Subsidized Problem Creation 10/23/2008 09:35:23 am by Dan Krohn

	Apparently with government approval, several big U.S. banks are planning to use new capial being supplied by U.S. taxpayers to fuel an acquisition binge. In the short term, government officials see this as positive as the big banks might acquire troubled smaller banks preventing further bank failures. However, as is often the case with the U.S. government, this is very short sighted. If there are banks that will fail, let that be the case. The government can handle sales of their assets and deposits to other banks at that time. What is troubling is that in this era of the "too big to fail" attitude towards big banks requiring a huge and yet to be defined taxpayer bailout, the government is subsidizing the exacerbation of the too big to fail problem. Government funds, if provided at all, should be used to shore up banks' capital positions to enable them to increase lending and not fail themselves. Poorly managed banks should not be given taxpayer money to increase market share. As previously argued in this blog, banks in the too big to fail category should be candidated for breaking up through antitrust action - not encouraged to grow. And if such big institutions are allowed to exist with the public insuring them against failure, then there should be an extra tax on such companies to serve as an insurance premium and they should be subject to greater regulation than their smaller rivals which would be allowed to fail if that demise were dictated by the market.

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Deflation? 10/11/2008 02:09:40 pm by Dan Krohn

	In previous entries on economic matters, this blogger has warned of inflationary risks. But now things have turned so grim that the reverse is actually a possibility. A tremendous amount of wealth has been lost during the last two weeks with the stock markets crashing. In a very short period of time many dollars have been erased from the economy. With fears of recession or worse increasing we have seen oil and other commodity prices fall. Last week saw an announcement of very high U.S. job losses. Business leaders everywhere are afraid to make decisions, which puts much buying of labor, services and materials on hold. Those businesses seeing decreased orders will decrease their own spending. Inventory will sit idle if no one is buying. Families with decreased income decrease spending. When there is no demand and supply remains, prices inevitably drop. This has not happened on a large scale in the U.S. since the Great Depression. A vicious cycle can develop where both employers and employees decrease spending to match decreased income. Such a cycle can only be broken when people are able to buy again. So now we have the government going to extremes pumping dollars into the economy in an effort to create enough money to keep things moving. Most other nations are finding themselves in similar situations. What is interesting is that the fundamentals of the world's economies did not change in an instant. The emotions did. Fear dominates almost everyone's mind. It's fear that has led to stock markets crashing; the world economy did not downshift twenty percent in a week. Clearly there have been problems with the overleveraging of mortgage loans, but the change from feast to famine is not justified in such short order. Thus far in the U.S. and most everywhere else the steps being taken to combat the ravaged economy have been big steps aimed at helping the big boys stay afloat (primarly big banks and investment banks but some other large companies as well) - hoping this will trickle throughout the economy. Undoubtedly we need such steps. But if things are this bad, programs should immediately be cranked up on the other end as well. One of the criticisms leveled at the Bush bailout plan was that it included no relief for the common man – particularly the homeowner. Several steps should be taken quickly to help the American middle and lower classes. True bankruptcy reform should be undertaken so that the process does not destroy consumers forced to go that route. Bankruptcy courts should be empowered to flex mortgage loans as needed, and the standard plans for individuals should be made less onerous. The federal government should begin acting as an employer of last resort as it did with programs during the Great Depression. Put people to work on an assortment of projects which will benefit the country such as improving our national parks, and the economy will benefit from those persons’ ability to buy. The federal government should send money to the states with reasonably strict requirements that people be employed but leaving the states with discretion as to the projects. The U.S. infrastructure is in terrible shape. The government should begin a crash program to improve infrastructure which will both put money into the economy and prevent tragedies such as bridges collapsing. Thus far almost all government efforts have been focused on liquidity injections into the banking system. But there are no requirements placed on those banks to lend, and with the current emotional climate they will be slow to do so. The treatment of this economy requires both increased liquidity in the financial markets and increasing the financial well being of average Americans. Let’s hope the government takes steps to help the newly fabled “Joe Six-Pack” as well as the Wall Street wizards - and soon.

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Renewal of Trust Busting? 10/04/2008 03:11:34 pm by Dan Krohn

	It appears that most economic and political leaders in the U.S. are in agreement that there are some companies that are simply too big to allow to fail. That raises some interesting questions. As a rule of thumb, this blogger suggests that if a company is too big to fail, then it is too big to exist. The too big to fail test ought to be enough to trigger an antitrust effort to break the company up in the public interest. Then we will not have companies around which are so big as to require the public to bail them out. Some will argue that in certain industries companies need to be exceedingly large (at least big enough to fall into the too big to fail category) in order to compete or effectively provide services. This blogger suggests that any such company which is allowed to exist should be subject to very intense government regulation and/or should pay substantial extra taxes for being permitted to exist. One old example of such a company is the AT&T of the old days. It was thought then that telephone service was a natural monopoly, and to prevent the public from predatory pricing and such, the old AT&T was subject to intense regulation. This is still the case with utilities in some places, in many instances utilities are owned outright by governments (for an example look at water suppliers). Some would argue that certain companies need to be big (falling into the too big to fail category) because such size is necessary to compete globally. But if one takes a close look at the competitors in such global markets where immense size is being called for - one finds that much of the competition is very heavily regulated by foreign governments if not being owned by a foreign government outright. Shouldn't the same rules apply here? At least to some extent? Any company which is allowed to exist without extensive regulation or substantial government ownership yet falls into the too big to fail category is having its existence insured by the taxpayers. Such companies should be required to pay a healthy premium for this very valuable insurance. Call it what you wish, but it's only fair for too big to fail sized companies that have their existence insured by the taxpayers to pay extra taxes, such taxes being essentially insurance premiums. Interesting idea at least. Comments?

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The Race Card Gets Played 10/02/2008 07:00:53 pm by Dan Krohn

	During the recent days I’ve begun to receive emails claiming to explain the financial crisis. The bottom line of these emails is that the problems are entirely due to black people and the Democrats who love them. Ever since Barack Obama was nominated I’ve been waiting for the race card to be played by the Republicans and wondering what form it would take. Now we know - at least for round one. The play takes the form of blaming the entire financial crisis on the Community Reinvestment Act. This statute was passed in response to a clear pattern of racial discrimination in making home loans. That statute was passed only after substantial research demonstrated that mortgage loan applicants with identical financial credentials received different responses to their loan applications depending on the color of their skin. It was civil rights legislation. Nothing in that legislation required bad loans to be made to unqualified borrowers. More obviously, that legislation had nothing whatever to do with the current financial crisis which arose from the foolish assumption that property values would only increase and the belief that more leverage is always good. The new derivative securities which enabled leveraging mortgage loans to absurd levels were creatures invented on Wall Street - all invented well after and independently of the Community Reinvestment Act. Lending to black borrowers is in no way related to the invention of credit default swaps. If one wants to look for legislation to blame, then look at Republican sponsored legislation prohibiting regulation of these new instruments of leverage and the repeal of the Glass Steagall Act. People hate to admit that they have done something wrong. And people hate to admit that their core beliefs, in this case the belief that all government regulation is bad and that free markets should be left entirely alone, could have flaws. But people love to find scapegoats on which to blame their problems, and traditionally the best scapegoats are easily identifiable minorities. With a black nominee for president, this is all the more tempting. So a blast of blog entries and hogwash emails have hit the Net blaming black borrowers and the Democrats who love them for the failures of Wall Street's unbridled greed. What is even more worrisome is recognition that we have not seen the worst of the financial crisis, which is yet to come to most Americans (especially given the bailout bill which contrary to gibberish from members of both parties is not designed primarily to help the average American). Previously this blog warned of the risk of very high inflation. Germany between the world wars suffered extraordinary inflation which caused great pain to the German people, making them vulnerable to beliefs which they would have never accepted in normal times. Then it was the Jews who were blamed for the economic problems. People could not accept any fault as their own. Let's hope that this economy does not get so bad. And let’s hope that after the election the need to blame blacks for economic ills will pass quickly. I’d like to hope that Americans have come too far to believe this nonsense, but people who should know better are forwarding those emails. If you are one of those tempted to believe the black bashers, please stop and think. If you are not one and meet one, please take the time to try to teach. The stakes are too high to ignore.

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