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  • Archive for the 'Public Finance' Category

    A Really Big Short Still Awaits

    Posted by Kevin Villani on 24th September 2016 (All posts by )

    When testifying in 2010 before the Financial Crisis Inquiry Commission into the financial crash, then Federal Reserve Board Chairman Ben Bernanke recommended only one reference, Lords of Finance: The Bankers Who Broke the World (2009), presumably for the narrative that insufficient money printing in the aftermath of the Great War lead to the next one. Right idea, wrong narrative!

    The US homeownership rate peaked at a rate well above the current level almost a half century ago mostly funded by a system of private mutual savings banks and savings and loans. The historical justification for federal “secondary market” agencies was political expediency – exemption from now obsolete federal, state and local laws and regulations inhibiting a national banking and mortgage market. Now government-run enterprises account for about 90% of all mortgages, with the Fed their primary funding mechanism, what the Economist recently labeled a de facto nationalization.

    The Historical Evolution

    How did the private US housing finance system repeatedly go bankrupt? To quote Hemingway: Gradually, then suddenly. The two competing political narratives of the cause of financial market crises remain at the extremes – either a private market or public political failure – with diametrically opposite policy prescriptions. The politician-exonerating market failure narrative has not surprisingly dominated policy, with past compromises contributing to the systemic financial system failure, the global recession of 2008 and subsequent nationalization.

    The Great Depression stressed the S&L system, but the industry’s vigorous opposition to both federal deposit insurance and the Fannie Mae secondary market proved prescient as the federally chartered savings and loan industry eventually succumbed by 1980 to the federal deposit insurer’s perverse politically imposed mandate of funding fixed rate mortgages with short term deposits and competition from the government sponsored enterprises.

    The S&Ls were largely replaced by the commercial banks. To make banks competitive with Fannie and Freddie, politicians and regulators allowed virtually the same extreme leverage, in return for a comparable low-income lending mandate – CRA requirements leading to a market dominating $4 trillion in commitments to community groups to whom the Clinton Administration had granted virtual veto power over new branch and merger authority.

    The Financial Crisis of 2008 and the aftermath

    The Big Short by Michael Lewis and more recent movie portrayed not just banker greed but the extreme frustration of those shorting the US mortgage market stymied by a housing price bubble many times greater than any in recorded US history that refused to burst. The reasons: 1. the Fed kept rates low and money plentiful, and 2. whereas banks would have run out of funding capacity, the ability of Fannie and Freddie to continuously borrow at the Treasury’s cost of funds regardless of risk and their HUD Mission Regulator requirement to maintain a 50% market share kept the bubble inflating to systemic proportions.

    The Obama Administration fully embraced the alternative private market failure narrative in Fed policy, regulation and legislation:

    • To partially ameliorate the effects on the real economy of disruption to the global payments mechanism the Fed had to bail out the banking system. QE1/2/3/4 and ZIRP (zero rates), now NIRP, did this by re-inflating the house price bubble, postponing defaults while allowing banks risk-free profits. The Fed – and taxpayers – would lose more than the entire S&L industry did should rates rise by a comparable amount if it marked its balance sheet to market.
    • Regulators had to appear to punish the banks. In response to paying hundreds of billions of dollars in what the Economist labeled “extortion” – some of which ironically went to populist political action groups – and the subsequent oppressive regulatory regime, U.S. commercial banks are exiting the US mortgage market in spite of ongoing profits enabled by extreme leverage.
    • One legislative centerpiece, the Dodd Frank Act passed in July 2010 in direct response to the financial crisis, doubled down on political control of financial markets without addressing the future of Fannie and Freddie. The other, Obamacare, enacted four months earlier, was similarly premised on regulating private health insurers to make health insurance simultaneously cheaper and more widely available.

    The Long Term Consequences

    Bernanke’s focus on choosing the narrative was useful, but the political choice of the market failure narrative appears to reflect convenience rather than conviction. The direct taxpayer costs of implicit or explicit public insurance and guarantees come with both a whimper – tax savings amounting to tens of billions annually due to the deductibility of interest costs – and a bang – future taxpayer bailouts generally delivered off-budget.

    Fannie and Freddie conservatorship deftly avoided debt consolidation while dividends reduced reported federal deficits. The student loan market has also been de facto nationalized, with potential unbudgeted losses totaling hundreds of billions. Obamacare was similarly premised on regulating private health insurers to make health insurance simultaneously cheaper and more widely available, but under-budgeted health insurance subsidies predictable caused massive losses and health insurers are now withdrawing from the market.

    Monetary policies caused household savings to stagnate as returns to retirement savings evaporated. Defined obligation public pension funds were all rendered technically insolvent when funding is valued at current market returns rather than the assumed rate as much as ten times that. The failure of the economy to grow per capita was explained as the “new normal”. But politicians made no attempt to reflect the implied technically insolvency of public pensions or Social Security and Medicare.

    Private firms fail, but private markets rarely do. Public protection and regulation makes firms “too big to fail” until markets fail systemically. The current and projected future public debt bubble is unsustainable, and financial markets will eventually ignore the accounting deceptions and pop it. The relative weakness of other sovereign debt is delaying the inevitably, making The Really Big Short a good title for a Michael Lewis’s sequel. Politicians and central bankers will again say “nobody saw this coming”. What then?

    ====
    Kevin Villani, chief economist at Freddie Mac from 1982 to 1985, is a principal of University Financial Associates. He has held senior government positions, been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath. This article was originally published at FFE.org

    Posted in Big Government, Economics & Finance, Markets and Trading, Predictions, Public Finance, Real Estate, Systems Analysis | 21 Comments »

    What has happened to Venezuela?

    Posted by Michael Kennedy on 21st May 2016 (All posts by )

    venzuela

    Venezuela is in the news as the country cannot even buy paper to print money.

    This all goes back to 1998 when Chavez was elected by the people.

    He was an army officer and had previously attempted to overthrow the government, a coup that failed.

    in the early 1980s. Chávez led the MBR-200 in an unsuccessful coup d’état against the Democratic Action government of President Carlos Andrés Pérez in 1992, for which he was imprisoned. Released from prison after two years, he founded a political party known as the Fifth Republic Movement and was elected president of Venezuela in 1998.

    Venezuela is an example of The Curse of Natural Resources.

    The idea that resources might be more of an economic curse than a blessing began to emerge in debates in the 1950s and 1960s about the economic problems of low and middle-income countries.[3] The term resource curse was first used by Richard Auty in 1993 to describe how countries rich in mineral resources were unable to use that wealth to boost their economies and how, counter-intuitively, these countries had lower economic growth than countries without an abundance of natural resources. An influential study by Jeffrey Sachs and Andrew Warner found a strong correlation between natural resource abundance and poor economic growth.

    Venezuela is only the latest and worst example. The history is depressingly familiar.

    Read the rest of this entry »

    Posted in Big Government, Civil Liberties, Civil Society, International Affairs, Leftism, Public Finance | 55 Comments »

    “THE 30-SECOND GUIDE TO GOVERNMENT SPENDING”

    Posted by Jonathan on 9th May 2016 (All posts by )


    View post on imgur.com

    (Via Dan Mitchell: Milton Friedman, Adam Smith, and Other People’s Money – well worth reading.)

    Posted in Big Government, Economics & Finance, Political Philosophy, Public Finance | 3 Comments »

    Government, the things we do together.

    Posted by Michael Kennedy on 6th April 2016 (All posts by )

    cal

    Barack Obama is fond of describing government this way.

    As President Obama said the other day, those who start businesses succeed because of their individual initiative – their drive, hard work, and creativity. But there are critical actions we must take to support businesses and encourage new ones – that means we need the best infrastructure, a good education system, and affordable, domestic sources of clean energy. Those are investments we make not as individuals, but as Americans, and our nation benefits from them.

    That was a reaction to Romney’s criticism of his silly comment.

    I prefer the quote attributed to Washington.

    “Government is not reason, it is not eloquence,—it is force! Like fire, it is a dangerous servant, and a fearful master; never for a moment should it be left to irresponsible action.”

    Now, we see a new imposition.

    The Department of Labor says its so-called fiduciary rule will make financial advisers act in the best interests of clients. What Labor doesn’t say is that the rule carries such enormous potential legal liability and demands such a high standard of care that many advisers will shun non-affluent accounts. Middle-income investors may be forced to look elsewhere for financial advice even as Team Obama is enabling a raft of new government-run competitors for retirement savings. This is no coincidence.

    Labor’s new rule will start biting in January as the President is leaving office. Under the rule, financial firms advising workers moving money out of company 401(k) plans into Individual Retirement Accounts will have to follow the new higher standards. But Labor has already proposed waivers from the federal Erisa law so new state-run retirement plans don’t have the same regulatory burden as private employers do.

    Read the rest of this entry »

    Posted in Big Government, Capitalism, Economics & Finance, Public Finance | 7 Comments »

    Who’s More Fascist: Presidential Candidate Donald Trump or Former Federal Reserve Chairman Ben Bernanke?

    Posted by Kevin Villani on 19th March 2016 (All posts by )

    How Economists Facilitated the Transition of Erstwhile “Market” Economies to Fascism

    The Left calls Donald Trump a fascist invoking the memory of Hitler and Mussolini, to which Trump might reply: “they were losers; I’m no loser.” Fascism is in essence the political control of the private economy, historically justified by democratically elected leaders to defend against perceived or orchestrated external threats. Progressive war politicians from Presidents Wilson and FDR to Johnson and Obama and now candidate Clinton have pursued this same goal in the US as has the social democratic European Union.

    At the recent meeting of the G20 leaders and central bankers political responsibility for and control over their respective economies was assumed, but their Alfred E. Newman “what, me worry” smiling faces belie the fragility of the current global economy. The political distortions to both the financial and real economy have arguably never been greater, to which politicians and their economist enablers prescribe more of the same mostly wasteful public spending financed by money printing, a cure reminiscent of medieval bloodletting.

    Having never been of much use to business, economists mostly followed “Say’s Law” that supply creates its own demand (for academic economists). They got their first pervasive shot at political power when President Wilson – an academic who chafed at constitutional constraints – created the Federal Reserve which helped US bankers fund the Allies until he could mobilize a war economy, making the first WW “Great.” The unprecedented death and destruction of the Great War knocked the global economy off kilter and the massive international war debts made stabilization politically difficult. As the creditor and least damaged victor, the US economy boomed in the roaring ’20s, followed by a bust.

    Purveyors of the “dismal science” had previously counseled that politicians had to own up to the cost of war until the private economy recovered. While the “arts” of manipulating the value of currency and public spending financed by coercive taxes and often uncollectable debt as well as coercive regulation were as old as politics and war itself, post WW I economists became noticeably less “dismal” and purportedly more “scientific,” believing that such “macroeconomic” interventions could be calibrated to “tame business cycles” in part by transferring or defaulting on war debts. This was complemented by “microeconomic science,” the recent objective of which has been to prove that individuals aren’t always perfectly rational (and by inference in need of paternalistic political protection and direction). Macroeconomists contend that this psychological defect is contagious, conjuring irrational mobs running on banks (or attending Trump rallies).

    Read the rest of this entry »

    Posted in Big Government, Crony Capitalism, Economics & Finance, Public Finance, Trump | 5 Comments »

    In Defense of Wall Street A**holes

    Posted by Kevin Villani on 11th February 2016 (All posts by )

    Long time Democrat turned Republican Donald Trump, who as a business titan relied more than any of his opponents on “Wall Street” funding, decisively won the Republican primary. In sharp contrast, socialist Bernie Sanders decisively won the New Hampshire Democrat primary by attacking his opponent’s Wall Street ties. Trump supporters apparently believe that the way to deal with Wall Street a**holes is a bigger a**hole who will negotiate much better deals, whereas Sanders supporters believe that “Wall Street (a synonym for the entire US financial system) is a fraud” requiring major extractive surgery.

    Most people within the NY financial community including the numerous mid-town asset management firms agree that many Wall Street players were a**holes during the sub-prime lending debacle leading to the 2008 financial crisis, but surely the Sanders pitchfork brigade wouldn’t travel uptown. This may explain why among the thousands of books and articles written in the aftermath of the financial crisis and the Occupy Wall Street movement, Wall Street hasn’t defended itself and has found few defenders willing to go public.

    Truth be told, Wall Street has always attracted more than its share of greedy a**holes. But historically they discriminated against the less profitable investments in favor of those that had the highest return potential relative to risk. This represented the brains of a heartless US capitalist system. Defenders of capitalism correctly argue that it is the only economic system at the base of all human economic progress, however unequally distributed. Progressive critics argue for greater equality, the poor made poorer so long as the better off are equally so (although this is not the way it is typically represented).

    Read the rest of this entry »

    Posted in Business, Crony Capitalism, Economics & Finance, Human Behavior, Markets and Trading, Politics, Predictions, Public Finance, Trump | 6 Comments »

    The Most Important Story No One Is Talking About – Puerto Rican Debt

    Posted by Carl from Chicago on 15th October 2015 (All posts by )

    Dan and I go back and forth on the relatively arcane topic of municipal debt. As we all know, the state of Illinois is awash in debt. The situation is so bad that:


    1. The State of Illinois is operating without a budget

    2. The city of Chicago is proposing a massive property tax increase

    3. Cook County just raised our sales tax (one of the highest rates in the country, already) and is proposing additional fees

    4. Chicago Public Schools face a major deficit and without some sort of massive state tax relief is likely going to face significant layoffs and a likely teachers strike

    5. Note that we are one of the few states and cities to be in such dire straits that we issue TAXABLE debt instead of MUNICIPAL debt which is generally exempt from Federal taxes and some state taxes. This is due to the fact that you generally cannot issue muni bonds to pay off operating expenses (like payroll and legal settlements)

    The long term most indebted players have been Detroit, Puerto Rico, and the State of Illinois / City of Chicago. We saw how the Detroit bankruptcy occurred, with bondholders generally taking it on the chin and unsecured pension holders in fact emerging in a relatively better situation.

    Now Puerto Rico is up to bat. They have massive, unpayable debts of many varieties (some secured by full faith and credit, some secured with revenues, some bank loans, etc…) and their governor basically said so out loud. All of this is inevitable as their island’s best talent has fled to the mainland USA and the remaining population is more and more reliant on government aid to survive. They also have failed to modernize their power infrastructure and / or build new industries outside of tourism which erodes their ability to compete against the mainland USA that in turn has much higher productivity.

    The real issue – long term – is whether or not the Federal government will back up the states. This is essentially the “long game” of the State of Illinois and the city of Chicago – waiting to see whether or not the Federal government is really going to stand by and let us go bankrupt or not. If the government is ultimately going to pick up our debts, it is “business as usual”, and the corruption, back-scratching, and non-competitive behavior can just continue indefinitely, with taxpayers across the nation picking up the debris rather than forcing the citizens of Illinois to clean up our act.

    Today Puerto Rico and the treasury announced that they are working to backstop the Puerto Rican debt with some sort of Federal umbrella per this article.

    Puerto Rico and U.S. officials are discussing the issuance of a “superbond” administered by the U.S. Treasury Department that would help restructure the commonwealth’s $72 billion of debt, people familiar with the plan said.

    And what a great name! A “superbond” means that all the US citizens will pick up the “super” obligations of our corrupt, crony-laden, inefficient city and state. That’s super!

    This is the path out for Illinois and the city of Chicago. Play brinksmanship with Federal government and receive a backstop. Puerto Rico leads the way!

    Cross posted at LITGM

    Posted in Big Government, Chicagoania, Economics & Finance, Politics, Public Finance, Taxes | 15 Comments »

    Risk: An Allegory

    Posted by Jonathan on 26th August 2015 (All posts by )

    Here’s an interesting article on CNBC’s website: Katrina anniversary: Will New Orleans levees hold next time?

    The 100-year threshold is also a statistical guess based on data on past storms and assessments of whether they’ll occur in the future. That means the models change every time a new hurricane strikes. The numbers being used as guidelines for construction are changing as time passes.
     
    The standard also does not mean—can’t possibly mean—that a 100-year storm will occur only once per century. It means that such a storm has a 1 percent chance of happening in any given year. So for example, it’s technically possible for several 100-year floods to occur in just a few years, although it’s highly unlikely.

    One way to look at it is that the engineers need to estimate how high a wall New Orleans needs to protect itself against a reasonably unlikely flood — say, a 1-in-1000-year event. This is the line of discussion pursued in the CNBC article.

    Another way to look at it is to observe that the odds of another Katrina, or worse, within a specified period are highly uncertain. In this case a radical course of action might be called for. You do something like: take the best estimate for the wall height needed to protect against a 1000-year flood and then double it. Building such a levee would probably be extremely expensive but at least the costs would be out in the open. Or you might decide that it’s not the best idea to have a coastal city that’s below sea level, and so you would discourage people from moving back to New Orleans, rather than encourage them by subsidizing a new and stronger system of walls.

    In this kind of situation the political incentives are usually going to encourage public decisionmakers to ignore radical solutions with high obvious costs, in favor of the minimum acceptable incremental solution with hidden costs: probably subsidies to rebuild the levees to, or perhaps a bit beyond, the standard needed to protect the city in the event of another Katrina. And it’s unlikely that any local pol is going to advise residents to move out and depopulate his constituency. Thus, eventually, a worst case will probably happen again.

    Posted in Deep Thoughts, Economics & Finance, Environment, Human Behavior, Markets and Trading, New Orleans Tragedy, Predictions, Public Finance, Statistics, Systems Analysis, Tradeoffs | 14 Comments »

    Greece is going aglimmering.

    Posted by Michael Kennedy on 5th July 2015 (All posts by )

    Greeks

    I’ve been planning trip to Greece for months. Back in January, I decided to wait until the Greek monetary crisis was closer to resolution. Finally in May, I made reservations for September. I even posted my plans here.

    Well, today it may be all going glimmering. The Greeks have apparently voted NO to the EU deal.

    Greece has overwhelmingly rejected Europe’s latest bailout package, plunging the country’s future in the Eurozone into jeopardy.

    With most of the votes counted in a referendum that will shape the future of the continent, the ‘No’ campaign has a staggering 61 per cent of the vote – 22 points ahead.
    German Chancellor Angela Merkel and French President Francois Hollande called for an EU crisis summit to find a ‘solution’ for Greece, with leaders set to meet in Brussels on Tuesday.
    Thousands of anti-austerity voters took to the streets in celebration as the leader of the pro-EU ‘Yes’ campaign resigned, with an official announcement of the final result imminent.
    But German politicians warned of ‘disaster’ as they accused Greek Prime Minister Alexis Tsipras of ‘tearing down bridges’ between Greece and Europe.

    Now what ?

    Read the rest of this entry »

    Posted in Big Government, Current Events, Europe, Leftism, Public Finance | 32 Comments »

    Random Thought

    Posted by Jonathan on 27th June 2015 (All posts by )

    The Supreme Court and Federal Reserve are corrupt in the same way. Both institutions defer excessively to legislative and regulatory agendas instead of sticking to their respective mandates.

    (Re: Judicial Restraint.)

    Posted in Current Events, Deep Thoughts, Law, Organizational Analysis, Political Philosophy, Politics, Public Finance, Tea Party | 6 Comments »

    Economic and Political Turmoil a Century after the Great War: Is it Deja Vu All Over Again?

    Posted by Kevin Villani on 17th October 2014 (All posts by )

    This year marks a century since the outbreak of WW I and coincidently the initiation of US Federal Reserve System operations. Prior to these events, politics were democratizing, economic growth was booming, economies were liberalizing and global trade and finance were growing, all at a pace not seen again for almost another century. Recognizing that achieving these mutual benefits required an externally imposed political discipline, all of the countries participating in this happy situation voluntarily followed a set of rules governing domestic and international trade and finance for automatic and continuous adjustment to changing economic reality, then provided by the gold standard.

    It was during this enlightened period that philosopher George Santayana wrote: “those who cannot remember the past are condemned to repeat it.” Hedge fund manager and Brookings Director Liaquat Ahamed set out to remind us why countries failed to recapture this economic dynamism after the Great War with the publication of the Pulitzer Prize winning Lords of Finance: The Bankers Who Broke the World in 2009. This book took on greater significance when in 2010 Federal Reserve Board Chairman Ben Bernanke recommended only this historical account in response to the Financial Crisis Inquiry Commission’s request for a book reference explaining the 2008 financial crisis. What history had this most recent financial crisis already repeated and what was Chairman Bernanke determined to avoid repeating in the aftermath?

    Read the rest of this entry »

    Posted in Book Notes, Current Events, Economics & Finance, History, Public Finance, Systems Analysis | 6 Comments »

    Incentives and Economics

    Posted by Carl from Chicago on 14th July 2014 (All posts by )

    A few years ago I went to Norway and had a great time. In this post I described how expensive everything was in Norway due to their highly valued currency (tied to oil riches) combined with the relentless decline of the US dollar (tied to ZIRP and other dubious economic moves). In the simplest terms, a fast food meal or a beer in Norway cost over $20 USD which is complete madness.

    Business Insider discussed the Scandinavian economic experiment, where high taxes are applied to goods and services in order to fund a vast social safety net. From the article:

    In Norway, a burger and fries at a fast food joint will set you back $23. A six-pack of warm grocery-store beer is nearly $30.
    These hefty price tags are due, in part, to high wages for low-skilled service jobs. But high taxes play a role too.
    Most products have a 25 percent value-added tax, which means that $5.50 of the cost of that burger goes to fund Norway’s generous social programs.
    As a visitor, you get little for the added price. But, as a resident, your daily spending helps to fund an expansive package of benefits, including health care, child care, high-quality education, pensions, and unemployment insurance.

    Some are now proposing this high-cost method, with large taxes embedded in everyday prices, as a solution to the inequity in incomes and wealth that is discussed widely in politics and economics today.

    From the perspective of someone who is highly interested in economics and tax policy, my two rules of thumb are:
    1) that the tax policy raise the money that it intends to raise
    2) that the tax policy not significantly distort economic activity

    Any society that implements high taxes such as Norway needs a comprehensive surveillance model in order to collect these taxes. It is difficult to avoid taxes that are broadly assessed on fast food, for instance, because each corporate location will set up cash registers and controls to remit these taxes onto the state. The same types of processes can be installed in liquor stores, formal bars and nightclubs, grocery stores, and restaurants.

    In a less-homogeneous society such as the USA, we already have major problems with tax evasion on cigarettes and likely liquor, and these are in responses to our sales taxes. The problems would be compounded if we placed value added taxes on all goods at a higher level and on services such as restaurants, hair care, etc… Smuggling would become rampant and informal or barter methodologies would increase in size and scope. These sorts of costs would have to be applied across the USA or some areas would become uncompetitive and see an out-migration of economic activity, starting with incremental additions (no one has opened a new manufacturing plant in Illinois in years, for instance) and eventually leading to the lock, stock and barrel out migration of existing industries (such as the exodus of car manufacturing out of the Midwest and California to the American South).

    Read the rest of this entry »

    Posted in Big Government, Economics & Finance, Public Finance, Taxes | 33 Comments »

    Emmanuel Todd, Speaking in English, on Why the Euro is a Failure

    Posted by Lexington Green on 9th July 2014 (All posts by )

    Todd applies his family structure analytic model to explain why the Euro is doomed to fail. He notes that the French and the Germans, for example, have little in common. He expressly says that the French individualism is much closer to the Anglo-American individualistic culture, distinct from the German authoritarian style. He says that the French elite caused the problem and they cannot admit their mistake or the entire foundation of the French political structure would collapse.

    The European idea of a union of free and equal states has been destroyed by the Euro, and it is now an economic hierarchy, with the Germans at the top. Further, democracy itself is incompatible with the Euro.

    Todd notes that the very low birth rates in Europe have a positive benefit: There will be no open or violent conflict to resolve the current political conflicts. Rather, contentious issues are kicked up to the “European level” — which means nothing whatsoever will happen.

    He sympathizes with the British position. Britain is dependent on a dying content, Europe. “It is committing suicide under German leadership.” But Britain is part of a much larger Anglo-American world, which in ten years, on current trends, will have more people than all of Europe.

    Of course, America 3.0 is based in large part on a “Toddean” understanding of American culture, and this talk is consistent with our understanding.

    A fascinating talk.

    H/t Brian Micklethwait

    Posted in America 3.0, Anglosphere, Economics & Finance, Europe, France, Public Finance, Video | 3 Comments »

    Posted by Jonathan on 19th June 2014 (All posts by )

    canned gold

    After Janet Yellen’s latest press conference Chicagoboyz plunge heavily in canned kipper snacks and other hard assets.

    Posted in Photos, Public Finance, That's NOT Funny | 6 Comments »

    Picketty’s Introduction

    Posted by TM Lutas on 9th June 2014 (All posts by )

    Thomas Piketty has written a monster of a book, Capital in the Twenty-First Century. I find myself in strange agreement with Brad DeLong, that the collective conservative response is weak. I had a patch of time that left me twiddling my thumbs waiting for some pretty long database operations to finish over the past four days. So I went and decided to fisk the book. I just finished the introduction. It took four posts, Part I, Part II, Part III, Part IV and overran the spare time I had available from a database import and indexing task by about 12 hours.

    Now I know why the criticism is so weak. Piketty is a target rich environment and doing a line by line analysis is simply exhausting. But it’s the only way to be sure.

    Posted in Book Notes, Business, Economics & Finance, Public Finance, Society, Taxes, USA | 18 Comments »

    “Death Stars are overrated military investments”

    Posted by Jonathan on 27th April 2014 (All posts by )

    Via J. Scott Shipman and Grurray on Twitter:

    Real-life performance data shows that the most important and high-impact technologies are not the gold-plated, over-engineered wonder weapons that turn majors into colonels, colonels into generals, and young Jedi apprentices into Sith Lords. Instead, data suggest the real winners are humble, simple, low-cost products made by small, rapid innovation teams — the type of projects that don’t attract much attention from the press or from the brass because all they do is get the mission done without any fuss.

    Read the whole thing.

    Posted in Management, Military Affairs, Public Finance, Systems Analysis | 34 Comments »

    Income inequality: Social justice or crony capitalism?

    Posted by Kevin Villani on 26th April 2014 (All posts by )

    The political movement Occupy Wall Street has shaped the tax and spending proposals of the Obama administration’s budget and political debate on the premise that our capitalist economic system is rigged to favor the top-earning “one percenters.” But income inequality can result either from capitalism or politics, each for better or worse.

    Historically, political elites focused on enriching themselves at the expense of the general public: In 1773 patriots threw the tea into Boston Harbor of the East India Tea Company, granted a “royal charter” in 1600. The U.S. system was founded not just on the principles of democracy but on limited government complementing private market capitalism that encouraged individuals to “pursue happiness” — accumulate wealth — on merit rather than political connections. Support for the less fortunate was provided by family members, religious and other charitable organizations.

    Believing (wrongly) that class envy against the new economic elites — innovative entrepreneurs — would cause revolution, Karl Marx offered the socialist alternative “from each according to his ability, to each according to his need” with politics supplanting merit. Despite totalitarian methods universally employed by governments seriously pursuing the socialist model leading to the murder of tens of millions, one historian recently concluded that communism reduced workers “to shiftless, work-shy alcoholics.”

    Read the rest of this entry »

    Posted in Big Government, Crony Capitalism, Economics & Finance, History, Political Philosophy, Public Finance, Taxes | 15 Comments »

    “Occupy Pennsylvania Avenue”

    Posted by Jonathan on 9th December 2013 (All posts by )

    New from Kevin Villani: Occupy Pennsylvania Avenue: How Politicians Caused the Financial Crisis and Why their Reforms Failed, and the Kindle version: Occupy Pennsylvania Avenue

    (Kevin has shared on this blog a couple of prior works on the same subject. You can find those essays, and reader comments in response, here.)

    Posted in Big Government, Book Notes, Economics & Finance, Public Finance, Urban Issues | Comments Off on “Occupy Pennsylvania Avenue”

    “THE DANGER OF BALANCING THE BUDGET”

    Posted by Jonathan on 19th August 2013 (All posts by )

    Henry Meers:

    House Republicans have to learn and proclaim the basics of money and taxes because balancing the budget could be a disaster for the economy as even more money is pulled out of the productive economy to pay for their past sins. The best example of how to get out of debt remains what England did after Waterloo and the massive debt of the Napoleonic War. Parliament dumped the income tax immediately, returned to sound money in 1821 and went to free trade later. The economy exploded and led to a century of prosperity like none seen before. They didn’t pay off their wartime debts, a huge sum for the time, they froze it and paid interest. As time went by, that once inconceivable mountain of debt shrank to insignificance in the shadow of the world’s most powerful economy.

    He gets it. Economic growth is the solution to most of our problems. Growth requires investment capital. The less investment capital that gets diverted from the private sector into unproductive govt spending and misguided debt paydowns, the more growth there will be.

    Read the whole thing.

    (Via Lex.)

    Posted in America 3.0, Economics & Finance, Public Finance | 20 Comments »

    Citizen Intelligence curious fact of the day

    Posted by TM Lutas on 9th July 2013 (All posts by )

    During the process of putting together Citizen Intelligence, I sometimes run into some things that are quite simple, but are worth remarking on. I’ve decided to put them up here as an irregular series.

    Out of the ~89,000 governments in the United States, ~55,000 of them bond, or borrow money, about 61% of the total. That means 34,000 do not. Which of your governments live within their means and spend all their tax money on providing services and which of them have an invisible drain installed siphoning off unnecessary interest payments to Wall Street? How many of them could, with minimal inconvenience, add a few more percent in services or cut a few percent off their tax bills simply by not bonding or reducing their bonding to large capital items instead of borrowing for operations?

    Note: Updated to make it clear that this is not about the classic large capital expenditure items that most would agree are legitimate projects for bond financing but rather borrowing that could be foregone and where, in some jurisdictions, they manage their cash flow well enough to do without the borrowing.

    Posted in Big Government, Economics & Finance, Public Finance | 3 Comments »

    Heed the Voices

    Posted by Lexington Green on 14th May 2013 (All posts by )

    IRS Intimidation Forced Founder to Shut Down Tea Party Group.

    Progressive Group: IRS Gave US Conservative Groups’ Confidential Documents.

    IG report: ‘Inappropriate Criteria’ Stalled IRS Approvals of Conservative Groups.

    During the 2012 election cycle the Internal Revenue Service did not act as an objective, nonpartisan arm of government subject to the rule of law.

    Instead the Internal Revenue service acted as an arm of the Democrat Party, engaged in harassment, intimidation and opposition research for partisan political purposes.

    The result of the most recent Presidential election, in the key state of Ohio, was impacted, possibly decisively, by this intentional, partisan, coordinated, unlawful activity.

    Yet this entity, the Internal Revenue Service, will imprison you if you disobey it.

    There are “voices that incessantly warn of government as nothing more than some separate, sinister entity … that tyranny is always lurking just around the corner.”

    Heed the voices.

    Posted in Anti-Americanism, Big Government, Crime and Punishment, Politics, Public Finance, Tea Party, USA | 6 Comments »

    “College Grads: It’s a Different Economy”

    Posted by Jonathan on 10th May 2013 (All posts by )

    This is very good:

    There are opportunities, but they require a deep understanding of risk and security. A livelihood with day-to-day low-level insecurity and volatility is actually far more stable and secure than the cartel-state one that claims to be guaranteed.
     
    The burdens of Fed manipulation and the cartel-state rentier arrangements will come home to roost between 2015-2017. Those who are willing to seek livelihoods in the non-cartel economy will likely have more security and satisfaction than those who believed that joining a rentier arrangement was a secure career.
     
    There is a price to joining a parasitic rentier arrangement, a loss of integrity, agency and independence. Complicity in an unsustainable neofeudal society has a cost.

    Read the whole thing.

    (Via Lex and ZeroHedge.)

    Posted in America 3.0, Big Government, Economics & Finance, Education, Political Philosophy, Predictions, Public Finance, Society, USA | 9 Comments »

    “Often, the insights of behavioral economics are used or misused to support this thesis.”

    Posted by Jonathan on 30th March 2013 (All posts by )

    Riffing on David Foster.

    It’s like how Keynes’s theory about liquidity traps is used to rationalize all kinds of govt spending programs, perhaps far beyond what Keynes himself would have advocated.

    1 Great man has a theory about a, b and c.

    2 Great man’s acolytes turn the theory into a dogma, religion and, eventually, industry.

    3 Politically savvy third parties with agendas use the theory to justify x, y and z.

    Posted in Human Behavior, Political Philosophy, Politics, Public Finance | 4 Comments »

    The Lost Boys

    Posted by Michael Kennedy on 2nd March 2013 (All posts by )

    UPDATE: Here is one solution.

    This week Europe blew up. The media haven’t caught up yet, because they are what they are. But the markets are catching up fast.

    This is a huge event for the United States, because our political elite is bound and determined to turn us into Europe. Hasn’t the EU found the answer to war and peace and prosperity forever?

    Our Democrats believe it. Europe is their model. Every batty new idea they have is copied from the glorious European Union. Twenty years ago they still celebrated the Soviet Union, until that house of cards crumbled. Now they have shifted their fantasy paradise to Europe.

    Over there, fifty years of increasingly centralized control have made it impossible for voters to be heard. The political parties are stuck in GroupThink. Only the fascist “protest” parties agitate for reform. The ruling class doesn’t listen. They don’t have to — they don’t have to run for election.

    So European voters fled to the fascists to express their rage and despair. Imagine one out of four US voters going for Lincoln Rockwell, and you get the idea.

    Read the rest, as they say.

    Belmont Club has an unusually good post for yesterday. I could say that more than once a week, if truth be known. This one is quite to the point on Sequester Day.

    The NHS, which its creators boasted would be the ‘envy of the world’, has been found to have been responsible for up to 40,000 preventable deaths under the helm of Sir David Nicholson, a former member of the Communist Party of Britain. “He was no ordinary revolutionary. He was on the hardline, so-called ‘Tankie’ wing of the party which backed the Kremlin using military action to crush dissident uprisings” — before he acquired a taste for young wives, first class travel and honors.

    The NHS is dealing with the shortage of funds by pruning its tree of life, so to speak. He also does not tolerate anyone telling the truth about it.

    it emerged he spent 15 million pounds in taxpayer money to gag and prosecute whistleblowers — often doctors and administrators who could not stomach his policies.

    The public money spent on stopping NHS staff from speaking out is almost equivalent to the salaries of around 750 nurses.

    It has recently been noted that NHS staff no longer recommend their own hospital for family members. Also one quarter report being harassed or bullied at work.

    The other half of the equation involves the youth.

    The European Youth will remain outside the Death Pathways for some time yet. But they will spend the time waiting for their turn at affordable, caring and passionate medicine in poverty and hopelessness. With the exception of Germany youth unemployment in Europe is over 20%. “A full 62% of young Greeks are out of work, 55% of young Spaniards don’t have jobs, and 38.7% of young Italians aren’t employed.”

    Unemployment exceeds even our own Obama economy for failure. Read the rest of this entry »

    Posted in Big Government, Britain, Civil Society, Coolidge, Economics & Finance, Elections, Europe, Health Care, Leftism, Libertarianism, Obama, Political Philosophy, Public Finance, Tea Party | 11 Comments »

    What lies ahead, I fear.

    Posted by Michael Kennedy on 8th February 2013 (All posts by )

    UPDATE: An an article at Belmont Club describes interest in alternative money creation as a way of anticipating inflation. It also goes further into a discussion of general competence.

    The idea that Virginia should consider issuing its own money was dismissed as just another quixotic quest by one of the most conservative members of the state legislature when Marshall introduced it three years ago. But it has since gained traction not only in Virginia, but also in states across the country as Americans have grown increasingly suspicious of the institutions entrusted with safeguarding the economy.

    What has changed is faith in the federal government, not just in Virginia but in a growing number of places. The lack of faith in the competence of government — and the soundness of the dollar — has been growing leading some states to create contingency plans in case the currency goes bust.

    Once again, I apologize for my pessimism but this is what I see. First, there is this article, which quotes a well known financier.

    There may be a natural evolution to our fractionally reserved credit system that characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a “big freeze” trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets. If so, then the legitimate response of creditors, debtors and investors inextricably intertwined within it, should logically be to ask about the economic and investment implications of its ongoing transition.

    Certainly “growth” seems to be fundamental to our economic health. That, of course, presumes a growing population but it also would be affected by a stagnant population with a growing age disparity. The obvious example of the latter is Japan.

    The creation of credit in our modern day fractional reserve banking system began with a deposit and the profitable expansion of that deposit via leverage. Banks and other lenders don’t always keep 100% of their deposits in the “vault” at any one time – in fact they keep very little – thus the term “fractional reserves.” That first deposit then, and the explosion outward of 10x and more of levered lending, is modern day finance’s equivalent of the big bang. When it began is actually harder to determine than the birth of the physical universe but it certainly accelerated with the invention of central banking – the U.S. in 1913 – and with it the increased confidence that these newly licensed lenders of last resort would provide support to financial and real economies. Banking and central banks were and remain essential elements of a productive global economy.

    The effect of asset bubbles on such a system is worrisome as the history of Japan and the recent history of the US have shown. The Panic of 1907 was largely responsible for the creation of the Federal Reserve. That financial crisis is thought, by the authors of a recent book, to have been a consequence of the 1906 earthquake in San Francisco, which destroyed a large amount of real assets and the insurance costs that were associated. The immediate cause was financial speculation but the real losses had added to the fragility of the system.

    Read the rest of this entry »

    Posted in Big Government, Civil Liberties, Conservatism, Economics & Finance, Elections, Libertarianism, Political Philosophy, Politics, Predictions, Public Finance | 23 Comments »