I wrote in quotes on Feb 22nd: on a vaca “I became more confident that corporate America and businesses around the world were well positioned for global economic growth but fearful that governments and central banks will screw it all up. The road to hell is paved with good intentions someone said someday. The gig of profligate fiscal spending and extraordinary easy monetary policy without consequence is up. As a result, the cost of capital is going higher, as the risk free rate (not so risk free anymore) goes up and risk premiums on everything else follows. In the short term, the tug of war between business and government will intensify…” The rebound in the markets in late Feb said “Business Will Overcome.” Now, with the Fin Reg bill about to come out of DC, China tightening trying to thread a needle, the German news today on top of the entire European bailout, etc…, governments are on the cusp of screwing this all up.

Category: MacroNotes

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15 Responses to “Governments on the cusp of screwing this all up”

  1. Abhishek says:

    Markets have become a very risky place both on the long and short side with governments coming up with new “bailouts” and “regulations” almost each day it seems.The new German ban on “naked short selling” effective from midnight has led to US markets declining along with the usual suspects like the Euro and the Pound.The EU has been coming down hard on the financial sector with new regulations on hedge funds and thinking of legal action against alleged misdoings by the US investment banks

  2. rj says:

    “…governments are on the cusp of screwing this all up.”

    People are pissed off, as this blog has stated several times. When people become pissed off, the politicians that do well are podium-banging populists. You could’ve only got a Huey Long in a period like the Depression.

  3. wally says:

    Industries that don’t want the government in their faces are perfectly free to run clean houses with good self-regulation an self-policing. But when you screw the world – wreck the financial markets or poison a whole sea – then you will get noticed.

  4. beezer says:

    All this volatility has to be increasing the cost of trading and the cost of risk management because these tools increase in price as volatility increases.

    Stability will also improve real liquidity. The kind that doesn’t evaporate.

  5. Amos Satterlee says:

    Boockvar’s logic is sketchy. The days of easy money without consequence are over, yet it is the government’s that are re-regulating that are going to screw this (whatever “this” is) up.

  6. franklin411 says:

    @Amos:
    I totally agree. His post is reminiscent of the blather we heard from 1998-2008: “Government needs to let business alone so it do the Lord’s work.”

    Remember all the CNBC silliness from 2006-2008 about how American markets were so overregulated that we were going to see all the exchange business flee to Europe?

    Business is no different than a teenager: physically, it possesses tremendous power to create and destroy. But emotionally/mentally, it lacks the ability to comprehend the best way to use this power productively. When the parents who created this teenager–the public, acting through the government we all created–try to help this teenager be all it can be without destroying itself, business lashes out.

    There is a reason that the cliche: “Young and dumb” has been around forever! =)

  7. Specterx says:

    Government – not business, and certainly not ‘markets’ – created these problems in the first place.

    The creation of a housing bubble was the _objective_ of Federal Reserve policy in the early-mid 2000s. I quote Paul Krugman, “Dubya’s Double Dip,” August 2nd 2002:

    “To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

    When you make available vast quantities of cheap money, it tends to go *somewhere*. In the 70s it went into wages and consumer prices, and we got inflation/stagflation; these days, it goes into massive commodity, share, and real-estate bubbles. Incidentally, cheap money also acts as a gigantic subsidy for a bloated finance industry.

    And surprise, surprise: when you (the government) manipulate interest rates for political purposes, try to “fight” recessions, run massive deficits for decades on end, and meddle in the markets with bailouts, guarantees, and GSEs, eventually the whole damn thing blows up. And that’s exactly what we’re experiencing now.

    Bureaucratic meddling of this sort is, and continues to be the *problem* – not the solution. We’re all still waiting for sensible (as opposed to capricious and self-destructive) regulation, and that will start with the reform of government.

  8. Avl Dao says:

    There is a Straw Man / Chinese Wall argument alleged to ‘separate and distinguish’ big global business from government. By the year 2010, such a dreamed-up separation is as much a man-made figment of imagination as is the difference between one’s ‘Freedom Fighter” and “Terrorist”.
    We have the revolving door of people moving between government appointments and the boardroom to thank for this reality. And perhaps more so, the decades long antics of legendary lobbying juggernauts for pharmaceuticals, banking & finance, oil exploration, aviation, and the road-building/auto-building/auto-importing trifecta.
    In a far-off imaginary world with an Orange-Colored sky, there indeed exists a “government” free of influence and control of big business and their law-drafting lobby-juggernauts. When this government screws things up, it is solely to blame and big global business hands are clean.
    However, on the watery planet with the blue sky, big business is egregiously short-sighted and advances that short-sightedness into government with every boardroom hack who secures a govt appointment by an elected official whose inaugural and subsequent election victories are paid for by big business campaign contributions. On the planet with the blue sky, that corporate hack-turned govt appointee then turns to big business’ lobbying juggernauts for pre- written drafts of legislation above and beyond mere regulatory changes. On the planet with the blue sky, when “govt” does something stupid, it is merely an extension of the short-sightedness, myopia and garden-variety stupidity of big business and its lobbying juggernauts.
    But back on the Orange-colored-sky planet, some folks claim the preceding does not exist…or that it is easily reversible; big business can be separated from “government”. And on that particular orange-colored-sky planet, the toothpaste naturally flows back into the tube…by osmosis.

  9. advsys says:

    My good man, Government has been screwing this up for at least 25 years and definitively so in the last 4 years. What you see now is the end game. We are finally being forced to deal with the screw ups of decades ago. Something we could have done at any time in the last 20 years with far less damage than we will have to face now.

  10. “The gig of profligate fiscal spending and extraordinary easy monetary policy without consequence is up.”

    It’s ever so fashionable to hate government, these days. But, we are edging out of the recession because of federal deficit spending. In fact, we have recovered from every recession and every depression, because of federal deficit spending. The only problem: The recent deficits have been too little and too late, which I predicted way back in an April 9, 2008 Email to the Chicago Tribune. And heaven help us, some recipients of federal money are paying it back — a perfect anti-stimulus.

    I invite all the government haters to provide historical data showing how federal deficit spending has injured our economy in any way — please, no debt hawk generalizations like, “Our grandchildren will have to pay” — just data. After you fail to provide such data, I’ll provide you with data showing how deficit spending has grown our economy.

    Rodger Malcolm Mitchell

  11. daveG says:

    “In the short term, the tug of war between business and government will intensify…” smells like the new normal brewing…..

  12. Mike S says:

    And the bonds rally, and rally, and rally. You couldn’t be more wrong about the risk free rate.

  13. insaneclownposse says:

    I don’t think you can blame government for the reemergence of the secular bear market trend. However, the action by the Germans could make the situation much worse. Banning short selling during the crash in 2008 did nothing to help financial stocks. Why are the authorities incapable of learning from recent history? Trying to freeze asset prices at higher levels never works. It could cause another implosion.

    Deficit spending grew the economy for 20 years. Unfortunately, we reached the point of maximum credit and the banking system blew up. I don’t think that the evidence supports a thesis that deficit spending is particularly healthy. Has it worked for the Greeks? What happens when the credit markets clam up and you can’t roll your debt? Guess what? You are totally FUCKED. You think that can’t happen to the U.S.?

  14. wisegrowth says:

    The way that business conducts itself has a lot of growing up to do…

    Take for instance the cooperative Mondragon in Spain… it has over 92,000 employees in 256 companies…and… While the unemployment rate in Spain went to 20%… nobody at Mondragon lost their job… Nobody

    How did that happen? Study their business model…
    http://en.wikipedia.org/wiki/Mondragon_Corporation

  15. cewing says:

    The naked short selling ban makes sense. If someone has a good explanation why people selling stocks they don’t own is a good thing, please let me know.

    “…governments are on the cusp of screwing this all up…”

    Screwing WHAT up, exactly? Another perfect quarter for the investment banks? Why should I care?