Archive for July, 2012

U.S. money market funds: leave well alone

July 31, 2012

The United States money market fund sector is very large, valued at some $2.6 trillion at the present time.  It is very liquid, and, unlike the commercial banks,  it is not protected by deposit insurance.  A number of Jeremiad  financial analysts consequentially worry about potential runs against these funds and press for additional regulations.

Such reformists lack a basic understanding of market principles.  Money market funds are supposed to invest in safe assets, such as highly-rated, short term bonds. They provide minimal returns but high levels of liquidity for those who invest in such assets.

The threat of a run is the true safeguard against misbehavior on the part of such funds. If a fund invests in high risk securities – let us say euro-bonds or municipal bonds at the present time – forward-looking investors will pull their assets out immediately and substantially. Knowing that, only money market funds that court financial trouble will break their commitment to highly liquid and safe investments.

No individual or organization investing in a money market fund can legitimately assume that the fund will never ‘break the buck’. If they desire such an outcome then they will place their assets in commerical banks keeping   within the deposit insurance limit.

So money market funds should never be viewed as too big to fail. Those who play in casinos – even for low stakes –  know precisely what they are doing and the risks that they incur.

To  protect the money market funds by deposit insurance assuredly will benefit the commerical banks, as would locking investors into their money market funds during a developing run.

The commercial banking system gambled excessively because of deposit insurance. Let us not follow suit with the money market funds.  Let the stupidity stop with one major error.

President Obama golfs and parties while U.S. economy slows

July 30, 2012

At the last meeting of his Jobs Council, President Obama stated:

“This has not been a show council. This has been a work council.”

Unfortunately, the President meant what he said. At that moment, his Jobs Council was dead in the water.   The President has not called a single meeting of that Jobs Council in the last six months. White House Press Secretary, Jay Carney, correctly excuses this failure by claiming that  ‘the President has a lot on his plate.’

So just what is on the President’s plate? 

Since the last meeting of the Jobs Council, President Obama has attended 111 campaign fund-raisers and has enjoyed 10 extended golf outings.  I do not doubt that these activities are time-consuming.  But they are vacuous leisure activities, far-distant from any serious work content.

The President has called the economy his ‘overriding focus’ and ‘No. 1 priority’.  It is strange, therefore, that he has not received a presidential briefing on the economy for well over a year.  The last time  ‘Economic Daily  Briefing’ appeared on his official White House schedule was April 26, 2011.

If the President cannot make time to hear what is happening in the economy, he cannot realistically expect to take measures designed to fix the problem.  Surely he must be aware that for 41 continuous months the unemployment rate has exceeded 8 per cent. Surely he must be aware that some 23 million Americans are struggling to secure employment. Yet he cannot find time to arrange a meeting of his Jobs Council or to receive an economic briefing.

The President can find time, however, to attend swanky soirees stuffed with celebrities, stars,and Hollywood glitterati.  He cannot resist rubbing shoulders with the likes of George Clooney, Julia Roberts, Spike Lee, Oprah Winfrey, Anne Wintour and Cher.  Now these good people may make fine company and wear their bleeding liberal hearts right out there on their fashionable sleeves. But to my knowledge not one of them has any professional understanding of economics.

So just what are we paying Barack Obama for during this fourth – and hopefully last  – year of his failed presidency?

Hat Tip: Reince Priebus, ‘Obama’s  “gaffes” are what he truly believes’, The Washington Times, July 30, 2012

Keep your eyes on Wang Yang: harbinger of China’s future

July 29, 2012

The fall from grace of Bo Xilai has opened up an opportunity for advancement for Wang Yang when the Communist Party’s Congress confirms a new Standing Committee of Nine in October 2012. Whether or not Wang Yang makes it to that committee will tell us almost everything about China’s destiny over the coming decade.

Bo Xilai was a far-left member of the Communist Party, dedicated to re-establishing Mao’s cultural revolution while lining his own corrupt pockets with bribes extorted those those operating within the public sector. One can think of him much as one should think about  Richard Daley, senior and junior, the corrupt Democratic Party mayors of  Chicago who conducted city- business  on neo-fascist lines.

Bo Xilai, who was party secretary of the mega-city of Chongqing, largely relied on state-owned firms to spur growth. He displayed little or no interest in the private sector except when tempted by bribes.

Wang Yang, who is party chief in Guangdong Province, is widely viewed as a foremost advocate among the Chinese elite of free market reform.  He looked to private companies to remake his province and sought actively to reduce the state’s role in resolving labor disputes and in providing social services.

Bo Xilai is the  grandson of an Immortal. His way to power was paved by privilege. Wang Yang is the son of a laborer who attracted the interest of Premier Deng Xiaoping during the 1980s as an enterprising young official in the eastern mining city of Tongling.  Both Bo and Wang served on China’s Politburo and were competing contenders for promotion to the Standing Committee of Nine.

With Bo in disgrace, if not already dead, Wang now has a realistic chance of that promotion. But much depends on the  direction chosen for China’s coming decade. If Wang Yang makes it to the Committee, that will be a clear signal that free market policies will be continued. If he is not chosen, that will be a harbinger of increased repression and of a planned regression to Maoism.

So we should keep our eyes on Wang Yang, as we await the outcome of the 2012 CPC Congress.

Politicians attack Chick-fil-A under banner of the anti-Christ

July 28, 2012

Christian doctrine unambiguously informs that homosexuality is sinful.  Any Christian who enters into a homosexual union places himself/herself in mortal sin.

So when Dan Cathy,  the president and chief operating officer of Chick-fil-  A – a closely-held company based in an Atlanta suburb, that operates 1,600 restaurants in 39 states –  says that he opposes gay marriage and supports the ‘biblical definition of the family unit’, he simply espouses a position that every conforming Christian (and several other religions) endorses.

The United States is not an exclusively Christian nation. Under the protection of the First Amendment to the Constitution, Americans may follow any religion, or none, of their choice. They may also speak  freely about their religious views. If they cannot speak freely without incurring zoning penalties, then their First Amendment right to free speech is non-existent.

So the threats that followed Dan Cathy’s remark, emanating from the dictatorial lips of  Boston Mayor, Thomas Menino, Chicago  Mayor Rahm Emanuel, and Chicago Alderman Proco Moreno, to the effect that they would deny a Christian-based  company zoning permits to open additional restaurants in Boston and Chicago specifically because of the company’s  expression of its Christian faith, is a direct challenge to free speech in the United States.

I do not know or care whether any or all of the three individuals concerned are  practising homosexuals. I do not know or care whether they are atheists or believers in another religion. But I do know that they breach the United States Constitution when they threaten to use their discretionary powers to stamp out Christian doctrine.

Chick-fil-A expressly rejects any notion of discriminating against customers who do not share their religious views:

the culture and service tradition in our restaurants is to treat every person with honor, dignity, and respect – regardless of their belief, race, creed, sexual orientation or gender.”

The Chick-fil-A position precisely reflects the Christian ethic. It also honors the code of non-discrimination. The same cannot be said of the three gutter-politicians who are attempting to penalize an honorable company under the banner of the anti-Christ.

If Chick-fil-A loses or gains custom as a result of its transparent ethical position, that is an entirely appropriate market reaction. If Chick-fil-A is denied access to the market-place by powerful politicians because it does not conform to their religious views, that is Fascism or National Socialism, and should be dealt with as such under the rule of law.  Otherwise, the United States will regress to the horrors of Mussolini’s Italy or Hitler’s Third Reich.

Life sentence or capital punishment for Gu Kailai

July 27, 2012

The leaders of China’s Communist Party have now reach a consensus on the fate of Gu Kailai, wife of the disgraced princeling, Bo Xilai. She will be tried  on the charge of murder on August 7, 2012, though her fate will  have been pre-determined. China’s courts are lackeys of the CPC, with no discretionary power. There is no rule of law in China. The consensus of the standing committee of 9 is all that matters.

The standing committee of 9 is desperate to expedite the departure of Gu Kailai before the October Congress that will confirm the transition of power to a new standing committee of 9 (or of whatever number the Party’s winning coalition chooses to endorse). The committee no doubt does not care at all about the murder of the  British citizen, Neil Heywood. It does care about suppressing information about the enormous wealth corruptly accumulated and smuggled out of China by all members of the ruling elite, including Gu Kailai and Bo Xilai.  For that knowledge might provoke a successful coup d’etat from within those  security force/military elites who have not fully participated in such wealth transfers.

So the court case will be brief. Because Gu Kailai is a descendant of a prestigious party family, she may be spared the customary death penalty for murder, but only if she can be effectively sequestered and forever silenced. Perhaps the Party will have her tongue cut out before she is imprisoned.

In the meantime, the Party struggles to determine the fate of her husband, Bo Xilai. It would be dangerous to charge him with corruption, since that is a crime for which every member of the standing committee of 9 is guilty. As the grandson of an Immortal, it might be dangerous for them to indict him as co-conspirator to murder, since a penalty of death or life imprisonment might incite a coup d’etat within his still-loyal security forces. Perhaps he will be found dead while under house arrest and the CPC will issue  a finding of accidental death.

Those in the United States who find themselves sympathetic to the Beijing model might do well to follow these show trials carefully. Sometimes what we wish for is not exactly what we truly would relish, should that wish come true!

The political dog days of 2012

July 26, 2012

We know well that the dog days of a U.S. election year are here when we find politicians playing stupid games. The Republican-dominated House of Representatives passes a balanced budget bill that has no chance of success in the Senate. The Senate passes an anti-higher- earner tax bill that has no chance of passing in the House of Representatives. Every politician in Washington knows that the episodes are charades. Yet, they waste the salaries acquired from American taxpayers to engage in fruitless side-shows at a time when the nation confronts the most serious fiscal crisis since its inception in 1787.

There surely must be a better way than this!  Every republic in history has collapsed, except for this one, as a consequence of fiscal incontinence.  Will the United States Constitution survive another decade of this?

Here they go again: and here comes stagflation!

July 25, 2012

This leaves a second option: the Fed could couple more quantitative easing with a formal announcement of a higher inflation target. Some Fed leaders are open to this. Charles Evans, the Chicago Fed president, has floated the idea of a 3 per cent target, effective until unemployment falls below 7 per cent.  A higher inflation target would lead markets to understand the Fed is committed to quantitative easing of game-changing magnitude, inducing the behavioral shifts needed to make the policy succeed.  Financiers would embrace risk assets rather than safe ones with real returns that would be clearly negative.  Companies expecting more growth , would step up investments.  Consumers, seeing the real value of their debts eroding, would probably spend more.” Sebastian Mallaby, ‘Show some real audacity at the Fed’, Financial Times, July 25, 2012

Mallaby is not alone in this crazy desire to return to the stagflation of the 1970s.  Tyler Cowen and Scott Sumner among many other so-called free market thinkers take the same line.  They have short memories. Once politicians began to exploit the fictitional Phillips Curve, trading off  higher inflation against lower unemployment, the statistiical trade off disappeared. Phillips himself was not at all surprised. He was my tutor at the LSE and advised me of the foolishness of trying to exploit such a purely statistical relationship. Of course,  A.W. Phillips was absolutely correct.

Nations witnessed rising rates of unemployment coupled to rising rates of price inflation and associated with economic stagnation. Politicians abandoned Keynesianism in droves, aware that its continued application would drive them out of the political market-place. Until September 2008, the vast majority of economists were stamping on Keynes’s grave.

The real motive behind inflationist rhetoric is to steal wealth from creditors and transfer it to debtors. Not only is such a policy one version of socialism – that is why true free market economists would never advocate it – but it is also full of moral hazard.

Always a borrower and never a lender be!  A wonderful prescription for economic success!

We come to praise Bashar Assad

July 24, 2012

“There’s a different leader in Syria now.  Many of the members of Congress of both parties who have gone to Syria in recent months have said that they believe he is a reformer.”  Hillary Clinton, Secretary of State,  ‘Interview with Bob Scheiffer, CBS, March 27, 2011

“Assad’s regime is certainly no paragon of democracy, but even its most hard-bitten enemies do not want to see it collapse.” Joshua Landis, University of Oklahoma, New York Times op-ed, September 2005

“the road to Damascus is a road to peace.” Nancy Pelosi, Congressional Record, 2007

“Assad is a man of his word who has been very generous with me.  Under Assad, Syria will move; Syria will change as it embraces a legitimate relationship with the United States.” John Kerry, Democratic Senator for Massachusetts, March 16, 2011.

How worthless are these wretched socialist bigots?  Did 10,000 Syrian rebels have to die because these corrupt United States politicians view one of the world’s most evil dictators through red-tinted spectacles?

Compare the crass ignorance of all the above commentators with the wisdom and insight of John Bolton, who served one year as a Bush recess appointment as Ambassador to the United Nations before resigning in December 2006 when it became clear that he could not achieve Senate confirmation. A major reason for the Senate majority disapproval was that John Bolton had exposed the fact that Syria’s Assad had accumulated chemical and biological weapons in contravention of the U.N. Charter!

Hat Tip: ‘Editorial, ‘Remember Bashar Assad: Reformer?’, The Wall Street Journal, July 24, 2012

Politics as it truly is!

July 24, 2012

“Thanks Judge, but don’t expect too much. This governor has never stopped an execution.  In fact, he wants to speed them up.  He has an eye on a Senate seat, and he counts votes before he chooses what to eat for breakfast.  He’s a two-faced, cutthroat, dirt-dumb, chickenshit, slimy little bastard with a bright future in politics.”  John Grisham, The Confession. Dell: New York, 2010, p. 155

Truth about tax fairness in the United States

July 23, 2012

President Obama consistently slams the U.S. tax code on the ground that it discriminates unfairly in favor of the rich. As usual, the President is ignorant of reality and devoid of accurate statistics.

Let me define tax fairness as a tax system that extracts equal proportions of each household’s income in federal taxes. Let me include  payroll taxes as well as federal income taxes in the relevant statistics. From this perspective, how does the U.S. federal tax system fare?

It fares very badly to be sure, but not for the reason asserted by Barack Obama.  As the Congressional Budget Office clearly demonstrates, the federal tax system discriminates heavily against the better off and in favor of the less well-off. In other words, it is highly progressive in nature.

In 2009, the top 1 percent of households earned 13.4 per cent of the nation’s income. They paid  22.3 per cent of the nation’s federal taxes. The top 20 per cent of households (who earned more than $74,000 a year)  earned 50.8 per cent of the nation’s income. They paid 67.9 per cent of the nation’s federal taxes.  These statistics allow for all tax avoidance measures taken by such households.

For everyone else in America, the tax code is a bargain.  The fourth quintile (households earning between $50,100 and $73,999 a year) earned 20.2 per cent of the nation’s income and paid 15.1 per cent of the nation’s federal taxes.  The third quintile (households earning between $34,900 and $50,009 a year)  earned 15 per cent of the nation’s wealth and paid only 9.4 per cent of the nation’s federal taxes.  The second quintile (households earning between $22,600 and $34,899 a year) earned 9 per cent of the nation’s income and paid 6.8 per cent of the nation’s federal taxes.  The lowest quintile (households earning less than $22,600 a year) earned 5 per cent 0f the nation’s income and paid only 0.3  per cent of the nation’s federal taxes.

Pull your head out of the sand, Mr. President, read the relevant CBO statistics, and tell the truth about tax fairness on the campaign trail.

Hat Tip: Ari Fleischer, ‘The Latest News on Tax Fairness’, The Wall Street Journal, July 23, 2012