IBD's Guide To Debunking Obama's Economic Myths

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IBD, in a recent editorial, explores the five myths on which Obama rests his reelection bid. The thumbnail:

1. The Bush tax cuts and deregulation caused the recession. IBD and I are in agreement on that one - it was almost two decades of left wing social engineering of our credit market that caused the massive housing bubble - and with it, the but for cause of our great recession.

2. Obama stopped a second depression. Not quite. The recession bottomed out before Obama took office. Obama's contribution has been in preventing recovery.

3. Obama's economic policies are working. If by that Obama means his policies have lowered median income, replaced jobs lost in the recession with low wage entry level jobs, caused record long term unemployment, and increased the numbers of Americans in poverty, then yes, Obama's policies have been an epic success.

4. A slow recovery was inevitable. This is an excuse Obama only trotted out after his economic policies failed.

5. Nobody could have done any better. History teaches that deep recessions are followed by faster recoveries - at least until Obama. As IBD notes:

Since World War II, there have been 10 recoveries before Obama's. Had Obama's merely performed as well the average of all those recoveries, the nation's GDP would be a staggering $1.2 trillion bigger than it is today, and 7.9 million more people would have jobs.

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A Conservative Economic Narrative

At City Journal, The Free Marketeers Strike Back. It is a long and probing look from the perspective of conservative economists at free markets, regulation, and the origins of our current fiscal crisis. I highly recommend the entire article. To summarize the conclusions:

- Keynes was demonstrably wrong.

- Rising costs of energy were implicated in our economic meltdown and are the looming challenge for our future economy. Our government is not moving to meet this challenge, it is moving in the opposite direction.

- Don't underestimate the importance of monetary policy. Keep interests rates high enough so that prices remain stable but sufficient currency and credit are available to finance steady growth. Interest rates set too low for too long are a major factor in causing spectacular bubbles. That is what happened with Greenspan and the housing bubble.

- Market bubbles are an inevitable part of capitalism. You can't kill bubbles without killing capitalism. It is only when bubbles are combined with a very cheap money supply that they become truly dangerous in size.

- Recessions, as a part of the business cycle, are an intregal part of capitalism. Recessions are necessary for our system to correct market imbalances. You can't stop recessions without killing capitalism.

- The much maligned derivative market brought tremendous financial benefit, particularly to the world's poor. They allow for the efficient allocation of risk, thus increasing the availability of cheap credit. Some have recommended greater transparency for the market by funneling them through a clearing house that would create a record of the swaps.

- Big banks do not bring any economy of scale and, therefore, we should consider limiting the ability of banks becoming "too big to fail."

- Big banks should not enjoy taxpayer protection because that harms free competition, putting smaller banks at a disadvantage

- Reasonable regulations are necessary to efficient markets, and that includes requiring sufficient reserves. Banks become far too overleveraged, leaving them vulnerable during the economic downturn.

- Republicans need to stand up more forcefully for markets.

- Ballooning American and European debt poses a huge threat to long-term prosperity.

- By increasing taxes and imposing the wrong regulations, Western governments are hindering entrepreneurship and hence growth, that is the path to long-term prosperity.

The one thing Guy Sorman touches upon in his article does not go into any great detail about is the dismantleing of traditional lending standards. It is critical to note that Democrats dismantled our lending standards in the 1990's on a now discredited assertion that racism was endemic in the mortgage and loan industries. Even though now fully discredited, the race based standards remain in our laws and have actually been strengthened by Obama as part of the financial regulatory overhall recently passed into law.

Sorman does make one interesting point in addressing this issue. That is that, in comparing U.S. to Canadian home ownership, the Canadians fared better because of higher down payment requirements, yet the overall home ownership percentage between the U.S. and Canada are the same, suggesting the final irony, that Democrats destroyed our credit system for nothing. Here is how Sorman addressed the issue:

. . . [E]asy money helped expand a massive credit bubble. And that credit helped fund a wild proliferation of risky subprime mortgages, often issued with little or no money down, thanks to relaxed mortgage-lending laws and to Fannie Mae and Freddie Mac, the now-infamous “government-sponsored enterprises” that busily bought mortgages from lenders to keep homeownership expanding. The bursting of the bubble in 2008 brought the U.S. banking system, which had invested extensively in the subprime mortgages, to its knees. Given the enormous scale of the crisis, Taylor says, it’s clear that the private sector could not have caused it on its own. “Distorted incentives encouraged private speculation,” he says. “Central banks should return to their former global targets against inflation and be less erratic and more predictable.”

Taylor’s analysis draws support from a comparison of the financial crisis in the U.S. and Canada. Canadian banks, it turns out, weathered the financial storm much more effectively than American banks did. The reason: Canadian mortgages, unlike American ones, legally required robust guarantees, usually a 20 percent down payment. That helped keep homeowners from running away from their mortgage payments when things turned south, as happened in the United States. Canada and the U.S., it’s worth noting, still have the same percentage of homeowners—roughly 67 percent—meaning that the American incentives that favored risky bank behavior failed to increase ownership levels.

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Obama and Keynes, Hayek and Laffer

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."

. . . This really is starting to feel like 1932.

- Ambrose Evans-Pritchard, The Telegraph, With the US trapped in depression, this really is starting to feel like 1932, 4 July 2010

. . . 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. . . .

- Niles Gardner, The Telegraph, America is sinking under Obama’s towering debt, 2 July 2010

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.

I doubt much of America is fooled at this point:



(H/T Hot Air)

And then there was this the other day:

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.

Welcome, Larwyn's Lynx readers.

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Jobs & Unemployment

According to Obama, this morning, our economy is moving in the right direction.



In claiming that we are recovering, he ignored the specifics of today's job's report and other economic indicators - that unemployment (U-3) is at 9.5%; that our economy shed another 125,000 jobs; that the work force contracted; that the average hourly earnings decreased; and that the actual measure of unemployment / underemployment stood at $16.5%. The sum total of these indicators point to "a rather serious softening in the employment market." Indeed, the "percentage of the overall working-age population that is in the labor force fell last month to 64.7% -- near a 25-year low." Further, Obama failed to note another ominous indicator:

New orders for factory products tumbled much more than expected in May, posting their sharpest drop since the depth of the recession and their first decline in nine months, a government report showed on Friday.

Ignoring all of the above, Obama claims that, this year alone, "government" created "600,000 private sector jobs." That is laughable.

The reality is that we have hemorrhaged over 8 million jobs since this recession began. As to Obama's arrogant assertion that he has created 600,000 private sector jobs - the government cannot create a single private sector job. What the government can do is twofold. One, government can direct funding for government contracts to the private sector. But Obama has gerrymandered that process by freezing out non-union businesses that make up 92% of the private sector.

Beyond such government contracting, government can only create the conditions effecting the entire economy that will help or hurt private sector employment. As near as I can tell, there is nothing that Obama has done to positively effect the economic environment. To the contrary, his massive increase in spending and entitlements, with the promise of more taxes and entitlements to follow, are creating the conditions for economic malaise. Indeed, Obama is directing our economy on a downward spiral of historic proportions. The graph below shows current job losses in comparison to previous post-WWII recessions:

So how is the left attempting to address this mismanagement of epic proportions? Beyond the fantasies spun by Obama, there is the effort to paint Republicans as heartless for refusing to sign yet another blank check to extend unemployment benefits. It is actually rather comic, between Nancy Pelosi claiming that unemployment benefits are the best method to increase employment to Harry Reid, et. al, screaming that the Republicans are intransigent and unfeeling while it is they themselves that are refusing any deal:

Congress adjourns this week for the July Fourth recess without having passed a bill to extend unemployment insurance benefits to 1.3 million people who started losing them this month.

Democrats have been painting Republicans as unsympathetic to the long-term unemployed who will be unable to collect benefits, but Democratic leaders have rejected several offers by the GOP to vote for the bill if at least some of it is paid for.

"My concern is that the Democrats are more interested in having this issue to demagogue for political gamesmanship than they are in simply passing the benefits extension," said Sen. George Voinovich, R-Ohio, who offered a deal that was rejected by Sen. Majority Leader Harry Reid, D-Nev.

Democratic leaders were quick to attack Republicans for opposing the benefits, with House Speaker Nancy Pelosi, D-Calif., calling their opposition "just cruel" and "contrary to what our country is about."

Republicans, meanwhile, stood firm in their argument that extending benefits should not add to the deficit.

Voinovich told Reid he would vote for extending benefits if at least half of the extension could be paid for with unused money from the $787 billion stimulus package.

"I came to the table with a fair compromise, and the ball is in their court," said Voinovich, whose state suffers from a 10.7 percent unemployment rate. . . .

Obama should be doing everything possible to create the environment for private sector job creation. It goes without saying that his administration is on the opposite course.

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Wall Street, A Billion Dollar Fraud & The Mortgage Meltdown

I have long been a defender of Wall St. against charges that it was the primary cause of our current economic troubles. Obama's demonization of "greedy" Wall St. is designed both to stoke populist anger and to hide the heavy hand of Democrat's race based social engineering - in which Obama took part - that is the real proximate cause of our current fiscal crisis. Moreover, I believe Obama's proposed changes to the financial regulations are not only unnecessary, but on at least several levels, deeply counterproductive (see here and here).

That said, one thing that I do support is much stronger penalties for white collar crime. For example, if the accusations in this SEC Complaint of a billion dollar fraud are true, than Goldman Sachs should be severly punished and its employee, Mr. Fabrice Tourre, locked up and the key thrown away. Do read the SEC Compalint, as it is a window into the derivatives market, a snapshot of the relationship between Wall St. and the mortgage meltdown, and a road map to a billion dollar fraud.

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Obama Leads The Progressive Left Across The Rubicon (Updated)

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Sir Winston Churchill, Speech in November 1942

President Obama has crossed the Rubicon with the health care vote. The bill was not really about medicine; after all, a moderately priced, relatively small federal program could offer the poorer not now insured, presently not on Medicare or state programs like Medicaid or Medical, a basic medical plan.

We have no interest in stopping trial lawyers from milking the system for billions. And we don’t want to address in any meaningful way the individual’s responsibility in some cases (drink, drugs, violence, dangerous sex, bad diet, sloth, etc.) for costly and chronic health procedures.

No, instead, the bill was about assuming a massive portion of the private sector, hiring tens of thousands of loyal, compliant new employees, staffing new departments with new technocrats, and feeling wonderful that we “are leveling the playing field” and have achieved another Civil Rights landmark law . . .

Victor Davis Hanson, We've Crossed The Rubicon, PJM, 21 March, 2010

On Saturday night, we were a nation in deep trouble. We had a national debt of $12,676,374,186,522.00 - and were hemorrhaging billions in red ink daily. Unemployment/underemployment was well over 16% and was not forecast to get better during the coming year. We were still in the midst of the worst recession in our nation since the Great Depression - a recession itself brought on by Democrat social engineering of lending standards and a massive market distortion caused by Fannie and Freddie. (Update: The WSJ reports today that personal incomes contracted in the past year) Social Security, run as a ponzi scheme by a rapacious Congress for years and protected at all costs by Democrats, faced a huge problem of solvency (Update: with the insolvency starting this year) - dwarfed only by the massive unfunded liabilities looming in Medicare/Medicaid. And our ability to borrow to finance Obama's world record spending spree was rapidly deteriorating. Not only was our AAA rating for government securities in danger, but the market had already weighed in. "Two-year notes sold by the . . . Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity." Indeed, so serious are our economic woes that the "latest Fox News poll finds that 79 percent of voters think it’s possible the economy could collapse, including large majorities of Democrats (72 percent), Republicans (84 percent) and independents (80 percent)." Moreover, the same poll finds that three times as many individuals, some 64%, see our national debt as a greater threat to our nation than terrorism. In short, we were, on Saturday night, in a very bad situation. And then, Sunday night, Obama and the progressive left managed to make a bad situation exponentially worse.

On Sunday night, the progressive pulled out all of the stops to pass Obamacare, taking over, directly and indirectly, one sixth of our economy (voting roll here). Instead of addressing the looming disaster of Social Security and Medicare - indeed, instead of addressing unemployment and an economy in deep distress - Obama added on top of our failing entitlement programs the biggest entitlement program of them all. And Obamacare comes replete with massive new taxes, including taxes on investment income, unfunded state mandates that will mean higher state taxes, and the assurance of skyrocketing insurance premiums. As to our national debt, Douglas Holtz-Eakin, former head of the CBO, explained the massive additions to our debt that we can expect as a result of this bill's passage.

The IRS will now expand massively as the designated arm of the state to enforce Obamacare. They will shortly begin hiring the 16,000 new agents needed to enforce the mandatory purchase of health insurance by all Americans. Over one hundred new bureaucratic offices are about to be created, all to oversee our Obamacare. As summed up by NRO, the vote last night “will increase taxes, increase premiums, and increase debt, while decreasing economic growth, job growth, and the quality of health care.” And the people are not fooled. When polled by CBS as to whether the health care plan pushed by Obama and the left was motivated by political concerns or actual concerns with health care - the majority, and even a majority of Democrats, 57%, answered that it was motivated by politics.

It is not enough to now simply say that our government runs our health care system. To give full credit where it is due, the Democrats now own it. Let's never let anyone forget that salient fact.

It looked for awhile like Bart Stupak and a handful of pro-life Democrats might hold out against language in the Senate bill that was so crafted as to allow for federal financing of abortions. Ultimately, Stupak caved in under intense pressure and with the promise that Obama would sign an executive order directing that no financing would go for abortions. An executive order does not trump the plain language of Congressional legislation. Indeed, a Court interpreting the law would likely only acknowledge the executive order in a footnote to its decision, if at all. You can bet your bottom dollar that, when the mandates become operative in a few years, there will be a law suit forcing the issue - and a court with any intellectual integrity will require that the government provide federal funding of abortion. The reality is that federal funding of abortion through Obamacare is now virtually inevitable.

Obama stated in remarks after the vote:

This is what change looks like. . . . We proved that this government — a government of the people and by the people — still works for the people.

Is Orwell now Obama's speechwriter? Health care played no role in causing our economic downturn - yet Obama pretended that it was at the heart of the problem. The plan designed by the progressive left does nothing to bend down the inflation of health care costs - yet it was sold on the basis of sound fiscal policy (Update: James Pethokoukis of Reuters no less calls it Faith Based Deficit Reduction; see also the post above, wherein Krauthammer forecasts an Obama attempt to impose a regressive VAT tax in order to fund Obamacare). Not a single poll showed that a majority of the people wanted this monstrosity - yet Obama claims a popular mandate. This was not a bill passed on its merits - it was progressive sausage made with toxic, backroom deals. All that last night proved was that the progressive left are power hungry statists willing to say and do anything in order to amass power. This is not a government that works for the people - it's a political elite that wants to control the people and punish wealth creation.

Megan McArdle, herself a throwback to old times - an intellectually honest, if a bit misguided, Democrat - summed up her thoughts at the Atlantic:

What I hope is that the Democrats take a beating at the ballot box and rethink their contempt for those mouth-breathing illiterates in the electorate. I hope Obama gets his wish to be a one-term president who passed health care. Not because I think I will like his opponent--I very much doubt that I will support much of anything Obama's opponent says. But because politicians shouldn't feel that the best route to electoral success is to lie to the voters, and then ignore them.

As Bill Kristol points out, this is by no means over, even now. Republicans are planning a series of parliamentary procedural moves that may yet impact final passage of proposed changes to the bill. But the real challenge lays in the upcoming elections. "[W]hat Republicans have to do is to make the 2010 and the 2012 elections referenda on Obamacare, win those elections, and then repeal Obamacare." Truer words were never spoken.

James Fallows, on the other hand, writing at the Atlantic thinks that "this will not seem anywhere near as poisonous seven months from now as it does today." He is living in a dream world if he thinks, after the election of Brown to Kennedy's seat in blue Mass., after the birth of the Tea Party movement so maligned out of fear by the left, this will all blow over. At the Politico, they speculate as to which Democrat seats are now in danger as a result of their vote last night on health care. No need to speculate. The answer is every damn one of them.

Even John McCain has put the left on notice that they should not expect any cooperation in Congress from the right after their actions of the past year:

"There will be no cooperation for the rest of the year," McCain said during an interview Monday on an Arizona radio affiliate. "They have poisoned the well in what they've done and how they've done it."

No, they didn't just poison the well, they urinated in it. And we really should go one further than McCain. If you hear anyone mention the word "bipartisan" again, in any suggesting that the Republicans should cooperate with the Obama administration, the only appropriate response is a swift and powerful kick to the groin. Repeat as necessary until the person expressing this obscenity has undergone a complete and permanent attitude adjustment.

While it will be several years before the full weight of Obamacare will be felt, some of the provisions, including ones directly attacking the health insurance industry, kick in immediately. One is a change to the acceptable ratio of payments to benefits that has long been the health insurance industry standard. The health care plan signed into law changes the acceptable ratio from 65/35 to to 85/15. In a stroke, Obama has destroyed the ability of health insurance companies to pay overhead, salaries and make a modicum of profit. In addition, the new health care bill includes a 40% rise in taxes on health insurance companies - which also must be paid from the 15. The net effect of this war on our health insurance industry will be a massive increase in premiums next January, when most plans renew, and a massive contraction of the health insurance industry as many, if not all, medium and small insurers, are forced from the market. This from a transcript of Rush Limbaugh's show on Tuesday, wherein a health insurance employee highlighted the impact of the newly passed bill:

. . .

CALLER: Okay. For time immemorial, both state and federal regulation -- and also just the industry standard -- has been a 65-45 percentage arrangement: 65 in claims payment and 45 for administration and claims expense. Withholding that you store for, you know, a major catastrophe or something.

RUSH: This is to pay your claims?

CALLER: No, 65% is to pay the claims. Thirty-five percent is for everything else.

RUSH: That means 35% is salaries, administration costs, and the offices, all the paperwork, that kind of thing?

CALLER: It's that as well as, you know, we are required to keep a certain amount of cash on hand as a percentage of our claims exposure to pay claims. . . .

RUSH: Now, I just want to make sure I understand here. State and federal regulations set those percentages?

CALLER: State and federal regulations, yes.

RUSH: So if you wanted to have 85% set aside for claims, you couldn't. You had to go at 65%?

CALLER: Exactly.

RUSH: If you wanted 30% set aside for claims and the rest were administration, you couldn't do it. It had to be 65%.

CALLER: That's illegal, yes. It has to be 65-35, and there's a couple of percentage either way, but generally when an insurance company falls outside of those guidelines, they are considered financially unstable.

RUSH: Well, who audits you all to make sure you are within the ratio?

CALLER: We're audited by the state insurance departments, primarily. There are some plans that are audited both state and federally, and then you have your private auditors who will come in as part of the stock market and that kind of thing. So we're audited often.
. . .
CALLER: . . . So what Obama just did an hour and a half ago is make every insurance company in the country financially unstable. Remember, the 15% that we are left has not only to pay salaries, maintenance, upkeep of buildings; it also has to pay the 40% increased taxes that we've got. I mean, there's just no way. You can't do it.

RUSH: Well, you're getting a little bit ahead of me here. What did Obama sign that changes this 65-45 split? In what way did Obama now sign you into permanent instability?

CALLER: The provision in the Senate bill requires that all insurance companies pay 85% of premiums collected every year in claims.

RUSH: So the 65 is now 85?

CALLER: Exactly. It doesn't matter how much we increase the premium, it won't matter.

. . .

Rush: . . . You originally thought that your industry would survive. You're speaking industry or just your particular company?

CALLER: I would say 99% of all insurance companies, health insurance companies in the country.

RUSH: Okay. So you originally thought you might have three to five years to stay in business under Obama. Now you said it's two to three. Why?

CALLER: Because of the 85-15. Plus the additional expenses were going to incur. Additionally, the mandates, what people don't understand when CMS (which is the Centers for Medicaid and Medicare) push a mandate down on insurance companies, we have to pay to complement those mandates. We don't know how many of those are in this monstrosity. So we can have our mandate budget doubled, our taxes already up 40% or whatever it is, and our cash flow immediately cut.

RUSH: Well, how can you know in advance of paying any claims? Because they've now shifted to 65% that you have to set aside for claims to 85%. How in the world can anybody know in advance of paying claims that it's going to amount to 85%?

CALLER: Well --

RUSH: Of course 65%? It seems to be like this is a ridiculous dictate made by people that have no clue how your business works.

CALLER: Well, they don't have a clue. But the way that that amount of money is calculated is you look at the past year, past five years, past ten years, and you see what your claims expense have been those years. Then based on your enrollment and your demographics you project forward into what you expect to be paying in the future, in the next year and the next five years. So you can do that. It's not precise to a dollar, but you usually get pretty close. What he's done is by saying, for example, the preventative services now --

RUSH: Those are free. Those are, quote, unquote, "free."

CALLER: Yeah, exactly.

RUSH: What the hell is a preventative service covered by an insurance company anyway?

CALLER: Well, that would be your colonoscopies, your mammograms, your yearly physicals, your lab work.

RUSH: Oh, so those are free now! So if I want to go get a colonoscopy today and I have an insurance policy, I'm not going to pay for it?

CALLER: Exactly.

RUSH: But you will.

CALLER: Well, we will. We'll pay out the nose for it.

RUSH: (laughing) Well...

CALLER: I know, bad analogy. I'm sorry.

RUSH: It is Christmas!

CALLER: But, Rush --

RUSH: Well, no, I don't look at a colonoscopy as Christmas. Don't misunderstand. . . . But it is Christmas in the sense that I'm not paying for it. I don't know how you can stay in business even two to three years with this kind of thing happening to you this year alone.

CALLER: I don't think we will and that's why I am seriously considering leaving this industry. I'm updating my resume. You know, people who I work with -- even people who voted for Obama and thought he was the greatest thing since sliced bread -- are shell-shocked.

RUSH: That just frustrates the hell out of me. Anybody with a brain has no reason to be shell-shocked about who this guy is, but it is what it is.
. . .
CALLER: And you know how many people are going to die in the interim, Rush? I say that in all sincerity, because come January 1st you're going to see 200, 300% increases in premiums and people are going to drop their coverage. So you've got the woman who isn't going to go get the mammogram or the man who's not going to get the prostate exam.

RUSH: Wait a minute!

CALLER: People are going to die.

RUSH: I thought the mammogram was free.

CALLER: Not when you drop the coverage because you can't afford three times the premium. Remember, the premiums are going up because of the government, and jobs are being lost because of the government. If you can't pay it, you can't pay it. So people are going to drop it. They're going to drop their insurance before they drop their mortgage.

RUSH: They're going to be clamoring to the government to fix the mean-spirited insurance companies for raising the prices so high and that's where Obama's going to step in and say, "You know what? We have no choice here but than to do it ourselves," and then you get dumped on again first and foremost with Obama portraying the government as the savior. . . .

Read the entire transcript.

When Julius Caseser crossed the Rubicon river in 49 B.C., entering into Roman territory, it marked both a crossing of the point of no return and a declaration of war on the Republic. The end result was ultimately the destruction of Rome's Republican form of government. I think the analogy here is apt. Obama has so polarized politics in our government, it is questionable when or if we will see a return to rational, measured politics until either conservatism or progressivism wins out and the other is pushed into the dustbin of history. We are, as I blogged here, in a zero sum ideological war today. Never in history has the political system been so manipulated and in such a highly partisan fashion. Its provisions, mandating each person purchase health insurance, if upheld, will represent a vast expansion of the government's power to control and direct our lives. But even beyond all of that, this bill threatens not merely our health care system, but it also poses a clear and present danger to the fiscal viability of our nation.

In the end, the right must not merely repeal Obamacare, but it must present a better alternative. In that respect, Paul Ryan may in fact have the answer to Obamacare, as well as the problems of Medicare and Social Security. His "Roadmap" is a very serious attempt to address the actual problems we face. Here is hoping that Congressman Ryan is a player in 2012.

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Obama - Smoke, Mirrors & Unemployment

Obama took the opportunity of the release of Dept. of Labor unemployment report on Friday to claim his stimulus (all 7% of it spent so far) was accomplishing its goal, the recession is coming to its end, and that what we need now is a lot more of Obamanomics (health care, cap and trade, finanicail regulatory change, etc.) to insure that we don't repeat the sins that got us into this recession in the first place. According to Obama, among those sins were "inflated profits," "dirty . . . energy," and "soaring healthcare costs" that only "serve special interests."

There is so much wrong with Obama's statement in each and every particular, it would take a small book to address them all. But first and foremost is his claim that the July unemployment figures are somehow good news for the economy. That claim is mind boggling.

In July, according to the Dept. of Labor, America hemmoraged yet another 247,000 jobs. So then how did the Dept. of Labor's unemployment figures drop from 9.5% unemployed in June to 9.4% unemployed in July? It has to do with how the counting is done - and it seems an incredibly dodgy method. Simply put, under Dept. of Labor methedology, if you are unemployed and not somehow counted as actively seeking work within the past four weeks, then you do not count as unemployed for their statistical summary. The actual number of unemployed and underemployed in America is without doubt well into double digits, but that number is unreported. And indeed, with another quarter million jobs lost in June, yet the unemployment rate dropping, the only conclusion is that there is a real numbers game being played at Obama's Dept. of Labor. Smoke, meet mirror - and the teleprompter.

Unfortunately, Obama refused to take any questions from reporters on Friday. One wonders if anyone will follow up on Obama's incredible claims, and particularly his embrace of further bad economic news as marking the "begining of the end" of the recession.

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Depressing (& Depression) News

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.

Social Security - a massive ponzi scheme that the left utterly refused to attempt to reform during the Bush years, is now running in the red. Medicare isn't being fixed, its being subsumed in a plan that will only expand care to 1/3 of the uninsured, yet cost us trillions in extra dollars. Cap and Trade is another massive regressive tax.

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.

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Dodging A Depression

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.

Update: As Karl at Protein Wisdom states:

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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