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Regarding a fractional reserve banking system, the Rothschild brothers once said "The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class." I am that rare individual they didn't... More
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Josh Dowlut
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  • Wenzel And The Austrians Only Half Right On Fed

    Robert Wenzel lit the Fed up like a Christmas tree at a Fed luncheon he was invited to this past Wednesday. It may have been the most criticism of the Fed spoken within the walls of the Fed ever. However, some problems with Wenzel's critique/analysis:

    1. While it is true that economics lacks the precise constants of the physical sciences, behaviors in the aggregate are predictable within margins of error that are acceptably narrow for the purposes of modeling and constructing formulas. All price setting activity, including hitting the interest rate targets through open market operations are based on a sufficiently precise relationship between price and quantity demanded.

    2. The staggering increases in price level and money supply are relatively meaningless without also considering increases in wage levels. It is the relative prices that are of importance, not the general prices. Many of the relative price changes between wages and basic necessities are compelling enough, thus alleviating the need to harp on the general prices which is a ploy amounting to little more than propaganda.

    3. The Austrian Business Cycle Theory connects the two variables of credit and output, but misses the full story. It attempts to pin the blame on malinvestment while overlooking the real drag of debt overhangs. Of course the money supply slows or contracts when loans default and consumer/business incomes are incapable of taking on any new debt. The slow down in money supply is the symptom of burdensome debt service that has the effect of reducing real incomes, thus real demand.

    4. The US banking system was a disaster prior to the Fed. There were13 major bank panics between 1833 (end of the Second Bank) and 1913 (start of the Fed), each one worse than the one before, some being known as "The Great Depression" until the next one would supplant it to take the title. There were real supply shocks as businesses lost their entire operating budgets and payroll accounts when the banks holding their deposits imploded. The Fed although far from perfect, and introducing an entire set of new problems, improved much of this.

    5. The faulty premises on which subprime mortgage underwriting was built were fairly obvious, namely that housing would appreciate rapidly forever.

    Wenzel does make some good points as well, particularly in criticism of ardent Keynesianism :

    1. The thought that real demand can be increased via an increase in the nominal money supply is a violation of Keynesian economics' very own IS/LM model. While there is some potential merit to the idea in light of its ability to lighten burdensome debt service, it impacts individuals who were never a party to the debt instruments this policy seeks to amend in real terms, and effectively externalizes costs, thus creating market failure. Far better would be to allow defaults, write-downs, and modifications between debtor and debtee. Banks that are brought to insolvency can be transferred to new management through FDIC and the receiver bank's reserve requirements can be adjusted accordingly.

    2. Wenzel's most provocative, yet astute statement is when he challenges the very notion of stable prices. "What is wrong with having falling prices across the economy, like we now have in the computer sector, the flat screen television sector and the cell phone sector? Why, I ask, do you want stable prices?" The reason we can't have falling prices is because falling prices are incompatible with a fractional reserve banking system. Falling prices would make long-term leveraged finance (think the entire commercial and residential mortgage market) unfeasible as the cost of the debt service would increase in real terms in the later years, thus increasing the chance of default, thus putting downward pressure on leveraged assets, thus creating a deflationary feedback loop. Debt based banking systems need a bit of predictable inflation in order to keep loan losses to a minimum.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: Fed
    Apr 29 7:12 AM | Link | Comment!
  • MD Gas Tax Hits the Poor 5 Times Harder than the Rich

    Maryland's proposed gas tax increase of 10 cents per gallon would hit families at the poverty level 5 times harder than the average family within the top 25% of tax payers. This is the epitome of regressive taxation.

    For a family with income of $162,279/year (the average income of the top 25%), the tax would equal a miniscule 0.08% of their income based on typical gas consumption of 1309 gallons per year. A family at the poverty level ($14,710-$18,530 depending on household size of 2 or 3, MD's average household size is 2.6), would pay .38% of their income based on typical gas consumption of 632 gallons per year, that's 4.75 times more than the wealthy household.

    If anyone dismisses the significance of raising taxes almost half a percent on the poor, while not even raising them a tenth of a percent on the rich, they probably have never lived like a poor person. If you haven't run out of gas because you've run out of money, gotten home with the change you scrounged off from under your floor mats to ask for "$1.75 on pump #2 please" paid for with a fistful of dirty pennies and nickels, and suffered the embarrassment of going through the grocery store checkout line with nothing but ramen noodles because you needed to budget for gas, then you probably can't comprehend the significance of taking another half a percent of a poor person's wages, or recognize the flagrant injustice of doing so at the same time you are taking less than a tenth of a percent of a rich person's wages.

    There is little else that would rival the draconian regressiveness of Maryland's proposed gas tax. Perhaps Maryland could choose to tax groceries or heating bills. Perhaps a new tax that only applies to the first $8,500 of income-whoops, they already did that.

    I propose 2 much better alternatives:

    1. Cut spending. Yes, the bulk of MD's budget goes to education, health, and public safety, however:
      1. Half of those employed in education are not teachers. They are "other." It is very possible to cut money from the $13 billion MD spends on K-12 education, without cutting teachers or teacher pay.
      2. MD spends almost 2 billion a year on public safety (to include police and prisons), perhaps tight times are the time to re-evaluate the war on drugs given that about 50% of all police and prison spending is devoted to it.
      3. MD spends another $2.4 billion per year on higher education. Stop subsidizing frat parties and focus the subsidies on online learning.
      4. UMUC (University of Maryland University College) spends only 28% of their budget on instruction. Even adding in research and operations/maintenance, the figure is only 38%. That's 62% of a $300M/year budget spent on administration. Does the university really need to spend $300k on a figure head position that quits for unexplained reasons?
      5. Does College Park really need to spend $7.2M for a new house for their overpaid figure head?
      6. Do away with mandatory art class past elementary school. By 6th or 7th grade, everyone knows who has artistic talent, and who's simply burning through art supplies. Keep it as an elective and spend a more focused, smaller amount of resources on the kids who have talent.
      7. End public pensions. Only 20% of the private sector gets them, why does 80% of the public sector?
      8. Stop overpaying contractors who do state construction projects. Their concentrated benefits are the diffuse costs borne by tax payers, and in the instance of the gas tax, the poor.
    1. A progressive property tax, and/or a progressive vehicle registration fee and/or progressive vehicle sales tax. Such a system is straight from the Wealth of Nations so much so that you could coin it the "Adam Smith Tax."

    Regardless of your ideological preference on the spectrum of tax increases versus spending cuts, we should all agree that taxes that hit the poor 5 times harder than the rich are simply wrong. It is pure cowardice to go after this group that is least able to defend itself. To anyone in the MD General Assembly who is considering this: Grow a pair and either sock it to the rich, or take on the well organized special interest groups who would howl at the spending cuts.


    U.S. Energy Information Agency, gas consumption by income:

    IRS 2008 tax returns crunched by The Tax Foundation:

    The Urban Institute, more gas consumption by income plus commuting habits:

    Mar 14 8:53 PM | Link | 4 Comments
  • Gay Marriage Improves Some, Makes None Worse Off
    I normally confine my writings to economics, but the issue of gay marriage demonstrates such a flagrant disregard for marginal analysis (weighing trade-offs which is the heart of all economic thought) that it is worthy of address from the perspective of an economist. I have never been so moved from ambivalence to support for an idea, not by the idea's proponents, but by its opponents. It is the irrational, judgemental, theocratic, appeal to tradition rooted in Leviticus, logically bankrupt arguments such as "man on child, man on dog" (someone was asleep during contracts) that has literally repelled me towards supporting marriage equality.

    Whatever compelling state interest, or rational basis the state has in getting involved in hetero marriage, namely stability, monogamy, and public recordation of property rights, also applies to gay marriage, and the benefits can be conferred to one, without costing the other. In other words, you can improve some without making anyone else any worse off. Marginalism, utilitarianism, Jeremy Bentham and Vilfredo Pareto would approve. Quite simply, if you believe the institution of marriage makes the world a better place, then by universally accepted logic, denying it to homosexual couples makes the world a worse place.

    If traditionalists were truly serious about protecting the sanctity of marriage, they would oppose no-fault divorce laws rather than this. Newt Gingrich, or any number of high profile Hollywood fly-by-night marriages have done more to erode the sanctity of marriage, than two men, or two women getting the equal application of publicly recorded contracts ever will.

    Some traditionalists, seeing the passage of marriage equality as almost certain in Maryland, have chosen to dig their heels in on the word "marriage." Essentially, allow civil unions, but reserve the word marriage for only men and women, and question why homosexuals so want the word "marriage."

    I hold the exact opposite view:

    Why are traditionalists so opposed to allowing gays to use the word marriage?

    The only explanation I can come up with is that they are clinging to the last shred of being able to disavow homosexuality. They want their society to go on the record as saying those who were born with a certain orientation, the minority orientation, are somehow less dignified than those who were born with the majority orientation. This is classic majoritarian suppression of individual rights, and exactly what the Equal Protection Clause covers.

    Traditionalist arguments also center on the breeder role of marriage. Would anyone who advances this argument dare say that women past the age of menopause should not be able to get married, or that there should be a deadline to adopt (no mind the difficulty and expense in doing so) before one's marriage is automatically nullified by the state?

    Traditionalists have claimed that roommates will be able to claim pension and insurance benefits. Regarding pension fraud, insurance fraud, or any other type of fraud that could stem from a fraudulent marriage, those opportunities already exist among hetero people. Is there any reason to believe gay people would be more prone to committing fraud?

    Traditionalists see marriage as a fragile balloon. They see conferring marriage benefits to gays as essentially a pin prick to that balloon. Everything else is premised on this threat assumption. But that is a flawed assumption that never offers anything but appeal to tradition, appeal to authority, or circular reasoning as support.

    In short, traditionalists' assessment of marriage is unreasonably high, and to believe that society would break down without a state-sponsored blessing of certain relationships is really a degree of statism. Also, traditionalists' threat assumption of expanding the breadth of that state-sponsored blessing are fabricated out of their own narrow mindedness. Traditionalists who rally in front of state houses over this, as if it somehow restricted, or infringed on their rights, are reinforcing every negative stereotype there is about religious fundamentalism and the hard right.

    This is about the majority group casting judgement on the minority group and nothing else. The recent 9th Circuit ruling sums up the entire issue:

    The measure "serves no purpose, and has no effect, other than to lessen the status and human dignity of gays and lesbians in California, and to officially reclassify their relationships and families as inferior to those of opposite-sex couples,"-Judge Stephen Reinhardt

    Feb 16 1:19 AM | Link | Comment!
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