The Obama Administration policy of forcing loan foregiveness on private market lenders began in the mortgage market and is now being extended into the student loan market. Such loan foregivess essentially rips up legitimate contracts and replaces them with the arbitrary whims of government, deciding who should pay up and who needn't bother.
Lenders aren't stupid and they have memories. It is incredibly difficult now for middle America to get mortgages thanks to Obama Administration loan foregiveness policies. Why? Because lenders know that politicians can, at their pleasure, rip up the contracts and deny the lenders the payments they are entitled to.
So, why lend to the class of Americans that the Obama Administration seems to want to provide loan foregiveness for? No reason I can think of. The next group that will find themselves out of luck when seeking loans will be students, especially the demographic now escaping their obligations thanks to the President.
Rabu, 25 Juli 2012
Jumat, 20 Juli 2012
The Stock Market -- Where Now?
There is an old saying: "Don't fight the tape!" -- meaning, of course, sometimes the stock market just wants to go up regardless. That seems to be what we have been witnessing the past few weeks as the stock market has almost regained its high for the year.
Why and where next? First, the economy. The economy has weakened over the past few months and seems to have stalled. GDP growth may be zero at this point. There are some bright spots: the energy sector is the brightest, housing has started to look better in most sections of the country. But, the trends are down everywhere else. A slide into negative growth territory is probably ahead in the second half of the year.
What about Europe? The steady slide into economic and political chaos continues across the Eurozone. The only thing new is the strong possibility that Germany may join its sister states into the slide into disaster. None of this has much to do with the Euro at this point. The real issue is that debt market buyers seem poised to walk away from several sectors of the European sovereign debt market. As that happens, Europe may descend into a new dark age. Watch Greece and Spain for a preview of the future for much of Europe. Thus far, there has been no reform and no austerity. There have been government layoffs in Greece and Spain, but mostly because there is simply no money left to pay them.
What about the US business community? This sector of the economy has not been this dispirited since the 1930s. Large swaths of the American public no longer seem to believe in free markets. That Obama still polls as high as he does is a clear indication that capitalism is in a fight for survival. With half of all Americans now on some form of government support, the trend is ominous. Given this atmosphere, the business community is frightened out of its wits and unlikely to provide the normal impetus to economic recovery that has appeared in every recession since the 1930s, except, of course, this one.
Without a recommittment to free markets, it is hard to see how the US situation gets any better. The "tax the rich" themes of the Obama campaign, where "rich" is defined as someone making income of $ 200,000 per year, is hauntingly similar to Francois Hollande's call for 75 % tax rates in France. Unemployment in France is now in double digits and rising and growth has turned negative. Investors are looking for ways to hide income and assets, as opposed to looking for ways to deploy their assets in new businesses and ventures.
Congressional Democrats believe that more food stamps and more unemployment compensation is the way to promote economic growth. You wonder if they are kidding about this. The President thinks business can grow and prosper without entrepreneurs. He seems to believe that people should risk their capital without any hope of economic reward. Receiving rewards for risking capital seems to be viewed as a criminal activity by the current occupant of the White House.
With this backdrop, stocks seem fully priced even though earnings reports are favorable. Unless and until government policy becomes more tolerant of free markets, it is hard to see anything but trouble ahead for both the stock market and the American economy. I would continue to avoid the stock market in this unfriendly environment.
Why and where next? First, the economy. The economy has weakened over the past few months and seems to have stalled. GDP growth may be zero at this point. There are some bright spots: the energy sector is the brightest, housing has started to look better in most sections of the country. But, the trends are down everywhere else. A slide into negative growth territory is probably ahead in the second half of the year.
What about Europe? The steady slide into economic and political chaos continues across the Eurozone. The only thing new is the strong possibility that Germany may join its sister states into the slide into disaster. None of this has much to do with the Euro at this point. The real issue is that debt market buyers seem poised to walk away from several sectors of the European sovereign debt market. As that happens, Europe may descend into a new dark age. Watch Greece and Spain for a preview of the future for much of Europe. Thus far, there has been no reform and no austerity. There have been government layoffs in Greece and Spain, but mostly because there is simply no money left to pay them.
What about the US business community? This sector of the economy has not been this dispirited since the 1930s. Large swaths of the American public no longer seem to believe in free markets. That Obama still polls as high as he does is a clear indication that capitalism is in a fight for survival. With half of all Americans now on some form of government support, the trend is ominous. Given this atmosphere, the business community is frightened out of its wits and unlikely to provide the normal impetus to economic recovery that has appeared in every recession since the 1930s, except, of course, this one.
Without a recommittment to free markets, it is hard to see how the US situation gets any better. The "tax the rich" themes of the Obama campaign, where "rich" is defined as someone making income of $ 200,000 per year, is hauntingly similar to Francois Hollande's call for 75 % tax rates in France. Unemployment in France is now in double digits and rising and growth has turned negative. Investors are looking for ways to hide income and assets, as opposed to looking for ways to deploy their assets in new businesses and ventures.
Congressional Democrats believe that more food stamps and more unemployment compensation is the way to promote economic growth. You wonder if they are kidding about this. The President thinks business can grow and prosper without entrepreneurs. He seems to believe that people should risk their capital without any hope of economic reward. Receiving rewards for risking capital seems to be viewed as a criminal activity by the current occupant of the White House.
With this backdrop, stocks seem fully priced even though earnings reports are favorable. Unless and until government policy becomes more tolerant of free markets, it is hard to see anything but trouble ahead for both the stock market and the American economy. I would continue to avoid the stock market in this unfriendly environment.
Rabu, 18 Juli 2012
Tax What You Wish to Discourage
Taxing activities means you wish to discourage or perhaps even eliminate them. Cigarette and liquor taxes are a good examples. Is their purpose revenue or to discourage undesirable activity? So, why does Obama want higher taxes on the rich? To discourage? To eliminate?
One clear reason not to tax the rich is that you want the economy to improve or you want to lower the national debt. Taxing the rich will actually have the exact opposite effect.
So, the Obama argument is that we should extend the Bush tax cuts for the middle class only if we can guarantee a weaker economy than we have now and offset the middle class tax cuts with lower revenues (though higher rates) from the rich that will increase the national debt.
And half of the nation wants to vote for this.
One clear reason not to tax the rich is that you want the economy to improve or you want to lower the national debt. Taxing the rich will actually have the exact opposite effect.
So, the Obama argument is that we should extend the Bush tax cuts for the middle class only if we can guarantee a weaker economy than we have now and offset the middle class tax cuts with lower revenues (though higher rates) from the rich that will increase the national debt.
And half of the nation wants to vote for this.
Senin, 16 Juli 2012
How to Prolong Economic Stagnation
The coming 'fiscal cliff,' by itself, is enough to bring the American economy to its knees. There is considerable evidence that the process is underway. The American economy shows virtually no economic growth at all and employment gains are miniscule.
"If you've got a business, you didn't build that...somebody else made that happen." Now who would you think would say that? Try the President of the United States! Obama made that statement yesterday. That pretty much sums up his attitude and understanding of free enterprise and explains the underlying rationale for his economic policies.
Obama's hatred of capitalism and free enterprise is apparently boundless. His policies, his rhetoric, and his body language exhibit this hatred every day.
Meanwhile the media is focused on non-issues that underscore the media's contempt for capitalism. The "libor scandal" is a joke, based upon a confusion. Unfortunately, the joke is on the economy as banks continue to spend more time with their lawyers than with their customers. Meanwhile, the media has decided that the presidential election should be a referendum on whether or not private equity is an ethically-based business. Who cares about unemployment and economic collapse, when we can focus on how terrible it is that there are rich people out there?
All of this means there is no economic growth in our future and the economy is likely headed for a generation of economic stagnation with the ultimate destination something like the morass that is modern day Europe.
"If you've got a business, you didn't build that...somebody else made that happen." Now who would you think would say that? Try the President of the United States! Obama made that statement yesterday. That pretty much sums up his attitude and understanding of free enterprise and explains the underlying rationale for his economic policies.
Obama's hatred of capitalism and free enterprise is apparently boundless. His policies, his rhetoric, and his body language exhibit this hatred every day.
Meanwhile the media is focused on non-issues that underscore the media's contempt for capitalism. The "libor scandal" is a joke, based upon a confusion. Unfortunately, the joke is on the economy as banks continue to spend more time with their lawyers than with their customers. Meanwhile, the media has decided that the presidential election should be a referendum on whether or not private equity is an ethically-based business. Who cares about unemployment and economic collapse, when we can focus on how terrible it is that there are rich people out there?
All of this means there is no economic growth in our future and the economy is likely headed for a generation of economic stagnation with the ultimate destination something like the morass that is modern day Europe.
Minggu, 15 Juli 2012
France in Denial
Francois Hollande, the new Socialist leader of France, is the new Obama of Europe. Peugeot announced last week that they were laying off 10,000 employees in order to "return to profitability." Naturally, Hollande responded with a government inquiry and statements that implied that the government would never permit the layoffs, by this private company, to take place. And you wonder why no one wants to hire anyone in France?
If that isn't enough, Hollande responded that labor costs in France, now averaging 34.20 Euros per hour were not all that high. Do the numbers. 34.20 times a 35 hour work week (mandated by French law) means 1,197 euros per week. With four weeks off per year, (also mandated by French law), that means hiring someone in France cost 57,456 euros per year, or approximately $ 69,000 per year. Gee, at that price, why not load up?
Good luck with that. An 11 percent unemployment rate is just the beginning. Look for a bull market in France in the unemployment numbers!
If that isn't enough, Hollande responded that labor costs in France, now averaging 34.20 Euros per hour were not all that high. Do the numbers. 34.20 times a 35 hour work week (mandated by French law) means 1,197 euros per week. With four weeks off per year, (also mandated by French law), that means hiring someone in France cost 57,456 euros per year, or approximately $ 69,000 per year. Gee, at that price, why not load up?
Good luck with that. An 11 percent unemployment rate is just the beginning. Look for a bull market in France in the unemployment numbers!
Rabu, 11 Juli 2012
The Libor Scandal -- More on Killing Recovery
The so-called libor scandal is ridiculous. Only people who do not understand what libor is and how it is calculated see this as a scandal. Barclays did nothing wrong or egregious. Now, of course, public pension funds -- probably the most corrupt and poorly managed institutions on the planet -- are huddling with their lawyers to sue the major banks over "managing" libor.
Libor is not a market interest rate. It never has been. It is an administered rate by definition, like the prime rate of old. It is what any bank wants it to be and it always has been. There is nothing in law or in practice that requires a bank to submit any particular libor rate. It is whatever each bank thinks it is, by definition. Those concerned about 'manipulation of libor' are simply showing their ignorance. There has always been a conflict of interest in libor rate setting as their has always been a conflict of interest in prime rate setting. Anyone unaware of this has not been paying attention. The timing of this so-called scandal is to give the politicians another opportunity to paint the commercial banks as bad guys.
This is one more witchhunt by politicians who are driving their respective countries over the cliff. Bankrupting their countries with foolish policies, they turn their eyes toward imaginary villains and victims. Meanwhile, commercial lending grinds to a halt while commercial banks pull in their horns and huddle with their lawyers. And these self same politicians wonder why capitalism can't deliver the goods. The truth is that capitalism could deliver the goods if it did not have to be bogged down in nonsensical legal and regulatory battles. The loser, once more, is the average person who will pay higher interest rates and have less access to credit, thanks to our political 'reformers.'
Meanwhile, the CFTC can't seem to provide the most basic regulatory enforcement as more then $200 million in customer money can be added to the $1.6 billion that disappeared in the MF Global disaster. Where is the CFTC? Where is the outrage? Why does the Obama Administration have no interest in enforcing laws that have been on the books for more than four decades? The CFTC is a disgrace.
So, attention by the media heads focuses on the so-called 'libor scandal' and ignores the looting of nearly $ 2 billion in customer accounts supposedly overseen by the CFTC. No wonder the economy is in shambles and people are losing confidence in American institutions.
Libor is not a market interest rate. It never has been. It is an administered rate by definition, like the prime rate of old. It is what any bank wants it to be and it always has been. There is nothing in law or in practice that requires a bank to submit any particular libor rate. It is whatever each bank thinks it is, by definition. Those concerned about 'manipulation of libor' are simply showing their ignorance. There has always been a conflict of interest in libor rate setting as their has always been a conflict of interest in prime rate setting. Anyone unaware of this has not been paying attention. The timing of this so-called scandal is to give the politicians another opportunity to paint the commercial banks as bad guys.
This is one more witchhunt by politicians who are driving their respective countries over the cliff. Bankrupting their countries with foolish policies, they turn their eyes toward imaginary villains and victims. Meanwhile, commercial lending grinds to a halt while commercial banks pull in their horns and huddle with their lawyers. And these self same politicians wonder why capitalism can't deliver the goods. The truth is that capitalism could deliver the goods if it did not have to be bogged down in nonsensical legal and regulatory battles. The loser, once more, is the average person who will pay higher interest rates and have less access to credit, thanks to our political 'reformers.'
Meanwhile, the CFTC can't seem to provide the most basic regulatory enforcement as more then $200 million in customer money can be added to the $1.6 billion that disappeared in the MF Global disaster. Where is the CFTC? Where is the outrage? Why does the Obama Administration have no interest in enforcing laws that have been on the books for more than four decades? The CFTC is a disgrace.
So, attention by the media heads focuses on the so-called 'libor scandal' and ignores the looting of nearly $ 2 billion in customer accounts supposedly overseen by the CFTC. No wonder the economy is in shambles and people are losing confidence in American institutions.
Senin, 09 Juli 2012
Misguided Debate
Today's economic malaise in the United States is a late chapter in a book that started with the housing bubble of the decade that preceded the fall of 2008. Was this caused by one political party or another? This is an important question, if one intends to adopt intelligent policies to deal with the bust that followed the bubble.
Admittedly, the government's pro-home-ownership policies enacted into law over the years in bi-partisan fashion helped exacerbate the home ownership boom. But, would there have been no housing boom without Fannie and Freddie and favorable tax treatment of housing? The boom might not have reached such extremes without government policy, but the bubble itself probably would have occurred anyway. Bubbles are part of life. They have happened and they will continue to happen.
When you are in a bubble, you never realize it. Instead, it seems that you are doing something intelligent, something everyone ought to do. Bubbles always have that 'bandwagon' feel and, along the way, they are exhilarating. Good things happen. Wealth increases, optimism surges, everyone's a winner! It never seems wrong, when you are cruising along in a bubble. "This time it's different."
But, it never is. Inevitably extreme optimism begins to have self doubts and eventually the crash comes and disaster. Did someone cause the disaster? Was it greed? Did some evil people running banks and other financial institutions do the damage? The answer is no. When bubbles unwind, you get crashes. This is not the result of bad guys doing bad things, although one can always find bad guys doing bad things. But, they are largely irrelevant. Bubbles and crashes can occur without bad guys doing bad things. This is a lesson that the citizenry needs to understand. Politicians will never get it, because they are incented to blame the other political party for whatever goes wrong. That won't change.
Left to themselves, crashes end quickly and very strong, vibrant economic recoveries ensue.....unless, policies are enacted to punish bad guys and "reform" something. Such "reform" policies are always misguided and always serve to abort the vigorous economic recovery that would naturally occur during their absence. We are in such a period. The combination of TARP, the stimulus bill, Dodd-Frank, Obamacare, the new EPA attitude, Bernanke's monetary policies, and the regulatory climate have all served to retard any real hope of true economic recovery.
These kind of policies caused the Great Depression to be Great. The depression that began in 1929 never entered a sustained recovery until government policies began to be rolled back in the late 1930s as the country began to mobilize for the coming war, by lifting restrictions on the private sector. Ten years of economic depression was the price that Americans paid for foolish policies in the 1930s. Now eight decades later, we are seeing that nothing was learned. The 1980s are a textbook case of how to recover from an economic collapse, but no one is following that successful playbook.
Economic recovery begins when businesses regain their optimism. That will never happen as long as government policy is driven by a need to see businesses as evil and businessmen as greedy and to focus on transferring wealth instead of creating it. The government needs to get out of the way. As long as the heavy hand of government maintains its chokehold on free enterprise, there will be no real economic recovery and America will continue down the European pathway. We need fewer regulations not more; we need more private commercial lending not less; we need less government workers not more; we need lower taxes, not higher. And we need to make it a matter of government policy that no business or bank is too big to fail. Let them fail. Let equity and bondholders take their punishment and leave taxpayers out of it.
The current debate about who caused what is a silly debate. Booms and busts are an essential part of free enterprise. Killing off booms and busts will kill off free enterprise. The result of reform and economic stimulus will continue to be economic stagnation. Bring back the boom!
Admittedly, the government's pro-home-ownership policies enacted into law over the years in bi-partisan fashion helped exacerbate the home ownership boom. But, would there have been no housing boom without Fannie and Freddie and favorable tax treatment of housing? The boom might not have reached such extremes without government policy, but the bubble itself probably would have occurred anyway. Bubbles are part of life. They have happened and they will continue to happen.
When you are in a bubble, you never realize it. Instead, it seems that you are doing something intelligent, something everyone ought to do. Bubbles always have that 'bandwagon' feel and, along the way, they are exhilarating. Good things happen. Wealth increases, optimism surges, everyone's a winner! It never seems wrong, when you are cruising along in a bubble. "This time it's different."
But, it never is. Inevitably extreme optimism begins to have self doubts and eventually the crash comes and disaster. Did someone cause the disaster? Was it greed? Did some evil people running banks and other financial institutions do the damage? The answer is no. When bubbles unwind, you get crashes. This is not the result of bad guys doing bad things, although one can always find bad guys doing bad things. But, they are largely irrelevant. Bubbles and crashes can occur without bad guys doing bad things. This is a lesson that the citizenry needs to understand. Politicians will never get it, because they are incented to blame the other political party for whatever goes wrong. That won't change.
Left to themselves, crashes end quickly and very strong, vibrant economic recoveries ensue.....unless, policies are enacted to punish bad guys and "reform" something. Such "reform" policies are always misguided and always serve to abort the vigorous economic recovery that would naturally occur during their absence. We are in such a period. The combination of TARP, the stimulus bill, Dodd-Frank, Obamacare, the new EPA attitude, Bernanke's monetary policies, and the regulatory climate have all served to retard any real hope of true economic recovery.
These kind of policies caused the Great Depression to be Great. The depression that began in 1929 never entered a sustained recovery until government policies began to be rolled back in the late 1930s as the country began to mobilize for the coming war, by lifting restrictions on the private sector. Ten years of economic depression was the price that Americans paid for foolish policies in the 1930s. Now eight decades later, we are seeing that nothing was learned. The 1980s are a textbook case of how to recover from an economic collapse, but no one is following that successful playbook.
Economic recovery begins when businesses regain their optimism. That will never happen as long as government policy is driven by a need to see businesses as evil and businessmen as greedy and to focus on transferring wealth instead of creating it. The government needs to get out of the way. As long as the heavy hand of government maintains its chokehold on free enterprise, there will be no real economic recovery and America will continue down the European pathway. We need fewer regulations not more; we need more private commercial lending not less; we need less government workers not more; we need lower taxes, not higher. And we need to make it a matter of government policy that no business or bank is too big to fail. Let them fail. Let equity and bondholders take their punishment and leave taxpayers out of it.
The current debate about who caused what is a silly debate. Booms and busts are an essential part of free enterprise. Killing off booms and busts will kill off free enterprise. The result of reform and economic stimulus will continue to be economic stagnation. Bring back the boom!
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