New Year's Revolutions

I like the AT&T commercials with the little kids being questioned by the moderator.  One of the more recent offerings involves the concept of a New Year's Revolution:



That kid to the left looks like he might want to pick a different revolution, but it got me thinking that sometimes the accumulation of small change is sufficient to defeat the forces of tyranny.  Just like eating too many jelly beans over time will pack on the pounds.

The purpose of this blog is to educate and advocate for freedom.  The forces of tyranny have been very busy during the Obama administration, so I am convinced of the need to make the case for freedom.  Many of my friends and fellow SLOBs paint a grim picture of lawless tyranny out of control, with .  While I don't deny the myriad and putrid ways in which this administration and the previous one have undermined the rule of law in this country, the march of technology and the impulse to freedom keep eroding the seeming victories of would-be oppressors.  Some examples:

• Freedom of speech continues to come under assault, especially on college campuses, as our good friends at Legal Insurrection keep pointing out.  But we have never had such a great opportunity to actually make the voices of ordinary citizens and students heard as in this era.  Blogs, Twitter, Facebook and other social media allow the citizenry to curb the impulse to suppress speech that is in the hearts of the leftists.  Yes, attempts at suppressing speech continue unabated, see Handle's Haus for an impressive compendium of recent efforts. However, the very fact that he can publish the list and link to so many rebuttals is proof that technology is keeping freedom of speech alive.
• While Bernanke and now Yellen have debased the currency and taken money out of your pockets and into the hands of bankers, alternatives to protect your hard earned cash exist.  Bitcoin is an example of smart people realizing that the stated inflationary policy of all government issued currency czars erodes the value of your wealth.  For a useful explanation of Bitcoin and some of its limitations, see The Economist. While Bitcoin may have fatal flaws, eventually some cryptographic based currency will give fiat a "run for its money."  In the meantime, gold has held its value like it has for millennia, see Matthew 2:1-9.  A free market in reputable gold coins exists to offset the dangers of paper money.
• The more the oppressors succeed, the more they fail.  The ACA is a prime example of course.  I have read of doctors who don't take insurance any more and wondered if this is a trend?  By accident, I met a pediatrician on a bus trip who doesn't take insurance and said that her practice isn't suffering one bit, as she has lower overhead.  As the ACA destroys health insurance, the number of doctors who opt out of the system will cause it to collapse.  We have to be ready with our free market alternatives when that happens.

Be of good cheer, the forces of tyranny are being outwitted world-wide and will not prevail.  Sometimes the revolution comes in the form of small jelly beans that have the accumulated affect of weighing down the system.

What You Should Be Reading

• KT continues to show the myriad ways that the culture contributes to poverty, through single mommy families, in yesterday's post.
• Dean gives out the Walter Duranty Putridity in Journalism Award. Cato agrees with him on the winner, who is?  Read the link to find out.  Hint: He claims to be "conservative." 

If You Really Cared About Income Inequality - Tea Party Prescription

I have been stewing about the President's latest "pivot," this time to income inequality, for a while.  First, it isn't necessarily a problem. Second, Obama has no real solutions.  Income inequality is a problem per se, it depends on the source of the inequality.  If it is caused by a privileged class entrenching its grip on a not-so-free economy, like crony capitalist third-world economies, then this is fundamentally unfair.  But if caused by the inevitable winners and losers in a free-market economy, then we shouldn't care so much, in fact, we should rejoice that our system rewards endeavor.

By the way, actual income inequality is NOT increasing.  The welfare state and progressive taxation have vastly reduced the gap between the poor and everyone else.

According to Messrs. Ohanian and Hagopian, once the effect of taxes and transfer payments is taken into account, "inequality actually declined 1.8% during the 16-year period between 1993 and 2009, when the Gini coefficient dropped from .395 to .388."

Unfortunately, government policies are increasing pre-tax/pre-entitlement inequality (as defined as "earned income" inequality for this discussion).  There is some real evil going on that could be addressed to improve actual fairness and improve economic growth.  Here are some liberty movement suggestions.

End the Fed and Return to a Gold Standard.  The Federal Reserve lends Wall Street bands money at below market rates that they use to fund loans.  This is supposed to help the economy, but it just concentrates wealth in Wall Street which then gets bailed out when it makes bad bets.  If you want to really stop the shenanigans that funnel wealth to people who don't produce anything, return to the gold standard and disband the federal reserve system.

The biggest source of income inequality.

Stop Raising the Minimum Wage.  Raising the minimum wage reduces the opportunity for lower skilled and teens to enter the workforce and start making their way up the economic ladder.  Moving people into the workforce begins lifelong upward mobility. By raising the minimum wage, we keep youth out of the labor market.

Introduce Competition into Education. Students are graduating from college and high school without discernible skills that allow them to enter the work force.  This was not alway so.  There was a time when a high school diploma indicated familiarity with basic math, reading and writing skills and at least a rudimentary knowledge of science.  No more.  Employers can no longer count on even college graduates being able to perform basic tasks needed in business.  This is the result of a century of monopoly in education.  Government schools have failed us.  Competition would restore the incentives for parents to be involved in education choices for their kids, and the result would cause employers to start to trust diplomas again.

Fix Immigration Policy to Favor Skilled Immigrants.  Amnesty for unskilled farm laborers is the opposite of this idea.  The United States is still the land of opportunity when compared to the rest of the world, even if our absolute level of opportunity has declined under Obama's leftist policies.  Bringing skilled immigrants to our country allows various tech teams to stay together and provides all sorts of additional jobs for native Americans as well.  However, if we limit immigration to unskilled farm workers, then we are bending the income curve to increase inequality.  If the President really care about income inequality he would have included a vast expansion of H-1B and other avenues to bring the skilled and wealthy, because he is such a smart policy dude.  Unfortunately, he did not.

Repeal the ACA.  There are plenty of incentives for people at the lower end of the income ladder to reduce their income in order to qualify for subsidies, including married couples getting divorced to reduce their household income.  The ACA is contributing to a rise in inequality by reducing the incentives for those in lower to middle income brackets to increase their income.

Of course, the President isn't really serious.  He is just making another speech about something he chose to ignore for five years, much like immigration.  But if we would like a larger middle class and economic growth, then my tea party policies should be considered.

Zero Interest Rates are Wrecking the Economy

David Einhorn, President of Greenlight Capital, has published a brilliant article exposing why the Fed's policies are counter-productive to economic recovery, because they don't produce the effects intended. (H/T WC Varones) Although, he doesn't explicitly say so in the article, I believe he is also making a good case for the gold standard, because only a gold standard would prevent the Federal Reserve from playing these kinds of games with the economy. It's difficult to do justice to an article of that length, but I wanted to give my readers a sense of the magnitude of the folly of Chairman Bernanke.

The fed is keeping interest rates low and is signalling that they will keep rates low for a long time. Both facts are impacting markets. Einhorn likens this to a steady of diet of Jelly Donuts, on the analogy that a single jelly donut might give you a boost of energy in the afternoon, but a steady diet of them just makes you sick. What are the impacts of artificially low interest rates?

• Low interest rates make it harder for retirement eligible to actually retire, they are getting little return for their money.
• Interest rates are a measure of the time value of money. By setting it at zero, there is no urgency about investment decisions.
• Because those who live on fixed savings, have less to spend, they spend less, harming the economic recovery.
• Investment isn't increasing at zero rates, because once rates fall below the rate of inflation, the only consideration is whether the principle can be paid back. If inflation is at 2.5%, then reducing interest rates from 2.5% to 1.5% or even zero percent will have no effect on investment, so there is no offset to the fact that savers have less to spend.
• Zero rates allow otherwise worthless loans to appear to be performing, as the borrower can make nominal payments. But it delays the necessary economic unwinding necessary for real economic recovery.
  

And what about signalling that interest rates will stay low for a long time?

• Bonds, even though they are paying a paltry 2%, have no downside risk, because investors know that there is no danger of rising rates.
• This does the stock market no good, because only the rich are investing. Note the thin volumes on the market, making it more volatile. Further, the policy allows the rich to leverage assets with access to cheap capital at the expense of the middle class, increasing income inequality. (I don't believe that income inequality per se, is bad; but when it derives from government favoritism in the banking system or policy, it rends the social fabric due to its fundamental unfairness.)
  
• Inflation is taking hold in commodity markets, especially oil and gold. Inflation seldom shows up evenly in the economy. Gold and oil prices seem to reflect belief that the fed is pumping ever greater numbers of dollars into the economy. But higher oil prices retard economic recovery.

Einhorn ends the article with a plea for a modest increase in interest rates. I disagree. We can't expect politically appointed and connected Federal Reserve board members to pursue such a policy. It would send a shock to the Treasury in the form of massive increases in the burden of servicing the debt. Better to remove the power of the fed to artificially set interest rates by returning to a gold standard. People may argue that we had boom and bust cycles under the gold standard. My question, "Is this economy any better?"

That's Why They Aren't Calling It a Default - UPDATE: It's Official

I earlier had said that the Greeks were essentially defaulting by giving their creditors a "haircut." However, there has been a great reluctance on the part of anyone except Moody's and S&P to call it a default. I thought it was just political correctness and a mistaken belief that it would spook the markets if the politicians uttered the d word out loud. Turns out there's an insurers vs banksters sub-plot in this whole deal. From the Telegraph:

Europe has ring-fenced Greece's debt crisis for now but its escalating recourse to legal legerdemain has shattered the trust of global bond markets and may ultimately expose Portugal, Spain, and Italy to greater danger.

Athens officials last night estimated more than 85pc of private creditors had accepted the €206bn (£173bn) bond swap shortly after a deadline expired yesterday evening. That is enough for the deal to go through, but leaves the possibility the government might have to use its controversial Collective Action Clauses (CACs).

Ratings agencies have warned they will declare a default if Greece activates the CACs, which allow the government to impose the deal on the remaining bondholders. The CACs will be used if the take-up falls below the desired 95pc but above the required 66pc.

The International Swaps and Derivatives Association (ISDA) is poised to convene again to decide if the deal amounts to a “credit event” that would trigger billions of euros of insurance.

If the event isn't called a default or "credit event" then the insurers are out billions of euros, but if its just a "haircut" then the insurance isn't triggered. This seems like a bad system, as a huge incentive is built in to game the system. Or should I say, yet one more incentive is built in to game the system.

Ambrose Evans-Pritchard calls out the whole enterprise for what it is, legal skull-duggery. He points out that the European Bank has exempted itself from losses on the Greek debt, in effect shifting debt on to other bond holders. (Governments interfering in bankruptcy's favoring certain groups, I could swear that sounds familiar.) Here is an extended quote (I don't normally like to do that, but he is very clear and its important.)

The rule of law has been treated with contempt," said Marc Ostwald from Monument Securities. "This will lead to litigation for the next ten years. It has become a massive impediment for long-term investors, and people will now be very wary about Portugal."

At the start of the crisis EU leaders declared it unthinkable that any eurozone state should require debt relief, let alone default. Each pledge was breached, and the haircut imposed on banks, insurers, and pension funds ratcheted up to 75pc.

Last month the European Central Bank exercised its droit du seigneur, exempting itself from loses on Greek bonds. The instant effect was to concentrate more loss on other bondholders. "This has set a major precedent," said Marchel Alexandrivich from Jefferies Fixed Income. "It does not matter how often the EU authorities repeat that Greece is a 'one-off' case, nobody in the markets believes them."

Anybody for some Portuguese bonds? So given this history and this administration's abysmal record on the rule of law, what's going to happen when Illinois or California head towards default of their bonds? I believe the class already knows the answer. But for added emphasis, we have the previous story of the U.S. Treasury guaranteeing interest on California state bonds. Just as perverse incentives are at play in the EU shenanigans, so too, will this cause the Fed to buy up state bonds should that day come. Of course, by concentrating all of the financial risk of every government entity onto the U.S. Treasury, the meltdown will be all the more spectacular.

UPDATE

The WSJ is reporting that the "special committee of the International Swaps and Derivatives Association, which rules on such matters for the credit-default" has indeed ruled that the Greek action is a default which triggers the insurance provisions discussed above.

Payouts on a net $3.2 billion of insurance-like contracts designed to protect against losses on Greek sovereign debt have been triggered, after the country forced certain private creditors into its debt restructuring who didn't want to accept the terms of the deal, a committee of dealers and investors decided Friday.

Now that the EU Central Bank has insulated itself, and we have a real life actual sovereign default, what will happen to other sovereign debt interest rates in the euro-zone? Here is what we have so far:

Question for Wall Street Protesters

If the Wall Street protesters were serious, they would be supporting a gold standard for our money. The Federal Reserve lends money to banks at artificially low interest rates that they use to finance deals or make loans and other investments. Given the fed's monopoly control of the money supply, this makes the whole banking system an insider's game. This allows the bankers to get rich and some of those ill gotten gains flow to Wall Street. A gold standard would force banks to rise and fall on their own and would return the money supply to a form that could not be manipulated.

So protesters, are you in favor of a gold standard?

Bank of America Loses $1.2 Billion in Just One Quarter

The Washington Post is reporting that Bank of America is bleeding money at a serious rate.

The bank said it lost $1.2 billion in the fourth quarter of last year, more than six times its loss from the same period in 2009. Perhaps more troubling were the bank's warnings about what might be coming: The company could be forced to pay out as much as $10 billion to resolve some disputes over the toxic mortgages it sold to investors around the globe.
. . .
Borrowers continue to default on loans. Allegations of robo-signing and other irregularities in foreclosure practices have made it harder for the banks to evict delinquent homeowners, sell the houses and cut their losses. Government investigations loom.

I don't have a lot of sympathy for the banks. They get bailed out by the government repeatedly either through the dirty Fed (W.C.'s term) or by direct intervention. They bought this trouble themselves with shoddy loan practices and lack of transparency. Even though the article stated that Wells Fargo and Chase have improving profits, I am concerned that the banks are facing big losses on dud loans, that will now be even more difficult to recover, because of past bad practice.

Ron Paul Will Head Fed Oversight Committee

Good news. The Republican leadership didn't cave to Wall Street and deprive Ron Paul of the leadership position as chair of the House Domestic Monetary Policy Subcommittee. This is great news considering this Bloomberg News report from December 2:

Five GOP leadership aides, speaking anonymously because a decision isn't final, say incoming House Speaker John Boehner has discussed ways to prevent Paul from becoming chairman or to keep him on a tight leash if he does.

I have had my differences with Ron Paul, I think he can be a crank, and his criticisms of the Iraq war in 2008 were unfounded. However, the Fed needs oversight and accountability to the American people and Ron Paul is the man to provide it.

I blogged previously that I have become uneasy with Fed policies that seem to lack a clear connection to their mission of acting as the country's central bank and policies designed to keep some businesses afloat on your dime. A core Christian principle is that we all need accountability and this goes for purportedly infallible institutions as well. I look forward to Federal Reserve Board of Governors members answering under oath how they perform their duties without favoritism and how they came to bail out businesses not even remotely involved in banking.

I am not advocating abolishing the Fed as Ron Paul has, only that it receive oversight and be held to the same level of scrutiny as all of our governmental institutions.

Converting B-Daddy on the Fed

W.C. Varones and Jr. Deputy Accountant have been a harsh critic of the Federal Reserve. I have not been on this bandwagon, seeing the reserve as a necessary evil, kind of like government itself. However, the need for transparency and oversight at the fed is revealed by a little transparency. The Fed has spread around money to foreign banks and U.S. companies that are not even banks in a disgusting display reminiscent of sailors on shore leave, except sailors don't print their own cash.

From the article:

When Lehman Brothers failed Sept. 15, 2008, borrowers started to line up for the PDCF. That day, the single-biggest loan went to Barclays Capital, the investment bank of U.K. lender Barclays PLC that eventually bought a big piece of Lehman out of bankruptcy. Several foreign banks benefited from the program, including Deutsche Bank, BNP Paribas and UBS.

Apparently, we have Bernie Sanders to thank for leading this fight.

Thanks to Mr. Sanders, who has been leading the fight to make the Fed more transparent, the Government Accountability Office will conduct an audit of the Fed's emergency actions going back to the start of the crisis in 2007.

The fed claims that it was responsible for averting economic disaster and that it made money on the operations.

The Fed and major Wall Street players defended the crisis lending actions in remarks Wednesday. Dallas Fed President Richard Fisher said the central bank "stepped into the breach" in its role as a lender of last resort.

"We took an enormous amount of risk with the people's money," Mr. Fisher said, speaking at a community forum in Killeen, Texas. But the crisis lending programs are now all closed, he said, "and we didn't lose a dime, and in fact we made money on every one of them."

I await the audit findings before I hit the "believe" button.