Monday, May 31, 2010

Deregulation? -- Are You Kidding Me?

Now the latest blame game maneuver is to argue the BP Oil Spill is the result of "de-regulation." What a joke? There has been no deregulation .... not one little bit regarding offshore oil exploration. In fact, what the BP Oil Spill shows, which we already knew, is that regulation is damaging, except when it's irrelevant. It didn't stop the spill and it won't stop future spills. Regulation doesn't work.

The reason BP was drilling for oil 5,000 below the surface was precisely because of regulation, forbidding oil exploration in shallower water. Somehow the regulators thought it would be safer if they moved the drilling further out. So much for the regulators. If this drilling had been down where it should been done, in the forbidden shallower waters, then the spill would be a relatively easy fix. But, the regulators won out, Congress won out, the President won out....and now we have an unfixable leak 5,000 feet down. Where is the de-regulation?

This is similar to the nonsense about the rating agencies. The rating agencies only gained power when the SEC mandated their usage by the debt markets. Why did the SEC do that? Is that de-regulation? It was an absurd thing to do. There are plenty of independent research operations to pass judgment on debt issuance, but the SEC put them all in limbo in favor of the rating agencies. Basically the SEC gave the rating agencies a monopoly and pushed the free market out of the way. Great move! Is that de-regulation?

Regulation doesn't work. The market works. BP will fix the leak because it is in their economic interest to do so. Politician will continue to spout nonsense, because that's what they do.

Oops .... Spoke Too Soon

Obama could not resist. After having calmly left the fixing of the leak to BP, now Obama has bowed to the talking heads and begun to demonize BP. That won't help anybody. BP's efforts to cap the well should be supported. What Obama should be working on is the clean up. Instead Obama is busy conjuring up sound bites to try to deflect blame away from himself and on to BP and on to George Bush.

Too bad. This is a time when all Americans should ban together to help our coast lines recover from this disaster. Time spent on demonizing other folks in the hope of political gain is time not spent trying to get to a solution for the most horrifying ecological disaster of our time.

Shame on Obama and shame on any politician -- Republican or Democrat -- trying to use this tragedy for political gain.

A Tale of Two Cities: Memphis, Tennessee

Michael Powell's article in today's New York Times is a painful snapshot of what happens when government tries to "do the right thing." This article chronicles the plight of black residents of Memphis who, like black American across the US, were lured into an over-priced housing market and then crushed by foreclosures. It was deliberate government policy that pushed many low income Americans into housing that they could not afford. We have Chris Dodd, Barney Franks, Bill Clinton, and George Bush to thank for much of this. These politicians and others, under the delusion that everyone in America needed to be a homeowner, encouraged and, in some cases, insisted that, Fannie and Freddie be used as vehicles to push the poor into expanded home ownership. What did they care if a future recession would bring this entire house of cards crashing down? This was the Memphis housing boom -- the first city -- spurred on by deliberate government policy.

So, the inevitable happened. Now, with the administration openly attacking mortgage lenders, the mortgage lenders are fighting back -- with foreclosures. Who gets caught in the middle -- the low income Americans fighting to make their way into the middle class? As the article by Powell points out, decades of economic gains were squandered by these misguided government policies -- policies which remain in place and are unaffected by FinReg. This is the second city of Memphis -- the recession-plagued Memphis that inept government policies have plunged into economic darkness.

When will we learn that government cannot create prosperity? Only individual Americans working and saving can create real prosperity. But, that requires government to get out of the way. It's a shame that the Memphis black community has to be a poster child for government's failures.

Sunday, May 30, 2010

Silliness about the Eurozone

Why, when there is a problem, do people think there is some quick fix. Is it supposed that investors are stupid? Investors can see that Europe is broke and that there is no way to "grow out" of their indebtedness. Since they can see this, investors are beating a path to the exit. Who wants to own sovereign debt when you know that the borrowers cannot ever pay you back? Simple arithmetic, melded with modern demographics, make it clear the Eurozone is financial toast. There is no way short of bankruptcy for Europe to expunge it's enormous debt. The question now is only how big the bankruptcy will be and who will get stuck holding the bag. There really aren't any other questions worth asking. And there is no quick fix.

Saturday, May 29, 2010

Oil Spill is not Obama's Fault

Anytime something unfortunate happens these days, we seem to spend all of our time looking for people to blame. Politicians preen before the camera "to show their anger." What are they angry about?

The idea that politicians have to "show our pain" when there is a problem, means that instead of dealing with the problem, we spend all of our time trying to show how angry we are and how angry we are at whoever we think "caused" the problem.

James Carville's rant against Obama this week is an example of stupidity in action. Just what exactly is Obama supposed to do. Carville, as usual, is all emotion and no thought.

The Gulf Oil Spill is an unfortunate accident of historic proportions. It is useful to know what caused it, so that, in the future, we can design ways to avoid such spillage in the future. We need calm, not hysteria. We need solutions, not the blame game.

Obama, interestingly, was on the right track in his initial reactions to this tragedy. He left the clean up operation to BP. That's the right solution. BP has an enormous incentive to get this under control. Politicians look to get elected. But, BP is the only entity with the expertise and incentive to solve this problem. Give them support and get this thing fixed. Afterwards, then you can go on talk shows and bitch and bitch and bitch. But, that sort of behavior is not helpful now.

We need offshore drilling and we need to think hard about how to prevent future accidents. But, they will happen anyway. Things happen. Dealing with such problems as an emotional outlook to vent frustration is not helpful.

On this one, Obama is innocent.

Wednesday, May 26, 2010

Geithner in Europe

If you have read Andrew Sorkin's book published last year, "Too Big to Fail," you know already that Geithner shoots from the hip. His solution, no doubt with the blessings of Ben Bernanke, is to throw as much government at a problem that you can and to bail out everyone in sight. Laws, history, patience go out the window with Geithner. Largely untrained in economics, Geithner nevertheless wanders the world lecturing the Chinese and now the Europeans about how the government should steer their economies. No economy in the history of the world (with the possible exception of Singapore) has ever done better because of an active government policy. The US in the 1930s is a great historical testament to the damage that the government can do an economic recovery. The current period will be another testament to the foolishness of government's response to a crisis.

If they are listening to Geithner, this does not bode well. He never believes in making foolish investors pay the price of their foolishness. Bankruptcy is a word he doesn't understand. Instead he believe in putting the taxpayer up front and center. Europe is a big enough mess without Geithner giving them advice. (The Chinese, no doubt, did not listen to him. They should be fine).

Tuesday, May 25, 2010

The Inevitable Consequences of Obama & Merkel Policies

Bailouts don't work. Stock markets, globally, are collapsing as they assess the full consequences of the leadership of Barrack Obama and Angela Merkel. Both these leaders think that politics trump economics and they are both wrong. One is a left wing idealogue and the other is a right wing idealogue, which just goes to show that bad policies transcend ideology. Even among commentators in the US revered as "conservative," bad economics is on display: Charles Krauthammer, Larry Kudlow, Peggy Noonan and Robert Samuelson all supported both the TARP and the Merkel-led Eurozone bailout policies. (Much-maligned Sarah Palin has been right all along).

Fear and ignorance are not good guides to economic policy. Free markets have no trouble recovering from bankruptcies and unemployment and they recover quickly if not impeded by foolish government policies. We are now awash in foolish government policies. So, the recovery process is thwarted thanks to Obama and Merkel (and others supporting their foolishness).

While today's markets will be tough, somewhere in here the stock markets will find regain their footings, although look for markets to be pretty volatile for a while. After all, government economic policies are pretty volatile. Eventually, even markets hobbled by Obama and Merkel will recover. It may be time, after today, to buy the stock market again.

I would be a buyer of US stocks today at the close of the market.

Sunday, May 23, 2010

So Much for the V Shaped Recovery

Obama's policies have effectively killed off any chance of a normal "v-shaped" recovery for the US. There are several Obama engineered headwinds for the US economy:

1) The problem of credit: several Obama initiatives have created severe problems for lower income and middle income Americans who seek credit, both retail credit (credit cards, debit card, etc.) and mortgage credit. This lack of credit will show up in retail sales. Small businesses have been especially hard hit by the Obama credit restriction programs. In no recovery period in US history has there been such a concerted effort by a political party to close down credit facilities crucial to small businesses, vital for economic recovery. The policies behind these restrictions are "reforms" of credit card lending, debit card regulations, and the new financial regulation bill soon to become law. As if these credit-destroying initiatives were not enough, the Obama Administration is quietly pushing bank regulators to crack down on business lending, especially lending to small businesses.

2) The problem of "toxifying employees": by sponsoring legislation that makes employees more expensive, the Obama Administration and the Congress have made employees toxic. Who wants to spend $ 50,000 to hire a $ 30,000 employee? The answer: hardly anyone. By adding significant employer financed mandates (including the health care monstrosity) and increasing employer liability (for things that employers cannot control), the Congress has created a huge cost per employee even if that employee worked for free. This means a significant drag on hiring and a permanently higher level of unemployment. The impact on low income workers and minorities will be the most severe. Watch unemployment rates for the most disadvantaged among us to be sky high and permanently so.

3) The destruction of the financial service industry: some of this is being accomplished by the demonizing rhetoric of the White House and especially the partisan and extreme rhetoric of the President himself. He will become known as the "great divider"). Obama cannot resist slamming the business community and the financial service industry in particular. But the FinReg bill (expected to become law within a few days) is the real killer. This bill permanently enshrines "too big to fail" as the cornerstone of US regulatory policy. This moves us in the direction of the old state-run banking regime that characterized China during the it's pre-capitalism years. The White House and the Treasury are authorized by FinReg to pick winners and losers among commercial and investment banks and to direct the flow of capital as they see fit with no checks on Treasury and White House powers to intervene in the financial service industry. Obama seems to truly despise capital creation activities and private enterprise. This means the financial service sector will retrench and the international center of finance will, within the next generation, shift to Asia, where the political climate is significantly milder and friendlier to the financial service industry. All of this will further inhibit the economy's chances of an economic recovery.

4) Finally the prospect of huge tax rate increases across the board (middle class Americans will face much, much higher tax bills, even the poorest among us) will act as a brake on capital formation and entrepreneurial activity. Rich folks will simply shift their assets around so that they can avoid paying the new, higher tax rates (that's why Buffett and Gates don't mind higher tax rates -- they won't have to pay them). This means no real momentum for an economic recovery.

Normally, had the government simply done nothing, we would probably be looking at six to eight percent GDP growth rates and an unemployment rate around 8 percent and declining. Instead, we face a serious chance of a "double dip" economy where the growth in GDP could slip back into negative territory in either the third or fourth quarter of the year. Unemployment rates will probably head into double digits and stay there through much of the latter half of 2010 and much, if not all, of 2011. This will will be the direct result of the Obama agenda.

Saturday, May 22, 2010

FDR and Barrack Obama

David Leonhardt writes this morning in the NY Times about a "progressive agenda" to remake Washington. In gushing terms, Leonhardt compares Obama's legislative agenda to that of FDR. Leonhardt is probably generally unaware of what happened in the 1930s after FDRs program became law. The economy entered an historic period of stagnation that persisted longer than any time in American history. That was, in no small part, due to the "progressive agenda of FDR." By 1939, the unemployment rate, seven years after FDR's initial election, was 20 percent -- quite an accomplishment.

You wonder if Leonhardt is aware of that history. If so, he might not be gushing so happily about the future. The FinReg is an absurd piece of legislation. It doesn't address any of the causes of the 2008 crisis -- not a single one. It enshrines, as permanent policy, "too big to fail." Now, under FinReg, no firm is too small not to be "too big to fail." The taxpayers will now guarantee any business that the Treasury, the White House, or the FDIC think should be saved in the public interest. This is the "Hugo Chavez" program glommed on to the USA. The power that this invests in the White House is without precedent in US history. No one needs to approve, or even be told, about a White House takeover of a major US industry. That's what FinReg is all about.

FinReg is also an absurd act of revenge. Lawmakers are striking out at Wall Street. Too bad if the American economy gets caught in the crossfire. The Securities Acts of 1933 and 1934, which were passed by large bi-partisan votes in both Houses of Congress, have been basically been overturned by Sarbanes-Oxley and FinReg. Gone is the "full disclosure" approach to regulating the financial services industry to be replaced by arbitrary rule by political figures. That can't bode well for the US economy.

Already several industries are bracing for the impact of FinReg. Andrew Martin details the concerns of the car dealerships and other business that will be forced to reduce credit to their customers because of FinRreg. See Martin's article in today's NY Times. Perhaps David Leonhardt should take a look at that article to see where this is headed.

The Obama agenda is about punishing his political enemies. Unfortunately, Obama's political enemies are the majority of American citizens. That doesn't deter Obama. He figures they will learn to love him.

The prospect of a double dip recession is growing. Leonhardt should study what actually happened in the 1930s, as opposed to what he thinks actually happened. FDRs policies led to a decade of stagnation and the highest unemployment levels in US history. I would not rule out a repeat of the 1930s based upon the policies of the Obama White House.

Friday, May 21, 2010

When Will The Equity Market Stabilize?

The good news is that we are probably not too far from the bottom of this stock market slide. As folks get more and more pessimistic, the chances of a rally increase. We are not there yet, but we are not too far away now.

One reason you know a rally is near is that Nuriell Roubini, the modern Dr. Doom, called for the equity markets to drop 20 percent from here today. He did not feel that way six weeks ago at the top, but now that the markets have lost 12 to 15 percent, Roubini has become a bear, joining the growing chorus of bears.

The news background isn't good, but there is hope. The hope is that what is truly plaguing the western economies is coming to light -- big governments and entitlements. These albatrosses weigh heavily on the US and Europe and will not go away. But, the good news is that they are now being discussed and making the news. Only Obama looks the other way. The rest of the world is now frightened to death about the growing and obvious collapse of the European welfare state (and it's political unity).

Our future and that of western Europe is economic stagnation, but equity markets are taking that into account. Stock markets can go up during economic stagnation and, at some point in the next few weeks, stock markets will begin grudgingly to rally.

The great tragedy is that low income workers in the US and in Europe will suffer greatly over the next decade or so thanks to the European welfare state and, in the US, thanks to Obama and his Congress. It will be impossible to employ large numbers of workers who are in the bottom half of the skill spectrum or who are "protected" by legislation. Small businesses will look for ways to avoid employees (they already are). No one wants a work force anymore -- not in the US, or in Western Europe.

But, stocks can still increase in value even if large numbers of our citizens are in pain. The only way to get employment going is to make employees cheaper to employers -- mandates and restrictions take you the other direction. Politicians advance policies that guarantee that our most at-risk citizens have no access to credit and no access to jobs.

No doubt Bill Gates and Warren Buffett will be pleased. They can shift their income around to avoid taxes and their companies will prosper even as they shed employees. So, they will continue to support increasing suffocation of the private sector, but businesses can figure out how to do without employees. They are doing that now and will do that in the future. Thank you, Mr. President.

So, look for equity markets to stabilize, especially if European politicians shut up and go back to the golf course. If European policy makers continue to look for heroic solutions to what are very obvious (and mundane) problems, then the stock market rally might get postponed for a while.

Thursday, May 20, 2010

How To Turn a Big Problem into a Huge Problem

The European bailout will not work. It simply doubles down on a bad bet. Greece is broke. They should restructure their debt with their creditors (in other words, take bankruptcy and start over). That probably is the direction that Spain, Italy, Portugal and the UK will be forced to take at some later date. There is not any real way to avoid it.

Contrary to popular opinion, the bailouts in the US in the Fall of 2008 exacerbated the woes of the financial sector. Had we simply restructured Fannie and Freddie and AIG, the worst would have been over by early 2009 and we could have embarked on recovery without the debt and bad asset overhang. Of course, Obama's policies likely would have retarded any recovery, but we would have gotten much of the financial service debt problems out of the way. Now, they are still there and Fed has a bloated balance sheet that it has no idea how to reduce. Meanwhile, Bernanke and Obama are urging the ECB to take the same disastrous route that the US took.

Does anyone seriously think that US is doing okay? Does this recovery look like anything we have seen since World War II? The combination of erratic and foolish policies in the Fall of 2008 and Obama's growth killing initiatives have put the US in stagnation mode. Now they want to do the same for Europe.

Much of Europe needs to take bankruptcy, including very likely France and Germany. Yes, they are in terrible shape because of their commercial banking systems, especially France. All of Europe needs to dismantle the welfare system.

The welfare system is numerically impossible to fund. It seemed to work for a long time because of the accident of demography. As countries grew younger, then it seemed to work. Same with health care. But as populations age, it just won't work. The numbers don't add up. Health care costs arise mostly in the elderly population. Retirement costs are exclusively in the elderly population. The elderly population is the fastest growing part of the population. Who is left to support this group? The answer: a dwindling number of folks, many of whom work in the public sector where the work ethic and output is suspicious to say the least. Someone has to produce real output to support all of this.

Germany and France are just whistling dixie through the graveyard. Merkel and Sarcozy are becoming psychotic and paranoic. They see evil speculators in every corner If only, they think to themselves, people would see how wonderful the Euro is and how wonderful our way of life is, they would support the Euro.

But, investors aren't interested in supporting anyone's way of life. They are interested in a return on investment. Buying European sovereign debt is a fool's game and will end up in massive losses. You cannot fool markets forever.

Merkel and Sarcozy will get overwhelmed by an electorate that sees clearly what Merkel and Sarcozy cannot see -- Greece is going to go bankrupt regardless of European policies. There is no way out. The only impact of Merkel and Sarcozy it to take Germany and France down too. The citizens of Germany are right.

Greece is spending money it doesn't have. It will continue to do that after the so-called austerity program is put in place. What then? By then the German bund will begin to look like a house of cards. That is where this is headed. The best thing the US can do is avoid ownership of any European sovereign debt. Of course, Bernanke and Obama are planning to enlarge swap lines, which, in effect commits the Federal Reserve to ownership of European sovereign debt by the bucketloads. Any dollar/euro swap is by definition a swap of the government debt of the US for government debt of the Eurozone.

So, after Germany and France collapse, we will be next.

Had they simply let Greece restructure that would have put some French and German banks in a pickle. The German and French banks that failed could be nationalized and then everyone could move on and economic recovery could take place in Europe. Not now. Europe will now join the US in the economic quagmire.

Merkel Mania

Angela Merkel, the current, but not for long, German Chancellor, is losing it. She is now urging world governments to basically try to regulate financial markets out of existence. Interesting view for a conservative political leader. This just shows that stupid economic policies come from both the right and the left. In fact, when policies are truly absurd, they tend to coalesce around them and support them.

Merkel should be quiet. Her comments are frightening the markets because it is so obvious that she doesn't understand what's going on. Investors do understand.

Obama Policies Bearing Fruit

The Obama policies are beginning to bear fruit. Unemployment claims are rising, leading indicators are falling, and stocks markets are collapsing. The financial service industry is in a state of free fall due to the overburdening regulations that are proposed and those that have been implemented. Credit has dried up for a large group of middle Americans and small businesses thanks to :1) Obama credit card reform and ii) Obama mortgage reform. The recently enacted health care bill has put hiring on hold for most businesses and hospitals and doctors are retrenching in expectation of the new government takeover of health care. Meanwhile the constant demonizing of businesses and companies by Obama and leading Congressional Democrats has further soured the business climate. Finally, Obama's widely publicized push to get the IMF and Germany and France to bailout Greece and other profligate economies has helped to bring on the collapse of the Euro and the destabilization of European economies and political environment. Obama policies are succeeding in destroying any serious chances of a strong economic recovery, both here and in Europe. Perfectly predictable. Thanks, Mr. President.

Wednesday, May 19, 2010

Reasserting "The Primacy of Politics"

Angela Merkel is losing it. Her ban on naked short sales, announced yesterday, is one more sign that the Merkel government is losing its bearings. Merkel appears to be in a state of panic that financial markets will not bend to her will. Strange.

Merkel expects people to eagerly buy bonds in the Eurozone after she has announced a plan that is certain to bankrupt the Eurozone. Yesterday, her ban on naked short selling had the effect of further terrifying world financial markets.

You would have to look far and wide to find anyone who thinks the future of the Eurozone is anything but disastrous at this point. Politics will not achieve "primacy" in the financial markets. Investors are voting with their feet, as rightly they should.

Meanwhile, public employee benefits and guaranteed retirement and health care plans continued unabated while governments pledge bailout money that they no longer have. Europe is in big trouble.

As Expected: Doctors Refusing Medicare Patients

An article in the Houston Chronicle on Monday by Todd Ackerman lays out the cold hard facts about Medicare and Obamacare. Doctors are increasingly refusing to take medicare patients because the reimbursement rates are too low. The article quotes a Dallas family practice doctor, Dr. Guy Culpepper, who says that:

"You do Medicare for God and country because you lose money on it."

In March of this year, Dr. Culpepper made the decision that many other doctors, in record numbers, are now making. He now refuses to treat medicare patients.

Obamacare legislation, recently enacted, strips out 21 percent of current medicare funding to pay for all of its explosively expensive mandates. Some of those mandates provide subsidies for families with twice the average national income, while denying reimbursement for the low income elderly. Increasing numbers of seniors will now be denied health care under medicare due to Obama. This transfers resources from the poor to affluent. This is Obama's idea of fairness.

The callousness of the Obama Administration is without precedent in American history. While Obama repeatedly claimed that no one's health insurance would change and that health care would be improved by Obamacare, it is increasingly obvious that Obama was not telling the truth. He knew when he made these claims that they were false.

Now, the facts are establishing that health care for the elderly is imploding. The promise of medicare is a false promise that will eventually leave America's elder citizens without health care access. This will be one of the many disastrous legacies of the Obama Adminstration. But, what do they care. Obama and his political cronies won't be relying on medicare anyway. They have a much better program funded by taxpayers, but unavailable to taxpayers. This is Obama's idea of fairness.

Check out the Houston Chronicle story. It's a window into the future for our elderly and it is not good:

Monday, May 17, 2010

Watch the Pennsylvania 12th

Tim Burns has an even chance of winning the Congressional seat long held by John Murtha, who died earlier this year. Murtha was Congress's king-of-pork and had served as the Congressman in this district for more than two decades. It is 60 percent Democratic by party registration, but the district went for Gore in 2000 and Bush in in 2004 (which is interesting in of itself).

This is a must win for Democrats. Losing here would suggest as much as a 100 seat swing in the House of Representatives towards the Republicans in November. Both the Republican and Democratic candidates are running away from Obama and the health care debacle. (That seems to be true most places).

This is Pennsylvania's Scott Brown moment. I forecast that Burns will win and win handily. Why? For one thing, the district is the largest coal mining district in Pennsylvania and the Obama is coal-unfriendly, to put it mildly. For another, this district has gun toting, abortion-hating, Reagan democrats. I suspect they've seen and heard enough of Obama and are ready to go in another direction.

The other races, regardless of who wins, won't tell us much. Paul, Sestak, and Lincoln should win their races, but Lincoln may be forced into an embarassing and brutal runoff before she can reclaim the Democratic nomination for Senator in Arkansas. On Saturday, watch for Hawaii to elect a Republican, Charles Djou, their new Congressman in a bizarre three way race. It's hard to imagine Djou surviving his re-election in November, when it's just one Republican against one Democrat, in such a heavily Democratic district, but who knows.

Rand Paul, in Kentucky, is by far the most interesting candidate in Tuesday's elections. He should win the Kentucky Republican nomination easily over party favorite, Tray Grayson. Polls show, contracy to Democratic chatter, that he will win the general election easily as well. Mitch McConnell, the Senior Senator from Kentucky endorsed Grayson to his chagrin. A new Paul in Congress would be a welcome addition. His father, represents a middle class Congressional district just outside of Houston, Texas. Congressman Paul and his son are thoughtful libertarians and not afraid to tell it like it is.

The only race that could upset the landscape is if the Republicans win the 12th District Congressional seat in Pennsylvania. That would forecast a tsunami this November, sweeping the Obama supporters from control of the House and possibly the Senate as well.

Thanks you, Mr. President.

Credit Card Nightmare

Now that Obama has succeeded in a credit card "reform" package, which prohibits credit card companies from running their own businesses and competing with one another, the results are pouring in.

The credit card companies are cancelling credit cards and reducing credit limits throughout the country. Google your favorite credit card company and add the word "complaints" and you can read page after page of the victims of this latest Obama outrage.

If you pass a law that says that credit card companies can't raise rates on weaker customers, then the credit card companies will simply eliminate those customers. Warren Buffett and Bill Gates (who support stupidity like this) have nothing to fear. Their credit cards will remain intact with nice fat credit limits that they don't need. But, for much of small business and a significant chunk of the middle class, credit availability is now being dramatically restricted. It's the old adage: if you need credit, you can't get it...if you don't need credit, you can have it in abundance.

It's an article of faith within the Obama Administration that if A loans money to B when B really needs it and may not have a perfect credit rating, then B is the victim and A is the villain. That's the meaning of the constant Obama demagoguery on "predatory lending."

Okay, fine. So be it. Those who provide credit to the economy have gotten the message and are no longer lending to those who need it the most. Thanks, again, Mr. President. Another body blow to the middle class and small business. Too bad if you were hoping for an economic recovery.

FinReg is an Embarassment

It is a sad statement about the state of American politics that the current so-called "financial regulation" bill is close to final passage. This bill addresses things that had absolutely nothing to do with the 2008 meltdown in the financial markets and the economy. Instead, this bill dramatically restricts the ability of the financial markets to spur economic recovery. It will curtail bank lending. It will reduce the ability of the financial services industry to provide much needed capital to businesses. Basically, it creates a huge regulatory overhang that will strangle the American financial industry without in any way addressing the causes of the 2008 collapse. But, it will appeal to the Obama coffee house crowd who seem to understand absolutely zero about the economy.

The true causes of the collapse of 2008 are the following: 1) tax favored residential housing market; 2) Fannie and Freddie. These two guarantee another boom and bust in residential housing. These two do not exist in Canada which is why Canada did not go bust in 2008 and is the best performing economy in the world today. Are Canadians that different from Americans? No. But what is different is that items 1) and 2) above exist in the US, but don't exist in Canada.

What in FinReg addresses 1) and 2) above? The answer -- nothing. Presumably, Chris Dodd will continue to get favorable financing from the companies that he purports to regulate, but for the rest of us the situation is not so good. It's interesting to note that Elena Kagan, the recent nominee by Obama for the Supreme Court got a $ 750,000 first mortgage from Countrywide just as did Charlie Wrangle and Chris Dodd. Wonder why left wing regulators seems so popular with the predatory lenders?

So look for a stagnant economy and within about five years another speculative binge in residential housing followed by the usual bust. If you rig the tax laws so that any rational American will speculate on his home, then don't be surprised by the recurrent booms and busts in housing. In the 1980s the commercial banks lent to this boom and were crushed. In the 1990s, the S&Ls lent to this boom and were crushed. In the 2000s, Wall Street lent to this boom and were crushed. In the next boom the US Treasury (which now through Fannie and Freddie control more than half of the mortgages in the United States) will get crushed.

Thanks, Mr. President, for nothing.

Sunday, May 16, 2010

The Week Ahead

Things are going to be a little scary this week for equity and debt markets. The Euro remains in free fall (trading in the mid 123's against the dollar). A lot of foolish economic myths are exploding.

Laying aside Greece and the Eurozone for the moment, the US economy faces major headwinds all its own. Most of the headwinds are a direct result of either Congressional or Presidential action. Obama's war on the financial industry will tighten the credit screws even more, so that small business will continue to be hampered by liquidity considerations. Don't expect much hiring.

State and local governments are facing their day of reckoning. Public employees are extremely overpaid in most states and the benefits provided to such employees border on the outrageous. This includes public school teachers. It is a myth that public school teachers are underpaid. They are overpaid and by a lot. There is a long line of qualified teachers ready to teach in our public schools for a lot less money than we currently pay public school teachers. That means the current group is overpaid. Most of these public employees have not suffered a bit in this recession. They applaud Obama's war on the private sector. But the private sector is the sector that funds the public sector. There will be millions of layoffs over the next twelve months in state and local government. Most of this is long overdue, but it is coming at the worst possible time -- when the economy is still very fragile.

Finally everyone knows that tax rates (not revenues) are headed upward. Higher tax rates discourage business hiring, so higher tax rates are another major headwind for the economy.

Meanwhile, there is Greece and the Eurozone. The US is on the hook for a lot of the worthless sovereign debt in Europe and Obama has pledged to buy more. We are now bailing out Europe. Wonder who will bail us out?

So, while the employment numbers and retail sales have been improving, the overall economic recovery is stunted and anemic. Until the White House calls a truce on its war on the American economy, it is hard to see an end to economic stagnation.

One More Hat to Wear

I am pleased to announce to my many blog readers that I have a new (additional) career in the works. By a series of remarkable accidents, I wrote seven articles for our local newspaper, the Charlottesville Daily Progress, two years ago on the subject of the NCAA Tennis Championships in Tulsa, Oklahoma. (I wrote them mostly because it was the only way I could get in free to the NCAA Tournament).

Earlier this Spring, the Daily Progress sent my seven articles to Wimbledon and requested a press pass for yours truly to cover the Wimbledon Tennis Championships for 2010. Believe it or not, Wimbledon approved the request. So, from June 12th to July 5th, I will be covering the Wimbledon Tournament for the Daily Progress as well as for local NBC news and local WINA radio (may as well go the whole route!). The tournament starts on June 21st, but I will be there early to cover the qualifying rounds as well. Two former UVA national tennis champions -- Somdev Devarrman and Dominic Inglot will be playing in the qualifying rounds and their results will be of interest to Charlottesville readers and media watchers.

I am now applying for the US Open, the Australian Open, and the 2011 French Open. I am entertaining offers for the rights to my forthcoming book (not yet begun): "My Life as an Ace Tennis Reporter."

Saturday, May 15, 2010

Meanwhile, Back in Greece

The IMF apparently suggested, during the talks that led to the $ 1 Trillion ECU bailout package announced last week, that Greece "restructure" it's debt.

What does that mean? It means that Greece offer it's creditors 25 cents or 50 cents on the dollar in full settlement of their outstanding debt. That is the right answer and it is interesting that it was rejected.

Follow the logic of the current plan: dramatic cuts in Greek government spending, significant tax increases. Where does that lead? According to the ECU, the "austerity" program will, in time, lead to economic growth in three years. Really?

More likely is that we will have a repeat of the "Treaty of Versailles" problem that Keynes wrote so eloquently about nearly a century ago. The Greek economy will spiral downward out of control. Greek budget deficits will accelerate and the new loans will be worthless, pushing the problem back on Germany and France. Political unrest will, no doubt, ultimately force Greece out of the European union and into a default anyway. But, by then, the default will be a much more serious problem than a default would be today.

What does this mean for the European union? Ultimately, it means the break-up of the European Union and the Euro and the great experiment will descend into chaos.

Much simpler, much fairer, and much more sensible is to let Greece (and others) restructure their debt today. That is basically bankruptcy. But, bankruptcy is not all bad (and is usually unavoidable anyway). Postponing the problem only makes it worse.

That's what the equity markets are worried about.

Small Business Lending Cut in 2009

So, what is the report card on the TARP? Did TARP, as Bennanke argued ar the time, rescue lending for small business?

We now know the answer to that question? The Congressional Oversight Panel released its report on commercial lending (by big banks) to small businesses this past Thursday. The result: commercial lending by large banks to small businesses was cut dramatically from 2008 to 2009. Overall lending declined by 4.1 percent, but small business lending endured a disastrous drop of 9 percent, twice the overall rate of decline.

No doubt, the angry attacks on the banks by Obama, as his Administration began its stormy first two years, helped to freeze the commercial banks into inactivity. But, TARP, itself was a foolish idea that has only served to lengthen what would have been a normal recession into something far, far worse.

Thanks, TARP.

Friday, May 14, 2010

Obama Just Cannot Resist Being Negative

Now that he has pummelled the financial service industry into submission, Obama is back after the oil companies. Instead of looking for constructive solutions to America's problems, Obama repeats his recurrent themes of fingerpointing and the blame game. Is that all there is?

One thing for sure, there is oil to be discovered in the Gulf, whether Obama likes it or not? Why not try to be helpful instead of simply villifying people who are working very hard to deal with a major accident? Isn't fixing the problem the real issue instead of after-the-fact name calling?

Obama seems to think that the "bully pulpit of the presidency" is meant to bully people who are in no position to defend themselves, regardless of right or wrong or legality.

When will Obama turn constructive? Ever? When will he defend America's free enterprise system? Ever?

Don't expect much hiring with this President in office.

Regulators to the Rescue of Day Traders

The 1,000 point slide in the Dow Jones last week, that no long term investor even noticed, has drawn the rapt attention of the regulators. The exchanges, under the now-watchful eye of the SEC, have adopted five minute "circuit breakers" -- a phrase that means a seller can't sell his stock without waiting for five minutes (even if there are bids well above the last quoted price!). This absurd system will simply speed the transfer of financial markets to a friendlier climate outside of the United States.

The only conceivable group that can benefit from this "five minute" delay are the most frantic of day traders who spend all day in front of a computer trading stocks. Are these the folks that the SEC is really out to protect? Whatever happened to the idea that financial regulation was supposed to protect long term investors? I guess the SEC doesn't buy into that anymore.

Who wants to own something that you can't sell?

Lets Talk Germany and France

All the conversation, so far, has been about the weaker, southern European countries. These are the profligate countries, so goes the story. Don't believe it.

Germany and France are basket cases. Their banking systems are in dire straights and much of the rationale for the recent Trillion dollar rescue package was based on the desire to prop up the larger commercial banks across Germany and France. Neither of these countries has seen any real economic growth for two decades and their growth rates today fluctuate around zero.

German and French debt? Big trouble lies ahead. These countries have rigid labor laws that perpetuate high levels of unemployment and discourage young people. These are demographically old societies that are growing dramatically older. Both countries have angry minorities that have never shared in what prosperity there is in these countries. The battle ahead will be to be to fend off the young and the minorities, who are expected to pay for health care and retirement benefits that they cannot expect for themselves. This unfortunate dynamic will dominate the politics in Germany and France for the next decade. The outcome is unclear.

But, what is clear is that neither Germany nor France will experience any real economic growth. Both economies will stagnate, even without the the perils of picking up a new Trillion dollar liability for the likes of Greece, Portugal, Spain, and Italy. The idea that Germany and France are the stewards of fiscal sanity is absurd. Germany, France and the UK for that matter are headed for fiscal disaster with or without the current debt problems of southern Europe.

Thursday, May 13, 2010

Euro Continues Lower

The Euro is now below 126 against the dollar -- a vote of no-confidence in the massive Trillion dollar bailout by the Eurozone for its more profligate members. In time, the bailout countries -- Germany and France -- will be looking for someone to bail them out. The spending trajectory and the enormous public sectors in most European countries are unchanged features of the landscape. This means more debt and renewed crisis at some future date.

Tuesday, May 11, 2010

Now What?

The Euro continues to trade down this morning. The Euro had been trading around 129 on Friday, briefly ticked to 130 on Monday morning during the euphoria rally, but ended the day in the 127.5 area. This morning it touched 126 and change. So, the Euro market is not cheering this ECU rescue package. Bond yields on German and French bonds and CDS spreads on these bonds are moving higher, suggesting that German and French bonds will, in time, be the story.

Once attention focuses on the weak credit of Germany and France, brought on by the stimulus package, then there will be no one left to rescue the Eurozone and it will collapse.

The right answer is to let the weaker countries restructure their debt (partial bankruptcy) and move on. That would leave the Eurozone stronger and remove moral hazard from the picture. Urged on by Obama, Europe took another tack.

Just as Obama is losing his political strength in the US, Merkel and Sarcozy will not survive this politically. Neither German citizens nor French citizens are enthusiastic about the Eurozone bailout and will give Merkel and Sarcozy the boot at their first opportunity. Ironically, this will put Europe's left in charge of a forced dismantling of their welfare state. A bit of poetic justice.

Any effort to force austerity programs on Spain, Italy, Portugal, Greece (and others yet unnamed) will lead to street riots and political instability. More governments will fall and the economy of the Eurozone will plunge into darkness. These will be the fruits of the Obama-Merkel-Sarcozy policies.

Monday was a great one day rally. Now the reality will set in.

Monday, May 10, 2010

The End of the ECB and the ECU -- Just a Matter of Time

Anyone who thinks that the European Central Bank is independent after this past weekend is simply not paying attention. The ECB was blackjacked into a number of policy changes that violate the very charter that created its founding. The long suspicion that the Euro would not survive its first major recession seems to be headed toward reality. The ECB was not the only casualty of this weekend's agreement. The ECU nations also agreed (with IMF money thrown in) to a $ 1 Trillion Dollar rescue package for Eurozone countries in trouble.

It won't work.

First of all, if the policy changes in the One Trillion "Rescue Plan" are really brought into force, it means economic disaster for the countries being rescued. Their economies will enter a period of long term decline. How can it be avoided? Austerity, in the midst of a recession, is a prescription for disaster. That is what lies ahead for Greece, Portugal, Spain, and Italy.

What is the future for Germany and France? We saw something of their future as we watched yields on German and French bonds rise (while the Euro fell) today amidst the spirited rally that swept world equity markets. Germany and France are not very good credits anymore, because they have underwritten the profligacy of the weakest of the Euro countries. That weakness is now the weakness of German and French sovereign debt. In time, a crisis will arise in the German and French sovereign debt markets. The US donated $ 50 billion to this foolishness (by way of the IMF).

There is some mild hope for the US and Britain, because they can drastically devalue their currencies and pump up inflation as ways to deal with their own debt crises. The debt crisis will reach Britain (sooner) and the US (later) -- but it will arrive in time. The US and UK have more flexibility, but they too may founder on foolish policy decisions. They certainly have made many such foolish decisions since the Fall of 2008.

What you are likely to see is a race to the bottom as countries withdraw from international trade all together, reminiscent of the 1930s. Everyone will attempt to curb imports and expand exports (even within the Eurozone). It will not be pretty.

The Euro countries are in desperate straights. The Eurozone was forecast, prior to this weekend's bailout, to grow at a mere 1 percent next year. The bailout package should reduce this +1 to some kind of negative number. This means fiscal situations will get worse not better, throughout the Eurozone. The Eurozone will have a lot more debt and an increasing inability to fund that debt. Overall bankruptcy, in one form of another, is the future of the Eurozone if the "bailout" package is really implemented.

But, what is the chance of implementation? Greek workers have scheduled a nationwide strike for Wednesday. Germany's largest and wealthiest province, NRW, just handed the Merkel government a stunning defeat Sunday, causing the Merkel government to lose their majority in the German upper house of Parliament, which narrowly passed the much smaller Greek package put forth by the Merkel government just last week. The issue in the NRW: opposition to the ECU bailout program for Greece. Polls show that 70 to 80 percent of German voters oppose the bailout. Which German political party is going to step and push this package?

Will the Spanish, the Portuguese, and the Italians sign on for the austerity measures that this agreement will call far? Not likely.

One way or another this package is probably not really going to be implemented. The Germans and French will begin to get nervous as CDS spreads on German and French debt began to widen. They will be peering into their own futures as they watch the CDS market value their sovereign debt. Popular opposition to austerity programs will kill any real chance of slowing spending in countries like Greece and their southern European neighbors. Tax revenues will fall throughout the Eurozone and especially in the weaker countries.

The Euro is now doomed. It will not survive and the Eurozone will plunge into long term economic stagnation and sky high unemployment for decades to come.

The European bailout is the ultimate in "kicking the can down the road." The problem is that the road is straight down hill and can is gaining momentum. It will soon not be catchable at all. Only economic growth and a reduction in entitlements and public employees can bail out the European welfare states and that is no longer in the cards.

The right answer to the problems of Greece, Spain, Italy and Portugal is to let these countries have a partial bankruptcy, offering their creditors a workout of 25 to 30 cents on the dollar (or whatever makes sense), establishing a clean balance sheet and beginning anew in the credit markets. That solution would permit economic growth and would not drag Germany and France into the mix (although German and French banks would take quite a hit, which they should take -- after all, they made bad decisions -- they should pay for those bad decisions).

There is still hope for the US, but there is no hope for Europe.

Sunday, May 9, 2010

$ 645 Billion Fund Makes Matters Worse Not Better

The problem is that budget deficits in Europe are out of control -- in every country. Nothing in the bailout package deals with that. The so-called "austerity plans" will not work in the middle of a recession. As the economies stagnate, so do tax revenues. So even budget cuts will be offset by revenue declines. Only economic prosperity will generate the tax revenues needed and, as prosperity goes forward, then budget cuts become possible, though they are never popular.

All the bailout package does is, ironically, postpone any serious efforts by European countries to bring their fiscal houses into order. So the situation will get worse. In a nutshell, the problems of Greece, Spain, Italy, and Portugal are now the problems of German and France. In time, someone will need to bail out Germany and France. Who will that be?

The only answer is to let Greece, Spain, Italy, and Portugal take some kind of controlled bankruptcy similar to what Argentina did in the late 1990s. Greece, for example, could offer bondholders $ .25 on the dollar for every bit of outstanding sovereign debt. Sure, French banks and German banks would then be in some serious trouble, but they are going to be in trouble anyway, eventually. Why not take the medicine now?

If you permit these countries to do a partial default, then there will be no need for extreme austerity measures and they can issue new debt, which they will now be able to do. This is the correct policy for Greece, Portugal, Italy, Spain, California, New York, Illinois, New Jersey, and so forth. There should be no bailouts. They will only permit miscreants to continue their miscreant ways.

Saturday, May 8, 2010

Hello Portugal

Portugal's 2 year note finished the week at 8.78 percent yield. The prior week, the handle for the 2 year note was in the 5's. Hmmm. For bondholders, that's a pretty good hit, even for a 2 year note. It will get worse.

The European Union officials think the worst is over as they attempt to patch up a bailout effort for Greece. It is only beginning. Portugal cannot conceivably survive if has to finance two years notes at this yield. What will the EU do with Portugal?

Shall we move on to Spain and Italy? Who is going to bail out the German and French banks? Is everyone on the planet too big to fail?

The bankruptcy of the European welfare state is simply a matter of time. The best strategy is to let Greece go and not to compound this foolishness. The sooner the welfare state is demolished, and it will be demolished at some point, the sooner that Europe can begin a sustainable economic path. Either that or they will descend into the state run economy that held sway in China and Russia during the dark years.

Free retirements, free health care and bloated government sectors are not consistent with economic growth. Europe will learn, eventually.

Eurozone Bailout Won't Work

European leaders, rushing over the weekend to fashion a bailout of Greece, are simply throwing good money after bad. It won''t work. It is simple arithmetic.

The Greek economy, already in deep trouble, is now in a state of collapse, replaced by rioting and street violence. Where are the tax revenues going to come from in a country plunging into chaos? The answer: tax revenues will be falling not rising. The Greek fiscal situation is going to get much worse, not better.

Greek citizens do not support austerity. Why should they? Their politicians have been telling them for two generations that they are entitled to free retirements, free health care, and all kinds of government largesse. Who pays for this? Folks that buy Greek sovereign debt. The problem is that no one wants to buy it anymore. That won't change.

The problem is the welfare state. It is not sustainable, not in Greece, not in Germany, not in the United States. It doesn't work anywhere. It can work for a while as long as you can fool people into not worrying about who pays for this stuff. But, eventually, time marches on and the costs of the welfare state move in the direction of infinity. It takes time, but the end result is inevitable.

There is no fix for Greece and soon there will be no fix for France and Germany. Hang onto your seat belts. You can only drink the koolaid for so long.

Here's a glimpse into the future. German and French banks own more than $ 120 billion of Greek sovereign debt. Guess how much Spanish and Italian sovereign debt these banks own? Try $ 1.6 trillion! How's that sound? Spain and Italian debt is getting crushed in the debt markets and they are now on the watch list to follow Greece down the road to collapse. Who is going to bail out the $ 1.6 Trillion that German and French banks now own in Spanish and Italian sovereign debt?

Letting Greece (and ultimately, Portugal, Spain, Italy, etc.) simply go bankrupt is the only viable solution. All other solutions will eventually end in bankruptcy anyway.

Friday, May 7, 2010

A Good Jobs Number -- No Doubt About It

Today's employment number is good news, not bad news. The private sector has shown its first serious sign of recovery on the jobs front.

The unemployment rate moved higher to 9.9 percent, mainly because more than 800,000 people entered or rejoined the work force.

To keep this in perspective, we need a couple of dozen months like this to move the unemployment rate back into the territory that healthy economies exhibit.

We're a long way from that. But, this is good news.

Greece Should Simply Default

The idea that that the Eurozone can start a series of rolling bailouts is a joke. Greece should simply default. That would be followed by further sovereign defaults. Banks, who own these debts may end up defaulting as well. That is what should happen when you make bad decisions and buy securities that you shouldn't have bought.

The problem is not the debt. The problem is the spending levels: entitlements and the public employee costs. These aren't affordable anywhere. Further, entitlements destroy incentives to save and destroy incentives to protect your health. Once you assume that someone else is going to take care of your every need, you are in trouble. That's why Greece is in trouble. That German and French banks provided over $ 100 billion to Greece by purchasing Greek bonds is too bad. They should sustain the losses they deserve and move on.

Doubling down is not a solution. The solution is to eliminate the entitlements and reduce the size of government. If you don't do that now, you will simply have to do it later.

Our friend, President Obama, said it best: "The United States is the only civilized country in the world who cannot afford universal health care." He was dead wrong. No country can afford universal health care, if, by that, you mean "free" and "universal" health care. No country in the Eurozone can afford it and the US can't afford it.

Anyone can afford anything for a while, until the creditors demand to be paid back their money. That time has arrived for Greece. It will arrive for every other member of the Eurozone in time and it will arrive for the US in time.

There is no easy out.

Thursday, May 6, 2010

The IMF -- A Predatory Lender

We have been treated, during the last three years, with frequent scenes of politicians villifying mortgage lenders, who loaned money to people who cannot conceivably pay that money back.

Now, comes Greece. The new predatory lender is the IMF. They are putting together a package that cannot possibly be paid back. No way. And, everyone knows it.

Borrowing the analogy from the US, when this mess finally collapses in a heap, one wonders if Obama will fault the IMF for luring poor Greece into taking on more debt that Greece cannot afford?

There is simply no way for Greece to avoid bankruptcy, with or without the IMF and the EU rescue package. Ditto for Spain, Portugal, Italy, France, Greece, and the US.

Watch out below.

Saturday, May 1, 2010

Summers Admits Failure

This morning's Wall Street Journal has an article that focuses on Larry Summers' views on the future unemployment in the US. Summers is Obama's number one economic adviser.

According to Summers, "even on optimistic assumptions, there is going to be substantial unused capacity in this economy." No kidding! What Summers means by "unused capacity" is sluggish economic growth and sky high unemployment. Summers is admitting the failure of the Obama economic strategy, assuming there is one.

An economy that had under four percent unemployment just a scant five years ago, now cannot find its way back to eight percent unemployment. Why? How did the world change so fast?

Summers thinks its because of evil Wall Street. As long as that's how you see things, there is no way to turn economic engine around. Free markets can turn things around and quickly. But free markets are not part of the Summers-Obama agenda. Instead villification of the business community, higher taxes on entrepreneurs, more mandates on employers -- these are the strategies of the Obama Administration.

The predictable result: Summers' stagnation. He's right. They have shackled the economy in a way that recovery will prove very difficult.

Thanks Larry for setting us straight.