Archive for May 2012 – Page 2

That Clever New French President and His Friends


Do you recall the courtroom classic in which the prosecutor says to the person in the box: “Just yes or no please, have you or have you not  stopped beating your wife?” Yes of course means that you were beating her. No means you are still beating her.

Debaters and politicians know that if you can control the terms of the debate, you will have won it. Sometimes the effort by politicians to insinuate their own loaded  language into the dialogue becomes ridiculous.

Here’s a recent case in point. The new French President, Francois Hollande,  campaigned on a theme of less “austerity” and more   “growth.” On being elected, he promised both France and Greece more “growth.” President Obama and other leaders at the G-8 meeting liked this terminology and agreed that less “austerity” and more “growth” is needed.

But what do these terms actually mean? Translated, “austerity” refers to a reduction in government deficit spending, which the Europeans are attempting to accomplish almost entirely through tax increases, with little or no reduction in government spending. “Growth” means an increase in government deficit spending.

So an increase in government deficit spending is synonymous with “growth.” The two terms are identical and either term may be used interchangeably without explanation. President Obama will no doubt use this formula extensively in the campaign. He will say he is  for “growth” and his opponent is against “growth.”

Of course, as any student of economics knows, there is little logic and no empirical evidence to support the idea that government borrowing to spend promotes growth, especially when so much borrowing has already taken place. There is plenty of reason to think that government money printing and deficit spending lead instead  to bubble and bust, and  therefore prevent economic growth.

Still you have to hand it to M. Hollande and now President Obama. Calling an increase in borrowing to fund government deficits ” growth” is a lot smoother than calling money printing ” quantitative easing.” QE has the merit, like “growth,” of obscuring the real terms of the debate. But “growth” rolls off the tongue so much more easily and will sound good to the average person.

Meanwhile it is not just the politicians of the left  who are trying to do something about the current revulsion against soaring government debt. Creative Keynesian minds are at work. Robert Shiller, leading Yale economist, would like to increase government deficit spending even further, but recognizing that the political climate is against it,  has a fallback idea. Why not just increase taxes on the wealthy and immediately  spend every dime of the revenue. That way, the deficit won’t go up and the economy will still  be stimulated by the spending.

Shiller is a very smart man. There is no doubt about that. But isn’t it remarkable that he apparently believes the government spending will help the economy even more than  the private spending or investment which has been precluded by the new taxes. In effect, we are to take money from experienced and successful investors, people who really know how to create jobs and are motivated by the profit system to do so, and give that money to politician spenders and investors, and lo, it will help the economy recover.

Maybe Shiller thinks these politician spenders and investors, in Keynes’s words, decide matters based on ” long views,…[ the] general social advantage,…[and] collective wisdom.” This idea defies history and experience, but even if politicians did decide matters that way, they still wouldn’t be able to run an economy.

Shiller’s new idea is almost as bad as the earlier brainstorm of leading Keynesian academics that the Fed needs to gin up inflation so that interests rates would be come even more negative than they are. The originator of this idea, Harvard economist Greg Mankiw, who in addition to being a former George W. Bush CEA chair, also happens to be one of two named economic advisors to George Romney, has been coy about how much extra CPI inflation he would like to see. But his Harvard colleague and co-author of This Time is Different, Ken Rogoff, has explained that they are thinking of about 6%.

Even Keynes never advocated giving away money to that degree. He did advocate zero % interest rates, but not -6% interest rates. That really raises the art of giving away money, generally to government cronies, to a new level. Of course it also assumes that the bond market will just go along with it and keep buying debt securities offering  such a return.

The one thing  that all these Keynesian remedies have in common is a desire to control prices. Unfortunately it is this very lust to control prices that is giving us the “austerity” and ” lack of growth” that M. Hollande, President Obama, and the other members of the G-8 so deplore.


Studia Humana

Studia Humana is a new English language journal. It is a multi-disciplinary peer reviewed journal publishing contributions on any aspect of human sciences such as political economy, sociology, political science and philosophy.  The editors invite the submission of articles, book reviews, discussions, responses, and notices from professional scientists. It is particularly interested in publishing contributions by new authors who pursue their academic development. One of the objectives of SH is the provision of a suitable platform for the discussion in all areas of human sciences beyond the limits of Western-centrism, with emphasis on problems of post-Socialist European states and ideas marginal to mainstream.  The editorial board includes Steve Horwitz, Walter Block, and Jesús Huerta de Soto.

The Problem with the Sun

In 1845,  Frédéric Bastiat   penned a satirical masterpiece with the long lumbering title of “A PETITION From the Manufacturers of Candles, Tapers, Lanterns, sticks, Street Lamps, Snuffers, and Extinguishers, and from Producers of Tallow, Oil, Resin, Alcohol, and Generally of Everything Connected with Lighting.”

This faux open letter to the French Parliament told its members that they were on the right track in not worrying about low prices and abundance for customers, but in their concern and protection of the nation’s producers.

Forget theory and principle, and the common man’s well-being, what’s best for the producer must be the parliament’s primary concern.  And of course, from the title, one can figure out that the petition addresses the wholly uncompetitive way the sun provides lighting.

Bastiat is brought to mind by the case of tanning customer Patricia Krentcil of Nutley, New Jersey, who is charged with taking her 5-year-old daughter inside a tanning bed.   Ms. Krentcil is now dubbed the “Tanning Mom,” is the brunt of late night comedy sketches, the subject of a parody action figure and has reportedly been banned from local tanning salons.

New Jersey law prohibits children under the age of 14 to tan in a tanning booth.  Teenagers between 14 and 17 in that state can tan in a booth, but must be accompanied by an adult, which seems like it would be a little crowded.

Of course this whole  brownhaha started when a teacher at the 5-year old’s school was concerned when the child came to school with a sunburn.  The little girl was telling her classmates that she “went tanning with Mommy.”

Upon hearing this, the conscientious teacher swung into action, not by grabbing some Aloe Vera, but by calling the cops to report child endangerment.

“This whole big thing happened, and everyone got involved,” Rick “Tanning husband” Krenteil  said. “It was 85 degrees outside, she got sunburned. That’s it. That’s all that happened.”

Tell that to politicians who have already slapped a 10% tan tax on the industry. reports,

But at the Statehouse today, lawmakers and health experts said they’re now trying to channel Patricia Krentcil’s notoriety into another cause: jump-starting a stalled bill that would ban anyone under 18 from using a tanning salon.

With prom season approaching, [Blair] Horner said he hopes lawmakers will act. “Parents will feel more comfortable saying no if there is a law against it,” he said.

Assemblyman Herb Conaway (D-Burlington), sponsor of bill (A21422) said the episode in Nutley “will raise attention among my colleagues … Unfortunately, this is how change comes.”

Chicago pols also want to ban teen tanning.   ”We regulate cigarettes being sold to minors under the age of 18 mainly because they are harmful to our youth. I do not see why this should not be extended to barring minors under the age of 18 from tanning facilities,” 50th Ward Alderman Debra Silverstein said in a news release.

North of the border, Conservative MP James Bezan wants to stop Canadians under the age of 18 from tanning indoors.  Bezan and his wife admit to tanning via a tanning bed in their younger years, but with more and more young Canadians browning up for prom season,  Bezan says, “That is a disturbing fact, and also that melanoma is the number three cancer among women under the age of 30.”

But one wonders if these assorted local politicians are not setting their sights high enough.  Are tanning beds really the biggest bogeyman to eradicate in the concern for melanoma?  Isn’t there a big red ball in the sky throwing off lots of heat and light that damages people’s skin, and not to mention, makes everyone sweat.  That thing that rises in the east and sets in the west.

Assemblyman Conaway, Alderman Silverstein, and MP Bezan, it is the sun that is the real problem.  And short of shutting off the sun’s harmful rays,  the only way to protect our kids is to make it unlawful for any and all children under the age of 18 to be outside exposed to the sun’s rays at any time.   Young people’s delicate skin must be protected and laws must be passed requiring children to stay indoors.

Facebook and the Public Company

Early reports describe Facebook’s much-ballyhooed IPO as a dud. This seems to support The Economist’s worries about the future of the public company, a theme raised by Michael Jensen in a famous 1990 article. Indeed, the corporate form has been hammered lately, the victim of particularly burdensome regulation under the Sarbanes-Oxley Act and other schemes. As noted in the Economist piece, the number of public companies, as well as the number of IPOs, have declined sharply over the last decade.

I’m certainly a fan of private equity (along with proprietorships, partnerships, cooperatives, and other organizational forms). But, as Art Carden and I discussed in a recent Mises Academy course, reports of the death of the public company are greatly exaggerated. Despite the additional regulatory scrutiny, the agency problems associated with diffused ownership, and other challenges, the corporate form is still an effective means of raising large amounts of capital.

To be sure, corporations benefit from a number of state interventions (though I don’t think the corporate form itself is one of them, contrary to a widespread view in “left-libertarian” circles). So do all forms of organization. With a diminution of the regulatory state we would see a flourishing of a variety of firms, both public and private.

AE in the FT

Mises, Ron Paul, and the Austrian Business Cycle Theory cited in this published letter from an Irish gentleman in the Financial Times.

Sir, In response to the correspondence (Letters, May 7) in relation to Ron Paul’s op-ed “Our central bankers are intellectually bankrupt”, I would suggest the gentlemen first acquaint themselves with Austrian economics before proposing their own theories or rehashing those of Keynes.

Congressman Paul’s views are informed by Ludwig von Mises and, in particular, his magnum opus Human Action.

Government interference in markets leads to artificially low interest rates, a misallocation of resources and, in essence, creates the business cycle.

Fiscal stimulus is the cause of and not the solution to the crisis that “nobody saw coming”.

Alec Gourley, Swellan, County Cavan, Ireland Web Ranking Bump

On the “Most Visited Libertarian Web Sites” list, we climbed a spot, from #7 up to #6!

Peter Klein answers questions from the Austrian_Economics Reddit

Dr. Klein discusses economics PhD programs, higher education, the business cycle and entrepreneurship, limits to the size of a firm, corporate personhood, the state of Austrian Economics, Keynesianism, Hayek on money, and Lachmann.

Innovation in Higher Education

I posted last week on Organizations and Markets about the tepid,and entirely predictable, reaction of the higher education establishment to the information technology revolution. Mainline universities loudly proclaim their love of online learning — and pedagogical innovation more generally — while doing everything possible to retard it. The strategy has been to make a few easy, low-cost, conservative moves that preserve the status quo, such as putting some existing courses online, while trying to suppress the innovative outsiders like Phoenix, DeVry, TED, Kahn Academy, etc. It’s a classic example of what Clayton Christensen calls sustaining innovation — incremental changes that keep the existing market structure intact. The last thing the higher-ed establishment wants is disruptive innovation that challenges its dominant incumbent position.

As Morgan Brown wrote earlier this year, universities are guilds, and it’s this organizational structure, not bad leadership or the wrong ideology, that underlies the universities’ hostility to markets. If there is fundamental reform, it will surely come from outside the guild system, not within it. It’s great that Harvard and MIT and other elite universities are offering some classes online. But look instead to bolder experiments like the Mises Academy — not a duplicate of the standard degree program, but a modular, flexible, focused approach to teaching Austrian economics and related subjects. Call it guerrilla teaching. Let’s see where this new movement can go!

All 10 Volumes of the LvMI RAE Converted to Ebook

We have just finished converting all of the 10 volumes of the Mises Institute’s run of The Review of Austrian Economics to ebook.

Good as Gold

While it is important that attention be paid to the slow recovery and to “What is holding the economy back,” the two most recent boom-bust episodes should have more clearly focused attention of economists on the need for significant monetary reform. The major goal of reform should the replacement of a central bank controlled fiat monetary regime with a market chosen money, not rules rather than discretion (Garrison 2009 and Cochran 2011).

Fortunately in a recent Congressional hearing (A diverse and wide open hearing on Fed reform) led by Ron Paul is bringing attention to this issue with excellent testimony by Austrians  Peter G. Klein, The Ultimate Disorganizing Organization,” and Jeffrey M. Herbener, “Leave Money Production to the Market.”

But don’t miss Herman Cain in today’s Wall Street Journal, We need a dollar as good as gold.” A highlight: A gold standard is to moochers and looters in government what sunlight and garlic are to vampires.”

Klein Versus Kirzner

There was a lively and enlightening discussion this past Monday at NYU’s Colloquium on Market Institutions & Economic Processes (formerly named the Austrian Economics Colloquium), when Peter Klein presented an excerpt from his new book , Organizing Entrepreneurial Judgment, co-authored with Nicolai Foss and published by prestigious Cambridge University Press.   Israel Kirzner, who is the leading theorist of entrepreneurship in Austrian economics as well as in the broader economics profession was present.  Also present were NYU professors David Harper who wrote a notable book on the subject and Mario Rizzo whose co-authored book and subsequent articles on the cognate topics of time and ignorance are highly influential in Austrian circles   The engagement among these prominent Austrian theorists was highly anticipated among colloquium participants and none of us were disappointed.

In his presentation, Klein challenged Israel Kirzner’s influential alertness paradigm of entrepreneurship.  Kirzner argues that alertness to and discovery of  profit opportunities–conceived as objectively and simultaneously existing differences in the prices of resources and products–is the crux of entrepreneurship.  Thus for Kirzner the entrepreneur is essentially an arbitrageur who buys a given good where prices are low and sells the same good where prices are high.  He faces no uncertainty, risks no capital, and always profits from his superior alertness to the existing profit opportunity.  Foss and Klein propose instead an approach to entrepreneurship based on Frank Knight’s and Ludwig von Mises’s focus on the “judgment” of uncertain future market conditions.   Judgment is exercised in the act of investing in  and allocating resources to specific time-consuming production processes that are organized and controlled by the entrepreneur until the completion and sale of the product.  For Foss and Klein the entrepreneur is therefore a capitalist and owner.  The capitalist firm is the organization created by the entrepreneur to facilitate ownership and decision-making control  over the productive resource combinations that embody his judgment of future product prices and markets.

The difference between the Kirznerian and the Knight-Mises (and Foss-Klein) conceptions of the entrepreneur was neatly summarized  in an illuminating exchange between Klein and a pro-Kirzner colloquium participant.  The participant gave the example of an owner of an orange grove, in the pre-orange juice era,  who discovers the “fact” that orange juice is valued more highly than fresh oranges by consumers.  The owner acts entrepreneurially by alertly discovering and costlessly exploiting the profit opportunity afforded by the price differential between lower valued fresh oranges and higher valued orange juice.  In doing so he also improves coordination between production plans and consumption plans in the economy and thereby moves the economy closer to equilibrium.

Klein responded by denying that the orange grower had discovered any “fact” at all.  What the grower did was to  judge that under future market conditions the price of orange juice would exceed the the production cost of the inputs, including fresh oranges, and, based on this speculative judgment, to invest his capital in purchasing these resources and organizing them accordng to a specific production plan.   Because his judgment and his  investment and organizational decisions turned out to be correct, he earned profits.  Had they been incorrect he would have suffered losses.  So, Klein maintained, the profit opportunity was not an ex ante  fact waiting to be discovered;  rather the profit opportunity was only realized , ex post,  as the successful outcome of an action based on a speculative judgment.  Whether or not the plans of economic agents are better coordinated and the economy is closer to equilibrium than before is “irrelevant,” Klein explained; the important point is that ex post profits indicate that resources have been reallocated from less valuable to more valuable uses from  the point of view of consumers.

Klein also disputed Kirzner’s contention that the entrepreneur qua arbitrageur was merely a “metaphor.”  In the excerpt presented, Foss and Klein perceptively wrote:

At least in usual parlance, a metaphor is a figure of speech in which a term and concept is used as a reference to something that it does not literally denote so that a potentially illuminating similarity is revealed.  Isn’t Kirzner talking about real-world entrepreneurs?  . . . Arguing that a construct is a metaphor drives a wedge between the reality that the construct is supposed to throw light over and the construct itself.  In particular , use of metaphorical reasoning is different from using models, constructs, or ideal types meant  to capture essential qualities of real phenomena (which a metaphor need not do).

This statement was challenged by another colloquium participant, who asserted that constructs and models were metaphors in the same way that a map was a metaphor for the actual  highways, roads, and streets whose configuration it depicted.  After all, the map “abstracted from” some essential characteristics of the real phenomena that it represented.  Klein’s critic was misled into equating metaphors with models and constructs just because both were abstract.  But, of course, as Mises emphasized repeatedly, all thought is necessarily “abstract.”  When we say that a disruptive co-worker is a “hurricane,” a brave warrior is a “lion,” or an under-performing athlete is a “dog,”  these  are metaphors that refer to real  phenomena that we perceive and that are part of our living experience.  They are abstractions in that they do not call to mind  the multifarious characteristics of these  really existing things things in all their particularity; but neither do they deny them.  In these examples they  refer to one outstanding attribute of an animal or natural occurrence by which we wish to characterize a person’s behavior.  Metaphors may also employ mythical or literary figures such as unicorns, ogres, classical demigods, witches and so on, but their purpose is always to highlight an outstanding characteristic of the person or thing to which it is compared.

The purpose of an economic construct or model is completely different.   Let us take the construct of the evenly rotating economy.  It is an entirely fictitious construction in which change is completely absent and which is populated  by automatons  who repeat  the same round of activities over and over again and never experience surprise or regret, profit or loss  from the outcome of their endeavors.  This construct is completely imaginary and does not refer to any realizable state of affairs in our world.  In fact it  deliberately specifies conditions that falsify reality.  It is not a metaphor, it was not formulated to make our rhetoric more vivid, intelligible or compelling;  it is a tool of thought used by economists  to  analyze the cause and essence of profit and loss.  Other economic models, like the ”plain  state of rest,” are  also abstract, but do not falsify reality.  For example, the plain state of rest describes  the outcome of the  process by which real people acting under conditions of uncertainty interact to  bring about actual market prices and exploit the mutual benefits of exchange.   It is abstract in the sense that it does not refer to the actors’s hair color, weight, age,  religion, etc., but it does not make any false or contradictory analytical assumptions.  And it also is not a metaphor, comparing one thing to a different thing, but the description of the essence of a real process of human interaction.

Klein’s provocative presentation evoked many other thoughtful comments, challenges,  and objections during the colloquium, but in my judgment Peter expounded and defended his position superbly.

All Aboard For Singapore

In a piece for Bloomberg, reporter Sanat Vallikappen begins, “Go away, American millionaires.”   Valliikappen then goes on to explain that wealth management firms the world over are declining to open offshore accounts for Americans.

“I don’t open U.S. accounts, period,” said Su Shan Tan, head of private banking at Singapore-based DBS, Southeast Asia’s largest lender, who described regulatory attitudes toward U.S. clients as “Draconian.”

It hadn’t been easy for Americans doing financial business overseas, but since the 2010 passage of the Foreign Account Tax Compliance Act, known as Fatca, which seeks to prevent tax evasion by Americans with offshore accounts, opening a foreign bank account has become mission impossible.

Valliikappen writes,

The 2010 law, to be phased in starting Jan. 1, 2013, requires financial institutions based outside the U.S. to obtain and report information about income and interest payments accrued to the accounts of American clients. It means additional compliance costs for banks and fewer investment options and advisers for all U.S. citizens living abroad, which could affect their ability to generate returns.

The Institute of International Bankers and the European Banking Federation said in an April 30 letter to the IRS, that the 400 pages of rules and regulations issued by the American tax authority create Unnecessary burdens and costs.”

Massachusetts Democrat Richard Neal says the government needs to crack down on offshore tax dodgers.  Mr. Neal wants tax money and doesn’t care much about privacy and all that.

“People should know, and the IRS should know, what money is being held offshore and for what purpose,” Neal said. “I don’t think there’s anything unreasonable about that.”

One young gentleman that believed Rep. Neal and the other thieves on Capitol Hill to be a bit too greedy and unreasonable is Eduardo Saverin, the billionaire co- founder of Facebook Inc.  Before Facebook does its public offering, and the price of Facebook stock is quoted daily, making Saverin’s wealth undistributable, he decided to renounce his American citizenship and head for Singapore.

Bloomberg reports,

Saverin, 30, joins a growing number of people giving up U.S. citizenship, a move that can trim their tax liabilities in that country. The Brazilian-born resident of Singapore is one of several people who helped Mark Zuckerberg start Facebook in a Harvard University dorm and stand to reap billions of dollars after the world’s largest social network holds its IPO.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income,” according to a government website on tax policies there.

Saverin has to pay the U.S. government an exit tax but doing it before the IPO was wise.  Renouncing your citizenship well in advance of an IPO is “a very smart idea,” from a tax standpoint, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan’s law school. “Once it’s public you can’t fool around with the value.”

There are a few Mises Institute supporters who have paid the American exit tax and now live in Singapore.  None I’ve spoken with regret it.

“It’s a loss for the U.S. to have many well-educated people who actually have a great deal of affection for America make that choice,” said Richard Weisman, an attorney at Baker & McKenzie in Hong Kong. “The tax cost, complexity and the traps for the unwary are among the considerations.”

While Mr. Neal chases away taxpayers, the only ones left will be tax eaters.

JP Morgan Loses $2 Billion trading, FDIC says no more TBTF

Victoria McGrane reports for the Wall Street Journal that the FDIC says it has it all figured out as to how it will unwind those huge, complicated, multinational financial institutions should the need arise.  McGrane writes,

The FDIC, known more for its bank deposit insurance, is working to persuade major investors, analysts, economists and bankers that it is building an apparatus that could cleanly guide a massive financial firm to failure without a taxpayer bailout.

Regulators at the Fed generally look down their noses at their FDIC peers, who primary regulate small banks.  Last month, Former Federal Reserve governor Kevin Warsh said that the new FDIC authority “is unlikely … to be up to the task” of mitigating harm in the next financial crisis.

“Critics argue that the FDIC doesn’t have the expertise to wind down a Lehman-like financial firm,” McGrane writes, “or they say that the international complexities would render the agency’s powers meaningless.”

Later in the day, after FDIC Chairman Martin Gruenberg gave a speech about all of this, J.P. Morgan’s wunderkind banker Jaime Dimon called an emergency press conference to announce that his bank’s CIO department booted $2 billion.  These weren’t a bunch of credit card loans gone bad.  The WSJ explains,

A massive trading bet boomeranged on J.P. Morgan Chase & Co., leaving the bank with at least $2 billion in trading losses and its chief executive, James Dimon, with a rare black eye following a long run as what some called the “King of Wall Street.”

The losses stemmed from wagers gone wrong in the bank’s Chief Investment Office, which manages risk for the New York company. The Wall Street Journal reported early last month that large positions taken in that office by a trader nicknamed “the London whale” had roiled a sector of the debt markets.

As the gang at Zero Hedge says, JPM’s CIO department is the world’s largest prop trading desk.   JPM wasn’t hedging but speculating,

because it knew with 100% certainty that if things turn out very, very badly, that the taxpayer, via the Fed, would come to its rescue. Luckily, things turned out only 80% bad. Although it is not over yet: if credit spreads soar, assuming at $200 million DV01, and a 100 bps move, JPM could suffer a $20 billion loss when all is said and done. But hey: at least “net” is not “gross” and we know, just know, that the SEC will get involved and make sure something like this never happens again.

Mr. Gruenberg, are you sure your troops are up to this?

Ladbrokes: 5/6 that the Euro is gone by the end of 2015.

Bookies in Britain have suspended betting on the “do” side of the proposition as to whether Greece leaves the Euro Zone.  Ladbrokes gave up cutting the odds on a Greek departure and has stopped taking action.  “It is safer for us to suspend betting than to keep cutting the odds,” a spokesman for Ladbrokes told CNBC. “We have been slashing the odds repeatedly over the last few days.”

“If we get some positive news we will open the book again,” he said.

Alexis Tsipras, the head Greece’s Radical Left Coalition (now that’s left), has been providing the sound bites that have punters hitting the windows hard, betting on a Greek euro exit stage left.  Mr. Tsipras says the Greek bailout agreement is “null and void.” He refers to the austerity program as “barbaric.”    “I fully disagree with what is at heart of the memorandum [austerity],” Tsipras said, adding that “further austerity will make us a third world country in the EU.”

Mr. Tsipras argues that the strong anti-austerity vote in Sunday’s election, which produced a hung parliament, stripped Greece’s bailout commitments of “political legitimacy.”

Michelle Caruso-Cabrera, CNBC’s goddess of all things Greek, reports, and Jennifer Parker writes,

Tsipras’s views are significant because a new poll on Thursday put him in first place to win snap elections if they are held in June. The elections may be necessary if none of the winners of Sunday’s elections are able to form a government so far.

For long-shot players, Ladbrokes is offering 33 to 1 odds that the euro ceases to exist by the end of this year.  For those wanting more time, the odds are a prohibitive 5/6 that the euro is gone by the end of 2015. Ladbrokes is offering 4 to 1 that two countries leave the euro by the end of this year.

It is unknown at this writing if Tragedy of the Euro author Philipp Baggus has money down on any of these propositions.


A Seedy Business

A Brooklyn bagel shop owner was assessed $1, 650 in fines by a New York City Health Inspector because–get ready for this–poppy and sesame seeds fall to the floor as he makes his bagels.  Alex Gormakh, the owner and a recent immigrant from Russia, opened  B & B Empire Bagel Cafe in June 2011.  Gormakh’s deli passed inspections both before and after he was cited for violations in October, and in the most recent inspection it received the highest cleanliness grade of “A.”   Nevertheless, his appeal of the fine has been denied at two separate hearings.   As a fellow Brooklyn bagel shop owner, whose establishment did pass inspection, points out, no matter how many times a day you sweep there will always be an accumulation of seeds on the floor.  To avoid future citations, Gormakh and his son have now invested almost $900,000 in larger stainless steel preparation tables in the hope of avoiding seed fall out and a water-filter vacuum to suck up any wayward seeds.

But Gormakh has learned a valuable lesson in doing business in the American mixed economy:  “If you want to work you have to pay.  In Russia, they call it corruption.  Here they call it something else.  Either way, you have to pay.”

There was one positive effect from this monstrous incident.  Judging by the heart warming vitriol of the  comments on the article, even jaded  New Yorkers were outraged.  Here is a small sample:

“somebody didn’t pay someone off ”

“Russia they call it corruption, over here, in New York City, they call it EXTORTION WITH A BADGE.”

“The city is right there for falling seeds but, somehow can’t stop cranes from hitting the floor.” [Referring to a recent deadly crane accident at a a city construction project.]

“Yea, doing business. Usually the Health Inspectors are on the take anyway.”

“Health Department?  Please… More like corruption Department! It is the duty of these inspectors to get money for the city.  If every busieness owner made their stories of violations public, it would most definitely change things a bit.”

“Another mindless bureaucrat. If he had a mind he would be considered over qualified for a city job.”

And my personal favorite:

“Again, nothing more than the tyranny of regulation.  My guess, Mr. Gormakh”s at fault for not offering a free bagel with a schmeer to the health inspector before the inspection occurred.  Had he fed the government pig first, he could have imported roaches into the shop and not have had any violations.”


Laissez Faire, Laissez Bouilloner

If we want want laborers and employers to come together to  discover and create value-productive jobs, then the prescription is simple:  leave labor markets alone and let them churn. columnist Caroline Baum reports some  interesting statistics drawn from the the Bureau of Labor Statistics’ job openings and labor turnovers survey, or JOLTS.  These figures illuminate the enormous flexibility and dynamism of U.S. labor markets.  Last year, 48.2 million Americans lost or left a job, while 50 million Americans found a new one.  The new hires represented 38.1 percent of total employment, which was down from 47.2 percent in 2005 at the peak of the Fed-fueled  bubble economy.   Now this figure does involve some double counting because some workers may have experienced multiple job separations and findings during the year.  Still in all this is a notable performance with the economy still languishing in the doldrums in the aftermath of a major financial crisis, the effects of which are being prolonged by government and central bank interventionism.   One can only imagine how much more creative job churning and productivity and employment growth we would have, if labor markets were completely freed from stifling government regulations and mandates as well as the massive uncertainty and distortions imposed by Fed monetary policy.

It’s Junk Time Again

Not to worry 99 percenters, Ben Bernanke’s Fed policy of just-north-of-zero interest rates is starting to gain traction.  Sure, unemployment is still elevated, and the number of people on food stamps still enormous, but the news is out that the collateral loan obligation (CLO) market is starting to come alive.

Rest assured that more money rushing into CLOs won’t help unemployed and overendebted college graduates secure employment or make a dent in their student loans, but Grant’s Interest Rate Observer reports the sighting of a commercial mortgage-backed security sporting a loan-to-value ratio greater than 100%.  “It was the first such occurrence since credit went to the hospital in 2008,” says Grant’s.

Katy Burne and Matt Wirz make the point in the Wall Street Journal,

Left for dead after the financial crisis, the market for collateralized-loan obligations—pools of loans to “junk”-rated companies—is staging a comeback, driven by investors’ hunger for high-risk, high-return securities.

Sales of CLOs have topped $6.8 billion in the U.S. so far this year, according to S&P Capital IQ LCD. That is the busiest start to a year since 2008 and more than sales for the whole of 2009 and 2010 combined.

Axel Merk notes that it is Bernanke’s “humble” fixation with fighting deflation that creates a lot of debt–

whether that be out of thin air on the Fed’s balance sheet, or potentially across the economy as consumers, businesses and the government alike are enticed to borrow ever more money. So far, businesses are not taking the bait. But the government and some consumers are. What we consider monetary largess, as well as fiscal unsustainability, may ultimately lead to deterioration of the purchasing power of the U.S. dollar.

Businesses may well be taking the bait.  One CMBS professional told Grant’s “You’re seeing a re-leveraging of the market pretty quickly.”  It may not be 2007 again, but it’s not 2010 either.

While the Fed does all it can to make speaking of interest rates in percentage pointpassé, “Pensioners need to eat, and pension-plan managers must strive to provide them with the necessary income, the zero-percent funds rate notwithstanding,” writes Grant’s.

There is enough of an increase in the issuance of dodgy paper to lead Wall Street insider and CNBC favorite, Wilber Ross to say,  “It’s not unduly dangerous, but we’re moving in that direction.”

In a yieldless world, lemmings are enticed off the cliff looking for any sort of yield at all, with no thought to risk below.

As Mark Quinn explains,

Reaching foryield is dangerous for a number of reasons, but mostly because such straining is done at precisely the wrong time.   When people are fed up with low yields that the economy, or the profligacy rewarding Fed, provides them, they tend to do things…go out the curve at precisely the wrong time (when rates are low and headed higher) or take on more credit risk when the economy is slow and credit risk is therefore especially salient, as evidenced by the natural or Fed engineered low interest rate environment.   The current tidal wave of money into credit sensitive lending is, of course, an instance of the latter.

Some $5.07 billion of CLO paper was issued in April, reports Grant’s, the most active month since November of 2007.  It’s projected that CLO issuance may top $25 billion this year.  A far cry from 2006’s $97 billion, but more than double 2011’s $12.3 billion.

Here we go again.

Ron Paul has His Hands Full

At a hearing (going on NOW) of the House Financial Services Committee on the Federal Reserve, Ron Paul is dealing with Lacy Clay who in the past called Austrian Economics “unscientific” because it was deductive, a Keynesian Democratic congressman (Keith Ellison) who wants the Fed to inflate more to focus on the “employment” side of the dual mandate, a Friedmanite Republican congressman (Kevin Brady) who wants a “single mandate” of “price stability” (posing, of course, as a free market advocate), and Barney Frank, who defends the “dual mandate” as it is, and even just commended George W. Bush for appointing Ben Bernanke, and defended the Fed Chairman as having been “unfairly criticized.”

Fortunately Paul will be joined soon at the hearing by two of the soundest economic thinkers in the world: Peter Klein and Jeffrey Herbener.  (See their submitted testimonies here.)

Today’s Hearing on the Fed

Will be broadcast on C-SPAN3. Thanks to Danny for posting the links to the prepared remarks.

Bastiat in Yuma

Howard Blitz introduces Frederic Bastiat to residents of Yuma, Arizona, home of The Freedom Library, in a local paper’s opinion column.  Up with local efforts!