Saturday, September 20, 2014

The Holder Transfer Payments

Increasingly the US government is a transfer machine that takes money from one group of citizens and gives it to others.

The Eric Holder lawsuits against the financial service industry is a great example of wealth transfer from average Americans to the friends of Eric Holder.

When a financial service company settles a lawsuit brought by the Attorney General's office, who pays?  Bad guys?  Think again.  The owners of the financial service companies are the payers -- not the bad guys.  And, who owns the financial service companies?  You do.

Long ago, whatever bad guys worked for these companies left for greener pastures.  Very few folks who may have played a role in parlaying misleading mortgages are involved today with financial service companies.  Even the owners of these companies are different.

It is, as if, someone who lived in a particular house on your block committed a crime, and the police arrested the person who bought the house from the criminal and who had absolutely no knowledge or participation in the crime.  The real bad guy could be miles away, relaxing and enjoying the fruits of his/her crime.  So, now the police come arrest an innocent person who just happens to be today's owner of the same house.

That's what Holder is doing.  He is extorting money from today's owners by alleging a crime by yesterday's employees.

Note what is not happening.  There are absolutely no charges or lawsuits against any individuals that perpetrated these so-called frauds.  No, indeed.  They will never be made to pay for these alleged crimes.  Instead, innocent shareholders, many of whom may have bought the stock long after the alleged misdeeds occurred, will pay the Holder transfer tax.

So, who wins -- friends of Eric Holder -- mostly various political interest groups like Moveon.Org receive much of the money that Holder is able to extort from the average, innocent taxpayer.

Retirement funds bear the biggest brunt of the Holder transfer tax, since more than 60 percent of financial service companies are owned by the retirement funds of average Americans.  Wonder what crime they committed?

So, large numbers of Americans will retire on a smaller pension fund thanks to the Holder transfer tax, while Holder's buddies live large.

Tuesday, September 16, 2014

Millennials' Malaise

An interesting article in today's Washington Post by Catherine Rampell mulls over the frustrating plight of America's 18-35 age group. The main points are: dwindling marriage rates, dwindling home ownership rates, dwindling job opportunities. These are all the predictable outcomes of the growth of big government solutions imposed on the economy over the last quarter of a century and the significant shifts in emphasis in our education system.

Ultimately skill development and work ethic determine economic outcomes.  When a society no longer thinks these things are important, the society loses its economic momentum.  The contrast between Asia and the western economies could not be more stark.  Asian youth find opportunities for jobs, housing and family development that were unheard of forty years ago.  The exact opposite is taking place in the western world.

Talk to American employers or visit the modern American university. 

American employers will tell you that, even with large levels of unemployment and record numbers of people leaving the work force, the pool of talented people with strong work ethic has been declining for more than a generation in the US. 

Any brief perusal of a college newspaper today will show what is emphasized on campus -- political correctness mainly.  Skill development including reading, mathematics, science and history are increasingly afterthoughts in the modern American university.  Instead, there is a constant focus on social issues and the "correct" political attitudes.

College graduates in modern America often view the job market that they are plunging into as a reward for their years of meandering through an increasingly dysfunctional education system. Instead of starting out and beginning the process of "paying their dues," many college graduates expect to move right into a lifestyle that matches the free flowing life of booze, sex and drugs that were the main components of their college days.  To many graduates, they have already paid their dues.  Now is reward time.

Meanwhile, politicians encourage a lack of interest in skill development and work ethic by beating the drums of inequality and promoting poverty-encouraging measures like increasing levels of the minimum wage.  All of this reinforces the idea that we are all "entitled" to, more or less, everything -- medical care, housing, old age income security and on and on.

The reality is that no one is really entitled to anything that their skill set and their efforts can't justify.  For a while, the political process can distort the workings of the economy, so that it seems like government can provide everything.  But, it can't.

Sooner or later the economic vitality and the cultural vitality of a country begins to wither away.  We can see that in modern America and the millennials are the first generation to feel the full brunt of the changing America.  European youth have been experiencing this phenomenon for decades, but for Americans, this is new.

Fortunately, there is positive change in other parts of the world.  This is likely to be the Asian century, as Asians, for whom skill development and work ethic take center stage, the future looks bright, especially for the young.  In some ways, this is a good outcome.  Good results should accrue to those who work to improve themselves and bad results should accrue to those who complacently think they are entitled to the fruits of other people's labor.






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Sunday, September 14, 2014

If Profits Are Evil, Then So is Economic Progress

Back in the good old days -- before the beginning of the seventeenth century -- the way to get rich was to get an army and then steal and extort from and enslave your neighbors.  That pretty much sums up world history until industrialization and free markets broke through on a grand scale in the seventeenth century.

Prior to the breakthrough of industrialization the plight of the vast bulk of mankind was to live relatively short lives with little to eat and no hopes of economic betterment.  That's just the way it was -- everywhere.

The critics of free markets think somehow that market outcomes are worse than government outcomes.  History suggests the opposite.  When free markets had little or nothing to do with outcomes, goods and services were allocated more or less by brute force and those with military muscle did well and the vast majority of humans lived in constant hunger and deprivation.

By the twentieth century free markets had created the wealthy societies of Western Europe and the US, while the rest of the world languished in hopeless retardation (as much of the world still does).  The poorest of the poor in Western Europe and the US lived far, far better than the top quartile of the population in any and every country outside of Western Europe and the US.  Free markets delivered prosperity for the folks at the bottom of the economic pile.

There have always been rich folks -- long before there were markets.  But, until free markets came along poor folks always remained poor folks with no hope of economic improvement.

In every society in the history of the world, there has been inequality of economic outcomes.  The interesting question is not whether there is inequality -- there is always inequality -- even in the "workers paradise" of the old Soviet Union.  The interesting question is what system best promotes the interests of those at the bottom of the economic pile.  To this question, there is only one answer that history will support.  Free markets are the best hope for those at the bottom of the economic pile.

It wasn't the institution of the minimum wage or government health care that lifted the economic hopes of the poor in the US and Western Europe.  In fact, the case can be made that these institutions and similar institutions designed to have government aid the poor have been total failures.  Left free to pursue their own fortune the vast bulk of poor people in Western Europe and the US became the middle class throughout the western world from the early seventeenth century to the beginnings of the twentieth century.  That's why poverty is now defined on a relative basis.  An American deemed by the bureaucracy to be in poverty would be considered wealthy in all but a few countries in today's world.

When you have few resources and few advantages in life, it helps if there are no government bureaucrats creating and enforcing laws that effectively prohibit you from learning a skill or working.  It also helps if the government doesn't dictate how you receive your income (through employer mandates).  All of these restrictions on free labor contracting really only hurt poor people, as the wealthy are rarely effected by this stuff.

Government poverty programs are notoriously ineffective.  Their main point seems to solidify an economic base for politicians.  You can look at modern America as a great example.  Sustainable economic growth is based upon building the skill sets required to produce things that other people want.  There are no historical examples that run counter to this simple proposition.  Nor, will there ever be.

Friday, September 12, 2014

Jason Furman is Embarrassing

Jason Furman, the chairman of the President's Economic Council, is presumably the principal advisor to the White House on economic policy.  Today, he appeared on CNBC to give his views.

Furman would have been a perfect policy advisor to the old Soviet Union.  He views businessmen as automatons, who have (and should have) no interest in profit maximization (pity their poor shareholders).  For Furman, everything is a political agenda.

Furman's number one idea for boosting economic growth in the US is to raise the minimum wage.  So much for being an economist.  His number two idea is to punish corporations who have moved some of their business operations out of the US to avoid the absurd levels of US corporate income tax.  If Furman gets his way, no rational corporation would ever headquarter themselves in the US, with chimerical and arbitrary policies, such as Furman advocates.

There must be something in the water around the White House that turns previously rational people into economic morons.  This would explain Administration economic policy and the resulting feeble economic growth of the US economy.  It is hard to stifle the US economy, but policy folks like Furman have succeeded with their proposals that serve only to convince rational business folks in America to sit this out until a rational Administration replaces these folks.

Monday, September 8, 2014

Chuck Schumer on Making America Less Competitive

As if the very highest corporate income tax rates weren't sufficient, Senator Chuck Schumer is fashioning some new legislation that punishes American corporations even more.

At the rate Schumer is going, having your corporate headquarters in the US is going to be a losing proposition for virtually any corporation.

Schumer, who never saw a tax hike that he didn't favor, has a long list of ways to spend taxpayer money and is hoping to get as much from corporate America as he can.

Ever hear the story of the goose who laid the golden egg.  Schumer is out to kill it.

Sunday, August 17, 2014

Lehman Creditors Recover Another $ 4.6 Billion

Thus far, unsecured creditors of failed Lehman Brothers have recovered $ 57.1 billion according to today's Wall Street Journal.  This doesn't include more than $ 105 billion that was returned to customers in the immediate aftermath of the Lehman Bankruptcy.

What this suggests is that, had Lehman had a path to Chapter 11 bankruptcy, it may well have managed its way through and returned as a new Lehman Brothers, rather than go through liquidation.  In the 1930's, nearly a third of the banks that failed turned out to have positive net worth after liquidation, suggesting that the bank runs that put them under were purely psychological.

Similarly, it is looking more and more like what put Lehman under was psychology not economics.  The collapse of Lehman's access to the repo market in October of 2008 was the precipitate cause of Lehman's bankruptcy.  That is the modern form of a "run on the bank."

Normally, when companies can't pay their bills, there are two alternatives available to them (or, more accurately, to their creditors): 1) Chapter 7 bankruptcy (liquidation); or 2) Chapter 11 bankruptcy (recapitalization of the balance sheet reducing overall debt and ultimately emerging as a new company with a clean(er) balance sheet).  This latter process is not available to financial service companies, mainly because no one will do business with a bankrupt financial service company.

Strangely, travelers have no hesitation flying on bankrupt airlines or shopping at bankrupt stores or gaining health care at a bankrupt hospital.  But, partly by law, partly by custom, financial services entities cannot, in practice, utilize Chapter 11.

That should be changed.

There is no reason to liquidate an ongoing concern if a reorganization of the balance sheet can keep the business alive.

The current government strategy is to strangle financial service companies with regulations so that they cannot fail.  That is a sure fire way to guarantee that they will fail.

Better is to provide through legislation a Chapter 11 path, so that the Lehman Brothers of the world can operate like United Airlines -- go bankrupt but emerge healthier and wiser after bankruptcy.  Chapter 11 puts the onus on equity holders (who normally lose everything) and bond holders (who lose a lot but become partly bond holders and partly equity holders in the new company).  The taxpayers and customers are normally spared in Chapter 11.  That's the way it should be.

Thursday, August 14, 2014

Eurozone Does a Faceplant

Once again, the real story in Europe is the exact opposite of the rosy predictions made by the politicians.  Even the German economy has ground to a halt.  Numbers released yesterday tell the same sad story that has characterized the Eurozone for the past five years -- no economic growth -- at all.

Meanwhile debt levels in the Eurozone continue to escalate without bound.  If the debt/gdp ratio was a racehorse, it would own the Triple Crown. 

Mario Draghi notwithstanding, postponing the debt problems of Europe is not a solution to their problems.  "Extend and pretend" does not work and has never worked.   Sooner or later someone is not going to get paid.

Efforts to blame this on rich people, on Wall Street, or on the hapless George Bush are completely irrelevant.  When you can't pay your bills, there will be big losers. 

Besides massive debt problems, the Eurozone is plagued with non-competitive regulatory and tax environments, which the US is desperately trying to imitate.  The health care solutions in Europe are now beginning to bear the expected fruit -- long lines, inadequate care, and VA style cover ups.  Add health care woes and pension funding woes to the massive sovereign debt issues, how would anyone expect the Eurozone to have an economic future?

The legendary Texan, Senator Ralph Yarborough once described a political action as akin to "rats swimming toward a sinking ship."  That pretty much sums up current American economic policy as the Obama Administration continues its efforts to "Europeanize" America.  The predictable outcome is available for all to see -- the current Eurozone economy.