Imagine throwing a party for your best customers and none of them show up.  What would you think about your future?

Well, about a week ago at a Miami Beach asset-backed securities conference, Wall Street professionals invited their best institutional bond customers to a cool South Beach party and almost no one showed up.

“Of course no traditional bond buyers are here,” one vulture investor told me. “I buy bonds that were rated AAA a few years ago for 30 cents on the dollar.  The insurance companies and pension funds − they took it in the shorts.  Who wants to be the dumb money, buy a new issue and watch it drop to nothing?  No one’s gonna bet their job on Wall Street ever again. No one trusts them.”

Unfortunately, while it’s tough to shed tears for Wall Street traders and bankers, the structured finance investor boycott has broad negative implications for everyone else.

Until the securitization market recovers it will be hard for many consumers to get a mortgage without government help.  Jumbo mortgages that don’t qualify for Freddie, Fannie or FHA programs will remain elusive and expensive.

Many small businesses are having a tough time borrowing money for working capital or expansion because of the structured finance shutdown.  It was asset-backed securities that created the liquidity for many small business loans prior to the credit crisis.

Like a junkie craving a fix, the commercial real estate industry needs the CMBS market to function.  In a sign of bad things to come, just two weeks ago Credit Swiss announced layoffs in its commercial real estate group.  The bank cited a lack of investor interest in buying new commercial mortgage backed securities as the reason for firing its department.

The real victims, however, were business and real estate owners who were depending upon Credit Swiss to fund their loans.  These orphaned borrowers will discover that it’s tough to find a new reliable lender.

Free markets advocates loudly chant the mantra of self-regulation and economic self-healing.  But, instead of a getting better, the asset-backed securities new issue market is DOA with few signs of resuscitating itself.

On the other hand, Dodd-Frank legislation hasn’t worked either.  If Dodd-Frank was actually fixing Wall Street’s problems, the asset-backed securities markets would be restarting.  The best that can be said for Dodd- Frank is that it hasn’t made things much worse…so far.

The asset-backed securities market shut down illustrates that neither the free markets nor Dodd-Frank regulations are working. America needs a third way and soon.  Trust, integrity and transparency aren’t complicated but seem hard to achieve for the securities and banking industry.

The solutions to Wall Street’s integrity problems won’t come from Washington and they won’t be easy.If industry executives want to know how to fix themselves they should study the Wall Street’s economic history from 1920 through 1965.  In the 1920s traders ruled the Street and traded their way into a banking induced housing collapse, a stock market crash and the Great Depression.

By 1931 customers had had enough of Wall Street and began a multi-decade boycott of the industry.  Private finance took the place of securities transaction and it wasn’t until the mid-1960’s that individual and institutional investors returned in mass to the securities markets.

The most successful firms to re-emerge from irrelevance, Goldman Sachs and Merrill Lynch (now a part of Bank of America), built their franchises based upon long term relationships, transparency and trust.  Both firms had a customer first attitude and neither firm bragged about how they made money trading against their customers.

Goldman Sachs invented stock and bond research.  If they had a good investment idea rather than keeping it for their own, they shared it with their customers and were rewarded with trading volume, assets under management and underwriting assignments.

For the asset-backed securities industry to restart, investment bankers need to re-learn the lessons of Sidney Weinberg and Charles Merrill and replace their focus on executing trades with a myopic focus on doing a good job financing businesses, consumers and families.  They need to worry about how they can improve investor returns and always share their best ideas with customers first rather than use these ideas to enhance their proprietary trading profits.

Wall Street is loosing its relevance and becoming a dinosaur.  Its business simply cannot exist without customers.  Unless it fundamentally reforms, and quickly, an entire generation of bankers and finance professionals will find that they are no longer relevant.

Posted under BANKS, Credit Crisis, Finance, Goldman Sachs, Merrill Lynch, Public Policy, REGULATION, Securitization, economy

Tax cut proponents want to encourage domestic employment by subsidizing American companies who employ foreign workers in overseas plants.

Cutting corporate income tax on foreign earnings puts companies that keep their production in America at a competitive disadvantage and encourages the continued hollowing out of the American economy.

The subsidy for moving production overseas has been euphemistically called a “repatriation tax holiday” but the only people who are going to get a holiday are unemployed Americans whose jobs will move overseas.

The problem with the repatriation tax holiday is that it will massively cut taxes on foreign corporate profits while not changing the tax rate on domestic profits. It isn’t hard to figure out what will happen. If the corporate income tax rate is close to 0% for foreign profits, but remains at 35% for profits made domestically, every company that can move overseas will do so. A 35% margin advantage by moving production overseas will be too much to overcome.

Tax cuts almost always sound good. Conservatives like them because it gives people more money to make their own choices, and some liberals like them because it’s a form of government stimulus. But not all tax cuts are created equal. Some, like the repatriation tax holiday, actually create incentives for bad economic behavior.

Tax holiday proponents argue that American companies won’t bring their foreign profits into the U.S. and invest in America because U.S. taxes on foreign profits are too expensive. It’s unfair, they say, to force American companies to pay U.S. corporate income taxes on foreign earnings because a foreign income tax was already paid. After all, why would anyone want to pay a tax on the same earnings twice?

Tax holiday supporters say that if taxes on foreign earnings are significantly reduced, U.S. companies will use their foreign earnings to fund a domestic investment renaissance. New York Senator Charles Schumer even thinks that the extra revenue could be used to fund an infrastructure bank.

But for some odd reason everyone who is advocating the tax holiday has forgotten that the tax code already contains a “foreign tax credit” which eliminates the double taxation of foreign earnings.

When U.S. companies pay taxes overseas they can claim a tax credit equal to the amount of foreign taxes paid or assessed. The effect of the tax credit is to reduce U.S. taxes by the amount of foreign taxes and keep the combined foreign and domestic tax burden the same as it would be for a domestic only taxpayer. If the tax holiday is enacted, the tax burden on foreign earned income by U.S. companies will be close to 0%.

The 0% tax rate won’t happen because foreign governments reduce their income tax rates or taxes collected. Taxes paid to foreign governments will still be paid, just indirectly by U.S. taxpayers through the foreign tax credit.

If tax cutters get their way U.S. companies that employ U.S. workers will be at a competitive disadvantage. U.S. employers that hire Americans will pay a 35%+ corporate income tax on their profits while U.S. companies that hire foreign workers will pay almost a 0% corporate income tax rate.

It’s just a common sense fact that if tax do-gooders were serious about creating U.S. jobs and investment they wouldn’t be talking about subsidizing U.S. companies to hire foreign workers.

If tax cutters were serious about supporting American jobs they be talking about tax increases on foreign profits and offsetting tax cuts on domestic earnings. A simple elimination of the foreign tax credit and a dollar for dollar domestic tax credit would do the trick.

For American workers struggling to compete in the global economy, the tax holiday proposal is insult on top of injury. American workers are trying to keep their jobs but are being asked to pay taxes that are used to subsidize employers replacing them with foreign workers.

American citizens should be demanding that their elected officials fight for American jobs and the American economy. It is unconscionable for any members of Congress to advocate a tax subsidy for U.S. companies so that they can hire foreign workers instead of Americans.

Congress needs to stop pandering to special interest groups that are hell bent on razing the American economy and start fighting for American workers.

Posted under Finance, Politics, Public Policy, economy

At first I couldn’t believe my ears: a U.S. manufacturer was telling me that they were planning on fleeing the high costs of Chinese manufacturing for the relatively lower costs of the U.S.

It’s been years since I heard anyone credibly claim that they could save money by moving manufacturing to the U.S., but just last week I met with a manufacturing CEO who was certain 2012 would be the year they outsourced to the U.S.

I was surprised with the textbook microeconomic explanation of why this manufacturer was leaving China for the U.S.

Long and inflexible supply lines are causing the company, which manufactures replacement industrial refrigerator parts, to finance and store large amounts of goods. High-energy prices are causing trans-Pacific transportation costs to skyrocket. And, the not so hidden expense and personal sacrifice needed to manage a large staff 8,000 miles away have worn down the CEO.

Management now believes Chinese manufacturing isn’t a financial elixir and is hurting their ability to service customers. The deal was sealed when Chinese inflation eroded whatever remaining financial benefit remained and civil unrest terrified visiting employees.

Instead of continuing down the Chinese rabbit hole, the CEO is working on a plan to transport his machine tools to a newly purchased manufacturing plant in South Florida. With a modest capital investment, he believes that 10 U.S. workers will be able to manufacturer as much as 50 Chinese workers.

Even better, by manufacturing in the U.S. the company will improve customer service and the personal wear and tear not of trying to control quality in a manufacturing operation located in the middle of China will simply disappear.

The CEO is highly motivated and very smart. His company is growing more than 50% per year and is very profitable. The company generates high margins by packaging the delivery and installation of a basic industrial consumable with superior customer service and customized installation.

In the big scheme of things, one company moving their manufacturing to the U.S. doesn’t mean much, but after listening to this CEO, and talking to scores of others, it’s clear that the Chinese advantage is being eroded by high domestic inflation, rising energy prices and an increasingly unstable civil environment. Given the choice of having to commute to China or stay in the U.S., the U.S. wins every time.

Posted under China, Finance, Manufacturing

I’m no pilot, but I imagine that if I were flying a plane and a mountain appeared in front of me, I’d pull up to avoid crashing. Instead, I am an economist and business person and I see an economic mountain looming in front of the U.S. I only wish I could explain why Washington insists on flying straight into the mountain rather than pulling up.

Washington politicians are pointing the U.S. economy straight into a liquidity trap and instead of a bright economic future, the U.S. is looking at years of high unemployment, weak GDP growth and the possibility of widespread deflation.

When the economy is in a liquidity trap, monetary policy is ineffective because individuals and businesses hoard money rather than spend it. The more money the Fed makes available, the more consumers hoard.

Will I be able to feed my family and pay the bills? Is my job secure? Is my house worth less than the mortgage? Will the government help me when I am old or will Medicare be denied when I need it the most? Why is the school board cutting pay and firing teachers? Does a government shutdown mean that I won’t be paid? Is the Treasury raiding my pension to pay bondholders?

When ordinary people aren’t sure how to answer those questions, they become gripped by fear and uncertainty. To assuage their fears, they spend their time and resources getting ready for whatever bad news comes their way. They hoard cash and try to save for the rainy day that they are convinced will come. As a result, demand for goods and services falls causing prices, wages and living standards to plunge. Before you know it, we’re in the midst of what economists call a deflationary spiral with no end in sight.

Last week the Federal Reserve of Bank St. Louis published an update to its M1 Money Multiplier chart that shows ordinary Americans are holding on to cash. In the last six months the Money Multiplier has gone into a downward spiral. When the Money Multiplier falls, it’s tough for the economy to sustain growth.

It’s not just the M1 Money Multiplier that is falling; M2 Velocity is falling as well. M2 velocity is a measure of how fast broadly defined money supply turns over each year. When M2 velocity falls, consumers, businesses and investors are slowing the rate at which they spend and invest their money. Annual GDP equals the amount of money available to spend multiplied by the number of times the money turns over in a year. When velocity goes down it is a sure bet that a recession is right around the corner.

As the below chart illustrates, M2 Velocity resumed its downward trajectory about six months ago after recovering a little from the 2008 financial crisis.

Falling velocity is a sign that consumers and businesses are losing confidence in the future.

Beyond the obvious inclination to hoard, one of the side effects of falling monetary velocity is the tendency of investors to sell more risky and less liquid assets and invest in Treasury bonds which are considered “as good as cash.” Right on queue in the last two months, the stock market has been in decline while the Treasury market has been rising.

Confidence in the future is needed to get money turning over again. Yet, confidence is being destroyed by a lethal combination of natural and man-made disasters.

In the last six months there have been natural disasters of epic proportion, but the worst disasters are man-made and causing self inflicted wounds.

The earthquake and tsunami in Japan were natural disasters with wide spread economic consequences for both Japan and the global economy. Flooding in the Midwest and tornadoes throughout the East were no one’s fault, but still rocked the world of millions of Americans.

Even so, it’s man-made disasters that are hurting the most.

Conflict in the Middle East is a man-made disaster that has the potential to take a turn to the dark side with lasting consequences. Also, the European sovereign debt crisis is a man-made crisis that still isn’t under control.

However, by far the biggest economic disaster is being created in Washington and in state capitols. The deaf ear of politicians and policy makers to the unintended side effects of their words and deeds is almost beyond comprehension. Certain politicians seem to think that they were elected to play Russian roulette with the economy and don’t understand the consequences of their actions.

In the last six months investors, businesses and consumers have watched the U.S. come within minutes of defunding itself and shutting down.

This month everyone is wondering if Congressional leaders will commit collective suicide and fail to pass an increase in the debt limit. Every night on TV members of Congress seem almost giddy at the prospect of serving the U.S. economy cyanide-laced Kool-Aid.

Consumer and business confidence requires public sector certainty. It can’t be up for debate whether or not the government should honor its commitments.

Several state and local governments aren’t doing any better. Solving budget problems by going to war with workers and constituents is like pouring acid on confidence.

The Fed’s ability to help the economy is very limited when fear drains money from the productive economy. For better or worse, when the Fed can’t help, it’s up to our elected officials to fix the economy. Unfortunately, it’s these elected officials that led us into the shadow of the valley of economic death.

Despite evidence to the contrary, politicians continue to believe that their words and personal deeds don’t matter; that there are no consequences to creating uncertainty by threatening to unilaterally break contracts and bankrupt people that trusted the word of the United States.

Until our elected officials stop threatening an economic Jonestown, we are doomed for as far as the eye can see.

Posted under Credit Crisis, Deflation, Economic Statistics, Liquidity Trap, Monetary Policy, Public Policy, REGULATION, economy

As published on Forbes.com

In ordinary times it would be ignorant to ask, “Who’s going to bail out the Fed?” — but then again these aren’t ordinary times.

Solvency of the Federal Reserve Bank shouldn’t be an issue because it carries the full faith and credit of the United States of America. In theory, the only way the Fed could need a bailout is if the federal government fails.

While theory is interesting, political reality is an entirely different story. The Federal Reserve is putting its future at risk by ignoring its own likely financial results when it raises interest rates. Simply put, rising interest rates will hurt the Fed by making interest costs higher and asset values lower.

Congress has gotten used to spending profits made by the Fed. Based upon first quarter results the Fed is on track to turn over more than $110 billion in 2011.But what happens if the Fed’s profits suddenly turn to losses? Will Washington remember the Fed’s enormous earnings and cut them some slack?

In the mafia, you are only as good as your last envelope. Congress works in much the same way. It’s a sure bet that Congressional memory won’t last more than a single missed payment. When the Fed stops kicking up to its Congressional bosses, it’s future will be in serious jeopardy.

While the Fed isn’t like any other bank in America, it is still subject to the immutable rules of math and interest rate risk. If the Fed starts to earn less on its investments than it pays in interest on its deposits, it will lose money.

That is exactly what the Fed is facing when interest rates rise — that it will pay more for deposits than it earns on its investments.

Taken in isolation the Fed’s balance sheet looks more like an overleveraged hedge fund than a shining example of prudent risk management. The Fed has almost no capital to back up its big macro bet on interest rates and the shape of the yield curve. Higher interest rates or an inverted yield curve where long-term assets yield less than short-term assets will cause problems.
The Fed borrows money by accepting short-term floating rate deposits from banks. It uses its cash to purchase mostly long-term fixed rate bonds. Through the monetary stimulus programs of QE I and QE II the Fed has purchased a boat load of long-term fixed rate bonds and now owns approximately $2.3 trillion of these assets.

When short-term interest rates increase the positive difference between what the Fed earns on its investments over what it pays to borrow money will shrink. If interest rates rise enough, the Fed will start booking losses.

A simple stress test on the Fed suggests that an increase of between 3.00% and 3.50% in the federal funds rate will turn the Fed into a text book example of a Congressional basket case. For the vast majority of the Fed’s existence, the Federal Funds rate was above its breakeven point of around 3.25%.

Even worse, the Fed’s assets, Treasury bonds and mortgage-backed securities, will fall in value when interest rates go up. It is a universal bond truth that when interest rates rise, the market value of fixed rate investments falls. Falling market values will restrict is ability to trade into higher yielding assets without realizing market value losses.

Unlike all other banks, the Fed has essentially no equity to absorb losses. It is required by law to transfer the vast majority of its profits to the Treasury every year and as a result has only $53 billion of equity backing up almost $2.7 trillion of assets. If the Fed were a private bank it would be immediately classified as critically undercapitalized and seized by regulators.

The Fed was there for Citigroup and Goldman Sachs and the entire financial sector but who will be there for the Fed?

As a practical matter the Fed cannot hedge its interest rate risk. While other banks can buy interest rate swaps, futures and options, the Fed is not like other banks and will be subject to a double standard.

The Fed will never collect on hedge contracts bought from Wall Street oligarchs. Hedging is a zero sum game —if the Fed makes money that means someone on Wall Street loses.

The “too big to fail” banking crowd will make the Fed’s hedging contracts uncollectable in less time than it takes to clean up after a K-Street cocktail party. There is just no way that Wall Street will voluntarily pay the Fed a few hundred billion when Congress is around for a bail out.

I happen to be a supporter of the Fed’s monetary policy and think that Mr. Bernanke and the Fed staff have done an amazing job. I am not suggesting that the Fed balance sheet is out of control or that they have been irresponsible by accumulating $2.3 trillion of assets.

However, the Fed staff just is not anticipating the firestorm of criticism it will receive when it stops earning money for Congress.

Mr. Bernanke has not laid the groundwork with the public for losses and is giving Fed haters ample ammunition to attack the institution. Just imagine if the Congress had to include funding for the Fed in debt limit debate.

In a perfect and intellectually honest world, losses at the Fed would be a non-event. But we don’t live in a perfect world. The Fed is setting itself up for political opportunists to take cheap shots without consequence.

By not dealing with the certain math of interest rate risk, Bernanke risks becoming the guy who gives Congress an excuse to end Fed independence.

Posted under Federal Reserve, Finance, Monetary Policy, Politics, Public Policy, UNITED STATES, economy

An open and a sent letter to Rep. Paul Ryan (R-Wisc.) and published on Forbes.com.

Dear Congressman Ryan:

I am writing to you again because I still don’t understand your plan to eliminate Medicare and I am seeking answers.

I wrote to you last month and didn’t get a response. Hopefully, after hearing first hand from your constituents, you will take my questions, and the questions of millions of other Americans, more seriously.

As everyone who is younger than 55 is rapidly becoming aware, you are proposing the elimination of Medicare. Normally, such a proposal would be considered politically laughable because Medicare provides seniors with medical insurance they would otherwise be unable to purchase.

But today, no one is laughing at your proposal.

I must give you credit where it is due. Everyone, including your political opponents, is taking your proposal seriously. However, I worry that your proposal has flaws and I want to understand why I shouldn’t be concerned.
Just to be clear, I believe in free markets and think that free markets will almost always allocate resources better than the government. However, I also know that free markets require certain conditions to exist; the most important of which is a level playing field with clearly defined rules that promotes competition and discourages anti-competitive behavior.

I think a good free market is a lot like basketball. Both sides compete in a game where the rules favor neither side. The basketball court is the same for both teams and the referee makes sure that the rules are followed. When a foul occurs, the team that broke the rules is penalized. If a player gets too many fouls, he is tossed out of the game.

The thing that I don’t understand about your proposal to get rid of Medicare and replace it with vouchers to purchase private insurance program is why you believe that competition exists in the individual medical insurance market.

Federal regulations for insurers are nothing like basketball rules — the playing court, the regulations and the referees all are designed to make sure that the insurance company wins because there is no competition.

Basically, the medical insurance game is rigged. Medical insurance companies have special legal protections that promote anti-competitive behavior. Since 1944 they have been exempt from virtually all the anti-trust laws that apply to other industries and underpin the foundation of our national economy.

Under the terms of the insurance exemption, health insurance companies can collude with one another, fix prices, rig bids and form cartels. Predatory pricing by health insurance companies is OK. These practices — normally illegal under federal anti-trust regulation— are protected by law.

Even worse, health insurance companies don’t have to worry about being sued if they hurt someone — they aren’t subject to tort liability and as a practical matter can’t be sued for messing up a claim or denying coverage.

In fact, the only thing health insurance companies definitely aren’t allowed to do is physically coerce individuals. It’s cold comfort to know that the health insurance industry pretty much only has to avoid violence to stay on the right side of Federal law.

By any reasonable measure, the individual health insurance market has failed to serve its constituents. In 2009 by almost a two to one margin consumers who could have purchased an individual health insurance policy decided that it was a better deal to go without it.

According to the U.S. Census Bureau, approximately 16.7% of American’s didn’t purchase an individual health insurance policy — not even a low cost, stripped down catastrophic policy. Only 8.9% of Americans actually purchased an individual insurance policy while everyone else didn’t have to worry about how the individual insurance market worked. Almost all of the rest of Americans, approximately 75% of the population, was covered through either a government program (primarily Medicare, Medicaid or Armed Forces) or through an employer provided policy.

So, Congressman Ryan, my question is what free market are you thinking is going to take the place of Medicare?

If you think the current individual insurance market will work for seniors, think again — it isn’t free and it isn’t a market.

Under your plan, instead of receiving Medicare benefits when I am old and frail should I expect to figure out how to purchase insurance from a cartel of companies that are protected by the Federal government and allowed to collude on predatory pricing schemes?

I hope that the current insurance market isn’t the one that you think is going to suddenly be open, free and competitive. Maybe it will be a real market someday. But that will require someone — maybe you, Congressman Ryan — to strip health insurance companies of their anti-trust exemption.

Congressman Ryan, I am wondering — while we wait for the health insurance market to become a real market — what economic theory teaches that anti-competitive behavior is good for anyone other than the side that is allowed and empowered to cheat?

I am hoping that the failure to repeal the anti-trust exemption for health insurance companies was just an honest oversight on your part. But mostly I am terrified about what your bill means for me and my family. Please tell me why I shouldn’t be scared.

I look forward to hearing from you.

Respectfully,

Mark Sunshine

Posted under Finance, Fiscal Policy, Forbes, Medicare, Paul Ryan, Public Policy, REGULATION, economy

Crude oil down almost 15% last week

As published on Forbes.com

I don’t know about you, but I’m fed up with being a victim of Wall Street speculators who are driving food and fuel prices up through the roof. The recent plunge in commodities prices confirms what everyone knew all the time — inflation is being driven by commodities speculators who are profiting from everyone else’s collective misery.

Last week the margin requirements for silver — a relatively minor commodity — were changed and triggered a widespread sell off. The evidence of a speculator driven bubble was unmistakable by the end of the week — crude oil was down almost 15%, corn down about 10% and wheat down almost 8%.

If margin rule changes for a minor commodity can trigger a general price run, imagine what would happen if a series of broad based rule changes were implemented.

Well I have a suggestion for our economic leadership in Washington — go crazy — change the rules for all commodities. I guarantee that the commodities price bubble will instantly pop.

The Fed has the regulatory authority to immediately implement this policy by ordering banks to stop funding, investing, clearing or facilitating derivatives commodity trading.

The problem that the Fed needs to fix is that the commodities markets have been “financialized” by Wall Street. Prices that used to be determined by producers and users of commodities are now set by financial speculators making naked bets on how much price pain consumers can endure without breaking by buying and selling derivatives commodity contracts. These speculators don’t own, or otherwise have a long term interest, in the commodities that they bet on, they are just in the market for the quick financial kill.

Over the past decade, commodities markets have become a large bookmaking operation where bets are placed on the amount of economic torture consumers can take before crying “uncle.” In the last 12 months when oil at $100 per barrel didn’t destroy American families, speculators raised the stakes and tried $110. When oil at $110 didn’t break us, speculators were willing to go to $115.

Despite the rapidly rising prices, there was no shortage of crude oil to justify the run up of price in the commodities pits. In fact, oil spot prices have consistently been far below reported “market” prices.

If you think the commodities markets seem like a Las Vegas casino operation that isn’t a coincidence. Commodities speculation enjoys a special exemption from criminal gaming laws and only exists because Congress says that wagering on oil, corn and wheat isn’t the same as gambling and that the people that run the markets aren’t the same as gangsters.

Commodities trading is a form of legalized gambling

If he wants to, Bernanke can fight back at commodities wagering by stopping banks from funding or supporting naked commodities bets. That action won’t hurt producers or users of commodities or the commodities trading markets that actually have something to do with the purchase and sale of the underlying goods. Nevertheless, it will stop financial speculators from using liquidity that was actually intended as economic stimulus from being diverted into legalized commodities gambling.

Thirty years ago Paul Volcker attacked a similar liquidity fueled commodities bubble by declaring banks couldn’t fund commodities speculation. Prices plunged and the bubble was popped. Bernanke can learn a thing or two from Volcker.

Bernanke can learn a thing or two from Volcker

Put simply, the Fed has the regulatory authority to stop bank holding companies, and their subsidiaries, from being the “house” at the commodities casino.

Unfortunately, in recent years the Fed has been at best a reluctant regulator. The Fed needs to ditch its policy of regulatory non-intervention, at least when its own monetary policy is creating unintended economic distortions.

Fed action doesn’t have to be broad based to be effective — in fact, narrower is better. Lending and capital rules only need to change for the financing and clearing of non-delivery derivative commodities contracts. Fed policy shouldn’t change for physical delivery contracts that are used by producers and users of commodities.

Bernanke needs to get some backbone and stand up to commodities speculators, and the sooner the better. He should remember that there was a time when the Fed Chairman wasn’t afraid of Wall Street and didn’t hesitate to use all of the regulatory tools at his disposal.

Punishing everyone by raising interest rates, or waiting until inflation overtakes the economy, isn’t a rational choice. Bernanke has the power to pop the commodities bubble right now without hurting the rest of us. Let’s hope he uses it.

Posted under Finance, Inflation, Public Policy, REGULATION, commodities, economy

Dateline April 29, 2036

At separate news conferences Democratic and Republican leaders accused each other of political opportunism after Congress again failed to raise the debt ceiling and banks refused the President’s request to fund a government bailout.

As a result, the federal government shutdown that began in 2011 will continue for another year.

Fed future for Ryan?

Federal American Reserve Bank Chairman Paul Ryan stated ”It isn’t fair that the president is asking banks to pay taxes. If we pay taxes this year, he will just come back next year for another handout. The cycle has to be broken. I used to be one of those irresponsible tax and spend officials and I know how things work in Washington. If we give in now to paying taxes there is no telling where this will end up.”

Chairman Ryan’s comments were circulated on the House floor just before today’s critical vote.

Ever since the mega bank American National acquired the Federal Reserve Banking system the government has been unable to collect tax revenue without Chairman Ryan’s help.

Sticky issue of taxes

The President responded to Ryan’s criticism by pointing out that because corporate taxes were eliminated and personal income tax rates are only 0.001% for anyone earning more than $250,000 per year the government hasn’t been able to balance the budget. ”Since the last tax reduction the government has been forced to live off of parking fees at the national parks. It just isn’t enough to fund essential services and invest in the future.”

It didn’t take long before Economics Nobel Prize Laureate Glenn Beck shot back at the President. ”We need to take back our country from the liberal elites. All they want to do is take from you and me and give it to the poor. We can’t let Marxists run this country anymore.”

Beck’s rival, Treasury Secretary Paul Krugman, worried that the government might have no choice but to permanently shut down. “The government has been on the ropes ever since we adopted the gold standard and closed the Federal Reserve. I warned everyone that this would happen but no one listened to me. The Republican’s even made fun of me. But, facts are facts. With gold at $18,829 per ounce we can’t afford to buy the currency needed to run government anymore.”

Long time TV commentator Sean Hannity interrupted his long running cable news show and devoted an entire 5 minutes to an in-depth examination of the issue. ”Let not your hearts be troubled. The only thing permanently shutting down is Krugman — he’s even older than me, and I am so old I have trouble thinking straight. I say government can be delivered by the private sector cheaper and more effectively than through the public sector. People just need to trust the private sector and free markets to take care of them and everything will be OK. Look at me, I have been taken care of all my life and I am doing just fine.”

In separate economic news, the Pay Czar delivered a new report criticizing the compensation of public sector employees including school teachers, fire fighters and sanitation workers as being excessive. ”When school teachers earn more than their students…well that just isn’t right. After all, who works for whom?”

The Pay Czar was especially disparaging of workers at the Department of Motor Vehicles. ”Those workers don’t deserve to be paid. I had to get my license renewed and I know — no one wants to pay for the DMV. If we could do it over again, why would there be a DMV at all?”

See the original version of this post at Forbes.com.

Posted under Finance, Fiscal Policy, Forbes, Headlines From The Future, Monetary Policy, Paul Krugman, Public Policy, economy

Today I heard it again on the car radio — an advertisement claiming that since gold has topped $1,500 an ounce it’s a “must buy” for every responsible saver.

If only it were true that I could protect my family from economic Armageddon by buying gold.

Unfortunately, the hard facts are that increasingly since 2000 gold has been the opposite of an inflation hedge. Even worse, when interest rates rise in response to inflation, gold will fall in value, and maybe by a lot.

The historical relationship of gold to inflation, i.e., that it is a hedge, is no longer true. Gold has been “financialized” by Wall Street and its price is being driven by institutional speculators that buy it by borrowing money at near 0% interest. As long as interest rates remain low, the cost of betting on gold is very low and money flows into the gold market.

As gold prices soar individual investors need to beware. One day interest rates will start to rise and gold prices will plummet. Innocent victims that buy gold because of a mass market sales pitch will be sorry.

My strong advice to readers is don’t be a gold bug. It’s only a matter of time before the Fed exterminates you.

See the rest of this post at Forbes.com.

Posted under BLS, CPI, Federal Reserve, Finance, Gold, Inflation, Investments, Public Policy, commodities, economy, monetary policy

An open and a sent letter to Rep. Paul Ryan (R-Wisc.)

Dear Congressman Ryan,

Please explain your Medicare plan to me and my wife. We are in our early fifties and are concerned about how your changes to Medicare will affect us. We know that Washington can seem disconnected from the real world but, for people of our age, your plan to do away with Medicare is very real.

Getting rid of Medicare feels like a free markets experiment to us and neither of us wants to be a “lab rat” for a social and economic experiment gone awry. Lab rats are usually expendable and we don’t want to be part of a discarded generation….

….Congressman Ryan, please feel free to provide as much detail as possible on how, as a practical matter, your plan will be implemented. I understand that your objective is to save money — I just wonder if there isn’t a less radical approach that would work.

For example what’s wrong with modifying the current Medicare system to include means testing on co-payments and deductibles, increasing the eligibility age by a few years, restricting payment of certain elective procedures and working to reduce hospital and provider administrative costs. Tort reform relating to end of life care couldn’t hurt either. These changes would be easy to implement, fair to all and still provide protection for the elderly.

When I was a child I read stories about how animals that that get old walk into the forest to die. They are never heard from again and as a result aren’t a burden on their herd. The remaining animals have better survival odds because they are not forced to waste precious resources on old animals that are going to die anyway.

For better or worse, a long time ago we decided that we were different than animals and that old people shouldn’t be asked to “take one” for the team.

Congressman Ryan, I am worried that your plan basically is telling me and my wife to get ready for that long walk into the forest. Please tell me it isn’t true and that I am over reacting.

Read the rest of this post and the questions I ask Congressman Ryan at Forbes.com.

Posted under Finance, Fiscal Policy, Forbes, Medicare, Politics, Public Policy, REGULATION