Thoughts from the Frontline

Time to Get Outraged

By John Mauldin

June 10, 2011

Choose your language

Is It Time to Buy a House?
Time to Get Outraged by the Banks
We Need a Mulligan
A Congressional Investigation Is Needed
How We Get Out of This
20 Policies to Implement to Create Jobs
Tuscany, Kiev, Geneva, and London

This week we look at data from the Bank of International Settlements, by which (if someone does a lot of work) you can figure out how much US banks have written in credit default swaps to banks in Europe on Greek, Irish, and Portuguese debt. The details should not make you happy. I meditate on whether one should buy a house now, and then discuss “the way out” of all this mess and why we will Muddle Through. Oh, and I’ll ask you for help on yet another book project, on creating jobs. And all while trying to finish early enough to go to dinner. So let’s get started.

Is It Time to Buy a House?

The answer to that question is not simple, but let’s start with my own personal experience. I bought a home in the early ’80s in Arlington, Texas for what we thought was a fair price; but the mortgage was back-loaded, so I was not buying back much equity, just paying a lot of interest. But we had a growing family and the need for space, so…

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Jeff Martin

June 14, 2011, 11:47 a.m.

THANK YOU! THANK YOU! THANK YOU!
It’s about time someone finally stated the obvious.  Glass Steagall kept the foxes out of the henhouse for 65 years and almost all of the economic problems subsequent to it’s demise can be traced to Phil Gramm’s bill that repealed it.  Every major financial crisis in the last 100 years can be traced to underregulated banks and rampant speculation with money that should have never been at risk.  Putting the derivatives on an exchange is also a must.
As far as creating jobs; maybe we should start with an attitude change.  Instead of looking at the world through the eyes of John Wayne American exceptionalism, maybe we could take a lesson from Germany and find a healthy partnership of management, labor and government. We created the German economy that is now one of the world’s most powerful manufacturing and exporting countries with the Marshall Plan after WWII.  Their citizens are now trained and supported by industry and government to maintain a level of excellence that Americans don’t have.  German citizens also have little debt and credit cards are non existent. They are savers and builders while we have become debtors and consumers.  We work many more hours than the Germans as we frantically try to sell things to each other to make a buck and pay off the massive personal debt foisted on us by our consumerist society.  The German economy is one of the strongest and most stable in the world.  We might want to look at some of the things that make it so and try them ourselves…if we can get over our rhetoric.
I want to stop being called a consumer and return to being a citizen. 

Jeff Martin

tax payer

June 14, 2011, 11:41 a.m.

RE: 20 ideas, what the government should do to help create jobs.
The land value tax (LVT) would have great benefits in job creation. LVT is a tax based on the value of land, excluding buildings & other improvements.  It can be used to replace taxes on retail sales, earned income and profits from capital goods. Benefits: (1) More pressure to use well-located land efficiently, creates jobs both in construction and in activities on the land. The tax itself affects land prices resulting in more efficient land use patterns. (2) Removing taxes on work, capital investment, and retail sales will create jobs and raise effective wages while reducing the cost of employing labor. Many studies document the effectiveness of this strategy at various times and places where it has been used.  There is much on the net about this; one good place to start is: http://foldvary.net/works/policystudy.pdf

Gary Corbin

June 13, 2011, 4:17 p.m.

If we do not begin immediately to encourage the increased quantity and quality of our US Engineering graduates we are doomed. To that end, the following should be required reading for any all that seriously wish to tackle our systemic unemployment problems. Particularly read pages 41-53. Our recent focus on producing more and more lawyers and financial “quick-buck” artists has brought to this point…it must stop.

http://www.nap.edu/openbook.php?record_id=12021&page=41

A brief ecerpt:

The attractivenessâ??or, more precisely, the unattractivenessâ??of a career in science or engineering, at least as seen through the eyes of much of Americaâ??s youth, becomes evident when one examines trends in graduation statistics. The number of traditional bachelor of engineering degrees (excluding computer science) awarded by US universities each year has, as already noted, declined by 18% over the past 20 years. And the number of doctorates in engineering awarded to US citizens by US universities has declined by 23% in the past decade alone. In contrast, over the most recent 2 decades, the number of law degrees granted each year by US law schools has increased by over 20% and the number of masterâ??s degrees in business administration has increased by 108%. In absolute terms, the most recent data available from Americaâ??s universities show nearly 44,000 students receiving law degrees, nearly 140,000 receiving MBAâ??s, and over 64,000 receiving bachelorâ??s of science in engineering and 6,400 receiving PhDs in engineering (of whom 33% are US citizens). In other terms, counting only US citizens, for every new (PhD) engineering researcher, the nation produces about one (PhD) physical scientist, 18 lawyers, and 50 MBAs. The implicit strategy seems to be to sue ourselves to prosperity, or perhaps to do so through financial â??engineering.â?

Mary Fowler

June 13, 2011, 11:56 a.m.

Ditto Michael Sandlin on the malpractice comments. 

To help unemployment, do away with minimum wage laws.  This and other nonsensical regulation is strangling business.  Let the marketplace determine wages, prices, etc.  Unions are HURTING business and employment.

Most of the stuff in this newsletter I am ignorant about.  But it is incorrectly stated above that “taxpayers made up the difference” when failed bank assets were/are sold at a loss.  Banks pay insurance premiums to the FDIC, and the losses are paid from the insurance fund….not by taxpayers.  Also, most people don’t know that the government made a profit on the so-called “TARP bank bail-out”.  As long as smart people like Mauldin perpetuate false info, people will continue to be misinformed.

Thank you for the opportunity to comment.

Stephen Ganns

June 13, 2011, 11:39 a.m.

John,
The BIS (Bank for International Settlements) has been warning on this topic for a few years.  The truth is that at the heart of the crisis, has always and forever been the OTC Swaps market.  It’s why we can’t clear the various asset classes.  The “gap” is and has been unquantifiable—so the hole could not be plugged—no matter how much stimuli.  Probably the correct action in mid 2008 would have been to suspend trading of all OTC swaps, reverse all “naked” transactions, and establish exchanges for clearing post haste.  Once quantified and done, use RGE’ Monitor’s shorfall and plug the hole—then markets could have cleared and GDP could have recovered.  It’s as if Moses came down from the mountain and said” Let the coporations go bust, let the homeowners be foreclosed, let the unemployeed starve, but at all costs save the “swaps.  This is what gave us not too big to fail, but “TOO Big to Bailout”

Bode Bliss

June 12, 2011, 9:51 p.m.

You have some of the most thought provoking essays of a dark age. An age of the world when economist, politicians, and even scientists pile on what is populist jawing just to say they were, ‘in the right’, ‘They knew!’, rather than stick with what they believe, and let history prove them right.

I admire your intelligence.

Dave Scotese

June 12, 2011, 5:58 p.m.

Unfortunately for all of us law abiding citizens, the way out of this mess will be led by brave and good people willing to break laws in stealth.  Of course there will be brave and bad people also willing to break laws, and it would be nice if the authorities concentrated on distinguishing between the two groups.  While it’s much more difficult to pinpoint the bad ones and prosecute them while avoiding the good ones, the effect on society would be positive instead of negative.  For example, importing cannabis, while likely to remain illegal, should be largely ignored as it provides the lowest parts of our economy with oomph and makes things better for most involved, save those who have to deal with its lack of legal sanction.

Of course, your book is supposedly going to be about policies - what government can do - rather than strategies - what we can do.  That is unfortunate because, as we have seen, none of us are angels.  Greed and deceit and violations of trust (“corruption” for those who view trust in authority as a necessity - Hobbesians, I guess) will always be around, and until we (rather than the authorities who demand our trust and obedience) figure out how to deal with their ubiquity, the problems attributed to their existence will continue growing.

A book about strategies would be much more helpful, although, given the growing recognition that government often does more harm than good, it would be less popular.  And I guess you already wrote about the strategies.  I recently read about a left-leaning fellow named Kirkpatrick Sale who seems to have identified a powerful idea: small polities.  Secession may ultimately save the world.  We just have to figure out how to do it peacefully.

Michael Sandlin

June 12, 2011, 12:39 p.m.

Job creation Ideas

1. I agree with a previous post that a Natural Gas Act in some form will ultimately lead to the next big boom in this country. Redirecting massive capital outflows, which are now subsidising foreign kingdoms through the purchase of oil, back into the domestic economy by substituting domestic natural gas for foreign oil would be the single most potent job creation mechanism that this country could offer itself. It will happen, but it’s hard to say when.

2. Malpractice Free Zones and Cash for Care - Believe it or not, our long-term healthcare issues are slowly being solved for us by the currently stealthy free market solution provided by foreign hospitals and surgery centers. Whether it be Thailand or India, great doctors and other medical professionals are jumping ship and setting up shop in foreign countries to dodge the wholly destructive litigious culture of opportunistic medical malpractice lawsuits here in the good ol USA. Let’s give patients the choice to seek medical attention outside of the malpractice umbrella. Create entire hospitals and medical centers in malpractice free zones within the US. Allow doctors and patients to interact outside of the costly and destructieve purview of hungry trial lawyers and federal regulators. A new, truly “free market” in medicine would be a boon to the economy. Instead of folks flying to Thailand, Costa Rica, or India for medical care, they would be able to stay here. You would see health care inflation reverse itself on a dime, and quality of care would skyrocket.

3. Insist on real IP protection laws in countries such as China, or institute consequences - This aint gonna happen, our country’s leaders are too stupid, corrupt, or scared to ever do what it needed here. This would probably be the best job creation strategy of all time, by any government, throughout history. If we demanded robust IP protection from foreign countries, we would have nothing to worry about here, for a long, long time. Information has more value than any other export in the world. But… that’s only if it can be monetized through robust international IP legislation and enforcement.

4. Anti-incumbency - vote them all out of office, and tell the next class to quit with the nonsense or else.

5. Real roads and bridges - I don’t have an issue with the government deficit spending on real infrastructure that is needed in this country. It just needs to be accomplished through a transparent (internet based) private sector bidding process coupled with local referendum voting. Roads, bridges, electrical grid infrastructure, airports, etc.

6. Slash the payroll tax rate by 50%, but uncap it - make the tax less regressive.

I could go on forever, and I would never get to Obamacare…

Russ Abbott

June 11, 2011, 8:57 p.m.

Great piece!  I just wish you would stop throwing gratuitous bricks at government. When you say “if government gets out of the way” the implication is that that government is always in the way and that we would be better off without any government.  I’m sure you don’t believe that, but by this sort of gratuitous brick throwing you are encouraging the people who (think they) do. 

You went on to say that government might “actually implement policies that help.” I’m glad to hear you say that. I hope you had something else in mind than the meaningless “less taxes and less regulation.” You must mean something else since you say you regret the elimination of Glass-Steagall.

Since you acknowledge that some sorts of regulations are important—and I’m sure you also agree that there must be taxes to pay for government—then be a voice of constructive moderation and speak out for good government. Perhaps more important coming from you, please don’t encourage the flame throwers with statements like “if government gets out of the way.”  Not only does it not help, it courages the crazies to continue acting crazy.

William Matz

June 11, 2011, 4:40 p.m.

Another fine, thought-provoking essay. I’ll throw in a few additional factors for consideration.

The homebuying analysis always needs to look at the full picture. Rates near historic lows favor purchase. Another article examined prices of homes over the last 80+ years relative to gold and showed that today’s prices are <2/3 Depression-era prices, normalized for size. May not be decisive but worth thinking about.

Agree that Glass-Steagall repeal has failed. It might have worked had financial institutions behaved responsibly. But not only have they not done so -chasing short-term profits at any cost- but as books like “Fools Gold” by Gillian Tett point out (for Chase) banks were already planning to game the system prior repeal. Despite all the public denials of the foreseeable dangers, inside anecdotal evidence was that they knew the whole derivatives scheme would blow up in @ten years, “But we’ll make a lot of monaey and be out of there when it does.”

Another recent commentary pointed out that while mortgages get the blame for the crisis, they were actually a symptom, not a cause. The cause was massive leverage, so that when doubts emerged about the value of any ABS (in this case MBS), the contagion spread throughout the ABS world well beyond the limited capital reserves available. In David Faber’s CNBC expose’, “House of Cards”, it was ironic that the ABS that blew up for the Norwegian town turned out to be based on assets other than mortgages.

Given the massive, indisputable violations of lending laws and regulations, it is simply amazing that no “big fish” have gone to prison. The Feds pursue small $2 million cases, while Killinger, Mozilo, Dimon, Fuld, et al skate. An irony here is enforcement of existing lending law would have prevented much of the mortgage abuse, even with the repeal of G-S. But clearly, we need to look at ‘too big to fail” as “too big to continue to exist and endanger the entire economy”.

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