It’s sad that the case for economic growth needs to be made. But it seems that too many people have lost sight of why growth is good as they fret about issues such as the environment and inequality (both of which growth actually helps).
In response, AEI’s Values & Capitalism series has published a little book, Economic Growth: Unleashing the Potential of Human Flourishing, that explores the benefits of growth and addresses common concerns regarding how growth impacts the poor, the environment, and culture.
Think about it: In real terms, the average income of Americans over the past two centuries went from $2,000 per person to $50,000. Here is the book’s formula for growth:
Governments seeking to unlock long-term growth should eschew command-and-control policies. Instead, they should craft economic institutions that reward all types of investment in physical and human capital, and that help markets function securely and inexpensively. For instance, an impartial judicial system that defines and enforces clear property rights gives firms and individuals the right incentives for work and investment; they know the courts will adjudicate property claims and contract disputes fairly, and uphold the rule of law.
Other key institutions include a stable, relatively corruption-free government, one that is able to provide for national defense and other public goods; a market system for the production and distribution of most goods and services, to provide monetary incentives for efficient allocation of resources and creation of jobs and incomes without need of government control or subsidy; and a financial system, modestly regulated for safety and economic growth paired with a sound currency, to encourage savings and to channel those savings into loans for large and small firms.
The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid.
Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.
Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.
When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.
THIS dyspeptic prospect results from the fact that we are now state-wrecked. With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy…
But don’t despair: there are plenty of ways to slow down even an inherently strong economy. History offers plenty of examples. But as more contemporary models, take your pick of successfully ruined economies — the Venezuelan, the Cuban, the North Korean, the Greek, the Italian, the Portuguese, or pretty much any from Mediterranean Africa to the Cape of Good Hope. There are certain commonalities about why and how they fail. Let’s review some of them.
The state can never be too big. Ensure that it is unaccountable and intrusive, in constant need of more money and more targets to regulate. The more government, the more people are shielded from the capital-creating, free-market system. Think the DMV or TSA, not Apple. The point is for an employee to spend each labor hour with less oversight, while regulating or hampering profit-making, rather than competing with like kind to create material wealth. Regulatory bodies are a two-fer: the more federal, union employees, the more regulations to hamper the private sector. The more federal mandates, like new healthcare requirements and financial reporting, the less employers profit and the fewer employees they can hire. Washington should be a growth city, absolutely immune from the downturn elsewhere, a sort of huge and growing octopus head with decaying tentacles. State jobs should be redefined as something partisan — whose expansion is noble and helps the helpless, and whose contraction is evil and the design of a bitter and aging white private-sector class.
On the other end of the equation, ensuring 50 million on food stamps, putting over 80,000 a month on Social Security disability insurance, and extending unemployment insurance to tens of millions all remind the jobless that life is not too bad (thanks to the government), and certainly a lot better than working at a “low-paid” job that equates to giving up federal support. To paraphrase Paul Krugman, the more and the longer the jobless receive, the less likely they are to take chances looking for a job. That too might be again a good thing if you wish to slow down the economy. In general, even Arnold Toynbee, a man of the Left, acknowledged that the greedy drive of the scrambling private sector was not as pernicious to civilizations as the collective ennui produced by vast cadres of lethargic and unaccountable public “servants” doing supposedly noble work.
To ensure capriciousness and unpredictability for both suspect employers and investors, make the law malleable, even unpredictable from day to day, in the style of an Argentina or Venezuela. Redefine the law as what is deemed socially useful. For federally subsidized bankrupt auto companies, creditors should be paid back on the basis not of contractual law, but of nobility — why borrow to give a rich man a return on his superfluous investment, when a retired auto worker might have to pay a higher healthcare premium? Boeing wants to open a non-union plant in South Carolina? Have the NLRB try to stop it (and illegally staff the NLRB with recess appointments). Illegal aliens? They are neither illegal nor aliens, as federal immigration law is itself a capricious construct. Does the Senate really have to present a budget? Do presidents need to meet budget deadlines? Who said there is a Defense of Marriage Act?
What law says that gays cannot serve overtly in the military or women (more…)
Per Thomas Sowell’s column below, big government can make big mistakes. China’s government created policies that have created a real estate boom (with bust to follow) that dwarfs anything else we’ve seen.
While poor Chinese scrape bricks to assemble hovels, there are thousands of unused condos they cannot afford. A market economy would not produce such a massive imbalance.
Watch on 60 Minutes:
Mitt Romney was derided (Gaffe!) by the media last summer for observing that culture in the Mideast has plenty to do with Arab poverty.
He was right. Hernando de Soto notes in the WSJ how property rights are virtually nonexistent in many Arab nations:
….Research in the region conducted by my organization, the Peruvian-based Institute for Liberty and Democracy, has found strong evidence that the Arab Spring revolution was rooted in a desire for what in the West would be called a market-based economy. Arabs and others may not always use that phrase, but their desire for the economic security that comes with property rights and other rights is a force that the foes of individual freedom will not easily overcome. The challenge is to harness that force by offering people of the region the legal protections and security that are the bedrock of all successful economies.
Recall the catalyst of what became the Arab Spring: the self-immolation in January 2011 of Mohamed Bouazizi, a Tunisian fruit vendor protesting the expropriation of his merchandise. According to our estimates, more than 200 million people throughout the Middle East and North Africa depend on income from operating businesses or occupying property in the informal economy—without the protection of the rule of law.
That means the entrepreneurs who want a legal system with property rights like those in the West outnumber al Qaeda membership in the region, often estimated at up to 4,000 core activists, by a ratio of about 50,000 to one.
Some other research highlights:
Mohamed Bouazizi’s desperate protest wasn’t unique. We found that at least 63 more men and women—in Tunisia and also in Algeria, Egypt, Morocco, Saudi Arabia, Syria and Yemen—followed Bouazizi’s example within 60 days of his death. That was the critical period during which governments were toppled or dramatically shaken. Forty percent of these protesters survived, and some of them are contributing to our research on the difficulty of living in societies without property rights or other freedoms.
All 64 of the self-immolation protesters were engaged in extralegal businesses, and they made their dramatic statements for economic rather than political or other reasons. In filmed footage of real-estate owner Fadoua Laroui in Morocco, for instance, she declares that she is protesting “economic exclusion” just before setting herself on fire in front of a municipal building on Feb. 23, 2011. In an on-camera interview, Mohamed Bouazizi’s brother, Salem, told me that Mohamed set himself alight because he believed that “the poor also have the right to buy and sell.”
The principal reason that self-immolators gave for their acts was “expropriation”—governmental seizure of property. A common view of Bouazizi’s death is that he killed himself because a policewoman slapped him and robbed him of his dignity. No slap in the face drives five dozen people to try to burn themselves to death. Every survivor without exception has told us it was about desperation over property.
We calculated the value of Bouazizi’s confiscated assets to be $225. Yet when legal property rights don’t exist, the damage goes far beyond money. Because Bouazizi wasn’t protected by law, his ability to conduct business depended not on an enforceable right but on the goodwill of local authorities. Once these authorities withdrew their protection and seized his goods, Bouazizi was ruined. There was no legal system in place by which he could hope to recover from bankruptcy.
Under contract with the Egyptian government, and with funding from the U.S. Agency for International Development, my institute undertook a five-year study that involved 113 Egyptian professionals working with us to ascertain the size of the gap between recorded property—including factories, cars and land—and the actual amount of property in those and other sectors. We found that 82% of businesses and 92% of land holdings were unrecorded and thus unprotected by the rule of law…
This artificially condemns all business to be small business. Poverty can be a self-inflicted wound.
Walter Williams explains why the minimum wage hurts those it is meant to help. No matter how many times you explain this to liberals, they will never get it.
Obama simply doesn’t care: it makes him seem generous and the GOP mean.
…President Barack Obama proposed raising the minimum wage from $7.25 an hour to $9 an hour. That would be almost a 25 percent increase. Let’s look at the president’s proposal, but before doing so, let’s ask some other economic questions.
Are people responsive to changes in price? For example, if the price of cars rose by 25 percent, would people purchase as many cars? Supposing housing prices rose by 25 percent, what would happen to sales? Those are big-ticket items, but what about smaller-priced items? If a supermarket raised its prices by 25 percent, would people purchase as much? It’s not rocket science to conclude that when prices rise, people adjust their behavior by purchasing less.
It’s almost childish to do so, but I’m going to ask questions about 25 percent price changes in the other way. What responses would people have if the price of cars or housing fell by 25 percent? What would happen to supermarket sales if prices fell by 25 percent? Again, it doesn’t require deep thinking to guess that people would purchase more.
This behavior in economics is known as the first fundamental law of demand. It holds that the higher the price of something the less people will take and that the lower the price the more people will take. There are no known exceptions to the law of demand. Any economist who could prove a real-world exception would probably be a candidate for the Nobel Memorial Prize in Economic Sciences and other honors.
Dr. Alan Krueger, an economist, is chairman of the president’s Council of Economic Advisers. I wonder whether he advised the president that though people surely would be responsive to 25 (more…)
First the housing bubble. Now we have two more bubbles to fret about: student loan debt and muni debt.
The next financial market meltdown may already be brewing: not in the housing market, this time, but in municipal bonds. Greedy bankers, opportunistic politicians and hobbled regulators are putting a time bomb in the muni market that could set off another devastating crash.
California is leading the way.
It is starting out innocently enough. Looking to expand a number of aging school facilities but loath to raise the taxes necessary to pay for it, California cities have opted to fund school construction projects with capital appreciation bonds, which allow school districts to borrow money now while putting off payments for decades. It sounds like a great deal, but it has one major drawback: The interest rates involved push the eventual price tag to many times the original amount—sometimes as much as ten times more. The New York Times has the story:
In San Diego, property owners owe $630 million on a $164 million bond. For theFolsom Cordova Unified School District, a $514,000 bond will cost $9.1 million.
And in the most expensive case yet, the Poway Unified School District borrowed $105 million to finish modernizing older school buildings, which local property owners will be paying off until four decades from now at an eventual cost of nearly $1 billion. Because payments on the bond do not start for 20 years, current school board members faced little risk of resistance from property owners. [...]
In 2009, as the housing market crash drove down tax revenues for schools and state education financing was cut, California lifted its requirement that long-term bonds be paid off at approximately the same rate each year, opening the door for bonds that delay payments for 20 years.
This is irresponsibility on steroids, but it represents a dream come true for crony capitalists and Wall Street I-bankers. Fat fees, enormous interest, and the taxpayers won’t even know what hit them when the whopping bills come due.
But everyone involved should be put on notice: While not all of these bond issues are equally bad, as a class these bonds are toxic and likely to bring serious pain to everyone connected to them. Some of the deals already done will likely blow up in the future; bankruptcy will loom when the pension squeeze and the bond bomb both hit at full force.
But the worst danger is not from the relatively small number of deals already done but in the potential for this kind of finance to spread. Like the bad ideas that started off small but grew until they were big enough to blow up the mortgage market, dangerous practices can become more common and widespread in municipal finance. More politicians will catch on to the magic of long term bonds that bring benefits now but will savage your town a couple of decades on. Other state legislatures will be pressured to follow California’s rash venture into muni (more…)
A favorite “progressive” trope is that America’s middle class has stagnated economically since the 1970s. One version of this claim, made by Robert Reich, President Clinton’s labor secretary, is typical: “After three decades of flat wages during which almost all the gains of growth have gone to the very top,” he wrote in 2010, “the middle class no longer has the buying power to keep the economy going.”
This trope is spectacularly wrong.
It is true enough that, when adjusted for inflation using the Consumer Price Index, the average hourly wage of nonsupervisory workers in America has remained about the same. But not just for three decades. The average hourly wage in real dollars has remained largely unchanged from at least 1964—when the Bureau of Labor Statistics (BLS) started reporting it.
Moreover, there are several problems with this measurement of wages. First, the CPI overestimates inflation by underestimating the value of improvements in product quality and variety. Would you prefer 1980 medical care at 1980 prices, or 2013 care at 2013 prices? Most of us wouldn’t hesitate to choose the latter.
Second, this wage figure ignores the rise over the past few decades in the portion of worker pay taken as (nontaxable) fringe benefits. This is no small matter—health benefits, pensions, paid leave and the rest now amount to an average of almost 31% of total compensation for all civilian workers according to the BLS.
Third and most important, the average hourly wage is held down by the great increase of women and immigrants into the workforce over the past three decades. Precisely because the U.S. economy was flexible and strong, it created millions of jobs for the influx of many often lesser-skilled workers who sought employment during these years.
Since almost all lesser-skilled workers entering the workforce in any given year are paid wages lower than the average, the measured statistic, “average hourly wage,” remained stagnant over the years—even while the real wages of actual flesh-and-blood workers employed in any given year rose over time as they gained more experience and skills…
These three factors tell us that flat average wages over time don’t necessarily support a narrative of middle-class stagnation. Still, pessimists reject these arguments. Rather than debate esoteric matters such as how to properly adjust for inflation, however, let’s examine some other measures of middle-class living standards.
No single measure of well-being is more informative or important than life expectancy. Happily, an American born today can expect to live approximately 79 years—a full five years longer than in 1980 and more than a decade longer than in 1950. These longer life spans aren’t just enjoyed by “privileged” Americans. As the New York Times reported this past June 7, “The gap in life expectancy between whites and blacks in America has narrowed, reaching the lowest point ever recorded.” This necessarily means that life expectancy for blacks has risen even more impressively than it has for whites.
Americans are also much better able to enjoy their longer lives. According to the Bureau of Economic Analysis, spending by households on many of modern life’s “basics”—food at home, automobiles, clothing and footwear, household furnishings and equipment, and housing and utilities—fell from 53% of disposable income in 1950 to 44% in 1970 to 32% today.
Obama’s radio address excerpt:
“Here in America, we know the free market is the greatest force for economic progress the world has ever known. But we also know the free market works best for everyone when we have smart, commonsense rules in place to prevent irresponsible behavior,” Obama began.
This from Mr. “You Didn’t Build It”?
“That’s why we passed tough reforms to protect consumers and our financial system from the kind of abuse that nearly brought our economy to its knees.
You mean the federal government won’t induce/compel lenders to make bad loans again?
And that’s why we’ve taken steps to end taxpayer-funded bailouts, and make sure businesses and individuals who do the right thing aren’t undermined by those who don’t.
Solyndra ring a bell? His list of taxpayer funded flops is long.
And if he means Dodd-Frank, its reforms unwittingly enshrine “too big to fail.”
“But it’s not enough to change the law – we also need cops on the beat to enforce the law. And that’s why, on Thursday, I nominated Mary Jo White to lead the Securities and Exchange Commission, and Richard Cordray to continue leading the Consumer Financial Protection Bureau.
To date, the Obama administration has not prosecuted one single criminal case against the crooks on Wall Street.
Big talking guy, that Obama.
If you’re concerned about corporate crime, 2012 looked like a pretty successful year for the good guys.
The Thousand Oaks biotech giant Amgen paid $762 million in fines and penalties and pleaded guilty to a federal charge related to illegal marketing of its anemia drug Aranesp. Britain’s GlaxoSmithKlineand Illinois-based Abbott Laboratories paid $3 billion and $1.5 billion in government penalties, respectively, in connection with their off-label promotions of blockbuster drugs. Glaxo’s was the biggest drug company settlement in history.
The global bank HSBC paid a record $1.92 billion to settle federal accusations that it operated a huge money-laundering scheme for Mexican drug dealers and Middle Eastern terrorists. BP agreed to pay $4.5 billion and plead guilty to 11 felony counts in connection with the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. It was the biggest federal criminal penalty ever.
To the companies, however, these big numbers are just chump change. Typically they don’t even represent repayment of ill-gotten gains — more often merely the cost of doing business. And to the public, they’re insults piled atop the injuries caused by the firms’ wrongdoing.
“These fines are a carny act to keep the rubes happy,” according to William K. Black, who was a thrift regulator during the savings and loan crisis of the 1980s. “It’s cynical — the art is to make the amount sound large but make sure that it has no material effect.”
What might really get the attention of the CEOs and other top executives of lawbreaking companies would be some time in the hoosegow. Does that sound quaint? If so, it’s because not a single high-ranking executive of any of the companies mentioned above faced indictment or was even forced to step down.
The absence of criminal cases against perpetrators of the 2008 financial crisis is a continuing scandal. It’s not as though there haven’t been suitable candidates for the docket. Angelo Mozilo, the chairman of Countrywide Financial, was the face of mortgage company excesses in the housing bubble…
…We’re also seeing Clinton nostalgia in a more concrete sense as we barrel towards the fiscal cliff, which both parties set up in two previous rounds of negotiations over spending and tax policies. Hearkening back to gauzy memories of prosperity in the late 1990s, Democrats have argued in the last few months that a return to Clinton-era tax rates won’t hurt the economy.
That isn’t exactly a new argument, but it is one that Democrats have used more frequently as Republicans argue that tax hikes will damage the currently stagnant economy and already-anemic job creation. Bill Clinton raised taxes and the economy grew in the late 1990s – so why not do the same thing again?
That argument ignores a lot of the context in both the current economy and the economy of the 1990s. As we approached the middle of the decade, the Internet’s economic potential began to explode – and investment followed, and the economy leaped into high gear. So much capital flowed into this brand-new market that the trend became irrational, producing the dot-com bubble that popped as Clinton was leaving office.
This produced the recession of 2000-1, which became exacerbated by the 9/11 attacks on the World Trade Center and the Pentagon. The Bush-era tax rates reversed the recession and produced solid economic growth for more than three years, as well as increases in federal income-tax revenue and decreases in the federal deficit, as this chart from Investors Business Daily based on White House data demonstrates:
…That bubble also started in the Clinton era, albeit with plenty of assistance from Republicans who wanted to be seen as promoting home ownership and fairness. Congress under control of both parties gave Fannie and Freddie carte blanche to create mortgage-backed securities on bad loans in order to fund this bubble. When housing prices inevitably snapped, after a ten-year holiday from their traditional linkage to the rate of inflation, vast sums of imaginary wealth disappeared nearly overnight.In other words, the prosperity of the Clinton years was in significant part a fiction based on irrational market behavior, boosted in one instance by significant distortion introduced by government policy. That’s also true for a good part of the Bush-era prosperity, as the irrational housing valuations lured homeowners into the habit of treating their homes as ATMs to cash out on rapidly-rising equity, which crashed out in 2008.
But the deficit crisis didn’t come from a reduction in federal income-tax revenue from George Bush’s tax policies, as we can see above. As far as relating it today, we have no new emerging market on the scale of the Internet on which to count for future economic growth, at least not at the moment, to balance out the constrictive impact of seizing more capital through tax hikes.
Conservatives have argued forever that free market capitalism is the greatest anti-poverty program.
It’s refreshing to hear Bono express this idea.
Of course, because human being are not equally talented or ambitious, the engine of capitalism creates wealth gaps, something progressives abhor. Obama tops that list.
I wish that Mitt Romney could have been a better explainer. Just one teachable moment like this below could have done wonders.
The Twinkie, it turns out, was introduced way back in 1930. In our memories, however, the iconic snack will forever be identified with the 1950s, when Hostess popularized the brand by sponsoring “The Howdy Doody Show.” And the demise of Hostess has unleashed a wave of baby boomer nostalgia for a seemingly more innocent time.
Needless to say, it wasn’t really innocent. But the ’50s — the Twinkie Era — do offer lessons that remain relevant in the 21st century. Above all, the success of the postwar American economy demonstrates that, contrary to today’s conservative orthodoxy, you can have prosperity without demeaning workers and coddling the rich.
Not taking from someone is coddling in Krugman’s fevered brain.
Consider the question of tax rates on the wealthy. The modern American right, and much of the alleged center, is obsessed with the notion that low tax rates at the top are essential to growth. Remember that Erskine Bowles and Alan Simpson, charged with producing a plan to curb deficits, nonetheless somehow ended up listing “lower tax rates” as a “guiding principle.”
Yet in the 1950s incomes in the top bracket faced a marginal tax rate of 91, that’s right, 91 percent, while taxes on corporate profits were twice as large, relative to national income, as in recent years. The best estimates suggest that circa 1960 the top 0.01 percent of Americans paid an effective federal tax rate of more than 70 percent, twice what they pay today.
Here is what Krugman forgets about America’s prosperous 1950s:
- We triumphed economically because Europe and Japan had been flattened during WWII. We had no serious competition.
- The United States had a population eager to get on with life: buying homes, having babies etc. There was massive pent-up demand.
- The USA’s industrial companies, having turned on a dime during the war to produce war materiel, were geared up and ready to go when peace returned.
In brief, the 1950s were a bubble. Intelligent analysis does not take bubbles as examples to prove a rule.
It’s a bitch watching Obama get away with blatant lies. He blamed the 2008 mortgage meltdown on Bush and some vague policy. No one ever called him on it. Not the media (natch), nor Romney.
But one simple fact remains: if individuals had not borrowed money they could not repay, there would have been no meltdown. And banks would not have made bad loans if not induced/coerced by the federal government to do so. Both created opportunities for Wall Street to cash in.
Have the Feds learned? No.
FHA gives those who defaulted on homes another chance
After two foreclosures and two bankruptcies, Hermes Maldonado is as surprised as anyone that he’s getting a third shot at home ownership.
The 61-year-old machine operator at a plastics factory bought a $170,000 house in Moreno Valley this summer that boasts laminate-wood floors and squeaky clean appliances. He got the four-bedroom, two-story house despite a pockmarked credit history.
The last time he owned a home, Maldonado refinanced four times and took on a second mortgage. He put a Cadillac and Mercedes-Benz C300W in the driveway and racked up about $45,000 in credit card bills and other debts. His debt-fueled lifestyle ended only when he was forced into bankruptcy.
His reentry into home ownership three years later came courtesy of the Federal Housing Administration. The agency has become a major source of cash for so-called rebound buyers — a burgeoning crop of homeowners with past defaults who otherwise would be shut out of the market.
“After everything that happened, thank God I was able to buy another house,” Maldonado said in Spanish. “Now, it’s good because the interest rates are low and there are lots of homes.”
The FHA, which backs nearly 8 million loans, is helping rebound buyers recapture the American dream, boosting the housing market in the process. But that’s touched off a fierce debate about the financial and ethical wisdom of bankrolling borrowers who contributed to the last housing bubble — and the potential cost to taxpayers.
The agency has suffered deepening losses in the last three years that have put it under enormous scrutiny.
Created during the Great Depression to revive the devastated housing market, the FHA doesn’t originate loans. It guarantees mortgages made by banks in exchange for insurance premiums. The agency now insures more than $1 trillion worth of homes. This year it has backed roughly 14% of all mortgage originations, according to the trade publication Inside Mortgage Finance…
John Tamny at Forbes writes that the dire prediction of a lending freeze in 2008 was based on stale, and hysterical, reasoning.
…Put plainly, banks in the U.S. have long since been eclipsed by alternative sources of finance when it comes to providing companies with credit. Putting it in numeric terms in the present, in their excellent new book Freedom Manifesto Steve Forbes and Elizabeth Ames write that U.S. companies have $1.2 trillion in bank loans outstanding, whereas their European counterparts have over $6 trillion. Contrary to popular opinion, the failure of one or many banks in 2008 would not have led to a collapse in credit for solvent companies.
To understand why, we must consider what economists refer to as the “substitution effect.” Basically, shortages of anything are often made up for by new market entrants. Banks are no different in this regard.
Back in the summer of 2010, with its small-business clientele suffering from tighter than normal credit, Walmart’s Sam’s Club subsidiary announced its willingness to provide its customers with $25,000 lines of credit. Walmart has for years tried to get into banking, absurd regulations about new entrants arguably kept it from purchasing some of the insolvent banks in ’08, but even without a banking charter, Walmart was able offer up credit at a time when banks weren’t able to.
Much the same is occurring now at Amazon.com. Traditional banks remain careful about lending, but Amazon, flush with cash, is eagerly substituting for the banks. Through its Amazon Capital Services subsidiary, Amazon is helping the sellers on its website to access credit that is in short supply at the moment from banks.
Getting into specifics, the Wall Street Journal recently reported on Lisa Zerr, owner of Yankee Toy Box, and her urgent need to secure credit in order to upgrade her inventory ahead of the holiday shopping season. Yankee Toy Box does a lot of business on Amazon, and she’s since borrowed from Capital Services $38,000 in July, and then $13,000 last month.
It should be stressed that Amazon is one of myriad companies that uses its balance sheet to provide banking services to customers. Not a traditional bank, it acts as a bank, and is a substitute for a limping sector.
Amazon’s story naturally exposes as fraudulent the hysterical assertions made by politicians, Fed Chairman Bernanke, and numerous members of the commentariat who said absent bank bailouts in ’08, the economy would disappear. They were wrong then, and they’re wrong now…
Some links from open tabs:
Western Lifestyle Disturbing Key Bacterial Balance? — more on the science of our guts. I see more on this subject all the time.
Welcome to the Modern-Day Depression — Publisher and onetime Obama supporter Mort Zuckerman spells out the disaster of the past four years.
How the Elites Built America’s Economic Wall — from Bloomberg news.
Testing Obama’s Promise of Transparency — also from Bloomberg. Hint: he flunked.
The recently discovered tape on which Barack Obama said back in 1998 that he believes in redistribution is not really news. He said the same thing to Joe the Plumber four years ago. But the surfacing of this tape may serve a useful purpose if it gets people to thinking about what the consequences of redistribution are.
Those who talk glibly about redistribution often act as if people are just inert objects that can be placed here and there, like pieces on a chess board, to carry out some grand design. But if human beings have their own responses to government policies, then we cannot blithely assume that government policies will have the effect intended.
The history of the 20th century is full of examples of countries that set out to redistribute wealth and ended up redistributing poverty. The communist nations were a classic example, but by no means the only example.
In theory, confiscating the wealth of the more successful people ought to make the rest of the society more prosperous. But when the Soviet Union confiscated the wealth of successful farmers, food became scarce. As many people died of starvation under Stalin in the 1930s as died in Hitler’s Holocaust in the 1940s.
How can that be? It is not complicated. You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated. Farmers in the Soviet Union cut back on how much time and effort they invested in growing their crops, when they realized that the government was going to take a big part of the harvest. They slaughtered and ate young farm animals that they would normally keep tending and feeding while raising them to maturity.
People in industry are not inert objects either. Moreover, unlike farmers, industrialists are not tied to the land in a particular country.
Russian aviation pioneer Igor Sikorsky could take his expertise to America and produce his planes and helicopters thousands of miles away from his native land. Financiers are (more…)
Mr. Obama has had so much success pinning the blame on George W. Bush that he’s even trying to tie the crisis to Mr. Romney. This takes some nerve considering that Mr. Romney was in private life at the time and had no policy-making role before the mortgage meltdown. Yet the president and his aides routinely make the fact-free claim that the GOP candidate intends to “let Wall Street write its own rules again.”
Unlike Mitt Romney, Mr. Obama did have a policy-making role, serving as a U.S. Senator beginning in January 2005. The media custom has been to give Mr. Obama a pass for the 3.5 years he spent as a senior elected official before the crisis hit. It’s ironic that he’s just about the only one of the 100 senators serving at the time who’s never really had to answer for the disaster or explain why he did nothing to prevent it.
To be fair, a list of the 20 Members of Congress most responsible for the crisis would not include Barack Obama. He didn’t create Fannie Mae or Freddie Mac. He simply went along as the Democratic caucus blocked GOP Sen. Richard Shelby’s effort to rein in these mortgage monsters.
Similarly, Mr. Obama didn’t invent the idea that the Securities and Exchange Commission should oversee not just stock brokerages but their parent companies as well. That decision was made at the SEC in 2004 and allowed the Wall Street giants to rely on their own risk models and operate with catastrophic levels of debt. Mr. Obama simply endorsed this policy when he co-sponsored the “Industrial Bank Holding Company Act” in 2007.
Recognizing the SEC as an “appropriate federal supervisory agency,” akin to a prudential bank regulator, was one of the signature policy mistakes of the pre-crisis era. But that policy was already being implemented by the time Mr. Obama signed his name to it.
The financial crisis likely would have occurred with or without Mr. Obama in the Senate. He was generally a non-factor in the business of legislating as he spent much of his time preparing to seek his next job.
But however modest his contribution, he did help create the mess he now blames on others.
The French elected a socialist bozo, and surprise, he’s behaving like a clown.
For a man who’s staked his presidency on restarting France’s economy, François Hollande seems oddly averse to the stuff that fuels growth. Last week, he announced his government will levy €20 billion in new taxes. Now he says he will not permit hydraulic fracturing for natural gas.
France imports 98% of the natural gas it uses each year. Yet according to U.S. Department of Energy data, the country’s technically recoverable shale gas is second only to Poland’s in Europe, and equal to more than a century’s worth of French gas consumption. Those numbers are still tentative, but the short history of shale-gas exploration suggests preliminary estimates often prove low.
The Hollande government has also been tussling with utilities over the prices consumers pay for gas. The retail price of natural gas is controlled by the state in France, and the utilities have complained that the price increases the government has allowed aren’t sufficient to cover their rising costs. In July, France’s energy regulator agreed. Yet the Hollande government has limited the price rise to 2% anyway. It also promises to expand energy subsidies for consumers.
So the French government could compel utilities to sell at a loss. How’s that for long-term thinking?
Mr. Hollande could have opened the door to a potentially transformative energy opportunity, brought down consumer prices and created a new domestic industry, with all the jobs that go with it. Too bad he once again chose ideology over prosperity.
Apparently Hollande fails to understand the relationship between le supply and le demand.
The American Action Forum has released new analysis of the burden of new regulations under President Obama. It’s most striking finding? The cost of added regulations under President Obama is now estimated to be $488 billion.
“Based on data from the Government Accountability Office (GAO) and regulations published in theFederal Register, the Administration has published more than $488 billion in regulatory costs since January 20, 2009 – $70 billion in 2012 alone,” reads the analysis from AAF.
“Ignoring all non-“major” rules with costs in 2009, the regulatory tally still surpassed $61 billion. In 2010, counting only “major” rules, the regulatory bill rose to $160 billion in lifetime costs. AAF began tracking every proposed and final rule in 2011. That year alone the Administration published more than $231 billion in regulatory costs. AAF reviewed 6,705 regulations in 2011 and has tracked more than 4,700 regulations to date in 2012.”
The most costly government agencies in 2012 alone are Health and Human Services (which has an estimated regulation burden of $16.7 billion), the Environmental Protection Agency ($12.1 billion), the Department of Energy ($10.6 billion), the Department of Justice ($6.9 billion), and the Securities and Exchange Commission ($6.2 billion)…
…or Black Swan? Reuters
Chinese banks and companies looking to seize steel pledged as collateral by firms that have defaulted on loans are making an uncomfortable discovery: the metal was never in the warehouses in the first place.
China’s demand has faltered with the slowing economy, pushing steel prices to a three-year low and making it tough for mills and traders to keep up with payments on the $400 billion of debt they racked up during years of double-digit growth.
As defaults have risen in the world’s largest steel consumer, lenders have found that warehouse receipts for metal pledged as collateral do not always lead them to stacks of stored metal. Chinese authorities are investigating a number of cases in which steel documented in receipts was either not there, belonged to another company or had been pledged as collateral to multiple lenders, industry sources said.
Ghost inventories are exacerbating the wider ailments of the sector in China, which produces around 45 percent of the world’s steel and has over 200 million metric tons (220.5 million tons) of excess production capacity. Steel is another drag on a financial system struggling with bad loans from the property sector and local governments.
“What we have seen so far is just the tip of the iceberg,” said a trader from a steel firm in Shanghai who declined to be identified as he was not authorized to speak to the media. “The situation will get worse as poor demand, slumping prices and tight credit from banks create a domino effect on the industry.”
The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States.
By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. Taylor
Sometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don’t want, but need, to hear.
Where are we now?
Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.
The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.
The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.
Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens’ and institutions’ purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.
The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.
Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.
The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?
The Fed’s policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.
The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed’s Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury’s traditional debt management.
This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.
The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current (more…)
A market economy is indescribably vast and complex—its success depends on so many intricate, changing details all somehow being made to work smoothly together that the “facts” that are essential to its thriving cannot be catalogued with anywhere near the completeness that can be achieved by a 21st-century scientist studying and cataloging the “facts” that enable sparrows to fly. A sparrow is complex compared, say, to a limestone rock. Compared to the modern market economy, however, a sparrow is extremely simple.
A surge in the supply of steel in Detroit for the month of October 2012—an uptick in consumer demand for a specific color of car and a downtick in demand for another color—the possibility of using a new financial instrument to spread investment risks more widely—unexpected difficulties in hiring workers who possess a certain set of skills—an innovation that lowers the costs of advertising—an electrical failure that threatens to shut down for several days a section of a factory—a trucking company that discovers it underestimated the fuel costs of delivering 1,000 new automobiles to dealerships throughout New England. . . . Dealing with details such as these—details that Hayek called “the particular circumstances of time and place”—is not incidental to the success of a modern economy; it is of the essence.
Awareness of these facts, and of knowledge of workable options of how to respond to them, are key to the growth and continued success of any market economy. These facts are dealt with successfully only in market economies and only to the extent that individuals on the spot are free to respond to these facts as they, individually, see fit.
Yet no observer or planner or regulator can see and catalog all these highly specific facts. The facts—each of which must be dealt with—are far too numerous at any moment for an observing scientist to catalog even if that moment were to be frozen for decades. Greatly intensifying this complexity is the reality that these facts are forever changing. A moment from now many of these facts will be different from what they are at this moment.
Nevertheless, too many people, including politicians, continue to believe that because they can observe a handful of bulky facts about the economy, they can thereby know enough to intervene into that economy in ways that will improve its operation. That belief, though, is hubris. It’s very much like believing that you’ll fly if you simply strap on a pair of wings and commence to flapping madly.
Among the many falsehoods pushed at last week’s Democratic Convention is that this is the party of the people, unafraid to hold Corporate America responsible for its many ills.
Judging by the records of the last two Democratic administrations, just the opposite appears to be true. Certainly, President Obama and, to some extent, Bill Clinton like to talk a good game in terms of class warfare, but under both men, real corporate crime-fighting has been at best a side issue — despite the immense amounts of white-collar fraud their administrations faced.
In fact, neither Obama nor Clinton can hold a candle to the corporate crime-fighting record of George W. Bush, that supposed lapdog for large corporate interests.
Consider: As we near the four-year anniversary of the financial crisis, not a single Wall Street fat cat has been charged with violations of securities laws in connection with the 2008 collapse.
Then we have the outlandish case of MF Global, the brokerage firm run into the ground nearly a year ago by Obama’s pal and campaign-cash bundler, Jon Corzine. It isn’t just that the former Goldman Sachs CEO and New Jersey governor took outsized trading risks that destroyed the firm; his firm appears to have misused and lost $1.6 billion in customer funds in the process.
Under securities laws, those customer funds were supposed to be kept sacrosanct — yet not a single MF Global employee, much less Corzine, has been charged in the matter by the Obama Justice Department or the Securities and Exchange Commission.
For obvious reasons, Clinton’s putrid record on corporate crime went unmentioned as he rewrote history during his speech.
(It wasn’t all that got left out as he tried to make people believe they’re doing just fine after four years of Obamanomics. He also skipped over the fact that the ’90s economy only got strong after he turned right by cutting deals with the Republicans to cut taxes and spending and to reform welfare.)
Simply put: The law-enforcement agencies under Clinton turned a blind eye to one of modern history’s biggest corporate crime waves.
Forget insider trading, where traders are basically ripping off each other. During the Clinton years, big Wall Street firms came up with new and imaginative ways to screw the average investor — who for the first time was turning to the stock market to save for retirement. Yet there wasn’t much of a peep from Bubba’s Justice Department or the corporate watchdogs at his Securities and Exchange Commission.
One such rip-off involved feeding small investors fraudulent research reports so they’d buy overvalued (and overhyped) Internet stocks — but there were many more, most of which came to light after the tech bubble burst in March 2000 and small investors lost countless billions in savings.
Those research scandals were initially uncovered by a Democrat — New York then-Attorney General Eliot Spitzer. But the Bush SEC shared in the enforcement of the cases.
The Bush Justice Department and SEC also started the investigations that have led to Obama’s one arguable area of success on Wall Street crime — insider-trading prosecutions. But the victims of insider trading are mostly other traders, not the average Joe — this isn’t the sort of corporate crime that ruins Main Street.
Anyway, lots else got prosecuted under Bush. The accounting fraud at Enron, a Houston-based energy company with ties to the Republican Party, brought immediate indictments against individuals like Bush friend Ken Lay. One major firm, accounting giant Arthur Andersen, was forced out of business.
The same thing with Worldcom, another accounting fraud prosecuted in the Bush era that landed its CEO in jail.
As it happens, the last major financial firm to be run out of business after being hit with criminal charges (prior to Arthur Andersen) was Drexel Burnham Lambert — and that was accomplished by President Ronald Reagan’s US attorney for Manhattan, a guy named Rudy Giuliani.
Of course, Bush’s record of corporate crime fighting was far from perfect. Much of the risk-taking that led to the 2008 collapse occurred under the nose of his regulators — but these practices started to explode during the Clinton years.
The bigger point here is that, if you’re really keeping a score card on who’s going after corporate America’s bad guys, the Democrats may talk a good game but have very little to show for it.
Keep that in mind the next time President Obama says how much he detests the Wall Street fat cats.
From Bill Clinton to Joe Biden to Michelle Obama, Democrats tried to get mileage from jobs not lost because the economy did not succumb to a total meltdown, thanks to President Obama’s timely rescue of the banking system.
Mr. Obama’s administration does get credit for mopping up, namely the kabuki “stress tests” that pronounced the banking system “saved.” Mr. Obama also played an important role before he took office when he might have been obstructive rather than supportive or noncommittal on the sidelines of a bailout then underway.
But it pays to remember that most of what was done, wise or not, was done before he became president. His task in the presidency was getting the country back on its feet rather than taking credit for arresting a fall that was arrested before he ever set foot in the oval office.
Recall two key dates:
TARP, or the Troubled Asset Relief Program, was enacted by Congress on Oct. 3, 2008.
Then-U.S. Treasury Secretary Henry Paulson, center, and Fed Chairman Ben Bernanke, right, before the House Financial Services Committee in Washington, D.C., in November 2008.
The move to put GM and Chrysler on the federal dole, with details left to the next administration, began with President Bush, who cut a check for $17.4 billion on Dec. 12, 2008.
Mr. Obama has subsequently accused Mr. Bush of giving money to the auto makers with no conditions; this is untrue and also ungenerous. Mr. Bush plainly put money into GM and Chrysler to keep them afloat for Mr. Obama’s benefit, since Mr. Obama would have to clean up the mess if they went into liquidation. And you know the sequel—a questionable, UAW-friendly bankruptcy that is proving one of the few money losers for taxpayers.
The main event, however, was the rescue of the financial system. Here, the heavy lifting was done by the Federal Reserve and FDIC long before Mr. Obama became president. It also involved a far greater effort than the public yet understands.
On March 16, 2008, the Fed intervened to halt the collapse of Bear Stearns and, over the next eight months, performed roughly similar heroics on behalf of Citigroup, AIG, Wachovia, Morgan Stanley, American Express, Goldman Sachs and many others.
On Oct. 3, 2008, the FDIC increased deposit insurance protection to $250,000 from $100,000. On Oct. 14, the FDIC allowed banks to raise new debt with federal guarantees and provided unlimited protection to certain accounts used by businesses.
On Sept. 19, 2008, the U.S. Treasury announced a temporary guarantee of money-market funds. On Oct. 26, the Federal Reserve itself started buying commercial paper issued by big industrial companies. Without these interventions, many large employers (notably GE) might have folded or drastically cut back operations and laid off workers to maintain liquidity.
These are the steps that stopped the descent and stabilized the system.
The rather more cosmetic solutions began with Hank Paulson’s injection of TARP money into the banks, to achieve an effect that could have been achieved less dramatically by waiving for a period the federal (more…)
Whether you liked the auto bailout or hated it, one thing is clear: Barack Obama had very little to do with it, at least financially.
$81.5 billion was allocated before Obama was sworn in.
Given how much credit he gives himself for this, one could expect some fact checking, no?
The following list shows the 4 recipients of Automotive Industry Financing Program.
|Name||State||Date Entered||Amount Committed by AIFP||Amount Returned to AIFP|
|General Motors||Mich.||Dec. 29, 2008||$50,744,648,329||$22,853,330,885|
|GMAC (now Ally Financial)||Mich.||Dec. 29, 2008||$16,290,000,000||$2,667,000,000|
|Chrysler||Mich.||Jan. 2, 2009||$12,810,284,222||$7,256,590,642|
|Chrysler Financial Services||Mich.||Jan. 16, 2009||$1,500,000,000||$1,500,000,000|
Before you watch this comical, over-the-top performance by Jennifer Granholm at the DNC, remember that President Bush began the auto bailout. Also remember that GM had largely completed its reorganization to become competitive in the years before, but was suffering a cash crunch.
President Obama on Wednesday said that President Bush was responsible for bailing out auto companies in Detroit, writes the Washington Examiner’s Charlie Spiering.
“Keep in mind,” the president said, “That the administration before us, they had been writing some checks to the auto industry asking nothing in return. It was just a bailout, straight — straightforward.”
President Obama said that if it weren’t for his current administration’s policies, the auto industry would have been an expensive failure. That is to say, if it weren’t for President Obama’s guiding hand, the auto industry would have collapsed and taken all that Bush-era bailout money with it.
Obama explained that, unlike his predecessor, he “demanded responsibility” from the auto industry, forcing it to “retool and to restructure,“ making it ”more efficient.”
Critics argue that the president’s claim that the Bush administration demanded “nothing in return” is false.
As Spiering notes, when the Bush administration authorized the first auto loan of $17.4 billion, in October 2008, some aspects of the loan were contingent upon the companies hitting “Restructuring Targets.” Therefore, no one can say that the Bush administration didn’t at least demand or impose guidelines.
Watching this I wondered if someone slipped her some of Honey Boo Boo’s go-go juice.