Day of Infamy

Last week I wrote about a day of infamy, but did not get around to talking about this. I was too happy about President Obama following through on his pledge to get our military forces out of Iraq. On that same day, the government did something that was not so good. The Fed essentially took control of Citibank.

But wait, we've heard Secretary Geithner and Chairman Bernake both say that they oppose nationalization of our banks, and assure us that what we are doing at Citibank is not nationalization. This is a classic case of mincing words. The Fed has not only assumed a commanding position of ownership, but they have already begun dictating the company's policies. They have remade the board of directors and mandated policies on employee compensation and lending standards. This is de facto control. It's like in The Sopranos when Uncle Junior was the nominal leader of the Jersey mafia, but everybody knew that Tony was calling the shots. This is what has happened with the US and Citibank. The US is Tony and Citibank is the Jersey mafia. The actual executives might as well be old, senile, and in jail.

Now the government has taken control of banks before, most notably in the S&L runs back in the 80's. This was always done to liquidate the assets of the bank. Maybe that is what is going on with Citibank, and the government is misleading the public because ... well who knows.

I do not think so. The government wants banks to loan money. They want businesses to borrow and hire workers. They want consumers to borrow and spend. This is not happening, for many very good reasons. If you are a bank, you need to clean up your balance sheet by increasing your cash and reducing your risky investments. If you are a consumer, you need to increase your savings and reduce your debt. But if the government has control over large banks, they can make the bank forget about increasing cash and reducing risk. They can offer up loan to any and everybody. They can make it really hard on consumers to resist the temptation of free money. Imagine getting a letter in the mail everyday saying that you have been pre-approved for a new credit card with a 0% interest rate and a $100,000 limit! It's the modern day version of the chicken in every pot.

And so it is that I think February 27 will be a day of infamy in American history. It may be the beginning of an era where the government is an essential part of all economic activity in America. Want to buy a house? Ask the government. Want to buy a car? Ask the government. Want to send your kids to college? Oh wait, nevermind on that one. Want to plan for retirement? Umm ...

Wall Street Deserves Its Bonuses

All of America is upset about Wall Streets bonuses. Even The President is pissed. Guess what. All of America, including President Obama, is wrong. It's easy to say oh these already-super-rich CEOs are just lining their own pockets with taxpayer money, but that's a knee jerk reaction with no thought behind it. All of those billions in bonuses did not just go to CEOs. They went to tens hundreds of thousands of American workers. They went to traders and portfolio manager and secretaries and HR people. It was money that was promised to those workers as part of their compensation. It was money that many probably used to pay for their kids college tuition or pay off their credit card bill from Christmas or maybe just for the basic staples of life. Maybe they used it to pay their mortgages. If you just think a little, then maybe you won't be so outraged. Maybe you'll realize that it shouldn't even be any of your business.

But of course it is everyone's business because of the government bailouts of the banks. Worse we have all been brainwashed into blaming things on the greed of Wall Street. That is the great red herring of this depression. Politicians want you to think that all of our problems are the result of the greed of Wall Street. If you have a scapegoat to blame things on, then you do not have to take any responsibility.

So if it's not Wall Street's fault, then whose fault is it? There is an easy and a hard part to that. The easy part is that it is the government's fault. It is the fault of the Federal Reserve for using its unconstitutional power to amplify business cycles. The Fed created a climate of malinvestment by fixing interest rates at unsustainably low levels. And guess what, they continue to do this. The seeds of the next recession are already being sown today.

That's the easy answer. The harder answer is that its your fault. Its the fault of every American who bought houses they could not afford. Its the fault of every American who constantly refinanced their house to "cash out" their equity. This carpe diem approach has lead to historically low savings in America, historically high debt, and historically high rates of loan default and foreclosures. Those are the real reasons why any bank would be a fool to loan out money right now. No matter how much money the government gives them, it will never make any sense to loan it out. The people who would borrow are not likely to be able to pay it back.

Back to reality. Nobody is going to accept personal responsibility. It's the government's job to saves us from ourselves, right? I actually thought for awhile that maybe people would (rightfully) blame the government, but that has not happened either. The politicians have cleverly manipuated the masses to put the blame on banks and Wall Street greed. Now we are pissed that those banks are paying the salaries of their employees instead of lending money. It's obvious what is next. We take over those banks and force them to lend money to everybody. Then we will get what we deserve.

Milton Friedman 1912-2006

This week saw the passing of the great economist, Milton Friedman. There is a nice homage to him on Cato. I can proudly say that I am one of the many people influenced by Friedman. I double majored in economics for three years in college, before I wimped out and settle for a single degree in math. The economics classes at Caltech were definitely tilted to the highly analytical theories of Keynes. I would often find myself dreaming of IS-LM curves. I knew about Hayek and the Austrian School, but they seemed to be saying "it's too hard to use math on economics, so don't even try." A lot of their theories were reactionary ones to the rise of fascism and communism as well, so they seemed dated in the 90s. Then I read Friedman.

Actually it was Friedman's writings on health care and the AMA that really got to me. When I learned this was from his book Free to Choose, I had to read that. It made me question some of the "traditional" interpretations of the causes of the Great Depression. It occurred to me that it was a revisionist view that the Depression was caused by "capitalism gone wild" and that it was government regulation, particularly the Federal Reserve monetary policy, that had really aggravated the Depression. Suddenly the Depression was no longer an IS-LM consequence, and the kind of "solution" implied by that kind of analysis actually made the Depression worse.

Now I can't say that Friedman turned me into a Republican or even a Libertarian. I know he advised Regan, but I really don't think Reagan's economic policies reflected the kind of theories presented by Friedman in Free to Choose. I am still convinced that despite Friedman's opposition to communism, that his theories were totally incompatible with Reagan's policies towards the former Soviet Union. Embargo and massive military spending had no place in Free to Choose. I will say that my opposition to public education is tied to my interpretation of Friedman's theories.

So I must pay my respects to Friedman. A lot of people claim that times has shown that Friedman was wrong and that Keynes was right. What's funny to me is the revisionism at work. The great success of capitalism in the 90s has been racked up to successful monetary policy. They say that Keynes stood for this, not the fiscal policy of the New Deal or the socialist democracies of Western Europe. That's the real legacy of Friedman. He's caused history to change its version of Keynes.