Clinton Agrees about Goldman

Former President Bill Clinton, not Hillary, that is. I mention this only because it was unexpected. First, I didn't expect to see Bill in the press commenting about Goldman; second because I would have guessed he'd spin it somehow on account of his links to the Administration's tough stance. Rather, here is what Bill had to say in a CNBC interview:

"base on what I read in the press about the--of Goldman and the CEO, it didn't seem to me that that was illegal, what they did."

"If we don't think it's advisable for people to be gambling one step removed on derivatives because it adds to the instability inthe marketplace, then there are plenty of ways to deal with that without claiming that it's illegal."

"...what we ought to do is have an honest conversation about what really happened, how to fix it, and how to get what's best about vital capital markets...I think to lower lower the rhetoric and talk about the facts, that's how we ought to deal with this."

Well, that was more or less my sentiment about SEC vs. Goldman. Even Slick Willie haters have to admit he can be pretty darn pragmatic sometimes. Regardless, unless a scandal is involved, I doubt anyone will pay attention to Bill's advice.

Goldman vs. SEC

Everyone "knows" Goldman Sachs is the root of all evil and that this SEC complaint is just more proof of that fact. While I'm not going to defend the morality or ethics of GS in any way, shape or form, I will say this is a pretty weak complaint on the surface. In fact, I think it might have ulterior motive.

The complaint is relatively short at 22 double-spaced pages. (Why do government documents always look like they were typed in 1952? Haven't they heard of Microsoft Word?) You can read it for yourself here. Anyway, the crux of the issue is a "synthetic CDO" called ABACUS 2007-AC1.

Chinese Effrontery, part II

We have an old saying, "the pot calling the kettle black". This English proverb simply means "when you accuse a person of doing something that you are guilty of doing yourself."  Perhaps there is no such similar Chinese proverb? I wonder this aloud because China's Premier is doing just that.

Obama proposes bank taxes, reforms

A couple of thoughts on the proposals this week. Let's start with this proposed "bank tax". Given the outrage centered around bank bonuses, the tax is supposed to penalize the banks for requiring government help last year (in the form of TARP). The idea is that the banks benefited from TARP and TARP will probably lose money on some portion of its loans, therefore we'll tax all banks to make up any shortfall to the return of taxpayer funds.

Market Rally Explained by Fed/Treasury Conspiracy

Ah, the first grand conspiracy theory of the new decade. That's what my email tells me anyway. A friend informed me about a story that a major Wall St. research shop has publicly said it thinks the Fed and Treasury are behind the massive stock market rally of 2009. According to sources (the WSJ's MarketWatch and Financial Times), founder and CEO of TrimTabs, Charles Biderman, claims that the money required to raise the market so much could not be accounted for, hence the government must have done it. I'm paraphrasing of course, so let's see what he really said:

TARP update and a few afterthoughts on the crisis of '08

There has been a flurry of activity lately surrounding TARP. You remember "TARP" don't you? The legislation that was passed with great debate and outrage in early October 2008. It was derided as a massive "bank bailout" sure to cost the taxpayers hundreds of billions. Even more important, many politicians, pundits and commentators shouted that in addition to the cost, it wouldn't work. Not only would TARP fail, but the proper course of action was to do nothing. Mostly Republican and free-market purest voices were heard to repeat, to varying degrees, that such intervention was futile- simply letting events unfold as they may is the only truly prudent course of action. No "bailout" was needed, they said; the system would right itself, they said; we aren't really facing a complete financial meltdown they argued.

Raising Taxes on Hedge Fund Managers

Ever wonder how hedge fund managers can become centi-millionaires or even billionaires in relatively short time spans? It isn't uncommon for a hedgie to build such a substantial net worth in less than a decade. Besides the extremely generous fee structure they command (I blame the customers for actually paying it), there is another factor that contributes to their wealth accumulation: a tax break. (In case you forget what a hedge fund is, see our older post on hedge funds.)

Some bearish news for the dollar

Since I wrote the 3-part piece about the dollar (parts I, II, III), some nasty things have occurred in Washington. It was just one-month ago that I made the following warning in "Part III: Can the Dollar Weaken Anyway?"

"Another very bad outcome for the dollar may happen if Congress starts dismantling the Fed’s independence"

Guess what?

Chinese Effrontery

Monday's WSJ brought a front page article that made me LOL at the hypocrisy. The sub-headline was all it took. The article in question is "China's Blunt Talk for Obama" and the humorous sub-headline "Regulator Says U.S. Policy Puts Global Recovery At Risk as President Arrives in Beijing". What specifically is so funny? Let me quote:

GDP, Truth Twisters and, well, Duh

A couple of noteworthy items made their way to my attention this week and unfortunately both are sad. Let's start with our official paper of record, The Wall Street Journal. Yesterday, the WSJ featured a 6-column article on the top of page 2 about the Fed's "Path to Higher Interest Rates". The article goes to great lengths speculating about how the Fed will raise rates when it ultimately decides to do so. Not only did I waste a few moments of my life reading this useless piece, but my only response was, well, "duh!" More precisely, many many "duhs".

Still Worried About All Those Reserves?

Many commentators still seem to be screaming that hyper-inflation is around the corner. The crux of their argument is that the Fed has pumped hundreds of billions into bank reserves. There is a chart circulating, which you may have seen, illustrating this explosion of credit. After all, reserves normally translate directly into fresh lending. I have reproduced the chart for you here:

Keynesian economics wrap up

A few days ago Brett and Julio sparred over Keynesian economics in our Second Great The Long Run Great Debate II. (Not to give a lot away but we're thinking of having the third as a pay-per-view event in Lagos.) Now lest you think my job in this debate was walking into the ring in a bikini with the title card, you stand corrected. Actually, I thought that was my job but Brett and Julio pointed out that in The First Great The Long Run Great Debate 1.0, Brett did a postmortem q&a. Right. So that duty now befalls me.

Keynes was right; then subsequently abused

It is a delight to be with you here today, discussing the policy prescriptions of the great John Maynard Keynes. (I like to pretend like it is an actual, face-to-face Ivy League-style debate.) Though I disagree with my opponent, I do appreciate his view. Unfortunately for him, it is just plain wrong.

Keynes wasn’t all wrong. He just wasn’t all right.

Keynes’ General Theory of Employment, Interest and Money revolutionized economic thought in 1936 and ignited a debate that continues to this day. Prior to Keynes, classical economists correctly believed that economies have self-correcting mechanisms that maintained prosperity and full employment. Keynes argued that the propensity of firms to invest could be too low compared with that of household savings, leading to recurring depressions. Keynes believed that through government fiscal policy, i.e. lower taxes and higher spending, that the government could help the private sector and restore full employment. Politicians seem to have forgotten the part of the policy about lower taxes for the most part.

Congress agrees

Way back last December, I wrote about corporate jets where I made the case that they are valuable and justifiable business tools despite Congress being in an uproar given the pending auto industry bailout. Many of you agreed with Congress that such flight privileges were outrageous- especially on the taxpayer's dime. It seems that Congress has had a change of opinion and thinks private flights are just fine, especially when paid for by the taxpayer.

A quick thought on healthcare reform

I have a quick thought on healthcare reform tonight. One of the many arguments against the Obama/Dems current proposal to cover more people is where will we get the money from? Estimates expect the tab to run near $1 trillion over the next decade. Many extend this idea into something on the order of "why should I pay for someone else's coverage or care?"

What I haven't seen mentioned, is that we are already bearing the cost of their care. Huh? Well, there is no free lunch. That much we know. If uninsured people end up in the hospital, which they inevitably do, who foots the bill? Either the hospital or the taxpayer do, both of which must pass the cost along to the rest of us through higher prices or taxes lest they would be out of business. And we all know that ER visits and emergency care are much more expensive- perhaps an order of magnitude more- than regular care. Those pnemonia cases in the ER, for example, generate bills in the thousands compared to a few doctor visits and some antibiotics. The same goes for most treatments.

Of course, this isn't an endorsement of the current plan. There are plenty of valid arguments against the plan, this just isn't one of them.

Edit- Once you've read this, please be sure to read the comments.

The Amazon Tax

In these cash-strapped times legislators everywhere are trying to find creative ways to raise revenue. California, for example, is issuing IOUs to help temporarily ease its cash crunch. Lawmakers in both Rhode Island and North Carolina are trying another tactic: they are trying to tax the internet.

Before we pass judgement, however, a little background is in order. Way back in the mid 1990's, when the nascent internet was just developing "ecommerce" in earnest, Congress decided it was best not to tax the internet so as not to nip in the bud the growth engine that ecommerce was deemed to be. State legislatures were and still are very worried about lost sales tax revenue. If a company has no physical presence in your state, the state can not collect sales taxes from it. So when Amazon ships a book from Washington to Colorado, Colorado can not collect sales tax because Amazon has no presence in CO. Washington does not tax Amazon's sales (unless in WA) because the shipment to CO is inter-state commerce, protected from tax by the Constitution.

Idiot Revisited: Fisher

A while back, last September 9th to be exact and right before the world really fell apart, I took some flack for calling the Dallas Fed President Richard Fisher the economic idiot of the week. If you don't recall why, let me help you. As the world was rapidly deflating in a giant credit crunch, Mr. Fisher's position was described in the Fed's meeting minutes as

"While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation." [Emphasis mine]

A few months later he changed his tune and accepted that the right thing to do during a credit crunch is not tighten credit, but rather expand credit and liquidity. Thankfully, Bernanke already knew this.

I raise this issue again because Mr. Fisher was in the news again today. Bloomberg reported on some of his remarks this week. I'll quote from Bloomberg's article (again, emphasis mine):

Obamanomics- Chrysler Style

Republicans haven't been shy about branding Obama a socialist, communist or anti-business liberal. After all, they love labels. That Obama leans left is no secret, but there really hasn't been a evidence for any of those labels to stick. I use "Obamanomics" not to denote any particular philosophy, but to capture the whole of Obama's actions in the economic realm. What I see so far is wildly inconsistent.

Stress Tests

Ever since Geithner announced they would be conducting "stress tests" on the banks a few months ago, people have been speculating on the outcome and what it will mean for the markets. Some argue that the government won't publish negative results because that would spook the markets. Others hypothesize that good results will be viewed skeptically by the markets, owing to the fact we all "know" the banks are in bad shape.