Wednesday, February 10, 2016

Trump Appeal Very Different From Sanders Appeal

The pundits keep (trump)eting the idea that the two front-runners in the presidential race are draining the same swamp. Wrong.  Trump and Sanders are appealing to fundamentally different yearnings.

Donald Trump is looking back.  He has the 1950s, 1960s, and 1980s in his rear view vision:  a simpler world with a dramatically better economy.  People actually received real health care, their incomes were rising, their futures and that of their children were bright.  (Not to mention that the US commanded the respect of other nations).  None of this is true anymore.  While the US is wealthier today than in the earlier bygone eras, there is no vibrancy to today's economy and the life chances of a majority of Americans are significantly diminished from the life chances of earlier generations.  Very few Americans think the future for their children will be better than the present.  And they are right.  A growing economy and opportunities for lower and middle income families are ancient history.

Bernie Sanders has an entirely different point of view.  Sanders believes that America is, and always has been, an unfair place.  He thinks that rich people run America and imprison the rest of us.  Rich people, in Sanders' view, are bad people with bad motives.  His statement that "the business model of Wall Street is based upon fraud" is telling.  One suspects that Bernie sees all businesses as based upon fraud. The fraud is the free market, which Bernie, who chose to take his honeymoon in Moscow when the communists were still firmly in power, would like to dismantle.  "Free this" and "free that" is just another way of saying:  "lets replace the free market with a few well-intention plutocrats like me and we will distribute society's production in a fair and equitable manner."  This is the fixed-pie concept.  There is only so much to go around -- economic growth is a non-starter of no interest to Bernie -- so lets divvy everything up the way I want it divvied up.  Forget the free market.  I know best what should be produced and who it should be given to. That's the Bernie message.

For Trump's vision to be a reality, there would have to be a return to free market economics.  It is by no means clear that he understands that.  What he seems to have in common with Bernie is the "strong man" formulation.  "I know best.  Trust me." That is what Trump and Sanders seem to have in common.  Sanders would prefer something along the lines of the old Soviet state, except Sanders seems to believe in "benevolent" state dictatorships.  Other than Singapore, there appear to be no examples of benevolent dictators in the long history of the world, so Sanders vision of compulsion probably would, in practice, be the same compulsion that one saw in the Soviet Union, Cuba, Venezuela, Iran, and North Korea.  Good intentions are rarely borne out when power is involved.

Free markets and free politics are the ticket to a good future, not "I know what's best for you."  The "I know what's best for you" view always ends in dictatorship and oppression. If Trump and/or Sanders are ultimately successful, the endgame would likely be the same for either.  But, they are certainly not tapping the same well.

Tuesday, February 9, 2016

Bank Business Model Doesn't Work Anymore

Excessive regulation over many decades culminating in the coup-de-grace -- the Dodd-Frank legislation has destroyed the bank business model. 

Note the stock price collapse of the big money-center banks that is currently in progress.  Commercial lending, trading, prime brokerage, and market making are businesses destined to disappear in a sea of red ink.  The new army of compliance officers -- the only part of commercial and investment banking that is growing -- has to be paid. That doesn't leave much left for bank profitably.

So, what will the banks do?  We are already seeing what they will do.  They are moving to the "fee" business model, charging for bank transactions -- check writing, transfer, wires, and so forth.  That model won't work.  Bank overhead is far too high.   So, the banks are rushing to expand wealth management which, thus far, has not been made illegal by regulators. But, even wealth management will fall victim to the regulators' hatchets in time.

Take a good long look at your commercial and/or investment bank.  It will be unrecognizable in a few years.  As for profitability, just take a look at how their stock prices are faring so far in 2016.

Monday, February 8, 2016

Capitalism Run Aground

When the old Soviet Union fell and China began to open itself to the beginnings of free markets, it was widely thought that capitalism had triumphed over state-run economies. Guess what? The tide of history went the opposite direction.

After 1990, the big, successful western economies began to accelerate their way along the path to the dustbin of history.  It is no accident that the only country in Europe that seems to believe in free markets today is Poland, having endured a century of state-run economics.

It is interesting watching the political debate taking place between Clinton and Sanders.  They seem to outdo one another in urging the end of free markets.  Not a word comes from either mouth that doesn't propose some specific way of removing free market policies and replacing the American democracy with a bureaucratic overlord system, not far removed from the way the old Soviet Union was organized.

Clinton and Sanders are typical of the favored elite that increasingly dominate American political and social life.  They are both incredibly wealthy, at least as compared to average Americans (even Sanders!).  Neither seem to believe that the average person is capable of making their own decisions. They both believe the state should direct investment not the private sector. In many ways, both would have been comfortable in the old Chinese government of the pre-1990s.

No wonder both dislike post-1990 China, a country that has advanced more of its citizens into the middle class by using free markets than any country in the history of the world.  For this, they have nothing but contempt.

Like the Democratic combatants, most of the Republican combatants are right there beside them on most of these issues.  Of the Republican candidates, not a single one has failed to speak out against at least one aspect of the free market, including Rand Paul (think ethanol). None of the Republican candidates have made free market economics the centerpiece of their campaign. None seem concerned about the economic stagnation that is now ubiquitous in the western world.

For the poor and lower income, the rout of capitalism portends declining opportunities and further reduced living standards. Only free markets help poor people.  Government simply keeps the poor in a virtual prison constructed with government welfare programs.

When the old Soviet Union fell, it looked like, at last, the least fortunate in our society would be cut a break.  But, the politicians will fight mightily to preserve their hegemony over ordinary citizens, as the elite move around gracefully in their limousines and gulfstreams, all the while decrying inequality and Wall Street.

Sunday, February 7, 2016

ObamaCare Bill Coming Due

The simple idea that people should purchase whatever health care insurance they need without interference from government has been overwhelmed by the idea that a handful of bureaucrats knows what's best for every citizen in the United States.  You are not free to choose even if you know what you are doing.

Now, comes the part that they didn't tell you about.  Two articles in today's NYTimes are enlightening.  Both articles are about the "high-deductibles" in most Obamacare insurance policies.  The practical impact is that most people now have insurance but cannot afford, and are increasingly not getting, health care.

The big lie was that your health care costs would fall.  For the average American, health care costs are now astronomical, because of high-deductibles that can range as high as $ 10,000 per year in out-of-pocket costs before the insurance kicks in.  For a family with the average family income in America, approximately $ 55,000 per year, this means you have to do without health care unless your problems are truly catastrophic.

One of the NYTimes articles notes that deductibles are rising much faster than wages in America, so the unaffordability problem is going to get a lot worse.

You have health insurance; you just don't have health care.  I guess that is a victory of sorts -- certainly for Obama.  But Obama never really cared whether anyone had adequate health care or not.  It was always about health insurance coverage, not health care.

How about letting people buy whatever health insurance they want without one iota of interference from the government?  And, let insurance companies design insurance products that people want and need -- not what Obama and his gang think they need.

Saturday, February 6, 2016

Free Tuition - Robbing the Poor to Give to the Rich

Bernie Sanders has a novel idea.  Why should affluent people pay for their college tuition?  Let's make it free.  The affluent need a break!  Thanks Bernie.  Hillary should soon endorse this brilliant scam as well.

Who goes to college?  Everyone except poor folks and lower and middle income folks.  Why shouldn't poorer folks shoulder the burden for their wealthier friends?  That's what Bernie proposes.

Bernie says he will tax the rich, but that is not how this scam will turn out (they never do!).   If tuition were free, it would be like the public schools, where property taxes, already burdening lower to middle income citizens provide the funding. The same would prove true for free colleges.

Will the poor and low income kids start heading to these free schools?  No.  They won't have any hope or, or even the remotest interest in, attending college.  Absent school choice or some other major reform, the poor and lower middle income are consigned to schools that provide little or no education and are mainly in existence for the sole purpose of providing income to "teachers," many of whom have no idea how to teach and not much interest.  These schools are mostly creatures of the powerful teachers unions and are not designed or intended to educate anyone.

So the same folks who now attend college -- the relatively affluent, like Bernie and Hillary -- will be the same folks who attend college under the Bernie/Hillary plan.  The only difference is that poor people and lower mcome families will begin to should more of the costs, for schools they are not ever likely to attend.

None of this, of course, gives pause to Bernie so long as 19 year old, affluent, college kids hold up signs at Bernie's rallies, demanding implicitly that poor folks start paying more of the tab for these kids college escapades.


Sunday, January 31, 2016

Absurd Central Bank Policy

According to today's Wall Street Journal:

"The Bank of Japan on Friday joined a host of European peers in setting its key short-term rate below zero.  The move, long denied as a possible course by the bank's governor, came a week after the European Central Bank president indicated he was ready to launch additional monetary stimulus in March -- and days after the Federal reserve expressed new worries over market turbulence and sluggish growth overseas."

This is reminiscent of Dorothy and Toto trying to track down the Wizard of Oz in their effort to overcome the wicked witch of the East.

As devoted fans of the Wizard of Oz know well, the Wizard was largely irrelevant to the problem of dealing with the infamous wicked witch.  But that didn't mean that a lot of folks were none the wiser, as the Wizard commanded quite a following, as do central banks.

How absurd is it for central banks to punish commercial banks for holding reserves by forcing the banks to pay a negative interest rate on their cash holdings?  This is completely ridiculous policy, only possible in a world of make believe.

Europe and the US have passed regulations that have laid their economies to ruin and stagnation.  They have enacted financial penalties on firms that hire employees.  They have forced their commercial banks to lend to customers for purely political reasons. 

The regulators making the decisions in Europe and the US don't like free market economics and they abhor economic success in the free market.  They are constantly opining about inequality as they snuff out any opportunity for the non-wealthy to prosper.  Most regulators have never been involved in the private sector.  Like academics cloistered in their protected tenured environment, regulators have nothing but contempt for those who strive to improve their lives through participation in the private sector.

But much like the Wizard of OZ, central bankers and their regulatory brethren form a religious cult, unconcerned about the realities of their policies.  As long as they can command the attention of the crowd, they can pretend to be doing something significant.

The problem will all of this is that it doesn't work.  Economies will not produce growth if regulators stifle it.  This means that folks in the bottom half of the income and wealth stratum will continue to lose ground, as their standard of living recedes back to an earlier epoch.  This is a circular process.  Activists push laws and regulations that make the life of the less fortunate much worse and then these same activists point to the declining living standards of the less fortunate -- declining standards that could easily be reversed if activists could find something else to occupy their attention -- like work, for example. 

Central bank policy is not particularly harmful.  It is just mainly irrelevant, much like the Wizard of Oz.   That some people believe that central bank policy actually does something, other than employ otherwise unemployable bureaucrats, is the real harm of central bank policy discussions in the media. Such discussions ignore the real problem of an over-zealous bureaucracy that has driven the western economies to the curb and blighted the hopes and dreams of their citizenry.

Friday, January 29, 2016

Why Not Try Free Markets for a Change?

The financial press seems to be obsessed with central bank policies.  There is little or no real evidence that central bank activity has ever mattered much in impacting real economic growth.  No doubt, as Paul Volcker showed in the early 1980s, central banks do matter in the determination of the rate of inflation.  But, the real economy?  No way.

The highest rate of growth ever achieved in any 50 year period in American history occurred when there was no central bank.  In the 1950's and 1960's when real economic growth exceeded 4.5 percent, the central bank was quiet and inactive.

Only in the 1970's did the Federal Reserve begin to make the front pages of the paper and then, only to show how inept they could be.  The Fed engineered the largest peacetime explosion in the money supply in American history.  The result, easily predictable by a freshman student of economics, was a massive burst of inflation.  Putting that fire out is what made Paul Volcker famous.

Now, the Fed is a constant center of attention.  Why, is not clear.  Nothing the Fed can do or say can matter for real output and real income.  The Fed is simply irrelevant.

Thank goodness.

Because the Fed has an atrocious forecasting record.  As the economy began sliding over the economic cliff in December, the Fed was concerned about an overheating economy and inflation.  Hard to believe that any organization could be that inept.  But, that's the Fed.

Fortunately, the Fed doesn't matter for good or evil.

What the economy needs is free markets not an over-zealous Fed.