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Posts Tagged ‘Bailouts’

I periodically comment about government corruption, often in the context of trying to make the general point that shrinking the size and scope of the public sector is the most effective way of reducing sleaze in Washington.

Now let’s get specific. I’ve already cited Obamacare, the tax code, and the Export-Import Bank as facilitators of corruption. Let’s augment that list by looking at government intervention in the financial sector.

We’ll start with some findings on the effectiveness of lobbying. In some new research, two professors at George Mason University’s Mercatus Center found that being active in Washington is beneficial for top executives, but it doesn’t help a company’s bottom line.

Here’s how the Washington Examiner summarized the study.

What is the return on investment in lobbying? Does a PAC contribution actually pay for itself? There are so many cases of a lobbyist winning an earmark, or a PAC contribution immediately preceding a subsidy, that it’s hard not to see politics as a good investment. …But for every company that hits the jackpot after lobbying campaign, scores of others end up throwing away money on lobbyists — and scores of executives whose PAC contributions don’t help the company a bit. Business professors Russell Sobel and Rachel Graefe-Anderson of the Mercatus Center at George Mason University collected the data and dug into the bigger question: Do lobbying expenditures and PAC contributions increase corporate profits, on average? Their answer: No… When Sobel and Graefe-Anderson crunched numbers, conducted regressions, and controlled for firm size, industry and other factors, they arrived at data “suggesting that any benefits gained from corporate political activity are largely captured by firm executives.” In short, when a CEO and a lobbyist decide to get their company more involved in politics, the CEO and the lobbyist benefit, while not helping the company.

These findings at first struck me as counterintuitive. After all, there are plenty of companies, such as General Electric and Archer Daniels Midland, that seem to obtain lots of unearned profits thanks to their lobbying activities.

But don’t forget that government – at best – is a zero-sum game. So for every company, industry, or sector that “wins,” there will be lots of companies, industries, and sectors that suffer.

And speaking of industries that benefit, there was one exception to the Mercatus Center findings.

The only exception was the banking and financial sectors, where they found “positive and significant correlations between firm lobbying activity and three measures of firm financial performance,” including return on investment and return on equity.

At this stage, let’s be careful to specify that lobbying is not necessarily bad. If a handful of business owners want to join forces to fight against higher taxes or more regulation, I’m all in favor of that kind of lobbying. They’re fighting to be left alone.

But a big chunk of the lobbying in Washington is not about being left alone. It’s about seeking undeserved benefits by using the coercive power of government.

And this latter definition is a good description of what the financial industry has been doing in Washington. That’s bad for taxpayers, but it’s also bad for the financial sector and the overall economy. Here are some of the conclusions from a recent study published by the New York Federal Reserve Bank.

…there have been many concerns with banks deemed “too big to fail.” These concerns derive from the belief that the too-big-to-fail status gives large banks a competitive edge and incentives to take on additional risk. If investors believe the largest banks are too big to fail, they will be willing to offer them funding at a discount. Together with expectations of rescues, this discount gives the too-big-to-fail banks incentives to engage in riskier activities. …The debate around too-big-to-fail banks has given rise to a large literature. … we study whether banks that rating agencies classify as likely to receive government support increase their risk-taking. …The results of our investigation show that a greater likelihood of government support leads to a rise in bank risk-taking. Following an increase in government support, we see a larger volume of bank lending becoming impaired. Further, and in line with this finding, our results show that stronger government support translates into an increase in net charge-offs. Additionally, we find that the effect of government support on impaired loans is stronger for riskier banks than safer ones, as measured by their issuer default ratings. …the level of impaired loans in a bank loan portfolio increases directly with the level of government support. …riskier banks are more likely to take advantage of potential sovereign support.

Isn’t that wonderful. Our tax dollars have been used to increase systemic risk and undermine economic growth. Though none of us should be surprised.

Since this has been a depressing column, let’s enjoy some morbid TARP humor.

Here’s a cartoon from Robert Ariail about the cronies who got rich from the Bush-Obama bailouts.

Good to see Hank Paulson getting ripped. At the end of the Bush Administration, I attempted to convince the White House that “FDIC resolution” was a much better way of recapitalizing the banking system. I was repeatedly told, though, that Paulson was in charge and there was no way of stopping him from bailing out his former cronies on Wall Street.

Oh well, at least I tried.

Here’s another cartoon about the real victims of TARP. Like the first cartoon, it’s an oldie but goodie and it’s a good illustration of how government is a zero-sum scam.

But let me re-emphasize a point I made above. Taxpayers aren’t the only ones to lose. The entire economy suffers from bailouts and subsidies. Such policies distort the allocation of capital and lead to slower long-run growth.

That may not be easy to measure, but it matters a lot.

Here’s a video explaining how such policies create moral hazard.

This is a good time to recycle the famous poster about supposed government solutions.

P.S. Not all financial institutions are corrupted by government. The nation’s 10th-largest bank, BB&T, did not want and did not need a bailout. But as the bank’s former CEO (and, I’m proud to say, current Cato Institute president) explained in his book, thugs from Washington threatened to use regulatory coercion if BB&T didn’t participate.

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Folks, the pendulum is swinging in the right direction.

PendulumIn recent weeks, I’ve shared a bunch of examples to support my hypothesis that libertarians, small-government conservatives, and classical liberals are finally making some progress.

This trend actually started with the fiscal cliff, though that was simply a smaller-than-expected defeat.

Since then, we’ve enjoyed victories on the sequester, the IMF, and dynamic scoring. I’ve also posted some evidence showing that the Tea Party has made a positive difference and specifically shared data showing that the burden of government fiscal policy has been reduced since the 2010 elections.

Well, here’s another feel-good story. A powerful Committee Chairman in the House of Representatives realizes that being pro-market is not the same as being pro-business. Hallelujah!

The Wall Street Journal reports:

During Jeb Hensarling’s first congressional bid, a man at a campaign stop in Athens, Texas, asked the Republican if he was “pro-business.” “No,” the candidate replied, drawing curious stares from local business leaders who had gathered to hear him speak, a former Hensarling aide recalled. “I’m not pro-business. I’m pro-free enterprise.” Now, more than a decade later, that distinction has Wall Street on edge. The new chairman of the House financial services committee wants to limit taxpayers’ exposure to banking, insurance and mortgage lending by unwinding government control of institutions and programs the private sector depends on, from mortgage giants Fannie Mae and Freddie Mac to flood insurance. Banks and other large financial institutions are particularly concerned because Mr. Hensarling plans to push legislation that could require them to hold significantly more capital and establish new barriers between their federally insured deposits and other activities, including trading and investment banking. …In interviews, a half-dozen industry representatives expressed some level of anxiety about Mr. Hensarling’s legislative agenda.

So, the cronyists are “on edge” and feeling “anxiety.” Gee, just breaks my heart.

And it’s not just Rep. Hensarling that is singing from the right song sheet.

Earlier this month, all 45 Senate Republicans voted for a symbolic measure aimed at banks with more than $500 billion in assets. The amendment, offered by Sens. David Vitter (R., La.) and Sherrod Brown (D., Ohio), sought to eliminate any subsidies or other advantages enjoyed by the biggest financial institutions because investors expect the government to prevent them from collapsing. …Most congressional Republicans believe the changes enacted in the wake of the 2008 financial crisis—principally in the Dodd-Frank financial reform bill—enshrined the notion that the biggest institutions are “too big to fail” because they guaranteed the government would step in to prevent the most sprawling firms from going under.

To be sure, many of these same politicians voted for TARP, so I’m not under any illusions that they’ve become committed supporters of genuine capitalism.

Putting taxpayers before Wall Street

Though Hensarling did vote the right way, so I’m confident that he understands that insolvent banks should be liquidated rather than bailed out.

Too bad folks in the Bush Administration didn’t understand this simple principle of free markets.

Here are some more details from the article about Hensarling’s commitment to economic liberty.

Mr. Hensarling has been a vocal critic of taxpayer backstops for the private sector. He voted against the Wall Street rescue package in the fall of 2008 and supported measures to ease the importation of prescription drugs. He even picked a fight with one of the largest employers in his backyard—American Airlines—by supporting initiatives to allow more long-distance flights out of Dallas’s Love Field, the home base for rival Southwest Airlines. Now, his other potential targets include: the Export-Import Bank of the U.S., which makes loans to American companies that do business overseas, and the Terrorism Risk Insurance Act, a temporary backstop created in the aftermath of 9/11 to insure construction projects. The latter measure expires at the end of 2014, unless Mr. Hensarling’s committee acts to extend it. “In every jurisdictional area that I can get my fingers on, I want to move us away from the Washington insider economy,” he said. Mr. Hensarling sharpened his free-market views when he studied economics under former Sen. Phil Gramm at Texas A&M University.

I’m especially happy to see that he wants to end the corrupt system of subsidies from the Export-Import Bank, which is a typical example of big businesses being anti-free market.

So what does all this mean? Perhaps not much in the short run, particularly with Obama in the White House and Tim Johnson of South Dakota chairing the Senate Banking Committee.

In the long run, though, this is a positive sign. Our prosperity and liberty depend on small government and free markets, so we need at least a few lawmakers who understand that there shouldn’t be any special favors for big interest groups.

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I’m not a fan of the International Monetary Fund. It galls me that a bunch of bureaucrats enjoy opulent lifestyles at our expense, and don’t even have to pay on their lavish incomes.

But I might be willing to overlook all that if it wasn’t for the fact that IMF routinely and reflexively pushes for bad policy.

And the icing on the cake is that the IMF was created for the purpose of helping the manage the system of fixed exchange rates that was imposed after World War II. That system no longer exists, yet the IMF is still plaguing us.

I’ll be happy if they simply take their hands out of my pockets

I remember reading someplace that cockroaches were the only animals that would survive a nuclear war. I have no idea if that’s true, but it appears that international bureaucracies have similar survival skills.

But I’m digressing. Notwithstanding all the bad news listed above, we’re celebrating some good news today.

Here’s the situation. The IMF has been so busy subsidizing bad policy around the world with lots of bailouts that the gold-plated bureaucracy wants American approval to permanently misallocate more of the world’s capital.

I’ve explained over and over again why it’s not a good idea to give more matches to a pyromaniac. But I never expected that lawmakers would do the right thing.

Yet they have, so let’s enjoy this fleeting experience. Here are some excerpts from a Reuters report.

…lawmakers…rebuffed a request by the Obama administration to approve a permanent increase in U.S. funding to the International Monetary Fund in a setback for IMF reforms to boost the voting power of emerging economies. The reforms need congressional approval because they involve shifting and making permanent a $65 billion U.S. contribution to an IMF crisis fund. …the U.S. Treasury sought to tuck the provision into pending legislation in Congress that aims to avoid a U.S. government shutdown at the end of March. The Republican-controlled House of Representatives rejected the IMF funding request last week, but the administration hoped the Democratic-led Senate would include it in its version of the funding bill. After days of negotiations, authors of the bill in the Senate Appropriations Committee rejected the request as too politically sensitive in the tense budget environment in Washington, where the sweeping government spending cuts triggered on March 1 are starting to be felt.

Wow. I wrote previously that rejecting additional IMF handouts was a minimum test of GOP seriousness in the battle against statism.

And they actually cleared that hurdle. Miracles do happen!

But there’s no such thing as a permanent victory in the battle against statism.

The Obama administration will have another shot at winning approval for increased IMF voting power when Congress starts work on a new set of spending bills later this spring for the 2014 fiscal year, which starts on October 1. But failure by President Barack Obama to reach a deal with Republicans to shrink the U.S. budget deficit could complicate any new requests for IMF funding, aides cautioned.

Not only is there no such thing as a permanent victory, even this bit of short-run success probably doesn’t mean much. If I understand correctly, the IMF already received the authority to squander the additional $65 billion. All that’s really happening now is a fight over whether to grant the bureaucrats permanent approval to misuse the funds.

But I’ll take any victory. Fighting for freedom in Washington is a rather grim task. Yet in the past month, we got the sequester and now we’ve stiff-armed the IMF.

I’m almost delirious with joy.

P.S. While the IMF almost always pushes bad policy, there are occasional glimmers of sanity from the economists on staff who write reports. Researchers at the international bureaucracy, for instance, have acknowledged the Laffer Curve and warned that it makes no sense to push taxes too high. And some of the bureaucrats have even admitted that it sometimes make sense to reduce the burden of government spending.

And even though it wasn’t their intention, IMF bureaucrats even provided very strong evidence showing why the value-added tax is a destructive money machine for big government.

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The mess in Europe has been rather frustrating, largely because almost everybody is on the wrong side.

Some folks say they want “austerity,” but that’s largely a code word for higher taxes. They’re fighting against the people who say they want “growth,” but that’s generally a code word for more Keynesian spending.

So you can understand how this debate between higher taxes and higher spending is like nails on a chalkboard for someone who wants smaller government.

And then, to get me even more irritated, lots of people support bailouts because they supposedly are needed to save the euro currency.

When I ask these people why a default in, say, Greece threatens the euro, they look at me as if it’s the year 1491 and I’ve declared the earth isn’t flat.

So I’m delighted that the Wall Street Journal has published some wise observations by a leading French economist (an intellectual heir to Bastiat!), who shares my disdain for the current discussion. Here are some excerpts from Prof. Salin’s column, starting with his common-sense hypothesis.

…there is no “euro crisis.” The single currency doesn’t have to be “saved” or else explode. The present crisis is not a European monetary problem at all, but rather a debt problem in some countries—Greece, Spain and some others—that happen to be members of the euro zone. Specifically, these are public-debt problems, stemming from bad budget management by their governments. But there is no logical link between these countries’ fiscal situations and the functioning of the euro system.

Salin then looks at how the artificial link was created between the euro currency and the fiscal crisis, and he makes a very good analogy (and I think it’s good because I’ve made the same point) to a potential state-level bankruptcy in America.

The public-debt problem becomes a euro problem only insofar as governments arbitrarily decide that there must be some “European solidarity” inside the euro zone. But how does mutual participation in the same currency logically imply that spendthrift governments should get help from the others? When a state in the U.S. has a debt problem, one never hears that there is a “dollar crisis.” There is simply a problem of budget management in that state.

He then says a euro crisis is being created, but only because the European Central Bank has surrendered its independence and is conducting backdoor bailouts.

Because European politicians have decided to create an artificial link between national budget problems and the functioning of the euro system, they have now effectively created a “euro crisis.” To help out badly managed governments, the European Central Bank is now buying public bonds issued by these governments or supplying liquidity to support their failing banks. In so doing, the ECB is violating its own principles and introducing harmful distortions.

Last but not least, Salin warns that politicians are using the crisis as an excuse for more bad policy – sort of the European version of Mitchell’s Law, with one bad policy (excessive spending) being the precursor of additional bad policy (centralization).

Politicians now argue that “saving the euro” will require not only propping up Europe’s irresponsible governments, but also centralizing decision-making. This is now the dominant opinion of politicians in Europe, France in particular. There are a few reasons why politicians in Paris might take that view. They might see themselves being in a similar situation as Greece in the near future, so all the schemes to “save the euro” could also be helpful to them shortly. They might also be looking to shift public attention away from France’s internal problems and toward the rest of Europe instead. It’s easier to complain about what one’s neighbors are doing than to tackle problems at home. France needs drastic tax cuts and far-reaching deregulation and labor-market liberalization. Much simpler to get the media worked up about the next “euro crisis” meeting with Angela Merkel.

This is a bit of a dry topic, but it has enormous implications since Europe already is a mess and the fiscal crisis sooner or later will spread to the supposedly prudent nations such as Germany and the Netherlands. And, thanks to entitlement programs, the United States isn’t that far behind.

So may as well enjoy some humor before the world falls apart, including this cartoon about bailouts to Europe from America, the parody video about Germany and downgrades, this cartoon about Greece deciding to stay in the euro, this “how the Greeks see Europe” map, and this cartoon about Obama’s approach to the European model.

P.S. Here’s a video narrated by a former Cato intern about the five lessons America should learn from the European fiscal crisis.

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I don’t like the international bureaucrats at the IMF, and I don’t like the corrupt politicians of Greece, so for whom do I cheer if there’s a fight between those two groups?

Ideally, both sides will lose (which is also my view of the European fight between Keynesians and tax increasers).

You’ll understand when you read about the recent remarks by Christine Lagarde, the head of the International Monetary Fund. Here’s what the UK-based Guardian reported.

IMF chief Christine Lagarde’s uncompromising description of Greeks as rampant tax-dodgers has provoked a furious reaction in Athens less than a month before the crisis-hit country heads to the polls. With Greece mired in ever-worsening recession, with cutbacks and tax rises, the IMF managing director was rounded on by almost the entire political establishment. In an interview with the Guardian, Lagarde said she had more sympathy for victims of poverty in sub-Saharan Africa than Greeks hit by the economic crisis. “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax.” Evangelos Venizelos, the Greek socialist leader, who met Lagarde several times as finance minister, accused her of “insulting” Greeks. “Nobody has the right to humiliate the Greek people during the crisis, and I say this today specifically addressing Ms Lagarde … who with her stance insulted the Greek people.”

So what should we think of this fight?

Well, I agree with Lagarde that the people of sub-Saharan Africa are more deserving of sympathy. After all, the Greek people repeatedly voted to steal money from their fellow citizens by using the coercive power of government, so it’s hard to feel much sympathy for people who thought that scam could continue indefinitely.

Though, to be fair, the people in sub-Saharan Africa would probably make the same venal choices if they had democracy.

Top IMF Moocher

On the other hand, I am nauseated by Lagarde’s comments about tax evasion. She is one of the world’s biggest leeches, with annual compensation of more than $550,000 that is diverted from the productive sector of the economy. And, adding insult to injury, her bloated salary is tax free. So we have the grotesque spectacle of a pampered international bureaucrat whining and moaning that ordinary people aren’t paying enough tax.

Keep in mind, by the way, that the tax burden in Greece is more than 40 percent of economic output (see annex table 26), which (at least to normal people) shows that the problems is that the Greek government is spending far too much.

Leading Greek Kleptocrat

Then we have the sniveling comments of Greece’s former socialist finance minister, who says the Greek people have been “insulted.” Well, they should be insulted. And mocked. And berated. After all, these are the people who voted for one kleptocrat government after another.

These are the people who thought it was a good idea to elect governments that made insane decisions such as choosing to subsidize pedophiles and imposing a regulatory requirement to collect stool samples from entrepreneurs setting up online companies.

I think “a pox on both your houses” was a line in one of Shakespeare’s plays. But wherever it comes from, it sums up my view of this spat between the IMF and Greece. The only good decision for the United States would be to back away and not be involved. Unfortunately, the Obama Administration wants American taxpayers on the hook for the reckless overspending of foreign politicians.

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I’m in Slovakia, where I just returned from some meetings at the annual conference of the Freedom and Solidarity Party. Unlike Republicans in the United States, these people practice what they preach about free markets and individual liberty.

Indeed, the SAS Party (which I gather must be Slovak initials for Freedom and Solidarity) is so committed to principles that it refused to join with other coalition members to support the European bailout fund.

The same cannot be said about the other supposedly right-leaning parties that were part of the government. Indeed, the Prime Minister’s party wound up supporting the bailout (even though she initially was opposed). Amazingly, these other parties thought the bailouts were such a good idea that they were willing to lose a “no-confidence” vote – paving the way for the Social Democrats to win the most recent election!

I guess the analogy is Bush and the other GOP statists supporting corrupt policies such as TARP, which helped pave the way for Obama to get elected.

In this analogy, the SAS Party is akin to the tea party, representing honest conservatives and libertarians.

By the way, there are a small handful of genuinely good political parties in the world. If we limit ourselves to ones that have legislative seats, SAS is on the list, of course, but I would also include the Reform Party in Estonia, which leads that nation’s coalition government. It’s worth noting that Estonia responded to the recent economic crisis by imposing genuine spending cuts, which helps explain why that nation’s economy has bounced back while other nations are languishing.

New Zealand’s ACT Party also deserves a mention, though they’re down to just one seat in that nation’s Parliament. Hopefully they’ll bounce back.

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I wrote last year about a backlash from long-suffering Greek taxpayers. These people – the ones pulling the wagon rather than riding in the wagon – are being raped and pillaged by a political class that is trying to protect the greedy interest groups that benefit from Greece’s bloated public sector.

We now have another group of taxpayers who are fighting back against greedy government. My ancestors in Ireland have decided that enough is enough and there is widespread civil disobedience against a new property tax.

Here are the key details from an AP report.

The Serfs Fight Back

Ireland is facing a revolt over its new property tax. The government said less than half of the country’s 1.6 million households paid the charge by Saturday’s deadline to avoid penalties. And about 5,000 marched in protest against the annual conference of Prime Minister Enda Kenny’s Fine Gael party. Emotions ran raw as police backed by officers on horseback stopped demonstrators from entering the Dublin Convention Centre. …One man mistakenly identified as the government minister responsible for collecting the tax had to be rescued by police from an angry scrum. Kenny said his government had no choice, but to impose the new charge as part of the nation’s efforts to emerge from an international bailout. …The charge this year is a flat-fee €100 ($130) per dwelling, but is expected to rise dramatically next year once Ireland starts to vary the charge based on a property’s estimated value. Anti-tax campaigners have urged the public to ignore the tax demand, arguing that the government doesn’t have the power to collect it.

What makes this new tax so outrageous is that Irish taxpayers already have been victimized with higher income tax rates and a more onerous value-added tax. Yet they weren’t the ones to cause the nation’s fiscal crisis. Ireland is in trouble for two reasons, and both deal with the spending side of the fiscal equation.

1. The burden of government spending exploded last decade, more than doubling in less than 10 years. This wiped out all the gains from fiscal restraint in the 1980s and 1990s.

2. Irish politicians decided to give a bailout not only to depositors of the nation’s failed banks, but also to bondholders. This is a grotesque transfer of wealth from ordinary people to those with higher incomes – and therefore a violation of Mitchell’s Guide to an Ethical Bleeding Heart.

It’s worth noting that academic studies find that tax evasion is driven largely by high tax rates. This makes sense since there is more incentive to hide money when the government is being very greedy. But there is also evidence that tax evasion rises when people perceive that government is wasting money and being corrupt.

Heck, no wonder the Irish people are up in arms. They’re being asked to cough up more money to finance a bailout that was both corrupt and wasteful.

Let’s close by looking at American attitudes about tax evasion. Here’s part of a column from Forbes, which expresses surprise that Americans view tax evasion more favorably than behaviors such as shoplifting and littering.

A new survey suggests Americans consider cheating on their taxes more socially acceptable than shoplifting, drunk driving or even throwing trash out the window of a moving car. …only 66% of  the participants said they “completely agree” that “everyone who cheats on their taxes should be held accountable”  and only 72% completely agreed that “it’s every American’s civic duty to pay their fair share of taxes”–suggesting, as the Shelton study does, that perhaps disapproval of tax evasion is not as strong as, say, disapproval of stealing from private businesses.

I’m not sure, though, why anybody would be shocked by these results. We have a government in Washington that is pervasively corrupt, funneling money to corrupt scams like Solyndra.

These same people want higher tax rates, which will further encourage people to protect their income.

If we really want to promote better tax compliance, whether in the U.S., Ireland, or anywhere in the world, there are two simple answers. First, enact a simple and fair flat tax to keep rates low. Second, shrink government to its proper size, which will automatically reduce waste and limit opportunities for corruption.

But none of this is in the interests of the political class, so don’t hold your breath waiting for these reforms.

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Governor Romney’s campaign is catching some flak because a top aide implied that many of the candidate’s positions have been insincere and that Romney will erase those views (like an Etch-a-Sketch) and return to his statist roots as the general election begins.

I’m surprised that anyone’s surprised.  Hasn’t anybody been paying attention to his comments and track record on issues such as the  value-added tax, healthcare, Social Security reform, budget savings, ethanol subsidies, Keynesian economics, and the minimum wage?

In any event, people should be more agitated by his recent defense of the corrupt TARP bailouts.

Here are the key sections of a report from NBC Politics.

Mitt Romney offered an unprompted defense of the 2008 Wall Street bailout on Wednesday, crediting President George W. Bush and the preceding administration for averting an economic depression. …”There was a fear that the whole economic system of America would collapse — that all of our banks, or virtually all, would go out of business,” Romney said. “In that circumstance, President Bush and Hank Paulson said we’ve got to do something to show we’re not going to let the whole system go out of business. I think they were right. I know some people disagree with me. I think they were right to do that.”

I can understand how some politicians got panicked back in 2008 by some of the reckless and inflammatory rhetoric that Bush, Paulson, and others used to build support  for their bailout plan.

But it’s now become more and more obvious that there was a much better alternative (as I explained in this post giving Cheney a kick in the pants), involving a process known as FDIC resolution.

That approach would have recapitalized the banking system without the corruption, favoritism, and moral hazard that characterized the TARP bailout.

"Which one of us is Tweedledee?"

I don’t know whether Romney doesn’t understand this, hasn’t bothered to learn about the issue, or simply thinks it is good politics to be pro-bailout, but it doesn’t matter. There is no good explanation for his actions.

This is going to be a miserable and depressing election season, revolving around whether the nation should replace a statist who calls himself a Democrat with a statist who calls himself a Republican.

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I’ve always admired the English sense of humor, and this post on terrorism alerts is a good example.

In that spirit, here’s something that just arrived in my inbox, originally from this website.

For your reading enjoyment, a financial glossary for modern times, including in many cases an example of how the term should be used.

BANK, n. Bottomless cavity in the ground that sucks in money and the unwary.
I had quite a bit of money but then I put it in the bank.

BOND, n. A profitless contrivance used for catching the gullible or feeble-minded.
That pension fund is 100% in bonds now.

BROKER, adj. A comparative descriptive state for a client of a Wall Street bank.
He didn’t exactly have a lot of money before he started dealing with Goldman Sachs. Now he’s even broker.

BUBBLE, n. Fundamental prerequisite for a functioning Anglo-Saxon economy.
We need a new bubble to replace the ones we had in dotcom and property.

CENTRAL BANK, n. Lobbyist for commercial banks well versed in alchemy.

CURRENCY, n. Largely intangible substance with an inherent property that tends to instantaneous evaporation, the destruction of life and the permanent impairment of wealth.
I had money once but then I exchanged it for currency in a moment of madness.

DEFAULT, n. Semi-mythical celestial occurrence that passes by Earth every 76 years.
I was worried for a second about that Greek default, but I realise there’s nothing to see now and all is well.

FEDERAL RESERVE, n. A wholly owned subsidiary of Goldman Sachs.
The Federal Reserve voted to give a few more billion dollars to Wall Street.

GREECE, n. An undesirable or unfortunate happening that occurs unintentionally but results in harm, injury, damage and colossal loss of wealth. And profits for Goldman Sachs.
Did you see Greece ? Sheesh.

HORLICK, n. Progressive and insufficiently appreciated investment visionary.

HOUSE, n. In most countries, simply a place to live. In Britain, a theoretically infinite source of perpetual tax revenue for deluded Lib Dems.¹
(¹This is tautological. – Ed.)

INVESTOR, n. Plucky protagonist admired for brave deeds and quixotic struggling who is about to get shafted by Wall Street interests.
I was an investor in euro zone sovereign bonds but then everything went Greek.

JAPAN, n. Where hopes of profit go to die.

KEYNES, n. Slang: Vulgar. Disparaging and offensive.
That joker Posen is a complete Keynes.

POLITICIAN, n. Someone better informed than you about how to spend your money.

RATINGS AGENCY, n. A professional entertainer who amuses by relating absurd and fantastical tales.
That ratings agency’s credit assessment was so funny, I had to change my trousers.

RESTRUCTURING, n. Statutory rape.
Those bondholders are undergoing a voluntary restructuring – you might even call it a ‘credit event’.

ROGUE TRADER, n. Unprofitable proprietary trader. (Hat-tip to Killian Connolly.)

SOCIETY, n. The process whereby wealth is diverted from taxpayers to banks.

TAXPAYER, n. Simple-minded dolt too foolish to be working for the government.

US GOVERNMENT, n. Another wholly owned subsidiary of Goldman Sachs.
We seem to be running out of Goldman Sachs alumni here in the Treasury. No, wait, we’ve still got hundreds of ‘em.

VINCE CABLE, n. (No longer in technical use; considered offensive) a person of the lowest order in a former and discarded classification of mental retardation.
Don’t be a Vince Cable – get down off that wardrobe and come and eat your tea!

Here’s one last joke that I assume was concocted by someone in England.

Also from the U.K., here are two youtube videos, one on the “end of the world in 3 minutes” (might be Australian, but close enough) and the other on the “subprime crisis.”

P.S. I have no idea who or what a “Horlick” is, but I can give you this clue and this clue about Vince Cable.

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In a grand Washington tradition, I periodically make imperious demands. In the past year or two, I’ve issued the following ultimatums to the GOP.

o No tax increases, since more money for Washington will encourage a bigger burden of government and undermine prosperity.

o Reform the biased number-crunching methodology at the Congressional Budget Office and Joint Committee on Taxation.

o No more money from American taxpayers to subsidize the left-wing bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

I don’t actually expect any politicians to pay attention when I make these demands, of course, but I am highlighting issues that send a signal about whether Republicans actually learned any lessons after getting shellacked in 2006 and 2008.

So far, they’re holding reasonably firm on the tax issue. They don’t have control over the CBO and JCT thanks to Harry Reid, so we’ll give them a pass on that topic. And we’ll see later this year whether they agree to squander another $100 million on the OECD.

Well, here’s another test to see whether the GOP is on the side of taxpayers or the establishment. The Obama Administration has agreed that the fiscal pyromaniacs at the International Monetary Fun should have more money and power to provide more and bigger bailouts.

Here are some relevant parts of a Washington Post story.

…a brewing election year fight with congressional Republicans…could restrict the IMF’s finances at a time when agency officials say they need a substantial boost to protect the world economy. The dispute centers on Republican opposition to increasing the United States’ financial contributions to the agency, reflecting anger over IMF rescue programs in Europe that some GOP lawmakers argue have become too expensive and have put U.S. taxpayers at risk. …opposition is growing to a permanent increase in U.S. government support for the IMF, as well as to a $100 billion credit line the United States provided in 2009 as part of an international move to help the IMF respond to the global financial crisis. The IMF has been dipping into that credit line for emergency loans to Portugal and elsewhere… Planned changes at the IMF, which would shift seats on the fund’s governing board from Europe to the developing world, cannot proceed without congressional approval. For practical purposes, neither can a related doubling, from $370 billion to $740 billion, in the total permanent contribution that IMF members make to support the agency.

As you can see from the excerpt, Republicans in the House of Representatives have the ability to stop this global boondoggle. The interesting question, though, is whether they defend the interests of ordinary people or whether they cater to the whims of the political elite.

By the way, I’m irked by the Post’s biased presentation. They refer to IMF “rescue programs,” yet all the evidence seems to suggest that the international bureaucracy is simply making the debt bubble bigger. We certainly don’t see any evidence that problems are getting solved. Greece is still in trouble, as are the other nations that stuck their hands in Uncle Sam’s pocket.

But that could be excused as a bit of sloppy reporting. Here’s a part of the story that is hopelessly biased.

The potential for a stalemate over the issue in the United States has the IMF and other international officials worried that it could put broader agency reform efforts at risk. IMF officials say that to backstop the global economy they need about $500 billion in addition to the increase in permanent contributions.

Since when is it appropriate to use the term “reform efforts” to describe policies that subsidize moral hazard and reward profligacy? And how is it accurate to say that IMF actions “backstop the global economy” when the bureaucrats don’t seem to achieve anything other than encouraging more debt?

Congresswoman Rodgers, Defending Taxpayers

But this isn’t a post about media bias, even though I sometimes can’t resist pointing out sloppy or dishonest journalism. Let’s get back to the main point. Giving the IMF more resources would be like giving the keys to a liquor store to a bunch of alcoholics.

Republicans have the ability to stop this raid on the Treasury by saying no. What they decide will reveal a lot about whether they’re still part of the problem.

Some GOPers in the House, such as Cathy McMorris Rodgers of Washington, already are fighting against expanded bailout money for the IMF. The real key, though, will be whether the Republican leadership does the right thing.

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Whenever I narrate videos lasting longer than nine minutes, such as my three videos on tax havens or my video on international corporate taxation, I often get backhanded compliments along the lines of “that was good, but it would be even better if you said it in five minutes.”

So it is with considerable envy that I offer up this video about Europe’s fiscal/financial/monetary mess. Even though it lasts longer than nine minutes, I suspect it will keep everyone’s attention.

I’m not fully endorsing the contents of the video. Mr. McWilliams, for instance, probably has a confused IMF-type definition of austerity. But I definitely agree with him that policy is driven by the interests of the elite.

In any event, the production values of the video are first rate. Perhaps not in the same league as Part I and Part II of the Hayek v Keynes video set, but still remarkably well done.

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Perhaps the title of this post is a bit unfair since the International Monetary Fund is good on some issues, such as reducing subsidies. And some of the economists at the IMF even produce good research.

But I can’t help but get agitated that this behemoth global bureaucracy wants more money when it has a dismal track record of promoting, enabling, and subsidizing bigger government.

Here’s a brief blurb from the Wall Street Journal, which shares my skepticism.

The IMF’s Christine Lagarde delivered a speech in Berlin Monday warning that, without dramatic action, the world risked another Great Depression. …”We estimate a global potential financing need of $1 trillion,” she said. “To play its part, the IMF would aim to raise up to $500 billion in additional lending resources.” …Perhaps an IMF managing director with sound ideas about what makes an economy grow might deserve a raise. The first thing such a director would demand would be to cut the Fund’s size in half, not double it.

The WSJ’s editors are right to criticize the IMF. The folks in charge at the international bureaucracy, depending on the circumstances, have a nasty habit of supporting Keynesian spending and class-warfare tax hikes.

Let’s look at two very recent news reports to prove this point.

Our first example is from Europe, where there’s a discussion of how to address the fiscal crisis. Remarkably, the IMF has staked out a position to the left of Germany, arguing that more government spending will boost growth in Europe. Consider these excerpts from a Washington Post article.

Germany, the economic engine of Europe, is afraid it could get stuck paying much of the cost to bail out its weaker European neighbors. It is pushing instead for budget cuts, which the IMF says could weaken growth further and undermine market confidence. The IMF is already lending to the region’s bailout fund and has a lead role in monitoring the progress that nations such as Greece make in reducing their government deficits. Germany, meanwhile, is also a large contributor to the bailout fund. …If Europe doesn’t take several steps recommended by the IMF, such as reducing its emphasis on budget cuts, the 17 nations that share the euro could contract at a much faster pace, the fund said. That could possibly plunge the rest of the world into recession.

This is remarkable. One would think that the past three years have proven, once and for all, that Keynesian spending is a sedative rather than a stimulus. Yet the IMF thinks recessions are caused by smaller government.

We have another story that is equally upsetting. IMF bureaucrats get tax-free salaries, yet they frequently urge governments to impose higher taxes. And they have a very troubling habit of undermining tax reform.

Here’s a blurb from a Bloomberg report.

The International Monetary Fund may require Hungary to change its flat personal income tax as part of a bailout agreement, according to a person familiar with the Washington-based lender’s preparations for the talks. The flat tax will be an important part in any program discussion, said the person, who declined to be identified because official talks haven’t started. The IMF is in general opposed to flat-tax systems.

I’ll confess that I’m not overly sympathetic to Hungary’s plight. The government is in a mess because it keeps overspending.

But if the IMF is going to foolishly provide a bailout, wouldn’t it be better if the bureaucrats made the money contingent on implementing good policy rather than bad policy?

Unfortunately, the IMF has a bad track record on tax reform, as I’m constantly reminded when talking to officials in Eastern Europe. Indeed, one of my early posts on this blog was about the IMF’s attempt to sabotage the Latvian flat tax.

People have a right to be statist, but the question we have to decide is whether American taxpayers should subsidize that destructive mindset. Not surprisingly, I say no. Indeed, the IMF may even be worse than the OECD, another international bureaucracy that promotes a statist agenda.

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I’ve already bragged that the Cato Institute is America’s best think tank, highlighting the fact that we took the lead in battling against Obama’s faux stimulus at a time when many were dispirited and reluctant to fight big government.

I’m biased, of course, so I’ll understand if you discount what I say. But I hope you’ll agree that my colleagues have put together an excellent video response to the President’s state-of-the-union speech.

As part of my contribution to the video, beginning around 6:35, I debunk the President’s class-warfare tax agenda by citing IRS data from the 1980s to explain that higher tax rates don’t necessarily mean higher tax revenue.

After a night’s sleep, here are a few additional observations on the President’s remarks.

  • I was disappointed, but not surprised, that he repeated the economically foolish assertion that Warren Buffett pays a lower tax rate than his secretary.
  • I also was not surprised that he didn’t say much about jobs and the economy. These four charts show he doesn’t have much to brag about.
  • It was also noteworthy that he didn’t spend much time talking about Obamacare, which suggests that White House pollsters understand that government-run healthcare isn’t very popular.
  • It was equally revealing that he didn’t spend much time on the so-called income inequality issue. Redistribution was implicit in what he said, to be sure, but the Occupy-Wall-Street crowd is probably disappointed that he didn’t explicitly embrace their agenda. More evidence that the pollsters played a big role in this speech.
  • I’m definitely not surprised that he talked about eliminating Osama bin Laden. Kudos to the Commander-in-Chief.
  • I was amazed that he had the gall to say “no bailouts,” particularly given his support for TARP, the Dodd-Frank bailout bill, and the giveaway to GM and the auto unions. And if the GM bailout is supposed to be a success, I’d hate to see his definition of failure.
  • And I was stunned that he could talk about the housing meltdown and mortgage crisis without mentioning the Federal Reserve, Fannie Mae, or Freddie Mac. Sort of like analyzing World War II and pretending Germany and Japan didn’t exist.

Since most of the previous observation are critical, I want to stress that I’m not being partisan. I also was disappointed in the Republican response. Was the GOP smart to showcase a governor who was part of the big-spending Bush Administration? Especially one who has said nice things about the value-added tax?

I even was a bit disappointed in Governor Daniels’ remarks. He focused a lot on means-testing for entitlements, but that’s the wrong way of reforming the programs. Such policies impose higher implicit marginal tax rates on people who save and invest during their working years.

If we’re going to reform entitlements, do it the right way.

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Kevin Williamson of National Review is always worth reading, whether he’s kicking Paul Krugman’s behind in a discussion about the Texas economy, explaining supply-side economics, or even when he’s writing misguided things about taxation.

But I’m tempted to say that anything he’s written to date pales into insignificance compared to his analysis of the corrupt relationship between big government and Wall Street. Here are some excerpts, but read the entire article.

He starts out with a strong claim about the Obama Administration being in the back pocket of Wall Street.

…it’s no big deal to buy a president, which is precisely what Wall Street did in 2008 when, led by investment giant Goldman Sachs, it closed the deal on Barack Obama. For a few measly millions, Wall Street not only bought itself a president, but got the start-up firm of B. H. Obama & Co. LLC to throw a cabinet into the deal, too — on remarkably generous terms. …the real bonus turned out to be Treasury secretary Tim Geithner, who came up through the ranks as part of the bipartisan Robert Rubin–Hank Paulson–Citigroup–Goldman Sachs cabal. Geithner, a government-and-academe man from way back, never really worked on Wall Street, though he once was offered a gig as CEO of Citigroup, which apparently thought he did an outstanding job as chairman of the New York Fed, where one of his main tasks was regulating Citigroup — until it collapsed into the yawning suckhole of its own cavernous ineptitude, at which point Geithner’s main job became shoveling tens of billions of federal dollars into Citigroup, in an ingeniously structured investment that allowed the government to buy a 27 percent share in the bank, for which it paid more than the entire market value of the bank. If you can’t figure out why you’d pay 100-plus percent of a bank’s value for 27 percent of it, then you just don’t understand high finance or high politics.

Since I’ve compared Tim Geithner to Forest Gump, I’m not going to argue with this assessment.

Later in the article, Kevin makes a case that politicians are engaging in widespread insider trading.

Nancy Pelosi and her husband were parties to a dozen or so IPOs, many of which were effectively off limits to all but the biggest institutional investors and their favored clients. One of those was a 2008 investment of between $1 million and $5 million in Visa, an opportunity the average investor could not have bought, begged, or borrowed his way into — one that made the Pelosis a 50 percent profit in two days. Visa, of course, had business before Speaker Pelosi, who was helping to shape credit-card-reform legislation at the time. Visa got what it wanted. The Pelosis have also made some very fortunate investments in gasand energy firms that have benefited from Representative Pelosi’s legislative actions. The Pelosis made a million bucks off a single deal involving OnDisplay, the IPO of which was underwritten by investment banker William Hambrecht, a major Pelosi campaign contributor. …Besting Nancy Pelosi, Rep. Gary Ackerman (D., N.Y.) got in on the pre-IPO action, without putting up so much as one rapidly depreciating U.S. dollar of his own assets, when a political supporter — who just happened to be the biggest shareholder of the firm in question — lent him $14,000 to buy shares in the private company, which he then sold for more than a hundred grand after the firm went public. There wasn’t so much as a written loan agreement. On and on and on it goes: Sen. John Kerry invested aggressively in health-care companies while shaping health-care legislation. Rep. Spencer Bachus (R. Ala.) was a remarkably apt options trader during the days when he had a front-row seat to Congress’s deliberations on the unfolding financial crisis.

I wish I had known these details when I went on TV to discuss congressional corruption earlier this year.

Kevin also explained how Warren Buffett made a boatload of money thanks to insider knowledge about bailouts.

…during the financial crisis, a big piece of Goldman Sachs was bought by Warren Buffett, who stacked up a lot of cash when the government poured money into that struggling investment bank with the support of Barack Obama. When the federal government bought into Goldman Sachs, it negotiated for itself a 5 percent dividend. Warren Buffett got 10 percent — on top of the benefit of having Washington inundate his investment with great rippling streams of taxpayers’ money.

No wonder Buffett’s willing to lie in order to help his buddies in Washington raise taxes.

There’s a lot more in the article, but here’s a final excerpt that sums up Kevin’s article.

Wall Street can do math, and the math looks like this: Wall Street + Washington = Wild Profitability. Free enterprise? Entrepreneurship? Starting a business making and selling stuff behind some grimy little storefront? You’d have to be a fool. Better to invest in political favors. …hedge-fund titans, i-bankers, congressional nabobs, committee chairmen, senators, swindlers, run-of-the-mill politicos, and a few outright thieves (these categories are not necessarily exclusive) all feeding at the same trough, and most of them betting that Mitt Romney won’t do anything more to stop it than Barack Obama did. …Free-market, limited-government conservatives should be none too eager to welcome them back, nor should we let our natural sympathy with the profit motive blind us to the fact that a great many of them do not belong in the conservative movement, and that more than a few of them belong in prison.

All of this underscores why TARP was such an unmitigated disaster – and why we should be suspicious of politicians like Romney and Gingrich who supported the bailouts.

Remember, capitalism without bankruptcy is like religion without hell.

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I haven’t said much about the losses/scandal at MF Global.

If Jon Corzine or any of his people committed crimes, I hope they spend the rest of their lives in jail, hopefully with big burly biker cellmates.

And if this was just a case of bad investments, then I’m glad there was no bailout. Maybe the morons in Washington have learned something from the TARP fiasco.

But if Corzine is charged with a crime, he does have a very plausible defense, as shown in this Mike Ramirez cartoon.

And if you like Ramirez cartoons, you can see some of my favorites here, here, here, and here.

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There’s a rather simple solution to Europe’s fiscal crisis, but politicians will never do the right thing unless every other option is exhausted.

That’s why American taxpayers should not be involved in any sort of European bailout, either directly or indirectly.

This cartoon captures my sentiment.

At the risk of being picky, however, I would replace “Fed” with “USA/IMF” or something like that.

As I explained a few days ago, the Federal Reserve’s recent announcement that it will provide dollar liquidity to Europe is not necessarily objectionable. After all, the Europeans have to pay us back if they borrow dollars, with interest, at current exchange rates.

Yes, I worry European politicians may interpret the Fed’s actions as a signal that they can defer long-overdue reforms, and I also worry that it might be a precursor for easy-money policies in the future.

But the real threat to American taxpayers is that the International Monetary Fund may provide more bailouts to Europe.

I keep explaining that the only solution is for Europe’s welfare states to copy the Baltic nations and actually cut spending, but that will never happen if European politicians think that they can get an IMF handout (and thus shift some of their bad fiscal policy onto the backs of American taxpayers).

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In hopes of stopping investor panic about Europe’s fiscal crisis, the world’s major central banks just announced that they will do whatever is needed to ensure financial markets don’t freeze up.

This could be an appropriate and relatively benign use of the lender-of-last-resort powers, or it could signal another round of reckless easy money and quantitative easing.

I’m skeptical of the Fed and other central banks, but I don’t want to play back-seat driver on monetary policy. Instead, I want to focus on the underlying issue, which is whether there is any alternative to immediate – and real – spending cuts.

Maybe there is some way to muddle through, but I think the answer is no. Easy money from central banks is not a solution. Bailouts from the IMF or some other entity are not the solution.

In this interview with Neil Cavuto, I explain that more bailouts won’t work and that Europe’s welfare states should copy the Baltic nations and shrink the burden of government spending.

One point I made deserves to be emphasized. We wouldn’t be in the current mess if the political elite at the IMF and in Europe and the United States had followed my sage advice and rejected the original bailout for Greece.

The Wall Street Journal agrees. Here’s a passage from today’s editorial page.

Europe’s original sin in this crisis was not letting Greece default, remaining in the euro but shrinking its debt load as it reformed its economy. The example would have sent a useful message of discipline to countries and creditors alike. The fear at the time was that a default would spread the contagion of higher bond rates, but those rates have soared despite the bailouts of Greece and Portugal.

Sadly, I expect more bad policies. Politicians are addicted to big government, so they’ll always take the primrose path of bailouts and easy money as an alternative to fiscal restraint. Especially when the United States is a source of laughably bad advice from the clowns in the Obama Administration.

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The economic and fiscal crisis in Europe looks worse every day as a growing number of international investors decide that nations such as Greece, Portugal, Italy, and Spain can’t be trusted. As a result, interest rates on government debt are hitting record levels.

Not surprisingly, Europe’s craven political class is refusing to reduce the burden of government, perhaps because many nations have reached the dangerous tipping point where the number of people riding in the wagon is greater than the number of people pulling the wagon.

But, as a friend of mine from Ireland explains, there’s no way to kick the can down the road. Here’s some of what Constantin Gurdgiev wrote for Canada’s Globe and Mail.

…the euro area as a whole is no longer an engine for real business creation, productive investment, entrepreneurship or competitive development. The euro area combines some of the world’s fastest aging economies with a decades-old ethos of entitlements-driven policy making. Telling a European that one has to earn her or his health-care benefits or social insurance or pension or access to amenities and infrastructure is equivalent to challenging a brick wall to be flexible and dynamic. Europe as a cultural, political and economic institution has evolved into a status quo preservationist society, where anything new is seen as a challenge to be resisted — i.e. regulated, restricted, taxed. All solutions put forward to date — especially the euro-bonds and top-up bonds proposed by the EU Commission this week, as well as the idea that the ECB should dramatically expand its sovereign debt buying programs — are amounting to a desperate search for another credit card to roll existing overdrafts into. In effect, the euro area is electing to get sober by getting more drunk and is doing this while walking along the precipice of the fiscal and growth cliff.

Constantin hits the nail on the head. You can’t solve the fiscal crisis without economic growth, but it’s virtually impossible to get robust economic performance with a bloated public sector and populations that have been infantilized by government dependency.

Yes, there are solutions to the mess in Europe. The obvious answer is to copy the Baltic nations and slash government spending.

Or governments can default, which would be disreputable, but at least they would then be cut off from credit markets, thus making it much harder for them to engage in debt-financed spending.

In a perverse way (sort of like watching a slow-motion train wreck), it will be interesting to see what happens in the next few months. The only thing we can say with certainty is that the United States should follow these five lessons so we don’t make the same mistakes.

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As demonstrated by the new video from the Center for Freedom and Prosperity, there are five key lessons to learn from the fiscal crisis in Europe.

Unfortunately, Europe’s despicable political class has not learned from their mistakes. They are not taking the simple and obvious steps that are needed to address the problems of spendthrift governments.

Instead, they want to compound bad fiscal policy with bad monetary policy by having the European Central Bank purchase even more bonds issued by the continent’s most decrepit welfare states.

I warned last year that this was a big mistake and I’m glad to see that the issue is now getting more attention. Here’s some of what the Wall Street Journal said in an editorial this morning.

Only weeks into his new job as president of the European Central Bank, the Italian is being portrayed along with German Chancellor Angela Merkel as the main—the only—obstacle to saving the euro zone. If only the ECB would print a few trillion euros to buy the debt of spendthrift European countries, all will be well. Hang in there, Mr. Draghi, and you too, Chancellor. Don’t let the French, the British and the Yanks, the euro-pundits and the other blabbering bullies for bailouts get you down. Someone needs to defend the principle of central bank independence and price stability. The ECB has been by far the most effective part of the euro system since its founding. It shouldn’t squander that legacy now by taking on the debts of spendthrift governments that are the real cause of this crisis. It’s true that the ECB has already become a little bit pregnant in buying sovereign bonds, first taking on Greek, Irish and Portuguese debt, and this summer Spanish and Italian bonds. A week ago Friday, the ECB held €187 billion worth of country bonds. …So far, the ECB’s bond purchases have been limited enough that the central bank has been able to “sterilize” them, meaning they are offset by withdrawing money elsewhere in the banking system and haven’t added to the overall supply of money. But a multitrillion euro program would make sterilization impossible and would become a money-printing exercise. …If the Germans and ECB do write a blank check, then the balance of power within the euro zone will shift markedly, and perhaps irreversibly, in favor of the spenders. Even if this prevented short-term panic, it would merely postpone the day of reckoning and leave Europe worse off in the medium and long term. Without a system that can enforce spending restraint, borrowing discipline and economic reform, all the ECB bond-buying in the world won’t save the euro, and the independence of the ECB itself will become another casualty of the crisis.

The mess in Europe is like a slow-motion train wreck. It’s easy to see it won’t work, but that doesn’t stop the politicians from doing the wrong thing.

Indeed, I predicted most of the bad policies. But it doesn’t require much insight to know that statism won’t work, as I acknowledged in my I-told-you-so post.

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Earlier this month, I took part in an online debate for U.S. News & World Report about whether Europe or the United States was in deeper fiscal trouble.

I wrote that Europe faced a bigger mess, though I warned that the United States was making the same mistakes of costly and inefficient welfare-state policies and that we would follow them into fiscal crisis if we didn’t reform programs such as Medicare and Medicaid.

More important (at least to my fragile ego), I asked people to vote for the best presentation and I’m happy to say that I now have a huge lead in the voting.

Now there’s a new debate topic. I have squared off against a statist on the topic of bailouts. Here’s some of what I wrote.

The Bush-Obama policies of bailouts and regulation have been bad for taxpayers, but they’ve also been bad for the economy. A vibrant and dynamic economy requires the possibility of big profits, but also the discipline of failure. Indeed, capitalism without bankruptcy is like religion without hell. …Especially when the government adopts bad policies that cause a housing bubble, such as easy money from the Federal Reserve and corrupt subsidies from Fannie Mae and Freddie Mac. …Some people argue that America had no choice but to bail out Wall Street and the financial services industry. …Either through ignorance or corruption, they falsely assert that company-specific bailouts were necessary to recapitalize the financial sector. Nonsense. It is a relatively simple matter for a government to put a financial institution in receivership, hold all depositors harmless, and then sell off the assets. Alternatively, the government can pay a healthy institution to absorb an insolvent institution. This is what America did during the savings & loan bailouts 20 years ago. It’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis. …If this policy makes sense and has worked before, why does the crowd in Washington prefer bailouts? At the risk of being cynical, the politicians don’t like the FDIC-resolution approach because it means no giveaways for shareholders, bondholders, and senior managers. And that would require stiff-arming big campaign contributors.

If you agree, you can vote for me by clicking the “mic” button near the top of the page. And, to be fair, you can also vote for bailouts and regulation on the page featuring my opponent’s article.

The debate just started yesterday and I’m currently trailing 14-12 (as of 8:57 EDT), so get your Chicago voter registration cards and vote early and vote often.

If I can win this debate, it will help ease the trauma of losing the stimulus debate in New York City.

Though I’m not sure what this would say about me. I got a big win last year in my US News & World Report debate on the flat tax, so perhaps the lesson to be learned is that I should only take part in online debates rather than appear in person.

Sort of like having a face for radio, I guess.

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I’ve written about the fiscal implosion in Europe and warned that America faces the same fate if we don’t reform poorly designed entitlement programs such as Medicare and Medicaid.

But this new video from the Center for Freedom and Prosperity, narrated by an Italian student and former Cato Institute intern, may be the best explanation of what went wrong in Europe and what should happen in the United States to avoid a similar meltdown.

I particularly like the five lessons she identifies.

1. Higher taxes lead to higher spending, not lower deficits. Miss Morandotti looks at the evidence from Europe and shows that politicians almost always claim that higher taxes will be used to reduce red ink, but the inevitable result is bigger government. This is a lesson that gullible Republicans need to learn – especially since some of them want to acquiesce to a tax hike as part of the “Supercommitee” negotiations.

2. A value-added tax would be a disaster. This was music to my ears since I have repeatedly warned that the statists won’t be able to impose a European-style welfare state in the United States without first imposing this European-style money machine for big government.

3. A welfare state cripples the human spirit. This was the point eloquently made by Hadley Heath of the Independent Women’s Forum in a recent video.

4. Nations reach a point of no return when the number of people mooching off government exceeds the number of people producing. Indeed, Miss Morandotti drew these two cartoons showing how the welfare state inevitably leads to fiscal collapse.

5. Bailouts don’t work. This also was a powerful lesson. Imagine how much better things would be in Europe if Greece never received an initial bailout. Much less money would have been flushed down the toilet and this tough-love approach would have sent a very positive message to nations such as Portugal, Italy, and Spain about the danger of continued excessive spending.

If I was doing this video, I would have added one more message. If nations want a return to fiscal sanity, they need to follow “Mitchell’s Golden Rule,” which simply states that the private sector should grow faster than the government.

This rule is not overly demanding (spending actually should be substantially cut, including elimination of departments such as HUD, Transportation, Education, Agriculture, etc), but if maintained over a lengthy period will eliminate all red ink. More importantly, it will reduce the burden of government spending relative to the productive sector of the economy.

Unfortunately, the politicians have done precisely the wrong thing during the Bush-Obama spending binge. Government has grown faster than the private sector. This is why this new video is so timely. Europe is collapsing before our eyes, yet the political elite in Washington think it’s okay to maintain business-as-usual policies.

Please share widely…before it’s too late.

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Politicians in Europe have spent decades creating a fiscal crisis by violating Mitchell’s Golden Rule and letting the government grow faster than the private sector.

As a result, government is far too big today, and nations such as Greece are in the process of fiscal collapse.

But that’s the good news – at least relatively speaking. Over the next few decades, the problems will get much worse because of demographic change and unsustainable promises to spend other people’s money.

(By the way, America will suffer the same fate in the absence of reforms.)

Here’s on stark indicator of why Greece is in the toilet.

Look at the skyrocketing number of people riding in the wagon of government dependency (and look at these cartoons to understand why this is so debilitating).

By the way, Greece’s population only increased by a bit more than 16 percent during this period. Yet the number of bureaucrats jumped by far more than 100 percent.

And don’t forget that this chart just looks at the number of bureaucrats, not their excessive pay and bloated pensions.

With this in mind, do you agree with President Obama and want to squander American tax dollars on a bailout for Greece?

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The Europeans have just agreed to another bailout for Greece. That’s the bad news.

The good news is…well, there is no good news. Sarkozy, Merkel, and the other statists have once again failed to do the right thing and instead have decided to throw good money after bad and dig the debt hole even deeper.

But there is worse news. The IMF is financing part of the bailout and American taxpayers are “shareholders” in the IMF.

In other words, I’m helping to reward bad behavior and misallocate global capital. This doesn’t make me very happy – especially since the White House supports this misguided approach.

But this is business-as-usual for the IMF, and here’s a first-hand example.

I’m in El Salvador where I just finished two days of speeches, meetings, and interviews to discuss how the country should deal with its fiscal imbalance.

Discussing Mitchell's Golden Rule in El Salvador

My message is simple. El Salvador should reject tax hikes and instead put government on a diet by capping annual spending growth so the budget grows by 1 percent or 2 percent annually.

Ever single reporter responded by saying some variant of “but the IMF says we need to raise taxes.”

During the first interview, I simply said the IMF was wrong. During the second interview, I said El Salvador should refuse to let IMF bureaucrats in the country. After I heard the same IMF message the third time, I suggested shooting down any flight carrying IMF bureaucrats and their snake-oil economic advice.

The last comment was a joke, of course, but it does raise a fundamental question. Why are American taxpayers subsidizing an international bureaucracy that runs around the world urging higher taxes and bailouts?!?

To be fair, the IMF usually includes some good advice in their reports. If you read the fine print, the bureaucrats often recommend reductions in subsidies, red tape, government payrolls, and handouts.

But if you give politicians in any country a set of options, and higher taxes and/or bailouts are on the list, it doesn’t take a genius to realize that the good reforms will get ignored while the bad policies will be adopted.

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I would have structured this flowchart differently, for reasons I discuss in this post, but this is pretty good picture of why Europe is in trouble.

They say all roads lead to Rome, and this flowchart shows all roads lead to a banking crisis (see this post to understand why).

But not all banking crises are created equal. A bailout (the left column) would inflate the debt bubble and make the ultimate crisis much more devastating.

Cutting Greece loose (the middle column) is the best approach, in part because it would have a sobering effect on other European nations that would like to mooch off the European Union (German taxpayers) or International Monetary Fund (American taxpayers).

Just imagine, by the way, how much better things would be today if Greece had been unable to access bailout money and instead had been forced to spend the last two years implementing real reform. That’s why I stand by everything I wrote in my first post about the Greek mess.

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After any news appearance, I torment myself by watching the clip and telling myself I should have said something differently or raised a different point.

But I’m actually happy with this appearance on Fox Business News because I (hopefully) explained the difference between wealth that is honestly accumulated and loot that is obtained through government coercion.

I also am pleased when I get to use the line about “capitalism without bankruptcy is like religion without hell.” One of the reasons I loathe bailouts is that such corrupt practices discredit capitalism.

If the Occupy Wall Street folks actually understood the difference between capitalism and cronyism, there’s a chance they might join the right side.

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The welfare states of Europe are in deep trouble. Decades of over-taxing and over-spending have sapped economic vitality and produced high levels of debt.

The high debt levels, by themselves, might not be a problem if European governments implemented good policy. After all, debt was even higher in many nations after World War II than it is today.

But Europe also faces a demographic problem. The population is aging, meaning that the fiscal situation will get worse - in some cases, much worse. So international investors are appropriately worried that today’s high debt levels will become tomorrow’s crippling debt levels.

And the cherry on the ice cream sundae of Europe’s fiscal nightmare is that many people have been lulled into dependency thanks to excessive government handouts combined with a political culture that tells people there is nothing wrong with mooching off others (as this cartoon aptly illustrates).

This sounds quite depressing, but there is a shred of hope. Simply stated, nations that hit rock bottom presumably have little choice but to move in the right direction.

Actually, let me qualify that statement. Governments do have the ability to maintain bad policy if they have access to bailout cash. And that’s been a problem in Europe. Nations such as Greece have very little incentive to reform if they think the European Union (German taxpayers) or International Monetary Fund (American taxpayers) will cough up some cash.

But that game, sooner or later, comes to an end. As Margaret Thatcher noted, the problem with socialism is that sooner or later you run out of other people’s money.

So what, then, should be done to address the European debt crisis? The European political elite in places such as France and Germany say more bailouts are needed. Why? Because without more bailouts, there will be contagion and the world will plunge into another 2008-style crisis.

But when you strip away the hysterical rhetoric, what they’re really saying is that bailouts are needed for the banks in their own nations that foolishly lent too much money to reckless governments in other nations.

As you might suspect, this is self-serving nonsense that would simply create a bigger debt bubble that ultimately causes bigger problems.

The right answer to the European debt crisis is simple. And it only requires two steps.

1. Do not give bailouts to nations, even if that means they default. This isn’t good news if you bought, say, Greek or Portuguese bonds, but there are two big advantages of default. First, it means that the bailouts come to an end so the debt bubble doesn’t get even worse. Second, it forces the affected governments to move – overnight – to a balanced-budget rule.

So what’s the downside? There isn’t one. The aforementioned bondholders won’t be happy. They gambled in the expectation that bailouts would enable them to get high returns, but that’s their problem. Overpaid government workers and greedy interest groups in the affected nations doubtlessly will be very upset because the gravy train gets derailed, but that’s a feature, not a bug.

2. If banks become insolvent because they recklessly lent money to governments  that default, those financial institutions should be allowed to fail. More specifically, they should be put into something akin to receivership (similar to what the U.S. did 20 years ago with the S&L crisis and a few years ago with WaMu and IndyMac, and also like what Sweden did in the early 1990s). This automatically prevents financial crisis since the financial sector gets recapitalized, but without the moral hazard and/or zombie bank problems associated with TARP-style bailouts.

So what’s the downside? There isn’t one, at least compared to the alternatives. Governments would be holding harmless depositors at the failed banks, so there would be additional debt. But this debt would be a one-time burden for a policy that actually stops the bleeding, and there would be no moral hazard since shareholders, bondholders, and senior management at the failed banks would get nothing.

This raises an obvious question. If my proposed solution is so simple, why aren’t governments choosing this option?

Part of the answer is that simple solutions aren’t necessarily easy solutions. We know how to fix America’s fiscal crisis, for instance, but that doesn’t mean it will happen. Governments will sometimes do the right thing – but only after they’ve exhausted every other option.

Europe isn’t quite at that stage. Yes, Greece is being allowed to default, which is a small step in the right direction, but the political elite hope that the right blend of additional bailouts and patchwork reforms can fix the problem.

I suppose that might happen, especially if the world economy somehow begins to boom. But don’t hold your breath.

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This cartoon is probably more amusing than the OWS jokes I posted a couple of days ago.

Making fun of looters and moochers is good sport, of course, so the cartoon is appealing in that regard.

I’m not comfortable, though, with the imagery of a rich guy who looks like he is from Wall Street.

Give me a group of honest rich people, folks who have accumulated wealth by providing value to the world, and I will defend them to my last breath.

The crowd on Wall Street, though, sometimes likes to put its snout in the public trough.

That irks me for three reasons.

First, I’m strongly opposed to bailouts.

Second, I viscerally despise government activities that redistribute from the poor to the rich.

Third, I loathe crony capitalism that gives well-connected rich people an advantage in the marketplace.

But the cartoon is funny, so let’s not make the perfect the enemy of the good. Enjoy and share.

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I’m routinely critical of politicians, even the “good” ones that say they want to limit government and promote freedom.

But I think I’ve found a lawmaker who is worthy of strong praise. Unfortunately, he’s not in America.

He is Richard Sulik, the head of the Slovakian parliament and leader of the libertarian-leaning Freedom and Solidarity party.

Along with other members of his party, he is the best hope to block the bailouts that will reward profligacy and dig Europe’s debt hole even deeper.

Here’s some of what the UK-based Telegraph reported about Sulik’s battle for liberty.

European leaders fear that Slovakia’s attempt to block the new bail-out fund is as dangerous as David’s stand against Goliath. But it’s not just the difference in size and power that’s the worry – it’s that Slovakia’s rebel might have “right” on his side.  Slovakia’s hero is Richard Sulik, head of the Freedom and Solidarity Party (SaS) the junior partner in a four-party coalition. He has passionately described Slovakia’s 20-year journey from Communism to the European Union – and the deep national pride of meeting the membership requirements against the odds.  Mr Sulik has articulated the dismay of many that in Greece, Slovakians are faced with a country that bent the rules, rather than sacrificed, to gain entry – and now are demanding their luxuries are maintained by others. The average Slovak, whose salary is lowest in the euro zone, Sulik claims, would have to work 300 extra hours to cover the increase in the country’s guarantees of the EFSF, which will rise from €4.4bn to €7.7bn under the proposed deal. Mr Sulik has been criticised for being nationalistic, but he’s fast-becoming the voice of the discontented European masses.
By the way, the former nation of Czechoslovakia seems to have produced worthy leaders once it split in half. Not only is Sulik worthy of praise in Slovakia, but so are other Slovak lawmakers, and  I’ve already pointed out the President Klaus of the Czech Republic is one of the few people in Europe fighting for freedom.

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One almost feels sorry for Treasury Secretary Tim Geithner.

He’s a punchline in his own country because he oversees the IRS even though he conveniently forgot to declare $80,000 of income (and managed to get away with punishment that wouldn’t even qualify as a slap on the wrist).

Now he’s becoming a a bit of a joke in Europe. Earlier this month, a wide range of European policy makers basically told the Treasury Secretary to take a long walk off a short pier when he tried to offer advice on Europe’s fiscal crisis.

And the latest development is that the German Finance Minister basically said Geithner was “stupid” for a new bailout scheme. Here’s an excerpt from the UK-based Daily Telegraph.

Germany and America were on a collision course on Tuesday night over the handling of Europe’s debt crisis after Berlin savaged plans to boost the EU rescue fund as a “stupid idea” and told the White House to sort out its own mess before giving gratuitous advice to others.German finance minister Wolfgang Schauble said it would be a folly to boost the EU’s bail-out machinery (EFSF) beyond its €440bn lending limit by deploying leverage to up to €2 trillion, perhaps by raising funds from the European Central Bank.”I don’t understand how anyone in the European Commission can have such a stupid idea. The result would be to endanger the AAA sovereign debt ratings of other member states. It makes no sense,” he said.

All that’s missing in the story is Geithner channeling his inner Forrest Gump and responding that “Stupid is as stupid does.”

…at birth?

Separated…

This little spat reminds me of the old saying that there is no honor among thieves. Geithner wants to do the wrong thing. The German government wants to do the wrong thing. And every other European government wants to do the wrong thing. They’re merely squabbling over the best way of picking German pockets to subsidize the collapsing welfare states of Southern Europe.

But that’s actually not accurate. German politicians don’t really want to give money to the Greeks and Portuguese.

The real story of the bailouts is that politicians from rich nations are trying to indirectly protect their banks, which – as shown in this chart – are in financial trouble because they foolishly thought lending money to reckless welfare states was a risk-free exercise.

Europe’s political class claims that bailouts are necessary to prevent a repeat of the 2008 financial crisis, but this is nonsense – much as American politicians were lying (or bamboozled) when they supported TARP.

It is a relatively simple matter for a government to put a bank in receivership, hold all depositors harmless, and then sell off the assets. Or to subsidize the takeover of an insolvent institution. This is what America did during the savings & loan bailouts 20 years ago. Heck, it’s also what happened with IndyMac and WaMu during the recent financial crisis. And it’s what the Swedish government basically did in the early 1990s when that nation had a financial crisis.

But politicians don’t like this “FDIC-resolution” approach because it means wiping out shareholders, bondholders, and senior management of institutions that made bad economic choices. And that would mean reducing moral hazard rather than increasing it. And it would mean stiff-arming campaign contributors and protecting the interests of taxpayers.

Heaven forbid those things happen. After all, as Bastiat told us, “Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

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This is getting surreal. We now have layers of bailouts around the world.

Different nations are doing their own bailouts. On top of that, the Europeans have set up something called the European Financial Stability Facility, which does bailouts across the continent. And then there’s the International Monetary Fund, doing bailouts on a global basis. (and we’re not even counting the indirect bailouts from the Federal Reserve and European Central Bank)

So how is this system working? Well, if you understand the principle of moral hazard, you won’t be surprised to learn that it’s a big flop. Giving bailouts is like trying to cure an alcoholic with more booze.

But the problems are much deeper than promoting bad behavior. Bailouts also undermine growth by misallocating capital. And, most ominously, they create even bigger problems down the road.

Which is now what’s happening. The queen bureaucracy of bailouts, the IMF, may run out of bailout money, and presumably will demand more handouts from member nations – with the United States on the hook for providing the biggest share. Here’s a blurb from the story in the Daily Telegraph.

The head of the IMF has warned that its $384bn (£248bn) war chest designed as an emergency bail-out fund is inadequate to deliver the scale of the support required by troubled states.In a document distributed to the IMF steering committee at the weekend, Ms Lagarde said: “The fund’s credibility, and hence effectiveness, rests on its perceived capacity to cope with worst-casescenarios. Our lending capacity of almost $400bn looks comfortable today, but pales in comparison with the potential financing needs of vulnerable countries and crisis bystanders.”

At the risk of stating the obvious, the IMF should not get any more money. This is one of those moments for which the phrase “Hell No!” was invented.

The time has come to stop the cycle of bailouts. As Greece has demonstrated, bailouts simply give politicians some breathing room to postpone necessary reforms.

But it’s not just that bailouts encourage bad behavior in the public sector. They also promote moral hazard, leading financial institutions to make excessively risky loans because of an expectation that taxpayers will be coerced into making up any losses.

To understand why bailouts and moral hazard are so misguided, here’s a video narrated by Nicole Neily of the Independent Women’s Forum.

The video largely focuses on American policy issues such as Fannie, Freddie, and TARP, but the principles apply to all bailouts.

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