Follow Up 2: Less is More

The lead story in the August 6, 2011 Economist minces no words in their opinion of US politicians' "current uselessness" which the paper fears will be responsible for a double-dip recession. They specifically highlight the negative impact of the growing US governmental unpredictability:

Any hard decisionshave been given to a commission--a cop-out that condemns workers and firms to more crippling uncertainty about how the country's fiscal mess will be tackled. Would you build a factory today if you knew that taxes had to rise eventually, but had no idea which ones?

Worse, the poisonous politics of the past few weeks have created new sorts of uncertainty.

This was precisely my message in a January 2010, blog post:

Risk is equivalent to unpredictability. The more able one is to predict the future, the lower the risk and the more confidently one can make moves today which create a nice return tomorrow. Conversely, when the rules of the game may significantly change tomorrow or next year, risk is dramatically increased. This raises the risk-vs-reward bar such that fewer investment options are viable.

Its no wonder that corporations and banks are choosing to sit on "piles of cash" instead of launching big, strategic, long-term investments which would support long-term and largely high-skilled job creation ... and hopefully long-term profitability for the investors.

No, US federal policy currently discourages that type of thing. More precisely, it forces such investment offshore. When US businesses choose to NOT use their cash for investment in their own commercial projects, they must find something else to do with the cash. People say that Apple has umpteen-hundred-billion dollars "in the bank" but more accurately, Apple has this cash invested in non-apple projects in that Apple owns shares, CDs, bonds, and IOUs from other banks and companies who are not subject to the unpredictability and caprice of the US government.

As my blog post continued:

Governments can increase or decrease this risk. Those with the discipline to stick to a stable, sensible, transparent industrial policy over a long period build tremendous "trust equity" with investors ... Ideas become businesses become economic value ...Unfortunately, being based entirely on intangibles (consensus expectations), this trust equity is a very fragile thing. Governments can quickly sabotage themselves, their economies, and thus their citizens by giving off even the whiff of erratic or ill-advised behavior.

 The current lot in Washington reek of it. Like Renaissance French nobility, they slather themselves in ever-increasing amounts of perfume to cover it up, but the flies still swarm. Here's David Brooks:

"If you ask people, 'why aren't you investing? Why aren't you lending?' it all comes down to uncertainty ... If bankers and entrepreneurs don't have any sense of certainty, they're just not going to invest ... We've not only got this economic problem, but its compounded by a psychological problem, magnified by the fact that distrust of institutions is at its highest level in history." - David Brooks, Meet the Press 1/31/2010

The answer? Of course, it's complicated but a good start is in the title of this blog. The Economist is concerned that immediate fiscal austerity would thrust the economy deeper into trouble. They suggest that we wait a bit. They're half right. I'd listen to Greenspan, who has been a long proponent of using the economic power of "signalling." Without changing a single regulation or appropriation today, the government can clearly communicate what changes are coming when. If the message is credible, people will respond as though the change had happened today. Markets will rapidly price in the new information, and the trajectory of the whole economy will shift.

IF the government's message is credible. This is the rub, given the extent to which Washington has squandered that intangible "trust equity." Given this situation, I'd suggest Obama and Congress see a psychologist ... to better understand how to psychologically build trust in a population.

I'd suggest follow-though is key.

The Zeitgeist of the BearDogs

Sometimes Simple IS the best way to communicate. Here's to the simpletons.

Yeah! What HE Said: Greenspan on the Hill (again)

They just won't let him alone. But Maestro is still too solid to be shaken by a few pols.

The surging demand for mortgage-backed securities was heavily driven by Fannie Mae and Freddie Mac which were pressed by the Department of Housing and Urban Development and the Congress to expand affordable housing commitments.
- Alan Greenspan, Congressional Testimony 4/7/10

Nuff said. If they don't want to know the real answers, maybe they should stop asking the questions.

Less is More

From today's Meet the Press:

Kramer: The CEOs I talk to - they're hiring ... in Russia, they're hiring in Brazil, China ... its rather quizzical that we know what the Communists will give us, but we don't know what the capitalists will give us.

Greenspan: Investment occurs when you have a stable economy and when you can foresee what's going on in the future ... it's very critical that we get the uncertainties out of the system.

It's simple math, included in pretty much every good risk model - volatility is a multiplier on risk. Higher risk leads to lower willingness to invest at a given return. (Smart) investment is a multiplier on growth. Growth is a multiplier on income. Sustained income (without excessive debt) creates wealth.

Washington ... don'tcha want wealth? Think of all the new taxes you could levy.

Like Spending a Dollar to Get a Dime

That's how Louisiana Govenor Piyush "Bobby" Jindal described the Stimulus payments on unemployment on Meet the Press 2/22/09.

Leave it to a first-generation American to cast an objective eye on US politics. His parents, as most immigrant families, struggled to make a better life for their kids. They fended for themselves. They took responsibility for improving their own lives. They sacrificed. Bobby was undeniably acculturated from the outset, preferring the Brady Bunch to Bollywood, but his parents' lessons were clearly not lost.

He's not the only one, of course, but he's a nice contrast to the likes of Puerto Rico, which sees no problem asking for nearly 5% of the total stimulus, though their population is under 4 million and their economy contributes nearly nothing to GDP. Boy, it must be expensive to build down there. "100 acres of new energy efficiency industrial zones" is gonna cost us $17 billion. That would be $4,000 a square foot ... or $11 million per job created. Why don't they just hand out shovelfuls of cash to these Caribbean shits? That would probably be cheaper than one of their other requests: $500 million to give solar water heater tanks to rural families. 14 very short-term jobs there (by their own count), so $35 million per job. Apparently the current $2,000 tax credit just isn't enough for these people, even though that's precisely the price of a one-family sized tank.

Not that they're the only ones. Miami (city and county) have put in for nearly the same amount, mostly for transportation projects like the "Two hundred million dollar mile" project ($2.4 billion to extend the "Orange Line" east-west transit by 10 miles). By comparison, their pitch for $1.4 billion to expand the same "Orange Line" north-south is a bargain.

And there's:

• The "Billion Dollar Bridge" in Moline Illinois
• The $600 million 100MW solar plant in Alabama using outdated technology. Strangely, other states can use newer technology to generate the same 100MW for hundreds of millions less.
• The new digs for the chief of Oakland police, $450 million
• And a parking garage for the Oakland Airport $300 million. Who can blame them? Its just SO TIRING to walk through their current lot.
• The events center and hotel in Albuquerque, $418 million
• Not to be outdone, a similar pitch in Irving, TX (and here and here), including residential, commercial, and every other kind of -ial $1.4 billion. Where the hell is Irving anyway?
• Or a Performing Arts Center in Vegas. $375 million. Apparently they don't have enough stages in that town.
• Or $2 billion to put (outmoded) solar panels on every roof in LA

Below the $300 million mark (aka chump change), there are literally thousands of projects to replace things that aren't broken (over 1,000 fire/police station renovations) and install things that range from unnecessary (over 100 police or fire "training centers" for every village and hamlet from here to Timbuktu) to downright infuriating (dog parks; river walks; a $20 million "downtown quiet zone" for raucous San Diego; several multi-million dollar golf courses in Texas ... including a 36 hole Disc Golf course for the dusty hipsters in Austin).

I make no mystery of my opposition to each and every one of these government bailouts. Everyone has their reasons for advocating or opposing it. Here are one or two of mine:

• Today, 12% of GDP is spent servicing the national debt With our new expenditures, this will likely increase to 20%. This is an untenable level for any economy. There is no way to prevent it from reducing GDP growth (and thus standard of living) other than to bring it back down to single digits where it should be.


• The above is just to "service" (maintain) the debt. Fees and interest. To actually reduce debt means increasing taxes and reducing government spending over the 5-to-25 year horizon. Mathematically, when people and businesses have an increase in taxes without a commensurate increase in earnings, investment, savings, and/or consumption must fall. In other words, the major "drivers" of our economy must be throttled back in favor of the non-productive, non-job-creating, non-profit-generating activity of paying down government debt. GDP will necessarily fall.


• There is a strong inverse relationship between the amount of debt a country has and the long-term value of the currency. Currency values are determined by supply and demand, just like everything else (pay attention, Tim and Barry). Any schmuck who didn't sleep through Econ 101 knows that supply and demand meet at a price which "clears the market." For currencies, that "price" is the NPV of all future interest payments one can get by owning the currency minus inflation. In other words, the interest rate now, plus the PV of expected interest rates into the future, adjusted for inflation, determine the current exchange rate. All of this is a round-about way of explaining what most people just accept: the interest rate drives the exchange rate. So what drives the interest rate? It is a consensus opinion about the credit-worthiness of the country. Just like a corporation's bond issue, the US government has to offer an interest rate which compensates investors (=holders of dollar assets) for expected inflation plus the risk that the US economy goes tits-up. Inflation expectations and default risk have been low, so interest rates have been low. This thanks to Paul Volcker and the Reagan economic team (including Greenspan) who realized that a high interest rate stifles investment and savings. It thus stifles financial stability and economic growth. The inflation component drives people to put their money in other currencies and thus other economies instead of ours. With the current gratuitous increase in debt, coupled with the decrease in long-term growth due to inflation and taxation, this risk is increasing significantly. Interest rates will necessarily increase.

Call me crazy, but personally I'm a fan of financial stability and economic growth.

PS: I'm amazed by the notoriety Rick Santelli of CNBC has garnered by refusing to accept the Washington line. The snarky childish response from the White House, referring to him by name, is a little Putin-esque. Last I checked, we still had freedom of speech around here.

I TOLD you so

Holy effing ess ... and wtf and shiteballs ...

I TOLD everyone NOT to make Greenspan a scapegoat for the collective financial screw ups of the entire planet. But no sooner than I had called off my blog strike, the useless pieces of Washington garbage (who I pay for!) showed they have as little self-discipline as they have personal integrity and leadership skills. Thank God they're now in charge of EVERYthing. This is going to be awesome.

Not.

Also up on the Hill, a bunch of hedge fund demi-gods plead powerlessness over the mess. "The system" did it? I always knew Soros was a little off ... but that's as idiotic as letting a murderer walk because "it was the gun that killed the victim."

Another hedge fund fly-boy, Bill Ackman, was on Charlie Rose echoing the hew HF refrain pegging it all on the short selling
ban and the ratings agencies.

Everyone apparently fails to notice that capitalism actually worked in this case ... if a bit messy. These agencies are in the information analysis biz. As people have learned that these agencies performed flawed analysis and turned out crap information, people have stopped trusting them and are no longer willing to pay for their services. They will likely find themselves in an Arthur Anderson situation before too long.

In other news, Paulson is still motoring without a rudder, map, or compass. Good things will not come of his mess. Did anyone else catch him borrowing an odd quote from Keynes?

Paulson, this week: “I will never apologize for changing an approach or strategy when the facts change"

Keynes: "When the facts change, I change my mind. What do you do, sir?"
(nb: there is debate about whether Keynes even said this confidence-killing line)

Appropriately, HSBC is furious. Per CEO Michael Geoghegan:

"There is no question that guarantees have been given to failed managements ...
I hope these guarantees don’t last too long because they may create the wrong
type of behaviour by managements in those banks."

That's British for "get out of the market, you dumb clots, before you sink us all!" After weathering the storm relatively unscathed, HSBC now finds itself not at a competitive advantage (as it should be) but again at a disadvantage to the reckless, who have been lavished with bail-outs and governmental support based solely on perceived need ... as opposed to more logical criteria such as prudence, ability, and track record. The message: risk management is a fool's game. Damn the torpedoes, full steam ahead ... we'll just jump ship when we get sunk ... let the nanny government take care of the rest.

Perversely, it seems that there is a segment of the Left which salivates at the idea of the above, seeing it as a golden opportunity to sink their unproductive talons into deeper into industry...

... Evidence the panic to bail out the auto industry so it can continue to lose $1,000 on every car it sells; so it can spend multiples more on pensions than on R&D; so it can choose to continue to avoid issues with its products and business models which have existed for the last 30 years.

... Evidence Michael Beschloss (big chicken who donated to Obama only in his wife's name so people wouldn't realize how biased his new books are) on Charlie Rose on the 7th casually dropping lines like:

"Government being involved in the economy in a very draconian way, picking winners and losers... It's Obama's job to explain that ... we're not just doing this as a momentary effort to fix a problem. Maybe this shows us that government should be more involved in the economy than people have expected over the last couple of decades."

Yes, indeed, we'll have to dumb it down and spin it and wrap it in charismatic bullshit for the little people who aren't political hacks ... because saying these things outright obviates their fallacy. History will show them fools.

Follow Up: Gears and Levers Buried at the Roots (updated)

Yes, here I am already with a follow-up less than 12 hours after my initial post. I just couldn't resist linking my stream-of-consciousness with that of John Steele Gordon, who guest-authored an awesome Freakonomics blog today. While I called out evil's name: DEBT ... he called out the names of its creator: The Fed (via artificially low interest rates) and Fannie and Freddie (via artificially low interest rates).

Behind both: Congress and the executive branch

Perhaps Barney Frank should have taken the fifth back in 2003 instead of putting his foot in his mouth incredibly:

in my view, the two government sponsored enterprises we are talking about here, Fannie Mae and Freddie Mac, are not in a crisis ...

I do not think at this point there is a problem with a threat to the Treasury ... if investors take some comfort and want to lend them a little money and less interest rates ... there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own ...

Fannie and Freddie have played a very useful role in helping to make housing more affordable ... a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing ...

I believe that we, as the Federal Government, have probably done too little rather than too much to push them

Hat tip to Mark J. Perry for plumbing the NY Times archives to find an even more obvious smoking gun ... and more importantly, genuflection and alms to Steven A. Holmes for (perhaps unwittingly) playing Cassandra. He spake thus in 1999:

...Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits...

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer...

...Fannie Mae is taking on significantly more risk ... the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

Unlike FnF, the Fed is supposed to be independent of political wrangling, but Greenspan himself griped in his book about the unprecedented level of meddling he saw in his last years ... as well as in the future:

In the political arena, the pressure to make low-interest-rate credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist

I fear that my successors on the FOMC [Fed], as they strive to maintain price stability in the coming quarter century, will run into populist resistance from Congress if not from the White House

To John's list of culprits, I will add the following ... with a caveat: good came with the bad. Low interest rates only presented the opportunity for the imprudent to over-borrow. High savings in certain pockets of the world economy enabled cheap lending in other pockets.

OK, caveat said ... the US government would not have been able to support their low-interest strategy for long without:

• Asian Savers (the Chinese government buying Treasuries, Japanese middle-managers saving 110% of their income, a billion citizens of industrializing countries squirreling away a buck apiece) flooding the money markets with dollars over the last 15 years


• Oil Producers (ditto)


• Baby Boomers (saving up for retirement; granted, they borrowed in lockstep)

Cartoon credit: www.cartoonstock.com
Updated to include Barney Frank Quote 9/23/08 1:30 PM EST

To Those Foresaking Maestro

Last time I checked, he warned those of us who bothered to listen ... and warned us .... and warned us again. He even offered prescriptions for the event (see below).

I suppose it's (unfortunately) human nature to desire someONE to blame for pain. Time after time, each crisis needs a fall guy. Just one will do. Two are OK as long as they're joined at the hip. Any more than that and our WIP brains apparently throw a cyclic-redundancy bluescreen.

I won't tilt at that imperfect human predillection, but I will adamantly fight against another one: the tendency to tear down the ascendant.


Do not repeat NOT vilify Alan Greenspan as the economic anti-christ responsible for the errs of a billion. For shame the growing hoardes of talking heads who are doing so (check out dailylife.com for the latest list). For shame those (see below) who insist on ignoring the last 28 years of unprecedented prosperity, innovation, wealth creation, and reduction in poverty.

There is a critical difference between being coerced to harm yourself ... and not being prevented from doing so.

Just a few apropos quotes for our near future (not all from the book):

any form of government guarantees of credit lessens the need of financial counterparties to earn a reputation for honest dealings

The benefits of broadened home ownership are worth the risk. Protection of property rights, so critical to a market economy, requires a critical mass of owners to sustain political support

History has not dealt kindly with the aftermath of protracted periods of low risk premiums

Protectionism will do little to create jobs and if foreigners retaliate, we will surely lose jobs

Anything that we can do to raise personal savings is very much in the interest of this country

The more flexible an economy, the greater its ability to self-correct in response to inevitable, often unanticipated, disturbances and thus to contain the size and consequences of cyclical imbalances

Whatever you tax, you get less of

How do we know when irrational exuberance has unduly escalated asset values? ... We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy

Regulators can pretend to provide oversight, but their capabilities are much diminished and declining. In practice they have to rely on "counterparty surveillance to do the heavy lifting".

regulation approved in a crisis must subsequently be fine-tuned.

The Current Hall of Shame:

Tim Iacono: The Mess that Greenspan Made (yes, he has a whole blog devoted to his mission)

Peter D. Schiff: Greenspan Blasts Housing Bubble He Helped Create
The Blogosphere: Greenspan and the Housing Bubble
Senators Reid and Shumer: It's Greenspan's Fault
Michael Hirsh: Greenspan's Folly The former Fed chief's culpability in Wall Street's woes.
Yves Smith: I consider Greenspan to be personally culpable.

Joseph Beaudon: Alan Greenspan started this recession

Yeah, What HE Said!

I'm sure some days Alan Greenspan misses his job as Chairman of the Fed. Other days he certainly doesn't. But either way, how could he not be frustrated by the recent ridiculous gyrations of our federal money folks in the Fed, Treasury, and financial regulators.

Monday he spoke:

The economic edifice – market capitalism – that has fostered this expansion is now being pilloried for the pause and partial retrenchment. The cause of our economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises...

The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility...

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs...

The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost.
- Editorial in the Financial Times, 8/4/08

Yeah. What he said.