Financial Crisis

Defending Cato from Paul Krugman’s Inaccurate Assertions

Written by Daniel J. Mitchell, a senior fellow at the Cato Institute. Posted with permission from Cato @ Liberty.

Writing for the New York Times, Paul Krugman has a new column promoting more government spending and additional government regulation. That’s a dog-bites-man revelation and hardly noteworthy, of course, but in this case he takes a swipe at the Cato Institute.

The financial crisis of 2008 and its painful aftermath…were a huge slap in the face for free-market fundamentalists. …analysts at right-wing think tanks like…the Cato Institute…insisted that deregulated financial markets were doing just fine, and dismissed warnings about a housing bubble as liberal whining. Then the nonexistent bubble burst, and the financial system proved dangerously fragile; only huge government bailouts prevented a total collapse.

Upon reading this, my first reaction was a perverse form of admiration. After all, Krugman explicitly advocated for a housing bubble back in 2002, so it takes a lot of chutzpah to attack other people for the consequences of that bubble.

But let’s set that aside and examine the accusation that folks at Cato had a Pollyanna view of monetary and regulatory policy. In other words, did Cato think that “deregulated markets were doing just fine”?

‘London Whale’ upsets J.P. Morgan

As many of you may already know, insvestment banking firm J.P Morgan recently lost nearly $2.3 billion dollars on some very, very, bad bets.

Sources in the MSM accordingly, show a trader only dignified by the sobriquet ‘London Whale’ was able to hedge together larger shares of Morgan company money and place them on malevolent trade returns. They did not pay off.

Some circles call it business as usual. Other circles call this collusion, or extended risk. Yet others would call this, hedging- or: placing large assets on wide-open targets, at just the right time and place. I don’t need to mention the implications of this; we’re back to 2007, when the Recession we are currently in, evolved- by these means.

Now, clearly- you could claim- the company knew what it’s employees were aiming at with their stoked assets. They didn’t. This story is just emerging, but it seems clear that this is a perfect example of those who don’t know what they are doing, laksadaising large amounts of money; and wielding power so great, there could be serious repercussions.

Gladly, at least so far, there have been few.

Nevertheless, what this shows is not only nefariousness on the part of some, but also the evident close ties in finance between Europe and the United States. We may think this country is just pulling from a recession, when in reality we’re right back to 2007, or earlier.

Entire Markets and nations are tanking in Europe: acidic debt scouring away at the health of entire economies. The European Union ready to dissect into multiple breakaway-province nationalities. National furor is high, while economic support has hit all-time lows.

At first sight, the entire investments-gone-wrong scenario would yearn for more oversight- but beware of what you ask for! Oversight by whom? I don’t think market regulation is a particularly good example of solving fiscal ‘problems’ by any stretch of the economic imagination.

We’ve Learned Nothing About Housing Bubbles

Apparently those who don’t learn from history really are destined to repeat it. Two different issues about the housing market caught my eye recently.

First, the Senate adopted a measure that would increase the maximum amount of a home that could be backed by Fannie Mae, Freddie Mac, and the Federal Housing Administration to more than $700,000.

Then there was a proposal, also in the Senate, to offer residence visas to foreigners who buy $500,000 homes and agree to live in them at least six months per year.

These ideas have bipartisan support. Robert Menendez (D-NJ) submitted the amendment for the first issue. Senators Chuck Schumer (D-NY) and Mike Lee (R-UT) make up the brainpower for the second. (Side note: I was extremely disappointed to see Mike Lee’s name on that proposal. He’s supposed to be one of the good guys.)

Both of these moves are attempts to get the real estate market moving, but they’re both bad ideas. The problem is that they involve the government taking action in the housing market to incentivize home purchases.

Quotes from the senators have been posted around the internet, and they all say something about how housing got us into this mess and housing will get us out. That’s not true. Artificially inflating home values created the last bubble. Creating another bubble is not the solution to our problems.

This is a perfect opportunity for free market supporters to call for the federal government to stay out of the market. In the long run, propping up home values will do more damage than good.

Dodd’s “financial reform” bill is a black hole

The following written by Joshua Fulton. You can check out his blog here.

Chris Dodd, everybody’s favorite hairdo, has introduced a “tough” financial “reform” bill that he claims will “limit the risk [financial institutions] can assume.” Of course, most people with a pulse realize that a 1565 page bill introduced by one of the top recipients of financial industry lobbyist money in Congress probably will do little to ‘reform’ the financial industry in the best interests of the American people. That, however, doesn’t fully capture the perniciousness of this bill.

When we look at it closely, we can see it is one of the most dangerous bills introduced in Congress in years.

Inflation or No Inflation, That Is The Question

Once again, the question of future inflation is boggling the minds of many a financial forecaster. Are we headed for a rise in prices that will carry the Dow up and away, hopefully carrying the rest of us with it, or are we going to suffer the second leg of the W Recession as commercial property and/or the inevitable rise in interest rates hits the skids?

The questions I would pose are quite different. We are already engulfed in a sea of inflated purchasing media that is constantly roosting, taking off, and realighting in its search for new quick profits. Unfortunately, given the current labor market, it won’t even be dipping a little toe in the ordinary person’s paycheck on its way by, at least not anytime soon.

So where is it now, and what is going on? It is where it has gone for the last two years, to wit ten years or more: into speculative investment, biding its time. In America, at least, it isn’t going into production, and it isn’t going into salaries. It’s going into profits and speculative investments, instruments like Greek bonds and credit default swaps so popular with the hedge fund crowd.

This means that the answer to the introductory question is yes, inflation, but be careful how you define it. As I have harangued before, the word is used flippantly to mean at least two things: on the one hand, price increases represented supposedly by the CPI; and on the other: excess purchasing media, the kind that used to cause price increases before the market got savvy, but that now finds itself blowing bubbles while maintaining general prices that should be falling so that the ordinary consumer gets a break. This definition we could differentiate by naming the process “inflating.”

The Money Tree

They say that money doesn’t grow on trees. That’s true. It grows in banks.

I’m not talking about compounding interest either. I’m talking about creation of money right out of thin air. It is well known and understood that the Federal Reserve (and other central banks) print money at will. What’s not so well understood is that regular commercial banks essentially do the same thing. To understand this, we have to explore the nature of money, credit, and the modern banking system.

Money can be described in several ways and has a variety of characteristics.We should begin with the Merriam Webster definition: “something generally accepted as a medium of exchange, a measure of value, or a means of payment.” In early simple economies, barter was the principle means of exchange. This ultimately evolved to commodity money. Items which had a useful value on their own, are easily transportable, do not lose value or deteriorate, and are reasonably commonplace would serve as commodity money. Over the centuries, metal coins evolved out of being simple commodity money into serving as government issued currency. Generally, the metal coins face value as issued would be equivalent to the metal’s value independently. Of course, governments were notorious for devaluing the coins in a variety of ways.

Stop Spending Our Future - The Crisis

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We all know the government is spending freely…. but do we really understand how much? Can we truly put things into proportion? I hope this video helps do just that.

H/T: Jason Pye

Peter Schiff: Why the Meltdown Should Have Surprised No One

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Naturally a recurrent theme of this lecture was monetary policy, specifically having to do with the dollar’s spiral toward hyper-inflation in the midst of the current economic collapse.  Schiff stressed that sooner than later the rest of the world, more importantly those still buying our debt would wise up to our inability to repay those fiscal obligations.  He told a short story about a wily old man in a certain neighborhood who had hoodwinked the neighborhood kids into vying for the job of painting his fence.  He related the metaphor by surmising, “We’ve got the world painting our fences, as if they don’t have their own fences to paint.”  Essentially, he said the way it is now, we get all the stuff and they only get the jobs.  He then fittingly asked, “What good are jobs without stuff?”  In short, we are barreling straight toward a currency crisis.

Blast From the Past- School House Rock: Tyrannosaurus Debt

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Part of our school day today included watching a DVD of the classic School House Rock cartoons that many of us grew up watching on Saturday mornings.  I was delighted when, after watching the one that talked about the wonderful opportunity we all have to pay our fair share of income taxes on April 15th, my daughter exclaimed, “Mom, this is wrong.  They’re saying that taxes are good!”

Music to my ears…

However, I found the next video interesting- Tyrannosaurus Debt- which compared the national debt to the appetite of a rather sizable dinosaur.  What surprised me was the direct correlation made between wartime and the increase of debt.

How to Get Out of Debt

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Classic parody of an infomercial offering common sense we could all benefit from.

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