|March & April 2012:
..Wenzel on the Fed
..MD gas tax
..Tax cut: Oh, really?
..Bain Capital pluses
..2nd & 14th vs. 10th
..Occupy Wall Street
..Herman Cain's 9's
..Reagan on immigrants
..Taxes on the rich
..Obama plan flawed
..What Fed might try
..$$$ on desert island
..Debt ceiling extension
..Adam Smith on voting
..Better than big government
..Growth rates & Reagan
..Illegals & tuition
..Gas tax unfairnesses
..Gas tax hits poor worse
..Public sector unions
..Why high unemployment?
..Rx industry bailout
..Rx companies and $$$
..Bullish for gold
..Tax cut fallacies
..Worst case scenario
..Income inequality causes
..Create jobs w/o spending
..More illegals = more jobs
..Rich get richer
..Trickle down & Paul Ryan
..Payroll tax cuts
..Cut payroll taxes
..No bailouts: transfer, adjust
..Let home prices fall
..Japan's 1900s deflation
..Cut or big deficits
..AZ Immigration law
..70 years of tax & spend
..Cut the payroll tax!
..Ross Perot's lesson
..Another bailout lie
..Costly IRS mandate
..Ban financial derivatives
..5 yrs to fix unemployment
..Building with spoons
..Reforms = higher prices
..Eliminate public pensions
..How to raise $500 billion
..Deflation is natural
..Grab for your 401k/IRA
..City Hall protest
..Federal pension myth
..Gold: never below $1000
..Gold's newest point
..How to hurt companies
..Bailed-out banks' pay
..Gold's price rise
..Fed's mortgage impact
..Disagreeing w/ Bernanke
..50% tax bracket
..Cash for clunkers: BAD!
..Buffet on the dollar
..Financial sleight of hand
..A central planning failure
..Buy a home recently?
..Inflation, coming up
..Some better alternatives
..$1T monetized debt
..Consumer prices up
..Interest rates up?
..What they don't tell you
..Pomp, but no substance
..Bet on inflation
..Stimulus package debt
..Monetary base doubles
..New Deal, or raw deal?
..Women & clothes
..More money, less housing?
..4% mortgage rates
..Work for $1 a year?
..5 times Chrysler deal
- May 26th -- Cost of an inflation-free
- May 25th -- Remembering Ross Perot's
lesson of substance over style
- May 10th -- U.S. debt rating downgrade
forecast as soon as 2012: America's
looming Greek tragedy
- May 4th -- How banks repaid TARP: The
other bailout repayment lie
- May 3rd -- IRS paperwork explosion buried
in health reform
Tuesday, May 26, 2010
What is the cost of an
inflation-free bank bailout?
The banks got two types of bailouts.
One was fiscal -- basically anything involving Treasury
(TARP, TALF, AIG, Fannie/Freddie); the other was monetary
-- basically anything involving the Fed (0% interest
rates, TAF, quantitative easing, MBS/Treasuries
purchases, and an expanded balance sheet/monetary base).
The general consensus for fiscal policy's trade-off
cost was increased deficits, debt and presumably higher
taxes or reduced spending in the future. The
general consensus of the monetary policy's trade-off cost
was inflation. At this point there is a real
possibility of avoiding inflation, and achieving an
inflation-free bailout of the banking system in spite of
unprecedented expansionary monetary policy.
How is this possible? The quantity theory of money
states that money supply affects prices. More money
chasing the same amount of stuff leads to inflation.
Most are familiar with MV=PQ where money supply
times velocity equals price times quantity. But you
also have to remember how banks create money in our
fractional reserve banking system. M0 (monetary
base) times bank lending=M2 (broad money supply), and it
is the M2 broad money supply that affects price levels.
In other words, if all the money the Fed created through
various quantitative easing and debt monetization stays
locked up as M0, it won't affect prices, and this leads
us to the Fed's crafty exit strategy.
The Fed's exit strategy can be summarized as paying banks
not to lend. (See Bernanke's
Feb. 10, 2010 statement.) Through
increasing the excess reserve rate (the interest rate
paid to banks with excess reserves -- normally banks have
to make loans to earn interest, but not anymore),
offering term deposits (essentially CDs that pay interest
on excess reserves), and reverse repos that trade banks
excess reserves created by the Fed for interest-bearing
securities, the Fed is engineering an environment where
banks can make interest revenue without lending to
anyone. It offers the real possibility of keeping a
lid on M2 regardless of what happened to M0 over the
least year or so.
Now for the big question: If we achieve an
inflation-free monetary bailout, is there a trade-off
cost. And, if so, what is that cost? The first rule
of economics is "there is no free lunch" so
logically there must be a cost, but what is it?
The first step to answering that question is to ask what
would have happened had there been no bailout? The
most likely scenario is that there would have been a
wholesale collapse of the banking system, a huge
contraction of M2, and a deflationary spiral.
Cleary the banks would have been losers in that
scenario, but there would have been winners. For
one, savers. For two, consumers. If you
couldn't qualify for a car loan or a mortgage but wanted
to buy a house or a car, wouldn't you be much better off
if the houses and cars cost less? The 3rd group
that would have been winners were the workers.
While it is true that nominal wages fall in
deflation, analyzing price and wage volatility from 1899
to 1933 shows the that ratchet effect works both ways;
wages are far more stable than price levels, and in
periods of deflation (e.g., the Great Depression) REAL
WAGES INCREASED. (See The Relationship
Between Wage Rates and Inflation, Emmett H.
Welch, 1933). Examining history from 1820 to 1913
reveals that US real per capita income increased by
nearly a factor of 5. When ranked against other developed
nations, the US real per capita income went from the
middle of the pack to #1 during the same time the general
price level fell almost 50% (Deflation Determinants,
Risks and Policy Options published by the IMF in 2003, pg
9). (See History of
Standard of Living in the U.S.)
The historical record shows that you can have deflation
and strong growth. It also shows that deflation
rebalances income distribution in favor of the average
To that end, what was the cost? The monetary
bailouts used central planning to override the free
market forces that would have lowered the Gini
coefficient and benefited savers, consumers, and workers
at the expense of banks, shareholders, and investors.
While the monetary bailouts may not appreciably
expand M2, they will serve to appreciably zero sum game
the division of it into the hands of bankers and out of
the hands of everyone else.
Tuesday, May 25, 2010
Remembering Ross Perot's lesson
of substance over style
Eighteen years ago a big-eared Texan
showed the world that Americans prefer substance, ideas,
and details, to ambiguity, ideology and platitudes. This
1992 NYT article could be mistaken for today's news if
not for the names, yet Perot's main lesson of substance
and ideas over vagueness and blind ideology has since
been buried and forgotten:
Eccentric but no Joke; Perot's Strong Showing
While you may have disagreed with some of Perot's ideas,
at least he got specific enough about them so that you
could intelligently disagree. Through his use of pie
charts, bar graphs, and 30-minute infomercials, Perot
gave you enough information that you could debate his
ideas and didn't have to resort to ad hominem
attacks and call him "socialist" or
"radical." He introduced pragmatic ideas to big
problems without clinging to the published platform
ideology of a particular party often more interested in
advancing the party than advancing the country.
Today we have Barack "Yes We Can/Hope &
Change" Obama and Nancy Pelosi's "radical
socialist agenda" vs. Glen Beck and Sarah Palin's
"radically racist conservative tea party
movement," but neither side can really point
accurately to specifics of their respective nemesis,
certainly not the average voter. The truth is that
healthcare was not socialist; rather, it was corporatist
(but it does raise taxes on the "95% of
Americans" who were not supposed to get a tax cut).
The bank bailouts were the opposite of socialism,
or reverse-socialism. Proposed cap and trade's
regressive pass-through tax certainly isn't going to help
the average working man and doesn't qualify as socialist
(but it functionally raises taxes on that same 95%
group). Foreign policy has been just as
Cheney-hawkish as it was under Bush II. On the
other side, the only specific ideas I'm aware of are
"drill baby drill," and let's blame all our
problems on Democrats and illegal aliens. There
also are those Greenspanian Free-marketeers who don't
believe in any financial regulation reform but certainly
believe in all of the bailouts. According to them,
socialism's OK on the way down, but you must leave the
markets as free as possible for the way up. How
exactly did they get Dem's to vote for TARP again?
There are two huge looming problems that threaten to hit
America with a Greece-style insolvency problem within the
next 3-8 years, yet not only does no one have a solution,
no one's even talking about working on a solution:
1. We have
converted huge unaffordable private debts into huge
unaffordable public debts through the numerous
bailouts and functional nationalization of banking.
With Fannie Mae and Freddie Mac intravenously hooked
up to the American Taxpayer through the Treasury,
today's "giant sucking sound" will be the
sound of our money being poured down a black hole to
save bankers under the pretense of saving homeowners.
2. We have a huge cresting
tidal wave of unaffordable entitlements that no one
in a position of power has the guts to address,
namely Social Security, and the inequitable, unjust
public pension system. For SS, we can raise
taxes, cut benefits, or raise the retirement age to
71. For public pensions, we can raise taxes,
cut other services, or eliminate a benefit that 80%
of the private sector does without, and the 20% in
the private sector who do get pensions get pensions
less generous than the government gives.
Getting people to start openly debating
these problems is the first step to solving them.
Monday, May 10, 2010
U.S. debt rating downgrade
forecast as soon as 2012: America's looming Greek tragedy
Moody's has run numbers based on CBO
budget-deficit projections and their own debt-service
risk-tolerances that forecast a U.S. Treasuries ratings
downgrade sometime between 2013 and 2018. Moody's
considers debt payments to only be AAA-quality up to
18-20% of tax revenue. Under CBO numbers, the Obama
budget is scheduled to hit that figure by 2018. Under a
more pessimistic assumption that assumes higher
interest rates, the hit-the-fan moment happens in 2013. A
ratings downgrade would lead to an interest rate spike
resulting in potentially unaffordable payments -- the
Article at investors.com.
Tuesday, May 4, 2010
How banks repaid TARP:
The other bailout repayment lie
Too-big-to-fail banks repaid their TARP
money with other bailout money. To suggest that TARP was
profitable to the taxpayer (as suggested in various
recent articles) is to use one-sided accounting that
overlooks the 11 TRILLION dollar bailout nation that TARP
played only a small part of. CNNMoney and the NYT have detailed and itemized the GDP-sized totals
of the bailouts beyond TARP. Here's how bailout
money poured into some of the less notorious programs was
laundered to repay the TARP portion:
While there are a few more moving parts
to this scam, the mechanics are much the same as the GM loan
repayment lie, essentially
moving publicly financed money from one pot to another.
The trick is to identify the pots and understand
how they work.
Borrow $1 at 0%, lend $10
against it at 3-4%: The biggest
item not on the CNN or NYT breakdown is a Federal
funds rate of 0%. This has enabled banks to
"borrow" from the Fed at 0%, and then
"lend" it to the taxpayer at 3-4% (See
bloomberg.com.) Given fractional reserve
banking rules, they can multiply these spreads by
a factor of 10. If you're wondering how a
failing bank can make a huge positive spread
lending money to the exact same entity that
bailed them out (the Treasury and the taxpayer),
so am I.
Raising capital under the
"too big to fail" guarantee: Selling
stock is much easier when the government has
repeatedly said that you won't be allowed to go
out of business. This is a key reason why
smaller banks have not been able to raise the
capital to repay TARP.
Fannie and Freddie are
banks' garbage cans: Banks sold
most of their bad loans to Fannie and Freddie,
where the bad loans are now festering and losing
money like hot garbage. Very little of the
actual residential loans were kept on banks'
balance sheets. The heavy losses are coming
from the heavy holders.
The Great Abyss of AIG:
Throw $100B+ down one end of AIG, and kick
it out the other end to Goldman Sachs and various
European headquartered banks.
Trash for Cash, TAF, and
TALF: You give us "hard to
sell assets" (trash). We give you
cash. Can I get that deal on the junk in my
Finally, if TARP has been so
"profitable," why is the federal government
projected to run deficits equal to or greater than 10% of
GDP for as far as the eye can see? On that question
alone, the idea of the bailout being
"profitable" falls apart.
Misunderstanding these facts is dangerous. It
increases the probability of a future bank bailout, and
it decreases the probability that those responsible for
this one get removed from power.
Monday, May 3, 2010
IRS paperwork explosion buried
in health reform
Cato Institute looks at a costly IRS mandate that's
in the health bill.
Starting in 2012, for the first time
ever businesses will be required to issue 1099s to other
businesses for purchases over $600. Spend more
than $600 at Office Depot in a year? Better
track down their Taxpayer Identification
Number. More than $600 on
FedEx? Same thing. Spend more than
$600 on gas for business? Yup, you'll be
mailing a 1099 off to either Exxon corporate, or maybe
the franchise owner, maybe both. Just pay an accountant a
couple hundred dollars an hour to figure it all out for
you. If you can't obtain a TIN, you are
required to withhold the taxes from the payment.
Rent, utilities, phones, equipment, inventory,
professional services. Think untangling the mess of
wires behind your TV, DVD, cable, and video game systems
times a hundred.
Now just imagine if you were a big
business ... all of the inbound 1099s you'll be receiving
(in addition to the ones you'll be filing) that you'll
need to reconcile with your records and file with your
taxes. Cato estimates it could increase the
total number of 1099s filed by over a billion.
Every single B2B (business to business)
transaction will have to be recorded, reconciled, and
filed with a separate tax form. Transaction costs
will increase. Accounting costs will increase.
At a time of 10-18% unemployment, barriers to entry
and barriers to growth for small business will increase.