Monday, June 27, 2011

Fat Chance

Greek Foreign Minister Papandreou is out selling the new austerity package to his Parliament. He wonders why Greeks are rioting in the streets. How would you like to see your taxes go up $ 4,000 per year next year? That's what a typical family of four in Greece will face under the proposed austerity plan, according to calculations by a Greek newspaper, To Vima.

That is only the beginning. This austerity plan is merely a small down payment on a massive effort to stem the huge budget deficit. There is no hope of a budget surplus. This plan is intended to slow the growth of debt, not reduce it. Reducing debt would require far, far larger sacrifices.

Papandreou assumes that citizens that have been told for generations that they are entitled to early retirement, free health care, free education...essentially free everything..will now pony up to pay for all of this free stuff. I have my doubts.

No way Greece will implement this plan. No way. The Parliament may pass the plan, but it will not be enforced or implemented in what is arguably the most corrupt government within the European Union.

Sunday, June 26, 2011

Call Biden's Bluff

There is no time like the present to bring an end to the massive US fiscal deficits. Congress should vote a resounding "no" to an increase in the debt limit. Force the issue. It is the only way any progress will ever take place. It gets no easier later. Now is the time as Senator Obama pointed out five years ago, when he voted, as a senator, not to increase the debt limit. He was right then, he is wrong now.

For example, moving the age limits on social security saves a lot more money if you do it now, than if you do it one year from now or five years from now. Why wait until all of the baby boomers have retired and the problem is a multiple of what it is today. Do it now!

This is the time. This is the place. Folks like Senator Warner of Virginia claim to be moderates, but their voting record is to the left of Barney Frank. They are preaching that if we don't raise the debt ceiling, there will be catastrophe. Thanks to senators like Warner there has been an ever escalating deficit. He knows that he won't be there when the ultimate catastrophe comes. All Warner wants is the ability to waste more taxpayer dollars and postpone dealing with the problem, so that he can get re-elected. That's why he wants a "clean" debt ceiling increase bill.

Congress should call Biden's bluff. A poll taken in the last few days shows that the public favors a "no" vote on raising the debt ceiling by a margin of 41-38. Every Congressman who votes to increase the debt ceiling should lose his seat -- Democrat or Republican.

Friday, June 24, 2011

Leave the Oil Market Alone

Obama's decision to release oil from America's strategic reserve is another bone-headed, political decision designed to rescue his collapsing state in the polls. It is bizarre that a President who claims to support alternatives to fossil fuel energy objects to the rising price of fossil fuel energy. There really is no other way to stimulate alternative energy than to let prices of fossil fuel energy rise and let the market produce alternatives. There simply is no other way.

This is truly an administration that believes government can work wonders. The only wonder is why they believe that. The sobering facts of what has happened to the economy under this administration is a compelling testament to the failure of government to create jobs and improve economic performance. Now, these folks think they can solve energy problems by lowering the price of fossil fuels. You wonder if anyone in this administration knows anything about economics.

This is Why Politics Has a Bad Name

Are they kidding? Merkel and Sarcozy. Is Greece really going to accept economic devastation for at least a generation to pay back German and French bankers? Is there anyone out there who thinks this is really going to happen?

There is no way Greek citizens will agree to this. It is not politically possible. The Greek Parliament may pass whatever legislation that it feels like passing, but enforcement will not take place. There are few governments or countries in the world where corruption and tax evasion is as rampant as Greece. This is always the outcome of of an ever burgeoning government.

European Union officials believe, as Obama believes, that raising tax rates will generate revenues. In fact, raising tax rates last year in Greece led to a substantial decline in tax revenues.

What is happening in Europe is typical of modern politics both in Europe and in the US. Pretend politics. There are few, if any, statesmen in Europe who are behaving rationally these days. Remember the Treaty of Versailles? How did that work out for you?

Tuesday, June 21, 2011

Sell The Rally

"Stocks up on news of a Greece settlement," read this morning headlines. Stocks are cheap, no doubt. But, stocks are cheap for a reason. Economic policy in the US threatens to push the economy into a second recession and Europe is turning a small problem into a potential financial conflagration. This rally is going nowhere. Sell it and wait for more rational times (or even cheaper stock prices).

Monday, June 20, 2011

From Molehill to Mountain

Greece is a small country with an estimated 11.3 million in population. It's total GDP was about $ 320 billion in 2010. So, why all the hubub. Why can't Greece default on its nearly $ 400 billion national debt? It is not going to be able to pay it and it's debt is growing currently at nearly $ 50 billion annually. With these numbers, why are France and Germany so intent on stepping in and turning a molehill into a mountain.

Politicians are obsessed with fixing things and so long as disaster is unlikely on their watch, they proceed. Obama doesn't have to worry. The US is not likely to go bankrupt within the next four years. Within the next ten years, that's a different story. But, he won't be there then, so what does he care?

Sarcozy and Merkel are obsessed with the same mindset. They don't want disaster on their watch. So, kick the can down the road and set the stage for a far bigger disaster on the next guy's watch. Such statesmanship!

Democracy is a tough game (for the electorate). It is easy to promise and hard to deliver. But you can get elected on a promise and by the time folks find out that you didn't deliver, you've bought your own island somewhere and what do you care. That is the kind of cynicism that permeates the folks who think government can solve all problems. They are not there when disaster strikes.

So, the European Union pushes the car closer to the cliff's edge, thinking it is doing something worthwhile. Only the car is now a bus and has many more passengers and the size of the bus and the number of passengers are growing every day. It is obvious that the bus is headed over the cliff. The only thing we don't know is how big the bus will be when it goes over and how many passengers are going to go with it.

The Plight of Papandreou

Why is Papandreou, Greece's prime minister, struggling to convince the Greek public to cut spending and raise taxes? At the moment, Greece is spending 25 percent more than their tax revenues, which means their national debt is continuing it's upward spiral. There has been no progress since the last year's bailout. No, indeed. Things have gotten much, much worse for Greece's finances, not better.

The problem for George Papandreou is the political rhetoric of the past half century. Politicians like Papandreou and his economist (sic) father Andreas Papandreou have, for several generations, preached to the Greek population that they could have it all -- free health care, free education, free everything, plus early retirement with a fat pension. Everything is free in the wonderful Papandreou state. Nothing need be paid for. That's what Papandreou and his father have been telling Greeks for the past fifty years.

Guess what? They lied. Providing all manner of free and inexpensive stuff to folks doesn't work unless there is someone out there who is willing to fund all of this. The fact is, in the long run, there is no one willing to fund the Greeks in the style to which the Papandreous wished them to become accustomed. The Papandreous were frauds and now the Greeks and other Europeans are angry, confused and rioting. Who wouldn't be angry and confused?

Papandreou deserves his current fate. He helped to create the problem and cheerlead the fraud that led to the current problems in Europe. Why Obama is choosing to follow this path is a great mystery.

Sunday, June 19, 2011

Betwixt and Between

What accounts for the fact that Obama is in trouble with both the left and the right and the middle appears to be defecting as well? Isn't anyone happy with Obama?

The problem for Obama, as well as for Europe, is simply a case of affordability. We've run out of chips, as has Europe. Who is to fund all the largesse that the left dreams about? The answer -- no one.

Unfortunately, much of the citizenry of the western world now believes that things like old age pensions, health care, education, jobs, etc. are rights to be guaranteed by the government. But, who pays?

Taxing the rich and selling bonds only takes you so far. 100 percent tax rates aren't likely to raise much revenue. Bondholders like to get their money back. They won't get it back if they loan it to western nations. Bond holders are learning this now at a rate that alarms western politicians. Western politicians are already beginning to blame bond holders for their greed in demanding that they get repaid. What terrible people? Wanting to get their money repaid?

This is all silly. It is merely a question of numbers. There is no way to make this work. You could resort to compulsion (i.e. dictatorship) to level the economic status of your populace. Some form of government such as the kind that the infamous Soviet Union imposed on its people. That kind of political outcome produced poverty and stability, but at least there were no rich folks. Or were there?

If all you want is to eliminate rich people, that is relatively easy to do. If you want your average citizen to prosper, then that is an entirely different proposition. Giving people opportunity, minimizing the reach of government, and providing a rule of law are the best prescriptive tools to economic prosperity for any nation. Unfortunately, the US and the West have been busy for several decades dismantling the very things that created prosperity in the West in the first place.

Asia is not so foolish. So far, their leaders have not promised the impossible. They have problems, no doubt, but they have created nothing like the absurd expectations of the average citizen in Greece. The US and the West are in the middle stages of removing themselves from world leadership, both political and economic.

Obama now realizes, I would suppose, that his policies don't really work. I doubt that he would say this out loud. But, really? 9.1 percent unemployment at this point in the recovery. 1.8 percent economic growth? These numbers are unprecedented for an economic recovery. Failure is only a word, but it aptly describes the economic reality of Obama policies.

So, what can Obama do? Not much. He has tried his full panoply of liberal schemes and they have simply made things far, far worse. Even the most leftist citizen still would like a job. That's the hard cold fact that the Obama folks don't seem to get.

Meanwhile, Obama continues to lecture the rest of the world about how to run their affairs. Fortunately, no one listens. Obama has badly damaged the American economy and its future. He is now essentially an irrelevant force, other than presiding over the wreckage that his policies have created.

Perhaps, playing golf is the only thing left for this president.

Saturday, June 18, 2011

Boeing and Obama

The Obama NLRB has intervened in Boeing's business decision to locate a plant in South Carolina. Why? South Carolina is a "right-to-work" state, meaning that South Carolina law doesn't force unwilling employees to join a union that they don't want to join. Freedom is a crime, according to the NLRB. Thus, an ordinary business decision is now a subject of litigation.

No doubt, other countries would be happy to provide a site for the plant that the NLRB doesn't want to see located in South Carolina. In effect, the NLRB is pushing American companies to outsource major sections of their business, unless they are willing to unionize their work force. So much for freedom.

You begin to wonder if this is part of a grander plan. Force the US economy to its knees by foolishness like the Boeing decision and push American jobs to foreign countries and foreign workers. Meanwhile, do everything possible to restrict free trade in products -- e.g. the Obama Administration's refusal to push the Columbia trade agreement to the finish line. Maybe this Administration really doesn't want the US economy to recover.

I have always thought the Obama economic policies resulted simply from stupidity, but the Boeing decision is so damaging to job creation (other businesses are watching) and such a government grab for power and influence over business, that it makes you wonder what the real end game is for the Obama Administration?

Friday, June 17, 2011

Why Not Cut Your Exposure?

The markets are rife with concerns that European banks and American banks will lose a lot of money if Greece defaults. So, why don't the banks simply sell their Greek sovereign debt holdings and avoid any further exposure? After all, post-2008, the banking systems in the US and Europe have been subject to new regulations and are marking their portfolios to market. Right? Wrong!

As usual, regulation doesn't work. If European and American banks sell their Greek debt assets, they will take huge losses precisely because they are not marking these assets to market as everyone assumes. The regulators are letting these banks carry all of this bad debt at par and their balance sheets incorrectly show assets at highly inflated values. So much for financial reform!

It's the same old story. Everyone assumes that bank regulation works. The fact is that it doesn't work. Just when you need heads up banking regulation, what you get is a wink and a nod and political interference. That is what is going on right now.

What would have been a minor problem -- a Greek default two years ago -- is being elevated into a major problem that will ultimately undermine the financial stability of Europe and the US.

Financial regulation doesn't work. Regulators are not the answer. Dodd-Frank legislation is a sham and is simply a hindrance to a serious economic recovery. Let the markets work. Let those who buy bad debt take their losses without involving taxpayers in the process.

We are in serious danger of replaying the fall of 2008 by more foolish government policy regarding the debt markets.

Thursday, June 16, 2011

Is This News?

There is a growing realization by world financial markets that Greece is not going to make it without some kind of default (partial or complete). Is this really a surprise? Is Obama serious that US taxpayers should step in and finance profligate Greek spending behavior? How absurd is the Obama economics going to get?

The Greeks expect the rest of Europe (and now, according to Obama, the US) to fund their extravagant lifestyle. Why? What greater good is served by bailing out folks who have a corrupt political and economic system and no work ethic? Does that do some over-arching good somewhere?

There seems to be no end to the irrationality of Obama economic policy. Let the Greeks default. Is it really a surprise that they are on the brink of default? Ordinary Greeks are not interested in paying their own bills. Look at the riots in the streets. That tells you what the typical Greek citizen thinks. They are mad that the rest of Europe is not willing to fund them indefinitely.

So, where is the news in this? When will Europe (and Obama) wake up to the realities of economic life?

Saturday, June 11, 2011

Double Dip -- A Real Possibility

Could the economy be headed for a second recession? Two months ago, the possibility of a second leg down seemed unlikely. Now, I'm not so sure. Amity Schlaes "The Forgotten Man" chronicles the double and triple dips of the 1930s Great Depression in the US. There are startling parallels between the depression era and our current malaise. And some storms clouds of the modern era were not present in those bygone days.

The main parallels are: 1) massive government intervention in the economy; 2) a mountain of new regulations on private sector economic activity and fear of new and unknown regulations yet to be announced; 3) fear of major new tax increases on wealth holders (I.e. "tax the rich"). These concerns prevented any sustained economic recovery in the twelve year span from 1929 until 1941, at which time many of these burdens were eased to allow for a major wartime production effort.

History may be about to repeat itself.

The problems in housing, where government action has been pernicious, suggest the long awaited bottom in the housing market is going to continue to be awaited. Jamie Dimon of J P Morgan spoke eloquently this week, in his exchange with Fed Chairman Bernanke, of the inhibiting influence of Dodd-Frank and other Obama-driven legislation that takes a sledgehammer to the commercial and mortgage lending capabilities of the country. Obama and his Congressional and labor union allies seem to want to push US tax rates to unprecedented levels. Meanwhile successful businesses are reviled and ordinary business mistakes are viewed as criminal activities by the White House.

So, why should businesses expand and hire employees given this backdrop?

Adding to all of this is the collapse of the Great European Experiment. Europe decided decades ago that their citizens could have it all-- light work loads, lavish health and old age benefits, employment without fear of termination! What a brave new world this was! Europe was all the rage. This worked as long as bondholders would provide the funding for this silly and foolish experiment. Guess what? The party is over. Europe is now front page news every day as European countries scramble to find new benefactors willing to bankroll their life of leisure. So this tragi-comedy is playing out alongside the other headwinds that face the world economy.

Finally, the Chinese economic engine is suddenly sputtering.

While nothing is ever certain about the economy, it now seems at least 50-50 that the US economy is headed for a second recession.

Wednesday, June 8, 2011

Bernanke is Bankrupt

Ben Bernanke's main concern in life is getting himself reappointed as Federal Reserve chairman. Nothing else really matters to Bernanke.

Yesterday, Jamie Dimon, CEO of JP Morgan Chase, questioned Bernanke on the effect of Dodd-Frank, Credit Card Reform, the new mortgage lending rules. It is worth noting that Jamie Dimon is a Democrat, contributed personally to the Obama presidential campaign in 2008, and has long spoken favorably about the president. Looks like he doesn't like the president's economic policies.

Dimon argued forcibly yesterday that Obama's economic policies, especially regulatory policies, are thwarting any real chance of a recovery. He's right. Bernanke, on the other hand, praised the so-called "reforms." This is the same Bernanke who was quoted in 2007: "..the sub-prime lending problems are contained." Bernanke stood by while the American economy bubbled and collapsed and he did nothing until it was far, far too late to do any good. Now, Bernanke's policies do harm.

Bernanke is a disgrace. He is the easily the worst Fed Chairman in US history, which is quite an accomplishment.

Tuesday, June 7, 2011

Obama on Greece

"...other countries are going to have to provide them a backstop and would be disastrous for us to see an uncontrolled spiral and default in Europe, because that could trigger a whole range of other events..." so said President Obama today while visiting with German Chancellor Angela Merkel.

Maybe Obama should take some notes here. The Greeks are interested in two things: 1) more bond sales backed by the Eurozone; 2) no austerity. Unfortunately, these two are incompatible and will not happen. German and French citizens are fed up with bankrolling the sick Greek economy and the absurd work ethic of most of the Greek citizenry. If "disastrous" is the right name, then it is on its way. Ultimately, no one has the resources to bail out Greece indefinitely.

Obama should look at the situation in his own country, which is on a path to the same outcome that lies ahead for Greece....bankruptcy.

NY Times Shows Its Ignorance Once More

Dig the New York Times story today about Walmart. According to the story by Lisa Lee, the Walton family has creeped over the 50 percent stock ownership line by arranging for the company to do stock buybacks. This article exposes, for all to see, the incompetence of the NY Times business team. Since when is 50% a significant goal line for "control" of a public company. Is there anyone out there who thinks that if the Walton family owned only 48.5 %, for example, that they would have some big difficulty lining up another 1.6 % of non-family members to exercise 50 % plus one voting majority?

Owning as little as 10 percent of a company is often sufficient to dominate the policy in most public corporations. The only practical difference between more than 50 percent and less than 50 percent that Lee can cite in her article is the fact that NYSE rules do not require a majority of outside directors. Wow! Owning only 49 percent puts the Waltons in the difficult position, according to Ms. Lee, of not controlling the board's directors. Is she kidding?

It is worth noting that there are no director changes announced or contemplated at Walmart as a result of the family crossing the magic 50 percent line. Once again, the Times does its readers a disservice by highlighting an irrelevancy as a matter of substance.

Monday, June 6, 2011

"Extend and Pretend" Comes to Greece

Members of the European Union are moving closer to a plan that will extend the debt maturities of Greek private debt (that is, debt owed to the private sector, mainly banks). This is more wishful thinking. Extending the debt in a package that involves more austerity is a prescription for more pain and no gain. Long run, this cannot work.

The Greeks are way overextended. Short of some kind of substantial default, Greece has no hope. Extending maturities is a "mild" default. Greece needs a real default. They need to offer bondholders 15 cents on the dollar for their outstanding debt -- take it or leave it. Merely extending debt maturities is too little too late.

The reason that the EU is not moving forward with true restructuring (meaning a much more drastic default than mere debt extension) is that they have orchestrated earlier bailouts using the private sector and the EU is reluctant to turn around a year later and demand that the buyers take an immediate haircut. So, they temporize.

The outcome for Greece is going to be a major default at some point. It is far better to do it now, not later. It is better for creditors, it is better for Greece.

Saturday, June 4, 2011

Surprise, Surprise..No Jobs

Hilda Solis, Obama's Secretary of Labor, was trotted out yesterday to make the rounds on the news shows to explain how the economy could produce a mere 54,000 new jobs in the month of May. According to Solis, all we need to do is pass Obama's plans for "investing in America" in education and alternative energy and to pass the debt ceiling increase. These people must live in a cave! How would boosting teacher salaries, providing more subsidies to Obama's friends in the alternative energy space and providing a new lease on life for deficit spending do anything for aggregate employment?

Solis, along with her boss, needs a course in economics. If you want workers hired, what should the government do? Make them more expensive? Give them additional rights to sue their employers? Solis seems to think that businesses should hire folks simply to further Obama's political future.

Back to square one. Businesses exist to make money. If they expand their businesses, they will do it in the most efficient way. If the government deliberately makes one of the factors of production much more expensive, then, when businesses do expand, they will avoid using that factor of production. That, in a nutshell, is why no wants to hire people, whether they are expanding or not. If you are trying to make money in the modern economy, the last thing you want are more employees.

High unemployment is a direct result of Obama economic policies. They are reaping what they have sown. Presumably, they must have thought that some other outcome was possible. A policy of demonizing business folks and making labor much, more expensive for business has lead to staggeringly high levels of unemployment and no serious job creation in sight. Why is that a surprise to anyone?

Thursday, June 2, 2011

If Not Now, When?

Why should Congress vote to increase the debt ceiling and simply kick the can down the road? Is there some date out there where it becomes politically easier to change the trajectory of spending? If you are really going to slow the rate of spending, it needs to begin now. Those who want a "clean debt limit increase" are also those who want to increase spending levels.

Congress should vote no on increasing the debt limit. It has to begin somewhere, sometime. Why not now?

Economy is Dead in the Water

Now what? Having worn everyone out with a fiscal and monetary explosion for the past two years, the Administration and Congress are now faced with an economy going nowhere. While we continue to punish businesses and financial institutions, we wonder why no one is interested in hiring lots of folks and risking their capital in this brave new world.

What gets lost in all of this is the question of how people decide to risk their capital and how they decide to hire employees? They do this only to make money, which many in the Obama Administration think is un-American. Until the Obama folks begin to see some virtues in the accumulation of wealth, they will never understand why their economic policies are doomed to failure. Businesses don't just invest to be patriotic and improve Obama's election chances.

People take risk to get rich and to accumulate more wealth. The rush by the Obama folks to redistribute wealth and demonize "the rich," just means that there will continue to be a natural and rational reluctance on the part of business to do anything to help move this recovery along. Someone has to risk capital and hire employees besides the government.

The Obama folks just don't get it.