Saturday, May 30, 2009

Krugman the Politico

Paul Krugman has embarrassed himself with his opinion piece this past Thursday in the New York Times. His political bias seems, on this occasion as on other occasions, to have overwhelmed his economic analysis.

Krugman is out to prove that inflation (and indirectly interest rate increases) are not something to fear in the future. According to Krugman the Fed is not (yes that is what he said!!) increasing the money supply. He says that the "claim that the Federal Reserve is printing lots of just wrong." As often is the case, Krugman is "just wrong." The Fed has, in the last three months, purchased $ 300 billion worth of treasury notes and bonds which is precisely equivalent to the US government printing money. Krugman seems to think that because excess reserves are temporarily high that no monetary creation is taking place.

The error in Krugman's analysis is the the level of excess reserves (reserves above and beyond what commercial banks are required by regulators to hold) will fall quickly as the economy begins to show life. The money supply is dramatically up already since September of 2008 and should be, by year end, double what it was in the Fall of 2008.

Guess what happens when you double the money supply? Contrary to the misleading op-ed of Krugman, there has never in history been an example of monetary expansion of this magnitude in such a short space of time that did not lead to dramatically higher level of inflation. That the inflation may not show up until 2010 or 2011 does not make it not a problem, as Krugman suggests.

Krugman seems to think that anyone who disagrees with him does so out of perverse motives. His is the only purely objective voice out there, according to Krugman. He argues that anyone who worries about inflation and a spike in interest rates must be a Republican. If Krugman is right about this, it won't be long before everyone is a Republican, including Paul Krugman. Make a note, Paul Krugman....inflation is coming and it is coming in a big way.

Friday, May 29, 2009

So Why All The Spending?

California home prices were up 1.4 percent in April. Unemployment claims fell last week, surprising market observers. Consumer confidence had one of the most dramatic one month increases in history in April. New home sales rose in April. The stock market will today complete one of its best two month's runs in its history.

So, what's the bad news? The US Treasury market is the bad news. Treasury yields are spiking up due to the 400 percent increase in the fiscal deficit. The rating agencies are poring over the possible downgrade of the US government's credit. State government budgets are in a state of collapse. The dollar is cascading downward.

So, the good news is that the private sector is turning around and is very close to a bottom. The government hysterics that began with Paulson and Bernanke and continues with Obama, Geithner and Frank is no longer enough to keep the free market from working.

The bad news is that government spending is spinning out of control at an historic clip and the big union-dominated state budgets are completely out of control and verge on bankruptcy.

Tuesday, May 26, 2009

Picking Winners and Losers

Once again the Obama Administration is playing God with investors' money. This time it is the GM bankruptcy. Instead of the bankruptcy court deciding who gets what by following contract law, Obama has decided that the affluent members of the UAW are more deserving than employees elsewhere (many of whom are the beneficial owners of General Motors bonds). Bondholders were asked to take a 9 percent stake in the new GM, which is a ridiculously low percentage and they are saying no!...thank goodness. Now, we will see if the courts are permitted to orchestrate this bankruptcy or if the White House will trample over existing bankruptcy law in an effort to save the UAW, whose members make a multiple of the average income of other workers in the US. This is another case of "reverse Robin Hood" by the Obama Administration. They are robbing the average worker to provide funds for relatively wealthy (UAW) workers. Nice redistribution policy! Take from the poor, give to the rich!

The main thing wrong with the Bush-Paulson-Bernanke-Obama-Geithner strategy in this economic crisis is that bondholders have generally paid no price for foolishly loaning money to the AIGs of the world. The taxpayer was conveniently inserted into the equation to take the hit and let the bondholders go unscathed. But, not this time. This time the affluent and politically powerful UAW is one of the potential players, so Obama is rolling out the (taxpayer) red carpet for the UAW and asking the bondholders to take a hike. Well, they won't do it. A significant percentage of the bondholders are workers, who are not UAW members (and make half the income of UAW members). They are saying no!! More power to them.

Lets see if the Obama folks let the courts decide this one or will Obama throw the Constitution under the bus. The jury is out.

Monday, May 25, 2009

Thomas Friedman Chimes In

If you haven't had a good laugh this Memorial Day, try reading Thomas Friedman's article in the NY Times today entitled "State of Paralysis." According to Friedman, Calfornia taxpayers are just too stingy. With a 9.3 percent income tax and a 7.25 percent sales tax, somehow Friedman thinks that the average Californian is not paying enough in taxes. He wants taxpayers to pony up to support the exhorbitant pensions demanded by the employees unions in California. Some of those pensions, for retirees still in their 50s, are more than $ 200,000 per year. Sounds like a good use of taxpayer money to Thomas Friedman.

Why doesn't Friedman ask where the California state government spends its money? To Friedman and other liberal pundits, the only issue is miserly taxpayers who won't fund things he wants. Why doesn't he write a check to the state of California out of his own pocket? If he believes that California is spending its money wisely, that is the least he can do. Is there any tax rate that Friedman might consider too high for over-taxed Californians?

Friedman blames the California constitution for the sin of letting the voters vote on what they want. Imagine that! Letting taxpayers have a say. He considers giving taxpayer a vote on the way the state spends their money and increases their taxes is proof of "the political system's inability to rise to the occasion."

It's interesting how "freedom" is interpreted by the left as freedom to do what Friedman and others want but not freedom to do what the voters want. The people are foolish and dysfunctional, according to folks like Friedman. Better to let politicians decide these matters. Politicians seem to have no trouble "rising to the occasion" to raise taxes, though politicians are not so good at paying them (Geithner, Daschle, etc.).

Fortunately, Californians have alternatives. They can move and they are moving. In record numbers, Californians are deserting their state for lower tax states that don't think retirees should be given six figure pensions.

Sunday, May 24, 2009

California -- Talk About Greed & Corruption!

How did California get to the point where it must partially shut down its public schools and begin to release dangerous criminals back onto the streets because it has a $ 21 billion budget shortfall? The greatest source of misinformation on this topic is the NY Times. According to the NY Times, all you need to do is raise income taxes on the wealthy and the problem is solved. Perhaps, the Times should note the nearly 150,000 people per year that are now moving out of California for good, thanks to the extraordinarily high tax rate on everyone -- rich and poor.

There are two problems in California that determine their current budget woes. The first and most significant is a woe that afflicts every state in the union -- the federal government. Begun under Nixon, the federal matching programs for entitlements such as medicaid now occupy more than one-third of all state budgets in the US. Matching programs for federal aid to education are enormous and affect state as well as local budgets. Neither the governor nor the state legislature have a vote on any of this is all federally mandated or you lose the federal matching funds. Eventually, federally mandated matching funds will break every state in the union, regardless of who is governor or who is elected to the state legislature or how voters vote on any and all referendums.

This is why numerous state governors are rejecting parts of the Obama stimulus package. All of these money grants to states create new permanent perpetural new spending mandates on states that will persist long after Obama has left the White House and is making $ 500,000 speeches around the country and the world. There is a controversy here in the state of Virginia over the funds in the stimulus package for unemployment compensation for part time workers. If the state accepts the one year of funds for this program, it commits to a permanent and massive new spending program that continues long after the single year of federal largesse. Republican candidate, Bob McDonnell is right to reject the funds for this program. Democratic candidates don't dare tell the voters that truth -- that accepting these funds creates a new permanent spending program that the state cannot afford.

The second problem, peculiar to California, New York, and New Jersey (and some, but not all, other states) is the absurd financial package for state employees and teachers. Prison guards make over $ 100,000 per year in California and that is before pension fund contributions and health care coats which add another $ 20,000 to the annual cost per employee. The publc school teachers have an even better deal. Who can afford this? The only answer for taxpayers is to call your real estate agent and the movers and get out of town fast, before the tax man comes.

California created its own nightmare by paying state employees and teachers more than twice the competitive compensation -- talk about greed and corruption!! Why should taxpayers bail out this problem.

Note that there is no fix short of bankruptcy for California, NY State and New Jersey. So, guess where these states are headed. If the US Treasury bails them out, then the US will be headed down the same road for the same reason.

Saturday, May 23, 2009

Europe and US - Converging?

The New York Times has another Floyd Norris nonsensensical economics article. Every day or so, the NY Times publishes an article in their business section purportedly to show why the US free market economy is a loser. Sometimes it is Paul Krugman, sometimes it is Bob Frank, sometimes, like today, it is Floyd Norris. These three economists share one thing in common -- they don't like capitalism and they can't stand to see others successful (other than themselves and their cronies). It is okay, in their opinion to make millions as a politician or selling political influence or trading on your political history (think of Tom Daschle for one of numerous examples), but it is a crime to get an MBA, work your way through the minefields of an investment bank, and make serious money.

The latest piece of silliness by one of these three free market bashers is Norris's diatribe today about the virtues of European laws that forbid employers to fire employees. Simple logic tells you that if the law doesn't permit you to fire someone, then you are not likely to hire them. It also suggests that when unemployment is growing worldwide, those who cannot legally fire anyone probably will have higher employment rolls, so long as they remain in business, than in countries where businesses can legally fire employees.

But logic isn't what Norris is about. He is about showing that, as the US economy weakened in 2009 it's unemployment rate is nearing the routinely high unemployment rates that prevail in Europe, in good times or bad times. For Europe, unemployment rates between 9 and 12 percent are the norm, not the 4 to 5 percent that prevail when the American economy is chugging along in good times. As Jack Nicholson once famously said: (for Europe), .."this is as good as it gets." It's like telling the healthy person who doesn't smoke or drink that he is no better off than the alcoholic smoker since both will eventually suffer the same end game.

Unfortunately, America has, in recent years, been adopting the European approach to toxifying employees. I don't doubt that if the US passed a law making it a capital crime to fire an employee, that the unemployment rate would not rise as fast in this country as it is currently rising. But, then, businesses would, over time, stagnate and collapse, which is pretty much the history of small business in Europe. If you are young and need a job in Europe, you have to get on a boat and go to another continent where the rules are different and you have some hope of getting a job.

For Norris to praise a system that has young people still out of work, looking for a job, and living at home well into their mid-30s, which is typical in Europe, is a sign that Norris is completely out of touch. Maybe some old geezer like Norris prefers laws that protect his job at the expense of the nation's youth, but then his is a policy of dividing generations, not improving economic conditions.

Before Obama, the US was the economic opportunity locale of the world. Post Obama, Norris might get his way. We may stagnate as badly as Europe has for generations. I guess that would make Norris, Krugman, and Frank happy.

Friday, May 22, 2009

S&P Warns Britain; US is Next

Yesterday, Standard and Poor announced that they may downgrade the credit rating of the United Kingdom later this year. At first, US treasuries rallied, but then they soon took a whopping three point loss. This could be just the beginning.

Standard and Poor made it clear that they do not believe the UK internal forecast that government debt levels will top out at 70 percent of UK GDP. Instead, S&P suggested that the UK is headed for 100 percent or more debt/GDP levels and that level would trigger a credit downgrade.

What about the US? The same wishful thinking pervades the Obama budget projections. According to the Obama budget, unemployment this year will top out at 8.9 percent, which is where it currently stands. Good luck on that one! Worse, the Obama budget projections suggest that in 2010 the economy will rocket to over 3.5 percent real growth. Where are their economists? These forecasts are beyond wishful thinking. They are absurd (and inconsistent with Obama's public statements and the public statements of Fed Chairman Bernanke).

Next week, the Treasury slogs its way through over $ 100 billion in treasury financing. This will not be easy and is merely one frightening week to be followed by many more as the credit markets are clobbered with Obama IOUs. It is an open question whether or not the US will be able to get these Treasury offerings done in 2009. Things get much, much worse in 2010 and thereafter. Hang on to your seatbelts!

Some take comfort in the fact that the dollar is the reserve currency of the world. It is hard to see why that is comforting since within a fairly short period of time, the dollar will be supplanted by something that Asian creditors feel more comfortable with than the Obama dollar.

The Obama Administration is living in fantasy land regarding the US National Debt. Having taken no action whatsoever on the entitlement programs (social security, medicard, medicaid) which will bankrupt the US if left unchecked, the Obama team has created a whole new raft of entitlements and wasteful spending that, by itself, will bankrupt the country even if social security, medicare and medicaid magically disappear.

Want to know why California is in trouble (and NY, New Jersey and most of the state governments)? Look at their mandated spending from federal programs in medicare, medicaid, education funding. None of these states have any chance of turning around their debt problems and Washington is one of the big culprits.

The orgy of debt by Washington and by profligate state governments (which are captive of the employee unions) cannot be sustained. The UK will likely be downgraded and ultimately default on its pound obligations. The US cannot be far behind.

Excessive leverage created our current financial plight. The Obama Administration seems determined to outdo the profligacy of the private sector by bankrupting the public sector with excessive leverage.

Wednesday, May 20, 2009

Obama Motor Company

Toyota must be licking its chops. GM wasn't much of a competitor anyway, but now here comes the UAW as the new competitor to Toyota (and Honda and others). Together with the new mileage rules to be in place by 2016, there is virtually no chance that the new Chrysler or new Obama (formerly General) Motors will be able to compete. Toyota and Honda build cars to satisfy consumers. Obama Motors will build cars to satisfy Obama. Whether they will sell or whether consumers want them or not is essentially irrelevant to the Obama plan. (Too bad if safety was one of your issues..Obama doesn't care about safety, only carbon emissions).

So, what else is new? Check out Yahoo today. Yahoo explains the effect of the new Obama credit card rules -- a dramatic increase in the business of "pay day lenders" and other loan sharks, since many middle Americans will no longer be able to get credit cards (or much of a credit limit, even if they manage to get the cards). That should help people a lot. Another great idea Mr. President! Have any more?

The next Obama move is to give all employees (in companies with 19 or more employees) a guaranteed seven days annually of paid sick leave. Obama has maneuvered to get a bill introduced in Congress to do just that. Great! More mandates on employers on the way.

I have an idea. Why not move the minimum wage to $ 1,000 per hour. Imagine how great that would be! Now employees could afford health care, quality child care for their children, tuition for college,...Heck, they could afford almost anything. What a great idea. Why didn't I think of that earlier? Maybe, we should make it higher? What about $ 2,000 an hour? I am not sure what the right number is but surely higher is better. What about 100 days a year of paid leave for any reason that the employee would like? That would solve a lot of problems...reduce transportation costs to work (since you don't go very often anymore...that cuts pollution doesn't it?). I should go to work for Obama. I think I am getting the general idea!

Tuesday, May 19, 2009

Credit Card Reform -- Obama Strikes Again

Chalk up one more blow to the poor consumer. Obama has proposed and the Congress will pass new rules for the credit card industry. The problem: the industry raises rates from time to time and especially on borrowers with poor credit. The solution: forbid the industry to raise rates (amid other restrictions on what card issuers may or may not do).

This is another solution from the folks who believe that spending more than you earn is the fault of the guy lending you the money. So lets punish the lender. Guess what? Punishing the lender is probably going to make the lender less willing to lend. And precisely who is it that the lender will be less willing to lend to. Yes, you guessed it!! The guy with the bad credit. He will be toast after Obama gets through.

I guess that's one way to stop people from getting in over their heads. Pass legislation that makes it a sure bet that no one will lend to them. Obama has already taken care of people that want jobs. His proposals involve so many employer mandates for employees that no rational employer is likely to hire anyone if he can avoid it. We have punished the mortgage lending industry, so the poor guy will no longer be able to get a mortgage. Now, we have have made sure that he/she can't get a credit card. Pretty soon we will fix the health care system so that he can't see a doctor or visit a hospital either.

We're solving a lot of problems in a pretty short space of time. This is real change!

Friday, May 8, 2009

$75 Billion? Say That Again!

The infamous TARP package received a favorable vote from the House of Representatives on Friday, October 3rd. The crisis was so serious, according to TARP advocates, that the President signed the bill into law Saturday, so that it could become effective immediately. Everyone assumed, at the time, that Treasury Secretary Paulson would proceed to buy "toxic assets" from the banks in the now forgotten "reverse auctions." After all, that is what Treasury Secretary Paulson said he would do as he pushed the single largest spending bill in history through a pliant Congress.

Within 48 hours of the TARP becoming law, Treasury Secretary announced a shift in course. Instead of the "reverse auctions," now deemed impractical (though the week before Paulson had labeled them the only hope to save the financial system), Paulson called in the nine leading financial institutions and insisted that they take Treasury cash whether they liked it or not. In all, nine institutions took in $ 250 billion in cash and the Treasury received a preferred security interest in each bank. Those banks who refused, notably Goldman Sachs, Wells Fargo, and JP Morgan, were to told to take it or else. So, they took it.

Over the next eight days more than $ 400 billion of bank equity disappeared in an avalanche of selling of the financial stocks (and other stocks as well). Within eight weeks, Citigroup alone had shed over $ 50 billion in market capitalization.

Now, we hear the banks need a mere $ 75 billion of additional capital to weather a significant worsening in the economy and more than half of that amount is needed by a single bank, Bank of America, leaving $ 40 billion needed for the entire remaining banking industry. Really?

$ 40 billion is a ridiculously small number. Bank of America acquired Merrill Lynch for more than that number. Lehman lost more than that number in market value in its final year of existence. If that is all the banking system needs after a significant deterioration in the quality of their assets as the recession has unfolded, then why all the hoopla last October?

This is truly incredible. If all the banking system needs, at this point in the recession is $ 75 billion, then this will rank as one of the mildest banking crises in history. Who are Geithner and Obama kidding? $ 75 billion? All of this anguish and panic for that?

And don't even suggest that the cash infusion did any good. The cash infusion of TARP shattered confidence in the American banking system, because it suggested that it was needed and needed immediately (now, I guess, it wasn't really needed after all). The TARP cash infusion led directly to the worst one week financial panic in world stock market history. All for a need for $ 75 billion in extra capital in case we have a real recession (instead of one conjured up and produced by politicians with an axe to grind and media pundits looking for something to say)?

$ 400 to $ 500 billion....why that would be a real need for additional equity. $ 75 billion indeed? As Rahm Emanuel has been quoted so frequently as saying, "never let a good crisis go to waste!"

Saturday, May 2, 2009

The Clinton Years - A Correction

One of my diligent students, Ian Buchanan (UVA '09) has thoughtfully noted a frequent error of fact in my blogs. I have on occasion claimed that unemployment averaged just below 7 percent for the eight years of Clinton's presidency. That is not so, as Ian pointed out to me in a recent email.

The fact is that unemployment averaged 5.2 percent for the eight years of the Clinton presidency, not slightly below 7 percent as stated in a recent blog. The first Clinton term did indeed average well above 6 percent unemployment, but the second term averaged well under 5 percent.

On a comparative basis, the eight Clinton years averaged 5.2 percent unemployment and the eight Bush (W) years averaged 5.3 percent unemployment. Both inherited recession conditions, although the highest Clinton unemployment months were in the very beginning months of his presidency, which could hardly be attributed to Clinton policies.

I stand corrected. (The actual facts on unemployment in the US economy are available at the website of the US Labor Department, among other places).