Tag Archives: political economy

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[.]

The Obama Economy on the World Stage

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The World Economic Forum puts out annual reports reflecting the quality and freedom of the world’s national economies; their 2012 report is here, and Fox News has a brief summary here.

Here are some of those…highlights…reflective of the performance of the Obama administration’s economic policies.

  • Since 2008, the United States has slid from No 1 in the world in “global competitiveness” to No 7 this year.  Out-ranking us are Switzerland, Singapore, Finland, Sweden, the Netherlands and Germany.
  • We’ve slid from 41st to 54th in “public trust in politicians.”
  • We’ve fallen from 50th to 76th on government regulation.
  • On government debt, though, we’ve not fallen so far; we already were near the bottom: from 97th to 140th.

James Gwartney, Economics Professor at Florida State University has the right of it:

The slide in the global competitiveness report is almost certainly due to … policy-related factors[.]

Yet Democratic Presidential Candidate Barack Obama objects to serious reform.  He and his surrogates spent all of last week castigating those evil Republicans for their proposals that would address this slide, all while proposing nothing of his own.  Other than another cynically nebulous “promise” to cut our deficit [sic] by $4 trillion over the next four years.

Americans Are Just Too Stupid

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That’s what Democratic Presidential Candidate Barack Obama is telling us.  We’re too stupid to manage our own fiscal affairs, so we need Know Betters in Big Government to do for us.

He’s using this argument on Social Security, in particular.  As you know, Social Security will be out of money in just a few short years, dependent solely on cash flow—incoming payroll tax revenue from current workers—to pay current retirees, and that cash flow is only sufficient (barely) to pay around 75% of the current benefits.  That’s how well the Know Betters in Big Government have done for us so far.

Obama’s solution? He promises to fight the privatization of Medicare and Social Security:

We’re going to keep the promise of Social Security by taking the responsible steps to strengthen it.  And that’s not by turning it over to Wall Street.

There are two insults to our intelligence here.  One is that he actually thinks we believe that any plan to privatize either of these does so by “turning them over to Wall Street.”  The other is, as I said, that we cannot manage our own affairs—we must rely on Know Betters to take care of us.

Now, before going further into Obama’s contempt for our intelligence, it’s useful to summarize the actual plans put forward by the Republican ticket and thereby expose the dishonestly presented red herring that is Obama’s straw man.  With regard to Social Security itself, Romney/Ryan are looking to gradually increase the retirement age and to slow the growth in benefits for higher income future retirees—the changes would not affect current or medium-term future (those already 55 years old) retirees.

For the Medicare aspect of the Social Security system, they propose fixed payments to future retirees (i.e., those younger than 55; there would be no change here, either, for current or medium-term future retirees), initially set equal to current Medicare payouts.  These folks then could use these funds to shop around for their own health insurance coverage and keep the money they save if they buy a policy that costs less than these payments.  The resulting competition also will bring down the cost of such coverage and improve the quality of the policies offered (magnifying future savings) since these folks, now with skin in the game, will shop aggressively.  Or they could stay in the existing Medicare program, which would remain unchanged.

There’s very little privatization here; certainly, there’s not enough to suit me.

But why does Obama object even to this little bit?  After all, private accounts (to take an earlier suggestion from Republican Vice Presidential Candidate Paul Ryan, but which is not in the proposal actually on the table today), created from a diversion of one-third of a worker’s current payroll tax payment, would let these workers earn a greater rate of return on those tax payments than Social Security provides them.  This would achieve a number of things: for one, it would give the workers a considerable measure of responsibility for their own futures, and this would let them shop around for the best investments—driving costs down through competition.  For another, it would let those workers set aside money for their own future (and ultimately for their own families’ future) and not have it all diverted for the current retirement of utter strangers.  For a third, it would allow these workers to satisfy their own moral obligation to “seek their own happiness” and to not be burdens on strangers, except temporarily and in the most dire conditions.

Opponents—Obama—object to this individual responsibility and freedom.   He says private accounts would make then-retirees dependent on volatile stock and bond markets.  And the move to private accounts would incur large transition costs, because tax payments diverted to the accounts are needed to pay benefits for current retirees.

The last is just a crude sophistry.  Transition costs are, by their nature, temporary—they are not permanent like, for instance, the cost of a failed, bankrupt social security system.  Moreover, the transition costs, while large (every dishonesty has a measure of truth in it, in order to achieve an appearance of plausibility) actually are easily borne.  A flatter (I say flat) and broader-based income tax system will bring in more revenue for the government through that broader base, fewer (I say no) deductions, credits, and the like, and through sharply increased economic activity which will generate increased income to be taxed.  This excess [sic] revenue can be used both to cover the transition costs and to pay down the debt (and exclusively to pay that debt once the transition is complete).

But more than this, a population that isn’t beholden to—isn’t dependent on—the incumbents aren’t a power base for those incumbents.  Obama’s Social Security and Medicare plans are just crass bread and circus vote pandering.  And they won’t solve the impending failures of Social Security and Medicare.

But Obama thinks we’re just too stupid.  Too stupid to manage our own affairs and too stupid to see through his empty rhetoric to the lie underneath.

Jobs

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The latest Labor Department jobs report, as James Pethokoukis of AEIdeas noted, was especially dismal.  For one thing, there’s this:

The Labor Department also said that 41,000 fewer jobs were created in June and July than previously reported.  The change in total nonfarm payroll employment for June was revised from 64,000 to 45,000, and the change for July was revised from 163,000 to 141,000.

These are very sharp downward corrections of initially erroneous (it turns out) numbers.  In fact, this initial coarse overestimation of job creation by Labor has become pretty commonplace this year.  Some might say that Democratic Presidential Candidate Barack Obama’s Labor Department is trying to cook the books for their boss’ benefit.  I’m not convinced of that.  It seems more likely to me that our economic situation simply is so dismal that it’s much harder today for the government to collect reasonably accurate near-real time data than it was in past times.

Here are some ugly graphs that further illustrate the depths of our economic woes three and a half years on, and three years after the nominal end of this recession.

This graph, from Pethokoukis’ article, shows the sharp fall-off (I hesitate, so far, to call it a collapse) in labor force participation over the last dozen years.

Notice that.  The recession formally ended in spring 2009, yet, as The Wall Street Journal noted, participation has kept right on falling during these three years of recovery—an unprecedented decline in our history.  And to put a bit more perspective on this decline, see the next graph, from the same WSJ link:

We haven’t had so low a per centage of Americans trying to find work in 30 years.  And it took the last three years—three years during which we’re “recovering,” we’re “on the right path,” and “it just takes a bit more time,” as some have lately insisted—to sink to such a depth.

One more ugly picture.  Pethokoukis also cited a graph from The Hamilton Project that illustrates the “jobs gap” in our current economy.  (It’s an interactive graph at the Project; go over and play with it).  This gap, according to the Project, is the monthly number of jobs that the US economy needs to create in order to return to pre-recession employment levels while also absorbing the people who enter the labor force each month.

The 96,000 jobs in this graph is the increase the latest Labor report says we had for the month of August.  The other three lines represent, in decreasing order, the effect of steady increases of 472,000 jobs/mo (from the highest single month in this century), 321,000 jobs/mo (the average of the best year in the ’90s), and 208,000 jobs/mo (the average of the best year in the 2000s).

We’re not even keeping up.  To paraphrase Anderson Cooper, those insisting we’re “making progress” are in an alternate universe.