Please give me a credible alternative to the Democrats! I used to be a full-fledged supporter of GOP, back in the days of Reagan and even GHW Bush. You remember, back when you stood for fiscal responsibility, limited government, and a competent national defense. Back before you became the Sarah Palin / Glenn Beck / Sean Hannity party (a.k.a. the stupid party). Well, needless to say, you lost your way. I am not sure which is worse – the meddling in our personal lives, the incompetent use of the world’s best military, or the unrestrained spending that would shame a drunken sailor on his first weekend leave in three years. Clearly we grew apart.
But sadly, the Democratic Party provides a pretty unsatisfactory alternative. For starters, I can’t even tell where I agree with them and where I disagree with them, because even though they control both Houses of Congress, they can’t even agree with each other long enough to pass anything. My main issue with their party leader in the White House isn’t his occasional verbal pandering to the liberal left, since that has amounted to absolutely nothing as far tangible results. No, my biggest problem with Mr. O is that he has continued all of the Bush era mistakes (e.g. the crazy deficit spending, the incompetent use of the world’s greatest military, the failure to implement any meaningful and effective financial market reforms, etc. – even Guantanamo is still open!).
So listen up, Republican Party! This is your big chance for redemption. There has been a lot of screaming during the past few days about Obama’s recent proposal to (gasp!) increase bank regulation. For the most part, your reaction has been something along the lines of “What is he thinking? The regulations that we’ve had in place for the past ten years have worked just fine.” This is a BIG mistake. The old regulatory system did NOT work fine in the years that culminated in 2009. When you defend the status quo then John Q. Public concludes that either (a) you are in the pocket of Wall Street, or (b) you are just not very smart (confirming our worst Palin/Hannity suspicions). Either way it is bad for the Republican Party and bad for the country.
I will admit that I am not a huge fan of Obama’s first shot at increasing bank regulation last week. It smacks of populist pandering, unfairly penalizes some and favors others, and only partially addresses the real issues. So again, Republican Party, this is your big chance. Stop being the party that says “NO.” Stop being the party that says “all new regulation is bad.” Don’t just tell us why the Democrats are wrong. Instead, propose something that is better! Propose some effective regulatory alternatives to the Obama plan. Give us some fixes that will prevent future problems and encourage productive capitalism. The Republican Party needs that. The whole country needs that.
Just to show you that my heart is in the right place, I am going to help you out. Here is a recap of my list of regulatory fixes that will prevent future problems and encourage productive capitalism. (For the rationale and details on these proposals, please see the Appendix to my October 19, 2009 post “Forget all the screaming about socialism. Have We Fixed Anything?”)
1. Reinstate the uptick rule
2. Prevent financial institutions from getting “too big to fail”
3. Regulate hedge funds
4. Regulate or prohibit dark pools, naked access and high-speed trading
5. Implement meaningful margin requirements for derivatives
6. Increase margin requirements on leveraged ETF’s or prohibit them completely
7. Put some teeth in the prohibition on naked shorting
8. Increase financial institution capital requirements
9. Increase deposit insurance levels
10. Stiffen regulation and disclosure requirements for consumer credit and residential mortgages
Democrats have proposed addressing about 10% of this and have actually implemented almost none of it. Republicans, this is your opportunity to win back John Q. Public and save the country in the process.
Tuesday, January 26, 2010
Tuesday, January 12, 2010
New Year, Same Worries
By any objective measure, 2009 was an absolutely stellar year for investment returns. But for obvious reasons, after 2008 and early 2009, no one feels like celebrating too hard. The future looks… perhaps not scary, but worrisome at the very least.
Maybe we should all lighten up, at least for now. All of that fiscal and monetary stimulus will continue to push the economy forward and markets up, at least for a while. I mean, what are you going to do? Sell your stocks and bonds and then let the cash sit around making about 0.1%? That’s no fun.
But (and there’s always a but) sooner or later all that cheap money and government spending will cause inflation, or so everyone says. That fear is driving much of today’s unease, and has driven up gold and oil to very high levels (in spite of declining oil demand and excess production capacity).
Certainly this inflation scenario is possible, but I do not believe it is the most likely outcome. The fear of inflation seems so wide spread that it is far more likely that before the governments of the debtor nations (mainly us!) are able to spend their way to inflation, lenders (i.e. purchasers of government bonds) will say “no way.” Put another way, governments will face a choice: Either show some fiscal and monetary restraint, or have rising interest rates forced upon them by bond buyers. Either way, it slows the economy and the worry becomes recession and deflation.
When that happens, the question will be which path will we take? Will the government and the Fed capitulate to the market, reigning in government spending and tightening monetary policy? I hope so, because even though this would be painful for a while it would finally be the beginning of the great unwinding of the excess leverage that drove our economy too far and too fast for too long. Perhaps we will finally come to grips with the fact that you can’t borrow your way out of having too much debt. While painful, this would set the country up for future prosperity for our children.
The other option is much worse. If our government can’t find some fiscal and monetary restraint then Treasury buyers will demand higher and higher interest rates as the government borrows to fund its spendthrift ways. This will quickly become untenable, because (as noted above) these rising interest rates on treasuries will drive up rates throughout the economy, pushing us back into recession and perhaps deflation. The feds will have two ways to get around this – one is quantitative easing (basically the Fed just runs the printing press to fund the deficit) but this would make the problem worse as world markets would panic at the prospect of the U.S. becoming Argentina. For that reason, I think that outcome is extremely unlikely.
The likely outcome in this scenario is actually much simpler, and (at first) much more benign. The government could start selling more TIPS (inflation protected treasury bonds). If investors start demanding higher rates on standard treasury bonds dues to concerns over our free-spending easy-money polices, then we can issue them TIPS at much lower rates because they are inflation protected. This will work and for a while will continue to enable our government to keep the good times rolling. But in the long run it is horribly insidious, because when inflation does begin to rear its ugly head both interest payments and outstanding principal amounts on TIPS will skyrocket. You can’t inflate your way out of debt when it is indexed to inflation, so the only two options then will be to (finally, belatedly) reign in spending and monetary policy (much more painful for having been postponed several more years) or just become Argentina after all and default on your sovereign debt.
So watch TIPS issuance – it could keep the party going a while longer, but too much could be a sign of even bigger problems in the long run.
BTW, did you see the article in yesterday’s WSJ titled “U.S., in Nod to Creditors, Is Adding TIPS Issues”? I wish I was making that up.
Maybe we should all lighten up, at least for now. All of that fiscal and monetary stimulus will continue to push the economy forward and markets up, at least for a while. I mean, what are you going to do? Sell your stocks and bonds and then let the cash sit around making about 0.1%? That’s no fun.
But (and there’s always a but) sooner or later all that cheap money and government spending will cause inflation, or so everyone says. That fear is driving much of today’s unease, and has driven up gold and oil to very high levels (in spite of declining oil demand and excess production capacity).
Certainly this inflation scenario is possible, but I do not believe it is the most likely outcome. The fear of inflation seems so wide spread that it is far more likely that before the governments of the debtor nations (mainly us!) are able to spend their way to inflation, lenders (i.e. purchasers of government bonds) will say “no way.” Put another way, governments will face a choice: Either show some fiscal and monetary restraint, or have rising interest rates forced upon them by bond buyers. Either way, it slows the economy and the worry becomes recession and deflation.
When that happens, the question will be which path will we take? Will the government and the Fed capitulate to the market, reigning in government spending and tightening monetary policy? I hope so, because even though this would be painful for a while it would finally be the beginning of the great unwinding of the excess leverage that drove our economy too far and too fast for too long. Perhaps we will finally come to grips with the fact that you can’t borrow your way out of having too much debt. While painful, this would set the country up for future prosperity for our children.
The other option is much worse. If our government can’t find some fiscal and monetary restraint then Treasury buyers will demand higher and higher interest rates as the government borrows to fund its spendthrift ways. This will quickly become untenable, because (as noted above) these rising interest rates on treasuries will drive up rates throughout the economy, pushing us back into recession and perhaps deflation. The feds will have two ways to get around this – one is quantitative easing (basically the Fed just runs the printing press to fund the deficit) but this would make the problem worse as world markets would panic at the prospect of the U.S. becoming Argentina. For that reason, I think that outcome is extremely unlikely.
The likely outcome in this scenario is actually much simpler, and (at first) much more benign. The government could start selling more TIPS (inflation protected treasury bonds). If investors start demanding higher rates on standard treasury bonds dues to concerns over our free-spending easy-money polices, then we can issue them TIPS at much lower rates because they are inflation protected. This will work and for a while will continue to enable our government to keep the good times rolling. But in the long run it is horribly insidious, because when inflation does begin to rear its ugly head both interest payments and outstanding principal amounts on TIPS will skyrocket. You can’t inflate your way out of debt when it is indexed to inflation, so the only two options then will be to (finally, belatedly) reign in spending and monetary policy (much more painful for having been postponed several more years) or just become Argentina after all and default on your sovereign debt.
So watch TIPS issuance – it could keep the party going a while longer, but too much could be a sign of even bigger problems in the long run.
BTW, did you see the article in yesterday’s WSJ titled “U.S., in Nod to Creditors, Is Adding TIPS Issues”? I wish I was making that up.
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