Conservative Logic

An economic guide to politics, designed for post-Baby Boomers

Archive for the ‘Economy’ Category

What’s In Your Wallet? Uncle Sam.

Posted by A Hamilton on April 24, 2009

It’s looking like Obama is now supporting the idea of adding new regulations for credit card companies.

America’s economically ill-advised populist lurch continued today as Obama met with leaders from major credit card companies and lectured them on the evils of their industry, then threatened them with increased regulation and oversight by the Federal government. 100 days ago, such patronizing interference would have been an unprecedented act for a US President — but it is starting to become a recurring theme in the Obama Administration.

As the economy worsens and consumer credit risk increases, credit card companies have increased interest rates and fees on cardholders. This seems like a fairly logical business reaction to increasing unemployment rates and related nonpayment or default on revolving debt.

Obama wants to place limits on how high rates can go. He also wants to limit how credit card companies can impose and change fee structures for late payments — something he considers an area of abusive practice.

Perhaps Obama hasn’t considered the likely consequences of this move. It will certainly drive credit card companies to further reduce credit lines and become less willing to extend lenders new credit cards. The net effect will be to further reduce the amount of liquidity in the economy. The timing couldn’t be worse, as consumers and small businesses (another major constituency dependent on revolving credit from credit cards) already face significant challenges from banks that are reluctant to lend.

Or, perhaps Obama has considered the consequences of the move.

We’re all aware of the moral hazard created by the Community Reinvestment Act, which essentially drove mortgage lenders to extend credit to borrowers that might not have otherwise qualified for loans. The unintended consequence of this act contributed significantly to the economic havoc of the mortgage crisis.

If the credit card companies react to increased regulation by tightening up on available credit, how long will it be before the government steps in and mandates extension of credit to risky borrowers — a Community Credit Card Act? Ultimately, we could very well be looking at federal guarantees of consumer credit card debt, or even a situation where the federal government itself starts issuing credit cards directly in order to maintain the flow of credit in the economy.

When given the opportunity, Obama has almost always chosen to extend the reach of government into the private sector. This could set him up with another excuse to do just that. We’re on a slippery slope. The idea of government-issued credit cards is a scary one. Setting aside the privacy implications of the government keeping tabs on every purchase you make, do you really want the IRS knocking on your door if you’re late with a payment or two?

These regulations are being introduced at exactly the wrong time. Short term, they will reduce liquidity and slow economic recovery. Longer term, they could lead to a situation where once again, the taxpayers are stuck bailing out the most financially irresponsible members of society. When that happens, it’s future generations that inevitably foot the bill.


Posted in Economy, Obama | 2 Comments »

Does Obama Understand Finance and Economics?

Posted by A Hamilton on April 1, 2009

I’m increasingly convinced that Obama doesn’t have a firm grasp on the basics of how our economy functions, how corporations do business, and how our banking system works.

Recently, Obama was speaking about the stock market and referred to the “profit and earnings ratio”, which doesn’t exist. Presumably, he was referring to the P/E, or price-to-earnings ratio, which measures relative stock value. It’s one of the first, most fundamental ratios any new investor learns about the stock market.

Obama has also commented on the strong dollar. But the dollar isn’t strong. True, it’s rallied recently, especially versus sick currencies like the GBP, but nobody even marginally familiar with this long term trend would think to call the dollar “strong”:

Weakening Dollar

Obama’s background and experience is politics and law. He’s never run a business, or even held an executive role in government. When he speaks on economic issues (particularly without his teleprompter), he looks about as comfortable as John McCain… In other words, not very comfortable.

It would be easy to assume that Obama was educated on finance and economics basics at Harvard Law School. But as a Harvard Law graduate myself, I know how easy it is to get through HLS without a working knowledge of business essentials. For every graduate who focuses study on contracts, corporations, and tax law, there are other grads (like Obama) who choose to focus on Constitutional law, criminal law, or human rights law. As a result, many Harvard Law alums would struggle to differentiate an income statement and a cash flow statement. I suspect Obama falls right in this category.

Why is this important? Surely Obama has advisors to guide him? Maybe. But at the end of the day, he’s the guy making decisions. He needs to be  able to listen to the self-serving statements of lobbyists, industry insiders, economists, and government bureaucrats, and separate the truth from the BS. Can he do it this effectively without the basic education he needs? Irrationally, he seems to think so. He’s decided to insert himself directly into American business (firing CEOs, setting bonus payouts, backing GM’s transmission quality with a government warranty). So now a guy who probably has a limited understanding of basic capital structure, the proper role of debt, equity, etc., and the functioning of credit markets is creating policy to recapitalize both the automotive and financial services industries!

Perhaps most importantly, I don’t get the feeling that Obama appreciates our corporate and financial institutions. Granted, our banking system is a disaster. And the economy is in bad shape. But a long term perspective is essential. And over the long term, the way that our capitalistic, market-driven system functions has created more good for more people than any other system in human history. Destroy the incentives that make the market work, insert government (aka political) influence into every nook and cranny of the economy, and you break that engine. The long term result is inevitably slower growth and less good for Americans. Does Obama understand that by breaking the American social contract, he ultimately ends up killing the goose that lays the golden eggs that (in turn) pay for the fat government he loves?

In the final analysis, if Obama doesn’t know the basics of economics, finance, and business, he can’t make good decisions when presented with alternative policy choices. He can’t anticipate the long term impact of his choices. He is liable to be susceptible to ideological or populist approaches (like big government bailouts), rather than relying on tried-and-true methods for resolving problems (such as bankruptcy proceedings). So far, this is exactly what has played out in terms of policy from the Obama Administration. Scary times for American capitalism, indeed.

Posted in Credit Crisis, Economy, Obama, Taxes | 1 Comment »

Getting at the Roots of the Mortgage Crisis

Posted by A Hamilton on March 31, 2009

This excellent, detailed article suggests a rational approach to addressing the mortgage crisis (and with it, helping to get the broader economy on track) in such a way that the American taxpayer isn’t left holding the bag.

The economic logic of the piece is unassailable. It’s approach also carries merit because it remains consistent with traditional principles of corporate finance and governance. Sadly, our government’s plan takes a different, riskier, more expensive approach.

For all our sakes, let’s hope the Geithner plan works. But I am not optimistic. It fundamentally misdiagnoses the problem as a liquidity issues, rather than a capitalization issue. Nobel prize winning economist Joseph Stiglitz agrees.

Posted in Economy, Housing, Mortgage Crisis | Leave a Comment »

The Information You Must Understand

Posted by A Hamilton on March 29, 2009

This excellent slide show captures the essential information that every citizen needs to undertstand about our government. It is based on official Congressional Budget Office (CBO) information. It reveals a number of scary and appalling trends in our nation’s finance.

Here’s a little preview. The chart shows historical and CBO prohections of the federal government budget deficit as a percentage of GDP:

Budget Deficit

More on the implications of this later…. As well as an urgent policy recommendation from yours truly. Suffice to say, if the trend holds, future generations of Americans will suffer tremedously. Our current path simply is not sustainable.

Posted in Economy, Social Security, Taxes | Leave a Comment »

Even Krugman Thinks Geithner Is Wrong

Posted by A Hamilton on March 22, 2009

Geither’s plan to address the mortgage crisis has been unveiled. And it’s (unsurprisingly) a disaster. The plan misdiagnoses the roots of the crisis, and proposes a plan that not only creates a tremendous moral hazard for potential investors in toxic mortgage assets, but also put the US taxpayer on the line as the backer of an open-ended government guarantee that will likely cost us trillions.

And who benefits? Hedge funds. They’ll swoop in, gamble on the toxic assets, make a killing if they are lucky, and if they aren’t the taxpayers foot the bill. A nice little payoff to certain major Democratic campaign supporters.

You know it’s bad when even liberal lapdog economists like Paul Krugman and and pseudo-economist hacks like James Galbraith weigh in against it.

Wall Street reaction won’t be kind, either. The Obama Administration needs to get this one straight. Meanwhile, a Congressional Sword of Damocles hangs over us all. With the AIG bonus debacle, this Congress has shown that it has no compunction about passing retroactive legislation, and is likely to want its own say in the resolution of the mortgage crisis. As long as government’s position remains unclear, markets will continue to remain paralyzed, and the broader economy will continue to suffer.

Posted in Economy | 1 Comment »