Mish's Global Economic Trend Analysis

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Stockman Fires Back at Krugman, Labeling Krugman "Utterly Disingenuous" Posted: 03 Apr 2013 05:19 PM PDT I have an advanced copy of Stockman's book, "The Great Deformation" but have not had time to review the book because of my conference. I hope to get to the book next week, but it is an amazingly long 712 pages. In reference to an op-ed piece by Stockman in the New York Times: Corruption of Capitalism in America, Krugman dismissed the ex-congressman as a "cranky old man" without even reading the book. Actually, I was disappointed in Stockman's piece. I thought there would be some kind of real argument, some presentation, however tendentious, of evidence. Instead it's just a series of gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant. It's cranky old man stuff, the kind of thing you get from people who read Investors Business Daily, listen to Rush Limbaugh, and maybe, if they're unusually teched up, get investment advice from Zero Hedge. Sad. Stockman Fires Back Today MarketWatch reports Stockman Fires Back at Krugman, Critics. Here is an excerpt of the interview.... MarketWatch: Since Nixon's "abomination" as you call it, we have had some periods where government spending to GDP actually went down, like during the Clinton era. Doesn't that show it's just the choices made by Congress rather than the Fed to blame [for rising debt]? Stockman: There is the issue that Congress ultimately is the fiscal authority. But my argument is, when the Fed becomes a massive buyer of bonds and debt and artificially suppresses interest rate below market-clearing levels, it's a terrible signal to the Congress that debt is cheap, that running deficits is a viable strategy. So therefore they are induced to kick the can, to let it drift and avoid hard choices. Who wants to tell the public you are going to take your broccoli of higher taxes and lower benefits and spending if you can issue debt on a three-year basis for 40 basis points. That's free. I was in Congress, they don't do decimal math, OK? And they think the money is free, it's a bad problem philosophically, we shouldn't be doing this for the great long run, but it's no harm today. Then they have professors like Krugman who give them the disingenuous advice that the bond vigilantes don't care. The market is saying, "fine with us, we don't care, keep piling the debt on, we love it." That is so much baloney. The reason the interest rate on the 10-year bond 10_YEAR -0.33% today is 1.8% or whatever it happened to settle today, is the market knows the Fed is buying half of the debt and is front running the Fed. And it is renting the bond on repo, 98 cents on the dollar, based on overnight money that's free thanks to Bubbles Ben as well. For a so-called Nobel laureate to claim the vigilantes are validating this crazy deficit expansion through the fact the interest rate is 1.8% is the height of disingenuous. MarketWatch: But Bernanke did a recent speech on this, and he pointed out the bond yields of every industrialized nation, including Germany, have dropped. Stockman: You know why? Because every central bank in the world is putting out the same heroin, the same monetary policy poison. Because the Fed is doing this, and this is part of my theme in the book, that once we started going into the massive balance sheet expansion, other central banks had to reciprocate or otherwise their currencies would be disadvantaged. The whole world of central banks is now administering the same bad medicine. To say it works because everyone is doing the same thing, again, I think is utterly disingenuous. Nixon's Abomination Explained Wikipedia refers to "abomination" as "Nixon Shock". "The Nixon Shock was a series of economic measures taken by United States President Richard Nixon in 1971 including unilaterally canceling the direct convertibility of the United States dollar to gold. It helped end the existing Bretton Woods system of international financial exchange, ushering in the era of freely floating currencies that remains to the present day." I side with Stockman. Krugman is disingenuous, and closing the gold window was an abomination. Deposit Insurance a Moral Hazard Stockman claims FDIC deposit insurance is a "moral Hazard". Here is the pertinent snip from the interview. MarketWatch: With what we've seen in Cyprus, doesn't that argue for more and a more credible deposit insurance system rather than pulling back? Stockman: No, I say deposit insurance is the great moral hazard. It's what allowed the banks after we repealed Glass-Steagall to grow to this enormous magnitude and engage in all this speculation. And remember, Glass was opposed to deposit insurance, Steagall wanted it, Glass said, "OK, the quid pro is we're not going to let the banks get outside the narrow walls of commercial banking." Now when you repeal Glass-Steagall, you got the worst of both worlds. You got moral hazard of deposit insurance without the regulatory protections and separation of basically trading and gambling as Carter Glass would have seen it from deposit banking. My argument is that if blue-haired ladies and timid people want to have safe places to save, create postal savings banks. Just a few government banks, they don't earn any interest, and they get charged a penalty on their interest rate because the government's credit is being used, but it's safe, they sleep at night, and they can honestly save, because under a free-market interest rate the deposit rate would be helluva lot higher than today, half a percent under Bernanke imperialism. Safe Way to Bank I said nearly the same thing in Fraudulent Guarantees; Fictional Reserve Lending; Comparison of US to Cyprus; What About New Zealand?. And the solution is so easy too. Open a bank that charges nominal fees for checking and makes no loans. Such a bank would not need loan officers or other high-priced personnel. It would offer safekeeping of money and simple checking accounts for a fee. Those who want interest on their money should have to take a risk, the risk of a possible loss. Finally, and as I have pointed out before, lending of checking accounts is outright fraud. Checking accounts are supposed to be money available on demand, but since Greenspan authorized Sweeps in 1994, almost none of it is. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Fools Never Learn Posted: 03 Apr 2013 07:41 AM PDT Proving that fools never learn, the Obama administration pushes banks to make home loans to people with weaker credit President Obama's economic advisers and outside experts say the nation's much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession. In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default. Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default. Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today's low interest rates, among other steps. Here We Go Again Mark Hanna commented "And Here We Go Again" Indeed. Home markets are booming again so let's get everyone in on it. The whiners are piling on already. "If you were going to tell people in low-income and moderate-income communities and communities of color there was a housing recovery, they would look at you as if you had two heads," said John Taylor, president of the National Community Reinvestment Coalition, a nonprofit housing organization. "It is very difficult for people of low and moderate incomes to refinance or buy homes." The FHA, in coordination with the White House, is working to develop new policies to make clear to banks that they will not lose their guarantees or face other legal action if loans that conform to the program's standards later default. Officials hope the FHA's actions will then spur Fannie and Freddie to do the same. The effort requires sign-on by the Justice Department and the inspector general of Department of Housing and Urban Development, agencies that investigate wrongdoing in mortgage lending. Proven Results We tried this already. The results were not pretty, to say the least. In spite of all the huffing and puffing by this administration, no one went to jail. Heck, no one was even prosecuted. And now, after whining for more bank regulations, the White House wants even looser lending standards. Let's lower our standards so everyone qualifies for a loan. Again! And while we're at it, let's make the banks immune from prosecution! Then let's put taxpayers at risk via "taxpayer-backed programs" for the whole boondoggle. This is all so obviously stupid that only a fool could propose it. And a fool in the highest spot did just that. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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