Monday, March 02, 2009

Stop the Bailouts!

I was critical of many of the Fed members last year when they were worried about inflation. But here's a good column from former member William Poole, Stop the Bailouts.  Excerpts, and my comments:

THE fundamental causes of this recession, unique in the experience of the United States, were mortgage defaults and the consequent insolvency of major financial firms. These insolvencies, and especially fear of them, damaged normal credit mechanisms.

You'll hear folks talk about the need for more regulations or the "greed of Wall Street."  I think that's just an effort to politicize the crisis.  The bottom line on why we are where we are is that loans were made that never had any hope of being paid off.  If the mortgages were paid monthly, everything would've worked.  But folks couldn't make the payments.  Yes, these folks were caught up in the greed of it all and wanted a piece of the American dream before it got away, and lenders preyed on that.  All bubbles seem to work in that fashion.  But the bottom line of the crisis is that mortgages went into default  A lot of mortgages.

The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.

Businesses that make bad decisions go out of business.  If loans were made to folks who didn't have the means to pay them back, it was a bad decision by companies to make those loans.  In a world without government bailouts, these firms would go out of business.  The free market wouldn't allow them to survive.  It would be painful, but those businesses that made more prudent decisions would emerge the evolutionary winners.  The strong survive, the weak perish.

The government is trying to stimulate the economy, and now is where we should start watching for signs of inflation.  Especially as we begin to recover.  The economic indicators provide a rear-view mirror snapshot of what has happened in previous quarters.  It'll be important to watch the bond market.

My thoughts are that the worst of the recession is already over, and that the employment numbers are lagging indicators.  I also say this realizing that I underestimated the severity of the recession!

Federal policy is damaging the economy’s prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.

The federal government is trying to prop up businesses that would otherwise fail.  I believe this postpones the inevitable for these companies.  I don't believe there is enough stimulus in Obama's stimulus package.  More should've went to tax relief and less to earmarks. (Such as $200,000 for tattoo removal in LA).  These earmarks are less stimulative than putting money in people's pockets.  Obama stood up and told us that there were no earmarks in this package.  There are over 8000.  C'mon, Mr. President.

In addition, many states are raising taxes and fees as the stimulus is being releases.  In CA, Governor Arnold Schwarzenegger is raising the sales tax, gas tax, car registration tax and income taxes.  This will more than suck up the stimulus Obama is providing families in direct tax relief.

Obama also promised "not a dime" in tax hikes for those making under $250,000.  C'mon, Mr. President.  Be honest.  He's raising the gasoline tax.  He's raising taxes on electricity, natural gas and heating oil.  Don't folks making under $250,000 pay those?  He's also lowering tax deductions for mortgage interest for folks making over $209,000.  That's a tax hike, sir.

And no serious energy policy.  Windmills and solar panels today contribute less than 1% to our energy grid. Obama wants to double this over the next decade.  Ooooooh.  What about nuclear power, as Italy and Sweden are now embarking on (and many other countries are already doing)?  What about using natural gas for our federal vehicle fleet?  The latter would have a quick impact on our consumption of foreign crude.  Wait until oil goes back to $5 a gallon.  Lots of the stimulus package will flow to OPEC.

I'm digressing.  I realize that President Obama was voted in because folks wanted to make changes.  And Obama is delivering.  But I think it's fair to criticize his actions if they don't make much sense and there are other options available.

Phew.  Thanks for listening.