Chuck Norris Solves the Banking Crisis

Chuck Norris announced today a plan to solve the financial crisis.

To strengthen the balance sheets of the major financial insitutions that have been wrecked by bad loans, a new class of assets will be created out of derivatives of Chuck's body.

These will be called WCD's: Weapons of Chuck's Destruction.

Banks will be allocated shares of these WCD's based on their performance in Chuck's "Stress Test." In Time's Square, one by one the stock price of each bank wanting Chuck's assistance will be put on the big screen.

Chuck and the stock price will stare each other down for 1 hour beginning at high noon. If the price of the stock goes up, the bank will be allocated shares of the WCD's based on its percentage gain during the stress test. If the price goes down, the bank will be allowed to fail. Chuck will also kick the ass of every "C" level in the companies that fail.

In return for allowing derivatives of his body to shore up the financial system, Chuck requires from the US Federal Government one change to the currency:

All faces of the bills of US currency will be replaced by the image of the face of Chuck. All backs of bills will have Chuck's fists.

This is because Chuck wants to let the banks know the following: 1.) he will be watching them and 2.) what they can expect from Chuck if they ever fuck us again.

The Idiocy of Cramer, Luskin, and Hassert

You would think that anyone who gets paid (a lot) to spew financial advice would receive said pay based on performance: you make the right call, your contract with CNBC goes up, you make the wrong call it goes down.

You would be mistaken.

People like Jim Cramer are experts in equities and investing. But they get paid because people enjoy watching, listening to, or reading material written by them. They don't get paid to be right.

Case in point is Mr. Henry Blodgett. Remember Mr. Blodgett? He was the one who was pumping dot com stocks during the millenial NASDAQ bubble on national TV while he was privately emailing confidents about how ridiculous it was to buy these same companies.

Now, after having multiple 'come-to-Jesus' moments, he is writing and speaking about all things investing.

Donald Luskin was wrong about the biggest market movement in our lifetimes. He said there was no recession right before Lehman Brothers went under:

“[A]nyone who says we’re in a recession, or heading into one—especially the worst one since the Great Depression—is making up his own private definition of recession.’” —Donald Luskin, The Washington Post, Sept. 14, 2008

Jim Cramer, in classic form, gave this costly advice to some poor sap:

“Peter writes: ‘Should I be worried about Bear Stearns in terms of liquidity and get my money out of there?’ No! No! No! Bear Stearns is fine! Do not take your money out. … Bear Stearns is not in trouble. I mean, if anything they’re more likely to be taken over. Don’t move your money from Bear! That’s just being silly! Don’t be silly!”

—Jim Cramer, responding to a viewer’s e-mail on CNBC’s Mad Money, March 11, 2008

Remember the reason given by conservatives as to why Obama started pulling ahead of McCain ? It was the markets! Tanking markets helped Obama get elected. Now, Luskin is saying that Obama is causing markets to tank.

Now Cramer and Luskin are both blaming the Dow's drop on Obama. I do believe as they do and even Krugman that he is moving too slow with regards to resolving the solvency of the banks issue. However, last I checked, he has been in office for about 45 days.

Time for Change: why Geitner needs a new plan

Obama was elected on the promise of change, and change he has provided. As far as campaign promises go, it has to be the easiest of promises to meet. Change is change; if he wants to change his mind about things he said in the past, he has the logic to do it.

So far he has not changed his message of change--except where it comes to managing the banking crisis.

His Secretary of the Treasury, Timothy Geithner, has been stubbornly committed to continuity. Surely, this initially made sense. Change for change's sake looks like the desperation of uncertainty. Markets hate uncertainty. So it has made sense for Mr. Geithner to appear to have a plan that was somewhat consistent with the last plan, even if it was a plan created by an unpopular adminstration.

However, the time has come to say what the markets already know: the big banks are insolvent. They need to be wiped out, possibly bond holders as well. Trying to prop them up has more to do with protecting bankers at this point than protecting lending. Geithner needs a plan to restore lending, not keep bankers--including holders of shares and bonds banks--whole. Bondholders and shareholders of Citi, Wells, etc. need to be wiped out.

Fresh capital then can be injected into banks that are healthy and that are lending, rather than to inject capital to protect people that made stupid decisions (bankers, and buyers of banking shares and debt).

Obama can claim change. He can claim that he has been on the job only 6 weeks, and needed the time to make a plan. Now that it is evident what is happening, it is time to own it, and deal with the fallout.

Once the banking crisis is put behind us, there will be less uncertainty in the market

Will increasing government spending work?

Of all the discussion regarding where the economy and markets are headed and what policies will affect their directions, none is more well known or understood to be as simple as the debate regarding federal government spending. For the left, federal government spending will help us. For the right, it will hurt us.

The case on the left for increasing federal government spending

John Maynard Keynes simple model is that during times of economic booms, the government should save money, and during times of recession, the government should spend it. This should make economic cycles less volatile. Proponents point to the "New Deal" programs of FDR that were done during the 1930's: massive public works projects that put 'shovels to the ground.' The idea here is that when the private sector is not spending money, the government can 'forcibly' spend money. This should make recessions less severe, and prevent depressions.

The case on the right against federal government spending

Government spending 'crowds out' private investment, according to anti-Keynesian folks who typically line up on the right. Government gets money immediately in two ways: by taxing private individuals and corporations, or by borrowing against future taxes on private individuals and corporations. The more government taxes or borrows against future taxes, the less money individuals have to invest and spend. So basically there is a "Robbing Peter to Pay Paul" problem. Interestingly, these anti-Keynesians also point to FDR's New Deal as evidence that Keynesianism does not work, as there was massive federal spending throughout the 30's, unemployment still was above 20%.

The evidence provided by historical charts

In the chart on the left, the three biggest increases of federal government spending as a percentage of GDP correlate to WWI (1917-1919), FDR's New Deal (1931-1935), and WWII (1941-1945).

What got us out of high unemployment was the spending associated with WWII. Another way to look at this is that FDR's increase in government spending was not enough, and it took the increase in government spending associated with WWII to bring unemployment down.

This chart on the left maps the same as above, but for a smaller period of time. As can be seen, it was Clinton who brought government spending down with a mostly Republican congress.

Conclusion

Current levels (before stimulus) of government spending are not at historic highs, even by post war standards. That should give us room to spend and borrow. Surely, cutting spending now is not evidenced by the charts. In fact, the case could be made that we need MASSIVE federal spending in addition to what has been budgeted so far. Conversely, the best years of prosperity have come when we have decreased spending after a period of elevated spending. Interestingly, I suppose this makes the case for massive military involvement, like a new war. There is no theoretical argument that says a dollar spent on guns is better than a dollar spent on solar panels, for example, but this should breath new life into the Neocons who want to invade Iran.

Another point to consider is absolute levels of government spending as differentiated from the changed in government spending. Since today government spending as a percentage is bigger than it was in 1930, perhaps it is not necessary to increase by as much.

In short, I conclude the stimulus package will help overall. If it fails to deliver the results, it will be because it is too small, rather than too big. However, to get prosperity back, we will need to quickly reduce government spending in the future so as not to crowd out private spending and investment. Currently, interest rates are extremely low, although the standards for getting loans are much higher, both for individuals, and for corporations. So there is not much crowing out going on currently.