The Fed's Independance

Fourteen months ago the financial crisis paralyzed more than just the economy: it also paralyzed Congress. In a heroic act of stupidity, Congressmen embarked upon the usual he-said, she-said blame game refusing to take any action to help the economy. A single entity stepped into the vacuum that Congress left in its wake: the Federal Reserve. Congress did not know how to do with the crisis and almost made things worse by not passing the TARP legislation. The Federal Reserve acted efficiently and aggressively to right the tipping ship and has reaped solid results so far.

What kind of response do they get from the very Congressmen that were scared into a cave last September? Dodd, Frank and Obama have each proposed legislation that would strip the Federal Reserve of some of their power! Easily worse than the others is Dodds plan which seems to implicitly blame the entire crisis on the Federal Reserve. Dodd proposes taking away all of Fed's regulatory power, handing these powers over to an organization that is brand new and will look something like the SEC or FDIC. These organizations do not have the culture or history needed to properly regulate the financial system. In reality, all that needs to take place is an updating of the Fed's duties.

Free Markets: A Lesson From Dubai

As many of you have already heard, the Dubai government is in a tough financial situation. Dubai has spent a decade and hundreds of billions of dollars trying to become the financial hub of the middle east (like New York is the financial hub of America and London is of Europe). To do this, Dubai has gone massively into debt to entities like its neighbor Abu Dhabi (Abu Dhabi has one of the largest oil reserves in the world), banks, investment firms and bond dealers. Dubai has very little oil, but has used the sale of the oil it has and the debt the government has gone into to build such awesome investments like artificial islands shaped like pretty palm trees, hundreds of skyscrapers, thousands of luxury condos and five lane highways with no speed limits.

Now, the country is very close to defaulting on all of its loans. The country is in debt about $100 billion (not a lot for America, but a staggering amount for state about the size of Colorado). Unfortunetly, almost all of the development in the last ten years has been directed by the government. Because the government did not wait for demand to determine what and how to build things, they have artificial islands that no one goes to, five lane highways that have no cars on them, skyscrapers with 50% vacancy rates and an enormous housing bubble. Even if Dubai does not default on their loans (Abu Dhabi will probably figure out a way to bail them out in one way or another), who cares? Dubai is still stuck with expensive investments that are going no where. Governments can't create a financial sector, there are complex processes that go on in New York that have taken a hundred of years to build!

Countries need to learn that you can't jump to the result you want; at best governments can set up streamlining entities that assist private companies in their quest for competitiveness. When a company fails, another company jumps in and takes over where the other company left off, but fix the mistakes the previous company made! Let demand and price dictate investment, not a round table committee that has government pockets.

A Response to Krugman

While Krugman has won the Nobel Prize, James Hamilton is a personal friend of Ben Bernanke... who do you think should be listened to? Read this post and compare it to Krugman's posts and you can decide!

http://www.econbrowser.com/archives/2009/11/yes_the_future.html

BBFiles Gaining Popularity

Apparently the BBFiles is becoming more and more influential. What else could explain the recent increase in US debt debate over the last week or so? The BBFiles has been saying that there is no threat of a total default by the USA for months. Paul Krugman must have tuned into the BBFiles, here is what he has to say:

http://krugman.blogs.nytimes.com/

The Housing Slump

As one of Bernanke's good friends points out today, the housing slump was not as geographically symmetrical as people probably think. James Hamilton's blog reads here: http://www.econbrowser.com/archives/2009/11/factors_in_loca.html

Bernanke's Play

Chairman Bernanke has been criticized for using policies that are sure to induce high inflation rates. However, as this article alludes to, Bernanke has been using monetary policy to right a tipping ship and has done so skillfully. As time progresses the genius of Bernanke reveals itself more and more.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ag8UzTSPtALE&pos=4

The Future of America's Banks

In 1998 the largest American bank was only the 25th largest bank in the world. In 1999, the Glass-Steagel Act was abolished which effectively reduced the legal constraints that had been implemented against large banks during the Great Depression. Since GS was abolished, commercial and investment banks have been allowed to merge together into super-banks. Bear Stearns, Goldman Sachs, Morgan Stanley, and Washington Mutual are good examples of this class of super-banks. These super-banks have been (probably rightfully so) for the current financial crisis. When these banks failed, they were classified as "Too Big To Fail" (TBTF) and were not allowed to file for bankruptcy. In reality, their size was not as important as how interconnected they were to other institutions. If one institution failed, the whole house could come barreling down. Lehman Brothers is the classic example of why a TBTF insititution should not be allowed to fail.

The TBTF policy has been criticized since the recession began. Therefore, policymakers have begun making policy change recommendations. These have included going back to the Glass-Steagel days, breaking up all banks that are 'large', or doing nothing at all. The last several weeks have revealed which direction policymakers are probably heading. First, there will probably be constraints against large banks. Regulators could charge very high insurance fees for the largest banks that could make it so no bank could become large. Or, banks that exceed a certain size may undergo excessive amounts of regulation and monitoring. These calls against large banks have been made primarily in Congress and are gaining popularity. There is a chance that America will not have a large bank for an entire generation.

There is another train of thought that is a little more market friendly. Thomas Hoenig of the KC Federal Reserve recommends that a regulator be given the authority to step in and takeover large failing financial institutions. The instiution's management would be fired and the stakeholders wiped out, but the rest of the institution would be held in tact. This would give the management team the incentive to take limited risk, but also the incentive to maximize profit and revenue. The only constraint would be the insurance the large firms would have to pay for siezures, and this would probably welcomed by the financial system because each firm would have more confidence in the other firms they are interacting with! Hoenigs plan most closely resembles Barney Frank's proposed bill.

Economics and Politics

There are three important bills currently going through Congress that have the potential to change America's economic landscape. The first and most dangerous bill is Ron Paul's attempt to insert Congress into monetary decisions! In its current state the Federal Reserve can change the money supply at a moments notice with no political intervention. Paul proposes creating a new Congressional committee that will have the ability to examine all monetary decisions, effectively placing Congress on the FOMC's doorstep. This is a very dangerous idea. Monetary theory is very complex and Congressmen do not have the expertise to improve upon the current process. For example, in front of the Esteemed Chairman himself Paul said that the definition of inflation was an increase in the money supply!! Furthermore, Congressmen have different incentives than members of the Federal Reserve. If you know you have to be re-elected in two years or six years you will change the money supply with every ebb and flow of the market! Paul is being moved to the top of the Bernanke Arch-Nemesis List for this stupid legislation.

The next two bills are related. Barney Frank presented a bill to the House and Chris Dodd a bill to the Senate that will change how the Federal Reserve supervises banks. These are competing bills and the final legislation will be somewhere in between each of them. The BBFiles supports the Frank bill. Both bills strips the Federal Reserve of its Consumer Protection agency and creates a new CPA that will probably be led by Elizabeth Warren. Next, and more importantly, the Frank bill gives the Federal Reserve more tools to supervise the financial system. It does this by allowing the Federal Reserve Board of Governors to take-over ANY systemically important institution EVEN IF IT IS NOT NECESSARILY A BANK! (Think AIG and FannieMae). This is obviously controversial and there should be efficient constraints that restrict the Fed from becoming uber-aggressive. But, the current system is wholly inefficient and should be changed ASAP. The takeover process would be almost identical to what the FDIC does when it takes over a bank! This process will be funded by large financial institutions that will have to pay a fee as they get larger. There are many repercussions that could occur from this bill but they will not be discussed here.

The Dodd plan is quite drastic. It strips the Federal Reserve of all bank supervision authority and creates a new agency that will be in charge of regulating all financial institutions. The BBFiles is not inheritently against this, but there are several reasons we believe this is not a good plan. First, it assumes that the new agency will be able to supervise the financial system. Agencies such as the SEC, FDIC, CFTC and FHA were not more or less effective than the Federal Reserve. Next, it is important to understand that there are several things that make the Federal Reserve as efficient as it is, and the biggest factor is the relationship it has maintained with every important financial system in the world! Bernanke can go to any European regulator, Chinese bank, South American bank or Wall St CEO and gain an audience that will seriously consider what he has to say. There is no way an agency that is politically created and ran could do this! The Federal Reserve agrees that regulation reform is needed, but it has said this for years. Dodd's plan is too drastic and should be withdrawn from the Senate.

The Apex of the Vortex

The BBFiles often brags about how awesome economics is. We believe that economics is the apex of the vortex of intellectual thought because it incorporates everything from math to business to science, politics, marketing, sociology, philosophy, history, accounting, relationships, experimentation, statistics, weather, development, investment, vacation, religion and many other things that are important and interesting. To be an economist is to be a true Renaissance man! Here is another example of how useful economics can be outside of the money world:

http://www.bloomberg.com/apps/news?pid=20601079&sid=a7jg9R368WdQ

Trade Gap Numbers

The latest trade gaps numbers were released today. The trade gap widened by $39 billion. This was more than expected but probably reflected rising crude oil prices and imported vehicles from Cash for Clunkers. Because we are importing $39 billion more, money is switched from US dollars into the foriegn currency (kinda) and the dollar should depreciate some. The current drop in the dollar probably does not have much to do with the trade gap though. When compared to the carry trade, which is counted in hundreds of billions, the current trade gap numbers seem trivial! Keep in mind that the dollar is still higher than the when the recession began.

Money Flows

In order, the three largest purchasers of US debt (US Tbonds) are Japan, China, and American financial institutions. Each purchaser has a different reason for buying the bonds, but the fact remains that there is high demand for American debt and therefore the interest rates will stay low for some time.

However, as Kenneth Rogoff (former head of the IMF and current Harvard professor) points out, America's ability to show these entities that it will be willing to pay back the debt is very important. As the BBFiles has pointed out several times, America can afford to be many times more in debt than it is right now. The question is how efficient is the new debt that we are accruing?

When Bush went into debt $500 Billion a year unemployment plummeted to 4.5%! Investment and growth was high and the interest rates we paid on these loans were very low. Obama has a different problem though. With Bush's tax cuts about to expire in the middle of next year, Obama almost necessarily has to let them expire just to show the rest of the world that we are willing (they know we are able) to pay back the debt with out having the value of their investment plummet!!

So, while Conservatives are criticizing Obama next year for increasing government control, loyal BBFile readers will know that it has more to do with America's debt confidence than it does politics!

On the Minimum Wage

One of the fantastic jobs that economists are blessed with is analyzing the unintended consequences that could occur if a certain policy is implemented. There are many consequences of implementing a minimum wage. This blog discusses one consequence that doesn't seem to be discussed very often; probably because it is not politically motivated.

While most economists focus on the increase in unemployment when minimum wages increase, this blog focuses on a potential positive consequence of minimum wages. Assume that you are a company that would like to hire an unskilled worker for $5 per hour. Unfortunetly, the minimum wage is $8 per hour. According to many Libertarian economists, the employer is losing $3 per hour, unemployment rises, and the employer can transfer some of the costs of hiring the employee onto the employee (uniform costs, working holidays, using the increased job competitiveness to make him work harder). However, the BBFiles points out that reality is quite different than theories and charts. In reality, no employer would pay a $5/hour employee $8/hour. The employer will have the natural incentive of training the employee to provide $8/hour of service!

Therefore, minimum wages could provide companies an incentive to train employees, which gives the untrained worker the ability to be worth more as an employee than if there was no unemployment!!!

Jerks!

As highlighted in this article, the Chinese government is expressing its concern that some countries might exit their stimulus programs sooner rather than later. As most loyal BBFiles readers can probably surmise, this posturing by Chinese officials is based less off of economic theory and based more off of self preservation.



There are two primary ways to stimulate an economy: fiscal and monetary. The Chinese will say anything and everything they can to keep other governments from stimulating the economy via monetary policies and the will say anything and everything to keep them stimulating the economy via fiscal stimulus.



This is a blatant self preservation tactic. The Chinese own a lot of our bonds, which depreciate in value when the economy is stimulated via monetary policies. Conversly, if the economy is stimulated through fiscal deficit spending than the bonds may appreciate in value. Moreover, the Chinese know that stimulus funds will reach Chinese companies through purchases of manufactured goods coming from China. Therefore, there are three reasons for why the Chinese will automatically say the USA should not reduce fiscal stimulus and none of them should be heeded by any reasonable economist!

The Fed's Independance

According to Bloomberg, the Federal Reserve is in a struggle with Congress to maintain its independence. Kansas City Federal Reserve President Thomas Hoenig is releasing a book that outlines the Fed's politcal fight to maintain autonomy. Hoenig is reacting to proposed legislation by two members of Congress, Barney Frank (D) and Chris Dodd (D), that would force every Regional Bank President to be appointed by Congress. Currently, the entire Board of Governors is appointed or approved by Congress and the Presidents are picked internally by Fed officials. This is in essence a checks and balances system so that Congress cannot overpower the monetary system while at the same they have oversight of the Fed. According to Hoenig, and the BBFiles wholeheartedly agrees, if Congress gains too much influence in the Federal Reserve monetary policy may begin to follow the political whims of whatever economic policies would help Congressmen be re-elected. This would retard growth and ensure a very inefficient and volatile monetary policy. The BBFiles would reccommend to Frank and Dodd to drop this proposed legislation immediately.

Krugman's Blog

Today, the always partisan Paul Krugman discussed the current attitudes of Federal Reserve Regional Presidents. He disagrees with them that interest rates should be hiked sooner rather than later. In response to Plosser's argument of early rate hikes, he says the following:

I don’t know what analysis lies behind these itchy trigger fingers. But it probably isn’t about analysis, anyway — it’s about mentality, the sense that central banks are supposed to act tough, not provide easy credit.

So the person who blames almost the entire recession of Greenspan's policy of easy credit is all of a sudden arguing that easy credit should be available for the next several years? It is interesting to note that Krugman's economic attitude changed on January 20, 2009. Why is that day significant again?

BBFiles to Tarullo: Quit Talking!

As most of our most dedicated BBFile subscribers noticed today, there have been several headlines made concerning Feinberg's limitations on banker pay. Even more headlines were made today when Bernanke announced that the Fed would look into banker compensation. Readers, do not take these statements at face-value. The Federal Reserve's independence from Washington is of utmost importance. Bernanke knows this and wisely chooses his battles, knowing that Congress needs to stay away from monetary decisions. Unfortunetly there is a rabble-rouser in the midst. Daniel Tarullo has been fueling the fire in support of Feinberg's plan. Actually, out of the six articles The BBFiles has found concerning this topic, the ONLY Board of Governor to talk about the pay restrictions has been Tarullo! What is disconcerting about this is that Tarullo is also the only Board of Governor appointed by President Obama! Clearly Tarullo is jeopardizing the Fed's independance and Obama is undoubetedly influencing this behavior.

If Tarullo doesn't quit talking, The BBFiles will have no choice but to add him to the dreaded Bernanke Arch-Nemesis List!

three journals energy

http://profesores.utdt.edu/~economia/summer/Papers%20XI%20workshop/16%20diciembre/Carrera.pdf

http://www.cii.org/UserFiles/file/resource%20center/investment%20issues/commodities%20brief%209-11-08%20updated.pdf

http://www.vermontfuel.com/Vermont_Fuel_Dealers_Association/News_files/Index%20Speculators%20Have%20Been%20a%20Major%20Cause%20of%20the%20Recent%20Drop%20in%20Oil%20Prices%20%20.pdf

An Economics Riddle: Dutch Disease

Here is an economics forecasting riddle:

In 2007 Ghana discovered massive amounts of crude oil about 20 miles off of the coast. It is estimated that it will bring over $1 Billion of revenue to the Ghana government. The crude oil will be primarily exported. Also, Ghana will own the entire field, except for a 25% stake sold to ExxonMobil so that the mining process goes efficiently and smoothly.

Here is the question: First, if Ghana EXPORTS a lot of crude oil what will happen to Ghana's currency? Will it increase or decrease?

Second, what ramifications will the change in Ghana's currency have on the rest of Ghana's economy?

More specifically, think about the different sectors of an economy (Government expenditure, investment, consumption, and export/import). Which sectors are affected more than the others? Could the rise in Ghana's currency have dangerous implications for any one sector in general?

For more information, research Dutch Disease... which is neither Dutch nor a disease!

What Can the Stock Market Tell Us?

Over the last year the stock market has been on a wild roller coaster ride. The question is, Why is this so important?

Here is a good analogy for what stocks do: Pretend that the USA's economy is a car; the current recession is a very bumpy road (probably designed by Commerce City road developers); and the stock market represents the vehicle's shocks.

When the economy is good, there is almost no tension on the shocks and the passengers in the USA economy are driving smoothly and comfortably. When the vehicle exits the nice road and enters Commerce City, the shocks are knocked every which way and pounded into a pulp. This puts a lot of tension on the shocks and the passengers are whipped around and every once in a while thrown out of the car.

The stress put on the shocks of the car tells you how comfortable a ride the passengers in the vehicle will have. Similarly, when there is a lot of stress in the stock market, the USA's economy is put under a lot of stress BECAUSE STOCKS ARE USED AS COLLATERAL FOR INVESTMENT!!

When a corporation wants to invest, it needs to raise funds. On average, corporations only raise funds through selling shares of stock for 3% of their investments. Selling bonds is where the real money is made! Therefore, corporations tell potential bondholders that if anything ever happens to the company and they have to go bankrupt, the bondholders can take all of the stock that the corporation has. This means that when stock prices are high there is more collateral and more investment. When stocks are not worth much, nobody can invest and the economy does not grow.

Has Bernanke Printed A Lot of Money?

When politicians and political pundits want to sound smart and make headlines, they begin oversimplifying things that they don't understand. Accordingly, the last several months has seen an increase in the accusation that the Fed has "printed money."

As stated above, though, this is way oversimplified. Normally when the Fed wants to print money, it gives cash to banks in exchange for an asset like a T-Bond or fixed income security. Then the bank can spend that money however it wants by giving consumers, homeowners, and business owners loans.

Chairman Bernanke made a decision though. He analyzed the crisis and found that banks needed liquidity (cash), but consumers, homeowners and business owners should not be the end-recipient of this money because inflation could get out of hand in the long run. He therefore went to Congress and asked for permission to pay interest on the extra money banks keep at the Federal Reserve. This way, the banks would make as much money by doing nothing than they would by giving loans to the public (this is because the interest rate paid by the Fed is almost equal to the interest they would recieve in profit from a loan).

This gives the Fed a great tool to fight inflation. The Fed hasn't printed money because almost all of the cash that has been given to banks is sitting UNUSED in the bank's account at the Federal Reserve! At the same time, banks meet liquidity standards by having the money held with out issuing a loan.

Bernanke: Better Than Advertised Part II

The Federal Reserve has to maintain stable growth while stifling harmful inflation. This is a balancing act because to stimulate growth you sometimes have to expand the monetary base which stokes the flames of inflation.

Here is an extremely important analysis by Econometrician James Hamilton. It analyzes the Fed's Balance Sheet and the options it has to "un-print money."

http://www.econbrowser.com/archives/2009/09/federal_reserve_2.html

Bernanke: Better Than Advertised!

Bernanke, probably the most underpaid individual in America, really is as good as The BBFiles made him out to be. Some just might say miraculously good...


http://www.bloomberg.com/apps/news?pid=20601087&sid=ayo1J7aDXneM

How Did Economists Miss This Downturn?

Last week Paul Krugman initiated a sequence of discussions centered around how and why the current recession blind sided economists as badly as it did. Other famous economists have jumped into the conversation, including Mark Thoma, James Delong and James Hamilton. It appears as though most of these economists "blame the other guy." For example, Paul Krugman, who is a Neo-Keynsian, basically argues that he was SO busy correcting Neo-Classical's mistakes that he totally missed the recession's warning signs. Liberals seem to blame Greenspan and Conservatives seem to blame... well Greenspan also.

The BBFiles, your trusty guide to unbiased economic analysis, disagrees with most of these economists. The study of business can be split into several fields: economics, finance, management, marketing, entrepeneurship. It appears as though economists have been assigned most of the blame for this recession. In reality, though, The BBFiles argues that the products that got us into the recession, the way they were traded, and and the people that were assigned to manage them, lie far outside of the field of economics. Financial wizards created MBS's, marketers sold them to as many people as possible, management teams gave employees incentive to stimulate short term profits, not long term growth. Lobbyists influenced Congressmen, Congressmen did what Congressmen do: spend a lot of money.

All of these things, which the field of economics does not specialize in, created a perfect storm of instability that led to this recession. It was economists of several different belief systems that stepped in via the Federal Reserve and the Treasury Department and saved financial traders, management teams and Congressmen from the debacle that they created. While economists like Krugman believe that he is right and everyone that disagrees with him wrong, the BBFiles appreciates the diverse ideas and the new theories that come from debating controversial issues.

America's Lost Wealth

According to a press release from the Federal Reserve on Tuesday, American households gained about $2 trillion in the 2nd quarter- the first time it has increased since 2007. The Flow of Funds report also showed that the current net worth of American households is $53 trillion. The highest it reached was $65 trillion in 2007. In the 4th quarter of 2008 alone, the total dropped a record $11 trillion.

The Fed's Balance Sheet

The Fed's balance sheet determines how much money is in circulation. When they want to put more money into the system ("print money") they BUY assets (bonds) from banks. Since they use cash to pay for the bonds, there is now more cash in the system.

When the economy goes into a recession, the Federal Reserve can stimulate the economy by injecting more money into the system. This blog entry examines how the Federal Reserve's balance sheet has changed over the last year. Before the recession began, the Fed's balance sheet had $800 billion on it. When looking at the balance sheet, one would see that $400 billion of the total was compromised of a mixture of long term T-Bonds and other safe bond investments. The other $400 billion was compromised of super-safe T-Bonds that expired every 1 to 6 months. For decades the Federal Reserve simply repurchased these short term bonds when they expired.

When the recession began, the Federal Reserve, in as safe a way as possible, began purchasing bonds directly from banks and other lending institutions. This injected cash into the system, but did not grow the Fed's balance sheet because the Fed offset the purchases of bank bonds by not repurchasing the "super-safe" short term T-Bonds. Thus, the balance sheet remained at $800 billion but added a little more liquidity and took on a little more risk.

When Lehman Brothers collapsed, and the LIBOR-OIS spread grew exponentially, the Federal Reserve decided to expand the balance sheet. This proved to be a difficult task. The Fed had a balancing act to perform: they had to inject enough cash into the system to keep the financial system afloat; but they also had to make sure the bonds they purchased along the way could be sold off easily when the recession ended (if the balance sheet remains at $2 trillion there is sure to be inflation). Chairman Bernanke was up to the task. Bernanke and the Federal Reserve found the safest bonds on the market, then from these selected bonds, they picked the ones that would would sell the fastest once they needed to be sold.

Therefore, the Fed's balance sheet, though huge today at $2 trillion dollars!, will be "drawn down" easily. Drawing the balance sheet down refers to exiting the Fed's added liquidity. Inflation will not occur from the Fed's large balance sheet because the bonds will be sold promptly by the Federal Reserve at the opportune time.

This quick, decisive action will certainly go down positively on Bernanke's resume.

Evidence That the Stimulus Didn't Work

Three respected economists wrote an editorial in the Wall Street Journal today arguing that the stimulus failed. While The BBFiles doesn't like using strong words like "fail" (we don't have to make headlines), the article is very interesting and should be read by Congressmen in Washington.

The BBFiles does not believe that President Obama's highest advisers (Larry Summers, Paul Volker, Christina Romer and Timothy Geithner) ever believed too strongly in the stimulus plan. Congressmen, who are mostly responsible for the plan, should try to pass this argument along to their constituents.

The BBFiles believes that stimulus can work. However, there is an enormous diminishing return after teh $500 billionth dollar, and since Bush was already stimulating the economy by this amount via tax cuts, there really was no need for such a large stimulus bill. Probably about an additional $250Billion would have been more than enough.

Here is the link:

http://online.wsj.com/article/SB10001424052970204731804574385233867030644.html

A Sad Anniversary

One year ago today, Lehman Brothers was allowed to file bankruptcy. This will go down as the primary flaw in Bernanke's othrewise impeccable resume. Political will basically forced the Fed and Paulson "to let the markets work." Within 24 hours of the Lehman collapse, FannieMae, FreddieMac, Wachovia, and AIG were completely insolvent. Clearly, in hindsight, an uber-regulator should have had the authority to step in and prevent Lehman from failing.

Let's look at the USA's tab from this bad policy:
Lehman Brothers......$766 Billion bankruptcy
AIG......$250 Billion in direct cash infusions
FannieMae....$250 Billion in cash, $1 trillion in garuantees
FreddieMac... " " " " " "

American citizens: A tariff implementing president and 10% unemployment

The costs are way too high!!! The Fed needs the power to sieze systemically important companies, just like the FDIC has the power to sieze banks.

A Closer Look at the Tariff

The BBFiles has generally supported the Obama Administration's economic policies. However, Obama has given into union demands and passed a terrible tax on rubber imports, and we cannot support this mistake. Even though Bush rejected the United Steelworkers tariff request four times, Obama gave in to this bad economic policy right away.

The tariff imposes a 35% tax on all rubber imports from China. This hurts the Chinese and American citizens in several ways. First, it means that the USA can sell lower quality rubber and be 35% less competitive in the rubber industry. Second, it hurts American companies that sell low-end rubber tires. This is basically every retail tire store. Next, it puts Chinese companies out of business. Remember, these are companies that SPECIALIZE in rubber manufacturing and can achieve high quality tires for low prices.

Essentially, the 35% tariff is a hand-out to uncompetitive American companies.

Bloomberg reports this about the nation's largest union, the AFL-CIO:

AFL-CIO Reaction
AFL-CIO President John Sweeney applauded the decision in a statement today, saying it “sends a strong message that the U.S. government will take the necessary action to ensure that American workers and producers can compete on fair terms in the global economy.”

Bloomberg says this about how American companies voted, this is interesting because if the tariff supposedly helped American companies, all US companies would approve. But Bloomberg reports:

Goodyear Tire & Rubber Co., the largest U.S. tiremaker, stayed neutral. Cooper Tire & Rubber Co., the second-largest U.S. tiremaker, opposed the relief. Imposing tariffs will have “highly damaging ripple effects throughout the U.S. economy by increasing the cost of imported tires that largely comprise the low-end of the tire market,” the Emergency Committee for American Trade, which represents those companies, wrote in a letter to Obama last month.

Really! A Tariff?

Obama has officially enacted a 35% tariff on rubber tire imports from China. Hopefully this is a last terrible move that comes from Obama's administration.

The Economics of Being a Jerk

As The Bernanke Files has repeatedly pointed out, the media, journalists, and political pundits have more of an incentive to make headlines than to be accurate. If your a logical, pragmatic critic you won't make any money and will never be famous.

Well, as it turns out politicians have similar incentives. During Barack Obama's speech to the Joint Session of Congress, South Carolina Republican Senator Wilson yelled "You lie" when the president discussed not insuring illegal immigrants. This was not an off the cuff remark. Wilson said he let his emotions get the best of him. This is ridiculous, of course. Politicians know that to get headlines these days they can do two things: give an interview on Sunday, or do something outrageous. Since we know politicians aren't giving up their Washington Party day, we can basically conclude that outrageousness is the best way to get their name out to the public. Wilson knows this and succesfully captured headlines with his outbreak.