OBAMA-NO!-MICS (How NOT to fix it)

Sunday, February 15th, 2009
2022 hrs

I've received a few emails telling me that my economic/political
rants typically bring down the "Happiness Quotient" of the reader.
Its not my intention to bring down moods but it is my intention
to bring readers a reality check because much of public perception
is controlled by the media. There are not many us that are willing
to spend the time looking at data and then seeing that the truth
is far from what popular media perceives it to be.

For instance, many commentators on financial TV need to go back
and read up on some Economics 101. They casually ask a market
expert (supposedly) when the recession will end while also
pointing out that a recession is defined as two consecutive
quarters of negative GDP. BING BING BING - WRONG!!! Its based
on the timing of the peaks in retails sales, employment, industrial
production, capacity utilization and growth of personal income...
--
Japan's economy contracted by 12.7% on an annualized basis
(Oct-Dec) period. Inventory rose, demand declined....so
industrial output will be adjusted in the future. Realize that
the economy is very dependent on exports, with the biggest
partners being China and the US. That's a black hole!
--
I read with great interest (www.nakedcapitalism.com) about the
increasing potential for a financial meltdown originating from
Europe. Remember what happened to Iceland last year? There are
countries in Europe today where the banking systems are in a very
precarious state, and looking into a very deep abyss. Austria has
lent approximately 240 Bllion Euros to the Eastern bloc. That amount
is about 70 percent of the country's GDP!!!!! In fact, a little
further research reveals that a large portion of debt by the East
blocs are owed to Western European banks - Austria, Sweden,
Greece, Italy, Belgium.....
--
Now "Level 3" accounting gives banks in the United States the
ability to value assets as they well please. As you can imagine,
there is a lot of junk on the balance sheets of banks that they
just do not want to tell you about. That hope is given to them by
their want of a huge bailout by the Feds. There is a fundamental
disconnect between prices (Ask - Bid Price) because sellers are
convinced that prices will recover (due to government intervention)
and the buyers are convinced that the market is right and that
prices will come down - its pure deception and this is exactly
what happened in Japan.

As long as there is government intervention to prop up prices
(that is artificial) a proper enduring price will not be found.
Markets find their prices because of an exchange between a
buyer and a seller. Government action is like us trying to mess
with weather systems because we want 65 degree weather in New
York City 365 days of the year - losing proposition.
--
What should be done :

1) There are two basic imbalances that need to be resolved. One
is the overconsumption by the US financed by the overproduction
in Asia. Second is the inflated asset prices in real estate and
related securities. Any attempts to continue the "good times"
by giving incentives to consumers and produce more are bound
to fail. Secondly, any measures that try to prop up prices of
inflated assets can only make the problem worse.

2) Governments can bail out certain individuals or entities. THEY
CANNOT BAIL OUT ENTIRE MARKETS. That has never worked and it
will never work in the future. Let us forget about how they
determine what the "correct price" of the housing stock here is.
How much money does the government in the US need to prop up US
house prices (a priority these days)? This is a 45 trillion dollar
market. Obama/democrats have pencilled in 50-100 billion dollars
to help the US housing mkt. 100 billion to prop up a 45 trillion
dollar market? Are these people mad?

3) Let the US household consumption come down to 60-62% of GDP.
That will put us in a more sustainable production-consumption
trajectory. Of course, people should not be starving. But that
was never the problem. East Asia, on the other hand needs to spur
consumption rather than exports. Stupid attempts to alter this via
taxes is going to be futile. Exchange rate realignments are a
necessary part of this adjustment process.

4) The BAD DEBT in the system needs to be written down/written
off. Paying down the debt is not a plausible scenario. We need to
recognize the debts (cries for suspending Mark to market should
be ignored). Placing problematic banks in government receivership
might be the only good and fair way to accomplish this in a clean
manner.

5) Not more regulation but wiser regulation - Along with letting
household debt be written off in bankruptcy court, perverse
distortionary incentives to home ownership should be eliminated.
And I am pointing toward favorable tax treatment of interest
payments on houses, tax free capital gains, subsidized interest
rates for housing via Fannie, Freddie, CRA etc. All these
distortions along with super low interest rates contributed to
the inflation of housing prices above their fundamentals would
justify. Similar approach should be applied to other assets. Does
anyone remember that after the Depression, the Fed was given the
power to set margin requirements in order to curb irrational
speculation in stocks. They conveniently forgot about that in
the 90s. In the 2000s, they forgot about the down payment rules
for housing. These are all examples of regulation that were
ignored and contributed heavily to speculation and bad debts
backed by shitty over priced assets. We are now paying the price.

- VO/aLV