California Budget Showdown – Schwarzenegger Courageously Holds the Line

June 30, 2009 · Posted in Politics · 2 Comments

Governor Schwarzenegger says Democrats are wasting time on flawed budget plans:

Reporting from Sacramento — With only days before the state begins issuing IOUs, Gov. Arnold Schwarzenegger scolded Democrats Monday for “wasting time” on budget fixes he won’t support while they accused him of making unreasonable demands.

Democrats in the state Senate passed proposals to balance the state’s books with the help of $2 billion in new taxes. But Schwarzenegger had already promised to veto the plan, which the Assembly approved Sunday night.

“I will never sign those kind of things, so why waste the time and why run out of time and then all of a sudden we have to hand out the IOUs?” Schwarzenegger told reporters.

“We are on the brink,” said Sen. Denise Moreno Ducheny (D-San Diego) during the Senate floor debate. “. . . We’re passing it to make sure that we’ve done our job,” she said.

My comment: What Sen. Ducheney is completely oblivious to: They have NOT done their job. In fact they have done the opposite. They have not balanced the budget, they have not cut Californians’ record high taxes, they have not addressed any long term structural issues. She is trying to fool the people into believing that her and her fellow Democrats have done what they could. This kind of mentality is sadly what one has to expect from an average California legislator these days.

California will begin issuing IOUs for some of its bills Thursday, according to Controller John Chiang.

Democratic leaders used a series of legal maneuvers to push the levies through without the GOP votes normally required to raise taxes. The package includes a tax increase of $1.50 per pack of cigarettes, a new 9.9% extraction tax on oil companies, a $15 vehicle license fee surcharge to fund state parks and a new charge on homeowner insurance premiums to pay for emergency response systems.

My comment: So the plan is to raise taxes on the most taxed state in the country, and that in the midst of one of the worst recessions in decades. Is there one person who seriously believes that this will help us solve the problems at hand?

Schwarzenegger has drawn several lines in the sand: He says he will not raise taxes, wants to address California’s entire projected $24-billion deficit at once and wants a number of fundamental changes to state government.

That stance does not sit well with the majority Democrats.

“I’ve never quite heard of a negotiating strategy that says, ‘I want $24 billion my way, and I want all my reforms over the next 37 hours,’ ” Senate President Pro Tem Darrell Steinberg (D-Sacramento) said in an interview Monday. “That’s not helpful.”

Steinberg said Democrats would be willing to meet Schwarzenegger “more than halfway,” even on a deficit-reduction plan without taxes. No such plan has been publicly released by the Democrats.

My comment: But these kinds of “half way” games are what brought California to where it was. If anything, Californians need someone who firmly stands up for the right thing and refuses to play games with a corrupt legislature.

Steinberg, meanwhile, was pressing Senate Republicans on Monday evening to agree to cut roughly $3 billion from education and push other education costs into the future. The Senate planned to meet into the night to consider that proposal, which was approved last week on a bipartisan vote of the Assembly but blocked by Republicans in the Senate.

Schwarzenegger has promised to veto that plan as well, calling it a “piecemeal approach.”

It must be signed into law by midnight tonight or the potential savings expire with the end of the fiscal year.

Meanwhile, some looming budget cuts were already being prepared. Regulators on Monday voted to freeze enrollment, starting in mid-July, in Healthy Families, the state’s decade-old health program for the poor.

The decision could deny coverage to nearly 350,000 children around the state over the next year if money cannot be found to enroll them.

Advocates hope that the state’s First 5 program, which collects nearly $600 million each year in tobacco taxes for children’s programs, can ride to the rescue. In December, First 5 provided $17 million in funding to help the Healthy Families program stave off cuts.

My comment: … so Californians, please make sure you all smoke a few extra packs a day, so your kids are covered.

Even if the tax hikes were to go through somehow, they will not solve any problems. We will back to the same debate in no time at all, discussing how to address the next shortfall.

As I wrote in January:

California has to wake up to reality. Whether we like it or not, the state needs to stop paying unionized workers outrageous wages. Instead of reducing expenses for some departments and programs, it needs to dismantle and abolish entire departments and programs. It needs to stop funding unsustainable pension plans. In return it needs to drastically cut the overwhelming taxes and fees that are stifling its economy.

If it doesn’t do it now, then it will have to do it later, by declaring bankruptcy, which will completely wipe out all programs and departmens that can then no longer be funded anyway.

…I consider the commencement of IOU issuance nothing but insolvency, for all intents and purposes a declaration of bankruptcy.

Tags: Add new tag, california, california budget, california tax

Ben Bernanke – Nothing but a Miserable Failure

June 29, 2009 · Posted in Politics · Comment

Watch Mish blast Bernanke as he lists his ten “qualifications”:

Ten Qualifications

1) Bernanke is either a liar or has a memory problem. I believe the former. Either way, there is a problem when a Fed chairman cannot recall a conversation with another Fed governor over something as critical as the Bank of America/Merrill Lynch merger. See Bernanke Suffers From Selective Memory Loss; Paulson Calls Bank of America “Turd in the Punchbowl” for my take.

2) Bernanke claims to be a student of the great depression yet amazingly concludes the cause was misguided Fed policy after the stock market crash. This is nonsense. The cause of the great depression and the cause of the current depression (yes we are in a depression), is the massive expansion of credit and debt fostered by the Fed itself. Bernanke is no student of history, he is a dunce.

3) Bernanke has on many occasions promised transparency. This is an outright lie. There is no transparency and Bloomberg has filed freedom of information lawsuits requesting information that should have been disclosed. Moreover, Congress had to subpoena the Fed in regards to the Bank of America / Merrill Lynch shotgun wedding which is how we know about Bernanke’s selective memory loss. What else is Bernanke hiding?

4) Bernanke is creative. Some might think creativity is a positive attribute. It is, for a design engineer. Unfortunately creativity is not a good attribute for a Fed chairman. This whole mess was sponsored by the Fed when Greenspan got creative with interest rate policy. Bernanke is light-years more creative than Greenspan as witnessed by an amazing array of Fed lending facilities and the ballooning of the Fed’s balance sheet swapped for garbage collateral. The unintended consequences of Bernanke’s extraordinary actions are coming down the road. We do not even know what those consequences are. However, we do know that the Fed has no exit policy, and will come up with one by the seat of Bernanke’s pants on the fly. Given there is no need for the Fed at all, the last thing we need is for a creative Fed.

5) Bernanke supports policies of theft. Proof of this is easy to establish. Bernanke favors a policy of 2% inflation, and inflation is theft. How so? Inflation benefits those with first access to money: governments, banks, and the wealthy. Government benefits when property taxes rise more than wages, banks benefit by borrowing money into existence, and the already wealthy benefit by being next in line for access to cheap money. By the time those low on the totem pole have access to cheap money, asset prices are already through the moon. Moreover, those with enough common sense to avoid the bubbles, get nothing for their money sitting in the bank. The middle class has been ravished by inflation, and Bernanke supports that inflation.

Please note that Bernanke cannot even follow his own mandate. Where was Bernanke when property and commodity prices were soaring? The answer is he was ignoring them. Thus we see the one sided nature of Bernanke’s policies. He let home prices soar, and now that they are crashing looks to support them. By the way, this is not just Bernanke, this is a symptom of central bankers in general.

6) Bernanke cannot dissent. As a member of the Greenspan Fed, Bernanke went along with everything Greenspan did. It is clear Greenspan failed. Thus it is clear that Bernanke failed by supporting Greenspan’s policies.

7) Bernanke supports policies of outright fraud. Fractional reserve lending is a fraud. Please consider Murray N. Rothbard and the Case for a 100 Percent Gold Dollar in which Rothbard condemned fractional reserve banking as a violation of contract. “In my view, issuing promises to pay on demand in excess of the amount of the goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues “fake” warehouse receipts — warehouse receipts, for example, for ounces of gold that do not actually exist in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that fractional-reserve banking is disastrous both for the morality and for the fundamental bases and institutions of the market economy….”

8) Bernanke could not spot the housing bubble. Amazingly Bernanke thought the housing bubble was “well contained” right before it exploded in his face. Of course there is another possibility: Bernanke is a liar and knew it was not contained but did not want to say so.

9) Bernanke has no idea where interest rates should be. Of course no one else does either. But Bernanke thinks he does. The result is overshooting interest rate policy in both directions, just as Greenspan did. This is the Fed Uncertainty Principle Corollary Number One in action: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.

10) Bernanke is a power grabbing hack. This is the Fed Uncertainty Principle Corollary Number Two in action: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Summary:

Bernanke is a disingenuous liar with a memory problem. He is also an economic dunce who does not understand the cause of great depression nor could he spot a housing/credit bubble visible to nearly every blogger in the country. However, like his mentor Greenspan, Bernanke believes that every problem can be cured by throwing money at it. Finally, he is a creative, political power grabbing hack who gives memorable speeches about throwing money out of helicopters.

I have to hand it to Caroline. That is indeed a unique set of qualifications.

Bernanke’s four-year term ends in February, let us hope he is gone. Better yet, it’s time to Audit the Fed Then End It!

As I pointed out before, Ben Bernanke is consistently wrong on virtually everything he says:

Let’s see what Bernanke had to say about 1 year ago in April 2008 …

Mr. Bernanke, testifying before the Joint Economic Committee on Capitol Hill, said the economic situation had weakened since the Fed last reported at the end of January but that it could revive later in 2008 because of the $150 billion spending and tax cut package enacted this year.

There is one thing you can trust Bernanke with – the fact that he is wrong, always and everywhere…In one year from now, when condidtions are worse than now, what do you think he will tell us then? Is anybody still listening to this guy? If so … why?

And here’s Bernanke in May 2007:

All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.

And I may point out that Bernanke needs to be tried as a criminal:

For all I know, this means that Paulson all but admitted to performing securities fraud, at the behest of Ben Bernanke. Bank of America shareholders have a clear case here. It’s time to let the indictments begin…

Mr. Bernanke, you need to step down, get ready to be tried in court, stop trying micromanage the economy, and above all Shut the Hell Up.

Meanwhile, Congress needs to Audit the Fed, expose it, and the get rid of it once and for all.

Tags: audit the fed, ben bernanke, federal reserve bank

Murray Rothbard – One of the Greatest

June 28, 2009 · Posted in Philosophy · 9 Comments

Lew Rockwell is always a good read. In The Uncompromising Rothbard he writes:

There are many varieties of libertarianism alive in the world today, and they owe a great debt to the work of Ludwig von Mises. His top American student was Murray N. Rothbard, and Rothbardianism remains the center of its intellectual gravity, its primary muse and conscience, its strategic and moral core, and the focal point of debate even when its name is not acknowledged. The reason is that Rothbard forged a blend between Austrian economics and natural-rights political theory of the old liberal school to create a modern libertarianism, a political-economic-ideological system that proposes a once-and-for-all escape from the trappings of left and right and their central plans for how state power should be used. Libertarianism is the radical alternative that says state power is both unworkable and immoral.

“Mr. Libertarian,” Murray N. Rothbard was called, and “The State’s Greatest Living Enemy.” He remains so. Yes, he had many predecessors from which he drew: the whole of the classical-liberal tradition, the Austrian economists, the American antiwar tradition, and the natural-rights tradition. But it was he who put all these pieces together into a unified system that seems inevitable once it has been defined and defended. The individual pieces of the system are straightforward (self-ownership, strict property rights, free markets, antistate in every conceivable respect) but the implications are earthshaking.

Once you are exposed to the complete picture – and For A New Liberty has been the leading means of exposure for more than a quarter of a century – you cannot forget it. This book has been out of print but will appear early next year from the Mises Institute. More than any other of his works, this book explains why Rothbard seems to grow in stature every year (his influence has vastly risen since his death) and why Rothbardianism has so many enemies on the left, right, and center.

Quite simply, the science of liberty that he brought into clear relief is as brilliant in the hopes it creates for a free world as it is unforgiving of error. Its logical and moral consistency, together with its empirical-explanatory muscle, represents a threat to any intellectual vision that sets out to use the state to refashion the world according to some pre-programmed plan. And to the same extent it impresses the reader with a hopeful vision of what might be.

Rothbard set out to write this book soon after he got a call from Tom Mandel, an editor at Macmillan who had seen an op-ed by Rothbard in the New York Times in the spring of 1971. It was the only commission Rothbard ever received from a commercial publishing house. Looking at the original manuscript, which is so consistent in its typeface and nearly complete after its first draft, it does seem that it was nearly effortless joy for him to write. It is seamless, unrelenting, and energetic.

It is also striking how Rothbard chose to pull no punches in his argument. Other intellectuals on the receiving end of such an invitation might have tended to water down the argument to make it more palatable. Why, for example, make a full case for no state when a case for limited government might bring more people into the movement? Why condemn the US? Why go into such depth about privatizing courts and roads and water? Why enter into the sticky area of regulation of consumption and of personal morality? And why go into such detail about monetary affairs and central banking and the like?

Trimming and compromising for the sake of the times or the audience was just not Rothbard’s way. He knew that he had a once-in-a-lifetime chance to present the full package of libertarianism in all its glory, and he was not about to pass it up. And thus do we read here: not just a case for cutting government but eliminating it altogether, not just an argument for assigning property rights but for deferring to the market even on questions of contract enforcement, and not just a case for cutting welfare but for banishing the entire welfare-warfare state.

Whereas other attempts to make a libertarian case, both before and after this book, might typically call for transitional or half measures, or be willing to concede as much as possible to statists, that is not what we get from Murray. Not for him such schemes as school vouchers or the privatization of government programs that should not exist at all. Instead, he presents and follows through with the full-blown and fully bracing vision of what liberty can be. This is why so many other similar attempts to write the Libertarian Manifesto have not stood the test of time, and yet this book remains in high demand.

Similarly, there have been many books on libertarianism that have appeared in the intervening years that covered philosophy alone, politics alone, economics alone, or history alone. Those that have put all these subjects together have usually been collections by various authors. Rothbard alone had the mastery of all these areas to be able to write an integrated manifesto – one that has never been displaced. And yet his approach is typically self-effacing: he constantly points to other writers and intellectuals of the past and his own generation.

In addition, some introductions of this sort are written to give the reader an easier passage into a difficult book, but that is not the case here. He never talks down to his readers but always with clarity. Every page exudes energy and passion that the logic of his argument is impossibly compelling, and that the intellectual fire that inspired this work burns as bright now as it did all those years ago.

The book is still regarded as “dangerous” precisely because, once the exposure to Rothbardianism takes place, no other book on politics, economics, or sociology can be read the same way again. What was once a commercial phenomenon has truly become a classical statement that I predict will be read for generations to come.

I can only concur. For a New Liberty is, next to The Ethics of Liberty, one of the most amazing books I have ever read. I was already leaning toward libertarianism, but this book sealed it for me. Nowhere have I ever read anything so precise, uncompromising, and consistent. His approach is the mother of all out-of-the-box thinking. I promise, whoever reads it will experience one eye-opener after another.

Rothbard doesn’t shy away from bringing up controversial issues, such as the separation of government from almost anything. He always backs his proposals up with unshakable, logical, and sound reasoning. Some people may not like what he writes, but they are at a loss when trying to debunk his logic.

Ideologies change over time, and the mood may swing from one side to another again and again. But truth and scientific facts are eternal. That is why I, too, believe that Murray Rothbard’s work will be remembered for many many generations to come. Once mankind recognizes the correctness, consistency, and completeness of libertarianism, For a New Liberty may even be the manifesto to lay the foundation for a new world, a world of Freedom, Liberty, Peace, Happiness and Prosperity for everyone.

Tags: for a new liberty, Murray Rothbard, the ethics of liberty

Cap & Trade – Lobbyism Gone Wild With Your Tax Dollars

June 27, 2009 · Posted in Environment, Interventionism · 2 Comments

Some facts about Cap and Trade:

This whole debate is so utterly misguided, one doesn’t even know where to start. The federal government, of course, once again has no other answer to offer than to tax the people to the hill with the pretense of protecting the environment.

Does anyone seriously think that yet another 1200 page government bill that most representatives have not read will be our salvation? A bill that adds to the already constantly rising tax burden for Americans. If we were truly so concerned about environmental protection, then why don’t we attack the problem at its root? Who is the biggest polluter in the nation? Dr. Mary Ruwart tells us in The Pollution Solution: Stopping the environment’s worst enemy:

Who’s the greatest polluter of all? The oil companies? The chemical companies? The nuclear power plants? If you guessed “none of the above,” you’d be correct. Our government, at the federal, state, and local levels, is the single greatest polluter in the land. In addition, our government doesn’t even clean up its own garbage! In 1988, for example, the EPA demanded that the Departments of Energy and Defense clean up 17 of their weapons plants which were leaking radioactive and toxic chemicals — enough contamination to cost $100 billion in clean-up costs over 50 years! The EPA was simply ignored. No bureaucrats went to jail or were sued for damages. Government departments have sovereign immunity.

In 1984, a Utah court ruled that the U.S. military was negligent in its nuclear testing, causing serious health problems (e.g. death) for the people exposed to radioactive fallout. The Court of Appeals dismissed the claims of the victims, because government employees have sovereign immunity.

Hooker Chemical begged the Niagara Falls School Board not to excavate the land where Hooker had safely stored toxic chemical waste. The school board ignored these warnings and taxpayers had to foot a $30 million relocation bill when health problems arose. The EPA filed suit, not against the reckless school board, but against Hooker Chemical! Government officials have sovereign immunity.

Government, both federal and local, is the greatest single polluter in the U.S. This polluter literally gets away with murder because of sovereign immunity. Libertarians would make government as responsible for its actions as everyone else is expected to be. Libertarians would protect the environment by first abolishing sovereign immunity.

By turning to government for environmental protection, we’ve placed the fox in charge of the hen house — and a very large hen house it is! Governments, both federal and local, control over 40% of our country’s land mass. Unfortunately, government’s stewardship over our land is gradually destroying it.

For example, the Bureau of Land Management controls an area almost twice the size of Texas, including nearly all of Alaska and Nevada. Much of this land is rented to ranchers for grazing cattle. Because ranchers are only renting the land, they have no incentive to take care of it. Not surprisingly, studies as early as 1925 indicated that cattle were twice as likely to die on public ranges and had half as many calves as animals grazing on private lands.

Obviously, owners make better environmental guardians than renters. If the government sold its acreage to private ranchers, the new owners would make sure that they grazed the land sustainably to maximize profit and yield.

Indeed, ownership of wildlife can literally save endangered species from extinction. Between 1979 and 1989, Kenya banned elephant hunting, yet the number of these noble beasts dropped from 65,000 to 19,000. In Zimbabwe during the same time period, however, elephants could be legally owned and sold. The number of elephants increased from 30,000 to 43,000 as their owners became fiercely protective of their “property.” Poachers didn’t have a chance!

Similarly, commercialization of the buffalo saved it from extinction. We never worry about cattle becoming extinct, because their status as valuable “property” encourages their propagation. The second step libertarians would take to protect the environment and save endangered species would be to encourage private ownership of both land and animals.

Environmentalists were once wary of private ownership, but now recognize that establishing the property rights of native people, for example, has become an effective strategy to save the rain forests. Do you remember the movie, Medicine Man, where scientist Sean Connery discovers a miracle drug in the rain forest ecology? Unfortunately, the life-saving compound is literally bulldozed under when the government turns the rain forest over to corporate interests. The natives that scientist Connery lives with are driven from their forest home. Their homesteading rights are simply ignored by their own government!

Our own Native Americans were driven from their rightful lands as well. Similarly, our national forests are turned over to logging companies, just as the rain forests are. By 1985, the U.S. Forest Service had built 350,000 miles of logging roads with our tax dollars — outstripping our interstate highway system by a factor of eight! In the meantime, hiking trails declined by 30%. Clearly, our government serves special interest groups instead of protecting our environmental heritage.

Even our national parks are not immune from abuse. Yellowstone’s Park Service once encouraged employees to trap predators (e.g., wolves, fox, etc.) so that the hoofed mammals favored by visitors would flourish. Not surprisingly, the ecological balance was upset. The larger elk drove out the deer and sheep, trampled the riverbanks, and destroyed beaver habitat. Without the beavers, the water fowl, mink, otter, and trout were threatened. Without the trout or the shrubs and berries that once lined the riverbanks, grizzlies began to endanger park visitors in their search for food. As a result, park officials had to remove the bears and have started bringing back the wolves.

Wouldn’t we be better served if naturalist organizations, such as the Audubon Society or Nature Conservancy, took over the management of our precious parks? The Audubon Society’s Rainey Wildlife Sanctuary partially supports itself with natural gas wells operated in an ecologically sound manner. In addition to preserving the sensitive habitat, the Society shows how technology and ecology can co-exist peacefully and profitably.

The environment would benefit immensely from the elimination of sovereign immunity coupled with the privatization of “land and beast.” The third and final step in the libertarian program to save the environment is the use of restitution both as a deterrent and a restorative. Next month’s column will feature the second part of the Pollution Solution, answering the question: “How would libertarians keep our air and water clean?”

… how about for once we try some common sense to solve a problem, not another monster bill that accomplishes nothing but a bonanza for corporate interest groups, with taxpayers footing the bill. Please don’t give us another TARP.

Tags: cap and trade, Environment, pollution

US Saving Rate Highest in 16 Years

June 26, 2009 · Posted in General Economics · Comment

The US Personal Saving Rate just hit 6.9%:

The last time it was higher was in December 1993:

Savings are crucial to economic progress and prosperity. For the first time in decades Americans have realized this and are turning the tide. This is in line with ongoing Delevaraging, Contraction, Imploding Consumer Credit & Increased Saving.

Tags: personal saving rate, savings

Deflation Continues in Japan

June 26, 2009 · Posted in Global Economics · Comment

The AP writes Record fall in Japan prices fuel deflation fears:

Japan’s key consumer price index tumbled at a record pace in May, the government said Friday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline.
…
With crude oil prices down dramatically from record highs a year earlier, energy and transportation prices fell sharply in May. Fuel, light and water charges were down 3 percent, and private transportation costs tumbled 9.2 percent.
…
Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.
…
The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation’s capital are considered a leading barometer of price trends across Japan.

“This is consistent with media reports that large supermarkets are marking such goods down as households turn increasingly defensive amid severe employment and income conditions,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Japan’s central bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year.

Note that in reality the price declines are probably move severe. I am not exactly sure how the numbers are measured in Japan, but in the US for example, real prices are actuall falling at a much faster pace than reported:

When we replace OER with the Case-Shiller home price index, which most recently indicated a year on year drop of 18.7%, prices overall actually fell by 6.3%.

Two fallacies in common reports in the media:

1. That there is a possibility of an impending deflation. – The truth is: Deflation is here and now, has been for a while, and will be for a while.

2. That we have to “fear” deflation. – The truth is: Deflation is a good thing, as I pointed out a couple of times:

Deflation is in essence a correction of the previous misallocations created by inflation.

What turns deflation into a bad thing? When the government tries to stave it off by spending billions and trillions of dollars, thus prolongs the correction, continues the misallocations, and increases the debt burden on the taxpayers. If you want to get an idea of the long term outlook for the US economy, look at Japan. The credit and stock bubble there burst in 1989, and has been deflating on and off since then.

As I referenced in The Long Term Outlook:

How much deleveraging?

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income. How much further will the deleveraging process go? In addition to factors governing the supply and demand for debt, the answer will depend on the future growth trajectory of the U.S. economy. While it’s true that Japanese firms and U.S. households may differ in important ways regarding decisions about paying down debt, the Japanese experience provides a recent example of a significant deleveraging episode that took place in the aftermath of a major real estate bubble and is useful as a benchmark.

The Japanese stock market bubble burst in late 1989, followed soon after by the bursting of the real estate bubble in early 1991. Nearly 20 years later, stock and commercial real estate prices remain more than 70% below their peaks, while residential land prices are more than 40% below their peak.

Figure 3 compares Japan’s nonfinancial corporate sector with the U.S. household sector over 10-year periods before and after the leverage-ratio peaks. In both countries, leverage ratios rose rapidly in the years before the peak.

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt to GDP ratio of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Update: I meant to say “public debt to GDP”, not ” public debt per capita”, even thought that, too, is likely to be accurate.

Tags: deflation, japan

US Confidence in Banks Reaches Record Low

June 25, 2009 · Posted in General Economics · Comment

Please consider the latest Gallup Poll on Confidence:

… confidence in banks fell by 10 points, from 32% in June 2008 to a record-low 22% today. The previous low point for banks was 30% in October 1991.

Tags: banks, confidence, june 2009

California Controller Considers Paying in IOUs

June 25, 2009 · Posted in Government · 3 Comments

As Democrats in California continue to try and shove their tax hikes down Californians’ throats, the state could begin issuing IOUs next week:

As lawmakers rejected the core of a Democrat-backed budget plan intended to tame California’s $24-billion deficit, a top finance official warned that the budget crisis could force him to begin issuing IOUs next week.

Controller John Chiang announced that he would have to start paying many of the state’s bills with IOUs on July 2 if the partisan tug-of-war over the deficit isn’t ended by then.

With a scant seven days to that deadline, both houses of the Legislature took up one of the 20 bills that make up the latest spending plan but failed to garner the two-thirds vote needed to pass it.

…

Chiang met with legislative leaders earlier this week to warn them of the consequences of further delays in adopting budget revisions. He said in a news release that resorting to IOUs “sends a signal” from Wall Street to Main Street that California is out of options.

Lawmakers said they were aware of the stakes.

“The clock is ticking and it’s ticking fast,” declared Assemblywoman Noreen Evans (D-Santa Rosa), chairwoman of the legislative budget panel that crafted the deficit-reduction package.

“Everybody’s talking about jumping off the cliff,” said Sen. Bob Dutton (R-Rancho Cucamonga). “We’re already off the cliff.”

The best signal would be for California Democrats to come to their senses, adopt the cuts to state spending and finally get it over with. As to whether or not they will make the deadline for this budget, I’m making a “bold” prediction: No. They absolutely won’t.

Tags: california, california budget

Ron Paul’s Audit the Fed Bill – Now 242 Co-Sponsors

June 25, 2009 · Posted in Monetary Economics · Comment

While President Obama continues his mindless praise for the Federal Reserve and Ben Bernanke, the representatives in the House continue to sign on to audit the Fed:

Ron Paul’s bill to audit the Federal Reserve (HR 1207) now has 242 co-sponsors, and the numbers keep growing! At the same time, HR 1207’s companion bill in the Senate, S 604, is beginning to attract its first co-sponsors!

This is history in the making, and victory is within reach. Imagine what will happen if HR 1207, The Federal Reserve Transparency Act, comes up for vote in Congress! With more than 55% of the House of Representatives already co-sponsoring this bill, it has real potential to pass — BUT only if we educate and rally the people to support it and get our Congresspeople to put it to vote and pass it.

… history in the making indeed! But no time for complacency. The companion bill in the Senate, S604 still needs more co-sponsors.

Tags: audit the fed, ron paul

The Federal Reserve’s Power Grab – The Insanity Knows no Boundaries

June 24, 2009 · Posted in Interventionism · Comment

Statements from President Obama and the people around him reaffirm a sad fact. They have not learned a single thing. The New York Times writes Behind the Scenes, Fed Chief Advocates Bigger Role:

WASHINGTON — During the debate over financial regulation, the Federal Reserve chairman, Ben S. Bernanke, has been surprisingly quiet.

But behind the scenes, he has been a forceful proponent of giving the Fed more power, both defending his management of the economic crisis and arguing that more authority would help the agency act more decisively to reduce the chances of a recurrence, according to interviews with lawmakers and officials from the Fed, the Treasury and the White House.

I may point out, as I have again and again, that credit expansion and the consumption business cycle were created by none less than the central bank, the Federal Reserve Bank, and the fractional reserve banks under its oversight. Giving the Fed more power will accomplish the opposite of reducing the chance of a recurrence. We need more regulation, not more decrees from a government institution, or an institution that only exists by means of government granted monopoly. More regulation can only be attained through the market place.

Despite criticism by some lawmakers that the Fed failed to anticipate the problems that led to the crisis, Mr. Bernanke has told associates that such critics fail to recognize the extraordinary actions taken by the central bank over the last year.

What the Fed has done over the last year was to get involved in corporate bailouts and an attempt to force lending. How are corporate bailouts a good thing? All they accomplish is to slow down and prolong the correction. What has the lending to banks accomplished? Are banks lending more now than 1 year ago? No, as a matter of fact credit is visibly imploding across the board. And in fact they shouldn’t be making any more loans. Bernanke still hasn’t been able to grasp the fact that lending can’t be forced. He has the wrong objective and on top of that he hasn’t attained it. How can one be any more out of touch with reality? The reality is: People are sick and tired of debt. What has Bernanke done to facilitate a swift liquidation of debt? Nothing.

Mr. Bernanke believes the Fed’s actions have played a major role in averting a possible second Great Depression, according to government officials who know his thinking. Those steps, the Fed chairman has told these people, demonstrate that the agency is up to the larger task assigned to it by the Obama administration.

Of course Bernanke is clueless about The Great Depression. The Fed has imitated virtually everything from the Great Depression playbook.

Mr. Bernanke has one important champion — President Obama. On Tuesday, the president reinforced his preference for an enlarged role for the Fed in a news conference at the White House.

The administration’s proposals for a regulatory overhaul are built around the idea “that there’s got to be somebody who is responsible not just for monitoring the health of individual institutions, but somebody who’s monitoring the systemic risks of the system as a whole,” Mr. Obama said. “And we believe that the Fed has the most technical expertise and the best track record in terms of doing that.”

And Mr. Obama: Would you mind telling us to whom the Fed is accountable? Congress is not allowed to audit their most fundamental operations. I am hoping you are aware of the fact that paragraph 714 of US Code 31 rules out any meaningful audit. I fear that you do not support Ron Paul’s Audit the Fed bill. Could you tell us if you are at least going to sign this transparency act before you give this secret institution any more powers? Who owns the Fed? Who is it accountable to? Right, the very banks it is supposed to oversee and who own member stock that pays 6 percent divident per year. You can read it up right here on the Fed’s own website. At the beginning of the same paragraph where this relationship is explained it says the Fed is not owned by anyone. Which one is it now? But then, is any one of those two options better than the other? If the Fed is not owned by anyone then it is accountable to nobody which is actually worse. If this kind of independence was so good, why don’t we make the military unaccountable to anyone as well. Heck, why don’t we abolish accountability of any government institution to anybody alltogether? What a misguided debate!

He said that while the Fed was not blameless, it was not fair to single it out for failing to avert the crisis.

“I think that the Fed probably performed better than most other regulators prior to the crisis taking place, but I think they’d be the first to acknowledge that in dealing with systemic risk and anticipating systemic risk, they didn’t do everything that needed to be done,” Mr. Obama said.

Unfortunately no, when you are instrumental to creating a crisis it is not permissible to claim that you “performed” in any way before it. In fact you didn’t perform at all if the objective of said performance was to avoid a crisis. As a matter of fact, you have done the exact opposite of “performing well”, you have “failed miserably”. That President Obama would utter such a baseless and false statement is simply deplorable.

The president and Mr. Bernanke do not, however, see eye-to-eye over whether to create a Consumer Financial Protection Agency, part of which would be carved out of the Fed’s existing jurisdiction over mortgages and credit cards.

Breaking ranks with the administration, Mr. Bernanke is expected to tell Congress that the Fed would prefer to keep the responsibility for consumer lending. He is also expected to promise a stronger emphasis on consumer debt issues in the future.

Mr. Bernanke’s surrogate in the debate has been the Treasury secretary, Timothy F. Geithner, who in Congressional testimony, speeches and interviews has praised the Federal Reserve’s performance.

(Mr. Geithner’s views may also have reflected his pedigree. He joined the administration after serving five years as president of the New York Federal Reserve, where he worked closely with Mr. Bernanke.)

I don’t think there is a more clueless person in this administration than Tim Geithner. That he would support Bernanke is only to be expected. That he himself admitted that the Fed kept rates too low for too long is probably just another statement that he has forgotten about, did not quite think through, and/or has no particular context for in his limited and low level mindset on economic theory.

Mr. Bernanke has been reluctant to get involved in the political debate, but has argued to associates and lawmakers that the often-mentioned alternative of a council supervising the largest firms would not be nimble or accountable enough.

And Mr. Bernanke: Would you mind telling us to whom the Fed is … darn, I am beginning to repeat myself.

He also has said that the plan is not a radical departure from the Fed’s current role. The Fed is already the umbrella supervisor of virtually all of Wall Street’s largest institutions, and the Obama plan would add only a handful of new companies to the Fed’s oversight list. The Fed so far has not specified which companies it would add to its purview, but once it decides, it is expected to make the list public.

One simple question: How well has the Fed done in overseeing the nation’s banking system as a whole over the past 10 year? Who is to believe that adding to its purview is a decision that a creature with more than one brain cell can possibly support.

The biggest impact, government officials said, is not in the number of institutions the Fed regulates, but in how it regulates them. It will have to go beyond measuring the financial safety of institutions to examining their connections to other firms and markets, and the dangers those connections could pose.

By possibly requiring the largest institutions to hold more capital against losses or to reduce the amount of debt they carry, for example, the Fed could make firms less profitable and less competitive with their smaller rivals. That in turn could prompt some of the largest institutions to decide to shrink, either by borrowing and lending less, or selling off units.

… how about a fair and free market in banking? You know, that thing where the ones who serve the consumers best prevail, and those who don’t, go out of business. That thing where irresponsible lending is punished. That thing where any bank that does not hold close to 100% reserves against their checking deposits, goes out of business. You know, all the things that the history of money has taught us, things that these clowns in office are obviously completely oblivious to.

If we were so concerned about big institutions with monopoly positions then why did the government by law create the hugest behemoth of all of them and give them exclusive privilege to print fiat money. Why does the President praise this institution so much? Does insanity have any boundaries?

Fed officials said they expected that new capital requirements would be tailored to the risks and strengths of each bank.

They and top administration officials disagree that the Fed’s new authority amounts to overseeing “too big to fail” banks. Under the plan, the government would have explicit authority to seize any faltering institution that was judged an unacceptable risk to the overall financial system. As a result, the government would not have to guarantee creditors 100 cents on the dollar — and “too big to fail” would no longer be the default policy.

That breaks from the practice of last year, when creditors to the American International Group, Fannie Mae and Freddie Mac were repaid in full because Mr. Bernanke and Henry M. Paulson Jr., then the Treasury secretary, did not think the government had the legal authority to shut down nonbank institutions, or to choose which loans to repay in full and which to discount.

I have a very simple solution to this: How the government AND the Fed once and for all stop all corporate bailouts? They are harmful and slow down any potential recovery. They hurt the productive and reward the unproductive. Why not put an end to this circus?

Mr. Bernanke has also told people that he finds it illogical that some lawmakers are citing the Fed’s failure years ago to curtail deceptive or abusive subprime loans as the reason for their objections to the administration’s plan.

This is not the criticism of the Fed. It is the fact that it is a substantially flawed institution, that it has brought about the worst crises in economic history, that we simply don’t need a Fed. These are the issues that Bernanke has to answer to, not some superficial criticisms of its regulatory activities.

In recent months, a series of new regulations issued by the Fed on mortgages and credit card policies issued under Mr. Bernanke have generally been applauded by consumer groups and some lawmakers, although Congress recently passed a law, which President Obama signed, to add some features. The new law requires banks and card companies to give 45 days’ notice before a change in interest rates and prohibits them from raising rates on existing balances unless a card holder falls 60 days behind on minimum payments.

Some critics have raised other concerns — that the Fed is stretching itself too thin, or compromising the political independence that is essential for setting monetary policy.

“The plan does give more power to the Fed and just complicates its job and therefore raises questions about its ultimate mission,” said John B. Taylor, a professor of economics at Stanford and a Treasury under secretary in the Bush administration. His book, “The Road Ahead for the Fed,” (Hoover Institution Press) is being published this week. “If the Fed goes further off its course and doesn’t focus on what it did in the 1980s and 1990s, it will have less control over inflation. It will lose its independence. It will have to become more political.”

Vincent R. Reinhart, a resident scholar at the American Enterprise Institute and former director of the Fed’s division of monetary affairs, said that policy makers needed to be concerned about mission creep.

“The main problem in becoming the systemic risk regulator is that it can be a very diffuse responsibility,” Mr. Reinhart said. “Should the Federal Reserve have been monitoring Enron and Long Term Capital Management and the Hunt brothers when they were involved in silver market manipulation?”

He added: “What is the ideal governor of the Fed supposed to be, someone who understands monetary policy, systemic risk, bank regulation, consumer affairs and Congressional relations? You are reaching the point where the agency is being spread pretty thin.”

Mr. Bernanke’s views, which have evolved as the financial crisis has unfolded, contrast markedly with those of his predecessor. Alan Greenspan, who said last year in his book “The Age of Turbulence” that the idea of the Fed as a systemwide regulator was “mission impossible.”

Of course it is impossible. And we will see it sooner or later. Who knows what problems a new and more powerful Fed will manage to create again down the road. But whatever it is, at some point we will be back to square one, debating how this could have happened, and debating how much more powers to grant to it in order to avert the problems that it itself has brought about.

Tags: ben bernanke, federal reserve bank