March madness is usually a term reserved for the college basketball playoffs, but this year what’s going on in Washington has upstaged the theatrics on the court. Here is a mere sampling:
* President Obama has proclaimed the health bill will save over a trillion dollars over the next 2 decades, “the most savings since the balanced budget bill of the 90’s” he says. I have to ask, “how’s that balanced budget bill workin’ for us?
” Obama also says “this is the biggest deficit reduction measure in history.” Talk is cheap. I rather look at actions. The first bill, the jobs bill, sent to congress after “pay as you go” was passed, insuring that all new bills passed must be paid for — was not paid for and added to the deficit. So much for promises.
* One thing that IS in the bill that we know of is the individual mandate. It fines those that can afford to pay for health insurance, and do not, $695 dollars per year. We also know that a hospital can not turn away a person who is in this country illegally if they need critical attention. So, if I understand this correctly a legal citizen will be fined or forced to pay for insurance and a person here illegally gets critical health care free of charge. And why should we pass this bill? “Because it’s the right thing to do”, says our President.
* We live in a dangerous world. Readers of this space don’t have to be reminded of the amount of threats that confront us today. A few news items hit the wires this week that add to the list. The House of Representatives is working up legislation that would impose tariffs on Chinese goods. They want China to revalue the Yuan or be declared a currency manipulator and suffer penalties. The Chinese will probably be forced to revalue their currency without the US’s insistence. But proposing protectionist trade measures is the worst thing we can do.
Protectionism is the most dangerous policy a country can follow. It leads to recessions and depressions. It is the trigger for currency crises and even wars between nations. History is littered with examples of protectionists policies gone wrong. Not every nation can run export surpluses, although every nation wants to. One nations trade surplus must be another nations trade deficit. For years America has been the most open market in the world. While Japan and China exported its way into prosperity they also accumulated American dollars. Those dollars are only good if you invest them or use them to consume, i.e. import. The refusal to import American goods has led to the huge surplus imbalances among export nations. This is Merchantilism and has plagued the world for centuries. President Obama’s latest speech on the importance of the US doubling it’s exports in 5 years together with the proposed trade bill to impose tariff’s on imports is an invitation for a trade war. It is a war we will not win. No one ever does.
* Also on the horizon is the attempt by FASB to reinstate the mark to market rule. They would like to impose it on all financial institutions that hold consumer loans. Mark to market was eliminated from accounting practices in 1938 when it was determined that it was a contributing cause of the deflationary spiral we were in during the depression. In its infinite wisdom the government decided to reinstate it just at the time that banks and other financial institutions were being “run”. This led to the subsequent credit implosion as banks had to either sell assets at fire sale prices in a market that barely functioned or was non-existent in some cases, or raise capital. Rating agencies lowered the ratings on banks being forced to sell which led to further sales of assets and further reductions in the value of their assets and once again their ratings. This vicious cycle resulted in a full fledge bank run and liquidity crisis. The government quickly removed mark to market rule and went back to the cash flow method of accounting and that ended the market crash and the deflationary spiral that was taking hold.
There is nothing wrong with mark to market especially among private parties. But you don’t change rules in the middle of a liquidity crisis for an entire system. That’s like pouring gasoline on a ragging fire. Yet, as fragile as the credit system is today, the re-imposition of mark to market rules is being considered once again. This time on all consumer loans. And you wonder why banks want to increase capital instead of making loans?
* And in a late breaking news story the Court of Appeals has ruled against the Federal Reserve’s right to keep confidential those institutions that borrow from them through the discount window. The discount window is a bank of last resort’s method of providing loans (liquidity) to those that need money fast. It loans at a higher rate than the fed funds rate which acts as a penalty rate to the borrower. The purpose is to head off bank runs and panics. Evidently the court considers the publics “right” to know to be more important than the publics “right” to financial security. This ruling has been called by a leading banker today, “catastrophic”. For hundreds of years the confidentiality between banks and their clients has been sacrosanct. This ruling violates that privacy. If enforced it will inevitably lead to rumors of insolvency (true or not) and encourage more runs on banks. This in a time of great fear and suspicion of all financial institutions. Once again, a terribly ill timed policy change.
Market Update:
Markets were once again subdued as volume continued to be unusually low. Commodities traded in a narrow range but trended lower. It feels like the calm before the storm. I continue to believe we are in a bull market for virtually all markets and this will continue until markets begin to discount a descending economy rather than an improving one. The message of the economy is very mixed right now and perhaps that is exactly why the market has paused.
Personally, I intend to sit back and watch the games this week-end. The games going on in Washington, that is.
Paul Nathan