Saturday, February 28, 2009

I Know For A Fact that Austrian Economist Robert P. Murphy...

taught Chicago economist Kevin M. Murphy everything he knows.

A Musician/Economics Student Falls in Love

The result is this neo-classical love song.

I think the man needs to study a bit of Game Theory,
or not even a Bernanke bailout is going to help this dude.


Ron Paul to Submit Bill Calling for Audit of Federal Reserve

Remarkably, one of the most powerful organizations of the federal government, the Federal Reserve, is not subject to audit. Congressman Ron Paul wants to change that. He announced yesterday that he will be submitting a bill in the House of Representatives calling for an audit of the Fed. Paul states:

The Fed is now pledging to reveal to the public more about its economic predictions, and calls this greater transparency. This is little more than window-dressing, at best, utterly useless at worst...

So while it might be nice to know what fantasy-infused outlook the Fed has on the economy, I am much more interested in what they are doing as a result of their faulty, haphazard interpretation of data. For instance, what arrangements do they have with other foreign central banks? What the Fed does on that front could very well affect or undermine foreign policy, or even contribute to starting a war.

We also need to know the source and destination of funds provided through the Fed’s emergency funding facilities. Information such as this will provide a more accurate and complete picture of the true cost of these endless bailouts and spending packages, and could very likely affect the decisions being made in Congress. But with so much of the Fed’s business cloaked in secrecy, these latest initiatives will not even scratch the surface of the Fed’s opaque operations. People are demanding answers and explanations for our economic malaise, and we should settle for nothing less than the whole truth on monetary policy.

The first step is to pass legislation I will soon introduce requiring an audit of the Federal Reserve so we can at least get an accurate picture of what is happening with our money.
This bill might have legs, Paul reports that several congressman, including Democrats, have approached him with interest in co-sponsoring the bill. Paul also reports that Barney Frank, Chairman of the Financial Services Committee, may be willing to hold hearings related to the bill.

Thomas Sowell and the Black Community

For years, every time I have had a discussion with a black person, and the topic has turned to economics , I have asked them if they have ever heard of Thomas Sowell. I have yet to run into anyone answering the question in the affirmative.

Last night, I ran into some MBA students from Howard University, Sowell attended Howard and later taught there. (He is currently a senior fellow of the Hoover Institution at Stanford University, where he holds a fellowship named after Rose and Milton Friedman.) I asked these MBA students if they have ever heard of him. Same answer as always, "No". To their credit, they seemed very curious and they both pulled out their Blackberrys and posted notes to themselves to check out Sowell.

For the record, Thomas Sowell is probably the most prolific black writer in the field of economics, some of his early work such as Knowledge and Decisions is near Nobel Prize winning quality. His books on race, culture and ethnicity are incredibly enlightening. At least one, anyone, of his race, culture and ethnicity books should be required reading for every college student--and yet none have heard of him. Not even at Howard.

Friday, February 27, 2009

Bernanke Continues with His Pedal to the Metal

3 month annualized M2 nsa money growth continues at an incredibly rapid rate. Through the week of February 16, the growth was 14.7%. Thus, I fully expect a "recovery" in the economy to occur much sooner than most expect. I hasten to add that, although traditional economic data will turn positive, because the "recovery" is fueled by money printing, it will distort the structure of the economy and set the stage for further crisis down the road, including the possiblty of near runaway inflation.

3 month annualized M1 nsa continues to decline, with the latest Fed data showing a decline of 8.6%. The decline, especially this time of year, is not fully unexpected, given that this data (3 month) goes up against the start of the Christmas season where there is a strong demand for cash. That said, the decline also probably reflects further easing of panic in the system, as the demand deposit component of M1 declined by $15 billion from last week.

POTUS Approval Ratings

Interesting stats from Gallup to Mankiw to EPJ:

Gallup reports:

President Obama's job approval is now 63 percent, which is almost exactly the average over the past 40 years for Presidents at this point in their first terms (62 percent). His disapproval rating is a bit higher than average (24 versus 16 percent).

The least popular president one month in: Ronald Reagan (55 percent).

The most popular president one month in: Jimmy Carter (71 percent).

OMB Director Self-Described "Economic Centrist"

Office of Management and Budget Director Peter Orszag describes himself as an "economic centrist" .

Here's what "centrist" Orszag has done in his roughly one month on the job:

According to Wapo, he's "a political dealmaker instrumental in negotiations over passing Obama's economic recovery plan." That is, a "stimulus" package that is nothing but pork delivered to Obama's favored people and pet projects. There is no such thing as a "stimulus" package that will help the economy.

"He has unveiled a $3.6 trillion budget and convened a "fiscal responsibility" summit ...," according to WaPo. How do you put $3.6 trillion budget and fiscal responsibility in the same sentence?

He is also expected to play a leading role in efforts to reform the nation's health-care system--which will put healthcare completely in the hands of government regulators and ruin healthcare in America.

I am really trying to picture who could possibly be to the left of this "centrist". Only a couple of people come to mind.

Thursday, February 26, 2009

Dick Morris: Obama as Fearmonger

Dick Morris is no economist. But he sure gets that President Obama is a fearmonger:

Obama has been instrumental in purveying fear and spreading doubt. It is his pronouncements, reinforced by the developments they kindle and catalyze, that are destroying good businesses, bankrupting responsible people and wiping out even conservative financial institutions. Every time he speaks, he sends the markets down and stocks crashing. He doesn’t seem to realize that the rest of the world takes its cue from him. He forgets that he stands at the epicenter of power, not on the fringes campaigning for office. This ain’t Iowa.

Why does Obama preach gloom and doom? Because he is so anxious to cram through every last spending bill, tax increase on the so-called rich, new government regulation, and expansion of healthcare entitlement that he must preserve the atmosphere of crisis as a political necessity. Only by keeping us in a state of panic can he induce us to vote for trillion-dollar deficits and spending packages that send our national debt soaring.

And then there is the matter of blame. The deeper the mess goes — and the further down his rhetoric drives it — the more imperative it becomes to lay off the blame on Bush. He must perpetually “discover” — to his shock — how deep the crisis that he inherited runs, stoking global fears in the process.

So, having inherited a recession, his words are creating a depression. He entered office amid a disaster and he is transforming it into a catastrophe, all to pass every last bit of government spending and move us a bit further to the left before his political capital dwindles.

The Budget Is Out: Get A Load of This

President Obama's budget is out. It's a head shaker.

The president states in an opening message of the 134-page budget document:

This crisis is neither the result of a normal turn of the business cycle nor an accident of history. We arrived at this point as a result of an era of profound irresponsibility that engulfed both private and public institutions from some of our largest companies' executive suites to the seats of power in Washington, D.C.
Let's make one thing clear right from the start, the current crisis is the direct result of a turn in the business cycle created by the money manipulations of Fed chairmen Alan Greenspan and Ben Bernanke. I sniffed out from President Obama's speech to Congress that he was going to use the crisis as cover for other pet projects when I wrote:

These are the most clever and dangerous words I have ever heard a president speak. Notice he starts off by talking about the economy, housing and the stock market, but then he slips into talks about energy, healthcare and education.
Lew Rockwell is correct when he says government loves economic downturns.

President Obama is attempting to use the current crisis to change America as we know it. According to WSJ, the budget calls for:

...large increases in education funding, including indexing Pell Grants for higher education to inflation and converting the popular scholarship to an automatic "entitlement" program. High-speed rail would gain a $1 billion-a-year grant program, part of a larger effort to boost infrastructure spending even beyond the funds in his $787 billion stimulus plan.

...Obama will request an additional $75.5 billion for the wars in Iraq and Afghanistan for the rest of 2009 and another $130 billion for 2010, as he withdraws most combat troops from Iraq over 19 months but sends many of them to Afghanistan.

...In one of the budget's most ambitious proposals, the president plans to cap the emissions of greenhouse gases..He acknowledged his $630 billion fund for a national health insurance program will not be enough to ensure access to health care for all Americans, but he said it will be a star.

...To finance his proposals, the president has clearly chosen winners and losers -- with the affluent heading the list of losers. In populist tones that reflect an anger he notably avoided on the campaign trail, Mr. Obama wrote, "Prudent investments in education, clean energy, health care, and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected. In the face of these trade-offs, Washington has ignored the squeeze on middle-class families that is making it harder for them to get ahead… There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few."

Oil and gas companies would be hit particularly hard, with the repeal of multiple tax credits and deductions.

The federal government would take over most student lending...

"There are times where you can afford to redecorate your house, and there are times where you need to focus on rebuilding its foundation," Mr. Obama said as he unveiled his plan. "Today we have to focus on foundations."

And in a bit of what sounds like a hint of payback (although Obama, himself, doesn't come form a slave background), I am willing to give him this one, if he ditches the rest of his socialist plan:

...cotton storage would no longer be financed by the federal government.

Government Loves Economic Downturns

A powerful reply by Lew Rockwell to President Obama and other advocates of the the current "stimulus" packages:

The great failing of the Obama administration is that it is packed with people who show no apparent knowledge of the essential truths of liberal theory. That theory, which is the core of the American political contribution and the driving force of modernity itself, is that freedom is the foundation of and the reason for social and economic flourishing. All evidence suggests they know nothing of this.

Obamites, in contrast, hold the opposite view, the one advanced by the Pharaohs and Emperors of old all the way through the Talibans and Hugo Chavezes of our own time. It is the view that nothing is beyond the competence of the state and its great leader. Particularly in economic affairs, these people have a wildly inflated view of what the nation's chief executive can accomplish through sheer will.

Liberal theory teaches that one truism of government is that whatever it does, the results end up making the problem not better but worse. I'm thinking of the war on drugs, the war on poverty, the war on illiteracy, and the war on terror. So it is with the war on recession. Already it has given us a record of failure, for going on a year most recently but really dating back to the 1930s.

A hundred years ago, liberal theory warned against the central bank on grounds that it would create inflation and generate instability and political corruption. All that happened. Liberals warned against the attack on the gold standard in the 1930s, and were proven right again. So it was for Bretton Woods and also for Nixon's final creation of unbacked currency. They were right again.

But do Obamites learn from history? On the contrary, they are completely blind to it.

Intellectual failure is at the root of the problem. Note how the administration invokes economic theory in its defense of its policy of wholesale national looting. In this case, bad economic theory works as a cover for acts of despotism. In the end, this is how the theoretical errors of J.M. Keynes end up having utility for governments.

But one aspect of this has not received enough comment. It concerns how the state is using the excuse of stimulus to help not society but itself. The state is certainly being stimulated here but the private economy – the only real source of social wealth – is being drained in many ways.

The most direct way in which stimulus is helping the state is by transferring resources from the private economy to itself in a zero-sum game. From Moody's comes direct evidence. While the rest of the nation's economy is shrinking, the economy of Washington, DC, is growing at a 2.5% pace. Northern Virginia and suburban Maryland are sharing in the glee, as government gains at the expense of everything else.

One of the great lessons of liberal theory concerns the extraordinary capacity of free exchange to create wealth. Trading makes both parties better off. Saving makes resources available for investment. Investment creates jobs that yield more products for people to purchase. Through this mechanism the West grew rich.

The economics of stimulus are not as complicated. They amount to taking from some and giving to others. There is no wealth creation at all. There is no magic "multiplier" to turn stones into bread. The economics of stimulus is value-destroying, because property is pried loose from owners who are putting it to socially useful purposes, and given to government so it can pass it out to friends.

This process is costly to overall wealth production – and most of those costs are unseen. We will never know what kind of real stimulus could have taken place had the property been left in private hands. What jobs might have been created, what investments might have been made, what kind of business expansions might have taken place? We will never know.

Phony stimulus can take the form of direct transfers of wealth, or it can take place through the creation of debt that ends up smashing the value of the currency in which people keep their savings. This introduces economic chaos that no one can control once it begins. The private sector is diminished.

The public sector, on the other hand, thrives on the unjust loot. The money it gets amounts to a direct infusion. How much of the stimulus helps the public sector? If you consider the private companies that are receiving public aid, it is 100%, as formerly capitalist enterprises are nationalized through the back door. Yet because private companies are getting the money, Obama believes he has bragging rights!

This phony stimulus seriously skews the job market as well, as people turn away from private-sector employment and look to government to provide no-risk employment. Really, this stimulus plan amounts to turning the hourglass upside down, so the sand can run from one bulb to the other bulb.

Bernanke is warning us that we are in a severe contraction right now, but the warning applies not to him or the rest of the public sector. They are all quite gleeful, actually.

Government stands to win while the rest of us will lose. Even if it had the perfect cure for recession, government has no incentive to implement it. Its prescriptions for the ailing economy are no different from the rest of the public sector, which serves itself at everyone's expense.

Indeed, government loves economic downturns. For decades, the private economy has been outrunning government. The private sector has taken over most of the command posts in society, from security to communications to all forms of technological progress. This has annoyed the state to no end. Now is the time for reprisal.

Economic depression is good for the state. Even if the state knew how to end it, why do we suppose that it has the incentive to do so?

The above originally appeared at

The Unintended Consequences of the Government "Stress Tests"

The government's "stress-test" of the nation's largest banks could end up discouraging lending as banks hoard cash to appear healthier to regulators, banking analysts say, Jeff Cox of CNBC correctly points out.

Further, as I have pointed out, the "stress test" is likely to give higher rankings for some assets versus others, thus creating pressure on some assets, as banks sell these assets to move into government "stress test" blessed securities and other assets.

The Obama Tax Increases

ABC's Jack Tapper has a breakdown of proposed Obama tax increases:

President Obama's budget proposes $989 billion in new taxes over the course of the next 10 years, starting fiscal year 2011, most of which are tax increases on individuals.

1) On people making more than $250,000.

$338 billion - Bush tax cuts expire

$179 billlion - eliminate itemized

$118 billion - capital gains tax hike

Total: $636 billion/10 years

2) Businesses:

$17 billion - Reinstate Superfund taxes

$24 billion - taxcarried-interest as income

$5 billion - codify "economic substance doctrine"

$61 billion - repeal LIFO

$210 billion - international enforcement, reform deferral, other tax reform$4 billion - information reporting for rental payments

$5.3 billion - excise tax on Gulf of Mexico oil and gas

$3.4 billion - repeal expensing of tangible drilling costs

$62 million - repeal deduction for tertiary injectants

$49 million - repeal passive loss exception for working interests in oil and natural gas properties

$13 billion - repeal manufacturing tax deduction for oil and natural gas companies

$1 billion - increase to 7 years geological and geophysical amortization period for independent producers

$882 million - eliminate advanced earned income tax credit

Total: $353 billion/10 years

More than $23 billion is related directly to the oil energy. That's $23 billion that won't be spent looking for oil.

Did Fidelity’s “Ned” Johnson Get an Advance Copy...

of Bob Murphy's upcoming book? It sounds it, according to this Boston Herald report.


Jim Rogers on India

I am linking to this Jim Rogers video mostly for my friends in India and the limited comments by Rogers on India.

However, there are a couple of other things of note in this video. It's clear from Rogers' comments that he doesn't watch the money supply on a month to month basis. In the video he mentions that he covered his shorts on U.S. stocks in October. Given that the Fed stopped printing money (under 2% growth)in the July through September period, October was no time to cover shorts. Now the opposite may be occurring, Roger is extremely bearish on the U.S. stock market but the Fed has reversed engines and is pumping money at double digit rates.

Rogers comments, with regard to civil unrest in the U.S. a couple of years out, does not shock me. It's behind my careful words, " I want to stay flexible and have the ability to move if economic times become extremely severe and it becomes downright dangerous to live in parts of the country," in my post, The Great Rent versus Buy Debate: Renters Lose Edge on Homeowners

I also find, Roger's comments on owning a farm, intriguing, Rogers does his homework and knows agricultural is poised for a major up-spike.


The Obama Hedge Fund Connection and the $200 Billion Payoff

It's pretty much common knowledge that billionaire hedge fund operator George Soros was a major supporter of Barack Obama during his presidential run, but the Obama hedge fund ties go much deeper than that.They start with chief-of-staff Rahm Emanuel and go right on up to the President.

In November, 2008, Joseph DiStefano wrote this:
Obama chief of staff-designate Rahm Emanuel, who's been an Illinois congressman, Democratic Party House leader,Wall Street investment banker (Wasserstein Perella), Clinton aide, and director of the failed mortgage-lending federal-bailout giant Freddie Mac, is also a loyal ally of the troubled, highly-paid hedge fund industry, and has worked to keep taxes on their fat fees low..."The appointment of Emanuel suggests that Obama's presumed hostility to the hedge fund industry may have been exaggerated and that the sector will get a fair hearing as the new administration begins the process of reforming US financial sector regulation. At a time when hedge fund managers feel particularly friendless, it cannot hurt to have someone who understands their business in the heart of the White House. Full story (it's not much longer) here.
Then we have this from FINalternatives:

Today’s inauguration of Barack Obama as the 44th president of the United States will be the most expensive in history. And despite their troubles, hedge fund managers and employees are helping to foot the bill.

The bill for Obama’s swearing-in may hit $150 million—more than $100 million of which is for security costs. And among those giving the maximum $50,000 per individual are Soros Fund Management’s George Soros and D.E. Shaw Group’s David Shaw, leading a large number of hedge fund industry professionals to pay for the inauguration.

The Presidential Inauguration Committee has raised more than $27 million, of which $7.1 million came from those involved in finance, according to the Centre for Responsive Politics. The Soros family alone gave $200,000. Other hedgies (or former hedgies) giving the max include Grosvenor Capital Management’s Stephen Malkin and Michael Sacks (and Sacks’ wife, Cari), Paloma Partners CEO Donald Sussman and Oaktree Capital Management Chairman Howard Marks.

Also giving $50,000 was CNBC personality Ron Insana, who recently shuttered his hedge fund, Insana Capital Partners, and Howard Kagan, late of activist shop Harbinger Capital Partners. Howard Gottlieb, a retired partner at Glenwood Financial Group, now owned by Man Group, gave $50,000, as did his wife, Anne. Marsha Laufer, the wife of Renaissance Technologies chief scientist Henry Laufer, also gave as much as she could, along with Naomi Aberly, the wife of HBK Capital Management’s Lawrence Lebowitz. Chess Capital Partners founder Shonda Warner, Fletcher Asset Management deputy CEO Denis Kiely, GEM Investors senior managing partner Barry Malkin, McGarr Capital’s Cappy McGarr, Seminole Capital Partners founder Michael Messner, Taconic Capital Advisors founder Frank Brosens, and Willow Creek Capital Management founder Aaron Braun each gave the maximum.
Get the picture? So what's the payoff?

How about a cool 20% on a TRILLION? That's $200 Billion. Here's Andrew Ross Sorkin at NYT's Dealbook with part of the details:
The Obama administration hopes to jump-start this crucial machinery [the securitization markets] by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.
So with all the government guarantees, what will be the returns to hedge funds? NYT fills us in:
Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF [Term Asset-Backed Securities Loan Facility] program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more.

"The TALF," he said, "raises a lot of questions."
And BTW, Talking Point Memo reports:

Hedge Funds Could Get a Pass on New Executive Pay Rules

Obama Tax Arithmetic Versus Reality

Did the statement by Presdent Obama not pass your gut check, when he said he was going to cut the deficit by just cutting tax breaks for the wealthest 2%? Well, your gut was right. WSJ does some calculations and reaches these conclusions:
President Obama ... [o]n Tuesday... left the impression that we need merely end "tax breaks for the wealthiest 2% of Americans," and he promised that households earning less than $250,000 won't see their taxes increased by "one single dime."

This is going to be some trick... the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income... a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

...Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don't ignore the data. And the reality is that the only way to pay for Mr. Obama's ambitions is to reach ever deeper into the pockets of the American middle.
The entire WSJ editorial is here.

Wednesday, February 25, 2009

Picking Apart The President

Key comments from President Barack Obama address last night, before a joint session of Congress, need to examined so we may get a better understanding of the President's thinking and the direction in which he would like to take the economy. Selected excerpts of his speech are below with comments by me, under each excerpt.
The fact is, our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for. And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before.

In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election. A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway. And all the while, critical debates and difficult decisions were put off for some other time on some other day.

Well that day of reckoning has arrived, and the time to take charge of our future is here.
These are the most clever and dangerous words I have ever heard a president speak. Notice he starts off by talking about the economy, housing and the stock market, but then he slips into talks about energy, healthcare and education.

The economic crisis was not caused by energy (energy prices have collapsed), it wasn't caused by healthcare or education defects. This is a slippery attempt to bring in pet projects that have nothing to do with the crisis.

Then note he talks about living for short-term gains versus long term prosperity. True enough. But the short term gains were at the hands of money printing by the Federal Reserve, which prevented a stable non-money manipulated economy to develop. Then he talks about "wealth transfer." Now normally wealth transfer is discussed in terms of government transferring wealth from one group to another, the President has redefined "wealth transfer" to mean those who earn money in the free market economy and become rich!

He says this "wealth transfer" prevented the opportunity "to invest in our future." Again twisted definitions. For sure, he is defining the taxing, i.e., transferring from the rich to give to his pet projects as "investment". When it is only individuals that can truly "invest". To invest means to take ones own money and put it at risk in the hope of gain. When a government puts money in a project, gain may not be the first objective and certainly no one looses if the investment goes bad, the loss occurs much earlier on when the money is forcibly taken, by taxation--the taxed is always the loser.

Over the next two years, this plan will save or create 3.5 million jobs. More than 90% of these jobs will be in the private sector - jobs rebuilding our roads and bridges; constructing wind turbines and solar panels; laying broadband and expanding mass transit
Here we have the President talking a bit on nonsense, followed by twisted words again.

The "stimulus" package won't create any new jobs that it first hasn't destroyed somewhere else. The money used in the stimulus package simply won't be available from those it was taxed away from, or from those who could not borrow funds because they were crowded out by government borrowing--thus these people can't hire others. The "stimulus" is a transfer of jobs to government pet projects.

As for these being "private sector" jobs, private sector means where the thought and development of a project are created on the free market. When the government hires workers or companies to work on government designed and created jobs the proper name for it is fascism. Think I'm kidding? Webster's second definition of fascism is "a tendency toward or actual exercise of strong autocratic or dictatorial control." The supposed "private sector" work the President is discussing is not work that comes up on the free market, but the autocratic designed projects of government.

Sheldon Richman contrasts socialism and fascism here, where it is clear that what the President calls "private sector" work is indeed the definition of private sector used under fascism:

As an economic system...Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it. (Nevertheless, a few industries were operated by the state.) Where socialism abolished all market relations outright, fascism left the appearance of market relations while planning all economic activities.
The President again:

First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running.

Second, we have launched a housing plan that will help responsible families facing the threat of foreclosure lower their monthly payments and re-finance their mortgages. It's a plan that won't help speculators or that neighbor down the street who bought a house he could never hope to afford, but it will help millions of Americans who are struggling with declining home values - Americans who will now be able to take advantage of the lower interest rates that this plan has already helped bring about. In fact, the average family who re-finances today can save nearly $2000 per year on their mortgage.

Third, we will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times.
As many have said, the crisis was caused by out of control borrowing, egged on by Fed money printing. The last thing you want is to egg on out of control borrowing again. Yet, this is exactly what the president is proposing in these paragraphs.

From the turmoil of the Industrial Revolution...
From the turmoil of the Industrial Revolution? Say what? The growth of industry that resulted in products once only available to kings and queens now available to the average man is turmoil? To somehow classify this as "turmoil" gives us a clue as to the kind of education the President received.

And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.
This is simply a payout to the oligarchs, specifically in this case, Boone Pickens. If there was a call for solar power or wind power, the market would supply it.

I believe the nation that invented the automobile cannot walk away from it.
Translation: The United Auto Workers were big supporters of my election campaign, so I will shovel automobile manufacturers the money they need to continue to make legacy payments to UAW workers, instead of taking the Detroit auto firms through bankruptcy reform.

Our recovery plan will invest in electronic health records..
Very scary. The new man in charge of what medicines you should and shouldn't take, because he will have all the records will be super-health lobbyist Tom Daschle and his gang of cronies. What medicines and treatments will be available to you will be based on who Daschle can shakedown. Prescription by shakedown. True treatment is going to move offshore and be the exclusive domain of the rich.

The third challenge we must address is the urgent need to expand the promise of education in America.
More government control of education. Thank God there is the Internet.

From there the President went into foreign policy, and I will leave it to others to explain those issues.

But as far as the President's economic plan, there was not even one item of good common sense.

The Great Rent versus Buy Debate: Renters Lose Edge on Homeowners

The relative cost of owning versus renting is swinging back in favor of home ownership in some U.S. markets, as a result of the sharp declines in home prices, reports WSJ.

WSJ continues:

After two years of rapid home-price depreciation, the relationship between the cost of rental payments versus after-tax mortgage payments is tilting toward ownership in a number of metropolitan areas.

Over the past 18 years, after-tax mortgage payments have averaged 26% more than rent payments, according to Green Street Advisors, a real-estate consultancy based in Newport Beach, Calif. In 2006, at the height of the housing bubble, mortgage payments reached as high as 66% more than rent payments. But by the end of 2008, average monthly rent for the largest 50 metropolitan areas was $1,045, compared with after-tax mortgage payments of $1,300, assuming a rate of 5.5% on a 30-year fixed mortgage. That means mortgage payments averaged just 24% more than rent payments, the narrowest gap since 2001.

In more than half of the top 50 U.S. housing markets -- including Los Angeles, northern Virginia and Las Vegas -- the ratio is now below its 18-year average. In Los Angeles, for example, mortgage payments averaged 60% more than rent payments between 1990 and 2008. Now, those payments average 30% more than rent...

A separate report by Moody's also finds that home prices relative to rents are more in line with their historical relationship...The report notes that home prices relative to rents remain well above historical levels in 30 markets, including Philadelphia; Portland, Ore.; and Virginia Beach, Va.
As far as the great buy versus rent debate is concerned, I personally do not see a big enough edge to the buy side. I want to stay flexible and have the ability to move if economic times become extremely severe and it becomes downright dangerous to live in parts of the country. Further, and I am not predicting this will absolutely occur, but I don't rule out severe energy shortages down the road if inflation gets bad enough and price controls are implemented. If energy shortages are severe enough where heating oil, and the like are impacted, I don't want to be stuck in a cold weather state.

That said, for those who have a strong nesting instinct, this is probably the best buying opportunity you are likely to see in the next five to ten years, maybe in your lifetime. However, with any mortgage you take out make sure it is fixed rate. Interest rates are likely headed much, much higher, and obviously you don't want your mortgage payments climbing with the spike in overall rates.

Not as important in the current environment, but certainly a plus if you can get it, is a mortgage with a small or no pre-payment penalty, thus giving you a bit more flexibility.

Japan’s Exports Down 45% Year on Year

There's an old saying, "When the United States sneezes the rest of the world catches a cold."

No better example that this saying still holds are the numbers out today on Japanese exports. Japanese exports fell 45.7 per cent in January, compared with the same month last year, according to the Japanese finance ministry. Exports to Asia sank by 46.7 per cent, the fourth straight month of decline, with shipments to China falling by 45.1 per cent. Clearly, it's an intertwined international economy with the United States exporting monetary inflation and a distorted structure of production.

This will continue as long as the dollar remains an important reserve currency (a dwindling status day-by-day) and countries like China prop up the dollar against their currencies. The Chinese support of the dollar resulted in massive Chinese internal money printing, thus the same distortions that took place in the U.S. took place in China. And Japan, as a result of the type of goods the U.S. and China were demanding has been severely impacted by supplying those goods.

Tuesday, February 24, 2009

Further Easing of Fear: Gold Down $25.50

Gold futures fell today for a second straight session. Gold for February delivery closed at $969.10 an ounce, down $25.50, or 2.6%, on the Comex division of the New York Mercantile Exchange. It surged above $1,000 on Friday.

Gold has been climbing more as a "flight to safety" versus for "fear of inflation" reasons. Thus the drop in gold over the last two days has to be viewed as an easing of fears about the global economy.

In addition, some of the decline should be attributed to the "round number phenomena", whereby at key round numbers, such as 1,000, commodities, stocks, and indexes tend to pullback for awhile before heading higher, as many traders take profits at round numbers.

Hint to grad students and other college students: There's a great paper to be written examining how big the "round number phenomena" really is. Look at key prices around a number of commodities, stocks and also indexes. Be sure to email me a copy of any paper you write.

Kellner: The Economy's Worst May Be Past

Irwin Kellner, chief economist for MarketWatch, seems to be the only economist that is viewing the current economy from the same perspective I am. I fully expect this recession to be over much sooner than most expect. Here's a bit of what Kellner says:

Although you wouldn't know it from the behavior of the stock market, the economic outlook is turning just a bit less gloomy.

Prosperity may not be just around the corner, but statistical evidence is mounting to suggest that the worst of this recession may soon be past.

And before you inundate me with email alleging that I am out of touch with the real world, let me say right at the top that I am not for one moment saying that the economy has stopped sliding. I am only suggesting that it appears to be contracting at a slower pace.

Clearly, this has nothing whatsoever to do with the stimulus package that the president signed into law last week. As a matter of fact, if the recession does end within the next few months, it will probably be in spite of this package, rather than because of it.

If you want a policy to credit, it's monetary policy. The combination of liquidity that the Federal Reserve has pumped into the economy, along with its special lending programs and capital injections into the banks, is largely responsible.

If anything, I may be a bit more positive than Kellner, as I believe the economy may be bottoming out right now and that the recession is just about over. I further concur that the "stimulus" package has nothing to do with the rebound and that it is completely monetary policy that is reversing the downtrend. I hasten to add that this will ultimately be highly inflationary and that this is not the way I would take the economy out of recession, since as Fed chairman I would forever freeze the quantity of money, and thus stop Federal Reserve money supply and interest rate manipulations. That said, in the world of realeconomik, we have a Fed manipulated "recovery" coming that will plant the seeds for severe inflation and a further distortion of the structure of production.

The rest of Kellner's column is worth reading as it details the data that suggests the worst is over. You can read it here.

Home Prices Continue to Decline Across the Country

December-January-February are not the best months to look at housing data since wintry weather conditions impact numbers across a broad swath of the United States.

So for what its worth, here's an overview of the latest (December) S&P/Case-Schiller index data.

The index continued to post record declines in December. National home prices hit levels last seen in 2003.

In the 20-city index, no area experienced year-over-year price gains, the ninth straight month that has happened. Further, none of the cities managed to avoid month-to-month declines for the third month in a row.

The worst performing cities in terms of year-over-year declines were, however, cities that are NOT generally impacted by weather. Phoenix was down 34.0%, Las Vegas -33.0% and San Francisco -31.2%.

Denver, Dallas, Cleveland and Boston fared the best in terms of annual declines down 4.0%, 4.3%, 6.1% and 7.0%, respectively, but again these are winter-impacted cities so pluses and minuses don't mean as much.

As of December, 18 of the 20 metro areas are in double digit declines from their peaks, with half posting declines of greater than 20% and four of those (Las Vegas, Miami, Phoenix and San Francisco) in excess of 40%.

Madness in Houston

A proposal before the Houston City Council calls "up to $3,000 in grants to individuals who are trying to qualify for mortgages through the city’s homebuyers assistance program."

The funds would be used "to help people pay down car loans, credit card balances, or other debts," so that they can raise their credit scores enough to be eligible to buy a house.

Among the questions one might ask:

What gives an individual a "right" to a home?

Why should other taxpayers be required to improve the credit of another person so that person can buy a house?

Aren't we in a major economic crisis right now that was partially caused by houses being purchased by people who could not afford to buy them?

How can this plan do anything but drive out taxpayers, and drag in dead beats?

Financial News Censorship

Censorship of negative financial news may be on the upswing.

In my recent post, The Government Panic of September 2008, I noted that there was extremely limited coverage of the run on bank mutual funds then going on. I also pointed to a Dow Jones story that was negative on money market mutual funds that completely disappeared.

Now comes word that a key comment made in New York last week by Luo Ping, a director-general at the China Banking Regulatory Commission was scrubbed from a Reuters report. Here's what Luo said. The bold is what was scrubbed:

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

However, Mr Luo said Chinese officials would encourage its banks to finance domestic mergers and acquisitions rather than provide rescue finance to distressed financial companies in other countries: “There will be no bottom-fishing of financial institutions, particularly in the US, because there is a lot of uncertainty about the quality of the books."

Read it with and without the bold paragraph. Two completely different stories. The top paragraph surrounding the scrubbed paragraph is just cushioning by Luo for the clear body blow sentence, "We know the dollar is going to depreciate.."

The Mortgage-Lender Implode-o-Meter reports that it has the original version of the Reuters story, that was picked up from FT, and notes:

Reuters did not disclose that this was an updated version of the release, nor did they change the timestamp on it from Thu Feb 12, 2009 8:22am EST, yet I can confirm the story has changed since 6:56pm on the 13th.

FT is still carrying its original version, here, from where Reuters picked up the story.

The Reuter's scrubbed version is here. Notice that the word, "However" is removed from the sentence following the scrubbed paragraph. This shows that the context of Luo's comments were distorted, from a contrast of two possibilities to a continuous flow of everything being peachy dandy and simply that the Chinese were going to buy U.S debt without reservation.

Now, what is of further interest is that there is no original reporting on this story from many U.S. majors, financial or otherwise, including NYT or Bloomberg--and some very curious reporting from WaPo and WSJ.

Here's what WaPo had to say about Luo's comments in a story about Secretary of State Hillary Clinton's trip to China:

China holds nearly $700 billion in U.S. Treasury securities, which some analysts have said China could use as lever against the United States if relations begin to fray. But in a signal of the two countries' growing interdependence, a top official recently said in New York that Beijing had little choice but to keep buying them.

"Except for U.S. Treasuries, what can you hold?" Luo Ping, a director-general at the China Banking Regulatory Commission, said to reporters. "Gold? You don't hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option."
Again, this gives Luo's comments a different spin from Luo's "the dollar will depreciate" part of the comment.

And here's WSJ's coverage:

A top Chinese bank regulator said Wednesday there are few real alternatives to holding U.S. Treasury securities.

"Except for U.S. Treasurys what else can you hold?" said Luo Ping, director general of the China Banking Regulatory Commission. He added that U.S. government debt "is the safe haven for investment."

Ping did add that it can be uncomfortable at times to hold Treasurys, especially in times of rising debt issuance that affects the value of the dollar and pushes yields higher
A WSJ blog post managed to butcher the story even more and mis-identifies Luo as heading the "training" center:

U.S. Treasurys have remained a favored purchase for those seeking safe assets, but even that picture is clouded. Luo Ping, director general of the training center of the Chinese Banking Regulatory Commission, was quoted last week as saying there are few real alternatives to holding U.S. Treasury securities — but the semi-official China News Service later said Mr. Luo said buying U.S. debt is one of China’s options, but not the sole option.
Who knows how much of this is self-censorship by MSM, and how much is more sinister. The China story and what Chinese officials think should be front page news, not a buried story with incomplete quotes. There are fewer more important stories right now than the climbing debt and how much of it China will buy. Hiding Chinese concerns does not appear to make for an informed citizenry, regardless of who is doing it.

Monday, February 23, 2009

While the SEC Was Napping


P.R.I.N.T Money


The “Instrument Instability” Phenomenon and the Current Economy

Jeffrey Sachs sees a much larger role for government overall in the economy than I do, so I can't agree with his views against tax cuts. I can't support his Keynesian beliefs. And, I can't support his Chicago School monetarist policy prescriptions. Indeed, how he fits all these contradictory policy prescriptions so that he can hug them all at the same time is a bit hard to figure.

That said, out of this mish mash, he has written for Scientific American some absolute pearls of wisdom that I wish I had written:

1.The U.S. political-economic system gives evidence of a phenomenon known as “instrument instability.” Policy makers at the Federal Reserve and the White House are attempting to use highly imperfect monetary and fiscal policies to stabilize the national economy. The result, however, has been ever-more desperate swings in economic policies in the attempt to prevent recessions that cannot be fully eliminated.

2.Looking back to the late 1990s, there is little doubt that unduly large swings in macroeconomic policies have been a major contributor to our current crisis. The lessons of the high inflation of the 1970s had supposedly chastened policy makers against trying to fine-tune the economy. The quest for never-ending full employment had contributed to high inflation in that decade, which required years of economic pain to wring out of the system. Monetary policies thereafter were supposed to be “steady as she goes,” not trying to smooth out every fluctuation and business cycle in the economy.

3.Most important, we should stop panicking. One of the reasons we got into this mess was the Fed’s exaggerated fear in 2002 and 2003 that the U.S. was following Japan into a decade of stagnation caused by deflation (falling prices). To avoid a deflation the Fed created a bubble. Now the bubble has burst, and we’ve ended up with the deflation we feared! Panics end badly, even panics of policy; more moderate policies will be safer in the medium term.

There is little reason to fear a decade of stagnation, much less a depression. The U.S. economy is technologically dynamic and highly flexible.

National Activity Index Up From December

A slight sign of a turnaround (emphasis on slight). However, it is very instructive, given the fear mongering going on at the White House.

The Chicago Fed said its National Activity Index was minus 3.45 in January, up from a downwardly revised minus 3.65 in December.

The index has been negative, indicating below-trend growth, for 18 straight months dating back to August 2007.

Of the 85 indicators tracked by the Chicago Fed, 23 made positive contributions in January and 62 made negative contributions. Some 50 indicators improved from December to January, while 34 deteriorated.

The Unintended Consequences of Gov't Intervention

As part of Senator Chris Dodd’s last-minute amendment about executive compensation, he put in a provision making it easier for the banks to pay back the TARP money to the government.

On Friday, according to Michelle Caruso-Cabrera, Standard & Poor’s said the Dodd provision changes the way they view the QUALITY of TARP money. The credit rating agency, which determines the ratings on the banks and decides whether a bank lives or dies, says the provision means that capital is on no longer "permanent" in their eyes. That's crucial because, as a result, they are no longer going to use it when determining certain capital ratios.

With weaker capital ratios, banks will have a tougher time convincing the ratings agencies they are in good financial health.

The Problem With 'Nationalization'

A former vice president at both the Federal Reserve Bank of Dallas and Citigroup, economist Gerald O'Driscoll puts together at WSJ a blow by blow of what is wrong with "nationalization", and government involvement in banking, here.

His conclusion:

Mr. Geithner wants a public-private partnership to buy toxic assets from banks. All that government has done thus far has only scared private money off. As bankers now realize, when you turn to the government for financial assistance you take on an untrustworthy partner. Outside money will not come in only to see its investment diluted later on when the government injects additional funds.

Rather than focusing on ways in which we can further involve the government in the financial system, we need to find ways to extricate banks from government's deadly embrace. Banks, at least the behemoths, were public-private partnerships before the crisis. Deposit insurance, access to the Fed's lending, and the implicit (now explicit) government guarantee for banks "too big to fail" all constituted a system of financial corporatism. It must be ended not extended.

Government: We Will Print as Much Money as Necessary to Bailout the Banks

The U.S. Department of the Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Reserve Board this morning issued the following joint statement:

A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.

We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.

Sunday, February 22, 2009

A New Low for America: Hillary Begs China to Buy U.S. Debt

US Secretary of State Hillary Clinton Sunday urged China to keep buying US debt as she wrapped up her first overseas trip, Breitbart reports.

"By continuing to support American Treasury instruments the Chinese are recognising our interconnection. We are truly going to rise or fall together," Clinton said at the US embassy here.

This, by the way, is the exact opposite of what Treasury Secretary Geithner said was U.S policy, during his confirmation hearings, where he called for China to stop propping up the dollar (which would mean less purchases of Treasury securities).

Is Hillary striking off on her own? Unlikely.

More than anything, it's another example of Geithner being in over his head.

Somewhere between 5% and 10% of the market decline since the Obama Administration has taken over has to be the blamed directly on Geithner.

As for China, it is the top holder of US Treasury bills, with 696.2 billion dollars worth of the securities at the end of December.

According to Bretbart, while taping an interview on a Chinese talk show, Hillary focused on the need for China to help finance the massive 787-billion-dollar US economic stimulus plan by continuing to buy US Treasuries.

"Because our economies are so intertwined the Chinese know that in order to start exporting again to its biggest market, the United States had to take some very drastic measures with this stimulus package," Clinton said.

"We have to incur more debt. It would not be in China's interest if we were unable to get our economy moving again."

Clinton added: "The US needs the investment in Treasury bonds to shore up its economy to continue to buy Chinese products."

Hillary said on Saturday after meetings with China's leaders that Beijing was still confident in US Treasury bonds and expressed Washington's appreciation for the investments.

Wait for the Treasury bubble to burst, then we will see how happy China is with ts Treasury portfolio.

LOL: Murphy Charges Me With Being Mainstream

Bob Murphy has a short post over at his blog that charges that my business cycle "analysis is identical to that of mainstream, NYT-approved gurus," and he links to one of my articles to "prove" his case.

For a short reply to Murphy's charge, I can't do better than the first commenter to Murphy's post, Tsundere, who writes to Murph:

1/10 for trolling, but I do admire linking to an article that so completely destroys your argument
Read the article of mine that he links to and judge for yourself.

As for the charge of being "mainstream", listen to the economists that NYT records, they all talk about interest rates, without discussing this in terms of the "real" rate or the money supply. Talking about the interest rate without talking about the other factors will simply mislead you and get your analysis all convoluted. Murphy does this all the time. Indeed, he falls into the same camp as Bernanke, who clearly thought he was easing in the summer of 2008, when he cut rates---but the money supply didn't grow because the real rate had to have been even lower (otherwise money supply would have exploded).

For Murphy to charge me as being mainstream, when I consistently recognize the difference between the Fed funds rate, the real rate and the money supply--and he doesn't--and while I also call for the Fed to stop manipulating the money supply-- means only one thing, Murph has to be back in the NYU rec room, on his unicycle chugging Red Bull, again.

The Financial Picture in Eastern Europe: Not So Good

Will Berlin bailout Europe?

William Rees-Mogg analyzes the situation, here.

Top 50 Locations of EPJ Visitors

Based on Google Analytic traffic trends (12 months).

1. New York

2. London

3. Chicago

4. Washington DC

5. San Francisco

6. Denver

7. West Hollywood

8. Toronto

9. Brooklyn

10. Houston

11. Seattle

12. Los Angeles

13. Dallas

14. Sydney

15. Austin

16. Minneapolis

17. Vancouver

18. Singapore

19. Portland

20. Hoboken

21. Arlington

22. San Diego

23. Cambridge

24. Madrid

25. Nashville

26. Beverly Hills

27. Pittsburgh

28. La Jolla

29. Long Island City

30. Irvine

31. Melbourne

32. Las Vegas

33. Calgary

34. Boston

35. North Metro

36. Columbus

37. Alameda

38. Atlanta

39. Philadelphia

40. Piedmont

41. Paris

42. Huntington Park

43. Greenville

44. Charlotte

45. Miami

46. Orlando

47. Brisbane

48. Albuquerque

49. Montreal

50. Baltimore

In total there were visits from 8,288 different cities.

Other cities of note:

63. Warsaw

82. Mountain View

147. Bangkok

178. Rome

193. Mumbai

435. Athens

442. Istanbul

466. Glasgow

492. Rio De Janeiro

514. Abu Dhabi

658. Mount Sinai

668. Bethlehem

781. Bismark

793. Woodstock

820. Ft. Bragg

883. Waco

1008. Bogota

1045. Berlin

1071. Simi Valley

1103. Miami Beach

1166. Delhi

1171. Kitty Hawk

1209. Cairo

1,239. Baghdad

1257. Albany

1259. Moscow

1285. Joplin

1523. Niagra Falls

1531. Belfast

1625. Lagos

2330. Monaco

Saturday, February 21, 2009

The Truth About the New Mortgage Rescue Plan...

...versus what White House Press Secretary Robert Gibbs wants you to believe.

Karl Denninger is brilliant in this video. Pass it around.


Blowback: Swiss Call to Battle U.S.

The right-wing Swiss People's Party (SVP) called on Saturday for retaliation against the United States over a U.S. tax probe into the country's biggest bank UBS that threatens Swtzerland's banking secrecy, reports Reuters.

The SVP said it would call for an urgent debate in parliament on ways to protect Swiss banking secrecy from "further foreign blackmail".

The comments came after UBS agreed on Wednesday to pay a fine of $780 million and to disclose about 250 names of U.S. clients it said had committed tax fraud to settle U.S. criminal charges that it had helped rich Americans dodge taxes.

U.S. tax authorities said on Thursday they were still pursuing a civil case against UBS seeking access to thousands more names of U.S. citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts.

The populist SVP, the country's biggest party, said Switzerland should not take in any detainees from the U.S. prison for terrorism suspects at Guantanamo Bay in Cuba, which the Swiss government said last month it could consider to help shut the camp down.

Switzerland should also reconsider its policy of representing the United States in countries where it has no diplomatic presence, the parliamentary SVP said in a statement.

The SVP said gold stored by the Swiss National Bank in the United States should be repatriated and Switzerland should ban the sale of U.S. funds in the country to protect Swiss investors after the failure of U.S. regulators.

The Unstimulus Package:Obama Tax Increases and Socialism

This will hurt the economy, and is the most clear sign that Obama hopes to move the United States on a socialist healthcare program.

President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on business and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said, WaPo is reporting.

The budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that Obama hopes to enact later this year, WaPo added.

Obama proposes "a fairly aggressive effort on tax enforcement" that would target tax havens and corporate loopholes, among other provisions. Overall, tax collections under the plan would rise from about 16 percent of GDP this year to 19 percent in 2013.

Even some non-partisan observers question the wisdom of announcing a plan to raise taxes in the midst of a recession,WaPo adds.

Tyler Cowen: Spend Your Stimulus Money On a Global Banker

The "stimulus" bill that President Obama signed includes $116 billion in tax credits that will come largely through reduced tax withholding from paychecks, over two years. That will put $8 a week into most Americans' paychecks.

WSJ went to
several economists and asked them, "So if you’re getting an extra $8 each week, and as a good citizen you want to do your part to get the economy going, what should you spend the money on, and why?"

Tyler Cowen recommends spending it with a global banker:

In my view, fixing the banking sector is more important than getting the stimulus right. So if you can afford to lose the money, go to a large bank (more likely to be insolvent), find their most overpriced service, and buy as much of it as you can. That way you are doing your part to recapitalize our banking system.

If you’re stuck for ideas, just keep on using ATM machines, owned by other banks, so you can pay large fees to take out small sums of money from your checking account. When you need to, take all of your withdrawals and deposit them back in the account once again and start all over with the process.

All joking aside (I think Cowen's joking), there is no such thing as a "stimulus" package. It's taking money from one person's pocket and putting it in another.

If you are going to get an $8 per week tax credit, the best use you can put it to is to educate yourself about the economy. Save for a few weeks until you have enough to buy The Failure of the "New Economics"; by Henry Hazlitt. It is a page by page devastating critique of Keynes' General Theory

Saturday Humor: TARP Explained

In this slideshow.

Hat Tip: Bullion Insider

Nouriel Roubini as Interventionist

On Thursday, Roubini told us that:

The Worst Economic and Financial Crisis Since the Great Depression Reveals the Weaknesses of the Laissez Faire Anglo-Saxon Model of Capitalism

On Saturday, he called for bank nationalisation:

'Nationalize' the Banks: Interview With Nouriel Roubini

A la Alan Greenspan, he is an "I believe in free markets, except when government micro-management is an option" person:

"I believe that people react to incentives, that incentives matter, and that prices reflect the way things should be allocated. But I also believe that market economies sometimes have market failures, and when these occur, there's a role for prudential -- not excessive -- regulation of the financial system.

No Nationalization: The Latest Bank Plan

Treasury is leaking to NyPo:

The strategy being bandied about would involve Treasury Secretary Tim Geithner's financial dream team classifying the ailing banking sector into three categories: those that can survive the recession, those that can't and those in between.

The banks seen as likely to fail would be put through a natural unwinding over time and would see their depositary bases seized by regulators and eventually sold off.

Banks that are borderline, meanwhile, could potentially get more capital injected into them, but efforts would be made to avoid a full-fledged nationalization.

Yankee's Johnny Damon Had His Money With Stanford

New York Yankee outfielder Johnny Dammon had his Yankee paychecks sent directly to Stanford International Bank. Ouch.

Dammon thinks his money is frozen for only a week.

"My money has been frozen for four or five days," Damon told NyPo. "Hopefully it won't be much longer.

"I can't pay my bills. My paychecks go into the fund. There is one out there but I am getting another one soon [March 1]."

Ah Johnny, hate to break this to you man, but the money is gone. You are not going to see it in 5 days, 50 days or 550 days.

Stay in shape, you are going to be playing baseball for a long time.

Friday, February 20, 2009

Year-over-Year CPI Lowest Since 1955

The Bureau of Labor Statistics reports that on a year-over-year basis, January-to-January, consumer prices were flat, the lowest reading since August 1955.

For the month of January, CPI rose 0.3 percent, advancing for the first time since July, after falling 0.8 percent in December. There were no sectors that showed declines in January. On a three month annualized basis prices were down 8.4%.

There's specks of inflation in the air, which will continue to intensify, but we are probably at least six to twelve months before serious inflation kicks in.

White Houses Disses Nationalization Talk


Update: "White House Says Strongly Believes That Privately Held Bank System is 'Way to Go', " CNBC is reporting.

Well, somebody at the White House understands the dangers of the threat of huge government interventions in the economy.

This should rally the stock market, especially bank stocks, big time.

January Leading Indicators Up; Second Straight Advancing Month

For the second consecutive month, the index of leading economic indicators rose, gaining 0.4% in January, following a revised 0.2% increase in December, according to tha latest Conference Board data.

The recent gains are due, significantly, to the Federal Reserve's huge increases of the money supply, which I have been reporting on regularly here at EPJ.

For January, five of the 10 indicators rose, with the largest positive contribution from the money supply..

The positive contributors — beginning with the largest positive contributor — were real money supply, the interest rate spread, index of consumer expectations, manufacturers' new orders for nondefense capital goods, and manufacturers' new orders for consumer goods and materials. The negative contributors — beginning with the largest negative contributor — were average weekly initial claims for unemployment insurance (inverted), building permits, average weekly manufacturing hours, stock prices, and the index of supplier deliveries (vendor performance).

The leading economic index now stands at 99.5 (2004=100). Based on revised data, this index increased 0.2 percent in December and decreased 0.7 percent in November. During the six-month span through January, the leading economic index decreased 1.9 percent, with only three out of ten components advancing.

The lagging economic index stands at 113.9 (2004=100) in January, with one of the seven components advancing. The positive contributor to the index was the ratio of consumer installment credit to personal income. The negative contributors — beginning with the largest negative contributor — were average prime rate charged by banks, change in labor cost per unit of output, commercial and industrial loans outstanding, and average duration of unemployment (inverted). The ratio of manufacturing and trade inventories to sales and change in CPI for services held steady in January.

Gold Trades Above $1,000 an Ounce

U.S. gold futures climbed above $1,000 an ounce briefly this morning.

Gold for April delivery was up $21.30, or 2.2 percent, at $997.80 an ounce on the COMEX division of the New York Mercantile Exchange after peaking at $1,000.30 which marked the highest price since July 16

Politically Incorrect Disinvesting? Alan Dershowitz Calls for Israel Related “Counter-Disinvestment Campaign”

Harvard Law School Professor Alan M. Dershowitz has called for a “counter-disinvestment campaign” against Hampshire College unless the school explicitly denies claims that their recent decision to withdraw from a mutual fund represents an act of divestment from Israel, reports The Harvard Crimson.

Hampshire administrators decided earlier this month to withdraw investments from a State Street mutual fund with holdings in six companies contracting with the Israeli military, after a college student group, Students for Justice in Palestine, petitioned the school to divest because of the companies’ ties to what students called “Israel’s illegal occupation of Palestine.”

Hampshire President Ralph M. Hexter said that the move resulted from a broader review of the fund that was prompted by the student petition and found that many of its companies—not just those flagged by the students—did not meet the college’s ethical standards, the Crimosm goes on.

“Israel’s occupation played no role in this decision,” Hexter said. “I want to make it very clear that we have funds in other Israeli companies, and we’re continuing to hold onto those stocks.”

After the student group hailed Hampshire’s decision as a divestment victory,in a press release, Dershowitz entered the fray, demanding to know from the group’s leaders and Hampshire administrators whether the decision was an act of divestment.

Dershowitz said he called the student group’s spokesperson to confirm that Hampshire had divested from Israel, and that he did not want to launch a campaign to stop donations to the college unless the college had divested.

“Dershowitz called me a few minutes after the press release came out,” said Matan Cohen, a student spokesperson for the group and a sophomore at Hampshire. “He threatened to start a boycott campaign against me, SJP, and the college at large.”

Dershowitz, whose son attended Hampshire, acknowledged calling the student group and administrators but denied allegations that he threatened anyone. “Anyone who interpreted it as a threat is simply lying for ideological reasons,” Dershowitz said.

Facing the possibility of a boycott, administrators at the college issued a “statement of clarification” that said the decision to withdraw from the fund was made “without reference to any country or political movement,” in an effort to distance itself from the claim that the college had divested from Israel.

Economic Planning versus Democracy

The only plus to the stimulus package, that I can see, is that it has caused the careful, but wise, economist Mario Rizzo to become a prolific writer. Here, he writes about the tension between central direction of economic resources and democracy.

As part of his observatons, this can not be ignored:

...the casual dismissal of the “niceties” of democratic deliberation is blind to something really important. Emergency large-scale government direction of resources produces demands for a leader – an executive with plenary powers in fact (if not in law). It has been the excuse for extreme centralization of power in many contexts over history. Carl Bernstein and others call it “leadership.” Ludwig von Mises and many others called it the Furhrer Principle (F├╝hrerprinzip).

Thursday, February 19, 2009

A Minor Correction

Lew Rockwell notes that Tom Woods' book Meltdown
will debut, tied for #15, on the New York Times best seller list, on March 1st

He also writes that, "For the first time in history, a book on the Austrian theory of the business cycle has made the New York Times bestseller list"

Actually, the great author-economist, Harry Browne, wrote an investment book, How You Can Profit From the Coming Devaluation, that was based on Austrian business cycle theory and included a full explanation of the theory. It ended up on the NYT Bestseller list in 1970(?). I remember because I was a grade school student and it introduced me to Austrian Economics. Further, I believe Lew Rockwell edited Browne's book!

Woods is in very good company.

My review of Woods' book is here.

Barney Frank Disrupted Kanjorski Questioning of Paulson and Bernanke About Run On Money Market Funds

A commenter "99" has added this interesting item to my story about a run on money markets that nearly crashed the entire financial system, Government Panic of 2008,:

I've been tearing my hair out about this, and the horrific conspiracy theories arising out of Kanjorski's statements on C-SPAN, for a week... having to go so far as to give myself a big headache listening to the entire hearing where Bernanke and Paulson testified before the House Finance Subcommittee on 24 September. Kanjorski brought up the run in that hearing and Paulson and Bernanke were trying to respond to it, but Franks broke in about members having to get to a vote in ten minutes and no full discussion of the run ensued after the outburst/break-in by Franks. I have been wondering if that was a purposeful attempt to cut off the line of questioning, or just bad luck.
I've seen both House and Senate hearings stopped before for votes, so it would take a real insider to detect if there was anything odd about the way Frank handled this one. Anyone out there familiar enough with House procedures to comment on Frank's interruption?

The Misdirection of Resources and the Current Recession

New York University Professor Mario Rizzo recently delivered a speech on the present crisis state of the economy, and government reaction to the crisis. The speech was presented at the Club for Growth-Heritage Foundation Conference, "Economic Recovery: Free Markets vs. Big Government," Hyatt Regency Washington on Capitol Hill, February 10, 2009.

The speech is the best summary and analysis of the current economic situation that has been written. I note that he points out that, "Low interest rates tend to favor consumer durable goods (like houses and automobiles) and capital projects because their present value is increased relative to what it would be at higher rates." Given what has gone on in the housing sector, it is important to understand, as Rizzo clearly does, that these "consumer durables" should be considered as part of the movement towards the "capital goods" sector growth during the boom period of the business cycle.

I consider Rizzo's paper must reading.

UPDATE: Here's a video copy of Rizzo's speech. Is Going Open Source

A commenter, Stewart, has brought to my attention that is going Open Source.

Congratulations must be offered to the Institute for following through in a principled manner on the beliefs they hold.

Further, Stewart asked if it has changed my mind on hypocrisy of the Institute. Actually, from these actions, one must say that there has been no hypocrisy on their part at all.

Webster's dictionary defines hypocrisy as, "a feigning to be what one is not." It's clear that the Mises Institute, after the contradiction between their beliefs and their actions was brought to their attention, acted with utmost speed to align their practices with their beliefs.

Stewart also asks, "Do you plan on following through with your promise to publish an edition of Last Knight?" The short answer is yes. However, as it appears that Mises is opening the " complete copy of This includes all the books, all the media, all the journals, all the source code, and the complete database behind" I can see some other properties that I may want to do something with first.

I hasten to add that I continue to see Open Source as a valid marketing strategy versus the basis for a universal intellectual property theory. I continue work on my book which will address this issue and others in detail. I'm sure the debate will liven up at that point again. In the meantime, let's enjoy this new gift the Mises Institute has given us.

Wholesale Inflation Takes Biggest Jump in 6 Months

Inflation at the wholesale level surged in January. The Labor Department said Thursday that wholesale prices increased by 0.8 percent last month, the biggest gain since last July.

The acceleration was led by a 3.7 percent surge in energy prices with gasoline prices jumping by 15 percent, the biggest gain in 14 months.

Even outside the food and energy sectors, wholesale prices showed a strong climb, rising by 0.4 percent.

There are very strong crosscurrents in the economy right now. Some areas of the economy are still working through the Bernanke money slowdown of this summer. This is where the negative unemployment numbers come in--not completely surprising numbers given that unemployment is a lagging indicator.

This spike in inflation is a signal that some of the money printing that Bernanke is doing is starting to have a price inflation impact.

Fun with Eliot

A Manhattan judge ordered the government to unseal documents about wiretaps in the Eliot Spitzer case, reports CNBC's Bertha Coombs.

As New York governor and attorney general, Eliot Spitzer went after Wall Street. There is no question that the exposure of Spitzer as a hooker crazed junkie was Wall Street payback.

Rick Santelli Speaks Truth to Power

'The government is promoting bad behavior... do we really want to subsidize the losers' mortgages... This is America! How many of you people want to pay for your neighbor's mortgage? President Obama are you listening? How about we all stop paying our mortgage!- Rick Santelli, on live nationwide television.

CNBC's Rick Santelli is the first mainstream news broadcast personality to ever let it rip live and tell it like it is. Done in front of traders in a Chicago pit, they cheered and applauded. BTW This is the real financial world applauding as opposed to the financial power elite who suck at the teat of government.

He takes on the stimulus package and the entire crew: President Obama and government economists. At one point he asks, to prove the absurdity of the stimulus package, "If there is this multiplier effect to government spending, why don't we just spend a trillion dollars an hour, and it will boost the economy by $1.5 trillion an hour?"

Nice job, Rick.

This is must see video.

Even More Stanford Money Payouts

During the 2002 election cycle, when Congress was debating a financial services antifraud bill that would have linked the databases of state and federal banking, securities and insurance regulators, a bill yhat ultimately died. Stanfotrd Internatonal contributed in the Senate. The biggest recipients were Sen. Bill Nelson, D-Fla. ($45,900); Sen. John McCain, R-Ariz. ($28,150); Sen. Chris Dodd, D-Conn. ($27,500); and Sen. John Cornyn, R-Texas ($19,700). Rep. Pete Sessions, R-Texas also received $41,375.

Stanford and his wife Susan also donated $931,100 of their own money, with 78 percent going to Democrats, including $4,600 to President Barack Obama's presidential campaign last May 31. Records show $2,300 of that was returned on the same day, according to AP.