Political Economics

[G M]

http://hotair.com/archives/2009/02/06/peter-schiff-the-stimulus-will-bring-about-economic-armageddon/

Obama-geddon!

[HUSS]

It's dark, gusty and rainy here at the beach, but I haven't lost my optimism. I'd recommend reading Jonah Goldberg's recent column about how Obama's overreach has been a fortunate mistake for those of us who believe in free markets and limited government. Some excerpts (and note the weather analogy at the end):

The stimulus bill was a bridge too far, an overplayed hand, ten pounds of manure in a five-pound bag. The legislation’s primary duty was never to stimulate the economy, but to stimulate the growth of government, the scope of the state.

By spending hundreds of billions on things that have absolutely nothing to do with providing an immediate stimulus for the economy, Democrats hoped to make a down payment on their dream government. The billions for student aid, expanded welfare and health-care benefits, and bailouts for profligate state governments; the hundreds of millions for better museums and prettier government buildings; and the millions for smoking-cessation programs and bee insurance aren’t just items on crapulent Democrats’ wish list. The budget bloating was deliberate.

The economic crisis was almost too good to be true. Like FDR and Lyndon Johnson, Obama was poised to act on Rahm’s Rule of Crisis Exploitation in a way that would not only guarantee a newer New Deal and an even greater Great Society, but would also receive bipartisan approval. That’s why Obama wanted so much GOP support—so as to ratify the left turn to European-style social democracy, particularly when voters cottoned on to the con.

Obama and his party were undone by their hubris. There was just too much muchness in the bill.

There is still probably bipartisan support for a stimulus bill, but only for a measure intended to stimulate our market-based economy rather than one that hastens its Swedenization.

Obama’s presidency has many victories ahead of it, and Democrats still run the show. But the perfect storm of liberalism has dissipated to mere scattered showers.

http://scottgrannis.blogspot.com/

[SB_Mig]

If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well?

Funny, I've actually considered that before. I certainly wouldn't complain...

And I love the past tense of HUSS post. Two weeks in and the administration is already part of the past, due to a bill that hasn't been passed.

[HUSS]

If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well?

Funny, I've actually considered that before. I certainly wouldn't complain...

And I love the past tense of HUSS post. Two weeks in and the administration is already part of the past, due to a bill that hasn't been passed.

Growing govt is an answer looking for a question.  Any one willing to accept a free house and million dollars they didn't work for is a free loader, its that attitude that caused the housing bubble, credit bubble and every other bubble.  People do not want to work hard, they want hand outs.  I made fun of my friends who parroted "my home is my investment, its the new world we can spend out way into prosperity".  Now when i mock them I'm the only one laughing.

[Chad]

Looks like the Senate sold us out....  I might not have a job 6 months from now, but I'll have a really nice bridge to sleep under!

http://www.foxnews.com/politics/2009/02/06/senators-reach-tentative-deal-b-economic-stimulus/

Senators have reached a tentative deal on a version of President Obama's economic stimulus plan, including about $811 billion in spending and tax cuts, that will win enough Republican votes to move forward.

Sens. Arlen Specter of Pennsylvania and Susan Collins of Maine appeared to be the critical Republicans to sign onto the bill, giving Democrats the 60 votes needed to advance to a final vote. Democrats also voiced confidence that Republican Sen. Olympia Snow of Maine also would vote for the plan.

It isn't certain when a vote would come, but sources indicate Sunday is a likely bet.

As part of the deal, spending in the bill was reduced while tax cuts were increased, for a mix of 58 percent spending and 42 percent tax cuts. A senior Democratic leadership aide said the White House was on board.

But Republican leaders still worry the bill contains too much spending on programs that won't stimulate the economy, with Minority Leader Mitch McConnell saying Friday night on the floor of the Senate arguing that "the big spending programs of the New Deal did not work."

Obama is pushing for the massive spending plan to jump-start the economy, which otherwise, he says, could be headed for "catastrophe."

Specter said Friday night that action was "very necessary," and this bill, though not perfect, is better than inaction.

"I think no one could argue with the fact that the situation would be much worse without this bill," Specter said at a news conference.

The president has taken an increasingly public approach to advocating the bill's passage, sitting for TV interviews early this week and planning trips to Indian and Florida next week to promote the measure. Polls suggest taxpayers are skeptical about the effectiveness of the plan.

The two cities Obama will visit next week have struggled amid the crumbling economy. Elkhart, Ind., has seen its unemployment jump to 15.3 percent from 4.7 percent in the past year and unemployment in Fort Myers, Fla., has climbed to 10 percent.

The House passed a economic stimulus package of a little more than $800 billion last month with Republicans unified against the measure. In Senate deliberations, the price tag had risen higher than $900 billion, prompting Senate Republicans to complain that it contained too much spending and not enough tax relief.

Even Democratic Sen. Dianne Feinstein of California voiced opposition to the bill on Friday, saying it wouldn't do enough to stimulate the economy. But after news broke Friday night that a deal had been reached, Feinstein said, "This is as good a compromise as we are going to get."

White House press secretary Robert Gibbs said Friday's report showing the economy lost nearly 600,000 jobs in January "is the equivalent of losing every job in the state of Maine," possibly a direct appeal by Gibbs that state's two senators. And he noted: "In the past two months, the economy lost 1.2 million jobs. That's basically losing every job in Pittsburgh or in Cleveland," possibly appealing to Specter and his Ohio colleague.

FOX News' Trish Turner contributed to this report.

[G M]

If "giving" everyone a government job is so great, then why not "give" everyone a free house and a million dollars as well?

Funny, I've actually considered that before. I certainly wouldn't complain...

And I love the past tense of HUSS post. Two weeks in and the administration is already part of the past, due to a bill that hasn't been passed.

You can't see any problem with this?

[Body-by-Guinness]

The original piece is well linked and sourced.

Economics, Evidence, Enlightenment [We know what works and not. We just prefer to ignore the truth]
americanthinker.com ^ | February 06, 2009 | Randall Hoven

With today's economy, wouldn't it be nice if we knew how to make an economy grow? To know what works and what doesn't? Well, we do. We just prefer to ignore the truth.

What works is economic freedom. What doesn't work is more government.

I'm sorry that those words sound simplistic and like Republican "ideology" (or at least what used to be Republican ideology - before the Bailout Fairy arrived). But they have the benefit of being true. If you were to start from scratch, ignoring all ideology and going simply by the evidence of what produces prosperity, you would come to that conclusion: more freedom and less government lead to greater wealth and prosperity.

It's not the ideology. It's the evidence.

Unfortunately, we are ignoring the evidence and rushing headlong in the wrong direction. Alec Baldwin and others threatened to move to France when George W. Bush became President. They didn't need to. France moved here.

Exhibit A is a thorough study of what works and what doesn't, conducted over 200 years ago, by Adam Smith. He examined the economies at the time and through history and came to the following conclusion.
"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."


The government need not "manage" the economy, but just stay pretty much out of the way, beyond securing "life, liberty and property."

Exhibit B is the Heritage Foundation's Index of Economic Freedom. Every year the data support Adam Smith's conclusion: more economic freedom yields more prosperity, where economic freedom means secure property rights and limited government in terms of size and control of the economy.
"Previous editions of the Index have confirmed the tangible benefits of living in freer societies. Not only are the higher levels of economic freedom associated with higher per capita incomes and higher GDP growth rates, but those higher growth rates seem to create a virtuous cycle, triggering further improvements in economic freedom."


The average GDP per capita of those considered "Free" was $40,253, about 10 times greater than those considered "Mostly Unfree" ($4,359) or "Repressed" ($3,926). There is strong and undeniable statistical correlation between economic freedom (as scored by the Heritage Foundation) and GDP per capita. And it shows up year after year.

Exhibit C is the case of Presidents Reagan and Mitterrand. Reagan was President of the US from 1981 to 1989 and was considered a very right-wing, free-market zealot. Mitterrand was President of France from 1981 to 1995 and was a socialist, the first socialist president of France. This would be an apples-to-apples comparison of free-market vs. socialist governance. How did that work out?

France was behind the US in 1980 and would fall further behind it in the following years. In 1980, France's GDP per capita was 84% that of the US. By 1989 it was down to 79% and by 1995 it was 78%. (For the various international comparisons throughout this article, see the US Statistical Abstract.) In 2006, the latest year for which data is available, it was just 74%. All that wonderful socialism in France just set it back further and further from the US.

Exhibit D is Japan. Remember the Japanese miracle? From 1960 to 1991 its GDP per capita grew from 37% of the US's to 86%. It was closing in on us! By 1991 we were all afraid that the Japanese would outpace us in computer chips, high definition televisions, artificial intelligence, automobiles and overall economic growth. It would buy up all the US assets worth having and we would soon all be working for Japanese bosses.

At that point, 1991, the Japanese government spent just 31.6% of its GDP, lower than that of any European country, Canada or the US. The US was spending 37.8%. The "small government" US had an even smaller government competitor, and it was eating our lunch. Only the US, West Germany and Norway were richer than Japan at that time (GDP per capita).

But then Japan did us a great favor. It decided to grow its government. By 1996 its government was bigger than the US's as a fraction of GDP, and would remain so through 2005. In 2000 its government was bigger than that of Australia, Ireland, Luxembourg, Switzerland and the United Kingdom. It had definitely lost its "smallest government" title.

How did that work out for Japan? Its GDP per capita went from 86% that of the US to just 73% by 1995. It had fallen behind Canada, Australia, Austria, Belgium, Denmark, France, the Netherlands, Sweden and the United Kingdom by that same measure.

Exhibit E involves Japan again, but this piece of evidence is very relevant to today -- it has to do with economic stimuli. As described by Benjamin Powell at the Ludwig von Mises Institute in 2002:
"Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen."


Sound familiar? Yet from 1991 to 2006 Japan's economy grew slower than that of any of the other 16 countries listed in the US Statistical Abstract for comparison - even slower than Italy's. Over those 16 years its GDP per capita grew just 16%. That of its Asian counterpart, South Korea, grew 94% in that same period. The US, Canada and most European countries grew at least twice as fast. And today Japan's government debt is 182% of its GDP, by far the highest of any developed country .

Economic stimuli work -- if what you want to grow is debt rather than real GDP.

Exhibit F is Ireland. In 1987, Ireland's government was 52% of its GDP, a higher fraction than even that of France at the time (51.9%). But by 1998 it was only 34.5% -- lower than that of the US or any other European country. It had cut income taxes across the board. Its top corporate tax rate was the lowest of all OECD countries by 2003.

How did that work for Ireland? From 1990 to 2000, its per capita real GDP grew 86%. By comparison, the US's grew just 26% in that period. France's grew just 12%. In 1980, Ireland's GDP per capita was just 61% of France's, but by 1998 it had overtaken France and by 2000 it was 118% of France's.

Exhibit G is Sweden. In 1993, Sweden took the prize for big government. It spent 71% of GDP at a time when even France was spending less than 55%. By 2007 Sweden's spending was trimmed to 51% of GDP. Still not a small government by any means, but smaller than France's, at 52%.

Over that time, 1993 to 2006, its real GDP per capita grew 42% compared to France's 24%. As its government shrank below France's, it's GDP per capita swelled above it -- from 94% of France's to 108%. Sweden cut its government burden and saw its economy take off.

Exhibit H is communism. The idea that an economy can be managed from top to bottom has been tried -- multiple times. It never worked. Not in Russia. Not in China. Not in Cambodia. Not in Cuba. Not in North Korea. Not in Zimbabwe. Not anywhere. The results were widespread poverty, famine and war. The death count due to communism likely exceeds 100 million.

Exhibit I is US history. The US grew from a British colony to the richest and most powerful country on earth. It was founded on the very principle of freedom. After slavery was ended, the US had about as close to a truly laissez-faire free market as ever existed. During that time it enjoyed about 40 years of 4% real GDP growth per year (quintupling the size of the real economy) and absorbed millions of immigrants looking for freedom and opportunity, all while expanding westward and inventing or employing new technologies from steam engines to electricity, automobiles and airplanes.

In 1913 the US Constitution was changed to allow a federal income tax and the Federal Reserve System was established. Sixteen years later came the Great Depression. President Hoover at the time did almost everything counter to free-market principles: he raised taxes, increased federal spending, restricted free trade and encouraged faulty monetary policy.

President Roosevelt did much more of mostly the same: more federal spending, more regulation, more monetary manipulation. By the end of it, Henry Morgenthau Jr., close friend of FDR, FDR's Treasury Secretary and architect of the New Deal said this:
"We have tried spending money. We are spending more than we have ever spent before and it does not work... We have never made good on our promises. I say after eight years of this Administration we have just as much unemployment as when we started. ... And an enormous debt to boot!"

Federal spending went from 3.4% of GDP in 1930 to 10.7% in 1934 -- more than a tripling of such spending in only four years -- and it would remain at those elevated levels throughout the Depression. Yet the unemployment rate went above 10% in 1930 and would stay above that level until February of 1941; it was as high as 20% as late as 1938.

Exhibits J-Z. We could go on with country after country, era after era. Whether we are talking the extremes of all countries on the planet (e.g., Australia vs. Zimbabwe) or relatively small differences (e.g., Sweden vs. France), or whether we are talking 200 years ago (e.g. Adam Smith), 100 years ago (the US vs. Europe) or the last 20 years, the evidence always leads to the same conclusion: that government is best which governs least.

There might be some point at which government is too small, where anarchy or tribal behavior might destroy such things as secure property rights, life and liberty. But with government in the developed world averaging over 40% of GDP, we are nowhere near such a point. In fact, our problem is the opposite: where the government itself becomes the thief, rather than the protector of property and individual rights.

Learning Lessons. Europe seemed to take such lessons to heart. The examples of Ireland and Sweden, above, are standouts, but not alone. From 1993 to 2007, Sweden cut its government spending by over 19% of GDP. Canada, Finland, Norway and Spain all cut theirs by at least 10%. The Euro area average cut was 6% of GDP.

How much did the US cut in that period? One half of one percent (0.5%). Portugal was the only country of the 28 listed to cut less -- 0.3%. And Japan and South Korea were the only ones to grow government in that time period, but still came in under the US in government spending as a fraction of GDP, since they started so low.

Government in the US (federal, state and local) in 2007 spent a larger fraction of GDP than did Australia, Ireland, Japan, Slovakia, South Korea and Switzerland (among 28 listed countries). In the Heritage Foundation's latest Index, the US ranks only 6th, below Hong Kong, Singapore, Australia, Ireland and New Zealand, and its score is falling. Our score was 80.7, with Canada breathing down our neck at 80.5.

And that was before the trillion-dollar bailout Bacchanalian debacle.

In short, the US is rapidly losing its standing as the free-market, limited-government leader of the world. While Europe was shrinking its government, the US stood pat. The US is becoming just another European country -- a high-tax, welfare state with a large public sector and rigid work rules.

Unless President Obama governs counter to all his promises, campaign commercials and supporters' wishes, he will only accelerate this trend, not reverse it.

We already overtook Australia, Ireland and Switzerland by 2007. We'll soon overtake Canada, Spain, Luxembourg and the OECD average. Maybe with our trillion dollar bailouts and stimuli, we already did.

All through this time we have been lied to.
The media called it "laissez-faire capitalism" as the government continued to eat over one third of the economy and regulated us at the equivalent of over 30 New Deals as measured by pages of the Federal Register.

The media called President Bush a free-market extremist, while he increased federal spending from 18.4% of GDP in 2000 to 20.4% in 2006, added prescription coverage to Medicare, teamed up with Ted Kennedy to expand federal spending on education, subsidized ethanol, etc..

The media fed the lie that out-of-control imperialism and warfare increased our defense spending to irresponsible and unsustainable levels. Yet defense spending rose from an historically low 3% of GDP in 2000 to a still-low 4% of GDP as we fought wars in both Iraq and Afghanistan, a level lower than the country experienced for over 50 years, from 1941 to 1994.

The electorate swallowed those lies and elected a man with just 11 years total experience in elective office, only 3 years at the national level, zero military experience and zero executive experience, but the most liberal voting record in the US Senate in 2007.

The conclusion I come to is a sad one: the US is no more.

At least not the US of freedom, free markets and limited government. Just when we should be reinvigorating the US brand of freedom as it had been known for generations, we are accelerating in the exactly opposite direction: salvation through government programs.

Imitating North Korea, Zimbabwe or even France is one way to get "change." Just not the change I was hoping for.

Randall Hoven can be contacted at randall.hoven@gmail.com or via his web site, kulak.worldbreak.com/.

http://www.americanthinker.com/2009/02/economics_evidence_and_enlight.html

[HUSS]

This is an Excerpt from the book "The Fourth turning"
 
   
  America feels like it’s unraveling.

Though we live in an era of relative peace and comfort, we have settled into a mood of pessimism about the long-term future, fearful that our superpower nation is somehow rotting from within.

Neither an epic victory over Communism nor an extended upswing of the business cycle can buoy our public spirit.  The Cold War and New Deal struggles are plainly over, but we are of no mind to bask in their successes.  The America of today feels worse, in its fundamentals, than the one many of us remember from youth, a society presided over by those of supposedly lesser consciousness.  Wherever we look, from L.A. to D.C., from Oklahoma City to Sun City, we see paths to a foreboding future.  We yearn for civic character but satisfy ourselves with symbolic gestures and celebrity circuses.  We perceive no greatness in our leaders, a new meanness in ourselves.  Small wonder that each new election brings a new jolt, its aftermath a new disappointment.
 


Gray Champions
 
   
 
 Back to
Excerpts
 
  One afternoon in April 1689, as the American colonies boiled with rumors that King James II was about to strip them of their liberties, the King’s hand-picked governor of New England, Sir Edmund Andros, marched his troops menacingly through Boston.  His purpose was to crush any thought of colonial self-rule.  To everyone present, the future looked grim.

Just at that moment, seemingly from nowhere, there appeared on the streets “the figure of an ancient man” with “the eye, the face, the attitude of command.”  His manner “combining the leader and the saint,” the old man planted himself directly in the path of the approaching British soldiers and demanded that they stop.  “The solemn, yet warlike peal of that voice, fit either to rule a host in the battlefield or be raised to God in prayer, were irresistible.  At the old man’s word and outstretched arm, the roll of the drum was hushed at once, and the advancing line stood still.”  Inspired by this single act of defiance, the people of Boston roused their courage and acted.  Within the day, Andros was deposed and jailed, the liberty of Boston saved, and the corner turned on the colonial Glorious Revolution.

“Who was this Gray Champion?” Nathaniel Hawthorne asked near the end of this story in his Twice-Told Tales.  No one knew, except that he had once been among the fire-hearted young Puritans who had first settled New England more than a half century earlier.  Later that evening, just before the old priest-warrior disappeared, the townspeople saw him embracing the 85-year-old Simon Bradstreet, a kindred spirit and one of the few original Puritans still alive.  Would the Gray Champion ever return?  “I have heard,” added Hawthorne, “that whenever the descendants of the Puritans are to show the spirit of their sires, the old man appears again.”
 






The Eternal Return

On the earthen floors of their rounded hogans, Navajo artists sift colored sand to depict the four seasons of life and time.  Their ancestors have been doing this for centuries.  They draw these sand circles in a counter-clockwise progression, one quadrant at a time, with decorative icons for the challenges of each age and season.  When they near the end of the fourth season, they stop the circle, leaving a small gap just to the right of its top.  This signifies the moment of death and rebirth, what the Hellenics called ekpyrosis.  By Navajo custom, this moment can be provided (and the circle closed) only by God, never by mortal man.  All the artist can do is rub out the painting, in reverse seasonal order, after which a new circle can be begun.  Thus, in the Navajo tradition, does seasonal time stage its eternal return.

Like most traditional peoples, the Navaho accept not just the circularity of life, but also its perpetuity.  Each generation knows its ancestors have drawn similar circles in the sand—and each expects its heirs to keep drawing them.  The Navaho ritually reenact the past while anticipating the future.  Thus do they transcend time.

Modern societies too often reject circles for straight lines between starts and finishes.  Believers in linear progress, we feel the need to keep moving forward.  The more we endeavor to defeat nature, the more profoundly we land at the mercy of its deeper rhythms.  Unlike the Navajo, we cannot withstand the temptation to try closing the circle ourselves and in the manner of our own liking.  Yet we cannot avoid history’s last quadrant.  We cannot avoid the Fourth Turning, nor its ekpyrosis.  Whether we welcome him or not, the Gray Champion will command our duty and sacrifice at a moment of Crisis.  Whether we prepare wisely or not, we will complete the Millennial Saeculum.  The epoch that began with V.J.-Day will reach a natural climax—and come to an end.

[SB_Mig]

Funny, I've actually considered that before. I certainly wouldn't complain... wink

Humor (n): That which is intended to induce laughter or amusement

[G M]

Ok, copy.

[HUSS]

stimulus break down...... The US is screwed and with it the rest of the western world.

http://2.bp.blogspot.com/_dZJ6SFB1ecE/SY8OJA4kmOI/AAAAAAAAAsA/aDRzmZJNvc0/s1600-h/wash.png

[Crafty_Dog]

I am getting only random snippets of news while on the road.  What happened to the Republican resistance?

[G M]

What always happens with republican resistance? 

[G M]

http://patterico.com/2009/02/07/feeling-unstimulated-watch-this/

A quick refresher from Milton Friedman on some eternal truths.

[Crafty_Dog]

By JOHN B. TAYLOR
Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

 
David GothardThe classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.

The Opinion Journal Widget
Download Opinion Journal's widget and link to the most important editorials and op-eds of the day from your blog or Web page.
Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.

Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.

Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.

A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.

The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?

It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.

Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.

Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis," published later this month by Hoover Press.

 

[ccp]

BO and his buddies in the House and Senate are getting their way to turning this country into a complete socialist state:

U.S. Taxpayers Risk $9.7 Trillion on Bailouts as Senate Votes

By Mark Pittman and Bob Ivry

Feb. 9 (Bloomberg) -- The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps. The Senate is to vote early this week on a stimulus package totaling at least $780 billion that President Barack Obama says is needed to avert a deeper recession. That measure would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

Financial Rescue

The pledges, amounting to almost two-thirds of the value of everything produced in the U.S. last year, are intended to rescue the financial system after the credit markets seized up about 18 months ago. The promises are composed of about $1 trillion in stimulus packages, around $3 trillion in lending and spending and $5.7 trillion in agreements to provide aid.

Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17 when it agreed to accept lower-quality collateral.

The worst financial crisis in two generations has erased $14.5 trillion, or 33 percent, of the value of the world’s companies since Sept. 15; brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc.; and led to the takeover of Merrill Lynch & Co. by Bank of America Corp.

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

‘All the Stops’

“The Fed, Treasury and FDIC are pulling out all the stops to stop any widespread systemic damage to the economy,” said Dana Johnson, chief economist for Comerica Inc. in Dallas and a former senior economist at the central bank. “The federal government is on the hook for an awful lot of money but I think it’s needed to help the financial system recover.”

Bloomberg News tabulated data from the Fed, Treasury and FDIC and interviewed regulators, economists and academic researchers to gauge the full extent of the government’s rescue effort.

Commitments may expand again soon. Treasury Secretary Timothy Geithner postponed an announcement scheduled for today that was to focus on new guarantees for illiquid assets to insure against losses without taking them off banks’ balance sheets. The Treasury said it would delay the announcement until after the Senate votes on the stimulus package.

Program Delay

The government is already backing $301 billion of Citigroup Inc. securities and another $118 billion from Bank of America. The government hasn’t yet paid out on any of the guarantees.

The Fed said Friday that it is delaying the start a $200 billion program called the Term Asset-Backed Securities Loan Facility, or TALF, to revive the market for securities based on consumer loans such as credit-card, auto and student borrowings.

Most of the spending programs are run out of the Federal Reserve Bank of New York, where Geithner served as president. He was sworn in as Treasury secretary on Jan. 26.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and then Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. The Federal Reserve so far is refusing to disclose loan recipients or reveal the collateral they are taking in return. Collateral is an asset pledged by a borrower in the event a loan payment isn’t made.

Fed Sued

Bloomberg requested details of Fed lending under the Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month, according to the court docket. Bloomberg asked the Treasury in an FOIA request Jan. 28 for a detailed list of the securities it planned to guarantee for Citigroup and Bank of America. Bloomberg hasn’t received a response to the request.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

[G M]

- Pajamas Media - http://pajamasmedia.com -

From ‘Hope and Change’ to ‘Fear and Loathing’
Posted By Rick Moran On February 9, 2009 @ 12:00 am In . Feature 01, . Positioning, Money, Politics, US News | 87 Comments

There is something surreal about the debate surrounding the stimulus bill which now appears headed for passage in the Senate. On the one hand, you have conservative Republican lawmakers railing against the bill’s pork-laden provisions with all the earnestness and fervor of the born-again, fiscally responsible politicians they have suddenly become. It’s as if we are getting lectures in morality from a pimp who, after seeing the light and embracing Christ as his savior, now feels compelled to preach against the evils of prostitution. You are happy for the transformation but leery about how long it will last.

Whether GOP legislators are now beating the tambourine for fiscal responsibility out of conviction is a matter open for debate, although being trounced at the polls may be reason enough for them to suddenly rediscover their conservative roots.

And what of the Democrats and their equally sudden metamorphosis from earmark crazy gigolos, bedding down any lobbyist who winks in their direction, to warriors for safeguarding the taxpayers’ money? Admittedly, the Democrats have a much harder sell given the blatant and sometimes comical fraud they are trying to perpetrate on a public scared out of its gourd by a president whose hyperbole and predictions of [1] “catastrophe” if the bill is not passed immediately is matched only by his cynical refutation of any semblance of the “bi-partisanship” he so blithely promised to bring to Washington during the campaign. No one doubts the economy is bad and getting worse. But when the president of the United States stands up and asks us to give in to our fears, to blindly obey his call to pass a bill with tens of billions of dollars in spending that even the bill’s proponents say is wasteful, one has to ask what happened to the party who once told us: “All we have to fear is fear itself.”

[2] Rep. David Obey (D-WI):

How money is spent should be far from the biggest concern about the stimulus package, its chief author, House Appropriations Committee Chairman David Obey (D-Wisc.) said Friday.

“So what?” Obey asked in response to a question on NPR’s “Morning Edition” about the perceived lack of direction from Congress as to how money in the stimulus should be spent. “This is an emergency. We’ve got to simply find a way to get this done as fast as possible and as well as possible, and that’s what we’re doing.”

Thus speaketh the voice of fiscal responsibility.

And thus speaketh a president who, for all his rhetorical gifts, can’t seem to muster the words that would give the American people the one thing desperately needed at this point in American history — hope.

That’s right. The candidate of “Hope and Change” has decided to be a president who espouses “Fear and Loathing.” Fear of financial Armageddon unless we do as we are told and blindly give in to his $900 billion panic panacea for the economy and loathing of the opposition — an opposition Obama unfairly portrays as opposing him out of spite and because a popular talk radio host is telling them what to do.

It is a far cry from the way Franklin Roosevelt and Ronald Reagan handled economic crises that in some ways were more dire than what Barack Obama is facing today.  Both men came to office at a time when the American spirit was limping and lost. Both men were confronted with unprecedented economic problems (double digit inflation and interest rates in 1981 were an impossibility according to the books).

And yet, both men eschewed fear mongering and sought to lift the people out of themselves in order to bring back hope and allow the natural optimism of the American people to come to the fore. Arguments rage to this day whether FDR’s massive spending helped or hurt the economy. And Reagan’s tax cuts began a spiral of deficits that, save for a brief period in the 1990s, fostered a climate of “let the kids pay for it” on Capitol Hill.

But few can argue that FDR and the Gipper didn’t succeed in changing the dynamics of the crisis they were facing by inspiring the people to believe in themselves again and that better times were ahead.

Obama does not want Americans to believe in themselves. He wants them to [3] believe in him:

If we don’t move swiftly to put this plan in motion, our economic crisis could become a national catastrophe. Millions of Americans will lose their jobs, their homes, and their health care. Millions more will have to put their dreams on hold.

The truth should be dawning on all of us just about now that Democrats, Republicans, economists, Wall Street wizards, and even the high priests of monetary policy at the Federal Reserve have no idea how bad things are going to get or whether anything Congress does can improve the situation — much less stave off disaster. And that means that the only thing we have to hang our hats on is the credibility and trustworthiness of the president of the United States.

Instead of instilling confidence, Obama is selling fear. Instead of raising us up, he is crushing us with his rank appeal to partisanship. Instead of statesmanship, we get gimmicks like his stimulus bill that the [4] Congressional Budget Office tells us will harm the economy in the long run.

It is amazing and frightening to think that less than three weeks into his presidency, Barack Obama is at risk of losing his credibility as a leader by threatening disaster unless his will be done. He may very well get what he wants when Congress passes this monstrosity despite it monumental flaws.

But at what cost? And is Obama capable of being the kind of leader who can inspire hope rather than generate fear?

So far, he has failed in that regard.

Article printed from Pajamas Media: http://pajamasmedia.com

URL to article: http://pajamasmedia.com/blog/from-hope-and-change-to-fear-and-loathing/

URLs in this post:
[1] “catastrophe”: http://news.yahoo.com/s/mcclatchy/20090205/pl_mcclatchy/3161647
[2] Rep. David Obey (D-WI):: http://briefingroom.thehill.com/2009/02/06/obey-on-stimulus-waste-so-what/
[3] believe in him:: http://www.washingtontimes.com/news/2009/feb/07/obama-national-catastrophe-if-bill-fails/
[4] Congressional Budget Office: http://www.washingtontimes.com/news/2009/feb/04/cbo-obama-stimulus-harmful-over-long-haul/

[Body-by-Guinness]

How Government Created the Financial Crisis
Research shows the failure to rescue Lehman did not trigger the fall panic.
By JOHN B. TAYLOR

Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis.

The classic explanation of financial crises is that they are caused by excesses -- frequently monetary excesses -- which lead to a boom and an inevitable bust. This crisis was no different: A housing boom followed by a bust led to defaults, the implosion of mortgages and mortgage-related securities at financial institutions, and resulting financial turmoil.

Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.

The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.

Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.

Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages.

Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.

Diagnosing the reason for this sudden increase was essential for determining what type of policy response was appropriate. If liquidity was the problem, then providing more liquidity by making borrowing easier at the Federal Reserve discount window, or opening new windows or facilities, would be appropriate. But if counterparty risk was behind the sudden rise in money-market interest rates, then a direct focus on the quality and transparency of the bank's balance sheets would be appropriate.

Early on, policy makers misdiagnosed the crisis as one of liquidity, and prescribed the wrong treatment.

To provide more liquidity, the Fed created the Term Auction Facility (TAF) in December 2007. Its main aim was to reduce interest rate spreads in the money markets and increase the flow of credit. But the TAF did not seem to make much difference. If the reason for the spread was counterparty risk as distinct from liquidity, this is not surprising.

Another early policy response was the Economic Stimulus Act of 2008, passed in February. The major part of this package was to send cash totaling over $100 billion to individuals and families so they would have more to spend and thus jump-start consumption and the economy. But people spent little if anything of the temporary rebate (as predicted by Milton Friedman's permanent income theory, which holds that temporary as distinct from permanent increases in income do not lead to significant increases in consumption). Consumption was not jump-started.

A third policy response was the very sharp reduction in the target federal-funds rate to 2% in April 2008 from 5.25% in August 2007. This was sharper than monetary guidelines such as my own Taylor Rule would prescribe. The most noticeable effect of this rate cut was a sharp depreciation of the dollar and a large increase in oil prices. After the start of the crisis, oil prices doubled to over $140 in July 2008, before plummeting back down as expectations of world economic growth declined. But by then the damage of the high oil prices had been done.

After a year of such mistaken prescriptions, the crisis suddenly worsened in September and October 2008. We experienced a serious credit crunch, seriously weakening an economy already suffering from the lingering impact of the oil price hike and housing bust.

Many have argued that the reason for this bad turn was the government's decision not to prevent the bankruptcy of Lehman Brothers over the weekend of Sept. 13 and 14. A study of this event suggests that the answer is more complicated and lay elsewhere.

While interest rate spreads increased slightly on Monday, Sept. 15, they stayed in the range observed during the previous year, and remained in that range through the rest of the week. On Friday, Sept. 19, the Treasury announced a rescue package, though not its size or the details. Over the weekend the package was put together, and on Tuesday, Sept. 23, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson testified before the Senate Banking Committee. They introduced the Troubled Asset Relief Program (TARP), saying that it would be $700 billion in size. A short draft of legislation was provided, with no mention of oversight and few restrictions on the use of the funds.

The two men were questioned intensely and the reaction was quite negative, judging by the large volume of critical mail received by many members of Congress. It was following this testimony that one really begins to see the crisis deepening and interest rate spreads widening.

The realization by the public that the government's intervention plan had not been fully thought through, and the official story that the economy was tanking, likely led to the panic seen in the next few weeks. And this was likely amplified by the ad hoc decisions to support some financial institutions and not others and unclear, seemingly fear-based explanations of programs to address the crisis. What was the rationale for intervening with Bear Stearns, then not with Lehman, and then again with AIG? What would guide the operations of the TARP?

It did not have to be this way. To prevent misguided actions in the future, it is urgent that we return to sound principles of monetary policy, basing government interventions on clearly stated diagnoses and predictable frameworks for government actions.

Massive responses with little explanation will probably make things worse. That is the lesson from this crisis so far.

Mr. Taylor, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis," published later this month by Hoover Press.

 
Please add your comments to the Opinion Journal forum.

Printed in The Wall Street Journal, page A19

http://online.wsj.com/article/SB123414310280561945.html

[Crafty_Dog]

By BENJAMIN E. SASSE and KERRY N. WEEMS
Twelve years ago, President Bill Clinton signed a law that he correctly proclaimed would end "welfare as we know it." That sweeping legislation, the Personal Responsibility and Work Opportunity Act, eliminated the open-ended entitlement that had existed since 1965, replacing it with a finite, block grant approach called the Temporary Assistance to Needy Families (TANF) program.

TANF has been a remarkable success. Welfare caseloads nationally fell from 12.6 million in 1997 to fewer than five million in 2007. And yet despite this achievement, House Democrats are seeking to undo Mr. Clinton's reforms under the cover of the stimulus bill.


Currently, welfare recipients are limited to a total of five years of federal benefits over a lifetime. They're also required to begin working after two years of government support. States are accountable for helping their needy citizens transition from handouts to self-sufficiency. Critically, the funds provided to states are fixed appropriations by the federal government.

Through a little noticed provision of the stimulus package that has passed the House of Representatives, the bill creates a fund for TANF that is open-ended -- the same way Medicare and Social Security are.

In the section of the House bill dealing with cash assistance to low-income families, the authors inserted the bombshell phrase: "such sums as are necessary." This is a profound departure from the current statutory scheme, despite the fact that, in this particular bill, state TANF spending would be capped. The "such sums" appropriation language is deliberately obscure. It is a camel's nose provision intended to reverse Clinton-era legislation and create a new template for future TANF reauthorizations.

Most liberals have always disliked welfare reform; critics of TANF believed Mr. Clinton supported it only to get re-elected. Some asserted it was racist or intended to punish the poor. Others claimed that the funds to assist single mothers with child care, transportation and job training were never as generous as were allegedly promised. Today, the fact that disqualification from the program is based on failing to secure a job within two years seems especially harsh given this economic crisis.

There are legitimate objections to the program that are worth debating. But this is not an open debate: It is a near secret provision buried deep in a more than 600-page piece of legislation.

The TANF provisions of the stimulus bill, like the nearly $100 billion Medicaid provisions, are less about stimulating the economy, and more about the federal government absorbing the states' budget problems. State budgets may be swamped with those needing temporary relief, and a contingency fund could help. But it should be a definite amount, not a precedent-setting, open-ended amount. (If the initial TANF allocation is not sufficient, Congress could appropriate another definite amount.)

The offending language is not in yesterday's Senate version of the bill, but that provides little comfort. The attempt to undo welfare reform has not been transparent, and the conference committee provides the perfect closed-door environment for slipping in "such sums" language into the final bill without public scrutiny.

Welfare reform was arguably the most important legislative development of the mid-1990s. It is bad policy to jettison it with five words during an economic crisis.

All who are concerned about our nation's unfunded obligations should be on guard against attempts to slip "such sums" language into any conference committee bill. Welfare policy is too important to change with a stealth maneuver.

Mr. Sasse, former U.S. assistant secretary of Health and Human services, teaches policy at the University of Texas. Mr. Weems, former vice chairman of the American Health Information Community, held the position of administrator of the Centers for Medicare and Medicaid services until last month.

[Freki]

http://austrianeconomists.typepad.com/weblog/2009/02/how-corrupt-is-our-language-in-economic-discourse.html


How Corrupt is Our Language in Economic Discourse?
The vast majority has no clue what economic science is.  To them economics is about political ideology or practical business.  There are no laws of economics.  We economists have permitted this to occur.  We have allowed politicians and the public to demand of our discipline results which the discipline cannot produce but which nevertheless if we pretend we can produce those results will provide power and prestige.  Hayek argued in the early 1930s that the fate of the economist was to be called upon to address questions of pressing political concern only to have his advice discounted as soon as it was uttered.  Why? Because economics as a discipline puts parameters on people's utopias.  It gives us primarily "negative" knowledge --- we live in a scarce world, there is no such thing as a free lunch, we cannot assume what it is we hope to prove, ought cannot presuppose can, and can doesn't mean we ought, etc.  In the 1980s, Hayek wrote that: "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design."

But that is not the "economics" we heard about last night from President Obama.  The economics is a POLITICAL economics.  It is an economics that at the service of political parties in power --- either right or left.  Conservative Keynesianism and Liberal Keynesianism, but it is still Keynesianism however you slice it. And as Deirdre McCloskey has put it, when your intellectual range is from M-N you think you are being open minded when you look at M and you look at N, but you certainly don't see A or Z.  President Obama actually argued that no serious economist has argued against the need for government action with respect to the stimulus package. The leading economists, he argued, for Bush I and Bush II, as well as his team of economists all agree that only government can break the economy out of this vicious spiral downward.  He must not have read the Christian Science Monitor yesterday.  Robert Higgs's op-ed is best on his historical research, which is among the best on the subject, dealing with the 1920s-1940s.

President Obama presents himself as a pragmatist who wants us to get beyond the stale ideological debates of the past.  But he is simply trapped in the conventional wisdom of Keynesian economics.  Why not take a few minutes --- since we are talking about actions which will transform the economic landscape of the US --- and think in a "non-Whig" fashion about economic ideas.  Consider once again the arguments that "lost" due not to intellectual defeat, but political expediency.  What were those pre-Keynesian ideas regarding the economy and the proper role of monetary and fiscal policy?  President Obama said he cannot take seriously criticisms of fiscal irresponsibility from politicians that when they were in power doubled the national debt.  Good point. But does that mean that fiscal irresponsibility is off the table as a concern? How pragmatic is thtat, as opposed to how politically convenient is that excuse?  If President Obama wants to break from the stale ideology of the past, then he should start with breaking with the policy path of the past. NOTHING he is doing is radically different from what President Bush did before him.  It is the same strategy being pursued just on "steroids" (and he is disappointed with A-Rod?!).  No answer has yet been given as to why President Bush's bailout package didn't work while his stimulus package will. In fact, when pushed on that question President Obama really just said, we might even need to spend more down the road when this doesn't give us the result we want.  And the claim is just that confidence has to be restored to the market and only government can do that.

The belief that only government can do this is the real stale ideology of the past.  What is really causing the problems in this economists opinion, is that government action has produced an uncertain investment environment. The rules of ownership and control are unclear, or clear but counter-productive for indiviudual initiative; monetary policy guided by the rhetoric of fighting inflation, but fearing deflation has been so loose that long term inflation that threatens the viability of the dollar should be a real concern to investors; and fiscal policy which is so out of control that US public debt will bankrupt the future generations with an astronomical tax burden and/or a monetization that will destroy the currency through hyper-inflation.  Whatever way you slice it, our current policy path is the PROBLEM not the SOLUTION.  But if your intellectual range is from M-N (lets say Larry Summers to Paul Krugman), then don't be surprised when in being "rational", examining the "evidence",  weighing the "arguments" and assessing the "theories", you fail to consider the fiscal arguments of a James Buchanan, the monetary and capital theories of F. A. Hayek, the comparative institutional analysis of law and politics in Ronald Coase, and the monetary and fiscal policy arguments of Milton Friedman.  Each of these gentlemen, President Obama, won the Nobel Prize in Economic Science.  Their ideas may have been used by politicians in rhetoric, but none have been political appointees (well Friedman served as an economist during WWII, Hayek and Buchanan fought for their countries in WWI and WWII respectively) and their ideas have not been used in political practice --- no denationalization of money; no balanced budget ammendment; no full scale school voucher program, drug legalization, monetary rule, etc..  Friedman had more success than the others in carrying the day, but compare the policy prescriptions in Capitalism and Freedom and Free to Choose with the reality of public policy that we got even under Ronald Reagan, and compare the policy prescriptions in Hayek's The Constitution of Liberty with what was achieved under Margaret Thatcher.  There is a far distance from the ideas in these books to the reality of the policy world.  A really radical notion of hope and change might be to get government out of the business of attempting to manage the economy, stop demanding of economics results that it as a discipline cannot produce, and lets depoliticize political economy. 

Economics is NOT social engineering, it is instead a phiosophical science.  Political economy is the best label for it, but at its best it is not political in the ordinary meaning of that term.  And the intellectual range is not limited to M-N, but instead travels at least from A-Z.  Because President Obama has failed to grasp this, to him economics disagreements are inherently political, economics science is Keynesian, and economic policy is pro-active.

Posted by Peter Boettke on February 10, 2009 at 10:28 AM | Permalink

The artical mentioned above which is in the Christian Science Monotor is worth a look as well

http://www.csmonitor.com/2009/0209/p09s01-coop.html

[SB_Mig]

Nice Q & A about the Stimulus package:

http://www.reason.com/news/show/131632.html

The Reason.com Stimulus Symposium
Leading economists sound off on the $800 billion stimulus package

February 11, 2009

Yesterday, the United States Senate passed a sweeping $800 billion stimulus plan that President Barack Obama says he would like to sign into law as soon as possible. “There is no disagreement,” Obama has declared, “that we need action by our government, a recovery plan that will help jump-start the economy.”

Reason.com asked a panel of leading economists for their response to the stimulus package.

Robert Higgs

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

This legislation entails the addition of a huge increment to the burden of debt the public must bear, directly or indirectly. It redirects resources on a grand scale from uses consumers value to uses politicians value and thereby impoverishes the general public. I've written along these lines at greater length here and here.

2. Is there anything in the stimulus package that you think will work? If so, what?

All of it works. The trouble is what it works for, which is to reward virtually every special interest allied with the Democrats and to guarantee the recipients' future support for the pirates who are now sending the booty their way. It is eerily similar to the New Dealers' use of the Works Progress Administration and other big relief programs to buy votes and bulk up their political machine.

3. Obama says that doing nothing is not an option. Do you agree with that?

For the economy in general, doing nothing is vastly preferable to doing the stimulus package, but doing nothing is not a political option; indeed, it would be political suicide. Which shows that only by adopting economically destructive policies can politicians survive. Do you see something wrong in this picture? Given the dominant ideology and the political institutions that now exist, economically rational public policy is incompatible with political viability. See here. Having hit bottom, the politicians can only do one thing: keep digging. If Hell is down there, they'll reach it, sooner or later.

Robert Higgs is senior fellow in political economy for The Independent Institute and editor of the Institute's quarterly journal The Independent Review.


Jeffrey Rogers Hummel

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

The biggest problem with the stimulus package is the amount by which it increases total government spending, the national debt, and therefore future taxes.

2. Is there anything in the stimulus package that you think will work? If so, what?

If by "work," you mean alleviate the depression, there is nothing in the stimulus that will do so.

3. Obama says that doing nothing is not an option. Do you agree with that?

Not at all. The best thing the government could do is to cut spending and taxes. Doing nothing is a second-best option.

Jeffrey Rogers Hummel is associate professor of economics at San Jose State University and the author of Emancipating Slaves, Enslaving Free Men: A History of the American Civil War.


Megan McArdle

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

Even if you accept the theory of the stimulus, the package is not well-structured. A good stimulus package should be designed to move money out the door rapidly, then stop. This program is designed to move money out the door slowly, and keep going. Moreover, the vast size of the package is going to add big costs in the not-so-distant future which have barely been discussed.

2. Is there anything in the stimulus package that you think will work? If so, what?

Expanding unemployment benefits and food stamps—the "automatic fiscal stabilizers"—are relatively low cost and transparent. They target money to the people whose consumption is contracting the most, and they will naturally shrink as the economy recovers.

3. Obama says that doing nothing is not an option. Do you agree with that?

I would like to see more proof of the statement that doing something is better than doing nothing. The Keynesian arguments upon which Obama's statements are based work out neatly in the textbooks, but there's little proof that they actually make things better, in aggregate, in the real world. And the current situation is all the proof you need that there are massive holes in our old textbook models.

Megan McArdle writes about economics, business, and politics at The Atlantic.


Deirdre McCloskey

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

It's not targeted, not temporary, not timely. Especially the last. Too slow, too slow, alas.

2. Is there anything in the stimulus package that you think will work? If so, what?

At less than full employment the Keynesian stuff works. So the minority of the quickie expenditures will "put people back to work"—until we return to almost-full employment, which will happen pretty quickly in the recovery. At that point the stimulus will merely crowd out private investment. In the short run people might get more cheerful, too, always a good thing. But in two years the recession will be over. And the myth will grow up—rather similar to the ones about FDR and war expenditure—that Obama did it. Essentially, Obama will get credit for the self-adjusting character of the economy. I reckon we should start preparing that other face of Mount Rushmore.

3. Obama says that doing nothing is not an option. Do you agree with that?

I agree on the money and banking side, not on the real expenditure side. We are in a financial panic, which happens only in a few recessions (1907, 1929). In other words, the TARP is way, way more important than the stimulus. Truly, Something Must Be Done about the banks. That's a logic of second best—the government fouled up the banking system (the most regulated part of the economy), so maybe the government should help clean up the mess. Someone needs to, and I reckon it's not going to be the Icelandic government. J.P. Morgan, where are you when we need you?

Contributing Editor Deirdre McCloskey teaches economics, history, English, and communication at the University of Illinois at Chicago. Her latest book is The Myth of Statistical Significance.


Allan H. Meltzer

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

No thought is given to the medium and longer-term consequences. We are very likely to have large inflation in the next few years.

2. Is there anything in the stimulus package that you think will work? If so, what?

Yes, extending unemployment compensation, tax subsidy to homebuyers, some of the permanent tax cuts.

3. Obama says that doing nothing is not an option. Do you agree with that?

Yes. But doing the right things is the option.

Allan H. Meltzer is the Allan H. Meltzer University Professor of political economy and public policy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute.

Jeffrey A. Miron

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

The package is focused on increased spending and tax cuts that fail to improve incentives. I am extremely skeptical that the U.S. has $500 billion in additional productive spending, especially if done in a hurry. In most areas government spending is too high, not too low.

2. Is there anything in the stimulus package that you think will work? If so, what?

Roughly, no.

3. Obama says that doing nothing is not an option. Do you agree with that?

Doing nothing is always an option, and in my view it would be better than the stimulus. Better yet, we should fix those aspects of current policy that ought to be fixed independent of the crisis. See here and here.

Jeffrey A. Miron is a senior lecturer in economics at Harvard University.

Michael C. Munger
1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

The creation of new bureaucratic and regulatory structures, restrictions on creation of liquidity. The genius of the American system, for all its flaws, has been that we can mobilize lots of liquidity quickly. Silicon Valley exists because you could sit down, make a pitch, and get $10 million that afternoon.

If we start governing finance like we govern universities, or city councils, we are going to lose that. Having committees, and a bunch of forms to sign off on, and stamps...Hernando de Soto wrote about systems like this. They strangle business, investment, and growth.

2. Is there anything in the stimulus package that you think will work? If so, what?

Keynes said that Y=C+I+G. Borrowing money to raise "G" (government spending) will work, I suppose. But the cost to future generations is enormous. I am amazed by the hypocrisy of both sides. John McCain calls the stimulus "intergenerational theft." Well, he's right, but he came late to this wisdom. The Republicans have been just pouring out new deficit spending since 2002.

And then Obama says he doesn't want to do tired old ideas, and failed economics. But he is doing exactly what the Republicans did: huge deficit-financed spending on largely useless or irrelevant programs designed to reward political friends. The only thing that's different is the identity of the "friends."

So, some of the spending may increase measured GDP slightly for 2009. But the price is increased inflationary pressures in 2010, and the squandering of the birthright of our children for decades.

3. Obama says that doing nothing is not an option. Do you agree with that?

This makes me furious. Doing nothing is not an option—anymore. Because first President Bush, and now President Obama, have engaged in a completely irresponsible fear campaign. "We must do something, or you should cower in helpless fear, behind locked doors, in darkened rooms!" Presidents should not use this kind of fear as a weapon to pass their pet projects. Roosevelt, for all his flaws, got it right: "The only thing we have to fear is fear itself." Well, not quite right: it turns out we need to fear fear itself, and also President Obama.

The sensible thing to do at this point would be to make an offer, at 40 cents on the dollar, for the "toxic" assets, both the collaterlized debt obligations packaged by Freddy and Fannie, and also the credit default swap "insurance" derivatives sold by AIG (and some other firms, but mostly AIG). Since AIG wrote so many "naked" CDSs, even for people who don't own the underlying, or "insured" asset, they are going to keep hemorrhaging until someone puts a floor on the value of the assets.

So, a one-time, take it or leave it, offer. One big reason that credit markets are frozen is the uncertainty created by Treasury indecision and vagueness. Asset owners are holding out for a better price, and they are trying to negotiate through the Senate, not the Treasury. Obama needs to lead here, and say, "Take this partial buyout, or hang on to the asset at your peril. There is no better deal coming tomorrow."

Michael C. Munger is professor of economics and chair of the department of political science at Duke University.


William A. Niskanen

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

Nothing in the package increases the incentive to work, save, invest, or increase productivity. Any spending stimulus should be limited to increasing the demand for housing, in order to increase the value of the mortgage-backed securities that are limiting the ability of the banks to lend.

2. Is there anything in the stimulus package that you think will work? If so, what?

No. Almost all of the tax cuts are welfare payments channeled through the tax system, not reductions in marginal rates.

3. Obama says that doing nothing is not an option. Do you agree with that?

No fiscal stimulus program is a viable option. Use monetary policy to stimulate demand. Consider an optional fiscal stimulus plan consisting only of selective marginal tax rate cuts and a temporary subsidy to increase the demand for housing.

William A. Niskanen is chairman emeritus and a distinguished senior economist at the Cato Institute.


Johan Norberg

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

The biggest problem is that it destroys savings by using them on projects that the majority did not think were reasonable a year ago. We take capital that would have been available to companies and poorer countries and use it to create a stimulus that will have its largest impact after the economy has already turned the corner—so that it will contribute to another round of boom and bust.

2. Is there anything in the stimulus package that you think will work? If so, what?

That depends on what the meaning of "works" is. The tax credit will work. Not as they intended it, though. But it gives people more money, which they will save because they can see that the government is building up a huge deficit that they will be forced to pay for in the future. And then those savings will come in handy.

3. Obama says that doing nothing is not an option. Do you agree with that?

No. Every single crisis in the last 100 years shows that doing nothing would have been preferable to doing bad things. But he is right that it is not an option in the current political climate. Now what applies is the politicians' logic from Yes, Prime Minister: "Something must be done. This is something. Therefore it must be done."

Johan Norberg is a Swedish author and historian of ideas, and a senior fellow at the Cato Institute. He is currently writing a book on the financial crisis.


Mark Perry

1. Outside of the obvious pork and special interest goodies, what are the biggest problems you see with the stimulus package?

There are many problems with the stimulus package, but there are several that stand out. First, like all fiscal stimulus packages in the past, the current one will not impact the economy at the right time for the intended stimulus effect, due to the inevitable problems of long lags. Much of the intended expansionary fiscal effects won't happen until next year and even 2011, and it's likely the economy will have recovered sufficiently by then so that the fiscal stimulus will be unnecessary, and might actually be destabilizing. Second, the fiscal stimulus has to be paid for eventually in the form of higher taxes, which will have a negative economic effect in the future, i.e. the "fiscal child abuse" effect. That is, any positive short-term effects of this stimulus package will be more than offset by future negative effects in the form of reduced future economic growth, decreased investments, and lower incomes.

2. Is there anything in the stimulus package that you think will work? If so, what?

The fiscal stimulus will work only in the sense that it will serve to stimulate the approval ratings of the President and other politicians.

3. Obama says that doing nothing is not an option. Do you agree with that?

No. The market economy has an underappreciated, but amazing ability to correct and reverse economic imbalances and problems on its own, and that economic self-correcting resiliency works best in the absence of government interference.

Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan.

[Body-by-Guinness]

This blurb, combined with a NYT table I'll post below, suggest we are stimulating an economy that will recover on its own.


U.S. retail sales jumped 1 percent in January, reversing a six-month declining trend and defying economists' expectations by posting the biggest increase in 14 months.

The Commerce Department says January retail sales rose a percent from December after having fallen for six straight months. Wall Street economists surveyed by Thomson Reuters had expected January sales to show a drop of 0.8 percent. They plunged 2.7 percent in December, which had the weakest holiday selling season since at least 1969.

The January report shows strong increases in sales of automobiles and in general merchandise stores -- the "big box" outlets -- though sales by department stores, carrying fewer varieties of items, posted a decline.

http://www.foxnews.com/politics/2009/02/12/commerce-department-says-retail-sales-unexpectedly-rebounded-january/





By BRUCE BARTLETT
Published: January 23, 2008
The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing. — Bruce Bartlett, author of “Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy.”

http://www.nytimes.com/2008/01/23/opinion/23bartlett.html

[Crafty_Dog]

As always, sound, pithy, and penetrating analysis from Scott Grannis:

http://scottgrannis.blogspot.com/2009/01/economic-stimulus-plan-is-gigantic.html

[Chad]

"On Thursday Sept 15, 2008 at roughly 11 AM The Federal Reserve noticed a tremendous draw down of money market accounts in the USA to the tune of $550 Billion dollars in a matter of an hour or two. Money was being removed electronically.

The Treasury tried to help, opened their window and pumped in $150 Billion but quickly realized they could not stem the tide. We were having an electronic run on the banks. So they decided to closed down the accounts.

Had they not closed down the accounts they estimated that by 2 PM that afternoon. Within 3 hours. $5.5 Trillion would have been withdrawn and the entire economy of the United States would have collapsed, and within 24 hours the world economy would have collapsed."

This is scary stuff, folks. See the C-Span video at the link below:

http://atlasshrugs2000.typepad.com/atlas_shrugs/2009/02/tight-before-the-election-of-president-hussein-an-electronic-run-on-the-banks.html

[Crafty_Dog]

Chad:

How did you find out about this site?  What is its track record?

[Body-by-Guinness]

I've seen these same figures cited elsewhere on several occasions, along with laments that the MSM is ignoring the story. None of the sources, however, have struck me as particularly reliable and most go on to do a lot of Soros bashing. If true, I'd sure like to see a well sourced piece.

[Chad]

@ Guro Crafty:

I only found the Atlas Shrugs site today doing research on this Jankorski interview. (it's in my favs now, tho.)
Here is Glenn Beck's commentary on the video: http://www.glennbeck.com/content/articles/article/198/21350/?ck=1

@ Guinness:

Why would a Democratic Represenative go on C-Span and make up this story? I would like to hear your take on it.

[Crafty_Dog]

Chad:

Although GB occassionally says things with which I agree, mostly I find him not to be worth the time it takes to listen to him.

As for the credibility and respect that should be given someone simply because they are a Dem Congressman?  Surely you jest , , ,

TAC,
Marc

[Chad]

found this: http://seekingalpha.com/article/120220-kanjorski-and-the-money-market-funds-the-facts seems to take the wind out of the story a bit. 

Kanjorski and the Money Market Funds: The Facts (Felix Salmon)

With the Kanjorski Meme still spreading (see Ben Smith, Andrew Leonard, Moldbug, and more), I think I'm finally able to squash it with some hard figures: there never was a $500 billion outflow from any asset class in the space of a couple of hours or even weeks, and the Fed never shut down or froze any money-market accounts.

This is not the first time that Kanjorski has made these allegations. But first, it's worth going through the timeline.

On September 15, Lehman Brothers failed. The Reserve fund -- which was $64 billion that morning, and which had a substantial investment in Lehman debt -- saw $10 billion of withdrawals that day. The following day, September 16, it saw another $10 billion of withdrawals; on September 17, when withdrawals had reached a total of about $40 billion, it announced that redemptions would take "as long as seven days"; as we all know, that was massively overoptimistic.

The news from The Reserve was gruesome, and total withdrawals from money-market funds reached $104 billion that day, according to Crane Data. Another data provider, ICI, says that as of the close of business on the 17th, money-market funds had a total of $3,549.3 billion, which was a fall of just $30.3 billion from their level a week previously.

The following day, September 18, was bad but not quite as bad, with withdrawals of $57 billion, according to Crane Data. By the 24th, according to ICI, the total was $3,456.2 billion -- a drop of another $93.1 billion from the 17th.

On September 19, worried about outflows from money-market funds, the Treasury announced that, for a fee, it would guarantee -- not freeze -- eligible money-market mutual funds. But the details of the plan still weren't clear as of September 21, when Treasury said it was "continuing to develop the specific details surrounding the temporary guaranty program".

Substantially all of the outflows came from institutional accounts: retail investors never panicked. If you look at the weekly data for bank savings deposits, including money market deposit accounts, they stood at $3,167.4 billion on the 15th, and rose to $3,191.4 billion on the 22nd.

So where does the $500 billion outflow number come from? Would you believe: the Sunday New York Post, which on September 21 published a story headlined "Almost Armageddon" featuring this paragraph:


According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening [on Thursday]. The total money-market capitalization was roughly $4 trillion that morning.


Remember where we're at here: the end of the longest week in financial-market history, when no one -- traders, reporters, Congressmen, you name it -- was getting much if any sleep. Simple errors can easily be made, numbers can get fuzzy, everything was moving very fast and confusingly.

In any case, three days later, on September 24, Kanjorski held a hearing on Capitol Hill with Treasury secretary Hank Paulson. Here's what he said:


I was talking to someone, one of my friends on Wall Street today, asking him to verify the money market run. It was anonymously reported in some of the New York papers, and I think I have evidence of it in some of our conversations, whether it was with you or with other experts, that between 11:00 and 11:30 on Thursday last, the money markets in the United States were hit by a run that amounted to about $500 billion of $4 trillion in accounts and that as I understand it, it was essential for the Federal Reserve to pump $105 billion into the system and to suspend operations or the money market accounts of the country would have, in fact, failed.
One, you should tell us that.


Kanjorski is clearly fishing here: he's talking about anonymous newspaper reports and vague "conversations" and anonymous Wall Street "friends", and basically asking Paulson to confirm his suspicions. Which, naturally, Paulson doesn't do, because the suspicions weren't actually true. That said, however, Paulson's being-polite-to-the-Congressman answer doesn't explicitly say that Kanjorski's numbers are false.

After that, we didn't hear much more about this meme until Kanjorski resuscitated it on C-Span, this time citing the Federal Reserve as his data source, and beefing up the numbers for good measure:


On Thursday at about 11 o'clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the United States to the tune of $550-billion was being drawn out in in a matter of an hour or two...
We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. ... If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.


This is all, frankly, fiction, and it's not clear where most of it came from, although maybe Kanjorski's "friends" on Wall Street are the same people as Michael Gray's sources at the New York Post. Thinking back to that crazy week it's easy to get details wrong, especially when you're speaking off the cuff on a call-in show. But let's stop treating it as though there's any substance to it. Please

[Crafty_Dog]

Anyone trying to understand why the credit mess keeps getting messier needs only to have sat through Wednesday's hearing of the House Financial Services Committee. The eight bank CEOs were mere props. The stars were the politicians, who managed to demand more loans for consumers while simultaneously giving lenders new cause to wonder if they'll ever be repaid. This gathering of the esteemed Committee on Doubt and Uncertainty occurred as markets desperately need less of both.

 
AP
Barney Frank.
Chairman Barney Frank's hearing was intended to flay the CEOs for not lending enough. It fell flat as political theater because banks have actually increased their lending in recent months. The people who aren't lending more are investors in nonbank financing such as asset-backed securities.

In fact, the nonbank credit market is normally much bigger than bank lending. But new issues backed by auto loans, credit cards and the like have been rare this year, as markets wonder how the government's next move will change the value of such investments. Buyers and sellers of existing securities are "sitting on the sidelines," according to Asset-Backed Alert, waiting for still another Washington recalibration of risk and reward.

Most investors who lend in these markets are not recipients of financial bailout money, so Congress can't simply browbeat them into making another big bet on the American consumer. They've been burned badly. They need reassurance that our capital markets operate with a consistent set of rules. The Committee on Doubt and Uncertainty offered only the assurance that the rules will keep changing.

The Opinion Journal Widget
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Early in the hearing, Mr. Frank urged all lenders not to foreclose on any mortgage borrowers until Treasury Secretary Timothy Geithner unveils a new foreclosure mitigation plan. In fact, foreclosures had already started to decline due to Treasury-created uncertainty. Mr. Frank's admonition will cause a more rapid fall, since Citigroup, Bank of America and J.P. Morgan "volunteered" to a temporary freeze after the hearing.

Don't confuse this with a sign that the housing market is improving. The pols are simply delaying the pain until they decide how much to inflict on taxpayers versus investors. It's true that investors in consumer debt can expect subsidized financing from Mr. Geithner, but it's a flip of the coin whether the new subsidies will outweigh the costs of new foreclosure limits.

The safest bet is a huge new rescue of those who borrowed too much, and Mr. Geithner has already promised another $50 billion of your tax dollars. Meanwhile, Mr. Frank made clear that Congress's obsession with promoting homeownership is alive and well. He explained that his foreclosure moratorium pending the Geithner plan is to avoid a circumstance akin to a soldier who is killed after a ceasefire agreement but before the news has reached the front. Readers who don't equate moving into a rental with death in combat should direct their comments to Mr. Frank's office.

Maxine Waters (D., Calif.), for her part, demanded to know why some banks don't modify loan terms until borrowers are 60-days delinquent. Heck, why stop at mortgages? Shouldn't lenders convert all of their money-making contracts into losers?

If potential investors weren't frightened enough, Nydia Velazquez (D., N.Y.) then seized the microphone. She demanded to know if the assembled CEOs would back "cramdown" legislation, which rewrites the bankruptcy code to allow judges to reduce the amount people owe on their mortgages. So investors who might have jumped back into housing now must calculate the odds that this provision will pass the Senate, and if it does, how much bankruptcy judges will reduce their overall returns.

Goldman Sachs CEO Lloyd Blankfein pointed out that a potential consequence of bankruptcy cramdowns is that "less capital flows into this market." The only CEO who sided with Rep. Velazquez was Citigroup's Vikram Pandit, who also agreed with nearly everything the politicians had to say. This is what a CEO does when his bank becomes a de facto ward of the state, as Citi now is. Unfortunately, Mr. Pandit's support for cramdowns will only discourage nongovernment investors in housing markets.

All in all, just another day's work for the Committee on Doubt and Uncertainty, which continues to believe that proposing more ways to punish lenders will somehow produce more lending.

[Chad]

And Carter's second term begins....

http://www.nytimes.com/2009/02/14/opinion/14ryan.html?em

February 14, 2009
Op-Ed Contributor
Thirty Years Later, a Return to Stagflation
By PAUL D. RYAN
Washington

CONGRESS has made a terrible mistake. Amid a rhetorical debate centered on words like “crisis,” “emergency” and “catastrophe,” it acted too fast. While arguments were made about the stimulus bill’s specific components — taxpayer money for condoms, new green cars and golf carts for federal bureaucrats, another round of rebate checks — its more dangerous consequences were overlooked. And now the package threatens a return to the kind of stagflation last seen in the 1970s.

To get a sense of the pressures ahead, we must first assess our fiscal health. We started this year with a projected trillion-dollar budget deficit for the 2009 fiscal year. In 2008, we spent $451 billion just to pay the interest on our debt.

With the stimulus bill now becoming law, we’re digging even deeper into debt. The headline price tag of $787 billion doesn’t include the extra $348 billion it will take to finance the new debt, or what it will cost when Congress extends the spending programs in the bill, as is likely — as much as $2 trillion more. Add in the billions that are being used to prop up the financial system, and when the dust settles on 2009, with millions of baby boomers retiring and entitlement spending exploding, taxpayers will face a financial nightmare.

From a global perspective, the picture only looks worse. As we have debated how much money to borrow and spend in hopes of jump-starting our economy, we’ve ignored the worldwide stimulus binge. China, Europe and Japan are all spending hundreds of billions of dollars they don’t have in hopes of speeding up their economies, too. That means the very countries we have relied on to buy our bonds, notably China and Japan, are now putting their own bonds on the global credit markets.

American Treasury bonds have been selling briskly on the global credit markets because they have been the calm in the storm of the global credit crisis. This has allowed advocates of borrow-and-spend to argue that for the United States, borrowing is uniquely cheap. But what happens when there is an excess supply of bonds on the worldwide markets? The cost of borrowing will rise. Today we fear deflation, but eventually our fears will turn to inflation.

It seems that no one in Washington is discussing what happens when the world begins this gargantuan borrowing spree. How high will interest rates rise? And more fundamentally, who will have the money to buy our bonds? It is possible that the Federal Reserve will succumb to pressure to “monetize” our debt — that is, print new money to buy our bonds. In fact, the Fed is already suggesting that it will buy long-term Treasury securities in order to lower borrowing costs. If it does, then our money supply, which has already increased substantially over the past year, will grow even faster.

As Milton Friedman noted, “Inflation is always and everywhere a monetary phenomenon.” It is a situation in which too few goods are being chased by too much money.

To American families, inflation is a destroyer of savings, a killer of wealth, a crusher of confidence. It calls into question the value of our money. And while we all share in the pain, the people whom inflation hits hardest are elderly people who live on fixed incomes, those in the middle class who are struggling to save for retirement and college and lower-income people who live paycheck to paycheck.

Combine high inflation and high unemployment and you have stagflation. Hindsight shows how the pain of the late 1970s and early 1980s could have been avoided, yet we’re now again planning to borrow and spend — and raise taxes — as President Jimmy Carter did. Soon we may again find ourselves watching a rising “misery index” of inflation and unemployment together. If that happens, individual earning power will evaporate, and our standard of living will decline.
To prevent stagflation, we should enact fiscal policy reforms that apply the lessons we learned from the 1970s. Keynesian stimuli based on borrowing and spending have not worked and will not work. One-time rebate checks do not increase the incentive to expand business operations and create jobs. But marginal cuts in tax rates do. We also must lower our job-killing corporate income tax rate, the highest in the industrialized world after Japan, and ease business worries by making it clear that there will be no tax increases in 2010.

We should also re-establish the sound dollar. For the past decade, the Federal Reserve has manipulated interest rates and vastly over-expanded the money supply — and in so doing fueled the housing bubble that precipitated our current crisis. To end uncertainty about the economy, to keep interest rates down, and to give Americans the confidence they need to take risks and ensure future growth, we should make price stability a priority, guaranteeing the value of the dollar.

Finally, we should tackle the entitlement crisis, which will be a $56 trillion liability that we have not figured out how to pay for. As members of the baby boom generation retire, and health care costs continue to spiral out of control, Social Security, Medicare and Medicaid will collapse. By reforming those programs and bringing their costs down to sustainable levels, we will show the world and the credit markets we are serious about reducing our debt. Then our credit will improve, the cost of necessary borrowing will drop, and we can stave off stagflation.

Paul D. Ryan is a Republican representative from Wisconsin.

[G M]

February 14, 2009, 8:00 a.m.

The Obamateur Hour
How long will it last?

By Mark Steyn

Few pieces of political “wisdom” are more tediously recycled than a well-retailed bon mot of British prime minister Harold Macmillan. Asked what he feared most in the months ahead, he gave an amused Edwardian response: “Events, dear boy, events.” In other words, you can plan all you want but next month, next year, some guy off the radar screen will launch a war, or there’ll be an earthquake, or something. Governments get thrown off course by “events.”

It suggests a perverse kind of genius that the 44th president did not wait for a single “event” to throw him off course. Instead he threw himself off: “Is Obama tanking already?” (Congressional Quarterly); “Has Barack Obama’s presidency already failed?” (the Financial Times). Whether or not it’s “already” failed or tanked, the monthly magazines still gazing out from their newsstands with their glossy inaugural covers of a smiling Barack and Michelle waltzing on the audacity of hope seem like musty historical artifacts from a lost age. The ship didn’t need to hit an iceberg; it stalled halfway down the slipway. This is still the phase before “events” come into play, when an incoming president has nothing to get in the way of his judgment and executive competence. President Obama chose to nominate Tim “Indispensable” Geithner and Tom “Home, James!” Daschle, men whose enthusiasm for the size of the federal budget is in inverse proportion to their urge to contribute to it. He chose to nominate as commerce secretary first the scandal-afflicted Bill Richardson and then the freakishly scandal-free Judd Gregg, and wound up losing both.

To be sure, the present state of the economy is an “event,” and has blown many governments around the world off course. But again: The hideous drooling blob of toxic pustules dignified as “stimulus” is something the incoming Obama had months to prepare for, with oodles of bipartisan goodwill and fawning press coverage to waft him along. Instead he chose to outsource it to Nancy Pelosi, Harry Reid, Barney Frank, and the rest of the congressional pork barons. So that too is not an “event” but merely, like his cabinet picks, a matter of judgment and executive competence.

Not to matter. When the going gets tough, the tough go campaigning. So, almost as if he were still running for office rather than actually running an office, the president arranges a photo-op or a town-hall meeting, where, for the moment, the hopeychangey shtick still plays. “I have an urgent need,” a freeborn citizen of the republic (I use the term loosely) beseeched the president in Fort Myers this week. “We need a home, our own kitchen, our own bathroom.”

As Michelle Malkin commented of the urgent needer: “If she had [had] more time, she probably would have remembered to ask Obama to fill up her gas tank, too.” Obama took her name — Henrietta Hughes — and ordered his staff to meet with her. Hopefully, he won’t insult her by dispatching some no-name deputy assistant associate secretary of whatever instead of flying in one of the bigtime tax-avoiding cabinet honchos to nationalize a Florida bank and convert one of its branches into a desirable family residence, with a swing set hanging where the drive-thru ATM used to be.

Still, the audience loved it. “Yes!” they yelped, and “Amen!” — and even “Gracious God, thank you so much!” In the words of Bob Hope: “Leave your name with the girl, and we may get to you for some crowd scenes.” Ah, but eventually the hosannas fade, and the community-organizer-in-chief has to return to Washington to attend to the drearier chores of being president. The “buy American” provisions in the “stimulus” will invite certain retaliation around the world, wrote Jagdish Bhagwati, the Columbia economics prof, in the New York Times. This is presumably the same Jagdish Bhagwati who reassured a Toronto audience last year that he was endorsing Obama despite the senator’s anti-NAFTA, anti-free-trade rhetoric because he didn’t think Obama really believed it. Today it’s even less clear what, if anything, Obama believes — and, even more critically, whether he has the wit or authority to impose those beliefs on a Congress whose operating procedure for the new era seems to be business as usual with three extra zeroes on the end.

Someday soon this inaugural Obamateur Hour (as one of my correspondents, John Gross, calls it) will end and the “events” phase will begin. Back last spring, some gloomy reflections of mine on multiculturalism prompted a reader to advise me to lighten up: “We’re rich enough that we can afford to be stupid.” A mere nine months later, the first part of that equation no longer seems quite so obvious. The market value of the U.S. banking sector is worth barely a quarter of what it was two years ago — from just north of $1.4 trillion in February 2007 to under $400 billion at the beginning of this month, and that due only to the “bailout.” The so-called Wall Street fat cats are, in fact, emaciated cadavers in the late stages of that feline version of HIV.


On the other hand, U.S. mortgage debt has more than quadrupled since 1990, from $2.5 trillion to over $10 trillion. On the other other hand — you may be running out of fingers by now — the IMF has increased its calculation of potential losses on U.S.-originated credit assets from $1.4 trillion last October to $2.2 trillion today, and that’s at the lowball end of estimates (others figure closer to $4 trillion). If you stick the community-organizer-in-chief in a room with Henrietta Hughes, he can play Bob Barker and tell her to “come on down!” But it’s not obvious that that technique will be quite so effective back in the Oval Office, poring over the smoldering ledgers.

2008: We’re rich enough that we can afford to be stupid.

2009: We’re not so rich so let’s be even more stupid.

The Obama narrative as packaged by the American media (another all-but-bankrupt industry, not coincidentally) is very appealing. Wouldn’t it be so much nicer if a benign paternalist sovereign could take care of all the beastly grown-up stuff like mortgages and health care, like he’s gonna do for Henrietta Hughes, while simultaneously blowing gazillions on “green” initiatives and other touchyfeely things?

America has a choice: It can reacquaint itself with socioeconomic reality, or it can buckle its mandatory seatbelt for the same decline most of the rest of the West embraced a couple of generations back. In 1897, troops from the greatest empire the world had ever seen marched down London’s mall for Queen Victoria’s diamond jubilee. Seventy years later, Britain had government health care, a government-owned car industry, massive government housing, and it was a shriveled high-unemployment socialist basket-case living off the dwindling cultural capital of its glorious past. In 1945, America emerged from the Second World War as the preeminent power on earth. Seventy years later . . .

Let’s not go there.

— Mark Steyn, a National Review columnist, is author of America Alone.

© 2009 Mark Steyn
National Review Online - http://article.nationalreview.com/?q=OTdjMzQ0MTg3MDZkMWM0YWE1MGNiOTZhZTVkN2JhZmY=

[HUSS]

Fox News is reporting that the UN is now lobbying the US for a portion of the stimulus money.  Anyone wanna bet that Obama had a provision added to the stimulus that gives the UN some cash?

[ccp]

"Let’s not go there."

Unfortunately we are.  It is all getting rammed down our throats with a complicit media.
By the time the public gets it it will probably be too late.

[ccp]

I did a search for "reparations" but no topic for this comes up so I will put here.

It is only natural for Black Americans to see this and think, "why not us".  Why don't we get in on the action?

If I recall Elie Weisel thinks this form of reparations actually cheapens the memory of the Holocaust.  To some degree I agree but not completely.  In any case BO's policies are actually reparations in a stealth mode. 

****February 17, 2009

'Jewish war victims have had enough compensation' French court saysCharles Bremner in Paris
The French State was responsible for deporting Jews during the Second World War, the top judicial authority ruled for the first time yesterday, but it dismayed families of victims by declaring that they had already been compensated.

The decision by the Council of State, the final arbiter on civil law matters, made formal a doctrine that has been accepted by successive governments since 1995.

It was advising on a case brought by Madeleine Hoffman-Glemane, 75, one of hundreds of victims who have sued recently for damages over their arrests and deportation during the Nazi occupation from 1940 to 1944.

The council called for a “solemn recognition of the responsibility of the State”. France was “responsible for damages caused by actions which did not result from the occupiers' direct orders but facilitated deportation from France of people who were victims of anti-Semitic persecution”, it said.

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The ruling endorses a view that was proclaimed by the former President Jacques Chirac when he took office in 1995. Before that the crimes of the collaborationist Vichy Government had been acknowledged but they had been ascribed widely to an outlaw regime and not to the French State.

The late President Mitterrand who left office in 1995 and who served as an official of the Vichy regime, refused to accept the responsibility of the nation for more than 75,000 people who were taken to Nazi death camps. Most were arrested by French police on the orders of state officials and few survived.

Since taking office in 2007 President Sarkozy, whose mother is Jewish, has ordered acts of remembrance of the French role in the Holocaust but during his election campaign he said that France should stop apologising for itself because it had never been involved in a policy of genocide.

To the anger of campaigners the council advised the court dealing with Ms Hoffman-Glemane's case that deportees had already received enough compensation. “The different measures taken since the end of the Second World War have made reparation as much as possible,” it said.

The Paris court had sought the opinion of the council on the request of Ms Hoffman-Glemane, whose mother died at Auschwitz, for material and moral damages for the suffering of her and her father. She is suing the state and the SNCF, the national railways, for 200,000 euros (£180,000) for Joseph Kaplon, her father, and 80,000 euros for herself. Anne-Laure Archambault, the lawyer for Ms Hoffman-Glemane, said that she would appeal to the European Court of Human Rights.

Avi Bitton, another lawyer who represents 600 deportees and plaintiffs, said: “We are simply asking to be treated like any other citizen who is a victim of asbestos poisoning or a road accident. When you suffer damage, you should be able to seek recourse.”

For more than a decade Holocaust survivors and their families have been waging legal battles in French and US courts. In 2007, however, an appeal court reversed a Bordeaux court conviction against the railways for holding and robbing two Jews. The court ruled that the SNCF was not an arm of the State.

A New York Federal Court judge also ruled in December that France was shielded as a sovereign state from action in US courts over its wartime conduct. Since then Senator Charles Schumer of New York has tabled a Bill in Congress to exempt the SNCF from the sovereign immunity.****

[HUSS]

A detailed list of the "stimulus" hahahahaha.  Good luck.
http://www.propublica.org/special/the-stimulus-plan-a-detailed-list-of-spending

[G M]

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/16/AR2009021601180_pf.html

Late Change in Course Hobbled Rollout of Geithner's Bank Plan
By Neil Irwin and Binyamin Appelbaum
Washington Post Staff Writers
Tuesday, February 17, 2009; D01

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.

Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were.

The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis.

Meanwhile, the sources said, Obama's senior economic advisers were hobbled in crafting the plan by a shortage of personnel. To date, the president has not nominated any assistant secretaries or undersecretaries at the Treasury, and the handful of mid-level staffers who have started work were still finding their offices and getting their building passes and BlackBerrys.

Moreover, the department made a strategic decision to limit input from the financial industry and other outsiders, aiming to prevent leaks and avoid a perception they were designing the plan for the benefit of big banks. But that also meant they were unable to vet their plan with the companies involved or set realistic expectations of what would be announced.

Though Geithner had been in his job for only two weeks, he had been thinking about the problem of troubled assets since the credit crisis erupted 19 months earlier, first as president of the Federal Reserve Bank of New York and then, since November, as Barack Obama's pick to head the Treasury.

His predecessor atop Treasury, Henry M. Paulson Jr., had drawn political fire after he unveiled the Bush administration's $700 billion bailout program in September, facing accusations that the money had been spent erratically.

Geithner, while still at the New York Fed, had been deeply involved in the discussions over crafting Paulson's program. The effort may have arrested a potentially devastating financial panic, but he sought to improve on its implementation by developing a more systemic plan for using billions of dollars, sources said.

Quickly, discussions got underway. Geithner set a Feb. 9 date to release a plan, creating an artificial deadline meant to focus internal debate and prevent an overly

prolonged period of what might come across publicly as indecisiveness.

At the center of the deliberations with Geithner were Lawrence H. Summers, chief White House economic adviser; Lee Sachs, a Clinton administration official likely to be named undersecretary for domestic finance; and Gene Sperling, another former Clinton aide. The debates among them were long and vigorous as they thrashed countless proposals and variations. Sometimes, Fed Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila C. Bair and Comptroller of the Currency John C. Dugan joined in.

The team concluded that the financial rescue effort would have to include several components. None would be more vital than an initiative for either removing or neutralizing the distressed assets on the banks of books -- many related to troubled mortgages -- so the banks would be freed to resume lending.

Senior economic officials had several approaches in mind, according to officials involved in the discussions. One would be to create an "aggregator bank," or bad bank, that would take government capital and use it to buy up the risky assets on banks' books. Another approach would be to offer banks a government guarantee against extreme losses on their assets, an approach already used to bolster Citigroup and Bank of America.

As the first week of February progressed, however, the problems with both approaches were becoming clearer to Geithner, said people involved in the talks. For one thing, the government would likely have to put trillions of dollars in taxpayer money at risk, a sum so huge it would anger members of Congress. Officials were also concerned that the program would be criticized as a pure giveaway to bank shareholders. And, finally, there continued to be the problem that had bedeviled the Bush administration's efforts to tackle toxic assets: There was little reason to believe government officials would be able to price these assets in a way that gave taxpayers a good deal.

By Wednesday, Feb. 4, Geithner was leaning toward a different approach that his former colleagues at the Federal Reserve had developed months earlier, the source said. This involved a joint public-private fund to buy up the assets. Private investors, likely hedge funds and private-equity funds, would put up capital, and the government would loan money to the fund. If the private investors made wise decisions about which assets they bought, they would be able to pay back the government and make money for themselves.

For the policymakers, the chief appeal of the public-private partnership is that it solves the problem of how to price assets. The private money managers who provide capital for the fund would decide which assets to buy, and at what price, taking government bureaucrats out of that difficult task.

Moreover, the private contribution lowers the total amount of money the government would need to put at risk. Also, the government would require private investors to incur any losses before the government does, reducing taxpayers' exposure to potential losses (but also potentially depriving them of any windfall profits).

But there were multiple complications: How much government financing would be needed? What other incentives would be needed to get private firms on board? Where would the government get the money? What assets would the fund buy? Would the government have a say in which banks they're bought from? Might there be more than one fund?

The clock was ticking. But Geithner wasn't ready to share his thoughts with senior government officials outside his narrow circle. He and his team worked on the plan through the weekend, with some of his staff working until 4 a.m. The team grew to about 20 officials, including lawyers, finance experts and public affairs staff.

One key element of the Treasury's new plan was to conduct "stress tests" of the 20 or so largest banks, figuring out what would happen to them if the economy worsens significantly more than most analysts forecast.

The information gathered from that process could help shape the public-private fund, said an administration source. But many in the banking industry are unclear what information the government could access beyond that already available to bank regulators or to Geithner himself, who until recently had been the chief regulator of the country's largest banks as the head of the New York Fed.

On Saturday, Feb. 7, the officials won a slight reprieve when the White House asked that Geithner's speech be postponed from Monday to Tuesday to allow Congress to focus a little longer on the on the massive economic stimulus package still pending.

But there still was not enough time to sculpt the detailed plan that the financial markets expected. In the end, Geithner and his colleagues decided that it would be better to take flak for being vague than publicly offer half-formed details that might later have to be revised. And ambiguity, the officials concluded, would make the plan an easier sell on Capitol Hill, as congressional leaders could be brought into the discussions of details rather than be presented a detailed plan as fait accompli.

Staff writers Lori Montgomery and David Cho contributed to this report.

[Crafty_Dog]

WSJ

The world has gone from the greatest synchronized global economic boom in history to the first synchronized global bust since the Great Depression. How we got here is not a cautionary tale of free markets gone wild. Rather, it's the story of what can happen when governments ignore market signals and central bankers believe in endless booms.

Following the March 2000 Nasdaq bust, the Federal Reserve began to slash the fed-funds rate from 6.5% in January 2001 to 1.75% by year-end and then to 1% in 2003. (This despite the fact that officially the U.S. economy had begun to recover in November 2001). Almost three years into the economic expansion, the Fed began to increase the fed-funds rate in baby steps beginning June 2004 from 1% to 5.25% in August 2006.

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But because interest rates during this time continuously lagged behind nominal GDP growth as well as cost of living increases, the Fed never truly implemented tight monetary policies. Indeed, total credit increased in the U.S. from an annual growth rate of 7% in the June 2004 quarter to over 16% in early 2007. It grew five-times faster than nominal GDP between 2001 and 2007.

The complete mispricing of money, combined with a cornucopia of financial innovations, led to the housing boom and allowed buyers to purchase homes with no down payments and homeowners to refinance their existing mortgages. A consumption boom followed, which was not accompanied by equal industrial production and capital spending increases. Consequently the U.S. trade and current-account deficit expanded -- the latter from 2% of GDP in 1998 to 7% in 2006, thus feeding the world with approximately $800 billion in excess liquidity that year.

When American consumption began to boom on the back of the housing bubble, the explosion of imports into the U.S. were largely provided by China and other Asian countries. Rising exports from China led to that country's strong domestic industrial production, income and consumption gains, as well as very high capital spending as capacities needed to be expanded in order to meet the export demand. An economic boom in China drove the demand for oil and other commodities up. Rapidly accumulating wealth allowed the resource producers in the Middle East, Latin America and elsewhere to go on a shopping binge for luxury goods and capital goods from Europe and Japan.

As a consequence of this expansionary cycle, the world experienced between 2001 and 2007 the greatest synchronized economic boom in the history of capitalism. Past booms -- of the 19th century under colonial economies, or after World War II when 40% of the world's population remained under communism, socialism, or was otherwise isolated -- were not nearly as global as this one.

Another unique feature of this synchronized boom was that nearly all asset prices skyrocketed around the world -- real estate, equities, commodities, art, even bonds. Meanwhile, the Fed continued to claim that it was impossible to identify any asset bubbles.

The cracks first appeared in the U.S. in 2006, when home prices became unaffordable and began to decline. The overleveraged housing sector brought about the first failures in the subprime market.

Sadly, the entire U.S. financial system, for which the Fed is largely responsible, turned out to be terribly overleveraged and badly in need of capital infusions. Investors grew apprehensive and risk averse, while financial institutions tightened lending standards. In other words, while the Fed cut the fed-funds rate to zero after September 2007, it had no impact -- except temporarily on oil, which soared between September 2007 and July 2008 from $75 per barrel to $150 (another Fed induced bubble) -- because the private sector tightened monetary conditions.

In 2008, a collapse in all asset prices led to lower U.S. consumption, which caused plunging exports, lower industrial production, and less capital spending in China. This led to a collapse in commodity prices and in the demand for luxury goods and capital goods from Europe and Japan. The virtuous up-cycle turned into a vicious down-cycle with an intensity not witnessed since before World War II.

Sadly, government policy responses -- not only in the U.S. -- are plainly wrong. It is not that the free market failed. The mistake was constant interventions in the free market by the Fed and the U.S. Treasury that addressed symptoms and postponed problems instead of solving them.

The bad policy started with the bailout of Mexico following the Tequila crisis in 1994. This prolonged the Asian bubble of the 1990s, because investors became convinced there was no risk in growing current-account deficits and continued to finance Asia's emerging economies until the bubble burst with the start of the Asian crisis in 1997-98.

Then came the ill-advised bailout of Long-Term Capital Management in 1998, which encouraged the financial sector to leverage up even more. This was followed by the ultra-expansionary monetary polices following the Nasdaq bubble in 2000, which led to rapid and unsustainable credit growth.

So what now? Unfortunately, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner were, as Fed officials, among the chief architects of easy money and are therefore largely responsible for the credit bubble that got us here. Worse, their commitment to meddling in markets has only intensified with the adoption of near-zero interest rates and massive bank bailouts.

The best policy response would be to do nothing and let the free market correct the excesses brought about by unforgivable policy errors. Further interventions through ill-conceived bailouts and bulging fiscal deficits are bound to prolong the agony and lead to another slump -- possibly an inflationary depression with dire social consequences.

Mr. Faber is managing director of Marc Faber Ltd. and editor of "The Gloom, Boom & Doom Report."

http://www.youtube.com/watch?v=dEDIyztZGBA

[Body-by-Guinness]

A succinct survey of Austrian perception of BHO's bailout.

Bailout Blues
by Mark Nugent | February 18, 2009

Barack Obama entered office backed by solid public support, the euphoria of his supporters, and even the heartfelt good wishes of many conservatives. But the economic catastrophe his administration faces may turn out to be more than even the putative savior of the world economy can handle: a deepening recession, mounting unemployment, an ongoing bank crisis, and the wipeout of trillions of dollars of stock market and real estate wealth.

The administration’s response is, to be sure, commensurate with these apocalyptic times. Obama has just successfully shepherded through Congress a gargantuan, $787 billion stimulus package of spending and tax cuts, in addition to the ongoing $700 billion bank bailout passed under Bush. The administration is even set to widen the scope of the bailout by putting more pressure on banks to lend and directing funds towards preventing home foreclosures. But banks remain reluctant to extend new credit despite the access to bailout funds and the Federal Reserve’s massive injections of funds into the system. Significant additional bailout money is likely, and the nationalization of banks is emerging as a real possibility. Meanwhile, the media frets that the stimulus package might even contain too little spending. Note that this is being said of a plan for which descriptors like “largest ever” don’t seem to capture the enormity of it all. How did we get to this point?

We are told that capitalism is inherently unstable, that its inevitable crises must be met with interventionist countermeasures, and that new regulation will prevent future shocks. Many also blame greedy financiers, who irresponsibly concocted exotic derivatives that no one fully understood, and which were traded in ill- or un-regulated markets. The emerging anti-market consensus was crystallized last year by Slate’s Jacob Weisberg, who has proclaimed libertarianism to be discredited by the financial meltdown, now and forever.

In short, a consensus has emerged that the crisis was caused by an excess of capitalism, abetted by bubble-era irrationality, from which only vigorous government action can save us: public works spending, aggressive monetary stimulus, a willingness to bail out distressed industries, re-regulation, and goodness knows what else.

Where is the response of the supposedly free-market side of the ideological divide? David Brooks bemoans the irrationality of markets and pegs blame for the financial mess on a cascade of psychological factors, which cannot possibly be grasped using tools of “classical economics.” In another column, he embraces stimulus as a solution while criticizing the Obama plan’s unfocused character. National Review, meanwhile, expresses skepticism at the effectiveness of any stimulus, but has hardly taken a consistently hard line against government intervention. In fact, in one blog post, Rich Lowry criticized congressional Republicans who opposed the massive TARP bailout as “extremely irresponsible.” Are there any voices left who can raise a compelling defense of free-market capitalism?

Enter the dogmatically free-market Austrian school of economics, and the Austrian theory of the business cycle, which holds real explanatory power over the current mess and convincingly places blame for financial panics and recessions firmly at the feet of government intervention.

According to the Austrians’ theory (despite their name, which dates back to the early twentieth century, today’s “Austrians” are mostly found in the United States), boom-and-bust cycles are, at root, not the consequence of rampaging greed, psychological mania, or insufficient regulation, but are the inevitable consequence of an excess of bank credit, which is the result of Federal Reserve policy.

The primary means of Fed expansion of the money supply is through buying government bonds on the open market. When it buys these bonds, the Fed pays for them by adding credit under its member banks’ accounts. These credits are created out of thin air; they are newly created money. It is through these “open market operations” that the Fed controls interest rates. Member banks, in turn, are only required by law to keep a small fraction of their deposits in reserve, and are free to lend out the rest, which multiplies the effects of the Fed’s purchases.

Interest rates are critical signals that tell businesses how much saving is available for investment in capital projects. When savings rates are low, the resulting high interest rates signal consumers’ preference for present over future consumption. Conversely, when savings rates are high, the resulting low interest rates show a preference of future consumption and a pool of savings available for investment. The low rates might then prompt business to invest in new projects, such as a new factory, subdivision, or online pet supply store. This is how the price of credit is set by the free market, resulting in the “natural” interest rate.

But when the Fed creates artificially cheap credit, businesses are misled into believing that riskier projects with more distant prospects of paying off will be profitable. A cluster of such projects will lead to a classic boom period, such as the dot-com bubble of the late 1990s. Cheap credit also leads to asset bubbles, such as the dot-com era stock market and the housing market in latter years. The distortions in the economy are exacerbated when consumers, believing themselves to be wealthier than they really are, decrease their savings and increase consumption.

Of course, there are also psychological aspects of the bubble economy that feed into the general irrationality, but this is more accurately seen as a follow-on effect of easy-money policies rather than as the cause of the bubbles.

The Fed can keep feeding the boom with continued low rates, but this only creates further mal-investments, and will deepen the inevitable crash when the irrationality of the boom-era projects becomes evident. When the party ends, bank credit contracts, unprofitable projects are liquidated, and economic resources shift to productive uses. Recessions, then, are a painful but necessary stage in the economy’s return to health.

The loose credit policies of the Greenspan years have lead to consequences that fit in well with the Austrian view. During Alan Greenspan’s reign as chairman of the Fed, he maintained a loose monetary policy punctuated with generous injections of extra cash in times of crisis, such as the Asian financial crisis of 1997 and the collapse of the hedge fund Long Term Capital Management. This easy credit fed into the excesses of the dot-com era, which lead directly to a stock market crash and recession in 2001.

Federal Reserve policy was also instrumental in inflating the housing bubble and creating the current recession. As the economist Mark Thornton points out, Alan Greenspan pushed interest rates down to unprecedented levels in the wake of the 9/11 attacks, which resulted in historically low mortgage rates. The fallout of the dot-com collapse led to massive losses, but the recession was mild, as the Fed’s easy money pumped up a real estate bubble just as the NASDAQ bubble unwound. The low rates led to increased borrowing for homes on a massive scale. House prices soared, but when reality eventually reasserted itself, they fell sharply, a process which culminated in last fall’s financial crisis.

Freddie Mac and Fannie Mae, which bought mortgages and resold them as securities under an implicit government guarantee, certainly abetted the housing bubble, as did the Community Reinvestment Act, which pressured banks into increased lending to disadvantaged groups at the cost of loosened lending standards. Perhaps these mechanisms helped to funnel cheap credit into the housing sector which would otherwise have created mal-investment elsewhere in the economy. But blame for the industry-wide decline in lending standards cannot be placed solely with the CRA: Lax credit standards are virtually inevitable when a massive amount of cheap money is looking for something to do.

Bolstering the Austrians’ credibility is the fact that Austrian school economists such as Mark Thornton, Frank Shostak, and Christopher Meyer warned of the housing bubble relatively early on in the process (in 2003-04). Likewise, Ludwig von Mises, the originator of Austrian business cycle theory, and his student F. A. Hayek warned of a coming depression during the boom years of the 1920s. Unfortunately, the parallels between the Great Depression and today’s troubles do not end there.

The Great Depression is often trotted out as an example of the failure of unfettered markets and the need for governmental regulation of the economy, and the same argument is being rehashed regarding today’s crisis. But like our housing bubble, the boom years of the 1920s were fueled with inflationary monetary policy. And just as in the 1920s, the current downturn is being exacerbated by misguided policy designed to alleviate the crisis.

The severity of recessions is determined by the heights reached in the boom period, but in the absence of government intervention, the adjustment process is relatively quick, and the economy can soon return to growth. As the economist Murray Rothbard taught, a serious recession in 1920–21 was met with a generally laissez-faire government response, the economy quickly returned to health, and it is now a historical footnote. The same can be said of the various panics and depressions of the 19th century.

But after the inflation-fueled boom of the 1920s, Herbert Hoover’s response to the 1929 stock market crash was aggressively interventionist from the start, as is documented exhaustively in Rothbard’s book America’s Great Depression. Hoover has been painted by historians as sitting impotently on the sidelines amid the deepening crisis, but in fact, the exact opposite is true: He had an expansive understanding of the role of government during a crisis, and he quickly set about to take aggressive action to rescue the economy.

What he actually did, though, was to take measures that seem expressly designed to thwart recovery by interfering with the economy’s ability to reallocate its resources to serve productive ends. Moreover, some of Hoover’s interventions in the wake of the 1929 crash show ominous parallels with policies being enacted to deal with the current crisis. Hoover initiated a program that kept failing businesses, including banks, afloat through emergency loans. Sickly banks on life support were pressured to expand lending despite a shortage of savings and viable projects. Measures were taken to save mortgaged property from foreclosure. Massive public works projects such as the Hoover Dam were initiated while large companies were pressured to retain staff at above-market wages. Such employment-boosting measures only served to divert capital and labor that could have been used productively by private industry into wealth-destroying make-work projects. Repeated bailouts of industry, moreover, forestalled the market’s correction process by propping up failed companies, rewarding poor decision-making, and keeping additional resources tied up unproductively.

Such measures were expanded upon by Franklin D. Roosevelt’s New Deal, and the depression predictably ground on. Like Obama, and despite the vaunted “brain trust” of policy intellectuals serving in his administration, Roosevelt entered office without any coherent economic philosophy, and experimentally created a hodgepodge of interventions in an effort to gain some kind of traction on the economy.

In recent years academics have come to acknowledge the ineffectiveness of New Deal programs, but have largely failed to come to terms with the New Deal’s role in extending and deepening the downturn. Saying that government intervention was ineffective in bringing the economy out of the Depression is like saying that despite repeated blows to the head, the patient failed to regain consciousness: It’s true enough, but evades the problem of causality.

Can we expect to see repeats of Roosevelt’s more nonsensically counterproductive measures, such as the slaughter of 6 million pigs and the plowing under of 10 million acres of crops amid widespread hunger, undertaken as an attempt to support agricultural prices? We can indeed, if a proposal of a Wall Street Journal editorialist for the government to bulldoze “surplus” homes is heeded. Expect renewed calls for the mindless destruction of wealth as the economy continues to sink.

In his inaugural speech, Barack Obama proclaimed that government should be judged by “whether it works.” Just so, and we should take this advice as we consider the likely effects of the stimulus bill and continuing bank bailouts. During the 1930s, Franklin Roosevelt, who enjoyed high popularity despite his dragging the nation through endless and miserable depression, somehow managed to escape being held to such a standard. Will today’s conservatives be able to hold our president accountable?

The tools to rescue the economy from recession are contained within the economy’s own self-corrective mechanisms, if only those in government could muster the discipline to refrain from intervening. Can conservatives articulate the case for an end to bailouts, destructive “stimulus” spending, counterproductive meddling, and the Fed’s incessant monetary pumping?

With Barack Obama’s soaring popularity, his solid Democratic majorities in Congress, and an atmosphere of crisis the passage of some sort of stimulus plan was probably inevitable. But the solid framework for understanding the economic crisis provided by the Austrian theory of the business cycle would provide a vastly improved intellectual grounding for a principled opposition than the inchoate, confused, and inconsistent defense of the free market we get from Republicans in the media and Congress.

Austrian economics, despite its focus on the free market as the only way to a stable and prosperous economy, enjoys scant popularity among establishment Republicans and movement conservatives. Part of the reason for this, perhaps, is its association with some antiwar “paleocons” and the insurgent presidential candidacy of Ron Paul. Moreover, spending, inflation and bailouts will always tempt those with access to the levers of power, regardless of party. But conservatives would be wise to resist the impulse towards intellectual tribalism and relearn the lessons of the Austrian school. With the tenets of true free-market economics, the causes of the economic crisis are brought into focus, as is the path to recovery.

-Mark Nugent is an attorney and Web designer living in Arlington, Virginia. He blogs at spinline.net/blog.

http://americasfuture.org/doublethink/2009/02/18/bailout-blues/

[G M]

http://hotair.com/archives/2009/02/19/smelling-a-rat/


GM:  GREAT find.  I've moved it to the Electoral Fraud and Corruption thread.

[G M]

http://campaignspot.nationalreview.com/post/?q=NTZlODFjYTM0Mzg5ZjNiN2I2Y2YyMDcwZmUwN2JiN2U=

Friday, February 20, 2009

BARACK OBAMA
The Obama Markets
On Election Day 2008, the Dow Jones Industrial Average closed at 9,625.

On Inauguration Day 2009, the DJIA closed at 7,949.09.

Today the Dow is at 7,342, down 124 points on the day, and down 600 points in the month since Obama became president. (By the time you read this, it will have changed, of course.)

Many factors affect stock prices on any given day, but to the extent that the market has responded to Obama's election and taking office, it has been in one steady direction: down.

Doesn't the message seem clear? With massive government borrowing, with higher taxes seen as inevitable, with the government taking from those who did pay their mortgages to bail out those who didn't, with details of much-touted financial rescues still sparse, with demonization of American businesses . . . who in their right mind would want to invest in a company right now? Why buy stock in companies that are going to be punished six ways to Sunday by an ever-growing government?

(Okay, those want to buy low and sell high would be buying now. But overall, investors are saying they see the nation's economic conditions as getting worse, with not much improvement in sight: shrinking or disappearing profits and dividends, continued drops in stock prices, and a bigger tax bite when you do make money. Why bother, then?)

02/20 12:44 PM

[HUSS]

Up until a couple weeks ago i thought things would begin to pick up.  Im starting to have my doubts. Up until last week aerospace/defense manufacturing was still humming along.

IATA chief sees huge drop in plane deliveries for 2009
Both Boeing and rival Airbus could deliver fewer than half the planes they are scheduled to produce this year as a global credit crunch makes it impossible for customers to secure billions of dollars in needed financing. Giovanni Bisignani, CEO of the International Air Transport Association, made the grim assessment on Thursday, saying it was based on his private conversations with airline CEOs. As if to confirm Bisignani's outlook, Airbus announced Thursday it would trim production of its narrow-body A320 by two planes per month, beginning in October. FlightGlobal.com/Air Transport Intelligence (2/20) , The Wall Street Journal (subscription required) (2/20)


I used to make fun of a friend for reading this guys blog, i almost ran out of tinfoil pictures.


http://www.chrismartenson.com/blog/daily-digest-feb-21/13675

Daily Digest - Feb 21Saturday, February 21, 2009, 9:57 am, by Davos

• Volcker "Mother of all Financial Crisis"
  
• Crisis of "Credit"
  
  • Breaking a Barrier to Lending (Proposed Solution to Shadow Banking)
    
  • Soros, No Bottom, More Severe Than During the Great Depression
    
    • Economic collapse severity intensifying
      
    • Get Ready for Mass Retail Closings
      
      • Gone in 60 Days: Citi and Bank of America Won't Live to See May
        
      • Trade Surplus
        
        • Hypo Real Estate: 600 billion in off-balance sheet assets
          
        • Economic Trends in U.S. Health Care

[HUSS]

Swiss party wants to punish U.S. for UBS probe
Sat Feb 21, 2009 9:53am EST
Reuters

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSTHO15017420090221




ZURICH, Feb 21 (Reuters) - The right-wing Swiss People's Party (SVP) called on Saturday for retaliation against the United States over a U.S. tax probe into the country's biggest bank UBS that threatens prized banking secrecy.

The populist SVP, the country's biggest party, said Switzerland should not take in any detainees from the U.S. prison for terrorism suspects at Guantanamo Bay in Cuba, which the Swiss government said last month it could consider to help shut the camp down.

Switzerland should also reconsider its policy of representing the United States in countries where it has no diplomatic presence, the parliamentary SVP said in a statement.

The SVP said gold stored by the Swiss National Bank in the United States should be repatriated and Switzerland should ban the sale of U.S. funds in the country to protect Swiss investors after the failure of U.S. regulators.

The SVP has one minister in the seven-member Swiss government which is made up of the biggest four parties, but its populist policies have shaken up usually consensual Swiss politics.

The comments came after UBS agreed on Wednesday to pay a fine of $780 million and to disclose about 250 names of U.S. clients it said had committed tax fraud to settle U.S. criminal charges that it had helped rich Americans dodge taxes.

U.S. tax authorities said on Thursday they were still pursuing a civil case against UBS seeking access to thousands more names of U.S. citizens it says are hiding about $14.8 billion in assets in secret Swiss bank accounts. [ID:nN19534438]

The SVP also said it would call for an urgent debate in parliament on ways to protect Swiss banking secrecy from "further foreign blackmail". (Reporting by Emma Thomasson)

[HUSS]

The New International Barter System by courtesy of the Russia and China.

http://www.financialsense.com/fsu/editorials/willie/2009/0219.html



Putin: Post-US World Blueprint
by Jim Willie, CB. Editor, Hat Trick Letter | February 19, 2009
Print
PROLOGUE & AFTERMATH

The World Economic Forum took place in Davos Switzerland last week. The global picture enabled a nice snapshot of sentiment, fault for the crisis, blame doled out, the vacuum of leadership, the perks for blunderers in a country club setting (instead of prison), and warnings on a potential situation that could spiral out of control. Amidst all the finger pointing, surprisingly little blame was given to themselves, the corporate chieftains in attendance. Let’s be clear! The Davos Forum was a funeral wake, and Putin rode in on a white horse to announce there is a new sheriff in town!! Davos afforded a unique opportunity for Russian self-styled leader Vladimir Putin to storm the forum stage and to steal the show. Putin presented a basic Blueprint for what should be called ‘The Post-US World’ as the United States and United Kingdom have lost the mantle of leadership and control. They lost it from failed economic policy, wrecked banking systems, fraud-ridden bond markets, corrupted debt ratings agencies, abuse of IMF & World Bank, and the severe backfire of economies that depended upon housing bubbles. Inflation turned on its haughty financial engineers! Nations with insolvent banks, insolvent households, corporations in liquidation, economies in near collapse, they tend not to be good owners and custodians of the global reserve currency!!!

Davos provided a flashpoint for a profound change in global leadership. The whimpering US-UK-EU bankers have been shamed. Then after the finger pointing, insults, hand wringing, and gut wrenching, Putin rode in on a white horse carrying a banner. Chinese Premier Wen Jiabao provided the confirmation to what Putin laid out, like a second of a formal motion. Wen Jiabao proceeded from the Davos stage to four European capitals to seal the new path and its legitimacy. The barter system has been launched in quiet, while the Western press continues not to comprehend a ruptured status quo limping along. It cannot; it will not; the transition is on. Not only will the USDollar not provide the global highway for all to travel, but new barter systems will be dominant soon in working around the commodity price systems dominated by the US-UK corrupt price discovery systems. The other painful consequence to the new system soon taking root is that the global commodity supply routes will bypass the US destinations, enough to create mammoth shortages. Such is the fate of a nation thrust to the Third World. Its people and its leaders still do not realize it, as denial is ensconced in hope. The US credit supply has already been severed and cut almost completely off. Reliance upon the printing press to finance its own debts is a primary trait of a Third World nation, a shocking fact soon to be recognized.

Since the autumn, the regular macro-economic reports and gold & currency reports have been accompanied by frequent reports on the crisis for unique coverage. The Crisis Update this month also covers Obama’s Opening Opus, not at all a promising start. He has surrounded himself with yet more Elite insiders who are in part responsible for the current failure and who are likely to continue the welfare raids for the Elite. The Crisis Update also covers many aspects of the Martial Law Threat. Those who think ‘Never in America’ need to catch up with what is happening, preparations being made, anecdotes from the field, hints of revolt from the states, and the dire straights that states find themselves, like in California. The martial law threat comes from economic disintegration more than anything else.
HOSPICE FOR US$, LAUNCH FOR GOLD

The USDollar is essentially dead, the Davos Forum its funeral wake. It is enjoying a physical erection in the medical morgue, a rise in a death dance ceremony. US leaders refuse to accept the reality. They desperately need its continuation for assistance in funding the USGovt monstrous deficits. Western leaders struggle to admit the reality. Russian leaders, Chinese leaders, and Arab leaders (more quietly) openly admit the reality. Read the billboards, as the Davos Forum offered an entire row of them to observe. THE BEST STRESS METER IS NOW GOLD. Notice how gold rose all through the Davos Forum gathering. Nothing was solved. The Putin Blueprint for the ‘Post-US World’ shook up the currency markets, as gold reacted. The gold price is breaking out in all major currencies, except in USDollar terms. It just hit a new euro high.

A cherished contact with deep global experience had some very strong words about Davos and the Putin Blueprint. He made additional comments about the Wen trip across major European capitals. In an important message, he said, “Read in between the lines of Putin’s speech and you find all the hints you want. The Chinese and Russians are burying the US alive. The Japanese, Germans, and Gulf States keep a very low profile for the moment. The decisions have been made: wait for 2010. They will use the unfolding chaos to introduce the new currency basket and trade rules… There is a brand new system being designed that will borrow from the past and apply 21st century tools for barter / counter trade / excess capacity etc. An Exchange Platform will cut out the banks altogether… [Chinese Premier] Wen delivered his speech in Davos and went straight to Berlin where they put the final touch on the new world currency basket, sponsored by Berlin-Moscow-Beijing-Tokyo-Riyadh. Moscow and Berlin already have a massive counter trade / barter trade agreement in place, and Beijing was eager to joint that platform as well.” The new global currencies are planned for launch in January 2010. They will be launched amidst growing chaos. Events up to that time will be tumultuous.

The gold price has completed an important U-shaped reversal. Its low of 710 and top at 980 indicate a target of 1250 next. Notice the crossovers of the crucial moving average series. Both the 50-day MA and 100-day MA have run above the 200-day MA, very bullish. Technical chart traders use them to direct traffic flow. The cyclicals are aligned with strength. The fundamentals could not be better for gold than at any time in a few decades. All major governments are ruining their currencies in a desperate attempt to avoid economic collapse after bank system insolvency has rendered their nations hostage to dangerous accommodative monetary policies. All major currencies are now at risk simultaneously. The gold price breakout over 1000 again could come when the Dow Jones Industrial Index and the S&P500 index each breach critical support. They have been dancing at that support for days. The USEconomic field has become a swamp, and it is sinking. It should sink the US stock market.

The USDollar should not be the true focus of attention. Paradoxically, as it dies a horrible death, its reserve currency status ensures it might be last to crumble. All other currencies are at risk, except perhaps the Japanese yen. The focus of attention should be directed to gold & silver. The pundits, anchors, and supposed experts believe that the rise in the gold price means that price inflation is an imminent but hidden threat. THEY ARE SO WRONG. The threat is of a collapsed global financial foundation, complete with rising chaos from no current viable alternative, as the Untied States finds itself tossed into a dungeon. The process is slow, but the pace is accelerating. The signpost in the dungeon is marked ‘Third World’ with full shame. The charges will go without trial, as the marketplace is brutal. But bank ruin, institutional corruption, exported bond fraud, permission of counterfeit rings, protection of crime syndicates, and abused global reserve currency custodial responsibility lie at the core. Most scrutiny of charges will be conducted much later, when too late, in an examination of the wreckage.

[Crafty_Dog]

--------------------------------------------------------------------------------

http://www.ibdeditorials.com/IBDArticles.aspx?id=320027936229029

Is It Any Wonder The Market Continues To Sink?

By INVESTOR'S BUSINESS DAILY | Posted Friday, February 20, 2009 4:20 PM PT
Last Oct. 13, in trying to explain why the market had sold off 30% in six weeks, we acknowledged that the freeze-up of the financial system was a big concern. But we cited three other factors as well:

*The imminent election of "the most anti-capitalist politician ever nominated by a major party."

• The possibility of "a filibuster-proof Congress led by politicians who are almost as liberal."

• A "media establishment dedicated to the implementation of a liberal agenda, and the smothering of dissent wherever it arises."
No wonder, we said then, that panic had set in.

Today, as the market continues to sell off and we plumb 12-year lows, we wish we had a different explanation. But it still looks, as we said four months ago, "like the U.S., which built the mightiest, most prosperous economy the world has ever known, is about to turn its back on the free-enterprise system that made it all possible."

How else would you explain all that's happened in a few short weeks? How else would you expect the stock market, where millions cast daily votes and which is still the best indicator of what the future holds, to act when:
• Newsweek, a prominent national newsweekly, blares from its cover "We Are All Socialists Now," without a hint of recognition that socialism in its various forms has been repudiated by history — as communism's collapse in the USSR, Eastern Europe and China attest.

Even so, a $787 billion "stimulus," along with a $700 billion bank bailout, $75 billion to refinance bad mortgages, $50 billion for the automakers, and as much as $2 trillion in loans from the Fed and the Treasury are hardly confidence-builders for our free-enterprise system.

• Talk of "nationalizing" U.S.' troubled major banks comes not just from tarnished Democratic Sen. Chris Dodd, chairman of the Senate Finance Committee, but also from Republicans like Sen. Lindsey Graham of South Carolina and former Fed chief Alan Greenspan.

To be sure, bank shares have plunged along with home prices, and many have inadequate capital. But is nationalization really the only solution for an industry whose main product — loans to consumers and businesses — has expanded by over 5% annually so far this year?

• A stimulus bill laden with huge amounts of spending on pork and special interests is the best our Congress can come up with to get the economy back on track. Economists broadly agree that the legislation has little stimulative power, and in fact will be a drag on economic growth for years to come.

The failure to include any meaningful tax cuts for either individuals or small businesses, the true stimulators of job growth, while throwing hundreds of billions of dollars at profligate state governments and programs — such as $4.2 billion for "neighborhood stabilization activities" and $740 million to help viewers switch from analog to digital TV— has investors shaking their heads.

• A $75 billion bailout for 9 million Americans who face foreclosure, regardless of how they got into financial trouble, is the government's answer to the housing crunch. Many Americans who have scrupulously kept up with payments are steaming at the thought of subsidizing those who've been profligate or irresponsible.

With recent data showing that as much as 55% of those who get foreclosure aid end up defaulting anyway, a signal has been sent that America has gone from being "Land of the Free" to "Bailout Nation."

• Energy solutions ranging from the expansion of offshore drilling and the development of Alaska's bountiful arctic oil reserves to developing shale oil in America's Big Sky country, tar-sands crude in Canada and coal that provides half the nation's electric power, are taken off the table.

The market knows full well what drives the economy and that restraining energy supply will make us all poorer and investing less profitable. Taking domestic energy sources off the table makes us more reliant on sources from hostile and unstable regimes, breeding uncertainty in a capital system in which participants seek stability.

• Lawmakers who seem more interested in pleasing special interests than voters back home now control Congress. Some of the leading voices in crafting the massive bank bailout and stimulus packages — including Sen. Chris Dodd, Rep. Barney Frank and House Speaker Nancy Pelosi — were the very ones who helped get us in this mess.

They did so by loosening Fannie Mae and Freddie Mac's lending rules and pushing commercial banks to make bad loans. Both Dodd and Frank were recipients of hefty donations from Fannie, Freddie and other financial firms they were charged with regulating.

• Trade protectionism passes as policy, even amid the administration's lip service to free trade. Congress' vast stimulus bill and its "Buy American" provisions limit spending to U.S.-made products and will drive up costs, limit choices and alienate key allies.

Already, it has triggered rumblings of retaliation in a 1930s-style trade war from trading partners, just as the Smoot-Hawley tariffs prolonged the Great Depression. Several European partners have begun raising barriers. Meanwhile, three signed free-trade pacts with Colombia, Panama and Korea languish with no chance of passage. Free trade offers one way out of our problems, yet it's been sidetracked.

• A 1,000-plus page stimulus bill is bulled through Congress with no GOP input and not a single member of Congress reading it before passage. It borders on censorship.

GOP protests of the bill's spending and the speed it was passed at were dismissed by Obama and other Democrats as seeking to "do nothing" or "breaking the spirit of bipartisanship." But voters are angry.

Along with thousands of angry phone calls to Congress, new Facebook groups have emerged, and street protests have sprung up in Denver, Seattle and Mesa, Ariz., against the "porkulus." CNBC Chicago reporter Rick Santelli's on-air denunciation of federal bailouts for mortgage deadbeats attracted a record 1.5 million Internet hits.

• Business leaders are demonized. Yes, there are bad eggs out there like the Madoffs and Stanfords. But most CEOs are hugely talented, driven, highly intelligent people who make our corporations the most productive in the world and add trillions of dollars of value to our economy.

They don't deserve to be dragged before Congress, as they have been dozens of times in the past two years, for a ritual heaping of verbal abuse from the very people most responsible for our ills — our tragically inept, Democrat-led Congress.

• Words like "catastrophe," "crisis" and "depression" are coming from the mouth of the newly elected president, rather than words of hope and optimism. Instead of talking up America's capabilities and prospects, he talks them down — the exact opposite of our most successful recent president, Ronald Reagan, who came in vowing to restore that "shining city on a hill."

Even ex-President Clinton admonished Obama to return to his previous optimism, saying he would "just like him to end by saying that he is hopeful and completely convinced we're gonna come through this."

• The missile defense system that brought the Soviet Union to its knees, and which offers so much hope for future security, is being discussed as a "bargaining chip" with Russia. This, at the same time the regime in Iran is close to having a nuclear weapon and North Korea is readying an intermediate-range missile that can reach the U.S.

This sends a message of weakness abroad and contributes to a feeling of vulnerability at home. A strong economy begins and ends with a strong defense.

All this in barely a month's time. And to think that more of the same is on the way seems to be sinking in. Investors are watching closely and not caring for what they see. Sooner or later, the market will rally — but not without good reason to do so.

[Body-by-Guinness]

The U.S. Didn’t Cause the World Recession

Posted by Alan Reynolds

In the Washington Post, Ricardo Caballero of MIT has a novel and promising idea about “How to Lift a Falling Economy.”  Unfortunately, he echoes the mantra that all the world’s economic problems can be traced to the U.S. in general, and to big U.S. banks in particular.  “Already,” he says, “this illness has spread to the global economy.”

Already?  Industrial in Japan production began collapsing in November 2007, two months ahead of the U.S. and the Japanese industrial decline has been twice as fast.

Unlike the U.S., real GDP began falling in the second quarter of 2008 in Germany, France, Italy, Japan, Singapore and Hong Kong.  By no coincidence, that was when the price of oil rose as high as $145 a barrel.  Soaring oil prices raise the cost of production and distribution for many industries, and reduce real household incomes and therefore consumption.   Nine of the ten postwar U.S. recessions were preceded by a major spike in the price of oil.

In a piece for the Claremont Review of Books (written last November), I conclude that, “This recession is not just a U.S. problem, not just about housing, and not just financial.”

Compare the decline in real GDP over the past 4 quarters (from The Economist):

U.S.

-0.2%

France

-1.0

Germany

-1.6

Britain

-1.8

Italy

-2.6

Japan

-4.6

Does it make sense to blame the largest declines in GDP on one country with the smallest decline?  If so, then we need some explanation of how some uniquely American “illness has spread” to so many innocent victims.

If the explanation is supposed to be falling U.S. imports, then the worst decline by far would have been in Canada and Mexico (where real GDP was rising even in the third quarter).  If the alleged causality is supposed to be because of some undefined links between financial centers, then Italy would not be among the hardest hit.

When it comes to trade, in fact, the shoe is mainly on the other foot: Collapsing foreign economies crushed U.S. exports.

In the second quarter of 2008, U.S. exports accounted for 1.54 percentage points of the 2.83% annualized rise in real GDP.  But falling exports subtracted 2.84 percentage points from fourth quarter GDP.  Falling exports, not falling consumption, were the biggest single contributor to the overall drop of 3.8%.

After looking at which economies fell first and fastest, it might be more accurate to say that some foreign  illness has spread to the U.S. economy than to assert or assume the causality ran only in the opposite direction.

http://www.cato-at-liberty.org/2009/02/22/the-us-didnt-cause-the-world-recession/

[G M]

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/21/AR2009022100911_pf.html

Obama's First Budget Seeks To Trim Deficit
Plan Would Cut War Spending, Increase Taxes on the Wealthy
By Lori Montgomery and Ceci Connolly
Washington Post Staff Writers
Sunday, February 22, 2009; A01

President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.

In addition to tackling a deficit swollen by the $787 billion stimulus package and other efforts to ease the nation's economic crisis, the budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that he hopes to enact later this year.

A summary of Obama's budget request for the fiscal year that begins in October will be delivered to Congress on Thursday, with the complete, multi-hundred-page document to follow in April. But Obama plans to unveil his goals for scaling back record deficits and rebuilding the nation's costly and inefficient health care system tomorrow, when he addresses lawmakers and budget experts at a White House summit on restoring "fiscal responsibility" to Washington.

Yesterday in his weekly radio and Internet address, Obama said he is determined to "get exploding deficits under control" and said his budget request is "sober in its assessments, honest in its accounting, and lays out in detail my strategy for investing in what we need, cutting what we don't, and restoring fiscal discipline."

Reducing the deficit, he said, is critical: "We can't generate sustained growth without getting our deficits under control."

Obama faces the long-term challenge of retirement and health programs that threaten to bankrupt the government years down the road, as well as the more immediate problem of deficits bloated by spending on the economy and financial system bailouts. His budget proposal takes aim at the short-term problem, administration officials said, but also would begin to address the nation's chronic budget imbalance by squeezing savings from federal health programs for the elderly and the poor.

Even before Congress approved the stimulus package this month, congressional budget analysts forecast that this year's deficit would approach $1.2 trillion -- 8.3 percent of the overall economy, the highest since World War II. With the stimulus and other expenses, some analysts say, the annual gap between federal spending and income could reach $2 trillion when the fiscal year ends in September.

Obama proposes to dramatically reduce those numbers, said White House budget director Peter Orszag: "We will cut the deficit in half by the end of the president's first term." The plan would keep the deficit hovering near $1 trillion in 2010 and 2011, but shows it dropping to $533 billion by 2013, he said -- still high but a more manageable 3 percent of the economy.

To get there, Obama proposes to cut spending and raise taxes. The savings would come primarily from "winding down the war" in Iraq, a senior administration official said. The budget assumes continued spending on "overseas military contingency operations" throughout Obama's presidency, the official said, but that number is lower than the nearly $190 billion budgeted for Iraq and Afghanistan last year.

Obama also seeks to increase tax collections, mainly by making good on his promise to eliminate some of the temporary tax cuts enacted in 2001 and 2003. While the budget would keep the breaks that benefit middle-income families, it would eliminate them for wealthy taxpayers, defined as families earning more than $250,000 a year. Those tax breaks would be permitted to expire on schedule in 2011. That means the top tax rate would rise from 35 percent to 39.6 percent, the tax on capital gains would jump to 20 percent from 15 percent for wealthy filers and the tax on estates worth more than $3.5 million would be maintained at the current rate of 45 percent.

Obama also proposes "a fairly aggressive effort on tax enforcement" that would target corporate loopholes, the official said. And Obama's budget seeks to tax the earnings of hedge fund managers as normal income rather than at the lower 15 percent capital gains rate.

Overall, tax collections under the plan would rise from about 16 percent of the economy this year to 19 percent in 2013, while federal spending would drop from about 26 percent of the economy, another post-World War II high, to 22 percent.

Republicans, who are already painting Obama as a profligate spender, are laying plans to attack him on taxes as well. Even some nonpartisan observers question the wisdom of announcing a plan to raise taxes in the midst of a recession. But senior White House adviser David Axelrod said in an interview that the proposals reflect the ideas that won the election.

"This is consistent with what the president talked about throughout the campaign," and "restores some balance to the tax code in a way that protects the middle class," Axelrod said. "Most Americans will come out very well here."

The budget also puts in place the building blocks of what administration officials say will be a broad restructuring of the U.S. health system, an effort aimed at covering some of the estimated 46 million Americans who lack insurance while controlling costs and improving quality.

"The budget will kick off or facilitate a focus on getting health care done this year," the senior official said, adding that the White House is planning a health care summit. The event has been delayed by former senator Thomas A. Daschle's decision to withdraw from consideration as health secretary because of tax problems, a move that left Obama without a key member of his health team.

Administration officials and outside experts say the most likely path to revamping the health system is to begin with Medicare, the federal program for retirees and people with disabilities, and Medicaid, which serves the poor. Together, the two programs cover about 100 million people at a cost of $561 billion in 2007. Making policy changes in those programs -- such as rewarding physicians who computerize their medical records or paying doctors for results rather than procedures -- could improve care while generating long-term savings, experts say.

Obama's budget request would create "running room for health reform," the official said, by reducing spending on some health programs so the administration would have money to devote to initiatives to expand coverage. The biggest target is bonus payments to insurance companies that run managed-care programs under Medicare, known as Medicare Advantage.

The Bush-era program has attracted nearly a quarter of Medicare beneficiaries to private health insurance plans that cover a package of services such as doctor visits, prescription drugs and eyeglasses. But the government pays the plans 13 to 17 percent more than it pays for traditional fee-for-service coverage, according to the Medicare Payment Advisory Commission, which advises Congress on Medicare financing issues.

Officials also are debating whether to permit people as young as 55 to purchase coverage through Medicare. That age group is particularly vulnerable in today's weakened economy, as many have lost jobs or seen insurance premiums rise rapidly. The cost would depend on whether recipients received a discount or were required to pay the full price.

In addition to the substantive proposals, Obama's team boasts of improving the budget process itself. For years, budget analysts complained that former president George W. Bush tried to make his deficits look smaller by excluding cost estimates for the war in Iraq and domestic disasters, minimizing the cost of payments to Medicare doctors and assuming that millions more families would pay the costly alternative minimum tax. Obama has banned those techniques, the senior official said.

Staff writer Shailagh Murray contributed to this report.

[Crafty_Dog]

Wonder how many hundreds the Dow will go down tomorrow?

[G M]

Put me down for 200 points at a minimum. Fraaaaaaaaak.....

[Crafty_Dog]

Good call.  We are now at levels not seen since 1997.    Look out below!