Congress recently passed a defense spending bill that includes more lovely wasteful spending! Here's a sample:
Congress added in 1,720 pet projects, including:
∙$5 million for a visitors center in San Francisco
∙$23 million for indigent health care in Hawaii
∙$18 million for the Edward Kennedy Policy Institute in Massachusetts
∙$1.6 million to computerize hospital records in Oakland
∙$47 million for anti-drug training centers around the country
∙$20 million for the World War II Museum in Louisiana
∙$3.9 million grant to develop an energy-efficient solar film for buildings
∙$800,000 for minority prostate cancer research
∙$3.6 million for marijuana eradication in Kentucky
∙$2.4 million for handicap access and a sprinkler system at a community club in New York
Plus they are building C-17s and destroyers that the Pentagon neither needs nor wants all because they protect jobs in some key lawmakers' states.
Proud to be an America!
Wednesday, December 30, 2009
Terror In The Skies
Apparently the man that recently attempted to blow up a plane was being tracked by the CIA. The CIA was putting together a report on this individual, but didn't distribute because it was waiting on photos. We have been spending lots of money, delaying travelers, and just generally making flying much more difficult all in the name of increasing security...seems like it's not working.
I for one don't feel all that much safer - because we have not been screening smart.
I for one don't feel all that much safer - because we have not been screening smart.
The Fed - Part 1 (Lender of Last Resort)
The Federal Reserve System in the United States is the most intrusive part of our federal government and is probably one of the least understood by the public. Many of the macroeconomic and financial market distortions we experience have their root cause in the Federal Reserve.
Recently there has been a lot of anger and outrage over the actions taken by the Fed – particularly bailing out banks. This anger has come from frustration at the seemingly endless power of the Fed that is very loosely regulated by Congress. The anger and frustration is very justified, but the actions being discussed (oversight by Congress) will only make the situation much worse. The only permanent solution is to eliminate the Fed entirely.
How would our economy look without the Fed? In order to answer that question we need to look at exactly why the Fed causes problems. This is a topic that has divided economists for decades and most mainstream economists are currently drinking the central bank kool-aid. The Federal Reserve has two major responsibilities: regulator and lender-of-last-resort to banks and conductor of monetary policy. These two responsibilities are separate and yet closely integrated.
The Fed is a lender of last resort for depository institutions (traditional banks) by legislation and through practice and precedent has extended this power/responsibility to investment banks and other financial institutions in general. As lender of last resort the Fed is supposed to safeguard our lending institutions by preventing bank runs. This task is divided into 2 parts: the FDIC guarantees deposits and the Fed stands ready to lend. In the event a bank were to experience withdrawals that exceeded capital on hand and the reserves the bank is required to keep on deposit with the Fed the bank is able to seek funds from other banks through the Federal Funds market (a market of interbank lending managed by the Fed) or from the Fed itself at the discount window. The idea is that banks will not fail if their deposits are backed by the FDIC and they can always get capital loans from the Fed. This is supposed to help prevent the public from starting bank runs and stabilize our financial system.
This system is of course seriously flawed. Most people can readily see the flaw in this system if put another way. Suppose you tell your children that you demand they learn to live on a budget for the year. You tell them you expect them to manage it wisely, but if they don’t you will bail them out. I can imagine most of you see the potential flaw here. It is really no different for banks. They take our deposits and are supposed to manage them responsibly – lending to facilitate investment, but not lose all our money so we can get it back on demand. The risk here is of course that if everyone asks for their money at once, because they have lost faith in the bank, the bank will of course fail. Banking lending only works because we have confidence in our ability to get our money back. The Fed basically says to banks we will watch over you, but you are free to try and make profits oh and if you lose it all we will lend you money to bail you out. It is kind of a heads-you-win/tails-I-lose situation. The bank has little incentive to manage its risk effectively. This has led to excessive lending, over use of debt, and high risk gambling by our banks because they believed and we proved they were too big to fail. The major issue with this recent crisis wasn’t the bailouts (by the time we got here it was too late, we had to bail them out or the whole system would fail) but it was sticking with a system that encouraged the behavior that got us here.
When we create a system that allows banks to benefit when they win and face virtually zero consequences when they fail we should not be surprised that it doesn’t turn out so well. Removing the Fed would of course fix this messed up incentive system.
Recently there has been a lot of anger and outrage over the actions taken by the Fed – particularly bailing out banks. This anger has come from frustration at the seemingly endless power of the Fed that is very loosely regulated by Congress. The anger and frustration is very justified, but the actions being discussed (oversight by Congress) will only make the situation much worse. The only permanent solution is to eliminate the Fed entirely.
How would our economy look without the Fed? In order to answer that question we need to look at exactly why the Fed causes problems. This is a topic that has divided economists for decades and most mainstream economists are currently drinking the central bank kool-aid. The Federal Reserve has two major responsibilities: regulator and lender-of-last-resort to banks and conductor of monetary policy. These two responsibilities are separate and yet closely integrated.
The Fed is a lender of last resort for depository institutions (traditional banks) by legislation and through practice and precedent has extended this power/responsibility to investment banks and other financial institutions in general. As lender of last resort the Fed is supposed to safeguard our lending institutions by preventing bank runs. This task is divided into 2 parts: the FDIC guarantees deposits and the Fed stands ready to lend. In the event a bank were to experience withdrawals that exceeded capital on hand and the reserves the bank is required to keep on deposit with the Fed the bank is able to seek funds from other banks through the Federal Funds market (a market of interbank lending managed by the Fed) or from the Fed itself at the discount window. The idea is that banks will not fail if their deposits are backed by the FDIC and they can always get capital loans from the Fed. This is supposed to help prevent the public from starting bank runs and stabilize our financial system.
This system is of course seriously flawed. Most people can readily see the flaw in this system if put another way. Suppose you tell your children that you demand they learn to live on a budget for the year. You tell them you expect them to manage it wisely, but if they don’t you will bail them out. I can imagine most of you see the potential flaw here. It is really no different for banks. They take our deposits and are supposed to manage them responsibly – lending to facilitate investment, but not lose all our money so we can get it back on demand. The risk here is of course that if everyone asks for their money at once, because they have lost faith in the bank, the bank will of course fail. Banking lending only works because we have confidence in our ability to get our money back. The Fed basically says to banks we will watch over you, but you are free to try and make profits oh and if you lose it all we will lend you money to bail you out. It is kind of a heads-you-win/tails-I-lose situation. The bank has little incentive to manage its risk effectively. This has led to excessive lending, over use of debt, and high risk gambling by our banks because they believed and we proved they were too big to fail. The major issue with this recent crisis wasn’t the bailouts (by the time we got here it was too late, we had to bail them out or the whole system would fail) but it was sticking with a system that encouraged the behavior that got us here.
When we create a system that allows banks to benefit when they win and face virtually zero consequences when they fail we should not be surprised that it doesn’t turn out so well. Removing the Fed would of course fix this messed up incentive system.
Tuesday, December 29, 2009
Terror In The Skies
Another person tried to blow up another plane. This time he failed...
The insane thing about all this is that now riding on a plane will be even more difficult than it is now. Security will be extra tight and in 3 months we will be where we are today again until someone else does something stupid. The major question is how safe should we strive to be? At what point does the task of getting through security and complying with rules while in the air make flying so difficult that no one will want to do it. I dare say that for anyone with small children that point is probably now.
I am all for being safe and preventing terror, but for all the measures we have taken how much safer are we truly. It seems that for all of our stronger security measures we are not really that much safer...because you see we lack the will to do what must be done to be truly safe. In the interests of being politically correct we do not put additional scrutiny on passengers from nations that tend to be originators of terrorists. Until we will dedicate ourselves entirely all we get are frustrations and minor improvements in security.
The insane thing about all this is that now riding on a plane will be even more difficult than it is now. Security will be extra tight and in 3 months we will be where we are today again until someone else does something stupid. The major question is how safe should we strive to be? At what point does the task of getting through security and complying with rules while in the air make flying so difficult that no one will want to do it. I dare say that for anyone with small children that point is probably now.
I am all for being safe and preventing terror, but for all the measures we have taken how much safer are we truly. It seems that for all of our stronger security measures we are not really that much safer...because you see we lack the will to do what must be done to be truly safe. In the interests of being politically correct we do not put additional scrutiny on passengers from nations that tend to be originators of terrorists. Until we will dedicate ourselves entirely all we get are frustrations and minor improvements in security.
The Euro-Zone Challenge
Greece is facing a serious financial crisis – with a current national budget deficit of ~13% of GDP – Greece is running about 10% over the GDP deficit limit set by the Euro-Zone of 3%. Greece’s debt is growing so fast and spending exceeds revenue by so much that several ratings agencies have downgraded their sovereign debt to near junk levels.
Greece’s malaise is going to test the staying power of the EU’s rules and resolve. Technically Greece’s debt rating is below the minimum (A-) that the European Central Bank (ECB) is supposed to accept as collateral for loans. This will cut Greek banks off from an important source of funds. The ECB must decide whether to bend the rules and bail Greece out or accept the risks to the Euro of Greece’s ailing fiscal picture. The major catch here is that one of the initial concerns over the long-term success of the Euro-Zone was the large differences across the national economies and the ability of the ECB to set appropriate and sustainable monetary policy over such a diverse group. This will be the first major test of the ECB and the stakes couldn’t be higher because other nations are struggling under the current policies and if the ECB steps in to help Greece others will want their bailout too. In particular, Italy and Spain may be the most upset. For now all we can do is sit and wait, but I for one was skeptical of the Euro-Zone from the start.
Wednesday, December 23, 2009
Obama Care Updated
Democratic Senators may have reached a deal to move the health care bill to the floor for a vote. In order to get the 60 votes necessary to block republican attempts to stall the bill they have made all kinds of deals for the holdouts. This how you elected representatives serve you - making middle of the night deals to give some states huge advantages in exchange for votes, pushing through a bill against clear opposition from the majority of the public, and refusing to properly debate and consider it on the floor. This is the way Obama and the democrats do business - remind anyone of the USSR?
Saturday, December 5, 2009
Obama Toys With More Stimulus
The President is "warming" to the idea of another round of stimulus to help create jobs. President Obama promised to create new jobs with the enormous $787 billion stimulus. Unfortunately that didn't work to well as the unemployment rate continued to climb. Now democrats are yearning for more spending and more deficits to create jobs. The catch here is that most of the $787 billion won't be spent until next year or the year after, so this package alone may hit the economy at a time when we no longer need it and could overheat or otherwise distort the economy.
The current administration's idea here seems to be that if at first you don't succeed just spend more! I feel sorry for my grandchildren already.
The current administration's idea here seems to be that if at first you don't succeed just spend more! I feel sorry for my grandchildren already.
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