Civilian Labor Force Participation Rate and Recessions 1950-Present

Posted by PITHOCRATES - April 9th, 2013

History 101

LBJ was able to pass JFK’s Tax Cuts resulting in a Long Period of Economic Growth

The official unemployment rate is stuck around 8%.  But if you count all the people who can’t find a full-time job the actual unemployment rate is closer to 14%.  With every jobs report we hear the positive spin from the government about another down tic in the official unemployment rate.  And the hundreds of thousands of new jobs created.  But after three years or so of hearing these reports people start questioning the numbers.  And the rosy spin.  Because despite all the good news they tell us people are disappearing from the civilian labor force.  Which is the only reason why the official unemployment rate is falling.  Because they’re not counting a lot of unemployed people.  So looking at the civilian labor force may be a better indicator of the health of the economy.  Or better yet, the civilian labor force participation rate (CLFPR).  Which is basically the percent of those who can work that are working.  So let’s do that.  Starting with the Fifties.

Labor Force Participation Rate and Recessions 1950 to 1959

After World War II veterans went to college on the G.I. Bill.  These new college graduates with degrees in science, engineering and business management entered the workforce in the Fifties.  Helping the United States to develop new technologies.  New industries.  And a lot of new jobs.  American wells were busy pumping domestic oil.  Keeping gasoline cheap.  Having escaped the damage of war the American economy exported to those countries that didn’t.  And consumer spending took off.  Thanks to the new advertising industry telling Americans about all the great things to buy.  They bought houses and cars with borrowed money.  And used the new credit card to spend even more money they didn’t have.  Changing the American economy into a consumer-based economy.  Making the Fifties one of the most prosperous times in U.S. history.  Despite the Korean War.  And the Cold War.  Which was getting underway in a big way.  There was a burst of inflation to help pay for the Korean War.  When it ended they contracted the money supply to get rid of that inflation sending the economy into recession.  But once the recession ended the economy took off with all that consumerism.  Shown by the sharp rise in the CLFPR.  To correspond with the very good economic times of the Fifties.  Another monetary contraction happened in 1957 to tamp out some price inflation.  With a corresponding fall in the CLFPR.

Labor Force Participation Rate and Recessions 1960 to 1969

The Sixties started with another recession.  After it ended, though, the CLFPR continued to fall.  The recession was officially over but the economy was not doing well.  The CLFPR fell for almost three years following the recession.  Things were different from the Fifties.  For one, a lot of those war-torn economies were up and running again.  Providing some competition.  Especially a little island nation by the name of Japan.  Which one day would build all the televisions sold in America.  It was because of this fall in economic activity that JFK started talking about tax cuts in 1963.  Congress blocked his attempt to cut tax rates.  But after his assassination LBJ was able to pass the Revenue Act of 1964.  This lowered the top marginal tax rate from 91% to 70%.  And lowered the corporate income tax from 52% to 48%.  Among other favorable business measures.  Resulting in a long period of economic growth.  And a long upward trend in the CLFPR.

The Tax Cuts and Deregulation of the Eighties created one of the Longest Periods of Economic Growth

But following the Revenue Act of 1964 came the Great Society.  The Vietnam War.  And the Apollo moon program.  All paid for with a huge surge in federal spending.  Deficits began to grow.   As the government struggled to pay for everything.  And were unwilling to cut anything.

Labor Force Participation Rate and Recessions 1969 to 1979

The economy fell into a mild recession in 1970.  The CLFPR remained relatively flat.  To meet their spending needs they started printing money.  Devaluing the dollar.  Still part of Bretton Woods the dollar was still pegged to gold at $35/ounce.  That is, the U.S. agreed to exchange gold for dollars at $35/ounce.  But as they devalued the dollar our trading partners no longer wanted to hold dollars.  Because they were losing their purchasing power.  They wanted the gold instead.  So they began exchanging their dollars for gold.  Causing a great outflow of gold from the U.S.  Causing a problem for President Nixon.  He didn’t want the U.S. to lose all of their gold reserves.  But he didn’t want to cut any spending.  Which meant he didn’t want to stop printing money.  In fact, he wanted to print more money.  And the easy way out of his dilemma was by doing the most irresponsible thing.  He slammed the gold window shut in 1971.  And refused to exchange gold for dollars anymore.  And when he did there was no restriction to the amount of money they could print.  And they printed it.  A lot.  Creating double-digit inflation before the Seventies were over.  The inflation caused prices to rise.  Which Nixon tried to prevent with wage and price controls.  Causing a shortage of available rental property as people converted them into condos to get away from the rent control.  Gasoline stations ran out of gas as people filled their tanks with below-market priced gas.  And meat disappeared from grocery stores.  Wage controls kept wages from keeping pace with inflation.  So even though people had jobs they lost more and more purchasing power.  Or simply found there was nothing to purchase.  Throwing the economy into recession in 1973.  After the recession the CLFPR grew throughout the remainder of the Seventies.  But it wasn’t good growth.  It was growth sustained with double-digit inflation.  A bubble of artificial economic activity.  That would have to crash.  As all inflationary periods must crash.

Labor Force Participation Rate and Recessions 1979 to 1989

In the Eighties Paul Volcker, Federal Reserve Chairman, raised interest rates to double digits to wring out the double-digit inflation from the economy.  To restore people’s purchasing power.  And return the nation to real economic growth.  The tax cuts and deregulation of the Eighties created one of the longest sustained periods of economic growth in U.S. history.  With one of the longest upward trends in the CLFPR ever.  Indicating a growing economy.  With more and more people who could work finding work.  Proving that Reaganomics worked.  And worked very well.

If JFK or Ronald Reagan were President Today we wouldn’t be seeing a Freefall of the CLFPR

But it wouldn’t last.  Thanks to the government’s interference into the banking industry.  They had set a maximum limit on interest rates S&Ls (and banks) could offer.  When inflation took off people pulled their money from their savings accounts.  Putting it in higher earning instruments.  So they didn’t lose their savings to inflation.   This bad banking policy begat more bad banking policy.  They deregulated the S&Ls and banks.  So they could do other things to make up for their lost savings business.  And that other thing was primarily real estate.  They borrowed short-term money to make long-term loans.  Helping to create a housing bubble.  And when they began to wring that inflation out of the economy interest rates rose.  When those short-term loans came due they had to refinance them at higher interest rates.  While the interest they were earning on those long-term loans remained the same.  So their interest expense soon exceeded their interest income.  Creating the savings and loan crisis.  And a severe recession that ended the economic expansion of the Eighties.  With a corresponding fall in the CLFPR.

Labor Force Participation Rate and Recessions 1990 to 2000

Once the recession ended the CLFPR resumed a general upward growth.  But not as good as it was in the Eighties.  Also, it would turn out that much of the growth in the Nineties was artificial.  Bill Clinton’s Policy Statement on Discrimination in Lending forced lenders to lower their lending requirements.  And to qualify the unqualified.  Which created a surge in subprime lending.  And the beginning of a housing bubble.  The Internet entered the economy in the Nineties.  Just as the personal computer entered the economy in the Eighties.  Making Bill Gates a very rich man.  Investors were anxious to find the next Bill Gates.  Taking advantage of those low interest rates creating that housing bubble. And poured money into dot-com start-ups.  Companies that had no revenues.  Or products to sell.  Creating a dot-com bubble.  And a surge in computer programming jobs.  Also, as the century came to a close there was the Y2K scare.  Creating another surge in computer programming jobs.  To rewrite computer code.  Changing 2-digit date codes (i.e., ’78) to 4-digit codes (i.e., 1978).

Labor Force Participation Rate and Recessions 2000 to 2013

The Y2K scare proved to be greatly overblown.  Which put a lot of computer programmers out of a job in January of 2000.  And they wouldn’t find a dot-com job for the dot-com bubble burst in the same year they lost their Y2K job.  Throwing the economy into recession in 2001.  And then making everything worse came the terrorist attacks on 9/11.  Prolonging the recession.  As can be seen by the long decline in the CLFPR.  Which leveled out after the Bush tax cuts.  But then that housing bubble peaked in 2006.  And burst in 2007 into the subprime mortgage crisis.  Thanks to all those toxic mortgages Bill Clinton’s Policy Statement on Discrimination in Lending forced lenders to make.  And because Fannie Mae and Freddie Mac bought these toxic mortgages and had Wall Street package them into collateralized debt obligations this crisis spread worldwide.  Selling what they told unsuspecting investors were high yield, low risk investments.  Because they were backed by the safest of all loans.  Mortgages.  What they failed to tell these investors was that these mortgages were not safe 30-year conventional mortgages.  But highly risky subprime mortgages.  In particular adjustable rate mortgages.  Where the monthly payment would increase with an increase in interest rates.  And that is what happened.  And when it happened the unqualified could not afford the new monthly payment.  And defaulted.  Kicking off the Great Recession.  And because President Obama was more interested in national health care than ending the Great Recession he didn’t cut taxes.  Or cut regulations.  Instead, he increased taxes and regulations.  Making the current recovery one of the worst in U.S. history.  As can be seen in the greatest decline in the CLFPR since the Great Depression.  If you look at a continuous graph from 1950 to the present you can see just how bad the Obama economic policies are.

Labor Force Participation Rate and Recessions 1950 to Present

The JFK and Reagan tax cuts caused the greatest economic expansions.  And the greatest rise in the CLFPR.  Also, after most recessions there was a return to a growing CLFPR.  Interestingly, the two times that didn’t happen are tied to Bill Clinton.  Who created two of the greatest bubbles.  The dot-com bubble in the Nineties.  And the subprime mortgage bubble that was built in the Nineties and the 2000s.  The growth was so artificial in building these bubbles that the CLFPR did not recover following the bursting of these bubbles.  It might have following the dot-com bubble if the subprime mortgage crisis didn’t follow so soon after.  The current recovery is so bad that it has taken the CLFPR back to levels we haven’t seen since the Seventies.  Making the current recovery far worse than the official unemployment rate suggests.  And far worse than the government is telling us.  So why are they not telling us the truth about the economy?  Because the government wants to raise taxes.  And if the economy is improving there is no need for recession-ending tax cuts.  So they say the economy is improving.  As they hate tax cuts that much.  Unlike Ronald Reagan.  Or JFK.  And if either of them were president today we wouldn’t be seeing a freefall of the CLFPR.

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Two Consecutive Negative Quarterly Growth Rates in Business Earnings say we’re in a Recession

Posted by PITHOCRATES - March 9th, 2013

Week in Review

Business earnings drive everything in the economy.  Every dollar a person spends in the economy came from a business.  From someone spending their paycheck.  To someone spending their government assistance.  Because business provides every tax dollar the government collects.  Whether from the business directly.  Or from their employees.  So business earnings are everything.  If they’re not earning profits they’re not creating jobs.  And the fewer people that are working the less tax revenue there is.

Lakshman Achuthan with the Economic Cycle Research Institute (ECRI) looks at business earnings and has found a direct correlation between the growth rate of business earnings and recessionary periods.  Finding that whenever there were 2 or more consecutive quarters of a falling growth rate in business earnings we were in a recession.  Business Insider has reproduced his chart showing this correlation as well as quoting from his report (see CHART OF THE DAY: A Stock Market Trend Has Developed That Coincided With The Last 3 Recessions by Sam Ro posted 3/6/2013 on Business Insider).

This is a bar chart of S&P 500 operating earnings growth going back a quarter of a century on a consistent basis, as we understand from S&P. Others can choose their own definitions of operating earnings, but this is the data from S&P. In this chart, the height of the red bar indicates the number of consecutive quarters of negative earnings growth.

It is interesting that, historically, there have never been two or more quarters of negative earnings growth outside of a recessionary context. On this chart, showing the complete history of the data, the only times we see two or more quarters of negative growth are in 1990-91, 2000-01, 2007-09 and, incidentally, in 2012. This data is not susceptible to the kind of revisions one sees with government data. The point is that this type of earnings recession is not surprising when nominal GDP growth falls below 3.7%. So, even though the level of corporate profits is high, this evidence is also consistent with recession.

Follow the above link to see this chart.

The stock market is doing well now thanks to the Federal Reserve flooding the market with cheap dollars.  Investors are borrowing money to invest because of artificially low interest rates.  So the rich are getting richer in the Obama recovery.  But only the rich.  For an administration that is so concerned about ‘leveling the playing field’ their economic policies continually tip it in favor of the rich.  Who can make money even if the economy is not creating new jobs.  Which it isn’t.

All of these recessions can be traced back to John Maynard Keynes.  And Keynesian economics.  Playing with interest rates to stimulate economic activity.  The 1990-91 recession was made so bad because of the savings and loan (S&L) crisis.  Which itself is the result of government interventions into the private economy.  First they set a maximum limit on interest rates S&Ls (and banks) could offer.  Then the Keynesians (in particular President Nixon) decoupled the dollar from gold.  Unleashing inflation.  Causing S&Ls to lose business as people were withdrawing their money to save it in a higher-interest money market account.  Then they deregulated the S&Ls to try and save them from being devastated by rising inflation rates.  Which the S&Ls used to good advantage by borrowing money and loaning it at a higher rate.  Then Paul Volcker and President Reagan brought that destructive high inflation rate down. Leaving these S&Ls with a lot of high-cost debt on their books that they couldn’t service.  And while this was happening the real estate bubble burst.  Reducing what limited business they had.  Making that high-cost debt even more difficult to service.  Ultimately ending in the S&L crisis.  And the 1990-91 recession.

Fast forward to the subprime mortgage crisis and it was pretty much the same thing.  Bad government policy (artificially low interest rates and federal pressure to qualify the unqualified) created another massive real estate bubble.  This one built on toxic subprime mortgages.  Which banks sold to get them off of their books as fast as possible because they knew the mortgage holders couldn’t pay their mortgage payment if interest rates rose.  Increasing the rate, and the monthly payment, on their adjustable rate mortgage (ARM).  Fannie Mae and Freddie Mac bought and/or guaranteed these toxic mortgages and sold them to their friends on Wall Street.  Who chopped and diced them into collateralized debt obligations (CDOs).  Sold them as high-yield low-risk investments to unsuspecting investors.  And when interest rates rose and those ARMs reset at higher interest rates, and higher monthly payments, the subprime borrowers couldn’t pay their mortgages anymore.  Causing a slew of foreclosures.  Giving us the subprime mortgage crisis.  And the Great Recession.

In between these two government-caused disasters was another.  The dot-com bubble.  Where artificially low interest rates and irrational exuberance gave us the great dot-com bubble.  As venture capitalists poured money into the dot-coms who had nothing to sell, had no revenue and no profits.  But they could just as well be the next Microsoft.  And investors wanted to be in on the next Microsoft from the ground floor.  So they poured start-up capital into these start-ups.  Helped by those low interest rates.  And these start-ups created a high-tech boom.  Colleges couldn’t graduate people with computer science degrees fast enough to build the stuff that was going to make bazillions off of that new fangled thing.  The Internet.  Even cities got into the action.  Offering incentives for these dot-coms to open up shop in their cities.  Building expansive and expensive high-tech corridors for them.  Everyone was making money working for these companies.  Staffed with an army of new computer programmers.  Who were living well.  The brightest in their field earning some serious money.  So they and their bosses were getting rich.  Only one problem.  The companies weren’t.  For they had nothing to sell.  And when the start-up capital finally ran out the dot-com boom turned into the dot-com bust.  As the dot-com bubble burst.  And when it did the NASDAQ crashed in 2000.  When it became clear that all of President Clinton’s prosperity in the Nineties was nothing more than an illusion.  There would be 4 consecutive quarters of negative growth in business earnings before the dust finally settled.  One quarter worse than both the S&L crisis and the subprime mortgage crisis recessions.

And now here we are.  With 2 consecutive quarters of negative earnings growth under our belt.  Based on this chart this has happened only three times in the past 3 decades.  The 1990-91 recession.  The 2000-01 recession.  And the 2007-09 recession.  Which if his theory holds we are in store for another very nasty and very long recession.  No matter what the government economic data tells us.

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If you Missed the U.S. Subprime Mortgage Crisis you might be able to catch one in South Korea

Posted by PITHOCRATES - February 23rd, 2013

Week in Review

Stop me if you heard this one before (see S. Korea’s Poisoned Chalice of Household Debt Restricts Park by Sangwon Yoon posted 2/21/2013 on Bloomberg).

Park [Geun Hye, Korea’s incoming president] suggested state institutions could buy stakes in mortgaged apartments that have fallen in value, such as Kwon’s. The stakes would then be used as collateral for asset-backed securities, using rent from homeowners to pay interest to investors…

South Korean regulators have been working on a “soft landing” policy since June 2011, including limits on bank lending and tax breaks for homeowners switching to fixed-rate loans. About 85.8 percent of mortgages are currently adjustable…

“The quality of household debt is worsening,” said Lee Eun Mi, senior research fellow at Samsung Economic Research Institute in Seoul. Park needs “measures to stymie the rising danger of a massive default crisis…”

Some borrowers have staved off default by taking out further loans to pay mortgage interest…

Irresponsible household borrowing began after the 1997-1998 Asian financial crisis, said Kim Mi Sun, a debt counselor at a non-profit organization called Edu Money in Seoul. In the wake of corporate defaults during the crisis, the government curbed companies’ ability to sell credit, prompting banks to expand lending to consumers, including a rapid increase in home loans.

“It became so much easier to get loans after the crisis and everyone started taking out debts and mortgages they couldn’t afford,” said Kim. “The crux of the issue is that people simply don’t know how to manage their finances.”

The credit boom early in the last decade caused house prices to soar and left many Koreans with large loan obligations.

Sound familiar?  Sounds a lot like the subprime mortgage crisis, doesn’t it?  Easy credit encouraged a lot of people to buy houses they couldn’t afford with adjustable rate mortgages (ARM).  Just like in the United States following President Clinton’s Policy Statement on Discrimination in Lending.  Where the president told lenders that they had better find a way to qualify the unqualified or else.  Which they did.  With subprime lending.  And the ARM.  And when the interest rates reset at higher rates there was a massive default crisis.

Interestingly Park Geun Hye is suggesting a solution to help underwater mortgages that the U.S. used to spread the subprime mortgage crisis contagion around the world.  The collateralized debt obligation (CDO).  Fannie Mae and Freddie Mac bought the toxic subprime mortgages and packaged them into CDOs.  And unloaded them on unsuspecting investors.  Telling them that they were high yield.  And low risk.  Because their return came from the cash flows of homeowners making mortgage payments.  And what was less risky than mortgage payments?  Of course, what they failed to mention was that these were ARMs sold to low-income people who had no hope of paying their mortgage payments if interest rates ever rose.  Which they did.  Sending the fallout of the subprime mortgage crisis around the world.

No.  CDOs may not be the best solution to their problems.  And chances are that investors may not buy these.  For they were burned once by Fannie Mae and Freddie Mac.  And they’re probably not going to fall for the old ‘investment backed by cash flows from subprime mortgages’ trick again.

Amazing how some things never change.  Different place.  Different people.  But the same bad government policies.  Producing the same massive default crisis.  This is what you get when you interfere in the free market economy.  But some people never learn this lesson.  Despite the numerous examples of what not to do.  And if anyone taught people what NOT to do was the U.S. in the run-up to the subprime mortgage crisis.  Even the Americans can’t learn from their own lesson as President Obama is already talking about bringing back the policies that caused the subprime mortgage crisis in the first place.  Putting more people into houses that they can’t afford.

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Monetary Policy

Posted by PITHOCRATES - January 30th, 2012

Economics 101

Monetary Policy created the Housing Bubble and the Subprime Mortgage Crisis

Those suffering in the fallout of the Subprime Mortgage Crisis can thank monetary policy.  That tool used by the federal government that kept interest rates so low for so long.  Following the old Milton Friedman idea of a permanent level of inflation (but small and manageable) to stimulate constant economic growth.  Why?  Because when people are buying houses the economy is booming.  Because it takes a lot of economic activity to build them.  And even more to furnish them.  Which means jobs.  Lots and lots of jobs.

But there is a danger in making money too cheap to borrow.  A lot of people will borrow that cheap money.  Creating an artificial demand for ever more housing.  And not for your parent’s house.  But bigger and bigger houses.  The McMansions.  Houses 2-3 times the size of your parent’s house.  This demand ran up the price of these houses.  Which didn’t deter buyers.  Because mortgage rates were so low.  People who weren’t even considering buying a new house, let alone a McMansion, jumped in, too.  When the jumping was good.  To take advantage of those low mortgage rates.  There was so much house buying that builders got into it, too.  House flippers.  Who took advantage of those cheap ‘no questions asked’ (no documentation) mortgages (i.e., subprime) and bought houses.  Fixed them up.  And put them back on the market.

Good times indeed.  But they couldn’t last.  Because those houses weren’t the only thing getting expensive.  Price inflation was creeping into the other things we bought.  And all those houses at such inflated prices were creating a dangerous housing bubble.  So the Federal Reserve, America’s central bank, tapped the brakes.  To cool the economy down.  To reduce the growing inflation.  By raising interest rates.  Making mortgages not cheap anymore.  So people stopped buying houses.  Leaving a glut of unsold houses on the market.  Bursting that housing bubble.  And it got worse.  The higher interest rate increased the monthly payment on adjustable rate mortgages.  A large amount of all those subprime mortgages.  Causing many people to default on these mortgages.  Which caused the Subprime Mortgage Crisis.  And the Great Recession.

The Federal Reserve System conducts Monetary Policy by Changing both the Money Supply and Interest Rates

Money is a commodity.  And subject to the laws of supply and demand.  When money is in high demand (during times of inflation) the ‘price’ of money goes up.  When money is in low demand (during times of recession) the ‘price’ of money goes down.  The ‘price’ of money is interest.  The cost of borrowing money.  The higher the demand for loans the higher the interest rate.  The less the demand for loans the lower the interest rate.

So there is a relationship between money and interest rates.  Adjusting one can affect the other.  If the money supply is increased the interest rates will decrease.  Because there is more money to loan to the same amount of borrowers.  When the money supply is decreased interest rates will increase.  Because there will be less money to loan to the same amount of borrowers.  And it works the other way.  If the interest rates are lowered people respond by borrowing more money.  Increasing the amount of money in the economy buying things.  If interest rates are raised people respond by borrowing less money.   Reducing the amount of money in the economy buying things.  We call these changes in the money supply and interest rates monetary policy.  Made by the monetary authority.  In most cases the central bank of a nation.  In the United States that central bank is the Federal Reserve System (the Fed).

The Fed changes the amount of money in the economy and the interest rates to minimize the length of recessions, combat inflation and to reduce unemployment.  At least in theory.  And they have a variety of tools at their disposal.  They can change the amount of money in the economy through open market operations.  Basically buying (increasing the money supply) or selling (decreasing the money supply) treasury bills, government bonds, company bonds, foreign currencies, etc., on the open market.  They can also buy and sell these financial instruments to change interest rates.  Such as the Federal funds rate.  The interest rate banks pay when borrowing from each other.  Moving money between their accounts at the central bank.  Or the Fed can change the discount rate.  The rate banks pay to borrow from the central bank itself.  Often called the lender of last resort.  Or they can change the reserve requirement in fractional reserve banking.  Lowering it allows banks to loan more of their deposits.  Raising it requires banks to hold more of their deposits in reserve.  Not used much these days.  Open market operations being the monetary tool of choice.

There is more to Economic Activity than Monetary Policy

Fractional reserve banking multiplies these transactions.  Where banks create money out of thin air.  When the Fed increases the money supply a little this creates a lot of lendable funds.  As buyers borrow money from some banks and pay sellers.  Then sellers deposit that money in other banks.  And these banks hold a little of these deposits in reserve.  And loan the rest.  Borrowers create depositors as buyers meet sellers.  And complete economic transactions.  When the Fed reduces the money supply a little this process works in reverse.  Fractional reserve banking pulls a lot of money out of the economy.  Some treat these economic transactions, and the way to increase or decrease them, as simple math.  Always obeying their mathematical formulas.  We call these people Keynesian economists.  Named for the economist John Maynard Keynes.

Big interventionist governments embrace monetary policy.  Because they think they can easily manipulate the economy as they wish.  So they can tax and spend (Keynesian fiscal policy).  And when economic activity declines they can simply use monetary policy to restore it.  But there is one problem.  It doesn’t work.  If it did there would not have been a Subprime Mortgage Crisis.  Or any of the recessions we’ve had since the advent of central banking.  Including the Great Depression.  As well as the Great Recession.

There is more to economic activity than monetary policy.  Such as punishing fiscal policy (high taxes and stifling regulations).  Technological innovation.  Contracts.  Property rights.  Etc.  Any one of these can influence risk takers.  Business owners.  Entrepreneurs.  The job creators.  The people who create economic activity.  And no amount of monetary policy will change this.

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Incentive and Competition

Posted by PITHOCRATES - December 19th, 2011

Economics 101

Prices set by the Free Market make Competitors Think and Innovate

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  Free labor sustained economic growth by increasing the number of people making economic exchanges.  Prices automated the process of assigning value and allocating scarce resources (that have alternative uses).  But that’s not all.  Prices also provide incentive and competition.

High prices signal high profits.  Or the potential for high profits.  Which encourages other people to enter the market to get their piece of these high profits.  People who think they can do a better job.  Make something better.  And sell it for less.  That’s right, to get rich they will sell it for less.  That’s key.  That’s how you gain market share.  The ultimate goal of all businesses.  Because with market share comes profit.  And often times this happens even with a price below that of the competition.

Prices set by the market allow this amazing phenomenon to happen.  It stimulates the creative juices.  It makes competitors think.  And innovate.  Providing incentive.  To improve on an existing idea.  Or replace an existing idea with a better idea.  All the while being guided by market prices.  Which tell them the current value a buyer places on a product or service.  And the final cost they have to remain below to bring their innovation to market.  If they do both they will gain market share.  By giving customers better value at a lower price.  And they will make themselves rich in the process.  The proverbial win-win of the free market.  The hallmark of capitalism.  Incentive and competition.

With Crony Capitalism Government Increases the Cost of Competition, Squelching any Incentive to Innovate

Free market prices are essential for free market capitalism.  If the market is not free to determine prices this amazing phenomenon will not occur.  Consumers will not get more value for less.  And business people and entrepreneurs will not take chances and create more value for less.  Because if there are outside forces influencing prices these forces also create uncertainty.  They throw unknowns into business calculations.  Things businesses have no power over.  Which makes them cautious.  And less prone to risk-taking.

We can see examples of this every time there is unrest in the Middle East.  Which tends to threaten the oil supply.  Everything in a modern economy uses energy.  Nothing comes to market without energy.  So anything that affects energy prices affects all prices.  Another example is government’s regulatory cost.  Such as Obamacare.  Which has caused great uncertainty.  And a lot of unknowns.  For entrepreneurs.  And business owners.  Who don’t know the ultimate regulatory compliance cost.  Freezing hiring.  And business expansion.  Extending the Great Recession.  Causing the economy to spit and sputter along.  Like an engine that just won’t restart.

Typically when government over regulates it’s to reward their friends and cronies.  Hence the term crony capitalism.  Which isn’t even capitalism.  Crony capitalism is about getting rich by who you know in government.  Not by creating more value for less.  The government fixes the game by keeping prices high for their cronies.  By enacting regulations that increase the cost of competition.  Squelching any incentive to innovate.  Leaving consumers stuck paying more for less value.

When Government Interfered with Market Prices they gave us the Great Depression and the Great Recession

Free market prices assign value.  Allocate scarce resources that have alternative uses.  Provide incentive to innovate.  Encourage competition.  Incentive and competition.  The hallmark of capitalism.  Which ultimately provides consumers with more value at lower prices.  And it does all of this automatically.  As long as government doesn’t interfere with this automatic pricing mechanism.

But government often does.  They interfere with this automatic pricing mechanism to reward friends and cronies far too often.  When they do the economy suffers.  And often goes into recession.  And when they really interfere, they cause Great Depressions.  And Great Recessions.

Government regulatory policy turned an ordinary recession into the Great Depression.  One of their greatest anti-business regulations being the Smoot–Hawley Tariff Act.  Which launched an all out trade war.  Killing the economy.  And government regulatory policy in the mortgage industry caused the Great Recession.    First by creating a housing bubble by forcing lenders to qualify the unqualified.  And then enabling this bad policy on a grand scale by having Fannie Mae and Freddie Mac buy the resulting bad subprime mortgages.  Which removed all risk from the lenders so they kept on approving bad subprime mortgages.

Say what you will about the Great Depression and the Great Recession.  But what you can’t say is that they were market failures.  Because they weren’t.  Both were government-made.  Because it was government that interfered with market prices.  Not the free market.  And the consumers paid the price for their crony capitalism.

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When Democrat Policies Fail and they Fall in the Polls they Scramble to Endorse Reaganomics

Posted by PITHOCRATES - October 5th, 2011

Democrats have Blamed every ill known to Mankind on Reaganomics

The Left hates Ronald Reagan.  Proclaimed the era of Reagan was over.  No more were these Reagan Republicans going to screw over the poor so the rich can live a better life.  Yes, they hated this man with a passion.  And everything he stood for.  This supply-sider of the Austrian School.  He and is unfunny Laffer Curve.  This cold-hearted tax cutter.  But now they love him.  Why?  Because he supported taxing the rich.

I’ll pause a moment for those of you who have fallen out of your chairs.  Ready?  Good.

You know Congressional Democrats are grasping at straws to promote their policies when they claim their archenemy would have supported them, too.  You know why they’re trying, though, don’t you?  If you listened to the protesters on Wall Street you should know.  With their control of public school teachers and college professors (both dependent on taxpayer money for generous pay and benefit packages), they can revise history.  And keep kids ignorant.  Hopefully keeping them oblivious of things they don’t want them to know.  Such as the true legacy of Ronald Reagan (see MILLER: Ripping off the Gipper by Emily Miller posted 10/4/2011 on The Washington Times).

Liberals are trying to twist Ronald Reagan’s words to muster support for raising taxes. House Minority Leader Nancy Pelosi’s press office sent a memo on Monday to congressional Republicans claiming they’d found evidence proving that President Reagan was the real inspiration for President Obama’s tax-the-rich “Buffett Rule.” The California Democrat posed the question: “What would Reagan do?”

The correct answer is: He would cut taxes. Mrs. Pelosi’s memo sends people over to the liberal Think Progress website, where a video montage interweaves clips of Mr. Obama and Reagan saying apparently similar things about tax rates. “We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” said the Gipper.

You’re supposed to think that’s just what Mr. Obama is doing, but the liberals edited out the context of the 40th president’s remarks. In a June 1985 speech at an Atlanta high school, he called for a total overhaul of the tax system. He wanted loopholes closed to lower the tax rates for everyone, for a net reduction in the tax burden. Congressional Republicans point out that’s precisely the opposite of what the Democrats are now trying to do.

You see, the Democrats can’t rely on telling the truth to pass their policies.  Because their policies only benefit those in government.  And those who live like parasites on the wealth creators.  Such as those protestors on Wall Street.  Who want the wealth of the wealth creators.  But want no part of capitalism which created that wealth.  And are too ignorant to understand that you can’t have one without the other.

Thank you public school teachers and college professors.

So they must lie.  Revise history.  To try and fool people into believing that their policies are just like Ronald Reagan’s.  And apparently hoping people don’t remember that Democrats have blamed every ill known to mankind on these very same policies.  ReaganomicsTrickledown economics.  The scourge of mankind.  But the majority of Americans apparently love the big lug so they’ll swallow back their bile and say, hey, we love him, too.  And hope that the grimace on their face doesn’t look as bad or as painful as it feels.

Fannie Mae and Freddie Mac created America’s Financial Mess, not Wall Street

So where did these Wall Street protests come from?  Where did the primary impetus come from?  Apparently Canada.  Thanks, Canada.  As if the corrupting influence of Terrance and Phillip wasn’t enough already.  So I guess we have to Blame Canada (Warning:  Blame Canada contains adult content) for this, too (see Occupy Toronto leaderless, unfocused but hopeful by Dana Flavelle posted 10/4/2011 on the Toronto Star).

The Wall Street protests were inspired by Canadian anti-consumer magazine Adbusters.

Editor in chief and co-founder Kalle Lasn said he’s been calling for this kind of protest movement for 20 years.

It’s finally happening because people are angry with the financial fraudsters on Wall Street who created America’s economic mess and largely went unpunished, he said in a telephone interview from Vancouver.

But that isn’t who created America’s financial mess.  It was government.  Specifically the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  If it wasn’t for them buying and/or guaranteeing risky subprime mortgages there would have been no subprime mortgage crisis.

That was government policy.  Putting as many people into houses as possible.  Even if they couldn’t afford them.  That wasn’t Wall Street.  Wall Street was merely an accessory after the fact.  Aiding and abetting Fannie Mae and Freddie Mac.  By selling those toxic subprime mortgages in collateralized debt obligations (CDOs).  Promoting them as high yield yet low risk.  Because they were backed by mortgages, historically the safest loans in all of America.  So investors bought these.  Not knowing how risky they were.  But you know who knew how risky they were?  The GSEs Fanny and Freddie.  Because they bought them.  And remember what the ‘G’ stands for in GSE.  Government.

If you removed government from this equation mortgage bankers would not have approved these risky subprime mortgages.  Because that risk would have been on their books.  But when government said ‘don’t worry  we’ll take that risk off of your books’ what did they have to lose in approving risky subprime mortgages?  Less harassment from the government for not approving mortgages for the poor and minorities who didn’t qualify?  Yeah, like they were going to miss that harassment.

If these protestors want to protest those responsible they should protest government.  Not Wall Street.

Damn Canadians.  If it’s not making our kids fart and curse they’re getting them to protest the wrong people.  (Editor’s note:  We like Canada and Canadians.  And mean them no disrespect.  We’re just having a little fun with the movie South Park: Bigger, Longer & Uncut.  In which incidents lead to war between Canada and the U.S.  A premise so ridiculous that it’s funny.  For Canada and the U.S. have been the best of friends.  And will always be the best of friends.)

The more Public Sector Union Employees paying Dues the more Money is collected for Democrat Coffers

Perhaps that’s the problem.  Too much government.  The federal government has grown into a behemoth.  On top of thousands and thousands of local governments throughout the country (see Infographic: Local government by the numbers by Mary Mahling and Carla Uriona posted 10/4/2011 on Stateline).

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

That’s a lot of government.  And there’s only one way to pay for a lot of government.  With a lot of taxes.

So we have government upon government upon government.  Surely with all that government we must be getting some value for all of these taxes.

More than two centuries of American democracy have resulted in a profusion of governments at the local level, not only cities and counties but villages and townships, park districts and sanitary districts and a host of others. To those trying desperately to bring a state’s budget into balance, many of these are useless anachronisms incapable of providing any service that could not be provided higher up the governmental chain. But to the tens of thousands of people who hold office in these local entities — and to millions of citizens who live within them — multiple local governments are a crucial piece of evidence that American democracy reaches down to the grassroots level.

Apparently not.  And don’t call me Shirley.

They just provide a lot of jobs for the unemployable.  By taxing the wealth creators.  And redistributing it to people whose job is a duplicate of one at another level of government.

They do serve a purpose, though.  Being totally funded by taxpayers, they have a vested interest to keep raising taxes on the taxpayers.  Which is, of course, helpful to Democrats.  So the more local governments the better.  The more public sector union employees paying dues the more money finds its way into Democrat coffers.

Any Attempt to Quantify Human Behavior will Ultimately Fail

And then you have academe.  And Keynesian economists.  Furthering the growth of government with their government-spending Keynesian economics (see Tis The Gift To Be Simple by Paul Krugman posted 10/5/2011 on The New York Times).

To be sure, IS-LM is an attempt to squeeze a dynamic economy into a static model, which is why people like me usually cross-check our conclusions with something intertemporal. But it’s actually a pretty darn sophisticated approach — as demonstrated by the fact that economists who dismiss or attack IS-LM as too simplistic or something almost always end up making assertions that are much more simplistic than IS-LM, if not falling into outright logical fallacies. In fact, I can’t think of a single exception to this rule: every attack on IS-LM I’ve ever seen (as opposed to suggestions that we should also look at more complex models) was followed by some kind of empirical or logical howler.

I have a criticism.  Any attempt to quantify human behavior will ultimately fail.  Because you can’t quantify human behavior.

Economics belong to the branch of science we call social sciences.  That is, it’s not real science.  Because the wildcard is that human behavior can always produce some unintended consequence to government action.  Such as Prohibition giving us organized crime.  Whereas the equations of science typically don’t.  We can use science to build bridges, buildings and airplanes.  And they work pretty much as planned.  Without any unintended consequences.

You can’t represent human behavior by mathematical formulas.  We know some behavioral responses.  Such as sex in advertising gets men’s attention.  But that’s a base primeval instinct.  There’s not a whole lot of thinking going on.  Not so in a complex economy.  Where there is a lot of thinking going on.  Keynesians like to think the economy is as simple as impulse buying at the point of sale checkout aisle.  Put more candy on display and you sell more candy.  Not so with buying a house.

Everyone will like to own a beautiful home.  But people won’t buy a house on impulse.  Not when there’s record unemployment.  And talk of a double-dip recession.  Because if you learned anything from the subprime mortgage crisis it’s this.  Too much debt is bad.  And there is no such thing as a guaranteed job.  Playing with interest rates won’t change that.  Only time will.  When enough time has passed to let people feel secure in their jobs again.  Then and only then will they consider taking on debt again.  No matter what the IS-LM model predicts.  Because you can’t quantify human behavior.

The Wall Street Protestors with Student Loan Debt Probably don’t have Science or Engineering Degrees

All government policy is social science.  It’s not an exact science.  That’s why strange things happen.  Unintended things.  Whenever government tries to influence behavior.  And when government tries they have a track record of failure.  Which is why they don’t run for reelection on the success of their policies.  They run on the success of someone else’s (Ronald Reagan’s) policies.  And say that their policies are the same.  And they are except with a few minor changes.  And by ‘few’ I mean they couldn’t be any more different.  So they lie.  Or they just demonize their opponents.

But our kids are blissfully ignorant.  Thanks to public school teachers.  And college professors.  Who care more about improving their taxpayer funded pay and benefits than education.  That’s why government grows.  And why we have degrees like women’s studies.  And poetry.  Degrees that offer no hope for employment in a capitalistic economy.  For what business that relies on pleasing their customers (like Apple does consistently) need people with these skills?

No.  They need people with science and engineering degrees.  You know, the hard ones.  So the kids who took the easy route in college must depend on teaching others their worthless knowledge.  Or get a government job.  Which has a lot to do with the anger of these protestors who have huge student loan debt.  And no job.  Because if they hate capitalism you can guess what their degrees are in.

(Editor’s note:  This was written before news of Steve Jobs’ passing broke.  Our condolences go out to his family.  We decided to leave the Apple reference in as a tribute to Steve Jobs.  He was one of America’s greatest entrepreneurs.  The world is a better place because of him.  For the gifts he gave us.  And the inspiration he gave to the next generation of great entrepreneurs.)

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Demand-Side Slump or Government caused Supply-Side Recession?

Posted by PITHOCRATES - June 4th, 2011

The Arrogance and Condescension of Liberal Elite Academics

The problem with liberal academics running the country is that they think like liberal academics.  They have no business experience.  But they know how to run businesses better than business owners who’ve been running businesses for years.  It’s the height of arrogance and condescension.  But these liberal elite academics don’t see people.  They see charts and grafts.  Which are religious icons to them.  Holy.  They accept them on faith.  They never question them.  And always make excuses for them when the policies they beget fail.  While pointing at successful policies with successful track records and calling them failures.  Because these policies are heretical.  And conservative.

Here is a liberal academic talking down to the American people with all-knowing condescension.  And if you want to know how the current administration thinks, all you have to do is read this arrogance and condescension (see Fatal Fatalism by Paul Krugman posted 6/4/2011 on The New York Times).

We are not, after all, suffering from supply-side problems…This is a demand-side slump; all we need to do is create more demand.

So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits. Normally we respond to demand-side slumps by cutting short-term nominal interest rates, which the Fed can move through open-market operations. But we now have severely depressed private demand thanks to the housing bust and the overhang of consumer debt, so even a zero rate isn’t low enough…

The answer seems obvious. We should be using fiscal stimulus; we should be using unconventional monetary policy, including raising the inflation target; we should be pursuing aggressive measures to reduce mortgage debt. Not doing these things means accepting huge waste and hardship.

But, say the serious people, there are risks to doing any of these things. Well, life is full of risks. But it’s simply crazy to put a higher weight on the possibility that the invisible bond vigilantes might manifest themselves, or the inflation monster emerge from its secret cave, over the continuing reality of enormous human and economic damage from doing nothing.

The housing bubble was created by too much unconventional monetary policy.  Money was dirt cheap to borrow.  And people borrowed.  To buy houses they couldn’t afford.  With subprime mortgages.  That they defaulted on when interest rates went up.  Causing the subprime mortgage crisis.  Which happens when you stimulate demand beyond normal market demand.  Why?  Because you don’t create healthy economic growth with easy money.  You create bubbles.

The Fed has done too much.  All their easy monetary policy to stimulate the economy has only devalued the dollar.  Making an important and scarce commodity more costly.  Because the world prices this most important of all commodities in U.S. dollars.  Oil.  Which makes diesel and gasoline.  The energy we use to bring food to market.  Which is why prices are up.  Across the board.  Especially food and energy.  That hit consumers the hardest.  Because of inflation.  Caused by monetary policy.  Which has failed to produce jobs.  Lower the misery index.  Or end the recession.

Their answer?  More of the same.  It’s always more of the same.  Jimmy Carter‘s ‘more of the same’ did not end the malaise of his stagflationRonald Reagan‘s economic policies did.  His conservative, supply-side economic policies.  That created real economic growth.  And doubled tax receipts to boot.  But his policies were heretical.  They went against everything liberals hold sacred.  Their Keynesian charts and graphs.  That look at business activity as an aggregate thing.  And not as people.  So liberals attack the success of Reaganomics.  Despite its soaring success.

You see, Reaganomics created jobs.  It made a favorable business climate.  So business people could do what they know how to do.  Create business. Expand business.  Make more things.  And create jobs.  Which drives all consumer spending.  Which makes up over 70% of the economy.  Because a consumer needs a job to spend.  And this kind of spending will sustain itself.  Unlike Keynesian tweaking.  Which is by definition only temporary.  To fill the gap until the private market restores itself.  Which makes Keynesian economics itself a paradox.  Using policies that hinder the private market to stimulate the private market.

The Inflation Monster is out and Squeezing Consumers

And while some will mock conservatives about letting loose the inflation monster from its secret cave, the inflation monster is already out.  And wreaking consumer havoc (see Tightening our belts: Americans lower income expectations by John Melloy, CNBC, posted 6/4/2011 on USA Today).

With consumers squeezed on both sides by stagnant wages and rising prices, the number who believe they will bring home more money one year from now is at its lowest in 25 years, according to analysis of survey data by Goldman Sachs.

The inflation monster has devalued the dollar.  And when you devalue the dollar you need more of them to buy the same amount of things you did before.  Because, thanks to inflation, those things have higher prices.  Consumers have to pay these higher prices.  Leaving them less money to spend.  And their employers have to pay them.  Leaving them less money to spend on wages.  So few people think they will bring more money home next year.  Because things are so bad this year.

A typical recovery pattern goes like this: stock market bottoms, economic growth bottoms and then hiring and wage increases return. What’s unique and scary about this recovery is that the last piece of the recovery is not there.

For a simple reason.  Intervention.  It’s all that Keynesian tweaking.  Like that trillion dollar stimulus bill.  If it wasn’t for all that government spending the economy may have actually recovered by now.  Now we have recession and inflation.  Thanks, liberal elite academics.

In the 2001 recession, the country lost 2 percent of jobs from peak employment and then made that back in a 48- month cycle, according to data from money management firm Trutina Financial. In 1990, the jobs lost during the recession were recovered in 30 months.

Right now, about 38 months from peak employment during the housing boom, there are still six percent fewer jobs out there. Making up that amount of jobs in 10 months or less would be unprecedented, if not impossible.

“The crawl out of this economic ditch is going to be long and slow,” said Patty Edwards, chief investment officer at Trutina. “Even if they’re employed, many consumers aren’t earnings what they were two years ago, either because they’re in lower-paying jobs or not getting as many hours.”

Jobs are everything.  And to create jobs you have to understand people.  Not look at sacred charts and graphs.  You have to understand what motivates the individual.  Not hypothesize about what will move aggregate curves on a graph.  Of course, liberal elite academics chose not to do this.  Because they are gods.  Infallible.  Who live in a world where paradoxes exist.  And can deny reality at will.

Small Business sees the Government as Adversarial

If jobs are everything, then why won’t there just be more jobs?  You’d think the gods could make them.  And no doubt are wrathful and miffed that their policies haven’t made them.  All because of those dirty, greedy, little business owners.  Heretics.  Sitting on cash instead of using it to hire people. 

Of course, the greatest job creators out there are small business owners.  Who don’t have big legal staffs or legions of tax accountants.  And these Keynesian polices are just overwhelming them.  As related in a conversation on a plane with a Yale law professor.  Who asked point blank why this small business owner didn’t hire more people (see Carter: Economic Stagnation Explained, at 30,000 Feet by Stephen L. Carter posted 5/26/2011 on Bloomberg).

“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”

He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.

It’s interesting listening to a person.  Because you learn something different than you do from moving a curve on a graph.

“I don’t understand why Washington does this to us,” he resumes. By “us,” he means people who run businesses of less- than-Fortune-500 size. He tells me that it doesn’t much matter which party is in office. Every change of power means a whole new set of rules to which he and those like him must respond. ‘‘I don’t understand,” he continues, “why Washington won’t just get out of our way and let us hire.”

Get out of our way?  And let us hire?  You mean they would be hiring more people if it wasn’t for all the policies encouraging them to hire more people?  Interesting.  So what should government do?  How should they be in this business-government relationship?

“Invisible,” he says. “I know there are things the government has to do. But they need to find a way to do them without people like me having to bump into a new regulation every time we turn a corner.” He reflects for a moment, then finds the analogy he seeks. “Government should act like my assistant, not my boss.”

In other words, government shouldn’t tell business owners how to better run their businesses.  Because few in government have ever run a business.  They need to stop acting as the authority on something when those they try to help know more than they do.  This conversation gave this Yale law professor some food for thought.

On the way to my connection, I ponder. As an academic with an interest in policy, I tend to see businesses as abstractions, fitting into a theory or a data set. Most policy makers do the same. We rarely encounter the simple human face of the less- than-giant businesses we constantly extol. And when they refuse to hire, we would often rather go on television and call them greedy than sit and talk to them about their challenges.

Recessions have complex causes, but, as the man on the aisle reminded me, we do nothing to make things better when the companies on which we rely see Washington as adversary rather than partner.

And there it is.  Small business sees the government as adversarial.  And there is only one reason why they do.  Because it’s true.

Fiscal Stimulus is the Problem

This is not a demand-side slump.  It’s a supply-side problem.  Caused by the adversarial relationship between business and government.  Otherwise a trillion dollar in stimulus spending would have done something.  Other than give us inflation. 

Fiscal stimulus isn’t the solution.  It’s the problem.  And we need to stop trying to fix this problem with what gave us the problem.  Because they aren’t gods.  And we are individuals.  Not an aggregate to hypothesize about for fun and games.    

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Fannie Mae and Freddie Mac Winding down after Costing us Dearly

Posted by PITHOCRATES - February 12th, 2011

The Subprime Mortgage Crisis

The housing market is still bad.  And hindering our economic recovery.  The Federal Reserve sees problems inherent in the system.  They don’t want to rehash the blame game for the housing collapse that triggered the worst recession since the Great Depression.  But they do (see Federal Reserve board member: U.S. investigation into mortgage servicing has found ‘widespread weakness’ by Ariana Eunjung Cha posted 2/11/2011 on The Washington Post).

While [Sarah] Bloom Raskin [Federal Reserve board of governors member] said in her speech that she did not want to dwell on how the industry came to such a crisis and instead focus on solutions, she did take some time to issue a harsh reprimand to mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies whose “selfish free-for-all,” she said, “ultimately led to an economic slide the effects of which are still visible in the boarded-up houses and sheriffs’ foreclosure notices posted all over America.”

Missing from this list is the government.  For it was their policies and threat of legal action that made lenders create all of those risky loans.  Those subprime mortgages.  That put people into houses.  Even if they couldn’t afford to buy a house.  And why did they do this you ask?

U.S. Economic Policy:  Put as many People into Homes as Possible

Well, I’ll tell you.  It’s pretty simple really.  The housing market drives our economy.  Good housing sales equate to a prosperous economy (see Home prices fell in almost half of U.S. cities in fourth quarter, Realtors say by Kathleen M. Howley, Bloomberg News, posted 2/12/2011 on The Washington Post).

Federal Reserve policymakers described the U.S. real estate market as “depressed” in a Jan. 26 statement after the end of a two-day meeting in Washington. The central bankers said declining home values continued to stymie the consumer spending that accounts for about three-quarters of the world’s largest economy.

Three-quarters of the economy.  That’s why government wants to put as many people as possible into houses.  Houses are built with lumber, brick, concrete, linoleum, ceramic tile, plastic plumbing pipe, garbage disposals, electrical wiring, light fixtures, carpeting, paint, ceiling fans, air conditioners, furnaces, etc.  Once we buy a house we have to furnish it.  Stoves, refrigerators, furniture, televisions, stereos, computers, washing machines, dryers, dishes, cutlery, curtains, blinds, beds, sheets, pillows, blankets, coffee makers, etc.  And that’s a lot of consumer spending.

Building and furnishing one house stimulates a lot of economic activity.  That’s why official government policy for decades has been to get as many people to become home owners as possible.  When they extended this to those who couldn’t afford to buy a home, though, we ended up with the subprime mortgage crisis.  And because of Fannie Mae and Freddie Mac, the problem of those subprime mortgages ricocheted throughout the world.

The most Expensive Government Rescue of the Financial Crisis

And speaking of Fannie and Freddie, just how much have their risky behavior cost the American taxpayer?  A lot.  And we’re still counting (see Fannie, Freddie bailout: $153 billion … and counting by Chris Isidore posted 2/11/2011 on CNNMoney).

When the dust settles, the federal bailout of Fannie Mae and Freddie Mac will be the most expensive government rescue of the financial crisis — it already stands at $153 billion and counting…

The Federal Housing Finance Agency, the government body that oversees the two mortgage giants, has estimated that losses through 2013 will require Treasury to pour another $68 billion to $210 billion into the firms on top of the money already used to prop-up the firms and the housing market.

That’s a lot of money.  But at least we may have learned our lesson about putting people into houses they can’t afford.

Friday the Obama administration unveiled its plan to slowly wind down Fannie and Freddie and have banks and the private sector provide the financing for home loans. But the administration plans call for some continued role for the government in promoting mortgage lending and home ownership.

Perhaps not.  Let us not forget what Fannie and Freddie were.  Government Sponsored Enterprises (GSE).  The government provided oversight for these GSEs.  They wrote the laws that they must operate under.  They encouraged them to buy more of those risky loans.  All in the name to put more people into houses.  Because the housing market drives consumer spending that makes up three-quarters of the economy.

The Greed of Fannie Mae and Freddie Mac

Even the Obama administration recognizes their role in the subprime mortgage crisis.  In a report that summarized some ideas about how to proceed post Fannie and Freddie, they clearly point a finger of blame in their direction (see Obama’s Plan: Fannie Mae and Freddie Mac Go, but What Replaces Them? by David C. John posted 2/11/2011 on Heritage’s The Foundry).

The report makes it very clear where the fault for Fannie and Freddie’s failure lies, saying that “as their combined market share declined—from nearly 70 percent of new originations in 2003 to 40 percent in 2006—Fannie Mae and Freddie Mac pursued riskier business to raise their market share and increase profits. Not only did they expand their guarantees to new and riskier products, but they also increased their holdings of some of these riskier mortgages on their own balance sheets” (page 7).

And yet the Federal Reserve blames mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies.  But if Fannie and Freddie weren’t buying these risky loans, no mortgage banker would have approved these risky loans.  Because no banker would want these on their balance sheets.  But if Fannie and Freddie were buying these, what did these bankers care?  They had zero risk.  It all went to Fannie and Freddie.  And then to the American taxpayer.

If Fannie and Freddie did not buy those risky loans, the problem ends before it begins.  This is an important point that many tend to gloss over.  And here we are.  While still bailing them out of their mess they’re already talking about a continued government role in the mortgage markets.

I guess we’ve learned little from subprime mortgage crisis.  Pity.  For it was an expensive lesson.

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A Liberal Opines on things Economic, Confirms why they Suck at Creating Jobs

Posted by PITHOCRATES - January 16th, 2011

Liberals don’t know Business or Jobs but they have their Big Keynesian Words

If you want to know why liberals are so bad at stimulating economic activity just read Paul Krugman’s Wages and Employment, Again (Wonkish) posted 1/16/2011 on The New York Times.  He pontificates with an erudite air of all-knowing condescension.  He’s smart.  And he wants to make sure you get this.  So he writes with big words and references big demand-side macroeconomic theories that he and his kind accept as undisputed fact.  Despite what the lessons of history say. 

Krugman is a Keynesian.  So, as a Keynesian, he knows nothing about business.  But, like a Keynesian, that doesn’t stop him from opining on the subject of business.

Here’s a fundamental truth (FT) about business.  FT 1:  If you make the cost of doing business high, you will reduce the amount of business a business does.  Here’s another.  FT 2:  If the people are NOT buying whatever they’re selling, this will also reduce the amount of business a business does.  A couple of key things a business needs here.  To have the cost of doing business kept low enough so they can sell at a price that makes them competitive in the market place.  And they need people to have jobs so they can buy their competitively priced goods or services they place into the market place.

Liberals never seem to get either of these points.

High Wages have never Stimulated Economic Activity

Keynesians believe if you give money to people that fixes everything.  When Krugman says:

…I’ve also argued a number of times that cutting wages now would probably make the slump worse, not better.

That’s Keynesian.  You cut wages and the people have less money spend.  So that’s why Keynesians are all about high wages.  Of course, they miss the other side of high wages.  High wages mean fewer jobs.  Because high wages limit the number of employees a business can hire and still sell at prices that are competitive in the market place.

High wages have never stimulated economic activity.  They just raise costs.  This let the Japanese take huge chunks of market share away from the Big Three.  And it’s bankrupting our big blue cities and states that are drowning in debt because of their public sector union contracts.  If Krugman was right, these cities would be booming in economic activity because of those fat public sector pay and benefits.  But they’re not.  The only thing those high wages are doing is bankrupting these cities and states.

Liberals never seem to get this point.  So they trade off economic activity for votes, blissfully unaware of the extent of economic damage they’re doing.  Or they’re aware and they just don’t care.

Easy Money begets Irrational Exuberance which begets Asset Bubbles which begets Recessions

Another favorite of the Keynesians is manipulating interest rates.

…a rise in the real money supply reduces interest rates, leading to a rise in demand.

Read ‘a rise in real money supply‘ as printing money.  The idea here is to make money cheap and plentiful so people will borrow it to buy things.  Like houses.  Like they did during Bill Clinton’s and George W Bush’s presidencies.  And, boy, did they.  Times were good.  Real good.  Only one problem.  Irrational exuberance.

Clinton and Bush thought they found the magical economic elixir.  Home ownership.  So they did everything in their power to extend homeownership.  Even to the people who couldn’t afford it.

Easy money.  Monetary policy that keeps money cheap and plentiful.  To entice people to borrow.  And they were.  Borrowing.  And buying houses.  So much so that they bid up the prices into a huge asset bubble.  Meanwhile, people who couldn’t afford to buy a house were buying houses, too.  The federal government pushed lenders to lend. Or face the consequences.  Be investigated for discriminatory lending.  Or, worse, suffer the public spectacle of having Jesse Jackson or an Al Sharpton publically calling them racist (a lot of the inner city poor were black).  So they came up with some creative ways to qualify unqualified people for mortgages.  We call them subprime mortgages.  And we know how those came back to bite us in the ass.

The problem with bubbles is that they burst.  And when they do, the life blows out of the economy like the air out of a popped balloon.  Deflationary spirals often follow.  And nasty, horrible and painfully long recessions.

Liberals never seem to get this point, either.  You’d think that they would as it has happened so often.

For Narcissists, it’s not the economy.  It’s their Egos, Stupid.

Krugman’s column really shows the problems with liberals.  They’re a bunch of narcissists.  Who love their superior minds.  They love to hear themselves talk.  And love to read what they write.  They write to impress.  And to stimulate themselves.  If you know what I mean.  Only those in his elite circle can understand what the hell he is writing about.  Not us.  The sloped-brow, knuckle-dragging, Neanderthals who didn’t go to the Ivy League schools.  We just work and live in the real world.  Raise our families.  And pay our taxes.

Liberals like to complicate things.  And to try to control the complex.  The economy will work fine on its own.  And when it does we experience some of the greatest economic expansions.   But when they tinker with their Ivy League knowledge, bad things typically happen.  Such as the subprime mortgage crisis.  The Great Recession.  Even the Great Depression.  All of which resulted from liberal tinkering.

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Obama to Small Business: Take the Money. Please.

Posted by PITHOCRATES - September 27th, 2010

Smart Dumb People

Imagine you’re a business owner.  Let’s say you manufacture and sell fancy, high-end, architectural lighting for high-end homes.  Business was good during the housing bubble.  So good you expanded production.  Built a new factory.  Then, with the subprime mortgage crisis, sales took a nosedive.  You had to shutter the new plant you built during the bubble.  And you had to cut a shift at your other factory.  Because with the new home market in the crapper, high unemployment and a general lack of optimism in the future, few people are buying fancy, high-end, architectural lighting.  So what do you do?  Borrow money so you can expand production and hire more people?  If you’re an idiot, perhaps.  But you’re not.  So you won’t.

Business people are smart.  They understand business.  The people in the Obama administration, on the other hand, are a bunch of idiots.  When it comes to business.  They may have their Ivy degrees and their smug condescending arrogance, but they are some of the dumbest smart people that ever were.  To them all business owners are thieves who exploit their employees.  They don’t like them but they understand they need them.  To provide the jobs.  Because everyone can’t work in government.  Someone has to work in the private sector so the government has someone to tax.

With their simplistic understanding of business, they believe business just needs more money.  That’s their answer to everything.  More money.  A business owner can hire more people if only he or she had more money.  Ergo, get them more money.  Hire the people.  Create jobs.  Build stuff.  Just do it already.  What’s the problem?

“Ah, Mr. President, what am I going to do with all this stuff if no one buys it?”

“Huh?  What?”

“That’s what I thought.”

Spend Baby Spend

The economy is a complex thing.  But it’s simple to operate.  All you have to do is get the hell out of the way.  But there are those who just can’t.  They need to tinker.  Because they are smarter than you.  And every other consumer.

Economists are like weather forecasters.  They’re wrong more than they’re right.  Let’s face it; if these people could figure out the economy, they wouldn’t need a day job.  But they do.  They need to offer ‘expert’ commentary.  And advise presidents.  To feel important.  To feel better about themselves.  For being such abject failures that they need a day job.

And, of course, the ones who find favor with those in power are the ones who favor the use of that power.  Keynesians.  Unemployment, Mr. President?  Why you fix that by spending money.  Inflation, Mr. President?  That’s just too much money chasing too few goods.  So you need to spend more.  To stimulate the economy to build more goods.  Inflation is good.  It stimulates.  And it helps to pay off the debt you’re building with your deficit spending.  A trillion dollars today may only be a few hundred billion, say, 10 years from now.  Billions are easier to repay than trillions.  And the more we inflate, the easier it will be to pay off that debt.  See?  Deficit spending and inflation are good things.  So keep spending.

It’s a load of crap.  But it’s doesn’t take much to sell it to a president.  Especially if they want to spend.  As the current president does.  And, boy, does he.

Failed Policies of the Past

Easy money and irrational exuberance created the housing bubble.  People borrowed money and bought over-priced houses.  Then the bubble burst.  The huge inventory of unsold homes corrected the market.  Prices plummeted.  Interest rates went up.  Adjustable Rate Mortgages (ARMs) reset at higher rates.  Subprime mortgages defaulted.  Foreclosures.  More houses thrown on the market, pushing prices down further.  People still paying their mortgages found they owed more than their houses were worth.  Some walked away.  More houses thrown on the market, further depressing housing prices.  That’s what easy money and excess capacity gives you.  A bubble.  Then a deflationary spiral.

And now the Obama administration wants to return to these failed policies of the past.  Obama wants business to borrow money to increase capacity to build stuff no one will buy.  (See AP article Small biz, banks may spurn Obama’s $30B program by Pallavi Gogoi on My Way.)  It’s not housing.  But it’s still the same.  Irrational exuberance.

It’s the Government, Stupid

It’s not a tight credit market that’s hurting this economy.  It’s the Obama administration.  Just like it was the FDR administration.  There’s just too much uncertainty.  Too many anti-business policies.  When you see government dissolve a legal obligation (screwing the bond holders) in favor of helping a political constituency (the UAW), business owners take notice.  And get nervous. 

If you want to help the economy, you got to stop scaring business owners.  You got to stop running roughshod over the rule of law.  If people enter into legal contracts, they need to have some assurance that the government will honor those contracts.  And, to date, the Obama administration’s actions don’t give much assurance.

Until they stop scaring business, what idiot is going to expand and hire people?  That doesn’t work for the government?

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