Saving Wall Street

Clair McCaskill has solved the financial crisis. Only pay people $400,000 per year to run the largest banks in the world. That way we can make sure to attract the very best talent from around the globe who are willing to work for a few million less than they may otherwise be able to earn. I thought only Senators were dumb enough to do something like that, but maybe we'll find some takers.

Buy American Act

Nothing new, we should be used to this by now. The original Buy American Act was passed in 1933, although it has been scaled back significantly since implementation. The act is really just a way to appease lobbyists and generate valuable campaign contributions. This act as well as the wave of protectionism in the 1930's is also credited for amplifying a recession into the great depression. Glad we seem to be headed down that road again.

Wikipedia Link

Economic Nationalism

In the wake of the World's economic downturn, leaders across the globe are succumbing to the temptations of economic nationalism. Both the "buy American" clause in the stimulus package and recent strikes in the U.K. to protest foreign workers are frightening examples. Here are the economic basics of economic nationalism or mercantilism.

Mercantilism was the popular economic theory throughout Europe during the 16Th and 18Th centuries until Adam Smith came along and published The Wealth of Nations in 1776 (The second best publication of that year). Mercantilism is the premise that countries can achieve maximum wealth by maximizing exports, and minimizing imports leading to a positive trade balance. While this theory seems attractive for a firm, i.e. selling more than you buy, it has several downfalls for a national economy. First, when a country has a positive trade balance they are requiring their trading partners to be net purchasers of their currency which leads to currency appreciation. Keep in mind you do not want to import under mercantilist theory, so currency appreciation will only make your goods more expensive for your trading partners, and consequently lead to a decline in exports. The inflated currency will also make many imports cheaper; however, citizens will be forced to buy nationally made goods leading to profit extraction. The economic conflicts created by mercantilist countries were not limited to currencies and expensive goods, they led to several wars between European countries during this time period.

The classical economist David Ricardo, also helped to dispel mercantilism through his theory of competitive advantage. His theory was that both countries would be better off if they traded freely due to competitive advantages. For example if the U.K. is better at making cloth, and France is better at making wine, both countries will be better off France gets its cloth from the U.K. and the U.K. gets its wine from France.

Buying American is great, as long as we produce the cheapest. If the same product is available cheaper elsewhere, it's because they are more efficient at producing it. Our stimulus plan should be to take a good look at what we produce most efficiently and make sure the rest of the World knows we have a "For Sale" sign on those goods and services.

Buy American

Washington Post Article - Buy American

So much for keeping out the lobbyists and special interest groups. If we think this financial crisis pissed off the rest of the world, wait until "Buy American" goes through. Not to mention buying American is extremely wasteful and inefficient. If another country sells something cheaper than us, it's because they're better at making it and more efficient. If we want to stimulate our economy, we have to concentrate on producing the things we are better at and let other countries do what they do best.

Buying local is the same concept, and equally as irresponsible. If a company more than 50 miles away wants to sell something that's better and cheaper than what we can buy "locally" we're idiots not to buy it. Unless we're not spending our own money, and we are rent seeking in which case we should buy locally at all costs.

Principal reduction

Washington Post Article

5 reasons why principal reduction is terrible.

1. It encourages reckless debt behavior
2. Fosters fiscal irresponsibility
3. Banks won't lend if they think their loans might be reduced
4. I have to pay for it (my rate will be higher, or my taxes)
5. I acted responsibly, my principal is not being reduced

Infrastructure

Very good quote from: http://www.kipesquire.net/


It is true, for example, that “tax cuts won’t build schools.”
It is therefore also true that tax cuts won’t build schools that are too big, or too close to an already existing school, or have an Olympic-sized pool “because it would be nice,” or a top-of-the-line football field “because the other school has one,” or…
And a second Hoover Dam right in front of the first one is hardly a worthwhile infrastructure project.
Simply chanting “Infrastructure!” as if it were a get-out-of-debate-free card is hardly Nobel or Ivy League thinking.

Interesting Theory

It's interesting to see how government regulators view the financial system as opposed to businesses and Wall Street. In this article, Alan Greenspan discusses what the World's consolidated balance sheet would like. All we have is equity.

Article from The Economist

National Debt

I'm getting a bit tired of reading about the mounting National debt without all the facts. These are the minimum facts that everyone should be armed with when confronting a national debt pundit.

First off the headline number for the national debt which is now somewhere in the $13 trillion range is known as the gross debt. A better measure of a country's debt is its net debt which excludes debts to the government's own agencies such as Social Security. It doesn't make much sense to count debts to yourself as debt. Don't forget, you would also have an asset (the debt receivable from yourself.) The entitlements granted by Social Security are another issue; however, excluding them is appropriate especially since we are not including future receipts of the program.

The national deficit is measured in nominal terms, or the amount it would take to repay the debt today. Fortunately the debt is not due today, and will actually be repaid well into the future. When inflation is taken into account then we can evaluate the debt in real terms, or the amount of future assets we will have to forgo to repay the debt. If we are truly expecting increased levels of inflation from the current stimulus activities, why not take out debt in today's dollars and repay in tomorrow's less valuable dollars.

Finally, the majority of US debt is denominated in US dollars which requires repayment in US dollars. As long as the US government retains is ability to print money, they will have the option to create dollars to repay their debts. This option of monetary policy includes significant inflationary drawbacks, although it remains an option.

Most national debt references are misleading and fail to take into consideration other aspects of a country's assets or monetary situations that have pervasive impacts on the relevance of national debt as a metric. Proceed with caution when national debt is in play, it's most likely a precursor to opinionated rhetoric.

Stimulus Plan Faux Pas

One piece of Obama's proposed stimulus plan seems a bit lackluster for the touted forward thinking president elect. His proposed tax refund to business for losses they have incurred in past years or NOL's seems contrary to a campaign of change. Why would we want to give refunds to only the companies that have shown they are good at loosing money? It seems like the US economy would be much better off in the long run if we let the money losing companies go and gave money to profitable companies to grow their businesses.