Dodd-Frank bill: putting a cast on the wrong leg
The American financial system has been hobbling on a broken leg for over a decade. Perverse regulatory incentives that required Fannie and Freddie to hold, in their portfolio of mortgage assets, a minimum percentage of sub-prime loans combined with monetary policy looser than Paul Krugman's grip on reality to create an Austrian Business Cycle on steroids.
The massive malignment of resources towards an artificially-inflated housing market eventually and inevitably led to a major financial collapse and economic recession. Thanks, Alan Greenspan. Thanks, Barney Frank.
So now Senator Chris Dodd and Rep. Frank are trying to atone for past sins (creating many of the previous regulations that contributed to the collapse) by drafting a brand new financial regulation bill. Problem is, the Dodd-Frank bill does absolutely nothing to address the central problems that led to financial collapse - i.e. regulations requiring or encouraging subprime lending and overly loose monetary policy. Dodd and Frank apparently understand that the American financial system has a broken leg. They just don't know which one is broken, so they're putting a cast on the healthy leg. Gee, I wonder if that will improve ambulation...
It seems the most economically illiterate individuals in the world have amassed themselves in Washington, DC and are running the country. With a complete misunderstanding of financial and monetary economics and the continued push for failed Keynesianism, American policymakers are parading ineptitude.
As one financial analyst is quoted today in the Washington Times:
"The U.S. continues to stick its head in the sand and ignore the animal mating calls of austerity measures [coming from Europe]. A crisis may need to develop before [Washington] wakes up and takes action."
The president of the Bundesbank clearly understands the blunders of Washington as well. He made that clear in a recent Handelsblatt column as reported by the Wall Street Journal:
"Where did the financial crisis begin? Which central bank conducted monetary policy that was too loose? Which country went down the wrong path of social policy by encouraging low income households to take on mortgage loans that they can never pay back?"
In frustration, I will concur with the famed words of Henry Ford:
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Apparently, those who understand the monetary and banking system the least work on Capitol Hill.
Read moreKeynesian economics at work: Housing bubble bursts (again)
A key tenet of Keynesian economic philosophy is that government must take an active role during downturns in the business cycle (otherwise known as depressions or recessions). Keynesians believe that government policies must encourage more spending and greater employment in the short term. This additional spending, or "stimulus," will bring the economy out of its downturn and lead to economic growth.This was the rationale given for the $787 billion stimulus pushed by President Obama and Sen. Harry Reid last year. And now, more than a year later, the results are in and the stimulus was and is an epic failure. Especially for Nevada.
Included in the federal stimulus was another example of the failed Keynesian way of thinking - an $8,000 tax credit for new homeowners that was supposed to expire in November 2009. Before it expired, though, Congress passed an extension through April 2010 and also extended a $6,500 tax credit to some current homeowners.
This tax credit was going to provide a "stimulus" to the struggling housing market that would allow it to recover. Did that happen?
No. All it did was push up the timeline for buyers who were going to buy anyway in the near future. It also cost taxpayers a lot of money. And now that the tax credit has expired, mortgage applications have fallen by 42 percent, and since home sales follow mortgage applications by a couple months, the housing market has hit a record low for new home sales. Total home sales are about to take a big hit, and those numbers are likely going to fall even further in the near future.
Mortgage applications tend to lead home sales by a couple of months. Move mortgage applications over two months and the potential drop-off in sales is going to be enormous.
Head over to Bloomberg for the full interactive chart. How bad will it get?
[F]inancing requests for home purchases plunged 42 percent from late April through early June, to levels last seen at the start of 1997. The decline reversed a 48 percent surge in the two months leading up to an April 30 contract-signing deadline to qualify for the home-buyers' tax credit. ...This shouldn't surprise anyone, since the government's other stimulus program, "Cash for Clunkers," had the exact same effect.
Existing home sales, which are tallied when transactions close, will rise 6 percent to a 6.1 million annual rate in May, economists surveyed by Bloomberg News forecast before today's report from the National Association of Realtors. Purchases may hold up in June because buyers still had time to make the June 30 closing date to qualify for the credit. Then, beginning in July, sales will tumble, Shepherdson said.
"The summer is going to be dreadful because the tax credit pulled activity from the summer into the spring," Shepherdson, the chief U.S. economist at the Valhalla, New York-based research group, said in a telephone interview last week. "New lows do seem entirely possible," he wrote in a note to clients. [Emphasis added]
What's especially ironic in all of this is that Keynesians, like Paul Krugman, wanted the government to create a housing bubble in 2002 in order to offset the NASDAQ bubble. As we all know, especially in Nevada, we got one - thanks to the Federal Reserve setting artificially low interest rates and irresponsible mortgages from Fannie and Freddie based on political pressure.What do our politicians need to do? The same thing they needed to do 16 months ago. Let the economy retract in the short term in order for individuals to move assets from low-value industries to more productive sectors of the economy.
During recessions, in a free-market system, the economy moves money and jobs from low-performing areas to higher-performing ones. And when I say "the economy," I mean millions of individuals acting in their own self-interest. The economy isn't a giant organism that has a mind of its own.
This reset is necessary and healthy, because resources (natural resources, products and people) are scarce. Keeping limited resources in low-value sectors of the economy and not allowing them to move to high-value sectors limits economic growth.
To use an analogy, it's like pruning a tree. In the short term, the tree is smaller, because you've cut back in some areas. But those cut backs are necessary to stimulate growth in the long term. Without those cuts, the tree won't grow as large and may even die.
Let's also use automobiles as a historical example. Before cars, people still needed transportation. They just used horses and buggies. As cars replaced the horse and buggy, the horse and buggy manufactures were hurt. Consumers no longer needed their product (at least not on such a large scale). Employees lost jobs. Large businesses closed or were forced to retool. This is the kind of economic reordering that happens everyday in the free market. And for consumers, it's good that this happens.
Unfortunately, the government often prevents the necessary corrections from happening.
While it's good for consumers in the long run for recessions and corrections to happen, economic downturns can be painful in the present. And politicians, citing misguided economic theories, are eager to look like they're doing something to help. Politicians offer bailouts and stimulus packages that they claim will jumpstart the economy and decrease unemployment.
While stimulus packages, bailouts and creating bubble markets may work in the short term, they do not create sustainable economic growth. This is because scarce resources are not transferred from low-value products to high-value ones, as explained above.
Politicians or the Federal Reserve guided by Keynesian economics, pay little attention to the idea of long-term consequences. Unfortunately, for politicians this often makes sense for selfish reasons. Politicians want to get re-elected. By the time long-term consequences hit, it is likely a different politician will have to take the unpopular steps to deal with the mess they have created. Ironically, the politicians who actually created the mess may be remembered fondly for the good times they oversaw. The Federal Reserve faces political pressure to make sure the economy keeps going strong.
Because politicians and the Federal Reserve bowed to the political pressure in 2002 to improve things in the short run, we are now suffering the long-run economic consequences.
The stimulus bill and bailouts are simply a doubling down on our past mistakes. We must let individuals in the market shift scarce resources from low-value products to high-value ones, or our long-term economic growth will continue to be stunted.
Should America follow the Swedish model?
Sweden is often upheld as an example of a socialist paradise that the U.S. should emulate. ReasonTV takes a closer look at why that's not possible and how Sweden is moving in a more free-market direction.
Rory Reid on education: Innovate without spending more
Via Jim Clark at Nevada News and Views:
And in Reno last week Reid crossed swords with state teacher union leaders by firmly stating that in his endeavor to improve public education he will not raise taxes. Speaking at a round-table discussion at Swope Middle School Reid told teacher union officials: "I have described how (improvements in education) can occur in the budget neutral way. You can innovate without significant cost." (Emphasis added)Reid is exactly right. Improvements like empowerment schools, which involve giving principals control over 90 percent of their budgets, and open enrollment don't require extra funding.
But the good news is that stronger educational reforms like vouchers, which have raised graduation rates among students in Washington, D.C., or tax credits can actually save Nevada a billion dollars over the next 10 years while increasing student achievement.
Around the country, educational reforms are gathering bi-partisan support. No matter how the governor's race turns out, let's hope that Nevada's next governor follows the lead of states where education reforms have greatly increased their students' achievement.
Vouchers work...again...who would have guessed?
A new report just released by the National Center for Education Statistics (NCES) reveals that students receiving vouchers in the D.C. Opportunity Scholarship program saw graduation rates that were 12 points higher than students who applied but did not receive a voucher. Better yet, students who won a voucher and then used it to attend a private school saw graduation rates that were 21 points higher than the control group.
The treatment group (students who won a voucher) saw a graduation rate of 82 percent.
The control group (which did not win a voucher, but of which 47 percent attended a charter school or private school anyway) saw a graduation rate of 70 percent - much higher than the District's official graduation rate.
The D.C district's graduation rate, according to NCES, is 56 percent.
The graduation rate for students winning and then using the voucher to attend a private school was 91 percent.
This all means that the effects of vouchers in D.C. are substantially understated by the report because nearly half of the control group exercised school choice. Unfortunately, journalists are unlikely to uncover these nuances and will instead report that vouchers don't work, despite the considerable scientific evidence that finds vouchers improve student achievement.
Rate-busting heroes
Walter Block has an excellent refutation of the union-created myth of the rate-buster today at the Mises Institute. The central fallacy, as Block points out, is the belief that there is a limited amount of work for humans to accomplish. This, of course, would imply that there is an upward bound to the desires that humans would like to have fulfilled - meaning that humans have no desire to achieve a higher standard of living.
Obviously, this is inaccurate, as is the belief that "rate-busters" somehow take work away from others. In reality, the rate-buster is a hero because he provides for more of the needs of others.
Hail the rate-buster!
Nevada Taxpayers Association releases 62 spending reforms for Nevada
A lot of good ideas, so dive right in.
I'll only highlight one area of recommendations that is extremely important - reforming Nevada's budgeting process.
The current budget process has been in place since 1993. Known as a cost-to-continue budget, it tends to presume that the spending levels of the prior biennium are still viable. This base budget is then increased by "roll-ups," which include increased caseloads, enrollments, utility costs, grounds upkeep costs, building maintenance costs, and shared administrative costs (Personnel Department costs, IT costs, etc.).
During periods of economic growth this tends to allow a budget that is on automatic pilot for increased spending. The following recommendations regarding the budget are focused on providing solutions that more efficiently identify expenditures, and also provide additional accountability and transparency to Nevadans about where and how their tax dollars are being spent.
1. Prioritize the expenditure of funds.
Reason: Frequently when the need arises for fiscal "belt-tightening," it is often a vocal minority who argues for nonessential program enhancements. Priorities should be established for programs and services that are essential to the well-being of the general public or carry penalties (mandated programs and services) for not being in compliance. Prioritization of agency budgets would also identify what programs or services should be maintained during an economic downturn vs. those that should be considered for cuts.
Action Required: Implementation by Governor and Legislature. (Statute should be changed, otherwise the Governor's office needs to prepare two budgets.)
Note: Also see recommendation #43 of the SAGE Commission Report. The Commission looked at the Arkansas priorities budget law which has been in place since 1945 and determined this would be a viable template for future Nevada budgets.
2. Program-based or Performance-based budgets should be utilized when applicable.
Reason: Program Based - Where multiple agencies and departments provide similar programs, those agency/department budgets should be program-based. This would allow for better program coordination and provide program continuity. A lead agency should be established and based on funding could award grants to other governmental units and nonprofit organizations that meet program requirements. This would streamline administrative procedures and minimize duplicative administrative costs. (For example, substance abuse programs separately funded with no coordinated link include programs administered by the Department of Prisons, the Office of Parole and Probation, the Department of Education, Clark and Washoe county drug courts, DARE, etc.) When analyzing the delivery of a program or service, nonprofit agencies that work in a particular field should receive consideration as a potential service or program provider.
Performance Based - Many agencies and departments are responsible for delivering a specific service(s). These departmental budgets should be based on what is necessary to efficiently perform/deliver the service(s) based on specific goals and required outcomes.
Action Required: See recommendation 1 "Action Required."
3. Objectives should be established for each program or service to be provided.
Reason: Specific objectives to be achieved can be measured to facilitate an evaluation of the effectiveness of the program or service to allow corrective action to be taken if necessary, or provide for the enhancement or elimination of the program of service.
Action Required: Implementation by Governor
4. The outcome-based performance indicators that have been developed for each agency/department should be based on the objectives established and also posted on the State's website.
Reason: This would provide the measurement standards for the objectives set for programs or services and allow greater transparency and accountability by taxpayers.
Action Required: Implementation by Governor or Legislature.
These reforms are similar to the budget reforms Geoffrey Lawrence has written about for NPRI and that the SAGE Commission has recommended (number 43).
They're also something Nevada's families and businesses do instinctively. Nevada's government should do the same.
(h/t Doug Busselman)
Pigs in space
President Obama wanted to scrap a Bush-era space program that was running over budget and behind schedule in favor of private competition in space flight. A Republican senator wants more pork to the NASA monopoly on space flight and, of course, politically connected firms in his home state. As a result, the senator has won Citizens Against Government Waste's Porker of the Month Award.
Bad news for high-tech education?
A new study by researchers at Duke University's Sanford School of Public Policy suggests that having a computer at home may actually lower student test scores, especially for low-income students. The study reports, "increased availability of high speed internet is actually associated with less frequent self-reported computer use for homework."
So what do kids use computers for? Playing video games and socializing with friends, of course. On the bright side, the study does find that parental monitoring of a child's computer use can lead to more productive time on the computer.
Extending unemployment
People who understand free-market economics have long understood that some Americans want to copy everything that doesn't work in Europe while ignoring everything that does. I'm not talking about socialized medicine; I'm talking about European-style unemployment.
Since 2008 the U.S. has continually extended unemployment benefits beyond the 26-week maximum period. The duration of the benefits has been extended to as much as 99 weeks. Not surprisingly, more and more people have remained unemployed in the long run.
European unemployment lasts a notoriously long time. Generous benefits - some life-long - encourage people to forego seeking employment and instead collect benefit checks for as long as possible. Not surprisingly, there are more long-term unemployed in Europe than are in the short-term and medium-term categories combined.
Senator Harry Reid and many others want to keep the extended unemployment benefits flowing. Unfortunately, this only means we will see longer, European-style unemployment.
*Source: EurostatAccording to Eurostat: For the EU27 and all Member States, short-term unemployment refers to a duration of unemployment of less than one month, medium-term unemployment to one to six months, and long-term unemployment to six months and more. For the U.S., short-term unemployment refers to a duration of up to five weeks, medium-term unemployment to five to 26 weeks and long-term unemployment to 27 weeks or more. In all cases, unemployment is still ongoing at the time of the reference week.
Read my full article on this subject: "How politicians' 'compassion' delays economic recovery."
