Tuesday, July 31, 2012

Folly in Massachusetts

Health care costs have gone through the roof since Massachusetts adopted its own version of Obamacare during the reign of Governor Mitt Romney.  The original legislation was bi-partisan.  Now, a bi-partisan majority of the Massachusetts legislature is poised to 'fix' the cost problem.  Pay heed, because this is where the national Obamacare is headed.

The legislature will vote today to remove $ 200 billion in costs over the next 15 years.  How will they do this?  By simply telling hospital and doctors that they are now going to pay less for health care services.  Seems so simple doesn't it.  Why don't we do that with everything?  Heck why not just make health care free in Massachusetts by telling hospitals and doctors that we just won't pay anything at all.  That way, Massachusetts' version of Obamacare won't cost anyone anything.

Monday, July 30, 2012

ECB May Be Preparing to Cross the Rubicon

This week, the European Central Bank (ECB) is going to announce policy measures to bolster the Euro and the bond markets in Spain and Italy (among others).  All of the available measures "Europeanize" the problems of Spain and Italy.  The real significance of this will be a disaster for Germany.  This won't be apparent in the immediate aftermath of the ECB policy announcements.  The instant reaction will be joy in Euroland and rallies in world markets. 

That happiness will gradually give way to the realization that nothing has changed in Europe.  The problems in Greece, Spain, Italy, and Portugal will continue to get worse, though, briefly, yields on their sovereign debt will be lower.   The idea that simply bringing in one more guarantor will solve the problems of Europe is almost laughable.  The media and the world's economists should be ashamed of themselves for believing that there is anything that ECB can do by itself to solve Europe's problems.  This is the same absurdity as believing that the Fed can offset the damage to the US economy being done daily by the Obama Administration.

Europe's problems stem from overwhelming levels of sovereign debt, absurd entitlement programs, and stultifying regulation of business and employment.  Nothing the ECB is mulling have anything to do with these problems.  All Draghi and the ECB are proposing is a temporary liquidity fix that effectively takes reform off the table.  This has been the strategy from the beginning -- find a way to increase the amount of sovereign debt without addressing the root cause of the problems of the Eurozone.  The ECB is leading Europe down the road to economic and political disaster.  One has to wonder if the US will take the same path.

Sunday, July 29, 2012

Doctor Shortage -- Wonder Why?

The NY Times has an article by Annie Lowrey and Robert Pear today on the growing shortage of doctors in the United States.  Now, logically, if you had a shortage of something what would you think is causing it?  This article seems to have no clue.

Let me offer some suggestions.  Try medicare and medicaid for starters.  Whenever the government gets involved, people tend to head for the exit.  Basically medicare and medicaid funding is based upon the premise that doctors would prefer to lower their own standard of living in the future and take on more patients.  These programs assume that doctors would much prefer to deal with patients who cannot afford to pay them and have little or no incentive to take preventative health care seriously.

Why is there less interest in becoming a doctor?  The combination of a future dealing with folks that cannot and will not pay, a government that is supposed to pay but is broke, a job that is overburdened with government red tape and a lifetime of defending yourself in court against frivolous lawsuits, is enough to convince smart and talented people to opt into some other profession.

The future of American medical care can be seen in modern Greece.   Hospitals are corroding, patients cannot get care of any kind at any price, and basic medicines are sold mainly on the black market.  That's where government health care takes you.

Obama said during the election:  "Why is America the only county in the developed world who cannot afford health care for all of its citizens?"  Interesting question.  The answer:  UK, Canada, France, Germany, Italy, Spain, Greece, among others can't afford health care for all of its citizens either, unless there are enough bondholders out there to provide the funding.  But that only works until bondholders wise up, as they are now doing in Europe.

European countries cannot afford government health care.   No one can.

Only free markets can deliver quality health care.  Everything else is simply fraud and will in time produce the result that we see playing out today in modern Greece.

Friday, July 27, 2012

Sandy Weill is Wrong

Sandy Weill is wrong.  Separating commercial from investment banking is not a good idea.  Glass-Steagall was always foolish and the 1999 law that overturned it was an intelligent move.  The financial crisis was not related to the abolition of Glass-Steagall.

I agree that taxpayers should not backstop proprietary trading.  I agree 100 percent with that and yet I think the Volcker Rule is ridiculous.  How do you reconcile those views?  Simple, get the taxpayer out of the way.  It is one thing to guarantee $ 10,000 checking accounts, but the Fed guarantees, effectively, all the creditors of our banking system.  No creditor, including unsecured bond holders, has ever lost a penny when an FDIC guaranteed bank failed.  They bail out everyone, even though there is absolutely nothing in the law governing the FDIC guarantees that sanctions such activity.  The FDIC puts the taxpayer at risk -- after the fact -- with no legal authority whatsoever.  That's what Sheila Bair's FDIC does, in reality.  They extend the law to give themselves powers that the law never granted them.

What should be done is to roll back the FDIC guarantees to $ 10,000 per individual (not per account) and get the taxpayer out of the way.  Secondly, let investment banks, like JP Morgan, Citi, Goldman Sachs, whatever, fail when they can't make it.  Get the taxpayer out of the way.  Nothing justified the foolish TARP bailout.  It was bad policy then and would be bad policy now. (Whether or not it made money or not is irrelevant.  It created a moral hazard problem that will not go away easily).

By providing all these taxpayer guarantees, you rationalize the absurd regulatory regime that Dodd-Frank is ushering in.  It  might be simpler to just pass a law that says average Americans can no longer borrow money legally and if the average American wants a credit card, forget it.  That would be a lot cheaper and accomplish pretty much the same thing as Dodd-Frank.

Providing taxpayer guarantees where they are completely unnecessary and then regulating the financial service industry into morbidity simply sucks the life out of a free enterprise economy.  The result is what you see today in the American economy.  We have turned our banking system into a state run banking system modeled after the system that the Chinese are now trying to discard.  Good for them; our bad.

Thursday, July 26, 2012

The Fed and The ECB

It's amazing what people will believe.

With the US economy sledgehammered by an unfriendly legal, tax and regulatory environment, the Fed is going to be able to do something about it?  What?  Lower interest rates?  Buy bonds and expand the nation's indebtedness?  Are our debts too low that they need expanding by the Fed?  How do you convince a businessman to hire someone in this environment?  Have the Fed buy Treasury bonds?  Is this a serious discussion?

How about Europe?  Mario Draghi announces that the ECB will do everything in its power to keep the Euro from falling apart.  Really?  By lending countries more money?  Is that the ticket?

No macroeconomic solutions will solve the problems in the western economies.  The microeconomic situation is not favorable for hiring.  Employees are, relatively, far too expensive compared to other factors of production and compared to countries in Asia where labor is not loaded up with government goodies that makes them toxic to employers.  So, western labor is doomed.  It's that simple. 

The only macro policy available is to make drastic cuts in entitlement programs, something no one is even considering doing.  Absent cuts in entitlements, no western nation can survive bankruptcy.  It is simply a matter of time.

So what role do these central banks play?  In reality, they have about as much to do with the real economy as astrologers (who are much more entertaining).  Central banks can impact the money supply and that's about it.  Increases in liquidity don't help economies that are mired in sovereign debt problems, though it may buy some time until everyone figures out the total irrelevancy of the central banks.

There is nothing the ECB can do about the sovereign bankruptcies that are in Europe's future, except perhaps hasten Germany's inclusion in the list of those who will ultimately default.  The real reasons for the current problems are: 1) over-regulated and over-taxed economies; 2) entitlement programs for retirement and health care.  No one is discussing fixing either 1 or 2.  Since those are the main drivers of the current problems, it is easy to see where this is headed and the central bank conversations are beside the point.

Wednesday, July 25, 2012

Mandated Loan Forgiveness

The Obama Administration policy of forcing loan foregiveness on private market lenders began in the mortgage market and is now being extended into the student loan market. Such loan foregivess essentially rips up legitimate contracts and replaces them with the arbitrary whims of government, deciding who should pay up and who needn't bother.

 Lenders aren't stupid and they have memories. It is incredibly difficult now for middle America to get mortgages thanks to Obama Administration loan foregiveness policies. Why? Because lenders know that politicians can, at their pleasure, rip up the contracts and deny the lenders the payments they are entitled to.

So, why lend to the class of Americans that the Obama Administration seems to want to provide loan foregiveness for? No reason I can think of. The next group that will find themselves out of luck when seeking loans will be students, especially the demographic now escaping their obligations thanks to the President.

Friday, July 20, 2012

The Stock Market -- Where Now?

There is an old saying: "Don't fight the tape!"  -- meaning, of course, sometimes the stock market just wants to go up regardless.  That seems to be what we have been witnessing the past few weeks as the stock market has almost regained its high for the year.

Why and where next?  First, the economy.  The economy has weakened over the past few months and seems to have stalled.  GDP growth may be zero at this point.  There are some bright spots:  the energy sector is the brightest, housing has started to look better in most sections of the country. But, the trends are down everywhere else.   A slide into negative growth territory is probably ahead in the second half of the year.

What about Europe?  The steady slide into economic and political chaos continues across the Eurozone.  The only thing new is the strong possibility that Germany may join its sister states into the slide into disaster.  None of this has much to do with the Euro at this point.  The real issue is that debt market buyers seem poised to walk away from several sectors of the European sovereign debt market.  As that happens, Europe may descend into a new dark age.  Watch Greece and Spain for a preview of the future for much of Europe.  Thus far, there has been no reform and no austerity.  There have been government layoffs in Greece and Spain, but mostly because there is simply no money left to pay them.

What about the US business community?  This sector of the economy has not been this dispirited since the 1930s.  Large swaths of the American public no longer seem to believe in free markets.  That Obama still polls as high as he does is a clear indication that capitalism is in a fight for survival.  With half of all Americans now on some form of government support, the trend is ominous.  Given this atmosphere, the business community is frightened out of its wits and unlikely to provide the normal impetus to economic recovery that has appeared in every recession since the 1930s, except, of course, this one.

Without a recommittment to free markets, it is hard to see how the US situation gets any better.  The "tax the rich" themes of the Obama campaign, where "rich" is defined as someone making income of $ 200,000 per year, is hauntingly similar to Francois Hollande's call for 75 % tax rates in France.  Unemployment in France is now in double digits and rising and growth has turned negative.  Investors are looking for ways to hide income and assets, as opposed to looking for ways to deploy their assets in new businesses and ventures. 

Congressional Democrats believe that more food stamps and more unemployment compensation is the way to promote economic growth.  You wonder if they are kidding about this.  The President thinks business can grow and prosper without entrepreneurs.  He seems to believe that people should risk their capital without any hope of economic reward.  Receiving rewards for risking capital seems to be viewed as a criminal activity by the current occupant of the White House.

With this backdrop, stocks seem fully priced even though earnings reports are favorable.  Unless and until government policy becomes more tolerant of free markets, it is hard to see anything but trouble ahead for both the stock market and the American economy.  I would continue to avoid the stock market in this unfriendly environment.

Wednesday, July 18, 2012

Tax What You Wish to Discourage

Taxing activities means you wish to discourage or perhaps even eliminate them.  Cigarette and liquor taxes are a good examples.  Is their purpose revenue or to discourage undesirable activity?  So, why does Obama want higher taxes on the rich?  To discourage?  To eliminate?

One clear reason not to tax the rich is that you want the economy to improve or you want to lower the national debt.  Taxing the rich will actually have the exact opposite effect.

So, the Obama argument is that we should extend the Bush tax cuts for the middle class only if we can guarantee a weaker economy than we have now and offset the middle class tax cuts with lower revenues (though higher rates) from the rich that will increase the national debt.

And half of the nation wants to vote for this.

Monday, July 16, 2012

How to Prolong Economic Stagnation

The coming 'fiscal cliff,' by itself,  is enough to bring the American economy to its knees.  There is considerable evidence that the process is underway.  The American economy shows virtually no economic growth at all and employment gains are miniscule.

 "If you've got a business, you didn't build that...somebody else made that happen."  Now who would you think would say that?  Try the President of the United States!  Obama made that statement yesterday.  That pretty much sums up his attitude and understanding of free enterprise and explains the underlying rationale for his economic policies.

Obama's hatred of capitalism and free enterprise is apparently boundless.  His policies, his rhetoric, and his body language exhibit this hatred every day.

Meanwhile the media is focused on non-issues that underscore the media's contempt for capitalism.  The "libor scandal" is a joke, based upon a confusion.  Unfortunately, the joke is on the economy as banks continue to spend more time with their lawyers than with their customers.  Meanwhile, the media has decided that the presidential election should be a referendum on whether or not private equity is an ethically-based business.  Who cares about unemployment and economic collapse, when we can focus on how terrible it is that there are rich people out there?

All of this means there is no economic growth in our future and the economy is likely headed for a generation of economic stagnation with the ultimate destination something like the morass that is modern day Europe.

Sunday, July 15, 2012

France in Denial

Francois Hollande, the new Socialist leader of France, is the new Obama of Europe.  Peugeot announced last week that they were laying off 10,000 employees in order to "return to profitability."  Naturally, Hollande responded with a government inquiry and statements that implied that the government would never permit the layoffs, by this private company, to take place.  And you wonder why no one wants to hire anyone in France?

If that isn't enough, Hollande responded that labor costs in France, now averaging 34.20 Euros per hour were not all that high.  Do the numbers.  34.20 times a 35 hour work week (mandated by French law) means 1,197 euros per week.  With four weeks off per year, (also mandated by French law), that means hiring someone in France cost 57,456 euros per year, or approximately $ 69,000 per year.  Gee, at that price, why not load up?

Good luck with that.  An 11 percent unemployment rate is just the beginning.  Look for a bull market in France in the unemployment numbers!

Wednesday, July 11, 2012

The Libor Scandal -- More on Killing Recovery

The so-called libor scandal is ridiculous.  Only people who do not understand what libor is and how it is calculated see this as a scandal.  Barclays did nothing wrong or egregious.  Now, of course, public pension funds -- probably the most corrupt and poorly managed institutions on the planet -- are huddling with their lawyers to sue the major banks over "managing" libor.

Libor is not a market interest rate.  It never has been.  It is an administered rate by definition, like the prime rate of old.  It is what any bank wants it to be and it always has been.  There is nothing in law or in practice that requires a bank to submit any particular libor rate.  It is whatever each bank thinks it is, by definition.  Those concerned about 'manipulation of libor' are simply showing their ignorance.  There has always been a conflict of interest in libor rate setting as their has always been a conflict of interest in prime rate setting.  Anyone unaware of this has not been paying attention.  The timing of this so-called scandal is to give the politicians another opportunity to paint the commercial banks as bad guys.

This is one more witchhunt by politicians who are driving their respective countries over the cliff.  Bankrupting their countries with foolish policies, they turn their eyes toward imaginary villains and victims.  Meanwhile, commercial lending grinds to a halt while commercial banks pull in their horns and huddle with their lawyers.  And these self same politicians wonder why capitalism can't deliver the goods.  The truth is that capitalism could deliver the goods if it did not have to be bogged down in nonsensical legal and regulatory battles.  The loser, once more, is the average person who will pay higher interest rates and have less access to credit, thanks to our political 'reformers.'

Meanwhile, the CFTC can't seem to provide the most basic regulatory enforcement as more then $200 million in customer money can be added to the $1.6 billion that disappeared in the MF Global disaster.  Where is the CFTC?  Where is the outrage?  Why does the Obama Administration have no interest in enforcing laws that have been on the books for more than four decades?  The CFTC is a disgrace.

So, attention by the media heads focuses on the so-called 'libor scandal' and ignores the looting of nearly $ 2 billion in customer accounts supposedly overseen by the CFTC.  No wonder the economy is in shambles and people are losing confidence in American institutions.

Monday, July 9, 2012

Misguided Debate

Today's economic malaise in the United States is a late chapter in a book that started with the housing bubble of the decade that preceded the fall of 2008.  Was this caused by one political party or another?  This is an important question, if one intends to adopt intelligent policies to deal with the bust that followed the bubble.

Admittedly, the government's pro-home-ownership policies enacted into law over the years in bi-partisan fashion helped exacerbate the home ownership boom.  But, would there have been no housing boom without Fannie and Freddie and favorable tax treatment of housing?  The boom might not have reached such extremes without government policy, but the bubble itself probably would have occurred anyway.  Bubbles are part of life.  They have happened and they will continue to happen.

When you are in a bubble, you never realize it.  Instead, it seems that you are doing something intelligent, something everyone ought to do.  Bubbles always have that 'bandwagon' feel and, along the way, they are exhilarating.  Good things happen.  Wealth increases, optimism surges, everyone's a winner!  It never seems wrong, when you are cruising along in a bubble.  "This time it's different."

But, it never is.  Inevitably extreme optimism begins to have self doubts and eventually the crash comes and disaster.  Did someone cause the disaster?  Was it greed?  Did some evil people running banks and other financial institutions do the damage?  The answer is no.  When bubbles unwind, you get crashes.  This is not the result of bad guys doing bad things, although one can always find bad guys doing bad things.  But, they are largely irrelevant.  Bubbles and crashes can occur without bad guys doing bad things.  This is a lesson that the citizenry needs to understand.  Politicians will never get it, because they are incented to blame the other political party for whatever goes wrong.  That won't change.

Left to themselves, crashes end quickly and very strong, vibrant economic recoveries ensue.....unless, policies are enacted to punish bad guys and "reform" something.  Such "reform" policies are always misguided and always serve to abort the vigorous economic recovery that would naturally occur during their absence.  We are in such a period.  The combination of TARP, the stimulus bill, Dodd-Frank, Obamacare, the new EPA attitude, Bernanke's monetary policies, and the regulatory climate have all served to retard any real hope of true economic recovery.

These kind of policies caused the Great Depression to be Great.  The depression that began in 1929 never entered a sustained recovery until government policies began to be rolled back in the late 1930s as the country began to mobilize for the coming war, by lifting restrictions on the private sector.  Ten years of economic depression was the price that Americans paid for foolish policies in the 1930s.  Now eight decades later, we are seeing that nothing was learned.  The 1980s are a textbook case of how to recover from an economic collapse, but no one is following that successful playbook. 

Economic recovery begins when businesses regain their optimism.  That will never happen as long as government policy is driven by a need to see businesses as evil and businessmen as greedy and to focus on transferring wealth instead of creating it.  The government needs to get out of the way.  As long as the heavy hand of government maintains its chokehold on free enterprise, there will be no real economic recovery and America will continue down the European pathway.  We need fewer regulations not more; we need more private commercial lending not less; we need less government workers not more; we need lower taxes, not higher. And we need to make it a matter of government policy that no business or bank is too big to fail.  Let them fail.  Let equity and bondholders take their punishment and leave taxpayers out of it.

The current debate about who caused what is a silly debate.  Booms and busts are an essential part of free enterprise.  Killing off booms and busts will kill off free enterprise.  The result of reform and economic stimulus will continue to be economic stagnation.  Bring back the boom!