Bob Murphy is an awesome free market economist. I’ve learned a ton from his book “The Politically Incorrect Guide to Capitalism” and his blog Free Advice. In this video he explains why the Fed is harming the economy instead of helping bring us out of recession.
In an op-ed in the Wall Street Journal this morning, Republican reps Jeb Hensarling and Pau Ryan layout why economic expectations are so low.
Why all the pessimism? The source appears to be a growing fear that the federal government is retreating from the free-market economic principles of the last half-century, and in particular the strong growth policies that began under Ronald Reagan. A review of the economic policies instituted by President Barack Obama and the Democratic-controlled Congress lends credibility to this concern.
Exhibit A is the economic stimulus package signed into law by President Barack Obama in February. Even among previous stimulus efforts, the 2009 stimulus stands out for its ineffective targeting and sheer size. With interest, it is $1.1 trillion, double the size of Roosevelt’s New Deal spending as a percentage of GDP.
Exhibit B is tax policy going forward. It is a near certainty that Democratic-controlled Congress will allow most of the tax cuts of 2001-2003 to expire on Dec. 31, 2010.
Exhibit C is the administration’s intervention in the GM and Chrysler reorganizations. Upsetting decades of accepted bankruptcy law, the administration leveraged TARP funds to place unsecured and lower priority creditors like the United Auto Workers union in front of secured and higher priority creditors.
Health care, the administration’s signature issue, is Exhibit D. Disregarding its impact on quality and access, its plan will surely cost well over $1 trillion over the next decade. The House-passed version includes an 8% “pay or play” payroll tax and a half-trillion dollar surtax on incomes over $500,000, much of which will strike small business. Both taxes will tend to depress investment and the creation of new jobs.
If one substitutes the Blue Chip Economic Forecast’s interest-rate forecast for that of the administration, deficits will increase by an additional $1.2 trillion over the administration’s projected deficits. If the next decade’s interest rates climb to match those of the 1980s, then the deficit would increase another $5.3 trillion. If higher interest rates then slow economic growth, the impact on the deficit would be much worse.
via Jeb Hensarling and Paul Ryan: Why No One Expects a Strong Recovery – WSJ.com.
While I agree with all these, I think the reps believes that government is the solution, and the problem is their solution is not being implemented. This is what happens when you believe the government is the solution to our problems. Whoever lies the best and gets control of the government sets the policies. I’d love to see these guys calling for the government to quit tinkering with the economy.
The free market works, and will handle slow downs much better than politics. This recession would have hit us fast and moved on already without the tinkering. Can you imagine a doctor giving you a shot and saying I don’t want to inflict the pain, so let me put the needle in slowly? When you get a shot, you want it fast and quick. You know it’s going to hurt. Just get it over with. The economy is the same way. If we are going to go through some economic pain, take the brunt of it and get it over with. Instead we have these idiots trying to avoid any pain, and all they do is prolong it. The Fed caused the damn pain, and then says their role is minimize the pain and prevent it going forward. Really? Good job jackasses. Maybe we should try to control the weather so we don’t have any natural disasters.
If you want expectations to pick up, go back to the constitution. Quit tinkering. Tinkering only causes people to speculate on what the tinkering will be, and because our current tinkerers are bigger socialists than the previous tinkerers, they don’t feel good about the tinkering. Remove the tinkering ,and you remove the speculation and the negative expectations.
Was Bush, Obama and Geithner really “bailing out Wall Street in order to bail out Main Street”? It sure not looking like it.
TARP Inspector General Neil Barofsky keeps committing flagrant acts of political transparency, which if nothing else ought to inform the debate going forward over financial reform. In his latest bombshell, the IG discloses that the New York Federal Reserve did not believe that AIG’s credit-default swap (CDS) counterparties posed a systemic financial risk.
Hello?
For the last year, the entire Beltway theory of the financial panic has been based on the claim that the “opaque,” unregulated CDS market had forced the Fed to take over AIG and pay off its counterparties, lest the system collapse. Yet we now learn from Mr. Barofsky that saving the counterparties was not the reason for the bailout.
In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG’s credit-default-swap counterparties. The Fed’s taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties’ mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.
The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, “the financial condition of the counterparties was not a relevant factor.”
This is startling. In April we noted in these columns that Goldman Sachs, a major AIG counterparty, would certainly have suffered from an AIG failure. And in his latest report, Mr. Barofsky comes to the same conclusion. But if Mr. Geithner now says the AIG bailout wasn’t driven by a need to rescue CDS counterparties, then what was the point? Why pay Goldman and even foreign banks like Societe Generale billions of tax dollars to make them whole?
Who was Treasury Secretary and worked hand in hand with Geithner to bail out Goldman Sachs, I mean AIG? Henry Paulson. Where did Henry Paulson work prior to becoming Treasury Secretary? What do you know, Goldman Sachs. I’m sure that’s just a coincidence. I’m sure one man couldn’t force the spending of billions of tax payer dollars to bail out the company he ran. Wonder if there are any other politicians that are involved with Goldman. Let’s see!
In case you missed it, yesterday, housing starts fell by 10.6%. Of course all the articles about it had some excuse, and how government was addressing it.
The U.S. housing market is sputtering again, adding to doubts about the vigor of the economic recovery.
Just a few months after housing showed signs of leveling off, bad weather and uncertainty over the extension of a home-buyer tax credit sent new-home starts in October tumbling 10.6% from the previous month. They fell to the lowest level since April, the Commerce Department said Wednesday. Starts of single-family houses fell 6.8%.
Earlier this month, Congress expanded the tax credit and extended it through April, so building should improve. Still, the latest data portend poorly for the economy overall, and for fourth-quarter …
Is this idiotic or what? We created a bubble by pushing so called affordable housing with government policies and “free money” via the Fed. “Everyone should be a homeowner” was the slogan of the day. So, as the bubble is deflating, instead of letting it deflate naturally so we can quickly get past it, we are prolonging it. We don’t want the quick fast pain of a bursting bubble, so we spend money, which only prolongs and delays the bursting and leaves us further in debt as a nation.
The government is creating speculation by people making their decisions based on if and when the government is going to extent a tax credit. This is why you have speculators. The government is giving them something to speculate about. This blurb even says that now that the tax credit passed, building should improve. OK, so what happens when it expires? Do people stop building? Do we pass another tax credit? We just keep going further in debt as a country trying to minimize the pain of our past mistakes all the while making new mistakes.
Think about this on a personal level. While tax credits and policy seems very impersonal, what is taking place is government is taking by force our money in order to give it to people they want buying a home. Is this moral? Why shouldn’t you be able to keep your own money and decide what you want to do with it. Maybe you’d decide to buy a home if you had more money.
The latest mile marker on our road to fascism is the regulation being crafted by the administration and Barney Frank and the alternative being crafted by Chris Dodd. The two people most responsible out of politicians for the mess we are in are now the ones claiming they are going to fix it.
Both bills are intended to cover more than just companies that are engaged in financial activities. Following the administration’s lead, both provide that a company engaged in a financial activity “in whole or in part, directly or indirectly” could be subject to enhanced regulation and supervision.
The Frank bill seems intended to regulate all financial firms as though they are banks. Thus it requires financial activities to be transferred out of operating companies into a separate entity, which would then be regulated like a bank (even in its relations with its parent company).
The Dodd bill is a blunter instrument, proposing to regulate all companies that include financial activities “in whole or in part.” But almost all companies—retailers, manufacturers and service organizations—engage in some financial activities, if only to promote the sale of their products and services. If the administration’s health-care proposal has the potential to nationalize one-sixth of the economy, Messrs. Frank and Dodd are bidding to cover the rest.
“in whole or in part, directly or indirectly” and “in whole or in part” sure sound all encompassing. It would seem to me that every business is “engaged in financial activity” to a point. Add the control of government health care to this equation, and you pretty much have complete control of business.
The administration’s original legislation would give the Federal Reserve authority to regulate and supervise all large nonbank financial institutions and, if they are in danger of failing, take control of them and resolve their problems outside the bankruptcy system. The underlying notion is that the failure of one of these companies—which include bank holding companies, securities firms, insurance companies, finance companies, hedge funds and possibly others—could cause a systemic collapse.
Although the administration likes to give the impression that its proposal is limited to exceptional cases and the largest financial institutions, its draft legislation, and the Frank and Dodd bills, use very broad language to describe the triggering event for either enhanced supervision or a subsequent bailout.
Putting it bluntly, the administration’s proposal, and the House and Senate draft bills, would establish too big to fail as national policy. Whether the companies are regulated by the Fed or by a new agency, they will still have been marked as threats to economic well-being—and thus seen by creditors and investors as specially protected by the government. This will give them the same advantages enjoyed in the mortgage business by Fannie Mae and Freddie Mac, with the same result for competitors and taxpayers.
This sure sounds like welfare for the rich to me. Basically if you are lucky enough to have your business labeled “too big to fail” (I’m sure we’ll see more lobbyist pushing to have their business classified as such), then you basically do not have to worry about your actions. Take your profits while you can and things are good, and when things get bad, don’t worry about it. The American taxpayer will have to eat it. The investors and the executives reap the rewards and have all upside.
The Frank bill would explicitly authorize the Federal Deposit Insurance Corp. (FDIC) to provide financing that would restore a failed company to health. The craftier Dodd bill implies that creditors will take a hit, but then authorizes the FDIC to pay off creditors in full if that would avoid “serious adverse effects to financial stability or the United States economy.”
Moreover, under the Dodd bill, after the government has settled with its creditors, a failed company can have a public offering of its shares and return to the competitive fray. That’s good news in one sense, of course, but not for everyone; under the Dodd plan, the government is authorized to recover what it spent by taxing all financial firms—that is, firms such as bank holding companies and others involved “in whole or in part” in financial activities—with total assets of more than $10 billion.
In effect, the legislation creates moral hazard by transferring the risks and losses of a failing company from its creditors to its competitors. The protection of taxpayers may be a mirage anyway, since the FDIC is authorized to put off these collections indefinitely to avoid an “adverse effect on the financial system or economic conditions.”
This regulation amounts to “there are no losers here” policies. It’s like all the kids participating in a sporting event getting a trophy, because they are all winners. Meanwhile, they lose their sense of competition and drive. There is no downside for a company once it’s classified as too big to fail. This is a scary proposition. If they have bad management, they don’t have to worry. The government will step in, usher them back to “health” with tax payer money, and then more bad management can come in and make profits until it falls apart again. Talk about wealth distribution. I didn’t know Obama meant this when he was talking to Joe the Plumber. I should have known when he said he was for “Trickle Up Economics” instead of Reagan’s “Trickle Down Economics”. Apparently with trickle up economics, the wealth that the poor and middle class have moves up to the rich that have political connections.
The Federal Reserve continues to throw gas on the fire claiming it can pull the gas back out if the fire gets out of control. Good luck.
Rand Paul and Peter Schiff respond to the erroneous claim that inflation is not a problem and that we should really be concerned about deflation. Also, Sean Ryan, a liberty activist from Boston, talks about his confrontations with Barney Frank and the president of the Cleveland Federal Reserve Bank.
The Federal Reserve has increased the monetary base to an unprecedented level. If that money works its way through the economy, we will see inflation. Bernanke claims that the Fed can reduce the money supply if necessary, but Rand Paul suspects that if stagflation occurs (high inflation plus a slow economy), the Fed will not be willing to reduce the money supply.
At the root of the problem is the fact that the Federal Reserve claims to control inflation, when it is really the vehicle for inflation.
via Confronting the Myth of Deflation | Wendy Macy’s Blog.
Fannie Mae announced a new “deed for lease” program, where they will take your deed and rent your house back to you if you don’t qualify for a loan modification and can prove you can’t pay your mortgage. They will sign a one year lease with the current owners. They are hoping they can then sell off the houses a year from now, when they assume the housing market will be better and the value of the homes will be higher. This is some pretty optimistic thinking from a now government owned institution.
What would make them think the housing market is going to pick up that much over the next year. So far, unemployment continues to rise. The Fed has been busy at the printing press, and the government is taking debt levels into unknown waters. More than likely if the economy begins to pick backup, we are going to have massive inflation. That will lead to two scenarios. Either we’ll have hyperinflation that makes the 70s look like child’s play, or we’ll have a Fed induced recession to bring inflation under control. Neither scenario paints a pretty picture for a booming housing market.
Fannie Mae and Freddie Mac (Freddie is already doing something similar) are only delaying the inevitable. The market is much smarter than the government is. It will take into account that these government institutions have a ton of inventory being hidden from the market, what analyst call “shadow” inventory. If the housing market begins to pick up, it will be driven back down with this excess inventory. Instead, Fannie should take the short term pain and end it quick.
Because of Fannie’s mistakes it is asking the government (me and you) for another $15 billion after a quarterly loss of $18.9 billion. In total, it’s estimated that we will have wasted $200 billion on both Fannie and Freddie by the time this mess is over. Then again, we know how reliable government estimates are. So far we have handed over $61 billion to Fannie, and estimates are that Fannie is sitting on inventory around 65,000 homes.
Instead of becoming landlords, why doesn’t Fannie and Freddie sell of packages of houses as investment bundles. This would get the houses off their books, and it would bring them back into the free market where they can begin to stabilize the market. Investors will buy theses homes, and guess what they’ll have to do? They have to pay taxes on their profits, which ultimately will help with the government losses that will occur with the sale. With the investors holding properties, they will want to drive prices up. They’ll either rent them out, which investors are better at than the government, or they will fix up the homes and put them back on the market. Investors will not shoot themselves in the foot by flooding the market. They will slowly bring the houses onto the market to maximize sale prices and make the most profit. Whether renting or selling, the investor will be paying taxes on his capital gains.
The government should just take the short term pain of selling them off now? This may hurt the housing market, but it will be over and stabilization can begin. Instead, the government is prolonging this crisis and making it worse, and who’s going to eat this mess? We are.
Translation: “We are going to continue to print money in hopes of tricking consumers and businesses into spending money. We know it will create false growth and the possibility for hyperinflation, but we are so smart we can stop it by driving the economy back into recession. Trust us. Look how good we’ve been at this.”
BY JON HILSENRATH
The Federal Reserve affirmed its plan to keep interest rates “exceptionally low” for a long time despite signs of economic recovery. But the Fed began to lay rhetorical groundwork for an eventual shift in its stance, suggesting that when the unemployment rate falls or if expectations of inflation turn up, it could change course.
“Economic activity has continued to pick up,” the Fed said in a statement following a two-day meeting. It noted that consumer spending has improved, housing activity has increased and businesses were retrenching at a slower pace.
Fed officials voted unanimously to maintain their target for the …
In a very long article in the Wall Street Journal today, they are highlighting a supposed genius economist who is developing a new paradigm of thinking of how the markets work and in particular the use of leverage by banks. Unfortunately, in the entire article, the writer and apparently the economist never mentions monetary policy, negative interest rates, or incentives and their effects on behavior. These supposed geniuses start off with the assumption that the market is irrational and just decides to go haywire out of the blue. They completely ignore incentives and how the change in incentives changes behavior. The new paradigm was reached a while ago. Someone tell this genius to grab some books and read up on Austrian economics.
Mr. Geanakoplos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists’ understanding of the world and serve as policy-making tools at the world’s biggest central banks. It is a task that could require a thorough overhaul of the way those models work.
via Crisis Compels Economists To Reach for New Paradigm – WSJ.com.
Ron Paul, who seems to be the only politician with a clue, writes in Forbes about how the Fed is the cause of our current crisis, and how they are doing the same thing now that they did to create this crisis. Many talk about our current crisis as the result of building the housing boom out of house of cards. What happens when you find out your entire currency and banking system is built out of the same cards?
Be Prepared for the Worst
Ron Paul, 10.29.09, 09:20 AM EDT
Forbes Magazine dated November 16, 2009
The large-scale government intervention in the economy is going to end badly.
Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.
A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.
