Sunday, December 26, 2010

What's Ahead in 2011?

2010 was not all bad, by any stretch.

Probably the best news of all was that problems that have been swept under the rug(s) for generations have now surfaced and are regular conversation topics. It is now quite apparent that the Western economies' love affair with entitlements may be coming to an end. They now know, as they should have known earlier, that there is simply no way these entitlements are affordable. That discussion is now front and center. That's good.

Public employees are finally coming under scrutiny as virtually every one of the 50 states in the United States faces bankruptcy under the weight of the benefits that have been promised to these public employees. Teachers, for one, have long been showered with guaranteed job security and extremely generous pension and health care benefits. All of these public employee benefits are now in play. Unions are in the middle of this because almost all of union organizing successes in recent years has been in the public employee sector. Unions are not really a factor of any significance in the private sector, since everywhere they have had a major presence, the companies have gone bust.

This is all good news, because failure to notice the impending disaster of entitlements and public employee largesse was moving the US and its 50 states into certain bankruptcy. Now, there is truly some hope. No solutions, but hope.

Other good news is that President Obama seems, at long last, to have awoken to the fact that his economic policies are a serious impediment to economic recovery. The tax agreement forged between the President and Senate Republicans was a foolish package, but better than the alternatives. For the first time since January, 2009, there was some recognition in that compromise that business matters. Finally!

So, there is hope that 2011 will be a better year than 2010. There will be continual reminders as 2011 unfolds that virtually every Western European nation will eventually default, in some manner, on their public debt and that several states in the United States are headed in the same direction. But, bankruptcy can be therapeutic; bailouts are never therapeutic.

Saturday, December 11, 2010

Reconciling Tax Cuts with Long Term Debt Issues

Hail to the Wall Street Journal! In one short paragraph the Journal has summed up the heart of the US debt problem and why keeping all of the Bush tax cuts in force make sense as well. In today's Journal and I quote:

"While in a hopey-changey mood, let's note for his (Obama's) benefit that the real fiscal problem today is not the immediate deficit, which does not call for radical action. The real problem is a system of health-care and retirement finance that deters us from saving and budgeting for our own needs while at the same time piling up disencetivizing taxes on those who work and whom we expect to pay for us in old age. Fix this and the government is solvent again."

Wow! The WSJ nailed it. .

Wednesday, December 8, 2010

A Beginning

The compromise between the President and Mitch McConnell on taxes represents a new beginning for the President and, perhaps, for the country. The compromise will definitely help the economy. The economy needs it.

There are still problems, especially on the unemployment front. Employees are still too expensive, laden down by government-imposed mandates and implied litigation liabilities for businesses. But capital expansion should pick up dramatically in 2011.

It's not perfect, but this deal is definitely an improvement over the policies of the past two years.

The looming debt problems are still there -- both for the US and for Europe. Hopefully, the idea of "workouts" and "defaults" will soon take the place of "bailouts." The debt problems have no easy fix.

Tuesday, November 30, 2010

And Now for the States

State governments are drowning for two reasons: 1) obligations to public employees; 2) the state share of medicare and medicaid spending. Most states are now beginning to confront the public employee problem by reigning in the some of the worst abuses of overly lavish pay and benefits (teachers top the list, by the way).

Only Republican Governor Bob McDonnell of Virginia has opted to pour on more lavish benefits for public employees and leave the taxpayer to pick up the tab, but he is an outlier. Governor Christie of New Jersey has led the charge to begin to curb the enormous pay and benefits of public employees. Other Governors, Democratic and Republican, are following Christie's lead. Even President Obama has entered the fray by freezing public employee pay for two years in a symbolic gesture toward sanity.

But, there is much to be done. California's off-balance sheet pension liabilities are estimated to exceed $ 1.5 Trillion (those numbers are not in the budget, which now $ 25 billion out of balance). So life should get interesting in California. A similar pattern exists in New York and time is no longer on their side.

Again, much like Europe, look for debt defaults and workouts by state governments as they struggle to undo the poor policies of the forty years.

Europe and All That

First Greece, then Ireland. Now all eyes turn to Portugal, Spain, and Italy. Little noticed is that neither and France and Germany are likely to survive some type of default on their own sovereign debt. A combination of bad economics, a bad economy, and the tide of demographics will sink both France and Germany in time.

The idea that you can paper over the problems in the PIIGS (the new name for Portugal, Ireland, Italy, Greece and Spain) is ludicrous. Much of the PIIGS sovereign debt is held in German and French banks. Merkel and Sarcozy think no one knows this, I suppose.

But, in fact, the world markets know everything. Just watch bond yields on European sovereign debt. The are beginning the slow, inevitable surge toward infinity. (You reach infinity when the bonds are completely worthless.

Europe has no real shot other than defaulting and the sooner the better. Ireland will probably be the first. They will renounce their guarantee of bank bondholders and that will begin a tide of defaults and partial defaults (and workouts) that will begin to crush the holders of sovereign debt. That is as it should be. Those who make bad investments should suffer the consequences.

Anxious eyes watch California, New York, New Jersey, Illinois and host of small American cities that will default, at least partially, on their debt within the next 24 to 36 months. The idea of a federal bailout died on November 2nd. All appropriations, according to the US Constitution, must originate in the House of Representatives. Good luck with that. There will be no bailouts for the profligate states. That is as it should be. Those who make bad investments should suffer the consequences.

You can't repeal the laws of economics by pretending to backstop folks who make bad decisions. That just leads to more bad decisions.

Real economic recovery and growth cannot begin until the wave of defaults begins.

Monday, November 15, 2010

Relitigating the Last Two Years

When the election was over, President Obama said that voters "do not want to relitigate the last two years." Wrong.

The voters voted to encourage those who were opposed to Obama policies to reverse them. That's what relitigating the last two years is all about.

The White House says it is time to move forward constructively. That is not what the voters seemed to favor in exit polls. They favored rolling back government, repealing Obamacare, and extending the Bush tax cuts for everyone. In short, they were completely anti-Obama.

Let the relitigation begin this week with the convening of the "lame duck" Congress!

Saturday, November 13, 2010

Embarassment in Asia

President Obama's Asian trips is a catastrophe. Obama has managed to reduce America's role to whining, finger pointing, ineffective posturing. Not a single world leader agreed with any of the President's agenda, so, in that sense, Obama forged a consensus -- of opposition to Obama. Looks like world leaders hare the same view as average American voters -- Obama's policies are the problem, not the solution.

You wonder if this President is ever going to figure out why Americans have lost faith in his presidency and why world leaders no longer have any respect for him and his sidekick Tim Geithner.

This is truly an embarassing moment in history for a once great economic power.

Wednesday, November 10, 2010

Obama is Confused

Obama's comments leading up to the G20 meetings this week show a serious confusion about why America is stuggling. As usual, Obama blames someone else. This time Obama's targets are other countries with high levels of exports to the US and substantial positive trade balances with the US. He thinks they should stop doing this. Why? Americans are buying, so why should they stop selling to them.

What Obama does not understand is the reason why Americans buy and do not save. The reason is simple. Americans assume that government will take care of them in their old age through social security and medicare, so why save? Why not live for today and let future generations fund your old age? That's the Obama way.

The result is Americans borrow from abroad, don't save and consume like crazy. The only way to stop this is to dismantle social security and medicare.

China doesn't have social security or medicare nor do any important countries that are currently experiencing economic growth. Only Europe has an elaborate welfare structure like the US and it is now beginning to dismantle it piece by piece.

Obama just doesn't understand simple economics. Fortunately, the rest of the world does.

Saturday, November 6, 2010

Maybe "No" is the Right Answer

Paul Krugman, one of many NY Times partisan Democrats masquerading as a columnist, has once more asked: "What would they have done different?" How about doing nothing?

When recessions begin, politicians look for quick fixes, sometimes called "stimulus plans." Republicans look for quick fixes; Democrats look for quick fixes. In Economics, we have a subject called "Macroeconomics," which is supposed to provide guidance to the correct macroeconomic policy. What Macroeconomics is, in truth, is a collection of random fairy tales and simplistic equations, that bear little resemblance to hard science. When you ask someone, "do you favor spending increases or tax cuts," the answer you get tells you the political party of the person doing the answering. Some science!

The cold hard truth is there is no specific government policy known to be helpful in moving the economy from recession to recovery. Doing nothing may well have been the right answer in 2008 and 2009. Sometimes, time alone heals and no amount of well-intentioned policies will help. Indeed, in Obama's case, it seems pretty clear that the legislative activity by Obama-Pelosi-Reid has inhibited the economy's ability to recover.

The economy will recover, regardless of the foolishness of the Obama regime. But, had they done nothing, we might be looking at 8 percent GDP growth (like much of the rest of the world) instead of limping along at 2 percent GDP growth. Maybe, just saying "no" is the right answer.

Thursday, November 4, 2010

Bernanke Has Lost It

QE2 is a disastrous mistake and will only inflate asset and commodity prices and provide a major impetus to future inflation. Bernanke is misreading his mentor, Milton Friedman. Today's Wall Street Journal has an excellent article by Alan Meltzer, one of Friedman's most famous disciples, laying out exactly why Friedman would not have agreed with Bernanke's current path.

QE2 is the announced future purchases of $ 600 billion of treasuries by the Federal Reserve. This would be a major expansion in the money supply. The dollar, of course, will collapse with this kind of money creation and economic policy makers around the world are looking toward imposing capital controls to try to offset Bernanke's policies. They view this as a trade war of epic proportions.

Ironically, Bernanke is too worried about the economy. Economies recover on their own when government gets out of the way, witness the 19th century in American. The period from the civil war until 1914 was the fastest economic growth in American history. It was characterized by deflation, not inflation; financial panics every ten years on average, but no government bail outs. The end result: a massive increase in the standard of living of the average American.

A healthy economy has ups and downs. Obama and Bernanke should get out of the way and let this economy recover.

Finally

It looks like the business community may finally begin to get some relief from the oppressive taxes, regulations, and rhetoric that has flowed constantly from the first two years of the Obama regime. The historic repudiation of the Obama program sets the stage for possible progress on reducing the obstructions to economic recovery that have been put in place by the Democratic Congress and President Obama.

Watching Obama's press conference yesterday, I was struck by how little Obama understands about the economy and how little he understands about the average American. His view that voters "don't want to relitigate the past two years" completely misreads the November 2nd landslide for the Republicans. In fact, the voters do want to relitigate the past two years. They are demanding it. That's what the tea party movement is all about.

If Obama continues to misread the electorate and stand in the way of economic recovery, then we must wait until the Fall of 2012 for free markets to really begin to power us out of this economic slump. That would mean slow growth and high unemployment until at least 2013. That doesn't seem to bother the President, but, as we found on Tuesday, it bothers lots average folks and they vote.

Monday, October 25, 2010

The Deficit Commission Offers Little

The President's "Deficit Commission" is composed of members of both political parties, who are expected to make recommendations to deal with the burgeoning national debt. Fat chance! The entitlements are off the table.

Instead, the commission is exploring various ways to raise tax revenues through the mantra of "tax reform." No effort is being made to curb spending, other than military spending. This is a complete waste of time and taxpayer money.

Without a plan to phase out the entitlements, medicare, medicaid and social security, there is no hope of dealing with America's long term public indebtedness.

The Commission reports its findings on December first. At that point there will be an effort, no doubt, to ram through the commission's so-called bi-partisan suggestions that all amount to higher taxes and a weakened military. Even that won't help.

Wednesday, October 20, 2010

The Daunting Task Ahead

Krugman and other Democratic loyalists are forever pointing out that the national debt was a much higher percentage of GDP at the end of World War II and therefore we should not be concerned about the high debt levels of the present day. These arguments are completely disingenuous.

During World War II, America mobilized a huge effort to produce guns, tanks, aircraft and other war-related goods. When the war ended, there was no longer a need for all of this spending and spending levels were dramatically reduced almost overnight. There were no "hard decisions" about reducing spending. The war was over.

Today, spending is driven by entitlement programs that large parts of the American public depend upon and expect to see continued. Spending, long run, can only be reduced by essentially eliminating these entitlement programs -- restraining them won't work for the same reasons that they have never been restrained.

Both federal and state spending is mostly driven by entitlements. It isn't fraud and "wasteful" spending. It is the entitlements. It is not the war in Iraq and the war in Afghanistan. It is the entitlements.

So, unless Krugman and his loyalist band of the Democratic faithful are proposing massive cuts in entitlement spending, which last I checked they weren't, America faces a massive debt crisis that will, in the end, require the same solution that Europe is now moving toward -- eliminate the entitlements.

Wednesday, October 13, 2010

QE2, The Yuan, and The Beat Goes On

Stock markets around the world have rallied by double digit percentages since early September. The financial news, of course, must explain this. (Explain the unexplainable -- that is their mission).

Enter "QE2:" QE2 means the Federal Reserve buys huge (think Trillions of dollars) amounts of treasury securities. This is the equivalent of printing money. QE2 is thought to be the great solution to our current malaise. The fear is that we may be collapsing into a deflationary spiral and only QE2 can save us. This is ridiculous of course. Printing money is never an intelligent monetary policy and there is certainly no evidence of deflation in the US economy.

Another non-issue is the Yuan. Tim Geithner simply cannot let a day go by without blasting Chinese authorities for not raising the value of the Yuan (and thereby further crushing the value of the dollar). This is no solution to our woes either. It is time to send Geithner back to to school to sit through a few economics classes. Geithner has no clue.

No one knows why markets go up except that when folks are especially negative on the future that typically leads to good markets. That's probably why we are where we are. The average shareholder has no particular interest in QE2, the Yuan, or any other irrelevancies.

Monday, October 11, 2010

Krugman is a Broken Record; Hooray for Mortenson

In his column this morning, Paul Krugman continues to beat the dead horse of "too little stimulus." Not satisfied with a $ 13 Trillion national debt, is apparently in favoring of moving the US totals toward Greece numbers. It would just take another $ 3 Trillion to get there. Perhaps, Krugman wishes to squeeze Greece out of the headlines. This is Krugman's plan to make American number one (in debt).

It should be noted that Krugman did not receive a Nobel Prize for his work on macroeconomics. This doesn't stop him from holding forth as if he is the high priest of macroecnomics Fortunately, few outside the Obama White House, share Krugman's views and the public has long since jumped off the Krugman train.

Three economists shared the Nobel Prize, announced this morning. One of them, Dale Mortenson, is my old professor and a member of my Ph.d dissertation committee. Mortenson is a great economist and a marvelous human being. Three cheers for Dale Mortenson!

Sunday, October 10, 2010

Obama Adopts the "Big Lie" Strategy

Desperate for something to say on the campaign trail, President Obama is now simply telling baldfaced lies. Worse, hundreds of millions of dollars are being spent on television and on radio to bring those lies to the public.

What lies? That foreign money is being washed through the Chamber of Commerce and is financing campaign adds across the country.

If the lies are truth, not lies, the Chamber is subject to criminal prosecution, since such money be a violation federal law. Obama does not object to George Soros, not an American citizen by the way, spending literally billions to help elect Obama president, but he now libels the Chamber of Commerce.

This man, Obama, has no shame and no sense of decency. If the Chamber is using foreign money, then give Eric Holder, your Attorney General a ring and begin the prosecutions. Otherwise, quit lying.

Incidentally, Mr. Obama, you might let Eric Holder look into MoveOn.Org and countless other Democratic organizations who have never publicly revealed their donors. Why has this only become of recent interest to the White House? November 2nd cannot come too soon. Congress should hold hearings on Mr. Obama's lies regarding campaign finance. This man, Obama, has no shame.

Saturday, October 9, 2010

9.6 % and Counting

No good news for the President. Unemployment remains historically high and nothing in the foreseeable future will change things. The hardest hit are the "legally protected groups" -- minorities, high school graduates and older workers. This is not unusual.

Congress has mandated all sorts of special rights for these "protected" groups and as a result they will be the last to be hired and will only be hired when the economy is truly frothy. All of the "unprotected" groups, mainly white males between 18 and 40 years of age, will do much better. They are cheaper to hire, easier to fire, and less likely to sue for a workplace grievance. It's as if we designed our labor laws to favor white males and to penalize minorities and others. Whether by design or not, that is certainly the end result.

Obama's dream was to expand government and have the government hire those who support him politically. To some extent, Obama's dream was fulfilled by the Stimulus Act of 2009. But, alas, the public woke up and have called for the expansion of government to end. Bereft of ideas, Obama is now complaining that ordinary Americans simply are not smart enough to understand his policies!

The Obama Administration is now granting waivers to companies who plan to drop health care insurance for their employees. More than 120 large companies, including McDonald's, have now received government-granted waivers from the onerous requirement of Obamacare. What this means is that Obama decides who must obey the new law and who gets away with ignoring it. So much for the rule of law.

The bankruptcy (literal and figurative) of the Obama Administration is on display daily as key Administration figures desert the sinking ship. The tsunami is coming. 24 more days until November 2nd.

Friday, October 8, 2010

Leave China Alone

The level of the Yuan (the Chinese currency) is not even remotely a cause of the economic problems that the US faces. Appreciating the Yuan (and devaluing the dollar), a program advocated by Tim Geithner, is silly policy. The US has a miniscule savings rate and as long that is the case, we will have a huge trade imbalance (almost by definition, since whatever investment activity occurs in the US must have the savings provided from some external source).

It is becoming a bedrock of American economic polical life to blame someone else for our own foolish policies. By blaming others, you never face up to reality.

The cold, hard truth is that Obama's policies have damaged the prospects for a US economic recovery. It is not clear that Obama cares one way or another. He seems focused on other matters. But, Americans care. We will eventually have an economic recovery with permanently higher levels of unemployment. This will be the Obama economic legacy -- economic stagnation and slow economic growth.

Hopefully, after November 2nd, we can begin to remove some of the roadblocks to economic growth that the Obama team has put in the way of the economy. Most of the country would like to return to the bad old days of prosperity, even if Obama prefers not to.

Sunday, October 3, 2010

The End of the Obama Agenda

Whatever the outcome on November 2nd, the Obama agenda is finished and cannot be resuscitated. Most of the economic agenda was aimed at pumping up the income of union and public sector employees. The health care system has been trashed and the financial sector lies under the most burdensome regulatory environment in history. Meanwhile ordinary Americans are still losing their jobs, their homes, their credit cards and their health care insurance. No wonder life is tough for Democrats.

The Obama answer to the enormous backlash to his first twenty one months in office is that the public doesn't understand his program. Unfortunately, for Obama the public does understand his program and has been opposed to it from the beginning.

Having nothing to run on but an incredibly unpopular legislative record, the Democrats, actively encouraged by President Obama, are resorting to mud slinging and personal attacks. That's about all they have left. This is the new politics that will be Obama's legacy to the American system.

Obama says that Americans don't understand. Yes, they do. The two biggest lies in the past two years are: 1) No one will lose their health insurance; and 2) We are bending the (health care) cost curve down. It's hard to imagine anyone in America, including folks in the White House, believe those lies anymore.

It is an Administration in shambles. The rats are leaving the sinking ship. The dream is over. Interviewed on public radio, students who lead the charge for Obama in 2008, were unanimous in their view that "Congressional elections aren't cool...I don't even know who my Congressman is...." So the students will sit this one out, but the adults will not sit this one out.

The Republicans will gain 65-70 seats in the House and 8-10 seats in the Senate. The era of Obama is over.

Wednesday, September 22, 2010

Romer First, Now Summers....Gone

The two chief economic advisors to Obama will not be around in 2011. Summers announced today that he is returning to his secured, tenured professorship at Harvard (which he cannot do if he lingers in Obamaland past January the 1st). Romer has already returned to her protected sanctuary at Berkeley. Neither of these two need worry about the plight of the millions of unemployed Americans. Romer and Summers have safe jobs. They work for the government, i.e. they are professors.

Now, all eyes turn to what kind of Keynesian will replace Romer and Summers. It is unlikely that Obama will change stripes. He likes big government and despises the private sector, so that if he goes after a corporate type, you can be sure that the "new corporate type" will be someone whose sympathies rest with big government, higher taxes, and more regulation.

Only a new Congress can reverse the disastrous course of this presidency. Shifting the deck chairs won't help as long as the Captain Queeg is in command.

Monday, September 20, 2010

The Unemployed Over 50 -- Never Work Again?

Why can't the 50 and over population find jobs? The New York Times has a lengthy article today spelling out the cold hard facts...no one wants to hire anyone over 50 years of age. Why? The article gives no reasons and laments the problem.

The answer is obvious.

If you are an employer and you hire someone over 50 years of age, that person can sue you for age discrimination if you every decide to let them go. In fact, a large number of such folks do sue for age discrimination when laid off. They are part of the protected class along with minorities, women, etc. Who wants to hire people who can sue you if you lay them off later? The answer: no one.

Over 50s will not get hired until the absurd "age discrimination" laws are repealed or until over 50s gain the right to waive their rights to sue. As things stand now, only a fool would hire someone over 50 years of age.

You might say: well isn't that illegal...to not hire someone because they are over 50 years of age. The answer is yes. But illegal immigration is also illegal.

Thursday, September 16, 2010

That We Know

Larry Summers, the main economic advisor, said on CNBC this morning that "a failure of regulation caused an economic crisis.....that we know" He could not be more wrong. A housing bubble induced by favorable tax treatment of housing combined with Fannie Mae and Freddie caused the economic crisis. Regulation actually made matters worse. The previous Basel accords encouraged banks to substitute riskier assets for safe assets (the new ones are likely to do the same).

Government regulation has never prevented a crisis and never will. Most economic crises are government induced. The government needs to get out of the way.

If Summers doesn't understand what caused the financial collapse of 2008, then it's no surprise that his policy recommendations to Obama have been as misguided as they have been. Summers should head back to academia, where he can continue to pretend that his policies work. People in the real world know better. "That we know."

Wednesday, September 15, 2010

The Role of the Tea Party

Yesterday's Republican primary results shocked the "official" Republican establishment and showed the power of the Tea Party. Why the Tea Party?

The truth is that Republicans share equal blame with Democrats for the colossal mismanagement of the American economy and the massive national debt. Republican moderates have lined up with Democrats time and time again over the past fifty years to produce the margins required to spend our way to our current plight.

The role of the Tea Party is to say: "no more." The Tea Party is not about electing Republicans or Democrats, but about electing people who will begin to tackle the project of rolling back big government. This is an important mission. More power to them.

Who cares which party controls the US Senate? The issue is who will begin to restrain the growth of government and move the country back toward free markets. Supporters of "cap and trade" like Mike Castle are no help in this great endeavor.

Long live the Tea Party!

Sunday, September 12, 2010

The Basel Capital Requirements

This week international central bankers are forging a new set of rules for banks that would move capital requirements from 4 percent currently to 7 percent (of outstanding loans). This absurd new policy comes just as the world economy is teetering on the brink, especially in the US and Western Europe, where the new Basel rules will have the most impact.

Why is it that no one wants the world economy to have credit? By every measure bank lending has shrunk, not only in the US but throughout Europe? How is a recovery supposed to take place when every "reform" measures reduces the available amount of credit?

The time to reduce or slow credit availability is during a boom, not during a recession. The Basel rules will only make things worse and could plant the seeds of a lengthy US-Western Europe slowdown in economic activity. Combined with the wrong-headed policies of the Obama Administration -- credit card reform, debit card reform, consumer protections in the FinReg bill -- the net effect of all of this is to dramatically reduce the available credit necessary to fuel a recovery.

Policy makers and politicians should take a holiday. The more they do, the harder it is for free markets to produce an economic recovery.

Maybe, just maybe, more regulation and more government is not the answer.

Monday, September 6, 2010

The Party of "No"

We constantly hear the comment that Republicans must put forth new ideas to get the economy going. Nope. That would be a big mistake. What the Republicans need to do is make the case that had the Democrats done nothing, the US economy would, today, be in a better place. And, it would be.

What Obama and the Democrats have done is create roadblocks to recovery. What the Republicans need to do is remove the roadblocks. The party of "no" is the way to go.

Free markets will bring recovery. Government intervention will simply impede recovery and prolong stagnation. That's what happened from 1929-1940 and that is what is happening now.

No new stimulus plans...please!

Saturday, September 4, 2010

Targeted Stimulus Ala Obama

Now, with 15 million Americans out of work, the Obama folks are preparing a new "stimulus" package to be unveiled next week. As usual, the Obama plan is "targeted." Targeted plans never work, because they are very easy to "game." You simply hire a good tax attorney and shoehorn yourself into the "target."

Nothing good can come from the Obama packages. Even suspending the payroll tax temporarily won't work, because it is temporary (as well as "targeted").

The only thing that works is for government to get out of the way and let free enterprise provide the economic recovery. Reduce the size of government and reduce the role of government into free markets.

Those who thinks the 1980s and 1990s was a bad economic period(which Obama seems to think), should support Obama. The rest of us would love to return to the economy of the 1980s and 1990s, when free markets reigned and unemployment reached a low of 4 percent.

Wednesday, September 1, 2010

Going It Alone

You might think that the whole world is plunged into a depression. If so, you could not be more wrong. Parts of Europe are booming, China growth is still well above 6 percent, India clocked in at over eight percent in the most recent quarter. Even Russia has growth exceeding four percent in this past quarter.

The US is the world's laggard. We have very high unemployment and anemic growth in a world that is recovering....just not us. This parallels a similar episode in the 1930s when the Roosevelt led recovery of the 30s faltered as the rest of the world sprinted to an economic recovery. In both the current episode and the experience of the 1930s, the heavy hand of government is the culprit.

The Obama/Pelosi/Reid agenda has stifled the US economy, while the rest of the world is recovering quite nicely. Most countries in the world have chosen to expand capitalism and free enterprise, including China interestingly, while the US has moved dramatically toward a government planned economy. Even Europe has owned up to its inability to afford the welfare state, while the US has spent the past two years dramatically expanding the welfare state. US government spending rose 16 percent in 2009, a rise not matched anywhere in the civilized world.

Obama and his cohorts are on a lonely path to economic stagnation that the rest of the world wants no part of. Come November 2nd, the American public finally has an opportunity to change this disastrous course.

Tuesday, August 31, 2010

Same 'Ole, Same 'Ole

President Obama talked about the economy yesterday, punctuating the end of "recovery summer." According to the President, the weakening economy is all the fault of stubborn Republicans who refuse to endorse the so-called "small business tax break" bill. This bill is another "targeted" tax break bill that is easily gamed and will contribute nothing to economic recovery. Republicans are correct to oppose this wasteful bill.

The President has no new ideas. His agenda is mostly a redistributive agenda with job-killing rules, regulations, taxes. The lack of job creation and the stultifying impact of Obama policies are a big surprise only to the President and his Congressional allies.

I wonder if this President will ever understand how jobs get created in the private sector? So far, Obama just keeps whistling the same discredited message of tax and spend. Fortunately, the Congress will have no more of this and November 2nd is fast approaching.

Sunday, August 29, 2010

Out of Bullets?

How do you restart the economy? At this point, every government policy prescription has been tried. The net result: zero. The economy is struggling and some even expect the economy to show negative growth in the second half. That's unlikely, but certainly possible.

Maybe, just maybe, government policy is the problem, not the solution. The economy, had there been no TARP, no bailouts, no credit and debit card reform, no Obamacare, no demonizing rhetoric from the President, may have been well on the road to recovery by now. The government could well be the problem.

Macroeconomics is no science. When you ask an economist whether he favors spending or tax cuts, his answer tells you whether he is a Republican or Democrat? What kind of science is that? The cold, hard truth is that economists don't know what to do. Obama is now learning that truth to his chagrin.

Obama thought this would all be easy. With folks like Larry Summers, Tim Geithner, and Christina Romer telling him to use the usual Keynesian tactics and to declare personal war on the insurance industry and the financial sector, it was assumed that by the Fall of 2010, the economy would be on the mend. Such nonsense.

Government is the enemy. Banks won't lend because government regulators are forcing them not to lend by raising capital requirements and discouraging loans to anyone but the best credits. Absent this kind of ridiculous government policy, banks would be lending and credit would be available. But, government is blocking that.

There is a similar impact from debit and credit card reforms. These so-called "reforms" have the effect of eliminating credit for middle income Americans and small businesses. Credit card limits have been drastically reduced for many Americans as a result of the Obama debit and credit card reforms. The law of unintended consequences is bearing a bitter fruit.

It is government policy, not the free market, that is denying much-needed credit to the American economy and without that credit, true recovery is not possible.

Meanwhile, the so-called stimulus and other government give-aways to political friends, have ballooned the deficit to unimagined levels. America is now considered one of the most irresponsible countries in the world from a fiscal standpoint.

Just to square the circle, the Obama crowd and their allies in Congress, jammed through Obamacare which not only imposes huge additional future spending at the federal and state levels, but threatens to destroy the best health care system in the world. Quite an accomplishment!

As bad as all of this is, it is reversible. The naivete of Obama, Pelosi, and Reid is now obvious to the public. Nothing they have done has worked and virtually every program they have pushed has been trumpeted with misleading, if not outright false, rhetoric. The economy is staggering, housing is struggling, businesses are frightened of the future (and of Obama) and not hiring.

Fortunately, the public is now wise to the absurd and destructive policies of the Obama Administration and the Democratic Congress. There is hope of changing policies if things go well in November.

Then, hopefully, Congress can begin to reduce the barriers to economic recovery that have been thrown up by the Administration. The economy, if left alone and unhampered with undue regulation and taxation, can recover on its own. It doesn't need stimulus programs or anything else. It needs government to get out of the way and let the natural juices flow.

Saturday, August 28, 2010

Reasons for Optimism

Don't let the national political scene get you down. Things are actually beginning to look up. November 2nd is the big day and no matter the result, there is an almost certain feeling that the political environment will get better for business.

Post November 2nd, Obama might change course. Not likely, though, as he seems to have his playbook memorized and can live with declining public approval. More likely, Republicans will block any new anti-jobs legislation that Obama and the Democrats can dream up. Moreover, there seems to real hope of gutting ObamaCare and shifting the health care discussion to a more rational plane. Progress can be made on repealing much of the finreg fiasco. Congresional committees can expose the enormous graft and corruption of the Obama Administration and their Congressional allies.

So, things will be changing for the better by late Fall and I would expect a very different public dialogue in 2011. All in all, I expect a better political environment for business as we approach the new year.

Good things lie ahead.

Thursday, August 26, 2010

Forget the "Hindenburg Omen"

The latest craze among stock market pessimists is the "Hindenburg Omen.". If you subscribe to this view, you will sell everything you own and retreat to a cave somewhere....immediately. According to "HO," the stock market will get crushed in September and October -- maybe to 5,000 on the Dow, maybe to 1,000!

Don't listen to this silliness. The stock market is cheap and serious Investors should be fully invested. There will soon be an "end-of-Obama" rally, as the enormous political sea-change that will take place on November 2nd gets factored in. There is a real chance of sweeping political change that will bring capitalism back to the US. There are good signs in Europe that even Europe realizes the welfare state must be dismantled.

Things can turn around and it looks more and more like that is where we are headed. So, put on your optimist hat, buy stocks, and enjoy the coming rally.

Thursday, August 12, 2010

New Unemployment Claims Surge Once More

More bad news -- unemployment claims on the rise. Hovering just below 500,000, new unemployment claims is a window into what employers are doing at the moment. They are beginning to add to layoffs again.

For reasons laid out over and over again in earlier blogs, this is a perfectly rational response by private employers to actions taken by the Obama Administration and the Congress in 2009-2010. Commercial banks have, as a predictable response to Obama and the Congress, dramatically curtailed business lending. Can't be pilloried for making bad loans, if you don't make loans.

So, in some sense the Obama plan is working: the private sector has been brought to it's knees: way to go, Barrack! You paid those guys back. A little collateral damage, but so what if the unemployed ranks continue to grow.

Sunday, August 8, 2010

The Future of Medical Care in the US

By waving magic wands in the air and declaring (almost) universal health insurance for all Americans, the Obama folks think that they have really accomplished something of significance. Actually, they have, but their main accomplishment is not what they think.

Obamacare, Medicare, Social Security will not succeed as advertised simply because there is no payment mechanism to fund these pipedreams. Instead, generations of Americans will find nothing in the well when their turn comes to receive benefits. The politicians that created this looming nightmare will be long gone, leaving a disillusioned populous with nothing but dark memories.

But beyond this. The assault on the the health care industry, the insurance industry, the medical supplies and technicians industry by the Obama Administration will destroy those various components of the health care industry. It will further erode the necessary supply of doctors and nurses required to service even past levels of American health care. The new Obama world will be health care without doctors and nurses. That should be interesting!

Like everything else in Obama-land, there is a huge disconnect between dreams and reality.

The Hidden Cost of Labor-Friendly Government

Why don't ordinary folks rob banks? That's where the money is, said famed bank robber Willie Sutton. The answer is: "you might get caught." If you a rob a bank, you might end up in prison (but, you might get away with it). This is what economists call a contingent liability. You have to do something first, then sit back and see the consequences.

What if you're a businessman, choosing between hiring an employee and a more expensive machine alternative. What would you do? Normally you would hire the employee. But this assumes that both choices have the same contingent liabilities. But, there are no government laws to protect machines...hence no real contingent liability to acquire the machine.

But, what about hiring an employee? Employees have "rights.". Literally, hundreds of rights. These "rights" enable employees to sue their employer, even for things that occur off the job site! The contingent liability of hiring a single employee can run into the hundreds of thousands of dollars! Even a small workforce, especially if it satisfies modern notions of diversity, can impose millions of dollars of contingent liabilitiies upon a small business.

So,what to do? The only way to avoid these massive contingent liabilities is to not trigger the enabling event: if you want to avoid jail, don't go around robbing banks; if you as a businessman want to avoid crippling litigation costs over presumed "employee rights," hire fewer employees and, almost as important, do not create a diverse workforce.

Employees with "rights" impose huge contingent liabilities on employers. There is a way out -- don't hire!

This seems to be what is happening in today's labor market.

Friday, August 6, 2010

The Employment Nightmare Continues

Today's job report simply re-emphasizes the Obama dilemma. The Obama effort has been aimed almost exclusively at preserving jobs in the public sector. Ultimately, the cost of preserving public sector jobs is unaffordable and a drag on the rest of the economy.

It's the private sector, now buried by Obama mandates, taxes, regulations, imposed government restrictions on lending, where the majority of new hiring must come from. Large businesses will begin to do more hiring, but small to medium businesses will not. The expiration of the Bush tax cuts will only add to the reluctance of medium size businesses to commit to new employees.

Wednesday, July 14, 2010

The Markets and The Economy

The economy is much worse than the financial markets. The Fed's release today of their lowered expectations for the economic recovery is simply one more marker that this recovery is unlike any other except during the dark days of the 1930s. Even Obama has acknowledged in recent days that maybe the government is part of the problem, as his press aide Gibbs acknowledges that the public may take out their frustrations on Obama's political allies.

The markets are likely to sell off during the next few days and weeks, but look for a strong rally as the stock market factors in the end of heavy Democratic majorities in Congress. The political climate for business is bound to improve after November and it is highly likely that Obama will, finally, shift course from stifling economic recovery to, at the very least, removing himself as the main obstacle to recovery.

The truth is: Obama and his anti- business agenda (and rhetoric) are the problem. Obama thinks job growth is a simple matter of getting the government to hire more people. He doesn't trust the private sector, partly because he doesn't understand it, but mostly because he is ideologically opposed to free markets.

But when the stock market sells off again, and it will, buy it when all the talking heads tell you to sell. There will be a "political change" rally as we get closer to election day.

Sunday, July 4, 2010

The Economy and the Markets

The V-shaped recovery isn't happening this time. Private employers are not adding new employees. Nearly 15 million jobs have been lost and they are not coming back anytime soon. The stock market has made a knee bend to this new, jobless reality. Only the Obama Administration seems to be oblivious to the absence of private sector job creation. Everyone else is all too aware of the problem.

In time, economics will trump politics. Companies will find a way to get around the roadblocks that politicians place in front of them. There will be a growth of off-the-books, black market activity to circumvent the enormous increase in rules, regulations and mandates faced by small to middling businesses. In the meantime, American business will continue to outsource activities that, thanks to the Obama Administration, are no longer economically feasible in the US.

What this means is that very high, long term unemployment will be a permanent feature of the new America created by Obama and the Democratic Congress. We may have several generations that grow up in a world of high unemployment and diminished opportunities. Only in the public sector will there be opportunity for young, highly educated Americans. All of this is the familiar landscape of Europe, where young people with education and talent must hop on a boat to somewhere else to find jobs that that fit their talents.

America has become much more like Europe, just at the very moment that Europe is beginning to realize that their model does not work. The G-20 meeting in Nova Scotia two weeks ago spotlighted the gaping difference in attitude between Barrack Obama and the newly chastened European leaders. The latter have simply run out of money. There is no way to provide stimulus when the markets are questioning your ability to roll over existing debt. That's where Europe is; that's where the US is heading.

The basic premise of the welfare state is that you can borrow from future generations to provide the good life for folks living today. To do that, bond markets have to play along. What is happening now is the beginning of the bond market saying "no." CDS's on European sovereign debt continue to widen; interbanking lending in Europe is collapsing. These are the realities, no matter what strange world Paul Krugman might live in.

Within a few months, perhaps a year or two, the bond markets will begin to question the viability of US debt financing and the debt financing of numerous states within the US. What then? Who bails out the US Treasury? Only then will the Obama Administration begin to realize that the game is over. Fattening the pocketbooks of public employees is not an economic program. It won't create private sector jobs.

To get the American economy going again, you have to loosen the noose that is around employers' necks -- something the Obama Administration is not going to do. It took World War II to convince the FDR Administration to lighten their attacks on private business. As a result, the economy boomed for the next five decades. Sooner or later a new and different American administration will face the realities, reign in entitlements and begin to provide an environment where business can thrive.

Until then, the main program for private business is to find ways to get around the rules and mandates and new taxes. This means don't add new employees unless absolutely necessary. Take no unnecessary risks and keep your head down. That's the Obama legacy and it won't produce an economic recovery of any substance.

Monday, June 28, 2010

Geithner and "Growth Initiatives"

Tim Geithner is "calling for the G-20 nations to continue growth initiatives," according to the main stream media. Geithner's idea of growth initiatives is to fatten the paychecks of currently employed public employees, which is essentially what constituted the $ 800 billion Obama-Pelosi-Reid package enacted in early 2009 "to prevent unemployment from reaching 8 percent.". Now with unemployment 25 percent higher than the Obama 8 percent target, Geithner and Obama would like to do more of the same. Even Europe's not buying the Geithner message any more. The G-20 Summit's concluding report emphasized debt reduction and getting one's fiscal house in order. Only the US is pushing for more spending and higher sovereign debt levels.

The Congress and the American public aren't buying it either. The public wants a fiscal about-face. Obama is increasingly isolated from reality and from the American public. Now, he seems to be losing his European fan base as well. Even the British public no longer consider that they have a "special relationship" with the US. In two short years, Obama and Geithner have have become shrill voices with an ever diminishing audience.

Saturday, June 19, 2010

November Nears

It is interesting how Congress has suddenly developed an aversion to spending, as the November elections approach. Twice in the past week, Obama-sponsored bailouts of profligate state governments with padded public payrolls have failed in the Senate. I guess public opinion is finally beginning to matter to everyone except the President. Of course, he's not on the ballot this year, so his interest in fiscal discipline won't surface until the Spring of 2012.

The moribund economic recovery, made weaker by the President's policies, is barely limping along. The BP oil spill and the President's self-destructive moratorium on offshore drilling, only make matters worse. The only part of the economy with vigorous growth is the incredible expansion of government. The private sector has retreated into it's shell. Businesses have learned that they can do more with fewer employees, a lesson they won't soon forget. As all Americans face staggeringly higher taxes next year and staggeringly higher health care costs, direct results of the President's legislative accomplishments, don't expect much in 2011.

You might think that Democratic losses in November might get through to the White House, but I doubt it. The White House seems to be in a world of it's own, where reality never seems to intrude.

Thursday, June 10, 2010

Obama Takes a Dangerous Left Turn

In an earlier blog, I defended Obama's initial reaction to the BP Oil Spill, but criticism from the political talking heads -- right and left -- have caused an abrupt shift in Obama policy toward the spill.

What should the government's response be? The government should declare that this is a two-part national disaster: Part I -- fix the leak; Part II -- prepare defenses for the environment to protect beaches, fisheries, wetlands, whatever is threatened by the spill. These are two separate activities. On Part I. BP had (but no longer, see below) enormous economic incentives to fix the leak and were working feverishly to do so. If BP plugs the leak, they can potentially save enormous amounts of money in liability and clean up costs. That is, until yesterday.

Yesterday, Ken Salazar, Secretary of the Interior, announced that BP should be responsible for all the layoffs that result from Obama's six month suspension of off shore drilling. That changed the incentives. If BP is responsible for bad policies enacted by the US after the spill, then they probably face bankruptcy. Whether they fix the leak or not may not matter to BP's future. BP may be toast no matter what. That dramatically alters their incentives to fix this leak. Big mistake by Salazar and, of course, by Obama. John McCain, not to be outdone in bi-partisan stupidity, quickly chimed in on the Larry Kudlow CNBC show last night that he supports making BP responsible for anyone laid off by the Obama drilling suspension directive. Thanks John. Good thing we didn't elect you president.

As for the clean up, here, the administration could show some real leadership. They could bring together environmentalists, including those of the far left, and fisherman, and oil cleanup experts from the industry and fashion a play to save our beaches and our shoreline. Instead, Obama is playing golf and laying plans to increase taxes big oil (and further alienate the oil industry, just at a time when he needs their help). By exerting real leadership Obama could bring the country into a unified effort to save our environment. Instead it's politics as usual, divide one from another, and villify any easy targets you can find.

The net effect of Obama policies will be to beggar pensioners in the UK and in the US (BP is a big pension dividend payer to lower and middle income Brits and Americans), to terrify the oil industry and move offshore drilling to other countries (with much more lax regulation, which means much more of a threat to the environment). Companies will be spending more time trying to figure out how to ward off the Obama threat to their existence and less concern on how to contain the oil spill and prepare to defend our coasts.

The Obama policy is now set on this disastrous course and the US (and the Brits) will suffer greatly. Obama has not even spoken once to Tony Hayward, the CEO of BP! That is an amazing fact. When quizzed about this, Obama says, and I paraphrase, I don't want to hear his lies. That should ensure Hayward's cooperation.

Obama only understands confrontation. He has no experience in dealing with conflicting and complicated problems and little understanding about how to unify people around a common theme. In short, Obama is a disaster. The result will be much, much higher energy prices for Americans, more job losses and more political division. As for the environment, the absence of a unifying program to defend our environment will prove to be disastrous in the end and destroy the hopes and the livelihoods of the Americans dependent for lifestyle and sustenance on our southern coasts. (I guess if it reaches NYC, Obama might begin to show some serious interest). It probably means the effective end of the Obama Administration. Growing number of Americans, including many prominent Democrats, are now openly questioning Obama's competence. He will not recover from this.

It could have been so different.

Tuesday, June 8, 2010

What Should Be Happening

Had there been a simple, across the board, tax cut for all Americans and all American companies, and had there been no stimulus package, no credit card reform, no FinReg, no Obamacare, the economy would be chugging along, creating between 500,000 and 1,000,000 jobs a month. That's what normally happens in a recovery in Post World War II USA.

Obama has changed all of that. We now are more like Europe: economic stagnation, slow and virtually non-existent economic growth, burgeoning sovereign debt, suffocating employer mandates, and unsustainable entitlements. Don't expect real economic recovery any time soon. We are in serious economic trouble as a nation, brought on by the worst set of economic policies in the nation's history.

It did not need to be that way. Had Obama played a little more golf and a little less time in front the mirror, the US economy would be well on its way. But, alas, Obama intervened and here we are.

Sunday, June 6, 2010

Jobs and the President

Last week, two days before the Labor Department's official release of May employment data, the President was gushing over the employment numbers that were soon to be released. Seemed like an abuse of "insider trading" rules for the President to give an early indication that the number would be "terrific." Market analysts, following the President's lead, began to forecast 500,000 to 750,000 new jobs for the May report. The stock market rallied 230 points based upon Obama's presumed leak of the wonderful employment report. But, Friday, as night follows day, the report was released at long last. The result: disaster!

41,000 private sector jobs were created in the month of May. If that pace continues, the unemployment rate will find its way to 20 percent in time. The total number of jobs created was 431,000 but that included 411,000 temporary Census workers, whose jobs disappear soon.

It is obvious, in retrospect, that the President thought this employmnent report was a "good" report, 431,000 new jobs, and is not bothered by the fact that 95 % of the new jobs are temporary Census worker jobs. This reaction by the President once again demonstrates his contempt for the private sector. It doesn't bother the President that the private sector is not creating jobs. He seems to think another stimulus (pumping up the compensation of public sector employees) is the right answer). The combination of Obama's contempt for private enterprise and free markets and his lack of understanding of economics is shining through.

Meanwhile, when the financial markets discovered the truth, the market suffered once of its worst days in history, dropping 325 points. The market cannot be fooled, even by a glib and ignorant President.

Monday, May 31, 2010

Deregulation? -- Are You Kidding Me?

Now the latest blame game maneuver is to argue the BP Oil Spill is the result of "de-regulation." What a joke? There has been no deregulation .... not one little bit regarding offshore oil exploration. In fact, what the BP Oil Spill shows, which we already knew, is that regulation is damaging, except when it's irrelevant. It didn't stop the spill and it won't stop future spills. Regulation doesn't work.

The reason BP was drilling for oil 5,000 below the surface was precisely because of regulation, forbidding oil exploration in shallower water. Somehow the regulators thought it would be safer if they moved the drilling further out. So much for the regulators. If this drilling had been down where it should been done, in the forbidden shallower waters, then the spill would be a relatively easy fix. But, the regulators won out, Congress won out, the President won out....and now we have an unfixable leak 5,000 feet down. Where is the de-regulation?

This is similar to the nonsense about the rating agencies. The rating agencies only gained power when the SEC mandated their usage by the debt markets. Why did the SEC do that? Is that de-regulation? It was an absurd thing to do. There are plenty of independent research operations to pass judgment on debt issuance, but the SEC put them all in limbo in favor of the rating agencies. Basically the SEC gave the rating agencies a monopoly and pushed the free market out of the way. Great move! Is that de-regulation?

Regulation doesn't work. The market works. BP will fix the leak because it is in their economic interest to do so. Politician will continue to spout nonsense, because that's what they do.

Oops .... Spoke Too Soon

Obama could not resist. After having calmly left the fixing of the leak to BP, now Obama has bowed to the talking heads and begun to demonize BP. That won't help anybody. BP's efforts to cap the well should be supported. What Obama should be working on is the clean up. Instead Obama is busy conjuring up sound bites to try to deflect blame away from himself and on to BP and on to George Bush.

Too bad. This is a time when all Americans should ban together to help our coast lines recover from this disaster. Time spent on demonizing other folks in the hope of political gain is time not spent trying to get to a solution for the most horrifying ecological disaster of our time.

Shame on Obama and shame on any politician -- Republican or Democrat -- trying to use this tragedy for political gain.

A Tale of Two Cities: Memphis, Tennessee

Michael Powell's article in today's New York Times is a painful snapshot of what happens when government tries to "do the right thing." This article chronicles the plight of black residents of Memphis who, like black American across the US, were lured into an over-priced housing market and then crushed by foreclosures. It was deliberate government policy that pushed many low income Americans into housing that they could not afford. We have Chris Dodd, Barney Franks, Bill Clinton, and George Bush to thank for much of this. These politicians and others, under the delusion that everyone in America needed to be a homeowner, encouraged and, in some cases, insisted that, Fannie and Freddie be used as vehicles to push the poor into expanded home ownership. What did they care if a future recession would bring this entire house of cards crashing down? This was the Memphis housing boom -- the first city -- spurred on by deliberate government policy.

So, the inevitable happened. Now, with the administration openly attacking mortgage lenders, the mortgage lenders are fighting back -- with foreclosures. Who gets caught in the middle -- the low income Americans fighting to make their way into the middle class? As the article by Powell points out, decades of economic gains were squandered by these misguided government policies -- policies which remain in place and are unaffected by FinReg. This is the second city of Memphis -- the recession-plagued Memphis that inept government policies have plunged into economic darkness.

When will we learn that government cannot create prosperity? Only individual Americans working and saving can create real prosperity. But, that requires government to get out of the way. It's a shame that the Memphis black community has to be a poster child for government's failures.

Sunday, May 30, 2010

Silliness about the Eurozone

Why, when there is a problem, do people think there is some quick fix. Is it supposed that investors are stupid? Investors can see that Europe is broke and that there is no way to "grow out" of their indebtedness. Since they can see this, investors are beating a path to the exit. Who wants to own sovereign debt when you know that the borrowers cannot ever pay you back? Simple arithmetic, melded with modern demographics, make it clear the Eurozone is financial toast. There is no way short of bankruptcy for Europe to expunge it's enormous debt. The question now is only how big the bankruptcy will be and who will get stuck holding the bag. There really aren't any other questions worth asking. And there is no quick fix.

Saturday, May 29, 2010

Oil Spill is not Obama's Fault

Anytime something unfortunate happens these days, we seem to spend all of our time looking for people to blame. Politicians preen before the camera "to show their anger." What are they angry about?

The idea that politicians have to "show our pain" when there is a problem, means that instead of dealing with the problem, we spend all of our time trying to show how angry we are and how angry we are at whoever we think "caused" the problem.

James Carville's rant against Obama this week is an example of stupidity in action. Just what exactly is Obama supposed to do. Carville, as usual, is all emotion and no thought.

The Gulf Oil Spill is an unfortunate accident of historic proportions. It is useful to know what caused it, so that, in the future, we can design ways to avoid such spillage in the future. We need calm, not hysteria. We need solutions, not the blame game.

Obama, interestingly, was on the right track in his initial reactions to this tragedy. He left the clean up operation to BP. That's the right solution. BP has an enormous incentive to get this under control. Politicians look to get elected. But, BP is the only entity with the expertise and incentive to solve this problem. Give them support and get this thing fixed. Afterwards, then you can go on talk shows and bitch and bitch and bitch. But, that sort of behavior is not helpful now.

We need offshore drilling and we need to think hard about how to prevent future accidents. But, they will happen anyway. Things happen. Dealing with such problems as an emotional outlook to vent frustration is not helpful.

On this one, Obama is innocent.

Wednesday, May 26, 2010

Geithner in Europe

If you have read Andrew Sorkin's book published last year, "Too Big to Fail," you know already that Geithner shoots from the hip. His solution, no doubt with the blessings of Ben Bernanke, is to throw as much government at a problem that you can and to bail out everyone in sight. Laws, history, patience go out the window with Geithner. Largely untrained in economics, Geithner nevertheless wanders the world lecturing the Chinese and now the Europeans about how the government should steer their economies. No economy in the history of the world (with the possible exception of Singapore) has ever done better because of an active government policy. The US in the 1930s is a great historical testament to the damage that the government can do an economic recovery. The current period will be another testament to the foolishness of government's response to a crisis.

If they are listening to Geithner, this does not bode well. He never believes in making foolish investors pay the price of their foolishness. Bankruptcy is a word he doesn't understand. Instead he believe in putting the taxpayer up front and center. Europe is a big enough mess without Geithner giving them advice. (The Chinese, no doubt, did not listen to him. They should be fine).

Tuesday, May 25, 2010

The Inevitable Consequences of Obama & Merkel Policies

Bailouts don't work. Stock markets, globally, are collapsing as they assess the full consequences of the leadership of Barrack Obama and Angela Merkel. Both these leaders think that politics trump economics and they are both wrong. One is a left wing idealogue and the other is a right wing idealogue, which just goes to show that bad policies transcend ideology. Even among commentators in the US revered as "conservative," bad economics is on display: Charles Krauthammer, Larry Kudlow, Peggy Noonan and Robert Samuelson all supported both the TARP and the Merkel-led Eurozone bailout policies. (Much-maligned Sarah Palin has been right all along).

Fear and ignorance are not good guides to economic policy. Free markets have no trouble recovering from bankruptcies and unemployment and they recover quickly if not impeded by foolish government policies. We are now awash in foolish government policies. So, the recovery process is thwarted thanks to Obama and Merkel (and others supporting their foolishness).

While today's markets will be tough, somewhere in here the stock markets will find regain their footings, although look for markets to be pretty volatile for a while. After all, government economic policies are pretty volatile. Eventually, even markets hobbled by Obama and Merkel will recover. It may be time, after today, to buy the stock market again.

I would be a buyer of US stocks today at the close of the market.

Sunday, May 23, 2010

So Much for the V Shaped Recovery

Obama's policies have effectively killed off any chance of a normal "v-shaped" recovery for the US. There are several Obama engineered headwinds for the US economy:

1) The problem of credit: several Obama initiatives have created severe problems for lower income and middle income Americans who seek credit, both retail credit (credit cards, debit card, etc.) and mortgage credit. This lack of credit will show up in retail sales. Small businesses have been especially hard hit by the Obama credit restriction programs. In no recovery period in US history has there been such a concerted effort by a political party to close down credit facilities crucial to small businesses, vital for economic recovery. The policies behind these restrictions are "reforms" of credit card lending, debit card regulations, and the new financial regulation bill soon to become law. As if these credit-destroying initiatives were not enough, the Obama Administration is quietly pushing bank regulators to crack down on business lending, especially lending to small businesses.

2) The problem of "toxifying employees": by sponsoring legislation that makes employees more expensive, the Obama Administration and the Congress have made employees toxic. Who wants to spend $ 50,000 to hire a $ 30,000 employee? The answer: hardly anyone. By adding significant employer financed mandates (including the health care monstrosity) and increasing employer liability (for things that employers cannot control), the Congress has created a huge cost per employee even if that employee worked for free. This means a significant drag on hiring and a permanently higher level of unemployment. The impact on low income workers and minorities will be the most severe. Watch unemployment rates for the most disadvantaged among us to be sky high and permanently so.

3) The destruction of the financial service industry: some of this is being accomplished by the demonizing rhetoric of the White House and especially the partisan and extreme rhetoric of the President himself. He will become known as the "great divider"). Obama cannot resist slamming the business community and the financial service industry in particular. But the FinReg bill (expected to become law within a few days) is the real killer. This bill permanently enshrines "too big to fail" as the cornerstone of US regulatory policy. This moves us in the direction of the old state-run banking regime that characterized China during the it's pre-capitalism years. The White House and the Treasury are authorized by FinReg to pick winners and losers among commercial and investment banks and to direct the flow of capital as they see fit with no checks on Treasury and White House powers to intervene in the financial service industry. Obama seems to truly despise capital creation activities and private enterprise. This means the financial service sector will retrench and the international center of finance will, within the next generation, shift to Asia, where the political climate is significantly milder and friendlier to the financial service industry. All of this will further inhibit the economy's chances of an economic recovery.

4) Finally the prospect of huge tax rate increases across the board (middle class Americans will face much, much higher tax bills, even the poorest among us) will act as a brake on capital formation and entrepreneurial activity. Rich folks will simply shift their assets around so that they can avoid paying the new, higher tax rates (that's why Buffett and Gates don't mind higher tax rates -- they won't have to pay them). This means no real momentum for an economic recovery.

Normally, had the government simply done nothing, we would probably be looking at six to eight percent GDP growth rates and an unemployment rate around 8 percent and declining. Instead, we face a serious chance of a "double dip" economy where the growth in GDP could slip back into negative territory in either the third or fourth quarter of the year. Unemployment rates will probably head into double digits and stay there through much of the latter half of 2010 and much, if not all, of 2011. This will will be the direct result of the Obama agenda.

Saturday, May 22, 2010

FDR and Barrack Obama

David Leonhardt writes this morning in the NY Times about a "progressive agenda" to remake Washington. In gushing terms, Leonhardt compares Obama's legislative agenda to that of FDR. Leonhardt is probably generally unaware of what happened in the 1930s after FDRs program became law. The economy entered an historic period of stagnation that persisted longer than any time in American history. That was, in no small part, due to the "progressive agenda of FDR." By 1939, the unemployment rate, seven years after FDR's initial election, was 20 percent -- quite an accomplishment.

You wonder if Leonhardt is aware of that history. If so, he might not be gushing so happily about the future. The FinReg is an absurd piece of legislation. It doesn't address any of the causes of the 2008 crisis -- not a single one. It enshrines, as permanent policy, "too big to fail." Now, under FinReg, no firm is too small not to be "too big to fail." The taxpayers will now guarantee any business that the Treasury, the White House, or the FDIC think should be saved in the public interest. This is the "Hugo Chavez" program glommed on to the USA. The power that this invests in the White House is without precedent in US history. No one needs to approve, or even be told, about a White House takeover of a major US industry. That's what FinReg is all about.

FinReg is also an absurd act of revenge. Lawmakers are striking out at Wall Street. Too bad if the American economy gets caught in the crossfire. The Securities Acts of 1933 and 1934, which were passed by large bi-partisan votes in both Houses of Congress, have been basically been overturned by Sarbanes-Oxley and FinReg. Gone is the "full disclosure" approach to regulating the financial services industry to be replaced by arbitrary rule by political figures. That can't bode well for the US economy.

Already several industries are bracing for the impact of FinReg. Andrew Martin details the concerns of the car dealerships and other business that will be forced to reduce credit to their customers because of FinRreg. See Martin's article in today's NY Times. Perhaps David Leonhardt should take a look at that article to see where this is headed.

The Obama agenda is about punishing his political enemies. Unfortunately, Obama's political enemies are the majority of American citizens. That doesn't deter Obama. He figures they will learn to love him.

The prospect of a double dip recession is growing. Leonhardt should study what actually happened in the 1930s, as opposed to what he thinks actually happened. FDRs policies led to a decade of stagnation and the highest unemployment levels in US history. I would not rule out a repeat of the 1930s based upon the policies of the Obama White House.

Friday, May 21, 2010

When Will The Equity Market Stabilize?

The good news is that we are probably not too far from the bottom of this stock market slide. As folks get more and more pessimistic, the chances of a rally increase. We are not there yet, but we are not too far away now.

One reason you know a rally is near is that Nuriell Roubini, the modern Dr. Doom, called for the equity markets to drop 20 percent from here today. He did not feel that way six weeks ago at the top, but now that the markets have lost 12 to 15 percent, Roubini has become a bear, joining the growing chorus of bears.

The news background isn't good, but there is hope. The hope is that what is truly plaguing the western economies is coming to light -- big governments and entitlements. These albatrosses weigh heavily on the US and Europe and will not go away. But, the good news is that they are now being discussed and making the news. Only Obama looks the other way. The rest of the world is now frightened to death about the growing and obvious collapse of the European welfare state (and it's political unity).

Our future and that of western Europe is economic stagnation, but equity markets are taking that into account. Stock markets can go up during economic stagnation and, at some point in the next few weeks, stock markets will begin grudgingly to rally.

The great tragedy is that low income workers in the US and in Europe will suffer greatly over the next decade or so thanks to the European welfare state and, in the US, thanks to Obama and his Congress. It will be impossible to employ large numbers of workers who are in the bottom half of the skill spectrum or who are "protected" by legislation. Small businesses will look for ways to avoid employees (they already are). No one wants a work force anymore -- not in the US, or in Western Europe.

But, stocks can still increase in value even if large numbers of our citizens are in pain. The only way to get employment going is to make employees cheaper to employers -- mandates and restrictions take you the other direction. Politicians advance policies that guarantee that our most at-risk citizens have no access to credit and no access to jobs.

No doubt Bill Gates and Warren Buffett will be pleased. They can shift their income around to avoid taxes and their companies will prosper even as they shed employees. So, they will continue to support increasing suffocation of the private sector, but businesses can figure out how to do without employees. They are doing that now and will do that in the future. Thank you, Mr. President.

So, look for equity markets to stabilize, especially if European politicians shut up and go back to the golf course. If European policy makers continue to look for heroic solutions to what are very obvious (and mundane) problems, then the stock market rally might get postponed for a while.

Thursday, May 20, 2010

How To Turn a Big Problem into a Huge Problem

The European bailout will not work. It simply doubles down on a bad bet. Greece is broke. They should restructure their debt with their creditors (in other words, take bankruptcy and start over). That probably is the direction that Spain, Italy, Portugal and the UK will be forced to take at some later date. There is not any real way to avoid it.

Contrary to popular opinion, the bailouts in the US in the Fall of 2008 exacerbated the woes of the financial sector. Had we simply restructured Fannie and Freddie and AIG, the worst would have been over by early 2009 and we could have embarked on recovery without the debt and bad asset overhang. Of course, Obama's policies likely would have retarded any recovery, but we would have gotten much of the financial service debt problems out of the way. Now, they are still there and Fed has a bloated balance sheet that it has no idea how to reduce. Meanwhile, Bernanke and Obama are urging the ECB to take the same disastrous route that the US took.

Does anyone seriously think that US is doing okay? Does this recovery look like anything we have seen since World War II? The combination of erratic and foolish policies in the Fall of 2008 and Obama's growth killing initiatives have put the US in stagnation mode. Now they want to do the same for Europe.

Much of Europe needs to take bankruptcy, including very likely France and Germany. Yes, they are in terrible shape because of their commercial banking systems, especially France. All of Europe needs to dismantle the welfare system.

The welfare system is numerically impossible to fund. It seemed to work for a long time because of the accident of demography. As countries grew younger, then it seemed to work. Same with health care. But as populations age, it just won't work. The numbers don't add up. Health care costs arise mostly in the elderly population. Retirement costs are exclusively in the elderly population. The elderly population is the fastest growing part of the population. Who is left to support this group? The answer: a dwindling number of folks, many of whom work in the public sector where the work ethic and output is suspicious to say the least. Someone has to produce real output to support all of this.

Germany and France are just whistling dixie through the graveyard. Merkel and Sarcozy are becoming psychotic and paranoic. They see evil speculators in every corner If only, they think to themselves, people would see how wonderful the Euro is and how wonderful our way of life is, they would support the Euro.

But, investors aren't interested in supporting anyone's way of life. They are interested in a return on investment. Buying European sovereign debt is a fool's game and will end up in massive losses. You cannot fool markets forever.

Merkel and Sarcozy will get overwhelmed by an electorate that sees clearly what Merkel and Sarcozy cannot see -- Greece is going to go bankrupt regardless of European policies. There is no way out. The only impact of Merkel and Sarcozy it to take Germany and France down too. The citizens of Germany are right.

Greece is spending money it doesn't have. It will continue to do that after the so-called austerity program is put in place. What then? By then the German bund will begin to look like a house of cards. That is where this is headed. The best thing the US can do is avoid ownership of any European sovereign debt. Of course, Bernanke and Obama are planning to enlarge swap lines, which, in effect commits the Federal Reserve to ownership of European sovereign debt by the bucketloads. Any dollar/euro swap is by definition a swap of the government debt of the US for government debt of the Eurozone.

So, after Germany and France collapse, we will be next.

Had they simply let Greece restructure that would have put some French and German banks in a pickle. The German and French banks that failed could be nationalized and then everyone could move on and economic recovery could take place in Europe. Not now. Europe will now join the US in the economic quagmire.

Merkel Mania

Angela Merkel, the current, but not for long, German Chancellor, is losing it. She is now urging world governments to basically try to regulate financial markets out of existence. Interesting view for a conservative political leader. This just shows that stupid economic policies come from both the right and the left. In fact, when policies are truly absurd, they tend to coalesce around them and support them.

Merkel should be quiet. Her comments are frightening the markets because it is so obvious that she doesn't understand what's going on. Investors do understand.

Obama Policies Bearing Fruit

The Obama policies are beginning to bear fruit. Unemployment claims are rising, leading indicators are falling, and stocks markets are collapsing. The financial service industry is in a state of free fall due to the overburdening regulations that are proposed and those that have been implemented. Credit has dried up for a large group of middle Americans and small businesses thanks to :1) Obama credit card reform and ii) Obama mortgage reform. The recently enacted health care bill has put hiring on hold for most businesses and hospitals and doctors are retrenching in expectation of the new government takeover of health care. Meanwhile the constant demonizing of businesses and companies by Obama and leading Congressional Democrats has further soured the business climate. Finally, Obama's widely publicized push to get the IMF and Germany and France to bailout Greece and other profligate economies has helped to bring on the collapse of the Euro and the destabilization of European economies and political environment. Obama policies are succeeding in destroying any serious chances of a strong economic recovery, both here and in Europe. Perfectly predictable. Thanks, Mr. President.

Wednesday, May 19, 2010

Reasserting "The Primacy of Politics"

Angela Merkel is losing it. Her ban on naked short sales, announced yesterday, is one more sign that the Merkel government is losing its bearings. Merkel appears to be in a state of panic that financial markets will not bend to her will. Strange.

Merkel expects people to eagerly buy bonds in the Eurozone after she has announced a plan that is certain to bankrupt the Eurozone. Yesterday, her ban on naked short selling had the effect of further terrifying world financial markets.

You would have to look far and wide to find anyone who thinks the future of the Eurozone is anything but disastrous at this point. Politics will not achieve "primacy" in the financial markets. Investors are voting with their feet, as rightly they should.

Meanwhile, public employee benefits and guaranteed retirement and health care plans continued unabated while governments pledge bailout money that they no longer have. Europe is in big trouble.

As Expected: Doctors Refusing Medicare Patients

An article in the Houston Chronicle on Monday by Todd Ackerman lays out the cold hard facts about Medicare and Obamacare. Doctors are increasingly refusing to take medicare patients because the reimbursement rates are too low. The article quotes a Dallas family practice doctor, Dr. Guy Culpepper, who says that:

"You do Medicare for God and country because you lose money on it."

In March of this year, Dr. Culpepper made the decision that many other doctors, in record numbers, are now making. He now refuses to treat medicare patients.

Obamacare legislation, recently enacted, strips out 21 percent of current medicare funding to pay for all of its explosively expensive mandates. Some of those mandates provide subsidies for families with twice the average national income, while denying reimbursement for the low income elderly. Increasing numbers of seniors will now be denied health care under medicare due to Obama. This transfers resources from the poor to affluent. This is Obama's idea of fairness.

The callousness of the Obama Administration is without precedent in American history. While Obama repeatedly claimed that no one's health insurance would change and that health care would be improved by Obamacare, it is increasingly obvious that Obama was not telling the truth. He knew when he made these claims that they were false.

Now, the facts are establishing that health care for the elderly is imploding. The promise of medicare is a false promise that will eventually leave America's elder citizens without health care access. This will be one of the many disastrous legacies of the Obama Adminstration. But, what do they care. Obama and his political cronies won't be relying on medicare anyway. They have a much better program funded by taxpayers, but unavailable to taxpayers. This is Obama's idea of fairness.

Check out the Houston Chronicle story. It's a window into the future for our elderly and it is not good:

http://www.chron.com/disp/story.mpl/metropolitan/7009807.html

Monday, May 17, 2010

Watch the Pennsylvania 12th

Tim Burns has an even chance of winning the Congressional seat long held by John Murtha, who died earlier this year. Murtha was Congress's king-of-pork and had served as the Congressman in this district for more than two decades. It is 60 percent Democratic by party registration, but the district went for Gore in 2000 and Bush in in 2004 (which is interesting in of itself).

This is a must win for Democrats. Losing here would suggest as much as a 100 seat swing in the House of Representatives towards the Republicans in November. Both the Republican and Democratic candidates are running away from Obama and the health care debacle. (That seems to be true most places).

This is Pennsylvania's Scott Brown moment. I forecast that Burns will win and win handily. Why? For one thing, the district is the largest coal mining district in Pennsylvania and the Obama is coal-unfriendly, to put it mildly. For another, this district has gun toting, abortion-hating, Reagan democrats. I suspect they've seen and heard enough of Obama and are ready to go in another direction.

The other races, regardless of who wins, won't tell us much. Paul, Sestak, and Lincoln should win their races, but Lincoln may be forced into an embarassing and brutal runoff before she can reclaim the Democratic nomination for Senator in Arkansas. On Saturday, watch for Hawaii to elect a Republican, Charles Djou, their new Congressman in a bizarre three way race. It's hard to imagine Djou surviving his re-election in November, when it's just one Republican against one Democrat, in such a heavily Democratic district, but who knows.

Rand Paul, in Kentucky, is by far the most interesting candidate in Tuesday's elections. He should win the Kentucky Republican nomination easily over party favorite, Tray Grayson. Polls show, contracy to Democratic chatter, that he will win the general election easily as well. Mitch McConnell, the Senior Senator from Kentucky endorsed Grayson to his chagrin. A new Paul in Congress would be a welcome addition. His father, represents a middle class Congressional district just outside of Houston, Texas. Congressman Paul and his son are thoughtful libertarians and not afraid to tell it like it is.

The only race that could upset the landscape is if the Republicans win the 12th District Congressional seat in Pennsylvania. That would forecast a tsunami this November, sweeping the Obama supporters from control of the House and possibly the Senate as well.

Thanks you, Mr. President.

Credit Card Nightmare

Now that Obama has succeeded in a credit card "reform" package, which prohibits credit card companies from running their own businesses and competing with one another, the results are pouring in.

The credit card companies are cancelling credit cards and reducing credit limits throughout the country. Google your favorite credit card company and add the word "complaints" and you can read page after page of the victims of this latest Obama outrage.

If you pass a law that says that credit card companies can't raise rates on weaker customers, then the credit card companies will simply eliminate those customers. Warren Buffett and Bill Gates (who support stupidity like this) have nothing to fear. Their credit cards will remain intact with nice fat credit limits that they don't need. But, for much of small business and a significant chunk of the middle class, credit availability is now being dramatically restricted. It's the old adage: if you need credit, you can't get it...if you don't need credit, you can have it in abundance.

It's an article of faith within the Obama Administration that if A loans money to B when B really needs it and may not have a perfect credit rating, then B is the victim and A is the villain. That's the meaning of the constant Obama demagoguery on "predatory lending."

Okay, fine. So be it. Those who provide credit to the economy have gotten the message and are no longer lending to those who need it the most. Thanks, again, Mr. President. Another body blow to the middle class and small business. Too bad if you were hoping for an economic recovery.

FinReg is an Embarassment

It is a sad statement about the state of American politics that the current so-called "financial regulation" bill is close to final passage. This bill addresses things that had absolutely nothing to do with the 2008 meltdown in the financial markets and the economy. Instead, this bill dramatically restricts the ability of the financial markets to spur economic recovery. It will curtail bank lending. It will reduce the ability of the financial services industry to provide much needed capital to businesses. Basically, it creates a huge regulatory overhang that will strangle the American financial industry without in any way addressing the causes of the 2008 collapse. But, it will appeal to the Obama coffee house crowd who seem to understand absolutely zero about the economy.

The true causes of the collapse of 2008 are the following: 1) tax favored residential housing market; 2) Fannie and Freddie. These two guarantee another boom and bust in residential housing. These two do not exist in Canada which is why Canada did not go bust in 2008 and is the best performing economy in the world today. Are Canadians that different from Americans? No. But what is different is that items 1) and 2) above exist in the US, but don't exist in Canada.

What in FinReg addresses 1) and 2) above? The answer -- nothing. Presumably, Chris Dodd will continue to get favorable financing from the companies that he purports to regulate, but for the rest of us the situation is not so good. It's interesting to note that Elena Kagan, the recent nominee by Obama for the Supreme Court got a $ 750,000 first mortgage from Countrywide just as did Charlie Wrangle and Chris Dodd. Wonder why left wing regulators seems so popular with the predatory lenders?

So look for a stagnant economy and within about five years another speculative binge in residential housing followed by the usual bust. If you rig the tax laws so that any rational American will speculate on his home, then don't be surprised by the recurrent booms and busts in housing. In the 1980s the commercial banks lent to this boom and were crushed. In the 1990s, the S&Ls lent to this boom and were crushed. In the 2000s, Wall Street lent to this boom and were crushed. In the next boom the US Treasury (which now through Fannie and Freddie control more than half of the mortgages in the United States) will get crushed.

Thanks, Mr. President, for nothing.

Sunday, May 16, 2010

The Week Ahead

Things are going to be a little scary this week for equity and debt markets. The Euro remains in free fall (trading in the mid 123's against the dollar). A lot of foolish economic myths are exploding.

Laying aside Greece and the Eurozone for the moment, the US economy faces major headwinds all its own. Most of the headwinds are a direct result of either Congressional or Presidential action. Obama's war on the financial industry will tighten the credit screws even more, so that small business will continue to be hampered by liquidity considerations. Don't expect much hiring.

State and local governments are facing their day of reckoning. Public employees are extremely overpaid in most states and the benefits provided to such employees border on the outrageous. This includes public school teachers. It is a myth that public school teachers are underpaid. They are overpaid and by a lot. There is a long line of qualified teachers ready to teach in our public schools for a lot less money than we currently pay public school teachers. That means the current group is overpaid. Most of these public employees have not suffered a bit in this recession. They applaud Obama's war on the private sector. But the private sector is the sector that funds the public sector. There will be millions of layoffs over the next twelve months in state and local government. Most of this is long overdue, but it is coming at the worst possible time -- when the economy is still very fragile.

Finally everyone knows that tax rates (not revenues) are headed upward. Higher tax rates discourage business hiring, so higher tax rates are another major headwind for the economy.

Meanwhile, there is Greece and the Eurozone. The US is on the hook for a lot of the worthless sovereign debt in Europe and Obama has pledged to buy more. We are now bailing out Europe. Wonder who will bail us out?

So, while the employment numbers and retail sales have been improving, the overall economic recovery is stunted and anemic. Until the White House calls a truce on its war on the American economy, it is hard to see an end to economic stagnation.

One More Hat to Wear

I am pleased to announce to my many blog readers that I have a new (additional) career in the works. By a series of remarkable accidents, I wrote seven articles for our local newspaper, the Charlottesville Daily Progress, two years ago on the subject of the NCAA Tennis Championships in Tulsa, Oklahoma. (I wrote them mostly because it was the only way I could get in free to the NCAA Tournament).

Earlier this Spring, the Daily Progress sent my seven articles to Wimbledon and requested a press pass for yours truly to cover the Wimbledon Tennis Championships for 2010. Believe it or not, Wimbledon approved the request. So, from June 12th to July 5th, I will be covering the Wimbledon Tournament for the Daily Progress as well as for local NBC news and local WINA radio (may as well go the whole route!). The tournament starts on June 21st, but I will be there early to cover the qualifying rounds as well. Two former UVA national tennis champions -- Somdev Devarrman and Dominic Inglot will be playing in the qualifying rounds and their results will be of interest to Charlottesville readers and media watchers.

I am now applying for the US Open, the Australian Open, and the 2011 French Open. I am entertaining offers for the rights to my forthcoming book (not yet begun): "My Life as an Ace Tennis Reporter."

Saturday, May 15, 2010

Meanwhile, Back in Greece

The IMF apparently suggested, during the talks that led to the $ 1 Trillion ECU bailout package announced last week, that Greece "restructure" it's debt.

What does that mean? It means that Greece offer it's creditors 25 cents or 50 cents on the dollar in full settlement of their outstanding debt. That is the right answer and it is interesting that it was rejected.

Follow the logic of the current plan: dramatic cuts in Greek government spending, significant tax increases. Where does that lead? According to the ECU, the "austerity" program will, in time, lead to economic growth in three years. Really?

More likely is that we will have a repeat of the "Treaty of Versailles" problem that Keynes wrote so eloquently about nearly a century ago. The Greek economy will spiral downward out of control. Greek budget deficits will accelerate and the new loans will be worthless, pushing the problem back on Germany and France. Political unrest will, no doubt, ultimately force Greece out of the European union and into a default anyway. But, by then, the default will be a much more serious problem than a default would be today.

What does this mean for the European union? Ultimately, it means the break-up of the European Union and the Euro and the great experiment will descend into chaos.

Much simpler, much fairer, and much more sensible is to let Greece (and others) restructure their debt today. That is basically bankruptcy. But, bankruptcy is not all bad (and is usually unavoidable anyway). Postponing the problem only makes it worse.

That's what the equity markets are worried about.

Small Business Lending Cut in 2009

So, what is the report card on the TARP? Did TARP, as Bennanke argued ar the time, rescue lending for small business?

We now know the answer to that question? The Congressional Oversight Panel released its report on commercial lending (by big banks) to small businesses this past Thursday. The result: commercial lending by large banks to small businesses was cut dramatically from 2008 to 2009. Overall lending declined by 4.1 percent, but small business lending endured a disastrous drop of 9 percent, twice the overall rate of decline.

No doubt, the angry attacks on the banks by Obama, as his Administration began its stormy first two years, helped to freeze the commercial banks into inactivity. But, TARP, itself was a foolish idea that has only served to lengthen what would have been a normal recession into something far, far worse.

Thanks, TARP.