Expanded Stimulus Action and Recessions

When left alone, interest rates usually adjust to supply and demand forces and adjust economic events. However,when the government imposes its stimulus proposals to raise credit and lift the economy, the system is disturbed and distorted.

This unbalances the economy and does the exact opposite of what has been intended.

Ludwig von Mises wrote fully about the phenomenon in the 1920s but the economist in fashion during the 1930s recession was, unfortunately, John Maynard Keynes. He became the poster child of that recovery movement.

The Keynes government pump-priming thesis that employed prolonged stimuli actually deepened, and helped induce the Great Depression. Nevertheless, it is the premise of the Obama administration’s failed current policy.

Politics and Bank Credit: Part 2

I recently noted that banks are not making sufficient loans to small business, even when they have the ability to do so. And that they make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

Also, that there is political meddling and strict bank supervision adding to the bank lending confused picture.

Some banking groups are now complaining that they have the money to lend, but with few takers because of the recession.

Yes, commerce is in a slump. But many viable, thriving businesses, especially commercial real estate operations, are genuinely seeking loans from banks with funds.

Yet, too many lenders are hesitant about extending loans they once more readily made.

Do Not Rely on The Federal Reserve

We make a habit of using Federal Reserve edicts as gospel, even though they are often proven wrong. This has been proven the case in almost half the decisions we have gotten, whether they have been those of Alan Greenspan or Ben Bernanke.

We have to remember that economists are fallible, even when they direct the Federal Reserve.

In the past, those in the Fed who worried we may have deflation and who therefore inflated the economy, instead added too much currency. In fact the Fed, almost automatically, has been on the side of targeting some inflation, in an attempt to prevent deflation.

Thus, the Fed has been the chief culprit causing the bubbles which invariably lead to busts and eventual depressions.

Politics and Bank Credit

Many smaller banks do not have sound loans on their books as bank examiners would like to see. They are, therefore, under constant pressure to clean up their financials and/or add to basic capital.

Unfortunately, politicians in their area are putting pressure on the bank examiners to allow these banks with questionable standing to make loans which ordinarily should not be made.

Unfortunately, banks are not making sufficient loans to small business even if they have the ability to do so. The truth is, they make more money these days by borrowing cheaply from the Federal Reserve and investing in government bonds.

So, there is a double whammy besetting small business requiring credit.

This unhealthy environment is perfect for the likes of meddling politicians in Washington whose influence is being made in the wrong place, in the wrong manner.

Solution? Supervise banks gingerly but independently of politics. Secondly, permit banks to make riskier small business loans and restrict their tendency to borrow cheaply and invest in government bonds.

It is also time to raise the cost of Fed money to banks, so the latter do what they are in business to do.

Annuity Pitfalls

Annuity sales people often compare the benefits of their product with the investing risks that attend stocks and bonds. They mention all the hazards of securities markets and possibilities of market loss. But annuity salesmen often overlook the downside of what they offer.

Annuities do have negatives. They are not for everyone. They have an insurance factor which may not be needed. And if not required, why pay for it?

There are annuity management fees, contrary to some sales pitches and also early termination charges. The strength of the company is always important to consider.

Then there are fixed or variable annuities to select that further complicate the picture. Fixed annuities have set returns which means the buyer has no protection from any future inflation. Variable annuities tie into securities markets but not as directly as you may want.

So be alert to annuity sales patter, as much as you ought to be when it comes to securities considerations.

The Options Market For You?

Options offer an investor the right but not the obligation to buy or sell a security at a set price.

Options are used for investments becoming more impervious to swings in the markets, Also, to protect shares from under-performing. And to make money when market conditions are extreme.

To invest in options, you must take time to learn fully about them. Know the difference between a call and a put, strike price and all the rest of applicable terms.

There is no quick options course, Take your time because of the complex nature of this arcane aspect of the securities business.

Do not attempt to get involved unless you learn about options both academically and in practice. Therefore, run through some fantasy dry-runs with no real funds, just to see how you would have done with real money.

Then use your own real capital.

Avoiding Investing Style Changes MidStream

You know an adviser has no clue about strategy when he or she tells a mutual fund investor not to buy a fund that clings to a particular “style” of investment, such as small cap or large cap. But to pick and choose what is just right for the “season.” or times.

That advice will tip you off that the adviser has no specific strategy. The adviser is willing to change strategy to suit whatever style may be popular at the time.

My experience has shown that such undisciplined investments with no set strategy tend to not do as well.