Coyote Blog

Countless regulations and laws in the US that are ostensibly consumer protection turn out to be simple power plays by government officials and well-connected corporations.

We see this yet again in Argentina, where a government takeover of the newsprint business was ostensibly justified based on “unfair” business practices by the previous owners.  Of course, the only thing the Argentine government, which recently started prosecuting private economists for disagreeing with government inflation numbers, finds “unfair” is the fact that newsprint is being sold to papers who publish unflattering articles about the government.  More here.

The same Argentine legislation defines a new crime right out of Atlas Shrugged that they call economic terrorism, which in practice will likely be interpreted as 1) businesses that do anything that the current rules do not like or 2) businesses that get just too valuable for government officials to resist grabbing them for themselves.

US government debt now larger than the GDP.

For a while now, a few authors have been quipping at Zero Hedge that the best investment strategy is to do the opposite of what Goldman Sachs is telling is retail customers.  The theory is that if Goldman tells the public to buy, it means that they are selling like crazy for their own account.

This seemed a bit cynical, but on Friday Zero Hedge observed that Goldman was telling its retail customers to buy European banks.  This advice seemed so crazy — the European agreement last weekly explicitly did not contain anything to help banks in the near term with over-leveraged bets on shaky sovereign debt — that for the fun of it I played along.  I shorted a couple hundred shares of EUFN, a US traded fund of European financial firms (took a bit of work to find the shares to borrow).

Made 6% in one day.  Thanks Goldman.

Investors everywhere were shocked to see that MF Global seems to have lost over a billion dollars of their customers capital.  In most cases, this capital was cash customers thought was sequestered as collateral for their trading accounts.  MF Global took its customers money and used that money as collateral in making risky, leveraged bets on European sovereign debt, bets that fell apart as debt prices fell and MF Global faced margin calls on its bets that it did not have the liquidity to cover.

Certainly it strikes most folks as unethical to lose the assets in your customers’ brokerage accounts making bets for the house.  But it turns out, it may have been entirely legal.  This article is quite good, and helps explain what was going on, what this “hypothecation” thing is (basically a fancy term for leveraging up assets by using them as collateral on loans), and why it may have been legal.

In short, the article discusses two regulatory changes that seemed to be important.  The first was a 2000 (ie Clinton era, for those who still think these regulatory screwups are attributable to a single Party) relaxation in how brokerages could invest customers’ collateral in their trading accounts.  The second was a loophole where brokerages created subsidiaries in countries with no controls on how client money was re-used (in this case mostly the UK) and used those subsidiaries to reinvest money even in US brokerage accounts.

The increase in leverage was staggering.  Already, cash in most commodities trading accounts is leveraged – customers might have only 30% of the value of their trading positions as collateral on their margin account.  Then the brokerage houses took this collateral and used it as collateral on new loans.  Those receiving the collateral on the other end often did the same.

MF Global would be bad if it were fraud.  But it is even worse if MF Global is doing legally what every other brokerage house is still doing.

Here is the minimum one should do:  Diversify brokerage accounts.  We diversify between bonds and stocks and other investments, but many people have everything in one account with one company.  I am not sure anyone can be trusted any more.  My mutual funds are now spread across three firms and, if I grow my brokerage account for individual stocks and investments (right now it is tiny) I will split that as well.

It is interesting to study the contrast between the handling of the Toyota accelerator problems, which turned out to be pretty much all driver error, and the Chevy Volt fire issues.

In the case of the former, we had public hearings and government threats.  The government, without evidence at that point, demanded Toyota recall the vehicles and stop production.  Eventually, when the NHTSA determined that the panic and recall was in error and the issue was operator error and not with the car, the Obama Administration suppressed the results.

Now, Volts appear to have a fire problem with their batteries.  This time, the government is keeping things real quiet and, instead of exaggerating the safety issue, they are suppresing it

It now appears the fire hazard was first discovered back in June, when GM first heard about a fire in a Volt that occurred some three weeks after the vehicle had been crash tested.

Yet, almost five months went by before either GM or the US National Highway Traffic Safety Administration (NHTSA) told dealers and customers about the potential risks and urged them to drain the battery pack as soon as possible after an accident.

Part of the reason for delaying the disclosure was the “fragility of Volt sales” up until that point, according to Joan Claybrook, a former administrator at NHTSA.

Demagoguing a non-problem in the first case, covering up a real problem in the second.  Guess which one has a union that supported Obama’s election and which does not.  Guess which one Obama bought equity in with taxpayer money?

It is December, 2005.  The Gulf Coast had just been pounded, in succession, by Katrina, Rita, and Wilma.  Everyone was talking about how global warming seemed to be intensifying hurricanes.  In a speech just after Katrina, Al Gore said

 When the corpses of American citizens are floating in toxic floodwaters five days after a hurricane strikes, it is time not only to respond directly to the victims of the catastrophe but to hold the processes of our nation accountable, and the leaders of our nation accountable, for the failures that have taken place….

There are scientific warnings now of another onrushing catastrophe. We were warned of an imminent attack by Al Qaeda; we didn’t respond. We were warned the levees would break in New Orleans; we didn’t respond. Now, the scientific community is warning us that the average hurricane will continue to get stronger because of global warming. A scientist at MIT has published a study well before this tragedy showing that since the 1970s, hurricanes in both the Atlantic and the Pacific have increased in duration, and in intensity, by about 50 percent….

Two thousand scientists, in 100 countries, engaged in the most elaborate, well-organized scientific collaboration in the history of humankind, have produced long-since a consensus that we will face a string of terrible catastrophes unless we act to prepare ourselves and deal with the underlying causes of global warming….

At about the same time, the IPCC was in the process of preparing its fourth report, later released in 2007.  It said, in part:

Several peer-reviewed studies show a clear global trend toward increased intensity of the strongest hurricanes over the past two or three decades. The strongest trends are in the North Atlantic Ocean and the Indian Ocean. According to the 2007 Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC-AR4), it is “more likely than not” (better than even odds) that there is a human contribution to the observed trend of hurricane intensification since the 1970s. In the future, “it is likely [better than 2 to 1 odds] that future tropical cyclones (typhoons and hurricanes) will become more intense, with larger peak wind speeds and more heavy precipitation associated with ongoing increases of tropical [sea surface temperatures].”

So what happened?  Since Wilma in 2005, we have gone 6 full years without a category 3+ hurricane making landfall in the US, the longest span since 1900 without such an event.  And the clock is still counting.  When alarmists of all stripes were breathlessly predicting hurricane after hurricane in late 2005, the reality is that we wouldn’t see another in the US for  over six years.

Of course, US landfall is in fact a terrible indicator of hurricane activity.  Its relevant to us, but it is a pretty random metric.  I said this when there were a lot of landfalls and I say it again since there have been so few.

A better metric is accumulated cyclonic energy, a sort of time integral of all large cyclonic storms worldwide.  Here is the most recent ACE figures:

As it turns out, the total strength of hurricane and hurricane-like storms has been falling almost since the exact day of Al Gore’s speech in 2005 (another Gore effect!)  In fact, of late, it has hit numbers close to all-time lows.

Of course this chart will go back up some day, and then back down, and then up … because hurricane activity has always been cyclical over decadal time scales.

The media loves to trumpet end-of-the-world predictions from folks like Al Gore and Paul Ehrlich, but they never go back five years later and back-check their predictions.  And despite their horrendous record for accuracy, the media eagerly publishes the next one.  Here is a proposed editorial rule for the MSM — no breathless publication of anyone’s next prediction without first revisiting the last one.

Here is what I remember from the late 1980′s – just about every technocratic pundit of the leftish bent, and a number on the right, all hailed Japan as the government economic planning model the US should follow.  One fawning essay after another lauded Japan’s MITI and its top-down approach to economic investment.

Practically within hours of when these editorials peaked, the Japanese economy began to crumble.  We know now that MITI and other Japanese officials were creating gross distortions and misallocations in the economy, and inflating an economic bubble with gobs of cheap credit.  These distortions have still not been entirely cleared from the Japanese economy 20 years later, and the country experienced what was called “the lost decade” which may become the lost two decades.

For over a year, it has appeared to me (and many other observers more knowledgeable than I) that China was headed for a crash for many of the same reasons as Japan.  I am now sure this is true, as today Andy Stern (formerly of the SEIU) writes an essay lauding the Chinese top-down state-planned economic model.

The current debates about China’s currency, the trade imbalance, our debt and China’s excessive use of pirated American intellectual property are evidence that the Global Revolution—coupled with Deng Xiaoping’s government-led, growth-oriented reforms—has created the planet’s second-largest economy. It’s on a clear trajectory to knock America off its perch by 2025….

There is no doubt that China will pass the US in total economic size — it has three times more people than we do.  But their success is clearly due to the small dollops of free enterprise that are allowed in a statist society, and advances are made in spite of, not because of, the meddling state.

Exactly how much economic progress had China made before its leaders brought in the very free market ideas Stern says are dead?  None, of course.  To read China as a triumph of statism and as the death nell of capitalism, when in fact it is one of the greatest examples in history of the power of capitalist ideas and how fast they can turn around a starving and poverty-stricken country, is just willful blindness.

I will include just one other excerpt

While we debate, Team China rolls on. Our delegation witnessed China’s people-oriented development in Chongqing, a city of 32 million in Western China, which is led by an aggressive and popular Communist Party leader—Bo Xilai. A skyline of cranes are building roughly 1.5 million square feet of usable floor space daily—including, our delegation was told, 700,000 units of public housing annually.

Meanwhile, the Chinese government can boast that it has established in Western China an economic zone for cloud computing and automotive and aerospace production resulting in 12.5% annual growth and 49% growth in annual tax revenue, with wages rising more than 10% a year.

My first thought on reading this was that Houston used to look exactly like this, with cranes all over the place building things, until we had an Administration that actively opposed expansion of domestic oil production.  My second thought is that this reads so much like the enthusiast essays written by leftists when they used to visit the Soviet Union and came back telling us Russia was so much superior to the US — just look at the Moscow subway!

The emergence of hundreds of millions of people in China and India from poverty is exciting as hell, and at some level I don’t blame Stern for his excitement.  But I fear that what he is seeing is the US housing bubble on steroids, a gross misallocation of capital and resources driven by a few technocrats who think they can manage a billion person economy from their office in Beijing.

Disclosure:  I seldom do anything but invest in generic bond funds and US stock funds, but right now I am out of US equities and I have a number of shorts on Chinese manufacturing and real estate.

Jackalope Pursuivant takes off from my post yesterday about Pearl Harbor.  If I were to give it a theme, I would call it “shock of the new.”  From time to time folks, for example in the military, may say that they understand a new technology, but the fact that a few smart staff officers “get it” does not mean that the military has really adjusted itself to it.  Like any large organization, it has a culture and set of expectations and people who have been successful based on the old model of things.   They may say they understand that naval aviation has changed things, but they don’t really adjust themselves until Pearl Harbor and Clark Field and Guam and Singapore are full of smoking ruins of planes and ships.

Dan’s observation about how quickly the US dusted itself off and recognized that the world had changed is a good one.  One could argue that no one did this in WWI.  The Europeans had every chance to see what the machine gun could do even before the war in a few African wars.  Heck, the final year of the American Civil War around Petersberg was a preview of WWI, as was the ill-fated charge of the light brigade.  But armies were still dominated by cavalries and plumed hats and bayonet charges and elan vital. Even in 1916 and 1917, when they should have learned their lesson, commanders were still obsessed with making full frontal charges.  The Americans had the chance to watch the war for four years before they entered, and then promptly began committing the exact same mistakes based on the exact same faulty assumptions as in 1914.  (Neal Stephenson has a great take on American flexibility to craft radically new combat doctrine based on new facts in WWII in Cryptonomicon, absolutely one of my favorite books).

As for Pearl Harbor, I am reminded of a quote that was attributed to Frank Borman (at least in the From the Earth to the Moon documentary) when he was testifying about the Apollo 1 fire.  He called it “a failure of imagination” — no one was even thinking about danger on the ground, all the focus was on space.  At the end of the day, the ultimate answer for Pearl Harbor’s negligence in readiness was a failure of imagination.   They may have had war games and studies discussing Pearl Harbor attacks, and they may have addressed the possibility intellectually, but no one in command really believed that a couple of hundred aircraft would suddenly appear over peacetime Honolulu dropping bombs and torpedoes.

It appears the Arab Spring, unsurprisingly, is coming to an end, as Islamic hard liners take a large share of the Parliamentary seats.

The idealist in me is offended when the US supports dictators with mixed respect for individual rights.  The realist in me knows that often, when such people are removed, worse governments take their place.

For a while, there has been a contrarian school of thought in historical study of WWII that FDR, wishing to have the US enter the way against a strong isolationist streak in the general population, purposefully ignored evidence of an impending Japanese attack at Pearl Harbor in order to create a casus belli.  A few historians have used some intelligence warmings combined with the insane un-preparedness of Pearl Harbor as their evidence.   Instapundit links to a new declassified memo that warns of Japanese interest in Hawaii just three days before the attack.

This is a fun but generally foolish game.  The same game was played after 9/11, pointing to a few scraps of intelligence that were “ignored.”  But the problem in intelligence isn’t always lack of information, but too much information.  In late 1941, the US government was getting warnings from everywhere about just about everything.   It is easy as a historian to pick out four or five warnings and say they were stupidly (or purposely) ignored, but this fails to address the real point — that those warnings were accompanied by a thousand false or misleading ones at the same time.  The entire Pacific theater had already had a whole series of alerts in the months leading up to Dec 7, one false alarm after another.  It is Monday morning quarterbacking that strips the intelligence problem of its context.  To prove that something unusual happened, one would have to show that these warnings were processed or prioritized in a manner that was unusual for the time.

And sure, the readiness issue at Pearl Harbor is inexcusable.  But while historians can always find a few people at the time who argued that Pearl Harbor was the most logical attack target, this ignores the thousands in and outside the military who thought the very idea of so audacious an attack that far from Japan was absurd.   Historians are failing in their job when they strip these decisions of context (if you really, really want to get on someone about preparedness, how about McArthur, who allowed most of his air force to be shot up on the ground despite having prior notification of the Pearl Harbor attack hours before).

Today, US markets are rallying strongly (Dow up 400 points or so at the moment) on news of coordinated central bank action that, that …. that what?  It looks to me like the US and European banks are merely building up liquidity in preparation for potential bank runs.  I would have considered this bad news, kind of like news we just went to DEFCON 2, but for some reason the market is rallying (though there was also an ADP report saying hiring was way up last month, which is certainly good news).

As I wrote yesterday, there only appear to be 3 solutions to the European debt crisis and this is not one of them.  If I am right and patterns hold, the markets will wake up in a day or two and say, “wait, there is still trillions of Euros of deteriorating sovereign debt sitting on bank balance sheets with 40:1 leverage ratios” and fall back.  I am thrilled that our economy shows signs of life and I know that corporate profits have been good, but I don’t see any way a European debt crash won’t have substantial negative effects on the US.   If I am wrong, the market will continue up, up and away and you should stop ever listening to me because I clearly don’t understand squat.

Update:  Yesterday I posited that real solutions were going to be a combination of 1) default/haircut 2) Make someone else pay back the debt and 3) print money.  I have heard it argued this morning that today’s announcement may be evidence of #2 (ie, US taxpayers will bail them out) or more likely #3 (since the ECB can’t print money, but the Fed seems to be doing a lot of it, lets get the Fed to print more money for the Europeans …. I don’t understand the mechanics well enough to pinpoint who would bear the inflationary consequences of this, but betting on the US to be the world’s patsy is never a bad bet).

My new column is up at Forbes, and discusses solutions to the European debt crisis.  The problem is that there are really only three, and all are bad, so most solutions being proposed either attempt to disguise that they are bad or to disguise that they are not really doing anything.  An excerpt:

The default option will almost certainly wipe out a lot of powerful banking and financial interests as well as make it very hard for governments to keep spending money at their historic pace.  This will certainly have a bad effect on the larger economy, but we should be careful accepting forecasts of economic catastrophe as most of these come from these same powerful bankers and politicians.   Every group, down to the local dog catchers, argue that the world will suffer a calamity if their particular profession is harmed.  What we do know is that large banks and financial companies are even more intertwined with the political elite in Europe than they are in the US.   We can be pretty certain that, push come to shove, a solution that saves the banks and allows politicians to keep spending will be preferred.

That is why the Europeans will likely end up printing money to pay off the debt.  They almost certainly would be doing so already,were it not for Germany’s strong memories of its Weimar inflation years, when exactly this kind of money printing to pay down government debt led to hyperinflation and political instability.  But the appeal to politicians of shifting the costs from themselves and banks to the average consumer is simply too great to pass up.  If Germany can be convinced, then the European Central Bank will print Euros.  If Germany cannot be convinced, then countries will leave the Euro and print Lira and Drachma.

1.  Accepting for a moment that the purpose of the loan program under which Solyndra received its money was truly reduction of CO2 output and fossil fuel use, what is the metric the DOE uses to score these investments against these goals (e.g. tons of CO2 output avoided over the next 10 years per dollar of government investment).

2.  How did Solyndra and other companies that were accepted for the program score on your metric?  How did companies that were turned down score?

Of course there was no such analysis — the government appears to have invested in whatever companies raised the most money for Obama or got Joe Biden’s heart palpitating or both.  Even if one pulls the obvious politics out of it, it appears they invested in stories they found appealing, the same mistake many novice investors make.

The Left works hard to wrap itself in the mantle of science, and Republicans just let them do so.  If Chu wanted to take the high ground of  trying to do the right thing for US energy policy, questioners should have taken him at his word and challenged how well his internal process matched his bold words.   Politicians are too obsessed with finding some crime or smoking gun.  The underlying failure is that the loan process does not, never will, and in fact cannot match the stated ideals and goals of the program.

via

Its amazing how many people can shake their heads in despair at the European debt crisis and then continue urging the US to do exactly the same things that got the Europeans into this mess.

Yes, its stupid, but perhaps for a different reason than has been mentioned.  The tax is on producers, and is meant to fund a promotion and marketing campaign.  Really.  Because Christian families in the US might forget to buy a tree this year if the government did not remind them.  Seriously, do any of these folks have kids.  ”Dad, can we get the tree today, can we, can we, please?”

By the way, this kind of taxation authority that bypasses Congress is actually fairly often used by the Department of Agriculture.   If you see random TV ads for avocados or almonds, you probably are seeing one of these government marketing forced-cooperatives.

I don’t have time today to link all the evidence, but the combination of crashing real estate markets and the Chinese government jamming liquidity into its banks tells me the China bubble is bursting as we speak.

This is an interesting test of the Austrian view of depressions vs. the Keynesian / Krugman / Thomas Friedman / MITI view of government-orchestrated prosperity.  If the latter are right, then China is doing more right to keep their economy going than any country in history and you should go invest all your money in Chinese real estate.

However, if one believes the Austrian model about government-enforced mis-allocation of capital and labor leading to bubbles and crashes; if one believes that the technocrat-beloved MITI was largely responsible for the Japanese lost decade; if one believes that the US govenrment through articially low interest rates and government-directed reductions in underwriting quality helped create the housing bubble — then the mother of all crashes is looming in China.  Because no country has done more to reallocate resources and capital based on the whims of a few technocrats  and well-connected industrialists than has China.  After all, this is why Thomas Friedman loves China, that it does not rely on the judgement of millions of individuals to allocate capital, but instead on the finger pointing of a few at the top.

Peter Tchir via Zero Hedge

The AIG moment was the first time that the US threw any pretense of real capitalism out the window.  Bear Stearns at least was done by JPM with government help.  Fannie and Freddie were taken over, but they were always quasi government entities.  It was AIG that was truly special.  The government didn’t even attempt to see if the banks had managed their exposures at all.  The government didn’t even care if they had.  They panicked and saved the banks from their own folly – they didn’t give capitalism a chance.  The US has never truly recovered from that.  The entire system looks to government support more and more.  Since AIG the Fed has been running at least one massive easing program or another constantly.  The government is lurching from spending program to spending program to keep the economy churning.

At the first signs of weakness we beg for the FED or ECB or the government to do something big and fast.  The European credit crisis seemed a final chance to put some capitalism back into capitalism.  To allow dumb decisions to pay the price for failure.  To reward the institutions that had properly navigated through the risks.  There was even a brief moment when it looked like Germany would do that – would force those who failed to pay the price and support those who had taken the best steps.  But now with Dexia bailed out and some super SIV on the way, it looks like we are once again heading down a path of not allowing failure – in fact we are once again rewarding failure and living beyond your means.  It isn’t communism, but it certainly doesn’t fit any classic definition of capitalism.

I am willing to believe that the initial push into alternative energy subsidies was undertaken with good, honest (though misguided) intentions to change the US energy mix.  But once such a program is begun, it inevitably gets turned into cronyism.

The best example is probably corn ethanol.  A combination of subsidies and mandates have pushed an enormous proportion of our food supply into gas tanks, for little or even negative environmental effect.   Environmentalists and the Left turned against it, but for a few large corporations like ADM, the subsidies have become life and death, and they do anything they have to to get Congress to maintain them.

The best evidence that corn ethanol shifted from a green program to pure cronyism was the imposition of large import tariffs.  The only possible purpose of these tariffs was to enrich farmers and a few manufacturers.  After all, if one really cared any more about getting more ethanol in the fuel supply, one would welcome low cost imports.

Well, the Solyndra debacle has started to make clear that cronyism has taken over solar subsidies as well.  Every day we find yet another high-ranking Obama supporter with his thumb on the scales tilting the DOE funding decision toward Solyndra.

Now we will see the ultimate test:

A group of U.S. solar-panel makers Wednesday called on the federal government to punish Chinese rivals with extra duties for allegedly dumping their products on the U.S. market…

The U.S. makers are asking the Department of Commerce and the International Trade Commission to impose a duty on panels imported from China, a market that totaled $1.6 billion in the first eight months of 2011. SolarWorld accused Chinese manufacturers of selling solar panels at less than half of what the production costs would be in a comparable free-market economy, and is asking for tariffs to make up the difference.

One could argue that this is in direct response to the Solyndra failure.  Solyndra’s failure has been blamed on low cost panel manufacturing in China.   Again, if we care just about energy, we should be thrilled about low-cost Chinese solar panels.  If the Chinese government wants to somehow subsidize our consumption of solar panels, great!

Watch this proposal.  Any politician that jumps on this solar tariff bandwagon will be saying “My statements about wanting to see more solar usage is just a bluff, I only really care about subsidizing a few selected businesses.”

David Roberts (via Kevin Drum) gives us a simply outstanding view of the mind of a statist:

In these grim economic times, one U.S. industry has defied gravity. Not only is it growing, it’s thefastest growing industry in the country. It now employs 100,000 Americans at 5,000 mostly small businesses spread across all 50 states. Unlike in so many others, in this industry the U.S. has a positive trade balance with China; it is a net exporter of high-tech manufactured products….

The startling counter-cyclical growth of this industry had been unleashed by a modest bit of economic stimulus: a cash grant program that helps project developers compensate for the crippling credit crunch. In contrast to the familiar tax credits — which tend to go to large, mature companies that have enough profit to benefit from them — cash grants help small, innovative, growing businesses that are plowing revenue into growth. In fact, a recent study found that they work twice as well as tax credits. In 2009, this cash grant program pulled in $4.50 of private capital for every public dollar it invested.

The cash grant program expires at the end of the year. Extending it for a single year could support 37,000 additional jobs over and above the industry’s baseline. And here’s the capper: Since the cash grant program is simply repurposing money that’s already devoted to a tax credit program, it requires no new federal revenue.

So you’d think this would be a home run, right? At a time when jobs are at the top of every politician’s mind, surely a bit of low-cost economic stimulus that doesn’t increase the deficit and leverages tons of private capital and creates tens of thousands of jobs can serve as the rare locus of bipartisan cooperation. Right?

Except the industry in question is the solar industry. And because this industry involves clean energy rather than, I dunno, tractor parts, it has been sucked into conservatives’ endless culture war. Rather than lining up to support the recession’s rare economic success story, Republicans are trying to use the failure of a single company — Solyndra — as a wedge to crush support for the whole industry. Odds are they’re going to succeed and the cash grant program (Sec. 1603) won’t be renewed next year.

Do you see the basic assumption — if we don’t take money from taxpayers and give it to businesses in a certain industry, that means we don’t like that business.  Really?  That means that there is not a single industry in this country that I like, since I don’t support subsidies for any of them.   Unless you believe the state is mother and father to us all, the fact that I don’t support state subsidies does not mean that I don’t like the industry somehow.  Kevin Drum even goes so far as to say that opposition to solar power subsidies is an aspect of the culture wars.  Huh?   Oh and by the way, the politicization of this loan process is just amazing to me.  More and more people at Solyndra seem to be fund raisers for Obama, and here is a story of how a cleaning products company turned donations to Democratic candidates into taxpayers subsidies for themselves.

It is interesting that he would mention tractor parts.  Guess what, folks who don’t like the solar subsidies probably don’t support subsidies for tractor parts either.  I was going to say something like, “guess what, we don’t subsidize tractor parts” but in our screwed up corporate state, we probably do at some level, like with some special export program snagged by a John Deere lobbyist.  But I can pretty much guarantee that we don’t subsidize anywhere near the total value of the tractor parts industry like we do the solar industry.

In one silly passage, he says

“In addition to being successful, this industry is wildly popular with the American public, across regions, demographics, and political parties. It has been embraced by mainstream institutions from Walmart to the U.S. military”

I could say the same thing for iPods too, but no one is rushing to provide grant programs for their manufacture.  If it is so wildly popular, why does its use require so many government incentives and subsidies.  Because the author pulls the trick of looking at one narrow solar program, and attributing the entire solar industry growth to that one program.  And then he says, see, look how much benefit we get from this tiny sensible expenditure.

But solar’s growth (I don’t have the data, but I am willing to be real money that his “fastest growing industry” claim is BS) is due not to just this tiny programs but to a plethora of federal, state, and local subsidies and mandates.  The government gives money to capitalize companies, and then then provides tax credits for up to 30-50% of their customer’s purchase, and then through public utility commissions enforce above-market feed-in tariff rates for solar power.  One reason we export so much (the export market for US solar is nearly entirely to Europe) is that European governments have feed-in tariffs for solar power more than 5 times higher than the market rate for electricity.   They are paying something like 70 cents a kilowatt for solar electricity.

So of course solar is growing.  If the government were to buy small cars for $150,000 each, there would be big growth in car manufacturing. This does not mean the product makes sense — in fact, the necessity for so many government supports at every step of the process means almost by definition that it does not make sense economically.  Look at corn ethanol.  Corn ethanol is the stupidest product ever, but it has grown like crazy due to the same combination of government subsidies, price floors, and mandates.

By the way, I am a huge fan of solar, in theory.  I honestly think that solar will some day be the power system of choice in this country, as companies figure out how to roll solar sheets out of the factory as cheaply and quickly as carpet comes out of Dalton, Georgia.  We are not there yet, and I am not at all convinced that the current approaches are anything but dead end technologies.  Beyond wasting a lot of money, there is a real risk the government actually slow ultimate implementation of sensible and economic solar, just as I would argue they did by forcing manned space flight and the transcontinental railroad ahead of their time.

Or maybe it is more correct to say that the taxpayer is being set up to keep BofA counter-parties whole. From Bloomberg, via Zero Hedge:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Obviously I am not a huge fan of bank regulation, but if the taxpayer is going to insure deposits, then the government has got to set and enforce capital restrictions on how those deposits are invested.  How many times do we have to learn this lesson?  The S&L crisis and the Texas bank collapse of the 1980′s was caused by the exact same BS, investing taxpayer insured deposits in increasingly risky investments.

Normally, in a free economy, we expect lenders to enforce rules and discipline on those to whom they lend, just as fire insurers in the 19th century developed the first building codes and inspections to protect their themselves.  But if depositors are insured, they are not going to get worked up too much about BofA — I am a depositor but I know the Feds will make me whole if the bank crashes.  Deposit insurance provides comfort to depositors and pays some dividends in heading off bank panics, but at the same time it relieves the bank of any accountability for how the deposits are invested unless the US government takes on that role.  Of all the BS regulations financial firms have to put up with, this is the one that should actually exist, and the implication in this article is that despite thousands of pages of new regulation, these basic protections still don’t exist.  Sure, they exist in law, but there seems to be nothing to stop an agency from issuing exemptions, and this Administration has shown itself to love giving exemptions.

This reminds me a ton of the AIG bailout.  For some reason, there are a group of Wall Street companies (cough Goldman cough) that seem to have immense political power to protect investments in which they are a counter-party.  To this point, people have been expecting that the BofA holding company might soon fail, but the underlying banks would be fine and just sold off in pretty good shape.  Most of the trash is apparently at the holding company level.

The losers in all this are the counter-parties to these various derivatives, who would rather have a better set of assets to grab if the ship starts sinking.  Of course, they don’t have any right to this — they didn’t make these original deals with the depository banks, they made them with Merrill Lynch and other trash BofA has bought.  But never-the-less, the Fed seems fired up to give these guys a special deal.  It reminds me of the Solyndra deal where the Administration allowed certain private parties to move ahead of the US Government on the creditor list, though at least in Solyndra’s case these parties actually put some money into the pot for the privilege.  This seems to be a straight giveaway, and it is no surprise that the FDIC is apoplectic.

Via Zero Hedge:

A key reason why a preponderance of the population is fascinated with the student loan market is that as USA Today reported in a landmark piece last year, it is now bigger than ever the credit card market. And as the monthly consumer debt update from the Fed reminds us, the primary source of funding is none other than the US government. To many, this market has become the biggest credit bubble in America. Why do we make a big deal out of this? Because as Bloomberg reported last night, we now have prima facie evidence that the student loan market is not only an epic bubble, but it is also the next subprime! To wit: “Vince Sampson, president, Education Finance Council, said during a panel at the IMN ABS East Conference in Miami Monday that lenders are no longer pushing loans to people who can’t afford them.” Re-read the last sentence as many times as necessary for it to sink in. Yes: just like before lenders were “pushing loans to people who can’t afford them” which became the reason for the subprime bubble which has since spread to prime, but was missing the actual confirmation from authorities of just this action, this time around we have actual confirmation that student loans are being actually peddled to people who can not afford them. And with the government a primary source of lending, we will be lucky if tears is all this ends in.

When you mess with pricing signals and resource allocation, you get bubbles.  And one could easily argue that OWS is as much about the student loan bubble bursting as about Wall Street.

I must say that I never had a ton of sympathy for home buyers who were supposedly “lured” into taking on loans they could not afford.  The ultimate cost for most of them was the loss of a home that, if the credit had not been extended, they would never have had anyway.  US law protects our other assets from home purchase failures, and while we have to sit in the credit penalty box for a while after mortgage default or bankruptcy, most people are able to recover in a few years.

Student loans are entirely different.  In large part because the government is the largest lender via Sallie Mae, student loans cannot be discharged via bankruptcy.  You can be 80 years old and still have your social security checks garnished to pay back your student loans.   You can more easily discharge credit card debt run up buying lap dances in topless bars than you can student loans. There is absolutely no way to escape a mistake, which is all the more draconian given that most folks who are borrowing are in their early twenties or even their teens.

I can see it now, the pious folks in power trying to foist this bubble off on some nameless loan originators.  Well, this is a problem we all caused.  The government, as a long-standing policy, has pushed college and student lending.  Private lenders have marketed these loans aggressively.  Colleges have jacked costs up into the stratosphere, in large part because student loans disconnected consumers from the immediate true costs.  And nearly everyone in any leadership position have pushed kids to go to college, irregardless of whether their course of study made even a lick of sense vis a vis their ability to earn back the costs later in the job market.

Public service note:  Their are, to my knowledge, five colleges that will provide up to 100% financial aid in the form of grants, such that a student can graduate debt free:  Princeton, Harvard, Yale, Stanford, Amherst.  These are obviously really hard schools to get into.   I don’t think a single one has a double digit percentage admissions rate.  But these are the top schools that hopefully establish trends.

I am thrilled my alma mater is on the list.  For years I have argued that they were approach severe diminishing returns from spending tens of millions of dollars to improve educational quality another 0.25%.   If an institution is really going to live by the liberal arts college philosophy — that a liberal arts education makes one a better human being irregardless of whether the course of study is easily monetized after graduation — then it better have a way for students who want to join the Peace Corp or run for the state legislature to graduate without a debt load than only a Wall Street job can pay off.

By the way, my other proposal for Princeton has been this:  rather than increasing the educational quality 1% more to the existing students, why not bring Ivy League education to 3x as many students.  I have always wondered why a school like Princeton doesn’t buy a bunch of cheap land in Arizona and build a western campus for another 10,000 kids.

My son and I spent the last year touring colleges.  One common denominator of all the good and great private colleges:  they are all over 100 years old.  Rice was probably the newest, when a rich guy toured the great colleges of the world and thought he could do as well, and started Rice  (Stanford is older but has a sort of similar origin story).  Where are the new schools?  The number of kids with the qualifications and desire to go to a top private college have skyrocketed, and tuition have risen far more than inflation, but there is no new supply coming on the market.  Why is that?

This is just staggering ignorance from a prominent US Congressman

“I think the answer is no,” [MN representative Keith] Ellison said when asked if he believes regulations kill jobs. “And here is why: When we talked about increasing fuel efficiency standards, the industry responded, and they need engineers and designers and manufacturers, and they need actually more people to help respond to the new requirement.”

“I believe if the government says, look, we have got to reduce our carbon footprint, you will kick into gear a whole number of people that know how to do that or have ideas about that, and that will be a job engine. I understand what you mean, because if anything adds a cost to a business, you could assume that that will diminish that business’s ability to hire. But I don’t think that’s actually right. I think what businesses want is customers and what — if they are selling product, if they have a product to sell they will do well even if they have some new regulations to meet,” the Congressman said.

There is a lot about economics we still do not understand, but one thing we are pretty certain about is that shifting labor and investment from productive to unproductive activities destroys wealth and reduces economic growth.  Of course, since much of the press is at least as ignorant on economic fundamentals, they just nod sagely.

I am amazed that the US equity market can fall for the same load of BS over and over again

Stocks finished with strong gains amid optimism about plans to recapitalize euro-zone banks.

Two thoughts

1. There is simply no source of money (and will) anywhere large enough to fill in the European debt hole.  Heck, there isn’t enough money and will to fix Greece, and that is a small percentage of the problem
2. Even if the current hole could nominally be recapitalized, it would be virtually meaningless because the no one in Europe is fessing up to anywhere near the total extent of the problem.

Countries are going to start to default in Europe, and I don’t see any way around it.  The Euro isn’t toast but its going to have a lot fewer members in 3 years.  And speaking of bad news, I don’t see any way to avoid a massive Chinese bubble burst in the next 3 years either.

From my Forbes post today, the following letter:

From:  The Consumers and Small Businesses of China

To:   The United States Senate

Re:  Currency Exchange Rate Oversight Reform Act of 2011

Dear Senators:

Thanks!  For years, our government has pursued a currency and trade policy that has subsidized your American consumers at the expense of our own here in China, and while we are unsure exactly why you would want to end this arrangement (we presume due to powerful lobby by your large manufacturers), we are happy that you are doing so….

A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called “dumping” represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields and creating inflationary pressures.

Every single step China takes to promote exports is in effect a transfer of wealth from Chinese citizens to Americans, and we are tired of it.

Read it all.

That is the sound of the printing presses running 24/7.  Because that appears to be how we are funding all of Obama’s spending right now (source)

When folks say they are not worried about the deficit, because folks still seem eager to buy our debt (as evidenced by the low interest rates) note that the general public has been a net seller of US debt the first 2 quarters of 2011.  In fact, the only buyer has been Uncle Sam himself, buying up the debt with newly minted cash (or electrons, really).

One other interesting issue, the Fed seems to have been soaking up the money supply in the early days of the recession, before the high-profile business and financial failures really got things moving downward.