The biggest lie told over the past century is that the Democratic left are better stewards of the economy than Conservatives. It worked to in 2008. And Obama is trying to sell to America that the right "can't be trusted" to control our economy as "Bush got us into this mess." As proof thereof, he cites to deregulation and "Wall St. greed."
We are now stuck with a President who believes that the profit motive is immoral, that businesses should be soaked of their wealth for redistribution, and that the economy can be successfully micromanaged from Washington. And we are stuck with a far left Congress that is the most profligate of all time.
The truth is that our economy fell apart because of social engineering by Democrats. Over a roughly 15 year period, they ruined our credit rating scheme as part and parcel of a massive push for "affordable housing." Instead of pursuing this laudable goal by market-based programs, they did so by means of punitive, race based social engineering. At every turn, they used the race card to protect the scheme. And in the end, they created a bubble with Fannie and Freddie that got so big that when it burst, it took our economy into the tank.
So either Obama is lying about all of this, or the right is. How can you possibly know which is which? It's easy.
If the Democrats were actually right, then their solutions to our ailing economy would have worked. Instead, the opposite has occurred. They have used our economic crisis to engage in even more social engineering between healthcare, labor regulations, massive favortism to unions, and new financial regulations. And our economy is on life support. It in serious trouble. Real unemployment is well into double digits and shows no sign of easing. Yesterday's housing report on sales of new and existing homes was the worst in well over a decade. Every day, we are accruing debt at record levels. CNBC reported today that, according to at least one respected economist, we are now in a depression. Indeed, the word incompetent doesn't begin to describe this President and Congress.
Why isn't the economy recovering? After previous recessions, unemployment didn't get stuck at close to 10 percent. If left alone, the economy can and does heal itself, as the mistakes of the previous inflationary boom are corrected.
The problem today is that the economy is not being left alone. Instead, it is haunted by uncertainty on a hundred fronts. When rules are unintelligible and unpredictable, when new workers are potential threats because of Labor Department regulations, businesses have little confidence to hire. President Obama's vaunted legislative record not only left entrepreneurs with the burden of bigger government, it also makes it impossible for them to accurately estimate the new burden.
In at least three big areas -- health insurance, financial regulation and taxes -- no one can know what will happen.
New intrusive rules for health insurance are yet to be written, and those rules will affect hiring, since most health insurance is provided by employers.
Thanks to the new 2,300 page Dodd-Frank finance regulatory act, The Wall Street Journal reports, there will be "no fewer than 243 new formal rule-makings by 11 different federal agencies." These as-yet unknown rules will govern lending to business and other key financial activity.
The George W. Bush tax cuts might be allowed to expire. But maybe not. Social Security and Medicare are dangerously shaky. Will Congress raise the payroll tax? A "distinguished" deficit commission is meeting. What will it do? Recommend a value-added tax?
Who knows? But few employers will commit to a big investment with those clouds hanging over our heads.
"As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company's vulnerability to government," Michael Fleischer, president of Bogen Communications Inc., wrote in The Wall Street Journal.
Nothing more effectively freezes business in place than what economist and historian Robert Higgs calls "regime uncertainty."
"(A)ll of these unsettling possibilities and others of substantial significance must give pause to anyone considering a long-term investment, because any one of them has the potential to turn what seems to be a profitable investment into a big loser. In short, investors now face regime uncertainty to an extent that few have experienced in this country -- to find anything comparable, one must go back to the 1930s and 1940s, when the menacing clouds of the New Deal and World War II darkened the economic horizon."
Uncertainty created by Obama's legislative "successes" are comparable to the Depression and World War II? This does not bode well for job growth.
Higgs says: "Unless the government acts soon to resolve the looming uncertainties about the half-dozen greatest threats of policy harm to business, investors will remain for the most part on the sideline ... consuming wealth that might otherwise have been invested."
Today is a tsunami of horrid news, each deserving of attention but which I do not now have time to blog seperately. Except where noted, all are from Drudge:
Let us be honest. The US is still trapped in depression a full 18 months into zero interest rates, quantitative easing (QE), and fiscal stimulus that has pushed the budget deficit above 10% of GDP.
The share of the US working-age population with jobs in June actually fell from 58.7% to 58.5%. This is the real stress indicator. The ratio was 63% three years ago. Eight million jobs have been lost.
The average time needed to find a job has risen to a record 35.2 weeks. Nothing like this has been seen before in the post-war era. . . .
"Legions of individuals have been left with stale skills, and little prospect of finding meaningful work, and benefits that are being exhausted. By our math the crop of people who are unemployed but not receiving a check amounts to 9.2m."
. . . With significantly lower revenues and higher outlays, debt would reach 87 percent of GDP by 2020, CBO projects. After that, the growing imbalance between revenues and noninterest spending, combined with spiraling interest payments, would swiftly push debt to unsustainable levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2025 and would reach 185 percent in 2035.
The CBO warns of potentially devastating consequence for the United States if this debt mountain is not tackled, and even points out that its “projections understate the severity of the long-term budget problem because they do not incorporate the significant negative effects that accumulating substantial amounts of additional federal debt would have on the economy” . . .
With his reckless big government policies, Barack Obama threatens to run his country into the ground, with American decline the inevitable end result. . . .
We are in a recession - if not a depression - that finally came to the fore in 2007 after two decades of Democrat social engineering of our financial sector. And we today are still in a recession - if not a depression - because of the election of a President who is deeply anti-business and who has demonized the profit motive. Indeed, it is those, along with his twin drives to socialize our economy and empower unions which have been the defining features of Obama's nearly eighteen months in office. Well, those four in addition to world record profligate spending. And on the horizon, Obama promises us massive new taxes ("don't read my lips"). Moreover, the centerpiece of his proposed financial regulations is to reinstall the same social engineering into our financial sector that led to our current economic mess in the first place. For the sake of brevity, I will stop my list there.
And yet now, Obama, in advance of November, is trying to convince America that he is not anti-business. According to Obama, all problems are the result of Republicans, he is struggling mightily to correct the situation (pay no attention to his projections in January 2009 that promised solutions if we immediately passed the Stimulus), and that he is a friend of business, both large and small. All of that is at least as outlandish as it would have been for Bill Clinton, during his last year in office, to try to convince America that he had always been deeply committed to monogamy.
You’d think the well-heeled and enlightened eggheads at the Aspen Ideas Festival . . . would be receptive to an intellectually ambitious president with big ideas of his own.
In a way, the folks attending this cerebral conclave pairing the Aspen Institute think tank with the Atlantic Monthly magazine might even be seen as President Obama’s natural base.
Apparently not so much.
“The real problem we have,” Mort Zuckerman said, “are some of the worst economic policies in place today that, in my judgment, go directly against the long-term interests of this country.” . . .
“If you’re asking if the United States is about to become a socialist state, I’d say it’s actually about to become a European state, with the expansiveness of the welfare system and the progressive tax system like what we’ve already experienced in Western Europe,” Harvard business and history professor Niall Ferguson declared during Monday’s kickoff session, offering a withering critique of Obama’s economic policies, which he claimed were encouraging laziness.
“The curse of longterm unemployment is that if you pay people to do nothing, they’ll find themselves doing nothing for very long periods of time,” Ferguson said. “Long-term unemployment is at an all-time high in the United States, and it is a direct consequence of a misconceived public policy.”
Ferguson was joined in his harsh attack by billionaire real estate mogul and New York Daily News owner Mort Zuckerman. Both lambasted Obama’s trillion-dollar deficit spending program—in the name of economic stimulus to cushion the impact of the 2008 financial meltdown—as fiscally ruinous, potentially turning America into a second-rate power.
“We are, without question, in a period of decline, particularly in the business world,” Zuckerman said. “The real problem we have…are some of the worst economic policies in place today that, in my judgment, go directly against the long-term interests of this country.”
Zuckerman added that he detects in the Obama White House “hostility to the very kinds of [business] culture that have made this the great country that it is and was. I think we have to find some way of dealing with that or else we will do great damage to this country with a public policy that could ruin everything.”
Ferguson added: “The critical point is if your policy says you’re going run a trillion-dollar deficit for the rest of time, you’re riding for a fall…Then it really is goodbye.” A dashing Brit, Ferguson added: “Can I say that, having grown up in a declining empire, I do not recommend it. It’s just not a lot of fun actually—decline.”
Ferguson called for what he called “radical” measures. “I can’t emphasize strongly enough the need for radical fiscal reform to restore the incentives for work and remove the incentives for idleness.” He praised “really radical reform of the sort that, for example, Paul Ryan [the ranking Republican on the House Budget Committee] has outlined in his wonderful ‘Roadmap’ for radical, root-and-branch reform not only of the tax system but of the entitlement system” and “unleash entrepreneurial innovation.” Otherwise, Ferguson warned: “Do you want to be a kind of implicit part of the European Union?
This was greeted by hearty applause from a crowd that included Barbra Streisand and her husband James Brolin. “Depressing, but fantastic,” Streisand told me afterward, rendering her verdict on the session. “So exciting. Wonderful!”
Brolin’s assessment: “Mind-blowing.”
What does it say when even rabid lefties Brolin and Steisand start to think that you are too far to the left and are leading us into economic Armageddon?
The reality is that what Zuckerman and Ferguson point out is apparent to very many Americans. On a similar note, Wayne Allen Root colorfully described the situation in his column in the Las Vegas Review-Journal:
The current occupant of the White House claims to know how to create jobs. He claims jobs have been created. But so far the score is Great Obama Depression 2.2 million lost jobs, Obama 0 -- a blowout.
Obama is as hopeless, helpless, clueless and bankrupt of good ideas as the manager of the Chicago Cubs in late September. This "community organizer" knows as much about private-sector jobs as Pamela Anderson knows about nuclear physics.
It's time to call Obama what he is: The Great Jobs Killer. With his massive spending and tax hikes -- rewarding big government and big unions, while punishing taxpayers and business owners -- Obama has killed jobs, he has killed motivation to create new jobs, he has killed the motivation to invest in new businesses, or expand old ones. With all this killing, Obama should be given the top spot on the FBI's Most Wanted List.
Meanwhile, he has kept the union workers of GM and Chrysler employed (with taxpayer money). He has made sure that most government employee union members got their annual raises for sleeping on the job (with taxpayer money). He made sure that his voters got handouts mislabeled as "tax cuts" even though they never paid taxes (with taxpayer money). And he made sure that major campaign contributors collected billions off government stimulus (with taxpayer money).
As far as the taxpayers -- the people who actually take risks with our own money to create small businesses and jobs and pay most of the taxes -- we require protection under the Endangered Species Act. . . .
The days of believing the Obama propaganda about a jobs recovery are over. The trillion-dollar corporate handouts (neatly named "stimulus") may have kept big business in the money for the past 18 months, and artificially propped up the stock market, but small business is the real canary in the coal mine.
My small business-owning friends aren't creating one job. Not one. They are shedding jobs. They are learning to do more with fewer employees. They are creating high-tech businesses that don't need employees. And many business owners are making plans to leave the country. In a high-tech world where businesses can be run from anywhere, Obama has a problem. His one-trick pony -- raise taxes, raise taxes, raising taxes -- is chasing away the business owners he desperately needs to pay his bills. . . .
For less color, but more facts, there is this frightening report from the LA Times:
For the recovery to gain steam, most economists believe small businesses need to be strong enough to hire new workers. But according to one measure, the employment picture in this sector is weakening.
Intuit Inc., which provides payroll services for small employers, says the nation's tiniest companies had fewer new hires last month than any time since October.
The data are further evidence of a trend that has had many economists worried for months and intensifies concerns that smaller firms may not be robust enough to help lead the country out of its financial slump. The slowdown in hiring is particularly troublesome, experts say, because small businesses typically hire first during a recovery. A reluctance by little companies to add positions could mean that the big firms, which typically lag behind, will add jobs even more gradually.
"It's a bad sign," said Susan Woodward, an economist who tracks small business employment for Intuit. "Small businesses hire first — and they're losing their steam."
To calculate its estimate of national hiring, Intuit uses payroll information from its 56,000 small-business customers. The company defines small businesses as those with fewer than 20 employees.
Intuit's data show that small businesses hired just 18,000 additional workers last month. That's still positive territory, but it's less than a third of the 60,000 that were added in February, when it seemed that an employment recovery was imminent. Additional hiring dropped steadily during the spring, to 40,000 in April and 32,000 in May. Another payroll company, Automatic Data Processing Inc., painted an even gloomier picture, saying that small businesses lost 1,000 jobs nationwide in June. . . .
Robert Alva, who owns Super Cool Air Conditioning in South El Monte, said he's been trying for months to expand his four-person shop to about 10 people to break into the potentially lucrative business of installing solar energy systems. But customers are reluctant to buy new cooling systems right now or even repair their old ones, he said. Whereas he would normally be able to finance a modest expansion by obtaining a loan, Alva said, he's been turned down twice for a small-business loan — squeezed by the credit crunch that has affected thousands of small firms.
To understand the oversized importance of these little businesses to the U.S. jobs picture, consider that the smallest firms — those with fewer than 20 employees — employ more than one-sixth of the nation's workers. But so far this year, these companies have provided about one-third of all new private-sector jobs, said Brian Headd, an economist with the Small Business Administration. So any cutbacks would be felt disproportionately throughout the economy.
"Small-business hiring is right at the heart of it because small businesses usually are the engine of job creation in the U.S.," said John Challenger, president of the employment consulting firm Challenger, Gray & Christmas. "It's small businesses that drive the unemployment rate down, and if the small businesses are faltering, that suggests that the risks of recession are growing." . . .
As I pointed out in prior posts, Obama has done anything but help businesses generally or small business in particular. Every one of his goals for America, from Obamacare to cap and trade to a complete revamp of our financial regulations, involve vast increases in costs, both to individuals and businesses. And as to small businesses, well, Obama pays little beyond lip service. Of the $787 billion Stimulus, only 2.6% was earmarked to help with small business loans. The vast majority of the remainder was wasted subsidizing profligate state governments and public union employees for a year.
Which brings us to a final point. In the Depression of the 1930's, there were two schools of thought as to how to handle a deathly sick economy. One, that of John Maynard Keynes - and beloved of the budding socialists then and now - suggested that massive government spending was necessary to stimulate the economy and restore confidence. The second school of thought, that of Friedrich Von Hayek, was that the government needed to limit spending and reduce or remove regulations that stifled private sector growth and inhibited trade. Indeed, you can find dueling letters between Keynes and Hayek, setting forth their positions, printed in the 1932 newspaper, The Times.
The question of who was correct was never definitively answered at the time. FDR adopted the Keynesian approach, but we were still in the grips of the depression in 1941 when World War II intervened and solved the problem of double digit unemployment. Most economists agree that it was WWII that drove the end of the depression. So today, the question remains, what should we be doing to treat an economy in deep distress.
Clearly, Obama, like FDR before him, has followed Keynes, at least partly. Obama counted on the massive government stimulus - and Bush's TARP - to put the economy well on the road to recovery, projecting that unemployment would top out below 8% and then recede. But he also did something else that Keynes clearly never supported. Obama has attacked confidence in our economy by promising ever greater spending and taxes and by attacking the private sector and the profit motive.
On the other hand, there is economist Arthur Laffer. He recently wrote an artice in the WSJ taking Crazy Nancy to task for her wildly false assertion that funding yet another extension of unemployment benefits (on even more borrowed money - the left refuses to pay for it with existing borrowed funds) is the best way stimulate the economy and create new jobs. Indeed, even without an explanation from Dr. Laffer, the fact that extending such benefits hasn't worked for two years now ought to be a clue that Crazy Nancy is either being disingenuous or that she is clinically insane (I, in all honesty, think she is both). At the conclusion of his article, Laffer writes:
Any government program that would reduce unemployment has to make working more attractive for both employer and employee. Since late 2007 the federal government has spent somewhere around $3.6 trillion to stimulate the economy. That is a lot of money.
My suggestion would have been to take all $3.6 trillion and declare a federal tax holiday for 18 months. No income tax, no corporate profits tax, no capital gains tax, no estate tax, no payroll tax (FICA) either employee or employer, no Medicare or Medicaid taxes, no federal excise taxes, no tariffs, no federal taxes at all, which would have reduced federal revenues by $2.4 trillion annually. Can you imagine where employment would be today? How does a 2.5% unemployment rate sound
Interestingly, Laffer is a bit between Hayek and Keynes. He would use government revenues to ease the burden on the private sector.
I happen to agree wholeheartedly with Laffer. Whether Laffer is right will likely be a question argued in the halls of academia many years into the future. But in any event, what is quite clear today is is that a pure Keyesian answer to the problem, as instituted with an Obama twist, has proven a disaster. And it seems, to me at least, that he will lead us into a true depression if allowed to continue on his current path.
Government does not create wealth. The major role for the government is to create an environment where people take risks to expand the job rate in the United States.
Finally, Bush has emerged from down the memory hole to defend some of his policies and to indirectly criticize Obama. Unfortunately, it is not the full throated rebuttal of Cheney, but at least its something. This from the Washington Times:
Former President George W. Bush fired a salvo at President Obama on Wednesday, asserting his administration's interrogation policies were within the law, declaring the private sector not government will fix the economy and rejecting the nationalization of health care. . . .
Repeatedly in his hourlong speech and question-and-answer session, Mr. Bush said he would not directly criticize the new president, who has moved to take over financial institutions and several large corporations. Several times, however, he took direct aim at Obama policies as he defended his own during eight years in office.
"Government does not create wealth. The major role for the government is to create an environment where people take risks to expand the job rate in the United States," he said to huge cheers.
Mr. Bush weighed in on some of the most pressing issues of the day: the election in Iran, the closing of the Guantanamo Bay detention center in Cuba, and his administration's interrogation policies of terrorists held there and elsewhere. The former president has not commented on Mr. Obama's decision to ban "enhanced interrogation techniques" such as waterboarding, which the current president has called "off course" and "based on fear."
. . . On Guantanamo, which while in office Mr. Bush said he wanted to close, the former president was diplomatic.
"I told you I'm not going to criticize my successor," he said. "I'll just tell you that there are people at Gitmo that will kill American people at a drop of a hat and I don't believe that persuasion isn't going to work. Therapy isn't going to cause terrorists to change their mind." . . .
Repeating a mantra from his presidency, he called the current war against terrorism an "ideological conflict," asserting that in the long term, the United States needs to press freedom and democracy in corners across the world.
Mr. Bush did not directly address Mr. Obama's response to the election in Iran, which some critics have called tepid, but he did make clear that the outcome is very much in dispute. For a fifth straight day, as the Obama administration walks a tightrope by issuing little criticism, protesters gathered in Tehran to demand a new election. . . .
Mr. Bush returned again and again to the economy, and sought to defend his own actions after the financial meltdown in the waning days of his second term. Mr. Obama repeatedly has said he inherited that mess.
"I am told, 'If you do not move strongly, Mr. President, you will be a president overseeing a depression that will ultimately be greater than the Great Depression,'" Mr. Bush said. "I firmly believe it was necessary to put money in our banks to make sure our financial system did not collapse. I did not want there to be bread lines, to be a great depression."
He said his administration sought to address the "housing bubble" before the system broke down. "We tried to reform" mortgage giants Fannie Mae and Freddie Mac, "but couldn't get it through the vested interests on Capitol Hill."
Still, Mr. Bush was optimistic, pressing, as he did as president, free trade, open markets and the free enterprise system. "We'll come out of this better than before," he said to more applause.
But he was less than convinced about Mr. Obama's move to overhaul the health care system.
"There are a lot of ways to remedy the situation without nationalizing health care," Mr. Bush said. "I worry about encouraging the government to replace the private sector when it comes to providing insurance for health care." . . .
He lamented the politics of personal destruction that he said is rampant in Washington, noting, though, that it has always been thus. Recalling how a treasury secretary and a vice president once fought a duel, he joked: "At least when my vice president shot somebody, it was an accident." . . .
Read the entire article. He should have said much more about the genesis of our finanical meltdown and hammered more on the quote I put at the top of the page. Cheney has been doing all of the heavy lifting on the war on terror issue. It would be nice if Bush could finally become a voice on the economy and where Obama is leading us.
The Great Depression began in June, 1929 and lasted until the early 1941. FDR didn't solve it with his "New Deal", WWII did. By 1933, unemployment had risen to 24.9%, average incomes contracted by 40%, global trade fell by half in volume, and millions lost their homes and farms. How do we compare to the Great Depression?
We are now running a budget deficit closing in on two trillion dollars. Unemployment is at 9.4% and seems headed only upward. Our bond rating is on the cusp of being downgraded - an occurrence that promises a whole host of problems. The fed is printing money as never before:
Even with no new deficit spending, new and heavy taxes seem inevitable to service this debt. Plus, with such an increase in the money supply, massive inflation and devaluation of the dollar seems inevitable.
But much more is waiting in the wings to hit, some sooner rather than later. Obama is doing nothing to rein in spending or to avoid taxation. Indeed, to the contrary, Obama has not even begun to tax and spend. In an Orwellian move, he is calling for institution of "pay as you go" legislation that will make future tax cuts next to impossible but will not apply to any of the massive new deficit spending he has planned in his pet projects.
We are on the cusp of an energy crisis that Obama is ignoring. The price of oil is set to skyrocket from a host of contributing causes. The green energy Obama has promised us is not even cost effective, nor can it possibly be scaled up as quickly as it would need to be to provide a realistic alternative to oil and coal.
Global trade, already under extreme stress, is set to experience far more stress. Some 80% of all goods traded internationally are shipped. David Smick, writing at the Washington Post, notes "[t]he U.N. agreement last October on sulfur-burning levels for ships . . . is expected to send shipping costs skyrocketing." Thus the price of the vast majority of goods traded internationally will be effected, all in the name of global warming.
Then to top it off, we have Obama, instead of fixing the issues that led to this global economic meltdown, proposing a massive new regulatory regime for our financial sector. This is precisely what the respected Harvard economist Niall Ferguson warned against a few weeks ago.
Could this news get any more dire? Well, . . . yes. We now have sufficient data to make a reasonable comparison of where we are as compared to the same time frame after the start of the Great Depression. And the news is depressing indeed. Even without this next round of price increases, massive spending and high taxation, we are at or below the same economic indicators in the same time frame as existed during the Great Depression. This from the Financial Times:
Green shoots are bursting out. Or so we are told. But before concluding that the recession will soon be over, we must ask what history tells us. It is one of the guides we have to our present predicament. Fortunately, we do have the data. Unfortunately, the story they tell is an unhappy one.
Two economic historians, Barry Eichengreen of the University of California at Berkeley . . . [document] that this recession fully matches the early part of the Great Depression. . . .
First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.
Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.
Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.
The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event.” . . .
You can read the rest of the article here. The authors go on to discuss the fact that Obama is attempting to rely on both Keynes and Friedman to guide his acts. Keynes theorized that massive public spending could be used to stimulate an economy while Friedman concentrated on monetary supply. The authors conclude hopefully that this will stop the full spiral into depression.
What gives me great pause is that these authors give no consideration to all of the additional taxes and the rising costs that we are about to have imposed upon us, plus what looks like new draconian regulation of our financial sector. Fed Chairman Ben Bernanke warned a few weeks ago that we needed to taking steps now to rein in spending and borrowing or we face severe problems in the foreseeable future. Obama is doing anything but that. I have never been so pessimistic about America's future. This could easilly go from bad to castrophically bad.
While the stock market is up sharply since early March, the economy as well as corporate earnings continue to suffer. Today's chart helps provide some perspective as to the magnitude of the current economic decline. Today's chart illustrates that 12-month, as-reported S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009), making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.
Change . . . it would seem that it's all we have left. Let's hope for more, eh.
We have been witness over the past several weeks to White House strong arming of businesses the likes of which have previously been unknown in this country. And now if appears Obama has crossed a threshold that the Constitution forbids.
First there are the TARP loans. The government has refused banks the ability to repay them. Instead, the Obama administration floated a plan, still under consideration, of de facto nationalizing the banks by converting bank TARP loans to common stock. One would think it could not get worse than that, but one would be wrong.
Obama, in proposing to reorganize the auto manufacturers, wants to place his major constituency, big Labour, at the front of the line when it comes to an ownership stake in GM and Chrysler. The end result of such a move is that secured creditors of the two companies would suffer a relative loss far in excess of that which would be suffered by the unions. Not only has the Obama plan been set up to show blatant favortism in contravention of the commercial code, but Obama and his crew were publicly criticizing - and privately threatening - the secured creditors holding out against this plan. Powerline, refering to this as banana republic capitalism, has the whole story. And indeed, there is nothing to distinguish this act of Obama from similar extortions of property by Hugo Chavez in Venezuela or . . . well, pick your favorite dictator.
Fortunately, it seems that the creditors are fighting back. At least one attorney, Thomas Lauria, has gone public about the threat to the entities he represents made by the Obama administration - to use the White House Press Corps to destroy them in the eyes of the public. Today, Lauria has filed a brief challenging the proposed acts of Obama based on the Fifth Amendment. Specifically, he cites to a 1935 case, Louisville Joint Stock Land Bank v. Radford, that dealt with a provision of the New Deal that would have acted to strip a secured creditor of the value of his security by government fiat. The Supreme Court held that, regardless of the government's compelling interest in responding to the economic chaos of the depression, such an act violated the 5th Amendment prohibition against taking private property without just compensation. It is a case dead on point. Hot Air has the story.
I will assume, without looking it up, that this case is still good law. It's interesting to note that this case fell two years prior to FDR's "court packing" scheme. FDR was tired of being stymied by a Supreme Court that found much of his "New Deal" legislation unconstitutional. In 1937, FDR proposed to expand the number of Justices on the Supreme Court and pack the Court in his favor. FDR lost the battle and the legislation failed. That said, FDR won the war. The Supreme Court got the message and began regularly defering to FDR's wishes and taking congressional findings at face value.
The second McCain-Obama debate is in the books. The format, faux town hall, was horrid. The questions varied from reasonable to mindless - why do we need to know who either one of these two would appoint as Treasury Secretary? The time allotted for answers was ridiculously short with no follow-ups. This all worked in favor of Obama who is sitting on a lead in the polls and a commonly held belief among far too many Americans that the tanking economy is the fault of George Bush and Republicans.
This was by far the worst debate I can recall every watching. McCain needed to be aggressive and to attack on the economy. He did that within the limits of the debate format. Unfortunately, the debate format was so limiting, I doubt whether he was able to impact many people at all. My notes from the debate:
- Finally, McCain goes on the attack over Fannie and Freddie. That was good, but he needs to extend out that attack and repeat it every day between now and the election.
- Obama is referring to a letter written in 2006 when he supposedly warned of the subprime crisis and the need to take action against Fannie Mae. I want to see that letter. It doesn't appear on his website. Obama is a political coward who does not go against the grain of his party - all of whom were in strong support of Fannie Mae and their mission to purchase subprime mortgages at the time. Bottom line, I am not taking the One at his word on this one. Show me the letter. Release it to the public. McCain should have demanded this at the debate.
- McCain is going to buy up all distressed mortgages. My initial reaction is to recoil in horror. I will have to sleep on whether it actually makes some fiscal sense given that, one, it was government intervention in the market place that got us here in the first place, and two, McCain is selling it as a way to stabilize markets. I have more than a little doubt.
- McCain hit on a point I have been thinking about for a few days. How similar Obama's plans sound to Herbert Hoover's when he found himself facing a down economy.
- Conbama Law 101 - The right of the people to health care shall not be infringed. If we are staring disaster in the face in the long run from the growth of medicaid, what is going to happen when we extend health care to the nation as a whole as a fundamental right?
- Obama is going to add a trillion in spending while cutting the budget and reducing taxes. That will no doubt come after he walks on water and feeds the nation with a loaf and a few fish. I wish he would name one program he intends to cut with that scalpel of his. Fannie Mae would be a start.
- The foreign policy questions were mostly a repeat of the same ones asked at the last debate, bringing out repeat responses.
- Why does McCain allow Obama to get away with saying he will end the war in Iraq? We've won the damn thing - Obama cannot ideologically admit to it.
- Did anyone else notice Obama's refusal to answer the question whether he would immediately rise to Israel's defense in the event of an attack by Iran. He spent two minutes trying to wind his way around the question without ever answering it. This guy really is dangerous.
- Overall, McCain needed a far more freewheeling debate format if he was to have any chance of turning things around. Tonight was just horrid. If the next debate is like this, say hello to Presidnt Obama.
The damage done to the American economy by Bill Clinton's forcing open of the sub-prime market, by Bill Clinton's forced reduction in mortgage lending criteria, and the Democrats protection of this scheme for over the past decade has done incalculable harm to our nation. It has taken us to the brink of financial disaster.
What we face today is not a mere dip in the business cycle. Nor is it, at root, an indictment of "greed on Wall St." This is not a traditional fiscal crisis in the sense of a deep loss of stock value - at least not yet. This fiscal crisis is wholly centered on the sub-prime lending mess. That mess is Democrat-made and has been Democrat protected against Bush administration and McCain attempts to reign it in. How serious is it? This from the NYT:
It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.
“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”
Specifically what is happening is that the mortgage backed securities have become untradable - no one knows their value. No one knows how much each of those securities represents a bad debt. Since this is a substantial part of our financial holdings as a nation, it has brought the nation's finiancial markets to their knees. The Feds solution to this is audacious, decisive, simple and elegant. Establish a a new corporation to buy these securities, make them transparent and establish their value, then auction them off. You can find the text of the proposed legislation for the plan here. The upfront cost to taxpayers is at about 700 billion dollars less any eventual recovery from resale of the loans and collateral. This from WSJ documents what has occurred in U.S. financal markets over the past week. It reads like a suspense novel:
When government officials surveyed the flailing American financial system this week, they didn't see only a collapsed investment bank or the surrender of a giant insurance firm. They saw the circulatory system of the U.S. economy -- credit markets -- starting to fail. . . .
On Monday morning, Lehman Brothers Holdings Inc. filed for bankruptcy protection. On Tuesday, the government took control of AIG. It was by far the worst disruption investors and policymakers had seen since the credit crisis gripped world markets last summer, and threatened the most dire market malfunction, some worried, since the crashes of 1929 and 1987. The tailspin threatened to put an already stumbling economy deep into recession.
"These markets are unhinged," T.J. Marta, fixed-income strategist at RBC Capital Markets said Wednesday afternoon. "This is like a fire that has burnt out of control."
For some assets, there were no buyers at any price. The weekend's tumult set off a cascade of fear among investors who buy bonds of all stripes, crucially those who buy the shortest-term obligations of companies and financial institutions, called commercial paper. This market feeds borrowers' most immediate needs for working capital.
Though U.S. authorities were alarmed, the situation they were facing didn't yet resemble that of the 1930s. For one thing, easy credit from the Fed had helped keep the economy afloat; in the early 1930s, the Fed kept credit tight. "Nothing in the New Deal relies on monetary policy the way we're relying on it today," said David Hamilton, a New Deal historian at the University of Kentucky. Indeed, the Fed's mistakes back then -- in tightening, not loosening monetary policy -- are considered a key reason for the depth and severity of the consequent depression.
The current turmoil is also more contained, noted Colin Gordon, a professor of 20th-century American history at the University of Iowa. "At least for the moment...the crisis is confined to the large New York houses," he said. "You don't have panic on Wall Street resulting in banks closing in Iowa City."
On Monday and Tuesday, nonetheless, many investors were gripped by fear. Markets such as those for credit-default swaps -- in which investors buy and sell protection against default on a borrower's debt -- were paralyzed by questions about how the Lehman bankruptcy would hurt their business. Stock investors pummeled the share prices of Morgan Stanley and Goldman Sachs Group Inc., the two remaining big stand-alone Wall Street investment firms. Participants in the credit-default-swap market, who need a trading partner for every transaction, didn't know whom to trust.
"The market was signaling that the stand-alone investment banking model doesn't work," says Tad Rivelle, chief investment officer at Metropolitan West Asset Management, which manages $26 billion in fixed-income assets. "We were on the verge of putting every Wall Street firm out of business."
Instead, investors flooded the safest investment they could find, short-term government debt. This drove the yields of short-term Treasury bonds to zero, meaning investors were willing to accept no return on their investment if they could guarantee getting their money back.
On Tuesday, the once-$62.6 billion Reserve Primary Fund, a money-market fund, saw its value fall below $1 a share because of its investments in Lehman's short-term debt. Money-market funds, which yield a bit more than basic cash accounts by buying safe, short-term debt instruments, strive to keep their share prices at exactly $1 -- and "breaking the buck" isn't supposed to happen.
Money-market funds are where corporate treasurers put rainy-day funds, where sovereign wealth funds park their excess dollars and where Mom-and-Pop investors stash savings. Now, money-market funds were selling what they could and hoarding cash to meet what they thought might be extraordinary levels of redemptions from investors, said one commercial trading desk head.
On a Tuesday conference call, staff from Treasury, the Federal Reserve and Federal Reserve Bank of New York hashed out the plan to bail out AIG. But they also began to discuss what more could be done to stem the broader fallout. Some Fed officials saw the AIG takeover not as a potential turning point for the market -- as the rescue of Bear Stearns Cos. had seemed to be in March -- but as the beginning of a bigger and worsening problem.
"We're treating the symptoms and we need to treat the cause," one Treasury staffer told colleagues.
Mr. Paulson agreed. "Confidence is so low we're going to need a fiscal response," he told staff. In other words, the government's usual monetary policy tools, such as interest rates, wouldn't be enough. It would have to pony up some money.
Mr. Paulson spoke with Mr. Bernanke and Federal Reserve Bank of New York President Timothy Geithner to discuss a systematic approach. The three agreed that buying distressed assets, such as residential and commercial mortgages and mortgage-backed securities, from financial companies could offer some relief.
Trust in financial institutions evaporated Wednesday when investors stampeded out of money-market funds. Putnam Prime Money Market Fund said it had shut down after a surge of requests for redemptions.
In three days, the Fed had pumped hundreds of billions of additional cash into the financial system. But instead of calming markets and helping to suppress interest rates, short-term interest rates had gone haywire. Most strikingly to some Fed staff, its own federal-funds rate, an interbank lending rate managed directly by the central bank, repeatedly shot up in the morning as banks sat on cash. The financial system was behaving like a patient losing blood pressure.
Fed staff discovered that one reason the federal-funds rate was behaving so abnormally was because money-market funds were building up cash in preparation for redemptions, leaving hoards of cash at their banks that the banks wouldn't invest. U.S. depositary institutions on average held excess reserves of $90 billion each day this week, estimates Lou Crandall, chief economist at Wrightson ICAP. This is cash the banks hold on the sidelines that does not earn any interest. That compares with an average of $2 billion, he says, noting he estimates banks held $190 billion in excess cash on Thursday, as they feared they'd have to meet many obligations at the same time.
Through Wednesday, money-market fund investors -- including institutional investors such as corporate treasurers, pension funds and sovereign wealth funds -- pulled out a record $144.5 billion, according to AMG Data Services. The industry had $7.1 billion in redemptions the week before.
Without these funds' participation, the $1.7 trillion commercial-paper market, which finances automakers' lending arms or banks credit-card units, faced higher costs. The commercial-paper market shrank by $52.1 billion in the week ended Wednesday, according to data from the Federal Reserve, the largest weekly decline since December.
Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," says Paul Schott Stevens, president of the Investment Company Institute mutual-fund trade group.
Officials also watched as the market for mortgage-backed securities disappeared. The government's seizure of Fannie Mae and Freddie Mac, they had hoped, would reinstill confidence in this market. But yields on mortgage-backed bonds were rising as trading evaporated, nearing levels reached before the government's takeover, which would likely translate into higher mortgage rates for consumers. Borrowers with adjustable-rate mortgages, meanwhile, were in trouble: The cost of many such loans is based on Libor, or the London interbank offered rate, which had soared as banks stopped lending to one another.
On Wednesday in Mr. Paulson's office, with its photographs of birds and other wildlife taken during family trips, top advisers stayed close at hand. Watching market quotes, they participated in an ongoing conference call via speakerphone with the Federal Reserve and New York Fed.
Mr. Paulson wanted Congress to bless a plan that would allow Treasury to create a new facility to hold auctions and buy up distressed assets from financial institutions headquartered in the U.S. Without Congressional approval, Treasury could expand programs to buy mortgage-backed securities through Fannie Mae and Freddie Mac, but that wouldn't be enough to address the broadening problems.
The Fed, meanwhile, was supposed to be a lender of last resort to banks. It wasn't built to fix all these problems, and the snowballing crisis worried Fed officials.
"This financial episode is one where a huge part of the problem is outside of the banking system," said Frederic Mishkin, a Columbia University professor who recently left the Federal Reserve as a governor. "We're in a whole new ball game."
On Thursday, Messrs. Paulson and Bernanke decided to ask Congress for authority to buy up hundreds of billions of dollars of assets. In the afternoon, Mr. Paulson, Mr. Bernanke and Securities and Exchange Commission Chairman Christopher Cox briefed President Bush for 45 minutes.
Mr. Paulson told Mr. Bush that markets were frozen and many different types of assets had become illiquid, or untradeable. Messrs. Paulson and Bernanke told the president that the situation was "extraordinarily serious," according to a senior administration official.
"We need to do what it takes to solve this problem," Mr. Bush replied.
That evening, during the meeting with Congressional leaders, Mr. Bernanke gave a "chilling" description of current conditions, according to one person present. He described the frozen credit markets, busted commercial-paper markets and attacks on investment banks. The financial condition of some major institutions was "uncertain," he said.
"If we don't do this, we risk an uncertain fate," Mr. Bernanke added. He said that if the problem wasn't corrected, the U.S. economy could enter a deep, multi-year recession akin to Japan's lost decade of the 1990s, or what Sweden endured in the early 1990s when a surge in bad loans plagued the economy and sent unemployment to 12%.
One lawmaker asked whether the solution will prevent bank failures. Mr. Paulson said it will stabilize markets. "But we'll still see banks fail in the normal course," he said.
On Friday, Mr. Paulson announced plans for a sweeping program to take over troubled mortgage assets. "The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," he said at a press conference. He said he would work with Congress over the weekend to get legislation in place next week.
During a round of briefings on Friday, Messrs. Bernanke and Paulson chilled lawmakers with their dire warnings about the cost of inaction. They had already taken additional steps, including new measures to unfreeze money-market mutual funds and an SEC plan to temporarily ban short-selling.
Speaking that afternoon, House Financial Services Chairman Barney Frank, the Massachusetts Democrat, tagged the rescue of AIG as the tipping point. "It didn't have the broader calming effect," Rep. Frank said. "They tried it the free-market way, they tried it the big intervention way -- and the result was on Wednesday, the world was falling in on everybody's ears."
Three things need to happen now. One, the Democratically controlled Congress needs for once to put aside partisan politics. It needs to pass the Fed plan within the week, resisting calls to add all sorts of bells and whistles to pander to their special interests. In this regard, Obama's calls of a few days ago - to include in an already trillion dollar bail out further protection for people who foolishly took out mortgages they could not afford - were an obscenity. Now Obama has decided to vote present on the economic bailout, not taking a position. That is a level of indecisiveness eminently preferrable to his previous position.
Two, subprime lending needs to made illegal. The insanity that began with the Clinton administration literally fining institutions that did not engage in the sub-prime market needs to be erased. It is still on the books today thanks to people like Barney Frank and Chris Dodd and their Democratic buddies in Congress. It needs to be consigned to the history books and economics classes that discuss the great financial disasters of history. This one needs to go under the chapter titled "Democrats and Socialism."
Lastly, the whole story of how this mess occurred needs to be told. This is, pure and simple, socialist intervention into the market that has blown up like a super-nova. The left is fighting a tremendous rear guard action to turn this history on its head. This must not be allowed to happen. Responsibility for this debacle needs to be clearly established. This nation cannot let people like Nancy Pelosi - who the other day made the utterly outrageous claim that Democrats bore no responsibity for this scandal - claim the narrative. She has promised hearings - which I am sure will be every bit as much a search for the truth as were hearings that took place the Soviet Politburo circa 1948.
Every single person, including the few intellectually honest members of the left, should be fully invested in insuring that the truth is told on this one. The necessity is a twist on the old truism, he who does not know history is doomed to reapeat it. In this case, he who wrongly believes in historical fiction is likely doomed to repeat it also. We may have just dodged not a bullet, but an atom bomb. It is not a situation we can morally, ethically, or financially allow to occur again.
If McCain and that part of the GOP who saw this coming don’t get out in front of this credit mess and start hammering away at the blame game the Dems and their media myrmidons are pushing, we could conceivably end up with the lunatics in charge of the asylum.
Update: NYT's resident Yale/MIT grad, the socialist economist whose most notable private sector work was consulting for Enron (for some reason, that doesn't appear on his NYT bio), Paul Krugman, has come out against the Treasury plan. For all long time readers of Mr. Krugman, there really can be no greater endorsement of the plan.
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