Tag Archives: economics

Wrong Answer

Posted on by
Reply

Senator Bill Hagerty (R, TN) and Treasury Scott Bessent disagree with The Wall Street Journal‘s editorial How to Make Banks Less Safe, an editorial with which I also disagreed. However, Hagerty and Bessent are wrong in their proposed solution.

They insist that the recent intermediate-sized bank “failures” (my euphemism quotes) stemmed from an intrinsic imbalance in protection for banks.

What explained the flight? A competitive imbalance: the biggest banks benefit from a perceived government guarantee that smaller institutions lack.

That protection imbalance is the Dodd-Frank entrench[ment of] the biggest banks as “too big to fail,” as Hagerty and Bessent correctly identified. Their solution is wrong, though.

…fortify our community banks against existential headwinds by raising the Federal Deposit Insurance Corp. limit. This would put community banks on a more even playing field with their larger competitors, and provide small businesses more certainty to maintain their payroll and other operating accounts with community banks in times of stress.

The correct answer is to take the “too big to fail” protection away from the allegedly systemically important banks and put them on the level of play on which their smaller competitors operate. There is no such thing as too big to fail in a competitive free market. Instead, hold all banks, regardless of size, to the quality of their management teams and those teams’ risk decisions. Do this further in large part by leaving the FDIC’s insurance cap at $250,000. The big players using the big banks will do a better job of moving among banks that are better led than others.

The market, which is individuals, small business, and international behemoths, will in its aggregate do a far better job of identifying well- and poorly-run banks, and imposing performance discipline on all of them, than can any government decision-making, which by design, is rife with political input rather than limited to economic input.

Two Mistakes at Once

Posted on by
Reply

The Federal Reserve has chosen to lower its benchmark interest rates by another quarter point, to a 3.75% to 4% band. At the same time, it has decided to call a halt to their 3½-year campaign to shrink the Fed’s $6.6 trillion asset portfolio on December 1.

That’s two mistakes in the same meeting. With inflation near (albeit less near than in the last couple of months) the Fed’s goal of 2% inflation, it’s been past time to leave its benchmark alone and to let market forces handle inflation and interest rates. Past time, because the benchmark rate historically consistent with 2% inflation has been in the range of 4½% to 5%. The Fed needs to sit down and stop tweaking with the rates.

The other mistake is to stop unloading its far too bloated asset portfolio. The Fed currently holds $6.6 trillion in Treasury assets. That’s the Fed funding too much of Treasury borrowing. The market should handle that, not the government borrowing from itself via a purely on paper accounting trick.

It’s true that unloading those assets might—even likely would—put the short term credit market into a turmoil. That especially would upset the overnight and short-term repo markets that are important to businesses’ ability to make payroll or pay other bills in the gap between irregular receipts payable and the clockwork due dates of paychecks and bills. That turmoil would be short-lived, though, as the markets readjust to a market-driven debt facility. The volatility of the turmoil would be mitigated, too, were the Fed to unload its Treasury assets simply by not replacing them until they mature, and to limit itself thereafter to holding a relative few longer-term Treasury assets—10-year Notes and bonds.

That, too

Posted on by
Reply

Progressive-Democrats are keeping the government shut down over their demand to extend—permanently, no negotiations—the Obamacare subsidies that the Progressive-Democrats during the Biden reign had scheduled to expire in November of this year, pretending at the time that the subsidies were just temporary, to tide people over during the Wuhan Virus situation. Their core claim on this aspect is that Obamacare premiums, as paid by the policy holder (carefully excluding, per those same Progressive-Democrats, the premium costs paid for by us taxpayers via those subsidies), will explode.

What the press, with equal care, ignores is that the purported need for those subsidies is a direct result of the cost of the government-run health care coverage program that is the Affordable Care Act. Government-run because these are coverage policies whose coverage suites are mandated by government, including the worst mandate of them all: the requirement to charge premiums (within narrow government set bands) for ailments and potential ailments without regard for the risk of the ailment being covered, and for some of those ailments at no cost to the policy holder at all.

The Wall Street Journal has pointed out an additional price to us average Americans:

If Republicans don’t extend the turbocharged subsidies, she [Minnesota Progressive-Democrat Senator Amy Klobuchar] warned, “early retirees like Bill & Shelly [who live in Meridian, ID] will see their health insurance premiums increase nearly 300%—from $442 to $1,700.”

And [emphasis added]

This is a tacit admission that ObamaCare encourages Americans to stop working. The Biden subsidies turbocharged that incentive by making subsidies larger and available even to those with incomes above 400% of the poverty line. The couple in Ms Klobuchar’s example had north of $130,000 of income in 2024….

This demand for permanentizing the ObamaCare subsidies is just one more aspect of big government taking over our lives, reducing individual liberties (the health coverage industry does not exist in a free, competitive market where individuals can make their own choices of what coverages they want, at prices that competition would make possible) and taking the flip side of individual liberties, individual responsibilities, away from the individual and, instead, spreading them across all of us together, as brokered by Government.

The editors offer some solutions that would be a good beginning toward correcting the failure that is the ObamaCare essay into socialized medicine.

  • codifying association health plans that let small businesses join up to form a larger risk pool to improve the economics of offering insurance
  • continuing to expand plans that can be paired with tax-preferred health-savings accounts
  • fix[ing] some ObamaCare regulations like the medical-loss ratio that obliges insurers to spend 80% of premiums on claims, which in practice is a profit cap

Also needed, I claim:

  • allowing health coverage plan providers to sell policies that cover preexisting conditions at premiums consistent with the risk involved. The risk here is not certainty since the preexisting conditions will not all flare up and require medical intervention simultaneously; the risks can be amortized across time, if government only got out of the way
  • allowing individuals to choose from, and insurers to offer, tailored coverages: only primary care—annual exams, for instance, and the occasional flu or broken bone
  • coverages only for catastrophic health potentialities
  • reducing the regulatory burden on doctors who want to eschew being reimbursed via health coverage providers by doing cash reimbursements, perhaps by annual subscriptions

But to do any of that, it’s necessary for the Progressive-Democrats to end their extortionate demand on subsidies as a condition or reopening, so those discussions can begin; it’s necessary for the Progressive-Democrats to release from their basements us American people, especially the poor and their children, whom they’ve taken hostage against their demand.

Monetary Misconception

Posted on by
Reply

Judy Shelton, a Senior Fellow at the Independent Institute, has this one. She wants the Federal government to issue a gold-backed bond would strike a blow for sound money.

Mr Trump has criticized currency manipulation in global trade relations. Challenging other nations to emulate the US [gold-backed bond] by guaranteeing some portion of their sovereign debt in gold would demonstrate America’s vision for stable money as the proper foundation for fair trade.

This is naïve. “Other countries” will continue to manipulate their currencies, just as they do now; this move only would add a new tool for manipulation—varying the value of the metal backing their own debt instrument(s).

Governments have been debasing their metal backed currencies ever since money was invented, doing so by shaving coins minted in the metal; by replacing some of the money-backing metal with other, cheaper metals; outright announcing a differing, lower values for a unit of the metal.

The most infamous recent example of the latter was during our own Great Depression when then-President Franklin Roosevelt (D) seized all privately held gold and then promptly devalued the gold in US dollar terms.

All currency is fiat currency, whether it’s minted in the metal or it’s printed on paper formally backed by the metal (at a rate the issuing government has announced for the time being), or it’s printed on paper and allowed to float in the markets for goods and services—and currencies. That currency has the value, in legal terms, that government says it has from time to time.

Backing a bond with a precious metal has no material meaning. What makes a money sound is the stability of the issuing government; the economy it oversees with a light hand; and that government’s ability to protect its people from invasion, whether physical, economic, or political. Nothing else does.

New Sanctions and some Thoughts

Posted on by
Reply

President Donald Trump (R) has implemented new sanctions on Russia in response to the barbarian’s continued intransigence in its invasion of Ukraine—blacklisting Russia’s two biggest oil producers and a plethora of their subsidiaries. As The Wall Street Journal notes, how much the sanctions will impact Russia depends on three major factors:

  • how well they are enforced
  • the reaction of major markets in India and China
  • whether Moscow can circumvent the measures

Regarding the first, that depends on Europe, India, and the People’s Republic of China. In the short term, Europe will give a strong indication of how serious those nations are in supporting Ukraine and how serious they are in beefing up their defense establishments and industries so as to be able to face down the confrontation with Russia that will follow as the night does the day if Russia succeeds in conquering Ukraine. Carrots can be offered those nations, and a primary one would be tariff relief in exchange for strictly enforcing the sanctions. There even are ready to hand alternative sources for oil and natural gas to supply their current and buildup energy needs.

Tariff relief and improved mutual investment agreements, along with those readily available alternative oil and gas sources, would go a long way to weaning India off Russian oil.

Another carrot is essentially self-referential. By taking themselves completely off Russian energy, they would be proofing themselves against Russian economic blackmail.

The Indian markets can be drawn off Russian energy with tariff relief and mutual investment agreements centered on other matters important to India, Europe, and the US.

The PRC, though, is going to buy Russian oil and gas regardless. The two nations already have an economic arrangement in place that allows the PRC to develop Siberian hydrocarbon resources in return for first pick on the output of that development. When those distributing pipelines are built from Siberia into the PRC, the latter will get the former’s oil and gas functionally at no cost.

There’s more to this, though than just the blacklists. What’s also needed is better enforcement and strengthening of the existing bars against technology transfers and against equipment and maintenance supply transfers that are needed to develop wells and to maintain delivery pipelines to refineries, to (re)build and maintain refineries, and to build and maintain refined output pipelines delivering to end users.

The third factor centers on the black market, the Russian shadow fleet of oil tankers serving that black market, and the buyers’ shadow fleet of tankers as ships meeting the Russian ships for at-sea transfers. This is, perhaps, the most straightforward factor to handle, if the most difficult for the politically timid national managers. The shadow fleet ships could be—have been in the main—easily identified and seized, their cargo transferred to the seizing nation for its use (not resale) and the ships sent to the breakers for recouping the scrap metal and such other items as might be useful. Those shadow fleet ships whose captains resist seizure should simply have their ships sunk on the spot, without wasting much time arguing the matter: “Prepare to be boarded.” “No.” Sink the ship.

All of that is straightforward, only that first factor of widespread enforcement will take some political maneuverings among the relevant nations.