Let there be spaces in your togetherness.
Kahlil Gibran
Pass the Russia PTNR NOW!
Russia, with the seventh largest economy in the world, is joining the WTO this summer. There are 5 critical aspects to WTO: non-discrimination; reciprocity; arbitration of trade disputes; transparency; and recognized exceptions to the rules. Non-discrimination (excluding tariffs) includes Most Favored Nation and national treatment. We can think of MFN policies as the trade deal equivalent to low price guarantees. Naturally all countries want to export goods, access to other countries' markets. Suppose Germany, which traditionally allows each country a quota of (say) 500 widgets in Germany, agrees to allow France to sell 1000 widgets. Then it would have to make the same deal available to other WTO members, e.g., Japan. National treatment addresses incidental barriers to foreign product competition.
The Congress this summer is considering Russia Permanent Normal Trade Relations; I'm glad to see that Chairman Max Baucus (D-MT) is pushing for passage, but I have generally two major criticisms of his approach. First, he's using American jobs (and related issues, e.g., enforcement of US intellectual property rights) as the carrot. Second, he's addressing issues of human rights issues involving certain Soviet or Russian citizens or current foreign policy differences.
First, Adam Smith's salient text is The Wealth of Nations, not The Jobs of Nations. Jobs are created in the pursuit of wealth; you grow wealth by developing and producing existing or innovative goods and services that consumers want to buy at attractive prices. That often entails taking on risk. All things being equal, consumers are better off with an abundance of competitive offerings; low prices generally attract more consumers. Low prices allow the consumer to stretch his purchasing dollar: it leaves him better off. I understand that Baucus wants to focus on the export part of the ledger, but he forgets that free trade (or at least improved trade) is a win-win proposition: it may well be that certain Russian-produced goods or services have a comparative advantage over their American counterparts. Just to provide a minor example: it may be there are Russian American producers of popular Russian products (say, dolls, vodka or caviar). The market size in the US is limited, but Russian producers may have relevant economies of scale enabling them to pass along the savings to American consumers. Always remember Bastiat's sage advice (below).
Second, although I have concerns about alleged human rights abuses and Russian foreign policy, I don't think it's ever prudent to grandstand and engage in morally superior and condescending talking points. All this does is ramp up counterproductive finger-pointing (e.g., Russians may point out disproportionately large numbers of young males of color in American prisons or rising suicide rates among former homeowners evicted from their homes in the aftermath of the 2008 economic tsunami). What is this all about? America thinks that it's doing Russia a favor by getting American exporters improved access to the Russian consumer market? Come on, demagogues! When you shoot down a win-win trade accord, you're really shooting yourself in the foot. I strongly believe that improved trade ties are constructive steps forward towards global peace.
President Obama, after we get this done, I would like to see you follow this up with a free trade pact with Russia.
Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race. - Frédéric Bastiat
Yes, I know the USSR reference is dated, but I wanted a pretext to
embed a great Beatles tune; I love the Beach Boys/Chuck Berry-like fusion
It's NOT the Banks: It's the Government
Failed Social Liberalism Is At Fault
I have not been a homeowner. But some of the stories are heartbreaking (HT Douglas French). According to KLAS-TV in Las Vegas (my edits; see embedded video below and here for more videos and statistics):
For more than 20 straight years, Nevada grew faster than any other state. Las Vegas led the nation in unemployment. In just one year, 25,000 personal bankruptcies were filed. Business bankruptcies increased 170 percent after 2008. Since 2008, more than 75,000 homes in Clark County have been foreclosed. Twenty thousand local families were evicted from their homes in a single year. Another 20,000 had to escape their mortgages through short sales. The number of homeless on the streets increased 40 percent. Nevadans on Medicaid jumped 66 percent since 2007. The demand for public assistance tripled. The number asking for food assistance exploded by 169 percent since 2007.
As of June [2011], more than 63 percent of homes were underwater, meaning nearly 270,000 [Las Vegas area] local homeowners owe more than their homes are worth. They are upside down by a collective $14 billion dollars. Up to 6 percent of local houses and 11 percent of apartments are vacant. Banks have made it worse by failing to maintain the foreclosed homes, allowing entire neighborhoods to become islands of neglect. Southern Highlands is one of the valley's most prestigious addresses. The McSwain home was purchased for well more than $1 million but is worth about a quarter of that now. Laura McSwain estimates 60 percent of the homeowners on her street have walked away.
"We were counting the effect this economy has on people and it is literally killing them," said attorney Tisha Black. "We counted 29 suicides that we know of." The shame of losing their home led Mr. and Mrs. Jeff Lingle out to the desert, where they took their own lives. Police found their bodies and a gut-wrenching note.Barack Obama, the Pied Piper of Failed Liberalism (my originally coined phase since the early days of the blog nearly 4 years ago), wants to blame this all on laissez-faire economics; but let's point out that the Federal Reserve was responsible for loose money policies, and many of these mortgage notes got purchased by the GSE's (Fannie Mae and Freddie Mac), implicitly backed by the American taxpayer. The federal government has subsidized (unlike a number of other countries) home purchases in various ways: interest paid deductibles for income tax, home sales capital gains exemptions under certain conditions, etc. You can also note CRA policies that encouraged bankers to lend to riskier groups and policies that made money available to people without a conventional down payment. We have government guarantees all over banking, including savers' deposits. We had a historically high home ownership percentage at a time home prices are outstripping wage gains and a sluggish economy. It's not like the Fed or the mortgage bankers weren't aware of a real estate cycle.
Let's point out it was the Dems whom established the Federal Reserve, felt a need to "fix" the banking system nearly a generation later, fed the taxpayers' exposure to the mortgage market through the GSE's from under 10% in the 1960's to nearly half overall, and pressured bankers to make loans to politically favored interest groups.
Steve Hanke starts off his CATO Institute paper "The Great 18-Year Real Estate Cycle" with this observation: "In his formal paper, "Monetary Policy and the Housing Bubble," Chairman Bernanke argues that the Fed's monetary policy was not responsible for the U.S. housing bubble. He claims that faulty regulation was the primary culprit."
I have to say this much about Bernanke: at least he has the intellectual integrity not to blame the issue on laissez-faire banking! I'm sure Helicopter Ben is getting details ready for the Fed's centennial birthday next year, but Hanke points out that while the Fed's inflation statistics during the bubble seemed to be reassuring, housing prices, stocks, and commodities were soaring. But how well known is the 18-year cycle? Hanke tells us "Prof. Fred Foldvary wrote in 1997: "the next major bust, 18 years after the 1990 downturn, will be around 2008, if there is no major interruption such as a global war."
And the Fed is still trying to manipulate the economy: they hope to encourage investors to make higher risk investments (like stocks and corporate bonds) and hence invest in the economy by making Treasuries a less profitable or attractive alternative. But as others have pointed out, by telegraphing holding interest rates very low, the Fed is actually being counterproductive, because investors or companies feel that they have time to wait in making the decision to borrow at historically low rates. And price-fixing almost never ends well. Artificially low savings rates are like borrowing from Peter to pay Paul, e.g., pulling future purchases into the present: you would have thought that social liberals learned their lessons from the Cash for Clunkers program! (We can think of savings as future consumption: penny-wise, pound-foolish) This may make it harder to sustain demand in future periods.
Progressives DON'T draw the right lessons: after the 2008 tsunami, what did they seek to reform? The GSE's whom have been loaned almost $200B, returned a mere fraction to date, the auto makers (with taxpayers still deep in the red, but Obama thinks is a prime reason to reelect him for "saving" the auto industry at their expense!). When they do do "financial reform", they try to implement a new variation of "too big to fail" versus actually letting bad banks fail!
Paul Krugman (references from Enron available on request) had this to say in "Why We Regulate", seizing on the recent JP Morgan Chase issue (a $2B loss in which the bank was actually trying to hedge itself against risks; note that in the first quarter alone the company made over $5B):
But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,” which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.Steve Horwitz, in "Krugman's Misreading of US Banking History", makes a compelling case that Krugman is wrong:
What Krugman calls the “right-wing mythology” is largely correct: government intervention is responsible for the systematic problems with the US banking system. The federal and state governments played a huge role in the banking industry [during] what he calls “Gilded Age America”. The two most relevant regulations were: 1) the prohibition on interstate banking, which created overly small and undiversified banks that were highly prone to failure; and 2) the requirement that federally chartered banks back their currency with purchases of US government bonds, which made it prohibitively expensive to issue more currency when the demand rose. Banks during the Great Depression were hardly unregulated, and those bank failures happened after the creation of the Fed. If free markets in banking are the problem, why did Canada, which, during this period, had a far less regulated banking system than the US, not experience the panics we did, and why did no Canadian banks fail during the Great Depression while around 9000 US banks did?IPPON! By the way, speaking of diversification, every MBA student has to take a managerial finance course which includes a discussion of the importance of diversified portfolios; every business and economics student knows about economies of scale. Most businesses want to diversify their products and services: consider, for instance, a one trick pony pharmaceutical which finds itself coming off patent or facing competitive offerings by larger companies in final stages of FDA approval....
Let me close with relevant quotes from a Washington Post article in October 2008, entitled "Worldwide Financial Crisis Largely Bypasses Canada":
Canadian banks have not gone shaky like their American counterparts, economists and other experts said. There is no subprime mortgage or home foreclosure mess. Experts here note that Canadian banks are more tightly regulated, more liquid and less highly leveraged.
According to the Canadian Banking Association, one reason for the system's solidity is that banks are national in scope. Each of the largest five institutions has branches in all 10 Canadian provinces, meaning they are less susceptible to regional downturns and they can move capital from region to region, as needed. "As far as I am aware, no American bank has branches in all 50 states," banking association spokesman Andrew Addison wrote in an e-mail.
By Canadian law, any mortgage that will finance more than 80 percent of the price of a home must be insured. Defaulting on a loan is also more difficult in Canada than the United States, Gregory said. "You can't just drop off the keys and walk away." Another difference is that in Canada, mortgage interest is not tax-deductible, making it harder to buy a house.
Musical Interlude: My Favorite Groups
Tom Petty & the Heartbreakers, "I Won't Back Down"
