession is not mysterious. The recession is due to exceptionally bad monetary policy and fiscal policy over the past several years. Until those policies change, no amount of additional spending will end the recession, just as it did not end the recession for FDR and his new deal.

Businesses will quicken their rate of production when they have reason to think that consumers and other businesses will buy what they produce. Consumers will quicken their rate of spending when they have reason to believe their income streams are not going to be unexpectedly interrupted. On what do such beliefs depend?

(1) money that has predictable purchasing power over the long run; flooding the world with even more new high-powered money, as the Fed has done since 9-11 won't help.

(2) aggregate credit based on aggregate household saving and responsible underwriting of loans; banks and non-bank financial institutions took the risks they took because they believed they would be bailed out; it appears that they were correct; now people have no idea about what to believe for the future.

(3) governments must confine their spending to what they tax away from households; sustained government deficit spending beyond household saving would not be possible at all without sustained growth in the money supply.

Everyone who understands macro economics at all understands that sustained growth in the money supply at a rate above growth in real output is the same thing as sustained loss of purchasing power of every dollar in existence.

Forget velocity; reductions in velocity sufficient to stave off inflation cannot be sustained in the face of a money supply rising faster than real output.

Congress had better focus on why private spending is not growing and on what would stimulate production of goods and services. Deficit spending is not the answer now; it never has been, and logic tells us it never will be.

Universal Health Care for America

I will be stupified if the Obama administration and its willing partner, Congress (which actually controls such things) don't bring us some sort of national health care legislation within two years.

I'm no fan of the mixed system of private-public health care we have in America today. It is riddled with flaws that could be improved. That said, I urge great caution and thinking when the national health care debate begins. Read the article you will find here to understand why.

These Senators Passed ECON 101

If your senator's name isn't on this list, you might want to question either your senator's knowledge of economics or your senator's motives. These senators voted to take the "Buy American" provision out of the "Stick it to 'em ... er, stimulus bill."

Alexander (R-TN)
Barrasso (R-WY)
Bennett (R-UT)
Bond (R-MO)
Bunning (R-KY)
Chambliss (R-GA)
Coburn (R-OK)
Cochran (R-MS)
Corker (R-TN)
Cornyn (R-TX)
Crapo (R-ID)
DeMint (R-SC)
Ensign (R-NV)
Enzi (R-WY)
Hatch (R-UT)
Inhofe (R-OK)
Isakson (R-GA)
Johanns (R-NE)
Kyl (R-AZ)
Lieberman (ID-CT)
Lugar (R-IN)
Martinez (R-FL)
McCain (R-AZ)
McConnell (R-KY)
Murkowski (R-AK)
Risch (R-ID)
Roberts (R-KS)
Sessions (R-AL)
Shelby (R-AL)
Thune (R-SD)
Wicker (R-MS)

How Government Created the Financial Crisis

WSJ 2-9-09 by John Taylor
Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis. Click here for the article.
Highly respected economist John Taylor's article recounts why we're in a financial crisis and the history of how we got here. He also explains the reactive policy blunders of the waning Bush administration and the Fed.

Will Team Obama correct the policy blunders? It's not looking promising. President Obama is pushing a massive deficit spending bill in the name of economic stimulus. History and economic logic both tell us that Obama's bill will definitely stimulate the wallets of the ones that brung him, but only by diverting dollars from private to public spending.

Geithner's new Treasury plan to "rescue" financial markets is nothing but a continuation of the blunders Paulson started, plus a $50 billion pool of money aimed at keeping people who aren't making their mortgage payments in their homes. For all his touted financial brilliance, Mr. Geithner is merely singing the second verse from the same hymnal Bush, Paulson, and Bernanke opened.

By the way, if you understand how a mortgage works, you will understand how important it is to keep borrowers paying their monthly payments, even if they have missed several payments already. You see, most of a monthly payment during the first half of a mortgage is payment of interest, not return of what was borrowed. Once the house is foreclosed, the lender's future stream of interest payments is gone.

The future stream of interest payments, assuming the borrower can be kept paying, dwarfs the payments already lost. Guess who will be the biggest beneficiaries of the $50 billion bailout of home owners. That's right; the lenders who hold the mortgages.

It's true that the homeowners will get to stay in the house for a while longer, but only because they will continue paying interest without building equity. Typically, the homeowner will stay in the house seven or fewer years. But in today's housing market with declining housing prices, homeowners won't be building equity. They'll just be paying interest.

Does that sound like renting? It should; it's just more expensive than renting, since rents didn't rise as fast as housing prices during the Fed-fueled housing bubble. By the way, homeowners have to pay property taxes for the privilege of paying all that interest instead of rent.

I'll keep looking for the "change" so many folks voted for. So far "change" amounts to even more federal borrowing and spending, coupled with more bailouts for the wealthy---all done in the name of saving main street. Sound strangely familiar?

Don't get me wrong. I'm not complaining. At least our new President makes us proud when he speaks. And besides, Presidents don't set and conduct fiscal policy; Congress does. Presidents also don't set and conduct monetary policy; the Fed does. You can watch President Obama all you like; I'll be keeping my eyes on Congress and the Fed.

Saturday, February 7, 2009

Stimulus That Would Work

From Harvard's Jeff Miron
When libertarians question the merit of President Obama's stimulus package, a frequent rejoinder is, "Well, we have to do something." This is hardly a persuasive response. If the cure is worse than the disease, it is better to live with the disease.

In any case, libertarians do not argue for doing nothing; rather, they advocate eliminating or adjusting policies that are bad for the economy independent of the recession. Here is a stimulus package that libertarians can endorse:
The article I point you to here is chock full ideas that are economically sound. Are they politically impossible? If they are, we're in a world of hurt over the next decade.

Friday, February 6, 2009

Politics vs History

This article provides some historical perspective to the ongoing debate about the stimulus package. It's a bit more economically technical, but not so bad.

When I was in graduate school, the "rational expectations" objection to Keynesian theory wasn't yet being taught. In fact, I was first attracted to economics because it held out the possibility that government could manage the economy, which is the core conclusion of Keynesian theory. History shows that's just not the case.

After 30 years of life following graduate school, I have a much greater appreciation of the simple truth that I first learned in Economics 101. There really isn't any such thing as a free lunch. The Keynesian stimulus theory proposes that there is a free lunch; but only the government can see it and deliver it.

Strangely enough, it's not hard to find an economist with a reputation who still pushes that old Keynesian idea, even though the basic proposition flies in the face of a truth all of us understand instinctively.

The idea that massive government spending---financed either by creating new credit money or by borrowing older credit money that the Fed created a bit earlier---doesn't even pass the straight face test. Yet, it passes for serious public policy following an election of "yes we can" politicians that now must be seen to be "doing something" to fix the economy. Politicians have never fixed the economy and they never will. If history shows anything abundantly, it shows that.

History shows that free people engaged in voluntary exchange will fix the economy. But before people can exchange anything, they first must produce it. Production, not spending, is what makes people prosperous. Keynes' biggest mistake is that he equated spending with production, just because the two must be equal when measured in dollars.

The recession will end when businesses and investors and consumers can see a believable future. Neither monetary policy nor fiscal policy can produce goods and services. But those policies, rightly reckoned and implemented, can give us a believable future. Tripling the monetary base (which the Fed has already done) and spending another trillion dollars or so that it doesn't have(which the Obama administration is cheer leading Congress to do) isn't a believable future.

The economists who support the stimulus package do so on political grounds, not on grounds founded in economic science. To say otherwise is to dishonor what it means to be a scientist. After all, we do have half a century of really talented, bright economists who have studied this issue beyond imagination. Just because a charismatic politician made it to the presidency by raising the hopes and dreams of millions doesn't erase the evidence from fifty years of careful economic research.

You Don't Say


The executive compensation caps that President Barack Obama and Treasury Secretary Tim Geithner summarily announced this week violate both the Constitution and Economics 101. Click here for the full article.
You don't say? Really? Neither Congress nor the Supreme Court have worried much about the Constitution since at least 1913---a really, really bad year for liberty in America. Congress gave us the Fed and the IRS that year!

So what do we the people do about it? We can write our Congressional delegation. We can write a blog :0) Ever try writing your member of Congress?  Don't wast your ink. 

Who has standing to bring a suit before the Supreme Court? Mr. Napolitano's article will doubtless be read by just a few lovers of liberty. Do you think it will make the mainstream news tonight?

You Can't Get Something for Nothing

Why 'Stimulus' Will Mean Inflation


As Congress blithely ushers its trillion dollar "stimulus" package toward law and the U.S. Treasury prepares to begin writing checks on this vast new appropriation, it might be wise to ask a simple question: Who's going to finance it? Click here for the whole article.
An earlier post below reveals how much new money the Fed has already enabled. The new money just hasn't hit the street yet. Inflation is a loss of purchasing power of every dollar in existence. It's the most insidious tax of all. Talk about a regressive tax; inflation tops the list.

A New Republican Fannie Mae?

Just amazing. This article just goes to show us that Republicans and Democrats have a lot in common. Regardless of political flavor, they don't seem to understand Economics 101.

It's the same old, same old. The wide-spread belief that somehow, someway, if we just get government involved, we can all have something for nothing. Shame on us if we believe that. We know better.

Limits on Executive Pay?

Check out this article in the WSJ 1-6-2009 in favor of federal limits for executive pay.

Top corporate managers are a scarce resource, just like other factors of production. What are their services worth? Neither you nor I know, and compensation committees at corporations don't know either. What anything is "worth" must be discovered through voluntary exchange in markets.

Anytime someone purports to "know" what something is worth, they should be prepared to buy it (with their own money; not taxpayers money) or if they already own it, sell it for that amount. If they are not, their claims of special knowledge about worth can be safely ignored as hubris and special pleading.

Shareholders of public corporations have an easy remedy if they think the top executive officers of the corporation are overpaid. They can sell their shares and buy companies that don't overpay their executives. If shareholders are satisfied with the return on investment they get from owning shares of a company, they hold on to their shares and are not the least bit concerned about what the CEO or other top officers are paid.

Once again, I come down on the side of voluntary exchange. It works (to generate human prosperity), and it's moral. Coercion, which is what Obama and the author of the cited article above argue for, doesn't value scarce factors of production well, and worse still, it's immoral. That's right; immoral. Anytime a person or group of person coerces another person or group of person, it's immoral. Think about it.

In the article cited above, we see how the camel's nose in the tent works. First, the feds buy equity in companies. Next, the feds tell the companies what they must do, since they are recipients of public money. If you think federal control of the factors of production is a good idea, I recommend that you read the history of the world. History makes it completely clear that government ownership and control of the means of production leads to human misery and deprivation. It's a convenient and interesting side bar that government coercion is also immoral.
Pushing on a string

From the Skeptical Optimist
The Fed has been "printing money" (purchasing assets from the public with money it has the power to create from so-called thin air) at an unprecedented pace in recent months, as we've discussed before. The objective is to stimulate lending and borrowing, which is the heartbeat of the economy. But all that new (base) money hasn't been doing much stimulating so far.

Below is a chart from the St. Louis Fed showing what the banks are doing with all that new base money: they aren't lending it out [...more precisely, they aren't using it to back new loans]; they're sitting on it, in the form of "excess reserves."

That explains why all that "money printing" by the Fed isn't causing price/wage inflation.
It's certainly true that the Fed cannot push on a string. It's also true that monetary policy takes time to take effect---anywhere from a year to two years. The Fed has tripled the size of its balance sheet in recent months. That's a lot of new monetary base.

Eventually, new money will start to show up in the economy in a big way. When it does, the Fed will not be able to benignly remove it without consequence.

If monetary policy were actually capable of improving human welfare, and if the Fed understood how to do it, we'd all be rich as God already. Commons sense (which is what good economics really is) tells us that creating more or less money is not the road to economic prosperity.

Keynesians mistake spending for production. Monetarists mistake credit for production. If you want to understand economics, it really helps to analyze whatever is the issue as if there were no money. That's not easy, because we are so used to money as a medium of exchange (a quite necessary medium, by the way).

We cannot do without money, but we can do without changes in its purchasing power. Just about any quantity of money will work, so long as people know how much of it there is and know that its purchasing power is not being systematically manipulated by 7 governors plus 5 Fed bank presidents (the Open Market Committee).

One really has to ask the obvious questions. If the Fed knows what it's doing, and if regulators know what they're doing, why are we having this financial debacle and the recession it has spawned? Keynes suggested "animal spirits." I suggest a much better answer. Neither the Fed nor the regulators can deliver what they say they can; namely, economic stability and sustainable growth with low unemployment. What they can deliver is massive uncertainty, which leads to exactly what we have now---recession and a credit crunch.

Financial instability and recessions are not accidents; they are also not random. It is most charitable to say they are caused by mistakes made by monetary policy makers (the Fed) and fiscal policy makers (the Congress). Less charitable explanations are also available.

Insight on the Stimulus Plan

My sister, a nurse in Detroit, sends me her take on the stimulus plan.
Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgen.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set, thus stimulating the economy.

Q. But isn't that stimulating the economy of China ?
A. "Shut up."

Below is some helpful advice on how to best help the US economy by spending your stimulus check wisely:

* If you spend that money at Wal-Mart, all the money will go to China.
* If you spend it on gasoline it will go to the Arabs.
* If you purchase a computer it will go to India.
* If you purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala (unless you buy organic).
* If you buy a car it will go to Japan.
* If you purchase useless crap it will go to Taiwan.

And none of it will help the American economy.

We need to keep that money here in America . You can keep the money in America by spending it at yard sales, going to a baseball game, or spend it on prostitutes, beer (domestic ONLY), or tattoos, since those are the only businesses still in the US.

Let's Start New Banks

Paul Romer, a highly regarded economist, supports letting the bad banks go, and the sooner the better.
Let's Start Brand New Banks
A clean slate would keep TARP money away from bad banks.


Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It's simpler and safer to start entirely new banks. Click here for the full article.

I have just a couple of ideas to offer in support of Romer's common sense recommendations. We already have any number of good banks that didn't make the poor decisions the bad banks made. All we really need to do is get the bad banks out of the way so the good banks can grow by buying up the good assets from the bad banks at auction. We already have elaborate procedures for FDIC taking over the assets of bad banks. Why aren't we using the process already in place?

Letting bad banks go bankrupt properly chastens the poor decision making that made the bank bad. It also properly rewards existing good banks, as they will grow their business and acquire market share.

Why does the federal government need to be involved at all, except to enforce laws and procedures already on the books? There is no shortage of private equity capital available to finance growth of existing good banks. What is in short supply is regulatory stability and ability to see a believable future. The uncertainty is caused by guess who---that's right, the federal government and the Fed.

Our society and economy certainly doesn't need a federal ownership stake in banks. Romer's notion that federal ownership would be a temporary bridge is quite idealistic. Once the federal government is in, it would be almost impossible to get them back out. And once the bureaucrats and politicians have an ownership stake, they will insist on running the show. Witness Obama's injunction about executive pay in recent days. Witness the "oversight" politicians are clamoring for with the bailout money advanced to the little three auto makers.

How often do we need to be reminded that voluntary exchange and private enterprise are the history-proven engines of human prosperity and welfare? It is hubris to think that 545 people (the federal government)---especially when aided by their bureaucratic minions---can know enough or do enough to manage a $14 trillion economy inhabited by 135 million households. That would be true even if the politicians and their bureaucrats were benevolent dictators instead of just being ordinary humans pursuing their own best interests.

Thursday, February 5, 2009

An Interview with Robert Barro

This link will take you to an interesting interview with Robert Barro. He's a respected economist who actually works on the macroeconomic stuff he writes about.

Bad Banks vs Good Banks

Couldn't have said it better.
“Free markets work well to flush out underperformers, giving soundly managed companies the opportunity to step up and fill the void. Government bailouts merely prolong the agony.”

— Wayne Silzel, responding to WSJ article "Business World: Obama's Dangerous Bank Bailout."
I would add that bailing out the bad banks also punishes the good banks. It really isn't the case that all the banks made bonehead decisions.

Stimulate What?

One thing is abundantly clear. The stimulus bill will certainly stimulate the federal government. Looks like any number of new jobs will be available in federal bureaucracies.

"Check your PC's virus program, then pull down the nearly 700 pages of the American Recovery and Reinvestment Act. Dive into its dank waters and what is most striking is how much "stimulus" money is being spent on the government's own infrastructure. This bill isn't economic stimulus. It's self-stimulus."

One wonders how well folks laid off over the past few months will fit into the D.C. scene.

According to Michael Hirsh writing in Newsweek,

Even so, Obama has allowed Congress to grow embroiled in nitpicking over efficiency when the central debate should be about whether the package is big enough. When you are dealing with a stimulus of this size, there are going to be wasteful expenditures and boondoggles. There's no way anyone can spend $800 to $900 billion quickly without waste and boondoggles. It comes with the Keynesian territory. This is an emergency; the normal rules do not apply.

That's doubtlessly true for any "one." But it's not true for all of us. Taxpayers could and would find any number of great ways to spend $800 to $900 billion quickly without waste and boondoggles. If Congress and Obama really want to stimulate the economy, cut payroll taxes for a period long enough to finance the stimulus total. I promise that I'll spend my share. How about you?

Trade War?

Another respected economist, Burton Malkiel, weighs in on the ill-advised provision of the stimulus bill that requires domestic steel be used in construction projects.

Wednesday, February 4, 2009

Accounting Standards Reform

Mark-to-market accounting has its advocates and detractors. Some say MTM accounting is at the core of our financial crisis. Others disagree.

Here's a question; why can't we have both traditional balance sheets and MTM balance sheets side by side? I vote for full disclosure. Why does it have to be one or the other?

Summary of the Stimulus Bill

Click here for a summary of the American Recovery and Reinvestment Act of 2009 (special nod to George Orwell a.k.a., Eric Arthur Blair).

Does anyone really believe that this gargantuan increase in federal spending is the path to economic prosperity? Here's the bad news; this is just the beginning of a massive transfer of resources from the private sector to Washington.

"TANSTAAFL" Lovers of liberty know what this means. Members of Congress evidently do not. That doesn't necessarily mean Members of Congress are not lovers of liberty, but it does raise the question.

Make no mistake; as Congress and the Obama administration command a larger share of national income, the fortunes of private enterprise will decline. Economic theory and economic history are exceptionally clear about the inevitable outcome.

If you agree with me that voluntary exchange and private enterprise are the engines of economic prosperity and human liberty, click here to send a message to Congress.

Tuesday, February 3, 2009

Time for Import Restrictions?

Nobel Laureate Gary Becker reminds us that the benefits of trade don't go away during a recession. Getting back to a healthy, growing economy as quickly as possible will depend on trade (voluntary exchange) with the rest of the world.

While it's certainly true that higher tariffs on imported steel will benefit the domestic steel industry, it's also true that the rest of us will bear the cost of that benefit. We will bear the costs in the form of more expensive infrastructure projects. We will also bear the costs through reduced exports of what we produce domestically.

Focused benefits with dispersed costs is the order of the day in the stimulus bill. Gary Becker explains it, yet again.

Buy American Once Again-Becker

Every recession, including those milder than the current recession, leads to pressure to reduce spending on foreign goods by raising tariffs and other import restrictions. The avowed goal is to help domestic workers and businesses that are going through difficult times. Hostility to imports when unemployment is high and rising is surely understandable. Nevertheless, it is unwise to engage in seriously restrictive international trade policies even during a serious recession.

Unfortunately, in the recent stimulus bill passed by the Democratic members of the House of Representatives, the recession is used as an excuse to promote "buy American" policies. The bill would, among other similar restrictions, ban the use of non-American steel in the many construction projects that are part of the stimulus package. This provision was included even though it appears to violate US obligations under the rules of the World Trade Organization, and under the Nafta agreement with Canada and Mexico. This buy American provision in the stimulus bill has already led to retaliatory threats by several European and Asian countries since many other countries are also eager to place greater restrictions on imports. Click here for the full article

Why Some People Favor Higher Taxes

I guess it’s no big deal to favor higher taxes if you don’t intend to pay them yourself.

Performance Czar Killefer Withdraws Candidacy

Ms. Killefer, 55 years old, failed to pay employment taxes on household help for a year and a half, the Associated Press reported. In 2005, the AP said, the District of Columbia filed a $946.69 tax lien on her home for failure to pay the unemployment compensation tax. The error was resolved five months later.

Ms. Killefer is the third Obama nominee to confront tax problems. Treasury Secretary Timothy Geithner was confirmed despite disclosure about his failure to pay certain taxes. Tom Daschle, Obama's pick for Health and Human Services, is under scrutiny for his delinquent payment of some $140,000 in taxes and interest.


from The Wall Street Journal

Feb. 3, 2009

Citigroup is exploring the possibility of backing out of a nearly $400 million marketing deal with the New York Mets, say people familiar with the matter. Officials at Citigroup have made no final decision about whether to try to void the 20-year agreement, which includes naming the Mets' new baseball stadium after the bank, say these people. In a statement Monday, Citigroup said that "no TARP capital will be used" for the stadium -- referring to government funds from the Troubled Asset Relief Program. But as it revisits the pact, Citigroup is essentially acknowledging that the volatile political climate could make it untenable for the bank to proceed with the deal.

The camel’s nose is in the tent. The TARP and whatever turns out to be Son of TARP have put our feet on “the road to serfdom.” This is how it begins. This slope isn’t just slippery; it’s a near vertical sheet of ice.

Incidentally, since money is fungible, TARP capital will certainly be used for any and all expenditures made by Citigroup, including the Met’s stadium deal.