Wednesday, October 19, 2011

A Quick Lesson in Banking Realities

From Open Europe news summary:

In the FT, Patrick Jenkins argues that new bank core tier one capital ratios of 9% could lead to reduced lending. He explains that several big banks across Europe have made clear that they will reduce lending commitments rather than raise additional capital in order to meet new EU capital requirements.
FT: Jenkins

A capital ratio is simply the capital account divided by total assets. As every school child knows (or should know!) the ratio can change from either a change in the numerator (capital), a change in the denominator (total assets), or a change in both. If government mandates that banks maintain a higher ratio, banks may choose to decrease the denominator (total assets) instead of increasing the numerator (capital). They would decrease total assets by reducing lending; i.e., not only refusing to make new loans but also refusing to renew existing loans. In today's money environment in which governments manipulate interest rates and change banking regulations as their whim strikes them, the market for new capital issues cannot be very attractive. Why risk more capital in such an environment?

Thursday, October 13, 2011

Restating the Question

The last paragraph of Japanese Prime Minister Noda's blog:

Within this month, I intend to formulate a concrete action plan on the basis of the midterm proposal for the revival of the food and agriculture industries in Japan that was compiled in August. In what ways can the national government assist in order to revitalize agriculture and transform it into a growth industry? I will put forward a definite vision as a nation so that the people who will be responsible for the future can engage in agriculture enjoying both big dreams and peace of mind.

He might just as well asked "In what ways can the national government encourage its people to make a career in a declining industry, one that requires fewer workers, produces less income than a career in alternative industries, and one that will burden the rest of the people of Japan through higher food prices?".

Monday, October 10, 2011

Social Security Cannot Be Reformed

In his recent essay in National Review magazine titled "Social Security Alert" senior editor Ramesh Ponnuru noted that Republican presidential contenders Rick Perry and Mitt Romney debated the merits of whether or not Social Security should ever have been established…Perry saying nay and Romney saying yea. His discussion of the structure of the program during the Great Depression and its impact on American society over the decades was a fine primer for those who think very little about it other than what one is likely to receive in benefits upon retirement. However, many of us readers of National Review have thought quite a lot about it, and I, for one, was somewhat disappointed that Mr. Ponnuru’s piece was more of an appetizer than a main course. Not that there was one untrue thing in the entire essay. But mark his concluding remarks that reform is necessary and that "moderating the growth of Social Security benefits…is a matter of some urgency…". This is like saying that someone really should have thought about designing watertight bulkheads for the Titanic. Come on, Ramesh; give it to us straight. We can take it.

The truth is that Social Security is one of the most corrupting and disastrous programs ever sold to the American people. Let me fast forward to the punch line—Social Security is not sustainable, is an unjust welfare program masquerading as a retirement program, and it may well bankrupt the nation. How’s that for a program that Mr. Ponnuru correctly states "remains one of the most popular federal programs, and polls consistently find that voters want to prevent benefits from being cut."?

Social Security was sold as a lie. While the government told the American people that it was a true annuity program just like one that could be purchased in the private insurance market, it told Congress that the program was nothing more than a welfare program, like many others that had passed Supreme Court muster. Well, we are long past worrying that an independent judiciary might actually read a little document called the Constitution and prevent our all-mighty government from doing whatever it wants, so lets look at what the program is, what it is not, and what the future holds.

Why Social Security Is NOT Insurance

The government was correct in its testimony to Congress in the 1930s that Social Security is NOT an insurance program. It is nothing more than a redistribution scheme, funneling current taxes from workers to retirees. Anything left over goes into the Social Security Trust Fund. But the trust fund holds no profitably invested assets out of which one would receive dividends. It merely holds general obligation bonds of the federal government. But a government bond is much different than a bond issued by a private company. The proceeds of the government bond have been spent, with no means of repayment other than by future taxes; whereas, the proceeds of a private bond are invested in productive assets that generate a revenue stream sufficient to repay the bond. Thusly, Social Security cannot be privatized: there is nothing to privatize! If Social Security did allow workers to invest some of their social security taxes in the private economy, the Trust Fund would go broke much sooner, because expenditures would outstrip revenue to a much greater degree than currently projected. Just think of it this way…if ALL Social Security taxes were invested in the private economy in order to produce a stream of revenue for later beneficiaries, from what source would current beneficiaries receive their benefits once the Trust Fund has been exhausted?

What the Future Holds

Since Social Security taxes were spent rather than invested, the capital of the nation has not been structured properly to support future beneficiaries. In an unhampered market economy workers save during their productive years and invest that savings, via banks and the stock market, in long term investments. Since workers curtail spending, there truly are more funds for financing this longer-term production structure. But the workers’ Social Security taxes did not fund productive investment. They were spent immediately by current beneficiaries. Mr. Ponnuru refers to the work of Harvard economist Martin Feldstein, whom no one would confuse with an Austrian economist, who contends that the capital stock of the nation—that is, the plants and factories that make the stuff that we want to buy—has been diminished by the program. There has been too much spending and too little savings to provide the real goods that workers will demand upon retirement. We have been eating our seed corn, so to speak, and we all are the poorer for it.

And things will only get worse. When the Trust Fund is exhausted there are only two choices—cut benefits or increases taxes (or some combination of the two). Oh, yes, I forgot the third choice—print more money and pretend that the government is honoring its obligations. That’s what it is doing now via its QE1, QE2, and QE3 programs for bailing out Wall Street and the auto companies, funding national health insurance, and paying for wars around the world so numerous that I have lost count. No doubt this will be the preferred method for meeting the Social Security shortfall, too. Of course none of these smoke and mirror proposals are real solutions. Perry is right. Social Security should never have been established, and the sooner we end the sorry program the better. Social Security cannot be reformed; it can only be terminated. The only truly sustainable retirement program is the one that each of us provides for himself.

Sunday, October 9, 2011

My Letter to National Review re: Why the Post Office Does Not Turn a Profit

Subject: Why the USPS Does Not Turn a Profit
Date: Sun, 9 Oct 2011 16:03:21 -0400

May I make a minor, but important, correction to Mr. Robert Vergruggen's otherwise excellent essay on the USPS titled "Dead Letter". The Post Office does not negotiate sustainable labor contracts with its unions and its unions have no concern over the terms that they demand not because the Post Office is a monopoly, as Mr. Vergruggen states, but rather because the Post Office is not a private company with private property to protect. If the Post Office were a private company with a government-enforced monopoly over first class mail delivery, it still would have to turn a profit or go out of business. Its shareholders would demand that the company turn a profit or, if that appeared to be impossible due to government interference in the labor market or union intransigence, they would demand that it cease operations and liquidate in order to preserve at least some capital. This is why private companies do a better job of negotiating labor agreements than public ones, and it is the same reason that capitalism is sustainable; i.e., those entrepreneurs who do a better job are rewarded with more capital to manage at the expense of those who do a poor job. So private firms go from strength to strength while public firms' deficits grow larger and larger.
Patrick Barron

Wednesday, October 5, 2011

Ron Paul's Campaign of Ideas

Kevin D. Williamson doesn’t quite know what to make of Dr. Ron Paul. Mr. Williamson is Deputy Managing Editor of National Review magazine and noted columnist therewith. In addition he is the author of The Politically Incorrect Guide to Socialism, which did point-by-point to socialism what the Romans did to Carthage. In his recent NR cover essay “Ron Paul’s Last Crusade”, Mr. Williamson “doubt(s) that there’s anybody at National Review who is closer to Ron Paul politically than I am…” Nevertheless, he finds much that bothers him about some of the Ron Paul supporters and even Ron himself…what he calls “Ron’s Ronness”.

I believe that Mr. Williamson’s concern over the background and fervor of some of the Dr. Paul’s supporters can be dismissed as not of Dr. Paul’s making or concern. What politician can spurn the support of those who agree with him on important campaign issues because they also hold somewhat out-of-the-mainstream or even odious views about non-campaign topics? Dr. Paul graciously accepts the support of the John Birch Society, for instance, but that in no way obligates him to endorse their conspiracy theories about plots to replace American sovereignty with a one-world government. I’ve heard this concern from many people who have never heard of the John Birch society and I would be surprised if Mr. Williamson has not heard the same. There is no doubt that many of Dr. Paul’s campaign workers are young, idealistic, and perhaps is often the case with the young. For instance, Mr. Williamson relates a conversation with a “well-spoken young woman” who did not handle very well his question of why Dr. Paul’s ideas were not all that popular. Is this really something for which Dr. Paul should be criticized? I think not.

So what about “Ron’s Ronness”? Mr. Williamson admires many of Dr Paul’s personal campaign traits; for example, that Dr. Paul almost never talks about himself or uses his family as props. His main beef is that Dr. Paul works any question around to the evils of fiat money and the unsustainable American military empire, which he is convinced will be the death of our liberty if not the death of the nation itself. But why is this a problem? Frankly, I see it as an indictment of our modern, personality centered campaigns of appearance over substance. American politics have been plagued by this phenomenon since 1928 when that new gadget the radio caused the electorate to be repelled by the Bronx-accent of New York governor and Democratic candidate Al Smith. Then it became enshrined as Gospel following the first-ever presidential TV debates, when Nixon’s five o’clock shadow and JFK’s Hollywood good looks may have tilted the 1960 election to JFK.

By contrast Dr. Paul harkens back to the days of the front-porch campaigns of the late nineteenth to the early twentieth centuries and even further back to the non-campaigning of Abraham Lincoln in 1860. The front porch campaign was coined in 1880 when candidate and later president James Garfield sat on his front porch and answered reporters’ questions. The last such campaign was by candidate and later president Warren Harding in 1920. Abraham Lincoln didn’t even go that far. He refused all interview requests during the dangerous 1860 campaign out of fear that he would say something not quite as he wished, which could then be used against him. He advised all those requesting interviews to study his many published speeches and position papers on all important campaign subjects. Dr. Paul has assembled such a campaign document in his recently release book Liberty Defined: Fifty Essential Issues That Affect Our Freedom. One could decide whether or not to vote for Dr. Paul simply by reading this book. Every topic that one could imagine is there, in simple, clear, unambiguous yet subtle writing. Dr. Paul himself explains that decades of thought went into this book. Do we really need anything else? How important, really, is the candidate’s looks, speaking style, wit, or charm to the great issues that he will face? I say not important at all.

Every interview with Dr. Paul eventually concludes with an attack on our monetary system for the simple reason that that is what is likely to destroy our liberties and possibly the nation itself, not al Qaeda or the Iranians or the North Koreans. Dr. Paul is a highly respected and much published Austrian economist. He has warned the nation about the dangers of fiat money and fractional reserve banking since he entered politics after Nixon took the nation off the last tenuous ties to the gold standard. His presidential campaign is a campaign of ideas. It is a true intellectual crusade, not because he calculated that that might get him elected but because an intellectual campaign is the only kind of campaign that can save us. It is an honest campaign, too. Unlike the typical politician who carefully tailors his speeches to match the prejudices or vested interests of his audience, Dr. Paul’s message is always the same—fractional reserve banking and fiat money are violations of historic legal principles. Their inherent fraud is revealed in frequent boom-and-bust business cycles that wipe out the honest savings of the people. Rather than prosecute such practices as fraud, bankers and businessmen conspired to create an institution that would shield THEM from the consequences of their fraud. That institution is the central bank; here in America it is called the Federal Reserve Bank. Although the central bank can protect the bankers and their politically connected businessmen by becoming a lender-of-last-resort, the central bank cannot stop the workings of economic law, which demands that someone, somewhere bear the loss of its wealth redistribution effects and capital destruction. That loss is born by the rest of us.

Dr. Paul is like a passenger on the Titanic who understands that plowing full steam ahead through iceberg infested waters is fraught with danger, while the captain and crew are engaged in schmoozing passengers about the ship’s finery and promises that they are part of a record-setting trans-Atlantic voyage. All is going well. The ship is making great progress. She is the finest product of modern engineering. She is unsinkable! Wait…what is that big, white thing up ahead? Too late. Too late.