In answer to my question about economic issues…. by guestblogger Robert Arvanitis

In an earlier post, I asked several questions about economic issues that confuse me.  Robert Arvanitis wrote a comprehensive reply, but then couldn’t get the Word Press comment system to accept it.  Because it is so comprehensive and informative, I’m putting it up here as an independent post.  All that I ask of the rest of you is that you don’t let its length and depth dissuade you from chiming in with your own two cents (or, with inflation, four cents) on the subject.  There’s a lot to be said here.

And now . . . Robert Arvanitis:

Why, if the economy is contracting and the labor market is flat-lined, has the stock market gone up?

Will the stock market stay up (long-term and short-term predictions, please)?

In normal times, the stock market is a reflection of true economic activity; stocks typically trade at multiples of earnings from 10 to 14 times. So the yield is the inverse of that — if you pay $10 for $1 yield, that’s a 10% return. Likewise if you invest $14 to get $1 then that’s like a 7% return. That’s the norm, 7-10% for “risky” equities in contrast to the “safe” bond yields of 3-4% or “really safe” bank accounts at 2-3%.

Alas, we are not in a yield-trading market. Rather, we are seeing the impact of inflation caused by printing of money at the Fed. Our GDP, the value of everything we produce, is like $16 trillion. But if we suddenly doubled our money supply, then the GDP would be, nominally, $32 trillion. Same loaves of bread and haircuts, but now “worth” twice as many dollars. Kinda like the story of the boy who sold his dog for a million dollars. Dad asks how he got so much money. Boy replies “No, I got two, $500,000 cats…”

Same with our stock market. Right now up to 14,000 on the Dow, but that’s not any more loaves of bread that the 10,000 Dow of just a few years ago.

Bad news — wealth effect makes people falsely confident, so they go spend and do other stupid things. Good news — at least it’s something of a hedge against inflation. You can still get the same number of (now more expensive) loaves of bread when you’re hungry.

The IRS says that families will be paying $20,000 for health insurance. It also says that the top penalty for failing to buy insurance is less than $3,000. Medical insurance companies can no longer turn away people with pre-existing conditions. This means that people can avoid the $20,000 fee, pay the small penalty, and buy “insurance” only at the time they need it. (Or, more accurately, buy “cost shifting” when they need it.) Can the insurance companies stay solvent under these circumstances?

If insurance companies cannot stay in business with this non-insurance fee structure imposed upon them from above, how will they change? Most are diversified. Will they simply abandon health insurance? They cannot refuse to pay onerous fees, because payments are forced upon them by law.

Will the death of insurance companies create a medical black market, where people pay cash for services? In a way, this wouldn’t be so bad, because it would do away with the moral hazard that comes from both huge insurance companies and government interference. With those huge systems, people have no incentive to shop around for better or more affordable treatment.

Take a step back. We must separate the various functions. First is health care provision. Doctors, nurses, drugs, hospitals, equipment… That is a service sector that will rise with demand and shrink with price-controls. Obamacare = less service, fewer doctors, worse outcomes.

Second is true insurance. You have a one in a hundred risk of losing 100,000 (car crash, home fire, serious illness). Being rationally risk averse you’ll gladly pay $1,000 (expected value of 1% times 100,000) as a premium. Heck, you’ll even pay like $1,500, just to be safe. That extra $500 pays for agents, and underwriters, and insurers’ capital, and all the rest.

Third is what we have today — redistribution masquerading as insurance. Young/healthy should pay a fair premium of like $4,000. Old/ill should properly pay $20,000. But Obamacare, to hide redistribution, says everyone will pay $12,000 each, the average of the high and the low. Insurers wouldn’t care how they get paid, EXCEPT the young/healthy aren’t stupid. They won’t pay $12,000 for insurance worth (to them!) a mere $4,000. Hence the unconstitutional (shut up Roberts!) mandate.

(Side note — this use of phony insurance to hide redistribution is just the latest iteration of the continuing fraud. It starts with “tax Peter to pay Paul.” Steps then include high rates with unfair deductions, borrowing to tax the unborn, inflation to rob lenders and the poor, unfunded mandates, and finally scams like Social Security and Obamacare. Details on request.)

Ok, that’s the real economics. Now the politics. Even with all the arm-twisting, and bribing, and parliamentary cheats, and brief supermajority, Obamacare could NOT pass with anything close to the necessary punitive taxes needed to get the young/healthy. That’s why the penalty is so foolishly low.

But to the left, that’s a feature, not a bug. It’s OK if insurers get squeezed out of health insurance. They’re just capitalist parasites anyway, and we’re one day closer to single-payer, that is, a government-monopoly on when you die.

Obama’s Consumer Financial Protection Bureau is forcing banks to give unsecured, low-interest home loans again. These loans, and the machinations into which the financial industry entered in order to protect itself from the downside risk of such loans, triggered the 2008 recession. What will happen this time around? Will banks go out of business? Will they come up with some grand new scheme? I assume that, if they do the latter, it will implode. The last time, it took around two decades before the Ponzi scheme collapsed. How long will it take this time?

We have a problem that banks got “too big to fail” because of government distortions of the credit markets. The Fed taught markets that serious losses get “socialized” (fall on taxpayers, not the true failures).

We also have a problem that government misallocated credit via the “Community Reinvestment Act.”

So what does government do? Makes an utterly irrelevant move into more controls. Plus an additional misdirection of credit.

We do not learn from our mistakes. We simply make new and more subtle errors.

It’s like this. A hippo gets into the bathtub. Water overflows everywhere. Hippos declares an emergency and nationalizes all the towels…v

Book Review — Greg Gutfeld’s The Joy of Hate: How to Triumph over Whiners in the Age of Phony Outrage

I have some very exciting news: I have found my long-lost identical twin. It’s amazing, really. Like me, my twin grew up in the San Francisco Bay Area during the 60s and 70s. Like me, my twin went to UC Berkeley and found Leftist antics revolting. Like me, my twin now does conservative commentary, with lots of self-deprecating parentheticals peppering observations about the illogic, hypocrisy, and mental sterility of the Leftist intellectual universe. And like me, my twin is short (or at least, claims to be short).

Okay, I’ll admit that there are a few differences. My long-lost twin is somewhat younger than I; Catholic, rather than Jewish; and, of course, he’s male. Other than that, the only really significant difference is that he’s famous, and he’s much more brilliant and amusing than I am — two qualities he amply demonstrates in his most recent book, The Joy of Hate: How to Triumph over Whiners in the Age of Phony Outrage.

I often start reading books that focus on the way the Left has taken over America’s intellectual universe, substituting emotion for reason and intellectual bullying for genuine political discourse.  Sadly, with many of these books, I stop reading about halfway through.  It’s not that the books are badly written or that I disagree with the premise.  The problem is that I end up so depressed that, despite applauding the author’s data and insights, I just can’t make myself pick the book up again.

There are a few exceptions, of course:  Jonah Goldberg and Ann Coulter spring to mind.  In addition to being informed and insightful, their books are also quite amusing. Even if I don’t agree with all of their conclusions or if I find their facts and conclusions depressing, I’m still laughing as I face ugly truths about the bankruptcy the Left has visited upon America’s marketplace of ideas.  With the publication of The Joy of Hate, I can add a new author to the list of those whose books I read right to the end, even though a part of me is practically weeping about the vast and angry intellectual wasteland he describes.

Gutfeld’s target is the Left’s habit of using the cloak of “tolerance” to justify turning manufactured outrage on anything that is inconsistent with Leftist norms.  In other words, as used by the Left, tolerance is a euphemism for grossly hypocritical.  A good example is Gutfeld’s chapter on the American military, in which he analyzes the professional Left’s (i.e., the media’s and Hollywood’s) outrage with a video purporting to show Marines peeing on a corpse.

Gutfeld acknowledges that peeing on a corpse is not a nice thing to do.  Reasonable people of good will might think that a good military kills its enemy, but it needn’t sink to the vulgarity of peeing on its enemy.  So the Left could have a point, except…

But you won’t find that sensible understanding from the left.  Which I’d accept — if they were consistent about all types of atrocity.

Here’s where the tolerant left falls apart once again.  You never see them express outrage when our enemies behead, mutilate, or hang our soldiers.  You never hear them express outrage over what these beasts do to women, gays, and whomever else they consider worthless, according to their caveman mentality.  They are vicious, backward, murderous assholes — but according to the left, our guys are worse because they peed on those assholes’ corpses.  (By the way, here’s another bizarre inconsistency:  How is pissing on a corpse worse than turning that guy into a corpse?  I mean, we accept that our troops go there to kill people, and I can safely say that being killed has to be worse than getting splashed with urine.  It defies logic that drones are preferable to water sports.)

Likewise, in his chapter on “Unreal Estate,” Gutfeld takes sharp, effective jabs at the way the Left uses faux tolerance to create an intellectual environment in which banks were afraid to say that giving loans to people who cannot afford them was an economic disaster waiting to happen:

The banks were encouraged to approve the loans, and for a while everyone was happy, or at least not in foreclosure.   But what would happen if some banking dude had said that this practice [of giving loans in such a non-discriminatory fashion that the ability to repay wasn't even considered] might be a bad idea:  that approving loans to millions of people who can’t afford them spells disaster?  That would be discriminatory.  Clearly, Mr. Evil Banker (who must look like the mustachioed Monopoly guy) doesn’t want blacks or Hispanics to own homes.  Yep, if you don’t approve of that loan, you’re probably a racist, Mr. Moneybags (never mind that whites got nailed, too).

For those of us who are political junkies, there are no new facts in The Joy of Hate.  What makes the book interesting, is the way Gutfeld follows the common thread binding such disparate characters and entities as Sandra Fluke, ESPN, Bill Maher, Robert Redford, and Janeane Garofalo, among others — all of them, under the guise of a vast tolerance, use nuclear-powered outrage to quash any views or beliefs that don’t fit within their anti-American, anti-capitalist, victim-centric world view.

Much of what Gutfeld does is to validate your and my common sense.  No, we’re not crazy if we think corporations are useful enterprises for getting things done on a larger scale than individuals on their own could accomplish.  Likewise, we’re not delusional if we think it’s appropriate for banks to make decisions based upon business considerations and we believe that deadbeats with expensive Womyn’s Studies or Puppetry degrees should be censured, more than pitied.  Put another way, Gutfeld is the antidote to cognitive dissonance.

Importantly, because it preserves him from being charged with hypocrisy, Gutfeld also isn’t afraid to turn his fire on conservatives.  We conservatives don’t help this overheated atmosphere by being “outraged” at things that are stupid or merely offensive.  We need to save the outrage for outrageous things — and use logic and intelligent sneering for the other stuff.

To begin with, without heat, and possibly with humor, we should also call the Left on its hypocrisy.  Clashing outrage convinces no one, but it does tend to favor the side with the bully pulpit (newspapers, TV news shows, movies, etc.).  Rather than weeping and wailing about Bill Maher’s tacky habit of affixing four letter sexual epithets only on conservative women, we should be asking him why he isn’t affixing those same purely sexual descriptions on any Leftist women.  I mean, considering that the Left won the election, in part, by focusing on women’s lady parts, isn’t he engaging in gross discrimination when he doesn’t call Babs Streisand or Cher a c**t?

As someone I know says, “Don’t get furious, get curious.”  Which leads to Dennis Prager’s preference for “clarity over agreement.”  Asking polite (or sarcastic, that’s okay too) questions does two things:  it forces people to examine their own beliefs, and perhaps change their minds, or it forces them to speak truths that they know make them look ugly.

Knowing all of you as I do — funny, informed, somewhat cynical, and intelligent — I think you’ll genuinely enjoy The Joy of Hate: How to Triumph over Whiners in the Age of Phony Outrage, and that you’ll like it from beginning to end.  It also has the virtue of being the kind of book you can give to your liberal friend who is a Jon Stewart fan.  Gutfeld’s somewhat rough, scatalogical humor (okay, so we’re not quite identical twins), should appeal to the same people who like Jon Stewart’s foul-mouthed encomiums to Leftism, and it might open their eyes a little bit.  They may not change their minds, but they might start questioning the hypocrisy that underpins the Left’s perpetual outrage.

By the way, if you’re in a book buying mood, don’t forget my books, which aren’t half as good as Greg’s, but may still while away a few idle hours (assuming you have any of those):

Are we as a society obligated to rescue people (banks or lenders) from their stupid mistakes?

My local Marin paper recently ran a story that showed paralyzing stupidity on the part of both a bank and an individual couple.  The law favors the bank, which was insanely greedy and stupid, so Occupy Marin is stepping up to help the couple, which was also insanely greedy and stupid.  I feel for a couple that might be homeless, but this is truly a “plague on both your houses” situation.

The story started a few years ago when the bank and the couple got together to be as dumb as vast collection of posts:

Graybill, a contractor and cabinet maker, said he and his wife, an interior designer, lost their home due to two home equity loans they took out. He said the loans were issued by World Savings, which at the time held the mortgage on their house. World Savings was bought by Wachovia in 2006, and Wells Fargo merged with Wachovia at the end of 2008.

Graybill said that with the encouragement of a World Savings employee they took out a second equity loan of $600,000 — even though the house had most recently been appraised for just $243,000. Graybill said the World Savings employee lied on the loan application indicating that the couple had two new cars and $100,000 in home furnishings, which they didn’t have. The loan featured an adjustable interest rate and balloon payments.

“We were foolish. We shouldn’t have borrowed the money,” Graybill said. “We shouldn’t have used our home as a checkbook.

“My parents grew up in the Depression and they never would have done what we did,” Graybill said. “My wife and I, like so many others, were betting that things would continue to get better and we would be able to turn the situation around.”

The above set of facts raises two questions:  What in the world were Graybill and his wife doing taking out a loan that was more than twice the value of the house?  And what in the world was a bank doing issuing a loan that was more than twice the value of the house?

The lender, having successfully instituted foreclosure proceedings, is now trying to evict the couple.  That it has the legal right to do so does not make any better its original stupid decision.  The property is still worth way less than the outstanding debt, so the lender is still in the hole.  Meanwhile (and this is why the story hit the news), Occupy Marin is trying to force the bank to stop eviction proceedings, allowing the debtors to keep their home.  Considering that these people took out the world’s dumbest mortgage, I don’t see that they deserve that kind of favorable treatment.

Ever since the housing market collapsed, both sides of the political aisle have been criticizing the banks’ greed.  Loans such as this one certainly lend credence to that line of thinking.  Of course, Congress created this nightmare when it forced banks to give bad loans so that “everyone” could own a home.  Once the banks got a system in place for giving bad loans and then immediately selling them, it had an incentive to create and sell as many bad loans as possible. That doesn’t excuse these deleterious bank practices, but it explains them.

But what’s the individual’s excuse?  Why in the world would people burden themselves with debt that they cannot possibly pay off?  These people admitted that they used their house as a check book.  Well, fine.  That’s a decision you’re allowed to make, but should you be able to come back later crying that your decision was a stupid one, so now the world has to support you?

Honestly, when I read stories such as this one, I see red.  I get angry at government policies that encourage profligate banking practices; I get angry at banks that use those same policies to justify almost criminal banking decisions; and I get angry at individuals who make foolish financial decisions and then expect the world to bail them out.

Sadly, at the end of the day, the politicians keep pandering and destroying, while the banks and the borrowers get rescued as always by the American taxpayers.  Which leaves one thing hanging:  when the taxpayers run out of money, who’s going to rescue them?  Germany?  I don’t think so.

Romney is proving to be a predictably bland candidate but honest-to-God, it would be so wonderful to have our chief executive officer be someone who understands finances at both a theoretical and practical level.

The Obama government’s attack on JP Morgan and banks is something we should find very worrisome

I’ve been suffering from an ear worm for the past few days.  Every time I read the headlines, I hear President Gerald Ford’s voice in my head.  He’s always saying the same thing, too:

A government big enough to give you everything you want is a government big enough to take from you everything you have.

Pithy, isn’t it?  Sometimes a pithy saying obscures the truth or means nothing at all.  But there are some pithy sayings that go to the heart of the issue — and with this one, Gerald Ford nailed it.

Right now, the government wants to take away private control over money.  Barack Obama phrased it as “reform,” with the government over seeing even those banks he concedes are “best-managed”:

“JPMorgan is one of the best-managed banks there is,” Obama said during an interview on ABC’s “The View”, which will air on Tuesday. “Jamie Dimon, the head of it, is one of the smartest bankers we got, and they still lost $2 billion and counting.”

[snip]

According to the president, if even a bank as well-managed as JPMorgan could make an error this glaring, other banks are susceptible to similar blunders.

“You could have a bank that isn’t as strong, isn’t as profitable, managing those same bets and we might have had to step in,” Obama said. “That’s why Wall Street reform is so important.”

Elizabeth Warren was more direct:

The era of self-regulation on Wall Street needs to end now, Elizabeth Warren says.

The Democratic candidate for Massachusetts Senate told CBS News Monday that America has to say “no, the banks cannot regulate themselves.” The comments were made in reference to JPMorgan Chase’s $2 billion trading loss on Thursday.

“Regulation” is not the same as the system we have now, which is a series of rules governing banks (and more on those rules later).  The regulation the Obam-ites envision really means central control of America’s financial systems, with the government calling the shots.  If they didn’t envision more government control, we’d be right back at our rules-based system.

As for the rules-based system (I promised I’d get back to it), that in itself is a laughable disaster.  There are too many rules, and they are too poorly written.  I’ve worked on banking related litigation and can tell you that, between the Code of Federal Regulations and the various state rules (a) nobody can get it right and (b) there is room for enough loopholes to make all the rules mere tools for those bent on nefarious behavior.

The government is promising order yet once it takes control over the banks, what’s to stop it from simply nationalizing the system?  Once the banks become indistinguishable from the government, we won’t have stability.  Instead, we’ll have reprise of what happened with social security.  Aside from being poorly managed, the government simply raided the “lock box.”

Yes, banks make errors.  Yes, big banks make big errors.  The smart solution is to have a few rules that are unbreakable — easy to follow; easy to police — rather than to trust a government that says, “We’re just here to help.”

 

Figuring out the subtext in Obama’s SOTU

Clark S. Judge sent to Hugh Hewitt a great note analyzing what Obama really said during the SOTU.  I’m going to do something here that I almost never do, which is to reprint the note in its entirety at my own blog, albeit reformatted from the original.  Why?  Because the paragraph breaks vanished at Hugh Hewitt’s site, making it very difficult for those of us who are struggling with glasses versus computer glasses versus bifocals to read the darn thing:

SOTU: Did I hear that right?

By Clark S. Judge: managing director, White House Writers Group, Inc.; chairman, Pacific Research Institute.

It sounded like such a soft, even conservative speech.

But let me get this straight:

1) banks will be punished (do I understand this right, by a committee headed by Eric Holder?) if their lending is too risky,

2) and they will be required (by the same committee) to give more home loans (meaning, it must be, to people who would otherwise not qualify for the loans, or else the government would not have to be involved) at lower rates (which means rates that do not compensate them as much as the market says they need to be compensated for the risks they are taking, all of which sounds like a new edition of the policies that brought on the financial collapse),

3) which must mean that they will have to pull back on risky lending someplace other than homes,

4) the only place that most banks would be able to pull back on riskier customers would be loans to small and new businesses,

5) but these are the businesses that have created just about all the jobs over the last 20 years and he said early in the speech he wants to encourage them,

6) so maybe their growth capital will come from selling stock to the kinds of people who invest in new and small businesses,

7) but through the Buffet Rule he’s going to double the tax rate on investment income for those people, meaning that, like the banks, they can’t be fully compensated for the risk of backing small and new businesses,

8) so they will not invest more in small and new companies but in big established firms,

9) so more of those small and new firms will have to turn to the government for capital,

10) which luckily he said would up its investing in early stage businesses with “the best” ideas,

11) “the best” ideas meaning, I guess, as with Solyndra, ideas that advance his agenda through companies whose owners support his candidacy),

11.2) or maybe it would be companies that agree to invite unionization (since the unions have failed to organize the new and dynamic sectors of the economy, which is why they have been shrinking),

12) but then with the big businesses, he wants to punish American companies if they invest overseas,

13) and he wants to increase exports,

14) but being competitive in the global markets often means having part of your production near your markets, which is why many companies have opened production facilities abroad and many foreign companies (BMW and Honda, for example) have opened their facilities here,

15) so he’ll make these companies less competitive, meaning less able to export anything that might be paired with some other product the company makes abroad in order to attract buyers,

16) and it also means he’ll have the U.S. ignoring many of the international trading rules of which we have been the principal sponsor since the end of WWII, rules that have led to an incredible growth in widely shared wealth all over the planet,

17) which means that, if he follows through, he’ll blow up the post-WWII global economic system,

18) which in the very short run may help the uncompetitive American labor unions but in the not-so-long run would devastate every economy on earth,

19) but it would also mean he would be in a position to decide where big companies could invest, and when, just as he’ll be in control of all new and small businesses, too,

20) meanwhile he is going to tell states and localities what their budget priorities should be,

21) and make them adopt his policies for running their schools, leaving me to wonder, when he’s through, what won’t he control?

I believe that’s what I heard the president advocate last night. But one term I didn’t hear, maybe I missed it: “The Constitution.” Then again, wasn’t he suggesting that, in brave times like these, we need to put aside those old rules. Do I have this straight?

Idle thoughts while hanging out

Thoughts during a busy day:

Idle thought 1:  I want to have Mewt Gingney for my candidate.  Newt Gingrich is a completely principled conservative with, in his past at least, an unprincipled private life.  Mitt Romney is an unprincipled conservative with, from the past to the present, what appears to be a completely principled private life.  Separately, each is an imperfect candidate.  Combined into one super Republican . . . well, wow!   If I have to pick one, though, I’d go for Newt, since I’m voting for president, not husband.

Idle thought 2:  My mother is not well, and I was at her bedside entertaining her.  In keeping with my belief that laughter is the best medicine, I read to her two of my favorite funny posts (here and here), both of which happen to be written by military types.  It occurred to me that, while many in our military have extremely well-developed senses of humor, the same cannot be said for the Occupy crowd.  Have any of them said anything funny?  (Intentionally funny, I mean, not insanely stupid that makes one feel as guilty as if one laughed at a mentally disabled person for an inadvertent joke.)

Idle thought 3:  People often try to figure out what it is about the West that made it zoom ahead of all other cultures.  I’d like to suggest a trigger for the economic and intellectual explosion:  banking.  Being able to transport money easily and, even more importantly, being able to rent it, unleashed enormous creative, exploratory and commercial energy.  It’s rather striking, isn’t it, that the Occupy movement is directed at destroying banks. In other words, the attack really isn’t against just banks.  The attack is at the core of Western intellectual energy and civilization.

I’ll be the first to admit that banks are royal pains in the butt (I’m still sweating from the effort I had to make to assemble the 200 pages of documents I needed to apply for a re-fi), but I’m more inclined to blame controlling Democrat legislation for this insanity than the banks themselves.  Banks should be policed for fraud and corruption, but otherwise, they — and we — function best in an open market.

Idle thought 4:  I wasn’t in a rush to judgment regarding the Cain sexual harassment allegations, since such claims were a dime a dozen in the 1990s.  As the story develops, though, two thoughts occur:  if he did it, better we know now than later; and regardless of whether or not he did it, his and his team’s response to the story is appalling, which should concern us regarding his readiness for any upcoming fight directly against Obama.  I like Cain, personally, but I have strong doubts about whether he’s ready for prime time.  I’d rather see his flame burn out now than in October 2012.

Anything you guys would like to add to my list of idle thoughts?