Populist Outrage and Government Intervention

One reason, maybe the main reason, I enjoy Bob McTeer’s Blog so much is that he uses plain spoken, uncomplicated logic to help explain a variety of issues related to economics.  The former president of the Federal Reserve Bank of Dallas has a nice piece up regarding populist and political outrage against seemingly high corporate pay and the like.  I pretty much agree with his assessment that, while some some pay and perks may seem unreasonably large, it’s not my job as an outsider to determine whether or not the payment is fitting.  I certainly wouldn’t want some outside observer with only a passing knowledge on my business to intervene and say that I don’t deserve what I’m making.

Of course, the introduction of government money complicates things.  The fact still remains, however, that most of us don’t know enough about the workings of Citigroup, GM, or AIG to set what workers for those firms make.  It’s the proverbial slippery slope.  It may sound a little over the top.  But before you know it, the U.S. Congress is stepping in and saying that an individual working in a company not receiving TARP funds is making too much.  As President Obama said at one point:  “We’ve got to spread the wealth around.”  Put this all together, and it sounds a bit like the redistribution of income.

If you believe private enterprise is wasteful at times, just give government a central role.  If you think government intervention is largely a good idea, just name one industry with heavy government involvement which is healthy and efficient.  The heavy hand of government is… well… heavy.

Populist outrage can be a tricky thing, because slick politicians can harness it to expand their power.  Reallocation of resources through government dictate doesn’t change market fundamentals.  Healthcare has once again become a hot topic.  Congressmen can award everyone health insurance, but that policy expansion doesn’t increase the number of doctors or hospitals.  It doesn’t encourage people to live healthier.  Such a move only accomplishes one goal; it shifts control from the private to the public sector.  Personally, I’m fine with the government helping people improve their lives.  I’m not a fan of government running the lives of its citizens.  There’s a big difference.

Government Acting Stupidly: Cash for Clunkers Edition

Wow, the media is head over heals for the “cash for clunkers” program.  Every network, cable news included, seems to agree that giving people money to kill their old cars is a stroke of economic genius.  Instead of extending unemployment benefits and/or cutting some taxes, we should give people money – those who evidently have enough spare cash or access to funds to make up the difference above $4,500 – to buy new, comparatively more fuel efficient cars?  On the surface, it’s just plain wasteful to kill a functioning automobile.  Also, scrapping these vehicles just puts upward price pressure on parts by destroying salvageable pieces that could have been utilized to help other people keep their cars running.  Everyday people in the media express some measure of concern for those suffering most as a result of the recession.  Well, I imagine that $4,500 toward the purchase of a new car isn’t going to be of much help to those  folks hardest hit by the depleted economy.

What about the poor auto companies?  This country’s thrown a ton of money their way already.  That includes Ford which is receiving $6 billion in loans to build more fuel efficient vehicles.  Besides, what happens when this money dries up?  There’s no long-lasting positive for auto companies produced by the “cash for clunkers” gimmick.  The federal government, going back at least to the Wagner Act of FDR’s administration, has been slowly killing the domestic auto companies for years.  They’ve lambasted them with CAFE standards.  They’ve helped strengthen the UAW monopoly which forced uncompetitive wages upon GM, Ford, and Chrysler.  I’m not saying that the domestic auto giants haven’t done their part to kill themselves.  But, for the federal government to claim the moral high ground and act as the savior of domestic auto production is nothing more than grandstanding and rewriting history.

The moral of the story is that government that does too much does so at the expense of real progress.  Maybe Jeb Hensarling is on to something.  What about “cash for cluckers?”  It is pretty catchy.  I believe we’ve been in a similar place.  The government attempted to support pork prices by indiscriminantly killing off hogs during the Great Depression.  Price support through destruction represents the most contrived of stimulus gimmicks.  What’s worse is that such actions are only attempts to cut and cover a problem with no lasting benefits whatsoever.

Ben Bernanke on PBS With Jim Lehrer

The first installment of Ben Bernanke’s town hall-style meeting aired tonight on News Hour.  The Fed chairman has received a great deal of criticism regarding his handling of the recent financial crisis.  I have to say that I really liked the way Bernanke responded to questions from the audience.  I found his answers quite sincere and informative.  Ultimately, history will give us a better idea as to whether the drastic measures that the Fed and the Treasury undertook, and continue to undertake, were called for.  Have they gone too far?  Perhaps, enough hasn’t been done.  It’s likely that the verdict will land somewhere in the middle.  Hell, I would be surprised if both sides weren’t still sparring years from now.

We can’t know with absolute certainty what would have happened if Bernanke had determined it best to largely stand on the sidelines.  But as a student of the Great Depression, Bernanke felt confident that allowing the “too big to fail” financial firms too fall would only worsen the calamity though he made it quite clear that he detested saving firms who put themselves in danger through a failure to effectively manage risk.  He indicated that policy must be put in place to allow for strict oversight and handling of such institutions.

I believe you can watch the entire forum at the above link.  Half of said forum aired tonight, and the rest is set to air tomorrow.  I find it all quite interesting.  For those who seem put off that Bernanke is defending himself and the actions of the Fed, get over it.  The fact that he’s willing to appear in such a venue and answer questions only helps in regard to understanding.  Transparency has been thrown around as something that’s always good.  While I don’t agree that it’s necessary or even prefferable in all instances, education as to the situation and mindset of public decison makers can allay fears by adding to the general understanding of what’s happening and what likely lies ahead.  Unlike Alan Greenspan, Ben Bernanke doesn’t utilize mythical Fedspeak.  His straightforward, thoughtful explanations allow forums, like this recent one with Jim Lehrer, to be excellent educational tools.  Whether you agree with the Fed chief or not, I think we’re getting some invaluable insight as to what goes into his extremely important decisions.

Oil Addiction?

ABC is building up a new special about America’s supposed addiction to crude oil.  To start with, I hate that media outlets and others continue to refer to the usage of oil as an “addiction.”  According to ABC, Americans are willing to continue consuming oil no matter what the price.  We can’t stop.  Whatever will we do?  Oil is not heroine.  As we witnessed when fuel prices skyrocketed just recently, demand lessens once prices get to a certain point.  Matter of fact, oil storage is in short supply, because demand hasn’t returned though fuel prices are around half what they were last year at this time.  Yes, the economy is still in rough shape.  But generally, addicts forgo other things (even food and shelter) to feed their habits.  The fact is that oil, even at $60 or $70 a barrel, is a relatively cheap source of power.  Until a viable alternative is found, the world’s pre-eminent economy -  that would be the U.S., not China though they use a bunch too – will continue to use a lot of oil so long as it’s not cost prohibitive.  When it does get too high, we’ll use less.  That’s just Econ 101 stuff.

Now, I don’t know what Charlie Gibson will present in his special.  There appears to be a national security/terrorism angle.  I too would feel much better if America’s primary fuel source wasn’t something that was abbundantly found in terror-supporting, unstable, and rogue nations, but it is.  Since this is the case, we should lay all cards on the table by encouraging exploration in the U.S. and offshore.  If the government must be involved which it is and will continue to be, we should get behind smart, potentially viable subsitutes to crude oil.  Hey, we’ve got a hell of a lot of coal.

Here’s the problem:  The powers that be and the media have decided that we need to beat our “addiction,” but only with clean, currently not feasible, alternatives.  Wind’s great on the surface if you want “green,” but it’s going to take a lot of infrastructure that’s not there.  In other words, it’s going to cost a lot, take time, and it probably won’t be able to fill the gap.  Ethanol has been a terrible mistake especially since the federal government continues to bombard foreign suppliers with tariffs.  Ethanol makers in places like Brazil can produce the fuel more cheaply from sugar cane than we can here from corn without driving up domestic food costs.  Plus, ethanol is less efficient from a miles per gallon perspective than gasoline.  Apparently, we’re still scared of nuclear power.  Natural gas works well and could be used more for transportation as Boone Pickens wishes, but the far left greenies complain that even it produces too much CO2.

The point being that, as a country, we’re tieing our hands by discounting some possibly good alternatives to crude, because we continue to fret about something that may not even be a problem (climate change, a.k.a global warming).  If it is a problem, we may not be able to do much to affect it even if we team up with other foolish European countries.  Our government works to build a competitive disadvantage for many industries in the United States.  Now, there’s a national security concern.

We could hurt Saudi Arabia, Venezuela, and Iran by reducing further our usage of crude oil.  This can be achieved by vastly increasing taxes on gasoline and diesel, but at what cost?  European countries have much higher fuel prices through taxes.  They use less fuel.  Of course, their economies aren’t nearly as strong as this one even considering our current problems.  Going forward, lower supplies of crude oil will lead to higher prices which will push demand down unless usage rates don’t return to pre-recession levels or more oil is present, or can be extracted efficiently, than we think.  In other words, supply and demand functions will largely solve a difficult problem.  There may be hurdles in the interim, but the result will be superior to the one produced by high-minded individuals picking what fuel sources we should and shouldn’t utilize.

Explaining the Need for Money Supply Growth

In recent months, it’s become popular to bash the Federal Reserve, Ben Bernanke, Hank Paulson, and anyone else involved in money supply growth and/or the handling of last year’s frozen credit market.  I can’t say that TARP was done correctly.  There are some legitimate arguments about whether or not the executive branch defied the bounds of the Constitution by extending TARP funds to GM and Chrysler.  History and a deeper examination of the issue should provide us better answers than we have today.  What does worry me right now is the propaganda being unleashed in regard to the printing of money.  I’m very concerned about how money supply growth could fuel future inflation.  However, a number of intelligent economists and investors don’t believe inflation is a concern for today.  In fact, we really need wage growth to provide a fertile environment for inflation.

Obviously, the Fed and the federal government are quite capable of devaluing the dollar in relation to other currencies.  At some point in the future, Bernanke will likely have the unenviable duty of tamping down inflation with higher interest rates while the government is borrowing to finance ridiculous deficits.  Hopefully, he or whomever holds his current post is able to do this in the face of stiff political pressure.

Another point worth noting is that money supply growth has actually been flat since its significant spike.   Bob McTeer layed out his thoughts on the issue in terms simple enough for even me to understand.  To make a long story a bit shorter, Bernanke has done what needs to be done vis a vis the money supply to ensure the viability of the U.S. financial system and broader economy.  The greatest free market economist of all time, Milton Friedman, basically argued that the money supply should have been increased to combat banking fears during  the Great Depression.  Glenn Beck can assert himself as a spokesman for limited government, and in many ways he is.  However, Friedman understood the important functions of the Federal Reserve in terms of backstopping the entire financial system.  Alexander Hamilton, a person who is probably most responsible for laying the groundwork  of what is now the Fed, viewed a strong central bank as a way to insure confidence and stability in the country’s financial system.

Instead of me rambling on, I’ll let Milton Friedman explain via a nice video clip of the late, great economist and ardent supporter of individual freedom.

The War on Sarah Palin

It’s not a business or economic story per se.  This is, however, a story about freedom.  Sarah Palin reportedly announced that she’s stepping down as governor of Alaska on July 25 and, obviously, won’t run for re-election.  MSNBC is currently dancing on her political grave.  David Shuster says she can’t comeback (in a political sense) after not finishing out her first term as governor.  Using words like “can’t” or “never” is an exercise in stupidity.  It’s hard to be surprised with the obvious slant of MSNBC, but I have to say that the way in which the anchor (Alex Witt), Shuster, and John Harwood are presenting this particular story is disgraceful.  The fellow from Politico.com (didn’t catch his name) is doing a fair job of speculating based on the meager amount of facts present.  The others can be described as hacks.  The left as a whole exudes fear when Palin’s name comes up.  Pat Buchanan did remind the talking heads of how popular Palin has been with much of the American public.

Much of freedom in a capitalist society hinges on the presence of a probing media that is as unbiased as possible.  The vast majority of media in the United States seems to be in the pocket of the far left.  You can like Palin or not.  You can agree or disagree with her on the issues, but character assassination should not be the role of journalists.  In fact, it’s the lowest way in which to win a political battle.  The media has conducted a war against Palin ever since she’s stepped on the stage, insinuating that she’s a joke and not intelligent enough to become a major player on the national stage.  These so-called leftist journalists have been aided by those who purport to be conservatives (i.e. Peggy Noonan).  The lack of concrete policy-based arguments against Palin have been few in number.  Below-the-belt, personal jabs directed at her have been many.  I’m not sure why I’m watching MSNBC right now.

Cap and Tax With a Side of Protectionism

As if the somewhat disguised taxes that lawmakers and the president are attempting to saddle energy consumers with isn’t enough, there’s an attempt by Congress to “protect” domestic companies from foreign firms that don’t adhere to the same strict CO2 emissions standards which the  House has passed.  Check out The Wall Street Journal article.  Anyone who realizes that protectionism doesn’t and never has helped domestic businesses in the long-term should find these measures horrifying.   There will likely be a response from the country, or countries, affected.  So, you essentially distribute pain to other domestic companies that are targeted by the countries burdened by the cap and trade, green industry nonsense.

Not only do we have to worry about retaliation by China and other importing countries, but tariffs and the like serve as taxes on American consumers.  Yes, you might be able to keep some jobs in tact through protectionist measures for a short while, but you end up making goods cost more than they otherwise would for consumers right here in the United States.

This is the federal government significantly altering the business landscape and then trying to offset the negative effects in terms of competitiveness with companies under the jurisdiction of less invasive governments – at least in respect to environmental issues – by implementing heavy-handed, protectionist measures.  These techniques just don’t work and will likely cause more harm than good.

One of my favorite columnists, Kim Strassel, wrote a great piece on the deteriorating “consensus” which underpins the entire movement against CO2.  Some lawmakers in other countries aren’t convinced enough by the shaky climate change argument to risk the economic well-being of their constituents by enacting onerous measures to curb CO2 emissions.  Wow, such a realistic approach toward the far from proven role of man-made CO2 is quite refreshing.  I’d like to see a little more skepticism from journalists and political leaders here in America.

The Wonders of Government Run Health Care

I must admit that I’m no expert on health care (or probably anything else for that matter).  What I do know is that Medicare is, for all intents and purposes, broke.  Obama’s plan looks extremely short on details.  Matter of fact, I’ve yet to see an outline which shows how it will deliver the lofty potential results that are being touted.  What I do know is that, if you’re looking for efficiency, the federal government likely doesn’t hold the answer.  The president has been on the air (ABC) for roughly 20 minutes, and I’m none the wiser.  Yes, there are problems.  However, since I haven’t seen Obama’s magic wand, I have to operate under the assumption that it does not exist.  No magic wand plus no convincing supporting details equals no deal.

Actually, this whole affair is utterly absurd.  This entire ABC special wreaks of shady propaganda.  There are no opposing views or forceful adversaries.  We should spend trillions – but there are absolutely no good estimates as to what this will cost – on something that will deliver, because the president said so?  You can even keep your current plan if you like.  Though, since the government is going to be a player and a referee with the ability to tax the entire country and run deficits, the likelihood that your current plan will survive seems slim.

There are so many angles to attack.  Only so many health care professionals and facilities exist.  Either people use less health care assets or these assets must be increased for there to be efficient utilization ending in cost savings for the consumer.  Yeah, you could make health care free for everyone.   But, since the number of doctors is basically finite, who gets seen and who does not?  It’s not like we’re talking about an industry with a ton of slack.  In the end, rationing will rule the day.  The free market has proven to be better suited than government for this duty.  Health insurance does not equal improved care.  This is a sham.  There is no free lunch.

Oh, Charles Gibson and Diane Sawyer look silly as pawns for the administration.  Is this journalism?  This really looks to be a job for Billy Mays.

Saluting the United States Military on Memorial Day

Those dedicated souls who have served, and are currently serving, the United States in the armed forces deserve a tip of the hat today.  These people aren’t thanked nearly enough for what they’ve done.  Whatever your beliefs regarding recent U.S. and/or current U.S.  foreign policy, military personnel have only done what this country has asked of them.  The men and women who have valiantly served over the years have made this great country a possibility.  Thank you.

The Federal Government’s Significant Role in the Banking and Credit Mess

For the most part, what you hear on the news is politicians lambasting bankers and other business leaders for acting incompetently or unethically or both.  Some probably deserve a strong dose of criticism, but not from politicians who have their fingerprints all over the current woes that have gripped the credit industry.  Whether it’s promoting home ownership for non-creditworthy individuals or enacting other absurd rules for banks to follow, politicians and the bureaucrats serving their cause are due some flogging, also.  Here’s a little silliness to chew on which was part of a recent post by Bob Mcteer:

Limiting capital reserves banks can set aside for losses during good times. Several years ago the SEC sued SunTrust Bank for accumulating too many reserves for loan losses, which effectively limited the accumulation of capital in the banking system. The name given to this new sin was “smoothing.” What it boils down to is that you aren’t allowed to make hay while the sun shines.

Increasing requirements for loan loss reserves during the bad times. You can’t make hay while the sun shines, but you must make additional hay when it rains. Once a bank experiences loan delinquencies or securities write-downs that threaten its required capital ratios, the supervisors increase the ratios. That is, they raise the bar for survival. I’d call that an unprecedented act of [expletive deleted] except it’s pretty much what your credit card company does when you miss a payment or your car insurance company does when you have an accident.

As if the government hasn’t screwed up enough, they now want to put their stamp on the credit card industry.  Austan Goolsbee thinks he’s got the answer.  According to Mr. Goolsbee, it’s okay if credit card issuers make a little less in the name of consumer protection.  That pseudo-populist argument sounds not so bad at first blush, but I’ll bet consumers end up paying for government intervention in some form or another.  Likely, some won’t be able to get credit at all, and that is a nice segue to some more disturbing credit-related news that’s now coming to light.

The Wall Street Journal reports that many local banks could incur losses due to exposure to commercial real estate loans.  These potential losses could put these institutions in peril.  Apparently, the paper did their own stress tests on these banks with the recent tests performed by the Fed on the large banks as their guide.  On top of that, the once red hot commodities industry is feeling the contraction in credit as farmers are seeing their credit lines cut.

Agriculture (an industry I know quite well) has long been an arena where the federal government has monkeyed around by issuing subsidies, instituting tariffs and engaging in other, generally, paternalistic actions.  A combination of easy money, increased global demand and the push for energy independence – leading to ethanol subsidies for domestic producers and tariffs for foreign producers – fused to help form the latest round of commodity mania.  Granted, there is some overlap among these aspects, but these are some of the most important factors, in my humble opinion.  As a result we saw price charts from agriculture-related companies ( fertilizer companies Potash or Mosaic for example) that were not normal.   Actually, those rates of growth were unsustainable.  Obviously, it’s easy to sit here, look back and point out red flags that are much more apparent in hindsight.  The point is, however, that these ridiculously rosy stories about cycles being a thing of the past, because China has billions of people that need all kinds of imports, are simply too good to be true.

Government usually furthers the problems inherent in so-called bubbles.  The reason being that bad news equals defeat at the ballot box.  Nobody, wants be the messenger when it’s a distinct possibility that the messenger will be shot.  Furthermore, no one (especially a politician) wants to admit that the policies they created may well have caused some unintended damage.  Instead of fixing what’s wrong before the entire machine fails, or is damn close to failure, we continue on at break-neck speed, hoping the impending crash doesn’t cause too many fatalities.

Getting back to banking and credit, I’m a bit torn.  As Milton Friedman said, “The government solution to a problem is usually as bad as the problem.”  I would add, “…if not worse.”  That said, I also believe it important that the Fed and the U.S. government be able to backstop the banking system, so any kind of unforeseen circumstance doesn’t threaten that sector and, by extension, the entire system.  No bank can cover all the deposits in that institution; confidence plays a huge role.  In short, some government involvement, at least through oversight and insurance duties, is necessary for the U.S. banking system to function effectively.  If one believes this to be the case, we must entrust the individuals in government with much responsibility.  In other words, they must act when the general public doesn’t want action in order keep unwise loans and the like from becoming parisitic to the entire system.  We don’t need “bailouts” after the fact which imperil the wonderfully capitalistic economy we utilize here in the United States.

The smoke and mirrors of politics are exactly what we don’t need as part of the banking system, but those unwanted shenanigans are quite hard to keep out.  Hopefully, the Federal Reserve has not become too politicized.  Price stability is something this country desperately needs in order to tamp down these boom/bust cycles that are predicated not on fundamentals but on irrational expectations.  Ideally, we should take as much of the power out of the hands of individuals by creating an infrastructure where price stability is the Federal Reserve’s main goal.  That body can’t cure all the ills of the economy, but it can largely control the creation of money and, subsequently, inflation or deflation.  I have very little confidence that the  Treasury, along with the rest of the Obama administration, or Congress can do anything helpful besides standing aside at this point.  It’s hard to see them doing nothing though that would be the most prudent course of action.