When it comes to Buying Votes few things work as well as High-Speed Rail

Posted by PITHOCRATES - November 3rd, 2013

Week in Review

Governments everywhere have a love affair with high-speed rail.  Because it’s big.  It’s costly.  And best of all it takes a lot of union workers to build it.  And even more to maintain and operate it.  That’s a lot of grateful people who will remember them at the next election.  And when you get down to it that’s what politics is all about.  Buying votes with taxpayers’ money.   And few things cost more than high-speed rail.  Which is why governments love them.  Even if they are not good economic models (see Upgrading existing rail network would be better value than HS2, government analysis finds by Tim Ross posted 11/3/2013 on The Telegraph).

Ministers published their latest economic “business case” for the controversial £50 billion high speed project last week, as the Prime Minister sought to deflect pressure onto Ed Miliband over Labour’s wavering support for the plan…

Ministers paraded the latest official estimate of the economic value of the plan, which claimed that HS2 would deliver £2.30 in benefits for every £1 spent on the scheme.

The figure was based on an assessment of the impact of quicker travel times, more trains running between London and the north, and extra investment in jobs and businesses along the new route, among other factors.

However, detailed analysis buried within a separate 150-page study into the alternatives to HS2, also published by the Department for Transport last week, showed that upgrading services on existing rail routes would provide far better value for money.

According to this study, one package of improvement works to existing lines between London, Birmingham and northern cities would deliver economic benefits equal to £3.30 for every £1 invested, 43 per cent more than HS2.

This is why high-speed rail is not a good economic model.  It may deliver everything they say it will but whatever it does deliver is never enough.  Not with those mammoth price tags.  In this case £50 billion (about $80 billion).  To return £2.30 for every £1 invested that would come to £115 billion in new economic activity.  Britain’s GDP in 2012 was about £1.49 trillion.  So the expected return on that high-speed rail investment would be 7.7% of GDP.  Sounds nice.  But highly unlikely when you consider Britain’s GDP growth was than 1% in 2012.  Coming in at 0.1%.  Worse, all the costs will be in the first few years of breaking ground.  While the new economic activity will be spread out over decades.  Guaranteeing costs will exceed revenue for a very long time. 

Of all the high-speed rail lines in the world only two actually operate at a profit.  One in Japan.  And one in France.  Every other passenger train in the world loses money and requires taxpayer subsidies.  And because they do it is better to spend less than more.  Especially when more is £50 billion (about $80 billion).  And you can produce a greater return on investment by spending less.  But that is hard to do when you’re in the business of buying votes.  Which is why they keep trying to build high-speed rail.

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The Threat of Default on the Debt is from the Left not the Right

Posted by PITHOCRATES - October 10th, 2013

Politics 101

We have a Debt and Spending Problem as we are Spending so much that we have to Raise the Debt Ceiling

Contrary to popular belief the government doesn’t just borrow money.  They also raise money by taxing us and charging us fees.  A lot of it.  In this past fiscal year (October 2012 to September 2013) they raised $2,450,200,000,000.  That’s $2.45 trillion dollars.  Sadly, they spent $3,537,100,000,000.  Or $3.5 trillion.  Giving us a deficit of $1,086,900,000,000.  Or $1.1 trillion.  Which is why we’re having a debt crisis.

Interestingly, the left does not believe that we have a debt problem.  Or a spending problem. For they see no problem with these numbers.  The only problem they have is with Republicans.  Who do believe we have a debt problem.  As well as a spending problem.  And they want to do something about it.  Before the debt grows so big that it threatens the full faith and credit of the United States.

Now the Democrats, who don’t think we have a debt or a spending problem, are saying the Republicans are threatening the full faith and credit of the United States.  With their shutting down of government.  And their demand for spending cuts before raising the debt ceiling.  Which proves the Republicans point.  We have a debt and a spending problem.  Because we are spending so much that we have to raise the debt limit.

The Interest on the Debt is only 11.75% of the Available Revenue so there is no Danger of Default

Of course, this explains the $1.1 trillion deficit.  Out of control spending.  That the government is funding with more and more borrowing.  Which threatens the full faith and credit of the United States.  Because the more debt we accumulate the less likely we’ll ever be able to pay it off.

But are we risking default on the debt now?  With this battle over the debt ceiling?  No.  Yes, the debt is huge.  Currently it is in excess of $16 trillion.  About six and a half times total federal revenue.  To get an idea what that means consider you have the median household income which is approximately $51,000.  If you carried the same amount of debt the federal government carries you would have approximately $331,500 in credit card debt.  Any household with a median income of $51,000 with credit card debt of $331,500 has a bleak future.  And unless they win the lottery they will not escape bankruptcy.

So $16 trillion in debt is recklessly high.  And impossible to pay off.  But as bad as that is the amount of revenue the federal government collects via taxes and fees greatly exceeds the interest on the debt.  The interest on the debt is $415.7 billion.  This is the amount the government has to pay to avoid defaulting on the debt.  Which is easy to do with $2.45 trillion in revenue.  The interest on the debt is only 11.75% of the available revenue.  So even if the Republicans refuse to raise the debt ceiling there is no way in hell the government will be unable to pay the interest on the debt.  Unless the government chooses NOT to pay the interest on the debt.  Even when they have the ability to pay the interest on the debt.

The Democrats become Chicken Little whenever anyone ever Threatens their Spending Authority

So why all the talk of defaulting on the debt?  And ruining the full faith and credit of the United States?  Simple.  Democrats are liars.  And what do liars do?  They lie.  The interest on the debt is in no danger of going unpaid.  It’s all that other government spending that is in danger of going unspent.  That spending that makes people dependent on government.  And buys votes.

The left tries to frighten the people so they can keep spending.  And keep buying votes.  They try to scare Social Security and Medicare recipients.  Telling them they will lose their benefits if the Republicans don’t stop what they’re doing.  Even though they won’t.  First of all we pay into our own retirement account. At least that’s what the government tells us.  And there is a Social Security Trust Fund.  Full of our money just waiting to pay our benefits.  Or so they say.  But the Trust Fund doesn’t have money in it.  It has government IOUs.  Because the government spent that money.

So that’s why Democrats lie.  So they can keep spending and buying votes.  Which they won’t be able to do if they can’t borrow more money to spend.  And they’re spending so much that they can’t afford to lose their charging privileges.  This is why they warned the sky would fall if the sequestration spending cuts went into effect.  But as we all witnessed the sky did NOT fall with those spending cuts.  There was some discomfort.  But nowhere near the calamity the Democrats warned would befall us if they didn’t get their way.  Bringing us to their greatest fear.  That life can go on with a large spending cut.  And telling us that the government can cut spending even more.  Far more.  Which is a threat to their ability to buy votes.  And to their power.  Which is why they become Chicken Little whenever anyone ever threatens their spending authority.

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Pure Gold Standard

Posted by PITHOCRATES - October 8th, 2012

Economics 101

To Expand the Money Supply under a Pure Gold Standard requires an Enormous Investment unlike it does for Fiat Money

Do you know why we’ll never have a pure gold standard?  Because a pure gold standard doesn’t need a government.  Or their economists (from the Keynesian school) advising them how to make the economy better.  A pure gold standard works all by itself.  And is hard to manipulate.  Governments can’t inflate the money supply to spend money they don’t have.  So it really takes the fun out of being a spendthrift politician.  And because it would work so well it would debunk a century or so of Keynesian economics.  And shut down most economics departments at our Universities.  Because that’s all they know how to teach.  Keynesian economics.

So there is a lot of opposition to returning to a responsible monetary standard like a pure gold standard.  Ronald Reagan was the last presidential candidate to include a pure gold standard in the campaign platform.  But the idea died quickly after inauguration.  Not because he lied.  There was just too much political opposition that would never let it happen.  For that’s the last thing our spendthrift politicians in Washington want.  Something restraining them from spending what they don’t have.  As that would only make it more difficult to buy votes.  Reward campaign donors.  And reward special contributors with federal jobs in an ever expanding federal bureaucracy.

No, what the spendthrift politicians like is fiat money.  The kind you make up out of thin air.  Easily.  And with very little cost.  Either by printing paper dollars.  Or adding numbers to an electronic ledger.  Something you can’t do when you use gold.  Because to expand the money supply under a pure gold standard requires an enormous investment to find it.  To dig the ore out of the ground.  To comminute it (break it into smaller pieces) usually by crushing and grinding.  To smelt it.  To separate the gold from everything else pulled out of the ground with it.  And add it to the money supply.  This process takes a while.  And costs an enormous amount of money.  Unlike fiat money.  Where they can simply expand the money supply with a few computer key strokes.  Over a cup of coffee.

The Keynesian Interest Rate will always have a Larger Inflation Factor Included than a Gold Standard Rate

Gold mining requires gold mining companies.  And these gold mining companies have to raise a lot of capital to finance their extraction of gold.  Often with stocks and bonds.  So digging gold out of the ground requires investors to take great risks with their investment portfolios.  So it takes a lot to get gold out of the ground.  Which is why under a gold standard you can never have runaway inflation.  Technically you could.  But it would require the company to invest an inordinate amount of money into that inflation.  And if they flooded the market with all of that gold it would only lower the price of gold.  So they would spend more to earn less.  Something a private company is not likely to do.  Which is why it would be very difficult to impossible to have runaway inflation.

One of the things that makes a healthy economy is low interest rates.  If the cost of borrowing money is low more people will borrow money.  And if they’re buying things that require loans they’re generating a lot of economic activity.  Creating a lot of jobs along the way.  This is why Keynesians want to print money.  To flood the market with dollars so it doesn’t cost much to borrow them.  But there is another factor in interest rates.  Inflation.  The greater the inflation rate the greater the interest rate.  To compensate lenders for the loss in purchasing power over the time of the loan.  And increasing the money supply devalues the dollar.  Leading to a loss in purchasing power.  And those higher interest rates.

As it is much easier to inflate fiat money than it is with gold interest rates are higher with fiat money than they are with gold.  Because there is always a risk for governments to print more money for political purposes (i.e., buying votes) there is more cushion built in interest rates.  If you remove the irresponsible government aspect from the monetary system interest rates will be lower.  Because lenders would ask for less cushion in their interest rates.  Because of this stability that gold gives you interest rates are low for extended periods of time.  Encouraging lenders to lend.  And borrowers to borrow.  Leading to economic growth.  And jobs.  What the Keynesians try to get by printing money.  But the Keynesian interest rate will always have a larger inflation factor included.  So their interest rates will never be as low as they are under a pure gold standard.

Because Gold is not a Friend of Inflation it is no Friend to Keynesian Economists or Spendthrift Politicians

Under such a gold standard we would not get rid of paper dollars.  We’d still have those.  Only there would be no fractional reserve banking.  Where the banks keep only a small percentage of their deposits in their bank vaults while lending the rest out.  Under a gold standard our dollars would be ‘receipts’ for the gold stored in those bank vaults.  If the price of gold was $50 an ounce (it’s not) then $1 would equal 1/50 of an ounce of gold.  So for every dollar in circulation there would be 1/50 of an ounce of gold in a bank vault somewhere.  If you had $500 in your checking account the bank would have 10 ($500 X 1/50) ounces of gold on deposit for you.  Which means if everyone came to withdraw their money at the same time everyone would get their money.  There would not be any bank runs.  And no bank failures like there were during the Great Depression.

But could banks still loan money with a 100% reserve requirement for demand deposits (i.e., checking accounts)?  Yes.  They would loan money that people deposited for a fixed period of time.  Like a 5-year certificate of deposit.  Where the depositor can’t withdraw it until that 5-year period is up without a significant penalty for early withdrawal.  If a bank makes a 4-year loan with a 5-year deposit the money should be returned to the bank in time for the depositor to withdraw it at the end of 5 years.  As most savings are long-term (such as for retirement) this would not hinder lending.  There would still be plenty of money to lend.  Only there may be tighter lending standards where only people who can actually repay their loans may be able to borrow money.  Which would be a good thing.  As it would prevent another subprime mortgage crisis from happening.

If the economy grows larger than the money supply there will be fewer dollars chasing all those goods and services.  Meaning that the dollar’s purchasing power will increase.  And prices will fall.  This is something Keynesians all fear (but not consumers who like lower prices).  For they say if prices fall there could be another Great Depression.  However, the Federal Reserve helped to bring about the Great Recession with their deflationary monetary policies.  They contracted the money supply by some 30%.  That can’t happen with a pure gold standard.  Because the money supply never gets smaller.  Because just as you can’t create gold out of thin air you can’t make it disappear.  For once they add it to the money supply it is always there.  The gold stock never shrinks.  It can only grow less than the economy.  So you can have a monetary deflation without a depression.  Which is a good thing.  For your paycheck will go farther.  You savings will give you a better retirement.  It even makes international trade fair.  Because gold is gold.  Which makes any currency based on a unit weight of gold difficult to manipulate when it comes to exchange rates.  As prices are, essentially, in weights of gold.

So who wouldn’t win under a pure gold standard?  Governments with welfare states.  Who like to buy votes with their power over the monetary system.  Who depend on Keynesian inflationary policies to give them those large sums to spend.  And because gold is not a friend of inflation it is no friend to Keynesian economists or spendthrift politicians.

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Three Members of the EBT Card Commission going Rogue, Try to Ban EBT Card use for Strip Clubs, Booze, Cigarettes and Scratch Tickets

Posted by PITHOCRATES - April 7th, 2012

Week in Review

When it comes to battles between conservatives and liberals the battle lines they draw often concern welfare benefits.  The conservatives want to take away milk for children while liberals want to make sure welfare recipients still have their dignity.  And can enjoy strip clubs, booze, cigarettes and scratch tickets (see Pundit: EBT card overhaul puts Hill bigs ‘in the hot seat’ by Chris Cassidy posted 4/5/2012 on the Boston Herald).

Outraged lawmakers trying to prevent taxpayer-funded EBT card abuse are putting the political screws on House and Senate leaders, who will face election-year pressure to place real reforms on the floor for an up-or-down vote, a GOP pundit told the Herald…

Three members of the state’s EBT Card Commission, formed to clean up the program, yesterday announced details of a bill to crack down on abuses, after last week slamming the commission’s failure to come down hard enough.  The rogue group’s bill would ban the use of EBT cards at such places as strip clubs, rent-a-centers, gyms and gun shops; banning card use outside New England states; and restrict how much cash can be drawn. The reform efforts followed Herald reports of welfare recipients spending benefits on booze, cigarettes and scratch tickets.

This is politics.  And, sadly, politics as usual.  Buying votes versus responsible governing.  For both conservatives and liberals know of these welfare abuses.  The difference is that conservatives want to reform the system to stop the abuses.  And liberals want to allow the abuses for the votes these abuses buy.  For they need those votes as few people will vote to raise their taxes to pay for poorly run welfare programs.  But if you’re the recipient of those welfare programs, well then, that’s a different story.  Your votes are for sale.  Which is why liberals fight to make sure welfare recipients can enjoy strip clubs, booze, cigarettes and scratch tickets.  As long as these people remember who it was that allowed them to enjoy these things in the election booth.

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The Anatomy of a Subprime Mortgage Crisis

Posted by PITHOCRATES - October 17th, 2010

Old Time Politics – Buying Votes

There’s a lot of lying going on about the subprime mortgage crisis.  How it happened.  Who was responsible for it.  Was it the banks and their predatory lending?  That’s who Barney Frank blames.  Well, them and Republicans.  Or was it some more of that irrational exuberance that led to a real estate bubble?  It created a dot-com bubble in the 1990s.  Which in turn caused a recession.  Was it just a little history repeating itself?  Perhaps they both played a part.  But if they did, they were minor supporting roles.  They weren’t the star of the crisis.  For neither could have done anything had it not been for their enabler.

The Boston Globe’s Donovan Slack writes about one of the enablers backpedaling on his previous rosy statements about the two companies at ground zero of the crisis (see Stance on Fannie and Freddie dogs Frank on boston.com).  Fannie Mae.  And Freddie Mac.  Frank is running for reelection.  And his words are coming back to haunt him.

America is a center-right nation.  To counter that, the Left courts a coalition of special interests and single-issue voters.  Federal workers, teachers, unions, gays & lesbians, pro-choice feminists, environmentalists, socialists, minorities, etc.  Each taken by themselves is a very small percentage of the voting population.  But taken together it’s a sizeable percentage.  Then add in one more very important Democrat constituency.  The poor.  Now with all of these firmly in the Democrat’s camp, it’s just a matter of getting enough of the moderate and independent vote to win an election.  Of course, this is a moot point if they DON’T lock in the Democrat base.  And they do this by giving away as much free stuff and favorable legislation as possible. 

Give Me Your Tired, Your Poor, Your Huddled Masses Yearning for a House They Can’t Afford

The key to locking in the base is, of course, the poor.  There are a lot of them.  So the Left courts them.  Engages in class warfare.  They paint the Republicans as rich fat-cats who want to take their welfare, social security, food stamps, etc., away from them.  That they want to keep them in slums or throw them onto the street.  In contrast, they, the Democrats, want to provide for them.  To help them.  And they give them a lot of things.  To earn their gratitude.  And their votes at the election booth.  And the grandest of all the things given to them?  Affordable housing.

Poor people don’t have a lot of money.  That’s pretty straight forward but it needs to be said.  Because people who don’t have a lot of money can’t afford to buy a house.  Again, that’s pretty straight forward.  But it needs to be said.  Now, when these people apply for a mortgage and get denied, why do you think they got denied?  Here’s a hint.  Re-read this paragraph.  They get denied because they don’t have a lot of money.  You see, if you don’t have a lot of money, you can’t buy expensive things.  Again, straight forward.  But it needs to be said.  Again.  And often.

Now, what do you think a politician thinks the reason was for these poor people getting their mortgage applications denied?  Red-lining.  Racism.  Classism.  Unfairism.  (Yeah, that isn’t a word.  But it works.)  A large percentage of those denied mortgages are from the inner city poor.  And because of previous white-flight, that inner-city poor also happens to be primarily minority.  Hence the charges of racism.  And that’s just gold to a political party who needs poor minorities to vote for them.

The Siren Song of Affordable Housing

Now Barney Frank is running for reelection.  His Republican challenger is using Frank’s own words in his campaign.   And they’re causing some damage.  For Frank sat on the House’s Financial Services Committee (the oversight committee for Fannie Mae and Freddie Mac) throughout the time the crisis built.  And now he’s answering some very uncomfortable questions (this and all quotes are from Stance on Fannie and Freddie dogs Frank).

Frank, in his most detailed explanation to date about his actions, said in an interview he missed the warning signs because he was wearing ideological blinders. He said he had worried that Republican lawmakers and the Bush administration were going after Fannie and Freddie for their own ideological reasons and would curtail the lenders’ mission of providing affordable housing.

Ideology trumped responsibility.  The Left cries foul when the Right doesn’t reach across the aisle, but the Left never reaches out when they have power.  It’s us against them.  Pure partisanship.  Even when there’s great danger brewing.  It’s their interests first.  Then the country’s.  So he protected Freddie and Fannie.  And enabled them to cause greater harm.

Freddie and Fannie are in the secondary mortgage market.  They don’t write mortgages.  They guarantee them (so banks are more willing to take risks with less credit-worthy people).  And they buy these risky mortgages from the banks.  This further reduces a bank’s risk in approving very risky loans to people who are not credit-worthy.  Which is what the Democrats want.  More affordable housing for people who can’t afford to buy houses.  Frank’s committee sets the rules Freddie and Fannie must follow to keep them from approving mortgages that are crazy-stupid.  But that’s exactly what they encouraged.  Subprime loans.  Adjustable Rate Mortgages (ARMs).  Interest only mortgages.  No documentation approvals.  Any bank that didn’t have enough of these mortgages on their books (i.e., risky loans to poor people who couldn’t afford to buy houses) was in trouble.  The federal government would investigate them for red-lining, racism, classism, etc.

The more mortgages Freddie and Fannie bought, the more cash banks had to make more risky loans.  They then dumped these risky loans onto Wall Street.  You see, before the day of subprime loans, ARMs, interest only mortgages and no documentation approvals, mortgages were very safe loans.  But these subprime loans weren’t.  But they looked safe when Wall Street sold them.  I mean, buyers didn’t see the mortgage applications.  They had no idea what a credit risk these people were.  They just knew mortgages were traditionally safe investments.  So they just bought them.  And Freddie and Fannie made it all possible.

Known as government-sponsored enterprises, they didn’t provide mortgages themselves, but rather bought loans from banks and mortgage brokers, freeing up cash so the lenders could make more loans. Fannie and Freddie held or bundled the loans and sold them to investors as mortgage-backed securities.

Investors bought these very ‘profitable’ securities.  This demand just fueled the crisis in waiting.  Because Freddie and Fannie could dump these on Wall Street, they wrote more and more risky loans.  This made everyone happy.  Everyone was making money.  And more people who couldn’t afford to buy houses were buying houses.  And this was, after all, Freddie and Fannie’s mission.  Affordable housing.

In an effort to increase homeownership, the Clinton administration in the late 1990s and the Bush administration in the 2000s pushed Fannie and Freddie to meet growing quotas for buying affordable home loans. Those pushes, combined with a drive for more profits at the enterprises, drove Fannie and Freddie to take on more risk and more debt. They backed subprime and other risky loans, including mortgages for borrowers without proof of steady income.

Even the Republicans got on the band wagon.  New homes sales drive the economy (because of the stuff people have to buy to put into those houses that they can’t afford).  And you make points with the poor and the minorities.  There was just no down side in affordable housing.  Or was there?

But the director of the federal office responsible for overseeing Fannie and Freddie, Armando Falcon, began noticing their expanding portfolios and increasing reliance on risky investments. In early 2003, Falcon warned Congress in a 118-page report of the companies’ potential for a catastrophic failure that could jeopardize the economy.

Okay.  Five years before the crash someone was taking notice.  And he warned Congress.  Thank god someone was looking out for America’s best interests.

But Frank and other Democrats still opposed tighter regulation, Frank most notably in his public statements saying there was nothing wrong with Fannie and Freddie. He and other House Democrats also sent a letter to President George W. Bush in June 2004, saying the proposed crackdown could “weaken affordable housing performance . . . by emphasizing only safety and soundness.’’

Frank and the Democrats were saying that it was more important to put people who couldn’t afford houses into houses than it was to provide oversight.

So he initially supported a Republican measure in 2005 that would have imposed stricter standards on the lenders. But he voted against it in the full chamber because it did not include funding for affordable housing, he said. The bill passed the House.

Frank came around.  He supported a Republican measure to provide stricter oversight.  But he changed his mind.  Once again, affordable housing was more important than the oversight he was supposed to provide.  Then, in the summer of 2008, Treasury Secretary Henry Paulson warned Frank again.  Now Frank chaired the House’s Financial Services Committee.  Now, more than ever, it was his responsibility to reign in Freddie and Fannie.  To provide the oversight that was his committee’s responsibility.  But he still didn’t.  Like Nero, he fiddled as the crisis burned out of control.

In July 2008, then-Treasury Secretary Henry Paulson called Frank and told him the government would need to spend “billions of taxpayer dollars to backstop the institutions from catastrophic failure,’’ according to Paulson’s recent book. Frank, despite that conversation, appeared on national television two days later and said the companies were “fundamentally sound, not in danger of going under.’’

A few months later, Freddie and Fannie would cause the worst recession since the Great Depression.  On Frank’s watch.  And he kept denying that there was any problem until the very end.

Lots of Blame to Go Around – On the Left Side of the Aisle

Barney Frank is not the sole cause of the subprime mortgage crisis.  He was just one of the leading players.  Ultimately, it was an ideology.  Affordable housing.  Putting people into houses who couldn’t afford to buy houses.  This is what caused the worst recession since the Great Depression.  And, yes, the Bush administration did partake in the affordable housing mania.  But if you want to assign real responsibility, ask yourself this question.  Which party do you think of when it comes to affordable housing for the poor and minorities?

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