Topic: Finance, Banking & Monetary Policy

Exposing the Keynesian Fallacy: The Condensed Version

Many of you have seen the video I narrated explaining why big-government “stimulus” schemes do not make sense. That mini-documentary discussed the theoretical shortcomings of Keynesianism and also reviewed the dismal results of real-world Keynesian episodes.

While the video has been very successful, both measured by the number of “views” and positive feedback, some have suggested that it would be good to produce shorter videos. The hypothesis is that most people have only a limited interest in economics, so a brief video is more likely to attract viewership. My personal bias is that longer videos are sometimes necessary to allow an appropriate level of analysis and explanation, but I do believe in letting the market decide. As such, I invite you to watch this condensed, four-minute video debunking Keynesian fiscal policy.

Please feel free to provide feedback. For purposes of comparison, the original video can be seen here.

Rubin Resigns from Giant Bank Taxpayergroup

The Washington Post reports:

Robert Rubin, a key figure in the U.S. financial boom as Treasury secretary and then as a senior adviser at Citigroup, announced his retirement from the troubled New York bank yesterday in the latest sign that Citigroup wants to break from its recent past.

Rubin joined Citigroup in 1999, soon after the company emerged as a financial services giant. He has since earned more than $115 million as Citigroup has suffered through setbacks and missteps that culminated in a November bailout by the federal government….

Citigroup, the long-time champion of free markets and deregulation, is increasingly dependent on the federal government, which has invested more than $50 billion to help it weather the economic crisis.

After we’ve invested $50 billion in the company, seems like we ought to call it Taxpayergroup. It’s not really a private company more, though private parties like Rubin may still profit handsomely from it.

A Bailout for Larry Flynt?

Banks, car companies, home builders, ethanol scammers, and steel companies are among the industries and interest groups trying to stick their snouts in the public trough. Now another group is looking for a handout.

CNN reports:

Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.

TARP

The Bush administration has blown through the first $350 billion of your money that Congress authorized it to spend under the Troubled Asset Relief Fund. Treasury Secretary Henry Paulson is now asking for the second $350 billion.

Will Congress approve the second $350 billion of TARP money? I have no special skill at political speculation, but since a reporter asked, here are five reasons I think that it won’t, thankfully.

  1. It is not clear that the first $350 billion of TARP money has aided the economy at all. I suspect that all the recent Treasury micromanagement through TARP has destabilized the economy and delayed the recovery, not helped it. But certainly TARP supporters cannot claim any big success
  2. Congress and the general public are unhappy with the lack of transparency and poor oversight of TARP spending. President-elect Obama campaigned on creating a more transparent government. TARP spending does not fit into that Obama vision.
  3. Democrats don’t like TARP anymore. Democrats are unhappy that TARP money has bailed out Wall Street and not Main Street, to use their nomenclature. They are resisting further bailouts of financial firms.
  4. Republicans don’t like TARP anymore. Republicans in Congress are unhappy that the Treasury bailed out the auto firms with TARP money after they explictly opposed an auto bailout. They don’t want to give the new Democratic administration a similar open-ended opportunity to spend.
  5. The U.S. economy will recover from the current recession, and the Obama administration will want to take credit for it. Renewing TARP will muddy the waters for that credit-taking. For Obama, it is politically important that he “do something” in his first few months to the economy so that when the recovery comes he can claim success. TARP is a Bush thing, Obama needs something fresh and new.

What Obama should do is a pass a large corporate tax rate cut, which would spur long-run growth. Alas, Obama appears to be an old-fashioned Keynesian, and his credit-taking vehicle is shaping up to be a gigantic “stimulus” spending plan. I think that’s crackpot, as I touched on here, and will address in future blog posts.

I’m Changing My Name to Bank Holding Company

It was a Merry Christmas for GMAC, which learned on Christmas Eve that the Federal Reserve had approved its application to become a bank holding company. That gives GMAC “access to new sources of funding, including a potential infusion of taxpayer dollars from the Treasury Department and loans from the Fed itself,” as the Washington Post explains. Of course, that’s on top of the $13 billion that General Motors itself has been granted as a short-term bailout until a bigger bailout can be arranged. 

GMAC isn’t the only company that has suddenly become a “bank holding company” in order to cash in on the $700 billion financial bailout. Late one night in November, American Express was granted the same privilege. Not to mention Morgan Stanley, Goldman Sachs, CIT…

Maybe it’s time for a new version of Tom Paxton’s classic song “I’m Changing My Name to Chrysler,” sung here by Arlo Guthrie: “When they hand a million grand out, I’ll be standing with my hand out.” Of course, there’s already been a new version, “I’m Changing My Name to Fannie Mae,” sung here by Arlo and here by Paxton. Besides the name of the company, they had to make a few other changes in the lyrics, like “When they hand a trillion grand out, I’ll be standing with my hand out.”

So take it away, Tom and Arlo: I’m Changing My Name to Bank Holding Company.

“A Real Regulator”

Sunday’s Meet the Press had a fascinating colloquy on securities regulation, revealing Washington’s immense capacity for self-deception.

David Gregory set up the story, on which CNBC’s Erin Burnett commented:

MR. GREGORY: … I want to stay in New York and something else that has rocked Wall Street beyond the economy, and that is Bernard Madoff. Big money man, investment man who was the darling of Wall Street for many, many years. Now it turns out he ran a giant Ponzi scheme and billions have been lost, from the small investor to, to Jewish organizations and, and philanthropies across the country. Steve Pearlstein, who writes about the economy for The Washington Post, wrote this: “With the Madoff story, it is now revealed that the masters of the universe aren’t just too clever by half—they’re not that clever at all. For years, they not only allowed themselves to be bamboozled by a con artist but also willingly and enthusiastically served as his market agent, offering friends, relatives and favorite charities the opportunity to invest with their good pal, Bernie Madoff. (So much for the idea that wealthy individuals and ‘sophisticated’ institutional investors don’t need the protection of government regulators.)” Was anybody watching?

MS. BURNETT: It, it is incredible, because there had been credible complaints brought to the SEC that said along the lines of, “This is too good to be true. You don’t get these sorts of consistent returns.”

MR. GREGORY: Mm-hmm.

MS. BURNETT: And they didn’t do anything about it. But they’re—you know, I was talking to Mort Zuckerman, the New York real estate man, earlier this week, and he had lost $30 million in one of his charities that was invested with Bernie Madoff. And he said, “I didn’t even know who the guy was. I had given my money to somebody else who actually”…

MR. GREGORY: Right.

MS. BURNETT: …”entrusted the entire $30 million to one guy, a guy I’d never heard of, and then I get a letter finding out that it’s completely gone.” So you’re talking about some very sophisticated people who were completely duped, and maybe some of them should have been doing more due diligence. Some of them were trusting that role to others…

MR. GREGORY: Right.

MS. BURNETT: …who had a fiduciary responsibility to do it. But there’s no question we need a real regulator.

“[W]e need a real regulator.”

Ms. Burnett, the SEC that failed to prevent this is a real regulator.

When regulators fail to address a problem ahead of time, when they regulate inefficiently, when they hand their rulemaking organs to the industries they are supposed to oversee, those are all the actions of real regulators. That’s what you get with real regulation.

What Burnett meant when she called for a “real” regulator, of course, was “the regulator I can imagine.” The regulators people imagine are foresighted, interested only in the public good, they’re resistant to lobbying, and they run efficient organizations. But these characteristics are simply imaginary.

Watching discussions like these, you come to realize how legislation and regulation thrive on self-deception and the appeal to ego.

Thousands of people come to Washington and stay because they believe that they can design the ideal regulatory system. They think they know how to write a law or a regulation that works for everyone, that protects consumers, that doesn’t pick winners and losers in the marketplace, that doesn’t make the glaring errors that we see month in and month out on Sunday morning political shows.

(If only voters didn’t elect the wrong guy. If only lobbyists didn’t ‘corrupt’ the system. If only, if only, if only … .)

Alas, we’re stuck with real regulators. They fail, and when people rely on them, the failures of regulation are magnified. (Not that Mort Zuckerman should get his money back from anyone other than Bernard Madoff. No bailout.)

Libertarians and pro-Washington people (for lack of a better term) have the same goals: honest, transparent marketplaces, productive economies, healthy and happy people. The difference is that Washingtonians strive to defeat human nature rather than harnessing it, and they build a bigger and bigger machine for doing that, sometimes calling it “real regulation.”