I know, I know, I’m just beating up on the guy all the time because I have impossibly high standards for my libertarian economists. I suppose the following is actually a responsible plea to limit Big Government:
Here is my guest post on bank nationalization. I could have stressed further that bank nationalization works best in small countries with a small number of banks. The more banks a country has, the greater the danger that nationalizing a few of them will make the rest much harder to recapitalize, thereby leading to a kind of contagious need for nationalization.
Jeff Tucker passed along this story:
South Korean prosecutors indicted a blogger on Thursday who had warned of financial doom for the country with critics saying he was targeted because his gloomy forecasts upset the government battling an economic downturn.
The blogger, writing under the pseudonym Minerva, became a household name for his predictions of sharp falls in the won and the local stock market and the collapse of U.S. investment bank Lehman Brothers. Prosecutors said he hurt the local currency by posting incorrect information online.
“The suspect in this case was indicted on charges of false information on two occasions,” an official at the prosecutors’ office said by telephone.
As South Korean markets tumbled late last year amid the global downturn, the main financial regulator warned it would crack down on what it considered malicious rumors and some economic analysts say they have come under pressure from authorities not to voice negative views on the economy.
At this point, I think the governments of the world should stop playing softball, and just order everyone at gunpoint to go buy something. Boom, recession solved.
…unless of course, there is some actual reason for the recession, besides fidgety consumers.
Here is the story to which Glenn Beck was alluding on his awesome (radio) show the other night:
Hours after the bank received a new government bailout to cover heavy losses at its Merrill Lynch subsidiary, [Bank of America CEO] Mr. Lewis came under fire Friday from investors wanting to know why the bank did not notify them of Merrill’s losses in December, when the bank told the government it would need additional support to ensure the merger would survive.
Merrill Lynch reported a devastating $15.3 billion loss in the fourth quarter, its last quarter before the merger closed. Those losses came atop Bank of America’s own $1.79 billion loss last quarter…The shares closed at $7.18, down 13.7 percent. In a conference call with analysts, Mr. Lewis found himself fending off a barrage of questions about what he knew of Merrill Lynch’s losses, and when he knew it.
Mr. Lewis told analysts that he was surprised to learn in December, three months after the bank snapped up Merrill Lynch in a shotgun deal, that the magnitude of losses at the brokerage was far greater than expected. He said he had considered walking away from the deal at that point, but was persuaded not to, partly by regulators who feared that a failure to seal the deal could set off a new round of panic in the markets.
The decision to stick with Merrill despite its problems, he said, was patriotic. “I do think we were doing the right thing for the country,” Mr. Lewis said.
But that may not be the right thing for the bank’s shareholders, who were already upset that Mr. Lewis appeared to have overpaid to achieve his dream of dominating the brokerage business.
In the months after the merger, however, financial markets deteriorated more brutally. The bank’s shareholders voted on the merger on Dec. 5. And while the full extent of Merrill’s fourth-quarter losses might not have been fully known then, had shareholders had an idea of the extent of the losses, they may have agitated for the deal price to be renegotiated.
Mr. Lewis said he had considered trying to renegotiate the price once he learned the extent of Merrill’s losses. But he feared that the length of time required for a new shareholder vote would put Merrill and the markets at risk. More important, he said, the government did not want to risk new turbulence in financial markets if the deal were to be delayed.
“In recognition of the position that Bank of America was in, both the Treasury and the Federal Reserve gave us assurance that we should close the deal and that we would receive protection,” Mr. Lewis said.
And now you know why I think the economy is in the toilet for years. If you think capital markets serve a purpose, then you will have to agree with me that we are screwed.
Another sneak peek from my forthcoming book… Check out this awesome quote from Lionel Robbins’ The Great Depression:
Nobody wishes for bankruptcies. Nobody likes liquidation as such. If bankruptcy and liquidation can be avoided by sound financing nobody would be against such measures. All that is contended is that when the extent of mal-investment and over-indebtedness has passed a certain limit, measures which postpone liquidation only tend to make matters worse. No doubt in the first years of depression, to those who held short views of the disturbance, anything seemed preferable to a smash. But is it really clear, in the fourth year of depression, that a more astringent policy in 1930 would have been likely to cause more disturbance and dislocation than the dislocation and disturbance which have actually been caused by its postponement?—Lionel Robbins, 1934
I know he dissed Ron Paul back when it mattered, but I don’t care: Glenn Beck is on fire. Unlike other “right wing” hosts who whine about liberal hypocrisy yadda yadda yadda, Beck every night keeps hammering home the fact that the government is taking over the financial sector. Tonight he gave two very specific examples of how Citigroup and Bank of America were pressured to make bad business decisions because they were dependent on the government. This isn’t, “Hey, Pelosi took a limo to the inaugural, sic Al Gore on her!” This is serious stuff.
I didn’t catch the guy’s full name (Beck kept calling him Steve), but there was a free market economist on tonight who was saying the stimulus plans were nonsense. Fine, fair enough. But then Beck pushed him on the inflation issue. Beck did an aww shucks “what do I have wrong here?” and said what I’ve been saying for months now–that when real output is falling and the Fed is printing money like crazy, you are going to get big time price inflation. (And yes, Beck went over the aspect of falling real output–not his term of course–and knew full well what he was saying.)
So anyway, the free market economist “Steve” wussed out. He said something like, there would be not inflation like the 70s, but maybe 6 – 7%. And then–bless his heart–Beck laughed in the guy’s face, though goodnaturedly. He said, “Steve, if you think we’re going to have 6 or 7% inflation, you’re fooling yourself.”
Woo hoo! Keep it real, Glenn!
I am one of the contributors to a new financial newsletter out of Ireland. My topic this month was to predict the relative fortunes of the dollar vs. euro. I said I thought that by 3Q the dollar would fall at least to $1.50 / euro and probably more. I’m going to ask the editor if back issues will be posted online, but I think it’s OK to give this excerpt:
In contrast to the reckless Federal Reserve, the European Central Bank is behaving much more responsibly. The ECB is definitely adopting an “easy” policy to stimulate the economy, but its actions are within the bounds of reason: The annualized three-month growth rate in bank capital and reserves is running around 25 percent. (In contrast, U.S. bank reserves with the Fed in the last three months have grown at an annualized rate of over 400,000 percent–that is not a typographical error.)
Incidentally, even though I’ve quadruple-checked it, that number still seems impossible. But U.S. bank reserves were some $100 billion in September, and then were some $800 billion in December. So that means over the course of three months, they increased by a factor of 8. So that means over a year, they would grow by a factor of 8x8x8x8 = 4096, which is 409,600%, and then you subtract 100% to make it a growth figure.
Am I doing that right? Did bank reserves grow at more than a 400,000% annualized rate in the last three months of 2008?
I just answered some questions for a Slovakian business weekly. (I’ll post it here if/when it’s online.) One of the questions was what I would recommend to the governments of the world, since (as would be clear in my earlier answers) I didn’t think “stimulus” spending programs were a good idea. My answer:
Governments should slash their spending and then cut taxes by the same amount. Ideally, the tax cuts should be implemented not through “rebates” but instead through reductions in the marginal rates applied to income. This would make the tax cut not merely a transfer from the government back to the taxpayer, but would also provide incentives for people to produce more. At the same time, central banks should stop inflating their currencies. Because of their monopoly positions, we can’t say what the “right” interest rate is, but I am pretty sure it is higher than 0%.
Just heard it while getting lunch. I had to turn to the NPR feed because Rush kept making comments and it was annoying me. Obama certainly is a wonderful speaker, and if you are going to be stuck listening to somebody for 4 years, it could be worse. I loved his themes on foreign relations, but I am waiting to see if he actually closes Gitmo, draws down troops “over there” (and moving troops from Iraq to Afghanistan doesn’t really count), stops warrantless wiretapping, etc. Since I believe he has only promised to just do the first of these, I am not optimistic.
On the domestic front, his rhetoric was pleasing to the ear but not to the brain. In particular, he said something to the effect that he was going to use government smartly to make sure our economy exhibits all that a free people can produce. That’s a whopper a la Mencken’s critique of the Gettysburg Address.
Last nitpick: He said he was the 44th person to take the oath, but I think Cleveland’s non-consecutive terms mess that up. So that poses an interesting issue, of how that slight mistake got into the speech that will go down in history. I can think of at least three explanations:
(A) Obama deviated from the teleprompter. The prepared remarks said this was the 44th time a person had taken the oath, and Obama just switched it a little bit in the moment.
(B) Obama’s team knew of the Cleveland technicality, but didn’t want to confuse people, and it sounded weird to say a technically correct statement using the 44 number.
(C) No one on Obama’s team had enough of an inkling of U.S. presidential history to bother checking that the number of the presidency was the same as the number of presidents.
(A) is fine, (B) is a little worrisome but not awful, whereas (C) is scary.
And I’m betting it was (C).