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U.S. stock index futures were flat before U.S. open on Friday. Asia
and Europe were mostly down. The Euro is still above 1.23 but may be
floundering some.
News For Thought
More trouble ahead for Minerals Management Services. According
to The Wall Street JOurnal: "The U.S. agency in charge of regulating
offshore oil drilling lacks sufficient guidelines and inspectors to police
the industry's operations in the Gulf, the acting inspector general of
the U.S. Interior Department is expected to tell a congressional panel."
Many in Congress were short selling companies that they were overseeing
during financial crisis. According to The Wall Street Journal: "In 2009,
amid the federal government's most aggressive intervention in the U.S. economy
in decades, some members of key congressional committees placed bets with their
own money on the stocks of companies they helped oversee, according to a preliminary
analysis by The Wall Street Journal of public disclosure filings made public
Wednesday." The Journal added: "There isn't evidence that any of the 2009 trades
identified by the Journal involved nonpublic information or broke any laws. Members
of both parties and both chambers traded regularly, although in some cases the
trades were made by spouses rather than by the legislators themselves. Whereas
many government officials are prohibited from making certain types of investments
in which they might have a conflict of interest, members of Congress face relatively
few restrictions." And "Under the codes of ethics set by the House and Senate,
members are generally free to trade stocks or other securities—and to "sell short," or
bet that investments will fall in price—even in the case of companies whose fortunes
may be directly influenced by legislative actions."
But it just feels so wrong, doesn't it? They write the tax code and evade paying
their own taxes. They make bad laws and sell the companies that the laws affect
short. And then it's all perfectly legal, because, they, of course, make the
laws.
Just another reason to consider restructuring the government.
Five Republicans and three Democrats being probed for fundraiser timing
issues. According to The Washington Post: "The Office of Congressional
Ethics is investigating eight lawmakers who held fundraisers within 48 hours
of a major House vote on a Wall Street reform bill or received substantial donations
from business people with a financial stake in the bill, according to congressional
sources and letters." The Post added: "The probe is focused on whether the timing
of accepting the campaign checks created an unacceptable appearance of a conflict,
according to sources familiar with the investigation and letters sent by the
OCE to lobbyists requesting information. The OCE's spokesman declined to comment
for this article, citing the ongoing nature of the investigation." Several of
those investigations have made statements denying wrongdoing.
TARP Deadbeat banks on the rise. According to Reuters: "More than
90 U.S. banks and thrifts missed making a May 17 payment to the U.S. government
under its main bank bailout program, signaling a rising number of lenders are
struggling to meet their obligations." According to the report: "It was the first
missed payment for 23 of the banks; for the others, it was at least their second
miss. The number of banks missing their TARP payments rose for the third straight
quarter. In February, 74 banks deferred their payments; 55 deferred last November."
The end of free checking is near. According to The Wall Street
Journal: " Bank of America Corp. and other banks are preparing new fees on basic
banking services as they try to replace revenue lost to regulatory rules, in
a push that is expected to spell an end to free checking accounts for many Americans.
Free checking accounts, which have been widely available for more than a decade,
have been a boon to middle-class consumers and attracted low-income customers
to the banking system for the first time." The unintended consequences of Congressional
action will continue, and no one can stop them, until November. |
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Former Federal Reserve Chairman Alan Greenspan is calling
for a "tectonic shift" in fiscal policy featuring "politically toxic cuts
or rationing of medical care, a marked rise in the eligible age for health
and retirement benefits, or significant inflation" to close the U.S. budget
deficit and rein the debt binge of the U.S. Federal government.
In a Wall Street Journal editorial, Greenspan lays out an interesting case for
how we got here and what needs to be done. According to "The Maestro," the major
problem is that the U.S. is running out of room with which to continue its borrowing
ways. Mr. Greenspan notes: "Despite the surge in federal debt to the public during
the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term
interest rates, the typical symptoms of fiscal excess, have remained remarkably
subdued. This is regrettable, because it is fostering a sense of complacency
that can have dire consequences."
In fact, he says that the problem is due to the decreased demand for credit and
the reluctance of banks to extend it. This has left banks with plenty of money
with which to invest in U.S. Treasuries, thus artificially lowering interest
rates and creating that false sense of security.
According to Greenspan: "Beneath the calm, there are market signals that do not
bode well for the future. For generations there had been a large buffer between
the borrowing capacity of the U.S. government and the level of its debt to the
public. But in the aftermath of the Lehman Brothers collapse, that gap began
to narrow rapidly. Federal debt to the public rose to 59% of GDP by mid-June
2010 from 38% in September 2008. How much borrowing leeway at current interest
rates remains for U.S. Treasury financing is highly uncertain."
Here is where it gets interesting. Greenspan says that because the U.S. can create
money out of thin air, U.S. Treasury bonds are credit risk free, meaning that
they will be backed by the endless supply of mythical "legal tender" fiat money
printed by the treasury. The problem is that they are not free of interest rate
risk. In other words, as Mr. Greenspan notes: "they are not free of interest
rate risk." What that means is that "If Treasury net debt issuance were to double
overnight, for example, newly issued Treasury securities would continue free
of credit risk, but the Treasury would have to pay much higher interest rates
to market its newly issued securities."
And here is where he gets serious, noting: "The current federal debt explosion
is being driven by an inability to stem new spending initiatives. Having appropriated
hundreds of billions of dollars on new programs in the last year and a half,
it is very difficult for Congress to deny an additional one or two billion dollars
for programs that significant constituencies perceive as urgent. The federal
government is currently saddled with commitments for the next three decades that
it will be unable to meet in real terms. This is not new. For at least a quarter
century analysts have been aware of the pending surge in baby boomer retirees."
In other words, there won't be enough workers to foot the bill in the future
as the work force has shrunk, or more specifically is growing more slowly.
What Mr. Greenspan doesn't explain is why this is happening. He makes no reference
to the shipping of U.S. jobs overseas, or the reliance on automation to yield "productivity." And
he doesn't mention the increase in people that don't work or those that work
and don't pay taxes. The net effect is the same, but it's also important to note
why the U.S. work force is shrinking.
Indeed, Mr. Greenspan's main point seems to be that "We cannot grow out of these
fiscal pressures" as "The product of a slowly growing labor force and limited
productivity growth will not provide the real resources necessary to meet existing
commitments."
Conclusion
Mr. Greenspan sounds pretty much as if he's awake. And he makes excellent points,
especially when he calls for the government to stop spending the taxpayer's money.
Yet, and despite the fact that, warts and all, we think he's the best Fed Chairman
that's ever been, he fails to mention one important theme in his argument. The
U.S. economic crisis, started by the collapse in the subprime mortgage sector,
was preventable, and his one mistake, in our opinion, as Fed Chairman, was to
champion the abolition of the Glass-Steagall Act, which kept investment banking
and community banking separate.
When the Glass-Steagall Act was repealed it opened the door for Goldman Sachs,
Merrill Lynch, Bank of America and Deutschebank to sell worthless mortgage backed
CDOs to community banks while simultaneously selling and buying credit default
swaps on the same instruments hedging their own potential losses and speculating
against further losses by those who held the soon to be worthless CDOs.
Let's put it another way. If Glass-Steagall would have remained in place, Goldman
and the rest of them would have been able to peddle their wares to hedge funds,
wealthy investors, and other fools who would have fallen for them. But not to
banks, as banks were only allowed to invest in mortgages directly and in other
mainstream investments. When the line between investment and community banks
blurred, the search for yield became a free for all that let the fox in the hen
house.
It was Greenspan's insistence, and President Clinton's signature on the bill
that repealed Glass-Steagall that opened the door to today's plight. To be sure,
the budget deficits have been climbing for decades. And Congress shares plenty
in the blame department. But no one had the pull of Greenspan during the heady
days in which the furor was to break down the walls that had been created by
Glass-Steagall.
That Greenspan isn't mentioning Glass-Steagall means that he doesn't want to
open a whole new can of worms and tarnish his image further, or that he still
doesn't get it. Either way, he's doing the financial system a disservice by avoiding
the subject. The fact that should not be lost in this situation is that the Glass-Steagall
act was put in place after The Great Depression in order to separate investment
banking from community banking. And it worked as all major recessions and economic
downturns prior to this most recent ones were much less damaging to the real
economy. Even the savings and loan debacle of the 1980s was relatively tame compared
to this. The reason is because Wall Street's infection of the Main Street banking
system was much more limited than the incursion caused by the subprime mortgage
backed CDOs and the ensuing credit default swap derivative bets on their failure.
We have no problem with big money guys betting against each other and speculating
on the end of the world. What we have a problem with is when their power games
and high stakes casinos affect the economy to a degree beyond repair, which is
what happened as a result of the Glass-Steagall barrier being broken down.
So, Mr. Greenspan, we appreciate the advice. And we agree that government should
spend a whole lot less and tax us less. But that's not what's going to happen,
at least not with this Congress and this administration. Perhaps, sir, you should
write an editorial that addresses Glass Steagall, and address some solutions
for those of us who are going to be holding the bag for your contribution to
the mess. And maybe you should consider lobbying for the reinstatement of Glass-Steagall,
lock, stock, and barrel so that community banks can start lending money and investing
in their communities again, instead of contributing to the low interest rate
mirage that you so aptly describe.
Otherwise, all we have to look forward to are higher taxes, worse medical care,
and a really crappy standard of living. That's not exactly what Ayn Rand had
in mind with regard to the way free markets are suppposed to work.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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