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Archive for the ‘Financial Crisis’ Category

At the beginning of the year, I was asked whether Europe’s fiscal crisis was over. Showing deep thought and characteristic maturity, my response was “HAHAHAHAHAHAHAHAHA, are you ;@($&^#’% kidding me?”

But I then shared specific reasons for pessimism, including the fact that many European nations had the wrong response to the fiscal crisis. With a few exceptions (such as the Baltic nations), European governments used the crisis to impose big tax hikes, including higher income tax rates and harsher VAT rates.

Combined with the fact that Europe’s demographic outlook is rather grim, you can understand why I’m not brimming with hope for the continent. And I’ve shared specific dismal data for nations such as Portugal, France, Greece, Italy, Poland, Spain, Ireland, and the United Kingdom.

But one thing I’ve largely overlooked is the degree to which the European Central Bank may be creating an unsustainable bubble in Europe’s financial markets. I warned about using bad monetary policy to subsidize bad fiscal policy, but only once in 2011 and once in 2012.

Check out this entertaining – but worrisome – video from David McWilliams and you’ll understand why this issue demands more attention.

I’ve openly argued that the euro is not the reason that many European nations got in trouble, but it appears that Europe’s political elite may be using the euro to make a bad situation even worse.

And to add insult to injury, the narrator is probably right that we’ll get the wrong outcome when this house of cards comes tumbling down. Instead of decentralization and smaller government, we’ll get an expanded layer of government at the European level.

Or, as I call it, Germany’s dark vision for Europe.

That’s Mitchell’s Law on steroids.

P.S. Here’s a video on the five lessons America should learn from the European crisis.

P.P.S. On a lighter note, the mess in Europe has generated some amusing videos (here, here, and here), as well as a very funny set of maps.

P.P.P.S. If all this sounds familiar, that may be because the Federal Reserve in the United States could be making the same mistakes as the European Central Bank. I don’t pretend to know when and how the Fed’s easy-money policy will turn out, but I’m not overly optimistic about the final outcome. As Thomas Sowell has sagely observed, “We all make mistakes. But we don’t all have the enormous and growing power of the Federal Reserve System… In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded.”

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For my birthday last year, the only present I wanted was for the Supreme Court to uphold the Constitution and reject Obamacare.

Needless to say, that didn’t happen. Instead, the Chief Justice put politics above the law and made a mockery of his Oath of Office.

So I’m now a bit superstitious and I’m not going to write about anything I want today or in the future. But I will pretend that something good happened because it’s my birthday, so let’s celebrate the fact that the European Union has basically made the right decision on how to deal with insolvent banks.

Technically, it happened yesterday, the day before my birthday, but it’s being reported today, and that’s close enough for me. Here are some details from the EU Observer.

Bank shareholders and creditors will be first in line to suffer losses if their bank gets into difficulties, according to draft rules agreed by ministers in the early hours of Thursday morning… Under the new regime, banks’ creditors and shareholders would be the first to take losses. But if this proves insufficient to rescue the bank in question, savers holding uninsured deposits worth more than €100,000 would also take a hit.

This is basically the “FDIC-resolution” approach that I’ve mentioned before, and it’s sort of what happened in Cyprus (after the politicians tried every other option).

And it’s the opposite of the corrupt TARP system that the Bush and Obama Administrations imposed on the American people.

The reason this new European approach is good is that it puts the pressure for sound business decisions where it belongs – with the shareholders who own the bank and with the big creditors (such as bondholders) who should be responsible for monitoring the underlying safety and soundness of a bank before lending it money.

And rich people (depositors with more than €100,000) also should be smart enough to apply some due diligence before putting their money someplace.

The last people to bear any costs should be taxpayers. They don’t own the bank. They don’t invest in the bank. And they don’t have big bucks. So why should they bear the cost when the big-money people screw up?!? Especially when TARP-style bailouts promote moral hazard!

I’m sure the new system won’t be properly implemented, that there are some bad details in the fine print, and there will be too many opportunities for back-door bailouts and cronyism, but let’s not make the perfect the enemy of the good.

Happy Birthday to me. And such an unexpected present: Something good actually came out of Europe!

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After the financial crisis, the consensus among government officials was that we needed more regulation.

This irked me in two ways.

1. I don’t want more costly red tape in America, particularly when the evidence is quite strong that the crisis was caused by government intervention. Needless to say, the politicians ignored my advice and imposed the costly Dodd-Frank bailout bill.

2. I’m even more worried about global regulations that force all nations to adopt the same policy. The one-size-fits-all approach of regulatory harmonization is akin to an investment strategy of putting all your retirement money into one stock.

I talked about this issue in Slovakia, as a conference that was part of the Free Market Road Show. The first part of my presentation was a brief description of cost-benefit analysis. I think that’s an important issue, and you can click here is you want more info about that topic.

But today I want to focus on the second part of my presentation, which begins at about the 3:40 mark. Simply stated, there are big downsides to putting all your eggs in one regulatory basket.

The strongest example for my position is what happened with the “Basel” banking rules. International regulators were the ones who pressured financial institutions to invest in both mortgage-backed securities and government bonds.

Those harmonized regulatory policies didn’t end well.

Sam Bowman makes a similar point in today’s UK-based City AM.

Financial regulations like the Basel capital accords, designed to make banks act more prudentially,  did the opposite – incentivising banks to load up on government-backed mortgage debt and, particularly in Europe, government bonds. Unlike mistakes made by individual firms, these were compounded across the entire global financial system.

The final sentence of that excerpt is key. Regulatory harmonization can result in mistakes that are “compounded across the entire global financial system.”

And let’s not forget that global regulation also would be a vehicle for more red tape since politicians wouldn’t have to worry about economic activity migrating to jurisdictions with more sensible policies – just as tax harmonization is a vehicle for higher taxes.

P.S. For a more learned and first-hand explanation of how regulatory harmonization can create systemic risk, check out this column by a former member of the Securities and Exchange Commission.

P.P.S. Politicians seem incapable of learning from their mistakes. The Obama Administration is trying to reinflate the housing bubble, which was a major reason for the last financial crisis. This Chuck Asay cartoon neatly shows why this is misguided.

Asay Housing Cartoon

P.P.S. Don’t forget that financial regulation is just one small piece of the overall red tape burden.

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Did Cyprus become an economic basket case because it is a tax haven, as some leftists have implied?

Did it get in trouble because the government overspent, which I have suggested?

The answers to those questions are “no” and “to some degree.”

The real problem, as I explain in this interview for Voice of America, is that Cypriot banks became insolvent because they made very poor investment decisions, particularly their purchases of Greek government bonds.

A few additional points.

1. The mess in Cyprus won’t cause problems in other nations, but it may lead investors in other nation to pay closer attention to whether there are problems with the government and/or banking sector.

2. There is not a “European problem” or “euro problem.” Some nations, such as Switzerland and Estonia, have made sound decisions. Others, such as Sweden, Denmark, and Germany, are in decent shape.

3. The final outcome in Cyprus was bad, but probably less bad than other options. The final result surely was better than the corrupt TARP regime in the United States.

4. It is utterly absurd to blame tax havens for the financial crisis. That disaster was caused by mistaken decisions by politicians in Washington.

So what happens now? I fear that Cyprus is going to be like Ireland, a nation that used to have a few attractive policies but now will have a bleak future.

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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.

He likes cats, so he’s not all bad

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”?

Hardly. If Krugman had bothered to spend even five minutes perusing the Cato website, he would have found hundreds of items by scholars such as Steve Hanke, Gerald O’Driscoll, Bert Ely, and others about misguided government regulatory and monetary policy. He could have perused the remarks of speakers at Cato’s annual monetary conferences. He could have looked at issues of the Cato Journal. Or our biennial Handbooks on Policy.

The tiniest bit of due diligence would have revealed that Cato was not a fan of Federal Reserve policy and we did not think that financial markets were deregulated. Indeed, Cato scholars last decade were relentlessly critical of monetary policy, Fannie Mae, Freddie Mac, Community Reinvestment Act, and other forms of government intervention.

Heck, I imagine that Krugman would have accused Cato of relentless and foolish pessimism had he reviewed our work  in 2006 or 2007.

I will confess that Cato people didn’t predict when the bubble would peak and when it would burst. If we had that type of knowledge, we’d all be billionaires. But since Krugman is still generating income by writing columns and doing appearances, I think it’s safe to assume that he didn’t have any special ability to time the market either.

Krugman also implies that Cato is guilty of historical revisionism.

…many on the right have chosen to rewrite history. Back then, they thought things were great, and their only complaint was that the government was getting in the way of even more mortgage lending; now they claim that government policies, somehow dictated by liberals even though the G.O.P. controlled both Congress and the White House, were promoting excessive borrowing and causing all the problems.

I’ve already pointed out that Cato was critical of government intervention before and during the bubble, so we obviously did not want government tilting the playing field in favor of home mortgages.

It’s also worth nothing that Cato has been dogmatically in favor of tax reform that would eliminate preferences for owner-occupied housing. That was our position 20 years ago. That was our position 10 years ago. And it’s our position today.

I also can’t help but comment on Krugman’s assertion that GOP control of government last decade somehow was inconsistent with statist government policy. One obvious example would be the 2004 Bush Administration regulations that dramatically boosted the affordable lending requirements for Fannie Mae and Freddie Mac, which surely played a role in driving the orgy of subprime lending.

And that’s just the tip of the iceberg. The burden of government spending almost doubled during the Bush years, the federal government accumulated more power, and the regulatory state expanded. No wonder economic freedom contracted under Bush after expanding under Clinton.

But I’m digressing. Let’s return to Krugman’s screed. He doesn’t single out Cato, but presumably he has us in mind when he criticizes those who reject Keynesian stimulus theory.

…right-wing economic analysts insisted that deficit spending would destroy jobs, because government borrowing would divert funds that would otherwise have gone into business investment, and also insisted that this borrowing would send interest rates soaring. The right thing, they claimed, was to balance the budget, even in a depressed economy.

Actually, I hope he’s not thinking about us. We argue for a smaller burden of government spending, not a balanced budget. And we haven’t made any assertions about higher interest rates. We instead point out that excessive government spending undermines growth by undermining incentives for productive behavior and misallocating labor and capital.

But we are critics of Keynesianism for reasons I explain in this video. And if you look at current economic performance, it’s certainly difficult to make the argument that Obama’s so-called stimulus was a success.

ZombieBut Krugman will argue that the government should have squandered even more money. Heck, he even asserted that the 9-11 attacks were a form of stimulus and has argued that it would be pro-growth if we faced the threat of an alien invasion.

In closing, I will agree with Krugman that there’s too much “zombie” economics in Washington. But I’ll let readers decide who’s guilty of mindlessly staggering in the wrong direction.

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Several months ago, I wrote a rather wonky post explaining that the western world became rich in large part because of jurisdictional competition. Citing historians, philosophers, economists, and other great thinkers, I explained that the rivalry made possible by decentralization and diversity played a big role in both economic and political liberalization.

In other words, it’s not just a matter of tax competition and tax havens (though you know how I feel about those topics).

Now I want to provide another argument in favor of the jurisdictional differences that are encouraged by national sovereignty. Simply stated, it’s the idea of diversification. Reduce risk by making sure one or two mistakes won’t cause a catastrophe.

This isn’t my insight. The author of The Black Swan understands that this simple principle of financial investment also applies to government. He recently explained his thinking in a short interview with Foreign Policy. The magazine began with a few sentences of introduction.

Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. …His newest project is helping governments get smarter about risks.

The rest of the article is Taleb in his own words. Here are some of my favorite passages, beginning with some praise for Switzerland’s genuine federalism and strong criticism of the EU bureaucracy in Brussels.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

But it’s important to understand why he likes Switzerland and dislikes the European Union: Small is beautiful. More specifically, decentralized decision making means less systemic risk.

We need smaller, more decentralized government. On paper, it might appear much more efficient to be large — to have economies of scale. But in reality, it’s much more efficient to be small. …an elephant can break a leg very easily, whereas you can toss a mouse out of a window and it’ll be fine. Size makes you fragile.

Taleb elaborates on this theme, echoing many of the thinkers I cited in my wonky September post.

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

Because it’s a short article, he doesn’t cite many specific examples, so let me elaborate. One of the reasons for the financial crisis is that the world’s financial regulators thought it would be a good idea if everybody agreed to abide the same rules for weighing risks. This resulted in the Basel rules that tilted the playing field in favor of mortgage-backed securities, thus helping to create and pump up the housing bubble. And we know how that turned out.

But that’s just part of the story. The regulatory cartel also decided to provide a one-size-fits-all endorsement of government debt. Now we’re in the middle of a sovereign debt crisis, so we see how that’s turning out.

Unfortunately, governments seem drawn to harmonization like moths to a flame. To make matters worse, the corporate community often has the same instinct. Their motive often is somewhat benign. They like the idea of one rulebook rather than having to comply with different policies in every nations.

But mistakes made for benign reasons can be just as bad as mistakes made for malignant reasons.

P.S. Last but not least, it’s worth noting that Taleb is not a big fan of democracy.

I have a negative approach to democracy. I think it should be primarily a mechanism by which people can remove a bad leader

I don’t know if this is because he recognizes the danger of untrammeled majoritarianism, much like Thomas Sowell, George Will, and Walter Williams. But if you want more information on why 51 percent of the people shouldn’t be allowed to oppress 49 percent of the people, here’s a very good video.

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I think it’s a mistake to bail out profligate governments, and I have the same skeptical attitude about bailouts for mismanaged banks and inefficient car companies.

Simply stated, bailouts reward past bad behavior and make future bad behavior more likely (what economists call moral hazard).

But some folks think government was right to put taxpayers on the hook for the sloppy decisions of private companies. Here’s the key passage in USA Today’s editorial on bailouts.

Put simply, the bailouts worked. True, in some cases the government did not do a very good job with the details, and taxpayers are out $142 billion in connection with the non-TARP takeovers of housing giants Fannie Mae and Freddie Mac. But it’s time for the economic purists and the Washington cynics to admit that government can occasionally do something positive, at least when faced with a terrifying crisis.

Well, I guess I’m one of those “economic purists” and “Washington cynics,” so I’m still holding firm to the position that the bailouts were a mistake. In my “opposing view” column, I argue that the auto bailout sets a very bad precedent.

Unfortunately, the bailout craze in the United States is a worrisome sign cronyism is taking root. In the GM/Chrysler bailout, Washington intervened in the bankruptcy process and arbitrarily tilted the playing field to help politically powerful creditors at the expense of others. …This precedent makes it more difficult to feel confident that the rule of law will be respected in the future when companies get in trouble. It also means investors will be less willing to put money into weak firms. That’s not good for workers, and not good for the economy.

If I had more space (the limit was about 350 words), I also would have dismissed the silly assertion that the auto bailout was a success. Yes, GM and Chrysler are still in business, but the worst business in the world can be kept alive with sufficiently large transfusions of taxpayer funds.

And we’re not talking small amounts. The direct cost to taxpayers presently is about $25 billion, though I noted as a postscript in this otherwise humorous post that experts like John Ransom have shown the total cost is far higher.

And here’s what I wrote about the financial sector bailouts.

The pro-bailout crowd argues that lawmakers had no choice. We had to recapitalize the financial system, they argued, to avoid another Great Depression. This is nonsense. The federal government could have used what’s known as “FDIC resolution” to take over insolvent institutions while protecting retail customers. Yes, taxpayer money still would have been involved, but shareholders, bondholders and top executives would have taken bigger losses. These relatively rich groups of people are precisely the ones who should burn their fingers when they touch hot stoves. Capitalism without bankruptcy, after all, is like religion without hell. And that’s what we got with TARP. Private profits and socialized losses are no way to operate a prosperous economy.

The part about “FDIC resolution” is critical. I’ve explained, both in a post criticizing Dick Cheney and in another post praising Paul Volcker, that policymakers didn’t face a choice of TARP vs nothing. They could have chosen the quick and simple option of giving the Federal Deposit Insurance Corporation additional authority to put insolvent banks into something akin to receivership.

Indeed, I explained in an online debate for U.S. News & World Report that the FDIC did handle the bankruptcies of both IndyMac and WaMu. And they could have used the same process for every other poorly run financial institution.

But the politicians didn’t want that approach because their rich contributors would have lost money.

I have nothing against rich people, of course, but I want them to earn money honestly.

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This past Monday, I took part in a panel discussion about the financial crisis at the European Resource Bank in Brussels.

One of my main points was that people in private markets always make mistakes, but that this is a healthy and necessary process so long as there is a profit and loss feedback mechanism that encourages people to quickly learn when things go wrong (and also to reward them when they make wise decisions).

In the financial crisis, though, we saw the government interfere with this process. First, bad policies such as easy money from the Fed and corrupt Fannie Mae/Freddie Mac subsidies distorted market signals and caused a needlessly high level of mistakes. Second, bailouts interfered with the feedback mechanism, teaching people that large levels of imprudent risk are okay.

The politicians, unsurprisingly, didn’t learn the right lessons. Instead of reducing the level of government intervention, they imposed the Dodd-Frank bailout bill (named after two lawmakers who were pimps for Fannie and Freddie and thus disproportionately responsible for the crisis).

I don’t know if this is a case of too-little-too-late, but more and more people are waking up to the idea that regulation is the problem rather than the solution. Perhaps most important, some of these people are in positions of power.

Let’s begin with a look at how the Wall Street Journal’s editorial page reacted to some very important research by some uncharacteristically astute regulators from the Bank of England.

…the speech of the year was delivered at the Federal Reserve’s annual policy conference in Jackson Hole, Wyoming on August 31. And not by Fed Chairman Ben Bernanke. …BoE Director of Financial Stability Andrew Haldane and colleague Vasileios Madouros point the way toward the real financial reform that Washington has never enacted. The authors marshal compelling evidence that as regulation has become more complex, it has also become less effective. They point out that much of the reason large banks are so difficult for regulators to comprehend is because regulators themselves have created complicated metrics that can’t provide accurate measurements of a bank’s health. …Basel II relied far too much on the judgments of government-anointed credit-rating agencies, plus a catastrophic bias in favor of mortgages as “safe.” Instead of learning from that mistake, the gnomes have written into the new Basel III rules a dangerous bias in favor of sovereign debt. The growing complexity of the rules leaves more room for banks to pursue regulatory arbitrage, identifying assets that can be classified as safe, at least for compliance purposes. …in both the U.K. and U.S. the number of regulators has for decades risen faster than the number of people employed in finance. Complexity grows still faster. The authors report that in the 12 months after the passage of Dodd-Frank, rule-making that represents a mere 10% of the expected total will impose more than 2.2 million hours of annual compliance work on private business. Recent history suggests that if anything this will make another crisis more likely. Here’s a better idea: Raise genuine capital standards at banks and slash regulatory budgets in Washington. Abandon the Basel rules on “risk-weighting” and other fantasies of regulatory omniscience.

The references to the Basel regulations are particularly noteworthy. These are the rules, cobbled together by regulators from different nations, and they’re supposed to steer financial institutions away from excessive risk.

You won’t be surprised to learn, though, that these rules caused imprudent behavior. Indeed, one of the slides from my presentation in Brussels specifically highlighted the perverse impact of the Basel regulations.

Some American regulators also understand the inverse relationship between regulation and well-functioning markets. The Wall Street Journal opines on the words of Thomas Hoenig.

The same “fundamentally flawed” system of financial rules that failed in 2008 lives on, “but with more complexity” in the latest proposals from regulators. That was the blunt message on Friday from Federal Deposit Insurance Corporation Director Thomas Hoenig. He was talking about the pending implementation of international bank capital standards known as Basel III. …Mr. Hoenig did a public service at an American Banker symposium by reviewing the relevant history from 2008: “It turns out that the Basel capital rules protected no one: not the banks, not the public, and certainly not the FDIC that bore the cost of the failures or the taxpayers who funded the bailouts. The complex Basel rules hurt, rather than helped the process of measurement and clarity of information.” Observing a Basel system that only grows more complicated as U.S. regulators prepare to implement the latest version, the former president of the Federal Reserve Bank of Kansas City also pointed out that the biggest winners from such regulatory regimes are never the little guys. Mr. Hoenig explained that “the most brazen and connected banks with the smartest experts will game the system…”

I closed my remarks in Brussels by saying that government does have a role in financial markets, but I said that it should focus on identifying and punishing fraud. The free market, by contrast, is the best way to promote safety and soundness.

More specifically, there is nothing quite like the possibility of failure and losses to encourage prudent behavior. As I stated in this interview, capitalism without bankruptcy is like religion without hell.

Hell, by contrast, occurs when government intervenes and sets up a system of private profits and socialized losses.

P.S. The financial crisis doesn’t create much opportunity for humor, but this cartoon is definitely worth a laugh.

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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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For quite some time, I’ve thought of Herman van Rompuy as the poster child of Europe’s incompetent political elite.

Virtually unknown to people in the real world (his sole claim to fame is that a British MEP, in a speech that went viral on YouTube, said he resembled a “low-grade bank clerk”), the President of the European Council manages to blunder from one mistake to another.

But Jose Manuel Barroso, President of the European Commission, is trying very hard to be an even bigger joke.

Well, Barroso now has done something else that deserves mockery and scorn. He’s whining that some of his opponents are happy about the mess in Europe.

Here’s some of what the EU Observer reported.

European Commission President Jose Manuel Barroso Tuesday (3 July) launched an angry attack on British Conservative’s in the European Parliament, accusing them of “taking delight” in the eurozone debt crisis. …Barroso’s outburst in Strasbourg followed a speech by Tory MEP Martin Callanan, who heads the eurosceptic ECR group.

Since I also experience some Schadenfreude about the mess in Europe, I suspect Barroso is right that the Tories are enjoying the situation. But that doesn’t give Barroso any moral authority to complain since the fiscal crisis largely exists because of policies he supported.

I also can’t resist adding this passage from the story.

President Barroso said he was “puzzled” that British eurosceptics were encouraging countries to leave the euro adding that this was “in stark contrast” to statements made by UK Prime Minister David Cameron.

Barroso is right. There is a gulf between the views of British MEPs and the attitude of the U.K.’s Prime Minister. But that’s because David Cameron is a wobbly statist with no strong beliefs (other than that he should be Prime Minister).

Arguing over who’s the biggest buffoon

Barroso’s comments, in other words, are akin to an American leftist saying that Republicans shouldn’t attack Obama’s statist agenda because Bush supported the same big-government policies when he was President.

In closing, I will acknowledge that I agree with Barroso on one point. He warned that democracy could collapse in Europe if economic conditions continue to unravel, and I think that could happen. But, as I’ve explained before, Europe’s future is somewhat bleak because of the policies supported by Barroso and his fellow travelers like van Rompuy.

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Every day brings more and more evidence that Obamanomics is failing in Europe.  I wrote some “Observations on the European Farce” last week, but the news this morning is even more surreal.

Compared to his foolishness on tax policy, Hollande is a genius when it comes to determining what time it is.

Let’s start with France, where I endorsed the explicit socialist over the implicit socialist precisely because of a morbid desire to see a nation commit faster economic suicide. Well, Monsieur Hollande isn’t disappointing me. Let’s look at some of his new initiatives, as reported by Tax-News.com.

The French Minister responsible for Parliamentary Relations Alain Vidalies has recently conceded that EUR10bn (USD12.7bn) is needed to balance the country’s budget this year, to be achieved notably by means of implementing a number of emergency tax measures. …The government plans to abolish the exemption from social contributions applicable to overtime hours, expected to yield a gain for the state of around EUR3.2bn, and to subject overtime hours to taxation, predicted to realize approximately EUR1.4bn in additional revenues. Other proposed measures include plans to reform the country’s solidarity tax on wealth (ISF), to cap tax breaks at EUR10,000, to impose a 3% tax on dividends and to increase inheritance tax as well as the tax on donations. …French President Hollande announced plans during his election campaign to reform ISF. Holland intends to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

France already has the highest tax burden of any non-Scandinavian nation, so why not further squeeze the productive sector. That’s bound to boost jobs and competitiveness, right? And more revenue as well!

In reality, the Laffer Curve will kick in because France’s dwindling productive class isn’t going to passively submit as the political jackals start looking for a new meal.

But while France is driving into a fiscal cul-de-sac, Italian politicians have constructed a very impressive maze of red tape, intervention, and regulation. From the Wall Street Journal, here is just a sampling of the idiotic rules that paralyze job creators and entrepreneurs.

Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include work-related stress and stress caused by age, gender and racial differences. …Once you hire your 16th employee, national unions can set up shop, and workers may elect their own separate representatives. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. …Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in kind. …Once you hire your 101st employee, you must submit a report every two years on the gender-dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of their compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact. …All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD. …which may explain the temptation to stay small and keep as much of your business as possible off the books. This gray- and black-market accounts for more than a quarter of the Italian economy. It also helps account for unemployment at a 12-year high of 10%, and GDP forecast to contract 1.3% this year.

You won’t be surprised to learn that the unelected Prime Minister of Italy, Mr. Monti, isn’t really trying to fix any of this nonsense and instead is agitating for more bailouts from taxpayers in countries that aren’t quite as corrupt and strangled by red tape.

Monti also is a big supporter of eurobonds, which make a lot of sense if you’re the type of person who likes co-signing loans for your unemployed alcoholic cousin with a gambling addiction.

But let’s not forget our Greek friends, the one from the country that subsidizes pedophiles and requires stool samples from entrepreneurs applying to set up online companies.

The recent elections resulted in a victory for the supposedly conservative party, so what did the new government announce? A flat tax to boost growth? Sweeping deregulation to get rid of the absurd rules that strangle entrepreneurship?

You must be smoking crack to even ask such questions. In addition to whining for further handouts from taxpayers in other nations, the Wall Street Journal reports that the new government has announced that it won’t be pruning any bureaucrats from the country’s bloated government workforce.

Greece’s new three-party coalition government on Thursday ruled out massive public-sector layoffs, a move that could help pacify restive trade unions… The new government’s refusal to slash public payrolls and its demands to renegotiate its loan deal comes just as euro-zone finance ministers meet in Luxembourg to discuss Greece’s troubled overhauls—and possibly weigh a two-year extension the new government is seeking in a bid to ease the terms of the austerity program that has accompanied the bailout. …Cutting the size of the public sector has been a top demand by Greece’s creditors—the European Union, European Central Bank and International Monetary Fund—to reduce costs and help Greece meet its budget-deficit targets needed for the country to get more financing. So far, Greece has laid off just a few hundred workers and failed to implement a so-called labor reserve last year, which foresaw slashing the public sector by 30,000 workers.

Gee, isn’t this just peachy. Best of all, thank to the International Monetary Fund, the rest of us are helping to subsidize these Greek moochers.

And speaking of the IMF, I never realized those overpaid bureaucrats (and they’re also exempt from tax!) are closet comedians. They must be a bunch of jokers, I’ve concluded, because they just released a report on problems in the eurozone without once mentioning excessive government spending or high tax burdens.

The tax-free IMF bureaucrats do claim that “Important actions have been taken,” but they’re talking about bailouts and easy money.

The ECB has lowered policy rates and conducted special liquidity interventions to address immediate bank funding pressures and avert an even more rapid escalation of the crisis.

And even though the problems in Europe are solely the result of bad policies by nations governments, the economic pyromaniacs at the IMF also say that “the crisis now calls for a stronger and more collective effort.”

Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. A more determined and forceful collective response is needed.

Let’s translate this into plain English: The IMF wants more money from American taxpayers (and other victimized producers elsewhere in the world) to subsidize the types of statist policies that are described above in places such as France, Italy, and Greece.

I’ve previously explained why conspiracy theories are silly, but we’ve gotten to the point where I can forgive people for thinking that politicians and bureaucrats are deliberately trying to turn Europe into some sort of statist Dystopia.

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I’ve written many times about the foolishness of bailing out profligate governments (or, for that matter, mismanaged banks and inefficient car companies).

Bailouts reward bad past behavior, encourage bad future behavior, and make the debt bubble bigger – thus increasing the likelihood of deeper economic problems. At the risk of stating the obvious, there’s a reason for the second word in the “moral hazard” phrase.

But I’m not surprised that politicians continue to advocate more bailouts. The latest version is the “eurobond,” sometimes referred to as “fiscal liability sharing.”

It doesn’t matter what it’s called, though, since we’re talking about the foolish idea of having Germany (with a few other small nations chipping in) guaranteeing the debt of Europe’s collapsing welfare states. Here’s how the New York Times described the issue.

When European leaders meet on Wednesday to discuss the troubles of the euro zone, France’s president will press the issue of euro bonds, his finance minister said in Berlin on Monday. …Pierre Moscovici, France’s newly appointed finance minister, traveled to Berlin for talks with his counterpart, Wolfgang Schäuble. In a news conference after the closed-door meeting, both characterized the exchange as friendly and productive, but Mr. Moscovici acknowledged that the two men, and their governments, had real differences of opinion over pooling obligations to use the credit of the strongest European countries to prop up the weaker ones, an approach achieved through euro bonds.

The good news is that the German government is opposed to this idea.

Steffen Kampeter, was much more forthcoming in reiterating German opposition to any such proposal. Mr. Kampeter called the joint bonds “a prescription at the wrong time with the wrong side effects,” in an interview with German public radio. “The government has repeatedly made clear that collective state borrowing — that is, euro bonds — are no way to overcome the current crisis,” said Georg Streiter, a spokesman for Ms. Merkel on Monday. “It is still the case that the government rejects euro bonds.” …German policy makers say, euro bonds would be comparable to the United States’ agreeing to pay off Mexico’s debts, almost like a blank check for nations that are in trouble for overspending in the first place. “Euro bonds are not where the keys to heaven lie,” said Michael Hüther, director of the Cologne Institute for Economic Research, because it would “mix up risk” and act as a disincentive for less competitive economies to reform.

The bad news is that the Germans support other bad policies instead.

Ms. Merkel has signaled flexibility on some of Mr. Hollande’s ideas, including more financing for the European Investment Bank and redirecting unspent European Union funds to try to fight unemployment.

And even when Merkel opposes bad policies, she indicates she will change her mind if one bad policy is mixed with another bad policy!

…the German government is staunchly opposed to euro bonds until deeper integration and harmonization of budgetary and public spending policies have been achieved.

If Ms. Merkel genuinely believes that political and fiscal union will solve Europe’s problems, she’s probably ingesting illegal substances. Centralization of European government will have the same unfortunate pro-statist impact as centralization of American government in the 1930s and 1960s.

Integration and harmonization simply means voters in the rest of Europe will take German funds using the ballot box.

Not surprisingly, all of the international bureaucracies are on the wrong side of this issue. The NY Times story notes that the European Commission is using the fiscal crisis to push for more centralization.

The European Commission floated the idea of bonds issued jointly by euro zone governments in November, suggesting that such “stability bonds” could be created “in parallel” with moves toward closer fiscal union, rather than at the end of the process, as the German government prefers, to “alleviate tension” in sovereign debt markets. “From an economic point of view this makes sense,” a commission spokesman, Amadeu Altafaj, said Monday. “But at the end of the day this is a political decision that has to be taken by the member states of the euro area.” Mr. Altafaj added that “any form of common debt issuance requires a closer coordination of fiscal policies, moving toward a fiscal union, it is a prerequisite.”

And the Financial Times reports that the Organization for Economic Cooperation and Development, which is reflexively supportive of bigger government and more intervention, has endorsed eurobonds.

Mr Hollande…won backing from the OECD, which in its twice-yearly economic outlook specifically called for such bonds…“We need to get on the path towards the issuance of euro bonds sooner rather than later,” Pier Carlo Padoan, the OECD chief economist, told the Financial Times.

The fiscal pyromaniacs at the IMF also are pushing to make the debt bubble bigger according to the FT.

Christine Lagarde, the IMF chief, also called for more burden-sharing. Though she stopped short of explicitly backing euro bonds, she said “more needs to be done, particularly by way of fiscal liability sharing” – a thinly veiled reference to such debt instruments.

What makes this particularly frustrating is that American taxpayers provide the largest share of the subsidies that keep the IMF and OECD afloat. In other words, we’re paying for left-wing bureaucrats, who then turn around and push for bad policies that will result in bigger bailouts in the future.

Episodes like this make me understand why so many people believe in conspiracy theories. Folks watch something like this unfold and they can’t help but suspect that people in these governments and international bureaucracies want to deliberately destroy the global economy.

But as I’ve noted before, it’s not smart to believe conspiracies when corruption, incompetence, politics, ideology, greed, and self-interest provide better explanations for bad policy.

If the Europeans want to hit the self-destruct button, I’m happy to explain why it’s a bad idea, and I’m willing to educate them about better alternatives.

But I damn sure don’t want to subsidize their foolishness when they do the wrong thing.

P.S. It’s very appropriate to close this post with a link to this parody of Hitler complaining about debt crisis.

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I posted yesterday about visiting the United Nations to participate in “The High Level Thematic Debate on the State of the World Economy.”

There were five speakers on my panel, including yours truly. Here are my thoughts on what the others said.

Dr. Supachai Panitchpakdi, Secretary-General of the United Nations Conference on Trade and Development, must have been part of the buzz-word contest I mentioned yesterday. Lots of rhetoric that theoretically was inoffensive, but I had the feeling that it translated into a call for more government. But maybe I’m paranoid SOB, so who knows.

Professor Dato’ Dr. Zaleha Kamaruddin, Rector of the International Islamic University of Malaysia, was an interesting mix. At some points, she sounded like Ron Paul, saying nice things about the gold standard and low tax rates. But she also called for debt forgiveness and other forms of intervention. She explicitly said she was providing Islamic insights, so perhaps the strange mix makes sense from that perspective.

Former Senator Alan K. Simpson also was a mixed bag. Simpson was co-chair of Obama’s fiscal commission, which I thought was a disappointment because it endorsed higher taxes and urged sub-par entitlement changes rather than much-needed structural reforms. He also went after Grover Norquist because of the no-tax pledge, which I think is a valuable tool to keep Republicans from selling out for bigger government. All that being said, Senator Simpson is a promoter of smaller government and he wants lower tax rates. So while I disagree with some of his tactical decisions, he was an ally on the panel and would probably do a pretty good job if he was economic czar.

Last but not least, Professor Jeffrey Sachs of Columbia University was a statist, as one would expect based on what I wrote about him last year. We clashed the most, arguing about everything from tax havens to the size of government. Interestingly, we both said nice things about Sweden, but I was focusing on policies such as school choice and pension reform, while he admired the large public sector. But I will admit he was a nice guy. We sat next to each other and did find a bit of common ground in that we both were sympathetic to the way Sweden dealt with its financial crisis about 20 years ago (a version of the FDIC-resolution approach rather than the corrupt TARP bailout approach).

My message, by the way, was very simple. Higher taxes won’t work. The “growth” vs. “austerity” debate in Europe is really a no-win fight between those who want higher spending vs. those who want higher taxes. The only good answer is to restrain spending with…you guessed it, Mitchell’s Golden Rule.

I’m not safely out of New York City, and I promise I didn’t drink any of the Kool-Aid. I’m still a critic of international bureaucracies. And I wouldn’t allow myself to be bought off by a lavish, tax-free job at the United Nations.

Unless, perhaps, it was a Special Envoy position with Angelina Jolie.

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I’m at the United Nations in New York City for something called “The High Level Thematic Debate on the State of the World Economy.”

Most speakers so far, including the Secretary General of the United Nations, the President of the European Commission, Paul Volcker, and Professor Joseph Stiglitz, have to varying degrees blamed private markets and called for more government.

I speak later today as part of a roundtable on the economic crisis (see full schedule here), and I will be offering a different point of view.

The other thing I’ve noticed is the over-use of certain terms. Reminded me of the state-of-the-union bingo game about Obama’s buzz words. It seems every speaker was required to use all of the following phrases.

From a philosophical perspective, I’d rather be sitting next to the Liechtenstein delegation

  • “sustainable development”
  • “equitable growth”
  • “forward looking”
  • “transparent”
  • “interdependence”
  • “collective action”
  • “firewalls”
  • “women and youth”

Other than “collective action,” these are all fine concepts. Unfortunately, most of the speakers use them as part of speeches urging more statism.

Assuming I don’t get burnt at the stake for heretical thoughts, I’ll give an update tomorrow on how my remarks were received.

I will say, though, that at least the United Nations is willing to have contrary voices – unlike the Organization for Economic Cooperation and Development, which threatened to cancel a Global Tax Forum because of my short-lived participation.

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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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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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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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There’s always been a simple and desirable solution to Europe’s fiscal crisis, but nobody in Europe wants to do the right thing because it means admitting the failure of big government and it would result in less power for the political elite.

So we get the spectacle of never-ending emergency summits as the political class blindly searches for some magical solution. Not surprisingly, the “solution” concocted by the latest gathering is not getting good reviews.

Here’s what Ambrose Evans-Pritchard wrote in the Daily Telegraph.

What remarkable petulance and stupidity. The leaders of France and Germany have more or less bulldozed Britain out of the European Union for the sake of a treaty that offers absolutely no solution to the crisis at hand, or indeed any future crisis. It is EU institutional chair shuffling at its worst, with venom for good measure. …There is no shared debt issuance, no fiscal transfers, no move to an EU Treasury, no banking licence for the ESM rescue fund, and no change in the mandate of the European Central Bank.

And here’s what Felix Salmon wrote for Reuters.

It all adds up to one of the most disastrous summits imaginable. A continent which has risen to multiple occasions over the past 66 years has, in 2011, decided to implode in a spectacle of pathetic ignominy. …Europe’s leaders have set a course which leads directly to a gruesome global recession, before we’ve even recovered from the last one. Europe can’t afford that; America can’t afford that; the world can’t afford that. But the hopes of arriving anywhere else have never been dimmer.

So why is everybody upset? For the simple reason that the supposed “solution” doesn’t address the immediate problem.

Europe’s short-run crisis is that the fear of default. Simply stated, governments have squandered so much money that they are now deeply in debt. As a result, investors no longer trust that they will get paid back (either on time or in full) if they buy bonds from various governments.

This is why interest rates on government debt are climbing and nations such as Greece, Ireland, and Portugal already have received direct bailouts. Moreover, the European Central Bank has been engaging in indirect bailouts of other welfare states such as Spain and Italy.

But these direct and indirect bailouts have simply made the debt bubble bigger.

Yet the new agreement from Europe’s political elite doesn’t deal with this crisis. Simply stated, there is no short-run bailout strategy, not even one that kicks the can down the road.

There are only four ways of dealing with the mess in Europe, one good and three bad.

1. No bailouts, thus forcing nations to do the right thing (like the Baltics) or letting them default. This imposes the costs on the people who created the mess, addresses the short-run crisis, and promotes good long-run policy.

2. Crank up the proverbial printing presses and have the European Central Bank buy up most of Europe’s dodgy debt. This imposes the costs on all consumers, addresses the short-run crisis, and promotes bad long-run policy.

3. Have the Germans (and some other northern Europeans) guarantee the debt of the less-stable welfare states, either through Euro-bonds or some other mechanism. This imposes the costs on taxpayers in Germany and other nations that have been more prudent, addresses the short-run crisis, and promotes bad long-run policy.

4. Have the Americans and the rest of the world bail out Europe’s welfare states via the International Monetary Fund. This imposes the costs on the entire world (with U.S. taxpayers picking up the biggest part of the tab), addresses the short-run crisis, and promotes bad long-run policy.

In a remarkable display of ignoring the elephant in the middle of the room, none of these options was selected.

Some people claim that the third option was used, but that’s whistling past the graveyard. Yes, there will be a €500 billion bail-out fund called the European Stability Mechanism at some point next year, but that simply replaces the current €440 billion European Financial Stability Facility. And nobody thinks the third option will be successful unless there is a multi-trillion euro bailout fund.

So if Europe’s politicians didn’t agree to deal with the problem, either with good policy or bad policy, what exactly did they do?

The agreement uses the short-run fiscal crisis as an excuse to propose permanent changes that will erode national sovereignty and impose more centralization, more harmonization, and more bureaucratization.

One can argue, though not very persuasively, that these changes will reduce the likelihood of fiscal crises in the future. But that’s not the same thing as coming up with a policy – good or bad – to deal with the immediate problem.

I’m not an expert on investing money, but I definitely won’t be surprised if financial markets (including the investors who want bad policy so they can be bailed out) react negatively to this latest faux agreement.

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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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A couple of months ago, after reading an excellent column in the semi-official newspaper of the Vatican, I joked that we should send Obama to Rome for an economics lesson.

I now completely retract that statement. There may be some economically astute people who write for L’Osservatore Romano, but they are offset by the economic illiterates at the Vatican’s Justice and Peace department.

Here are some excerpts from Reuters about the spectacularly misguided thinking from this division of the Catholic Church. For all intents and purposes, they want to double down on the cross-subsidization policies that have undermined markets and crippled the global economy.

The Vatican called on Monday for the establishment of a “global public authority” and a “central world bank” to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises. The document from the Vatican’s Justice and Peace department should please the “Occupy Wall Street” demonstrators and similar movements around the world who have protested against the economic downturn. “Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was at times very specific, calling, for example, for taxation measures on financial transactions. …It condemned what it called “the idolatry of the market” as well as a “neo-liberal thinking” that it said looked exclusively at technical solutions to economic problems. “In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale,” it said, adding that world economics needed an “ethic of solidarity” among rich and poor nations. …It called for the establishment of “a supranational authority” with worldwide scope and “universal jurisdiction” to guide economic policies and decisions.

Wow. So many bad ideas in so few words.

Let’s look at the three main proposals and translate what they actually mean.

1. A “global public authority” is bureaucrat-speak for a world government. We’re already dealing with statist schemes like the OECD’s “Multilateral Convention” that will morph into an International Tax Organization. A supra-national government would be even worse since it would have power to wreck all sectors of the economy. These proposals are driven by the left’s desire for bureaucratization, harmonization, and centralization.

2. A “Central World Bank” is bureaucrat-speak for a Federal Reserve on steroids. But it would be even worse than that. In the current system, at least investors have the ability to dump dollars and euros and shift to currencies that are better managed, such as the Swiss Franc. A supra-national Fed, by contrast, will give the political elite more power to pursue bad monetary policy.

3. The notion of “taxation measures on financial transactions” is bureaucrat-speak for the Tobin Tax, which is a great scam for politicians since they would get to tax every transaction we make. If you think it is a good idea to put sand in the gears of the economy, sign up for this scheme. This idea is so bad that even the Obama Administration is opposed to it.

Last but not least, I’m flabbergasted by the report’s comments on the “idolatry of the market.”

What planet have these people been living on?

Do they blame the market for the financial crisis, when the mess was the result of the Federal Reserve, Fannie Mae, Freddie Mac, and government-created moral hazard? Do they blame the market for the sovereign-debt crisis, when the mess is the result of over-spending governments?

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I have no idea whether George Santayana was a good philosopher, but he certainly was right when he wrote, “Those who do not learn from history are doomed to repeat it.”

Consider the fools in the U.S. Senate. They just voted to expand Fannie Mae and Freddie Mac subsidies, apparently thinking that re-inflating the housing bubble would be a good idea when every sensible person thinks we should abolish these government-created entities.

Here are some blurbs from the Business Week story.

The U.S. Senate adopted a measure that would raise the maximum size of a home loan backed by mortgage companies Fannie Mae, Freddie Mac and the Federal Housing Administration to $729,750. Senator Robert Menendez, a New Jersey Democrat, offered the increase as an amendment to a spending bill today. The measure was approved less than a month after the limit on so-called conforming loans was automatically reduced to $625,500. …The Senate adopted the amendment 60-31. The amendment required 60 votes for approval and was offered during the chamber’s consideration of a package of spending measures. If the Senate passes the underlying bill, the House would then have to vote for it to become law. …The limits, which vary by locale, apply to loans backed by the FHA and government-controlled mortgage companies Fannie Mae and Freddie Mac, which together buy or guarantee about 90 percent of all residential home loans.

For what it’s worth, every Democrat voted for the measure, as well as these Republicans.

Blunt – Missouri

Brown – Massachusetts

Chambliss – Georgia

Graham – South Carolina

Heller – Nevada

Isakson – Georgia

Murkowski – Alaska

Snowe – Maine

Maybe these feckless and irresponsible jokers should spend a bit of time reading Peter Wallison’s work. And here’s a George Will column if they can’t comprehend anything longer than 800 words.

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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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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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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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Last year, after seeing former Treasury Secretary Hank Paulson trying to defend the TARP bailout he designed, I wrote that he should go away in shame.

After all, even former Fed Chairman Paul Volcker recognized there was a much better, non-corrupt, way of recapitalizing the financial sector – what is known as FDIC resolution.

I’m now even more disappointed that the former Vice President, Dick Cheney, defended the TARP bailout in his memoirs.

Former Vice President Dick Cheney anticipated the conservative uproar over the 2008 Wall Street rescue package, and he writes in his new memoir that the Bush administration “briefly” considered not seeking congressional authorization for the $700 billion bank bailout. …The former vice president writes that he signed on immediately to the plan devised by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, despite his reservations about the intense government intervention into the financial sector. “There was no other option,” Cheney writes in the memoir, In My Time.

But Cheney is completely wrong. There was another option. The FDIC-resolution approach, which was basically how the government handled the S&L crisis about 20 years ago, was the right policy.

And I must have talked to about 10 people in the Bush Administration in September 2008, trying to get them to go with that approach.

I was told that wasn’t possible since congressional approval would have been needed to increase the FDIC’s financial resources. Knowing that the White House was going to ask for something (and fearing they would do something really bad), I responded that they should seek that authority.

As was usual during the Bush years, my fears were justified. My advice was ignored and the Administration chose the corrupt and damaging approach – an approach the Obama Administration has happily continued.

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The governments of Spain, Italy, Belgium and (of course) France recently imposed 15-day bans on “short selling,” which means they are prohibiting people from making investments that would be profitable if certain stocks fall in value.

According to the politicians, the bans are being imposed to protect financial markets from “speculators” who cause “panics” by “betting” in favor of bad news.

But this type of regulatory intervention doesn’t seem very effective, at least if the U.S. and U.K. experiences are any guide. Here’s an excerpt from a Bloomberg report.

British financial stocks dropped 41 percent in the four months after regulators imposed a ban on short selling following the collapse of Lehman Brothers Holdings Inc. in September 2008. The benchmark FTSE 100 index fell 15 percent in the period. When the Securities and Exchange Commission prohibited short-sales for three weeks in September 2008 a Bloomberg Index tracking the 880 U.S. stocks affected fell 26 percent, outpacing the Standard & Poor’s 500 Index’s 22 percent decline. …“In contrast to the regulators’ hopes, the overall evidence indicates that short-selling bans at best left stock prices unaffected and at worst may have contributed to their decline,” said Alessandro Beber, a professor at Cass Business School in London who’s studied short-sales bans in 30 countries. …“EU policy makers don’t seem to understand the law of unintended consequences,” Jim Chanos, the short seller known for predicting Enron Corp.’s collapse, said by e-mail. “The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators. The interbank lending market froze up completely in October to December 2008 — after the short-selling bans.”

Beber’s research (cited in the excerpt above) has been confirmed by other scholars. Simply stated, if investors realize that something is over-valued, it is going to fall in price. Governments can hinder and delay that process, thus increasing volatility and uncertainty, but they can’t stop it.

But here’s a very big reason why these laws are stupid (at least from my amateur perspective*). Most rational people presumably would agree that the housing and financial bubbles of the last decade were a bad thing. But most of us know it was a bad thing because we have 20-20 hindsight.

But what if there were lots of people back in 2005, 2006, and 2007 who recognized a bad thing as it was happening? And what if they had the ability to deflate the bubble (or at least slow its increase) by making investments that assumed housing and finance were heading for a fall?

We could have saved ourselves a lot of economic misery if that was the case. Heck, short sellers probably did save us from a lot of additional economic agony by stopping the bubbles from getting even bigger.

In other words, short sellers are the good guys. To some extent, they put a damper on “irrational exuberance” and therefore reduce the subsequent economic damage.

But don’t believe me. Here are some sage words from Cliff Asness.

…what goes through the minds of the politicians and bureaucrats and what do they say to themselves? Perhaps it’s the following: “What this crisis absolutely requires is that a really futile and stupid gesture be done on somebody’s part and we’re just the guys to do it.” It was funny when Bluto said it in “Animal House.” …So, they decide to outlaw shorting in a giant number of stocks… Never mind that the short sellers were in many cases the heroes who uncovered much of the ugliness in the financial system that needed uncovering. The government’s actions here will unambiguously hurt our capital markets and economy long-term. …At the risk of restating the obvious, short-sellers play a vital role in any free market. In a world where everyone can only hold long positions, managers have less incentive to work hard, improve stale business models or keep their companies competitive and efficient (sound anything like government bureaucracy?). Short-sellers keep companies, managers and markets honest, and without them the disciplining mechanism is much weaker.

By the way, Asness made those comments back in 2008, and his analysis was confirmed by subsequent events.

Andrew Lilico, meanwhile, is equally astute in his analysis.

Short-sellers make money by identifying situations in which the world is worse than the Market thinks. They expose cases where managements or governments are disorganised or lying or have themselves been deceived. Given the events of the past few years, it would seem very foolish to try to deter people from properly analysing companies or governments to see whether they might actually be less robust than they claim. Surely we want more such analysis, not less! …short-selling (and other forms of speculation) are extremely valuable. They improve market efficiency…and they expose errors made by the management of companies and by governments, early, when those companies and governments might still have a chance to rectify things. Banning short-selling is a classic case of shooting the messenger because one does not like the truth he tells.

The bans on short selling are classic examples of Mitchell’s Law. Politicians do stupid things such as bad monetary policy and corrupt housing subsidies. Those misguided policies cause bubbles that eventually pop. But rather than learn that bad policies are foolish, they use the economic damage as an excuse to implement additional forms of intervention such as short-selling bans. The only constant is that the political class gains more power and control.

* Caveat: I’m only commenting on public policy, not how you should invest your money. I’m only a policy wonk. I know less about financial markets than Barack Obama knows about economics

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Welcome Instapundit readers. Here’s a related link if you want to get even more depressed about politicians digging the debt hole deeper.

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If you want to understand how government intervention screws up markets and damages an economy, there are two new publications worth reading. First, pick up a copy of Reckless Endangerment, a new book by Gretchen Morgenson of the New York Times, and Joshua Rosner, an expert on housing finance.

I’ll confess I haven’t read the book, but it’s on my list based on two columns. Here’s some of what George Will wrote after giving it a read.

The book’s subtitle could be: “Cry ‘Compassion’ and Let Slip the Dogs of Cupidity.” Or: “How James Johnson and Others (Mostly Democrats) Made the Great Recession.” The book is another cautionary tale about government’s terrifying self-confidence. It is, the authors say, “a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.” …“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.

And here is some of what David Brooks wrote, in a column that focused on the sleazy insider corruption exposed by the book.

The Fannie Mae scandal has gotten relatively little media attention because many of the participants are still powerful, admired and well connected. But Gretchen Morgenson, a Times colleague, and the financial analyst Joshua Rosner have rectified that, writing “Reckless Endangerment,” a brave book that exposes the affair in clear and gripping form. The story centers around James Johnson, a Democratic sage with a raft of prestigious connections. …Morgenson and Rosner write with barely suppressed rage, as if great crimes are being committed. But there are no crimes. This is how Washington works. Only two of the characters in this tale come off as egregiously immoral. Johnson made $100 million while supposedly helping the poor. Representative Barney Frank, whose partner at the time worked for Fannie, was arrogantly dismissive when anybody raised doubts about the stability of the whole arrangement. …Johnson roped in some of the most respected establishment names: Bill Daley, Tom Donilan, Joseph Stiglitz, Dianne Feinstein, Kit Bond, Franklin Raines, Larry Summers, Robert Zoellick, Ken Starr and so on. Of course, it all came undone. Underneath, Fannie was a cancer that helped spread risky behavior and low standards across the housing industry. We all know what happened next. The scandal has sent the message that the leadership class is fundamentally self-dealing. Leaders on the center-right and center-left are always trying to create public-private partnerships to spark socially productive activity. But the biggest public-private partnership to date led to shameless self-enrichment and disastrous results.

Not surprisingly, politicians have not addressed the problem, even with the benefit of hindsight. The Dodd-Frank bailout bill, which was supposed to address the problems of the housing crisis/financial crisis, left Fannie and Freddie untouched. The two government-created entities are on life support after their bailouts (speaking of which, here’s a funny cartoon), so this would have been the right moment to drive a stake through their hearts. One can only wonder what damage they will do in the future.

But government intervention in housing is not limited to Fannie Mae and Freddie Mac. A new report from Pew looks at the panoply of tax preferences for the industry, and analyzes the impact on overall economic performance. There are parts of the report I don’t like, such as the term “subsidies,” which implies that tax distortions are a form of government spending, but I fully agree that tax preferences harm the economy by causing capital to be misallocated.

Investment in owner-occupied housing faces an effective marginal tax rate of just 3.5 percent. In contrast, investment in the business sector faces an effective tax rate of 25.5 percent. This leads to a tax-induced bias for capital to flow into housing-related uses rather than other types of projects. As a result, businesses are less likely to purchase new equipment and less likely to incorporate new technologies than otherwise might be the case. Less business investment results in lower worker productivity and ultimately lower real wages and living standards. While the housing sector provides employment and has other positive effects on the overall economy and on society, the resources employed in the housing sector displace investment that would otherwise occur in the business sector were it not for the favored tax treatment of housing. The resulting distortion in the allocation of capital likely lowers overall output, because resources are allocated based on tax considerations rather than economic merit. In effect, the United States has chosen as a society to live in larger, debt-financed homes while accepting a lower standard of living in other regards.

The moral of the story is that if more government is the answer, someone has asked a very stupid question.

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