qe2

Once again credit to my boy Mikey for this one.  The part about the prices of energy, food and healthcare rising is the best.

iran again, and obama's reqorking of the financial regulation system

Well since my last post, things in Iran seem to be getting worse. At this point the government has begun cracking down on protesters and several innocent people have been killed while trying to assemble peacefully and voice their outrage over this sham election. Earlier today President Obama made a statement condemning the "unjust actions" being taken by the Iranian government. Many Republicans have criticized the the president for not being more forceful with his condemnation. Although I had been critical of President Obama for not speaking out more clearly, I think he took a step in the right direction today. I think the President is right not to issue a harshly worded statement condemning the Iranian government in general. Although that is how every American feels, doing so would simply give fuel to the regime to spew anti-American propaganda and use it as an excuse to crack down on the dissenters. This type of harsh crackdown could end the protests altogether, along with any chance of seeing real change in Iran anytime soon.


The President should denounce the violence against the protesters. The U.S. stands for the principles of freedom of speech and assembly, and we should tell the world that any regime that does not respect those rights is no friend of ours. However, attacking the regime directly and threatening direct military action will probably do little more than given the Ayatollah an excuse to quash the protests even further. Things are currently moving in the right direction without the help of the U.S. and we should let the people of Iran continue their push for basic human rights. I'm not saying that we should never get involved, but until the regime starts using even more brutal tactics and killing its own citizens on a wider scale, we should let the Iranian people do the heavy lifting. The U.S. should allow the Iranians to contest the issue of whether the election was free and fair, and then focus the government's efforts on standing behind the rights of Iranians to peacefully protest election results that they believe have been manipulated.


But just because we won't intervene militarily, or threaten to do so, does not mean we should do nothing. First we should impose an oil embargo on Iran. Unfortunately, doing this through the U.N. will prove ineffective. The U.S. should come out and say that any country that buys or sells oil from Iran will no longer be a favored trading partner. This must include China. The consequence of doing business in Iran should be a large tariff place on any good imported from that country to the United States. If we make the penalty strong and stick to it, not even China will be able to skirt around it. They are much to dependent on U.S. imports.

On a very different note, I just want to say a few words regarding Obama's recently passed retool of the financial regulation system imposed by the federal government. The premise behind the whole bill was that although their were several agencies overseeing individual players and institutions in the financial markets, there was no single entity on the lookout for problems that posed a "systematic risk" to the system as a whole. According to Obama's flawed rhetoric, Wall Street bankers gamed the system and took tremendous long term risks in order to make large short term profits. According to the administration, the bankers deliberately packaged volatile investments such as mortgage banked securities so that they could hide risk and sell them to banks and other financial institutions for short term profits. How could anyone believe such a statement? Most Wall Street bankers are extremely intelligent people who were simply using the information available to them at the time to try and make profits for the investors they represent.

Investment bankers are logical decision makers like anyone else, and they make decisions based on two factors: potential returns and associated risks. The real cause of the crisis was not greedy bankers trying to make a quick buck, but the distortion of actual risk in the marketplace. And who caused that distortion of risk? I'm my opinion there were three principle causes: the federal government's implicit backing of Fannie May and Freddie Mac, failure of the ratings agencies and the federal reserve's easy money policy of the first half of this decade.

The first I think is quite obvious. Fannie and Freddie have always been semi-public entities, and the federal government has pressured them to finance mortgages for lower income people, even if those borrowers would not have received the loans absent the government pressure. By giving these loans to people who would not otherwise be deserving, at rates that do not reflect this risk of default, the government created bubble whereby they were almost statistically guaranteeing that default rates would be higher than would have otherwise have been expected. Additionally, by not adjusting the interest rates of these mortgages to reflect these higher probabilities of default, they did not hedge the risk of default with a higher rate of return. However, since the mortgages were backed by Fannie and Freddie, investors assumed they adequately reflected market conditions and even if they weren't that the federal government would take any losses (which they are doing now).

This also plays into the second point, that the rating agencies gave many mortgage back securities AAA ratings. What in hindsight could be considered extremely risky and small return securities received the highest ratings possible. Why? Well first there are tremendous conflicts of interest associated with these agencies. They are paid by the sellers, so they have strong incentive to inflate their ratings to make their clients happy and earn repeat business. The ratings agencies should work for the buyer, as they are evaluating risk for the buyer, not the seller. However, only federally approved agencies can perform this work, and the federal government dictates their structure. Until the federal government gets out of the rating picture, forcing buyers to independently rate potential securities investments by use of private rating entities, thereby imposing on the buyer the known risk of what happens if they trust a faulty rating, these mistakes will continue.

Lastly the federal reserve fueled a bubble mentality by keeping interest rates artificially low for too long, making them effectively negative in terms of real dollars. An effectively negative interest rate makes it more profitable to borrow money even if you don't have too, because you will be paying off the loan with a dollar that is worth less in value in the future. This lower dollar value even made up for the interest being paid on the loan under prevailing rates. By flooding the system with excess liquidity, the fed ensured that more risky investments would be made for less chance of profit. The result is the bust we are currently enduring.

So how is the Obama administration solving the problem. BY GIVING THE FED MORE POWER. He is giving an unelected body that already wields way too much power in our monetary system even more influence. It is outrageous. They will now have the power to inspect the books and require certain actions to be taken by any entity that the chairman deems to be a "systematic risk" to the financial system. Not to mention the rating agencies are not being reformed at all. For an example of how ignorance at the fed has contributed to the current collapse please read the following three articles in order: Speed Demons at the Fed, Slack Labor Markets Will Hold Down Prices, and Bernanke at the Creation. The first is an editorial by the WSJ in 2003 which predicted many of the problems were are seeing today, and criticised the fed as creating the environment for them. The second is Bernanke's remarks from a 2003 open market committee meeting were he dismisses the journal as being out of touch. The final is an editorial which points out why the journal was right, Bernanke was wrong, and that he is now pursuing the same type of policies that caused the problems in the first place. So get ready for another boom/bust cycle, except this one will probably be marked by much higher inflation. So what is the only logical thing to do? I know, let's give the fed even more power.

a couple of points

First of all, sorry to all my avid readers (if there are any) for the long break. I thought I would be able to write more often, but I am now working full time again, and I forgot how tiring that can be. I will try to do a couple of posts by the end of the weekend though. No promises.

I'm not sure if anyone besides me reads Matt Mosley's NFC East Blog on espn, but he recently asked his readers the following question: if you were starting a NFL franchise and were charged with winning a super bowl within three years, and you were allowed to draft 10 players from the NFC East, who would they be? I am not going to elaborate on why I would make these picks, but here they are in reverse order.

10. Brandon Jacobs, RB-NYG
9. Shawn Andrews, G-Phi
8. Brian Westbrook, RB-Phi
7. Jason Witten, TE-Dal
6. Asante Samuel, CB-Phi
5. Justin Tuck, DE-NYG
4. Jason Peters, T-Phi
3. Donovan McNabb, QB-Phi
2. Albert Haynesworth, DT-Was
1. Demarcus Ware, DE-Dal (He would be a DE for me)

Honorable mention to Santana Moss, Trent Cole, Marion Barber and Chris Cooley.

Apparently a bunch of people are making a big fuss because Supreme Court nominee Sonia Sotomayor apparently is a member of a club called Belizian Grove, which only accepts women as members. These people are claiming that if a male nominee were a member of an all-male club that did not allow women, then he would not be confirmed and labeled a sexist. What a bunch of cry babies. Although they are probably right that a male would have it held against him, they should stand up for their principles and say that this kind of thing doesn't matter. If they don't want that kind of thing used against a male nominee, don't complain now. What type of club you are in during your free time is nobody's business but your own. If Sotomayor wants to hang out in her girly club and talk about girly things, who gives two shits. So nobody should get pissed when I am nominated for the Supreme Court while I am a member of Augusta National.

President Obama is now trying to revive the "pay-as-you-go" rules for Congressional spending. In theory, this means that Congress cannot authorize new spending until it either finds a way to fund it through higher taxes or eliminating spending elsewhere. President Obama showing fiscal discipline? This is the biggest joke I have ever seen. It is so outrageous that he would propose this after all that he has spent in just 5 months, I cannot even comprehend how anyone would buy this shit. Does anyone really believe Obama has any, and I mean any, limits to how much he would be willing to spend? Sure, stupid people do. After a $787 billion stimulus bill that isn't stimulating anything other than the pockets of Washington special interests, hundreds of billions in bailouts for financial institutions through TARP, another hundred million of so for GM and Chrysler, and about $500 billion around the corner for socialized healthcare, sure I totally believe that Obama will now all of the sudden start being fiscally responsible. Not to mention that under the proposed pay-as-you-go rules, discretionary spending (which accounts for approximately 40% of the federal budget) and current entitlements are not included. So pet projects and programs like social security, medicare and medicaid would not have the rules apply to them. So basically all it would do would make it extremely hard to pass future tax cuts and limit increases in defense spending. Fuck that.

Inflation is on the horizon, and maybe even closer than the horizon. Unprecedented federal deficit spending, which has increased more this year (including adjustments for inflation, not just in terms of real money) than ever before in U.S. peacetime history. The fed has increased the monetary base at an extraordinary rate in an attempt to combat the recession. In fact, M1 (currency in circulation plus travelers checks plus demand deposits in banks) has increased more this year than at any time in the past 50 years. And its not even close. With a budget deficit that is 15% of GDP, and the total liabilities of our entitlement society after universal healthcare approaching an astronomical $100 trillion, there is no other answer. If the fed wants to keep tremendously high levels of inflation from occurring, the only thing they can do is to sell some of the trillions of dollars in U.S. treasuries it owns. However, does anyone think that is likely that the fed will do so, which would raise interest rates, especially since Obama will have to sell upwards of $2 trillion in newly issued treasuries over the next year or so to finance his enormous budget? Doubtful. In fact, the fed will probably end up buying some of treasuries that the Obama administration is issuing. At least this inflation will have the positive effect of making my school debt worth a lot less. But it is going to be tremendously harmful to the economy in general. My suggestion is to buy gold, silver, oil, wheat and other commodities. If you don't, then I told you so.

The Supreme Court decided not to hear Chrysler's bondholders appeal of Chrysler's bankruptcy. Although I knew that would happen, I think I have developed a good legal argument for why the should have taken the case. 11 U.S.C. 1126(c) states that

A class of claims has accepted a plan if such plan has been accepted by creditors, other than any entity designated under subsection (e) of this section, that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors, other than any entity designated under subsection (e) of this section, that have accepted or rejected such plan.

In the case of Chrysler, the banks who were receiving TARP money and were also secured creditors (BoA, Citi, J.P. Morgan, etc.) held enough debt to easily meet these requirements. However, subsection (e) states that

On request of a party in interest, and after notice and a hearing, the court may designate any entity whose acceptance or rejection of such plan was not in good faith, or was not solicited or procured in good faith or in accordance with the provisions of this title.

Although "good faith" is not defined in the statute the case law has developed so that it seems to mean "whether those parties in interest with respect to whom a motion for disqualification is made, had some ulterior reason for their action which looked to some special advantage to be gained thereby." American Mutual Life Insurance Company v. City of Avon Park, 311 U.S. 138, 85 L. Ed. 91, 61 S. Ct. 157 (1940). Furthermore, at least one court as found bad faith where "a purchaser of claims in voting the assigned claims is pursuing an interest in addition to its interest as a creditor." In re Allegheny Int'l, Inc., 118 B.R. 282, 289 (Bankr. W.D. Pa. 1990). Even more on point, although "selfless disinterest" is not required where the creditor "was not acting to protect or maximize its rights as a creditor but, rather, was acting to preserve financial advantages it would receive if the Plan was confirmed," bad faith could be found. In re Holly Knoll Partnership, 167 B.R. 381, 389 (Bankr. E.D. Pa. 1994). Although the facts in the cited case were different than the conflict of interest experienced by the TARP banks, this is a novel issue and the law must be applied in a new way. The banks accepted the plan not because they were maximizing their interest as creditors, but because they wanted to continue to receive federal TARP funds (and the feds received a 20% share of Chrysler, so it amounts to a party receiving equity in the restructuring paying more proportionally to some bondholders outside of any bankruptcy agreement than to others who have equal shares and rights, so that the plan will be approved). There is no way that agreement is made in good faith. The problem is that it would be very hard to prove. But what do I know.

The Phillies just won their second extra innings game in a row against the mets, this time 6-3, giving them a series win in New York and a four game lead in the division. Raul Ibanez hit a game winning 3-run home run. Man I am pumped. Great come from behind win. GO WORLD CHAMPION PHILS!

jack kemp, becker and posner, and the federal reserve

First, I would like to start off with the sad news the former NFL quarterback, Congressman, and 1996 Vice-Presidential candidate Jack Kemp died over the weekend. Kemp was one of the few voices for truly free markets and limited government over the past half century. One of the biggest mistakes the Republican party has ever made was nominating George H. W. Bush for President in 1988 instead of Kemp.  The first Bush's anti-free trade and pro-tax growth policies undercut the Republican message and its legitimacy, leading directly to Bill Clinton's election in 1992.  Kemp also co-sponsored Reagan's 30% across the board tax cuts in the early 1980's, which were a major factor contributing the sustained economic growth of the United States during the 1980's and 1990's.  Today's WSJ had an excellent collection of partial op-eds written by Kemp over the past 30 years.  The link is here, and I highly recommend checking it out, as Kemp's consistent policies and dedication to free markets, show that he understood the problems facing the nation and how to address it.  If more of Kemp's ideas had been put into place, we may not be facing as serious economic problems as we are today.

Secondly, I recently stumbled upon a blog written by Gary Becker (a Nobel Prize winning economist at the University of Chicago) and Richard Posner (Judge on the 7th Circuit Court of Appeals, leading scholar on economics and the law, and probably the most cited Circuit Judge in United States history).  Located at http://www.becker-posner-blog.com/, the blog breaks down important issues in economic terms.  For instance, in their latest posts, the two independently analyze the economic consequences of a pandemic such as swine flu, the costs associated with preventing such an outbreak, and posit several viable options as the most economically efficient way to tackle such a problem.  I highly recommend it to anyone interested in economics and its application to real world political issues as well as policy in general.   Both Becker and Posner have great economic and analytical minds and are able to succinctly breakdown very complex issues, thereby making them understandable even to someone with only a modest economic background.  

In one of his more recent posts, Judge Posner addressed the Independence and fundamental role of the Federal Reserve system, which got me thinking.  It is unfortunate and extremely disheartening that so many Americans do not even understand what it is that the Fed actually does or what its role is in the American financial system.  Fundamentally, many Americans understand that the Fed adjusts interests rates, but they do not understand how they accomplish this goal, what the Fed's objectives actually are, and how it is responsible for the entire monetary policy of the United States.  Therefore I am going to briefly describe the Fed and its role in our financial system and address what I consider potentially devestating powers available to the Fed with regards to monetary policy.

The federal reserve was originally created in 1913 as a lender of last resort in order to prevent runs on banks that were common at that time.  After the Bretten Woods agreement collapsed in the 1970's when Nixon took the U.S. off the gold standard, the Fed gained increased influence by affecting monetary policy in order to attempt to maintain low inflation as well as maximum employment.  But how does the fed actually affect monetary policy?  In times of economic downturn, the money supply will become more scarce, as more people will save in an expectation that they will need it later during more tough times.  In order to keep the credit markets flowing and provide the capital necessary to spur investment, the fed will buy government securities/bonds (mostly short-term bonds), which pumps cash into the economy when the cash is deposited in bank accounts and then withdrawn and spent.  This increase in monetary supply held by banks will allow for more money to be lent, decreasing the demanded interest for such loans (i.e. lowering short term interest rates).  Long term interest rates will inevitably follow (at least to some degree) the short term rates, which will increasing lending, hopefully spurring economic growth and growing the economy.  Conversely, if the Fed wants to raise interest rates (probably to combat inflation) it will sell some of the government bonds it holds, thereby removing money from the financial system.  Presumably, it could then prevent that money from re-entering the system, which decreases the total amount available, thereby increasing the demand for the currency.  This increased demand will lead lenders to value their money higher, an charge an increased rate of interest on the money that they loan.

All of this sounds good, but missteps by the Fed over the past few decades have had extremely detrimental effects on the U.S. economy.  Additionally, the Fed's tremendous power as the sole decision maker with regards to the U.S. money supply (and effectively the entire world's money supply as many major currencies are fixed to the U.S. dollar) has the potential to have a devastating effect on the country's growth and the standard of living of all Americans.  Today, there is almost uniform agreement that the Fed's easy money policy of the late 1990's and early 2000's was a major contributing factor to the housing bubble that lead to the economic collapse we are currently facing.  In order to spur current economic growth, the Fed has increased the money supply by over $1 trillion this year alone.  If the Fed gets its job right, then it should increase the money supply as total U.S. output increase, thereby stabilizing prices relative to growth.  However, this rarely happens.  In order to prevent devastating deflation from occurring, the Fed must over estimate the amount of money to produce, thus increasing money supply relative to total economic output and causing inflation.  In fact, for the past three decades the fed has doubled the money supply every ten years.  This inflation is a hidden tax, which is in fact extremely regressive.  How is it that we allow a completely private, unelected board decide how much to tax the American consumer in the form of inflation?  It just doesn't make sense.  Unfortunately I do not have time to outline my solution here, but I will in a future post.