San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, July 20, 2012

Massive Government Hypocrisy Exposed In Libor "Scandal"

In yesterday's posting I pointed out that the Libor "scandal" is really not a scandal at all.  The presupposition that is held by everyone who believes that something immoral or wrong took place is that there is some objective rate of interest that exists somewhere in the marketplace that is subject to manipulation by evil bankers.  That presupposition is in error.  The rate of interest on any transaction is always determined by those who are participating in the transaction, and no one else.  The world's greatest economist, Murray Rothbard, said it best when he wrote (Man, Economy and State) "because money is the general medium of exchange, for the time markets well as for other markets, money is the present good, and the future goods are present expectations of the future acquisition of money.  It follows from the law of time preference that present money is worth more than present expectations of the same amount of future money.  This discount on future goods as compared with present goods is the rate of interest."  It is therefore impossible to declare that there is some stated rate of interest that exists independently of the subjective appraisals of the participants in any particular market.  The entire notion of "manipulating the Libor" is, therefore, quite impossible.
Today however, for the sake of argument, let's assume that manipulation of the Libor rate is possible.  The allegation of government investigators is that the sixteen member banks which determine the Libor rate haphazardly and randomly changed the rate of interest in order to make excess profits that would not have been realized if they had not manipulated the rates.  One inconvenient truth is ignored in this discussion.   When dealing with changes to a rate of interest, there will be both a loser and a winner in the transaction.  As the middleman in these transactions, it is impossible for the banks to come out net gainers.  Consider this fact.  When a bank establishes a rate of interest that is artificially low the bank will receive less income from its loan portfolio and pay out less interest on its deposits.  Overall the net to the bank will be zero.  When a bank establishes a rate of interest that is artificially high the bank will receive more income from its loan portfolio and pay out more interest on its deposits.  Overall the net to the bank will be zero.  The only thing that changes when interest rates are artificially high or low is who wins and who loses.  
Barclays is accused of setting an interest rate that was artificially low during the financial crisis of 2008 and 2009.  Bankers at Barclays defend their action by saying that the proposed Libor rate is designed to be based upon their subjective appraisal of the fiscal solvency of the member banks.  Although the media, the government, the regulators and a good deal of the general public had little confidence in the banks at this point in time, Barclays had a great deal of confidence in the member banks.  History has proven that Barclays was right.  The banks were nowhere near the distressed status so many believed them to be.  Investors would have been wise to look at the Libor and realize that those who understood the financial situation the best, the bankers, were not panicking.  Today, greedy government regulators who are out to make a name for themselves are piling on the favorite whipping boy of both regulators and the general public, the banks.  Government regulators want to sue the banks for billions of dollars because they allegedly established an artificially low rate of interest on the Libor, thus reducing interest payments to the  municipal, state and federal governments that held banks notes subject to the Libor index rate.  Let's consider the massive hypocrisy being displayed by the government for a moment.
Completely ignored in this entire discussion is the massive elephant in the room.  Do you see him?  His name is Fed.  Painted on his gigantic ears is the word 'hypocrite'.  One on each side.  Hypocrite!  It amazes and astonishes me that nobody is pointing out that the Fed did exactly what federal regulators are accusing the banks of doing and was praised for "saving the world's financial system" for doing so!  Does anybody know what the Fed funds rate is today?  Zero!  That's right.  Zero.  Does anybody know when it was reduced to zero?  That's right, in late 2008.  The Federal Reserve Board of the United States of America deliberately and maliciously lowered the Federal Funds rate to zero percent in the middle of the financial crisis.  The net impact of that manipulation of the rate of interest is huge.  Billions of dollars in profits have accrued to the government because of these lower rates. Billions of dollars have been transferred to favored players in the scam.  Trillions of dollars of investments are tied to the Fed Funds rate.  Mortgage holders have realized windfall profits as the rate of interest on mortgages has plummeted to historic lows.  Of course, the Fed did this on purpose to try and stimulate the housing market.  At the same time, money market funds, CD's and other short term debt investments have been reduced to paying, in many cases, zero interest.  The negative impact upon those who were counting upon that stream of interest income is impossible to underestimate.  How many retirees are suffering at this very moment as a result of the Feds immoral actions?  It is staggering to even consider the devastation being done by the Fed.
The Libor "scandal" illustrates just how far we, the citizens of the SDA (Socialist Democracy of America) have degenerated.  This non-event proves that we are all worshipers of the great State. When a private individual or a publicly traded corporation engages in a particular behavior related to establishing interest rates, it is called devious, immoral, evil, greedy, and subject to severe government punishments.  When the Fed does exactly the same thing, with far worse consequences for all of us, it is praised for its service to the public and heralded as the savior of the financial system of the world.  The Libor non-scandal is one of the best illustrations of governmental hypocrisy I have ever seen.  I have to stop writing before I get sick.

Thursday, July 19, 2012

Froma Harrop Is Wrong Again/No Libor Scandal

In the July 13th Denver Post, syndicated columnist Froma Harrop (see the 5-25-12 posting for my original commentary on her knowledge, or lack thereof, of economics) once again shows that she does not understand economics.  Here is what Froma has to say about the Libor "crisis":
"Libor is at the center of another major financial scandal....The illegal fixing of Libor, the interest rate to which much of the world's financial transactions are tied, took a ton of money out of ordinary folk's pockets and handed it to the select few....We've been subject to shocking financial scandals in recent years, but some experts are calling this one the worst....So here's another example why accusing financial con artists of greed, dishonesty, or avarice is so fruitless.  Let a higher power dwell on their character.  The job for we earthlings is to regulate them without apology.  This latest scandal should make that a done deal."
Froma never met a politician she did not admire.  Froma never met a new rule she did not approve of.  Froma never met a regulation she considered to be onerous.  Froma never met a banker she considered to be anything other than a thief.  Her response to the Libor crisis (it is not a crisis, nor is it a scandal, as I will explain later) is to call for excessive and punitive regulations upon the entire banking industry.  This makes sense in her mind since everyone who is involved in the banking industry is immoral.  If government is not here to protect us from those greedy bankers, we would all be impoverished to the point of bankruptcy.  For, you see, in Froma's universe, bankers are always evil and politicians are always good.  Froma is wrong again.
The Huffington Post (July 12th) described the process by which the Libor is set.  "It is the average of a daily poll of the Association's member banks, who give an estimate of the interest rate they think they would pay if they sought to borrow from another bank.  It is supposed to be the way the financial system assesses the overall health of the financial system, because if the banks being polled feel confident about the state of things, they report a low number, because they assume that if they had to borrow from another bank, their cost of borrowing would be low. If member banks feel a low degree of confidence in the financial system, they report a higher interest rate. And from that the Libor is calculated, affecting the interest rate on financial products around the globe."  
The alleged "scandal" is described here (from, "Borrowers with ARM loans that are indexed to the Libor pay a margin plus the Libor. Say the margin on your loan is 2.5 percent and your loan resets today when the Libor is 1.07 percent. The rate on your loan will be 3.57 percent. The Libor wasn't always this low. In January 2007, the one-year Libor was about 5.4 percent.  When your ARM loan resets, if the Libor used to determine the interest rate on the loan is incorrect -- as a result of banks' manipulation -- you may be overcharged or undercharged for your loan.  As of 2008, nearly all subprime ARM loans and 60 percent of prime ARMs were tied to the Libor, according to research by the Federal Reserve Bank of Cleveland."
What is the net impact of the alleged "manipulation of the Libor rate"?  Again, quoting from, "Say the Libor was affected. It's difficult to say whether borrowers were helped or hurt by the mess. Depending on when a loan reset, a borrower could have been overcharged or undercharged for the interest. That's because during the financial crisis of 2008, when media started to question Barclays' financial stability, Barclays suppressed its rates and reported artificially lower rates to make it look like the bank was doing well.  In theory, if the Libor was affected by the manipulation, borrowers who had loans resetting during that period probably got cheaper rates than they should have."
Any objective, rational observer of this situation can immediately see the problem with declaring that a scandal or a crisis has erupted around the Libor.  The Libor is, by definition, a subjective rate of interest.  16 member banks submit their daily rates of interest.  The two highest rates and the two lowest rates are thrown out.  An average of the remaining dozen rates becomes the Libor for that day.  The Libor is set very much in the same fashion a skater can win a medal in figure skating.  A panel of judges renders subjective decisions about the performance of a skater, with the extremes being tossed out, before a subjective rating is assigned.  
Froma alleges that "banks set the Libor rate artificially low", resulting in windfall profits for those greedy monsters.  But, as any first year student of logic can clearly see, to say that the Libor is "artificially low" one must have an objective rate of interest that is properly higher.  What is that rate of interest?  Where does it come from?  How does anybody determine what the real rate of interest is?  How is it possible to declare that some banker manipulated the rate of interest downward when there is no objective standard as to what the rate of interest was in the first place?   Interest rates are, by definition, subjectively appraised.  To accuse subjective appraisers of manipulation is ridiculous.  Each appraiser’s opinion is just that, his opinion.  If he diverges far from the median, his proposed rate will be tossed out.  If he proposes a rate that is wildly different than his peers, he will have no impact upon the actual rate that is set.  Given the reality as to how the Libor is established, it is hard to see how anybody could ever prove that a banker has deliberately manipulated the rate.  Indeed, it is logically impossible to even define what constitutes manipulation.
Perhaps even more important is the fact that Froma can't see that even if the Libor was "manipulated", there are people who would have benefited from that manipulation who are not bankers.  As the above quotations prove, it is possible that those who borrowed money actually ended up paying less.  Anybody who has a mortgage that is tied to the Libor and if the Libor was manipulated downward (as is alleged), would have benefited from that manipulation.  It is hard to see how bankers can make evil profits when they give their customers an even better deal.  Froma is so blinded by her pathological hatred of bankers in particular, and capitalism in general, that she is incapable of seeing how a banker could ever do something positive for society.  Froma is so dedicated in her love for government that she makes up scandals and crises that bring about cries for more government regulation.  In her ideal world there would be no free market.  We would have nothing but beneficent government rulers watching our every move. Everything would be regulated, except the regulators, of course.
Froma's allegation that the Libor was "fixed" is not true.  It can't be.  It is a subjective rate that is "fixed" every single day.  Her allegation that bankers associated with Libor "took a ton of money out of ordinary folk's pockets and handed it to the select few" is clearly false.  Mortgages tied to Libor account for trillions of dollars.  Millions of people who hold those trillions of dollars in mortgages would have benefited from a lower rate.  Froma Harrop is wrong again.

Wednesday, July 18, 2012

Most Economists Are Ostriches

People like to believe that economists are some sort of magical class of people with the ability to see the future.  We gather around them, waiting with great anticipation for their most recent predictions about the future of the business cycle and the stock market.  Yet, if you take a little time to examine what they have to say, it becomes readily apparent that most economists are subject to all of the typical human foibles.  They do not want to be unpopular.  Or, conversely, they want to be popular.  They want to be interviewed.  They want to see their names in the newspaper and their faces on the television.  That means they will interpret economic data in such a way as to agree with the prevailing sentiments of the time.  Sometimes this results in a chance connection with economic truth.  Most of the time it results in a serious diversion from what is really economically true.  In order to arrive at their false conclusions, and maintain popularity, most economists have to become ostriches.  They stuff their heads firmly underground so that they are never influenced by economic data that tell them something other than what they want to believe.  Today is a good example of their ostrich like behavior.
Popular talk among economists today is all about the pending economic disaster that will be brought about by such things as the "fiscal cliff", the stubbornly high rate of unemployment, the lackluster performance of the housing market, the continuing woes in Europe, and the mistrust most Americans feel for the "banking system", whatever that is.  All of the talk related to these topics has to ignore economic reality in order to remain pessimistic. reported this morning that "Housing Starts Are A Bright Spot For The Cooling Economy".  Even the headline to the article illustrates the negative bias that exists at  Why not simply report what is happening in the housing market without relating that information to their opinion that the economy is declining (it is not, growth is still growth)?  The article goes on to say that, "Groundbreaking on new U.S. homes rose in June to its fastest pace in over three years, lending a helping hand to an economy that has shown worrisome signs of cooling."  This is good news!  Housing starts are at their highest rate in over three years.  Why is that not reported positively?  Why does it have to be couched in negativism?  The article continues when it says, "But since it makes up a smaller share of the economy than before the recession, it can provide only a limited lift to the broader recovery."  Talk about seeking out a bit of negative information for no other reason than to throw cold water on good news.  Nobody wants to come out and say that the housing market is doing well, and accelerating.  I will.  It is.  Believe it.
The Fed's Index of Industrial Production number was reported this week.  It is a very good indicator of what is going on in the economy.  As Fisher Investment's reported, "Following a -0.2% dip in May (+4.4% y/y), US industrial production (IP) rebounded nicely in June (+0.4%)—solidly besting expectations. Diving deeper into the data, manufacturing and mining production rebounded solidly, but declining utility production detracted. Automotive production recovered from a relatively steep decline in May, and business equipment production (+1.6% m/m) reaccelerated."  Why was this not reported at  At least, I couldn't find a report about this terrific news on the website.  The report by Fisher Investments concludes by telling us that,  "to put that in perspective, the 4.7% y/y rate is faster than any seen during the entire 2001-20007 expansion."  That is fantastic news.  Our present rate of industrial production is rising faster than the previous economic expansion!  Why is nobody telling this story?  Because it is impossible to see anything when your head is firmly ensconced underground.
Concerns about Europe continue to be overblown.  Good news out of Europe continues to be ignored.  What do you think about Spain?  Is the country in trouble?  Is Spain doomed to suffer a depression?  Are Spanish banks doomed to fail?  Is Spanish government debt about to collapse?  I would suspect most people would answer the string of questions above with a resounding "Yes!".  All those answers would be wrong.  On Tuesday the Spanish Treasury sold 2.6 billion Euros of One Year bills at an interest rate of 3.92%.  The bid to cover ratio was a solid 2:1.  This compares to an interest rate of 5.1% for the June auction.  An additional 961 million Euros of Eighteen Month bills were sold with an astounding 4:1 bid to cover ratio.  The rate was 4.2%, significantly lower than the 5.2% rate in June.  When the June auction was completed, the news wires were full of reports about the high rate of interest the Spanish Treasury would be required to pay.  When the most recent auction dramatically reduced that rate of interest, the news was ignored.  Why?
Most economists are presently pessimistic.  It is popular to be pessimistic.  It is difficult to be an optimistic economist and keep your government job.  All politicians want to paint a picture of disaster, when it comes to the economy, in order to grind their respective axes.  Most news media outlets want to follow the crowd and increase ratings, so bad news gets reported and good news gets ignored.  
Maybe I should create an index.  I would call it the "Ostrich Index" and it would show, on a relative scale, just how much economists and media types have their heads buried in the sand.  On a scale of  1-10, I would say the present factor is a 9.

Tuesday, July 17, 2012

Why I Do Not Watch The Olympics

By now we are all aware that the summer Olympics games are coming.  They will held in London starting the last week of this month.  How depressing.   The Olympic games are a total waste of time and taxpayer money.  They are a sham and a scam.  There should be an international law declaring them to be illegal for the rest of human history.  They should be eradicated from the history books so we never have to hear about them again.  All companies that buy commercial time during the games should be boycotted.  We, the citizens of the world, need to band together and ensure that we never have to witness this spectacle again.  We need to do it for the children.  We need to do it for the environment.  We need to do it for world peace.  We need to do it for the whales and the seals.  The Olympic games must be stopped.  Why, you ask?  Let me give you several reasons.
First, the Olympic games have ruined the most important sporting event of the summer, the Tour de France.  It is a well known fact that many of the cyclists presently racing in the Tour are not giving their maximum effort because they are saving themselves for the Olympic road race and time trial.  For example, yesterday's stage was completely neutralized because several of the sprinter's teams later admitted they were resting in preparation for the Olympics.  For reasons known only to themselves, they have insanely decided that a shot at an Olympic medal is somehow more important than a shot at a stage win in the Tour.  How any cyclist could have such a distorted view of reality is incomprehensible to me. Still, I am aware that most of you consider cycling to be no more of a sport than bowling or beach volleyball.  This argument just isn't cutting it.  So here is another.
The Olympic games are nothing more than another opportunity for national pride to be put on display.  By "national" pride, of course, I mean pride in the government.  The absurd and meaningless practice of keeping track of the "medal count" according to which geo-political entity each athlete hearkens from is the best proof of this assertion.  The sickening practice of playing the national anthem of each gold medal winner is difficult to stomach.  Why should the awarding of a medal to an individual athlete be accompanied by the playing of a statist hymn derived from the country in which he lives?  It would make a lot more sense if the gold medal winner was simply allowed to select his favorite song to be played during the ceremony.  Imagine how much more interesting it would be if a gold medal was being presented to an athlete accompanied by "Satisfaction" by the Rolling Stones or, in the case of a multiple medal winner, "Oops, I Did It Again" by Brittany Spears.
 I guess it could be argued that each athlete should be counted as a citizen of his country because, in reality, he is being funded by that country.  He who pays the piper calls the tune.  And that brings me to another huge problem I have with the Olympic games.  Remember how they were supposed to be a forum for the amateur athlete to showcase his skills.  Decades ago our hearts were warmed by tales of pizza delivery drivers and stock boys who also happened to be good at putting a shot or jumping over a hurdle.  They would take a break from their daily chores to go to the Olympics to compete against other like-minded fellows.  There was some nobility in that.  Today the situation is totally different.  Olympic athletes are funded either directly or indirectly by the government.  They train in government facilities.  They eat government food.  They are bought and paid for by the government.  Governments, and the politicians who run them,  do this because they like to waste taxpayer money and enjoy the glory associated with beating up on a third world country in the Olympic games.  Once again we prove we are superior to the rest of the world.  Hurray for America!  We are better at swimming the backstroke than anybody from Peru.  Hold your heads high.
Speaking of proving our superiority......when did it become the case that the highest paid athletes in the world should be permitted to compete in the games?  Why do professional basketball players go to the games?  Does it strike anybody as just a little bit unfair that the US men's basketball team measures success not in victories but in margin of victory?  Do the games seem to be a bit rigged when the typical margin of victory is around 40 points?  How can any person who enjoys sports be excited about watching one rout after another?  Whatever happened to amateur competition?  Even more, whatever happened to competition in general? 
Another disgusting aspect of the Olympic games is how it celebrates obsessive-compulsive behavior (OC).  I hate OC behavior and can't stand being in the presence of OC people.  Since when is excellence defined as totally obsessing upon one tiny little part of life, to the exclusion of everything else, in order to claim that for one minute of time you were the best in the world at doing it?  What does it profit a man to gain a gold medal and lose his soul?  These poor athletes are surrounded by people who encourage their OC behavior.  The more they obsess, they more they are deemed to be committed to the cause.  Next thing they know, four to eight years of their lives have gone by and they have nothing to show for it but a litany of broken relationships.  This is success?  If so, I don't want any of it.
Another reprehensible aspect of the Olympic games is how they celebrate youth.  I have to laugh every time I hear an interview with some 22 year old who tells the interviewer that he has "dedicated my entire life to the pursuit of this medal."  Wasting four to eight years in OC behavior over some trivial pursuit that, if it was not for the fact it is a medal event in the Olympics, would not even exist in the real world is not my model for dedication.  Talk to me again when you have dedicated thirty, or forty, or fifty years of your life to something valuable.  Talk to me when you have accomplished something meaningful in life.  Then we will have something to talk about.
Join me in a boycott of the Olympic games.  It is time for all of this nonsense to end.  Think of the children.  Think of the money wasted on advertising that could have been used to feed the poor.  Think of the time wasted that could have been spent on broadening your knowledge and experience.  Don't watch the Olympics.

Monday, July 16, 2012

Extinction Is Good

Some things need to die.  Some things need to go extinct.  Who would complain if poison ivy became extinct?  Who would be upset if black widows ceased to exist?  Who, in his right mind, would offer one word of remorse if all the kudzu in America were to disappear overnight?  Personally, I would be quite pleased if the grizzly bear disappeared from the face of the earth.  That would open up mountain climbing opportunities in areas that are presently heavily populated with the vindictive, arrogant, human-hating beasts.  This belief of mine that extinction is a good thing is not unique to me.  It is actually shared by two of the fathers of the environmental/conservation movement.  Both John Muir and John Audubon believed that extinction is good.  In particular, they were both quite pleased when the passenger pigeon blinked out.
One of the things I was taught in the government schools was that the extinction of the passenger pigeon was one of the worst examples of human destruction in the history of mankind.  My teachers informed me that greedy corporate hunters slaughtered the innocent and beautiful birds by the millions, just for the sport of it.  I was told that everyone believed that the passenger pigeon could never be harmed because there were so many of them.  Then, one day, everyone awakened to the realization that these noble beasts were on the brink of extinction.  Heroic efforts were undertaken to try to preserve the species.  But, the efforts of the evil hunters were too much to overcome and when Martha (a passenger pigeon named after Martha Washington) died on September 1, 1914, the passenger pigeon went extinct.  Apparently all sensitive souls deeply mourned the passing of such a magnificent species.  That is the way the story was told to me.  Muir and Audubon had a different perspective.  (The information contained in this blog is from a book by Charles Mann entitled 1491.  It is well worth reading.)
In the 18th and 19th centuries in America the passenger pigeon was seen by most people as a colossal pest.  The closest behavioral equivalent to the passenger pigeon would have been the locust.  The birds would consume everything in sight, doing massive devastation to crops, farmlands, and forests.  When eating, millions of pigeons would form a long line and advance along the ground, eating everything in sight.  When they had gorged they would practice bulimia.  Once purged of their previous meal, they would begin the process over again.  As the line advanced those who found themselves in the rear would fly up and over the line in front and establish a new line.  Muir described the process like this, "...revolving something like a wheel with a low buzzing wing roar that could be heard a long way off."  Muir said that as a boy he "saw thousands of acres perfectly cleaned of acorns in minutes."  Audubon wrote that because the birds would travel in flocks estimated to number in the billions, it was not uncommon for "dung to lay almost two inches deep for miles."  Audubon recounts how one flock of pigeons was so large that it "passed overhead in a single cloud for three whole days." 
People were so dismayed by the presence of the pigeons that the bishop of Quebec took the extreme measure of excommunicating the species in 1703.  How a bird could be excommunicated was not explained.  Audubon describes one roost that he observed.  He said, "The pigeons, arriving by thousands, alighted everywhere, one above another, until solid masses as large as hogsheads were formed on the branches all around.  Here and there the perches gave way under the weight with a crash, and, falling to the ground, destroyed hundreds of birds beneath, forcing down the dense groups with which every stick was loaded.  It was a scene of uproar and confusion.  I found it quite useless to speak over the roar of the wings, or even to shout to those persons who were nearest me."
The passenger pigeon is extinct.  I, for one, am glad. Both Audubon and Muir shed no tears at the demise of the passenger pigeon.  Common sense seemed to be the order of the day with those fellows.   Too bad that common sense has not been passed down to their intellectual heirs.   I would like to see many other species of plants and animals become extinct. The world would be a much better place without a lot of the riff raff that lives here now.  Extinction is good.

UPDATE:  May 15, 2013

Mr. Unknown posted a comment to this post on May 14th.  He corrects some of the more egregious errors in the above content.  I suggest you read the comments to get the straight scoop.