No expense spared

The Economic Times editorializes-

Obama announced on Wednesday a salary cap of $500,000 (Rs 2.4 crore) for top executives at companies that receive taxpayer-funded largesse. The move, reminiscent of controls in state-controlled planned economies, including our own pre-reform era, is an obvious attempt to address public anger before the President seeks more taxpayer money to fix the US banking system.

It follows quick on the heels of reports of generous bonuses ($4 billion) paid to Merill Lynch executives just before it was taken over by Bank of America, and of the lavish lifestyles of some of the now-disgraced investment bank honchos.

John Thain, ex-chief of Merrill Lynch, spent $35,000 on a commode and former Tyco boss Dennis Kozlowski spent $15,000 on an umbrella stand. Calling Wall Street bonuses shameful and expressing disgust at chiefs who reward themselves for failure, Obama said the curbs were aimed at “taking the air out of the golden parachute.”

Thain spent $35,000, Kozlowski spent $15,000, some one even got himself a $1,500 trash can; and Obama spent $150,000,000 on his inauguration, a third coming from his supporters. But didn’t everybody’s favorite economist say that even if you pay some one to dig a pit and fill it again, that helps the economy? Surely buying trashcans helps too. If you can pay pit-diggers, why not people like Thain?

I think people have lost all sense of perspective and have gone crazy. That’s why they can’t see the situation for what it really is – a big government engineered mess. Not all of them though. Read this comment from the BW article linked to above-

John, you make too much sense. Congress doesn’t seem to understand that “economics” comes from the word meaning “household management”. If we all ran our households like they run our country, we would have creditors threatening our lives. I can’t believe we actually run our economy based on the “wisdom” of John Maynard Keynes. He had no concept of future generations. I’ll have to research his personal life to understand how anyone thinks it is a good idea to pass that kind of debt to your children and grandchildren. These are the same liberals who are always faulting conservatives’ lack of compassion? Wake up, America, we are being robbed blind by the people we “hired”.

Vipin writes about what will happen post recession-

Note that since the cause of the crisis is misallocation of resources, we would like economy wide churning. Firms must readjust production processes, some firms will have to reduce employee count, these people will then be employed elsewhere (the time lag between the two registers a high rate of unemployment), some firms will have to shut down, other firms will have to produce new products (less luxury villas, more apartments for instance), and so on. And soon enough we will be back to a rather normal state of affairs.

Not understanding this process is the root cause of many dangerous proposals floating around in the press.

[...]

In fact what we really need is more savings, and it’s a good thing that household reduce consumption and increase savings during recessions, we need more resources to restructure production.

Some other perspectives. The Austrian Economists say-

Goldman Sachs has released a report that the economy is going deeper into recession, not recovering. They have also predicted that the bank bailout will exceed $4 trillion. The Washington Post headline this morning is that the economic signs are getting worse, not better. Michigan is officially the hardest hit state by this economic downturn, but California is right behind. Cut backs are taking place everywhere from Starbucks to colleges nationwide.

[...]

As readers of this blog know, neither Steve nor I endorsed Ron Paul in his presidential bid even before the negative press concerning his newsletter came out. But I think Ron Paul has been the only political actor I have heard who understands what is going on. As he recently said, politicians and policy makers in Washington think they see a house on fire and they are providing water to put the fire out, but instead what they are doing is pouring gasoline on the fire. As I have said several times on the blog, we are turning a “crisis” into a catastrophe through the policy actions taken.

Of saints and sinners, banksters and whores (er, parliamentarians)

Peter Klein of Organizations and Markets writes-

As I mentioned in a recent talk, one good thing to come out of the bailout disaster is the diminished reputation of St. Alan the Wise. It was fun watching the same Congressional clowns who months earlier praised the “Maestro” as the greatest Fed chair in history slap him down for failing to prevent the housing bubble. Of course, Greenspan, like these clowns, ignored the issue of credit expansion, expressing regret only that he had put “too much trust” in market forces. Ha!

He then links to two posts/ articles by economist Robert Higgs (he’s an Austrian), one on the demise of the TARP and the other on The Bailout of Abominations-

As a rule,we may assume that any statute containing the word ‘emergency’ in its title, preamble, or statement of purposes is a bad law.
[...]
Yes, my friends, full-fledged socialism has finally arrived, not with the bloody violence that some commies hoped for, but with the shameful collaboration of the people’s elected representatives, under the guise of saving one and all from an impending financial and economic catastrophe too horrible to contemplate.

I am currently reading a novel by Frederick Forsyth in which a character has some issues with Karl Marx-

Across the street he could see the main entrance to the centuries-old Schiller University. Outside was a bust of Karl Marx. A plaque revealed that Marx had taught in the philosophy faculty there in 1841. [M] wished the bearded philosopher had dropped dead while doing it. Then he would never have gone to London and written Das Kapital, and [M] would not now be going through his misery so far from home.

How I wished that had happened – to Marx, and to Nobel. Then there would be no communism, and no Nobel Prize winning jerks influencing government.

Give and make

Big Banker says-

“Banks don’t give loans,” (as the headline read) they make loans.” “Give” implies that the money does not need to be repaid.

The verb is unimportant (unless it is forgive or write-off), the noun is. A loan, whether “given” or “made” is money that has to be “returned”.

Be wary of lending to someone who does not care about the interest rate, for he might not have any intention of repaying the loan, one saying goes. Don’t know if the same applies to AIG and the punitive LIBOR + 8.5% interest rate, but since the US government is the majority owner of the company, and governments never return money to anyone, who knows. AIG’s demands keep on increasing though, with no information on where the money is going.

Bankrupt countries

Countries shouldn’t go bankrupt. But they do – Iceland suffered a near bankruptcy, Pakistan is running around with a begging bowl, India did the same in 1991, and lots of countries did it in the 1997-98 emerging markets and “tiger” economies crisis. How did this happen?

Every country has its own fiat currency. Some allow it to float freely, and allow conversion both on the current account as well as the capital account; others use their central banks to fix the rate vis-a-vis other currencies – a direct peg, or a range. Money moves in and out of countries in various ways – payments for imports and exports, investments – short term and long term, remittances, loans and so on. And most of these transactions take place between individuals, corporations and banks; except when governments borrow money on their own account. Now, those countries that still exercise control over their currency markets find that if they keep their currency low vis-a-vis the dollar (or the other major currencies, mainly the dollar though), their exports are cheaper compared to other competing countries. So their central banks will buy dollars from the market (from exporters or anyone else who has dollars and wants to sell it) thereby keeping their currency low. Others prefer a stronger currency – they will do the opposite – shore up their currency. This is how they peg their currency against another. But this is a game till it blows up in their face, either way – they will have to either maintain huge foreign currency reserves trying to keep their currency low (flooding the market with fiat currency and then having to resort to other measures to suck it out), or bankrupt themselves trying to peg it at unrealistic exchange rates (throwing dollars at the market till reserves extinguish); its simply a matter of time. And the now-defunct Bretton Woods or any other fancy system won’t help it one bit.

When countries consistently run up current account deficits, and don’t have others sources of foreign currency inflows, they find themselves in a precarious situation when it comes to repayment of loans in foreign currency; businesses in the country won’t be able to pay back their loans or import bills. Under laissez-faire capitalist systems, this wouldn’t be a problem because businesses and countries will know that they cannot spend beyond their means and can’t trade in what others don’t want. But in a world used to quick fix solutions and fiat money, government intervention in the economy as well as currency markets wrecks havoc on market signaling mechanisms, and “problems” that would other wise be considered normal becomes monsters. Such fiddling has huge implications for the US which is the beneficiary of mainly Chinese and S.E.Asian policies, and the pricing of Middle Eastern oil in dollars.

Every major country in the world, as also the so called “sovereign wealth funds” (how can countries go bankrupt? how can countries “own” wealth?) has money invested in US treasuries and stock markets, and the dollar being the currency of reserve, the US does not have to maintain such reserves. But a day might come when the sheikhs decide that they would rather receive payment in euros or the yuan, and a day will come when the Chinese stop working for everyone else and start enjoying the benefits of their labor. Money will then exit from the US, and with the US running huge trade deficits and having a huge debt burden, things could get pretty bad. The utter nonsense that Paulson and Bernanke have indulged in in trying to live another day is a sign of ominous times to come. As Liam Halligan says, “Yes siree, the mighty US government could default.” I am no economist, but its surely in the realm of possibility – if the current crisis does not set the ball rolling, the reasons I mentioned should; a laissez-faire belt tightening is the only solution.

Countries shouldn’t go bankrupt; its a stupid concept that has been realized thanks to the fiddlers in government.

The “credit crunch” myth

Over the last few weeks, all newspapers have gone to town about why the bailout package was necessary to “unfreeze” the US credit system and that businesses were suffering from lack of funds due to a “credit crunch.” Economists V.V. Chari, Lawrence Christiano, and Patrick J. Kehoe of the Federal Reserve Bank of Minneapolis have gone through data from the Federal Reserve Board till October 8, 2008, and claim that the “credit crunch” is a myth; well I might be putting words into their mouths. They examine four claims made by pink papers and “policymakers”-

1. Bank lending to nonfinancial corporations and individuals has declined sharply.
2. Interbank lending is essentially nonexistent.
3. Commercial paper issuance by nonfinancial corporations has declined sharply and rates have risen to unprecedented levels.
4. Banks play a large role in channeling funds from savers to borrowers.

and say that all four claims are false. Read about it and download their paper from Organizations and Markets where Peter Klein asks – What Credit Crunch?