Friday, June 13, 2008

France To Subsidize Gasoline (Government Intervention Run Amuck No. 18)

Just when you thought French President Sarkozy's government was getting things right, you learn something like this:

Francois Fillon, the Prime Minister, announced last night that the government will help all wage earners meet the rising cost of gasoline through a direct paycheck subsidy.

[Thanks to for the photo.]

To quote an article published at the French TF1 TV website:

"Francois Fillon announced a 'direct subsidy' for all wage earners to help them meet the rising cost of their commute to work, and he asked that all the social partners [the powerful French unions] come to agreement on the conditions surrounding this transfer." ... "The Prime Minister chose the method of a direct payment that would appear on the paystub of salaried workers." ... "The conditions to receive the subsidy should include the impossibility of using some form of public transport."

(At the same time, he announced the development of plans for new nuclear facilities, a more practical solution. France is way ahead of the U.S. in this domain.)

Recently, France and other European countries have suffered a number of trucking stoppages and public unrest due to the high cost of gas.

Remember that the social system of many European countries needs to be fed regularly, and a good bite comes out of the French gas budget in the form of taxes; so right now a French worker pays almost $10 a gallon, and large transport companies are suffering even more there than here.

Subsidizing gasoline for commuters is:

(1) Robbing Peter to pay Paul (i.e. taking tax money from the truckers and from all consumers and giving it back to some consumers);

(2) Encouraging consumers to buy more gasoline thereby upholding the demand level even at these unprecented prices;

(3) Placing an additional burden on the already heavily indebted French social economy; and

(4) Using counterproductive measures from an economic standpoint, because when high prices don't result in a lessening of demand, the high prices continue (even if the measure is "productive" in the sense that it calms voters' ire).

On a more positive note, hopefully all those gallon-dollars and euros will end up encouraging production and expansion of the energy industries, provided that they don't think this price spiking is an effect of speculation alone (and there is debate about this on all sides).

So you have here a double-whammy of messy government intervention:

- Bubbles in commodity prices probably are caused at least in part by interventionary and loose central bank monetary policy; and

- These efforts to calm the masses through hand-outs that strain public budgets will only be palliative and most likely will backfire.

Good grief. What a mess.

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Thursday, June 12, 2008

Odd Ducks Freddie and Fannie: Example No. 17 of Government Intervention Run Amuck

"...[T]he vast majority of mortgage securities sold in the last six months" were offered by Fannie Mae and Freddie Mac, semi-public enterprises that are neither ducks nor geese, human nor animal; i.e. neither totally public nor private corporate entities. (Source.)

[Image thanks to Patricia Piccinini, an Australian sculptress, through]

The Legislature created them in the 1930s and 1970s in order to help people of modest means acquire their own home; but--and this is typical of government well-meaning ventures of this type--the latest mortgage crisis has revealed that many of the people who obtained loans over the last four or five years should never have passed through the financial screening process from a banking point of view.

Yet still the impractical goal holds the minds and wills of our legislators today:

"'I want these companies to help with affordable housing, to help low-income families get loans and to help clean up this subprime mess,' said Representative Barney Frank, a Massachusetts Democrat and the chairman of the House Financial Services Committee. 'Otherwise, why should they exist?'" (Source.)

Excellent question, especially when one realizes that Freddie and Fannie were two of the originators of "this subprime mess" (among others).

Both organisms get most of their funding from the public sale of shares, but the line to the government purse is in place, "just in case." This dual line of financing is at once their saving grace and their Achilles Heel, because management has to please two benefactors.

Unfortunately, however, there is a golden rule that says, “No one can serve two masters, because either he will hate one and love the other, or be loyal to one and despise the other." (Luke 16:13).

In trying to please both, Freddie and Fannie have take on a precarious amount of leverage (i.e. they have borrowed way over their credit limit). The market allowed them to do this because of their seeming immunity to the effects of negative market forces, which immunity springs from their position as semi-governmental agencies. The government allowed them to do this because of their above-mentioned goal.

Both companies are about to face a crisis based upon this double role they have been trying to play. They may surmount it; but to do so they may have to dip into our tax money if their regular private sources of capital dry up.

I would hate to be in their CEOs' shoes over the next few months.

Here are two easy-to-read links that will inform you of the situation:

This Wall Street Journal article from today's paper; and

This nice graphic from an earlier New York Times piece.

There's another golden rule that we the voting public may learn in due course: When governments intervene in the marketplace, unintended forces will evolve, and they often run amuck of even the best of intentions.

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Tuesday, June 10, 2008

Expectations Schmexpectations (Example No. 16 of Government Intervention Run Amuck)

I get so annoyed with our central bank governors when they talk about "market expectations," as though these were something they, the governors, controlled by a mere syllable or two, when in fact they don't even know what they are.

[Thanks to Dr. Leila R. Brammer at for the image.]

To get an idea of how truly flakey economists' understanding of inflation expectations really is, read this speech by Supreme Economist Fed Governor Bernanke himself. I applaud his candid approach to this subject; but the vacuum of scientific knowledge is scary when you think that the Fed Board controls the world economy.

Jean-Claude Trichet, the European Union central bank governor, says in his own most recent speech that "inflation expectations must be controlled."

Although Trichet has earned a reputation for putting his actions where his mouth is, Bernanke is now addressing the inflation issue mainly through jawboning, saying things like, "The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation."

Okay, talk on. We'll wait for the action.

What the monetary authorities seem to want to brush under the rug is the following point:

Not only the central bankers' words but their anticipated actions have become a part of the market itself.

Here's how it works: The market participants listen to what the central bank governors say, and then they act accordingly.

Now, this doesn't mean necessarily that the market players heed the words. It may mean that they speculate on the effect of the words first, profiting from the immediate market movement; meantime, they have judged for themselves what the actual actions and outcomes of the words will be. They know well that sometimes the actions and outcomes are diametrically opposed to the words our central bankers utter.

For example, when the U.S. central bank governors instruct the market that they intend to "control inflation," the market knows that the general public might believe them and this may cause certain indices to move in the short term. However, for the long term the market players may know better and suspect that the Fed will continue to inflate at the slightest sign of economic trouble.

The words have now have become a signal to some market players that there is profit to be made in the short-term swings of public reaction to the words; but that in the long run, they can expect the opposite actions and outcome.

Speculators take action accordingly. Company management listens to the Fed governors, even using the words as an excuse to withhold pay raises for their employees. After all, they say to themselves, "[d]espite rising energy and food prices, Trichet said it was vital for workers in Western countries to moderate wage increases, which economists regard as the best way to avoid an inflationary spiral."

Okay, so employees must tighten their belt? But why then doesn't this prevent some of the more savvy market players, e.g. management of larger corporations, from skimming off the profit cream for themselves, or from using corporate funds to indulge in speculative activities a la Sears Roebuck?

In this example, it could almost sound as though management and the central bankers are in cahoots against the wage-earning public.

This may sound far-fetched; but it describes pretty much what is going on. Central bankers are asking wage earners to forego a salary increase even though this is supremely unfair given that the speculators and corporate CEOs are reaping record millions.

This means that the average Joe and Jane get stiffed on the pay raise as the cost of their food and gas is doubling. Meanwhile, higher management with their gawdy salaries--and the central bankers with their political hubris--apparently don't see the irony, or the potential dangers.

I've made a point of listing examples of government intervention gone amuck. This has got to be one of the best.

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Friday, June 06, 2008

Global Warming as Religion

Today, I fell upon this great commentary at the website of the American Institute for Economic Research.

AIER has recently had a conference on Global Warming that scientists and philosophers from all sides attended. You can hear a few podcasts of speeches at this page of their website.

This particular commentary discusses the religious aspects of environmentalism. Boy, do they hit that particular nail where it hurts.

[Thanks to for the image.]

Isn't it true that today's greenies sound just like the religious fanatics they so despise. And aren't those businesses laughable that are kowtowing to them.

I read this article about a huge French supermarket chain named LeClerc that is now publishing the "carbon equivalent value" of items for sale right next to the article's price.

Sounds like having a priest watch every bite you eat at the dinner table.

A young secretary leaving the cash register is informed by her receipt that she has incurred a "carbo equivalent value" of 9.28. She asks herself. guilt-ridden: "Could it be the yogurt containers? Or perhaps it's the transport costs of my imported fruits."

The company has calculated this "value" by estimating the carbon emissions caused by packaging production, transportation, refrigeration, stockage, sales, and discarded by-products.

They probably forgot to include the wasted human effort: It costs 50,000 euros to calculate the carbon impact on one product, making 300,000 euros for 20,000 products.

LeClerc pays only 150,000 euros, because the rest is financed by ADEME ("Agence de l'Environnement et de la Maitrise de l'Energie," or Agency for Environment and Energy Management, a governmental environmental organization) and by the local government of the particular region of France in which the store is located.

LeClerc probably includes their share in their marketing budget.

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Thursday, June 05, 2008

Thanks, Bernanke, but I'll Take What You Do Over What You Say

Bernanke has taken up the Volcker challenge and has decided to change tactics.

He is now going to defend the dollar, if we can believe his latest declarations.

Apparently he thinks talking about it will do the trick, i.e. shape market expectations and prevent inflation from taking hold over the longer term. In other words, he's learning how to jawbone, like any self-respecting Federal Reserve Governor should.

[Thanks to for the picture.]

Jawboning is the Fed representatives' technique of influencing speculators and other market participants so that markets move in the direction the Fed desires.

But this will not be enough this time around.

As this excellent editorial in the Wall Street Journal points out so clearly, words alone will not do the trick at this stage in the game. The world has lived through too much political mirror-speak to believe everything our government or its representatives say.

We have seen nothing but dollar trashing over the last several years. Nothing in the Fed's actions to date confirms that the Board has any intention whatsoever of doing what is necessary to stop the decline of the dollar's exchange value and purchasing power. Quite the contrary.

There has been a loosening of the credit spigot and an assumption of moral hazard to an extent never before seen in history. The road backward is a long, exhausting haul that no political animal would undertake without extreme force.

So what do we learn from all of this jawboning? Markets learn; but Fed officials apparently don't.

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