The Federal Government’s entry into the Student Loan Market eliminates Market Forces

Posted by PITHOCRATES - September 7th, 2013

Week in Review

A sound banking system is a requirement for any advanced economy.  Because you need capital to make an advanced economy.  And how do you do that?  By people responsibly saving for their retirement.  Putting away a few dollars of every paycheck.  A small amount of money that can’t buy much of anything.  But when hundreds of thousands of people save a few dollars from every paycheck those small amounts become capital.  Large sums of money banks can lend out to investors who want to build factories.  Responsible bankers loaned their customers’ deposits to investors.  Investors paid the bankers interest on these loans.  And the bankers paid interest to their depositors.  The economy grew.  And people saved for their retirement.  The system worked well.  And grew the US economy into the world’s number one economy.  But now we’re in danger of dropping from that number one spot.  Because the government destroyed our banking system (see Exclusive – JPMorgan to stop making student loans by Reuters posted 9/5/2013 on Yahoo! Finance).

JPMorgan Chase & Co (NYS:JPM) will stop making student loans in October, according to a document reviewed by Reuters on Thursday, after the biggest U.S. bank concluded that competition from federal government programs limits its ability to expand the business.

When the government runs a deficit they sell bonds to finance it.  Pulling capital out of the private sector.  Raising borrowing costs.  The government then tries to lower borrowing costs by printing money.  Expanding the money supply.  And by making more money available to lend interest rates fall.  But it also does something else.  It encourages bad investments.  Malinvestments.  People who look at those artificially low interest rates and think they should borrow money when the borrowing is good.  Even when they don’t have a good investment opportunity.

They may expand their business now because money is cheap now.  Even though they don’t really need the additional capacity now.  And then if the government raises interest rates to cool the overheated economy thanks to those artificially low interest rates these same investors see their revenues fall as they took on additional expenses by expanding their business.  Just because interest rates were low.  Now their costs are higher just when their revenues have fallen.  Pushing the business towards bankruptcy.  Which would never have happened if the government didn’t encourage them to borrow money they didn’t need by keeping interest rates artificially low.

But getting people to borrow money when they don’t need it is the government’s only economic policy.  Which they took to another level in the housing market.  With pressure from the Clinton Justice Department on lenders to qualify the unqualified for loans.  Exploding the use of risky subprime lending.  And then using Fannie Mae and Freddie Mac to buy these risky subprime loans from these lenders.  Removing all risks from these lenders and passing them on to the taxpayers.  To encourage these lenders to lower their lending standards.  So they would keep making risky loans.  Which they were more than willing to do if they incurred no risk in making these loans.  Which Fannie Mae and Freddie Mac did for them.  Thus further destroying the banking system.

And now the government has taken over student loans.  Where they will do to student loans what they did to home mortgages.  Where lending decisions will be made for political reasons instead of objective lending standards.  Guaranteeing more subprime mortgage crises in the future.  A further destruction of the banking system.  And the destruction of one of the pillars of an advanced economy.

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If the U.S. was on a Gold Standard there would NOT have been a Financial Crisis in 2007

Posted by PITHOCRATES - June 9th, 2013

Week in Review

Counterfeiting money is against the law.  We all know this.  But do we understand why?  Today’s money is just fiat money.  The Federal Reserve prints it and simply says it is money.  So why is it okay for them to print money but not for anyone else?  Because the amount of money in circulation matters.

The goods and services that make up our economy grow at a given rate.  You hear numbers like GDP of 2%, 3% or more.  In China they had GDP numbers in excess of 8%.  The goods and services in our economy are what have value.  Not the money.  It just temporarily holds the value of these goods and services as they change hands in the economy.  So the amount of money in circulation should be close to the value of goods and services in the economy.  Think of a balancing scale.  Where on the one side you have the value of all goods and services in the economy.  And on the other you have the amount of money in circulation.  If you increase the amount of money on the one side it doesn’t increase the amount of goods and services on the other side.  But it still must balance.  So as we increase the amount of money in circulation the value of each dollar must fall to keep the scale in balance.

Now when we put our money into the bank for our retirement we don’t want the value of those individual dollars grow less over time.  Because that would reduce the purchasing power of our money in the bank.  Making for an uncomfortable retirement.  This is why we want a stable dollar.  One that won’t depreciate away the value of our retirement savings, our investments or the homes we live in.  We’d prefer these to increase in value.  But we can stomach if they just hold their value.  For awhile, perhaps.  But we cannot tolerate it when they lose their value.  Because when they do years of our hard work just goes ‘poof’ and disappears.  Leaving us to work longer and harder to make up for these losses.  Perhaps delaying our retirements.  Perhaps having to work until the day we die.  So we want a stable currency.  Like the gold standard gave us (see Advance Look: What The New Gold Standard Will Look Like by Steve Forbes posted 5/8/2013 on Forbes).

The financial crisis that began in 2007 would never have happened had the Federal Reserve kept the value of the dollar stable. A housing bubble of the proportions that unfolded–not to mention bubbles in commodities and farmland–would not have been possible with a stable dollar. The Fed has also created a unique bubble this time: bonds. It hasn’t popped yet (nor has the farmland bubble), but it will.

The American dollar was linked to gold from the time of George Washington until the early 1970s. If the world’s people are to realize their full economic potential, relinking the dollar to gold is essential. Without it we will experience more debilitating financial disasters and economic stagnation.

What should a new gold standard look like? Representative Ted Poe (R-Tex.) has introduced an original and practical version. Unlike in days of old we don’t need piles of the yellow metal for a new standard to operate. Under Poe’s plan–an approach I have long favored–the dollar would be fixed to gold at a specific price. For argument’s sake let’s say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would “print” new money by buying bonds, thereby injecting cash into the banking system.

Yes, the subprime mortgage crisis and the Great Recession would not have happened if the Federal Reserve kept the dollar stable.  Instead, they kept printing and putting more money into circulation.  Why?  To keep interest rates low.  To encourage more and more people to buy a house.  Even people who weren’t planning to buy a house.  Even people who couldn’t afford to buy a house.  Until, that is, subprime lending took off.  Because of those low interest rates.  With all of these people added to the housing market who otherwise would not have been there (because of the Federal Reserve’s monetary policies of printing money to keep interest rates artificially low) the demand for new houses exploded.  As people tried to buy these before others could house prices soared.  Creating a great housing bubble.  Houses worth far greater than they should have been.  And when the bubble burst those housing prices fell back to earth.  Often well below the value of the outstanding balance of the mortgage on the house.  Leaving people underwater in their mortgages.  And when the Great Recession took hold a lot of two-income families went to one-income.  And had a mortgage payment far greater than a single earner could afford to pay.

So that’s how that mess came about.  Because the Federal Reserve devalued the dollar to stimulate the housing market (and any other market of big-ticket items that required borrowed money).  If we re-link the dollar to gold things like this couldn’t happen anymore.  For if it would put a short leash on the Federal Reserve and their ability to print dollars.  How?  As they print more dollars the value of the dollar falls.  Causing the value of gold priced in dollars to rise.  So they would have to stop printing money to keep the value of gold priced in dollars from rising beyond the established gold price.  Or they would have to remove dollars from circulation to decreases the value of gold priced in dollars back down to the established price.  Thereby giving us a stable currency.  And stable housing prices.  For having a stable currency limits the size of bubbles the Federal Reserve can make.

But governments love to print money.  Because they love to spend money.  As well as manipulate it.  For example, depreciating the dollar makes our exports cheaper.  But those export sales help fewer people than the depreciated dollar harms.  But helping a large exporter may result in a large campaign contribution.  Which helps the politicians.  You see, a stable dollar helps everyone but the politicians and their friends.  For printing money helps Wall Street, K Street (where the lobbyists are in Washington DC) and Pennsylvania Avenue.  While hurting Main Street.  The very people the politicians work for.

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Economic Indicators

Posted by PITHOCRATES - May 20th, 2013

Economics 101

To Better Understand the Economy we should Study the Economic Indicators Investors Study

If you’ve lost your job you have a pretty good idea about the state of the economy.  It’s bad.  An unemployed person is like a soldier in the trench.  He or she doesn’t need to examine any data to understand what’s happening in the economy.  They know firsthand how bad things are.  But generals far behind the lines don’t have that up close and personal economic experience.  So they have to examine data to understand what’s going on.  Just as government officials, investors and economic prognosticators have to examine data.  Giving them an understanding of the state of the economy.  So they can know what the unemployed know.  The economy sucks.

Government officials want positive economic data so they can say their policies are working.  Whether they are or not.  In fact, they will parse the data to serve them politically.  When necessary.  Such as during the run-up to an election.  So their reports on the economy are not always, how should we say, full of truthiness.  For they can take some bad economic data and put a positive spin on it.  Completely changing the meaning of the data.  The unemployed won’t believe the rosy picture they’re painting.  But those in the trenches may.  And those in the rear with the gear.  After all, they have jobs.  So things don’t really seem that bad to them.

No, for a better picture of the economy you should listen to the people with skin in the game.  Those who are making bets on the economy.  Investors.  And business owners.  Who are risking their money.  And if we look at what they look at we can get a better understanding of the economy.  See what bothers them.  What pleases them.  And what excites them.  So what do they look at?  Economic data we call economic indicators.  Because they indicate the health of the economy.  And give an idea of what the future holds.  There are a lot of economic indicators.  The government compiles most of them.  They each give a little piece of the economic puzzle.  And when you put them together you see the bigger picture.

With a Rise in Housing Starts a Rise in Durable Goods should Follow Creating a lot of New Jobs

As far as economic indicators go retail sales is a big one.  Because consumer spending is the vast majority of economic activity in the new Keynesian economy.  (John Maynard Keynes changed the way governments intervene in the private sector economy in the early 20th century.)  Keynesians believe consumer spending is everything.  Which is why governments everywhere inflate their money supplies.  To keep their interest rates artificially low.  To encourage people to borrow money.  And spend.  When they do retail sales increase.  Signaling a healthy economy.  When they fall it may mean a recession is coming.  Of course, if retail spending rises more than expected investors get nervous.  Because it could mean inflation is coming.  Which the government will try to prevent by raising interest rates.  Thus cooling the economy.  And hopefully sending it into a soft landing.  But more often than not they send it into recession.

Another economic indicator is housing starts.  A lot of economic activity comes from building houses.  Building them generates a lot.  And furnishing them generates even more.  So governments are always trying to do everything within their power to encourage new housing.  They keep interest rates artificially low.  Encouraging people to get mortgages.  And they’ve pressured lenders to lower their lending standards.  To get more people with bad credit (or no credit) into houses.  Which led to subprime lending.  The subprime mortgage crisis.  And the Great Recession.  So more housing starts can be good.  But too many housing starts can be bad.  Generally, though, if they are increasing it’s a sign of an improving economy.

Before Keynesian economics the prevailing school of economic thought was classical economics.  Which we used to make America the world’s number one economic power.  Unlike Keynesians in the classical school we looked higher in the stages of productions.  Where real economic activity took place.  Raw material extraction.  Industrial processing.  Manufacturing.  And wholesaling.  An enormous amount of activity before you reach the consumer level.  All of these higher order economic activities fed into the making of durable goods.  Those things we bought to fill those new houses.  Which is why we like rising housing starts.  Because a rise in durable goods should follow.  And when we’re producing more durable goods we’re employing more people.  Making the durable goods economic indicator a very useful one.

One should Always be Skeptical when the Government says their Policies are Improving the Economy

The Producer Price Index (PPI) tells us how the prices are moving above the consumer level.  So if the PPI is rising it tells us the costs to produce consumer goods are rising.  And these higher costs will flow down the stages of production to the consumer level.  Causing a rise in consumer prices.  So the PPI forecasts what will happen to the CPI.  The consumer price index.  When it rises it means inflation is entering the picture.  Which the government will try to prevent by raising interest rates.  To cool the economy down.  And lower the prices at both the consumer and producer level.  Again, trying to send the economy into a soft landing.  But usually sending it into recession.  Which is why investors pay close attention to the PPI.  So they can get an idea of what will happen to the CPI.  So they can buy and sell (stocks and/or bonds) accordingly.

The rest of us can get an idea of what these investors think about the economy by following the Dow Jones Industrial Average (DJIA).  Which is the weighted ‘average’ of 30 stocks.  (We calculate it by dividing the sum of the 30 stock prices by a divisor that factors in all stock splits and changes of companies in the Dow 30).  As a company does well in a growing economy its stock price grows.  And if investors like what they see in other economic indicators they bid up the stock price even further.  So a rising DJIA indicates that investors believe the economy is doing well.  And will probably even improve.  But sometimes investors have a little irrational exuberance.  Such as during the dot-com bubble in the Nineties.  Where they poured money into any company that had anything to do with the Internet.  Making a huge bet that they found the next Bill Gates or Steve Jobs.  Of course, when that blind hope faded and reality set in those inflated stock prices came crashing down to reality.  Causing a long and painful recession in the early 2000s.  So even investors don’t always get it right.

When the dot-com bubble burst it threw a lot of people out of a job.  Increasing the unemployment rate.  Another big economic indicator.  But one that can be massaged by the government.  For they only count people out of a full-time job who are looking for full-time work.  The official unemployment rate (what we call the U-3 rate) doesn’t count people who gave up looking for work.  Or people who took a couple of part-time jobs to make ends meet.  A more accurate unemployment rate is the U-6 rate that counts these people.  For while the official unemployment rate fell below 8% during the run-up to the 2012 election the U-6 rate was showing a much poorer economic picture.  And the labor force participation rate showed an even poorer economic picture.  The labor force participation rate shows the percentage of people who could be working who were actually working.  So the lower this is the worse the economy.  The higher it is the better the economy.  So while the president highlighted the fall of the U-3 rate below 8% as a sign of an improving economy the labor force participation rate showed it was the worst economy since the Seventies.  Something the unemployed could easily understand.  But those who had a job believed the less than honest U-3 economic indicator.  Believed the president was making the economy better.  When, in fact, he had made it worse.  Which is why one should always be skeptical when the government says their policies are improving the economy.  For they are more concerned about winning the next election than the people toiling away in the trenches.

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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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The UAW and Public Sector Unions devastate Three Michigan Cities

Posted by PITHOCRATES - February 24th, 2013

Week in Review

It’s not been a good year for Detroit.  Well, it’s been more than a year.  It’s been a few bad years.  Actually, it’s been a great many bad years.  Since 1970.  When Ford Motor Company Chairman Henry Ford II joined with other business leaders to form Detroit Renaissance.  To revitalize the City of Detroit.  And some 42 years later, the City of Detroit is still struggling (see Detroit’s Misery Can Be Its Turning Point by Micheline Maynard posted 2/23/2013 on Forbes).

Detroit boosters were dealt a one-two blow this week by the kind of outsiders they have come to resent.

First, a state review panel declared that a financial emergency existed in the city, making it likely that Michigan Gov. Rick Snyder will appoint an emergency financial manager with sweeping powers.

Then, Forbes weighed in by declaring Detroit the nation’s most miserable city, based on a series of criteria that include crime, unemployment, foreclosures and home value…

Although General Motors is based in Detroit, and Chrysler recently opened an office there, the automobile industry is not going to provide the vast numbers of jobs the city needs to become solvent.

And there lies the problem for Detroit.  A city that grew big and rich off of the automobile industry saw a steady exodus and a declining tax base when the automobile industry declined.  Live by the automobile.  Die by the automobile.  And it’s just not Detroit.  A couple of other Michigan cities broke into the top 10 of Forbes’ America’s Most Miserable Cities 2013.

#7 Warren, Mich.

Troy and Farmington Hills are part of the government-defined Warren metro division. Like Detroit, the Warren metro has seen home prices collapse–off 53% the past five years.

#2 Flint, Mich.

Flint has been demolishing homes as the city shrinks with residents leaving in search of jobs. Only Detroit has a higher net out-migration rate. Flint ranks third worst for violent crime, behind Detroit and Memphis.

#1 Detroit, Mich.

Violent crime in the Detroit metro was down 5% in 2011, but it remains the highest in the country with 1,052 violent crimes per 100,000 people, according to the FBI. Home prices were off 35% the past 3 years, which is the biggest drop in the U.S.

If you seek a pleasant peninsula* you’d do better looking for one where the UAW isn’t dominant.  Perhaps Florida.  For the UAW is a city killer based on these Michigan cities.  (*The official state motto of Michigan is “If you seek a pleasant peninsula, look about you.”)

The Big Three dominated these cities.  Where fat pay and benefit packages were passed on to consumers in overpriced vehicles.  The Big Three’s monopoly on car sales allowed them to make fat profits.  And pay enormous amounts of taxes to the cities that had the factories that assembled their cars.  City coffers were so flush with cash city governments grew.  And city workers enjoyed fat pay and benefit packages.  This was the high water mark of the UAW.  Just after public sector unions had joined them on the gravy train.  But then something happened that devastated the UAW.  Consumers got choice.  They no longer had to buy overpriced ‘rust buckets’ the Big Three was putting out during the Seventies.  For the Japanese gave them choice.

And so began the great decline of the Big Three.  Quality and value did them in.  It’s what the people wanted.  While the UAW wanted consumers to pay more and get less.  So they could continue to enjoy their fat pay and benefit packages.  As the jobs went away so do did the taxes.  The cities bloated with all those government workers with their fat pay and benefit packages tried to maintain the size of their governments even while the tax base was declining.  Reducing other government services as they had little money left over after paying those fat pay and benefit packages.

With fewer and fewer jobs available people left these cities.  Empty houses dotted the horizon.  And housing prices fell.  With the tax base continuing to decline.  Poverty rates rose.  As did city services for the impoverished.  Leaving even less for other city services.  Causing a further exodus from the city.  Urban blight followed.  As did crime.  Causing a further decline in property values.

Low interest rates helped boost housing prices.  For awhile.  President Clinton’s Policy Statement on Discrimination in Lending kicked off subprime lending in earnest as lenders bowed to the Clinton Justice Department to put more low-income and minorities into homes they couldn’t afford.  Creating a huge housing bubble.  Built on easy credit.  Artificially low interest rates.  And the adjustable rate mortgage (ARM).  When rates went up all those low-income and minorities who bought houses they couldn’t afford defaulted on their higher mortgage payments.  Creating the subprime mortgage crisis.  Giving us the Great Recession.  Creating a flood of foreclosures.  A free fall in housing prices.  And more of the same that helped put those three Michigan cities into the top ten of Forbes’ America’s Most Miserable Cities 2013.

Michigan recently opted to become a Right-to-Work state.  Greatly angering the UAW and those public sector unions.  But it may be just what Michigan needs to reverse the great decline caused by the UAW and the public sector unions that devastated some of Michigan’s greatest cities.  One thing for sure it can’t get any worse.  Not when being a union state for so long secured three places in the top ten of Forbes’ America’s Most Miserable Cities 2013.

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The Democrats issue new Lending Regulations to address the Financial Crisis they Created

Posted by PITHOCRATES - January 13th, 2013

Week in Review

The subprime mortgage crisis is still a political football.  The Democrats are using the crisis to further regulate the financial markets.  Giving us the convoluted Dodd-Frank Wall Street Reform and Consumer Protection Act.  Financial reform.  For apparently there was no financial oversight of the financial markets up until now.  Despite Barney Frank being the Chairman of the House Financial Services Committee (2007-2011).  And Chris Dodd being the Chairman of the Senate Committee on Banking, Housing, and Urban Affairs (2007-2011).  Both of who were responsible for the oversight of Fannie Mae and Freddie Mac.  The GSEs at the center of the subprime mortgage crisis (see Mortgage lender rules released by Daniel Wagner, Associated Press, posted 1/10/2013 on The Washington Times).

In the wake of the national housing collapse that helped bring on the Great Recession, federal regulators for the first time are laying out rules aimed at ensuring that borrowers can afford to pay their mortgages.

The long-anticipated rules being unveiled Thursday by the Consumer Financial Protection Bureau impose a range of obligations and restrictions on lenders, including bans on the risky “interest-only” and “no documentation” loans that helped inflate the housing bubble…

CFPB Director Richard Cordray, in remarks prepared for an event Thursday, called the rules “the true essence of responsible lending…”

Mr. Cordray noted that in the years leading up to the 2008 financial crisis, consumers could easily obtain mortgages that they could not afford to repay.

So, prior to the Great Recession and the 2008 financial crisis we did not have responsible lending.  Which resulted in consumers obtaining mortgages they could not afford to repay.  Why?  Why were people getting mortgages they had no chance of repaying?  Who was responsible for that?  Well, as it turns out it was President Clinton.  Whose administration overhauled the Community Reinvestment Act (see New Study Finds CRA ‘Clearly’ Did Lead To Risky Lending by Paul Sperry posted 12/20/2012 on Investors.com)

Democrats and the media insist the Community Reinvestment Act, the anti-redlining law beefed up by President Clinton, had nothing to do with the subprime mortgage crisis and recession.

But a new study by the respected National Bureau of Economic Research finds, “Yes, it did. We find that adherence to that act led to riskier lending by banks.”

Added NBER: “There is a clear pattern of increased defaults for loans made by these banks in quarters around the (CRA) exam. Moreover, the effects are larger for loans made within CRA tracts,” or predominantly low-income and minority areas.

To satisfy CRA examiners, “flexible” lending by large banks rose an average 5% and those loans defaulted about 15% more often, the 43-page study found…

The strongest link between CRA lending and defaults took place in the runup to the crisis — 2004 to 2006 — when banks rapidly sold CRA mortgages for securitization by Fannie Mae and Freddie Mac and Wall Street.

CRA regulations are at the core of Fannie’s and Freddie’s so-called affordable housing mission. In the early 1990s, a Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie.

It passed a law requiring the government-backed agencies to “assist insured depository institutions to meet their obligations under the (CRA).” The goal was to help banks meet lending quotas by buying their CRA loans.

But they had to loosen underwriting standards to do it. And that’s what they did…

From 2001-2007, Fannie and Freddie bought roughly half of all CRA home loans, most carrying subprime features…

Housing analysts say the CRA is the central thread running through the subprime scandal — from banks and subprime lenders to Fannie and Freddie to even Wall Street firms that took most of the heat for the crisis…

While the 1977 law was passed 30 years before the crisis, it underwent a major overhaul just 10 years earlier. Starting in 1995, banks were measured on their use of innovative and flexible” lending standards, which included reduced down payments and credit requirements.

Banks that didn’t meet Clinton’s tough new numerical lending targets were denied merger plans, among other penalties. CRA shakedown groups like Acorn held hostage the merger plans of banks like Citibank and Washington Mutual until they pledged more loans to credit-poor minorities (see chart).

A Democrat Congress gave HUD the authority to set and enforce (through fines) CRA-grade loan quotas at Fannie and Freddie?  And Democrats say that Community Reinvestment Act had nothing to do with the 2008 financial crisis?  Funny.  Based on the historical record the Democrat Congress that forced lenders to loosen underwriting standards to meet those quotas are solely responsible for setting into motion the events that led to the 2008 financial crisis.  Not Wall Street.  Not the banks.  It was the Democrat Congress that empowered HUD to destroy good lending practices.  And they bear the responsibility for the 2008 financial crisis.  And the Great Recession.

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President Obama’s Economic Recovery is worse than Ronald Reagan’s and George W. Bush’s Combined

Posted by PITHOCRATES - December 8th, 2012

Week in Review

President Obama has said time and again that we can’t go back to the failed policies of the past.  Referring to Ronald Reagan and George W. Bush and their tax cutting ways that stimulated real job creation.  Not the Obama administration Keynesian stimulus spending which has the absolute worst record of job creation in post-war America (see THE SCARIEST JOBS CHART EVER by Joe Weisenthal posted 12/7/2012 on Business Insider).

Despite the strong jobs report, the employment situation in America remains depressing.

Once again, we go back to Calculated Risk, which compares the trajectory of this recovery (red line) with all other post-WWII recoveries.

As you can see, the pace of the downturn was far more severe than anything in previous recessions, and the long march back to pre-recession levels remains incredibly slow.

The chart tells a dismal story.  Ronald Reagan chose tax cuts to pull us out of the 1981 recession.  That recession saw a peak job loss of just over 3%.  And a duration of just over 27 months to recover ALL the jobs that we lost in that recession.

George W. Bush chose tax cuts to pull us out of the 2001 recession following the bursting of Bill Clinton’s dot-com bubble.  That recession saw a peak job loss of just over 2%.  And a duration of about 46 months to recover ALL the jobs lost in that recession.

Bill Clinton’s Policy Statement on Discrimination in Lending basically created subprime lending.  As the Clinton administration pressured lenders to find a way to qualify the unqualified for mortgages.  And the real estate market boomed in the 2000s.  But much like the economic boom in the 1990s it was just a bubble.  That inflated to dangerous heights thanks to Fannie Mae and Freddie Mac buying those toxic subprime mortgages from lenders so they could approve more of them.  Unloading those toxic mortgages on unsuspecting investors.  Sending this toxic contagion throughout the world.  The resulting 2007 recession saw a peak job loss of about 6.5%.  And a duration of about 58 months AND counting to recover all those  jobs lost in the current recession.  We still have another 3% to go.

This postwar recession is the worst by whatever metric you measure it by.  But the singular aspect of it that makes this recession much longer and deeper in job losses is the Obama administration’s choice of using Keynesian stimulus to try to end it.  Instead of tax cuts.  Which is why the Obama recovery is far worse and more long-lasting in misery than both the Reagan and Bush recoveries added together.  Proving the current economic disaster is an Obama disaster.  For his insistence on using the failed policies of Keynesian stimulus spending instead of the time proven policies of tax cuts.

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The Great Housing Bubble and The Subprime Mortgage Crisis

Posted by PITHOCRATES - December 27th, 2011

History 101

Putting People into Houses trumped Sound Monetary Policy, a Sound Currency and good Lending Practices

Housing has for a long time been the key to economic prosperity.  Because to build a house you need a lot of economic activity.  Industries produce lumber, concrete, sheetrock, brick, shingles, door frames, doors, windows, glass, flooring, plumbing pipes, plumbing fixtures, sump pumps, furnaces, heating ducts, insulation, air conditioners, electrical wiring and fixtures, carpeting, tile, linoleum, etc.  The bigger the house the more of this stuff there is.  Once built people have to buy them (stimulating the mortgage banking industry) and then furnish them.  This triggers a monsoon of economic activity.  Drapes, shades, blinds, paint, washers, dryers, stoves, refrigerators, freezers, microwave ovens, toasters, blenders, food processers, plates, dishes, knives, silverware, ceiling fans, televisions, home theaters, sound systems, computers, cable and internet services, utilities, shelving, furniture, beds, cribs, art, etc.  And, of course, the exterior of the house creates further economic activity.

This is why one of the most important economic indicators is new housing starts.  For each new house we build we create a whirlwind of economic activity.  So much that it boggles the mind trying to think about it.  That’s why governments do whatever they can to stimulate this particular economic activity.  They encourage borrowing by allowing us to deduct the interest we pay on our mortgages.  They use monetary policy to keep interest rates as low as possible.  They’ve created federal programs to help veterans.  To help low income people.  And to remove risk from lenders to encourage more risky lending (as in Fannie Mae and Freddie Mac).  They’ve even used the power of government to force mortgage lenders to qualify the unqualified (Policy Statement on Discrimination in Lending).

You see, putting people into houses trumped everything else.  Sound monetary policy.  A sound currency.  Good lending practices.  Everything.  Because that was the key to a healthy economy.  A happy constituent.  And healthy tax revenue.  Not to mention you can score a lot of points with the poor and minorities by helping them into houses they can’t afford.  So this coordinated effort to put people into houses did two things.  Made money cheap and easy to borrow.  And created a boom in new housing starts.  Which resulted in a third thing.  A housing bubble.

Subprime Mortgages were for those who didn’t have Good Credit or Stable Employment with Reliable Income

Builders couldn’t build enough houses.  People were buying them faster than they built them.  And the houses they bought were getting bigger and bigger.  As they qualified for ever larger mortgages.  Poor people and people with bad credit could walk into a bank and get approved without documenting income.  House flippers could walk in day after day and get loans to buy houses.  Fix them up.  And put them back on the market.  Without using any of their own money. The market was soon flooded with new McMansions.  And refurbished smaller homes that people were moving out of.  Demand for homes was high.  And interest rates were low.  So the supply of homes swelled.  As did home prices.

Interest rates were low.  But they didn’t stay low.  All this coordinated effort to put as many people into homes as possible created a lot of artificial demand.  Heating up the economy.  Increasing prices higher than they had been.  Leading to inflationary worries.  So the Federal Reserve began to raise interest rates.  To temper that inflation.  Which didn’t sit well with those low income house owners.  Who got into their homes with the help of the Policy Statement on Discrimination in Lending.  Which forced lenders to get creative in qualifying the unqualified.  To avoid undo federal attention.  And legal actions against them.  So a lot of poor people had subprime mortgages.  As did all of those house flippers.  People who used little of their own money.  Who put little down.  And had little to lose.

What is a subprime mortgage?  In a word, risky.  It isn’t a 30-year fixed-rate mortgage at a good interest rate.  No, for those you need a good credit score and years of stable employment with reliable income.  And enough money saved up to put close to 20% down.  Subprime mortgages were for those who didn’t have a good credit score.  Years of stable employment with reliable income.  Or any savings.  These people didn’t get the ‘prime’ mortgages.  They got the expensive ones.  The ones with the higher interest rates.  And the higher monthly payments.  Why?  Because risk determined the interest rate.  And the higher the risk the higher the interest rate.

In their Effort to sustain Economic Activity the Government caused the Worst Recession since the Great Depression

But this posed a problem.  Because of the Policy Statement on Discrimination in Lending.  Making loans available to the unqualified was no good if the unqualified couldn’t afford them.  Enter the adjustable rate mortgage (ARM).  These mortgages had lower interest rates.  And lower monthly payments.  How you ask?  By making them adjustable.  A fixed-rate mortgage has to account for inflation.  And adjustable-rate mortgage doesn’t.  Because if there is inflation and the interest rates go up the ARM resets to a higher value.  Which is what happened right about the time housing prices peaked.

When the ARMs reset a lot of people couldn’t make their monthly payments anymore.  Having put little down and having made few monthly payments, these homeowners had little to lose by walking away from their homes.  And a lot of them did.  Including those house flippers.  And that was just the beginning.  With higher interest rates the new home market contracted.  Those artificially high house prices began to fall.  And when the ARMs reset they caused an avalanche of defaults and foreclosures.  The market was correcting.  There were far more houses for sale than there were buyers looking to buy.  Home values began to fall to reflect this real demand.  People who bought the biggest house they could afford because they thought real estate prices always went up soon discovered that wasn’t true.  People were making monthly payments on a mortgage that was greater than the value of their house.  Some walked away.  Some got out with short sales.  Where the lender agreed to eat the loss equity.

The housing market was imploding.  Thanks to a great real estate bubble created by the government.  In their quest to put as many people into houses as possible.  By making mortgages cheap and easy to get.  Relaxing lending standards.  And encouraging risky lending.  None of which would have happened had they left the housing market to market forces.  Where the market sets interest rates.  And housing prices.  The irony of the subprime mortgage crisis is that in their effort to sustain economic activity the government caused the worst recession since the Great Depression.  The Great Recession.

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The Subprime Mortgage Crisis and Great Recession was caused by Bill Clinton and Fannie Mae and Freddie Mac

Posted by PITHOCRATES - December 18th, 2011

Week in Review

The Securities and Exchange Commission (SEC) has filed civil fraud charges against Fannie Mae and Freddie Mac for their part in the subprime mortgage crisis.  The charges say they misled investors about their subprime mortgage risk exposure (see SEC charges ex-Fannie, Freddie CEOs with fraud by Derek Kravitz, Associated Press, posted 12/16/2011 on The Washington Times).

According to the lawsuit, Fannie told investors in 2007 that it had roughly $4.8 billion worth of subprime loans on its books, or just 0.2 percent of its portfolio. The SEC says that Fannie actually had about $43 billion worth of products targeted to borrowers with weak credit, or 11 percent of its holdings…

Freddie told investors in 2006 that it held between $2 billion and $6 billion of subprime mortgages on its books. The SEC says its holdings were actually closer to $141 billion, or 10 percent of its portfolio in 2006, and $244 billion, or 14 percent, by 2008.

In a May 2007 speech in New York, Syron said Freddie had “basically no subprime exposure,” according to the suit.

Not 0.2% but 11%.  Not 0% but 10-14%.  This is some serious misrepresentation of the subprime mortgage risk exposure.  It goes from virtually no risk to a risk great enough to cause, well, a Great Recession.

Fannie and Freddie buy home loans from banks and other lenders, package them into bonds with a guarantee against default and then sell them to investors around the world…

Fannie and Freddie had traditionally purchased a small number of subprime mortgage loans, which involved borrowers with credit problems who could not qualify for cheaper prime loans. But starting in the late 1990s many firms started purchasing subprime loans, and Fannie and Freddie followed suit.

Yes, the late 1990s.  Just after the Clinton White House began pressuring lenders to qualify more unqualified borrowers.  In their Policy Statement on Discrimination in Lending.  As noted in a previous post.

Wall Street isn’t to blame for the subprime mortgage crisis.  Bill Clinton started it with his Policy Statement on Discrimination in Lending.  And then Fannie and Freddie bought these high risk mortgages and sold them as safe investments.  If anyone is to blame for the Great Recession it’s government.  And the government sponsored enterprises Fannie and Freddie.

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Keynesian Policies gave us the Subprime Mortgage Crisis, Solyndra and Inflation while the Free Market gives us Jobs

Posted by PITHOCRATES - September 30th, 2011

The Problem with Washington is that there are too many Elitists who Think they are Smarter than Us

Now we know why we have slow economic growth.  Apparently it’s par for the course after a financial crisis (see Phony Fear Factor by Paul Krugman, Keynesian Economist, posted 9/29/2011 on The New York Times).

We might add that major financial crises are almost always followed by a period of slow growth, and U.S. experience is more or less what you should have expected given the severity of the 2008 shock.

So why do any spending?  Why have any stimulus to stimulate growth that won’t come.  Because “major financial crises are almost always followed by a period of slow growth…”  If true then we could have gotten here without that $800 billion stimulus bill.  And we could have avoided that debt ceiling debate.  And the subsequent downgrading of U.S. sovereign debt.  All because we were spending money trying to alter slow growth that was going to happen anyway.

But the Keynesian will say, “Just think how bad things would have been if we didn’t spend that $800 billion.  And how better things would be if we had just spent more.”  How do you argue with that?  When spending fails it’s because we didn’t spend enough.    By this logic, then, spending as a policy can never fail.  Even when it fails.

If slow growth is more or less what you get were they then lying?  When they said they would keep the unemployment rate below 8%?  If Congress passed the stimulus bill?  Or did they just not understand how bad things were?  Because their understanding of economics is that bad?  Or was George W. Bush so much smarter than them that he was able to hide how bad things were?

And it also, of course, reflects the political need of the right to make everything bad in America President Obama’s fault. Never mind the fact that the housing bubble, the debt explosion and the financial crisis took place on the watch of a conservative, free-market-praising president; it’s that Democrat in the White House now who gets the blame.

But good politics can be very bad policy. The truth is that we’re in this mess because we had too little regulation, not too much. And now one of our two major parties is determined to double down on the mistakes that caused the disaster.

Who was it that pushed subprime lending to get people who couldn’t afford a house into a house?  Whose policies were those that made home ownership available to everyone, not just those with good-paying jobs that could pay their mortgage payments?  Who was it that brought suits and protests against lenders for ‘redlining’ poor and minority communities by not approving mortgages for those who could not qualify for a mortgage?  The Republicans?  The so-called servants of the wealthy?  Or the Democrats?  The so-called champion of the poor and disenfranchised?

Buying risky mortgages from banks allowed banks to make risky loans.  And who was buying those risky mortgages?  Fannie Mae and Freddie Mac.  That was government policy.  Keynesian policy.  Keeping interest rates low and removing risks from the normal risk takers in the mortgage industry.  There could not have been a Subprime Mortgage Crisis without these Keynesian government policies in place.  And we know that conservative Republicans aren’t Keynesians.  That’s why Keynesians hate conservative Republicans.  Especially when they hold up further stimulus spending in Congress.

The problem with Washington is that there are too many elitists who think they are smarter than us.  And these elitists want to double down on the mistakes that caused this crisis.  Already the Obama administration has been talking about boosting subprime lending.  Incredible.  This after that very same policy caused the worst recession since the Great Depression.

After the Benefit of a Cheap Euro runs its Course the Depreciated Euro turns into a Liability

The Keynesian’s answer to everything is more spending.  And when someone warns about igniting inflation with all of their easy monetary policy they call those people misinformed.  Monetary policy doesn’t cause inflation.  Greedy business people do.  By raising prices.  And supply shocks.  Like the OPEC oil embargo of the Seventies.  They point to the Eurozone and say, “See?  Their central banks have been keeping rates low to stimulate spending.  And where is the inflation?”  Here, apparently (see Euro-Zone Inflation Surges by Paul Hannon, Dow Jones Newswires, posted 9/30/2011 on NASDAQ).

The annual rate of inflation in the 17 countries that share the euro surged to its highest level in almost three years in September, while the number of people without work fell slightly.

The European Union’s official statistics agency Eurostat Friday said consumer prices rose 3% in the 12 months to September, up from 2.5% in August and was well above the European Central Bank’s target of just below 2%.

Prices rose faster than at any time since October 2008, and more rapidly than economists had expected. Those surveyed last week by Dow Jones Newswires had estimated that prices rose 2.5%. The last rise in the annual rate from one month to the next that was of a similar scale was in March 2010, when it picked up to 1.6% from 0.8%.

With a depressed economy businesses haven’t been able to raise their prices.  But what they couldn’t do their central bank has.  Put so much cheap money into the economy that they depreciated the Euro.  Which is another way to cause inflation.  Eventually.  After the benefits of a cheap Euro (making cheap exports) run its course.  And the depreciated Euro turns into a liability (higher input prices in the manufacturing process).

This always happens in Keynesian economics.  Yet the Keynesian ignores this reality and doubles down on the failed policies of the past.

Government Policies Favor Green Energy over Oil and Gas because Government Elitists are in Control

Keynesian economic thought is the prevailing though in most governments.  For a reason.  They’re expansionary policies.  And put government in control of that expansion.  Government officials don’t care if they work.  They just like the power it gives them.  The control over the economy.  And an open checkbook to buy votes.  So governments everywhere put Keynesians into their administrations.  Which give the Keynesians legitimacy.  People accept what they say.  Because if government adopts what they say they must know what they’re saying.

But Keynesian thought is wrong.  History has shown this.  The Austrian School of economics has a far better track record of success.  But that is not a popular school among expansionists.  Because it leaves the economy to the free market.  Not to elitists in government.  Who think they know better than the free market.

An example of this elitist intervention into the free market is government’s choice of green energy as the smart investment of the future.  Which has been failing even with heavy subsidies.  While the hated oil and gas industry, on the other hand, is creating jobs (see Gassing Up: Why America’s Future Job Growth Lies In Traditional Energy Industries by Joel Kotkin posted 9/27/2011 on Forbes).

But the biggest growth by far has taken place in the mining, oil and natural gas industries, where jobs expanded by 60%, creating a total of 500,000 new jobs…

Nor is this expansion showing signs of slowing down. Contrary to expectations pushed by “peak oil” enthusiasts, overall U.S. oil production has grown by 10% since 2008; the import share of U.S. oil consumption has dropped to 47% from 60% in 2005.  Over the next year, according to one recent industry-funded study, oil and gas could create an additional 1.5 million new jobs.

What makes this growth even more remarkable is that the month of August posted zero new jobs.  So if there were no new jobs while oil and gas was creating hundreds of thousands of jobs, hundreds of thousands of jobs in other industries must have been disappearing.  Such as in that government-backed green energy sector.

How about those “green jobs” so widely touted as the way to recover the lost blue-collar positions from the recession? Since 2006, the critical waste management and remediation sector — a critical portion of the “green” economy — actually lost over 480,000 jobs, 4% of its total employment…

The future of the rest of the “green” sector seems dimmer than widely anticipated. One big problem lies in cost per kilowatt, where wind is roughly twice as expensive and solar at least three times as expensive as electricity produced with natural gas. Given the Solyndra  bankruptcy  and their inevitable impact on the renewables industry, it’s also pretty certain that the U.S., at least in the near term, will not be powered by windmills and solar panels.

Natural gas is a clean burning fuel.  It’s so clean we use it in our homes.  In our stoves.  And our furnaces.  It’s cheap.  And it’s plentiful.  We’re getting it out of American ground that can put hundreds of thousands of Americans to work.  Without loan guarantees.  And they can bring it to market at market prices.  Without any subsidies.  It’s the hanging softball of energy policy.  But what are we pursuing?  Green energy.  A sector that is bleeding jobs.

The relative strength of the energy sector can be seen in changes in income by region over the past decade. For the most part, the largest gains have been heavily concentrated in the energy belt between the Dakotas and the Gulf of Mexico. Energy-oriented metropolitan economies such as Houston, Dallas, Bismarck and Oklahoma City have also fared relatively well. In energy-rich North Dakota there’s actually a huge labor shortage, reaching over 17,000 — one likely to get worse if production expands, as now proposed, from 6000 to over 30,000 wells over the next decade.

Why are we subsidizing green startups when we have an energy belt almost the size of the Louisiana Territory?  A labor shortage of 17,000?  And a plan to increase wells from 6,000 to 30,000 (an increase of 400%) in one state?  This is real economic growth.  Created with no government help.  I mean, if there is one thing the Obama administration isn’t known for it’s being a friend to the oil and gas industry.

So this is an industry government doesn’t help.  If anything government hinders it with heavy regulation.  And yet the gas and oil industry is blowing government-subsidized green energy away.  There’s a lesson here.  Free market works.  And when government intervenes into the market you can bet on them picking a loser.

Industry experts say that the shift in energy exploration is moving from the Middle East to the Americas, with rich deposits of oil and gas uncovered from Brazil to the Canadian oil sands.

Much of the new action is on the U.S. mainland, including the Dakotas, Montana and Wyoming. Increasingly, there’s excitement about finds in long-challenged sections of the Midwest such as Ohio. The Utica shale formation, according to an estimate by Chesapeake Energy, could be worth roughly a half trillion dollars and be, in the words of CEO Aubrey McClendon, “the biggest to hit Ohio, since maybe the plow.”

Ohio now has over 64,000 wells, with five hundred drilled just year. Recent and potential finds, particularly in the Appalachian basin, could transform the Buckeye State into something of a Midwest Abu Dhabi, creating more than 200,000 jobs over the next decade.

A Midwest Abu Dhabi?  Creating 200,000 new jobs?  And that’s just in the oil and gas business.

The energy boom also has sparked a spate of new factory expansions, including a $650 million new steel mill to make pipes for gas pipelines. Other local firms are gearing up to make up specialized equipment like compressors.

This is real economic growth.  Created and sustained by the private sector.  Without any stimulus funding or subsidies.  The way of the Austrian School of economics.  But is anathema to expansionist Keynesians.  That’s why government policies favor green energy.  Like they favored subprime lending.  Because government elitists are in control.  Not the free market.

The Genius Elite have given us the Subprime Mortgage Crisis, Solyndra and Inflation in the Eurozone

The government bet wrong on green energy.  As smart as they are.  And as smart as their Keynesian advisers are.  Is there a lesson here?  Yes.  They are not that smart.

The oil and gas industry is booming.  Why?  Because there is enormous demand for oil and gas.  For all the Keynesians’ lament over the lack of demand you’d think they’d jump on this.  But no.  They ignore it.  Instead they impose oppressive regulations.  Impose moratoriums on Gulf drilling.  And do more to impede this industry than to help it.  To please the environmentalists.  And their friends in green energy.

The genius elite have given us the Subprime Mortgage Crisis, Solyndra and inflation in the Eurozone.  The Keynesian way.  Whereas the free market is finding domestic sources of real energy and creating jobs.  The Austrian School way.  Which was also the American way.  Once upon a time.  And it can be again.  If we listen more to the market.  And less to the Keynesian elites.

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