The further to the left or the right you move, the more your lens on life distorts.

Wednesday, March 18, 2009

Three Simple Things

It appears that the Obama administration and our Democratic congress believe that the only three elements in their efforts to resurrect our broken economy are: (1) to spend trillions (as in $1,000,000,000,000) of taxpayer dollars on stimulus programs that are more about generic spending than economic recovery; (2) to spend addition trillions propping up the financial companies, banks, and insurance companies that got us into this mess in the first place, and (3) expressing mock outrage when these same culprits pay obscene bonuses to the masters of the universe who were directly responsible for designing and implementing CDOs and related toxic instruments.

Yet as trillions in debt are heaped on our children and grandchildren, it’s rather odd that Obama and company haven’t done three simple things that would cost almost nothing and, in the end, might have considerably more impact than their big government solutions.

1. Eliminate the “mark-to-market” rules that restricts banks from making loans right now. Steve Forbes comments on this when he writes:
…mark-to-market has been demolishing financial balance sheets with book losses. Banks have more cash than ever before, but their regulatory capital (the amount of capital required by regulators for industries like banks and life insurance) is continually being eviscerated by lawsuit-fearful auditors and stupidly aggressive bank regulators. As Brian Wesbury and Robert Stein said on, "The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans."

The cost of eliminating “mark to market is almost zero, yet the impact could free up capital and reinvigorate the credit markets. Why hasn’t it been done?

2. Reimposing the “up-tick” rule on short selling and abolishing naked short selling. Again Forbes comments:
Previously short-sellers had to wait for a stock to go up in price before trying to hammer it. Now the uptick road bump is gone, thanks to the SEC's repeal (based on faulty research) in July 2007. It's no coincidence that since the repeal market volatility has gone berserk. Why is Schapiro reluctant to crack down on naked short-selling? After all, short-sellers, including exchange-traded funds, are supposed to borrow the shares before they sell them.

Hedge fund managers are notorious for shorting stocks (betting that stocks prices will go down) and in doing so, fueling precipitous stock market declines. Given the seriousness of this crisis, why haven’t simple and effective rules to control short selling been put into place?

3. Quietly suggesting that the Federal Reserve loosen the money supply. Forbes comments:
Contrary to impression, the Fed has been tightening, shrinking its balance sheet by nearly $400 billion since December. In the face of the most severe banking/insurance crisis since the 1930s, the squeeze absolutely defies belief. This would be like a fire department deciding to roll up some of its hoses when a big house is a flaming inferno. Bernanke says he fears future inflation, but that's like those firefighters being afraid to cause water damage to the furniture. Right now we're in a bone-crunching deflation.

We will face future inflation, but that’s more about the administration trillion dollar spending spree that about the Fed’s interest rate and internal anti-inflationary policies. Why hasn’t the Fed acted more decisively?

Over the next few weeks, it’s likely that the President and Congress will ask the taxpayers to spend another trillion dollars to buy up the toxic assets that the master of the universe have created. That’s right, to date, the trillions spent haven’t done that. Surprised?

Many of my left of center friends have remarked repeatedly how happy they are that the new administration is, in the words of David Brooks, a “valedictocracy”— a white house “run by onetime high school valedictorians and Ivy Leaguers.”

Hmmm. If these guys are so smart, you’d think they would have tried the three no cost options noted earlier before they spent trillions upon trillions of dollars. Especially when there's virtually no down side to doing so. I wonder why the validictocracy haven't tried the simple before choosing the complex? I guess it's because they're just so darn smart. Aren't they?