The Case for Balanced Budgets and Actual Compromise

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The Case for Balanced Budgets and Actual Compromise

Here’s one thing I am not worried about: suppose the Bush tax cuts go away, and the budget is cut pro-rata.  That would be a good thing.  I have always believed in balanced budgets.  Yes, restoring balance may be painful for a little while, but the results are usually good after a “big bang,” whether that is a default, currency conversion, or massive privatization.

Why are balanced budgets good? Duh, they are sustainable, particularly if they are done on an accrual basis, which is not the norm.  Sustainable government budgets engender confidence in businesses and individuals, because they sense stability, and stability encourages growth.  Businessman can plan sensibly, because they have a sensible government.

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I don’t think the economy would do badly in this scenario.  Hopefully, we would clear out the least valuable programs (I dream), and the taxes raised were not counted on by those subject to the change.

I don’t think this would have a big effect on the US economy.  So Congress can’t agree; that is good, because it forces cuts that Congress would never make given their disagreements.

This is the next best thing to a balanced budget amendment.  Eliminate Keynesian idiocy, and manage the economy sensibly, balancing the budget as a normal matter, and don’t use government or central bank policy to moderate it, because that only creates liquidity traps like the one we are in.  (Need I mention that the Fed should either peg to gold, or that it should only have a a double mandate — bank solvency first, inflation second. unemployment does not figure in, largely, because the Fed has no effect on unemployment.)

Let the economy be free, aside from regulating banks tightly; it will be far better than what we currently have.  Regulation of maturity transformation is important because maturity-transformation violates basic asset-liability management rules.  We need to force banks not to take interest rate risk.  No more borrowing short and lending long.  Long-dated lending requires long-dated financing.  Organize society for stability, not boffo profits for banks in the bull phase, and huge losses/bailouts in the bear phase.

I don’t care about short-term pain, so long as we end up in a better spot afterward, with better growth prospects.

By David Merkel, CFA of  alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.