Consider Gillibrand Carefully

It seems that the new Senator Gillibrand of New York is not entirely appreciated within her own party in her own state. That may be a good thing.

She's catching flak for her opposition to illegal immigration, for which she has earned the term "xenophobe." Note that senators are sworn to uphold the laws of the country.

I'm not going to defend her extreme enthusiasm for personal weaponry, but it's a fair statement that few of America's crime problems are due to people with properly licensed guns. Some deranged people have gunned down people on campuses, but I'm not aware of any of them who had a concealed weapons permit. Statistically, it would make more sense to require everyone attending classes to pass the test of earning such a permit.

But I digress. More important is Ms Gillibrand's opposition to the bailout last fall. Representative Peter DeFazio (D-Oregon) also opposed it, and he's fairly well established in the progressive wing of his party. We're used to Peter being an heir to the maverick Oregonian tradition, a much longer established theme than that of Arizona or Alaska. New York should be able to tolerate some dissent, even with their dependence on the financial industry that was bailed out. After all, Gillibrand and DeFazio lost and the bailout passed.

And interestingly, the consequences that it was supposed to prevent just seem to keep on coming down the pike. The taxpayers have forked over hundreds of billions, hundreds of billions are to follow, and yet bank lending is tight, bank solvency is questionable, the stock market has dropped to the area that people were fretting about, and generally everything stinks.

I'll be interested to hear her position on the stimulus, a much more benign word than "bailout." I'm getting very skeptical myself. It all seems like a Ponzi scheme, where we keep borrowing money to pay interest on what we borrowed before while distributing bread and circuses to the mob.

Rather than being a formula for recovery, it looks a lot more like a guarantee that there will never be one. Because we're only able to sell all this federal paper because people are so loath to invest in anything else. But if things once start to go back up, there's going to want their money back in order to invest in alternatives, and the treasury won't be able to handle it.

Some day we're going to have a run on the people we've designated to prevent runs on banks. I have no idea what happens next.

Statistics and rare events

People with a fondness for statistical foolishness should check out Statistics.org for a regular dose of the follies perpetrated in the media. Sometimes ESPN serves the same purpose. A writer there commented that in a match between two pro teams, one of them was coming up against the "law of averages" because they'd already won the previous two games.

But in addition to the general misuse of statistics, there is also the problem of a general disregard for the wings of a normal distribution. Unlikely events happen, or to put it another way, the law of averages says that sooner or later, things that seem unlikely do in fact happen. Maybe not often, maybe not soon, but they will happen.

The problem with public fiscal policy is that it's impossible to impress that fact on the voting public. They will always favor the solution that discounts what they deem to be unlikely if there are short-term rewards. Such as having happy public employees, who are promised secure pensions at a rate that presumes no evil economic periods in the future, without enough taxpayer contributions to ensure the result.

All across America, there are public entities who made big promises that they now can't keep. Not the feds, of course, who simply print whatever they need, but at the state, county, and local levels, disaster looms. It's one thing to hope for an 8% ROI on pension assets, quite another to bet the taxpayers' future on it.

There's going to be a lot of resistance from public unions, with a lot of "but you promised ..." They are right that we made the promises and hired politicians on the basis of easy answers. On the other hand, we simply can't fulfill those promises and compromises are going to be made or bankrupcies will occur.

Fixing Derivatives and Short Selling

I'm not a big fan of government regulation. It's a necessary evil at times, but it should be a last resort.

We've been through a vast problem with derivatives, those arcane financial instruments through which people "invest" in anticipation of certain financial results. The problem is that supposedly conservative financial institutions got involved and wound up betting that certain outcomes were statistically insignificant. Those improbable events have come to pass and the banks and brokerages who became entangled are dragging down a system that the economy actually needs.

I think there's a simple way out. The IRS has a simple policy on gambling income. If you make money gambling, you must report it as income. If you win some and lose less, you're only taxed on the net that you win. But you have net losses, don't come crying to the IRS. There's no offset against other income for gambling losses.

Certain types of financial trades smell of speculation but can be reasonably included in regular economic activity. I may buy oil futures without actually wanting to take delivery. I may buy shares in a company I don't believe will ever make a profit, but which I think will look good enough that I can sell for a gain after three months.

But these are still legitimate, since the economy depends on people buying and selling oil and shares in companies. Other types of trades have no such cover. Consider futures trading on the Dow Jones Industrial Index. It's a simple gamble, entered into by two parties, about a future number. Not all that much different from the numbers racket that the Mafia used to run.

Or short selling. People who buy stocks may have different motivations, but the original issurance of shares and the subsequent trading of those shares is a vital part of capitalism. Short selling has no such purpose. The economy needs people to take chances that a company will succeed, but not that it will fail.

Without any government regulation, the entire problem could be fixed by having the IRS treat all gambling the same. It's much simpler than a transaction tax and avoids putting penalties on legitimate activity. But if I invest in DJIA futures or I sell Bank of America short, that's gambling and the normal IRS rules should apply.

It's always been obvious that when people say they are against drugs, they only mean drugs not manufactured by people with shares trading on Wall Street. The two most dangerous drugs in America are alcohol and nicotine. The worst form of gambling is derivatives. In both cases, Wall Street gets preferential treatment over the common man. We should level the playing field.

Is The Stimulus Another Bubble?

It seems that more Americans favor the big burst of federal spending to regenerate the U.S. economy when tax cuts are included. The number of opponents falls by about one third under those conditions.

I'm starting to think we're looking at the third bubble in a decade. When the dot com mania was peaking, I noticed that Amazon was valued at more than the total revenue of all bookstores in America from 1776 to date. Forget profit, just revenue.

Then after the stock market crashed, we saw people shifting their assets into real estate. It became a retirement plan for many Americans to buy a larger house than they could realistically afford, live in it for a decade, and sell it to someone else for enough money to retire on.

That's a plan that may work for an individual, but it doesn't work for the economy as a whole. Eventually, we learned that what the economy can't afford, huge numbers of individuals can't benefit from.

So here we are in the wreckage of that insanity and a third bubble seems to be developing. We've screwed up and lost much of our wealth as well as personal income. So we'll have the government print a bunch more money and everything will turn out fine.

Of course, we're dressing this up and not calling it printing money, but it works out the same. The government acts on our behalf and we pay an even smaller portion of it. President Bush refers to the aftermath of the immediate past bubble as a hangover. Nobody is talking about what the aftermath of printing a few trillion extra dollars and injecting them into the economy will be.

In September when TARP was proposed, commentators were speaking darkly of future years in which our taxes would rise or government services would fall as a result. Nobody says that anymore. We are bailing out segments of the economy, maintaining government services, and reducing taxes now. Maybe later, we'll increase them, but only back to where they were.

Are we thinking that this stimulus will put the economy back above its old trend line, so that future tax revenues, at old rates, will generate the cash to repay all this borrowing? Not likely.

I've long held the view that inflation is God's way of restoring reality when people insist on doing things on a large scale that just don't compute. This is one of those cases, leading me to the following bold prediction. The stimulus won't work well. We are headed further down and government spending won't do much to reverse it.

Eventually, people who are loaning money to the government at trivial rates will calm their nerves and want to do something different. At that point, interest rates will soar. I don't have a crystal ball, but 2010 is not going to be one of those spiffy, zippy recoveries from a recession that people are so hoping for.

Fighting the Great Depression Again

There's a quip about military thinking that says that every general staff devotes itself to preparing to fight the last war. As the government piles on more experts on the Great Depression, Bernanke at the Fed and now Christina Romer for the Council of Economic Advisors, I can't escape the feeling that the government is assiduously preventing the events of 1932.

But while it's possible to criticize Hoover and his ilk for making the situation worse through fiscal policy, there is no established method for doing any better. There's a lot of theory, but nobody has actually headed off a Depression through government action.

So when folks say that they'll do as much as it takes, they assume that what they are doing is what it takes. But I see the economy as the equivalent of a couch potato, waking up one day fat and unfit and having trouble just walking around. The cure would be diet and exercise. A temporary substitute would be meth, but sooner or later, you either crash from your meth high or die.

Only a little while ago, everyone would have agreed that running trillions of dollars into debt would not be good. Now it can be discussed almost nonchalantly. When interest rates start back up, with the extra few trillion of debt obligations, the feds may find themselves spending a trillion a year on interest. Does nobody else worry?