Where Fun Comes to Die

He’s been right for about 3.5 billion years.

Richard Posner, writing about “Capitalism in Crisis,” begins by reiterating exactly what are the potential issues of the $13 trillion the government is spending in its plans to improve the economy:

Much of this sum will not be spent (the guarantees), and probably most will eventually be recovered. But a commitment of such magnitude — stacked on top of enormous budget deficits enlarged by sharply falling federal-tax revenues — could lead to high inflation, greatly increased interest costs on a greatly increased national debt, much heavier taxes, the restructuring of major industries, and the redrawing of the line that separates business from government.

He follows this framing of the issue by an overview of how we have come to this, then finishes with several lessons that he has learned from the crisis, first that the Fed needs to do a better job looking for bubbles and gradually deflating them: “Our central bank failed us.” “The second lesson is that we may need more regulation of banking to reduce its inherent riskiness.” But he concedes:

[I]t is unclear how banking should be regulated. Banking in the broad sense of financial intermediation (borrowing capital in order to lend or otherwise invest it) is immensely diverse. It is also international. If one nation reduces the riskiness of its banking industry, business will flow to other nations, just as a bank that decides to be cautious will lose investors to its competitors because of the positive correlation of risk and return. So international regulation of banking is needed in principle, but international regulation tends to be lowest-common-denominator regulation and so may be ineffectual.

He concludes with some blame throwing:

Finally, let’s place the blame where it belongs. Not on the bankers, who are not responsible for assuring economic stability, but on the government officials who had that responsibility and failed to discharge it. They failed even to develop contingency plans to deal with what everyone knew could happen in a context of escalating housing prices (it had happened in Japan in the late 1980s and the 1990s). Lacking such plans, the government responded to the crisis with spasmodic improvisations, amplifying uncertainty and mistrust and thus retarding recovery.

And let’s not forget to apportion some of the blame to the influential economists who assured us that there could never be another depression. They argued that in the face of a recession the Federal Reserve had only to reduce interest rates and flood the banks with money and all would be well. If only.

So let me get this straight — the government is engaged in risky behavior ($13 trillion) that may sink the entire economy. The government is doing this in response to the dire consequences of it engaging in risky behavior that actually did sink the economy (manipulating interest rates to keep them artificially low).  Dastardly economists have been leading us astray (who knows for what purpose — conspiracy?).  Posner’s solution to all of this? Presumably based on the advice of a few influential economists, more government involvement in the form of regulation that Posner admits is at best tricky and at worst impossible to accomplish.  In other words, risky behavior by the government that could sink the entire economy.  More of the same, but better…  somehow…

Frankly I find George Selgin’s solution of a free banking system a lot more coherent and promising then the disenchanted-libertarian rantings of Judge Posner.

President Obama has plans to further regulate the credit card industry by restricting their ability to collect money on delinquent accounts:

President Barack Obama warned credit-card issuers they will face new regulations and scrutiny to keep consumers from being hit by “unfair” rate increases and abusive fees and penalties.

. . .

Card issuers are under fire for policies that impose large late fees and boost interest rates on delinquent customers amid higher unemployment and a recession.

I sympathize with the bankers.  If I had loaned a bunch of money to people who were suddenly unemployed, I would also try to collect as much money as possible before my debtors went bankrupt.  Why?  Because it is was their money in the first place.  Bankers are not running a charity organization.  They don’t care how you spend the money as long as you pay them back, which is a good option to have in a free market.

I understand Obama’s calls for “transparency” in credit card contracts, which are notoriously long and unread.  But to the extent these new regulations restrict the companies’ ability to collect debts, I would expect there to be a decreased willingness from banks to extend credit to high-risk people in the first place.  Which is what the bankers association warns:

The bankers association has warned the requirements may raise costs and limit the credit availability as banks already are reeling from the recession and the credit crunch.

At Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, according to Bloomberg data. That’s up from 5.9 percent last August. Delinquencies are jumping throughout the industry in tandem with unemployment, which reached a 25- year high of 8.5 percent in March.

Charge-offs, which are loans that banks don’t expect to be repaid, increased to an average of 8.02 percent in February from 4.53 percent a year earlier.

With Obama’s new regulations, I worry that the total bank losses from delinquencies will expand, increasing the pressure on an already unstable industry.  How will the banks make up for these losses?  More bailout money?  Charging their solvent customers more in interest rates and fees?  Either way, the money always comes from somewhere.  Although I understand why Obama would choose to extend relief in this political sleight-of-hand, indirect way (similar to the way he “handled” the mortgage crisis by cramming mortgage modifications down the throats of lenders), his calls for transparency in government ring all the more hollow to my ears.

After being accosted by Greenpeace enthusiasts yesterday, I was surprised to hear how they too have joined the bandwagon and caboosed all of their arguments with “and it will be good for the economy,” presumably because researching alternative energy sources will sponge up all of the unemployed physicists that are sapping the resources of the country.   Assuming the Greenpeacers were right about everything, why would they be in favor of such a measure?  The best thing that has happened to the environment in the past decade has arguably been the global recession and accompanying scale back on production and consumerism.   If we create new jobs, one result is that we enable our current national lifestyle to the detriment of the planet.  This would be a trickier issue if it was a choice between us or the planet.  Luckily Americans are not faced with the possibility of starvation and total lack of medical care so much as the possibility of crippling amounts of debt and its accompanying hardships at worst, and at best a reduced work week allowing them to spend more time with their family or pursuing the joys of life in a more environmentally friendly way. The Europeans seem to do it without too much angst.  We’ve already made the switch (almost?) to European-style small cars, let’s adopt the 35 hour week/2 month vacation lifestyle as well.

update: check out this new yorker article along the same lines.

I know this is old news, but there’s something about the recent SCHIP expansion that bothers me. Unlike the Republicans, I don’t care about SCHIP’s impact on the private health insurance market. If the US healthcare system is an example of capitalism in action, well then, maybe that Mao fellow wasn’t entirely wrong.

What bothers me about the SCHIP expansion is not what it does, but how it’s paid for. The bill is estimated to cost $32 billion over the next 4 1/2 years, and that’s being paid for with an increase on tobacco taxes.

Full disclosure: I love smoking. At the right time and place, a good cigarette is one of life’s great pleasures. I oppose smoking bans in bars on the grounds that people who don’t like smelling smoke while they drink should avoid taverns altogether and seek out places more suited to their tastes, such as yoga clinics or candle shops. 

But this is about more the fact that I like spending time in flavor country.  This is about basic fiscal sanity.

The smoking rate in America has been in a steady, gradual decline for years, and many government officials have made anti-smoking efforts into a centerpiece of their public health campaigns. Given the draconian smoking bans that are being adopted in some parts of the nation (and the American public’s insatiable love for drug wars), it wouldn’t surprise me at all if possession of tobacco was a criminal offense before too long. To keep up with the Depression-are analogies that are so popular nowadays, Obama funding SCHIP with a tobacco tax is like Roosevelt funding social security with taxes on laudanum and cocaine-flavored sodas.

I understand why Obama would rather tax smokers than pay for SCHIP out of general revenues.  Smokers are an easy target politically, and voters always prefer raise somebody else’s taxes.  But as the tobacco well gradually dries up, one of three things has to happen:

(1) The government, realizing that gets more money from cigarette sales than the tobacco companies do, starts up a major ad campaign encouraging everyone to smoke “for the children’s sake.” 

(2) The government sets its tax receipts and public expenditures at sustainable levels.

(3) The government finds some exciting new way to push the buck along, like selling organ-backed securities to the Chinese or imposing a mullet tax.

I’d love to see #1, because I think it would be hilarious. I think we’ll probably see #3, because I’m cynical. #2, which would require people to think about the future and live within their means, is fundamentally unamerican.