Sunday, February 28, 2010

Keynes vs. Hayek for Dummies

If you do not know who John Maynard Keynes or Friedrich von Hayek are, simply think of this video as 2 white rappers trying to impress white chicks.

if you do know, then listen to the lyrics.

Thursday, February 25, 2010

Demography is destiny: The inevitable decline of the welfare state.

The trend to ignore old age or even to fight it by chemical and surgical means permeates not only our modern society by our government policy as well.

But age, like gravity and rust, always wins in the end. Populations all over the world, with few exceptions, are getting older. Aging populations severely impacts western-style welfare states.

The ratio of payers to beneficiary has been more than cut in half over the last 50 years. Even the US, where population growth continues and the median age is a relatively young 38, social security went from 16:1 in 1950 to 3.3:1 today and is projected to reach 2:1 in 2050.

The problem is more severe in Western Europe and Japan where population growth is often negative and median age is now above 40. It is no coincidence that the biggest budget deficits are now being experienced by countries (Portugal, Italy, Greece, and Spain collectively known as Eurozone PIGS) with highest median age and lowest population growth.

For welfare states costs are rising and fewer workers are paying to support more retirees. This imbalance, temporarily aggravated by depressed economies, is simply not sustainable. Something has to give and this something is the welfare state.

Welfare state will not go quietly into the night. It will fight all the way to the end, this after all is an existentialist threat.

The outcome, I believe, is not in doubt. And strangely, Europe will lead America on that journey. The question is not of if, but of when.

Thursday, February 18, 2010

Hank, Hank, Hank...

I just finished reading Hank Paulson’s “On the Brink”, and though the book was a boring, blow-by-blow recount of the events, it shed some light on the near collapse of the global financial system in the fall of 2008.

It did help me answer the question of whether TARP was necessary: it wasn’t.

TARP in of itself was pretty harmless; most of the funds have or will be paid back, with interest, to taxpayers. Toxic assets turned out not to be a real problem: it was a good-old-fashioned run on the bank; a global run on all the banks.

TARP never lived up to its name: It never purchased any “Troubled Assets”. It simply played the role of “lender of last resort”. A role typically reserved for the Federal Reserve, and as such avoided some short term pain. We will never know what could have happened.

But the story does not end here.

TARP opened Pandora’s box and enabled the US Government to do or attempt to do things that a few months prior would have been unthinkable.

TARP changed the American psyche so talk of “hundreds of billions” became acceptable in polite company.

TARP led to the Stimulus, GM bailout, $13T budget deficit, red ink as far as the eye can see.

TARP forced us to cross the Rubicon. Led by the unwavering self-confident, never-doubt-myself-for-a-minute but willing-to-change-my-mind-at-my-convenience Paulson, we moved into virgin territory. And the damage caused will take decades to undo.

Moral hazard on a slippery slope! We could and should have done without TARP. Libertarians and House Republicans were right after all.

By the way, Hank portrayed John McCain as a bumbling idiot, unable to grasp the situation let alone formulate a cohesive plan. Maybe my faute-de-mieux theory was right?