The Rabid Independent, Nonpartisan solutions, independent policy ideas

Greenspan’s Defense

Alan G. has written an article defending his easy money policy.  He contends that the
flat yield curve was testimony to a capital surplus that flooded into risky
assets and lowered risk premiums to bubble levels.  His efforts to reduce
liquidity by raising short rates were defeated by these conditions.

The problem is that he created this ocean of liquidity by lowering rates to
negative (“real”) levels in 2002.  The only way to correct this problem was to
raise rates by a lot – a lot more that he eventually did. 

He did exactly the same thing in the late 90’s.  As the stock market rocketed
into a crazy bubble state, he raised rates gently with an eye on CPI.  He has
always been happy to allow asset prices to rise inexorably because his defining
moment was the stock market crash of 1987 which occurred 2 weeks after he became

The massive move to outsourcing has kept goods inflation at very benign
levels for 20 years so he could always be the good guy when it came to propping
up asset markets.  His tightening moves were almost symbolic and always quickly
reversed.  The stock market eventually came to count on The Greenspan

If CPI is kept low by structural changes then excessive liquidity needs an
outlet.  That outlet is usually asset prices.  The Fed never changed policy to
address asset bubbles – I guess he never thought it was his job. 

Now he wants us to believe that there was nothing he could have done about

Glass-Steagall Got It Right

The NY Times had an article discussing the (correct) philosophy that banks should be regulated and managed like utilities while investment banks can be casinos.  A bank utility would have severely limited leverage ), and asset quality restrictions.  They would also be restricted from having long dated contracts with casinos like CDS’s and Interest rate swaps.

In this case, if a casino (say Bear Stearns) goes bust then we could let it go, since it may affect other casinos but not the fiduciaries of the nations savings.  The debate we’re having is whether we can or should save all these corrupt, mismanaged, overleveraged companies.  Because of all the interlocking connections to our retail bank deposit system, the government has to save almost everyone.

The NY Times article doesn’t seem to understand that the “utilities” had vastly more leverage than they should or ever used to have (by law prior to 1999).  He mentions Northern Rock – which had 42X leverage! It follows that if they had less leverage then the off balance sheet derivative books of the casinos would have been much smaller since a lot of their counterparty exposure was to those banks.

This separation and redefinition would not stop excessive speculation, bear markets and bad lending decisions, but the scale would be greatly reduced and mainly isolated to those casinos that the investment banks have become.

The Losers Are Now The Winners

The "Asian" model of economic development is to subsidize exports, prevent imports and maximize your foreign exchange earnings. I call it modern mercantilism.  If a country runs up a huge export surplus then those earnings have to be recirculated to balance their account so the country then buys a debtor country's debt or equities or even their sub-prime loans.  If you depended on the US consumer to buy all your exports then you just hit a wall.  The biggest exporters of capital are now in big trouble. And they are…
Future Losers

and the winners will be…

Futture Winners


Who’s to blame

A lot of analysts, authors, and regulators are trying to assign blame for all our economic woes.  They look at all the corruption in the mortgage business and the leverage on Wall St.  But it really all comes down to one thing – price.  The free price of debt made it irresistible to everyone.  Who do we blame for that .. one man :


Alan Greenspan  

And there was a second (virtual) freebie.  The price of new imports from China (Asia in general).  When goods are produced by workers who earn $3 a month, flat screen TV's suddenly get awfully cheap from the perspective of a first world earner.  It especially helps if those 3rd world countries manage to block their own purchases of anything we sell.  Who do we blame for this?  One man :


Bill Clinton ..

-who sprinkled MFN status on every country in the world in 1994 like it was pixie dust.

Hosts as Commentators

A TV news host is supposed to ask a question and if it is not answered he is expected to ask it again and again until it is answered.  That is his only job. 
I never want to hear his opinion or forecast or analysis of anything.  He is a conduit – a medium, through which I am supposed to get "expert" opinion.  When a news shows interviews another news host they are wasting my time.
In fact I think every time any expert is interviewed a list of his historical predictions should be put up on a split screen (with the help of say factcheck). If he has no record or is always wrong he should not be allowed on camera until he gets something big right.

The Second Chinese Stimulus Plan

Yesterday, markets collapsed as China failed to deliver on it's temporary idea of initiating a second stimulus plan.  Why does anyone think that a stimulus plan by China would help any economy other than China's?
Can China switch from being a mercantilist economy – totally dependent on exports, to one that consumes what it makes and maybe a even a little of what other countries make?
Highly unlikely.

Everybody wants to be like Singapore

The front page of the NY Times shows Mahmoud Karzai (Hamid's brother) planning a new apartment complex in Kabul.  He has been busy getting sweetheart deals in banking, cement, real estate, coal mines, and car dealerships.  He proclaims: “I’m in love with the idea that Afghanistan can become a Singapore, a Hong Kong.”
Has he been watching what's going on over there lately?  It's easy to show him.  All he has to do is turn to page A8 which explains the economic crisis going on there.  The statistic of the day:

"Singapore, where the population is just 4.6 million compared with
Taiwan’s 23 million, is particularly vulnerable to a decline in trade.
It typically imports unfinished products, does some processing of the
goods and then exports them, so the total dollar value of its exports
and imports is far larger than its gross domestic product — about three
and a half times as much, in fact."

That is staggering …the world is full of drug addicts addicted to US consumption.

The US-China Trade Disaster

Chinese Trade Surplus Will Never Die (?)

So you say – we have entered a global recession, maybe even a
depression; surely the Chinese trade surplus will wither as western
import demand shrivels up.  The first report is in.  We have a new
record!  In October the surplus reached $35.2 bn..  In fact export
growth did weaken from a rate of 21.5% year over year to 19.1% but
incredibly, import growth collapsed from a rate of 21.3% to 12.4%.

Specifically the trade surplus with the US rose 13.3% year over year.  It is easy to
argue that Chinese goods that feed through say Walmart into the US can
not be replaced by US production and in fact are necessities that will
be bought even if the economy tanks.  I find neither one of these
arguments to be very compelling but the swing factor here is NOT our
imports which are down a little and acting as they should.  I would
expect to see further declines here as the economy falls further.  The
real story is (US) exports.

The published growth rate of the Chinese
economy has declined from 10.1% to 9%.  How does such a small decline
in the rate of GDP growth drive such a massive instant drop in
imports.  There are precious few explanations of this in the press
beyond the countless anecdotes about their economic malaise.  Could
their economy be so addicted to exports that any decline in exports
triggers a collapse in domestic demand?  If that’s true then the GDP
figures are being produced in a Chinese Disneyland.

The Left and the Right Converge (on Defense Spending)

Bob Herbert, the liberal editorial writer from the NY Times called for a shrinking of the defense budget and a reduction of the extension of American military power given our appalling economic circumstances. (Go HERE) We simply can't afford the same size commitment to the military.
The other famous exponent of a shrunken military is Ron Paul who has said repeatedly that we cannot afford countless foreign military bases.  The political spectrum has come full circle on this issue.
Are there any plans to shrink the defense budget?

Not that I see.

Income Tax Progressivity

A hot topic is the recent changes made to the tax code by the new Obama administration.  The tax rate on the top 2% is going up and their deductions are going down.  The tax rates on the rest of the population will decline.  This is a relative redistribution of the tax burden (this does not redistribute wealth since this is not a wealth tax).  Is that fair?
When we open up our borders to trade with 3rd world countries then indirectly our labor begins to compete with their labor.  The resulting exporting of jobs forces our union system to cower and the leverage that workers have to ask for raises, collapses.  This is called factor price equalization and while it drives down incomes for most Americans, it improves the returns on management who can now oversee more productive processes where their companies' ROE inexorably rises.  We see this in all the fake productivity numbers that are generated when we make parts offshore and then complete the assembly here – with fewer US workers.  Miraculously our productivity improves.
So moving jobs offshore drives a wedge between the different strata of our labor pool and it is logical to tax the beneficiaries at a higher rate and the victims at a lower one.

Fair and Unbalanced

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