The Economic Way of Thinking

Fannie and Freddie as the Biggest Losers

The two are expected to pay dividends on their taxpayer-financed preferred stock, and how?  Through further taxation:

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.

The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.

More here.

The House That Uncle Sam Built

Steve Horwitz and Pete Boettke have a new and highly readable pamphlet on the causes of the housing bubble and our Great Recession, published by the Foundation for Economic Education.  Highly recommended.

Christina Romer On The Apparent Recovery

From yesterday's Wall Street Journal.

Do you agree with her that the stimulus package is working, that the cash for clunkers program was a success, that business and government must "come together" to pull us out of the recession?

Is The Fed Independent?

No.  See Don Boudreaux's Open Letter to Ben Bernanke.

From Pot Holes to Black Holes

ABC News reports that the Obama administration is now claiming to have saved jobs in districts that don't exist.  According to the report, it has happened not just once, but many times. 

If we're now in the business of sending money to mystery districts, could someone please send some money to the Island of Reason known as the Beaulier household?!

HT: Cara Burgess

Assorted Links

(1) I'm not a fan of generalizations about generations (e.g., Gen X, Gen Y, Baby Boomers), but here's a story about the increased restlessness of Gen X (which I'm barely a member of!). 

(2) Holy schnikes water!  Here's Don Boudreaux's latest "cleaned by capitalism" post. 

(3) Here are Pete Boettke and I arguing for debt repudiation instead of the usual government "juggling tricks" in the East Valley Tribune.  We think it's ranked 100th in the US by circulation. 

(4) In praise of Belichick. 

(5) Gold prices keep rising. 

Our Keith Richards Economy

 

The Rolling Stones are, hands down, my favorite band.  I often surf around the Web in search of new tour rumors, and I'm proud to say I own merchandise like What Would Keith Richards Do? (a birthday gift from Anemone).  One of my favorite Keefism's from the book is his explanation of why he takes a turn as front-man: "The only joy I got out of being a front-man was I didn't have to look at [Mick Jagger's] *ss."     

My love for the Stones makes it all the more satisfying (no pun intended!) to report to you all that I worked in a Stones reference on the radio this morning.  When talking about America's current growth path with Kenny & Charles, I referenced an old comment by Pete and described the US economy as "the Keith Richards economy." 

The real GDP growth of 3.5% for the US, which was reported on Friday, is "totally fake."  More injections are ahead, and I just hope the US can make it as long as Keith has in our experiment of "better living through chemistry."    

Intervention Begets Intervention: Corporate Salary Caps After TARP

Here's one of the main insights of the economic way of thinking:  a particular intervention into the market creates unintended consequences, and those consequences often lead to further interventions.  That's one of our clearest conjectures about a complex world.

You are already aware that the corporate bailout package (i.e., taxpayer supported corporate welfare) has created new calls for executive salary caps.  And this will create even more unintended consequences.  From today's Wall Street Journal:

The most profound mistake in these rules is the terrible precedent they set for wage controls across the economy. The Obama Administration will say that banks are a special case, and that is true. But once politicians feel free to regulate executive pay for one industry, it is no great leap to do it for everyone. Our guess is that these pay rules will prove to be both ineffectual and destructive—a perfect Washington combination.

And They Thought They Were So Smart: Barofsky On The Failure Of TARP

The government expenditures on TARP, the Troubled Asset Relief Program and brainchild of the former Treasury Secretary Paulson, was promoted as part of the bailout that would return money to the government.  The American public was assured that it won't burden the taxpayer because those expenditures would soon be returned. 

I never believed it. 

And now the overseer of the program admitted in a television interview on Wednesday October 21 that it clearly will not happen:

Neil Barofsky, who oversees the federal Troubled Asset Relief Program, said that while TARP funds helped pull the economy back from the brink of collapse, there is "no expectation at all that that money will come back."

According to Barofsky's report issued the same day, The Treasury spent over $450 billion and so far forty seven firms have paid back only $73 billion.  

Exactly one year ago, on October 21, 2008, I commented on Paulson's optimism over the Capital Asset Purchase Program.  He claimed

This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything. They will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions.

My response:  how could he be so certain?  Show me.  Show me the money.  Back then I said I'd like to see Paulson's personal Schedule D capital gains returns over the past 5 to 10 years. If we knew how well he invests his own money, we could ever more clearly judge his potential success at investing other people's money -- the taxpayers'. 

Well, the results now flow in.  The government can't even lend money without massive losses.

Look, this was all garbage and nonsense a year ago.  I knew it, and you our dear readers knew it. Barofsky's statement shows we were right and they were wrong.

It Was Just A Matter Of Time

Back last October we predicted that farmers would call for bailouts to get their share of stimulus dollars.  Well, take a look at what's going on in Upstate NY's dairy industry. An excerpt:

How bad is the current crisis?

Across upstate, hundreds of dairy farms have already shut down, and conversations that I have had with local farmers makes clear that many more could face a similar fate. Sen. Schumer says without this relief, even bigger farms with relatively healthy finances will have difficulty hanging on for another six months.

The time to act was in April, when Albany’s budget was being put in place. But it’s not too late to help save dairy farming.

The federal stimulus program, which is supposed to create and protect jobs, is the perfect avenue for doing so. Under the stimulus, every state, including New York, has access to discretionary funding to use in ways that will strengthen our local economy. Dairy farming is such a critical part of the local economies of so many Upstate communities that the industry is custom made to fit that profile.

How did we know?  It's called the economic way of thinking.... clear conjectures about a complex world.

ADDENDUM:  The quote is from Cathy Young, a Republican state senator.  More here.

When We Talk About the Environment...Let's Be Honest

My favorite Mercer graduate, Bruce Yandle, brings attention to an immanent critique of "Cash for Clunkers" in this recent piece.  Yandle points readers to some research done by Christopher Knittel of Cal-Berkeley and The Center for the Study of Energy Markets. 

According to Knittel, the cost per ton of carbon under "Cash for Clunkers" was at best $237 and could be near $500 under certain assumptions.  When summarizing Knittel's findings, Yandle writes, 

The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries.  Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it.

Here's the Knittel piece. 

Regime Uncertainty Redux

With the conclusion of the "Cash for Clunkers" hand-out, there's now talk that a similar initiative for consumers who upgrade to green appliances will soon be introduced.  (Stories here and here.)  It's even sounding like the "federal rebate program will not require states to recycle old appliances."  So, in the name of environmental upgrades, government money is going to help many afford the all-important beer refrigerator!

As readers can imagine, I'm opposed to silly programs like the one being rolled out for appliances.  But, if this is something that's going to be done, officials better move quickly.  The uncertainty generated by the possibility of a future hand-out is tremendous, and delays in acting could cripple appliance dealers in the here and now as people wait for the government hand-out.   

Big Numbers

A reminder:  There are a million millions in a trillion.

Why Economics and Politics Shouldn't Mix

Without having information on whether or not a lot of Obama's contributors remained on Chrysler's safe list, it's hard to judge the claims being made here and here.  That said, I wouldn't be surprised to learn Chrysler's dealership closings were driven by political calculations. 

The list of dealerships set to be closed includes many libertarian, conservative, and anti-Obama supporters, such as:

• Vernon G. Buchanan: $147,450 to GOP candidates and organizations
• Wallace D. Alley and Family: $4,500 to GOP.
• Robert Archer: $4,600 to GOP and conservative causes.
• Homer S. Higginbotham and Family: $2950 to GOP.
• James Auffenberg and Family: $28,000 to GOP; $6,000 to one Democrat candidate.
• Michael Maroone and Family: $60,000 to GOP; $8,500 to two Democrat candidates.
• Jerome Fader: $6,500 to Democrats; $2,500 to Independent Joe Lieberman.
• Stephen Fay and Family: $13,500 to GOP.
• William Numrich: $20,000 to GOP.
• Robert Carver: $10,000 to Democrats including $1,950 to Hillary Clinton, nothing to Barack Obama.

• Robert and Linda Rohrman: $24,000 to GOP.
• Frank Boucher, Jr. and Family: $18,000 to GOP, $1,000 to one Democrat candidate.
• Scott Bossier: $4,300 to GOP.
• Todd Reardon: $17,000 to GOP; $2,000 to one Democrat candidate.
• Russ Darrow and Family: $78,000 to GOP.
• Bradford Deery and Family: $24,700 to GOP.
• Charles Gabus and Family: $30,000 to GOP.
• Brian Smith: $15,500 to GOP.
• Michael Schlossman: $14,000 to GOP; $14,000 to three Democrats ($12,500 to Sen. Russ Feingold).
• Don Hill: $11,000 to GOP; $12,800 to conservative incumbent Rep. Heath Shuler.

• Don Miller: $2,000 to GOP; $1,000 to Feingold.
• Eddie Cordes: $2,150 to GOP.
• Robert Edwards: $1,100 to GOP.
• James Crowley: $19,100 to GOP.
• Stanley Graff: $2,200 to John Edwards (2008 Presidential Run); $500 to GOP.
• John Stewart: $10,500 to GOP.
• John Fitzgerald and Family: $4,600 to John McCain (2008); $2,000 to Hillary Clinton (2008); nothing to Barack Obama.
• William Churchill and Family: $3,500 to GOP.
• Thomas Ganley: $9.450 to GOP.
• Gary Miller: $20,000 to GOP.

• Kevin and Gene Beltz: $18,500 to GOP.
• Arthur Grayson: $14,000 to GOP.
• Eric Grubbs and Family: $26,000 to GOP.
• Michael Leep and Family: $19,500 to GOP; $4,800 to three Democrats including Sen. Evan Bayh.
• Harry Green, Jr.: $10,000 to GOP.
• Ronald Hoover: $5,250 to GOP.
• Ray Huffines and Family: $18,500 to GOP.
• John O. Stevenson: $1,500 to GOP.
• James Marsh: $8,200 to GOP.
• Max Pearson and Family: $112,000 to GOP.

Meanwhile, no more than a few Obama supporters are on the list. 

HT: Erick Erickson

The Agony Over AIG

If there is a bright side to the current fiasco, it's this:  We might be witnessing a move into a (politicized) debate about the legitimacy of corporate bailouts in general, one in which Democrats (esp. Democrats as taxpaying citizens) seriously question the Bush-Obama policy package as a whole.  After all,

“This money doesn’t belong to A.I.G.,” said Representative Steve Israel, Democrat of New York. “It belongs to the American taxpayer and we are going to get it back."

(More on Congress's reaction to Edward Liddy's testimony here.)

The issue is the "we." Who is the "we" that Israel and other Democrats are talking about?  Sure, they consider it theirs.  But perhaps, just perhaps, the typical American taxpayer-voter (Republican and Democrat) will come to see the light, will come to realize that the bailout plan is a failed attempt and a colossal waste of their money.

A "bright side," however, is relative.  Almost any hint of reversal appears bright against such a dim, nay, black, backdrop.