The Fed Finally Moves

Now that Janet Yellen and the Fed have finally gotten off the floor, it's time to review a brief history of Fed tinkering and its consequences.

Below is the Fed Funds Target Rates for the last 15 years.  (2010 -2015 = 0.0%)

During the period 2001 - 2004 the Fed lowered rates eventually down to 1% to boost a sagging economy and in response to 9/11.  This had an important side effect.  The already emerging housing bubble got a massive new injection of easy money.  The housing bubble was originated by alternative government mortgage policies dating back to the 1990s which upended thousands of years of sound lending practices.  This included mandates for Fannie and Freddie to buy the bulk of the new alternative mortgages.  Then came the Fed.  By lowering rates to historically low levels, the housing bubble was put on steroids.  Along with all the new easy Fed money came the mortgage derivative monster that Hollywood loves to focus on.  This was how the bubble got so big and so dangerous. Fed tinkering, no matter how well-meaning, played a big role.  But the real damage came when the Fed violently burst the bubble it helped create.        

Ben Bernanke became Fed Chairman February 1, 2006 when the Fed Target rate had already been raised by Alan Greenspan to 4.25% from 1%. The day Bernanke became Chairman, he raised the Target Rate to 4.5%, but he didn’t stop there. He kept raising until July 1, 2006 when the Fed Funds Target hit 5.25%. So from July 1, 2004 to July 1, 2006 the Fed raised it’s Target Rate from 1.00% to 5.25%, an increase of 425% in 24 months.

Imagine if food or gasoline went up by 425.00%! Can you picture the carnage?

What effect did all those rate increases have on the yield curve and why would that matter? Well, as most economists will tell you, nothing screams recession quite like an inverted yield curve (when long term rates are lower than short term rates).  Forcing a negative yield curve is economic poison.

In January, just before Bernanke became Chairman, the yield curve was essentially flat with a slightly positive bias, but that quickly changed. Bernanke’s first raise to 4.5%, resulted in a slightly negative yield curve and again, he kept raising the Fed Target all the way to 5.25% by July 1, 2006. By November 2006, there was a clear downward trend in yields. (see chart below).

Why did Bernanke's Fed keep raising interest rates in the midst of a housing bubble with a midterm election coming up in November 2006 and a yield curve already threatening negative by late 2005? Why did they persist and force the yield curve decidedly negative by mid 2006 thus throwing us into recession and crashing the housing market?  Only they know, but their tinkering turned a bubble into a financial crisis.  

The collapse of the housing market quickly inspired the Fed to lower once again - all the way down to zero this time.  That's where it's been for about seven years.  No President in Fed history has enjoyed an economy for his entire term boosted by 0.0% Fed funds rates as has Barack Obama.  So what side effects are we experiencing this time?

That's the funny thing about interest rates; the side effects of Fed tinkering only reveal themselves over time.  Consider this:  During the Obama presidency we have been able to borrow and print over $12 trillion including QEI, II, and III - more than every other U.S. president - combined!  We have financed that spending spree with cheap money that will not last.  When rates normalize, it will consume the federal budget in a way we have never seen before.  This government borrowing bubble will make the housing bubble seem like small potatoes in comparison.

Janet Yellen and Barack Obama hope they will be long gone when that happens.    

    

 


 

Is Islam just a Religion?

I do not take Donald Trump seriously, and have not since he entered the race.  Despite his consistent lead in the polls, I stand by what I wrote months ago :

Donald Trump is the Howard Stern of politics.  He’s a shock jock in a field of politicians who sound like boring newsreaders in comparison.  He opens his mouth and out comes ego, shameless self-promotion, outrageousness, braggadocio, and downright meanness towards his detractors.  But there are other things too which endear him to his audience.   He’s fearless, confident, unapologetic, and says things no one else has the cojones to say.   And he's entertaining.  In other words, he’s exactly like Howard Stern.  His fans are the same too.  Listen to them talk and you'll find yourself expecting them to blurt out “Baba Booey!” any second.  

Donald Trump is a serious candidate for President the same way Howard Stern was a serious candidate when he ran for Governor of New York in 1994.  Stern didn’t win.  Neither will Trump. 

      

That said, Trump does create opportunities for serious discussion as he has most recently with his seemingly extreme position on a pause in Muslims being allowed into the country.  The reason this is so controversial is that we have two definitions for Islam in the West.

If you deplore Trump's proposal, chances are you think of Islam as just another religion.  Every other religion in the world has its fanatics and orthodox observants.  Islam is no different.  Singling out a religion on any level seemingly violates the principles on which we were founded.

However, if you believe Trump's proposal deserves a fair hearing, chances are you think of Islam, particularly the Salafist variety, as a treasonous and murderous political movement inseparable from a religion.   Our constitution specifically defines treason as a crime and grants the legislature the power to deal with it accordingly.

In other words, everything hinges on one's knowledge of Islam and whether it is seen as just a religion, or as a treasonous political movement.  Neither side is crazy.  Neither side is being un-American. Neither side is morally inferior.  It is a disconnect based on different understandings of Islam.  A majority, including many Republicans from Dick Cheney to Paul Ryan, apparently define Islam as just a religion.  A minority believe that's naive.

I wonder how those whacky nut-jobs Thomas Jefferson and John Adams would see it given the recent power of Islam to project its power within our borders?

(Hat tip to The Wall Street Journal for today's "Notable & Quotable" column which featured the above Adams and Jefferson quote.)



   

Obama, Guns, Islam, and San Bernardino

In a case of galloping irony, I picked-up my newspaper today and saw two stories on page one :  The massacre by Muslims in San Bernardino, CA, and the U.S. is set to lift sanctions on Iran.

Meanwhile, Obama's message after the massacre in CA was, of course, about...gun control.

So, over a hundred billion dollars goes to the people who desire nuclear weapons, ICBMs, and chant "Death to America", and law abiding Americans have their constitutional right to self defense taken from them.

Is it any wonder some people think Donald Trump would be an improvement?  I believe my labradoodle would be an improvement!

ICYMI, this one says it all:

    

The Syrian Refugee Problem - Part 2

In Part 1, I posed the following questions regarding the problem of Syrian Refugees:

• Are the refugees fleeing a war?
• Are they coming here for a better life?
• Do we owe them a better life? 
• Are they coming here to conquer us?  
• Is coming here the best way for them to have a better life?
• Can we know they are not terrorists?
• Can we discriminate against refugees based on religion?
• Does the West have an obligation to absorb every civil war torn population?

These Muslim refugees are not innocent victims fleeing a war.  There is no war in Kosovo, and the majority were Kosovars in early 2015.  Even now, the majority of Muslim refugees are from countries other than Syria and without wars.    

Of the minority fleeing Syria lately, the majority of them, 72%, are fighting age men.  And they are Sunnis, not the more endangered Christians and Infidels.  These men are the rebels who tried to overthrow Assad and failed.  If they stay, they will likely be imprisoned or worse by Assad.   Assad's ally, Russia, is now actively involved in the fighting and that is a game changer.  As Russia swooped in, the Sunni rebels swooped out.  It's that simple.  The Syrians who are seeking refugee status are fleeing a war they started and now have lost.    

  

And yes, most refugees are seeking a better economic life than the one they currently have.  They are aggressively seeking out countries that have the best welfare programs and job opportunities, which is why they insist on getting to Germany and the US for example.  

But, do we owe them a better life?  We have historically been very welcoming to immigrants in the U.S.  Much of this occurred before we became a welfare state.  Now that we are a welfare state though, it is increasingly expensive and politically divisive to welcome unlimited numbers of needy immigrants.

But these immigrants present a new question:  Are they coming to conquer us?  Islam has a word, hijrah (hejira, or hijra, etc.), which means emigration jihad.  In other words a holy war conducted through demographic overthrow.  The idea is to infiltrate the West and conquer it from within.  The history of Islam is replete with such conquests, many of them successful.   So yes, they seek to conquer the West.

If a better life is all they seek, is emigrating to the West the best way to achieve that?  A better way is to create a better life for them in their homelands.  It is actually cheaper too.  This seems obvious, but there is no will to pursue this in the West, or from those engaged in hijrah.

Can we know they are not terrorists?  Of course there is no way to screen terrorists, or potential terrorists from this wave of hijrah.  

Which brings us to the real question:  Can we discriminate against refugees based on religion?  This is really an interesting question when it comes to Islam because Islam is not just a religion - Islam is also a violent political system.  These two aspects of Islam are, in current practice, inseparable.

Of course in the U.S., we don't care which God you pray to or what holidays you observe.  But if your religion is hell-bent on denying others their rights to life, liberty, and the pursuit of happiness, we ought to discriminate against you.  If your faith imposes it's ideology on others against their will, we ought to discriminate against you.  But the duality of Islam is a paradigm we cannot wrap our minds around in the West.  We are incapable of understanding the difference between a mere religion, and a religious political movement which incites violence.

The grey area in the U.S. is what constitutes "inciting violence".  Courts have given wide latitude for hate speech in the U.S. and even allowed some speech which clearly incites violence.  In other words, an Imam at a Mosque in the U.S. can basically implore his congregants to blow things up and kill thousands in the name of Islam, but as long as he chooses his words carefully, we cannot legally stop him.

Finally, does the West have an obligation to absorb every civil war-torn population?  When the option of engaging enemies abroad is taken off the table, and when we are unwilling to identify the enemy amongst us, we have painted ourselves into a dangerous corner.

This is how democracies commit suicide.                    

     

The Syrian Refugee Problem - Part 1

Battle lines have been drawn on the issue of Syrian refugees.  (Whether or not the refugees are actually from Syria is beside the point.)  The questions everyone is struggling with are these:

• Are the refugees fleeing a war?
• Are they coming here for a better life?
• Do we owe them a better life? 
• Are they coming here to conquer us?  
• Is coming here the best way for them to have a better life?
• Can we know they are not terrorists?
• Can we discriminate against refugees based on religion?
• Does the West have an obligation to absorb every civil war torn population?

All good questions.  Before I answer them, please watch some Syrians sing about one of their favorite events:  

(YouTube has deleted this content, and as we now know this censorship is often done at the direction of the U.S. government in direct violation of the First Amendment to The Constitution of The United States.)



I'll answer the questions in my next post - Part 2.

The Syrian Refugee Problem - Part-2

Déjà vu à Paris

I wrote the following in March of this year:

Kinetic Islam Déjà vu 

In March of 2001 Mullah Omar and the Taliban destroyed two 1700 year-old stone Buddahs in Afghanistan.  One of them stood 165 feet tall.  At the time few westerners understood that act.  Six months later when the twin towers of The World Trade Center were destroyed we all got an education in how kinetic Islam feels about infidel idols and symbols.  

Fast forward to today and the exact same thing is happening in Iraq.  Islamic State, or ISIS, or ISIL, is summarily destroying ancient churches, statues, artwork, and symbols of the infidels.  This time we have some perspective on why this behavior is occurring – Islam, or at least a fundamental interpretation of Islam, leads its followers to destroy these symbols.  It turns out the Quran, like the Old and New Testaments, contains a fair amount of idol destruction.  The difference is Christians and Jews do not go about re-enacting these verses from the early days of monotheism.  Muslims do, particularly the kinetic radical fundamental type. 

What scares me is the timing of all this.  Six months after the Buddahs came down we got 9/11.  I hope kinetic Islam has a different schedule this time.

Anatomy of a Myth - Democrats are Better for the Economy!

The Wall Street Journal published a letter Nov, 3rd from two Princeton Professors, Alan Blinder and Mark Watson, defending Hillary Clinton for saying, "The economy does better when you have a Democrat in the White House!"  They have written a well publicized research paper proving her assertion.  Alan Blinder is a Clinton advisor.

Robert Reich, (no relation), is another one who has written extensively about the miraculous economies of Democrats, particularly in the years after WWII.   Robert Reich served in the Bill Clinton administration.

The New York Times ran a related piece in 2008,  right before the election,  about how the stock market does much better under Democrats than under Republicans.  The New York Times is a long time supporter of both Clintons. (I refuted the NYT piece thoroughly at the time here.  I highly recommend reading it.)

We can expect much more of this as the 2016 election approaches.  Having studied these claims for years, I find this is all carefully calculated political sophistry, but very weak economics, and void of logic.      

The GDP assertions are of two types:

• Democrat presidents have a better record of growing GDP since 1947.
• During some of our best GDP growth periods we had much higher tax rates and a highly unionized workforce.  

Both assertions are factually correct - and meaningless at the same time.

It is true that Democrat presidents have a better record of growing GDP.  After all, Democrats are the party of growing government, and GDP includes government spending.  Ergo, when government grows, GDP grows.  Barack Obama borrowed and printed fourteen trillion dollars, all of which added to GDP, but must be paid back at some future time.   GDP doesn't account for that. It is a one sided account entry.  If you take away the fourteen trillion in debt and QE under Obama, growth is about ten trillion...negative, since he took office.  But that's not how GDP growth is reported. It should be if we want the whole story.   

Another factor is that Republican presidents have had two hands tied behind their backs when it comes to economic policy: power and interest rates.  No Republican president since 1947 has ever had full robust control of both houses of the legislature.  Democrats, on the other hand, had either filibuster power (40 votes) or complete control (60 votes) of the Senate every second since 1947. Democrats had complete control of the executive and legislative branches for 20 years since 1947. Republicans had all of 4 years.  Moreover, Republican presidents have had an interest rate headwind averaging about 38% higher rates since the Fed began setting rates.  Albeit, most of that discrepancy comes from the historically low rates from the Obama years. 

Additionally, presidential party affiliation has almost no correlation with economic policies over time.  JFK, a Democrat, was a tax cutting supply-sider like Reagan, and nothing like Hillary Clinton or Barack Obama.  Richard Nixon, a Republican, instituted wage and price controls, something Ronald Reagan would never have done.  Bill Clinton ended up as a free trader and a capital gains tax cutter.  The list goes on.

Finally, economic policies do not reveal themselves instantly.  Medicare, Medicaid, and Social Security were passed by Democrats long ago, but only now threaten to explode in our faces.  George W. Bush was saddled with the 2008 sub-prime disaster, yet Bill Clinton and the Democrats set that disaster in motion in the 1990’s when they thought it was a good idea to offer mortgages to unqualified people.  Sub-prime boosted the economy smartly until it blew-up over a decade later. Barack Obama likes to claim victimhood for inheriting the sub-prime mess, yet he was a key supporter all the way back to his community organizer days.  He continued that support while in the Illinois state senate,  into the U.S. Senate in 2008, and continuing even to this very day as president.   

Alan Blinder asserted in his letter that the economy is healthier today than it was in 2009.  I calculated that if we had just given every family in the US the money added to the debt since 2009, plus the Fed’s Quantitative Easing under Obama, each household could have been gifted $120,000.  My Labradoodle could have improved the economy if you gave him $14 trillion to re-distribute!

Robert Reich waxes nostalgic for the halcyon days after WWII when tax rates and unionization were high and the economy grew like topsy.  He is making a classic "post hoc" fallacy mistake.  ("post hoc, ergo propter hoc" is latin for the logical fallacy, "after this, therefore because if this.") Correlation is not causation.  Yes, the post war economy was very strong for decades, but that strength had nothing to do with high taxes and unionization.   In fact it was in spite of that.  WWII left us the only intact industrialized country in the world.  Japan, Europe, and the USSR were smoldering ruins.  China was still in loincloths.  South Korea was on the verge of its own war.   Of course we grew!  We could do no wrong with that tailwind.

Despite being convinced that Democrats are not superior stewards of the economy, I cannot make the claim that Republicans are.  There's just too much noise in an economy.  Too many moving parts. And party affiliation is too weak an indicator of historical economic philosophy.  

It all comes down to where the parties are at a given point in time.  Today's Democrat party is a Demand Side Economics party, and there's one thing I know in this life; nothing good ever comes from a Demand Side Economy.  

(For my definition of Demand Side Economics see this.  And this.)    

Ted Cruz is Awesome! VIII

Watch for as long as you like, but the whole thing is worth seeing.
At least to this classical liberal observer, this may be the best political speech I've ever seen.

Here's the link in case the embed doesn't work properly. Remember, this is C-SPAN, a government operation.
http://www.c-span.org/video/?328980-12/senator-ted-cruz-budget-deal

Ted Cruz is Awesome! VII

I heard Ben Carson refer to this as a "Cruz Missile".  I like that.

Search for Ted Cruz in the upper left search box for the other six "Ted Cruz is Awesome!" posts.

UPDATE: I tried to upload my own version of this exchange from CNBC but was blocked by NBC for copyright infringement.  I intend to file a claim based on this being a public matter that is now in the public domain.  If they continue to fight, I will research whether they are as strict with Democrat content, because if not, that constitutes an in-kind unreported campaign contribution to the Democrat party.  As Saul Alinsky said, "Make them live up to their own book of rules."  This will be interesting...

UPDATE2: They capitulated, and the above clip is now my version.  

Happy Birthday, Hillary!

On the occasion of Hillary Clinton's 68th trip around the sun, I offer two videos I made just for her, because everyone knows store bought gifts are never as cool as hand crafted ones.  Please enjoy and share!