My letter to the Financial Times, London re: Do bank regulations actually work?

Re: Banks face pushback over surging compliance and regulatory costs

Re: ECB warns of risks posed by shadow banking sector

Dear Sirs:

Nowhere in your excellent article about shareholder concern over whether banks are spending their regulatory compliance money wisely is there any discussion over whether such regulations actually work. Banking regulators and their supporters would have us believe that the banks themselves are inherently unstable businesses likely to destroy themselves, their customers, and their stockholders unless properly regulated by those of superior insight. The promise from such financial critics is that more regulations more vigorously enforced by more examiners will prevent bank losses. This is a fantasy. Systemic financial panics are caused by central bank expansion of the money supply that drives interest rates below their natural level, encouraging unsustainable debt that must eventually be liquidated en mass. The unregulated so-called "shadow banking" sector, so decried by ECB president Mario Draghi, is funded by investors who are willing to bear their own losses. Any investment bubble that threatens this industry is caused by Mr. Draghi himself.

Patrick Barron

How Does It Know?

IMF Says China's Currency No Longer Undervalued

The International Monetary Fund announced on Tuesday that for the first time in over a decade China's currency is no longer undervalued (SCMP). U.S. policymakers have long criticized China's artificial weakening of the renminbi, and the issue of currency manipulation has been at the center of deliberations over trade deals in the U.S. Congress.

With currency markets rigged everywhere and central banks intervening either to support or devalue their currencies according to the politics of the day, there is no free currency market. Only free markets deliver real prices; therefore, in a free market no good is ever undervalued or overvalued. There is only the latest price at which buyers and sellers agreed to an exchange.

US inflation up 47.1% and real GDP down 21.4% since 2011!

Alasdair Macleod compares the Chapwood Index to the official CPI

Government has been lying to everyone, including itself, about the rate of inflation. The government claims that cumulative inflation since 2011 is 7.2%; whereas, the Chapwood Index claims that real prices of the top 500 items purchased by Americans in America's 50 largest cities have risen a cumulative 47.1%.

The Chapwood Index also challenges the government's claim that nominal GDP has grown by 18.1% since 2011, which would mean that real GDP is up by 10.9% (the difference between nominal GDP of 18.1% and inflation of 7.2%). But Chapwood claims that real GDP has FALLEN by 21.4%!

My letter to the NY Times re: Why laid off American workers can't find jobs

Re: The Perils of Globalization

Dear Sirs:

I believe that Binyamin Appelbaum may have unwittingly answered his own question about why American workers who lose their jobs--as illustrated by the former Maytag employees in Galesburg, Illinois--have such a difficult time finding alternative employment of the same standard. Mr.Applebaum reports that America is trying to negotiate international trade agreements that would build a "shield against globalization that would move closer to American standards for environmental protection, worker rights and intellectual property." These very policies are the cause of America's economic problems, and our trading partners would be foolish to adopt them. They are more likely to adopt the common sense policy of gradually incorporating these standards over time on a cooperative rather than an adversarial basis, in full knowledge that adopting them too early would create a barrier to economic growth. These standards are the consequences of economic growth. In effect, economic growth pays for them. The adverse consequences for believing otherwise are there for all to see in the US and Western Europe--a falling labor participation rate and out of control government debt to pay so-called welfare entitlements.

Greeks get Mercedes and BMW's; Germans get depreciating euros

Re: Where Greeks Are Stashing Their Cash

Ludwig von Mises characterized the third and final stage of a currency's collapse, where people are desperate to exchange their currency for almost anything of real value, as a "crack up boom". Notice the "boom" part. The German automobile industry is booming, because Greeks (and others) are converting their depreciating euros into real goods. Apparently Greek pharmacies cannot get drugs, because they or their government do not pay their bills. But luxury cars are still available and Germans are happy to sell them. OK, now the Germans have euros instead of cars. What can they do with these depreciating euros? Well, for one thing, these euros are stacking up as credits at the Bundesbank's TARGET2 account at the European Central Bank. Unlike other clearing systems run by central banks, which require member banks to fund their deficit clearing accounts with real assets on a daily basis, the ECB allows its national central bank members to run overdrafts. A close look at the latest TARGET2 accounts reveals that Germany and Luxembourg are running significant positive balances; whereas, Spain, Italy, and Greece are running significant negative balances. The other ECB members carry somewhat less significant positive (Finland, the Netherlands) or negative (Ireland, France, Portugal) TARGET2 balances. Another way of looking at this is that Germany and Luxembourg are not getting paid for the goods and services that their hard working population provides to Spain, Italy, and Greece. It's all funny money. Germany, especially, carries a huge positive balance of around a half trillion euros.

ECB president Mario Draghi is determined to drive down the value of the euro vis a vis other world currencies and generate positive inflation in the euro zone. So Germany's TARGET2 balance is officially under attack. Draghi is a fool for believing that his bank can peg inflation to a low number once inflation gets a good hold on the people's psyche. 

Germany should get out of this monetary loony bin forthwith, reinstate the Deutsche Mark, and treat its euro credit at the ECB as a bad debt. One of the rules of debt collection is to stop lending the debtor more money! A strong Deutsche Mark exchange rate vis a vis what's left of the euro and especially vis a vis a reinstated Greek Drachma and/or Italian Lira would reveal that Germany in effect has been giving its products away for almost nothing. This used to be called slavery.

The Problem Isn't Overproduction: It's Malinvestment

Mr. Max Ehrendfreund, writing in the Washington Post's Wonkblog, believes that he has discovered something new: that the world is producing too much and doesn't know what to do with it. His solution, of course, is to confiscate the overproduced products, such as oil and cotton, from its rightful owners and give it to the people who need it. This phony problem and its statist solution goes back at least as far at the 1930's socialist calls for "production for use" vs. the hated capitalist concept of "production for profit".

Mr. Ehrenfreund commiserates that a "surplus...challenges some basic principles of conventional economics...". Ah, now we see why Mr. Ehrenfreund has a problem; he understands only "conventional economics". Austrians have no such problem understanding why many commodities are currently in surplus. Our understanding of Austrian business cycle theory tells us that years of interest rate suppression by monetary authorities worldwide has disrupted the time structure of production; i.e., that artificially low interest rates have led entrepreneurs and their business partners to believe that sufficient resources exist for the profitable completion of longer term projects, such as increasing investment in oil and cotton production. Austrians do not contend that there cannot be a surplus of some goods. Of course, there can! But we know that a surplus of some goods means that there is a scarcity of others. Resources were "malinvested" in some projects instead of those more urgently desired by the public.

Here's a rather humorous example.  A good friend was teaching in West Germany during the age of Tito, when he and his wife decided to vacation along Yugoslavia's beautiful Adriatic coast. While there they tried in vain to find swimming accessories, like fins and masks, but shop after shop sold only one product. That one product? Panama hats! True story. So here is a good example of zero demand for Panama hats and a scarcity of swimming accessories in one of the most beautiful seaside vacation spots in the world. But these surpluses and scarcities are not always so obviously related. A surplus of oil and cotton may mean that there is a scarcity of millions of other goods that could otherwise have been produced.

The socialist dogma, to which Mr. Ehrenfeund seems to be enamored, blinds him to the concept that a successful economy does not need centralized control. In fact a successful economy needs no guidance at all, except the rational decisions of the owners of the means of production to put their resources to the most desired use. How do they know what that "most desired use" is? The price system tells them! A dynamic economy is controlled by millions upon millions of people making billions upon billions of decisions that are in constant flux. Manipulating the price of any factor of production, such as cotton prices, will cause disruptions. But our governments have done much worse than manipulate the price of a few major factors o f production; they have manipulated the price of money itself, the medium of exchange that is the lubricating and knowledge transmission device for ALL economic decisions.

So, Mr. Ehrendreund, brush up on your Mises, Rothbard, Hayek, Habeler, and Garrison. Your confusion will disappear to be replaced, no doubt, by exasperation that you ever could have harbored such silly notions as those you espouse in your article.

Give the free market a chance!

Re: US jobs relapse raises fresh doubts on Fed tightening

This link to a recent Telegraph (of London) Ambrose Evans-Pritchard (AEP) report is typical of the trap that Keynesians have built for themselves. AEP well articulates their dilemma, stating:

"...the developed world has yet to shake off the legacy of the Lehman crisis, is struggling with record debt ratios and has already used up most of its fiscal and monetary ammunition."

The Keynesian tools of choice for escaping a recession are increased government spending and monetary stimulus. It must work, they believe, because their models tell them so. But when governments spend themselves to unsustainable debt levels and central banks expand base money and drive down the interest rate and STILL the economy refuses to budge, these Keynesians are trapped. And like all trapped animals, they are dangerous. But their conundrum is a mental trap only and one that is easily conquered, if only they have the courage to admit it and take appropriate action. The cure is simplicity itself. They must give the free market a chance. Governments must CUT spending, and central banks must STOP EXPANDING base money. This means that governments must tell their citizens that the welfare/warfare state is ending. And central banks must tell their governments that they will no longer monetize debt or intervene in any way to influence the interest rate. The resulting recession, perhaps even depression, is the necessary and inevitable workings of the free market to shed itself of what must now be massive malinvestment. It is the market working to realign the structure of production to economic reality. This will take time, but there is no other way.

A so-called "independent scrutiny board" still is not democratic

From today's Open Europe news summary:

European Commission considers independent scrutiny board to assess new EU laws – as proposed by Open Europe in 2009

A leaked European Commission document reveals plans for EU laws to require a green light from an independent scrutiny panel to ensure they do not impose unnecessary burdens on business before they can be tabled, as first proposed by Open Europe in 2009. The proposal envisages a six-person Regulatory Scrutiny Board, three of whom will come from outside the EU institutions, which will evaluate the cost of existing laws and assess the impact assessments (IAs) for new bills.

The initiative is part of EU Commissioner Frans Timmerman’s Better Regulation drive to cut red tape for businesses – which has been strongly backed by Open Europe. Open Europe’s Vincenzo Scarpetta is quoted by EUobserver as saying, “Time will tell if the new Commission is serious about substantively reducing the regulatory burden on businesses across Europe.”

Source: Open Europe Intelligence: Out of Control Open Europe Intelligence: Still out of Control Open Europe Blog EUobserver

This is a typical end run around democracy. An "independent scrutiny board" would be not be independent. Public choice theory tells us that there is no such thing as an altruistic politician or bureaucrat. Not only would members of such a board still be subject to political pressure, they would have no basis upon which to make their decisions. The so-called facts that they would collect and "scrutinize" are too numerous and controversial.

The EU can never be more than a consultative body of representatives from sovereign nations answerable to national governments who, in turn, are answerable to the electorate. Politics may be messy at the national level, but no one should harbor the illusion that they are absent at the supra-national level. If anything, politics at the supra-national lever are more dangerous because the appointees and bureaucrats are another step removed from the oversight of the people through their democratically elected representatives.