Wednesday, April 28, 2010

The World Focuses on Greece

As the world focuses on the financial problems that are becoming apparent in Greece, I am pulling back in order to understand the implications from a more global perspective. Considering that Greece represents 2-3% of the European economy, it is not in itself much of a threat to global stability. In fact, I have seen those with an optimistic bent suggest that this issue will go the way of the Dubai situation, making it a non-event. I am more concerned than that.

Let’s begin with a review of the problems at hand. The government in Greece has succumbed to the same pressure evident in many other countries, namely, they have promised more payments and services to citizens than can be paid for given current and future tax receipts. This was a somewhat minor issue prior to the Great Recession, but has now become front and center because tax receipts have declined precipitously while costs have gone up, and investors that would loan Greece funds have become skeptical and therefore, scarce. In addition, Greece has crossed a tipping point, much like a consumer with excessive credit card debt, whereby it can’t grow its economy enough to avoid being overwhelmed by its debt obligations. Said another way, it is in a spiral that it can’t pull out of. The final compounding factor is that as a member of the European Community it can’t use currency manipulation to save itself and will likely have to default on promises made to debt holders and its citizens. A default to debt holders means investors receiving some fraction of the amount owed to them, while a default to Greek inhabitants equals reduced payments and services, and I am told, likely social unrest (read rioting).

Taking a few steps back, from the European Community perspective, Greece represents everything the group was trying to avoid when it established its common currency, the Euro. Unfortunately, in the optimism that accompanies many new ventures, the Union neglected to have any support (bailout) features or exit strategies built into its constructs when the Euro was created a decade ago. The plan was to rely on self policing regarding member’s fiscal deficits and total debt outstanding relative to a country’s economic output. What is now coming to light is that in order to participate in the Union, and thereby benefit from much lower borrowing costs, numerous countries fudged the numbers, surprise.

This sub-group of the EU has been dubbed the PIIGS, for Portugal, Italy, Irelands, Greece and Spain, and is too large a part of the organization to just ignore and hope the problems go away. So the more well heeled of the group, Germany, France and others are scrambling to rescue the reprobates in order to prevent an uncontrolled failure of the region’s financial infrastructure. But the only solution appears to be for the more conservative governments and citizens to subsidize the fudgers and spendthrifts; Germans sending their tax dollars to Greeks. In my opinion, the most likely outcome will be a very messy process over the next couple of weeks to establish support for Greece, and by extension the PIIGS, to buy time for a more orderly default or devaluation of Greek debt. Of course, there is always the possibility of a policy mistake that leads to an economic contagion in the European region and a substantial decline in the Euro; however I think this will be avoided by putting lipstick on the PIIGS.

Tuesday, April 13, 2010

I’ve had my fill of the Tea Party

Occasionally I am queried as to my political affiliation and I always respond raging moderate. I am of the belief that 90% of what makes this country great is still in place and the 10% that is wrong could be easily fixed using a logical, incentive based approach. I am not blind to the dangerous imbalances that exist in the country today such as excessive government spending compared to tax receipts, increasing wealth disparity, poor regulatory structures and social safety nets that have become corrupting, economically un-sustainable entitlement programs. It’s just that when I take an “America, Love it or Leave It” perspective, I can find nowhere else in the world to go that would be an improvement. It appears that I am not alone in that opinion judging from immigration statistics.

What gives rise to this rather lengthy disclosure is that the local Tea Party group has decided to picket in front of my office and it has become an aggravation. And when I requested that they move their operation down the street in front of their own office I got a fairly rude response. What lead to my irritation was the hypocrisy of the entire episode. According to this group’s press release, members want respect for property rights while violating mine by giving the impression of protesting my business in front of my building. They want to pursue happiness while imploring motorists to honk thereby disturbing mine. They want less government but disregarded my request that they honor my property rights, insuring the need for police enforcement. Arrogance bothers them but they demonstrated it with their behavior. They take issue with taxes and wealth redistribution, but judging from their ages, I’ll bet that they receive the funds that I pay into social security. The intention of this protest is probably to gain support for their movement, but with me and others I have discussed this matter with the result has been the opposite.

Maybe they should take their protest to the post office, the forest service, or the courthouse, thus negating my complaints. My oppressor, when alerted to the fact that the honking of horns was annoying said “it’s the sound of freedom”. Well so are gunshots and I hope that is not what they plan for today. As the late comedian Mitch Hedberg (no relation) said, “I’m against picketing but I don’t know how to show it”.

Wednesday, April 7, 2010

Zero % Interest Rates Hurt

I saw Laura D’Andrea Tyson, Professor at UC Berkley, Haas School of Business, on CNBC today, and in commenting on the Federal Reserve Board, Open Market Committee minutes released today she said “now I think, as far as the rates are concerned, I am one of the people who really believe that the slack in the economy remains considerable, there is no sign of inflationary pressure, if you take a kind of Taylor like rule to what the Federal Reserve should be doing on interest rate policy, there is no argument in my mind for an increase in rates, and that is why they continue to use the extended period language. I think it is the right thing to do”.

I can’t disagree with her more. The Fed’s zero interest rate policy (ZIRP) benefits two groups; banks and politicians. Banks, because they borrow funds more cheaply than would otherwise be the case and reinvest in Government backed securities, thereby creating riskless profits by the boatloads that can then be apportioned between bonuses for employees and reserves. Since banks have all but eliminated their dividends, even shareholders get left out. Politicians, the faces behind the world’s largest borrower, the U.S. Government, also borrow at rates lower than would otherwise be the case. This allows them to spend beyond reason, and probably the ability to repay, in order to insure their own re-election.

Who then pays the price? This country’s savers and investors, that’s who. This group is forced to choose between no return on their hard earned savings or being forced to take more investment risk than might be reasonable, all because they had the discipline to put away funds for the future and not spend themselves into bankruptcy. This group is forced to take the Government’s $250 bonus for social security recipients, when if safe investments yielded even 2% annually, a $25,000 nest egg would return $500 in a year, twice as much. As far as the economy is too weak to support an interest rate increase argument, I think if investors and savers earned more, they would spend more, and undoubtedly in a much fairer and wiser fashion than our Government representatives.

It is time to normalize interest rate policy in this country. The Chairman of the Federal Reserve Board has stated before congress, the crisis is behind us. In that case, Mr. Chairman, it is time to raise rates now.