European Union’s “too-big-to-fail” guarantees & “too-lazy-to-enforce-treaties” mentality invite demise of euro


Governments that use taxpayers’ funds to bailout commercial or financial interests essentially admit to their own failings. In the US, irresponsible monetary & credit expansion driven by artificially-low interest rates undermined risk. In turn, financial institutions were encouraged to misbehave due to low downside costs since both debtors & creditors could count on lifelines thrown by politicians using other people’s money.

At least, the bailouts of US banks money aimed to convince markets that institutions receiving TARP money were solvent so a sector of the private sector would return to profitability. But in Europe, taxpayers are forced to underwrite the debt of governments by granting them greater access to more debt. And the European Central Bank (ECB) has become a financer for existing and future fiscal deficits rather than preserving European monetary stability. Both of these steps have undermined the future of the euro.

PUBLIC-SECTOR DEBT IS IMMORAL & ENCOURAGES INEFFICIENCY

Citizens of democratic countries around the world, from Greece to the US to Japan, are awakening to the fact that governments have mortgaged off their futures. This is the result of an experiment with democracy whereby political elites and their bureaucratic minions acquired increasingly-unlimited powers while being largely unaccountable for the outcomes of their misdeeds and missteps.

As they are, incentives associated with representative democracy encourage profligate politicians to ignore or skirt constitutional restraints to expand the scope of government. Added to the inducements for growth of the state driven by special interest groups that promise political payoffs is cheerleading from Keynesian economists and spendthrift bureaucrats.

An ever-widening range of policies and spending commitments are offered to attract electoral support. With such promises growing faster than the ability of current wealth creators in the private sector to contribute to the pool of tax revenues to pay for them, public-sector deficits keep rising.

After hard lessons that monetary expansions to pay for excessive spending lead to crippling rises in price levels, democratic governments increasingly turned to debt issuance to fund deficits. Deficits financed by expanded bank credit create permanent and rising price levels that lead to cycles of artificial booms and “bubbles” followed inevitably by painful economic busts.

The only alternative to fund those deficits is to issue ever-rising public-sector debts. As such, politicians have created a “welfare state trap” by making ever-expanding promises to citizens that develop an insatiable demand for entitlements. But attempts to appease these populist demands fall on a private sector that is increasingly enfeebled by higher burdens of regulations and taxes.

While the private sector exists as a means for wealth creation, governments operate as a means to redistribute wealth and income. Increasing the size and role of government diverts more workers and resources from wealth-creating activities towards activities that are inefficient and less productive.

For example, public-sector employees paid from the pool of tax revenues through (forced) contributions from the private sector are living off surpluses created by others. As such, public-sector employees do not directly add to wealth creation and are not taxpayers in the most meaningful sense.

Formation of public debt is very different from the creation of private debt that leads to different expectation and incentives for both creditors and debtors.

For its part, private debt involves a voluntary transaction whereby creditors exchange funds for an IOU from a debtor. Since private debtors pledge property or stake their reputations as a basis for repayments, they and creditors face incentives to limit debt creation that encourage prudent behavior by both parties.

By contrast, public-sector debts are created by the ruling elite to bind citizens involuntarily to contracts enforced using coercive claims against the future income of citizens. Since public officials spend someone else’s money that promotes their own careers but are not personally liable for its repayment, they face weak incentives to restrain debt creation. And creditors understand that repayment is not made by politicians or bureaucrats but by taxpayers that pony up under threat of the coercive powers possessed by the state.

Since public credit transactions lead to the involuntary use of someone else’s property and income based on implied coercion, they violate the property rights of citizens in the future. As such, public-sector debt contracts should be seen as immoral acts that should be denounced.

Those that are not convinced by the “immorality” of deficit spending that leads to growing public-sector debt might consider economic arguments against it.

It is often claimed that increased government spending is justified in that constitutes an investment. But a large proportion of government spending involves transfer payments to support careers of bureaucrats and politicians or consumption of their dependent clients.

Another problem with deficits and public-sector debt involves higher future tax burdens is that they divert resources from the productive private sector to the less-efficient public sector. Profit-seeking corporations offer incentives that reward their employees for being efficient & innovative. Employees & managers in the private sector received rewards in the form of pay hikes, bonuses or promotions for taking initiatives & being innovative reduce costs or increase sales.

While bureaucrats face legislative encumbrances & political interferences, they also face disincentives to be efficient or innovative. Individual bureaucrats do not capture rewards if they boost efficiency or take initiatives to innovate & agencies that cut costs tend to find their budgets cut.

On balance, diverting more resources to governments leads to net losses in productivity & the potential for economic growth. Eventually, a tipping point occurs when public-sector claims on resources inhibits the ability of the private sector to create jobs & increase income.

Greed, graft & inefficiency; courtesy of your favorite public-sector official:

Lessons from anti-government demonstrations

It is interesting to note the differences in the nature of organized dissent against government policies that are appearing on the streets of the US with those in Athens, Greece & Bangkok, Thailand.

Left-wing extremists & rent seeking public-sector trade unionists joined welfare recipients to denounce cuts in government handouts. The end result has been violence that descended into cold-blooded murder of innocent bystanders.

Protesters on the streets of Thailand that dispute the legitimacy of the ruling party were greeted with armed police & military forces. In turns, violence has erupted with a growing number of casualties, including a sniper attack on an active-duty army general that was overseeing security for the demonstrators.

In the US, the principal complaint is the general overreach of government, triggered by excessive deficit spending that has caused the national debt to mushroom beyond tolerable limits. Despite media reports suggesting all manner of nefarious attributes to the “Tea Party” movement, there has been no violent acts.

Which is better? This:

Or this:

Corrupt EU public officials use “sleight of hand” to evade Rule of Law

Founding principles of the European common currency area require each euro-zone country to manage & be responsible for its own fiscal affairs. And EU treaties contain a “no-bailout clause” that forbids the currency bloc or any member to “be liable for or assume the commitments of” another EU country.

Following this thread, the European Central Bank (ECB) is barred from lending to countries or buying their debt directly.

EU public officials apparently view treaties as obstacles to be averted rather than honored. As such, they applied slippery “interpretations” of the documents so they can do whatever they please.

And so it is that the ECB said it will buy euro-zone government & private bonds “to ensure depth and liquidity” in markets. Now “bilateral loans” involving loans between countries will be permitted under the guise that lending countries do not purchase existing debt.

Anticipating challenges to their arguments, they have offer a strained interpretation of a clause permitting assistance under “exceptional occurrences”. This allows spendthrift governments overseen by irresponsible public officials to remain unaccountable.

When will European citizens rise up against the corruption of treaty obligations that were intended to stop such flagrant abuses?

So big, they have to fail!!!

If the Obama Administration & Chris Dodd were serious about financial reform, they would close Fannie Mae & Freddie Mac.

For its part, Fannie registered its 11th consecutive quarterly loss of $11.5B & asked for $8.4B more from American taxpayers. This came after Freddie recently requested $10.6 billion of taxpayers’ money, pushing the combined take to $145B.

And the Treasury made an unlimited commitment of taxpayer cash to these monsters that were political creations to serve political ends & led by political appointees. Political logic created distortions so they could become so big so that they had to fail & will continue to do so until market logic dissolves them.

The US Constitution & the “rule of law” versus judicial permissiveness & legislated law

Writing in the University of Chicago Law Review (1995), Elena Kagan complained that Supreme Court confirmation hearings tended to be “a vapid and hollow charade.” She felt the Senate should ask questions so as to “gain knowledge & promote public understanding of what the nominee believes the Court should do & how she would affect its conduct.”

One has to wonder if President Obama will pressure the Senate to grant her wishes during her own confirmation hearings.

This is important given that most “progressives” in the US, indeed most legislators tend to view the Constitution as a nuisance to be averted.

In considering claims that Barack Obama taught Constitutional Law, one has to imagine that he explored clever ruses to circumvent it rather than to see the underlying values that guided the framers.

A rare moment for Hollywood: Speaking truth to power

There is a lot to like about Tony Stark’s response in “Iron Man 2” as he faced down overbearing & overreaching government authorities that had demanded his appearance before a US Senate committee hearing.

On one the hand, he rejected an attempt to confiscate his private property while ridiculing a self-important political figure.

On the other hand, he defiantly supported the Second Amendment right to possess legally-acquired weapons.

It is interesting to note that the Iron Man suit in private hands was a force for good. However, once it fell into the possession of government agents it became the basis for widespread destruction of life & property.

But it is also surprising that Hollywood let such a libertarian message find its way into the collective conscious of viewers.

Robert Downing probably played to type in the film after being oppressed & persecuted for his personal vice involving consumption of drugs deemed illicit by the government.

Street-fightin’ man….

It is interesting to note that the “mainstream media” (e.g., dispatches from AP) describe those perpetrating violence & mayhem on the streets of Athens, Greece as “rioters” or “demonstrators”.

To date, there have been no references to left-wing extremists, trade-union fanatics, or socialist ideologues. (There has been some mention of “anarchists” though most seem to embrace government actions to halt/reverse globalization or as a tool of redistribution.)

Meanwhile, supporters of the Tea Party movement in the US are often portrayed as “potentially” dangerous & extremist, a bias that continues despite a complete lack of violence

Court jesters highlight political & diplomatic buffonery in European Union

Eurogroup president & Luxembourg Prime Minister Jean-Claude Juncker joked while hiding a chart indicating Greece’s (likely, feigned) plans to reduce its fiscal deficit.
Indeed, such shenanigans allowed Greece (as well as Portugal, Spain & Ireland) to ignore their EU treaty obligations outlining fiscal prudence.
It is amazing that Mr. Juncker is so inept that in making himself look ridiculous he also reveals that such abuses make the EU look like a bunch of double-dealers.