Lawson for Congress

This has got to be the most ridiculous idea I’ve ever heard from a politician. Senator Clinton’s most recent proposal shows that she skipped a few economics classes in college:

WASHINGTON - Democratic presidential candidate Hillary Rodham Clinton said Friday that every child born in the United States should get a $5,000 “baby bond” from the government to help pay for future costs of college or buying a home. Clinton, her party’s front-runner in the 2008 race, made the suggestion during a forum hosted by the Congressional Black Caucus.

“I like the idea of giving every baby born in America a $5,000 account that will grow over time, so that when that young person turns 18 if they have finished high school they will be able to access it to go to college or maybe they will be able to make that downpayment on their first home,” she said.

The New York senator did not offer any estimate of the total cost of such a program or how she would pay for it. Approximately 4 million babies are born each year in the United States.

Clinton said such an account program would help Americans get back to the tradition of savings that she remembers as a child, and has become harder to accomplish in the face of rising college and housing costs.

She argued that wealthy people “get to have all kinds of tax incentives to save, but most people can’t afford to do that.”

The proposal was met with enthusiastic applause at an event aimed to encourage young people to excel and engage in politics.

“I think it’s a wonderful idea,” said Rep. Stephanie Stubbs Jones, an Ohio Democrat who attended the event and has already endorsed Clinton. “Every child born in the United States today owes $27,000 on the national debt, why not let them come get $5,000 to grow until their 18?”

Britain launched a similar program in January 2005, handing out vouchers worth hundreds of dollars each to parents with children born after Sept. 1, 2002.

Earlier this month, Time magazine proposed a $5,000 baby bond program.

Question: What happens to property prices if you give everyone around the Monopoly board an additional $5,000? Answer: Prices go up, and your existing paper dollars buy less property.

Question: Can the government create wealth by giving away free money? Answer: No, but we sure do love trying.

I don’t know who sounds worse in this exchange: Senator Clinton or Representative Stubbs Jones with her well-meaning support. Sure, every child is born owing $30,000 of our national debt. So why not borrow another $5,000 for each of them? How does that help our balance sheet?

Is there a cure for this madness? Fortunately, yes. Check out this classic Ron Paul clip below:

A friend forwarded me the following amusing article from CFO.com:

NEC Gives Up over Revenue Recognition
Company says it simply cannot figure out U.S. GAAP revenue-recognition rules, and will stop trying.
Tim Reason, CFO.com
September 24, 2007

NEC Corp. says it is stumped by U.S. accounting rules for revenue recognition and has given up trying to comply with them.

The Japanese electronics giant says it realizes this will likely lead to the delisting of its ADR shares on Nasdaq. It also says it will not be able to file its 2006 annual report under U.S. GAAP, and that it cannot vouch for its financial statements since 2000.

Under U.S. generally accepted accounting principles, revenue-recognition rules are complicated for software companies whose contracts combine the sale of software with maintenance and service agreements. Under a GAAP standard called SOP 97-2, companies wishing to recognize the software-sales revenue up front must perform an analysis of such contracts that provides “vendor-specific objective evidence” of consistent treatment of sales and service. That analysis, which NEC says it has been unable to complete, is required before portions of revenue from a single contract can be broken out and recognized at different times.

NEC says it is unable to complete the VSOE analysis for its auditor in time to file its annual report for the March 31, 2006, fiscal year with the Securities and Exchange Commission, and that its failure to file will likely result in its ADRs being delisted from Nasdaq. NEC had previously been warned by Nasdaq and had received an extension to September 25.

The company adds that its financial statements dating back to 2000 should no longer be relied upon; however, it says a restatement “is not practicable” because of the complexities involved in determining the adjustments that would be required. NEC notes that its financial statements under Japanese GAAP are current and are not affected by this announcement. It addition, the company says, it remains in compliance with the disclosure rules of the Tokyo Stock Exchange and the Securities and Exchange Law of Japan.

How great is that? Take your shares and go home, NEC. We don’t want to invest in your company, and we don’t want you to invest in us, either. Can’t figure out how to calculate revenue? You clearly haven’t found the right accountants yet, or maybe you’re just not paying them enough.

Having been in the software industry, I experienced the magic of revenue recognition and so-called “vendor specific objective evidence” firsthand. To this day, I have a tough time reading financial reports for software companies with a straight face. The system is so capricious and riddled with arbitrary complexity that the only value creation is for auditors and accountants.

Perhaps other companies will follow NEC’s lead. Between GAAP and SOX, why would you want a domestic listing?

Nancy Pelosi released a statement in the wake of Chairman Bernanke’s kick-in-the-pants to the market this afternoon. Here it is:

Pelosi Statement on Federal Reserve Interest Rate Cut

| 18 Sep 2007 | 08:38 PM ET |

WASHINGTON, Sept 18, 2007 /PRNewswire-USNewswire via COMTEX/ — Speaker Nancy Pelosi issued the following statement after the Federal Reserve cut interest rates by half a percentage point: “Today’s announcement by the Federal Reserve to reduce interest rates underscores the economic insecurity that middle-class Americans have long been feeling. A weakening economy, record home foreclosures, record energy prices, and meager job creation are not just numbers, but rather serious challenges for working families across the country. I hope that the action taken today by the Fed will bring some relief to the middle-class.

“For families facing skyrocketing mortgages, Congress is taking action today.

With crucial reforms to the Federal Housing Administration, we will enable it to serve more subprime borrowers at affordable rates, offer refinancing to families struggling to meet their mortgage payments, and help create more affordable rental housing across the country.

“This Congress is taking us in a New Direction: we have made college more affordable, increased the minimum wage, and passed legislation to spur U.S. innovation. To reduce the pressure of growing energy and health care costs, we will make sweeping changes to our energy policy that will declare America’s energy independence, and pass a health care bill to cover millions of children.

That is a New Direction that the vast majority of Americans support.” (from http://www.cnbc.com/id/20853362/for/cnbc)

My favorite quote: “I hope that the action taken today by the Fed will bring some relief to the middle-class.“

Sorry, Nancy. The Great Inflation started today. You missed it? The Dow was up over 300 points! Don’t get me wrong, I’m thrilled. Oil sands, natural gas, gold, international growth stocks… liquidity is flowing, and it’s going straight into my portfolio, baby! Just don’t hold U.S. dollars (yep, Federal Reserve Notes), and you’ll be fine.

But the “middle class” will be lucky to keep their homes. And these folks who are trying to earn a “decent” wage in dollars will find that those dollars will buy less and less with every passing day. Less gold, less stocks (at least the good ones), less food, less energy… it’s called inflation. And that’s how we’re going to get out of this little pickle we’re in. Pelosi complains about “record energy prices” — she’s not seen anything yet.

Let’s see how the dollar reacts. We’re approaching 1:1 parity with the Canadian dollar, new historic lows against the euro, and as China’s central bank loosens the reins on the RMB, it’s going up against the dollar. That’s good news if you’re a multinational or foreign company with earnings in foreign currencies, but bad news if you’re a U.S. consumer trying to buy stuff in a global market with a depreciating currency.

How can anyone believe our legislators are upholding their oath of office to defend the Constitution? What does the Constitution say about New Directions of creating more money for more bailout programs? Making higher education “more affordable” by throwing more fiat money at it? And since when has the federal government “spurred innovation”?

Wake up, America!

We are serious, and don’t call us Shirley. We’re David McCormick and Robert Steel, and we’re under-secretaries at the U.S. Treasury. We wrote this nifty article in the Financial Times just to let the global economy know that the folks in Washington DC have our little credit problem well under control.

Check out the article, but here are some of our favorite quotes (try to read with a straight face):

US economic policy-makers have a three-part framework for response. First, President George W. Bush and Treasury secretary Hank Paulson remain steadfast in their commitment to the core policies – low taxes, free trade, open investment and fiscal restraint – that have contributed to the strong US economy.

OK, so we weren’t going to say “fiscal restraint” at first. That’s just too much of a stretch. But they insisted.

The third part of our framework includes working closely with our international economic counterparts to evaluate the contributing factors of this uncertainty and determine appropriate actions. Consistent with this objective, Mr Paulson and his counterparts in the Group of Seven leading industrial nations will ask the Financial Stability Forum (FSF) – a body of finance ministries, central banks and regulatory bodies from leading financial centres created after the Asian financial crisis – for a timely examination of four issues.

First is financial institutions’ liquidity, market and credit risk practices, including treatment of complex credit products and conduits. The second is accounting and valuation procedures for financial derivative instruments, particularly for complex, narrowly traded products that become difficult to price in times of stress. Third is basic supervisory oversight principles for regulated financial entities, especially given exposures to off-balance sheet, contingent claims. And fourth is the role of credit rating agencies in evaluating structured finance products.

Honestly, we wanted to explain how that Greenspan guy over at the Federal Reserve pushed interest rates down to historically low levels a few years back and kicked off this whole wave of malinvestment and reckless credit expansion. It’s really upsetting to us Treasury guys that we’re supposed to “support the currency” when it’s those Fed guys who aren’t even in the government who are creating the money and the moral hazard that causes this kind of madness. But they wouldn’t let us say that. I guess that FSF committee can figure it out for themselves.

And finally:

The US is committed to policy prescriptions that address the root causes of recent volatility while maintaining the benefit of competitive global markets.

Yep. We’re all about getting to the root causes. Don’t worry, America. This will never happen again.

Hi, it’s me. Ben Bernanke. Chairman of your Federal Reserve. I’m talking in Germany, but listen up:

11:01 Bernanke says as savings glut dissipates, real interest rates could rise

11:01 Bernanke says U.S. ability to service debt, willingness of foreigners to hold U.S. assets limited

(Thanks to Briefing.com for the timely summary…)

So says Bill O’Reilly in his interview tonight with Rep. Ron Paul. Rep. Paul tried to educate him, but some folks are only capable of speaking when they should be listening.

Thanks, Bill, for your efforts to advance the national debate.

So should we fear Iran? If Iran were to develop a nuclear weapon, they would need to be suicidal to deploy it offensively in the Middle East. Why? Israel’s nuclear stockpile of 100-200 weapons is a “public secret” at this point. There’s no “mutually assured destruction” here, folks. It would be toast for Tehran if Israel were to retaliate.

But that’s just Israel. What about our national security? Well, if we defended our borders presumably it would be more difficult for Iran or a terrorist agent armed by Iran to get its nuclear weapon over here. It seems that we should be more worried about the thousands of former Soviet nuclear weapons falling into the wrong hands as opposed to a rogue state creating a new one.

Finally, as Ron Paul has noted, history has shown that our foreign policy strongly encourages rogue states to “go nuclear”. Here’s the pattern:

1. We economically isolate a developing nation with a totalitarian government, and threaten its tyrannical leader
2. Leader and his state pursue nuclear weapons program
3. We threaten the leader and his state with further economic and military devastation
4. Leader and state doggedly continue to pursue nuclear weapons program
5. We ratchet up the rhetoric and sanctions
6. (Repeat steps 4-5)
7. State eventually succeeds in creation of weapons-grade nuclear fuel
8. We capitulate, sit down at the bargaining table, and fund aid packages to support the tyrannical leader

Sound familiar? Ever heard of North Korea and Kim Jong Il?

For those who would argue that I have reversed steps 1 and 2, I’d simply note that the outcome is the same regardless.

Note to parents: If your discipline techniques resemble our foreign policy as outlined in steps 1-8 above, you will not like the results.

The Financial Times has an interesting series of articles exploring the rapid growth of Sovereign Wealth Funds (SWFs). These are investment vehicles for governments to invest surplus reserves from foreign exchange. As you can see below, while these funds were traditionally the domain of oil-producing countries, China’s prowess in accumulating dollars is formidable. They’re taking baby steps towards being greater activists with their investments, allocating $200 billion for a new SWF that is still a relatively small proportion of their $1.3 trillion in foreign exchange reserves.

Why is this phenomenon interesting? Well, SWFs provide an alternative to governments’ central banks simply buying and holding U.S. Treasuries for a “risk-free” return. Looks like China is beginning to hedge its dollar exposure through this type of diversification, long practiced by our friends such as the UAE in the Middle East. It’s estimated that SWFs have $2.5 trillion currently under management, expected to grow to $12 trillion by 2015. (I wonder what a dollar will buy in 2015, though?)

So how is China going to deploy its $200 billion? Well, they started (and took an initial hit) with a $3 billion position in Blackstone Group prior to its IPO. Needless to say, all of their investments won’t be in the United States, though. I’d imagine they’ll look for opportunity where they’re comfortable looking, and where they expect growth. In any case, it’s clear that their appetite for U.S Treasury bonds is limited.

The increasing importance of government funds taking investment positions sparked a healthy debate led by Lawrence Summers here. It’s also created a bit of protectionist rhetoric, as well.

It’s interesting to consider the consequences of our government’s creating such massive amounts of debt. Without our government selling several hundred billion dollars in new debt every year, the dollars that China and other trading partners receive from foreign exchange would be either be exchanged back into their native currency, or used to purchase other dollar-denominated investments or goods. Those choices are the desired outcomes from trade and foreign exchange.

If anyone you know tries to blame China for their creative efforts to deploy their surplus reserves, just ask them who sold the bonds to China in the first place. Too bad no one ever read us the Miranda warning of international finance: “You have the right to sell debt. Any debt you sell can and will be used against you in the marketplace.”