Radio Free Market

Re: Fed Governor Raises the Specter of a Bubble in Junk Bonds

Dear Sirs:
So the Fed thinks that it just might be possible that its unprecedented bond buying programs will cause a bubble in junk bonds.  How many Fed economists does it take to screw in a light bulb?  And will the light actually come back on with a new bulb installed?  If you are a Fed economist, these things must be tested and tested and tested and….

When the Fed finds evidence of such a bubble, of course it will be too late.  And if it takes regulatory action to prevent its base money production from going into junk bonds, the money just will go somewhere else.  It must go somewhere!  Isn’t that the point?

The Fed has no idea what it is doing or what the consequences will be.  Nevertheless, when the markets crash, the Fed will blame everyone but themselves.  Patrick Barron

Re: Case Offers a Peek Behind the Curtain of a Security

Dear Sirs:
Floyd Norris makes the preposterous claim that the government’s PPIP program saved the Mortgaged Back Securities market by its $18.6 billion handout ($18.6 BILLION!!!!) to nine politically connected money managers for the purpose of buying risky mortgaged backed securities from a supposedly frozen market.  This vast amount represented 75% of their investment and is nothing more than a gift of free money with which to take undue risk.  (Otherwise the money managers would have invested their own funds in the first place and not had to share any profits with the government.)  But the big picture is that PPIP is nothing more than a government cover-up of its own failed policies.  The MBS market was overblown due to government’s intervention into the mortagage market and the Fed’s intervention to drive down the interest rate.  This created massive malinvestment in mortgages that spilled over into the MBS market, eventually creating uncertainty into the real worth of most MBS’s.  A market is never “frozen”, but potential sellers may be reluctant to invest more money or sell at a loss.  The PPIP program created classic moral hazard in that the money managers were willing to offer higher prices for risky MBS’s because they had to put up only 25% of the money.  Let’s get over the idea that government saved anyone but its own reputation.  Patrick Barron

Re: Germany, Italy Data Show Divergence

Dear Sirs:
Let’s assume that your neighbor’s finances are completely out of control.  His family runs a deficit every month, and that deficit gets bigger and bigger.  But, not to worry, he can print all the money he needs in order to buy your farm produce and everything else he needs and desires from your extended family, which runs a budget surplus due to a history of financial probity.  Would you be happy with this arrangement?  You are producing and handing over real goods for ever depreciating pieces of paper.  That is what is happening in Europe.  Italy, Greece, etc. run budget deficits, print euros, and buy German goods.  German exporters are happy, as are their union laborers.  But Germany’s capital is being decumulated before its very eyes.  It is being shipped to Italy, Greece, and the rest of the profligate countries of the eurozone, who have no compelling reason to stop the spending.

Patrick Barron

Re: United States and Mexico Reach Tomato Deal, Averting a Trade War

Dear Sirs:
The biggest losers in this rotten tomato deal with Mexico will be U.S. consumers.  In fact, to call it a “deal” is not accurate.  Mexico agreed to the so-called deal, which will raise the minimum sale price for Mexican tomatoes, only to prevent a worse outcome; i.e., a renewal of the U.S.’s “anti-dumping” charges.  So, Mexicans invest billions in greenhouses to meet the demands of the specialty tomato market in the U.S., while U.S. growers in Florida pick their tomatoes while green and then treat them with a gas to change their color.  U.S. growers object to losing this market and march like all good socialists to government to stop the evil foreigners from offering American consumers what we want at the price we are willing to pay.  I am certain that this plunder of the American consumer is just a tip of the iceberg of government protection of inefficient and backward industries.

Patrick Barron

From today’s Open Europe news summary:

EurActiv reports that free trade agreement talks between Canada and the EU have reached a deadlock due to EU opposition to raising Canada’s quotas of imported beef and pork and Canadian opposition to increasing imports of EU dairy products, eggs and poultry. EurActiv

Both Canada and the EU subscribe to the Mercantilist myth that a nation is harmed if it allows its citizens to purchase desired goods from producers beyond it borders than it sells to those same producers.  It is obvious that both Canada and the EU are less concerned about the standard of living of ALL their citizens than about protecting the livelihoods of politically connected, inefficient industries.  (If they were efficient, they would not need tariff protection.)  Patrick Barron

Dear Sirs:

I read with interest Mark A. Calabria’s detailed recommendations for bank reform titled “An End to Bailouts”.  Unfortunately, it is the nature of man to use a power that he possesses; therefore, eventually all the powers stripped from the Fed will slowly be returned, probably due to so-called “crisis management”.  But, let us assume that the Fed’s powers were scaled back to those recommended by Walter Bagehot’ i. e., “Lend without limit, to solvent firms, against good collateral, at ‘high rates’.”   Why is a central bank required to perform this function?  If a bank is fundamentally sound, yet short of liquid funds, it has no problem borrowing short term from other banks.  The Fed’s vaunted discount window power is used soley to bail out banks that are NOT fundamentally sound.  As long as the Fed possesses the power to lend to unsound banks, it WILL lend to unsound banks, because the political pressure not to do so will be irresistible.  Better to “End the Fed” now.  There is no reason to reform it, and there is no possibility that reform will last.

Patrick Barron

I found this article about the ECB being worried about competition from BitCoin to be similar to the U.S. Postal Service threatening to prosecute a Boy Scout troop for planning to make a little money by delivering Christmas cards.  Neither inefficient organization can stand competition from any source.  This supports the contention of many economists that all that props up fiat currencies is legal tender laws.  If we were allowed to use any currency mutually desired, Gresham’s Law would work in the reverse; i.e., sound money would drive bad money out of the market.  Patrick Barron

From Open Europe online of Feb 1, 2013:

Süddeutsche Zeitung reports that Germany’s Federal Social Court has ruled that a Bulgarian immigrant without work permit is entitled to social benefits. The ruling may now set a precedent for immigrants from other EU states claiming welfare benefits in Germany. Süddeutsche Ruling of Federal Social Court

So, the weak countries can print euros and buy German products or their citizens can travel to Germany and go on welfare.  Germany’s economy will be hollowed out, and few will understand how that happened.  Patrick Barron

Dear Sirs:

Will the madness ever stop?Will the editors and reporters at the Wall Street Journal ever critique monetary debasement honestly?The Japanese are thrilled that they have driven their yen to new lows against the dollar (Yen’s Tumble Brightens Earnings Prospects in Japan), and the European Central Bank is concerned about the euro’s strength (Threats Cloud Euro’s Flight).Both believe that prosperity lies in making exports cheap through monetary debasement. This is a horrible myth.No nation can make another pay for its own recovery.On the contrary, monetary debasement makes exports cheap through internal subsidies.The central bank gives more local currency to the foreign importer.The exporter benefits from buying replacement factors of production before the additional money raises the cost of living for all members of society.  After the new money works it way through the economy, raising the cost of replacement resources, the exporter is right back in the same position; i.e., he can sell more goods only through another round of monetary debasement.The nation’s wealth has been transferred to the foreign importer, using the exporter as the intermediary.Monetary debasement to spur exports is no substitute for the hard job of lowering costs of production through productivity improvements (that are the result of savings and investment), reduced regulations, lower taxes, and better management. Patrick Barron