Central Perk

sâmbătă, 12 februarie 2011

Mish's Global Economic Trend Analysis

Ex-Goldman Sachs Managing Director is Leading Candidate to Replace Trichet as ECB President
Is this more like 2007 or 1998?
Gas Pump Prices Hit Highest Level Ever for Mid-February; Gas Price Seasonality, Where to from Here?

Ex-Goldman Sachs Managing Director is Leading Candidate to Replace Trichet as ECB President

Posted: 12 Feb 2011 01:54 PM PST

ECB President Jean-Claude Trichet's term expires in October. Alex Weber president of Bundesbank (Germany's Central Bank), an inflation hawk was widely recognized to be the leading candidate to replace Trichet.

However, that idea came to a crashing end last week when Alex Weber resigned from Bundesbank.

Supposedly Trichet's replacement is a wide-open race. However, Mario Draghi, an Ex-Goldman Sachs Managing Director has the clear inside track.

Please consider Axel Weber Resigns Bundesbank, Throws ECB Race Open

Bundesbank President Axel Weber resigned, ending three days of confusion and opening the field for candidates from Finland to Italy to become the next chief of the European Central Bank.

Weber, 53, "expressed the wish to resign" and will leave office on April 30 with a successor to be named during the next week, Steffen Seibert, a German government spokesman, said today after Weber met in Berlin with Chancellor Angela Merkel. Weber is leaving for "personal reasons" after deciding to step down a year early on Feb. 8 and then being asked by Merkel to postpone the announcement, the Bundesbank said.

Attention shifts from Weber to the qualities of other candidates who, according to 1991's Maastricht Treaty, must be from the euro area and boast "recognized standing and professional experience in monetary or banking matters." Likely meeting that criteria are central bankers Mario Draghi from Italy, Luxembourg's Yves Mersch and Erkki Liikanen of Finland. German Klaus Regling, head of Europe's bailout fund, may also do so even if he lacks monetary policy experience.

This week's decline in the euro against the dollar suggests the "FX market is not pleased" by the loss of Weber given his status as an inflation fighter, said Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt. The ECB's credibility may nevertheless be safe given "the assessment of a central bank should not depend on one person alone," he said.

Philosophical Reasons For Weber Leaving

Weber is not leaving for "personal personal" per se. He is leaving because of huge feuds with current President Jean-Claude Trichet, and the likelihood he would be in disagreement with the the rest of the ECB as well.

For example, please consider ECB's Trichet Rejects Weber's Call to End Bond Purchase Program

European Central Bank President Jean-Claude Trichet rejected Bundesbank President Axel Weber's call to end the bond purchase program that has provided a lifeline for European governments and banks trying to shore up their finances.

"This is not the position of the Governing Council, with an overwhelming majority," Trichet said when asked to respond to Weber's Oct. 13 call for an end to the program, according to the a transcript of an interview published yesterday in Italian newspaper La Stampa.

Weber, who also sits on the ECB's 22-member decision-making council, said the risk of "exiting too late" from the emergency measures was greater than pulling out too soon. The remarks, the strongest from any ECB official advocating a removal of stimulus, came as governments and banks in Ireland, Portugal and Greece struggle to convince investors they can control their finances in the aftermath of this year's sovereign debt crisis.

"Trichet is sending a clear signal to Weber," said Carsten Brzeski, an economist at ING Group NV in Brussels. "The majority seems to favor a safety belt option for the moment and isn't comfortable with sending conflicting signals to the markets."

"There is only one single currency; there is one Governing Council, only one monetary policy decision, and one president, who is also the porte-parole of the Governing Council," Trichet told La Stampa.

Weber was never in favor of the ECB's bond program to begin with, and that caused a feud at the outset.

Weber felt the ECB was not only violating the Maastricht Treaty, but making unsound decisions on monetary policy as well. Given Weber was in a distinct minority on many decisions he decided to say to hell with it.

Mario Draghi is now recognized as the leading candidate to replace Jean-Claude Trichet.

Mario Draghi's Background

Inquiring minds are interested in Mario Dragh's Background

Mario Draghi is a member of the Governing and General Councils of the European Central Bank and a member of the Board of Directors of the Bank for International Settlements. He is also governor for Italy on the Boards of Governors of the International Bank for Reconstruction and Development and the Asian Development Bank. In April 2006 he was elected Chairman of the Financial Stability Forum, which became Financial Stability Board in spring 2009.

He graduated from the University of Rome, received his Ph.D. in economics from the Massachusetts Institute of Technology, and subsequently served as professor of economics at the University of Florence from 1981 to 1991.

Prior to taking the helm of the Bank of Italy, he was vice chairman and managing director of Goldman Sachs International and a member of the firm-wide management committee (2002-2005). He was director general of the Italian Treasury (1991-2001), chairman of the European Economic and Financial Committee, a member of the G7 Deputies, and chairman of OECD Working Party 3. He was appointed chairman of the Italian Committee for Privatisations in 1993, and, from 1984 to 1990, was an executive director of the World Bank.

Mario Draghi's Role In Greek Debt Swaps Under Review

Please consider Mario Draghi and Goldman Sachs, Again

March 17, 2010

The latest revelations regarding the Goldman-Greece relationship (on the Senate floor, no less) clearly indicate that Goldman was a lead manager of Greek debt issues in spring 2002, i.e., when Mr. Draghi was on board.

This raises three entirely reasonable and straightforward questions.

Was Mr. Draghi involved in the Goldman-Greece relationship? Sources indicate that this was very much part of his set of responsibilities, but this may be disputed.
If Mr. Draghi was involved in marketing Greek debt, did he at that time know the true Greek debt numbers - i.e., was he aware of the "debt swap" arrangement? Perhaps his Goldman colleagues concealed that information from him.
And when/if Mr. Draghi became aware of the inherent misrepresentation involved this transaction, did he take steps to fully informed investors (and any relevant regulatory bodies)? Again, it is entirely possible he learned of this matter only recently and from the newspapers.

SEC Names ex-Goldman Sachs Employee to Oversee Asset Managers and Hedged Funds

While on the subject of ex-Goldman Sachs employees turning up in high-power jobs, please consider SEC Taps Goldman Sachs Executive as Division Head

The Securities and Exchange Commission has named Goldman Sachs Asset Management Chief Investment Officer Eileen Rominger to head its division overseeing asset managers and hedge funds.

Rominger will come to the SEC after nearly 30 years in the investment management business, according to an SEC press release Tuesday.

She managed equity funds at Oppenheimer Capital and at Goldman before becoming Goldman's chief investment officer for its global portfolio management teams.

All we need now to complete the picture is for an ex-Goldman employee to run for president of the United States and for another ex-Goldman employee to replace Bernanke at the Fed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Is this more like 2007 or 1998?

Posted: 12 Feb 2011 09:21 AM PST

In Thursday's Breakfast with Dave, Dave Rosenberg asks the question Is this the time to be going long?

My question is a bit different, but this is what Rosenberg had to say.

Sorry, but that time has passed. But we will probably get another kick at the can because we are sure that the "event risk", which caused so much turbulence and buying opportunities in 2010 will come around again in 2011. But this is one overextended U.S. stock market, that is for sure.

We have a dividend yield on the S&P 500 of 1.8% with a 10-year bond yield at 3.7%. Somehow that is just slightly less appealing than the 3.6% dividend yield and 2.8% bond yield we had at the March 2009 market lows. The dividend yield, by the way, is where it was at the market peak in October 2007. Food for thought.

The cyclically-adjusted P/E ratio on the S&P 500 is now 23.3x, where it was back in May 2008. At the lows, it was trading at 13.3x. So if we are talking about the best entry point from a value perspective, it was then, not now.

Amazingly, the Investors Intelligence survey now shows 53.4% bulls and 23.3% bears. At the March 2009 lows, these numbers were basically reversed.

Equity portfolio manager cash ratios today are at 3.5%; at the March 2009 lows they were closer to 6%. As an aside, the last time the liquidity ratio was as low as it is today was in September 2007.

Back at the March 2009 lows, economic indicators like the ISM was at 36 and all we could do from there was to look up. Today it is at 61 and … well, you know which way it's going from here.

When Will Global Imbalances Matter?

Everyone is partying, upping forecasts, jumping on the bandwagon, etc. Bernanke is openly bragging about his successes.

Rosenberg asked and answered his question, but I have a slightly different one: Is this more like 2007 or more like 1998 with 2 more years of partying before another crash?

No one knows for sure. Heck, most are not even aware of the question, oblivious to how overvalued this market is.

If you are in the that group, please see Negative Annualized Stock Market Returns for the Next 10 Years or Longer? It's Far More Likely Than You Think.

As in 2007, everyone thinks they can or will get out in time. Mathematically it's impossible. Moreover, dip buying is now so firmly entrenched (again), that few will recognize the turn when it happens.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Gas Pump Prices Hit Highest Level Ever for Mid-February; Gas Price Seasonality, Where to from Here?

Posted: 12 Feb 2011 12:24 AM PST

Yahoo!Finance reports Gas pump prices highest ever for this time of year

U.S. gasoline prices have jumped to the highest levels ever for the middle of February. The national average hit $3.127 per gallon on Friday, about 50 cents above a year ago.

The price is about 6 percent higher than on this date in 2008. The next day, pump prices began a string of 32 gains over 34 days. They rose 39 percent over five months, eventually hitting an all-time high of $4.11 per gallon in July.

Although gas prices are expected to rise, most experts aren't expecting a reprise of 2008, when the price spike forced many drivers to join car pools and trade in gas-guzzling SUVs for fuel-efficient cars.

"It would be a mistake to think we're going to have that all over again," said OPIS chief oil analyst Tom Kloza.

He says oil demand will slide in the U.S. by May, as refineries slow fuel production while they switch to summer blends of gas. World oil consumption also may not rise as much as expected.

And Kloza contends that oil traders are more cautious now, after getting burned when oil plunged to $33 per barrel in early 2009, just six months after hitting $147 per barrel. Even the most bullish traders no longer think they can chase commodity prices higher without risk, he says.

Still, Kloza expects gas to reach $3.50 to $3.75 per gallon this spring because of the usual run-up in prices ahead of the summer driving season. That would mean an increase of 12 to 20 percent from the current level.

Crude Futures - Monthly Chart

click on chart for sharper image

Crude futures for now have stalled right at 50% retrace level of the 2008 plunge in spite of the recent turbulence in Egypt.

Unleaded Gasoline Futures - Monthly Chart

click on chart for sharper image

Unleaded gasoline futures and gas pump prices follow the price of crude as one might expect.

Note the seasonal nature of the moves. Gasoline prices (and crude futures) tend to rise from January until June or July in most years.

In 2007, there was a ramp from the beginning of the year that ended in April, followed by a pullback until July. From then it was straight up for a full year.

2009 was back to the familiar pattern of continued strength from the beginning of the year until July. 2010 had a July low instead of a high, similar to 2007.

Crude Futures - Daily Chart

click on chart for sharper image

Prices at the pump may be up, but crude prices are down since the start of the year as noted by the dashed line. Prices at the pump will head lower eventually if crude prices keep sliding.

Inability for crude prices to continue higher with events in Egypt and the Mideast might be meaningful. Moreover, interest rate hikes in China could start weighing on commodity prices in general, especially if those hikes come at a pace faster than expected.

There are a lot of variables in play, including seasonality, rate hikes in China, the extremely overbought reflation trade, Quantitative Easing, and price action weakness (except for a 2-day pop now taken back) in the face of events in Egypt.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Seth's Blog : Evil plans, Enchantment and Orange County, California

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Evil plans, Enchantment and Orange County, California

Worth considering, three to pre-order:

Hugh MacLeod's new book is out this week. Once again, it will shatter your status quo. Possibly beyond repair.

Guy Kawaski's beautifully titled book Enchantment, which comes out in March, will help you think differently about persuasion.

And I'll be the guest of Linked Orange County on March 2 for a speech in the evening. Get early bird (half price) pricing for a few more days.

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"It's Time Washington Acted as Responsibly as Our Families Do"

Your Daily Snapshot for
Saturday, Feb. 12, 2011

"It's Time Washington Acted as Responsibly as Our Families Do"

The President previews his budget, explaining that it will help the government live within its means, while still investing to make sure America wins the future.

Watch the video.

Weekly Wrap Up

Quote: "America has always used the building of our infrastructure networks to take our economy forward and to build out American industry. The Wireless Initiative is going to bring that to the 21st Century. It's going to take it to the next level, because that's the American way."--Austan Goolsbee, chairman of the Council of Economic Advisers, explaining the National Wireless Initiative on the White Board.

Open for Suggestions: The Consumer Financial Protection Bureau wants to hear from you. Check out the new ConsumerFinance.gov, share your suggestions for the bureau and watch video responses.

Out-Building: This week, the President puts forward plans to build up the nation's infrastructure, investing in things like high speed rail, and expanding broadband access so all of America's families will be equipped to win the future:

He traveled to Marquette, Michigan to unveil his National Wireless Initiative, which aims to bring high-speed wireless internet access to 98% of American families.
Vice President Biden and Transportation Secretary Ray LaHood took the Amtrak Acela train from D.C. to Philadelphia to announce a six-year plan to invest in high-speed rail.
Secretary of the Interior Ken Salazar, along with Secretary of Energy Steven Chu, outlined plans to develop wind energy off the coast of Virginia.
Treasury Secretary Tim Geithner explained the immediate and long-term benefits of infrastructure investment, creating jobs today building the foundation for the economy of tomorrow.

"Time to Invest in America": President Obama visits the Chamber of Commerce to talk about how investing in America's workers will keep our economy growing.

West Wing Week Video: "The New Electrification"

Let's Move! Turns One: The First Lady's Let's Move! initiative celebrates its first anniversary with events across the country.

Egypt: "There are very few moments in our lives where we have the privilege to witness history taking place. This is one of those moments. This is one of those times. The people of Egypt have spoken, their voices have been heard, and Egypt will never be the same." Watch the President's remarks.

Blowing in the Wind... Offshore: A new strategy that will guide a national effort to accelerate development of coastal wind projects while driving down costs, helping us meet President Obama’s goal of powering the nation with 80% clean electricity by 2035.

Celebrating Black History Month: February is Black History Month, and WhiteHouse.gov is featuring African Americans from across the Administration whose work is contributing to the President's goals for winning the future. Senior Advisor to the President Valerie Jarrett also shared a special message on National Black HIV/AIDS Awareness Day.

Voices of Health Reform: Nan Warshaw is a small business owner in Chicago, Illinois, who is benefiting from the small business tax credits in the Affordable Care Act. Read more about her story.

Protecting Intellectual Property: President Obama signs an Executive Order establishing two intellectual property enforcement advisory committees tasked with improving the Federal Government’s intellectual property enforcement efforts.

New Trade Initiatives: Ron Kirk, the U.S. Trade Representative, announces new progress on trade initiatives during testimony before Congress.

Making Home Affordable: Jacqueline of Hialeah, Florida shares her story of home-ownership thanks to the Making Home Affordable Program through the Department of the Treasury.

Working Together in Detroit: Secretary of Labor Hilda Solis publishes an op-ed in the Detroit Free-Press on the importance of American auto companies to work with labor to keep the auto industry growing.

IssueMap at FCC.gov: The Federal Communications Commission launches IssueMap, the first product that lets users visualize the relationship between data in America and the communities the data come from.

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Seth's Blog : The danger of repeating signals

[You're getting this note because you subscribed to Seth Godin's blog.]

The danger of repeating signals

Kevin shares this great quote from the Count of Monte Cristo:

"I have been told," said the count, "that you do not always yourselves understand the signals you repeat."

"That is true, sir, and that is what I like best," said the man, smiling.

"Why do you like that best?"

"Because then I have no responsibility. I am a machine then, and nothing else, and so long as I work, nothing more is required of me."

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vineri, 11 februarie 2011

Mish's Global Economic Trend Analysis

3 Fannie & Freddie Restructuring Options, None of them Right; Cheering the Demise of 30-Year Mortgages
Atlas Shrugged movie part I coming April 15
Wimpy Republican Leadership Yields to Tea Party; Term Limits and Balanced Budget Amendment Needed to Eliminate "Culture of Spending"
Mubarak Steps Down, Military Takes Over; Live Feed Al Jazeera; Celebrations in Egypt
Calculated Risk vs. Ron Paul on Soviet Style Central Planning

3 Fannie & Freddie Restructuring Options, None of them Right; Cheering the Demise of 30-Year Mortgages

Posted: 11 Feb 2011 05:41 PM PST

Obama want to reform Fannie and Freddie. There are a few options on the table, but Little Red Riding Hood does not think the porridge in any of the bowls is quite right.

Please consider White House wants less government in mortgage system

The Obama administration wants to shrink the government's role in the mortgage system -- a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board.

The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis.

The first option proposed by the administration would give the government no role beyond helping poorer and middle-class borrowers through agencies like the Federal Housing Administration, which provides insurance on mortgage loans.

The second and third options would give the government a role as an insurer of mortgages, and each would prompt mortgage companies to pass along fees to borrowers.

Under one, the government would step in to guarantee private mortgages during a severe economic downturn, such as another housing slump, but would provide limited support during normal times.

The third option would be more complex. The government would insure a targeted range of mortgage investments that already are guaranteed by private insurers -- serving as a "reinsurance" broker to those financing companies. In the event the private insurers couldn't pay the owners of the mortgage investments, the government insurance would pay.

The third option would leave the government with the largest role and probably have the smallest impact on mortgage rates. While lenders would have to pay fees, which would ordinarily drive rates higher, the government guarantees would also make mortgages a safer investment. That would attract more private money and hold rates down.

The correct option is to get rid of Fannie, Freddie, the FHA and HUD. The government should not provide any backstop or any guarantees at any time. Unfortunately that option was not on the table.

Some are concerned that private lending may dry up. If it did, so what? The government has no business promoting housing or taking on risks best suited for private markets.

Here's the deal: If lenders knew there was no government guarantees, they would not make as many stupid loans. If they don't make stupid loans, there is far less risk that lending freezes up in the first place.

Moreover, if somehow the lenders do go broke as a consequence of making poor loans, bondholders and shareholders will pay the price, not taxpayers. Pray tell, what is wrong with that?

Cheering the Demise of 30-Year Mortgages

In a free market, we may very well not see many 30-year loans issued. Why would any lending institute want to lend for 30 years at an interest rate of 5% anyway?

We might even see new products like 8-year, 10-year, or 12-year loans. Such loans would help ensure equity paybacks quickly, reducing risk for everyone on both sides of the transaction. If that forces people to buy a smaller house, so be it.

A home should be an affordable place to live, not a debt-trap or method of leveraged financial speculation for 30 years.

Borrowing short and lending long for 30-years (while attempting to hedge in between) is a recipe for disaster. Fannie and Freddie have already gotten into serious trouble over it. If that practice stops, we will all be the better for it. Thus, we should all cheer the demise of 30-year loans.

If we would just get government totally out of the way, housing will recover a lot quicker, with home prices far more stable, than with government guarantees or half-assed measures. It's time we remove the government crutch completely. For more on this line of thinking, please see Mortgage Rates Hit 1-Year High; NAR Whines for Government (Taxpayer) Support of Fannie, Freddie; "*" the NAR

We have tried everything else, and everything else failed, so why not try the free market for a change.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Atlas Shrugged movie part I coming April 15

Posted: 11 Feb 2011 04:04 PM PST

Fans of Ayn Rand's novel Atlas Shrugged will have a chance to see it in movie format April 15. Here is a YouTube clip.

If the object does not play, here is the link to the trailer: http://www.atlasshruggedpart1.com/atlas-shrugged-movie-trailer

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Wimpy Republican Leadership Yields to Tea Party; Term Limits and Balanced Budget Amendment Needed to Eliminate "Culture of Spending"

Posted: 11 Feb 2011 10:25 AM PST

Hats off to new legislative representatives who steadfastly held to the position that more budget cuts are needed. Republican leaders reluctantly went along with those Tea Party demands (which of course shows just how wimpy Republican leadership is when it comes to really doing anything about the budget crisis).

Democrats are screaming of course, clueless about why they lost the election, and what changes are needed.

Please consider Republican Leaders Yield to a Push for More Budget Cuts

In response to complaints from rank-and-file Republicans that the party was not fulfilling a campaign promise to roll back domestic spending this year by $100 billion, the chairman of the House Appropriations Committee said his panel would abandon its initial plan and draw up a new one to slice spending more aggressively.

The reversal was the most concrete demonstration yet that the wave of fiscal conservatives who catapulted Republicans into the House majority is reshaping the political and policy calculations being made by the party leadership.

Senate Democrats, who will have to negotiate with their Republican counterparts in the House, quickly criticized the plan. "In many cases, these proposals may mean taking workers off the assembly line or taking teachers out of the classroom or police off our streets," Senator Harry Reid, the Nevada Democrat and majority leader, said.

The initial Republican plan called for $35 billion in cuts for the balance of this year, which has more than seven months yet to run. Republican leaders had said that figure was equivalent to about $74 billion in cuts had they been applied to the full fiscal year, measured against the budget request made last year by the Obama administration.

But that argument rang hollow to many conservative Republicans who did not relish the idea of explaining to constituents why the new majority was coming up short of the pledge. After Republicans challenged the plan in a closed-door party meeting on Wednesday, Mr. Rogers and his fellow Appropriations Committee leaders say they now intend to provide new cuts that would meet the target of eliminating $100 billion from Mr. Obama's request in "one fell swoop."

Even with added cuts, the budget plan is unlikely to satisfy all Republicans. Some want even deeper reductions, and others are insisting that any budget bill bar the government from spending money to carry out the new health care law — a provision certain to be summarily rejected by Senate Democrats and the White House.

"If we don't fight on this ground, there will not be ground this good to fight on again," said Representative Steve King, Republican of Iowa. He said he was inclined to oppose any measure if the health care law was spared.

The widening division between House Republicans and Senate Democrats raises the prospect that they will be unable to reach agreement to finance the government through Sept. 30 and will instead have to rely on a series of brief extensions. In the event of a total impasse, the government could shut down as it did in 1995.

Republican officials would not divulge details of their planned cuts. But previous disclosures by the Appropriations Committee showed the reductions would reach deep into energy, environmental, education, transportation and housing programs, and totally eliminate more than 60 other federal initiatives.

For Smaller Government, Elect Shorter Lawmakers

Notice how it was new members of Congress forcing the issue. For all their blowhard talk, a lousy $35 billion was the best the Republican leadership could come up with to reduce a $1.4 trillion deficit.

In light of that pathetic effort, are we are supposed to believe Republicans are going to balance the budget?

Caroline Baum questioned that idea recently in For Smaller Government, Elect Shorter Lawmakers.

The Republican majority in the U.S. House of Representatives is promising to cut $100 billion from domestic spending this year. The Tea Party caucus's response? I'll see your $100 billion and raise you $2.4 trillion over 10 years.

Both groups are barking up the wrong tree or, to use a more appropriate animal analogy, putting the cart before the horse. The road to real deficit reduction, not a cosmetic nip and tuck, runs through term limits. If Americans are truly interested in shrinking the size of government -- one of the takeaways from the 2010 midterm election -- they can start by limiting the amount of time lawmakers are allowed to serve.

This would require a constitutional amendment (see U.S. Term Limits, Inc. v. Thornton, 1995), no mean feat, requiring as it does approval by a two-thirds majority in Congress. But not impossible either. Recent events in the Middle East demonstrate just how potent people power can be.

Would it surprise you to learn that newbies in Congress (those who have served six years or less in the House and 12 or less in the Senate) are more likely to vote for fiscal restraint than veteran lawmakers? Or that this finding was based on votes taken from 1995 through 1998, when Republicans controlled both houses of Congress? Even Newt Gingrich's class of '94, determined to shrink the size and scope of government, couldn't buck the Old Guard, according to the results of this Cato Institute study.

In the last two years, the spending increases in bills proposed by freshman House Democrats were 60 percent lower than those sponsored by their more senior colleagues, according to Peter Sepp, vice president for communications at the National Taxpayers' Union. The GOP freshmen proposed 15 percent more cuts in spending than the old-timers.

It turns out the old adage is true: The longer they stay, the more they spend. It's what political scientist James L. Payne calls "The Culture of Spending," the title of his 1991 book.

"What goes on is a socialization process: a nicer way of saying indoctrination," Payne said in a telephone interview. "One is surrounded by people who have a biased reason for arguing that federal spending is good, necessary, wise and proper. There's no reason for anyone to enter this process if he believes it's unwise or unethical."

Clearly the Paul family, father Ron and son Rand, stands out as an exception.

Like most human beings, lawmakers want to help. So they blithely vote for more spending because, quite simply, if they don't put their hand in the cookie jar, someone else will.

When was the last time a constituent walked into his congressman's office and asked for cuts in popular government programs? Unless you believe in fairy tales, a prerequisite for smaller government is short-term legislators.

Balanced Budget Amendment Needed as Well

Republicans scream and holler for smaller government, yet never act on it.

Why? Because they are always worried about getting reelected thus fear cutting programs that voters may want. Term limits would eliminate that worry.

A balanced budget amendment would sure help too. Want that pet project? OK but raise taxes to pay for it. Want to waste $trillions on needless defense programs? Some thing, have the guts and decency to raise taxes enough to pay for it. Otherwise the Fed may monetize the debt, debasing the currency.

Then again, as long as sweeping changes are being made, let's get rid of the Fed too.

Democrats and Republican hypocrites alike refuse to do what they were elected to do. Term limits and a balanced budget amendment would force them.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mubarak Steps Down, Military Takes Over; Live Feed Al Jazeera; Celebrations in Egypt

Posted: 11 Feb 2011 09:16 AM PST

Crowds in Tahrir Square in Cairo are jubilant today as Mubarak Steps Down, Ceding Power to Military

President Hosni Mubarak of Egypt turned over all power to the military and left the Egyptian capital for his resort home in Sharm el-Sheik, Vice President Omar Suleiman announced on state television on Friday.

The Egyptian military issued a communiqué pledging to carry out a variety of constitutional reforms in a statement notable for its commanding tone. The military's statement alluded to the delegation of power to Mr. Suleiman and it suggested that the military would supervise implementation of the reforms. Mr. Mubarak "has charged the high council of the armed forces to administer the affairs of the country," he said in his statement.

Live Feed Al Jazeera

Here is a link to the Live Feed From Al Jazeera

Live Feed MSNBC

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Calculated Risk vs. Ron Paul on Soviet Style Central Planning

Posted: 11 Feb 2011 02:05 AM PST

On Wednesday, my friend Calculated Risk wrote a post that many have asked me about. In case you missed it, please see I come to praise Bernanke

Right now I think the Fed is doing an excellent job with monetary policy, and I was very pleased that Bernanke stayed away from specifics on the deficit (not his responsibility).

In Praise of Soviet Central Planning

Bernanke deserves as much praise as Soviet Central planners for being right about something once every 10 years.

After all, the Fed is nothing more than a group of Soviet-style central planners, primarily academic wonks with no real word experience. Those planners (and their supporters) think the Fed can divine where interest rates should be to support dual or triple mandates, when mathematically it's not even possible to achieve the stated mission (Please see Dual Mandates, the Price of Gold, and Tinfoil Hats for more about Fed mandates).

For decades, all the Fed has done is blow serial bubble after serial bubble with increasing boom-bust amplitude, occasionally (by mathematical necessity) crossing the zero-line where things appear to be relatively normal, at least for a while.

Unfortunately things are not normal. Bernanke has reignited bubbles in the stock market and junk bonds, and commodity speculation.

Bernanke on Fiscal Policy

Calculated Risk praised Bernanke for staying away from specifics on fiscal policy but that does not hold up to scrutiny.

Fox News has the full text of Bernanke's Remarks to House Budget Committee for those who are interested. Here are a few snips.

In thinking about achieving fiscal sustainability, it is useful to apply the concept of the primary budget deficit, which is the government budget deficit excluding interest payments on the national debt. To stabilize the ratio of federal debt to the GDP -- a useful benchmark for assessing fiscal sustainability -- the primary budget deficit must be reduced to zero. Under the CBO projection that I noted earlier, the primary budget deficit is expected to be 2 percent of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6 percent of GDP in 2030. These projections provide a gauge of the adjustments that will be necessary to attain fiscal sustainability. To put the budget on a sustainable trajectory, policy actions -- either reductions in spending, increases in revenues, or some combination of the two -- will have to be taken to eventually close these primary budget gaps.

By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis. Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much- needed national conversation. Although these proposals differ on many details, they demonstrate that realistic solutions to our fiscal problems do exist.

Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress and the Administration will undertake reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit, but also to enhance the long-term growth potential of our economy -- for example, by reducing disincentives to work and to save, by encouraging investment in the skills of our workforce as well as new machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face.

Bernanke Warns of "Rapid and Painful Response to a Looming Fiscal Crisis"

Bernanke has also warned Congress about a "Rapid and Painful Response to a Looming Fiscal Crisis", a concept I agree with.

Quoting the economist Herbert Stein that "if something cannot go on forever, it will stop," Bernanke said that the federal government must stabilize its budget. The question, he said, "is whether these adjustment will take place through a ... process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether there will be a rapid and painful response to a looming or actual fiscal crisis."

Rapid and Painful Response to a Looming Fiscal Crisis

I suggest Congress should listen to one of the few things Bernanke has ever said that made any sense. The correct Congressional response is to take Bernanke at his word and not raise the debt ceiling.

Bernanke Talks out of Both Sides of his Mouth at Once

As much as I can praise Bernanke's concern over a "Rapid and Painful Response to a Looming Fiscal Crisis", Bernanke is a hypocrite. He does not want Congress to do anything now.

In fact, Bernanke warned Congress not to take fiscal action now. In effect, Bernanke is telling Congress what to do, and when to do it. He even suggested specific actions in regards to corporate income taxes.

Regardless of whether or not you agree with Bernanke, if that is not specifically commenting on fiscal policy, what the hell is it? Chicken soup?

Tomorrow, Tomorrow, I Love You Tomorrow

Keynesian and Monetarist clown never want to do anything "now". Should by some miracle the recovery pick up steam, they will not want to do anything "then" either, for fear of killing the recovery.

More importantly, the very idea that a group of currency cranks and academic wonks can divine where interest rates should be is complete totalitarian silliness.

One can argue that things would be worse if Bernanke did not act but that is speculation. Had Bernanke not acted, bondholders would not have been bailed out, too big to fail would have bitten the dust and we would have had a chance for someone like Bill Black to come in, remove all the bank boards of directors, and put in sound management.

Instead, we bailed out the banks at taxpayer expense, the "too big to fail" got even bigger, we did not reinstall Glass-Steagall (one piece of regulation I am in favor of), nor did we tackle any fundamental issues that caused the crisis.

Too Soon To Judge

Calculated Risk argues Bernanke made the right decisions the past couple years. If (big if) Bernake did, it is irrelevant. Praising Bernanke now is like praising a doctor for successfully amputating the cancerous leg of a patient after he first amputated the wrong one.

The Fed has made so many mistakes amplified over the years, that some decisions are likely to be correct (or appear to be correct at any particular point in time).

Realistically, we cannot make a determination now as to the success or failure of the Fed's recent actions. Perhaps we can make a determination 10 or 20 years from now. Even then, there will be debate as to what might have happened had there not been a Fed that bailed out banks at the expense of taxpayers and those on fixed income. (For a discussion of the problems of those on fixed income, please see Hello Ben Bernanke, Meet "Stephanie")

Ron Paul: QE2 Is a Total Failure

Ron Paul says QE2 Is a Total Failure and Bernanke Is Delusional About Inflation

QE2 is a "total failure," except for those folks who work on Wall Street," Rep. Paul says. "It hasn't done anything for Main Street; hasn't done anything to give us real jobs; hasn't done anything for people who are losing their houses."

As for inflation, "I think there's plenty," Rep. Paul says, citing "skyrocketing" commodity prices and rising food prices. One problem is the Fed's reliance on core CPI, which famously excludes food and energy and relies on hedonic adjustments. "They rig that number," he says. "[Bernanke] looks at government stats that are fudged to reassure him he doesn't have to do anything."

"We're trying to correct the massive problems we had this decade with more" of the same policies, he laments. "He's supposed to give us full employment and stable prices and we have neither. How did the Fed do?"

Rep. Paul says he'd support stripping the Fed of its dual mandate - full employment and price stability - as others in Congress have discussed. But he doesn't think it will do much good and continue to push for a full audit of the Fed and some "competition" for the dollar, as you'll see in part 2 of this interview.

Central Planning Delusion

Ron Paul: "It is delusional to think that one person could know what the money supply should be and interest rates should be, and that you can do total central economic planning through monetary policy is positively baffling. ... I would like to get the monopoly power away from this cartel that pretends they know how to run this entire economy."

I do not agree with Ron Paul about everything. However, those statements are impossible to logically refute. Moreover, theory and practice are the same, as numerous Fed-sponsored bubbles prove.

By the way, please do not make more out of this post than exists. I agree with Calculated Risk on many things, but vehemently disagree with him on the role of the Fed. We talked on the phone an hour before I wrote this, and we agree to disagree.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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