There's been a lot of talk in the media about the looming "fiscal cliff" - the scheduled expiration of the Bush tax cuts and the Obama cut in the FICA withholding tax, along with programmed spending cuts to be imposed across the board because our lawmakers lacked the political will to agree to a reasoned combination of cuts.
But first, why do we still call them the "Bush tax cuts" when Obama has extended them? Why not now call them the "Obama tax cuts?" Or, do they really need a moniker tied to a particular president? Since they've been the current tax rates since 2001, why don't we just refer to the current tax rate as the current tax rate?
As another aside, in my humble opinion, the cut in the FICA withholding rate was a stupid move. It did zilch to stimuluate the economy, and Social Security is already in a deep hole, one that our children and grandchildren are going to have to dig us out of. Why give them more dirt to shovel? (Having said that, if you want to cut my taxes, okay - I'll pocket the money.)
Anyway, back to the cliff. Fear not: we aren't going over it.
Washington lacks political will these days. (That's like saying, "Replacement refs suck.") Moreover, our lawmakers may not know much when it comes to economics, but they know all about getting re-elected. And that, after all, is their primary motivation.
You can bet your FICA withholding savings that they're paying attention to what's been happening in Greece, Ireland, and France, and what's about to happen in Spain. Austerity breeds protests, and those protests ultimately manifest themselves in voter outrage, which results in incumbents getting voted out of office. It happened in Greece. It happened in Ireland. It happened in France. And, as soon as Spain asks for a bailout from the EU (which it will any day now), and is required to impose austerity measures in exchange for said bailout (which is a given), the voters will revolt, and Spain will have a new leader.
What are "austerity measures?" Simple: tax increases and spending cuts. And allowing previous tax cuts to expire - which will return tax rates to the higher level at which they stood prior to 2001 - is a tax increase, no matter how you spin it. So allowing the Bush tax cuts to sunset would be, in effect, a tax increase.
Likewise, the programmed spending cuts called for by the failure to compromise by our lawmakers would affect many Americans. The combination will make people mad. Mad enough to protest, and mad enough to vote out incumbents.
And the incumbents don't want that. So they'll keep the tax cuts in place. Not sure what they can do about the spending cuts, but they'll probably try to do something, like put some watered-down compromise in place at the 11th hour, one that will claim to cut spending but will actually merely grow it slower than they'd planned to, which in Washington-speak is a spending "cut."
This will happen no matter who wins the presidency in November (and the handicappers are giving the race to Obama, who's more than happy to dig a deeper deficit hole). It's a safe bet that the GOP will retain control of the House, and they may gain seats in the Senate, so we'll be looking at another four years of gridlock, which also augurs for extension of the tax cuts.
Of course, this will exacerbate our deficit problem, and will lead Moody's to follow S&P in downgrading Treasuries. At that point, Washington won't be able to hide its collective head in the sand anymore, and blame one rogue ratings agency for jumping the gun. Rates will go up. China will slow its purchases of Treasuries further. And we'll start heading down the Greek path.
But hey, your paycheck will remain as big as it is now (at least for as long as you have a job). So you can take some comfort in that.
Friday, September 28, 2012
Thursday, September 27, 2012
More on Mortgages, and Money
I got a call today from an old dear friend - the friend's not old, the friendship is; we were fraternity brothers in college (though, during the course of the conversation, I was reminded that next year will be the 30th anniversary of my undergraduate degree, which officially makes me old, I guess). He had read my blog post last night about bubbles, and about taking equity out of your house by refinancing, and he had some questions. That made me realize there were some points left out of my post that I ought to address. So thanks to my friend (I'll call him Paul, because - well, that's his name), I have fodder for another post today.
Heck, I'm just gratified that someone reads this stuff. And even more gratified that someone actually thinks I might know what I'm talking about (besides my Mom, that is).
The key point I neglected to make relates to the equity in your home. That's an asset, right? So why would I recommend reducing it?
For one thing, equity in your home is not a liquid asset. You hope it's there when you eventually sell the house, but until then, it does nothing for you (except provide some peace of mind, perhaps). I love being debt-free, don't get me wrong. But I love having a nice, comfortable liquid cushion even more, especially in these times, with so much uncertainty on the horizon. And especially if it's not going to cost me much to attain it (more on that later).
Paul and I talked about various scenarios, including the doomsday scenario in which not only do all the myriad bubbles I alluded to in last night's post burst, but banks fail, which could threaten our money on deposit with them. But wait - that money is safe as long as we don't hold more than $250,000 per account, right? (That's the current deposit insurance limit, and as I think of it, would make an excellent topic for yet another post.)
Then there's the Armageddon scenario in which our government's financial system fails, and deposit insurance can't cover banks' losses (and if you think Frank-Dodd removed the "too big to fail" risk, you probably also still think "Hope" and "Change" are things you can believe in).
That scenario isn't just the stuff of conspiracy theorists; it's a plausible risk.
So taking equity out of your house can also be seen as a hedge against that risk. If the bubbles burst and the banks fail and the government collapses, selling your house in a few years to get the equity out probably isn't going to happen. So why not get some of it out now, and have some cash with which to make your escape to a third-world ex-pat haven?
The other thing about your equity is that taking some of it out of the house by doing a cash-out refi doesn't really reduce your assets. Let's say you own a $300,000 house free and clear, and you borrow $130,000 in a cash-out refi. Your house is still worth $300,000, but you now have a $130,000 liability in the form of a mortgage, so the equity in your home is reduced to $170,000.
But you have $130,000 in cash, which is also an asset. (If you go out and spend it on things that aren't stable assets, you learned nothing from the last decade, and I can't help you much.) So your overall net worth is unchanged; the only thing that's changed is the portion of your net worth represented by the equity in your home. In other words, you've merely re-distributed your net worth, reducing homeowner's equity and increasing cash.
That's like selling off part of your stock portfolio and investing in it bonds. We call this "diversification," and it's a good thing. So think of it that way.
Now, let's talk about money. It's a funny thing, something nearly all of us have, and have to deal with, but not many of us understand very well.
Sort of like spouses.
Think of money as a product. Like any other product, it has utility. My car has utility; it gets me where I need to go. My guitar has utility; it gives me enjoyment and lets me provide the same to others (at least I hope they enjoy it). Food has utility; it keeps me from starving.
Taking that view, saving and borrowing is really just selling and buying money.
For any product that gives us utility, we pay a price - cars, guitars, and food all have a price tag. So does money.
As savers, we're giving the bank the utility of some of our money, so they pay us a price (interest earned). As borrowers, the bank is giving us the utility of some of its money, so we pay a price (interest paid).
That takes us back to a point I made last night: if somebody is going to give me the utility of a given product for a certain useful life, I pay a price. If they offer me that utility for double the useful life, I'd expect to pay roughly double that price. But in the case of a 30-year vs. a 15-year mortgage, I get the utility of the bank's money for twice as long, and I only pay about 24% more for the additional useful life of that "product." That's a no-brainer.
Now, there are those who say, "But wait - I only have ten years to pay on my current mortgage. I'm skittish about taking on a new obligation that won't be paid off for 30 years." Understandable. Except most of us won't pay that obligation off in 30 years anyway; we'll sell the house before then, and pay off the mortgage with the proceeds.
So, you might argue, why not just stick with my current mortgage and pay it off in ten years, owning the house free and clear at that time? Then, when I sell, I get the full value of the house, not the sales price less the mortgage balance.
That's fine, but again, you're not diversifying if you do that - indeed, you're putting all your eggs in one basket.
Besides, your equity is going to keep building. You're going to pay down the mortgage - albeit slowly on a 30-year loan - and your home's value is going to increase. The worst of the housing decline is behind us, and even though home prices aren't going to rise by double digits in the future, they're going to rise. If they only rise at the inflation rate (which theoretically is the rate at which residential real estate should appreciate), and the inflation rate stays around where it is now (which is unlikely; at the rate the government is printing money, it's likely to go much higher, which means real estate values would increase at a faster clip), then in ten years, price appreciation alone will add more than $91,000 to the value of your home (assuming 3% inflation).
At the same time, that $130,000, 3.25% mortgage is going to go down by slightly more than $30,000. So you now own a $391,000 house, and you owe about $100,000 on it, so your equity is now $291,000 - just $9,000 less than you had before you took out the mortgage.
And if rates on savings accounts average just 1% over that ten years (and granted, they're well below that now, but they're likely to go much higher than that within a few years, if not months), the $130,000 in equity that you took out of your house and stuck in the bank will have grown to about $142,000, netting you $12,000 in interest income (ignoring taxes on both sides, which actually favor the mortgage side).
So your net worth has gone up by $3,000 in ten years. Not huge, but better than staying the same. And that's assuming that interest rates on savings stay at 1%. If that's the case, you're still money ahead by pulling equity now.
If rates are above the 3% appreciation rate on your house, you're better off pulling the equity. And I'm willing to bet they will be. If they're above the 3.25% you pay on your mortgage, you have positive arbitrage, which a lot of guys on Wall Street would give their left arm to attain.
And if the Armageddon scenario materializes, you can take your cash cushion and live comfortably in that third-world paradise, and read about the demise of the US in the local newspaper. If they have one. If you're lucky, they won't, and you can just focus on your suntan.
Heck, I'm just gratified that someone reads this stuff. And even more gratified that someone actually thinks I might know what I'm talking about (besides my Mom, that is).
The key point I neglected to make relates to the equity in your home. That's an asset, right? So why would I recommend reducing it?
For one thing, equity in your home is not a liquid asset. You hope it's there when you eventually sell the house, but until then, it does nothing for you (except provide some peace of mind, perhaps). I love being debt-free, don't get me wrong. But I love having a nice, comfortable liquid cushion even more, especially in these times, with so much uncertainty on the horizon. And especially if it's not going to cost me much to attain it (more on that later).
Paul and I talked about various scenarios, including the doomsday scenario in which not only do all the myriad bubbles I alluded to in last night's post burst, but banks fail, which could threaten our money on deposit with them. But wait - that money is safe as long as we don't hold more than $250,000 per account, right? (That's the current deposit insurance limit, and as I think of it, would make an excellent topic for yet another post.)
Then there's the Armageddon scenario in which our government's financial system fails, and deposit insurance can't cover banks' losses (and if you think Frank-Dodd removed the "too big to fail" risk, you probably also still think "Hope" and "Change" are things you can believe in).
That scenario isn't just the stuff of conspiracy theorists; it's a plausible risk.
So taking equity out of your house can also be seen as a hedge against that risk. If the bubbles burst and the banks fail and the government collapses, selling your house in a few years to get the equity out probably isn't going to happen. So why not get some of it out now, and have some cash with which to make your escape to a third-world ex-pat haven?
The other thing about your equity is that taking some of it out of the house by doing a cash-out refi doesn't really reduce your assets. Let's say you own a $300,000 house free and clear, and you borrow $130,000 in a cash-out refi. Your house is still worth $300,000, but you now have a $130,000 liability in the form of a mortgage, so the equity in your home is reduced to $170,000.
But you have $130,000 in cash, which is also an asset. (If you go out and spend it on things that aren't stable assets, you learned nothing from the last decade, and I can't help you much.) So your overall net worth is unchanged; the only thing that's changed is the portion of your net worth represented by the equity in your home. In other words, you've merely re-distributed your net worth, reducing homeowner's equity and increasing cash.
That's like selling off part of your stock portfolio and investing in it bonds. We call this "diversification," and it's a good thing. So think of it that way.
Now, let's talk about money. It's a funny thing, something nearly all of us have, and have to deal with, but not many of us understand very well.
Sort of like spouses.
Think of money as a product. Like any other product, it has utility. My car has utility; it gets me where I need to go. My guitar has utility; it gives me enjoyment and lets me provide the same to others (at least I hope they enjoy it). Food has utility; it keeps me from starving.
Taking that view, saving and borrowing is really just selling and buying money.
For any product that gives us utility, we pay a price - cars, guitars, and food all have a price tag. So does money.
As savers, we're giving the bank the utility of some of our money, so they pay us a price (interest earned). As borrowers, the bank is giving us the utility of some of its money, so we pay a price (interest paid).
That takes us back to a point I made last night: if somebody is going to give me the utility of a given product for a certain useful life, I pay a price. If they offer me that utility for double the useful life, I'd expect to pay roughly double that price. But in the case of a 30-year vs. a 15-year mortgage, I get the utility of the bank's money for twice as long, and I only pay about 24% more for the additional useful life of that "product." That's a no-brainer.
Now, there are those who say, "But wait - I only have ten years to pay on my current mortgage. I'm skittish about taking on a new obligation that won't be paid off for 30 years." Understandable. Except most of us won't pay that obligation off in 30 years anyway; we'll sell the house before then, and pay off the mortgage with the proceeds.
So, you might argue, why not just stick with my current mortgage and pay it off in ten years, owning the house free and clear at that time? Then, when I sell, I get the full value of the house, not the sales price less the mortgage balance.
That's fine, but again, you're not diversifying if you do that - indeed, you're putting all your eggs in one basket.
Besides, your equity is going to keep building. You're going to pay down the mortgage - albeit slowly on a 30-year loan - and your home's value is going to increase. The worst of the housing decline is behind us, and even though home prices aren't going to rise by double digits in the future, they're going to rise. If they only rise at the inflation rate (which theoretically is the rate at which residential real estate should appreciate), and the inflation rate stays around where it is now (which is unlikely; at the rate the government is printing money, it's likely to go much higher, which means real estate values would increase at a faster clip), then in ten years, price appreciation alone will add more than $91,000 to the value of your home (assuming 3% inflation).
At the same time, that $130,000, 3.25% mortgage is going to go down by slightly more than $30,000. So you now own a $391,000 house, and you owe about $100,000 on it, so your equity is now $291,000 - just $9,000 less than you had before you took out the mortgage.
And if rates on savings accounts average just 1% over that ten years (and granted, they're well below that now, but they're likely to go much higher than that within a few years, if not months), the $130,000 in equity that you took out of your house and stuck in the bank will have grown to about $142,000, netting you $12,000 in interest income (ignoring taxes on both sides, which actually favor the mortgage side).
So your net worth has gone up by $3,000 in ten years. Not huge, but better than staying the same. And that's assuming that interest rates on savings stay at 1%. If that's the case, you're still money ahead by pulling equity now.
If rates are above the 3% appreciation rate on your house, you're better off pulling the equity. And I'm willing to bet they will be. If they're above the 3.25% you pay on your mortgage, you have positive arbitrage, which a lot of guys on Wall Street would give their left arm to attain.
And if the Armageddon scenario materializes, you can take your cash cushion and live comfortably in that third-world paradise, and read about the demise of the US in the local newspaper. If they have one. If you're lucky, they won't, and you can just focus on your suntan.
Wednesday, September 26, 2012
Bubble, Bubble, Toil and Trouble ...
Yeah, I know what you're thinking: "It's not even October yet, and the Curmudgeon is jumping on the bandwagon with Wal-Mart, Target, et al and posting about Halloween." Fear not; that's not the subject of this post.
It's the Fed, which is scarier than Michael, Jason, and the Zombie Horde all rolled into one.
So Bernanke & Co. have launched QE3, buying $40B of mortgage-backed securities (MBS) a month, hoping to bring mortgage rates down (which they have - read on to learn how you can take advantage of this), in further hopes that this will spark a wave of refinancing (which it won't, as I'll explain), in even further hopes that that will spark a surge in consumer spending (which it won't, as I'll also explain).
First, let's review a little history.
In the summer of 1998, I predicted a recession, based on my read of various manufacturing indicators that I follow, which happen to be pretty reliable leading indicators of economic downturns.
Okay, I was wrong.
What I didn't count on was the Greenspan Fed intervening to ease monetary policy, at a time when policy was already easy. Let's review the history of the Fed funds target up to that point.
In July 1992, in the aftermath of a credit-driven recession, the Fed cut the funds target 50 basis points (bp; recall that a basis point is 1/100 of a percent) to a then-unprecedented 3.25%. Very few economists predicted that move. One notable one was Lacy Hunt, one of the most astute Fed-watchers of our time.
Another was yours truly. I had just started as an analyst with my current employer in late May of that year, and I wrote my first newsletter article for the company in June, predicting that the Fed would cut the funds target 50 bp. I was right (sometimes you're good, sometimes you're lucky, and sometimes you're good and lucky, as the saying goes).
That helped to kick-start the recovery, and after cutting the target another 25 bp in September of that year, they began raising it to cool things off. From that point until February 1995, they raised it to 6.00%.
Then, they began to ease again, cutting the rate to 5.50% by March 1997. They stood pat after that, as the economy perked along in "Goldilocks mode": not too hot, not too cold.
Then, in September 1998, the Greenspan Fed made history. If you're a student of the Dismal Science, mark that date in your memory. For it was the first time (that I'm aware of; admittedly I only began actively watching the Fed during the Volcker era, and you can be assured that Mr. Volcker would never have done this) that the Fed intervened to influence the markets.
In the Fall of 1998, a hedge fund (something that was largely unheard of theretofore) called Long-Term Capital Management (LTCM) began to experience large losses. A number of large US and foreign banks had big positions in LTCM, which is a problem in and of itself that begged action by banking regulators, including the Fed.
By "action," I mean limiting banks' ability to invest heavily in hedge funds, and maybe keeping in place the Glass-Steagall Act of 1933, which separated banks' traditional banking and trading functions, but was (stupidly) repealed in 1999.
Anyway, the Greenspan Fed chose instead to cut the funds target from 5.50% (already having eased by 50 bp over the course of two years) to 4.75%, a drop of 75 bp, in just 49 days. That was one of the most aggressive moves in Fed history, and it had nothing to do with the underlying economic fundamentals, it was merely meant to stimulate the financial markets to overcome the effects of the LTCM debacle.
Again, do not miss the significance of this event: the Fed, for the first time, intervened to manipulate the securities markets. This is not the Fed's job (recall their dual mandate to control inflation and promote full employment), and for them to do so is, in my book, unconscionable.
But they didn't ask me.
What followed was the fueling of the dot-com bubble. Chairman Greenspan failed to see this coming. We should have been headed into a recession, by all indications from the data. But the unsupported accommodation had an unintended consequence.
Money became uber-cheap (by the standards of the day, anyway), and liquidity flooded the market. So venture capital firms were awash with cheap money, which they threw at dot-com start-ups that didn't have a viable business plan, but had cute sock puppets as mascots and bought expensive Super Bowl ads to show them off. (Give me the Bud Light Lingerie Bowl any day, for a variety of reasons.) Greenspan himself drank the "this time it's different" Kool-Aid, arguing that technological advances made productivity higher than in previous cycles, therefore higher stock market valuations were warranted.
To which I say balderdash, and repeat my oft-stated maxim that this time is never different; the fundamentals of supply and demand that drive macroeconomic trends have not changed since we were all wearing animal skins and trading rocks.
Of course, the Emperor's new clothes in which those companies were attired were soon revealed, and their sudden nakedness resulted in the bursting of the dot-com bubble.
Note this: the dot-com bubble was fueled by a cut in the Fed funds target to 4.75% for a period of just seven months, after which the Fed began to tighten again.
So the dot-com bubble burst, resulting in a recession that ensued in 2000, and persisted for about a year, though the subsequent recovery was dubbed "the jobless recovery," and in reality it took until about 2003 for things to get perking again.
And perk they did. By that time, the Fed had cut the funds target to 1.00% - a new ridiculous low - where the Greenspan Fed held it for a full year. And that fueled another bubble, one that Greenspan again failed to anticipate - in fact, in hindsight, he was quoted as saying, rather bewilderedly, that he had no idea it was coming.
The asset bubble this time was housing. Aided and abetted by excessively lax lending standards intended to increase homeownership -
An aside here. There's a natural rate of homeownership in this country, and if you try to monkey with things to get it higher, you're taking risk. Let's face it; some people should be renters, plain and simple. Who are they? People who can't afford to buy a house, who can't make mortgage payments. But Barney Frank et al wanted to nudge homeownership rates higher. In fact, in arguing that Fannie Mae and Freddie Mac should buy subprime mortgages, Barney actually said:
"When it comes to increasing homeownership, I'm willing to gamble with the taxpayers' money."
In my humble opinion, any lawmaker who openly expresses willingness to gamble with the taxpayers' money should be waterboarded, just for starters, then drawn, quartered, burned at the stake, tarred and feathered, and ... well, you get the idea.
Okay, back to our story. Aided by the subprime lending craze, those record low rates, for a record long time, fueled the housing bubble, whose bursting had catastrophic consequences for the global economy, consequences from which we've yet to recover.
So the Bernanke Fed responded by cutting the funds rate to the unheard-of level of 25 bp - where they've held it for an unprecedented period of nearly four years - and pledged to hold it there for another three years.
(That pledge carries unintended consequences of its own, among them stifling the very housing recovery the Fed hopes to spark, by signaling to would-be buyers that mortgage rates are going to stay low for another few years, so they might as well wait until home prices bottom - which they may not yet have done, in spite of recent data, which is probably seasonal. So they'll remain largely on the sidelines, stalling the housing recovery further.)
And at the same time, the Fed has grossed up its balance sheet three times, to about $3 trillion, and with the latest round of quantitative easing, they'll probably jack it up to $4 trillion, merrily printing money all the way.
So here's the point of tonight's post:
If holding the funds rate at 4.75% for about two quarters fueled the dot-com bubble, and holding it at 1.00% for four quarters fueled the even larger and more damaging housing bubble -
How can we not believe that by holding the funds target at 25 bp for seven years isn't inflating the Mother of All Bubbles?
I guarantee you, it is.
So where's the bubble this time?
In bonds, for one; there's undoubtedly a bubble in Treasuries, and by extension, in corporate bonds. To wit: junk bond yields have fallen, in some cases, to below 5%.
That's nuts.
Also, I fear, in gold, though that depends on what happens to inflation, which could very well skyrocket as a result of the Fed's beyond-easy policy (especially if - er, when - Treasuries get downgraded again). I'm not sure about the gold bubble theory, but it's what's kept me out of gold; every time I think, "Yeah, I'd better jump on the gold bandwagon," I get skittish.
And I'm quite sure there's a bubble in stocks.
How do I support this theory, when savants like Jim Cramer are telling us that every stock out there is a screaming buy?
For one, we're starting to hear the same nonsense that we heard during the dot-com bubble: "things are different this time," and historical P/E ratios no longer apply.
Poppycock.
For another, the market rallies every time the Fed launches a round of QE. Graph the Dow Jones average since 2008, and draw vertical lines marking the start and finish of each of the three rounds of QE to date (QE1, QE2, and Operation Twist, which has been extended into the recently-launched QE3). You'll see a clear pattern of the market rising, then trending sideways as traders (also known as stimulus addicts) anxiously await the next fix. When the crack dealer (the Fed) supplies it, off the market goes again.
And the most recent run-up is counter to the underlying fundamentals; earnings have been on the decline, and the cuts in analysts' estimates of future earnings that usually come late in the fall have hit early this year. That should spark a correction, but no; we're seeing quite the opposite, as the crack fuels another bout of buying euphoria.
The third reason for my assertion that stocks are a bubble is that the Fed itself has signaled this.
Bernanke freely admits that one of the Fed's strategic objectives in providing more stimulus is to push savers into riskier assets - i.e., stocks. In other words, if you can't earn squat in a savings account, or buying relatively safe Treasuries, you'll buy stocks instead.
Even that's not working, as domestic equity mutual fund flows have been markedly negative for quite a few months now. But the Fed is intentionally trying to drive investors into the stock market.
Why?
They hope that the resulting buying pressure will in and of itself spark a rally, defying the crappy fundamentals, and that people will see their swelling portfolio values and respond to the so-called wealth effect: if I feel rich on paper, I'll spend more money on crap I don't need.
Well, for one thing, again, the average Joe isn't drinking the Kool-Aid, and is pulling money out of equity mutual funds.
And for another, the "new normal" - which, as I've said before, is really just "normal"; my Dad's normal of living within your means, is keeping people from the consumerist behavior that dominating the American household economic psyche from about 1982 until 2008.
True, much of the "balance sheet repair" that has brought the average household's debt service burden down to about 10% has been forced, through defaults on credit cards, home equity lines, mortgages, etc.
But however the burden got that low, households are loathe to ratchet it back up again. Memories are long when you've been burned.
More to the point, THE FED HAS NO BUSINESS TRYING TO PUSH PEOPLE INTO THE STOCK MARKET. That's not their flipping job, and for them to do so is as unconscionable as Barney gambling with the taxpayers' money. So in my view, Bernanke should join Barney in the waterboarding/drawing and quartering/tarring and feathering experience.
So, how do you profit from this mess?
Simple: refinance.
You can now get a 30-year, fixed rate mortgage for 3.25%. We've never, I repeat NEVER, seen a rate that low.
If you're in the 30% tax bracket, that means that your effective rate is less than 2.3%. So, somebody wants to sell you money at 2.3% interest, for 30 years? Take it.
I know, you're thinking, "Gee, I'm nervous taking out a 30-year loan. How about fifteen years?"
Here's an analogy: let's say you invented a car that would run maintenance-free for five years, then suddenly just quit running altogether. How much would you charge for that car? Your answer doesn't really matter, so let's say you would charge $20,000.
Now, you've also invented another car that will run equally maintenance-free for ten years, then quit running. How much would you charge for that car? Most of you will say $40,000, or something around there.
So the bank will make you a 15-year mortgage for about 2.625% today. In other words, you'll have use of that money, with no additional cost, for 15 years, then you'll have paid off the loan and you won't have use of the money anymore.
Now, you'd expect the bank to charge twice as much for doubling the term of utility of their money. But no, they're only going to charge you 23.8% more for doubling your utility term. Why wouldn't you take that deal?
If you're worried about your home's value, don't. For one thing, while house prices aren't going to rise at anywhere near the rate they did during the bubble (in part because we won't see another housing bubble of that magnitude in our lifetimes, and in part because of the demographics - boomers are going to be downsizing their housing, to the point where eventually their place of residence will be a six-foot-long box), they've pretty much bottomed out. And besides, your house isn't an investment, it's a place to park your butt, so if you wind up "upside down" for a brief period of time, it's not the end of the world.
Okay, so you're going to take my advice and pull equity out of your home (don't worry about pulling too much; these days, the bank won't let you, as the days of the 100% loan-to-value mortgage are history), borrowing at an after-tax rate of about 2.3%. So where will you invest it at a rate that will earn more than that, without taking risk? After all, I've just told you that stocks, bonds and possibly gold are the next bubbles.
The answer? You won't. You'll suck it up and accept the fact that, for a brief period of time, you're going to pay 2.3% after taxes for your money, and earn a fraction of that in a nice, safe insured savings account at your local bank, thrift or credit union.
But rates won't stay this low forever. In fact, if Washington doesn't get serious about deficit reduction (and if you believe they will anytime soon, I've got some ocean-front property in Iowa to sell you), Treasuries are going to get downgraded again. And when they do, rates are going to go up, and you'll be able to park your excess money in an insured savings account earning much more than you're paying on your mortgage, especially after taxes.
Ah, but what if I'm wrong? What if the Fed's stimulus works, and the economy takes off like a rocket? Again, that will result in rates going up, as the Fed will have to abandon its dovish posture and start raising the funds target.
Either way, rates are going up. And you can take advantage of it.
A quick note on taxes: I've said that your after-tax rate will be lower than the nominal rate you're paying on your mortgage. That assumes that the tax deduction for mortgage interest remains in place. But in a quest to raise revenue to fund the record deficit, lawmakers have been making noise about taking that deduction away.
Don't worry about it. For one thing, that would be a complete reversal of the mindset of Barney Frank and his ilk, and while Barney has done us all a favor and gotten his worthless arse out of Congress, there are still plenty of his ilk in place. And until we weed all of them out of Washington, which I'm afraid I'll never live to see, the mortgage interest deduction is sacrosanct, in spite of all the talk about removing it to raise revenue and prevent another housing bubble.
Make no mistake; I don't believe mortgage interest should be tax-deductible, for a variety of reasons. However, as long as it is, I'm gonna claim it, and you should, too. I do think they'll take away the deduction for second homes, and probably for second mortgages and home equity lines, at some point. But again, the mortgage interest deduction on first mortgages on a primary resident is a sacred cow that isn't likely to be slaughtered.
How confident am I that this is a good move? I paid off my mortgage a couple of years ago, leaving me happily debt-free, and I'm planning to take the plunge myself, pulling a chunk of equity out of my house (not too much) for a 30-year term, to avail myself of record low prices on money. So I'm putting my own money where my mouth is.
The caveats: don't pull too much equity out - make sure you still have at least 20% equity in your home, and if your mortgage is paid off, don't borrow even half the home's value - and make sure you can afford the monthly payments.
Then sit back and laugh as the next bubble(s) burst. Hey, if you're lucky, the US banking system will collapse altogether, and you'll never have to pay the money back. You can abscond with it and follow me into ex-pat retirement someplace cheap and beautiful, like Reunion Island or Mauritius.
It's the Fed, which is scarier than Michael, Jason, and the Zombie Horde all rolled into one.
So Bernanke & Co. have launched QE3, buying $40B of mortgage-backed securities (MBS) a month, hoping to bring mortgage rates down (which they have - read on to learn how you can take advantage of this), in further hopes that this will spark a wave of refinancing (which it won't, as I'll explain), in even further hopes that that will spark a surge in consumer spending (which it won't, as I'll also explain).
First, let's review a little history.
In the summer of 1998, I predicted a recession, based on my read of various manufacturing indicators that I follow, which happen to be pretty reliable leading indicators of economic downturns.
Okay, I was wrong.
What I didn't count on was the Greenspan Fed intervening to ease monetary policy, at a time when policy was already easy. Let's review the history of the Fed funds target up to that point.
In July 1992, in the aftermath of a credit-driven recession, the Fed cut the funds target 50 basis points (bp; recall that a basis point is 1/100 of a percent) to a then-unprecedented 3.25%. Very few economists predicted that move. One notable one was Lacy Hunt, one of the most astute Fed-watchers of our time.
Another was yours truly. I had just started as an analyst with my current employer in late May of that year, and I wrote my first newsletter article for the company in June, predicting that the Fed would cut the funds target 50 bp. I was right (sometimes you're good, sometimes you're lucky, and sometimes you're good and lucky, as the saying goes).
That helped to kick-start the recovery, and after cutting the target another 25 bp in September of that year, they began raising it to cool things off. From that point until February 1995, they raised it to 6.00%.
Then, they began to ease again, cutting the rate to 5.50% by March 1997. They stood pat after that, as the economy perked along in "Goldilocks mode": not too hot, not too cold.
Then, in September 1998, the Greenspan Fed made history. If you're a student of the Dismal Science, mark that date in your memory. For it was the first time (that I'm aware of; admittedly I only began actively watching the Fed during the Volcker era, and you can be assured that Mr. Volcker would never have done this) that the Fed intervened to influence the markets.
In the Fall of 1998, a hedge fund (something that was largely unheard of theretofore) called Long-Term Capital Management (LTCM) began to experience large losses. A number of large US and foreign banks had big positions in LTCM, which is a problem in and of itself that begged action by banking regulators, including the Fed.
By "action," I mean limiting banks' ability to invest heavily in hedge funds, and maybe keeping in place the Glass-Steagall Act of 1933, which separated banks' traditional banking and trading functions, but was (stupidly) repealed in 1999.
Anyway, the Greenspan Fed chose instead to cut the funds target from 5.50% (already having eased by 50 bp over the course of two years) to 4.75%, a drop of 75 bp, in just 49 days. That was one of the most aggressive moves in Fed history, and it had nothing to do with the underlying economic fundamentals, it was merely meant to stimulate the financial markets to overcome the effects of the LTCM debacle.
Again, do not miss the significance of this event: the Fed, for the first time, intervened to manipulate the securities markets. This is not the Fed's job (recall their dual mandate to control inflation and promote full employment), and for them to do so is, in my book, unconscionable.
But they didn't ask me.
What followed was the fueling of the dot-com bubble. Chairman Greenspan failed to see this coming. We should have been headed into a recession, by all indications from the data. But the unsupported accommodation had an unintended consequence.
Money became uber-cheap (by the standards of the day, anyway), and liquidity flooded the market. So venture capital firms were awash with cheap money, which they threw at dot-com start-ups that didn't have a viable business plan, but had cute sock puppets as mascots and bought expensive Super Bowl ads to show them off. (Give me the Bud Light Lingerie Bowl any day, for a variety of reasons.) Greenspan himself drank the "this time it's different" Kool-Aid, arguing that technological advances made productivity higher than in previous cycles, therefore higher stock market valuations were warranted.
To which I say balderdash, and repeat my oft-stated maxim that this time is never different; the fundamentals of supply and demand that drive macroeconomic trends have not changed since we were all wearing animal skins and trading rocks.
Of course, the Emperor's new clothes in which those companies were attired were soon revealed, and their sudden nakedness resulted in the bursting of the dot-com bubble.
Note this: the dot-com bubble was fueled by a cut in the Fed funds target to 4.75% for a period of just seven months, after which the Fed began to tighten again.
So the dot-com bubble burst, resulting in a recession that ensued in 2000, and persisted for about a year, though the subsequent recovery was dubbed "the jobless recovery," and in reality it took until about 2003 for things to get perking again.
And perk they did. By that time, the Fed had cut the funds target to 1.00% - a new ridiculous low - where the Greenspan Fed held it for a full year. And that fueled another bubble, one that Greenspan again failed to anticipate - in fact, in hindsight, he was quoted as saying, rather bewilderedly, that he had no idea it was coming.
The asset bubble this time was housing. Aided and abetted by excessively lax lending standards intended to increase homeownership -
An aside here. There's a natural rate of homeownership in this country, and if you try to monkey with things to get it higher, you're taking risk. Let's face it; some people should be renters, plain and simple. Who are they? People who can't afford to buy a house, who can't make mortgage payments. But Barney Frank et al wanted to nudge homeownership rates higher. In fact, in arguing that Fannie Mae and Freddie Mac should buy subprime mortgages, Barney actually said:
"When it comes to increasing homeownership, I'm willing to gamble with the taxpayers' money."
In my humble opinion, any lawmaker who openly expresses willingness to gamble with the taxpayers' money should be waterboarded, just for starters, then drawn, quartered, burned at the stake, tarred and feathered, and ... well, you get the idea.
Okay, back to our story. Aided by the subprime lending craze, those record low rates, for a record long time, fueled the housing bubble, whose bursting had catastrophic consequences for the global economy, consequences from which we've yet to recover.
So the Bernanke Fed responded by cutting the funds rate to the unheard-of level of 25 bp - where they've held it for an unprecedented period of nearly four years - and pledged to hold it there for another three years.
(That pledge carries unintended consequences of its own, among them stifling the very housing recovery the Fed hopes to spark, by signaling to would-be buyers that mortgage rates are going to stay low for another few years, so they might as well wait until home prices bottom - which they may not yet have done, in spite of recent data, which is probably seasonal. So they'll remain largely on the sidelines, stalling the housing recovery further.)
And at the same time, the Fed has grossed up its balance sheet three times, to about $3 trillion, and with the latest round of quantitative easing, they'll probably jack it up to $4 trillion, merrily printing money all the way.
So here's the point of tonight's post:
If holding the funds rate at 4.75% for about two quarters fueled the dot-com bubble, and holding it at 1.00% for four quarters fueled the even larger and more damaging housing bubble -
How can we not believe that by holding the funds target at 25 bp for seven years isn't inflating the Mother of All Bubbles?
I guarantee you, it is.
So where's the bubble this time?
In bonds, for one; there's undoubtedly a bubble in Treasuries, and by extension, in corporate bonds. To wit: junk bond yields have fallen, in some cases, to below 5%.
That's nuts.
Also, I fear, in gold, though that depends on what happens to inflation, which could very well skyrocket as a result of the Fed's beyond-easy policy (especially if - er, when - Treasuries get downgraded again). I'm not sure about the gold bubble theory, but it's what's kept me out of gold; every time I think, "Yeah, I'd better jump on the gold bandwagon," I get skittish.
And I'm quite sure there's a bubble in stocks.
How do I support this theory, when savants like Jim Cramer are telling us that every stock out there is a screaming buy?
For one, we're starting to hear the same nonsense that we heard during the dot-com bubble: "things are different this time," and historical P/E ratios no longer apply.
Poppycock.
For another, the market rallies every time the Fed launches a round of QE. Graph the Dow Jones average since 2008, and draw vertical lines marking the start and finish of each of the three rounds of QE to date (QE1, QE2, and Operation Twist, which has been extended into the recently-launched QE3). You'll see a clear pattern of the market rising, then trending sideways as traders (also known as stimulus addicts) anxiously await the next fix. When the crack dealer (the Fed) supplies it, off the market goes again.
And the most recent run-up is counter to the underlying fundamentals; earnings have been on the decline, and the cuts in analysts' estimates of future earnings that usually come late in the fall have hit early this year. That should spark a correction, but no; we're seeing quite the opposite, as the crack fuels another bout of buying euphoria.
The third reason for my assertion that stocks are a bubble is that the Fed itself has signaled this.
Bernanke freely admits that one of the Fed's strategic objectives in providing more stimulus is to push savers into riskier assets - i.e., stocks. In other words, if you can't earn squat in a savings account, or buying relatively safe Treasuries, you'll buy stocks instead.
Even that's not working, as domestic equity mutual fund flows have been markedly negative for quite a few months now. But the Fed is intentionally trying to drive investors into the stock market.
Why?
They hope that the resulting buying pressure will in and of itself spark a rally, defying the crappy fundamentals, and that people will see their swelling portfolio values and respond to the so-called wealth effect: if I feel rich on paper, I'll spend more money on crap I don't need.
Well, for one thing, again, the average Joe isn't drinking the Kool-Aid, and is pulling money out of equity mutual funds.
And for another, the "new normal" - which, as I've said before, is really just "normal"; my Dad's normal of living within your means, is keeping people from the consumerist behavior that dominating the American household economic psyche from about 1982 until 2008.
True, much of the "balance sheet repair" that has brought the average household's debt service burden down to about 10% has been forced, through defaults on credit cards, home equity lines, mortgages, etc.
But however the burden got that low, households are loathe to ratchet it back up again. Memories are long when you've been burned.
More to the point, THE FED HAS NO BUSINESS TRYING TO PUSH PEOPLE INTO THE STOCK MARKET. That's not their flipping job, and for them to do so is as unconscionable as Barney gambling with the taxpayers' money. So in my view, Bernanke should join Barney in the waterboarding/drawing and quartering/tarring and feathering experience.
So, how do you profit from this mess?
Simple: refinance.
You can now get a 30-year, fixed rate mortgage for 3.25%. We've never, I repeat NEVER, seen a rate that low.
If you're in the 30% tax bracket, that means that your effective rate is less than 2.3%. So, somebody wants to sell you money at 2.3% interest, for 30 years? Take it.
I know, you're thinking, "Gee, I'm nervous taking out a 30-year loan. How about fifteen years?"
Here's an analogy: let's say you invented a car that would run maintenance-free for five years, then suddenly just quit running altogether. How much would you charge for that car? Your answer doesn't really matter, so let's say you would charge $20,000.
Now, you've also invented another car that will run equally maintenance-free for ten years, then quit running. How much would you charge for that car? Most of you will say $40,000, or something around there.
So the bank will make you a 15-year mortgage for about 2.625% today. In other words, you'll have use of that money, with no additional cost, for 15 years, then you'll have paid off the loan and you won't have use of the money anymore.
Now, you'd expect the bank to charge twice as much for doubling the term of utility of their money. But no, they're only going to charge you 23.8% more for doubling your utility term. Why wouldn't you take that deal?
If you're worried about your home's value, don't. For one thing, while house prices aren't going to rise at anywhere near the rate they did during the bubble (in part because we won't see another housing bubble of that magnitude in our lifetimes, and in part because of the demographics - boomers are going to be downsizing their housing, to the point where eventually their place of residence will be a six-foot-long box), they've pretty much bottomed out. And besides, your house isn't an investment, it's a place to park your butt, so if you wind up "upside down" for a brief period of time, it's not the end of the world.
Okay, so you're going to take my advice and pull equity out of your home (don't worry about pulling too much; these days, the bank won't let you, as the days of the 100% loan-to-value mortgage are history), borrowing at an after-tax rate of about 2.3%. So where will you invest it at a rate that will earn more than that, without taking risk? After all, I've just told you that stocks, bonds and possibly gold are the next bubbles.
The answer? You won't. You'll suck it up and accept the fact that, for a brief period of time, you're going to pay 2.3% after taxes for your money, and earn a fraction of that in a nice, safe insured savings account at your local bank, thrift or credit union.
But rates won't stay this low forever. In fact, if Washington doesn't get serious about deficit reduction (and if you believe they will anytime soon, I've got some ocean-front property in Iowa to sell you), Treasuries are going to get downgraded again. And when they do, rates are going to go up, and you'll be able to park your excess money in an insured savings account earning much more than you're paying on your mortgage, especially after taxes.
Ah, but what if I'm wrong? What if the Fed's stimulus works, and the economy takes off like a rocket? Again, that will result in rates going up, as the Fed will have to abandon its dovish posture and start raising the funds target.
Either way, rates are going up. And you can take advantage of it.
A quick note on taxes: I've said that your after-tax rate will be lower than the nominal rate you're paying on your mortgage. That assumes that the tax deduction for mortgage interest remains in place. But in a quest to raise revenue to fund the record deficit, lawmakers have been making noise about taking that deduction away.
Don't worry about it. For one thing, that would be a complete reversal of the mindset of Barney Frank and his ilk, and while Barney has done us all a favor and gotten his worthless arse out of Congress, there are still plenty of his ilk in place. And until we weed all of them out of Washington, which I'm afraid I'll never live to see, the mortgage interest deduction is sacrosanct, in spite of all the talk about removing it to raise revenue and prevent another housing bubble.
Make no mistake; I don't believe mortgage interest should be tax-deductible, for a variety of reasons. However, as long as it is, I'm gonna claim it, and you should, too. I do think they'll take away the deduction for second homes, and probably for second mortgages and home equity lines, at some point. But again, the mortgage interest deduction on first mortgages on a primary resident is a sacred cow that isn't likely to be slaughtered.
How confident am I that this is a good move? I paid off my mortgage a couple of years ago, leaving me happily debt-free, and I'm planning to take the plunge myself, pulling a chunk of equity out of my house (not too much) for a 30-year term, to avail myself of record low prices on money. So I'm putting my own money where my mouth is.
The caveats: don't pull too much equity out - make sure you still have at least 20% equity in your home, and if your mortgage is paid off, don't borrow even half the home's value - and make sure you can afford the monthly payments.
Then sit back and laugh as the next bubble(s) burst. Hey, if you're lucky, the US banking system will collapse altogether, and you'll never have to pay the money back. You can abscond with it and follow me into ex-pat retirement someplace cheap and beautiful, like Reunion Island or Mauritius.
Friday, September 14, 2012
Shoots First, Aims Later
I didn't think I'd be making a second post tonight, but ... sheesh. What I just heard almost made my head explode. From bewilderment, not anger.
Let's replay events of this week. A bunch of radicals wage a major protest outside the US Embassy in Cairo. The Embassy makes a statement on its website condemning an amateurish anti-Islam video for the protest. Mitt Romney makes a statement that we as a country shouldn't be apologizing for what some nutjob does in the name of free speech. The Left jumps all over him for supposedly making an insensitive statement about our apologizing for the video when four of our citizens, including the US Ambassador to Libya, were later killed in a similar protest. President Obama even goes so far as to claim that Mitt "shoots first and aims later."
Mr. Obama, I'd like to introduce you to one Joe "Stand Up, Chuck!" Biden.
Yeah, Mitt was way out of line to criticize that video. That's why the White House flinched, and made the Embassy in Cairo pull the statement condemning it. Uh-huh.
So today, at the ceremony at Andrews AFB, over the flag-draped coffins of the four dead diplomats, Secretary of State Hillary Clinton again blames the video for the protests.
Why isn't the Left so quick to blame the White House and Congress for the Tea Party protests?
And then comes the icing on the cake: White House Press Secretary Jay Carney - who looks like a high school kid, by the way, and has about as much sense (no, wait, that's an insult to high school kids) - says that "this is not a case of protests directed at the United States."
Funny, I thought those flags that were being burned in the protest footage were red, white and blue, and had stars and stripes on them. Nice aim, Jay.
While I'm at it, I heard a liberal talking head tonight call Romney a Keynesian because he said that balancing the budget in his first term would have an adverse impact on the economy. Romney's statement was based on the fact that completely eliminating a budget deficit of a trillion and a half dollars in four years, when the economy will likely already be in recession by the time he would take office, is a pretty tall order, and cuts that draconian could, yes, hurt the economy in the short run.
So the talking head's premise was that, by not calling for extreme budget cuts to eliminate a record deficit in four years during a recession, Romney is a Keynesian.
Wrong, dude. A Keynesian would call for more spending to get us out of the recession, not spending cuts. Just because a guy calls for measured cuts instead of the most painful medicine possible doesn't make him a Keynesian.
And people wonder why I have a problem with non-economists trying to argue Keynesianism vs. monetarism.
Let's replay events of this week. A bunch of radicals wage a major protest outside the US Embassy in Cairo. The Embassy makes a statement on its website condemning an amateurish anti-Islam video for the protest. Mitt Romney makes a statement that we as a country shouldn't be apologizing for what some nutjob does in the name of free speech. The Left jumps all over him for supposedly making an insensitive statement about our apologizing for the video when four of our citizens, including the US Ambassador to Libya, were later killed in a similar protest. President Obama even goes so far as to claim that Mitt "shoots first and aims later."
Mr. Obama, I'd like to introduce you to one Joe "Stand Up, Chuck!" Biden.
Yeah, Mitt was way out of line to criticize that video. That's why the White House flinched, and made the Embassy in Cairo pull the statement condemning it. Uh-huh.
So today, at the ceremony at Andrews AFB, over the flag-draped coffins of the four dead diplomats, Secretary of State Hillary Clinton again blames the video for the protests.
Why isn't the Left so quick to blame the White House and Congress for the Tea Party protests?
And then comes the icing on the cake: White House Press Secretary Jay Carney - who looks like a high school kid, by the way, and has about as much sense (no, wait, that's an insult to high school kids) - says that "this is not a case of protests directed at the United States."
Funny, I thought those flags that were being burned in the protest footage were red, white and blue, and had stars and stripes on them. Nice aim, Jay.
While I'm at it, I heard a liberal talking head tonight call Romney a Keynesian because he said that balancing the budget in his first term would have an adverse impact on the economy. Romney's statement was based on the fact that completely eliminating a budget deficit of a trillion and a half dollars in four years, when the economy will likely already be in recession by the time he would take office, is a pretty tall order, and cuts that draconian could, yes, hurt the economy in the short run.
So the talking head's premise was that, by not calling for extreme budget cuts to eliminate a record deficit in four years during a recession, Romney is a Keynesian.
Wrong, dude. A Keynesian would call for more spending to get us out of the recession, not spending cuts. Just because a guy calls for measured cuts instead of the most painful medicine possible doesn't make him a Keynesian.
And people wonder why I have a problem with non-economists trying to argue Keynesianism vs. monetarism.
Oops, I Did It Again
Sorry for the Britney Spears reference. But honestly, Ms. Spears would probably make about as good a Fed Chairman as the one we've got.
As a brief aside, I used to think Jim Cramer was probably a pretty smart guy. Annoying as can be, yes, and the Chief Rally-Monger of Bubblevision, but smart. Then I watched him try to explain quantitative easing last night.
Not only did the Mad One butcher the attempt - I hope he didn't really believe what he was saying - but he praised Ben Bernanke in the process. Oh my. Only a lover of bubbles could think highly of the job Helicopter Ben is doing.
So let's talk about what Ben did yesterday, which relates to the title of this post.
Ben, as expected, launched QE3 (that's the third round of quantitative easing, not a transatlantic ship). Before we talk about that, though, a primer on the Fed.
The Federal Open Market Committee, or FOMC, is the rate-setting arm of the Federal Reserve Board. It consists of Chairman Bernanke and the other six members of the board, and five of the presidents of the 12 regional Fed banks, who serve on a rotating basis (except that the president of the New York Fed bank is always an FOMC member). It's dominated by doves at present, with only Jeff Lacker of Richmond falling in the hawk camp (doves favor easy monetary policy, while hawks favor fighting inflation). The FOMC meets eight times a year to set monetary policy, and their primary tool is interest rates - specifically, the Fed funds rate, which is the rate at which banks with excess liquidity lend it to banks that need more liquidity. With me so far?
The FOMC has been handed a dual mandate by Congress: use monetary policy to (a) limit inflation and (b) ensure full employment.
That's a bit like being handed a dual mandate to (a) jump in a swimming pool and (b) don't get wet.
When the economy is heating up, people are buying more stuff. As the demand for stuff increases relative to the supply, we have the classic definition of demand-pull inflation: too much money chasing too few goods. So the FOMC will raise the Fed funds rate, which raises banks' borrowing cost, which leads to the banks passing the higher cost of borrowing along to its own borrowers in the form of higher rates, which curbs demand: people won't borrow as much money at high rates to buy more stuff as they will at lower rates. So inflation is held in check.
So far, so good. But as the economy then slows due to declining demand, companies are selling less stuff, and they start laying people off. If the cuts are sufficiently draconian, a recession could ensue. Thus, the Fed will begin - hopefully before a recession starts - to cut the Fed funds rate, so that banks can borrow more cheaply, and pass the lower rates on to their own borrowers, who will now be willing to borrow more money to buy more stuff, thus stimulating the economy.
Makes perfect sense, right? Except that our last couple of recessions have been caused not by normal business cycles of the economy heating up, the Fed raising rates, and then the economy cooling, but by the bursting of asset bubbles (dot-com stock prices in the 2000 recession, housing prices in the latest downturn). And those bubbles have been fueled by low interest rates, i.e., easy monetary policy.
That begs the question: if policy is already easy, and a recession happens anyway, what can the Fed do to stave off the recession or at least spark a recovery?
The answer, as we're seeing, is not a whole heck of a lot.
The Fed cut the Funds rate to "zero to 25 basis points" (bp; a basis point is 1/100 of a percent) in late 2008. The Fed had begun cutting rates in the third quarter of 2007, when the funds rate started at 5.25%.
So we've now seen rates near zero for nearly four years, and what has been the effect on borrowing and the economy?
Virtually nada. Borrowing has contracted, as people are more reluctant to take on debt now, especially credit card debt, having seen the error of their ways. Auto loans are growing some, but not like they were before the housing bubble burst. Student loans are way up, because if you can't find a job, you can always go back to college and borrow your living expenses, to pay the piper later, if at all (and student loans are brewing to be the next credit bubble).
Mortgage borrowing? Renting is the new owning, so there's not much purchase borrowing going on. And refis have largely run their course; those borrowers who can qualify, now that lending standards have returned to normal, have already refinanced, and it would take significantly lower rates to offer an incentive to refi from, say, a 4% mortgage - with rates currently at 3.5% for a 30-year fixed-rate mortgage, there's not much incentive to pay the fees to refi.
And the economy has sputtered, with much of the recent data showing a slide toward recession, whether the EU drags us there or not. So cutting rates hasn't done much to stimulate the economy, and there's precious little room to cut further. Cutting all the way to zero is the last bullet in Barney's - er, Ben's - pocket, and he doesn't want to chamber it until he absolutely has to.
Enter quantitative easing, or QE. All that is, is the Fed buying bonds of various types to keep interest rates down. How does this work? Glad you asked.
If the Fed commits to buying bonds - and they're not price-sensitive; after all, they're paying with your money - that creates demand for those bonds, which is significant: there's now a large, price-insensitive buyer of size in the market. So the price is bid up. When bond prices go up, bond yields - interest rates - go down.
In December of 2008 - at about the same time the Fed cut rates to near-zero - it launched QE1, a program of buying bonds that lasted until March 2010. During that span, the Fed nearly tripled the size of its balance sheet, from less than $1 trillion to about $2.3 trillion. That's a lot of money that got printed.
QE1 worked so well that when the economy still wasn't picking up in late 2010, the Fed launched QE2, buying more bonds. That round lasted until June 2011, and grossed up the Fed's balance sheet further, to about $2.9 trillion.
Now, with QE1 and QE2 having failed to stimulate the economy, which is showing increasing signs of weakness (Chairman Bernanke recently commented that the unemployment rate was a "grave" concern, which reminds me of Col. Jessup's response to McCaffey in "A Few Good Men," when McCaffey asked whether Jessup thought his soldier was in "grave danger" - "Is there any other kind?"), what's the best course of action?
Why, launch QE3! Buy $40 billion of mortgage-backed securities a month! That'll keep mortgage rates low, which should set off a wave of mortgage borrowing!
Yeah, like QE1 and QE2 did.
What it will do is gross up the Fed's balance sheet to $4 trillion.
At the same time, the Fed promised to keep rates at their current level until at least mid-2015. I heard one pundit yesterday forecast that the Fed won't raise rates until 2017. (I'm still trying to figure out how Bernanke, whose term expires in 2014, can promise anything beyond that. Of course, if he keeps rates low enough, long enough, to get Mr. Obama re-elected, he stands a good chance of being re-appointed; could it be that ... nah.)
That means, at a minimum, we'll have seen the Fed funds rate at an unprecedented 25 bp for an unprecedented six and a half years, maybe as much as eight or nine years. To put that in perspective, the Greenspan Fed held the funds rate at the then-ridiculously low level of 1% for four quarters in the wake of the dot-com bubble. (And that comparison will be the topic of my next post.)
Now, who benefits from quantitative easing? The stock market, for one, and I'll address that in the next post as well. But more specifically, who benefits from low rates? Savers? Hardly. Banks? Well, yeah. But who is the primary beneficiary?
Borrowers, of course. And who's borrowing these days? You? Me, neither. Students, I guess. But not much more than that. Companies? Sure, and I'll also talk about their debt in the next post (my, but I'm a tease today.)
But who's the biggest borrower in the US? If you said, "the government," give yourself a gold star.
With $16 trillion in debt, the US government has more debt outstanding than all Americans in total. Add in state and local government debt, and you have a total that's nearly as much as all US citizens and companies combined.
Interest rates influence the cost of servicing debt. And when your debt burden is $16 trillion, it costs you, at 25 bp, $40 billion a year just to make the interest payments. Note that the government's debt service burden is much higher than that, as it's not paying the Fed funds rate, but higher rates for longer maturities. In fact, the federal government's monthly debt service burden is larger than the annual budget for the Department of Labor (ironic, when everyone in Washington is talking about how to create jobs).
For the sake of comparison - again, actual government borrowing costs are higher than the funds rate - at a Fed funds rate of 1%, where Greenspan held rates after the dot-com bubble, the debt service burden would jump from $40 billion a year to $160 billion. At 3%, it would be nearly a half-trillion dollars. And at 5%, we'd basically double the deficit every year, just paying the interest on the debt we've got. Can you say "Weimar Germany?"
Now, am I suggesting that the Fed is keeping money as easy as possible just to help the boys and girls in Washington run record deficits? I'm not a conspiracy theorist. But, hmmm ...
By the way, don't look now, but the Fed's current policy is a tax - a hidden tax on you and me. To keep those borrowing costs down, savers have to pay the price. And that brings me to an interesting unintended consequence of the Fed's policy.
Retirees typically live on a fixed income - meaning interest income. With interest income virtually non-existent, an increasing number of would-be retirees are remaining in, or re-entering, the labor force. They're experienced, and they're willing to accept a lower wage than they demanded in their peak earning years. So they're crowding out jobs that would otherwise be held by younger workers. So much for the Fed keeping money cheap to create jobs.
Also, by promising that rates will remain low through 2015, the Fed is signaling would-be homebuyers that mortgage rates won't go up. So with home prices not appreciating, why be in a hurry to borrow now? Thus the Fed is also keeping a lid on housing activity.
Does this make sense to you? Me, neither. So that's why I assert that Mr. Bernanke is the worst Fed chairman in the history of the role.
Hey Britney, what are you doing these days?
As a brief aside, I used to think Jim Cramer was probably a pretty smart guy. Annoying as can be, yes, and the Chief Rally-Monger of Bubblevision, but smart. Then I watched him try to explain quantitative easing last night.
Not only did the Mad One butcher the attempt - I hope he didn't really believe what he was saying - but he praised Ben Bernanke in the process. Oh my. Only a lover of bubbles could think highly of the job Helicopter Ben is doing.
So let's talk about what Ben did yesterday, which relates to the title of this post.
Ben, as expected, launched QE3 (that's the third round of quantitative easing, not a transatlantic ship). Before we talk about that, though, a primer on the Fed.
The Federal Open Market Committee, or FOMC, is the rate-setting arm of the Federal Reserve Board. It consists of Chairman Bernanke and the other six members of the board, and five of the presidents of the 12 regional Fed banks, who serve on a rotating basis (except that the president of the New York Fed bank is always an FOMC member). It's dominated by doves at present, with only Jeff Lacker of Richmond falling in the hawk camp (doves favor easy monetary policy, while hawks favor fighting inflation). The FOMC meets eight times a year to set monetary policy, and their primary tool is interest rates - specifically, the Fed funds rate, which is the rate at which banks with excess liquidity lend it to banks that need more liquidity. With me so far?
The FOMC has been handed a dual mandate by Congress: use monetary policy to (a) limit inflation and (b) ensure full employment.
That's a bit like being handed a dual mandate to (a) jump in a swimming pool and (b) don't get wet.
When the economy is heating up, people are buying more stuff. As the demand for stuff increases relative to the supply, we have the classic definition of demand-pull inflation: too much money chasing too few goods. So the FOMC will raise the Fed funds rate, which raises banks' borrowing cost, which leads to the banks passing the higher cost of borrowing along to its own borrowers in the form of higher rates, which curbs demand: people won't borrow as much money at high rates to buy more stuff as they will at lower rates. So inflation is held in check.
So far, so good. But as the economy then slows due to declining demand, companies are selling less stuff, and they start laying people off. If the cuts are sufficiently draconian, a recession could ensue. Thus, the Fed will begin - hopefully before a recession starts - to cut the Fed funds rate, so that banks can borrow more cheaply, and pass the lower rates on to their own borrowers, who will now be willing to borrow more money to buy more stuff, thus stimulating the economy.
Makes perfect sense, right? Except that our last couple of recessions have been caused not by normal business cycles of the economy heating up, the Fed raising rates, and then the economy cooling, but by the bursting of asset bubbles (dot-com stock prices in the 2000 recession, housing prices in the latest downturn). And those bubbles have been fueled by low interest rates, i.e., easy monetary policy.
That begs the question: if policy is already easy, and a recession happens anyway, what can the Fed do to stave off the recession or at least spark a recovery?
The answer, as we're seeing, is not a whole heck of a lot.
The Fed cut the Funds rate to "zero to 25 basis points" (bp; a basis point is 1/100 of a percent) in late 2008. The Fed had begun cutting rates in the third quarter of 2007, when the funds rate started at 5.25%.
So we've now seen rates near zero for nearly four years, and what has been the effect on borrowing and the economy?
Virtually nada. Borrowing has contracted, as people are more reluctant to take on debt now, especially credit card debt, having seen the error of their ways. Auto loans are growing some, but not like they were before the housing bubble burst. Student loans are way up, because if you can't find a job, you can always go back to college and borrow your living expenses, to pay the piper later, if at all (and student loans are brewing to be the next credit bubble).
Mortgage borrowing? Renting is the new owning, so there's not much purchase borrowing going on. And refis have largely run their course; those borrowers who can qualify, now that lending standards have returned to normal, have already refinanced, and it would take significantly lower rates to offer an incentive to refi from, say, a 4% mortgage - with rates currently at 3.5% for a 30-year fixed-rate mortgage, there's not much incentive to pay the fees to refi.
And the economy has sputtered, with much of the recent data showing a slide toward recession, whether the EU drags us there or not. So cutting rates hasn't done much to stimulate the economy, and there's precious little room to cut further. Cutting all the way to zero is the last bullet in Barney's - er, Ben's - pocket, and he doesn't want to chamber it until he absolutely has to.
Enter quantitative easing, or QE. All that is, is the Fed buying bonds of various types to keep interest rates down. How does this work? Glad you asked.
If the Fed commits to buying bonds - and they're not price-sensitive; after all, they're paying with your money - that creates demand for those bonds, which is significant: there's now a large, price-insensitive buyer of size in the market. So the price is bid up. When bond prices go up, bond yields - interest rates - go down.
In December of 2008 - at about the same time the Fed cut rates to near-zero - it launched QE1, a program of buying bonds that lasted until March 2010. During that span, the Fed nearly tripled the size of its balance sheet, from less than $1 trillion to about $2.3 trillion. That's a lot of money that got printed.
QE1 worked so well that when the economy still wasn't picking up in late 2010, the Fed launched QE2, buying more bonds. That round lasted until June 2011, and grossed up the Fed's balance sheet further, to about $2.9 trillion.
Now, with QE1 and QE2 having failed to stimulate the economy, which is showing increasing signs of weakness (Chairman Bernanke recently commented that the unemployment rate was a "grave" concern, which reminds me of Col. Jessup's response to McCaffey in "A Few Good Men," when McCaffey asked whether Jessup thought his soldier was in "grave danger" - "Is there any other kind?"), what's the best course of action?
Why, launch QE3! Buy $40 billion of mortgage-backed securities a month! That'll keep mortgage rates low, which should set off a wave of mortgage borrowing!
Yeah, like QE1 and QE2 did.
What it will do is gross up the Fed's balance sheet to $4 trillion.
At the same time, the Fed promised to keep rates at their current level until at least mid-2015. I heard one pundit yesterday forecast that the Fed won't raise rates until 2017. (I'm still trying to figure out how Bernanke, whose term expires in 2014, can promise anything beyond that. Of course, if he keeps rates low enough, long enough, to get Mr. Obama re-elected, he stands a good chance of being re-appointed; could it be that ... nah.)
That means, at a minimum, we'll have seen the Fed funds rate at an unprecedented 25 bp for an unprecedented six and a half years, maybe as much as eight or nine years. To put that in perspective, the Greenspan Fed held the funds rate at the then-ridiculously low level of 1% for four quarters in the wake of the dot-com bubble. (And that comparison will be the topic of my next post.)
Now, who benefits from quantitative easing? The stock market, for one, and I'll address that in the next post as well. But more specifically, who benefits from low rates? Savers? Hardly. Banks? Well, yeah. But who is the primary beneficiary?
Borrowers, of course. And who's borrowing these days? You? Me, neither. Students, I guess. But not much more than that. Companies? Sure, and I'll also talk about their debt in the next post (my, but I'm a tease today.)
But who's the biggest borrower in the US? If you said, "the government," give yourself a gold star.
With $16 trillion in debt, the US government has more debt outstanding than all Americans in total. Add in state and local government debt, and you have a total that's nearly as much as all US citizens and companies combined.
Interest rates influence the cost of servicing debt. And when your debt burden is $16 trillion, it costs you, at 25 bp, $40 billion a year just to make the interest payments. Note that the government's debt service burden is much higher than that, as it's not paying the Fed funds rate, but higher rates for longer maturities. In fact, the federal government's monthly debt service burden is larger than the annual budget for the Department of Labor (ironic, when everyone in Washington is talking about how to create jobs).
For the sake of comparison - again, actual government borrowing costs are higher than the funds rate - at a Fed funds rate of 1%, where Greenspan held rates after the dot-com bubble, the debt service burden would jump from $40 billion a year to $160 billion. At 3%, it would be nearly a half-trillion dollars. And at 5%, we'd basically double the deficit every year, just paying the interest on the debt we've got. Can you say "Weimar Germany?"
Now, am I suggesting that the Fed is keeping money as easy as possible just to help the boys and girls in Washington run record deficits? I'm not a conspiracy theorist. But, hmmm ...
By the way, don't look now, but the Fed's current policy is a tax - a hidden tax on you and me. To keep those borrowing costs down, savers have to pay the price. And that brings me to an interesting unintended consequence of the Fed's policy.
Retirees typically live on a fixed income - meaning interest income. With interest income virtually non-existent, an increasing number of would-be retirees are remaining in, or re-entering, the labor force. They're experienced, and they're willing to accept a lower wage than they demanded in their peak earning years. So they're crowding out jobs that would otherwise be held by younger workers. So much for the Fed keeping money cheap to create jobs.
Also, by promising that rates will remain low through 2015, the Fed is signaling would-be homebuyers that mortgage rates won't go up. So with home prices not appreciating, why be in a hurry to borrow now? Thus the Fed is also keeping a lid on housing activity.
Does this make sense to you? Me, neither. So that's why I assert that Mr. Bernanke is the worst Fed chairman in the history of the role.
Hey Britney, what are you doing these days?
Wednesday, September 12, 2012
The Day After, and the Day Before
I somehow couldn't bring myself to post anything yesterday, the 11th anniversary of the 9/11 terror attacks. I certainly didn't want to demean the occasion by posting anything related to politics; after all, it was in the aftermath of those attacks that we as a nation, however briefly, set our partisan vitriol aside and came together as one.
And I'd planned an economic diatribe, but I just couldn't get in the mood. I'm sure you understand.
I'll risk being cliche and tell what I remember of that dark morning. I was in the shower, and my wife had gone downstairs to let our brood of mutts out. She had turned on the TV, and came upstairs to tell me that a plane had flown into the World Trade Center. At first I thought it had to be an accident.
But something just didn't feel right.
What are the odds that Joe Pilot loses control of his Cessna, and manages to fly it into one of the twin towers? Just as I was contemplating that, my wife informed me that a second plane had flown into the other tower. No accident.
I hurried to finish getting ready for work, watching the horror unfold on the TV in our sitting room. I drove to work, listening to the coverage on the radio. Once in the office, we all gathered around the sales desk. The market, of course, was closed, and we all watched the coverage on the live CNBC feed that we have in our office to keep up with the markets throughout the day. I remember the shock and horror as first one tower collapsed, then the other.
I've since visited Ground Zero, and seen the cross left there, formed by what was left of iron girders. We as a family also visited St. Paul's Chapel, where the first responders took many of the rescuees, and saw the memorials there. That was perhaps the most powerful part of it for us.
When our daughter was eight years old, in 1998, we visited the Big Apple - one of our favorite cities in the world - and took the ferry to Liberty Island. Our daughter took a picture of my wife and me with the twin towers in the background, and we cherish that picture now. On that later trip when we visited Ground Zero, we went back to Liberty Island and had her replicate the shot - a little older, a little grayer, and without the WTC in the background.
On to tomorrow. It feels funny posting today as well, given what happened in Libya, but there's a Fed meeting today and tomorrow, and the Fed is likely to announce tomorrow that more stimulus is on the way. I place the odds at around 70% that they'll make a move.
In part, that's because there's an election coming up, and Mr. Bernanke knows that if he does nothing, it hurts Mr. Obama's chances, and Mr. Romney has pledged to replace Bernanke if he's elected (nearly reason enough right there to vote for Romney). Don't let anyone tell you that the Fed doesn't consider politics in its actions. That hasn't been the case since at least Alan Greenspan.
Also, the markets thrive on stimulus these days - it's like crack to an addict. I'll devote more attention to this topic in a future post. But everybody wants the market rallying, and the only thing keeping it rallying right now is Fed accommodation.
On the flip side, Bernanke is like Barney Fife. He's got one bullet left in his pocket, and he might not want to use it right now, especially since the economy's likely to get worse. But that bullet is probably a blank; all the stimulus undertaken to date has done pretty much nil in stimulating the economy, and besides the fact that the Fed can't really gross up its balance sheet much more than it already has, what effect would more bond purchases have?
The Fed has hinted at copying the Bank of England (there's a good idea; copy the plan of a central bank whose country is in recession), and offering low borrowing rates to banks only if they use the funds to make loans.
Great idea. Guess what? Borrowing costs for banks are already ridiculously low, and they're awash with liquidity, unlike their British counterparts. Heck, US banks are offering basically nothing for savings deposits, yet they can't stem the tide of money rolling into their collective coffers. So why would they need more liquidity?
And they're not making loans with the liquidity they've got, in part because they can earn a virtual (supposedly) risk-free spread borrowing overnight at rates they've been promised will stay low for two more years, at least, and investing them in longer-term bonds. Why take the risk of making loans in a still-shaky economy?
Also, nobody really wants to borrow right now - at least, nobody whose credit is sufficient to qualify for a loan.
So I'm guessing the Fed will act, the markets will rally ... and the economy will get worse.
And I'd planned an economic diatribe, but I just couldn't get in the mood. I'm sure you understand.
I'll risk being cliche and tell what I remember of that dark morning. I was in the shower, and my wife had gone downstairs to let our brood of mutts out. She had turned on the TV, and came upstairs to tell me that a plane had flown into the World Trade Center. At first I thought it had to be an accident.
But something just didn't feel right.
What are the odds that Joe Pilot loses control of his Cessna, and manages to fly it into one of the twin towers? Just as I was contemplating that, my wife informed me that a second plane had flown into the other tower. No accident.
I hurried to finish getting ready for work, watching the horror unfold on the TV in our sitting room. I drove to work, listening to the coverage on the radio. Once in the office, we all gathered around the sales desk. The market, of course, was closed, and we all watched the coverage on the live CNBC feed that we have in our office to keep up with the markets throughout the day. I remember the shock and horror as first one tower collapsed, then the other.
I've since visited Ground Zero, and seen the cross left there, formed by what was left of iron girders. We as a family also visited St. Paul's Chapel, where the first responders took many of the rescuees, and saw the memorials there. That was perhaps the most powerful part of it for us.
When our daughter was eight years old, in 1998, we visited the Big Apple - one of our favorite cities in the world - and took the ferry to Liberty Island. Our daughter took a picture of my wife and me with the twin towers in the background, and we cherish that picture now. On that later trip when we visited Ground Zero, we went back to Liberty Island and had her replicate the shot - a little older, a little grayer, and without the WTC in the background.
On to tomorrow. It feels funny posting today as well, given what happened in Libya, but there's a Fed meeting today and tomorrow, and the Fed is likely to announce tomorrow that more stimulus is on the way. I place the odds at around 70% that they'll make a move.
In part, that's because there's an election coming up, and Mr. Bernanke knows that if he does nothing, it hurts Mr. Obama's chances, and Mr. Romney has pledged to replace Bernanke if he's elected (nearly reason enough right there to vote for Romney). Don't let anyone tell you that the Fed doesn't consider politics in its actions. That hasn't been the case since at least Alan Greenspan.
Also, the markets thrive on stimulus these days - it's like crack to an addict. I'll devote more attention to this topic in a future post. But everybody wants the market rallying, and the only thing keeping it rallying right now is Fed accommodation.
On the flip side, Bernanke is like Barney Fife. He's got one bullet left in his pocket, and he might not want to use it right now, especially since the economy's likely to get worse. But that bullet is probably a blank; all the stimulus undertaken to date has done pretty much nil in stimulating the economy, and besides the fact that the Fed can't really gross up its balance sheet much more than it already has, what effect would more bond purchases have?
The Fed has hinted at copying the Bank of England (there's a good idea; copy the plan of a central bank whose country is in recession), and offering low borrowing rates to banks only if they use the funds to make loans.
Great idea. Guess what? Borrowing costs for banks are already ridiculously low, and they're awash with liquidity, unlike their British counterparts. Heck, US banks are offering basically nothing for savings deposits, yet they can't stem the tide of money rolling into their collective coffers. So why would they need more liquidity?
And they're not making loans with the liquidity they've got, in part because they can earn a virtual (supposedly) risk-free spread borrowing overnight at rates they've been promised will stay low for two more years, at least, and investing them in longer-term bonds. Why take the risk of making loans in a still-shaky economy?
Also, nobody really wants to borrow right now - at least, nobody whose credit is sufficient to qualify for a loan.
So I'm guessing the Fed will act, the markets will rally ... and the economy will get worse.
Monday, September 10, 2012
The Fulfillment of Foreshadowing
My last two posts hinted at posts to come, so I figured I'd better address the points foreshadowed before they slip from my increasingly slippery memory. The first had to do with the track record, or lack thereof, of a candidate for office, and the second had to do with a business owner having built his or her own business. And both are related to our current POTUS, so I'll address them both in one fell swoop.
My initial problem with President Obama - then merely Candidate Obama - had nothing to do with his race, his background, or his place of birth, though most of his ardent supporters have accused me, and people like me (i.e., anyone who isn't a fan of his), of being "afraid of a black man in the White House," or of being a "birther" (to tell you the truth, until about a year ago, I thought the term was a derogatory swipe at those who are opposed to abortion; I didn't know what the term actually meant until someone pointed it out to me).
I'm not afraid of a black man - or woman - in the White House. I embrace it. I'd vote for a man like J.C. Watts - admittedly a Republican - or a Democrat like Newark Mayor Cory Booker, in a ... well, a Newark minute. These are men with clearly stated plans, and proven track records of accomplishments, of getting things done. I'd probably vote for Condie Rice, too, if she'd run.
In fact, I'm not even afraid of an unqualified man or woman in the White House. In my humble opinion, we have one of those now, and I don't recall being afraid as a result. Regardless who the president is, I'm going to try and make the best of it, and endeavor to prosper as a result.
Let me continue this detour from my originally intended train of thought for a moment. President Obama's extension of the Bush tax cuts ... wait a second. If he extended them, are they not now the Obama tax cuts? Or, if we want to be politically non-divisive and attribute them to no single president, since they've now spanned two administrations, should we call them the current tax cuts, since they remain in place? And are they really cuts, since nothing's been cut for a while, it's merely been extended, so that they're simply the current tax rates? It's so confusing.
Ah well, no matter. These tax cuts have benefitted me, as I fall within the group of taxpayers whose rates have been reduced by them. And as much as I disagree with Mr. Obama's cuts in the FICA tax withholding rate, as it only serves to exacerbate the Social Security shortfall, I have benefitted from that as well. So why should I fear him? He's been good for me in the short run, even if he's been bad for the economy overall, and may be bad for me in the long run.
As for where he was born, I could care less. Though I chuckle when I hear the left chide Mitt Romney for not disclosing more of his tax returns, claiming that by refusing to do so, he's the one creating the controversy. Yet, when President Obama refuses the simple step of disclosing his birth certificate, the "birthers" are the ones who created the controversy. But such is the nature of our new liberal-speak, which seems rather Orwellian to me.
In any event, if he were, after one term in office, doing a whiz-bang job, and it was suddenly revealed that he had been born in, say, New Guinea, or Angola (the country, not the prison in Louisiana), or on Mars, I'd be first in line to say, "Who cares? He's doing a whiz-bang job. Let's re-elect him anyway, let's change the rules."
Nor do I care what his middle name is. It could be Gerbil-Karma for all I care.
No, it matters not to me the color of his skin, his gender, his name, or his birthplace. What matters to me is that he was ushered into office on a complete lack of experience, but an ability to make a pretty speech, laced with empty buzzwords like "Hope" and "Change" and the Bob the Builder-inspired "Yes we can!", with no one questioning the substance behind those words.
Let's break it down: he gradutated from Columbia University in 1983 with a degree in political science. He worked for a year at a publishing and consulting firm, then for another year at a lobbying firm. After that he was a community organizer (what is that, anyway?) for five years, then went to law school at Harvard, graduating in 1991, after which he worked as a civil rights attorney until 1994.
Then, he threw his hat in the ring to run for the Illinois State Senate, at the tender age of 34. He won the race in 1996, and served just one term before running for the US House of Representatives. He lost that bid, but was re-elected to the Illinios Senate for a second term, then a third. While he was running for that third term, he was already prepping for a shot at the US Senate, hiring political consultant David Axelrod.
A year after being re-elected to the Illinois Senate, and just seven years after first gaining that seat, he announced his candidacy for the US Senate, in 2003. He was elected in 2004, and took office the next year. A scant two years later, he announced his candidacy for the presidency, but of course he'd planned that course of action well before, as all candidates do.
So Mr. Obama, a career politician, has spent virtually all of his political career campaigning for the next step. Little wonder that, now that there is no next step above his current office (except perhaps "lobbyist"), he hasn't the first earthly idea of what to do. He missed most of his US Senate votes, and one can only surmise from the timing of his campaigning that he missed a good number of state senate votes too.
It's as if we were all so sick of GWB, we looked out in the parking lot, pointed at the first dude we saw, and said, "There - that guy."
"Hope" and "Change" have now been replaced with "Forward," equally bereft of meaning, not that that's a deterrent to his avid - or rabid? - followers. It's a word, and if it's chanted enough, by enough people, again in Orwellian fashion, it creates fervor. (For an example, see the DNC highlights.)
He does give a pretty speech. I remember listening to his inauguration speech with rapt attention, actually tearing up at a couple of points, and thinking, "Yeah - maybe this is the guy!" Immediately afterward, I couldn't help thinking of the line uttered by Stephen the Irishman in Braveheart, after William Wallace's stirring "Sons of Scotland" speech: "Fine speech. Now what do we do?"
And it's been the "now what?", or lack thereof, that has troubled me ever since.
So my preference is for a candidate who's actually done something, and whose speeches actually outline a plan. I listened for that in President Obama's recent acceptance speech, which began by falsely criticizing his opponent for not laying out a plan. I listened carefully for some details on what he'd do, and how he'd do it.
I'm still listening.
As for the now-infamous "You didn't build that" speech (which has been spun by his supporters to not really mean what he has since repeated several times that he did, in fact, mean), I'm living proof to the contrary, as are scores upon scores of Americans.
I didn't start this business, nor do I have an ownership interest. I'm just a hired gun. But from the time I started with this company 20 years ago, various factions within the credit union industry - our primary clientele - have sought to limit what we do.
These organizations, which form a wholesale tier of the industry that I won't bother to explain right now, are called corporate credit unions. And throughout our firm's history, they've had an ownership stake, either directly or indirectly, in our company.
Now, what we do competes to a degree with what they do, or at least they've always thought so. So, whether it was in the best interests of the credit unions we all serve or not, corporate credit unions have always sought to limit our access to credit unions, thus limiting our business, and limiting credit unions' options in the process.
At the same time, our business is highly cyclical, with periods of extremely strong profitability, and periods of losses. So we don't need more hurdles thrown in front of us. Yet our owners - the very people who benefit from our gains and suffer from our losses - have done just that, or at least a group of them have. This, on top of the usual hurdles that our regulators - part of the very government that Mr. Obama claims made things happen so that businesses could be built - routinely toss in our path.
In spite of the regulatory hurdles, in spite of a perverse ownership structure in which some of our owners seek to prevent us from doing what we can to achieve ultimate success, in spite of employees occasionally defecting and trying to steal our business from us, sometimes attempting to destroy information on their way out - we've succeeded, over the past 14 years under my leadership, and with the help of a lot of smart, talented, dedicated people.
Meanwhile, a number of the very corporate credit unions that used to try to limit what we do - including the largest of them all, and our former parent organization - are out of business today. We're not. We're still here.
So did we build this? Mr. Obama, you can bet your White House beer recipe we did. And anytime you want to try to persuade me otherwise, you just name the time and place. I look forward to the opportunity for that debate. Oh, and I'll buy the beer; you've spent enough of the taxpayers' money already.
My initial problem with President Obama - then merely Candidate Obama - had nothing to do with his race, his background, or his place of birth, though most of his ardent supporters have accused me, and people like me (i.e., anyone who isn't a fan of his), of being "afraid of a black man in the White House," or of being a "birther" (to tell you the truth, until about a year ago, I thought the term was a derogatory swipe at those who are opposed to abortion; I didn't know what the term actually meant until someone pointed it out to me).
I'm not afraid of a black man - or woman - in the White House. I embrace it. I'd vote for a man like J.C. Watts - admittedly a Republican - or a Democrat like Newark Mayor Cory Booker, in a ... well, a Newark minute. These are men with clearly stated plans, and proven track records of accomplishments, of getting things done. I'd probably vote for Condie Rice, too, if she'd run.
In fact, I'm not even afraid of an unqualified man or woman in the White House. In my humble opinion, we have one of those now, and I don't recall being afraid as a result. Regardless who the president is, I'm going to try and make the best of it, and endeavor to prosper as a result.
Let me continue this detour from my originally intended train of thought for a moment. President Obama's extension of the Bush tax cuts ... wait a second. If he extended them, are they not now the Obama tax cuts? Or, if we want to be politically non-divisive and attribute them to no single president, since they've now spanned two administrations, should we call them the current tax cuts, since they remain in place? And are they really cuts, since nothing's been cut for a while, it's merely been extended, so that they're simply the current tax rates? It's so confusing.
Ah well, no matter. These tax cuts have benefitted me, as I fall within the group of taxpayers whose rates have been reduced by them. And as much as I disagree with Mr. Obama's cuts in the FICA tax withholding rate, as it only serves to exacerbate the Social Security shortfall, I have benefitted from that as well. So why should I fear him? He's been good for me in the short run, even if he's been bad for the economy overall, and may be bad for me in the long run.
As for where he was born, I could care less. Though I chuckle when I hear the left chide Mitt Romney for not disclosing more of his tax returns, claiming that by refusing to do so, he's the one creating the controversy. Yet, when President Obama refuses the simple step of disclosing his birth certificate, the "birthers" are the ones who created the controversy. But such is the nature of our new liberal-speak, which seems rather Orwellian to me.
In any event, if he were, after one term in office, doing a whiz-bang job, and it was suddenly revealed that he had been born in, say, New Guinea, or Angola (the country, not the prison in Louisiana), or on Mars, I'd be first in line to say, "Who cares? He's doing a whiz-bang job. Let's re-elect him anyway, let's change the rules."
Nor do I care what his middle name is. It could be Gerbil-Karma for all I care.
No, it matters not to me the color of his skin, his gender, his name, or his birthplace. What matters to me is that he was ushered into office on a complete lack of experience, but an ability to make a pretty speech, laced with empty buzzwords like "Hope" and "Change" and the Bob the Builder-inspired "Yes we can!", with no one questioning the substance behind those words.
Let's break it down: he gradutated from Columbia University in 1983 with a degree in political science. He worked for a year at a publishing and consulting firm, then for another year at a lobbying firm. After that he was a community organizer (what is that, anyway?) for five years, then went to law school at Harvard, graduating in 1991, after which he worked as a civil rights attorney until 1994.
Then, he threw his hat in the ring to run for the Illinois State Senate, at the tender age of 34. He won the race in 1996, and served just one term before running for the US House of Representatives. He lost that bid, but was re-elected to the Illinios Senate for a second term, then a third. While he was running for that third term, he was already prepping for a shot at the US Senate, hiring political consultant David Axelrod.
A year after being re-elected to the Illinois Senate, and just seven years after first gaining that seat, he announced his candidacy for the US Senate, in 2003. He was elected in 2004, and took office the next year. A scant two years later, he announced his candidacy for the presidency, but of course he'd planned that course of action well before, as all candidates do.
So Mr. Obama, a career politician, has spent virtually all of his political career campaigning for the next step. Little wonder that, now that there is no next step above his current office (except perhaps "lobbyist"), he hasn't the first earthly idea of what to do. He missed most of his US Senate votes, and one can only surmise from the timing of his campaigning that he missed a good number of state senate votes too.
It's as if we were all so sick of GWB, we looked out in the parking lot, pointed at the first dude we saw, and said, "There - that guy."
"Hope" and "Change" have now been replaced with "Forward," equally bereft of meaning, not that that's a deterrent to his avid - or rabid? - followers. It's a word, and if it's chanted enough, by enough people, again in Orwellian fashion, it creates fervor. (For an example, see the DNC highlights.)
He does give a pretty speech. I remember listening to his inauguration speech with rapt attention, actually tearing up at a couple of points, and thinking, "Yeah - maybe this is the guy!" Immediately afterward, I couldn't help thinking of the line uttered by Stephen the Irishman in Braveheart, after William Wallace's stirring "Sons of Scotland" speech: "Fine speech. Now what do we do?"
And it's been the "now what?", or lack thereof, that has troubled me ever since.
So my preference is for a candidate who's actually done something, and whose speeches actually outline a plan. I listened for that in President Obama's recent acceptance speech, which began by falsely criticizing his opponent for not laying out a plan. I listened carefully for some details on what he'd do, and how he'd do it.
I'm still listening.
As for the now-infamous "You didn't build that" speech (which has been spun by his supporters to not really mean what he has since repeated several times that he did, in fact, mean), I'm living proof to the contrary, as are scores upon scores of Americans.
I didn't start this business, nor do I have an ownership interest. I'm just a hired gun. But from the time I started with this company 20 years ago, various factions within the credit union industry - our primary clientele - have sought to limit what we do.
These organizations, which form a wholesale tier of the industry that I won't bother to explain right now, are called corporate credit unions. And throughout our firm's history, they've had an ownership stake, either directly or indirectly, in our company.
Now, what we do competes to a degree with what they do, or at least they've always thought so. So, whether it was in the best interests of the credit unions we all serve or not, corporate credit unions have always sought to limit our access to credit unions, thus limiting our business, and limiting credit unions' options in the process.
At the same time, our business is highly cyclical, with periods of extremely strong profitability, and periods of losses. So we don't need more hurdles thrown in front of us. Yet our owners - the very people who benefit from our gains and suffer from our losses - have done just that, or at least a group of them have. This, on top of the usual hurdles that our regulators - part of the very government that Mr. Obama claims made things happen so that businesses could be built - routinely toss in our path.
In spite of the regulatory hurdles, in spite of a perverse ownership structure in which some of our owners seek to prevent us from doing what we can to achieve ultimate success, in spite of employees occasionally defecting and trying to steal our business from us, sometimes attempting to destroy information on their way out - we've succeeded, over the past 14 years under my leadership, and with the help of a lot of smart, talented, dedicated people.
Meanwhile, a number of the very corporate credit unions that used to try to limit what we do - including the largest of them all, and our former parent organization - are out of business today. We're not. We're still here.
So did we build this? Mr. Obama, you can bet your White House beer recipe we did. And anytime you want to try to persuade me otherwise, you just name the time and place. I look forward to the opportunity for that debate. Oh, and I'll buy the beer; you've spent enough of the taxpayers' money already.
Sunday, September 9, 2012
Random Sunday
Welcome to Random Sunday, in which I will address certain topics of randomness, in totally random fashion. (Note that this practice will not always occur on Sundays; if it did, it could hardly be called "random.")
All three of today's random thoughts relate to my last post, which marked the Return of the Curmudgeon. (Presumably to be followed by the sequel, Night of the Living Curmudgeon.)
First up, an apology. In my last post, I made two parenthetical references which I failed to close. In other words, I put some words in parentheses by placing a left paren ("(") in front of them. (That last set of characters inside the parentheses was intended as an example of what I was talking about, hence placed in quotes inside parentheses; it was not an attempt to replicate some facial expression using typed punctuation marks, e.g. ";-)".) But then, in my typing haste - I type fast; a skill inherited from my Dad, who could crank out more than 100wpm, error-free, on an old Royal manual typewriter - I omitted the right paren, thus failing to close the parenthetical reference.
Now, you ask, why would he apologize for a simple typo?
The answer is simple: I am an unabashed spelling, grammar, usage and punctuation nazi.
I'm proud of this. I inherited the trait from my parents, neither of whom were college-educated, but both of whom wrote very well (Mom still does). They were also voracious readers, as am I, and I believe there's a strong correlation between reading a lot and writing well. Regardless what you read (as long as it isn't comic books), be it classic literature, Vonnegut, John Jakes, Louis L'Amour, Stephen King, Michael Connelly, or Brian Haig (he's a novelist, the son of former Secretary of State Alexander Haig), you expose yourself to proper usage of the language, and that should help you become a better writer. That's my theory, anyway.
I also passed this along to my daughter, who is also an unabashed spelling, grammar, usage and punctuation nazi, having devoted an entire post of her own blog to the topic. I'm proud of that, too.
You see, writing is a lost art, and I believe that also correlates to how little we read these days. The advent of technology has meant that we instead watch TV, browse the internet, etc.
Random detour: I do most of my reading on the internet or on an iPad these days. I'm not enough of a purist to need the feel of a book in my hands, or smell its pages. I read at the gym and on vacation, and it's easier to tote along an iPad than a bunch of books. I do print out most of the articles I find on the web that I want to read, so that I can read them while I eat lunch, or while I'm riding on a plane or in the car.
Anyway, as I said, writing is a lost art. And too many people are willing to accept that: "It's not important that I make typos," etc., etc. To which I say, "Poppycock" (I said "Balderdash" in my last post, and I like to change things up once in a while, though I'm told that I say "Bear in mind" too much).
When I was in grad school, in one of our classes we were required to write a business case analysis, then do a peer review of each other's work, on an anonymous basis. I was tasked with reviewing the paper of a very sharp graduate accounting student. I noted that while his analysis was spot-on and his calculations mathematically sound, his paper was rife with grammatical and spelling errors (this was in the days before the internet and spell-check). I later overheard him complaining to a classmate about his peer review, saying, "It's not important that I write well. I'm going to be an accountant. The important thing is my analysis. There will be other people who will review and correct my spelling errors."
And I thought, "Yes, and those people will be called 'supervisors.' And they'll recognize that your work, while mathematically and analytically sound, can never be presented directly to clients, on the off-chance that they're sufficiently literate to judge your work not up to their standards, and fire the firm. And thus you've placed a ceiling on yourself; you'll never be one of those supervisors, because you can't be relied upon to perform a quality review of the work of others." Hey, not everybody aspires to management. But then, not everybody's in an MBA program, either, so one assumes those that are, do.
I look at it this way: a neighbor once asked me, "Are you left-brain or right-brain? Are you good at math and numbers, or are you better at writing?" Thinking of all the calculus and statistics I'd taken in grad school, at which I'd done pretty well, and of the couple of books and numerous articles I'd written by the time she asked the question, I answered this way: "The good Lord saw fit to give me both halves of my brain, so I figure, why not use the whole thing?"
****************************
Second random thought. I love my wife, for a host of reasons. One of them is her intellectual curiosity, which leads her to question darn near everything. Okay, I admit - sometimes that tendency makes me want to run headlong into a brick wall. Heck, sometimes it makes me feel that I am running headlong into a brick wall.
But after reading my last post, in which I said I'd brook no argument about Keynesian vs. supply-side economics from a non-economist, she asked the valid question: "What qualifies one as an economist?"
Here's my answer: either a graduate degree (Master's or above) in economics, or holding the title of or having held the title of "economist" in a reputable academic institution or commercial enterprise. (And I don't mean your own business that you've started: "Jane Doe, Chief Economist, Jane's Lemonade Stand.")
I recognize how limiting that is. I myself have an MBA with a concentration in finance and economics, and formerly held the title of Chief Economist for a large national financial institution. I've penned economic commentary for more than 15 years, and remain an avid Fed-watcher (and now, a watcher of other central banks).
Not everyone is in a similar role - I get that. My point is simply that it's a waste of my time to argue economics with someone who might not have a strong grasp of it. At some point in that exercise, I'm going to have to explain my position by providing a thorough discourse on either Keynesianism or supply-side economics, or some other facet of the Dismal Science. Tomes have been devoted to that, and time and space don't allow me to repeat that here. So I'll assume coming in that anyone who wants to argue these points is well-grounded in what they're talking about.
Otherwise, as a friend once said, arguing with them is like rocking in a rocking chair: it gives you something to do, but you don't get anywhere.
****************************
Third and final random thought, on a related topic.
That attitude is rather exclusionist, especially from a guy who claims to want to help people better understand economic truth in a world devoid of it. Yet, I don't think the attitude is inconsistent with the desire to spread economic truth. An important component of the latter is to be open to it; to approach it without bringing along one's inherent biases that are borne of factors outside economics: i.e., politics.
See, I've seen arguments in favor of Keynesianism posted in public places on the web by a number of people whose backgrounds have nothing to do with economics, but they all have one thing in common: they're liberal in their politics. And Keynesianism is the favored economic school of thought of the liberal.
I'll give you an example: one guy, a very successful accountant who's built his own business in accounting and tax services (and yes, "he built that" - more foreshadowing of posts to come), has argued vehemently in favor of Keynesianism, holding himself out as a definitive authority.
Look, I'd never argue what is and is not GAAP (generally accepted accounting principles) with him. I know just enough accounting to be dangerous, and while I have a pretty good understanding of GAAP accounting as a result of running a company that has to conform with its standards, I don't pretend to be an expert on its intricacies.
Nor would I argue the tax code with him. I do my own taxes - always have - and understand most of the standard loopholes, requirements and forms. But I would never advise someone else on tax strategy.
So why does an accountant, or a compliance officer with a theology degree, want to argue Keynesian vs. supply-side economics with an economist? Answer: because he or she is politically partisan, and his or her candidates of choice advocate Keynesian economics, ergo he or she feels duty-bound to defend it.
So, defend away. If I have the time, space and energy, I'll address your arguments. Otherwise, I'm forced to consider the source, and leave the meaty discourse for those properly equipped to engage in it.
I hope that doesn't come across as exclusionist, but hey, there are only so many hours in a day.
First up, an apology. In my last post, I made two parenthetical references which I failed to close. In other words, I put some words in parentheses by placing a left paren ("(") in front of them. (That last set of characters inside the parentheses was intended as an example of what I was talking about, hence placed in quotes inside parentheses; it was not an attempt to replicate some facial expression using typed punctuation marks, e.g. ";-)".) But then, in my typing haste - I type fast; a skill inherited from my Dad, who could crank out more than 100wpm, error-free, on an old Royal manual typewriter - I omitted the right paren, thus failing to close the parenthetical reference.
Now, you ask, why would he apologize for a simple typo?
The answer is simple: I am an unabashed spelling, grammar, usage and punctuation nazi.
I'm proud of this. I inherited the trait from my parents, neither of whom were college-educated, but both of whom wrote very well (Mom still does). They were also voracious readers, as am I, and I believe there's a strong correlation between reading a lot and writing well. Regardless what you read (as long as it isn't comic books), be it classic literature, Vonnegut, John Jakes, Louis L'Amour, Stephen King, Michael Connelly, or Brian Haig (he's a novelist, the son of former Secretary of State Alexander Haig), you expose yourself to proper usage of the language, and that should help you become a better writer. That's my theory, anyway.
I also passed this along to my daughter, who is also an unabashed spelling, grammar, usage and punctuation nazi, having devoted an entire post of her own blog to the topic. I'm proud of that, too.
You see, writing is a lost art, and I believe that also correlates to how little we read these days. The advent of technology has meant that we instead watch TV, browse the internet, etc.
Random detour: I do most of my reading on the internet or on an iPad these days. I'm not enough of a purist to need the feel of a book in my hands, or smell its pages. I read at the gym and on vacation, and it's easier to tote along an iPad than a bunch of books. I do print out most of the articles I find on the web that I want to read, so that I can read them while I eat lunch, or while I'm riding on a plane or in the car.
Anyway, as I said, writing is a lost art. And too many people are willing to accept that: "It's not important that I make typos," etc., etc. To which I say, "Poppycock" (I said "Balderdash" in my last post, and I like to change things up once in a while, though I'm told that I say "Bear in mind" too much).
When I was in grad school, in one of our classes we were required to write a business case analysis, then do a peer review of each other's work, on an anonymous basis. I was tasked with reviewing the paper of a very sharp graduate accounting student. I noted that while his analysis was spot-on and his calculations mathematically sound, his paper was rife with grammatical and spelling errors (this was in the days before the internet and spell-check). I later overheard him complaining to a classmate about his peer review, saying, "It's not important that I write well. I'm going to be an accountant. The important thing is my analysis. There will be other people who will review and correct my spelling errors."
And I thought, "Yes, and those people will be called 'supervisors.' And they'll recognize that your work, while mathematically and analytically sound, can never be presented directly to clients, on the off-chance that they're sufficiently literate to judge your work not up to their standards, and fire the firm. And thus you've placed a ceiling on yourself; you'll never be one of those supervisors, because you can't be relied upon to perform a quality review of the work of others." Hey, not everybody aspires to management. But then, not everybody's in an MBA program, either, so one assumes those that are, do.
I look at it this way: a neighbor once asked me, "Are you left-brain or right-brain? Are you good at math and numbers, or are you better at writing?" Thinking of all the calculus and statistics I'd taken in grad school, at which I'd done pretty well, and of the couple of books and numerous articles I'd written by the time she asked the question, I answered this way: "The good Lord saw fit to give me both halves of my brain, so I figure, why not use the whole thing?"
****************************
Second random thought. I love my wife, for a host of reasons. One of them is her intellectual curiosity, which leads her to question darn near everything. Okay, I admit - sometimes that tendency makes me want to run headlong into a brick wall. Heck, sometimes it makes me feel that I am running headlong into a brick wall.
But after reading my last post, in which I said I'd brook no argument about Keynesian vs. supply-side economics from a non-economist, she asked the valid question: "What qualifies one as an economist?"
Here's my answer: either a graduate degree (Master's or above) in economics, or holding the title of or having held the title of "economist" in a reputable academic institution or commercial enterprise. (And I don't mean your own business that you've started: "Jane Doe, Chief Economist, Jane's Lemonade Stand.")
I recognize how limiting that is. I myself have an MBA with a concentration in finance and economics, and formerly held the title of Chief Economist for a large national financial institution. I've penned economic commentary for more than 15 years, and remain an avid Fed-watcher (and now, a watcher of other central banks).
Not everyone is in a similar role - I get that. My point is simply that it's a waste of my time to argue economics with someone who might not have a strong grasp of it. At some point in that exercise, I'm going to have to explain my position by providing a thorough discourse on either Keynesianism or supply-side economics, or some other facet of the Dismal Science. Tomes have been devoted to that, and time and space don't allow me to repeat that here. So I'll assume coming in that anyone who wants to argue these points is well-grounded in what they're talking about.
Otherwise, as a friend once said, arguing with them is like rocking in a rocking chair: it gives you something to do, but you don't get anywhere.
****************************
Third and final random thought, on a related topic.
That attitude is rather exclusionist, especially from a guy who claims to want to help people better understand economic truth in a world devoid of it. Yet, I don't think the attitude is inconsistent with the desire to spread economic truth. An important component of the latter is to be open to it; to approach it without bringing along one's inherent biases that are borne of factors outside economics: i.e., politics.
See, I've seen arguments in favor of Keynesianism posted in public places on the web by a number of people whose backgrounds have nothing to do with economics, but they all have one thing in common: they're liberal in their politics. And Keynesianism is the favored economic school of thought of the liberal.
I'll give you an example: one guy, a very successful accountant who's built his own business in accounting and tax services (and yes, "he built that" - more foreshadowing of posts to come), has argued vehemently in favor of Keynesianism, holding himself out as a definitive authority.
Look, I'd never argue what is and is not GAAP (generally accepted accounting principles) with him. I know just enough accounting to be dangerous, and while I have a pretty good understanding of GAAP accounting as a result of running a company that has to conform with its standards, I don't pretend to be an expert on its intricacies.
Nor would I argue the tax code with him. I do my own taxes - always have - and understand most of the standard loopholes, requirements and forms. But I would never advise someone else on tax strategy.
So why does an accountant, or a compliance officer with a theology degree, want to argue Keynesian vs. supply-side economics with an economist? Answer: because he or she is politically partisan, and his or her candidates of choice advocate Keynesian economics, ergo he or she feels duty-bound to defend it.
So, defend away. If I have the time, space and energy, I'll address your arguments. Otherwise, I'm forced to consider the source, and leave the meaty discourse for those properly equipped to engage in it.
I hope that doesn't come across as exclusionist, but hey, there are only so many hours in a day.
Friday, September 7, 2012
The Curmudgeon Lives!
Yes, boys and girls, like a phoenix rising from the ashes; like a bad penny that always turns up; like a B horror movie: "It's ALIVE!"
So what motivated me to resurrect The Economic Curmudgeon?
Two things. First, this space was devoted to speaking economic truth and dispelling the myths and false notions out there, at a time of economic crisis unlike anything we'd seen since the Great Depression. And we now find ourselves teetering on the brink of yet another economic catastrophe, but the central bankers are running amok in the streets, doing their best impersonation of the Kevin Bacon character during the parade scene in Animal House: "All is well!" So I figured the blogosphere could use a dose of economic truth. Forewarned is forearmed, and all that (hopefully forearmed as in prepared for what's to come, not forearmed as in a shiver from Ray Nitschke. (Look him up on Wikipedia if you're too young to get that reference.)
The second bit of motivation has been the Democratic National Convention.
The last couple of evenings, I've gone to the gym after work, gotten in a good workout stoked on Pump Fuel and ACG3, and hopped in my car with a major adrenaline rush, then listened to the convention speeches on the radio on the way home.
Bad combo.
By the time I've gotten home, I've found myself listening to the speeches on TV, yelling at the tube the way my dear old Dad, may he rest in peace, used to when he watched football. So I figure that I have from now until November to vent, and speak more economic truth, but from a political angle. Hopefully I can persuade at least one American of legal voting age to avoid repeating the sins of the past. In any event, I'll feel better, and the risk that I throw some hard, inanimate object at my television will diminish. A new TV really isn't in the budget right now, with a daughter getting married next year.
I'll provide more detail on specifically what it was about the speeches that fueled my ire in a future post (or two, or three). I'll devote the rest of this one to a couple of disclaimers, one political and one economic, and a general observation on the state of all things political today. I'm really going to make an effort to make this blog less verbose this time around, as I recognize that previous posts taxed the attention spans of some of my followers who tend not to want to read anything longer than the back of a cereal box.
Herewith, the disclaimer. I am, today, a registered Independent. When last I posted on this space, I was a registered Republican. In the interim, I became so thoroughly disenfranchised and disgusted with our entire political system, and the divisiveness that the two-party system (aided and abetted by the media) has fomented, that I decided I could no longer affiliate with either party. I am not a Libertarian. I know a lot of people who claim to be, but when push comes to shove, they simply cannot commit, ideologically, to the tenets that Libertarianism embraces. (I think it just sounds cool to them to say they're Libertarians.)
I remain a staunch fiscal conservative. I probably lean conservative on a number of social issues, but not far off-center, and they're far less important to me, in terms of what our elected officials should be meddling with, than other things. Many of the social issues are ours to wrestle with on our own, or states' rights issues. And I'm pretty much squarely in the middle on defense: while I agree with Ronald Reagan in the principle of "Peace Through Strength," neither do I believe that the US is obligated to be the world's cop.
A little background: I grew up the son of solid, blue-collar, lower-middle-class Democrats. Dad was a straight party line voter; if the candidate had a "D" after his or her name, that was all he needed to know. I loved my Dad, but I don't advocate that approach for any voter - assess the candidates, learn their true positions, research their track record (if they have one, and if they don't, that's a red flag - and yes, that was foreshadowing of a future post topic), and vote for the best man or woman for the job.
So I carried that bias into adulthood, and had I been able to vote when I was 18 (my birthday fell a few days after Election Day, 1976), I'd have voted for Jimmy Carter. Because he was a Democrat, though I did read his book, and much of what he'd done in Georgia (by his own account, which I failed to consider at the time) resonated with me. In 1980, I did vote for Carter, and I was thoroughly aggravated that he lost to that actor from California.
By 1984, however, I'd had an epiphany, courtesy of my supervisor at my university job. He simply asked me if I believed that the government should solve all our problems, or if I believed that the government should get out of our way and let us take initiative to solve them ourselves. If I believed in the government giving us what we wanted, or in us earning what we wanted.
I was getting ready to enter an MBA program, and my business sensibilities made me lean toward the latter answers to those questions. So my supervisor told me, "Congratulations - you're a Republican." And so I registered from then until a couple of years ago.
Lest one surmise that I am in fact an IINO (Independent in name only), ie, a closet Republican who's just too ashamed or afraid of confrontation to admit it, know this: first, anyone who knows me will tell you that I have no shame in terms of what I believe, and that I'm about as fearful of confrontation as one of Michael Vick's dogs.
And second, if I could vote for any candidate for President today, it would be Evan Bayh, former Senator from Indiana, the last of the true Blue Dog Democrats. Alas, Sen. Bayh also became disenfranchised with Washington, and is now making an honest living.
Second disclaimer, this one economic: I do not let politics influence my economics. Economics, in general, is black and white; its laws largely immutable in my view. To wit, my famous claim that the laws of supply and demand, which govern economics, have not changed since we were all wearing animal skins and trading rocks (this is usually stated in response to those who blindly claim that we're in a "new economy," or that "this time things are different."
I am not a Keynesian; that experiment failed. And for the record, supply-side economics can work, if done right and left alone by those who would tweak it to achieve some Keynesian-influenced social agenda.
Forthwith, I will brook no argument from anyone not an economist themselves to the contrary. It's simply not worth arguing about economics with somebody who doesn't understand economics, but is motivated by their blind partisanship. It's like arguing about molecular biology with a history teacher (not that history teachers aren't smart, they're just not molecular biologists). So if you want to argue Keynesian economics vs. supply-side or free-market monetarist economics with me, you'd better show your credentials and line up your facts, and leave politics out of the discussion, or your cred is non-existent.
Finally, a bit of the pith that the people who used to follow this blog expect, in the form of the general political observation that I promised early on.
Someone recently asked me if Ronald Reagan could get elected today, given the state of the Republican Party, and my initial reaction was, "Sure."
I have since reversed my position. Ronald Reagan could not, in fact, get elected today, but not because of the state of the Republican Party. Quite the opposite.
You see, the people that voted in Barack Obama four years ago, devoid of qualifications or experience but long on buzzwords like "Hope" and "Change" - most of whom have already decided they're going to vote for him again, because he has a "D" after his name and has conjured up a new empty buzzword: "Foward" - those same voters simply wouldn't allow it. There's a good chance they'll turn out in sufficient number to keep Mr. Obama in office for another four years, in spite of the fact that he may well be an even worse president than was Mr. Carter.
And therein lies the rationale for my premise. Reagan ran against Carter; of course we'd expect him to win. But that was then, and this is now.
Remember the term, "Reagan Democrat?" Many Dems crossed party lines back in 1980 to vote Carter out and Reagan in. But partisanship is so rampant today that such an occurrence is nigh impossible. Today's Democrats would vote in, yes, even Jimmy Carter, or Barack Obama, over Ronald Reagan. Heck, if Bill Clinton ran for president today on the Republican ticket, Obama would win, ushered back into office by the Democrat faithful.
Now, the left would have you believe that today's Republican Party has shifted far to the right, and that's why they're so venomously opposed to it.
To which I say as emphatically as I can, "Balderdash."
Ronald Reagan was certainly more conservative than either Bush - fiscally, in most ways socially, and in terms of defense. And he was a darn sight more conservative than Mitt Romney.
No, the truth is that the left has shifted so far further left, that the center-right (Mr. Romney's turf) looks uber-right wing to them. So a man like Ronald Reagan wouldn't stand a chance of unseating Mr. Obama. And that's not a function of the Republican Party, nor of Mr. Obama's impressive resume, nor of Mr. Reagan's lack of capability. It's a function of the times, and how far left we've shifted, and how partisan we've become.
Okay, so this was longer than the back of a cereal box. Break it into chunks if you need to. Be back soon, The Curmudgeon.
Two things. First, this space was devoted to speaking economic truth and dispelling the myths and false notions out there, at a time of economic crisis unlike anything we'd seen since the Great Depression. And we now find ourselves teetering on the brink of yet another economic catastrophe, but the central bankers are running amok in the streets, doing their best impersonation of the Kevin Bacon character during the parade scene in Animal House: "All is well!" So I figured the blogosphere could use a dose of economic truth. Forewarned is forearmed, and all that (hopefully forearmed as in prepared for what's to come, not forearmed as in a shiver from Ray Nitschke. (Look him up on Wikipedia if you're too young to get that reference.)
The second bit of motivation has been the Democratic National Convention.
The last couple of evenings, I've gone to the gym after work, gotten in a good workout stoked on Pump Fuel and ACG3, and hopped in my car with a major adrenaline rush, then listened to the convention speeches on the radio on the way home.
Bad combo.
By the time I've gotten home, I've found myself listening to the speeches on TV, yelling at the tube the way my dear old Dad, may he rest in peace, used to when he watched football. So I figure that I have from now until November to vent, and speak more economic truth, but from a political angle. Hopefully I can persuade at least one American of legal voting age to avoid repeating the sins of the past. In any event, I'll feel better, and the risk that I throw some hard, inanimate object at my television will diminish. A new TV really isn't in the budget right now, with a daughter getting married next year.
I'll provide more detail on specifically what it was about the speeches that fueled my ire in a future post (or two, or three). I'll devote the rest of this one to a couple of disclaimers, one political and one economic, and a general observation on the state of all things political today. I'm really going to make an effort to make this blog less verbose this time around, as I recognize that previous posts taxed the attention spans of some of my followers who tend not to want to read anything longer than the back of a cereal box.
Herewith, the disclaimer. I am, today, a registered Independent. When last I posted on this space, I was a registered Republican. In the interim, I became so thoroughly disenfranchised and disgusted with our entire political system, and the divisiveness that the two-party system (aided and abetted by the media) has fomented, that I decided I could no longer affiliate with either party. I am not a Libertarian. I know a lot of people who claim to be, but when push comes to shove, they simply cannot commit, ideologically, to the tenets that Libertarianism embraces. (I think it just sounds cool to them to say they're Libertarians.)
I remain a staunch fiscal conservative. I probably lean conservative on a number of social issues, but not far off-center, and they're far less important to me, in terms of what our elected officials should be meddling with, than other things. Many of the social issues are ours to wrestle with on our own, or states' rights issues. And I'm pretty much squarely in the middle on defense: while I agree with Ronald Reagan in the principle of "Peace Through Strength," neither do I believe that the US is obligated to be the world's cop.
A little background: I grew up the son of solid, blue-collar, lower-middle-class Democrats. Dad was a straight party line voter; if the candidate had a "D" after his or her name, that was all he needed to know. I loved my Dad, but I don't advocate that approach for any voter - assess the candidates, learn their true positions, research their track record (if they have one, and if they don't, that's a red flag - and yes, that was foreshadowing of a future post topic), and vote for the best man or woman for the job.
So I carried that bias into adulthood, and had I been able to vote when I was 18 (my birthday fell a few days after Election Day, 1976), I'd have voted for Jimmy Carter. Because he was a Democrat, though I did read his book, and much of what he'd done in Georgia (by his own account, which I failed to consider at the time) resonated with me. In 1980, I did vote for Carter, and I was thoroughly aggravated that he lost to that actor from California.
By 1984, however, I'd had an epiphany, courtesy of my supervisor at my university job. He simply asked me if I believed that the government should solve all our problems, or if I believed that the government should get out of our way and let us take initiative to solve them ourselves. If I believed in the government giving us what we wanted, or in us earning what we wanted.
I was getting ready to enter an MBA program, and my business sensibilities made me lean toward the latter answers to those questions. So my supervisor told me, "Congratulations - you're a Republican." And so I registered from then until a couple of years ago.
Lest one surmise that I am in fact an IINO (Independent in name only), ie, a closet Republican who's just too ashamed or afraid of confrontation to admit it, know this: first, anyone who knows me will tell you that I have no shame in terms of what I believe, and that I'm about as fearful of confrontation as one of Michael Vick's dogs.
And second, if I could vote for any candidate for President today, it would be Evan Bayh, former Senator from Indiana, the last of the true Blue Dog Democrats. Alas, Sen. Bayh also became disenfranchised with Washington, and is now making an honest living.
Second disclaimer, this one economic: I do not let politics influence my economics. Economics, in general, is black and white; its laws largely immutable in my view. To wit, my famous claim that the laws of supply and demand, which govern economics, have not changed since we were all wearing animal skins and trading rocks (this is usually stated in response to those who blindly claim that we're in a "new economy," or that "this time things are different."
I am not a Keynesian; that experiment failed. And for the record, supply-side economics can work, if done right and left alone by those who would tweak it to achieve some Keynesian-influenced social agenda.
Forthwith, I will brook no argument from anyone not an economist themselves to the contrary. It's simply not worth arguing about economics with somebody who doesn't understand economics, but is motivated by their blind partisanship. It's like arguing about molecular biology with a history teacher (not that history teachers aren't smart, they're just not molecular biologists). So if you want to argue Keynesian economics vs. supply-side or free-market monetarist economics with me, you'd better show your credentials and line up your facts, and leave politics out of the discussion, or your cred is non-existent.
Finally, a bit of the pith that the people who used to follow this blog expect, in the form of the general political observation that I promised early on.
Someone recently asked me if Ronald Reagan could get elected today, given the state of the Republican Party, and my initial reaction was, "Sure."
I have since reversed my position. Ronald Reagan could not, in fact, get elected today, but not because of the state of the Republican Party. Quite the opposite.
You see, the people that voted in Barack Obama four years ago, devoid of qualifications or experience but long on buzzwords like "Hope" and "Change" - most of whom have already decided they're going to vote for him again, because he has a "D" after his name and has conjured up a new empty buzzword: "Foward" - those same voters simply wouldn't allow it. There's a good chance they'll turn out in sufficient number to keep Mr. Obama in office for another four years, in spite of the fact that he may well be an even worse president than was Mr. Carter.
And therein lies the rationale for my premise. Reagan ran against Carter; of course we'd expect him to win. But that was then, and this is now.
Remember the term, "Reagan Democrat?" Many Dems crossed party lines back in 1980 to vote Carter out and Reagan in. But partisanship is so rampant today that such an occurrence is nigh impossible. Today's Democrats would vote in, yes, even Jimmy Carter, or Barack Obama, over Ronald Reagan. Heck, if Bill Clinton ran for president today on the Republican ticket, Obama would win, ushered back into office by the Democrat faithful.
Now, the left would have you believe that today's Republican Party has shifted far to the right, and that's why they're so venomously opposed to it.
To which I say as emphatically as I can, "Balderdash."
Ronald Reagan was certainly more conservative than either Bush - fiscally, in most ways socially, and in terms of defense. And he was a darn sight more conservative than Mitt Romney.
No, the truth is that the left has shifted so far further left, that the center-right (Mr. Romney's turf) looks uber-right wing to them. So a man like Ronald Reagan wouldn't stand a chance of unseating Mr. Obama. And that's not a function of the Republican Party, nor of Mr. Obama's impressive resume, nor of Mr. Reagan's lack of capability. It's a function of the times, and how far left we've shifted, and how partisan we've become.
Okay, so this was longer than the back of a cereal box. Break it into chunks if you need to. Be back soon, The Curmudgeon.
Subscribe to:
Posts (Atom)