The Fix: Austerity, Small Banks & A Gold Standard

The Aleph Blog May 16, 2012

This is a confusing time:

Personally, I think that the fiscal multiplier is negative. Spend money on government projects, many of which do not build value for the economy, and the economy grows slower or shrinks.

We would do better with austerity. The economy would grow faster with a balanced budget, and a sense that government was not out of control. Shrinking the bureaucracy and its rules, would allow the economy to grow faster. Delegate more responsibilities to the states, particularly regulation of financial companies. Relatively few insurers fail, which are state-regulated. Many banks fail, which are federally regulated. It is far easier to co-opt a single federal regulator than many state regulators. Best yet, split all of the too big to fail banks into 51 entities, divided into the states and DC. No more interstate branching — that’s the real problem, not Glass-Steagall.

Limiting banking to states keeps it small, Glass-Steagall tinkers at the edges, but if banks are kept small by limiting their size by states, like insurers, they won’t become systemic problems. Simple, huh?

Much like the AT&T breakup, I think a breakup of interstate banking would be good for the US economy. It would unleash competition in financial services, and would eliminate systemic risk in the financial economy. And once banking regulation is returned to the states, like insurance, we can eliminate the Fed, which has been a poor regulator of banks, and a bad manager of monetary policy. Go back to a gold standard, or at worst a currency board. Get money out of the hands of the government, who diverts much of the economics back to themselves.

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[...] Limit US banks to state borders. [...]

[...] David Merkel: We're at a crossroads. (AlephBlog) [...]

[...] David Merkel: “Limiting banking to states keeps it small, Glass-Steagall tinkers at the edges, but if banks are kept small by limiting their size by states, like insurers, they won't become systemic problems. Simple, huh? Much like the AT&T breakup, I think a breakup of intrastate banking would be good for the US economy. It would unleash competition in financial services, and would eliminate systemic risk in the financial economy. And once banking regulation is returned to the states, like insurance, we can eliminate the Fed, which has been a poor regulator of banks, and a bad manager of monetary policy.” FacebookShareStumbleUponRedditDiggEmail /* [...]

Let me try:

Real interest rates: what is their natural value? You seem to imply they should be naturally positive. But why? They might have been positive when you were a young lad, but is that an intrinsic property or merely incidental? Like any market, ultimately it’s a question of demand and supply. Treasuries are a branded wealth storage technology being offered by a monopoly (at the brand level) supplier. If more people want that particular brand of wealth storage technology than the supplier makes, then the price as expressed by interest rate can go negative, that is the storage function value is greater than the compensation for delayed consumption that positive rates represent. That is when people want to store value more than they want to be compensated for not consuming now, the real rate goes negative. It’s simply the market at work, no need to make up a conspiracy theory. And you’re advocating that the US Treasury supply less of their popular wealth storage products, which can only make the rate more negative, unless somehow the demand goes down.

Labour pool issues cannot possibly explain higher margins beyond short term friction effects. In markets, if incumbents have excess margin, competition will shrink it as people start new companies to capture the free money being on offer by undercutting the incumbent. If the input costs go down (for whatever reason) then the margin will ultimately follow, unless there’s been a structural change that say impedes competition from doing its job (e.g. laws making it illegal to start new companies). That is, the profit margins will very likely reverse mean whatever happens on the labour market — or to any other costs, for example if commodity prices permanently collapsed, it will only help margins of commodity intensive businesses in the short term.

Money on government projects, when done as a short term Keynesian stimulus, does not work, as such, via the value added of the projects themselves. It works by giving money to people with a high propensity to spend: that is you pay salary to a previously unemployed road building guy, who spends it at the store buying a new lawn mower, the store pays the law mower manufacturers, who pay their employees, who buy more lawn mowers, etc, etc. Gov programs tend to employ people who are hand to mouth enough not to be able to save, hence a greater effect (targeted tax cuts towards a group with a similar propensity to spend would work similarly well). Of course at some point it stops working if people all start working on the government roads-to-nowhere programs because it’s so well paid and nobody is interested in making lawn mowers or anything that people actually want anymore. The whole useful, and tricky, part of debate is to find out where that particular tipping point is.

(Besides it’s pretty difficult for the government to totally waste money: it may be at times inefficient, but basically the core things they do is education, care of sick/old people, picking up garbage, and building roads that mostly do go somewhere, which, while not always strictly speaking economically productive, are generally nice things to have in a civilised society. I mean on a purely economic utility view you should just kill unproductive old people or anyone diagnosed with a terminal disease, but we like to be nice to them.)

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You seem to imply they should be naturally...cold.as.ice: This is close to a simple PEG. I can put directly in the Yahoo stock screen. I will often add (.25 <=...somrh: This is similar to and a somewhat more conservative version of Benjamin Graham’s formula: PE = 8.5 + 2 x...cfischer: You’re being kind to Motley Fool by simply referring to them as “Low Value”..Paul in Kansas City: It is well written; and not long at all. I have referred to this multiple times as it contains...Recent TrackbacksTaegan Goddard's Wonk Wire: Just Limit Banks to the StatesThe Reformed Broker: Hot Links: And the Crowd Goes Wild!FT Alphaville: Further readingCrossing Wall Street: Morning News: May 14, 2012Abnormal Returns: Sunday links: just play your game

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Copyright David Merkel (c) 2007-2012 Disclaimer: David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures. Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions. Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of. _qacct="p-37GEOW7Y76-VY";quantserve(); var sc_project=2500170; var sc_invisible=0; var sc_partition=23; var sc_security="aacd9be3"; View My Stats _uacct = "UA-1957608-1"; urchinTracker();

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The Fix: Austerity, Small Banks & A Gold Standard

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