Free Markets, Free People

Economy

Economy: GOP Now More Trusted Than Dems

This is just funny. And fickle. But apparently watching what has gone on in the last few months, if you believe Rasmussen, has caused the GOP to suddenly again be the most trusted of the 2 parties when it comes to economics:

Voters now trust Republicans more than Democrats on six out of 10 key issues, including the top issue of the economy.

The latest Rasmussen Reports national telephone survey finds that 45% now trust the GOP more to handle economic issues, while 39% trust Democrats more.

This is the first time in over two years of polling that the GOP has held the advantage on this issue.

Of course we’ll see how much weight this carries in 2010. However I’d be in that 6% not documented who don’t trust either of them.

~McQ

Socialism? Why Not Call A Spade A Spade?

One of the things we talked about on the podcast this week is how, in the broadest sense, socialism is a growing phenomenon in our country. As I mentioned, while government may not actually own the means of production, if its regulations are such that they dictate how a company must operate, then government exercises de facto ownership.

What is happening in the financial sector right now serves as a perfect example.

The Obama administration plans to require banks and corporations that have received two rounds of federal bailouts to submit any major executive pay changes for approval by a new federal official who will monitor pay, according to two government officials.

[…]

Others, which are being described as broad principles, would set standards that the government would like the entire financial industry to observe as they compensate their highest-paid executives, though it is not clear how regulators will enforce them.

So regulators will have the final say on compensation. That, of course, is an ownership function. The de facto owner then is who?

Moving on:

In a sign of how eager corporations are to escape government diktats on pay, nine of the nation’s biggest banks are likely to repay bailout money as quickly as by the end of this month. The administration is expected to grant its approval this week.

Goldman Sachs, JPMorgan Chase and a handful of others have worked to rid themselves of their ties to government in order to shed restrictions on pay that they say put them at a competitive disadvantage.

But under the administration’s new plans, even companies that repay the taxpayer money will not escape some form of oversight on their compensation structure.

The set of broad pay principles being drafted by the Treasury Department would authorize regulators to tell a bank to alter its compensation arrangements if they are found to encourage too much risk-taking. It is not clear how the government will define too much risk.

Part two – no matter whether you pay the money back in full with whatever interest is owed, the government retains the right to dictate your compensation structure based in some arbitrary metric of “too much risk”, to be determined only by them.

They will apply to a broad swath of financial companies, even the United States operations of foreign banks, as well as private companies like hedge funds and private equity firms.

“This is the government trying to tell the TARP banks not to worry, because everyone else’s compensation will be monitored too,” said Gustavo Dolfino, president of the WhiteRock Group, a financial recruiter, of the industrywide principles. “We’re in a world of TARP and non-TARP.”

Clear enough? For those that like to quibble about the meaning of socialism and parse words, I’m eager to hear your spin on this. But, in light of the plan above you’d better be damned good at deploying the rhetorical smoke and mirrors if you plan to call this anything but a manifestation of the “s” word.

~McQ

Wow, That Stimulus – Just What Was Needed! More, Please!

Another indicator that those in charge haven’t a clue about what they’re doing and anything they say or claim should be taken with a large grain of salt.

Chart: Innocentbystanders.net

Chart: Innocentbystanders.net

So let’s see, given the “logic” which has driven the “solution” thus far, what this calls for is more stimulus money, right?

~McQ

Recession Over? Not Yet Says NBER

Some indicators are looking better, but others, not as good:

While the U.S. economy is showing signs of stabilizing from a recession that started in December 2007, it’s “way too early” to say the contraction is over, said the head of the group that officially makes the call.

Gross domestic product estimated on a monthly basis “had a trough earlier this year, but it is way too early to say that it is a true trough rather than a pause in a longer decline,” said Robert Hall, who heads the National Bureau of Economic Research’s Business Cycle Dating Committee.

So while you continue to hear the happy talk about economic recovery, the experts aren’t yet ready to say whether we’ve bottomed out or are just taking a breather in the midst of a longer decline.

~McQ

Japanese “Lost Decade” Redux

It certainly seems like it. Reason magazine finds the current way the US is addressing the economic crises to be pretty familiar:

The scenario was eerily familiar. A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south. The national government responded to the crisis by encouraging more lending and spending previously unfathomable amounts of money on public works projects in an effort to stimulate consumer spending and restart growth.

Of course that’s where we are now and what that led too in Japan has come to be known as the “lost decade” (now three decades old).

One of the things we’ve pointed out is there is an element within this model that both Japan and now the US has used that is focused on “pain avoidance” (GM and Chrysler are prefect examples of that). Part of that is driven by the belief by those in power that the government can address problems within markets and lessen the impact. The second part of that, of course, is by convincing the public that’s the case, they then have to try to do what they claim they can do. But the law of unintended consequences has a bad habit of pushing its way into such situations and turning them sour:

The Japanese experience shows that when the government is an active participant in the market, many firms would rather accept state support than initiate the inevitable financial reckoning. Such a status quo does not provide a sustainable foundation for the economy. Instead, it restricts economic growth and creates a cycle of stagnation.

A friend, talking about the recession and eventual recovery, said that we’ll come out of it “okay” because “Americans are neurotically productive”. True. But so are the Japanese. While we have a fantastic workforce which is among the most productive in the world, even they won’t be able to overcome restricted economic growth caused by the government’s deep intrusion into various markets.

Comparing Japan’s reaction to the US reaction in similar circumstances is instructive:

When a recession began to set in after the 1990 stock market crash, Japan responded by reversing its tight money policy, cutting rates to 4.5 percent in 1991, 3.25 percent in 1992, 1.75 percent from 1993 to 1994, 0.5 percent from 1995 to 2000, and as low as 0.1 percent in September 2001.

A similar pattern took place in the United States. From 2000 to 2002, the Federal Reserve slashed the target discount rate from 6 percent to 0.75 percent. Fearing irrational exuberance, to borrow Alan Greenspan’s famous phrase, the Fed then raised the rate as high as 6.25 percent in June 2006. But now that the bubble has burst and the economy contracted, the Fed has cut the discount rate 12 times, lowering it to the current 0.5 percent. Federal Reserve Chairman Ben Bernanke has repeatedly stated that he sees interest rate cuts as a way to “support growth and to provide adequate insurance against downside risks.”

In both the Japanese and the American cases, post-bubble policy makers believed that lowering interest rates would make credit easier to obtain, thus recreating the environment that had spurred economic growth to begin with. But this meant that the supposed cure for a bubble created by easy credit was to extend even more easy credit.

These rate cuts only perpetuated the distortion of economic decisions and prevented savings, investment, and consumption from realigning with true preferences, as opposed to the illusory ones created by easy credit and artificially low interest rates. The lesson is that when monetary policy is used to “smooth” or “tweak” the market, it inevitably causes unintended consequences that in some cases can be very damaging to long-term economic growth.

Of course it is hard to say what future growth might be had the US government not done what it has done. But again, using Japan of that era vs. the US of that era, the difference is between 1.3% growth on average vs. 3.5% growth here. In economic terms that is a huge difference.

Reason also does a nice job of dismantling the “failure of regulation” argument. As they point out, what must be examined is how the regulatory environment then in place spawned the crisis vs. the claim that not enough regulation was in place.

For instance, government housing policy of the era:

The push to expand homeownership had two big effects. First, it greatly increased the number of buyers, driving up housing prices. Second, it provided mortgages to a large number of people who had a high risk of default.

That policy was further enabled by the capital reserve requirements which, in effect, encouraged heavy lending and an insensitivity to risk. Instead of admitting that and understanding that such policies are dangerous, the reaction has mostly been to ignore that and shift the blame to the private sector with calls for “more regulation”.

And then, going back to the “pain avoidance” point (justified as “too big to fail” by the government), what has happened is, as in the case of GM and Chrysler before the bankruptcies, government propping up failed businesses:

The Bank of Japan tried to ease economic pain by loaning large amounts to businesses. But the attempts to recapitalize the market ignored underlying management problems in the dying firms. It was a costly mistake. Intense lobbying from special-interest groups representing various sectors of the Japanese economy perpetuated the ill-fated loans and funneled government money to zombie businesses.

The United States has already begun to copy this policy, lending billions of dollars to financial institutions and auto companies and buying up billions more in bank equity in an effort to recapitalize the marketplace. The effect has been to keep poorly managed firms alive with taxpayer money.

Had they been allowed to fail and go through the reorganization process, those problems would have at least been addressed. They haven’t, at this point, in most of the financial sector and in the auto sector, it remains to be seen.

Of course the government’s deep involvement in these sectors and businesses sets up a natural conflict of interests. While a business is market oriented, and takes signals from consumers, governments are agenda driven and politically oriented. And it then comes down to a matter of incentives. In the first case the incentive of a business is to serve its consumer base. But that’s not the case with politicians necessarily, is it?

Lawmakers’ incentives are to serve their constituencies or their own political careers. This can put them at odds with the businesses they are suddenly attempting to manage. The more the government is involved in directing business activity, the less likely those firms will succeed in maintaining long-term growth, and the more likely they will turn into Japanese-style zombies.

While we’d like to believe that lawmaker’s constituencies consist of the people in their state or district, in reality they consist of special interests who help keep them in office. The ability to deliver to those special interests and keep their support and dollars flowing is just to much to resist for most.

Additionally:

Studies from Okimoto’s center and the Bank of Japan concluded that data revealing the scope of the economic malaise were suppressed and that regulations were developed with governmental interests in mind.

Given how the discussion has been driven here by the likes of Barney Frank and Chris Dodd, there’s little doubt that regulations will be “developed with governmental interests in mind”.

In reality it all comes down to power, or the illusion of power, and politics. Short-term politics with no real eye on the future impact of actions taken today. And these actions are based in a false premise that the market is not self-correcting and that it must be both controlled and tweaked by government.

Japan bought into that premise, and so has the US:

The principle of creative destruction—the economic mutation that continuously breaks down old forms and creates newer, more productive and efficient ones—was ignored in the hope that legacy corporations could somehow save Japan. From Wall Street to Detroit, under both George W. Bush and Barack Obama, the American government has been equally unwilling to let once-formidable companies fail.

And that, in my opinion, will see us repeat the Japanese experience, despite the small glimmers of hope we’ve been seeing in the reports in recent days. This isn’t about short term increases in home sales and construction spending. This is about the long term economic health of our economy.

Unsurprisingly, I’m not seeing moves by the government that work toward the most positive outcome in that regard.

~McQ

Our Inordinate Fear of Inflation

That’s the subject Paul Krugman addresses in his NYT Op/Ed piece today.  In fact, he implies that even talking up the possibility of inflation comes solely from bad political motives, mostly from people who don’t grasp The Fierce Moral Urgency of Change™.

Why shouldn’t we worry about inflation, according to Prof. Krugman?

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

But, let’s grant that the current monetary moves aren’t immediately inflationary.  What happens when the economy recovers and the banks do begin to spnd those extra reserves?  Krugman attempts some sleight of hand, in an effort to make it appear that he addresses that concern.

Still, don’t such actions have to be inflationary sooner or later? No. The Bank of Japan, faced with economic difficulties not too different from those we face today, purchased debt on a huge scale between 1997 and 2003. What happened to consumer prices? They fell.

Yes, they did.  But since Japan hasn’t had a real economic recovery even today, and is entering its third “Lost Decade”, that really isn’t a compelling argument.  Since 1999, Japan’s rate of GDP growth has averaged 1.31%, which is less than half of the average GDP growth rate of 3% a mature economy should experience.  Indeed, over the last decade, Japan has experienced exactly 5 quarters where GDP growth was at 3% or more. In that same period, there have been 9 quarters when GDP contracted.  The highest annual rate of growth was in 2000, when the annual GDP growth was 2.85%.

So, let’s not pretend we know how the inflationary pressures fall out in Japan once a recovery hits…until there actually is a recovery.

ON the other hand, since our policymakers seem hell-bent on following the same path the Japanese did in the 1990s, the return of inflation when the economy recovers might turn out to be worry we can avoid until sometime in the relatively distant future.

Spinning The China Climate Talk Failure

You really can’t blame her for trying to put – excuse the expression since it seems to have become cliche – lipstick on a pig, but Nancy Peolsi’s attempt to change China’s mind concerning curbing its CO2 seems to have been an abject failure.

Pelosi called them “hopeful”. That’s diplo-speak for “absolutely nothing substantial changed from the previously held position”. The fact that they even saw her would be deemed as “hopeful” but certainly not substantive.

Rep. James Sensenbrenner (R-WI) sums up the trip:

“It’s business as usual for China,” said Mr. Sensenbrenner, the ranking Republican on the House Select Committee for Energy Independence and Global Warming. “The message that I received was that China was going to do it their way regardless of what the rest of the world negotiates in Copenhagen.”

“Their way” consists of giving lip service to curbs while demanding the “rich nations” pay the freight for curbing such emissions in China (and the rest of the “emerging nations”). China refuses to jeopardize its economic growth for something it obviously believes is much less of a threat than others do.  And why should they when it appears the upcoming conference plans on exempting them anyway?

We, on the other hand, seem bound and determined to try to do what would be tantamount to the task of cleaning up the ocean up by putting economy wrecking filters only on our shore line. Little or no effect. China and India share similar philosophies on this question and are emerging as the number one and two emitters on the planet. I think they’re right. The threat, if there is one, is minimal at best. Wrecking one’s economy to hopefully make a less that one degree Celsius change at some distant point in the future (maybe) seems to me to be the height of folly.

But that’s certainly where our politicians seem to be headed. And, to compound the problem, they’ve adopted a “damn the torpedoes, full speed ahead” philosophy, ignoring the 10 year cooling trend torpedo as well as the “China and India” aren’t going to play along” torpedo.

No one wants dirty air or dirty water – no one. But this hysterical reaction to what seems to be a natural earth cycle and the human hubris which claims we both effect and can change that cycle is going to put us all in the poor house unless some sanity (like in China) prevails.

~McQ

Juxtaposition

Compare and contrast this rehabilitation effort of Timothy Geitner:

After his hellish opening weeks, Treasury Secretary Timothy Geithner started inviting White House economic officials across the street to his conference room for hours-long working dinners that have helped get — and keep — the whole team on the same page.

[…]

Geithner, a former president of the New York Federal Reserve who once looked like he was floundering in one of the administration’s most scrutinized jobs, is emerging in a new position of strength with the media and the markets, just as he launches President Barack Obama’s high-stakes effort to re-regulate the nation’s financial markets.

[…]

The secretary’s advisers acknowledge that his newfound political standing is tied, in part, to the state of the economy, which is now showing early signs of improvement. But Treasury officials also have updated their playbook after his Feb. 10 speech on financial recovery, which was panned by the press and blamed for a 381-point slide in the stock market.

They decided to “let Tim be Tim” and accepted the fact that his strength wasn’t giving a speech in front of a bunch of flags. Rather, they let reporters see him in off-camera, pen-and-pad settings, where he fielded questions with the confidence that his staff saw behind the scenes. He aced an interview with PBS’s Charlie Rose, thriving in a relaxed setting where he could explain issues at length.

… with this bit of economic reality:

China has warned a top member of the US Federal Reserve that it is increasingly disturbed by the Fed’s direct purchase of US Treasury bonds.

Richard Fisher, president of the Dallas Federal Reserve Bank, said: “Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature.”

“I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States,” he told the Wall Street Journal.

[…]

The Oxford-educated Mr Fisher, an outspoken free-marketer and believer in the Schumpeterian process of “creative destruction”, has been running a fervent campaign to alert Americans to the “very big hole” in unfunded pension and health-care liabilities built up by a careless political class over the years.

“We at the Dallas Fed believe the total is over $99 trillion,” he said in February.

“This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them,” he said.

His warning comes amid growing fears that America could lose its AAA sovereign rating.

I guess since the media tried to talk down the economy for the previous eight years, they may as well try and talk it up now that their boy is in the White House. The shame of it is that as the economy worsens, a lot of people are going to be shocked.

Closing Dealerships Via Barack-Foolery?

I watched this story percolate throughout the day, wondering if there was anything of substance to it. Even now I’m not entirely sure how much is pure speculation and how much can be decisively proven. If any of it turns out to be true, however, then the repercussions could prove politically fatal. Doug Ross has the scoop:

A tipster alerted me to an interesting assertion. A cursory review by that person showed that many of the Chrysler dealers on the closing list were heavy Republican donors.

To quickly review the situation, I took all dealer owners whose names appeared more than once in the list. And, of those who contributed to political campaigns, every single one had donated almost exclusively to GOP candidates. While this isn’t an exhaustive review, it does have some ominous implications if it can be verified.

However, I also found additional research online at Scribd (author unknown), which also appears to point to a highly partisan decision-making process.

[…]

I have thus far found only a single Obama donor (and a minor one at that: $200 from Jeffrey Hunter of Waco, Texas) on the closing list.

Chrysler claimed that its formula for determining whether a dealership should close or not included “sales volume, customer service scores, local market share and average household income in the immediate area.”

In fact, there may have been other criteria involved: politics may have played a part. If this data can be validated, it would appear to be further proof that the Obama administration is willing to step over any line to advance its agenda.

Doug notes some anecdotal evidence to back up his theory, and reading through the various personal accounts from dealerships who claim to be successful, and yet who are being shut down, lends some credibility to the idea. As does the fact that the closing list is reportedly populated almost exclusively with Republican donors and/or those who gave money to Obama’s Democratic rivals. But the real test is in a comparison of the lists of dealerships staying open and those that are closing against a campaign donor database (which I haven’t done, but feel free to scrutinize them for yourself).

Nevertheless, the following bit of research from Red State strikes an ominous chord:

Eric Dondero recognizes some of the dealers’ names on the hit list:

“Vern Buchanan is a Republican Congressman from the Tampa Bay area. Robert Archer is the son of former Republican Congressman Bill Archer. John Culberson, a libertarian-leaning Conservative, is now the Congressman for that West Houston District. He was heavily supported in his election efforts by the Archers Family.”

“Additionally, James Crowley, owner of a Chrysler Dealership in Escondido, California is on the list to be closed. Crowley is a big backer of libertarian-leaning Republican Cong. John Campbell of Orange County.”

The list is heavy with influential Republicans and libertarians. Another name on the list is Ray Huffines, who owns a large dealerhsip in the Metro-Dallas/Ft. Worth area. The Huffines family have been major contributors to Rep. Ron Paul (R-TX) over the years.

It’s hard to know what to make of all this, but at first blush it certainly looks like the decisions to close dealerships may have been influenced by the political affiliations of the dealers. Under regular circumstances that would elicit a big shrug, but when Chrysler’s decisions are basically being made for them, well, that’s a whole ‘nother kettle of fish (via Reliapundit):

A lawyer for Chrysler dealers facing closure as part of the automaker’s bankruptcy reorganization said on Tuesday he believes Chrysler executives do not support a plan to eliminate a quarter of its retail outlets.

Lawyer Leonard Bellavia, of Bellavia Gentile & Associates, who represents some of the terminated dealers, said he deposed Chrysler President Jim Press on Tuesday and came away with the impression that Press did not support the plan.

“It became clear to us that Chrysler does not see the wisdom of terminating 25 percent of its dealers,” Bellavia said. “It really wasn’t Chrysler’s decision. They are under enormous pressure from the President’s automotive task force.”

Given the other sorts of thuggery that have been alleged in these Chrysler proceedings, this should come as no shock. But the fact that these closings will have to be approved by the creditors in the bankruptcy case lends a certain bit of intrigue to this case and raises a lot questions in my mind.

Assuming that the closings are motivated by political payback from Obama, how will that plan affect the stakeholders in the new company? If there really are profitable dealerships being shutdown just because they gave money to the wrong candidates, then it stands to reason that the remaining dealers will be something less than the cream of the crop, and therefore the new Chrysler will have a less than optimal distribution chain for its products. It’s not entirely clear why shutting down dealerships helps Chrysler anyway, since they are essentially the real customers of the carmaker, but it seems to me that those who plan to profit from the new venture would have something to say about the plan in the bankruptcy case. Presumably, they will want to protect their investment by challenging any plan for closings that does not maximize their return. If and when they do, it could get very interesting for Obama (again, assuming that any of this is true).

It should be noted that until some further confirmation surfaces, this story should be treated with a healthy dose of skepticism. Indeed, if it weren’t for the rather dictatorial way the Obama administration has dealt with the entire automaker bailout fiasco, these allegations of political payback would ring pretty hollow. Yet, considering the past bullying, the story definitely merits further consideration, so keep your eyes and ears open for more.

Health Care Is Why We’re Broke?

The more I listen to Obama, the more of an ideologue I realize he is and how willing he is to use any opportunity to “justify” his agenda, even those that don’t fit. For instance:

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: “We are out of money.”

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we’ve made on health care so far. This is a consequence of the crisis that we’ve seen and in fact our failure to make some good decisions on health care over the last several decades.

This is about as twisted a bit of reasoning as I’ve seen in a while. We’re “out of money” because of “health care decisions?”

What total nonsense. This is a politician using a crisis unrelated to “health care decisions” to push his ideology (i.e. that it is government that is the answer in all areas of life). As Glenn Reynolds says:

“I’ve bankrupted the nation, so now your only hope is to pass my healthcare plan.” That goes beyond chutzpah to the edge of pathological dishonesty. Except, I guess, that it’s not pathological if you get away with it. And so far, he has.

Very true – but at some point, as his favorite pastor likes to say, the chickens have got to come home to roost.

From the same interview:

SCULLY: States like California in desperate financial situation, will you be forced to bail out the states?

OBAMA: No. I think that what you’re seeing in states is that anytime you got a severe recession like this, as I said before, their demands on services are higher. So, they are sending more money out. At the same time, they’re bringing less tax revenue in. And that’s a painful adjustment, what we’re going end up seeing is lot of states making very difficult choices there..

Painful choices? But for the federal government – unprecedented spending spree. The cognitive dissonance there is mind boggling.

~McQ