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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the Fed’s interest rate announcement, the divided cultural experiences of America’s upper and lower class, and whether or not “the American way of life” still exists.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

U.S. Stocks Cheer Fed’s Rate Pledge
The New American Divide
Quiz: How Thick Is Your Bubble?

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From the Associated Press:

Federal Reserve Chairman Ben Bernanke says the economic recovery “is close to faltering” and the central bank is prepared to take further steps to support it.

The economy is growing more slowly than the Federal Reserve had expected, Bernanke said Tuesday before the congressional Joint Economic Committee. He said the biggest factor depressing consumer confidence is poor job growth.

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From the Associated Press:

The U.S. Federal Reserve’s tacit acknowledgment that America’s economic slowdown is likely to persist for quite a while sent global stock markets skidding Thursday as investors brushed off the central bank’s efforts to spur growth and focused instead on its gloomy assessment.

Oil tumbled too but the dollar held its own against the euro, which has been weighed down in recent weeks over concerns that Greece might go bankrupt. Hong Kong’s Hang Seng led the retreat lower earlier during the Asian session with a near 5 percent dive.

The losses began Wednesday afternoon in the U.S. after the Fed announced a highly anticipated program to trade in $400 billion worth of short-term bonds for the same amount of longer-term bonds. The goal is to ensure low borrowing rates for a long period, thereby helping to stimulate the housing market and other economic activity.

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From the Associated Press:

The Federal Reserve is running out of options to try to boost a slumping economy and lower unemployment. So policymakers are expected to reach 50 years back into their playbook for their next move.

Most economists expect the Fed to announce a plan Wednesday to shift money in its $1.7 trillion portfolio out of short-term securities and into longer-term holdings.

The plan could lower Treasury yields further. Ultimately, it could reduce rates on mortgages and other consumer and business loans, too.

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My favorite contributor over at Black Entertainment Television wrote a piece on President Obama’s eroding support among African Americans –specifically on his dismal handling of the economy. According to a Washington Post/ABC News poll, Obama’s African American support has dropped from 77%, to just over half supporting his stewardship of the economy. What a difference just two and a half years can make! When the president was elected, the exuberance among African Americans was infectious, joyous, and a bit overly optimistic as this clip from the day after the election shows:

Liberals and African Americans still clinging to “hope and change” cite in the president’s defense that he inherited a terrible economy from President Bush and that Obama can’t be expected to turn the economy around in only two and half years. It’s almost a plausible argument – until you start comparing this presidency and economy with the economy our 40^th President inherited from Jimmy Carter in 1981.

When Ronald Reagan was inaugurated in 1981, interest rates were at 21%, inflation was at a wrenching 13.5%, and unemployment was at 7%. In contrast, when President Obama was inaugurated in 2009, interest rates were at a historically low 3.25%, inflation stood at 4.2%, and unemployment was at 7.8%. The misery index (the addition of inflation and unemployment numbers) when Reagan entered office was 20.5%, for Mr. Obama, 12.8%. Currently under President Obama, inflation is 2.7% and unemployment is at 9.2% and climbing with many economists believing it’s really 16% giving Obama a real misery index of 18.7%. Even the liberal Washington Post suggests that President Obama has had enough time to jump start the economy:

The economy rebounded significantly during Reagan’s third and fourth years in office. The unemployment rate declined, although not spectacularly. It was still at 8.3 percent in December 1983 and at 7.5 percent in August 1984 as the general election campaign was entering its final months.

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From the Associated Press:

The Federal Reserve acknowledged Wednesday that the economy is growing more slowly than it expected. But it said it will complete its $600 billion Treasury bond buying program by June 30 as planned and announced no further efforts to boost the economy.

Ending a two-day meeting, the Fed repeated a pledge to keep interest rates at record lows near zero for “an extended period,” a promise it’s made for more than two years.

Fed officials said in a statement that they think the main causes of the economy’s slowdown, such as high gas prices and supply disruptions from Japan’s disasters, are temporary. Once those problems subside, Fed officials said the economy should rebound.

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In the 26 months since the stock market bottomed in March of 2009, stocks have risen 80%+ as the economy regained its footing after the 2008 financial crisis and ensuing market crash.

As impressively, the market has made such tremendous gains with only one significant correction, which ironically began almost a year to the day before the one in which we now find ourselves. Now, with the markets tumbling, many are unsure of why or how far they will fall.

To be blunt, the basic problem with the markets at present is that since the bottom investors haven’t been adequately compensated for the risks they’re taking in the markets. Sure stocks prices have risen, but that buying has been in anticipation of growth in revenue being passed onto shareholders. After all, when investors buy stocks what they’re really paying for is a share of dividends to be paid in the future (plus the break-up value of the company).

Unfortunately, since the bottom of the 2008 crash interest income paid to Americans has made almost no recovery (thanks to the Fed’s policy of maintaining low interest rates for “an extended period of time”). Dividend income, meanwhile, has ticked up just slightly and is still nowhere near pre-crash highs, and Personal Income Receipts on Assets has completely failed to keep pace.

(more…)

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On today’s edition of Coffee and Markets, Brad Jackson is joined by Pejman Yousefzadeh and Elizabeth Blackney to discuss how the Fed’s monetary policy has created a two tier economy and the impact that has had on the jobs market and the average American family.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Pej: My Kingdom For a Coherent Monetary Policy (Paul Ryan Edition)
Pej: Let Me See If I Have This Straight
Coffee & Markets: Investors and Economists Slap Bernanke Over QE2
Coffee & Markets: David Malpass on the Government as a “Silent Partner”

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On today’s edition of Coffee and Markets, Francis Cianfrocca is joined by David Malpass, economist former Reagan administration official and founder of Encima Global to discuss the Fed, raising the debt ceiling and how the government is a “silent partner” in American business.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

The Weak-Dollar Threat to Prosperity
How the Fed Is Holding Back Recovery
Near-Zero Rates Are Hurting the Economy
David Malpass on CNBC: Letter To Bernanke: Stop QE2
Encima Global

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Can you hear that great sucking sound? It’s the sound of government shrinking around the world, as Portugal just joined Greece, Ireland and soon many others in acknowledging they are bankrupt and asking their European brethren for a bail-out. What is frightening to the big government advocates is this collapse was caused by a doubling of Portugal’s borrowing costs in just three weeks. The klaxon horns are going off in Europe and America; cut deficit spending or be destroyed by rising interest rates.

Over the last two decades, governments in Europe and the United States have been massively using taxpayer subsidies to sponsor favoured industries, under the smoke screen of National Industrial Policy. The theory, developed by Harvard economist and former Secretary of Labor in the Clinton Administration, Robert Reich, stated that governments must “deliberately and strategically” speed the movement of capital and labor into “higher-valued production” or suffer social decline; with infant mortality rates rising and employment and life expectancy falling. Reich championed National Industrial Policy planners would more efficiently allocate capital and labor resources to satisfy consumer demand than large corporations who inefficiently use marketing to bend customer demand to their needs. He claimed it was the duty of government to induce through direct subsidies and worker retraining grants uncompetitive companies to scrap production and steer investment in industries of the future.

Europe adopted National Industrial Policy through the introduction of the Euro currency and banking deregulation. Southern European countries like Portugal, Italy, Greece and Spain got low-interest German and French bank loans to scrap supposedly uncompetitive local manufacturing and “cushion” the transition of workers into leisure services and retirement housing development. Germany and France got elimination of competition and export growth to Southern Europe. Europeans were ecstatic for 15 years; the South had a real estate and banking boom, the North had a manufacturing and banking boom.

The U.S. adopted a National Industrial Policy during the Clinton Administration in 1999 by tying bank deregulation to a colossal expansion of the Community Reinvestment Act. The big banks got unlimited ability for multi-state banking and abolition of the 1933 Glass–Steagall Act prohibitions against banks engaging in high risk securities and derivative trading for their own accounts. Planners got huge quota requirements for loans to inter-city and rural communities. President Clinton hailed that the signing of the Gramm-Leach-Bliley Act “establishes the principles that, as we expand the powers of banks, we will expand the reach of the [Community Reinvestment] Act”.

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On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the reality of inflation vs the Fed rate, the latest unemployment numbers and the fall of the dollar.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Current Inflation Rates: 2001-2011
Focus of US Fed remains on core inflation
Unemployment Report – February
U-6 Underemployment Rate – February
Why the Dollar’s Reign Is Near an End
(more…)

The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counterproductive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

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While chaos theory has had a place in science since mathematician and physicist Jules Henri Poincare first coined the term in the 1880s, it made its way into pop culture with the introduction of the so-called butterfly effect by fiction writers Ray Bradbury (“A Sound of Thunder,” 1952) and fictional chaotician-in-chief Ian Malcolm with his widely popular “Jurassic Park” in 1993. The idea, of course, is that activity that impacts one part of a system can have wide-ranging, unforeseen (and in the case of government interfering in a free-market economy) unintended and undesirable consequences elsewhere in that system.  While we have had no scarcity over the years of political butterflies in both parties incessantly flapping their wings to, generally, no good purpose, we are currently witnessing a truly historic exercise in chaos theory, Washington style.

As we argued in an earlier column this month, the $2.0 trillion in cash (and growing) that has been accumulating throughout the year in corporate bank accounts is more than enough to jump start the economy out of the doldrums in which it has been languishing for the better part of three years.  All of this capital is locked in irons, as our sea-faring friends like to say, chiefly because a muscle-flexing, game-changing government is piling uncertainty on top of uncertainty with largely unwanted new taxes, new programs, new mandates (mostly unfunded), new regulations and new agencies to enforce them.  What’s a well-intentioned businessman to do?

Rather than stepping aside and giving the marketplace a chance to regain its footing after the financial debacle (also largely the result of government malfeasance) that defined the transition of government nearly two years ago, the Administration, Congress and the Fed have elbowed their way, at great cost, into the commerce of the country with dubious to negative results thus far and, for many, with absolutely devastating impact.

Interest rates have been maintained at ridiculously low rates quarter after quarter and, now, year after year.  The Fed has accomplished its goal and made this a heyday for borrowers. Companies and others who don’t even need the money are borrowing to avoid missing this debtors’ bonanza although in many sectors (notably real estate), banks won’t lend because of marketplace uncertainties.

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In a June 14th editorial entitled “Politicizing the Fed,” the Wall Street Journal sheds light on one of the dubious regulations of the upcoming financial reform bill.  The Journal states:

The biggest underreported threat comes from Subtitle I, Section 1801 of the House financial reform bill titled “Inclusion of Minorities and Women; Diversity in Agency Workforce.” Sponsored by California Democrat Maxine Waters, the provision requires each federal financial agency, the Fed Board of Governors and the 12 regional Fed banks to “establish an Office of Minority and Women Inclusion.”

So what else is new, you say? Don’t the feds already dictate racial and gender hiring? Yes, they do, through the Equal Employment Opportunity Commission and assorted other federal laws. As a matter of racial and gender diversity, the Waters provision is at best redundant.

But Ms. Waters and the House are hunting bigger game—to wit, the political allocation of credit.

[...]

The House provision makes that very clear by making each diversity officer a Presidential appointee who must be confirmed by the Senate.The post, says the bill, will be “comparable to that of other senior level staff.”  The post, says the bill, will be “comparable to that of other senior level staff.”

The law says this diversity czar will “ensure equal employment opportunity and the racial, ethnic and gender diversity” of the work force and senior management of these institutions. More ominously, this creature of Congress and the White House will also be charged with “increas[ing] the participation of minority-owned and women-owned businesses in the programs and contracts” of each agency and conducting “an assessment” of stated inclusion goals.

Mull over that one for a minute. Having recently lived through a financial mania and panic caused in part by political pressure for “affordable housing,” Congress will now order regulators to allocate credit by race and gender.

In an article I wrote on February 28th entitled “Fiscal Death by Welfare,” I argued: “I believe that as the downturn goes on the government will blame the banks for the lack of economic growth and force them to allocate credit to chosen political entrepreneurs and other bad credit risks…”  I truly wish I had been wrong in my assessment.

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Today the leading Austrian economic think tank, the Ludwig von Mises Institute held a conference at the University Club in Manhattan in which Marc Faber, famed contrarian investor and publisher of the “Gloom, Boom and Doom Report” gave his perspective on the financial crisis and his outlook for the future.

Below are his main points and entertaining quotes:

• Central banks will never tighten monetary policy again, merely print, print, print
• Bubbles used to be concentrated in 1 sector or region in the 19th century, but off of the gold standard this concentration has ended
• “The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”
• “Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this
• US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US
• “You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004
• Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked
• The next 3-5 years will be highly volatile

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A recent Pew survey revealed the nation’s big banks are drawing the most ire from the American public, and now that the Federal Reserve is poised to hand them another victory, it’s easy to see why Main Street’s anger burns deep.

Wednesday, Federal Reserve Chairman Ben Bernanke released a statement to the House Committee on Financial Services which detailed the accommodative policy the Fed implemented as a result of the Great Recession and outlined its exit strategy from that policy.

The objective of the Fed’s intervention was to alleviate the pressure on the balance sheets of the banks, which would provide them with the financial flexibility necessary to begin lending to consumers and businesses once again. To meet such an end, the Fed increased the size of its balance sheet through purchases of securities and real-estate loans from the banks, and decreased the interest-rate for interbank lending to nearly zero percent.

The banks’ first ‘Win’ came as a result of those sales to the Fed which produced billions of dollars in revenue. Afterwards, many of us were wondering why the banks weren’t lending again, despite raking in record profits, but the answer was simple. They quickly realized they had found themselves with a can’t lose proposition, as they could make guaranteed money instead of taking on more risk from lending to consumers and businesses during a period of economic uncertainty.

How could they do that?

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President Obama says he’s going to have a “serious talk” with bankers today to pressure them to provide more credit. Why? Well, because if you’re upside down on your house and want to take advantage of low rates, your bank is just as likely to say, “eh, no thanks, we’ll just keep making money.” We’ll discuss this and more on today’s edition of Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

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Related Links:

TNL: Want to Refinance? Tough Luck Pal
Business Insider: Citi’s TARP Repayment Bilks Taxpayers
Bloomberg: Obama to Have “Serious Talk” With Bankers
NYT: Refinancing Woes Mount

Black Friday predictions run from pessimistic to disastrous, negative interest rates worry the markets, and the New York Times makes ridiculous claims about the success of the stimulus. We discuss all this and more on today’s Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

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Related Links:

NYT: Stimulus was Awesome!
MSNBC: Black Friday Safety
SmartMoney: Wall Street Expects Big Black Friday

Negative interest rates finally materialize, Tim Geithner falls on his face at Congress, and the House moves forward with their policy of gutting the authority of the Federal Reserve. That’s three big stories to talk about on today’s Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

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Related Links:

WSJ: House Attacks Fed, Treasury
MarketWatch: Panel Votes to Audit Fed Balance Sheet
WP: Threatening the Fed’s Independence
Bloomberg: Geithner Resignation Calls Increase
Ryan and Hensarling: Why No One Expects a Strong Recovery

It’s another day with the Federal Reserve at the center of discussion as Ben Bernanke heads to New York City to give some significant remarks. Should the Fed be more transparent? Should it be audited? We’ll talk about that and how the markets respond to the latest retail report on the latest Coffee and Markets, a daily podcast from The New Ledger on politics, policy and the marketplace with Francis Cianfrocca, brought to you by BigGovernment.com.

Download Podcast | iTunes | Podcast Feed

You can subscribe to the podcast by following the links above, and if you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

AP: Stocks Rise on Retail Report
WSJ: The Fed and Transparency
David Ignatius: Dodd and the Fed
Cafe Hayek: Adam Smith and Financial Regulation
TNL: Chris Dodd’s Big Regulation Push