A very bad omen 0

From Investor’s Business Daily (read it all here):

Understand, this is a time of great financial peril. That’s the main reason why Bernanke was renominated. The idea of changing Fed leaders in the middle of a financial crisis was too much.

Bernanke has printed close to $2 trillion in new money to help refloat the economy. President Obama is no doubt happy — if for no other reason than it will let the White House claim its $787 billion “stimulus” is the real reason the economy’s starting to grow again.

But the naming of [Denis] Hughes as the top banker at the New York Fed is the real news. And it’s quite astounding.

He has no significant finance experience. Nor does his educational background — “Brother Hughes,” as the AFL-CIO’s Web site calls him, has a B.S. degree from the Harry Van Arsdale School of Labor Studies at Empire State College — reassure us…

Of greater concern is his career as a bought-and-paid-for union official and political operative. The New York Fed chairmanship is hardly a place for a person whose entire career has been spent fighting and strong-arming the very people he’ll now be regulating.

Putting this key Fed bank in the hands of a person whose experience suggests a bred-in-the-bone hostility to capitalism strikes us as bizarre at best and dangerous at worst. And it bears the unmistakable imprint of the White House. Just last week we wrote about plans to elevate former United Steelworkers adviser Ron Bloom from head of the auto task force to “industrial policy czar.”

Putting so many union people in powerful positions of economic policymaking is a recipe for disaster. Since 1955, the share of the workers belonging to unions has plunged from 33% to about 11%. Still, though increasingly unpopular, unions have helped wreck two major industries: autos and steel. Not much of a track record.

But now, through politics, unions are getting rewarded with control of the economy a very bad omen for American capitalism.

Posted under Commentary, Economics, government, News, Socialism, United States by Jillian Becker on Wednesday, August 26, 2009

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Trust capitalism, it works 0

 Joseph Calhoun writes in Real Clear Markets (read the whole thing here):

Now markets are waiting on pins and needles as the politicians haggle over the details of the latest bailout attempt by the Fed and Treasury. This has introduced another roadblock to the re-capitalization and reorganization of the financial industry. Companies that are in need of capital are waiting to see if the plan will bail them out of their difficulties. If Hank Paulson is willing to pay an above market price for their bad loans, why should they dilute their equity now? Why not wait until they can offload the bad paper on the taxpayer and raise capital at a better price? Why take Tony Soprano terms when Uncle Sam is willing to let the taxpayer take the hit for you?

If this bailout goes ahead in its current form and the Treasury pays a high enough price to recapitalize the troubled banks, what has been accomplished? The plan may be enough to induce the banking sector to start lending again, although frankly, I don’t know why we would want institutions who have shown such poor judgment in the past to stay in that business. This plan short circuits the capitalist model which would allow the stronger, well-run institutions to gain market share and/or expand profit margins. The long-term effect will be to lower the overall return on capital in the financial services industry. The government apparently believes that the key to economic recovery is to allocate limited resources in an inefficient manner. Does that make sense?

Paulson and Bernanke have testified to Congress that the market for the mortgage paper rotting on the balance sheets of bad banks is not working. They have not offered an explanation of why that market is not functioning except to blame the complicated nature of some of the securities. That explanation begs the question of how exactly the Treasury believes it will be any better at deciphering the mortgage market. A more logical explanation is not a lack of willing buyers, but a lack of willing sellers. The Fed has allowed institutions to use collateral of ever falling quality to secure loans from the Fed. If a bank can finance its activities through the Fed and keep the bad loans on the balance sheet, what incentive does it have to sell? Selling will reveal the true condition of the company and will also force other institutions to do the same under mark- to-market accounting. The Fed is the one keeping the market from functioning. The Treasury does not need to enter the market for it to start functioning; the Fed needs to leave the market.

Paulson has said that the cause of the current problems is the housing deflation, but that ignores the elephant in the living room. The housing bubble, which was concentrated in a relatively small number of states, was caused by the reckless actions of the Greenspan Fed. The consequences of that bubble have been exacerbated by the Bernanke Fed. The market is functioning as it should. It is the Fed that is not functioning correctly. There is no reason we had to go through either the bubble or the aftermath. We got into this mess because we tried to avoid the consequences of the Internet bubble. We will only make things worse by trying to avoid the consequences of the housing bubble.

We are not on the verge of a new depression. The housing bubble collapse in California, Florida and a few other states is not enough to bring down the entire banking system. Investors who made mistakes in these markets should be held responsible and those who navigated the Fed-distorted market should be rewarded for their wisdom and prudence. Enacting the Paulson plan will not allow that to happen and our economy will suffer for it in the long run. The Japanese tried to prop up failed banks in the aftermath of the bursting of their twin bubbles and the result was 15 years of stagnation. Why are we emulating a strategy that is a demonstrable failure? A better alternative would be to allow capitalism to work as it should and stop the interventions of the Fed in the money market. Trust capitalism. It works.

 

Posted under Commentary by Jillian Becker on Thursday, October 2, 2008

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