Sunday, July 28, 2013

Markets, More Lies And Munipulation

To say the market is rigged is an understatement. After over 30 years of trading commodities, I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader you are wrong. An unholy alliance of the Federal Reserve, the government, and the too big to fail has left the rest of us in a precarious position. For the big boys, its insider information, and computer trading, this includes computing patterns that exploit where stops are placed, this improves their ability to wash the weak out of their positions.

The Plunge Protection Team (PPT) is not some urban myth or Oliver Stone-style conspiracy theory. It is hidden in plain sight, even though the U.S. Government prefers to be tight-lipped about it. The PPT was born out of the 1987 crash, it is formally known as the Working Group on Financial Markets, it was created by Executive Order 12631 and signed on March 18, 1988, by President Reagan. Just imagine the type of reversal Goldman Sachs and JP Morgan backed by the Federal Reserve can generate with a concerted effort to buy S&P 500 index futures at crucial support points late in the day, it is more than enough to turn the markets from red to green in the blink of an eye

Following the 2008 collapse, the market started showing some odd patterns and many of us saw these as the result of what we called the "plunge protection team" this team appears to have morphed into a full-fledged market manipulation vehicle over the years. When stocks like Amazon trading at an astronomical P/E miss earnings and actually lose money it is hard to explain how they reverse after hours losses to close the next day posting a new record close. May I suggest that the market has become so distorted it no longer reflects reality.

Promoting and linking this all together is the idea that higher equity prices reflect a strengthening economy and creates a wealth effect that drives consumer spending, with this in mind those pushing hope and confidence are all in. This is what drives the market as the souls in charge amass a fortune doing "god's work" by creating money out of thin air. The defense or argument that consumer confidence and the economy would be in far worse shape if "the to big too fail" had not manipulated the markets higher, is full of holes, and their motivation far less than noble.

The higher market prices mask many of the weaknesses we have created in the system while keeping intact pension funds and large banks higher prices have addressed none of the real problems, but merely set us up for a bigger fall. We have created an unsustainable house of cards that at some point will collapse under its own weight. While many investors are skeptical of the ever upward moving market any bears that put a toe into the water tend to be very timid and run tight stops, making them easy targets, and accomplices to those wishing to manipulate the market ever higher.

All this is supported by a mix of a "cheerleading" as teams of media shows spout market wisdom 24-7, advice from things like "don't fight the Fed" to "it is a risk on day" continues to push the markets ever higher. Beating the lowered earning expectations, or even missing a forecast is a recipe for higher stock prices. With great power should come great responsibility, it would serve those governing the market to take a long term view and realize they would benefit most by protecting and serving those in the marketplace, but greed tends to warp and distort reality.

If you think markets today are distorted, you are right. Distorted by artificially low interest, easy money, currency games, and more. A word to the wise, we have seen in the market a total disconnect from Main Street. It almost looks like those controlling this game are afraid to go into any weekend or holiday without a strong appearing market. Even a bad report on job creation is twisted and spun as to mean more Federal Reserve support for easy money policies and a reason to rally the market. No suggestion of weakness no matter how subtle can exist because it may begin to unravel or blunt the already fragile consumer confidence.

The bottom-line is that the higher the market goes the more vulnerable it becomes to a major collapse and sudden downward move. Lately, we are seeing some large quantities of money flowing across borders and into crazy investments. With each new rally I feel a bit of deja vu, we have seen this all before. Way back in 2007 we saw all stocks moving in unison, always upward, often ignoring both the news and reality, note, it is happening again. This is a reason for caution! If it looks like a Ponzi scheme, sounds like a Ponzi scheme, and feels like a Ponzi scheme, then it is probably a Ponzi scheme.


Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged. The below post lays out some of the thought presented by economist Allen Meltzer,
                              http://brucewilds.blogspot.com/2013/07/it-will-all-end-badly.html

Monday, July 22, 2013

It Will All End Badly

What I like about numbers is that when they are not jockeyed, jerked around, and falsified they tend to tell the truth. Looking down the road the numbers do not work. Allen H Meltzer is viewed by many economist as America’s foremost expert in monetary policy, Meltzer is the author of the three-volume “A History of the Federal Reserve.” For over 25 years he was the chair of the Shadow Open Market Committee, a group that meets regularly to discuss the policy of the Federal Reserve. At 85 his mind is clear, but his mood cloudy. “We’re in the biggest mess we’ve been in since the 1930s,” he recently stated. “We’ve never had a more problematic future.”

People have been forced into riskier assets because of low interest rates.When interest rates rise, as they will have to do at some point, the value of these risky investments will decline, and these investors will be hurt. Making things worse is the fact that interest payments on the public debt will rise increasing the budget deficit which has grown by well over a trillion dollars a year for the past four years. It is clear that prices in some sectors of the economy  have been rising rapidly and major distortions exist within the market place. When the large "to big to fail" banks like Goldman and bank of America report they made profits in the market on roughly 95% of trading days in 2012 we have to raise an eyebrow. This is an indication that the game is manipulated as no trader is that good.

Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off. What was once the "long run" or "distant future" may be getting very near. Soon the dollar and the American economy will be nearly dead. I recently reviewed a book I read years ago, in his book "A Time For Action" written in 1980 William Simon, a former Secretary of the Treasury tells how he was "frightened and angry".  In short he was sounding the trumpet about how he saw the country was heading down the wrong path. Looking back, it is hard to imagine how we have made it this long without addressing the concerns that Simon wrote about so many years ago. Back then it was about billions of dollars of debt, today it is about trillions of dollars.

It appears Meltzer has not been a fan of recent economic policy for some time, in a Wall Street Journal opinion piece on June 30, 2010 titled "Why Obamanomics Has Failed" Meltzer wrote about how uncertainty about future taxes and regulations was the biggest enemy facing future economic growth. He goes on to say that the administration's stimulus program has failed. Growth is slow and unemployment remains high. The president, his friends and advisers talk endlessly about the circumstances they inherited as a way of avoiding responsibility. Two overarching reasons explain the failure of Obamanomics. First, administration economists and their outside supporters neglected the longer-term costs and consequences of their actions. Second, the administration and Congress have through their deeds and words heightened uncertainty about the economic future.

Meltzer goes on to say that most of the earlier spending was a very short-term response to long-term problems. Part of the money financed temporary tax cuts, this was a mistake because it ignores the role of expectations in the economy. Economic theory predicts that temporary tax cuts have little effect on spending. Unless tax cuts are expected to last, consumers save the proceeds and pay down debt. Another large part of the stimulus went to relieve state and local governments of their budget deficits. Transferring a deficit from the state to the federal government changes very little. Some teachers and police got an additional year of employment, but their gain is temporary. Any benefits to them must be balanced against the negative effect of the increased public debt and the temporary nature of the transfer.

The Obama economic team have ignored history. Meltzer says the two most successful fiscal stimulus programs since World War II took place under Kennedy-Johnson and Reagan, both took the form of permanent reductions in corporate and marginal tax rates. Economist Arthur Okun, who had a major role in developing the Kennedy-Johnson program, later analyzed the effect of individual items. He concluded that corporate tax reduction was most effective. Another defect of Obamanomics was that part of the increased spending authorized by the 2009 stimulus bill was held back. Remember the often repeated claim that the spending would go for "shovel ready" projects? That didn't happen.

In his January 2010 State of the Union address, President Obama recognized that the United States must increase exports. He was right, but he has done little to help, either by encouraging investment to increase productivity, or by supporting trade agreements, despite his promise to the Koreans that he repeated in Toronto. Export earnings are the only way to service our massive foreign borrowing. This should be a high priority. Isn't anyone in the government thinking about the future?

Mr. Obama has denied the cost burden on business from his health-care program, but business is aware that it is likely to be large. How large? That's part of the uncertainty that employers face if they hire additional labor. The president asks for cap and trade, that's more cost and more uncertainty. Who will be forced to pay? What will it do to costs here compared to foreign producers? We should not expect businesses to invest in new, export-led growth when uncertainty about future costs is so large. Medicaid, is an excellent example, the new Medicaid spending mandated by Obamacare comes at a time when states face large deficits and even larger unfunded liabilities for pensions. All this only adds to uncertainty about taxes and spending.

Meltzer also finds other aspects of the Obama economic program are problematic. The way the auto bailouts ran roughshod over the rule of law with Chrysler bondholders given short shrift in order to benefit the auto workers union was very troubling. By weakening the rule of law, the president opened the way to great mischief and increased investors' and producers' uncertainty. That's not the way to get more investment and employment. Almost daily, Mr. Obama uses his rhetorical skill to castigate businessmen who have the audacity to hope for profitable opportunities. No president since Franklin Roosevelt has taken that route. President Roosevelt slowed recovery in 1938-40 until the war by creating uncertainty about his objectives. It was harmful then, and it's harmful now.

That's what the U.S. needs now according to Meltzer in not major cuts in current spending, but a credible plan showing that authorities will not wait for a fiscal crisis but begin to act prudently and continue until deficits disappear, and the debt is below 60% of GDP. He points out that plans have been put forth, like the one offered by Rep. Paul Ryan (R., Wisc.) but the administration and Congress ignored it. The country does not need more of the same. Successful leaders give the public reason to believe that they have a long-term program to bring a better tomorrow. Let's plan our way out of our explosive deficits and our hesitant and jobless recovery by reducing uncertainty and encouraging growth.

In 1980, Meltzer had the privilege of advising Prime Minister Margaret Thatcher to ignore the demands of 360 British economists who made the outrageous claim that Britain would never (yes, never) recover from her decision to reduce government spending during a severe recession. They wanted more spending. She responded with a speech promising to stay with her tight budget. She kept a sustained focus on long-term problems. Expectations about the economy's future improved, and the recovery soon began. High uncertainty is the enemy of investment and growth.

The point of this post is to make clear that just because we have muddled along putting band-aids on our economy does not mean that we have done anything but postpone the day of reckoning, and in many ways we may of made it far worse. The time the Federal Reserve has bought for the country to come to terms with its many problems has been squandered at a great cost. While many people say the economy is getting better others like me who are involved in business on Main Street all across America say this is not true and that an ugly reality is only being masked by the easy money and deficit spending policies we have today.


Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.

Saturday, July 13, 2013

QE - A Mask On Reality

For years central banks across the world have printed ever more money and have spent their time looking for "green shoots". Politicians and the optimistic have continued touting that we only need "confidence", and that consumers need to go out and spend. Many economist have placed the blame for our woes on austerity claiming that it is not the answer and will only make things worse. With the bonds and coupons of the strongest countries yielding near zero after inflation savers are left with a losing hand. The reward for saving and doing the "right thing" is gone. Our government centered economy  does not work, the emperor has no clothes!  Slowly our Government, and those others across the world are breaking their promises and rewriting the rules.

The term "modern society" is based on the idea that mankind and society has seen rapid and massive change over the years. During the last two hundred years we have created new ways for man to relate to his governments, institutions, and each other. The entitlement societies that have developed over the last several decades were created following the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances. They were built on the assumption that those advantages would continue in both Europe and US, and that ever greater prosperity and entitlements would be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about ever more growth.

Now reality has raised its ugly head and it is becoming apparent that this is unsustainable. The entitlements and promises that have piled up have begun to overwhelm those forced to honor them. While the populations of  Europe and America were led to believe the good times would never end, recently they have begun to see their core advantages in technology, capital, and productivity started to erode, and  to lag behind the emerging countries. Manufacturing jobs have steadily moved to countries that have the resource of cheap and abundant labor, many of the good jobs are being replaced by low skilled service jobs, this has removed the supports from our debt fueled prosperity and showing it to be unsustainable.

We were told that we were moving up the value chain, while in reality the opposite was true. The debt fueled prosperity and consumption growth of the past has led many to believe that their future would be secure if they moved towards "higher value adding activities" than the emerging and developing countries. The economies built on those false assumptions are now burdened by the weight of past debt. Add to the suffering pain from a surging world population and changing demographics and you have a new economic reality. Merely addressing the symptoms of our malaise as "financial problems", a tactic being tried by  leaders, central banks, and the IMF, will only raise false hope, it will not avert the economic and political catastrophe.       

Central banks have tried to address the situation by printing money and adding liquidity, this is their equivalent of a band-aid. Sadly they have been putting one band-aid on top of another, but our wounds are not healing. In the modern border-less world we have created, bankers are finding it impossible to control where money flows, the result is akin to pouring water into a leaky bucket. Money flows into the hands of speculators, manipulators, and a over valued stock market, meanwhile the poor and many people receiving a "stipend" from the government have little incentive and few prospects to earn money. With the burden of supporting a ever larger number of people not employed in real jobs in the private sector governments are running massive deficits.

Quantitative easing and the printing of money only mask the many problems that exist in the economy. Propping up banks and governments that fail, and will continue to fail is not the answer. We live in a world with serious issues that can and must be addressed by reforming the structural problems that have been allowed to fester. Creating more debt that cannot, and will not be paid off, is not the answer on how to move towards a sustainable long term economic model. Governments must face the reality that they have to step up to the plate and take responsible action, they must cut waste, and better utilize the tools at their disposal to better allocate opportunity and reward those who want to work and do the right thing. The bottom line is that you cannot spend your way out of debt.


Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.
                      http://brucewilds.blogspot.com/2013/03/the-young-will-be-burdened.html


Sunday, July 7, 2013

Indiana Marijuana Laws A Step Back In Time

A recent Pew Research Center poll found that for the first time a majority of Americans favor legalizing the use of marijuana. Indiana Governor Mike Pence is not among them. With the rest of the United States moving towards relaxing marijuana laws, Indiana seems to be bravely marching into the past. The Hoosier State's penalties for marijuana are getting tougher after Gov. Mike Pence requested, and was granted stricter laws for low-level cannabis offenders. They have gone so far as proposing that felony charges for possession be extended down to cover one-third of an ounce of marijuana, down from 30 grams or one ounce of marijuana.

As a resident of Indiana and having voted for Pence, I was very surprised that the  former Republican congressman who became governor in January, is pushing for an overhaul of Indiana's criminal sentencing laws. He's insisted to state lawmakers that the changes include tougher penalties for marijuana possession. Pence recently told reporters that he believed the bill should send a message that the state is tough on drug dealers, AP reports. The governor says he's interested in reducing prison populations. But he wants do that by reducing crime, not by decreasing penalties on some crimes.

The move comes months after voters in Colorado and Washington chose to legalize pot under state law. Marijuana remains a banned substance under federal law. But several members of Congress are pushing legislation to legalize pot outright. Or to at least prevent the feds from cracking down on states like Colorado and Washington where votes want it legalized. While Pence’s proposal would lead to more persons convicted of low-level felonies spending time in a work release program rather than prison, the plan also would require those convicted of more serious crimes like possession of a small amount of marijuana to spend more time in prison.

Pence posed these changes to the public as a message that the state is tough on drug dealers, but as some organizations have pointed out, Pence may have been financially inspired to invoke tougher laws as a favor to the GEO Group, one of the largest private prison companies in the United States. Though GEO Group is based in Florida, the prison has made contributions to political campaigns across the U.S., mostly to Republican candidates. In the last 10 years, the company has spent more than $3 million on direct campaign contributions, and the number is a low estimate since many state contribution records are either incomplete or missing.

Based on the data that is available, Indiana ranks No. 8 on GEO Group’s list of campaign contributions — spending about $60,000 in state elections. Pence himself received $12,500 from GEO Group for his 2012 gubernatorial campaign, making the prison group one of  Pence’s top 30 corporate contributors,When GEO built a 2,416-bed prison in New Castle, Indiana, the state signed a contract guaranteeing the for-profit prison company that 90 percent of the beds would stay filled. Yes, private prisons are a big business, as is the whole legal system, and all this is part of how government hides its growth  through mandates and the use of quasi-government groups.

While like many Americans I do not want drugs sold on street corners and a total "free for all" atmosphere to develop this appears to be a strong move in the wrong direction. Recent revelations from Washington concerning the NSA and its massive spying program on the Americans should give us all pause and raise concern as to this troubling trend. It is not only about the curtailment of our freedom but also of the cost of such questionable programs. It may be that more education about the negitive effects of drug use is a better use of our tax money then more prisons. I understand from a website that the following are some of the details contained in the new Indiana marijuana law being put forth;

The possession of 30 grams or less of marijuana is a misdemeanor punishable by up to one year in jail and a fine of up to $5,000. For first offenders, the court may consider a conditional discharge. For possession of more than 30 grams, the penalties range from 6 months - 3 years in prison and a fine of up to $10,000. The cultivation, delivery or sale of 30 grams or less is a misdemeanor, punishable by up to one year in jail and a fine of up to $5,000. Cultivation or delivery of more than 30 grams is a felony, punishable by six months - three years in prison and a fine of up to $10,000. For cultivation or delivery of any amount of ten pounds or more the penalties range from 2 - 8 years in prison and a fine of up to $10,000.

But there is more. Any sale within 1,000 feet (which is about three city blocks) of a school, public park or a family housing complex, or any sale on a school bus is punishable by 2 - 8 years in prison and a fine of up to $10,000. Sale to a minor is punishable by 6 months - 3 years in prison and a fine of up to $10,000. Possession of paraphernalia can be a misdemeanor if it is committed “recklessly”, and is punishable by imprisonment for a fixed term of not more than one year and a fine of not more than $5,000. There is no mention in the statute of what “recklessly” means. Possession of paraphernalia can be a felony if the person has a previous judgment or conviction under the statute, and is punishable by imprisonment for a fixed term of one and one-half years and a fine of not more than $10,000.

Even knowingly visiting a place where drugs are used is a misdemeanor, punishable by up to six months in jail and a fine of up to $1,000. Add to this the fact that a person convicted of dealing or possessing marijuana will have his operator’s license, his existing motor vehicle registration, and his ability to register motor vehicles suspended. All this may be viewed by many as rather harsh and extensive when many Americans are shifting their values towards a more open and tolerant culture. I side with those who feel that the war on drugs has been a costly and dismal failure. America and Indiana needs to reform these laws in a way that focuses on putting dangerous criminals behind bars and not just filling the expensive system with what is often the most stupid and unmotivated of society.


Footnote; Other related articles as to what I consider government overreach may be found in my blog archive, thanks for reading, your comments are encouraged. This recent article on "Reefer Madnesss" may be of interest,
                                http://brucewilds.blogspot.com/2013/12/reefer-madness.html

Saturday, July 6, 2013

Obamacare Postponed Is A Warning Signal

The Obamacare employer mandate that was due to start on January 1, 2014, has been put on hold for one year. Administration officials said enforcement of the employer mandate, which requires businesses with more than 50 employees to provide a certain level of health insurance, will be delayed to 2015. The administration says that this change reflects its desire "to implement the ACA in a careful, thoughtful manner." The announcement that came from President Barack Obama's administration to delay this crucial component of its health-care reform law, raises several immediate questions. First, can the White House protect other components of the law from renewed attack? Second, what does this say about the broader problems facing implementation?  And last, just for fun, what gives the White House such authority? My problem extends to the quality of government, and the stupidity of conjuring up complicate bills of over 2,000 pages.

"This announcement means even the Obama administration knows the 'train wreck' will only get worse," House Speaker John Boehner (R-Ohio) said in a statement. "This is a clear acknowledgment that the law is unworkable, and it underscores the need to repeal the law and replace it with effective, patient-centered reforms." The administration's move on the employer penalties follows a recent Government Accountability Office report suggesting the law's health insurance exchanges for individuals who don't get coverage at work and for small companies may not be ready for the six-month enrollment period that begins Oct. 1. Under the mandate in the Affordable Care Act, employers with 50 or more employees are required to provide government-approved health insurance to their workers or pay a $2,000 fine per employee. The individual mandate for Americans to buy health insurance or pay a penalty to the IRS will still go into effect as planned in 2014.

It is hard to believe that business groups will be satisfied with just this change, by announcing that it's willing to budge on timing, the administration weakens its ability to resist more substantial changes, such as reducing the mandate's scope. This change could make the politics worse, not better. The National Retail Federation wants the employer mandate to apply only to businesses with 100 or more full-time employees, not 50. Opponents of other elements of the law, the individual mandate, Medicare payment cuts, and exchange subsidies, will no longer buy the line that we're too far along to change now. Trade associations, whose members have started questioning the return on investment of their Obamacare lobbying campaigns, may now increase their efforts to chop at the bill. Groups like The Advanced Medical Technology Association have never liked the excise tax on medical devices. America's Health Insurance Plans oppose the law's tax on health insurers, now they may try to get that dropped.

Putting off a major element of the 2010 health care reform law less than six months before the expansion of health insurance coverage to millions is supposed to take effect nevertheless stands as a setback for the administration and gives fodder to Obamacare critics to proclaim the law isn't ready for prime time. In April, the administration also delayed part of the law intended to provide small-business workers with more health insurance choices. The scramble is on to bring the logistical framework for Obamacare into full form before its inaugural arrival in 2014. But as legislators and program architects dig down into the nitty-gritty of what the "tax" will actually entail in practicality, it is becoming abundantly clear from basic economics that the entire system will collapse before it even has a chance to get off the ground due to the extreme weight of rising premiums, which will hit young people the hardest.

A major point of contention with Obamacare has long been the individual mandate that requires all American taxpayers to purchase health insurance. The argument in defense of this mandate is that adding millions of healthy young people onto the health insurance rolls will "even out" health insurance costs within the general insurance pool, and thus decrease costs for the people that need the most care, but in reality, such a scenario may never occur. On the contrary, young people will most likely flee the system in droves once they realize that their insurance premiums are set to rise dramatically in response to Obamacare. In a recent poll by the American Action Forum, nearly half of all people between the ages of 18 and 40 who currently have health insurance said they would flat out cancel their premiums in the event that said premiums rose by 30 percent.

When provided with detailed and specific information as to what their monthly premiums would likely be once Obamacare is fully implemented, many young people have indicated that they would drop their health insurance if the costs rose beyond a certain point. Even in the event that premiums rose by only 10 percent, nearly 20 percent of those surveyed said they would stop buying health coverage. "Unfortunately, health insurance is a product, not a social vision," writes Douglas Holtz-Eakin for The Washington Times. "What we know to be true thanks to ample survey and analytic research is that in 2014, Obamacare will cause premiums to rise sharply for the healthy and young." Bottom-line, postponing implementation of part of this massive program changes little for business and the country, but is a warning signal of problems to come, this poorly crafted legislation still hangs over the economy as a very troubling cloud.


Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged.
                  http://brucewilds.blogspot.com/2013/06/obamacare-means-partime-work.html







Monday, July 1, 2013

Egypt Is A Tinder Box

Egypt is a tinder box and millions upon millions of protesters stand ready to light the fuse. Several reasons exist for why the country of over 82 million is about to blow. Egyptians are frustrated with the mounting economic pressures the country has faced over the past three years, and they are now also worried that President Mohammed Morsi and the powerful Muslim Brotherhood organization he once led are moving to install their people in all state institutions. Some protesters have expressed concern that Mr. Morsi’s Islamist supporters have overreached and are aiming to “Islamize” an Egyptian culture known for its relatively moderate and Mediterranean outlook. This is not the result many Egyptians wanted when they drove Mr. Mubarak from office.

Today the military gave Mohammed Morsi a 48 hour ultimatum to "resolve the crisis" before they intervene setting the stage for a possible military coup. Despite the protests against them, Mr. Morsi’s Muslim Brotherhood enjoys huge support from among Egypt’s moderate and conservative Muslims. A group of young people known as “Tamarod,” or “Rebel” is a key player in this conflict, members of this grass-root group participated in the uprising against President Hosni Mubarak and are now tapping into the declining popularity of Mr. Morsi and the Muslim Brotherhood. Artists, activists and poor Egyptians fed up with the economic crisis are also turning out in mass, this is pitting Egyptian against Egyptian.

The mood remained largely festive as protesters at giant anti-Morsi rallies in Cairo's central Tahrir Square and outside the Ittihadiya Palace spilled into side streets and across boulevards. They waving flags, blowing whistles and chanting as fireworks went off overhead. Men and women, some with small children on their shoulders, beat drums, danced and sang, "By hook or by crook, we will bring Morsi down." Still the widespread fear is that the collisions between the two sides will grow violent in coming days. Morsi made clear through a spokesman that he would not step down and his Islamist supporters vowed not to allow protesters to remove one of their own. During the day Sunday, thousands of Islamists massed not far from the presidential palace in support of Morsi, some of them gearing up for a fight with makeshift armor and sticks.

It seems that the "State," what many view as the institutions and the bureaucrats that work throughout the country have had enough, both worry and fear that Egypt is fast becoming dysfunctional has driven the money and gut of Egypt to call on the army to return to politics. This is a testament to how polarized Egypt is just a year after the election. Morsi has failed to show much interest in compromise and is blamed for the dreadful economic condition that Egypt now finds itself in, "buyers remorse" is rampant and voters want a do over. It appears that the protesters aim to show by sheer numbers that the country has irrevocably turned against Morsi. The time may be coming to a close where Morsi can peacefully negotiate a compromise to settle unrest. Note, a bigger fear is if this goes badly, Egypt being a large and very poor country, turmoil there could spread and destabilize the region.

Governments Must Take Responsibility for Economic Policies

The Bank for International Settlements (BIS) said last week that banks have done their bit to help economic recovery and now it is time for governments to do more. This means that governments must take responsibility for their economic policies and responsibility for how these policies effect the economic prosperity of their nation both in the short term and the long haul. Governments should oil the wheels of the economy by reforming labor markets and undertaking a forceful program of "repair and reform" the BIS said this is the only way to bring about a lasting economic revival.

The Basel based organization was founded in 1930 and the BIS is the world's oldest international financial institution, and it has been called the "central banks' central bank". The BIS boast a 60-strong membership which includes the Bank of England, the European Central Bank, the US Federal Reserve, the People's Bank of China and the Bank of Japan. The BIS said central bank action across the world has borrowed "time for others to act, allowing them to repair balance sheets, to consolidate fiscal balances, and to enact reforms to restore productivity growth".

The BIS made it clear that it wants to see a return to "strong and sustainable growth" but believes it is time to end the "whatever it takes" approach. "Although six years have passed since the eruption of the global financial crisis, robust, self-sustaining growth still eludes the global economy", the report said. "During this time, central banks in advanced economies have been forced to support and look for ways to increase their degree of accommodation. But central banks cannot solve the structural problems that are preventing a return to strong and sustainable growth."

Last week the US Federal Reserve announced that it planned to stop its asset purchase program, this sparked a wave of market volatility. As the credit crunch hit, central banks tried a number of tactics to try to keep the money flowing, initially cutting interest rates and later adding in quantitative easing, buying in assets and releasing vast sums into the banking system. Now that the world was "past the height of the crisis", it is time for such interventionist policies to change. Central Banks must now begin to move back towards normal and sustainable policies.

Stephen Cecchetti, the head of the BIS monetary and economic department, said that the actions by the world's central banks had made it easy for the private sector to put off reforms and for governments to finance deficits more cheaply thanks to the low interest rates their policies had introduced. He went on to say that central banks must return their focus to maintaining financial stability and encouraging reforms, rather than "retarding them with near-zero interest rates and purchases of ever larger quantities of government securities".

Over the last several decades government growth has been on a tear. Whenever Washington goes about "tweaking" government policy, whether it be regarding an extensive spy program collecting data on all Americans, on immigration, or extending the benefits of over eleven hundred Federal programs to gay couples, the cost is always downplayed. I often hear optimistic statements, proclaiming America will in the long run come out ahead, these are based on projections of  "the growth that will be produced". This is more of the "head in the sand" kind of accounting that got us here in the first place. We deserve better.


Footnote; This post dovetails with many of my recent writings, for more I might suggest reading the article below. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged,
                      http://brucewilds.blogspot.com/2013/05/the-bernanke-box.html

Interest In And On Student Loans


Again the interest paid on student loans is in the news. The Senate left Washington for the Fourth of July Holiday without taking action on extending a bill which keeps interest rates low on student loans, but fear not, for they are never short of tricks. Politicians who have made their mark by pandering to voters can always made any laws passed upon their return retroactive. The repeated warnings that student loan rates will double on July 1 unless Congress prevents it may be causing unwarranted fears for people with college debt, the truth is the increase will only affect loans taken out on or after July 1.

Student debt became a hot button issue last year because it was an election year. At the time many news stories and press releases omitted or downplayed the fact that the impending rate increase would affect only one type of federal student loan: subsidized undergraduate Stafford loans. Again, just as last year, it won't affect other types of federal loans - such as unsubsidized Stafford loans, Plus loans for parents and grad students, or student loans made by banks and other private-sector lenders. Students typically take out new loans each academic year, and the rate increase will not apply to loans that have already been made.

In 2007 Congress cut the interest on Strafford Loans in half to 3.4% on the day it expires  July1, it will just return to its normal 6.8% for new loans. Exaggeration of the effect on some 7,4 million students with low to middle incomes is a description that is pathetic and misleading. Sure it will not effect those financially better off  because high income students are not eligible and/or do not need the loans. Just as bad is the terminology "fixing the problem" would cost six billion dollars for one year, again this is not a problem and it is not broken, the rate is just returning to normal. All this gets sticky because politicians have framed the issue in a way that stirs the voters emotions, a petition circulating online to forgive many student loans is gaining momentum and approaching one million signatures, this raises new questions, like one of fairness.

In 1988, Congress renamed the Federal Guaranteed Student Loan program the Robert T. Stafford Student Loan program, in honor of  a Vermont U.S Senator Robert Stafford for his work on higher education. When we take a deeper look into the realm of student loans we find that 80% are Strafford Loans, all of these come directly from the government subsidized or unsubsidized they are often not enough to cover all a students college cost. No payments are expected on the loan while the student is enrolled as a full or half-time student. This "in-school deferment" continues for six months after the student leaves school either by graduating, dropping below half-time enrollment, or withdrawing. This is referred to as the grace period. Unpaid interest that is deferred until after graduation is added to the loan principal.

The government already effects the cost of higher education in many different ways. State governments subsidize the budgets of public colleges and universities. And federal and state governments give money to students through programs like Pell Grants and the American Opportunity Tax Credit. A below-market interest rate for Stafford Loans is just another subsidy mechanism. Like the government programs involved in supplying people with paid healthcare making cheap government loans available for education encourages people to consume more than they otherwise would. While many would argue that this is a good thing when it comes to education the policy also causes some negative distortions in that it encourages students at the margin, to choose more expensive educational institutions than they otherwise would, and to finance more of their education with borrowing. These incentives leave students burdened with debt and also makes them less focused on price than they should be.

When it comes to healthcare many people see governments intrusion into the market results in higher cost, the same can be said in education. Government loans are a driving force behind tuition inflation. Instead of extending the policy of holding Stafford Loan interest rates very low, it might be better to let rates go back up and redirect the cost of the subsidy into an expansion of Pell Grants and refundable tuition tax credits. This policy would keep the positive distortion associated with Stafford Loans such as allowing people get more education without the negative ones such as diminishing price sensitivity which causes them to borrow more money. The clear instinct of many politicians is to defend cheap Stafford Loans in an effort to be on the side of education. But subsidizing education need not mean subsidizing borrowing. We would  be better off letting student loan interest rates rise and searching for other ways to drive down the cost of higher education with innovations like integration of more online classes and addressing the inflated price of books required for educational courses.



Footnote; Please check out my post below titled "Students Borrowing against the Future." It focuses on the dark-side of these loans, and the staggering size of this debt. Other related articles may be found in my blog archive, thanks for reading and comments are encouraged,
                   http://brucewilds.blogspot.com/2012/04/students-borrowing-against-future.html