Thursday, April 28, 2011

Obama and the Race to the Bottom

The results of the President's economic policies are becoming plain to see. The economy is mired in stagnation; inflation is picking up; and new unemployment claims are surging. The national debt is reaching catastrophic levels. The Fed is printing money to finance purchases of new debt (they bought 80 percent of the newly financed deficits for the past eight months). The most absurd economic policies in American history are bearing fruit. The economy is a total mess.

Obama often speaks of "the race to the bottom." Now we know what he means. The American economic engine, once the envy of the world, is now a joke, and a bad one at that. Obama's policies have strangled the private sector and broken the finances of the federal government.

So what is Obama doing now? He's beginning his re-election campaign. Wonder what part of this record he plans to defend?

Wednesday, April 20, 2011

Greek Restructuring -- Sooner or Later?

It is interesting to see folks saying that if the Greeks restructure their debt (meaning a partial default on their debt) that a financial Armageddon will soon follow. Since restructuring or some type of default is inevitable for Greece, I guess there must be a financial Armageddon in our future. Last week the IMF suggested that the Greeks must restructure within 12 months and now more voices have been added saying essentially the same.

What those who worry about the coming Armageddon don't seem to get is that "restructuring" or a "partial default" is inevitable for Greece, Ireland, Portugal, Italy, and Spain. Indeed, one should add Germany and France to that list since their governments and banks have backstopped the former countries with bailouts in the past 24 months.

What is wrong with a default or partial default by Greece? Nothing. Those who have made bad loans to Greece should lose money. Is there any reason that they should be insulated from their bad decisions and the losses should be spread to those who did not make bad decisions? That's the problem with bailouts. They transfer wealth from those who made good decisions to those who made bad decisions. Why is that a good (or fair) idea? The answer is: it isn't.

Lending money to people who can't possibly pay it back is stupid and will eventually result in loss. Call it financial Armageddon or whatever you will. It is inevitable. The Western European plains are soon to be littered with defaults, partial defaults and restructurings. There is no way to avoid it. You may as well plan for it.

Saturday, April 16, 2011

Why Bail Out Bondholders?

Debts continue to rise in the US and in Western Europe. The so-called bailouts of Greece and Ireland simply enable those countries to get deeper in debt and continue the fiction that some day those debts can be paid off. They can't.

Over the next sixteen months, more European countries will be added to the bailout list: Portugal first, then Spain, and then attention will focus on Italy. The purpose of a bailout is to enable a country to continue to expand its debt. Is that a good idea?

Isn't it time the lenders took a loss. Why are we protecting the lenders? The lenders are sophisticated, highly paid folks, who took a risk that is not working out. They should get burned for their mistake. Why bring the taxpayers into the picture and continue to increase debt levels that everyone knows will never get paid.

It is time for a "workout," as they say in the finance world. Lenders and borrowers need to sit down at a a table and "work out" a new repayment schedule -- a schedule that will inevitably lower debt levels and force the lenders to restructure their way into losses. This is going to happen anyway. Why not start now, instead of pushing policies that simply increase debt to even higher levels and perpetuate the myth of eventual repayment.

Capitalism can't work unless you let it work. Let it work.

Tuesday, April 12, 2011

Yellen and Dudley

Academic economist Janet Yellen, now President of the San Francisco Federal Reserve Bank and Bill Dudley, long time Wall Street (Goldman Sachs) economist, now president of the New York Federal Reserve, have both chimed in on inflation in the last 24 hours. They don't see it coming. The Fed, in their view, should continue to expand its balance sheet to historic levels, effectively printing massive quantities of new dollars. Why?

Well, in their collective view, the economy is still weak and the incredibly surging commodity prices will soon be reversed. Maybe they should be trading, not running FRS banks. Their views and analysis show the poverty of economics as a science. Both Yellen and Dudley are staunch supporters of President Obama. He doesn't see any inflation coming, so neither do they. It's that simple.

Once again, the Yellen-Dudley theme is that government knows best. In this case, the government's agent is Ben Bernanke, whose famous utterance in 2007 that housing prices were justifiably high based on sound economic fundamentals, still echoes as a reminder of how little economists know about the economy.

There ought to be a rule that when you don't know anything about the future don't do anything that might make things worse. If that were the case, Ben Bernanke would be joining the ranks of the unemployed, instead of setting up future problems for the struggling American economy. His cheerleaders, Yellen and Dudley, should go back and do some research to justify their political leanings instead of sounding off about things they know nothing about. All we have learned from their pronouncements is that they both still worship at the shrine of Obama. We've learned nothing about the future of inflation from either of them.

Friday, April 8, 2011

Sound and Fury ...Signifying Nothing

The budget impasse is a lot of drama over very little. A $ 40 billion spending reduction shows that neither political party understands the depth of the US's national debt problems. It will likely take a failed treasury auction before the politicians on either side of the aisle understand how serious the US situation is. We are not that far from a Greece debacle or a Portugal debacle....and the European Central Bank is not available for our needs. Perhaps Obama should go ahead and take his Virginia vacation this weekend as planned. He doesn't really understand what's going on anyway.

By contrast, the victory in Wisconsin for Scott Walker is a true victory for fiscal sanity. Things look brighter in Wisconsin, but they remain pretty dim for the US taxpayer.