Tag Archives: debt

An Influence on Bank Lending

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Professor Alan Blinder, of Princeton University, has another laugher in The Wall Street Journal.  This time he wants the Fed to “encourage” private bank lending—in an environment where the intended market is vary chary of taking on debt, new or additional—but without “without interfering in private credit-allocation decisions.”

His idea is stimulated by a scheme (in both the British and American English senses) of the Bank of England’s, itself generated out of the premise that UK banks aren’t lending enough to suit the government suits.  Essentially, Blinder wants to ape the BoE scheme of giving private lenders preferential rates on central bank lending according to how much lending the private lenders are doing.

Hmm….

First, Blinder operates from a false premise.  It’s impossible for government to “encourage” without “interfering in private decisions.”  The whole point of government encouragement to execute exactly that interference.  To claim that compliance is voluntary and so not interference is disingenuous sophistry.  Banks are out to make money for their owners, just as any business must—its fiduciary duty drives it to—make money for its owners.  The offer of a goodie for doing what government wants is no less a cudgel than providing a penalty for not doing.

Second, Blinder gives his game away in the penultimate paragraph of his piece:

Last, but certainly not least, there is the crucial question of what types of bank lending to subsidize.

Of course, the sole purpose of a subsidy is to drive the recipient to a government-desired behavior.  The whole point of government encouragement to execute exactly that interference.

The Obama Debt Plan

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John Hinderaker, of Power Line, commented on President Obama’s plan to pay down the national debt, as demonstrated by Obama’s mid-year budget plan update.  Obama also is campaigning on his plan to “pay down the debt in a balanced way.”

Here’s what his “balanced plan” does to our national debt, illustrated by the following graph from Power Line, and The Washington Times.

That’s a rather startling increase in the size of this paid-down debt.  “But wait,” some of you might object.  “What about the debt as a per cent of our GDP, a perhaps better way to assess the size of our debt?”

Our 2011 GDP was some $15 trillion, and it’s projected to be in the neighborhood of $24 trillion by 2021 (my calculation based on data in Table 1-6 of the CBO’s report “Budget and Economic Outlook: Fiscal Years 2011 to 2021.”

That makes our national debt 98.7% of GDP in 2011, and 105.8% of GDP by 2021.  This is how Obama intends to “pay down the debt in a balanced way” via Obamanomics’ New Math.

Eurozone Breakup Disaster?

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Spiegel Online International carried an interesting article the other day.  They cited the Institute for New Economic Thinking as saying

We believe that as of July 2012, Europe is sleepwalking toward a disaster of incalculable proportions….

Paraphrasing them, SOI went on to say that the European leadership must move faster and more decisively, else the euro could simply disintegrate.  The INET report can be read here.

SOI went on, noting that

The experts wrote that the crisis is the result of flawed design, construction and implementation of the finance and currency system.  In order to rescue it, the economists are calling for a radical restructuring.

And here are the changes these experts want:

  • tighter integration of the financial system with a strong institution at the European Union or euro-zone level that would make stabilizing the banks a matter for all of Europe;
  • the permanent euro rescue fund, the European Stability Mechanism, to be provided with a banking license as a lender in order to give it the “firepower” that it needs;
  • the European Central Bank to better use all the tools at its disposal (both conventional and unconventional) in order to bolster the currency union.

Then these experts claim, contradictorily, that none of this

mean[s] that the costs of the crisis should be socialized across euro-zone citizens: systemic failure does not absolve from responsibility individuals, banks and supervisors who took or oversaw imprudent lending and borrowing decisions.

This much is correct, but each of those three steps specifically socialize the costs of the present crisis across “euro-zone citizens.”

Even the illustrious Secretary General of the OECD,  Angel Gurria, thinks much of this is a good idea, insisting that the ECB should get back into the business of buying bankrupt countries’ junk bonds

more decisively and with bigger numbers…you have to stabilize the yields.

Gurria added that he saw no reason why Italy and Spain should be paying yields of 7.5%.  Here he shows the typical mindset of a European government man: the market has said these bonds have value only at those yields.  Why should individual taxpayers be forced to indemnify them at a lower yield?   Because a Government Man Knows Better.

None of these measures can succeed, though, since they proceed from a wholesale misunderstanding of what is necessary for effective integration of polities: comity of social purpose, common understanding of the role of government in the lives and economies of free men, common understanding of the purpose of money.  These do not obtain in the EU as a whole, nor in that subset that is the eurozone.  The whole of southern Europe has an entirely different view of the role of government and of money, wholly differing social imperatives than those of northern Europe.  And these nations radically differ in their views from the concepts extant in eastern Europe.  And France and Great Britain differ—in their unique ways—from all of these.  Absent greater political and social moral imperative agreement, there can be no successful “eurozone.”

There is a lesser false premise from which INET (and the others) proceed: that the breakup of the Eurozone would be a “disaster of incalculable proportions.”  The only disaster here would be to the various subsets of Europe forcibly carved up and jammed into the eurozone’s Procrustean Bed, and to the egos of those married to the Eurozone as it is constructed.

Collapse of the Euro?

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Much is being made of the impending collapse of the euro, and of the disaster this would represent for Europe.  Indeed, a graph published by Spiegel Online can look frightening:

The risk to Germany in particular?  Much is made about the money Germany and Germans have in some of the PIIGS, as the graph below indicates.

But against the German 2011 GDP of €2.57 trillion, this totals to less than 4%.  That will sting, but not much.

As I’ve written before, a breakup would be near-term disruptive.  But what happens after those two years of the first graph above?  There needn’t be a disorderly collapse.  Even this short term disruption (pop quiz: what are the current inflation and unemployment rates in the PIIGS?), the stronger economies will recover, and do so faster without the albatross of the profligate spend-and-borrowers dragging on their wallets.  Furthermore, it’s not too late to realign into a small collection of smaller common currency regions, each with free trade agreements with the others.  Within each smaller currency region, there would be a far larger opportunity for social, political, purpose-of-money homogeneity, and so a far greater chance of success.

The single alternative of every nation for itself with its old currency back is simply the other half of a false dichotomy presented by Spiegel Online—and by Europe’s politicians, who have a personal interest in the continuation of the current, failing, structure.

An Old Dead Guy’s View of National Debt

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On this, the 80th day shy of the 215th year since George Washington’s Farewell Address, an anniversary made notable by our present astronomical and exploding national debt, I thought I’d post what that old dead guy had to say about national borrowing and national debt.

The short version is, “Don’t do it, and don’t have it.”  Following are his specific words.

As a very important source of strength and security, cherish public credit.  One method of preserving it is to use it as sparingly as possible: avoiding occasions of expence by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expence, but by vigorous exertions in time of Peace to discharge the Debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burthen which we ourselves ought to bear.  The execution of these maxims belongs to your Representatives, but it is necessary that public opinion should cooperate.  To facilitate to them the performance of their duty, it is essential that you should practically bear in mind, that towards the payment of debts there must be Revenue; that to have Revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment inseperable from the selection of the proper objects (which is always a choice of difficulties) ought to be a decisive motive for a candid construction of the Conduct of the Government in making it, and for a spirit of acquiescence in the measures for obtaining Revenue which the public exigencies may at any time dictate.

Notice that bit about taxation, too.  Taxes are for paying down the national debt and for the common defence, not for frivolous spending.  But again, the overriding imperative this Founder laid out is that our nation’s debts should be kept small by keeping spending small, and those debts should be paid by the generation that incurred them—not visited on our children’s children.

We citizens bear an additional responsibility in this, too: not to make frivolous demands on government to do for us that which we should—and can—do for ourselves.

Á propos is this remark by David Ricardo in response to Great Britain’s decision to print fiat money in an effort to increase funding for their war against Napoleon (one of those “unavoidable wars” to which Washington would have been referring, and not too far removed in time from Washington’s address):

Why should the mere increase of money have any other effect than to lower its value?  How would it cause any increase in the production of commodities? ….

Money cannot call forth goods, —but goods can call forth money…[.]