Category Archives: Economics

Miscellaneous economy stuff

This is Stupid

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Spiegel Online International is describing another European hare-brained scheme in the mill for “bailing out” Greece.

Greece’s lenders are reportedly considering further relief in the form of a partial debt haircut for the crisis-wracked country, the Financial Times Deutschland reported on Friday.

…

Martin Blessing, chairman of Germany’s second-largest bank, Commerzbank, has also said a second debt haircut is likely.  “In the end we will see another debt haircut for Greece, in which all creditors will take part,” he said on Thursday in Frankfurt.

And

And though a second debt haircut would be tantamount to bankruptcy for Greece, it would also enable Athens to tackle the extreme debt that has so far hindered economic recovery.

And in a blatant case of demanding this be done with OPM (at least from the IMF’s perspective; the IMF wholeheartedly approves this second bailout),

[T]he IMF is pushing for debt restructuring from public lenders, who currently hold over two-thirds of the country’s total debt of some €330 billion [$426 billion], according to the newspaper.  However, neither the IMF nor the ECB would take part in such a debt haircut, placing the burden on the euro-zone members, the paper added.

I have a couple of questions.  Wasn’t the first haircut, functionally, a Greek bankruptcy?

Second, if you’re not going to hold the Greeks accountable and responsible for their obligations and commitments, why bother at all?  Why not just forgive the entire debt, and let them resume their profligate ways?  You’ll only bail them outprop them up again, next time, anyway.

In the end, here’s the IMF (and ECB, but at least this organization has honorably committed its own creditors’ money) saying, “Debt.  Very dangerous.  You go first.”  Still, the burden, as the IMF and ECB suggest, should be wholly within the euro zone, or rather (say I) more particularly, it should rest entirely with the private investors who loaned their money to Greece—the private holders of Greek sovereign debt.  Europe’s taxpayers should not be—should not have been—put on the hook any further than they already were from the moment it became known that the Greek government was unable to repay its debt.  Indeed, those taxpayers should not have been put further onto the hook from the moment it became known that the Greek government had lied about its financials in order to gain admittance to the euro zone.

Here’s an alternative thought—work with me on this; it’s an idea of responsibility—how about not bailing them out, again?  Instead, let them go bankrupt, and thereby free them to start over.

Splitting Up Major Banks?

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Because they’re too big to fail?  Because government bureaucrats are jealous of success?

Spiegel Online International‘s Martin Hesse and Christoph Pauly are reporting that the EU actually is considering just such a thought:

EU Commissioner Michel Barnier has asked experts to examine the possibility of splitting up major European banks to avoid future bailouts at taxpayers’ expense.

Certainly, the EU (and others making the same “argument”) couch the move in suitably plaintive terms:

Many banks are so big that no country can afford to allow them to fail.  This is why the government bailed out a number of financial companies starting in 2008, a move that allowed major banks like Deutsche Bank to grow even larger.

Yeah, that worked out well, didn’t it?  Aside from the growth possibilities for the governments’ favored few, how’s the recovery such bailouts were supposed to facilitate working out?

Then, Germany’s Monopolies Commission head, Daniel Zimmer, had this:

Taking a more-of-the-same approach in the treatment of major banks is not an option.  First of all, in contrast to 2008, many countries no longer have the resources to bail out banks.  Second, taxpayers are no longer willing to foot the bill for the financial industry’s mistakes.

Zimmer, though, is arguing for government mandating the structure of a bank to facilitate its government-ordered breakup in an economic crisis.  But he’s not listening to his own words.  Countries (including the US) don’t have the resources for bailouts, and taxpayers don’t want to foot the bill for any more bailouts.

Nor should they have to.  The government interventions into the market place in the US in the ’30s and since 2008 and the EU’s intervention since 2008 only prolonged the crises they were intended to alleviate.  This has cost the taxpayers far more than the bailouts themselves in lost jobs, lost incomes, higher personal costs (when they had any jobs/income at all with which to pay them—most especially in the ’30s and with an inflation time bomb ticking down from the US’ monetary “easing”) and from that, lost revenues for the respective governments.

And never mind the morality of protecting failure by not allowing a free market to punish it suitably.

Here’s a thought (are you listening, Barack?).  Work with me on this, it’s kinda conservative.  How about avoiding future bailouts of major banks by…not bailing them out?

Redistribution

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…by government of one individual’s wealth to another?  Hmm….

This is then-Illinois State Senator Barack Obama in a speech at Loyola University in October 1998.

 [T]he trick is figuring out how do we structure government systems that pool resources, and hence facilitate some redistribution because I actually believe in redistribution.

The Federal Bank of US Taxpayer

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In a new Bernanke hair-brained scheme, the Federal Reserve Bank said last week that it is going to quantitatively “ease” by buying mortgage-backed securities from the private economy, to the tune of $40 billion worth per month.  Nearly half a trillion dollars each year.  And it’s open-ended, meaning the Fed has no plan—no idea, really—of when it might stop.

Bernanke says this is necessary.

If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

Bernanke then said, in all seriousness,

[This move will] assure the public that the Fed will remain accommodative long enough to ensure recovery.

We don’t have a single number that captures that, but we anticipate that we’ll have to do more and we’ll do enough to make sure the economy gets on the right track[.]

In other words, he doesn’t have a clue what his decision criterion should be, but he’s going to decide, anyway.  And more so, as time goes on and his nonexistent milestone isn’t met.

And

These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month [including its existing long-bond buying “plan”] through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative[.]

There are a number of questions, though.

Why are we taxpayers being put on the hook for these private economy instruments?  If these securities are failing in our economy, why should the public have to pick up the tab?  If they aren’t failing, whence the need to take them off the banks’ hands?  What ever happened to free markets, responsibility, and accepting consequences, as well as reaping rewards?

And these questions:

The Fed has been artificially suppressing interest rates for the last three-plus years.  That suppression already has lowered my own mortgage rate from 6+% to nearly 3.5%.  What does Bernanke expect to gain from suppressing mortgage rates directly?  The inflation rate this year is 1.7% month on month, and 2% year on year through August.  The August interest rate on a one-year Treasury Note is 0.16%: he’s already suppressed interest rates to the point that we’re paying the government for the pleasure of lending it our money.  What does Bernanke expect to gain?

These artificially suppressed rates have a number of negative effects.  By distorting the market for debt instruments, the Fed is making it difficult, if not impossible, for investors accurately to assess value of the debt of borrowers—and so is making it unnecessarily difficult, and risky, to lend.  How does the Fed plan on redressing this failure?

By artificially suppressing interest rates, the Fed is actively and extensively damaging those who’re committed to, or dependent on, fixed income instruments, like bonds, for their income.  Folks like retirees.  How does the Fed plan on redressing this failure?

Savings accounts have become utterly useless—the interest rates here have been good approximations of zero for the last four years.  Savings accounts used to be an effective means through which financial institutions could accumulate funds for lending to borrowers—like home-buyers and businesses looking to expand their operations. How does the Fed plan on redressing this failure?

Our economy will recover, eventually.  And interest rates will rise.  Catastrophically, if all the money the Fed is pumping into our economy with…ideas…like this one drives inflation skyward.

On top of this, though, the Fed is creating another time bomb, one which it has no hope of controlling.  When interest rates rise, and the cost of borrowing goes up, for lending institutions as well as for borrowers, as the former search for funds to loan to the latter, those lenders still will be sitting on all those mortgage loans let at artificially low rates.  Those low rates in a healthy economy (let’s skip over the high inflation, high interest rate economy) will be far below then-market rates, and so those existing mortgages, mortgages with which the lender still will be stuck, will not be generating enough income for the lenders to continue to loan.  For up to 30 years in the mortgage market.  Can you say, “S&L bankruptcy?”

And, by the way, as Federal Reserve Bank of Richmond President Jeffrey Lacker said Saturday,

Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve[.]

Or for any part of the government.

How’s That Working Out For You?

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Here are some more data on our economic condition:

  • US wholesale prices in August had the largest one-month gain in more than three years
  • The producer-price index, which measures how much manufacturers and wholesalers pay for finished goods, increased a seasonally adjusted 1.7% in August from July
  • Prices for intermediate goods—which are semifinished goods, like lumber or flour, that require further processing—grew 1.1% in August from July
  • Prices of raw materials increased 5.8% in August, suggesting prices for finished goods will rise further in the future
  • [I]nitial jobless claims were up 15,000 to a seasonally adjusted 382,000 in the week ended Sep 8.  Economists surveyed by Dow Jones Newswires had expected “only” 370,000 new applications

And these data [emphasis mine]:

The income of the typical US family has fallen to levels last seen in 1995.  Census Bureau said annual household income fell in 2011 for the fourth straight year to an inflation-adjusted $50,054.  …it will be a generation before Americans regain the peak income levels reached at the close of the ’90s

Here’s a graph of what that looks like:

Notice that: Not only is income much lower than the Evil Bush years, it’s still falling.

The monthlies are snapshots, and should be taken with a grain of salt, certainly.  But they also bear watching, especially in light of those falling incomes under the Obama administration, and the inflation trap his Fed chief, Ben Bernanke, is building in with all that dollar injection.

And the guy who sometimes sits in the President’s chair actually said this, as though he believed it,

[W]e have made progress digging our way out of the worst economic crisis since the Great Depression[.]