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Pretending to Balance the Budget

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from Kevin Williamson at National Review, We’re Not That Far from a Balanced Budget

One, Americans earning $100,000 or more pay basically all of the federal income taxes, about 80 percent. That is far in excess of their portion of national income (“national income” being another thing that does not exist but which we are obliged to talk about), and they are only about 15 percent of all taxpayers. Households earning $250,000 or more, a tiny group (2.4 percent of taxpayers) pay about half of all federal income taxes, which is, again, disproportionate to their income relative to the rest of the population.

You do have to stop pretending that you can give the American middle class a big income-tax cut when it hardly pays any income taxes, and stop pretending that you can get spending under control without touching the tiny handful of popular programs (Social Security, Medicare, Medicaid, national security) that constitute the vast majority of federal spending. You don’t have to reinvent the wheel; you just have to cut federal spending from 21.4 percent of GDP to 19.1 percent a couple of years from now, and maybe reform the tax code with an eye toward making revenue meet spending halfway. That isn’t going to make everybody happy, but it isn’t landing on Omaha Beach, either.

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Currency Manipulation

US and Chinese currencies

from the editors of the Wall Street Journal, Emerging Market Rip Tide:

The destabilizing effect of QE threatens global growth at a moment when none of the major economies is firing on all cylinders. By encouraging overinvestment in developing countries, it may have created new deflationary pressures. China built massive steel-making capacity that will now drive down the global price and lead to protectionist pressure in the U.S. This dislocation and wasted investment should make policy makers reconsider their faith in the power of monetary policy to stimulate growth, and put the emphasis back on pro-market reforms.

There has often been a tension between the Fed’s roles as regulator of the U.S. domestic economy and custodian of the world’s reserve currency. The QE era shows what happens when it ignores the latter responsibility. Bond-buying allowed the U.S. to pump up asset values, even as it has failed to stimulate the real economy.

U.S. presidential candidates have been quick to jump on China’s recent small devaluation as proof of currency manipulation aimed at stealing American jobs. The irony is that the Federal Reserve has been guilty of the biggest currency whipsaw the world has ever seen. And it has beggared its neighbors in the process.

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Financial Myths


from Forbes Five Years Of Dodd-Frank: ‘Too Big To Fail’ Still Unresolved by Norbert Michel

The notion that these transactions took place in some shadowy, hidden room of finance, where regulators had no clue what was going on, is absolutely false. Not only did they know, they actually blessed the transactions as safe. Repeatedly.

More broadly, even AIG was regulated. And there was no substantial reduction in financial market regulations in any of the previous 10 decades. Many rules and regulations had been changed over the yearsbut virtually none were eliminated.

Perhaps it’s tradition. The practice of blaming speculators for financial turmoil is as old as the hills. Back in the 1600s, the English Parliament blamed a major crisis on the “pernicious Art of Stock-jobbing.” In 1929, members of Congress blamed the stock market crash (and the Great Depression) on speculators. They subsequently used the event to radically alter federal regulations.

One major piece of legislation was the Glass-Steagall Act of 1933. It prevented – for the first time in the U.S. – commercial banks from engaging in many securities-related activities through companies known as securities affiliates.

Sen. Carter Glass argued that these affiliates “made one of the greatest contributions to the unprecedented disaster which has caused this almost incurable depression.”

Even though the evidence suggests combined commercial and investment banking activities did not cause excessive risk taking, much less the Great Depression, this myth persists to this very day.

Senators John McCain (R-Ariz.) and Elizabeth Warren (D-Mass.) have just introduced a new bill to reinstitute Glass-Steagall restrictions on commercial and investment banking affiliates.

Yet there’s not one shred of credible evidence that these affiliations, legally permitted by the 1999 Gramm–Leach–Bliley Act (GLBA), caused the 2008 financial crisis. It’s just as much a myth now as it was in the 1930s.

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Dumb Regulation isn’t the same as Deregulation


from Jeb Hensarling at The Wall Street Journal, After Five Years, Dodd-Frank Is a Failure:

Dodd-Frank was based on the premise that the financial crisis was the result of deregulation. Yet George Mason University’s Mercatus Center reports that regulatory restrictions on financial services grew every year between 1999-2008. It wasn’t deregulation that caused the crisis, it was dumb regulation.

Before Dodd-Frank, 75% of banks offered free checking. Two years after it passed, only 39% did so—a trend various scholars have attributed to Dodd-Frank’s “Durbin amendment,” which imposed price controls on the fee paid by retailers when consumers use a debit card. Bank fees have also increased due to Dodd-Frank, leading to a rise of the unbanked and underbanked among low- and moderate-income Americans.

Has Dodd-Frank nevertheless made the financial system more secure? Many of the threats to financial stability identified in the latest report of Dodd-Frank’s Financial Stability Oversight Council are primarily the result of the law itself, along with other government policies.

Dodd-Frank’s Volcker rule banning proprietary trading by banks, and other postcrisis regulatory mandates, has drastically reduced liquidity for making markets in fixed-income assets. The corporate bond market is one of the primary channels for capital formation in the economy. Reduced liquidity in this market amplifies volatility. Because of Dodd-Frank, financial markets will have less capacity to deal with shocks and are more likely to seize up in a panic. Many economists believe this could be the source of the next financial crisis.


read the whole article.  This regulation was based on political narratives and expediency, rather than the thoughtful and non partisan analysis such a significant piece of regulation requires.  It seems that our next crisis is the result of the bad solutions legislated for the last crisis.

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Fostering a Liquidity Crisis

From The Wall Street Journal, How the Next Financial Crisis Will Happen by Stephen Schwarzman:

Despite good intentions, however, politicians and regulators constructed an expansive and untested regulatory framework that will have unintended consequences for liquidity in our financial system. Taken together, these regulatory changes may well fuel the next financial crisis as well as slow U.S. economic growth.

The Volcker Rule, for example, bans proprietary trading by banks. The prohibition, when combined with enhanced capital and liquidity requirements, has led banks to avoid some market-making functions in certain key equity and debt markets. This has reduced liquidity in the trading markets, especially for debt. A warning flashed last October in the U.S. Treasury market with huge intraday moves, unrelated to external events. Deutsche Bank has reported that dealer inventories of corporate bonds are down 90% since 2001, despite outstanding corporate bonds almost doubling. A liquidity drought can exacerbate, or even trigger, the next financial crisis. Sellers will offer securities, but there will be no buyers. Prices will drop sharply, causing large losses for investors, pension funds and financial institutions. Additional fire sales will aggravate the decline.

Why should we care? Because new capital, liquidity and trading rules are interrelated, and locked-up markets and rapidly falling securities prices will force banks to reduce assets and hoard liquidity in order to satisfy applicable regulatory tests. With individuals suffering losses and companies not able to raise capital, the economy will contract with layoffs, lower tax revenues and pain for middle- and lower-income Americans.

Small business owners will be particularly vulnerable because the number of community banks declined by 41% between 2007 and 2013. Recent studies by economists at the Richmond Federal Reserveand Harvard University both concluded that the 2010 Dodd-Frank financial law contributed to this decline. Dodd-Frank has disproportionately burdened community banks, despite their having no role in the financial crisis. We must revisit Dodd-Frank’s application to community banks because of their special relationship with borrowers in agriculture, small business and local real estate.


The lack of liquidity in the bond market is already being felt and is increasing volatility. We also see private companies starting to emerge to fill the void from lackluster bank lending.

Systemic changes such as Dodd Frank have some improvements but they tend to fight the last war without realizing their role in the next one.