8/31/07
Today our “free market” president announced a plan to use the FHA and the tax code to help homeowners who are in over their heads to refinance their mortgages and keep the houses they obviously could not afford in the first place. As the President explained:
"This has led some homeowners to take out loans larger than they could afford based on overly optimistic assumptions about the future performance of the housing market. Others may have been confused by the terms of their loan, or misled by irresponsible lenders. Whatever the reason they chose this kind of mortgage, some borrowers are now unable to make their monthly payments, or facing foreclosure."
The President went on to say:
"Anybody who loses their home is somebody with whom we must show enormous empathy," the president said at an Aug. 9 news conference. "The word `bailout,' I'm not exactly sure what you mean. If you mean direct grants to homeowners, the answer would be no, I don't support that."
Well, no, Mr. President, we can have sympathy for people who have lost their homes, but we can’t have empathy with or for them unless we, too, have lost our homes to foreclosure, and most of us haven’t. Most of us haven’t lost our homes in foreclosure because we purchased homes we could afford, made sure we had a financial cushion before we bought such homes, and have been fortunate not to have had to endure a financial problem that exhausted that cushion. Some people are losing their homes in foreclosure due to circumstances beyond their control, but most are losing their homes because they purchased homes they could not afford, homes they had no business purchasing in the first place, and homes that they never really owned anyway. As the AP story said:
A key element of Bush's plan would allow homeowners with good credit histories, but who cannot afford their mortgage payments, to refinance into mortgages insured by the Federal Housing Administration to keep from defaulting. (Emphasis mine)
Despite his protestations against the word “bailout,” what our purportedly “free market” but actually economically illiterate and statist. (One cannot be the latter without being the former.) President is proposing is that we who have been careful with our money and who have purchased homes we actually could afford subsidize those who bought their “dream houses” regardless of cost in order to bail out a mortgage industry with a disregard for its customers that is matched only by the utter lack of financial knowledge displayed by its sales force and, in many cases, its upper management and to save the proverbial bacon of other financial players who plunged into “investments” with little regard for risk or its price.
No wonder people do not make wise economic decisions! They are rewarded for financial irresponsibility and punished for financial rectitude. Perhaps those of us who have practiced the latter are really the stupid ones—why be careful with one’s money when the government will always be there to clean up your mess? After all, it’s never YOUR fault! And we wonder why our national savings rate regularly hovers around 0%, give or take a few basis points.
This proposed bailout has confirmed my recent belief that what we need is a no exceptions balanced budget rule. I used to worry that politicians would only use such a rule to raise taxes to match their insatiable spending habits rather than borrow to match those lascivious designs on the taxpayers’ wallets. Now, however, I have come to believe that such a policy would act as a check on such spending and on the inexorable growth in government of which it is a part. As it is now, taxpayers must pick up only the interest, if that, on any new spending, so the resistance to never ending government growth is muted to the point of inaudibility. That would change if the budget had to be balanced and, thus, new programs had to be paid for in, effectively, cash. In the case of the President’s latest bright idea, if people had to actually reach into their pockets and pay for the irresponsibility of their big spending neighbors in order to bail out a pack of financial hyenas and mountebanks, the outcry would be so great that no president, no politician, would even think of proposing such an economically destructive and politically oppressive wealth transfer.
Friday, August 31, 2007
Thursday, August 30, 2007
Inordinate Fear of Hillaryism
8/30/07
Just a few weeks ago, Hillary Clinton wondered about the Right’s “obsession” with her. Those of us who have little fear of, and perhaps even less love for, Mrs. Clinton have been wondering about the Right’s fear, bordering on paranoia, of her for years.
Of what is everyone so afraid? Why did the American Spectator feel compelled to have a column called “Hillary Watch”? Why do people who would appear to have more important things to do devote their lives to full-time Hillary bashing (as the Wall Street Journal reported last week) out of fear that she might become president?
As one who really believes the things that self-proclaimed conservatives say they believe about limited government and personal and economic freedom, I have very little fear of Mrs. Clinton. Even if we assume she is some sort of wild-eyed Left Wing ideologue, we have to assume that the statist philosophy we normally associate with the Left (what I like to call “All things to all people with your money”) is so seductive, or that Mrs. Clinton is such a charismatic salesperson, that another Clinton presidency will result in a wholesale change of American political thinking. In reality, the bromides of the far left wing of the Democratic Party are the same dyspeptic codswallop they have always been (Has anyone noticed Dennis Kucinich’s poll numbers lately?) and Mrs. Clinton is no Huey Long. Such radical shifts, though certainly not without precedent (1932 and 1980 come immediately to mind, though neither represented as radical a shift as either their fans or critics would have us believe.), are very rare in American politics.
Equally important, there is very little evidence that Mrs. Clinton is a loony leftist. Sure, she may be more ideologically motivated than was her husband, but the same could be said for about 95% of breathing Americans. In reality, the most salient feature of Hillary Clinton is the most salient feature of Bill Clinton: a solipsistic obsession with acquiring and maintaining power. As is the case with Bill, what matters to Hillary Clinton is Hillary Clinton. To the extent that any political philosophy would interfere with her winning, and keeping, the presidency that philosophy will be thrown overboard.
Therefore, when Mrs. Clinton becomes president, we shouldn’t expect any addle-brained initiatives in either foreign or domestic policy. The capital gains tax will not be increased (Note that her husband reduced the capital gains tax after Mr. Reagan raised it.) because Hillary, and the Democrats, are smart enough to know the consequences that such an increase would have for the markets and the economy, and thus for their grip on power. Domestic spending will not skyrocket in an effort to implement a radical left wing agenda, at least not to the extent that it skyrocketed under George II in an effort to implement a radical right wing (but certainly not conservative or libertarian) agenda, because Mrs. Clinton knows just how much the American people like their money spent on quixotic attempts at remaking society. Foreign policy (sadly) will remain pretty much as it has been since the end of World War II. Taxes at the very high end of the income scale will probably be raised, but, just as when Bill Clinton raised such taxes, most people, and the economy, will barely notice. Nor will the nightmares of the religious Right be realized. The number of abortions, for example, will rise or fall with society’s attitude toward abortion without regard for what the occupant of the White House thinks. Note that abortions rose sharply during the administration of the most “pro-life” President ever, Ronald Reagan, and fell sharply during the administration of the most “pro-choice” President ever, Bill Clinton.
In short, because Mrs. Clinton is as focused on Hillary Clinton as Mr. Clinton was focused on Bill Clinton, and she is a rather talented and clever politician (though not in Bill’s league), we can expect that the second Clinton presidency will be pretty much like the first Clinton presidency. Especially after the second Bush presidency, is that such a bad thing?
Just a few weeks ago, Hillary Clinton wondered about the Right’s “obsession” with her. Those of us who have little fear of, and perhaps even less love for, Mrs. Clinton have been wondering about the Right’s fear, bordering on paranoia, of her for years.
Of what is everyone so afraid? Why did the American Spectator feel compelled to have a column called “Hillary Watch”? Why do people who would appear to have more important things to do devote their lives to full-time Hillary bashing (as the Wall Street Journal reported last week) out of fear that she might become president?
As one who really believes the things that self-proclaimed conservatives say they believe about limited government and personal and economic freedom, I have very little fear of Mrs. Clinton. Even if we assume she is some sort of wild-eyed Left Wing ideologue, we have to assume that the statist philosophy we normally associate with the Left (what I like to call “All things to all people with your money”) is so seductive, or that Mrs. Clinton is such a charismatic salesperson, that another Clinton presidency will result in a wholesale change of American political thinking. In reality, the bromides of the far left wing of the Democratic Party are the same dyspeptic codswallop they have always been (Has anyone noticed Dennis Kucinich’s poll numbers lately?) and Mrs. Clinton is no Huey Long. Such radical shifts, though certainly not without precedent (1932 and 1980 come immediately to mind, though neither represented as radical a shift as either their fans or critics would have us believe.), are very rare in American politics.
Equally important, there is very little evidence that Mrs. Clinton is a loony leftist. Sure, she may be more ideologically motivated than was her husband, but the same could be said for about 95% of breathing Americans. In reality, the most salient feature of Hillary Clinton is the most salient feature of Bill Clinton: a solipsistic obsession with acquiring and maintaining power. As is the case with Bill, what matters to Hillary Clinton is Hillary Clinton. To the extent that any political philosophy would interfere with her winning, and keeping, the presidency that philosophy will be thrown overboard.
Therefore, when Mrs. Clinton becomes president, we shouldn’t expect any addle-brained initiatives in either foreign or domestic policy. The capital gains tax will not be increased (Note that her husband reduced the capital gains tax after Mr. Reagan raised it.) because Hillary, and the Democrats, are smart enough to know the consequences that such an increase would have for the markets and the economy, and thus for their grip on power. Domestic spending will not skyrocket in an effort to implement a radical left wing agenda, at least not to the extent that it skyrocketed under George II in an effort to implement a radical right wing (but certainly not conservative or libertarian) agenda, because Mrs. Clinton knows just how much the American people like their money spent on quixotic attempts at remaking society. Foreign policy (sadly) will remain pretty much as it has been since the end of World War II. Taxes at the very high end of the income scale will probably be raised, but, just as when Bill Clinton raised such taxes, most people, and the economy, will barely notice. Nor will the nightmares of the religious Right be realized. The number of abortions, for example, will rise or fall with society’s attitude toward abortion without regard for what the occupant of the White House thinks. Note that abortions rose sharply during the administration of the most “pro-life” President ever, Ronald Reagan, and fell sharply during the administration of the most “pro-choice” President ever, Bill Clinton.
In short, because Mrs. Clinton is as focused on Hillary Clinton as Mr. Clinton was focused on Bill Clinton, and she is a rather talented and clever politician (though not in Bill’s league), we can expect that the second Clinton presidency will be pretty much like the first Clinton presidency. Especially after the second Bush presidency, is that such a bad thing?
Peter Clemenza on the economic cycle
8/30/07
NOTED ECONOMIC OBSERVER PETER CLEMENZA EXPLAINS RECESSION
Earlier this week, Michael (“Please call me Mike.”) Jackson, the very capable CEO of AutoNation, called for the Fed to cut the fed funds rate because, as he put it, the economy is “at a tipping point,” on the verge of recession. Mr. Jackson is by no means unique among our nation’s corporate top brass in calling for Fed action to avert recession.
Several questions occur to this observer when he hears knowledgeable people calling for the Fed to “do something” in order to prevent (Heaven forbid!) recession:
First, since when did the Fed’s job become steering the economy clear of recession? One could argue that with the passage of Humphrey-Hawkins (“HH”), the Fed’s mission deviated from a single-minded focus on maintaining the purchasing power of the dollar, but H-H has been given little more than lip service by post H-H Fed chairman. If you don’t believe that, note H-H’s 3% inflation, 3% unemployment goal and our real experience in the post H-H environment.
Second, and more importantly, when did recessions become such bogeymen? When did it become imperative that we do everything humanly possible to keep the economy from experiencing recessions? In the past, the business cycle was an accepted phenomenon, and for good reason. Economies have experienced boom-bust cycles, even if usually milder than implied by that nomenclature, since, well, the beginning of time. In the twentieth century, we had come to expect a recession about every, oh, 8 years, give or take a few years. Recessions were accepted as a necessary phase of the natural working of the economy. While recessions were painful, they were necessary to work out the excesses the economy had experienced during long expansion cycles. Recessions were to the economy what gang wars were to the Mob, according to worldly philosopher Peter Clemenza, capo regime under Don Vito Corleone (It was Mr. Clemenza who discovered young Vito Corleone when both were struggling young entrepreneurs on the lower East Side. Without Mr. Clemenza, the Don would never have built his empire in financial services, entertainment, import/export, and personnel management. Thus, Mr. Clemenza’s reputation was built in headhunting (though this record was sullied by his recruitment of Paulie Gallo and Nick Geraci), along with operations management, but, as this post shows, he was no slouch in economics, either. But I digress; at least I do so parenthetically.): “The Sanitation Department will be sweeping up a lot of dead bodies this winter. (but) These things have to happen once every ten years or so. It gets rid of the bad blood.”
Now, however, we have reached the point in man’s economic hubris at which we think we have repealed the business cycle, that we should never have to endure economic pain in the form of a recession. While I agree that we should do everything we can to avoid, even prevent, recessions from becoming depressions, we cannot avoid economic pain any more than we as individuals can avoid emotional or physical pain. Such suffering is part of life, and it allows us to grow into the people we are capable of becoming. The economic pain of recession is as necessary to sustainable growth, to our long term economic well-being, as physical and emotional pain is necessary to the personal maturation process.
The most regrettable feature of recessions is that they fall most heavily on the poor and lower middle class. That, however, is an economic fact of life. But to hear meretricious economic “experts” who are calling for Fed action in order to bail their patrons on Wall Street out of their arrogant recklessness crying crocodile tears about the ramifications of recession for “the working guy” strains credulity.
Judging from the level of economic discourse one reads or hears in the financial media, most experts have not yet come to terms with the reality that the Fed cannot keep the economy from falling into recession. Almost none have come to the realization that perhaps the Fed should not keep the economy from falling into recession.
NOTED ECONOMIC OBSERVER PETER CLEMENZA EXPLAINS RECESSION
Earlier this week, Michael (“Please call me Mike.”) Jackson, the very capable CEO of AutoNation, called for the Fed to cut the fed funds rate because, as he put it, the economy is “at a tipping point,” on the verge of recession. Mr. Jackson is by no means unique among our nation’s corporate top brass in calling for Fed action to avert recession.
Several questions occur to this observer when he hears knowledgeable people calling for the Fed to “do something” in order to prevent (Heaven forbid!) recession:
First, since when did the Fed’s job become steering the economy clear of recession? One could argue that with the passage of Humphrey-Hawkins (“HH”), the Fed’s mission deviated from a single-minded focus on maintaining the purchasing power of the dollar, but H-H has been given little more than lip service by post H-H Fed chairman. If you don’t believe that, note H-H’s 3% inflation, 3% unemployment goal and our real experience in the post H-H environment.
Second, and more importantly, when did recessions become such bogeymen? When did it become imperative that we do everything humanly possible to keep the economy from experiencing recessions? In the past, the business cycle was an accepted phenomenon, and for good reason. Economies have experienced boom-bust cycles, even if usually milder than implied by that nomenclature, since, well, the beginning of time. In the twentieth century, we had come to expect a recession about every, oh, 8 years, give or take a few years. Recessions were accepted as a necessary phase of the natural working of the economy. While recessions were painful, they were necessary to work out the excesses the economy had experienced during long expansion cycles. Recessions were to the economy what gang wars were to the Mob, according to worldly philosopher Peter Clemenza, capo regime under Don Vito Corleone (It was Mr. Clemenza who discovered young Vito Corleone when both were struggling young entrepreneurs on the lower East Side. Without Mr. Clemenza, the Don would never have built his empire in financial services, entertainment, import/export, and personnel management. Thus, Mr. Clemenza’s reputation was built in headhunting (though this record was sullied by his recruitment of Paulie Gallo and Nick Geraci), along with operations management, but, as this post shows, he was no slouch in economics, either. But I digress; at least I do so parenthetically.): “The Sanitation Department will be sweeping up a lot of dead bodies this winter. (but) These things have to happen once every ten years or so. It gets rid of the bad blood.”
Now, however, we have reached the point in man’s economic hubris at which we think we have repealed the business cycle, that we should never have to endure economic pain in the form of a recession. While I agree that we should do everything we can to avoid, even prevent, recessions from becoming depressions, we cannot avoid economic pain any more than we as individuals can avoid emotional or physical pain. Such suffering is part of life, and it allows us to grow into the people we are capable of becoming. The economic pain of recession is as necessary to sustainable growth, to our long term economic well-being, as physical and emotional pain is necessary to the personal maturation process.
The most regrettable feature of recessions is that they fall most heavily on the poor and lower middle class. That, however, is an economic fact of life. But to hear meretricious economic “experts” who are calling for Fed action in order to bail their patrons on Wall Street out of their arrogant recklessness crying crocodile tears about the ramifications of recession for “the working guy” strains credulity.
Judging from the level of economic discourse one reads or hears in the financial media, most experts have not yet come to terms with the reality that the Fed cannot keep the economy from falling into recession. Almost none have come to the realization that perhaps the Fed should not keep the economy from falling into recession.
Sunday, August 26, 2007
BARE NECESSITIES?
In an 8/26/07 Chicago Tribune front page article outlining the all but inevitable crunch in revolving lines of personal credit (i.e., credit cards), Harvard law Professor Elizabeth Warren seeks to deflect blame for the problem of credit overextension from the very people who got themselves into financial trouble:
“The real problem lies in the basics: Median earning families simply don’t have enough money to pay the mortgage, buy health insurance, pay for transportation and day care, and still put groceries on the table.”
Professor Warren may be technically right. But could the problem lie in the expanding definition of “the basics”? Perhaps young adults don’t have to live as well as their parent live as soon as they enter the job market. Perhaps a $400,000 house is not a necessity after all, maybe a $200,000 house would do just as well. Maybe people ought to do something really unconventional and rent for a few years and save (Perish the thought!) for a generous down payment on a home in order to make a mortgage payment more affordable. Transportation? How is that defined? Many people consider a $30,000 car basic transportation. Maybe a $20,000 car is more in order. Perhaps a Honda is as good as an Acura, but how can we expect people to endure the shame of having to face the neighbors in a (Sniff!) “mass market” car. Strictly for the plebes! As sacrosanct as health care is in this country, we clearly spend far too much taking care of ourselves. Years of having someone else pick up the tab for our doctor visits have made us a society of hypochondriacs. We go to the doctor for minor allergies, heartburn (er, sorry, acid reflux disease), and other minor maladies that were once considered part of life and were best treated by waiting them out. We also indulge ourselves in the yearly physician’s fishing expeditions called “checkups,” which tap our wallets (or our insurance company’s reserves and, consequently, our health premia) and feed our anxiety and paranoia, which themselves take their toll on our health. These costs were always there; now that consumers are being asked to pay for more of the “health care” they demand, they are finally beginning to notice.
Doubtless, one can cite examples of people in financial trouble though no fault of their own, whose money problems arose from health troubles, divorce, etc. No one, however, honestly believes that the credit crisis in this country is solely, or even largely, attributable to blameless individuals who got into trouble through bad luck or the vicissitudes of the new economy. If you really believe that, take a look around your neighborhood, observe your neighbors’ spending habits, and tell me with a straight face that our credit problems arose from those who had a round of bad luck or from people merely trying to provide the real necessities. If these were the only people in credit trouble, the scope of the problem would be small enough to render it imperceptible.
The problem, as was alluded to earlier in this excellent Tribune article, is that median earning families don’t want to live like median earning families. Everyone has to have everything…now. The source of this fixation lies deep in our new national psyche: We have bought the codswallop that having the latest gadget or gizmo with the label that the addle-brained opinion makers have suddenly deemed “stylish” will make us happy or win us the esteem of our neighbors. Instead, this fatuous pursuit leaves us frustrated and resentful. While we all hail the virtues of “simple living,” few of us practice it. This is a shame, because the rewards of simple living, of being content with one has and of not being concerned with what one’s neighbors have, are real and innumerable. Someone said that about 2,000 years ago, but no one listens to Him, or his colleagues in faith, any more. Our spiritual vacuum might be the ultimate source of our financial problem.
“The real problem lies in the basics: Median earning families simply don’t have enough money to pay the mortgage, buy health insurance, pay for transportation and day care, and still put groceries on the table.”
Professor Warren may be technically right. But could the problem lie in the expanding definition of “the basics”? Perhaps young adults don’t have to live as well as their parent live as soon as they enter the job market. Perhaps a $400,000 house is not a necessity after all, maybe a $200,000 house would do just as well. Maybe people ought to do something really unconventional and rent for a few years and save (Perish the thought!) for a generous down payment on a home in order to make a mortgage payment more affordable. Transportation? How is that defined? Many people consider a $30,000 car basic transportation. Maybe a $20,000 car is more in order. Perhaps a Honda is as good as an Acura, but how can we expect people to endure the shame of having to face the neighbors in a (Sniff!) “mass market” car. Strictly for the plebes! As sacrosanct as health care is in this country, we clearly spend far too much taking care of ourselves. Years of having someone else pick up the tab for our doctor visits have made us a society of hypochondriacs. We go to the doctor for minor allergies, heartburn (er, sorry, acid reflux disease), and other minor maladies that were once considered part of life and were best treated by waiting them out. We also indulge ourselves in the yearly physician’s fishing expeditions called “checkups,” which tap our wallets (or our insurance company’s reserves and, consequently, our health premia) and feed our anxiety and paranoia, which themselves take their toll on our health. These costs were always there; now that consumers are being asked to pay for more of the “health care” they demand, they are finally beginning to notice.
Doubtless, one can cite examples of people in financial trouble though no fault of their own, whose money problems arose from health troubles, divorce, etc. No one, however, honestly believes that the credit crisis in this country is solely, or even largely, attributable to blameless individuals who got into trouble through bad luck or the vicissitudes of the new economy. If you really believe that, take a look around your neighborhood, observe your neighbors’ spending habits, and tell me with a straight face that our credit problems arose from those who had a round of bad luck or from people merely trying to provide the real necessities. If these were the only people in credit trouble, the scope of the problem would be small enough to render it imperceptible.
The problem, as was alluded to earlier in this excellent Tribune article, is that median earning families don’t want to live like median earning families. Everyone has to have everything…now. The source of this fixation lies deep in our new national psyche: We have bought the codswallop that having the latest gadget or gizmo with the label that the addle-brained opinion makers have suddenly deemed “stylish” will make us happy or win us the esteem of our neighbors. Instead, this fatuous pursuit leaves us frustrated and resentful. While we all hail the virtues of “simple living,” few of us practice it. This is a shame, because the rewards of simple living, of being content with one has and of not being concerned with what one’s neighbors have, are real and innumerable. Someone said that about 2,000 years ago, but no one listens to Him, or his colleagues in faith, any more. Our spiritual vacuum might be the ultimate source of our financial problem.
Thursday, August 23, 2007
Et tu, Dr. Angell?
8/23/07
Wayne Angell, writing on today’s (i.e., 8/23/07’s) Wall Street Journal’s opinion page, argues that the Fed ought to stop worrying about inflation so much and reduce the federal funds rate in order to counter the travails currently besetting the credit markets.
Dr. Angell is apparently convinced that the FOMC staff, after 19 years of Alan Greenspan and a year and a half of Ben Bernanke, remains a nest of perfidious Keynesians. Dr. Angell argues that the “Fed staff story line,” slavishly followed by the Bernanke Fed, is taken straight from the Phillips curve: that “excess demand for labor puts upward pressure on wage increases, increasing the cost of goods and services and leading to price increases.” Rather than continue its misguided focus on inflation, the Fed, Dr. Angell argues, ought to reduce the fed funds rate in order to permit “…Treasury yields to fall enough to encourage banks and other lenders to reach for higher returns, through assuming some risk by buying mortgages and other needed credit to finance the real economy.” Lest the reader assume that Dr. Angell is speaking only about Treasury bills, Angell goes on to say that the “…the FOMC should have been alerted to the evidence that the yield (sic) on Treasury bills, Treasury notes, and Treasury bonds were too high relative to financial assets with more risk.” Dr. Angell further argues that keeping the Fed funds rate too high will lead the market to “…assume that Treasury yields will rise—and the risk of a rush into Treasuries will resume, at the expense of real financing needs of the economy.”
Dr. Angell’s analysis is uncharacteristically wrong on a number of fronts. First, if keeping the fed funds rate too high will indeed lead the market to assume that Treasury yields will rise, why would that induce investors to rush into notes and bonds? I may not be much of a trader, but if I assumed that Treasury yields would rise, one of the last places I would put my money would be into intermediate and long term Treasuries. That is a minor point, however. If, as Dr. Angell argues, what the real economy now needs is a reduction in treasury yields in order to induce investors to assume more risk, the market has already obliged the real economy: since July 20, the yields on the 10 year, 5 year, 2 year, 6 month, and 3 month treasuries have fallen 29, 45, 55, 94, and 121 basis points respectively, decreasing the returns on safety and steepening the yield curve as well, the latter, perhaps, because the market anticipates that the Fed will follow Dr. Angell’s advice.
What Dr. Angell is prescribing is a Fed abandonment of its primary mission, keeping the price level under control, in order to bail out people who made foolish financial decisions. Perhaps Dr. Angell, who gained notoriety and admiration, certainly in these quarters, as a plain-speaking economist from the plains, has spent too much time on Wall Street and in Washington and has now joined the chorus of those self-styled free marketeers who, while cautioning the government to step aside when the working person is driven to desperation, want the Fed to pull out all the stops when bazillionaire hedge fund managers and other Wall Street operators begin to detect a whiff of discomfort.
The market is just going to have to sort out the current problems, just as it has sorted out so many problems in the past. If scores of hedge fund operators and other well-fixed financial sharpies lose their jobs, thousands of “homeowners” who had no business owning homes in the first place lose their homes, and millions of yuppies who borrowed against their McMansions in order to finance a lifestyle they felt entitled them to look down their noses at their neighbors finally have to face grim economic reality, those are the costs of economic adjustment. Capitalism without failure, as someone once said, is like Christianity without hell.
Wayne Angell, writing on today’s (i.e., 8/23/07’s) Wall Street Journal’s opinion page, argues that the Fed ought to stop worrying about inflation so much and reduce the federal funds rate in order to counter the travails currently besetting the credit markets.
Dr. Angell is apparently convinced that the FOMC staff, after 19 years of Alan Greenspan and a year and a half of Ben Bernanke, remains a nest of perfidious Keynesians. Dr. Angell argues that the “Fed staff story line,” slavishly followed by the Bernanke Fed, is taken straight from the Phillips curve: that “excess demand for labor puts upward pressure on wage increases, increasing the cost of goods and services and leading to price increases.” Rather than continue its misguided focus on inflation, the Fed, Dr. Angell argues, ought to reduce the fed funds rate in order to permit “…Treasury yields to fall enough to encourage banks and other lenders to reach for higher returns, through assuming some risk by buying mortgages and other needed credit to finance the real economy.” Lest the reader assume that Dr. Angell is speaking only about Treasury bills, Angell goes on to say that the “…the FOMC should have been alerted to the evidence that the yield (sic) on Treasury bills, Treasury notes, and Treasury bonds were too high relative to financial assets with more risk.” Dr. Angell further argues that keeping the Fed funds rate too high will lead the market to “…assume that Treasury yields will rise—and the risk of a rush into Treasuries will resume, at the expense of real financing needs of the economy.”
Dr. Angell’s analysis is uncharacteristically wrong on a number of fronts. First, if keeping the fed funds rate too high will indeed lead the market to assume that Treasury yields will rise, why would that induce investors to rush into notes and bonds? I may not be much of a trader, but if I assumed that Treasury yields would rise, one of the last places I would put my money would be into intermediate and long term Treasuries. That is a minor point, however. If, as Dr. Angell argues, what the real economy now needs is a reduction in treasury yields in order to induce investors to assume more risk, the market has already obliged the real economy: since July 20, the yields on the 10 year, 5 year, 2 year, 6 month, and 3 month treasuries have fallen 29, 45, 55, 94, and 121 basis points respectively, decreasing the returns on safety and steepening the yield curve as well, the latter, perhaps, because the market anticipates that the Fed will follow Dr. Angell’s advice.
What Dr. Angell is prescribing is a Fed abandonment of its primary mission, keeping the price level under control, in order to bail out people who made foolish financial decisions. Perhaps Dr. Angell, who gained notoriety and admiration, certainly in these quarters, as a plain-speaking economist from the plains, has spent too much time on Wall Street and in Washington and has now joined the chorus of those self-styled free marketeers who, while cautioning the government to step aside when the working person is driven to desperation, want the Fed to pull out all the stops when bazillionaire hedge fund managers and other Wall Street operators begin to detect a whiff of discomfort.
The market is just going to have to sort out the current problems, just as it has sorted out so many problems in the past. If scores of hedge fund operators and other well-fixed financial sharpies lose their jobs, thousands of “homeowners” who had no business owning homes in the first place lose their homes, and millions of yuppies who borrowed against their McMansions in order to finance a lifestyle they felt entitled them to look down their noses at their neighbors finally have to face grim economic reality, those are the costs of economic adjustment. Capitalism without failure, as someone once said, is like Christianity without hell.
Saturday, August 18, 2007
THE KEYNESIAN LIQUIDITY TRAP MAKES A COMEBACK
8/19/07
THE KEYNESIAN LIQUIDITY TRAP MAKES A COMEBACK
Now the “Don’t Worry, be Happy” and “Keep the Government Out of My Business until I Need Help” crowd is counting on the Fed to bail out the hedge funds and other various risk takers under the guise of “shoring up the financial system” by adding generous doses of liquidity to the system. Yesterday’s decrease of the discount rate, along with loosening terms on collateral and repayment for borrowings at the discount window, was the first, and the bulls hope, the only necessary, step in this rescue process. It’s not going to work.
Lack of liquidity is not the problem. As recently as July, we were being told, by the same experts who now wail that their friends might (Oh My Gosh!) lose their jobs if the Fed doesn’t DO SOMETHING, that the world was awash in liquidity. In fact, this worldwide ocean of liquidity was offered by some clear thinking experts as one of the reasons that the equity markets were performing so well even though the fundamentals would indicate that at least a correction was long overdue. No, the problem is not lack of liquidity; rather, it is that the world’s lenders, broadly defined, have finally sobered up after a five year lending binge. Like a drunk desperately trying to relieve his hangover symptoms overdoses on vitamins (which he should have taken before going to bed), orange juice, and other healthy staples in order to shore up his badly battered system, the world’s financial system is seeking to lend money only to salubrious blue chip credits. In the process, lenders are discovering that many of their formerly creditworthy customers were creditworthy only because they could refinance, a classic example of the greater fool theory at work. Now, with that access to refinancing cut off, these credits are being shown for what they are: overextended, overleveraged, wing and a prayer “we’ll cross that bridge when we come to it” gambles. There is not a great enough fool to lend to these types, except, of course, you and I through the beneficent offices of our government and its various quasi-autonomous arms.
Back in 1933, when the Fed finally began to realize that the money supply’s dropping by 25% since 1929 had had a major role in bringing on the Depression which was at its worst, it tried to solve the problem by injecting liquidity into the system. But it didn’t work because the liquidity went into T-bills and other ultra-safe investments. Providing liquidity does not assure that it will reach the sectors of the economy that can make things happen. Notice how, in the meeting it called to announce that it was throwing open wide the discount window, the Fed felt compelled to encourage the nation’s lenders to overlook the stigma formerly attached to discount window borrowings and borrow freely. As in 1933, the Fed is faced with a classic “pushing on a string” problem, or liquidity trap, problem. If the Fed continues to provide liquidity, it will not solve the problem; in this case, it will serve only to weaken the dollar, discouraging the people to whom we so freely send our dollars from sending them back to us. THEN we will have a liquidity problem to go with our nearly economy-wide credit problem.
Like anyone else, I could be wrong here, but this problem appears to be far from over. As I said in my 3/14/07 post, wait until it becomes apparent to the financial wunderkinds who have seized control of our economy that this problem is by no means limited to sub-prime mortgages. The truly exotic mortgage products (the interest only loans, negative amortization loans, etc.) were almost exclusively prime, or at least Alt-A, loans. Look around your neighborhood and at your neighbors’ spending habits and tell me with assurance that all these loans are just fine. And if the Fed continues to do the wrong thing, attempting to continue the decades long practice of socializing the risk while privatizing the profits, things could get worse…a LOT worse.
When the booze is flowing freely, many rational thinking people do foolish things. The next morning, their sense of propriety and shame return and they resume their normal respectable and defensible conduct. We can only hope that enough of the financial geniuses who got us into this trouble have a store of propriety and shame when sober. Many have not been around long enough for us to get a legitimate read on their behavior in a forum where sobriety, rather than debauchery, is the norm.
The Pontificator
THE KEYNESIAN LIQUIDITY TRAP MAKES A COMEBACK
Now the “Don’t Worry, be Happy” and “Keep the Government Out of My Business until I Need Help” crowd is counting on the Fed to bail out the hedge funds and other various risk takers under the guise of “shoring up the financial system” by adding generous doses of liquidity to the system. Yesterday’s decrease of the discount rate, along with loosening terms on collateral and repayment for borrowings at the discount window, was the first, and the bulls hope, the only necessary, step in this rescue process. It’s not going to work.
Lack of liquidity is not the problem. As recently as July, we were being told, by the same experts who now wail that their friends might (Oh My Gosh!) lose their jobs if the Fed doesn’t DO SOMETHING, that the world was awash in liquidity. In fact, this worldwide ocean of liquidity was offered by some clear thinking experts as one of the reasons that the equity markets were performing so well even though the fundamentals would indicate that at least a correction was long overdue. No, the problem is not lack of liquidity; rather, it is that the world’s lenders, broadly defined, have finally sobered up after a five year lending binge. Like a drunk desperately trying to relieve his hangover symptoms overdoses on vitamins (which he should have taken before going to bed), orange juice, and other healthy staples in order to shore up his badly battered system, the world’s financial system is seeking to lend money only to salubrious blue chip credits. In the process, lenders are discovering that many of their formerly creditworthy customers were creditworthy only because they could refinance, a classic example of the greater fool theory at work. Now, with that access to refinancing cut off, these credits are being shown for what they are: overextended, overleveraged, wing and a prayer “we’ll cross that bridge when we come to it” gambles. There is not a great enough fool to lend to these types, except, of course, you and I through the beneficent offices of our government and its various quasi-autonomous arms.
Back in 1933, when the Fed finally began to realize that the money supply’s dropping by 25% since 1929 had had a major role in bringing on the Depression which was at its worst, it tried to solve the problem by injecting liquidity into the system. But it didn’t work because the liquidity went into T-bills and other ultra-safe investments. Providing liquidity does not assure that it will reach the sectors of the economy that can make things happen. Notice how, in the meeting it called to announce that it was throwing open wide the discount window, the Fed felt compelled to encourage the nation’s lenders to overlook the stigma formerly attached to discount window borrowings and borrow freely. As in 1933, the Fed is faced with a classic “pushing on a string” problem, or liquidity trap, problem. If the Fed continues to provide liquidity, it will not solve the problem; in this case, it will serve only to weaken the dollar, discouraging the people to whom we so freely send our dollars from sending them back to us. THEN we will have a liquidity problem to go with our nearly economy-wide credit problem.
Like anyone else, I could be wrong here, but this problem appears to be far from over. As I said in my 3/14/07 post, wait until it becomes apparent to the financial wunderkinds who have seized control of our economy that this problem is by no means limited to sub-prime mortgages. The truly exotic mortgage products (the interest only loans, negative amortization loans, etc.) were almost exclusively prime, or at least Alt-A, loans. Look around your neighborhood and at your neighbors’ spending habits and tell me with assurance that all these loans are just fine. And if the Fed continues to do the wrong thing, attempting to continue the decades long practice of socializing the risk while privatizing the profits, things could get worse…a LOT worse.
When the booze is flowing freely, many rational thinking people do foolish things. The next morning, their sense of propriety and shame return and they resume their normal respectable and defensible conduct. We can only hope that enough of the financial geniuses who got us into this trouble have a store of propriety and shame when sober. Many have not been around long enough for us to get a legitimate read on their behavior in a forum where sobriety, rather than debauchery, is the norm.
The Pontificator
Friday, August 10, 2007
The Fed has to do something for those rugged individualist types!
8/10/07
This is an e-mail I sent to CNBC in response to CNBC’s request for opinions regarding the Fed’s adding liquidity to the system in the wake of the “sub-prime mortgage” crisis. See my 3/14/07 post.
8/10/07
The same people who argue that the “irresponsible” poor are always looking for government handouts and that the starry-eyed liberals are only too willing to indulge this “sloth” are now calling for the Fed to bail out irresponsible billionaire financiers and financial institutions.
And they don’t even see the irony.
The next time you hear some self-styled conservative calling for smaller government, rest assured that he is really calling for smaller government for poor people only. According to these Janus-faces, government can’t be big enough if it serves the interests of the rich and powerful.
Mark Quinn
Naperville, IL
This is an e-mail I sent to CNBC in response to CNBC’s request for opinions regarding the Fed’s adding liquidity to the system in the wake of the “sub-prime mortgage” crisis. See my 3/14/07 post.
8/10/07
The same people who argue that the “irresponsible” poor are always looking for government handouts and that the starry-eyed liberals are only too willing to indulge this “sloth” are now calling for the Fed to bail out irresponsible billionaire financiers and financial institutions.
And they don’t even see the irony.
The next time you hear some self-styled conservative calling for smaller government, rest assured that he is really calling for smaller government for poor people only. According to these Janus-faces, government can’t be big enough if it serves the interests of the rich and powerful.
Mark Quinn
Naperville, IL
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