With much of the current media focus is on the failures of man’s institutions; i.e. governments, we often overlook the possibilities of individuals to be creative. Unleash the power of motivated individuals and there is not limit to what man can achieve. Stiffel the motivation of the individual with governmental meddling and you have just another failed social program.
Archive for the ‘Free Markets’ Category
Posted by Steve Markowitz on July 31, 2011
Posted by Steve Markowitz on February 1, 2011
The Financial Crisis Inquiry Commission was formed in 2009 to study the crisis that hit financial markets over two and a half years ago. The Commission interviewed 700 witnesses that included bank executives, governmental officials and representatives from the rating agencies. They have released their findings that are critical of many and concluded that the crisis was avoidable.
CNNMoney has reported on the following findings by the Commission. Each finding is followed by comments, questions and/or conclusions referred to as “Issue”.
“Federal authorities, who failed to curb reckless behavior on Wall Street, bear much of blame for the turmoil that erupted in 2008 and 2009.”
Issue – This conclusion should surprise to no one. Bureaucrats have proven many times that they are incapable of oversight over an extended period. What starts as a good idea degenerates into a governmental boondoggle that puts more governmental workers on the dole.
“The crisis was also the product of “dramatic failures of corporate governance and risk management at many systemically important financial institutions,” according to one of the report’s nine conclusions.”
Issue – As long the large financial institutions run by executives with no long-term skin in the game they will make reckless decisions that benefit themselves via short-term bonus compensation plans.
“The commission faults policies under both Presidents Bush and Obama, as well as actions taken by the Federal Reserve under Alan Greenspan and the current chairman, Ben Bernanke. Tim Geithner, the current Treasury Secretary who was president of the New York Fed during the crisis, and his predecessor, Henry Paulson, were also named in the report.”
Issues – Politicians like Bush and Obama, as well as those in the Congress, are incapable of foreseeing even the potential systemic problems within the financial system. They are but politicians focused on elections.
Assuming that the professionals like Greenspan, Bernanke, Geithner and Paulson did not have more nefarious motivations, the fact that these financial elites did not see the train wreck coming should give pause to any expectation that their kind will see the next crisis coming.
The Commission faulted the shadow banking system including Lehman Brothers and Bear Stearns, and Goldman Sachs, Merrill Lynch and Citibank, as well as AIG. “The commission also faults the lending practices of commercial banks such as Countrywide, now owned by Bank of America, Wachovia and JP Morgan Chase.”
Issue – While Lehman Brothers and Bear Stearns were destroyed by the crisis, governmental bailouts undoubtedly saved the remaining institutions and many of those that live off of them. In other words the taxpayers bailed out the scoundrels that created the crisis.
“The report also criticizes the three main credit rating agencies – Moody’s, S&P and Fitch — as “essential cogs in the wheel of financial destruction””.
Issue – These for profit agencies are still in business. Why?
“The Commission said: “As our report shows, key policy makers – the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York – who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008”“.
Issue – Given that the Treasury Department, Federal Reserve Board, and Federal Reserve Bank of New York with all of their resources and brain-power were “ill prepared”, it is unreasonable to expect the government and their bureaucrats to protect the people from future crises.
Fannie Mae and Freddie Mac, two government-sponsored enterprises, were “the kings of leverage,” the report says. By the end of 2007, the companies had a combined leverage ratio of 75 to 1.”
Issue – These enterprises became the “the kings of leverage,” because of their backing by the government and their executives being compensated based on short-term results.
In addition, the Congress forced these lending agencies to promote the government’s activist social programs that included giving mortgages to those that could not afford to pay them back.
You would think that with such a damming report that those in government would suggest a change in direction. However, instead of admitting that government oversight only helps to keep honest people honest, the government is adding even more bureaucrats and regulations in the promise that the next time it will work. How many times must this solution fail?
There are action that the government could take that would lessen the likelihood of similar systemic problems occurring again. They include:
1. “Too big to fail” must not protect companies from failure. Companies that fail must be left to go out of business, period; no exceptions. Their owners, shareholders, employees and customers must share the pain of being involved with a failed business. The fear of this draconian endgame is the best protector that society has towards bad business practices.
2. Anti-trust laws currently on the books must be enforced. Companies that approach the level of being “too big to fail” must be broken into smaller pieces.
3. Make it easier to prosecute corporate managers, individually, for illegal behavior made at the corporate level. While there are those that will claim this may limit corporations’ ability to attract managers, so be it. The damage done to our economy as a result of immoral and illegal, behavior by professional mangers demands this action.
4. Term limits. The professional politician class must be eliminated. Our Country must be run by the People, as our Founders envisioned.
5. Conflicts of interests must be eliminated between government employees and the private sector by restricting those that can work at both sides of related positions. Allowing Henry Paulson, a former head of Goldman Sachs to manage Treasury enabled him to decide which banks failed and which ones receive the benefits of the government’s bailout. How ludicrous!
Those that continue proffering the thesis that only the goventment can protect the People from scoundrels are either ignoring history or are attempting to protect some parochial interest. Even assuming that the lawmakers and bureaucrats had the best of intentions and the intellectual skills, which they do not always have, the dynamics of a complex economy and the resourcefulness of the greedy will always be one step ahead of the regulators.
Only the free market can govern and control reckless behavior. The government’s role should be to insure that the market remains truly free and that must start with no bailouts for those that fail.
Posted in Bailouts, Free Markets, Governmental Intervention | Tagged: AIG, Alan Greenspan, Anti-Trust Laws, Bank of America, Bear Stearns, Ben Bernanke, Bush, Citibank, Congress, Fannie Mae, Federal Reserve, financial crisis, Financial Crisis Inquiry Commission, Freddie Mac, Free Markets, Goldman Sachs, Henry Paulson, JP Morgan, Lehman Brothers, Merrill Lynch, Obama, Term Limits, Timothy Geithner, Too Big to Fail, US Treasury, Wachovia | 1 Comment »
Posted by Steve Markowitz on December 27, 2010
New York’s Attorney General Andrew Cuomo has filed suit against accounting giant Ernst & Young, accusing the firm of aiding investment bank Lehman Brother to cook their books. The complaint alleges that the accounting firm helped make Lehman’s financial condition look better than it was by getting as much as $50 billion in assets off the its books when financial statements were due.
During this same seven-year period, Ernst & Young collected in excess of $150 million in fees from Lehman. In addition, two Lehman CFO’s were previously Ernst & Young employees. It doesn’t take rocket science to connect these dots.
This is not the first time a scam like this was concocted by large corporations and accounting firms. In 2001, Enron declared bankruptcy after it and accounting giant Authur Anderson got caught cooking the company’s books. Investors incurred total losses and 22,000 Enron employees lost their jobs. Authur Anderson was dissolved with its business units in essence moving to other giant accounting firms.
However, as tragic as the losses were for shareholders and employees, they were trivial compared to the real damages that came from the government’s response to the fraud; i.e. the Sarbanes-Oxley Act (SOX) of 2002. SOX was implemented with typical governmental naivety. Politicians promised that with its transparency, that the type of fraud perpetrated by Enron and Anderson was a thing of the past. Lehman and Ernst have proven this to be false.
The Sarbanes-Oxley is affectionately known in the industry as “the Accounting Full Employment Act”. It has rewarded the very accounting industry that helped perpetuate the Enron debacle. It has robbed billions from shareholders through unnecessary accounting practices that protected no one and caused many businesses in the United States to list their stock in other countries to avoid the burdensome rules.
Attorney General Cuomo’s suit against Ernst & Young is probably well-deserved. Joining them as defendants should be the politicians that gave us Sarbanes-Oxley. However, is more likely that the politicians will use this latest industry fraud as an excuse to implement even more regulations.
How many failures of governmental intervention will it take to understand the beauty of the free-market?
Posted by Steve Markowitz on May 20, 2010
As the ongoing recession marches from one crisis to another, our politicians in Washington look for scapegoats. While their crosshairs have been focused on Wall Street Banks, who are not blameless, they should start by looking in the mirror.
Many, including this Blog, have pointed the finger at our government for its responsibility in sowing the seeds for the financial crisis that led to this recession. Governmental intervention in the markets was a primary cause of the subprime mortgage mess that led to the financial ongoing meltdown.
Heide Malhotra published an aritcle this week in The Epoch Times that discusses the government’s role stating:
- MyCommunityMortgage (MCM) loans, a product offered by Fannie Mae, was created to allow low income families who could not afford homes a way to purchase them. This program was Washington’s attempt to get more Americans into home ownership, i.e. social engineering.
- MCM helped low-income public service workers purchase homes with no down payment mortgages.
- Fannie’s MCM program came as the result of a study by the Federal Reserve Bank of Boston that indicated minorities were being discriminated against by lenders. However, in a 1998 report economists Stan J. Liebowitz and Theodore E. Day found the study flawed.
Malhotra quotes economist Eric Falkenstein: “Fannie Mae’s MyCommunityMortgage™ was at the forefront of the credit crisis, and had many sub-programs, all targeted at low income communities and borrowers.” This program was “doing what the private sector would not, serve the historically underserved.” In other words Fannie Mae made imprudent loans. They and the Progressives that promoted the program should have seen the train wreck coming.
Besides the international financial turmoil caused by MCM, Fannie Mae is insolvent with a negative net worth of $8.5 billion. They now request an additional government bailout of $8.4 billion. Out politicians are too tied up with culpability to pull the plug on the bailouts.
In recent weeks Congress has put Wall Street bankers on the hot seat with questions of dubious relevancy. Along with President Obama, they blame capitalism and greed as the root causes for the financial meltdown. Their protestations, why partially correct, are also designed to deflect from their responsibility in creating the biggest financial mess since the great depression. Had they and their Progressive associates not changed the charter of Fannie Mae to intervene in the social policy of home ownership, the meltdown would have never occurred and the bankers could not have acted on their greed.
The Knuckleheads in Washington continue to try additional interventions in the markets (i.e. bailouts) to cure problems that their initial interventions caused. Given that we are nearly two years into the crisis and the problems persist, it is evident that these Progressives haven’t learned from their mistakes.
As Einstein so ably said: “Insanity is defined as repeating the same behavior and expecting a different result“.
Posted in Fannie Mae, Free Markets, Governmental Intervention | Tagged: Bailouts, Capitalism, Crisis, Eric Falkenstein, Fannie Mae, Federal Reserve Bank of Boston, Financial, MCM, MyCommunityMortgage, Obama, Progressives, Scapegoat, Stan J. Liebowitz, Theodore E. Day, Wall Street Banks, Washington | Leave a Comment »
Posted by Steve Markowitz on April 20, 2010
The federal government continues down the path of ever increasing intervention in markets and our economy. Often the interventions start with good intentions, mainly to avoid recessions and hardships for citizens. Just as often they lead to unintended consequences creating even greater long-term issues than the initial problems addressed.
Perhaps the most dangerous of interventions by our government has been keeping interest rates artificially low. The short-term benefits of this policy keep the cost of the government’s own debt lower by reducing the interest it pays. The lower rates also act as an incentive for companies and individuals to borrow more in the hope that this will help jumpstart the economy.
History has shown that the low interest policies of the Greenspan era lead to false economic growth i.e. bubbles. The ongoing recession and financial mess worldwide are the legacies of this failed policy.
While Greenspan is gone, the current Federal Reserve Chairman, Ben Bernanke, continues the low interest policies at the Fed. Unfortunately, this will lead to other market dislocations and possibly even larger bubbles.
Today’s Wall Street Journal includes a story titled: “Tech Firms Bulk Up With Debt” that points to one potential unintended consequence of Bernanke’s low interest rate policy. Strong companies with little current need to barrow are doing so mainly because the cost of debt is so cheap. Examples include SAP, Adobe Systems, and Salesforce.com, as well as Microsoft. Time will tell if this increased debt leads to problems for these companies
The ongoing economic problems we face were caused to a significant extent by artificially low interest rates that then led to individuals and companies taking on too much debt. Then, with the bubbles being popped, the government has borrowed money to bailout those individuals and companies from excessive debt. Now, the government also has excessive and growing debt.
It is remarkable how little we look to history to see the future!
Posted in Bubbles, economics, Free Markets, Governmental Intervention, National Debt | Tagged: Ben Bernanke, Bubbles, Debt, economy, Federal Government, Greenspan, Interest Rates, Intervention, Unintended Consequences | Leave a Comment »
Posted by Steve Markowitz on April 16, 2010
This Blog appreciates the comments submitted by readers. The exchanges help expose broad views and ultimately the truth. Below is a link to an important exchange relating to the power of the government to control the economy and effect repairs. It’s a worthy read.
Posted by Steve Markowitz on April 14, 2010
Lee from New Jersey forwarded this interesting You Tube clip featuring MSNBC financial commentator, Dylan Ratigan, discussing the con perpetrated on the economy by the banks, Wall Street and the government that led to the finical meltdown and the greatest wealth transfer in American history. This two-piece clip is a worthy view.
Towards the end of the first clip, Congressman Alan Grayson, Democrat from Florida does an interesting politico two-step. First, he accurately blames the previous administration (Republicans) and the banks for creating the mess. But, he then looks to government to create legislation to “fix” the problem. How lame, especially after Grayson correctly accuses Congress of being on the bankers’ take. In addition, it was government intervention in the first place fertilized the mess, mainly through tinkering with Fannie Mae’s and Freddie Mac’s charters. Then, it was government, first Bush and now Obama, that bailed out the con artists. So let’s give government another shot at it? Hmmmmm. That’s Progressive logic.
Ignoring for a moment how we got here, the main problems are gross imbalances in supply and demand within our complex economy. Should we turn the “repairs” over to the same class that helped create the mess, we should expect no different outcome. The correct alternative is to let the free market repair itself by correcting the imbalances. While not pretty, this mechanism is the quickest and most efficient way to allow the economy to get back again into equilibrium and then grow. And unlike the government, the laws of supply and demand cannot by bribed.
Posted in Bailouts, Banks, Capitalism, economy, Free Markets, Governmental Intervention | Tagged: Alan Grayson, Bailouts, bankers, Bush, Con, Congress, Dylan Ratigan, Fannie Mae, Freddie Mac, Free Markets, meltdown, Obama, Supply & Demand, Wall Street | 13 Comments »
Posted by Steve Markowitz on February 11, 2010
The current recession has been lengthy and continues on. It has followed an unusually long period of prosperity, or at least the perception of prosperity. In reality, the previous period included artificial prosperity, which led to the significant economic challenges we now face.
The perceived prosperity that proceeded the current recession included bubbles and periods of relatively minor economic downturns. Neither type of event is unusual for economies that are growing. However, it is the way the government responded to these events that caused each to morph into something far worse.
Bubbles and Crisis
The bar for what is considered an economic crisis has changed dramatically over the years. Less than 40-years ago President Nixon put in wage and price controls when inflation reached the then unacceptable level of 4%. In 1979 the Carter Administration bailed out Chrysler Corporation with a $1 billion loan. Today such numbers are trivial.
Since Nixon’s and Carter’s interventions, the crises “requiring” intervention have become more frequent and costly, as the following partial list indicates:
- 1987 – The Dow Jones Industrial Average dropped 500 points, then considered to be a calamity. The government responded with massive liquidity injections.
- Late 1980’s – The savings and loan crisis costs taxpayers about $125 billion and contributed to huge budget deficits on the early 1990’s.
- 1997 – The South American, Asia and Russian currency crises hit with governmental interventions required on a world-wide basis.
- 1997 to 2000 – The Dot.com and Telecom bubbles burst, costing investors billions.
- 2001 – 9/11 caused a rapid economic slowdown. The government responds with massive liquidity injections, historically low interest, and other incentives for consumers and businesses to take on debt and spend.
- 2002 – Enron and Arthur Andersen meltdowns cost society billions.
- 2007 – The housing bubble pops resulting in the Subprime Mortgage and banking crises of 2008. The government then implicitly takes on responsibility for Fannie Mae’s debt with a potential obligation of $5 trillion
- 2008 to 2009 – Government bailout of AIG cost taxpayers about $150 billion.
- 2008 – Government bails out banks through TARP to the tune of about $700 billion.
- 2009 – Government bails out of GM and Chrysler in excess of $50 billion.
- 2010 – Most recently, sovereign debt is becoming problematic. Greece will require a bailout from the European Union as it debt is in excess of $400 billion. Spain, Portugal, Ireland and Italy are also on shaky ground.
It is not by coincidence that each of crises listed dwarfs the cost of the original Chrysler bailout of 1979. Government intervention merely plugs the dyke. Economic problems are not resolved, but instead the pressure builds for even larger.
What is next for the economy? Economists use empirical evaluations to determine likely scenarios. Given that their track record has not been stellar, and that the numbers used are often wrong, I believe that a simpler approach based on understanding how we got here, trends and human nature, to be a more valid method of forecasting.
Human Nature: Greed
Adam Smith’s, The Wealth of Nations, offers insight into human nature and the way we respond to needs and emotions. His basic thesis is that in the long term, the balance of varying human behaviors is the best and most efficient way to manage a complex macro economy and will lead to the greatest wealth for all.
Example of Smith’s thesis: An economy is made up of two farmers and two staples for the village. Farmer A raises corn and Farmer B, tomatoes. Being the only corn grower, Farmer A’s greed leads him to raise corn prices to increase his income, but at a greater cost to the villagers. Seeing the profit made on corn, Farmer B switches all of his production from tomatoes to corn. An oversupply results and corn prices significantly drops, decreasing the profit for both farmers. This also causes a tomatoe shortage for which the villagers are now willing to pay higher prices. Both farmers then take a portion of their land to grow tomatoes. Prices and the supply of both commodities ultimately stabilize, as well as each farmer’s profit. Should either farmer try to increase the price of either commodity, the other will undercut him to increase market share. The system remains in balance in the long term, but could have short-term imbalances.
With Smith’s thesis, why then has the economy of recent decades not been able to correct huge imbalances? Why have we jumped from one bubble to another? Have the rules of human nature changed making Smith’s thesis outdated or is something else at play?
Smith’s Thesis in a Modern Economy
The significant economic imbalances of recent years have not been caused by any change in human behavior since Smith’s time. Instead, governments have tinkered much with the opposing economic checks and balances allowing greed to become unchecked, making the economy neither efficient nor in equilibrium.
In the two farmer example, let’s add a new player, the Farmers Protection Bureau (FPB). The FPB’s charter is to protect the income of farmers so that they remain growers and therefore insure adequate food supplies. In our example, when Farmers A and B put all of their production into corn, instead of letting prices drop to allow supply to match demand (and lower margins both farmers), the FPB purchases the excess supply of corn to support the higher price so that the farmers keep their profit margins. Happy ending? Not quite. To pay the FPB subsidies, the government had to raises the villager’s taxes. Just as problematic, both farmers decide to not produce tomatoes creating a tomato shortage. The government’s intervention removed the risk of loss from over production and created market inefficiency. At the same time it told the farmers that if they miscalculate on production planning, the FPB will come to their rescue in the future causing future market disruptions.
Response to Bubbles and Crisis
The government’s intervention in the example above mimics the real-world response governments have used when economic imbalances have occurred in recent decades.
The interventions listed above from the relatively small 1979 Chrysler bailout to huge bailouts of the past two years has resulted in a slippery slope that led to our growing economic crisis. With each intervention, investors were taught that the government would do whatever was required to avoid market meltdowns, thus mitigating investor downside risk. This has created an upward spiral of ever increasing risk taking during the past 30 years. No matter how good the logic or intentions of the interventions, the unintended consequences have been ever increasing economic pain. We have not seen the last bubble or crisis in this cycle.
Private Sector Culpability; The Neo-Capitalist
The government is not solely culpable for the economic imbalances. Capitalists have run amuck with unchecked greed, the result of governmental bailouts that have taught them that risky behavior is not risky. Investors rightfully believe they will be bailed out of any hair-brain investment that goes sour. Special interest lobbyist from investment banks to labor unions use their clout to insure that the Washington politicos bail them out, even if not in the best interest of the country.
Another key item in the distortion of the moral hazard is the capitalists’ ability to use other people’s money (OPM). OPM takes risk and responsibility from neo-capitalists. Take the airline industry that was deregulated thirty years ago. While lower fares have been the result, the entire industry has been on the brink of collapse for years. This distortion occurred because the money invested in the airline industry was not that of the decision makers. The professional managers and unions took their money when the companies should have said “no”.
Commercial banks are another example. In the “old days” mortgages were given by local banks who kept the paper and risk. They required 20% down and proof of a borrower’s ability to make payments. What an outdated concept! Bring in the Neo-capitalists and the result was the sub-prime mortgage mess. Risk was moved from the mortage brokers to others through Wall Street, separating decision making from the “pain”.
History, common sense and understanding basic human nature are good tools for predicting future economic events. Based on these items, it is probable that the real economic crisis remains in front of us. The historical trends are clear. Major economic disruptions are occurring with increased frequency. The costs of the governments’ interventions are increasing. Finally, the long-term effects of the damaged moral hazard are yet to play out.
Adam Smith’s theories remain relevant today. The market will ultimately take corrective action to bring supply and demand back into equilibrium, no matter how many times the government attempts puts its finger in the dyke. The longer they hold back correction of the imbalances, the more serious the corrective action will be.
In 1979, the bailout was a mere $1 billion for the third largest American auto manufacturer. Now, the problems are no longer a failing company, but a failing nation with Greece’s debt in excess of $400 billion. How much better off would the economy would be now had we let Chrysler fail in 1979?
Posted in Adam Smith, Bailouts, economics, Free Markets | Tagged: 9/11, Adam Smith, AIG, Arthur Andersen, Bubbles, Capitalism, Carter, Chrysler Bailout, Commercial Banks, Crisis, Dot Com Bubble, economy, Enron, European Union, Fannie Mae, GM, Greece, Neo-capitalist, Nixon, OPM, Recession, Savings and Loan, Sovereign Debt, Telecom Bubble, The Wealth of Nations, Wage and Price Controls | 7 Comments »