Paul Krugman Strikes Again

Speaking of inflation, New York Times columnist Paul Krugman is one of the pundits calling for more inflation as something good.

I simply don't have stamina this morning to pick apart his strange and simplistic (and often inaccurate) argument, so I will link two articles, one by Peter Schiff on his April 9 Op-Ed on the need for the government to inflate more, and another by Bill Anderson on today's Op-Ed on the need for the government to basically micromanage who gets what money (fresh off the government press) to achieve the noble goal of "protecting consumers".

Krugman Strikes Again (Peter Schiff, 4/12/2010 Euro Pacific Capital via Lewrockwell.com)

Regulate Inflation? I Don't Think So! (Bill Anderson, 4/12/2010 Krugman-in-Wonderland)

Taken together, the Nobel laureate columnist is strongly advocating more government-induced inflation which is good for the debtor government and destructive to citizens, and more government regulation which will further restrict the flow of capital, bloodline of a free market. I don't understand his blind faith in all things "government", the benevolent and omniscient dictator who knows what's good for you and me.

He is (or was, at least) also a staunch defender of Fannie and Freddie; "Fannie and Freddie can’t be allowed to fail", he opined back in July 2008.

I was totally at a loss when he once said people should buy cheap houses in middle-of-nowhere inland suburban sprawl, instead of buying houses in pricier neighborhood. To him, it was irrational that people wanted to live in nicer neighborhoods, paying more for the housing.

Russians must be really shaking their heads. (And Swedes, too.)

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Bureaucrats Set the Taxi Fare in Japan

for the taxi companies who wanted to offer LOW fare

Let's see... Japan is entering the third decade of stagnation/recession/depression however you want to call it. People are struggling to keep or find jobs, now that the traditional "life-time employment" has been destroyed even for male workers (female workers never had such a thing). Contrary to what is generally reported and perceived here in the U.S., prices of goods and services haven't gone down in Japan. It has pretty much stayed the same. But increasing burden of more taxes from two decades of deficit spending, pensions, national health insurance, and national long-term care insurance on a shrinking population means people have less money to spend.

So, when entrepreneurial taxi companies in Osaka, Japan wanted to continue their popular low taxi fare so that people use their taxis more (and maybe they can hire more taxi drivers), what does the government bureaucrat in the regional bureau of MLIT (Ministry of Land, Infrastructure, Transport and Tourism) do?

Deny the request, of course.

Yomiuri Shinbun reported (in Japanese) on February 11, 2010 that the regional bureau of MLIT notified the two taxi companies that their request to continue the low taxi fare was denied. The bureau is demanding that the two taxi companies RAISE the fare for the first 2 kilometers (1.24 miles) from 500 yen to 590 yen, in line with their competitors.

"500-yen" taxi is also called "one-coin" taxi, as 500 yen is the largest denominated coin in Japan.

The MLIT bureau even calculated the profit and loss for them, and decided that the profit level would not be "appropriate" if the first-ride fare remained 500 yen.

The two taxi companies are furious. Their competitors welcome the decision, as it will "help dampen excess competition".

This is the first intervention by the MLIT after the legislation to "normalize and revitalize the taxi industry" was passed in October last year. Far from "revitalizing", this legislation was designed to further regulate the industry. Orwellian use of language is not exclusive to English-speaking countries.

(Hmmm. Maybe I will start writing about Austrian economics on my Japanese blog...)

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Regulators Want to Regulate Derivatives.. Good Luck with That

If career bankers don't understand complex financial products of their own creation (see my previous post), do you think politicians and bureaucrats understand?

Regulators seek tighter oversight of derivatives
(10/7/09 AP via Yahoo Finance)

"WASHINGTON (AP) -- As two federal regulators asked a House panel to tighten proposed legislation imposing new oversight on derivatives, Republican lawmakers contended the measure already could eliminate jobs and stifle companies' ability to manage risks.

"A potent new coalition of about 170 companies that use derivatives -- including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. -- is lobbying Congress to make the case that legislative proposals to regulate the complex financial instruments could severely increase costs for corporate America.

""The end-user community has been constantly knocking on my door," Rep. Frank Lucas, an Oklahoma Republican, said Wednesday at a Financial Services Committee hearing.

"Companies of all kinds use derivatives to hedge against risks -- airlines ensuring against spikes in fuel prices, for example. At the same time, the complex products have become a growing vehicle for financial speculation and ballooned into a $600 trillion global trade. Regulators say they pose a threat to the stability of the financial system."

(You can read the rest of the article by clicking on the link above.)

Opponents contend that the proposed regulation would raise the cost of capital by requiring large collateral from companies that use the derivatives for their operations.

I see a problem from a slightly different angle.

What would the government regulators do when the counterparties renege on the derivative contracts, and those counterparties happen to be foreign entities? Or worse, foreign government entities? How do they enforce the regulation across the border? Do they have jurisdiction? (Short answer is No.)

Chinese government-sponsored corporations come to mind. They are threatening to default on commodity derivatives now, and they already defaulted on the forex derivatives last year (see this post from Tavakoli Structured Finance, Inc., link was from Jesse's Cafe Americain).

And their counterparties? I read somewhere long time ago that 10 biggest players in the world in derivatives trading get 90% of the business. It's not hard to guess who, and many of them are U.S. banks.

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