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Archive for the ‘free market economics’ Category

Rasmussen has an interesting poll that caught my eye last week regarding the free market economy. Please consider 75% Say Free Markets Better Than Government Management of Economy, Political Class Disagrees.

A new Rasmussen Reports national telephone survey finds that 75% of Likely Voters prefer free markets over a government managed economy. Just 14% think a government managed economy is better while 11% are not sure. These figures have changed little since December.

Polling released earlier this week showed that Americans overwhelmingly believe that more competition and less regulation is better for the economy than more regulation and less competition.

Not surprisingly, America’s Political Class is far less enamored with the virtues of a free market. In fact, Political Class voters narrowly prefer a government managed economy over free markets by a 44% to 37% margin. However, among Mainstream voters, 90% prefer the free market.

Outside of the Political Class, free markets are preferred across all demographic and partisan lines. This gap may be one reason that 68% of voters believe the Political Class doesn’t care what most Americans think. Fifty-nine percent (59%) are embarrassed by the behavior of the Political Class.

If we have all these free-market believers, how the heck do we keep electing politicians who believe in anything but free markets?

For example, president Obama is the worst combination possible of socialist, corporatist, and war-monger possible. Clearly he does not believe in a free market. However, he had a very catchy message “Change You Can Believe In”.

Where was the change?

Then again, please remember he never promised change, just change you could believe in. People believed. However, the few changes were all for the worse.

That still does not explain how Congressional anti-free market clowns keep getting elected if the public wants something else.

Throw the Bums Out – But Not My Bum

Caroline Baum offers one possible answer in Throw the Bums Out as Long as My Bum Stays Put

Everywhere you turn, anti-incumbent sentiment is on the rise.

You can see it in opinion polls, where six in 10 Americans, the highest ever, say most members of Congress don’t deserve to be re-elected, according to a June 11-13 Gallup survey.

You can see it in primary ballots, where long-serving lawmakers are being booted in favor of Tea Party candidates and other outsiders.

And you can see it at town meetings, at social gatherings and on talk radio, where ordinary Americans are eager to voice their discontent with the culture in Washington.

In fact, the only place you probably won’t see it is at the bi-annual congressional elections. Incumbency, it turns out, is the best credential for winning an election.

In the House of Representatives, the incumbency rate has averaged 93.3 percent since 1964, according to the Center for Responsive Politics, a non-partisan independent research group tracking money in politics. It dipped below 90 percent only five times in the last 23 elections. The low was 85 percent in 1970.

Devil I Know

Even revolutions don’t produce a dramatic shake-up in the composition of the House of Representatives. The Reagan Revolution of 1980 returned 91 percent of House incumbents to their seats. The Republican Revolution of 1994 saw the GOP pick up 54 seats and take control of both houses of Congress for the first time in 40 years. Even then 90 percent of House incumbents were re-elected.

What happens to all that angst when Americans walk into the voting booth on alternate Novembers and pull the lever for 16- term Congressman Peter Porkbarrel instead of Ida Unknown? In some cases, people never make it to the polls. Voter turnout in the U.S. since 1960 has averaged 55 percent at presidential elections and 40 percent in off-year elections, well below the 75 percent to 80 percent typical of most democracies.

Those who make it to their polling place often have limited options. Many incumbents run unopposed. And if there is somebody challenging the incumbent, “that somebody is invisible, lacks credentials and isn’t an appealing alternative,” says Stuart Rothenberg, editor and publisher of the Rothenberg Political Report. “It’s not really a choice.”

In an April Gallup poll, 28 percent of registered voters, the lowest on record, said members of Congress deserved to be re-elected. Forty-nine percent said their own member was worthy. (Translation: Throw the bums out, but spare my bum, at least until he brings home the funds for that civic center.)

Campaign Contribution Bribes

Baum’s “bum-analysis” is correct. However, there are other reasons too, notably campaign contributions.

Businesses and public unions give hundreds of millions of dollars to politicians who will vote how they are paid to vote. Indeed, incumbents have a huge head start in fund raising bribe collection activities. This is why campaign finance reform and lobby reform is desperately needed, and exactly why it won’t happen.

Topping that off, the incumbent gets free staff, free news mailings, etc. “Free” means at taxpayer expense of course.

Dumb and Dumber Choices

As to why election choices frequently appear to be between dumb and dumber, please bear in mind that corporations frequently bribe the incumbent’s opponents as well, just in case.

The result is that is often hard to tell much difference between the candidates on major things like the economy. Frequently the only major differentiation between candidates is on lightening-rod issues like abortion. The banks and major corporations could not care less about such issues, so without hot and heavy money telling the candidates how to vote, energetic mudslinging surfaces.

Gerrymandering

Finally, many Congressional districts are so Gerrymandered on the basis of race, nationality, etc. that it is nearly impossible to defeat the incumbent. In such cases, there may be genuine political differences but no chance in hell of doing anything other than returning the incumbent to office, no matter how bad the incumbent candidate might be.

In Illinois, voters continually reelect known crooks up to the point of conviction and jail sentencing. Is Illinois unique? Probably not.

Will It Be Different This Time?

Unfortunately, it’s highly unlikely this election will be any different than the last.

However, there is sufficient voter anger to throw out enough incumbents, many who were elected on Obama coattails, that I believe Republicans will win the House and pick up enough seats in the Senate to sink any legislation Obama wants.

That would be a good thing, even if 90% of the bums deserving to be thrown out on their bums get reelected.

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

From The Daily Capitalist.

Dear Santa:

Since you give away stuff for free, I hope you aren’t a socialist and ignore my wish list during the annual potlach. By the way, it seems that the Obama Administration is way ahead of you in giving out free stuff to everyone. I hope you can catch up.

I think I’ve been a pretty good boy this year. I have regularly bitten my tongue in my commentary so as not to be accused of being a flamer. I don’t think I’ve defamed anyone. And I try to write as much original material as possible to avoid being labeled a “scraper” (lifting stuff off the Net and publishing it under my own name). And, I haven’t sold out my opinions for mere money. For a blogger, that’s a pretty good record.

Here’s my wish list. I couldn’t find where to post it on Amazon, so here goes:

1. Kill The Bill

No, not the Uma Thurman thing. I’m talking about the health care “reform” bill going through Congress right now. If your magical powers extend that far, please put economic sense into our politicians’ collective heads that government control over the system is not a way to “save money” or create “efficiency.”

2. Put in the Fix

Instead of eliminating market forces in health care, please convince Congress to fix it by peeling back the convoluted rules and regulations that have screwed it up in the first place. Suggest these four little things we could try first that actually would work, save billions, and cover more people:

Give Medicare enrollees a voucher and the freedom to choose any health plan on the market;

Give workers control over their health care dollars with “large” health savings accounts which would allow them to purchase secure health coverage from any source;

Break up state monopolies on insurance and allow insurance companies to compete across state lines; and

Block-grant Medicaid and the State Children’s Health Insurance Program to prevent massive waste and encourage states to target resources to the truly needy.

3. Turn the Sausage Makers into Sausage

I understand it’s Christmas and it would be kind of negative to wish political ill fortune on someone, but, there’s this especially despicable sentator, Ben Nelson, that I would like for you to arrange to catch him with a hooker or taking a bribe. Whatever you think would work, Santa. Make sure there are tapes. I have lots more names, but I’d be happy with Ben.

4. Firing Suggestions

Please arrange for Obama to fire Ben Bernanke, Larry Summers, Timmy Geithner, and Christina Romer.

5. Hiring Suggestions

To replace the above, how about Ron Paul at the Fed, and the following economic advisers: Walter Block, Russ Roberts, and Joseph Salerno. They are all fine economic scholars and would steer our President in the right direction.

6. Freeze Congress

Don’t let Congress pass any more bills until they’ve all read, and discussed with the No. 5 guys, Economics in One Lesson by Henry Hazlitt, the best little book on economics, ever. Televise it.

7. Bring Back the Real Constitution

Please have Obama appoint strict constructionists to the Supreme Court. Nominees who understand natural law, and that the Ninth and Tenth Amendments actually mean something. Maybe we’d get our individual sovereignty back.

8. Make Work is No Work

Let Mrs. Pelosi and Mr. Reid see the folly of the American American Recovery and Reinvestment Act of 2009, a useless $787 billion bill that is nothing other than intergenerational theft. Someone has to pay for it and I’m afraid it will be my children, grandchildren, and ten generations of my great-grandchildren.

9. Beautiful Sunsets

Require Congress to sunset every spending law they pass. You know how they promise that a program will be very effective and that it will only cost so much? Make them prove it, say every two years. If the bill fails to cure the perceived ill, get rid of it. If the program exceeds its budget, get rid of it. It will also provide us with a handy voting guide at election time.

10. Let a Thousand Flowers Bloom

Sprinkle some free market magic dust on the economics departments of our major universities. Maybe that will help the sheep break from Keynesian orthodoxy and actually begin to think.

Thank you, Dear Santa. I’m forever hopeful.

Econophile

From The Daily Capitalist

As my readers know, every so often I really get fed up with what comes out of Washington (Our Nation’s Capital) and feel the need to vent. My recent irritation is a letter Christina Romer, the president of Obama’s Council of Economic Advisers, published in the Wall Street Journal.

The letter is an apologia for the economic policies she and Summers and Geithner have been recommending to the president. She seems like such a nice lady, and she’s the wife of economist David Romer. Both were econ professors at Berkeley and both studied economics at MIT. But …

Here are some excerpts from her letter, with my comments:

Within a month of taking office, the administration had announced its Financial Stability Plan and signed the American Recovery and Reinvestment Act. The Recovery Act helped stem the decline in spending caused by consumers and businesses reeling from the fall in asset prices and the drying up of credit. Real GDP, which had fallen at a 6.4% annual rate in the first quarter of 2009, began to grow again just two quarters later. …

She seriously believes this. But she has a slight problem with the cause and effect, post hoc ergo propter hoc*, thingie. That is, there is no evidence, theoretical or empirical, that the Recovery Act did anything positive or lasting. Even assuming Keynesian stimulus works, the government hadn’t spent enough money to make it work according to the Keynesian formula. At least that’s what Paul Krugman said. Whatever, no one has ever offered any proof that such stimulus works.

And, as far as I know, PCE (consumer spending) is still very low, asset prices are still declining, and credit is worse.

We’ve already seen from the Recovery Act that spending on infrastructure—everything from roads and bridges to schools and municipal buildings—is an effective way to put people back to work while creating lasting investments that raise future productivity. …

Yadda, yadda, yadda. Again more spending on things the government wants, not the things that the market wants. The jobs are already fizzling. See this excellent article in the WSJ, ironically published on the same day as Mrs. Romer’s piece. The gist is that when the government money ends, the jobs dry up.

Subsequently the president pushed for the Cash for Clunkers program that was successful in boosting demand and job creation. …

All this did was to junk a bunch of good cars, fill the pockets of auto dealers, and appease the UAW. Auto sales are already declining again. It just accelerated future sales of people who would have bought cars anyway.

[A]bout a month ago the president announced the latest in a series of measures to encourage banks to lend to small businesses. …

As we all know credit is still shrinking, not growing. They have tried every trick in the Keynesian book to loosen credit but to no avail. I’m sure this new legislation will be different.

[I]n early November the president signed into law a measure that would provide relief and spur job creation by adding additional weeks of unemployment insurance, cutting taxes for businesses, and expanding and extending the home-buyer tax credit. …

That must have worked really fast, because unemployment, according to the Bureau of Labor Statistics, dropped from 10.2% to 10% in November. Wow, that’s great legislation. But, as we all know, Things Are Not What They Seem. As David Rosenberg pointed out in one of his reports, the government stats look funny because they are so different from what ADP reported. 

Despite these positive developments, the job market remains very weak. … American businesses appear hesitant to hire, and are producing more with fewer workers. …

Didn’t she just say that things are getting better?

Tomorrow [the President] will convene a meeting of business and labor leaders, small-business owners, economists and community representatives to discuss our ideas and solicit others for accelerating hiring. … [W]e need to harness the private sector, bringing large and small firms in off the sidelines to boost job creation. …

This is the part that really upset me. First, this is a typical political move. “Let’s all get together and come up with some great ideas!” No offense to the community organizers out there, but getting a bunch of people in a room like this gets nowhere. The best thing they could do is cancel all meetings, and get the hell out of the way.

But what really got me was the “harness the private sector” comment. I hope she didn’t mean it in the way I’m thinking, but if she didn’t then it’s even worse because she doesn’t realize the implications of her policies. When government gets together with business and labor to create policies for political benefit, it is called fascism, or national socialism. The words she used were rather telling: a “harness” is not something I would want to be in. You know who has the whip.

While the words seem innocent, it is all about losing our freedoms. Here’s the conclusion from a piece I wrote about the takeover of GM (in homage to Ayn Rand):

Sometimes it’s hard to see what is happening in front of your eyes. It seems rather benign and logical when you read about it, but it’s not. Nationalizing GM is just good old fashioned fascism–just like what happened in Italy in the 1920s and ‘30s … And now us. If you think I’m exaggerating, it’s probably because you think everything the government does is OK because we’re having a crisis. As Wesley Mouch said in Atlas Shrugged, “We’ve got to act!” That’s how we are losing our freedom, by a thousand cuts.

*Since that event followed this one, that event must have been caused by this one.

From The Daily Capitalist
December 3, 2009

Since the biggest financial collapse in world history was built on credit related to housing, it is pretty obvious that we should be paying very close attention to that market. The reasons are complex, but a recovery must be based on the liquidation of bad debt. The sooner that happens the quicker a recovery will happen.

When we mean “liquidation of debt” we are talking about a mountain of credit built on the housing bubble. This phony bubble wealth permeated the entire economy. When home owners saw the price of their home rising, they saw it as a source of capital to use for a variety of things, but let’s face it, most people spent it.

New stores opened, malls were built, financial institutions grew, cars and boats, second homes, vacations, and restaurants all flourished. Credit card debt mushroomed. Home mortgages were increased to pull cash out for spending. Yes, some of it went to good things, like our children’s education, helping our aged parents, and paying off bills. But the reality was that our debt kept growing.

The clever lads created even more phony wealth under the guise of insurance, but as we found out, companies like AIG really had no idea how large their obligations were for credit default swaps written against almost any financial risk. And these instruments were further leveraged without understanding the magnitude of these triple-counted obligations or their relationship to housing.

It all comes back to housing as the fuel for the 70% of our economy that was consumer spending. The thought was that housing has always gone up, and if it went down, it really never went down if you averaged growth since the post-WWII-period. A drop of 10%? Never has happened. 20%? Not even a 6th deviation possibility.

My thesis has been that this was all fueled by the Fed through monetary policies that created and supported the bubble. Aided and abetted by governmental policies and financing schemes that favored housing and risky loans. This was not a “free market” phenomenon. Far, far from it.

My thesis has also been that we can’t recover until all this bad debt is liquidated, and capital generated by savings is created and ultimately invested in profitable enterprises. It would be a mistake to rekindle the bubble. But, as we know, that’s what our government is trying to do. The government creates uncertainty as it flails around with programs, spending, and debt schemes to revive the economy. As a result mark-to-market accounting is thing of the past and banks are guarding their balance sheets, corporations are sitting on a lot of cash, cutting costs, and becoming leaner, and Mr. and Mrs. America still favor savings and debt instruments over equities and spending.

The big question: is the housing market bottoming out? Because once it does, debtors and debt holders will then have a handle on how great their losses are. When the bottom is falling out, it is difficult to get lenders to lend if they are afraid their remaining cash reserves will be needed to shore up the bank because of loan losses. The holders of subprime debt find it difficult to value their assets while housing values are still dropping.

Lenders have been shepherding their cash, reducing debt obligations, and cutting back lending and new investments because they do not know how deep their hole will be until housing bottoms out. Keynes called this a “liquidity trap.” More reasonable people, especially the Austrian school economists, call this a reasonable and necessary response to uncertainty.

The Fed and the federal government have been flogging this liquidity trap issue without let up and basically credit is still drying up. A 0.25% Fed Funds rate is basically a negative rate and they still can’t get banks to lend. The Fed’s balance sheet is at a record high. They have bought $850 million of mortgage backed securities. They are injecting cash into lenders. They have basically suspended mark-to-market accounting.

In Q3, the FDIC reported that bank lending still contracted by 3%:

Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.

 

Commercial and industrial loans have dropped to $1.37 trillion from $1.6 trillion, commercial real-estate loans have declined to $1.66 trillion from $1.72 trillion, and consumer loans have fallen to $847 billion from $857 billion at the end of last year.

What do banks do? They have decided they would rather hold Treasury paper instead of make loans. This chart shows what’s been happening. No wonder T-rates have stayed so low despite massive deficit financing.

This is what makes Bernanke, Geithner, and Summers lose sleep at night. “It’s supposed to work, dammit!” Maybe this is why Summers is always falling asleep. No matter what they’ve tried, they can’t get banks to lend. I think they are very worried about this and while they say the economy is recovering nicely, they are crossing their fingers at the same time.

Back to housing.

I have been saying that I think the housing market is finding a bottom. I thought that low prices and rising affordability was the main driver of the housing market. If this were so, then housing prices would reflect real market valuations and this would finally bring about the liquidation of assets and debt wastefully invested during the prior artificial credit cycle. Lenders would know where they stood financially and would liquidate bad assets and rebuild their balance sheets. No more waiting around wondering what the Fed or the government would do to save housing.

I was wrong.

The housing market I now believe is being sustained almost entirely by the Fed and the federal government. This rekindling of the housing bubble is counterproductive and will hinder a real recovery of the economy because an artificially backed market will delay the necessary liquidation of the prior cycle’s malinvestment of capital.

Here is why I changed my mind:

First, 59% of new home buyers are relying on government-backed FHA, the Veterans Administration, and the Department of Agriculture loans. Most of these sales are driven by the first-time home buyers tax credit. The tax credit program has been extended through April, 2010.

Second, existing home sales are being driven by the tax credit and by foreclosure and short sales. Existing home sales are up 10.1%. Distressed sales — mainly foreclosures and short sales — accounted for 30% of transactions in the third quarter. And. according to the NAR, home sales are being driven by first time home buyers trying to make the previous November deadline.

This will have a negative impact on future sales. Like Cash for Clunkers, these government-driven sales may just be eating into sales that would have occurred in 2010. Many economists are referring to this phenomenon as “payback.”

Third, mortgage rates are now at 30 year lows. Another Fed related gift to home buyers. The average 30-year mortgage rate was 4.95% in October, down from 5.06% in September, according to Freddie Mac. Today, Freddie said the rate was down to 4.7%.

But … home prices are still falling. The S&P/Case-Shiller index of prices fell 8.9% for the July-through-September period from a year earlier. That was an improvement from the 14.7% drop in the second quarter and the 19% decline in the first three months of 2009. Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier. The national median price was $177,900, down 11.2% from the third quarter of 2008. [Don't ask me to explain the disparity. Case-Shiller and NAR measure this differently.] Last month the median price for an existing home was $173,100, down 7.1% from $186,400 in October 2008.

Thus, despite record interference in the housing market by the government, home prices are still falling. There are several reasons why it is likely that home prices will continue to fall.

Almost 25% of home owners are upside down with their mortgages. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic. This shadow market is huge:

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. …

 

But negative equity “is an outstanding risk hanging over the mortgage market,” said Mark Fleming, chief economist of First American Core Logic. “It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.” Borrowers who owe more than 120% of their home’s value, he said, were more likely to default.

 

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay — more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. “The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that,” the study said.

This overhang will continue to drive prices down. There is no way the Feds can force lenders to modify enough loans to make a serious dent in this overhang. It’s imply too big. Eventually the losses from forced modifications will mount and the FHA or any other agency will not be able to pay off their guarantees to lender. Nor should they try.

Mark Zandi, who correctly predicted a crisis in the housing market, but not the Crash, said on Wednesday, “The housing crash is not over.” He said the lull in foreclosure sales for the past few months, due to the government’s pressure on lenders to modify loans, has resulting in higher prices. He expects Case-Shiller to bottom by Q3 2010 with an overall price decline of 38% (now at 32%).

“Foreclosure sales will increase, and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification,” he said.

 

Zandi said 7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.

What this means is that the housing supply, now down to a 7+ months supply, will rise again, and prices will continue to decline. We haven’t seen the bottom yet.