Monday, January 28, 2008

What about Inflation and the Dollar?

Bernanke's rate cut, expected to be followed soon by additional rate cuts at the next Fed meeting, helped the stock markets and the rich investors avoid a deep drop last week, but what effect will it have on inflation in the US and the value of the dollar? It's likely to be negative on both counts. The usual monetary tool to stop inflation is higher interest rates, which also depresses business. Unfortunately, cutting interest rates tends to encourage inflation, and it is likely to do so in this case. Furthermore, currency traders tend to invest in currencies that give a good rate of return, interest, on their holdings. Lowering interest rates discourages people from investing in that currency, the dollar. Therefore the rate cut will likely have the effect of lowering the value of the dollar. The effect may not be immediate, because the dollar is currently at almost historic lows against most major currencies, the yen, euro and pound. It may take a while for people to get used to even lower values for the dollar.

The US has a great incentive to allow inflation and devaluation of the dollar because of our huge debt. It's a common practice for third rate developing countries to run up huge debts with foreign lenders and then devalue their currencies so that they pay off the debt with cheaper money. Thus, if the dollar eventually is worth many less Chinese yuans, the US will have to sell a lot fewer goods overseas to pay off the billions we owe China. That's not going to happen immediately because the Chinese persist in pegging the yuan to the dollar, but if the dollar really starts to tank, they may change their mind. But it's a complicated case, like the one where if you owe the bank $1,000 and can't pay, you are at the bank's mercy, but if you owe the bank $10 billion and can't pay, the bank is at your mercy. Thus we and the Chinese each have leverage on each other.

The Economist magazine takes Bernanke to task for his precipitous cut in interest rates, mainly because it smacks of panic. But it's also likely to have some harmful long-term effects.

Thursday, January 24, 2008

The Bernanke Put

It will be interesting to see how Fed Chairman Bernanke's rescue of the stock market works out. It may be easy to compare his approach with a less activist approach, since all the other central bank governors appear to be resisting the temptation to rescue their stock markets. The Bernanke put seems to have replace the Greenspan put, allowing big investors to maintain an option to sell their stocks at a higher price if the market goes down too much. In essence this administration has said that it will rescue the rich investors immediately, and maybe later it will do something for the small fry.

The Europeans so far seem to think that the stock markets and the rich investors can take care of themselves. If they make some bad investments, they should have to live with them. This runs the risk of being a drag on the economy in the short term, but it gets the trash out of the financial system and creates a foundation for future growth. Bernanke and Greenspan are acting in the present, but are they mortgaging the future? Greenspan had twenty good years, which argues that his approach may work out. But the turmoil we have today is at least in part due to Greenspan's decision to keep credit cheap and let the good times roll.

Friday, December 14, 2007

Banks in Trouble

An excellent op-ed in Friday's Wall Street Journal (which I can't access on the web) explained the credit crunch problem well to me, and why the Fed has so far been unable to solve it.

The problem is that banks don't trust each other. Therefore, it's clear that there is another shoe to drop. Banks have expanded their risks enormously because they used securitization (selling loans as some kind of paper) to get loans off of their books. If the loans stayed on their books, the banks would have been limited in their loan making by their capital and their access to funds. Once banks were close to being limited in making loans by the size of their capital, the Fed could regulate new lending by expanding or limiting the banks access to additional funds.

If they moved the loans off of their books, however, they were never limited. Furthermore, at least in theory, moving the loans off of their books also moved the risk off. But now all of this junk that the banks thought they had gotten rid of is coming back home. Citibank has recently taken several of the "SIV" off-books sham entities it created back onto its own books, thus limiting the amount of new lending it can do.

To the extend that Citibank or other banks become capital limited, the Fed can help in its traditional way. However, if the majority of the loans are floating around as commercial paper being held by who knows who, there is not much the Fed can do. In essence the banks created money that was beyond the control of the Fed.

The rub is that the banks know how much trash is out there, because they know how much trash they sold. Therefore, banks are reluctant to lend to other banks, because they don't trust the other bank to stay solvent to repay the loan. The scary thing is that the banks know better than anybody what risk is out there, and they are too scared to lend to their colleagues. That makes it look bad.

Everybody talks about the subprime housing crisis, but what if there is other bad stuff out there. Banks have been "securitizing" everything, getting loans off their books. What about credit card debt? Car loans? Business loans? If banks lowered their lending standards considerably in these other sectors as they did for mortgages, won't some of them start to go belly up, too?

Paul Krugman has an article in the NYT saying that we are in more than a liquidity crisis. A liquidity crisis is when you have the capacity to pay off a loan, but you just don't have the cash on you. In this case, somebody (the Fed) can loan you the money to pay it off now, and then you can pay them (the Fed) off later as you continue to get salary paychecks, or your house finally sells, or whatever. But if you can never pay off the loan, it's a different problem. The money is gone for good. In this case the banks may have paid themselves huge profits on bad loans in a giant ponzi scheme. If the debtor can never pay, a Fed loan is not going to help. It may be that the banks believe this, and that's why they won't lend to each other.

If only a small percentage of the loans are bad, the system can handle it, but at some point this could grow from a liquidity crisis into a financial crisis.

Monday, December 10, 2007

Chalabi's Back

Ahmad Chalabi is back in power in Iraq. I had been wondering what happened to him. The LA Times reports that he is now in charge of restoring the Baghdad infrastructure -- electricity, water, trash collection, etc. No doubt he is using to good personal advantage his ability to give away politically valuable stuff that is paid for by someone else, probably the US. Since he was one of the main people responsible for starting the Iraq war, it is not surprising that he is benefiting from it. His ability to make Bush, Cheney, Rumsfeld and Wolfowitz his puppets who danced to his instructions showed how clever he is. Now, to come back like the phoenix from the ashes of his banishment from Baghdad shows it again. It probably does not bode well for Iraq, since Chalabi is much more interested in helping himself than in helping Iraq. It just shows how American policy in Iraq has failed, failed, failed, while Chalabi has won, won, won at America's expense, figuratively and literally.

Wednesday, November 21, 2007

How Are Services in Baghdad?

There has been a lot of press about how well the surge is working in Baghdad and how many people are returning from Syria and Jordan. But how well is the reconstruction of the Iraqi infrastructure going? Until now, a major problem has been security. We couldn't build things like sewage plants, electrical generation stations, etc., because people kept getting killed working on them. Now what's it like? How many hours do Baghdad residents have electricity? Do they have water?

The other question is what has happened to the neighborhoods? Has violence dropped because the neighborhoods have been ethnically cleansed, because neighborhoods that were once mixed Sunni and Shiite are now only one or the other?

And, has the violence dropped because we defeated al Qaeda and other opponents, or have they just faded into the woodwork until the surge is over? It appears that the surge is about over. Troops are coming home that are not being replaced, because there are no troops to replace them.

It looks like the surge proved that we needed more troops than we had for most of the war. Why did it take us four years to learn that? Just how bad are our military planners and leaders?

Sunday, November 18, 2007

Bush Lessens US Standing in the World

The Financial Times had an excellent editorial saying that the US needs to make some more friends in the world to help it achieve its objectives. Bush loves to stick his finger in other countries' eyes and call for regime change, but it doesn't work that well, as Iraq illustrates. This editorial is apparently based on a a report by the Centre for Strategic and International Studies. It says, "One of the chief casualties of the Bush administration's foreign and security policies has been US standing in the world. This loss of reputation matters. In testing the limits of its 'hard power', the administration has sacrificed precious 'soft power' resources too. It hurts the country that so many people around the world no longer trust it to act responsibly, and that (according to a recent BBC poll of 26,000 people in 25 countries) one in two says the US is playing a mainly negative role in the world."

It adds, "Dethrone the 'war on terror' as the organising principle of US action - not because containing terrorism is unimportant, but because subordinating everything to that aim makes it harder to achieve."

But in general, even of the this report, the FT says, "there is a whiff of hubris about it."

Saturday, November 17, 2007

Send the State Department to Change Regimes

The op-ed in the NYT on "Send the State Department to War"

  1. Criticizes the State Department for a reorganization that was mandated by Sen. Jesse Helms, a Republican who hated State, and
  2. Implies that the main job of State should be regime change.

On both counts it is misguided. Helms mandated that USIS (the public affairs diplomatic arm) be merged into main State, along with AID and ACDA (which he doesn't mention). No doubt merging them into State has made them somewhat less desirable, but that's what the Republicans wanted because they generally hate State and what to see it stymied in whatever it's doing. But I doubt that separating them out again will make much difference in the short term.

He complains that State has not been involved enough in Iraq and Afghanistan, but part of that is due to Rumsfeld and his colleagues at Defense, who fought hard to keep State out of Iraq and to make Defense responsible for things that would normally be done by State. Only after Defense failed at these tasks did insiders start to call for State to take up the tasks and to criticize State for not having done it earlier.

Without specifically mentioning regime change, Max Boot calls for State to aid moderate Muslims, flex our political and diplomatic muscles to achieve vital objectives peacefully, gather intelligence, and build the rule of law in ungoverned lands.

I am one of those, who as he says will "object that to build up these capacities will encourage reckless 'imperialism' or 'militarism.' But improving our abilities in nation-building, strategic communications, security advising and related disciplines will actually lessen the chances that we will need to mount a major military intervention such as the one in Iraq."

Who Hates More - Republicans or Democrats

The Wall Street Journal ran an op-ed called, "The Insanity of Bush Hatred." Apparently the author forgot that the Republicans tried to impeach Bill Clinton for an offense unrelated to governing the country. He didn't lie to us about invading another country. Plus, Ken Starr followed Clinton around like a little dog with a death grip on his ankle. In any case, I don't think that any Democratic hatred of Bush can be more irrational than the Republican hatred of Clinton. And now it looks like they are going to get another Clinton, because Bush has been such a bad President that he makes Bill Clinton look like George Washington by comparison.

Friday, November 16, 2007

Few Veterans in New York

On Veterans Day, the NYT noted that New York has the lowest percentage of veterans of any state in the union.

I would have thought this, but I would have thought that I was prejudiced for thinking it. I think Wall Street is one of the most unpatriotic streets in America. It's a street of greed, a street that says, "Send some rednecks to die in Iraq and Afghanistan for us." And as a further note of prejudice, New York is full of Jews. Jews did fight in World War II -- Norman Mailer is an example -- but they don't fight so much now. They pay Anglos and other ethnics to go fight for them, while they stay on Wall Street and get rich.

They don't have a monopoly on this attitude; Mitt Romney did the same thing. Being a Mormon missionary in France is not equivalent to being an infantryman in Vietnam. Sorry, Mitt, I'm prejudiced on this issue, too. But Mitt's the exception for Mormons, many of whom did and do serve in the military. Jews tend to fight for Israel, not for America, even if they are born in America. Mitt, of course, has another problem, which is that after he got back from France, he went into the private equity business with Bain Capital, where he did not pay a tax rate as high as most working men and women, while he was becoming a millionaire. Romney does not love America enough to pay his fair share of taxes.

So, the leading presidential candidates for both parties come from New York -- Hillary Clinton and Rudy Giuliani, with Mike Bloomberg waiting in the wings -- but their state is the least patriotic state, despite Rudy's claim to 9/11 fame. More and more there seem to be two (or more) Americas who don't talk to each other.

Monday, October 29, 2007

Hillary as Evita

The election of the President's wife in Argentina brings to mind the story of Evita Peron, and makes you wonder about the election of a President's wife in the US. Is Hillary America's Evita? While Evita relied more on her husband than Hillary claims to, she was independent, and Hillary may rely more on Bill than she lets on during the campaign.

Sunday, October 21, 2007

Support the Troops

A great op-ed in the NYT points out the hypocrisy of the Bush administration, the Republican party, and politicians in general on the Iraq war. Nobody supports the troops, except their families. America is in party mode! Let those soldiers die! America doesn't give a damn!

As the op-ed says, a draft would sort things out. Let's have a draft now! Of course, that's a little problem for Bush and Cheney, both of whom dodged the draft during Vietnam. They don't believe in fighting for their country. They believe in sending somebody else to fight for the United States. That's why we have thousands of mercenary troops like Blackwater fighting in Iraq, in addition to our "volunteer" military.

Wednesday, October 10, 2007

AIPAC, Iran and Gravel

See this link to The Vineyard of the Saker for info on how AIPAC is trying to get the US to attack Iran, and how Presidential candidate Gravel spoke out about it.

Sunday, October 07, 2007

Regressive Income Taxes

A news article that the EU finance ministers are going to meet to discuss how US financial problems will impact the EU raised a question in my mind about how the US would fit into the EU.

Previously the Wall Street Journal printed an op-ed suggesting that the US join some larger currency scheme that would take the pressure off the dollar as an international exchange currency. The problem with that is that when you join such an international scheme, you have to conform to certain standards.

The above article on the EU says that EU countries must keep their budget deficit below 3% of GDP to meet Euro guidelines. That made me wonder if the US would qualify to join the Euro regime. It took me a while to find what appeared to be a reliable table giving budget deficit estimates as a percentage of GDP. Finally, I found this one by the Congressional Budget Office done in 2004, with projections for future years.

What surprised me was that we would meet the 3% guidelines overall, by taking into account the Social Security "off-budget" SURPLUS. The projected overall budget deficit for 2007 is only 2% of GDP. But the "on-budget" deficit is 3.6%. The 3.6% is the budget actually approved by the President and Congress. BUT, there is a 1.6% Social Security SURPLUS. So, the working people who fund Social Security through payroll taxes are in surplus, while the rich people, who got the huge Bush tax cuts and who pay no payroll tax on the millions they earn above the approximately $90,000 ceiling on income subject to the payroll tax, are causing a budget deficit in excess of the EU guidelines for good government.

This is truly a government of Robin Hood's Sheriff of Nottingham that takes from the poor and gives to the rich. A fat cat who paid social security payroll taxes on maybe 5 or 10 percent of his income during his earning years (as opposed to most salaried workers who pay the tax on 100% of their earnings), and who then retires and lives off of his investments, can collect 100% of his social security, while workers who still earn a salary after age 62 have their social security payments reduced by a formula linked to how much they continue to earn.

Neocons the New Liberals

Roger Cohen has my number in his NYT column on Neocons being the new L-word, instead of "liberal." He says with some contempt, "Neocon, for many, has become shorthand for neocon-Zionist conspiracy, whatever that may be, although probably involving some combination of plans to exploit Iraqi oil, bomb Iran and apply U.S. power to Israel’s benefit."

I think AIPAC played a large role in the policy making process that led to the US invasion of Iraq. Cohen may not, but look at those arguing for invastion: Perle, Adelman, Krystal, Wolfowitz, Feith, et al.

Friday, October 05, 2007

Obama Stops Wearing Coward's Flag Pin

It's indicative of the cowardice of George Bush and Dick Cheney that they lead the pack of lapel flag pin wearers, because they are draft dodgers from the Vietnam war. If they had fought in the war they would have had some kind of little ribbon to wear on their lapel, a bronze star, an Army Commendation medal, something. But they didn't serve; so, they wear a flag. It's a sign that they didn't serve their country.

Congratulations to Obama for ending the charade that wearing the flag pin somehow symbolizes patriotism. Where were Bush and Cheney on 9/11? Bush was reading "My Pet Goat," and then got in Air Force One and hid out for hours when he should have been leading the country. Cheney went into his spider hole in Washington and ran things from remote control because he was afraid to come out. Cheney and Saddam: the spider hole twins!

Blackwater Perils

I recommend the editorial in today's (10/4/07) Financial Times, "Blackwater and the outsourcing of war." A web link is:

http://www.ft.com/cms/s/0/94bc0252-71dd-11dc-8960-0000779fd2ac.html

Two main points are:

"...Privatising war is, in reality, financially, politically and militarily very expensive," and

"Neither [the Senate's nor the Pentagon's efforts to control Blackwater] has a chance, much less moral validity, unless the US and its allies adhere to the rule of law they claim their forces are there to defend."

Sunday, September 30, 2007

Failed Bank No Big Deal?

I was surprised that the failure of Netbank in the US, coming on the heels of the run on Northern Rock bank in England, did not attract more attention. It failed during the day on Friday, and the stock market seemed not to notice. It apparently has been in trouble for a while, but its failure seems to be linked to the sub-prime mortgage mess. So, doesn't that indicate that there are some pretty shaky things out there?

We're approaching the 20th anniversary of the 1987 stock market meltdown, not that that means anything. The stock market seems very happy with its .5% rate cut; maybe that means they expect the Fed to bail them out of any problems, like failed banks, not to mention failed hedge funds.

Friday, September 28, 2007

US Promotes Speculation and Debt

In an earlier post, I noted that John Stewart had pointed out that the Fed's .5% rate cut had helped stock market investors, a.k.a. speculators, and had hurt ordinary savers with interest bearing savings accounts. I omitted one other class, borrowers or debtors, whose interest rates will also be cut.

So, the Fed action aided speculators, hurt savers, and aided debtors. So, it's encouraging borrowing money to speculate in the stock market. That's definitely the behavior we want to encourage -- NOT!

Thursday, September 27, 2007

Worry About Inflation

FT columnist Martin Wolf argues that the Fed can't ignore the risk of inflation as it fights recession. It says:
To critics it is now the "Bernanke put" - the belief that, as under Alan Greenspan, the US Federal Reserve will always ride to the rescue of Wall Street. The jubilant response of traders to the Fed's 50 basis point cut in the short-term interest rate might justify this suspicion. But saving Wall Street from its follies is not the Fed's objective. It is an (unfortunate) by-product of the attempt to do its job.
The "unfortunate by-product" reference is similar to Alan Greenspan's reply to Jon Stewart on the Daily Show. Stewart asked Greenspan why it was that the Fed 50 basis point interest rate cut sent the stock market up over 300 point, thus benefitting the rich, while it meant that banks would pay less interest to the ordinary people who had savings accounts in banks, rather than stock market investments. Greenspan responded that this was an "unintended effect."

I agree with Wolf that one inflationary risk the US runs is that the dollar's value will decline against other currencies (as it has already), thus making everything imported more expensive. However, inflation is the easiest way for debtor nations to try to get out from under their debts; as the dollar's value decreases, the absolute value of the debt decreases, too. So, you pay off your debt in cheaper dollars. This is usually only attempted by pariah states, currently Zimbabwe comes to mind, but George Bush has such contempt for the international community that it is not beyond possibility that he will try it. He may think it will help him pay off his Iraq War debt. As Wolf describes the situation:
Externally, the US is a huge net debtor. A large dollar devaluation is then a far less painful way to turn it into a net creditor than running current account surpluses, since its liabilities are denominated in dollars.

Given these facts, it is going to be an enduring struggle for the Fed to convince those who have put their faith in the dollar that it is safe. This is not some remote danger. In financial markets, the future is now. If holders of the dollar conclude it is no longer a secure store of value they will dump both the currency and assets dependent on its future value. If that were to happen, the Fed would confront a dreadful dilemma - whether or not to cut rates as the dollar plunged and long-term interest rates soared. Its freedom of manoeuvre would be gone, as in 1979, when Paul Volcker became chairman.
In retrospect it looks as if Volker may have been a better Fed chairman than Greenspan, if only because Volker had more difficult issues to deal with.

Wednesday, September 26, 2007

Chinese Buy Rothschild Jewish Conspiracy Theory

The Financial Times reports on a best selling book in China, Currency Wars, which claims that the Rothschild banking dynasty controls money issuance. According to the article:

...the US Federal Reserve remains a puppet of private banks, which also ultimately owe their allegiance to the ubiquitous Rothschilds.

The thing that most shocked [the author, Song Hongbing], he says, was his “discovery” that the Fed is a privately owned and run bank. “I just never imagined a central bank could be a private body,” he says.

The Fed does describe itself “as an unusual mixture of public and private elements”. While its seven governors are all appointed by the US president, private banks do hold shares in its 12 regional reserve banks.

But Mr Song ignores the government’s role and argues that the Fed’s key functions are ultimately controlled by five private banks, such as Citibank, all of which have maintained a “close relationship” with the Rothschilds.

Mr Song is defensive about his focus on the Rothschilds and what the book depicts as their Jewish clannishness.

“The Chinese people think that the Jews are smart and rich, so we should learn from them,” he says. “Even me, I think they are really smart, maybe the smartest people on earth.”