Waiting for the next crisis

Hope and Change in the Banking System seems to be “hope” that the system can get through this economic cycle while “change” is non-existent. “Too big to fail” creates incentives for risk-taking that would not occur in a true free market. Taxpayers underwriting risk and backstopping failure ensure that firms will take on more, rather than less, risk.
Legislated rules need to be imposed to contain excessive risk-taking based upon taxpayer guarantees. While a truly free market could handle this better than legislation, there appears to be zero hope for that occurring. Thus, a reinstatement of Glass-Steagall or its equivalent is necessary. Without some type of legislation, we are merely waiting for the next crisis to occur. With it, crises will still occur, but they should be more manageable.
The return to risky behavior is already underway. An analysis of JP Morgan’s recent financial results  concludes:
You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank.  So much for those bailouts helping the average American.  The media really needs to scrutinize how these companies make their earnings.  They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime.  No reform has happened since the collapse of Wall Street because these banks own our politicians.

Intervening into the housing market

Interventionism is economic intervention by the government into the free market. It typically involves subsidies or penalties to particular groups. Interventions never improve the economy. Indeed, many interventions lead to additional interventions to attempt to correct the harm done by the first action. Interventions may improve the lot of a targeted group, but does so at the expense of society. While a particular group may be said to benefit, the total economy is always made worse off. As stated by Henry Hazlitt:
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Others like Bastiat expressed a similar views about a hundred years before. Based on Bastiat, this

A slack employment environment

Death of Muddle Through
The US government is on an unsustainable path. Deficits are soaring and the Obama administration is planning massive tax hikes.
Moreover, businesses have little reason to hire already because of massive overcapacity. Add increasing health care costs to the list of reasons for businesses not to hire.
Given that government spending crowds out private investment, these policies all but assures that unemployment is going to remain high for a long time as noted in Structurally High Unemployment For A Decade.
Killing The Goose
Last week in Thoughts on the Economy: Problems and Solutions I listed the problems and some of the solutions facing the economy. It was a discussion between John Mauldin and I about his weekly E-Letter Killing The Goose.

The world needs more food

Not much to disagree with here, at least in the intermediate to long-term. If we have a market correction in the US, which seems almost inevitable, then the whole world will be affected including, if not especially China. There is much not to like short-term in China — the banking systems, centrally-directed economy (when they make mistakes they tend to be doozies), dependence on US for exports, coming currency adjustments, etc. Despite these near-term concerns, I am in agreement with the article. Just don’t “double-down” right now.
Jim Rogers on the Next 10 Years
I’m moving to China … possibly to live in a bunker. At least that was my inclination after listening to a presentation by Jim Rogers Thursday.
Now don’t get me wrong―Mr. Commodities wasn’t all doom and gloom. In fact, his talk was both informative and highly entertaining. But Rogers doesn’t sugarcoat things―he’s very matter-of-fact about his concerns and projections for the future. And most of them don’t bode well for the U.S.
I’ll be posting an interview with Jim Rogers on the site in the coming week, but for now, I just

Monetary system

This is a piece that I wrote in response to a request for a guest post over at ZeroHedge. It ran there yesterday garnering some nice attention and a diverse range of comments beneath.
Based on some of those comments, this article represents nothing more than my attempt to find an explanation that matches the data.
My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms, while the money system itself is the cause.
My views on this are expressed in the opening of an article that I initially penned in 2006 but updated in 2008:
 Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.

The necessity of government spending

A depression was borne out of high levels of private sector debt made apparent by a financial crisis.
The effects of this depression have been lessened by economic stimulus and government support.
Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.
While I might quibble with his time frame and the necessity of government spending (a bit too Keynesian), it is a valuable piece that provides background for those attempting to understand better what has happened and what the future may hold.

Another trillion dollars

Tim Geithner hadn’t slept well on Friday night, having again decided to stay in one of the grim rooms on the 12th floor of the Federal Reserve. By six a.m., he had returned upstairs to his office dressed in an oxford dress shirt and sweatpants.
In his mind, he was already making battle plans. He had made it safely to the weekend but was worried about what would happen on Monday.
“John’s holding on to a slim reed,” Paulson had told Geithner about John Mack’s perilous position on a phone call the night before. Paulson was also still anxious about Goldman Sachs, his former employer. “We’ve got to find a lifeline for these guys,” said Paulson, and they reviewed the possible options.
On note cards that morning, Geithner started writing out various merger permutations: Morgan Stanley and Citigroup. Morgan Stanley and JPMorgan Chase. Morgan Stanley and Mitsubishi. Morgan Stanley and C.I.C. Morgan Stanley and Outside Investor. Goldman Sachs and Citigroup. Goldman Sachs and Wachovia. Goldman Sachs and Outside Investor. Fortress Goldman. Fortress Morgan Stanley.
It was the ultimate Wall Street chessboard.