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Considering the Future, Because Somebody Should
February 20, 2008
Economic actions are moving fast and furiously
in Washington. President Obama railroaded his so called $787 billion “stimulus
and “recovery” plan through Congress. Now, the President is moving
quickly to address other issues negatively affecting our economy. On Wednesday
the President announced a new bailout plan for distressed homeowners and began considering further loans to the bankrupt American
auto industry.
Of course all of these actions are knee-jerk reactions to a situation that continues to spiral out of
control. Based on politics and not sound economic considerations, the President
and Congress continue to spend us into oblivion in an effort to heal our economic ills.
The $12 trillion Uncle Sam has committed or already spent has done nothing to save our sinking ship. If the consequences of this federal largess were just temporary and carried no future repercussions then
we could all sleep more soundly at night. However, what Washington has already
done and is about to do will have enormous negative consequences for many years to come.
By following their political
instincts, policymakers in DC aren’t considering the future consequences of their current economic policy actions. Take their position on the auto industry for instance.
On Tuesday night, GM and Chrysler got back to Washington with a restructuring plan and their hands out looking for
$14 billion more. Of course, the billions already loaned to them by the taxpayer
was simply a stop gap measure to prevent them from going belly up on the watch of President Bush. Now, President Obama faces the same political consideration. So,
forget about whether giving Detroit more money makes any economic sense, they will get it because politicians don’t
like to look uncompassionate.
The problem is that whatever amount the President gives them will not be the end of it. GM and Chrysler’s woes have been building for decades and now they are trying
to restructure during the biggest economic downturn since the Great Depression. If
the market doesn’t think the two carmakers are a good investment, then why should the government? By continuing to finance these failures someday we will face the choice of either losing all of our money
or continuing to throw money at them for the sake of the money we already spent. What
a great choice that will be.
Then there is the increased support that Fannie Mae and Freddie Mac will be receiving
with the President’s plan to “help” homeowners. Already slated
to receive $66 billion in taxpayer support for projected losses, the two mortgage giants would receive up to an additional
$400 billion under Obama’s plan. Treasury Secretary Geithner was quoted
as saying that the support "will provide
forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to
ensure mortgage affordability for responsible homeowners."
Weren’t Fannie and Freddie big culprits in causing this current mess? Since nothing has changed including the provisions of the Community Reinvestment Act
why should we retool the mortgage giants with hundreds of billions of taxpayer dollars?
What does “ambitious efforts” mean? Is this another recipe
for disaster?
More automaker bailouts and strengthening Fannie and Freddie are troubling propositions to say the least. But, an even bigger concern is the Federal Reserve’s monetary policies combined
with Obama’s plans to stem the tide of foreclosures. As mentioned earlier,
the Fed along with the Congress has pumped in almost one hundred percent of GDP in dollars into our economy in the last year. The federal funds rate still stands at an artificially low 0 percent. Of course, the Fed has lowered the rate to this ridiculous percent not because that is what the market
called for, but to stimulate the housing market. However, last week, refinancings
made up 74.2 percent of all mortgage applications. So,
instead of stimulating new buying, the policy is encouraging refinancing. That’s
fine, but then President Obama comes along and proposes helping distressed homeowners refinance their homes with hundreds
of billions of dollars in subsidies.
This
combination of Fed monetary policies and Obama’s homeowner bailout will lay the foundation for another banking crisis. As millions of homeowners lock into artificially low rate, long term mortgages this
will set the stage for future bank failures. When consumer prices begin to rise
significantly because of Fed monetary policies and Congressional spending, the Fed will have no choice but to raise interest
rates to quell inflation. Banks will experience difficulties because on the one
hand they will be taking in much less money through their loans than they have to pay the Fed for new money and they will
lose deposits on savings accounts as customers move money to higher yielding money market accounts. This is what caused the savings and loan crisis of the late seventies and it will cause another banking crisis in the future if Washington continues with these
reckless economic policies.
At the end of the day, the Fed’s
monetary policies and the government’s fiscal program to end this economic crisis are all about politics over sound
economic policy. They represent nothing more than a massive expansion of the
socialist welfare state, which has been discredited time and time again. Our
policymakers’ lack of creativity in dealing with this crisis is appalling. Their
neglect in considering the future consequences of their actions is criminal.
Do Fed Officials Read Fed Publications? They Should!February 13, 2008
It
is mindboggling when considering the amount of newly printed money Washington has dumped into our economy in the last ten
months or so. The Federal Reserve, Treasury, and the Congress have poured in
over $9 trillion worth of stimulus, loans, stock purchases, and loan guarantee money.
That figure represents about two-thirds of our GDP. However last night,
Treasury Secretary Tim Geithner indicated in an interview on Bloomberg that what has been done so far is “too little
too late”. Thus he proposed a new $2 trillion big bank bailout plan. The plan coupled with Obama’s stimulus bill will saturate the market with an
addition $3 trillion. The new printing of dollars will bring the total to $12
trillion - if this doesn’t stabilize home prices, increase lending, and create four million jobs then I don’t
know what will.
But, the President doesn’t seem convinced all this spending will work. Speaking in Ft. Myers, Florida, on Tuesday, he stated his belief that his winning a second term in office
could depend on whether he can turn the country’s economy around. The President
stated, “If stuff hasn’t worked, if
people don’t feel like I’ve led the country in the right direction then you’ll have a new president”. If history is any guide then chances are likely we will have a new president in 2013.
At
the Federal Reserve Bank of Minneapolis, from 2000 to 2007, Timothy Kehoe, Edward Prescott and a team of 24 economists from
around the world studied economic depressions that happened in the Twentieth Century.
Instead of focusing on what caused each severe downturn, their study examined government’s reaction to the downturn
and the consequences thereof.
First, they looked at the economic experiences of Chile and Mexico in the 1980s. Both countries suffered from falling international prices for the commodity they exported
– copper for Chile and oil for Mexico. This in turn exposed a weakness
in each country’s banking sector. In 1982, Chile took control of its banks;
it liquidated the insolvent ones and reprivatized the solvent ones.
It set up a new regulatory structure which allowed the market to dictate interest rates and allocation of credit to
business. The immediate effect was severe pain, but by 1984 the Chilean economy
began to grow and is still the fastest growing in Latin America.
Conversely, Mexico pursued policies which nationalized
banks, provided credit at below-market interest rates to some large firms and no credit to others, and provided
massive fiscal stimulus schemes to grow employment. Even though both nations arrived at the same place for the same reasons, it was in
how each nation’s government dealt with the crisis that determined their economic futures. Since 1982, Chile has experienced significant GDP growth while Mexico
has languished with a slight GDP growth increase. See graph on page three: http://www.minneapolisfed.org/research/SR/SR421.pdf
The researchers also looked at
Japan and Finland in the 1990s. Both countries experienced economic downturns
in the early part of that decade. Japan pursued similar policies to Mexico’s
in the previous decade – massive fiscal stimulus, propping up of insolvent banks, and discriminatory credit allowances. Japan’s economy is still stagnant to this day.
Finland’s response
was more like Chile’s. Its government paid the price of reform and let
the market decide the allotment of credit to the private sector. The Finnish
economy has experienced robust growth since.
From their
seven year study, Kehoe and Prescott have concluded that bad government policies cause depressions. Specifically, they are convinced that it is the “overreaction” by government which “prolongs”
and “deepens” economic downturns. Based on their research, they believe
unproductive firms should be liquidated, including banks and auto makers. Bailouts
which prop up unproductive firms do nothing but “depress productivity” further because they take labor and capital
away from productive enterprises that would use them more effectively. Lastly,
they have more faith in markets than the government to make better decisions when it comes to resource allocation.
Their
findings have been published in the book Great Depressions of the Twentieth Century, published in 2007 by the Federal Reserve
Bank of Minneapolis. The big question is, have Geithner (former chair of the
New York Federal Reserve) and Bernanke (current chair of the Federal Reserve Bank) read it?
How can there be such a disconnect between the Fed’s publication and Geithner and Bernanke’s words and
actions? History does repeat itself. Perhaps
if Geithner and Bernanke in 2007 had read the wise analysis of their colleagues, we wouldn’t be repeating history and
well on our way to the next great depression. Kehoe and Prescott would have to
agree that $12 trillion is a hell of an overreaction by government. Thus, we
should expect the mother of all depressions.
For
the whole report go to: http://www.minneapolisfed.org/research/SR/SR421.pdf
Are We Headed for a “Change” in the War on Drugs?
February 6, 2008
Please excuse the teacher in me for a moment,
but let’s review President Obama’s performance so far in bringing “Change” to America. In foreign
affairs he has kept Bush’s Secretary of Defense and old time Cold Warrior Robert Gates on. He has made Hillary “I voted for American aggression in both Serbia and Iraq” Clinton his Secretary
of State. His Chief of Staff, Rahm “Rhambo” Emanuel is a firm supporter
of Israel whose dad actually perpetrated terrorist acts in the 1940s to bring about the birth of that nation. Lastly, it took him all of four days in office to authorize a cross border bombing of Pakistan.
Economically, his first priority in office has been to outdo George Bush by signing an even bigger
“stimulus” (notice the quotation marks) bill than the one signed by “W” in October. By the way, the current “stimulus” bill is growing as we speak to close to $800 billion and
Obama is using the same rhetoric Bush used (if it doesn’t pass we will face catastrophe) to railroad the bill through. He also made Tim “I have no idea what happened to $350 billion of taxpayer money
from the first stimulus bill and several of my own tax returns” Geithner Secretary of the Treasury. Imagine that; make a tax cheat the boss of the IRS. Isn’t
anything sacred anymore? Of course, Geithner isn’t the only tax cheat Obama
has nominated – Daschle, Richardson, and Killefer make up the remainder of the elite group. For this record, I give Obama an “F” for “Change”.
But wait, there is one
policy area I neglected to mention – social policy. A part of social policy
is the so called “War on Drugs”. Americans have spent a half a trillion
dollars since the 1970s fighting this endless battle. Over half of all federal
prisoners are drug offenders. The prohibition of illicit drugs in the United
States has directly financed, through consequent high prices for the rebels’ product, the longest running civil war
in the world in Columbia. The violence that has resulted because of the renewed
fight against illegal drugs by the government in Mexico is destabilizing our border with that country and threatening to spill
over into American cities in the Southwest.
Against this backdrop, given the political capital he possesses, Obama
has the opportunity to do something about this. In fact, in a March 2008 interview,
candidate Obama stated, "If it's an issue of doctors prescribing medical marijuana as a treatment for glaucoma
or as a cancer treatment, I think that should be appropriate because there really is no difference
between that and a doctor prescribing morphine or anything else". He went on
to say, "what I'm not going to be doing is using Justice Department resources to try to circumvent
state laws on this issue". These words gave encouragement to civil libertarians
and medical marijuana proponents that an Obama Administration would change the direction of at least some parts of the War
on Drugs.
Then on Tuesday of this past week, the Drug Enforcement Agency, a part of the Justice Department, raided
four medical marijuana facilities in the Los Angeles area. Agents seized over
400 lbs of the drug and $10,000 in cash. When questioned about the raids in light
of candidate Obama’s campaign remarks, DEA spokeswoman and special agent Sarah Pullen answered that, "There has been
no direction as to a change in how we ... enforce federal law". The key word
in the quote of course is “change”.
It is certainly disappointing that the Obama Administration hasn’t
yet put a halt to one of the most uncompassionate things the federal government does – deny medication to those in pain. Indeed the new president is preoccupied with two other wars he inherited and an economy
headed for depression. Maybe he just hasn’t gotten around to addressing
drug policy. For that possible reason I am willing to give him an “incomplete”
on “change” in regards to the War on Drugs. However, my patience
is running thin.
“Change” Has Come to America?
January 30, 2008
The current financial meltdown has its origins in a presidential act that took place in 1971. In that year, through presidential directive, the United States defaulted on its obligations
under the Bretton Woods system. Because the Vietnam War and LBJ’s Great Society required large expenditures on the part of Uncle Sam, inflation
and a devalued U.S. dollar resulted. The problem for the U.S. at the time was
that foreign countries could demand gold in exchange for devalued dollars. Naturally,
this is exactly what they did. Fearing a complete depletion of U.S. gold reserves,
Richard Nixon closed the gold window and began the age of the fiat dollar.
With
the Gold Standard out of the way, the federal government could monetize even larger amounts of debt. In 1971 the national debt of the United States
was $425 billion. At the end of 2008, the national debt exceeded $10 trillion
– a 2252 percent increase in 38 years! Naturally, this mammoth increase
in debt did come at a cost to our economy. For one thing, every dollar in debt
the government monetized was one dollar less that could be used by industry to grow the economy. Another cost was inflation – the erosion of savings and purchasing power. From 1792 to 1971, the average yearly inflation rate was .7 percent. From 1972 to 2008, the super monetized debt era, the average yearly inflation rate was 4.66 percent.
This increase in inflation contributed to the ballooning of household debt during this time period. If things cost more money and savings isn’t worth as much debt is likely to increase. In 1971 U.S. household debt was about $500 billion. In 2008 the number ballooned to about $14 trillion – a 2700 percent increase in 38 years!
Spending sprees, whether personal or governmental, can’t last forever. The depression we are heading into is the hangover for our binging. Taking the debt numbers from above into account, we are headed for the mother of all depressions.
The funny thing is that Washington has tried very hard to avoid depression. It has done it through, you guessed it, more monetized debt. It is like policymakers at the Federal Reserve, Executive Branch, and in Congress have no creativity or
memory. They have spent trillions of dollars to stimulate the economy out of
the current financial crisis. What we have to show for it is a record number
of Americans receiving jobless benefits, many well-known brand names on the brink of bankruptcy, and an assets market that
has already lost trillions in value continuing to flounder.
Then on January 20, 2009, Barack Obama, the man that promised us “Change
We Can Believe In”, was sworn in (well, sort of) as president. What was
one of his first priorities? - to monetize over $800 billion in new debt to stimulate the economy. This is the same exact thing we have been doing for the last 38 years.
Isn’t one definition of insanity to repeat the same action over and over again expecting a different result? But, it gets worst. Obama’s stimulus
bill is packed with spending that doesn’t have anything to do with economic recovery.
Washington can’t even make it look good anymore. The spending proposals
include: $420 million to battle avian flu, $335 million for programs to combat
AIDS, VD, and TB, $2 billion for Head Start, $10 billion for science facilities, and $6 billion to bring high-speed Internet
to rural and underserved areas. If this is change then I am a communist.
We
do need change in America. We need to change our political leadership and install
statesmen that can think outside the Keynesian box. We need to change our expectations
of what government can and should do. We must return to the limitations placed
on Washington’s power found in the Constitution. We need to change our
monetary system. The Fed should be abolished and our currency should be backed
by a scarce commodity. We need to change our personal habits. Many Americans need to learn there is no such thing as a free lunch.
The bills eventually come due as is being proven through this impending depression.
Finally, we need to change our economic system. We need to reject the
statism, socialism, fascism or whatever ism you want to call it of at least the last 38 years and reinstitute a free market
system. That free market system would pay its bills, reward merit, and penalize
misbehavior. If President Obama genuinely wants to fulfill his campaign pledge
to “Change” America then he can start with this blueprint.
Boycott
the Banking Cartel, Join a Credit Union
January 24, 2008
It is no secret that this author detests the Federal Reserve Bank
and believes it should be abolished in favor of a sound monetary system. However,
the chances of that happening any time soon are about as good as former president Bush being appointed Secretary of State
in a future administration. So, is there anything Americans can do to hurt the
cartelized system and potentially bring it to its knees? Besides electing anti-Fed
representatives and senators to Congress, Americans have the ability to take their banking business elsewhere – to non-Federal
Reserve credit unions.
For first time readers of this column, I will briefly review the reasons for my disdain of the
Fed. In 1913, at the urging of big bankers, Congress created the Federal Reserve
System. The system essentially set up a banking cartel in the United States whereby
through Fed policies big banks could reap huge profits while the little guy had his purchasing power and savings stolen from
him. This was done through interest rate adjustments, a fractional reserve
banking scheme and the printing press. Since 1913 Fed policies have been responsible
for a 95
percent loss in the purchasing power of the dollar. Of course the Fed had accomplices in committing this grand
larceny of epic proportions. On April 5, 1933 Roosevelt ended the Gold Standard
for domestic holders and in 1971Nixon permanently closed the Gold window for foreigners.
Because the supply of money was no longer restricted to the amount of gold in circulation, the Fed could now increase
the money supply arbitrarily. And that is exactly what it did.
As a related
consequence, today, our national debt is $11 trillion and according to President Obama Americans need to get used to budget
deficits over $1 trillion a year into the future. Many will say, “well,
the national debt doesn’t matter”. Many pundits and politicians alike
seem unfazed by all the spending. But, the debt does matter. Like individuals and businesses, when Uncle Sam’s credit runs out and the bills come due Washington
will be faced with a choice between default or raising taxes and cutting spending. In
light of the current spending spree and Washington’s aversion to spending cuts, tax hikes will be hefty and will certainly
lead to economic disaster.
Then there are all the bailouts of Fed member banks.
These banks and most Americans know who they are, have made horrible lending decisions in the recent past, but through
their buddies at the Fed are not suffering the consequences of those decisions. Bernanke
pressured the Congress to appropriate money we didn’t have to the tune of $850 trillion to bail the banks out. Congress, going against the wishes of 90 percent of the American people, acquiesced. The Fed printed the money. What did we
get for our involuntary generosity? No progress toward solving our economic woes
and no accountability from the Fed on where the money went.
So, let’s get back to our discussion of credit unions. Because of their status they have many advantages for consumers. They are not-for-profit and therefore unconcerned about stockholder equity and exempted from most state
and federal taxes. Consequently, credit unions, compared to traditional banks,
return their profits to their customers, who are the owners, in the form of lower rate loans and services and higher rate
savings accounts.
But, beyond the advantages of using credit unions as a consumer, using them would contribute to hurting
the Fed sponsored cartelized banking system and perhaps perpetuate its eventual downfall.
First, credit unions are not regulated by the Fed. Second, Fed banks rely
on our deposits to make loans. By rechanneling our deposits into safer, more
responsible credit unions we take away their ability to make profit (and bad loans).
The question then arises, how much further bailout money would the American people tolerate for these failing Fed banks
before calling for the Federal Reserve system’s abolition?
Third, with less deposits in Fed banks the fractional
reserve scheme is tempered in its ability to artificially increase the money supply.
It is true that credit unions are held to reserve requirements, but to the best of my knowledge these are minimum requirements. Thus the democratically elected boards of credit unions could keep their reserves
at percentages much higher than required by the Fed.
Credit unions, like the rest of us, are feeling the effects of
the financial crisis. However, they are not running to Congress looking for handouts
from taxpayers. They exist to serve their members and not irresponsible Wall
Street fat cats. Many did not participate in sub-prime lending. By transferring the national savings to them and away from Federal Reserve banks, Americans can put a significant
hurt on the Federal Reserve system and eventually bring about its demise. For
more information about joining a credit union go to: http.www.creditunion.coop/how_to_join.html.
Keynes’ Prophetic Words January
16, 2008
"By this means [printing money] government may secretly and unobserved, confiscate the wealth of the people,
and not one man in a million will detect the theft." John Maynard Keynes (1883-1946), British economist.
How true
Keynes’ words have been. Since its inception in 1913 the Federal Reserve
Bank of the United States has perpetrated policies that have devalued the U.S. dollar by over 90 percent. It has done this by increasing the money supply arbitrarily through fractional-reserve banking, interest
rate adjustments and yes as the context of Keynes’ statement indicates through the printing of money out of thin air. For the most part, almost all Americans have been oblivious to this grand larceny
of epic proportions. Many realize that they cannot buy as much as days gone by,
but they don’t know exactly why. Many realize that they will have to save/invest
a lot more for a better retirement than their grandparents, but again many do not know why.
I remember a history teacher of mine bemoaning the fact that unlike his father of a generation earlier he could not
afford to buy a new automobile each year. He made more money than his father
did, but that just didn’t convert into a new car per annum. The irony was
that my history teacher, like many, loved Franklin Roosevelt, who was of course the very scoundrel responsible for taking
us off the Gold Standard and allowing the Fed through our elected officials to print money at will and debase our currency.
What is truly amazing is that today given the consequences of fiat money and
all the trillions of dollars the Fed has already printed for “economic recovery” there is still a large clamoring
for more artificial dollar production to “thaw” credit markets. Most
pundits, journalists, and economists are badgering the incoming Obama Administration and Congress to do more. Well, their wish is about to come true.
Congress is considering an $825 billion “economic
recovery plan”. The plan would do everything from making homes more energy
efficient to, if you can believe it, infusing cash into money-losing companies to help them stay afloat. It’s the old, the government can solve all of our problems with no costs mentality. Of course, for those of us that understand why we have to save more for retirement and why most of us no
longer can buy a new car every year it is more of the same – the Federal Reserve counterfeiting our currency and thereby
devaluing it based on false economic theory that was discredited long ago.
The facts speak for themselves. Uncle Sam has already
injected over $2 trillion to thaw credit markets and stimulate the economy. What
do we have to show for it – a surging unemployment rate, the lowest consumer confidence in a long time, and still no
pick up in banks loaning money again. As of the week ending December 17, 2008,
the cash reserves of banks in the U.S. increased to $774.4 billion from $604.7 billion in November and an incredible $2.39
billion in December 2007. In December the yearly rate of growth of commercial
bank loans fell to 3.55 from 4.8% in November and a hearty 10.2% in December 2007. Remember
how we were told by the Paulson/Bernanke/Bush Crime Syndicate that if Congress didn’t appropriate $700 billion in October
the world would come to an end? Their scare tactics were based on phony economics
then and consideration of even more spending now is based on equally phony economic assumptions.
Make no mistake about
it, even though the Fed has pumped trillions of dollars into the economy prices continue to fall. That’s because consumers, banks, and other businesses have not bought into the government’s
phony recovery scheme and are saving their cash for harder economic times to come. Those
times will come and be accompanied by the realization of most Americans that the dollar has been devalued enormously and they
better spend theirs before it is too late. At that point, the resulting inflation
and lack of goods to buy from all the spending will send us into an economic ice age.
Unfortunately, even then, Keynes words will be prophetic. I am sure the
Fed’s printing press activities will not be blamed for our disaster. Like
now, the blame will fall on capitalism.
Why the Hell Are We Allied with Israel? January
4, 2008
Abu Gleg was an elderly Bedouin, father of 30. Eight years ago
he donated land for an American international school to build its facilities. Within
the walls of that facility, an American curriculum and the noble goals of tolerance and peace were taught to the students. Over the weekend, the benevolent Bedouin and the institution he gave birth to were
killed and demolished by Israeli bombers.
As an international American teacher this story hit home. The fact that a school would be demolished and its night watchman killed in a combat action is hard to
believe. I am not naïve enough to believe that it couldn’t happen. But I didn’t expect it to happen as a result of the actions of a major ally
of the United States.
The latest violence in the Middle East has gotten
me to question once again, why is Israel a major ally of the United States? The
one lesson I learned from my college foreign policy classes was that countries act to preserve their survival, period. Nation-states are not people. They do
not have altruism. They do not sacrifice the well-being of their people for high
principles or ideals. As a matter of fact, this stance would ultimately put at
least a portion of a country’s population at risk. Pacifist leaning countries
do go to war all the time to ensure their survival. The United States did not
sign the Kyoto Agreement on the environment because it would have harmed at least a portion of our economy and therefore our
citizenry to do so.
So what is it that Israel gives us that makes it indispensable to our national interest? Does it have a natural resource that we need for economic or military reasons? No, as a matter of fact the direct opposite is true - those countries that are Israel’s sworn enemies
have oil. Being friends with Israel has placed the lifeblood of our economy at
risk many times throughout the years, yet we continue to support Israel with aid, both military and economic, votes in the
United Nations, and rhetorically through our leaders.
Does Israel’s location provide us with security of a trade
route or a convenient military outpost? Again the answer is no. In the Middle East it is other states, some not friendly with Israel, that control or are near strategic
trade routes. Egypt owns the Suez Canal.
Iran and the United Arab Emirates surround the Straits of Hormuz. As far
as military outposts are concerned, the United States has fought two gulf wars in the last twenty years and has never used
Israeli soil to encamp or to launch an attack. Bases in Turkey, Qatar, and Saudi
Arabia were used with great success.
Lastly, one could ask, does Israel produce some good or service that Americans
need to warrant the cozy relationship between them and us? I can’t think
of any. Certainly our countries trade with each other, but that might continue
even if we were not necessarily allies. Didn’t the United States and the
former Soviet Union trade with each other?
As far as I can understand from our leaders, the reason the United States
and Israel are such close allies is because Israel is the only democracy in the Middle East.
This view is a throwback to Woodrow Wilson’s idea that the United States is ultimately responsible for “making
the world safe for democracy”. Under this mindset, the United States must
support Israel unconditionally to ensure its survival and help spread the ideals of representative government throughout the
Middle East. This of course runs counter to what I learned in college about the
pragmatic actions of nation-states. Why would the United States support a country
on high principle and at the same time jeopardize its own well-being?
The
answer to the above question is, it wouldn’t. The real reason our government
has close ties with Israel is because our shameless politicians love to be reelected.
There are two groups in America that support Israel with all their might, American Jews and Evangelical Christians. These two groups are vociferous, politically well organized, capable of raising large
amounts of money and they vote all the time. Why else would the mayor of New
York, Michael Bloomberg, be in Israel right now to show his support for its actions?
Doesn’t he have enough to worry about at home with the financial crisis on Wall Street?
Now, this is not
a criticism of Israel. As a sovereign nation it has a right to defend itself. This is a criticism of our politicians for placing their interests ahead of our country’s
interests. We support Israel to our detriment.
Why have so many Middle Easterners trained to be terrorists to strike American targets?
Why is the supply of oil and its price so unstable? Why are some Arabs
threatening revenge against both Israel and the United States over the current violence in Gaza. The answer to all of these questions is because we support Israel.
By not supporting Israel the United States would be safer and oil would probably flow more freely. We would be promoting our national interests and perhaps no more American international schools would get
blown up as well.
More Money Does Not Necessarily Equal More Wealth
December 20, 2008
I am a billionaire. Well, I would be if I lived a little farther
south in Zimbabwe. You could be as well if you moved to the south-central African
nation. Once known as the breadbasket of the region, Zim. (as it is affectionately
called in southern Africa) is on track to be the country in the world with the highest billionaire rate. You see, through government mismanagement of the economy and extensive exercising of the printing press
by the central bank in the country, inflation is in the millions of percent. The
central planners answer, well, continue to print more money in larger and larger denominations so people can have the currency
to buy things like bread and beans. Of course, as all Austrian economists know
more money means even more inflation – prices double about every day in the capital Harare. Unbelievably, the most recent note issued was a $100 billion bill – equal to about $20 USD on the
black market. The problem is that through the policies of its central economic
planners Zim. is becoming the poorest country on earth. This is proof that more
money in the economy does not necessarily translate into more wealth.
This
would be a lesson that our economic central planners should learn. Now to be
sure, our Federal Reserve Bank is not increasing our money supply anywhere
near the rate of increase that
Zim’s central bank has imposed on that economy. After all, Zim’s
central bank is more like Bernanke on speed. But, Uncle Sam is spending a lot
of money He doesn’t have on programs that are not working to reinvigorate the economy.
Take the $161 billion stimulus package passed earlier this year by Congress.
It hasn’t achieved its intended goal – consumer spending to induce economic recovery in the United States. Maybe it didn’t work because Americans spend 61 percent of their consumer goods dollars on imports. Or maybe it didn’t
work because the American people are smarter than their leaders. They simply
saved the money for the impending rainy day that is sure to come.
Then there is the $700 billion bank bailout bill
hurriedly passed by Congress in October. In November over one million workers
lost their jobs. Housing prices are still going down and Americans are still
not buying from the Big Three automakers. The Administration can’t even
decide on a definite plan to use the money. First it was to buy bad assets from
financial institutions, then to liquidate banks balance sheets, then to buy bad paper from corporations, and now it is to
bailout the automotive industry. Since, oil has plunged to below $34 a barrel
maybe the petroleum companies could use some taxpayer funds to tide them over for a while.
Speaking of the automakers, Bush once again showed exactly what kind
of a weasel he is – the worst kind. He essentially threw $17.4 billion
dollars of money we don’t have down the drain so that Chrysler and GM would not collapse on his watch. The automakers belong in bankruptcy court. They have no chance
of restructuring into something that is economically viable. The President has
given them 3 months to shape up. Give me a break.
The UAW has already rejected even the mention of wage and benefit concessions that would allow the Big Three to be
more competitive against foreign car makers. Even though he has run GM into the
ground, Rick Wagoner has been allowed to stay on as CEO. Lastly, there is an
impression among American consumers, rightly or wrongly, that American automakers produce junk vehicles. By simply changing car designs, this impression of quality will not change and sales will not improve. The Big Three will eventually fail or they will become like many banks have become,
wards of the state. The Big Three bailout is just the latest example of policies
that will not even bailout the recipients of the money let alone reinvigorate the economy.
To come will be President
Obama’s stimulus package. It will be huge, probably in the neighborhood
of $700 billion. It will include all of the things FDR was revered for –
public works, welfare payments, and other Keynesian spending. Just like the Great
Depression, this spending will not work today either.
Zim’s problems began when President Robert Mugabe confiscated
farms and handed them over to his non-farming cronies. Scarce resources were
stolen from productive users and given to incompetent recipients. The U.S. government
is doing the same thing right now. It is taking scarce resources away from productive
individuals and businesses who are efficient and valuable to our economy, and giving them to banks, automakers and other corporations
who through their performance are a drag on our economy and therefore must be liquidated.
As Uncle Sam continues to spend money it doesn’t have on programs that will not improve our economy like Zimbabwe
the United States will be poorer for it. The only question is how poor?
Will Obama “Change” U.S. Foreign Policy? Part II
December 15, 2008
As noted in this column on November 8, Barack
Obama’s first two presidential acts were not encouraging for those who believed him during the campaign when he said
his administration would bring “Change We Can Believe In”. The
appointment of Democratic neo-cons, Joe Biden as vice-president and Rahm Emanuel as chief of staff raised serious questions
as to Obama’s commitment to “change” U.S. foreign policy. But,
even this writer was willing to give the president-elect the benefit of the doubt until such time as he made more appointments. Well, that time has come. Obama has made
three more foreign policy appointments. Each
of those appointments indicates no change in direction, but a continuance of failed past policies.
First of all, Robert
Gates will stay on as Secretary of Defense. Gates, a career CIA guy has been
a vocal critic of Obama’s Iraq withdrawal plan. He supported the invasion
of Iraq and bought into the fraudulent excuses for attacking. Additionally, at
a time when Russo-American relations need repairing, Obama is keeping a veteran Cold Warrior as head of defense. Lastly, Gates is no Rumsfeld, but he still is connected with the Bush regime and its reign of terror around
the world. At the end of the day, Gates is nothing more than an establishment
choice for the important position at Defense.
Another Obama appointment was
Marine general James Jones as national security advisor. Jones is a good friend
of John McCain’s and served as an outside advisor to him on national security issues.
As a matter of fact, McCain would have appointed Jones to a similar post in his administration. Clearly
the two are like minded, which calls into question why Obama would want Jones around.
Lastly, there is the appointment
of Hillary Clinton as Secretary of State. During the campaign, the biggest and
perhaps only substantive issue that she and Obama differed on was Iraq policy. She
voted to give the president the authority to invade and was slow to call for withdraw.
This was not the first time her hawkish inclination reared its ugly head. In
a 1999 interview with Talk magazine, the former first lady was quoted as saying she urged her husband to use NATO to bomb
Serb targets to halt ethnic cleansing in Kosovo. “I urged him to bomb….What
do we have NATO for if not to defend our way of life?” The actions and
verbiage of Mrs. Clinton seem more like those of a Bush appointee, which doesn’t bode well for the idea that there will
be change in foreign policy from the new administration.
No, it is clear from Obama’s appointments that U.S. foreign policy will not change
much from the Bush years. It is telling that not a single top official of Obama's
foreign policy/national security team opposed the war with Iraq--or the fraudulent claims leading up to it. He has chosen establishment figures that have the approval of the ruling elite. Recently, Senator Lieberman, a big supporter of McCain during the campaign was quoted as saying,
"Everything that President-elect Obama has done since
election night has been just about perfect, both in terms of a tone and also in terms of the strength of the names that have
either been announced or are being discussed to fill his administration". With an endorsement like that we can be assured that on the last Election
Day the American people voted to replace one belligerent administration with another.
Russo-Georgian War Revisited
December 5, 2008
On
August 17, 2008, I published a blog that decried the reporting of the Russo-Georgian War by the American “mainstream” media. In that piece, I accused our media of disinformation, ignoring the facts and downright lying in its coverage
of the conflict. Specifically, my condemnation centered on the impression our
media gave that the conflict was all Russia’s fault. We were led to believe
that Russia had invaded Georgia unprovoked and Georgia’s enlightened democratic president Mikhail Saakashvili was a
victim of the big bad bear from the north.
Of course, I took a lot of abuse for my siding with the bad guys (Russia)
in this event. It was indicative of the “you are either with us or against
us” mentality that our esteemed president has instilled into our cultural norms.
Some of the comments I received for that blog included, “Are you getting your news from TASS”; “I
suggest that from your perch in Zambia, you need better binoculars to see the action”; and my favorite, “do cue
me as to when I start playing the Russian national anthem on the violin here…
I also received hate e-mail from a woman of Georgian descent.
Now, I am a big boy and can
take the abuse, even the e-mail that condemned me to eternity in hell. And as
a big boy I can also boast and say I told you so. On November 26, Georgia’s
former ambassador to Russia Erosi Kitsmarishvili, told a Georgian parliamentary commission that Georgian
President Mikheil Saakashvili was “itching” to do battle over South Ossetia. Kitsmarishvili labeled Georgia
the aggressor in the conflict and said that Georgian officials told him President Bush gave his
blessing for such a use of force when he met the Georgian president in Washington in March.
Vindication is sweet, but I am sure that the same detractors will respond to this blog by saying Kitsmarishvili
is suffering from Stockholm Syndrome. Or they will say he is
really a Russian parading around as a Georgian ambassador. Or that he is lying
because he is a communist. In any event, these detractors will probably still
not face reality that their media and president have lied to them again. They
will still have faith in the man who chewed on his tie in front of live TV cameras.
But, this blog is not just about saying I told you so. It is a
reminder that we shouldn’t believe everything the media in America tells us. Their
perspective on most things is skewed. They have been socialized by the public
schools, their college professors, and the underlying persuasion in this country that the U.S. government can do little wrong. Most journalists have sold out to their corporate employers who in turn are more interested
in pleasing the politicians so they can get the interview or the special favor than in doing their jobs – holding elected
official accountable. With the advent of the Internet we do have more choices
when it comes to media outlets. Here’s hoping more Americans will overcome
their socialized belief that if ABC, NBC, CBS, CNN, and Fox said it then it must be true.
Congress Has Reached New Depths of Stupidity
November 28, 2008
This week the government reported several statistics that indicate
that the $7 trillion Uncle Sam has committed to economic stabilization is having little real effect. On Wednesday, the Labor Department reported that the four-week average of initial requests for unemployment
benefits was at its highest level since January 1983. The Commerce Department
reported that consumer spending plunged by 1 percent in October. Commerce also
reported that orders for big ticket manufactured goods plunged in October by the largest amount in two years. Orders for durable goods dropped by 6.2 percent which was more than double the decline economists expected. Lastly, the unemployment rate hit a 14 year high of 6.5 percent.
So, with all of this grave news and the seemingly ineffectiveness of the government to spend our way out of
depression, unbelievably Washington with an increased Democratic majority in Congress and a Democratic president-elect is
planning a bevy of new pro-union measures when they take office in January. It
is unbelievable because the last thing we need right now, other than a tax increase, is for Washington to increase costs on
business. After all, it is business that is being relied upon to supply the jobs
that will eventually lead us to recovery.
What are the measures the new administration is considering imposing
on business? They are essentially the same old left-wing schemes that have been
pushed for years. They include: mandatory
paid sick leave, ergonomics regulations, and expansion of the Family and Medical Leave Act.
These
measures that the president-elect and his socialist buddies in the Congress are considering are of course unconstitutional. This blogger is going to sound like a broken record, but Congress has no authority
under Article 1 Section 8 of the U.S. Constitution to legislate benefit packages for workers of private business. There is a good reason for this. The founders realized the
only way for a people to be truly free was by guaranteeing their economic freedom. It
works both ways – freedom of individuals to use private property as they see fit and freedom of workers to use their
labor as they see fit. Forced regulation puts business at a competitive disadvantage
because it usurps the power of the market to make the most efficient decisions possible.
These measures seem just, but how does Congress know what the ramifications will be for the health of American business? They don’t and remember again that we are relying on business to reinvigorate
the economy with jobs.
One thing is certain each of the measures will increase the costs
of doing business. Cost estimates for the ergonomics regulations alone total about $100 billion a year to implement. The proposal to
expand the Family and Medical Leave Act includes small firms and applies to events such as parents attending school conferences
with their child’s teacher. It is naïve
to think that businesses can or will simply absorb the increased costs of production due to government regulations. These costs will be passed on to workers through less job growth and higher prices for products and services. If Washington truly believes that consumer spending will get us out of our current
economic mess then policies that increase business costs will be counterproductive to that effort.
The cornerstone of the pro-union, anti-business measures is the card-check legislation. Card-check is Obama’s reward to his union supporters like the Department of Education was Jimmy Carter’s
reward to the National Education Association’s for their support in 1976.
It would force companies to recognize a union if a majority of its workers signed cards. This is different from today’s law which requires a month-long campaign ending in a secret vote and
would make unionization of a business much easier to attain. Government meddling
in this matter is ridiculously unconstitutional. Beyond that obvious fact, why
is government still supporting a dinosaur whose historical record is filled with hooliganism, and putting whole industries
out of business in the U.S. (see steel and automobiles)? Has Congress learned
nothing from its recent study of how the UAW has contributed to the collapse of the Big Three?
It is illegal for Congress to enact the
above measures anytime, but is particularly irresponsible for them to do it now while we are headed for a depression. Having already committed close to $7 trillion of money we do not have to fix our economic
problems, now they want to compound our difficulties by placing unreasonable regulations on the sector that is charged with
reviving our economy. Congress has reached new depths of stupidity.
Bankruptcy over Bailout
November 21, 2008
Congress
is getting so much pressure and hearing so many tall tales these days that it’s akin to unscrupulous telemarketers battering
the simple minded to buy their product. It is getting to the point where Congress
will need to pass legislation to protect itself from money grubbing shysters. First,
it was the Paulson/Bernanke Crime Syndicate (their specialty is counterfeiting) that told Congress they needed a cool $700
billion or the sky would collapse on the United States. Now, it is the poor automobile
industry (that just got $25 billion from Congress in October) that needs another $25 billion lest the unemployment rolls in
this country will swell by 13 million or 4 million (they haven’t decided on a number yet). Next month, Congress will probably hear from the airline industry and how it needs billions. After that, look for the agriculture sector to weigh in and then who knows, cigarette companies?
The
fact is, soon there will be no end in sight to the steady stream of industries and groups that will lobby Congress for federal
largess unless they put an immediate halt to the giveaways. Congress has a golden
opportunity to do just that right now by saying no to the automobile industry. No
matter what the costs, Congress must say in the words of Roberto Duran “no mas” to billions in bailouts for Detroit.
For one thing, all of these bailouts are unconstitutional
and thus illegal. Article 1 Section 8 of the U.S. Constitution clearly specifies
the powers delegated to Congress. Nowhere in those roughly 17 powers is Congress
given the authority to transfer money from one constituency to another. Nowhere
in there does it say Congress can use the federal Treasury to prevent corporate bankruptcies.
Critics of this position will say, “but what about the general welfare clause in the same section?” The answer is, if the general welfare clause gives the Congress the power to
bailout corporations with taxpayer funds then why did the authors of the Constitution not delineate that power among the 17
powers in that section of the Constitution? Why did they delineate any powers
at all if the general welfare clause includes any power? According to the general
welfare clause logic of the statists, the Congress can do whatever it wants under that one clause. That is why we are in the mess we are in.
Another reason Congress must put an end to its handouts
is because it is investing in losing propositions. The Big Three automakers are
a perfect example. Their stock has plummeted by 75 percent since the beginning
of the year and all three are on the brink of bankruptcy. If investors are bailing
on the Big Three in droves and each has one foot in bankruptcy court and the other on a banana peel, why in the world would
our elected representatives even consider putting billions of dollars in them. Would
you?
Of course there is a good reason why the carmakers are collapsing.
Like other industries that have disappeared from the American landscape, the automobile companies have been the victims
of collective bargaining laws passed by Washington and the State of Michigan. It
has been estimated that the average GM worker makes $81.80 an hour in wages and benefits.
In comparison, non-union Toyota pays $48 per hour in wages and benefits. The legalized extortion that the UAW is allowed
to hold over GM puts the company at a competitive disadvantage costs wise by about $1000 per vehicle produced.
So, if Congress should not bail out these broke companies, then what
should be done? The same fate should befall the automakers that should have befallen
the failing banks. They should be allowed to go bankrupt. “But they are too big to fail.” “Many people
will lose their jobs, their homes, and their healthcare.” The bottom line
is that the Congress cannot solve our economic problems by throwing good money into unsustainable enterprises. The more than $2 trillion the government has already injected into the economy has proven that. Besides, at the right price, entrepreneurs will buy the assets of the bankrupt firms and start a new American
auto industry. There is a market for cars in the U.S. and it is only a matter
of time before some American(s) fills that market need. Then the millions of
workers who lost their jobs with the Big Three bankruptcies will have an opportunity to work for a competitive company.
Paulson: Liar or Misfit?
November 14, 2008
Hank Paulson is a dirty rotten liar. In July, along with Fed chairman Bernanke, he assured Congress that Fannie Mae and
Freddie Mac were not in danger of failing. His testimony before Congress was
instrumental in getting Congress to approve Treasury Department and Federal Reserve proposals
to make sweeping changes to the relationship between the two institutions and the government.
Within 7 weeks, Uncle Sam took over the mortgage giants preventing their inevitable collapse. Then at the beginning of October, the dynamic duo was swindling Congress again. This time Paulson and his banker buddy Bernanke told Congress that it had to act quickly and approve a
$700 billion package to buy the bad assets (mortgages) of failing Wall Street firms otherwise
America faced calamity – civil unrest, economic collapse, and extinction of our blessed (debt ridden) lifestyle. This past week Paulson announced that he would use the taxpayer assets not to buy
troubled assets as he told Congress in October, but to inject capital into struggling banks by acquiring equity stakes in
them.
Now, perhaps calling Paulson a liar is harsh. Maybe he just doesn’t know what he is doing.
For instance, in a recent interview on National Public Radio, Paulson said, “I believe the banking system has
been stabilized.” Oh really. Just
this week, Citi Group, one of the biggest financial services companies in the country, indicated that it would cut at least
10,000 jobs. In October, foreclosures grew 25 percent nationally over the same
month in 2007. Yet to come is the impending auto loan, student loan, and
credit card crisis. Given his track record and the current circumstances it is
amazing that anyone even listens to Paulson anymore.
But, there is more. In his “I changed my mind
about how to use the taxpayers $700 billion” speech this week, Paulson indicated that the economy was in better shape
than it was two weeks ago. Again, the facts tell a different story. The Labor Department reported this week that the number of newly laid-off workers seeking unemployment
benefits increased to a seven-year high. The big three automakers are on the
verge of bankruptcy and the mayors of 3 American cities petitioned the federal government to use a portion of the $700 billion
Wall Street bailout plan to assist cities with pension costs and cash flow problems.
This news indicates that we are headed in the opposite direction of Paulson’s analysis.
Naturally, through his comments, Paulson is trying
to justify his actions in handling the economic crisis to this point. Here is
a summary of Treasury actions since March:
$29 billion for Bear Stearns
$143.8
billion for AIG (and growing)
$100
billion for Fannie Mac
$100
billion for Freddie Mac
$700
billion for Wall Street, including: Bank of America (Merrill Lynch), Citi Group, JP Morgan (WaMu), Wells Fargo (Wachovia),
Morgan Stanley, Goldman Sachs, and others
$25
billion for the Big Three in Detroit
$8 billion
for Indy Mac
$150
billion for stimulus package (January)
$50
billion for money market funds
$138
billion for Lehman Bros. (post bankruptcy through JP Morgan)
$620
billion for general currency swaps from the Fed
Rough total: $2,063,800,000,000
- Two trillion and still spending!!
When will
the madness end? The federal government ran a deficit of $237 billion just in
the month of October. It is well on its way to the unthinkable $1 trillion budget
deficit by the end of the fiscal year. All of this money, created out of thin
air by the Treasury Department and Federal Reserve with the blessings of Congress, is not stabilizing the markets as Paulson
suggests. It is simply throwing good money at companies that deserve to go bankrupt. The current economic crisis is proof that debt does matter. At some point, it has to be paid back. The U.S. government
is bankrupt, but it continues to spend money like a gambling addict in a casino. Months
from now, when the economy is in even more of a mess and we are laden with even more debt, think back to the comments of Hank
Paulson. At that point, it still might be hard to decide if he was lying or simply
just didn’t know what he was doing.
Will Obama “Change” U.S.
Foreign Policy?
November
8, 2008
The national sham, better known as the 2008 U.S. Presidential Election, is behind us. 24 months and more than $2 billion later, Barack Obama is our new leader.
He ran on a platform of “change”. To be precise his campaign
theme was “Change We Can Believe In”. Clearly, after eight years
of the Bush Administration this mantra appealed to many Americans and with good reason.
But before we get too excited, like many Americans have, about the “change” he will bring to America, let’s
look at his first two presidential appointments. They should certainly put a
damper on the idea that things will be different in terms of foreign policy from the new administration.
In his first
presidential act, over the summer, Obama chose Senator Joe Biden to be his vice-presidential running mate. This is the same Joe Biden who had to withdraw from the 1988 presidential race after it was revealed he
plagiarized a speech from British Labor party leader Neil Kinnock. That was a
long time ago and everyone is entitled to redemption for past sins. However,
Biden’s most recent positions on foreign policy issues are what is really concerning and perhaps an indication that
Obama did not mean change in terms of current U.S. foreign policy.
A quick review of Biden’s foreign policy record in the last ten years reveals that he is as hawkish as
some well known Republicans. In 1999, he joined forces with one such Republican,
John McCain (funny how politics does make for strange bedfellows), in the Senate to sponsor the resolution authorizing NATO
aggression against Yugoslavia. This aggression included an 11 week bombardment
against Serbia and Montenegro.
Then in 2003, Biden not only voted to give the president authorization to invade Iraq,
but he vigorously supported the president’s false claims about WMDs and Saddam’s ties to Osama bin Laden. As Senate Foreign Relations Committee chairman, he suppressed antiwar testimony to
the committee leading up to the attack.
Last year, Biden was a cosponsor (with Senators McCain and Lieberman) of a
Senate resolution that called for U.S. support for the independence of the autonomous Serbian region of Kosovo. He showed his hypocrisy a short time later by lambasting Russia for its liberation of South Ossetia after
Georgian troops invaded the autonomous region of Georgia and attacked Russian peacekeepers.
His sharp rebuke of Russia was reminiscent of Cold War days. In terms
of foreign policy, it is ironic that Biden found himself on Obama’s ticket and not McCain’s. Or perhaps it is a sign that Obama will continue with the failed foreign policy of the Bush Administration.
Obama’s
second presidential appointment came just a day after his election victory, with his appointment of Rahm Emanuel as chief
of staff. Rahmbo, as he is known, is also a hawk when it comes to war issues. Out of nine Democratic members of Congress from Illinois, he was the only one to vote
to give the president authorization to invade Iraq. He has voted for unconditional
funding of the war and voted against efforts to set a timetable for U.S. withdraw from Iraq.
His record on the Iraq War is comparable to John McCain’s.
Beyond Iraq, Rahmbo would also like to see action taken against Iran.
He has voted against measures to prevent Bush from attacking that country and even joined the administration in launching
inflammatory remarks about Iran’s nuclear threat.
His strong positions toward attacking Arab countries clearly
come from his love of Israel. After all, his father, Benjamin, was a member of
the terrorist/freedom fighter (depending on your perspective) group Irgun which launched attacks against Palestinian and British
civilians in Palestine in the 1940s. Rahm himself has been critical of the Bush
Administration for criticizing Israel’s assassination policies and human rights abuses.
He was a leading proponent of Israel’s invasion of Lebanon in 2006 and questioned Amnesty International’s
motives in reporting Israeli violations of international humanitarian law.
Now, many will say that these appointments
by President-elect Obama are political and do not necessarily indicate a direction that his administration will take in foreign
affairs. But, the old axiom is true, “you judge a man by the company he
keeps”. Modern vice presidents do play a large role as confidants and advisors
to the president. As Dick Cheney has proven, they are very influential partners
to presidents who lack the foreign policy experience they possess. And let’s
not forget that vice presidents are one heartbeat away from the top job.
As the chief of staff, Rahm Emanuel will be
President Obama’s gatekeeper. He will in large part determine who has the
president’s ear. He will also have more influence on the president than
others in the administration by virtue of his position and close friendship with Obama.
There is no question that president-elect Obama’s first two appointments call into question his commitment
to change as far as U.S. foreign policy is concerned. By choosing two Democratic
neo-cons as vice president and chief of staff, he not only validated the belief that there was not a quarter’s (adjusted
for inflation) worth of difference between him and McCain, he has alarmed many of his progressive supporters on the left. At some point in the near future, perhaps with his selection of defense secretary,
it will be clearer whether Obama will change U.S. foreign policy or continue the failed policies of the Bush Administration. My hunch is that those Americans, who are paying attention, will have their excitement
zapped from them as they realize that they have replaced one belligerent administration with another.
Potholes Ahead for Main Street
November 1, 2008
Congress, the
Administration, and Federal Reserve Chairman have repeatedly told us that they are working hard to fix the economy for the
American people. They claim that every action they have taken has been done with
the best interests of Main Street not Wall Street in mind. Whether their intentions
can be believed is questionable. After all they are politicians. One thing is certain; the ramifications of their actions at least in the short term have not benefited
Main Street.
As we all know by now, the goal of Washington’s gross intervention in the economy is to unfreeze
the credit markets with injections of massive amounts of liquidity. This unfreezing
will allow financial institutions to resume regular lending thereby putting us on the road to recovery. In other words, the same device (debt) that got us into this mess will get us out of it. That argument aside, as was reported in this column a couple of weeks ago, the best laid plans of Washington
are once again going astray. In that column, I reported that instead of unfreezing
the credit markets allowing for a freer flow of capital and lower lending rates, the government’s actions so far have
actually resulted in higher mortgage rates and consequently less borrowing. This
is a result of more government debt pushing up the yields on Treasury notes which in turn raises mortgage rates. Additionally,
because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and creating more competition for
his own firms - Fannie and Freddie, when they seek to sell their securities. To
compete for investors, the nationalized companies must raise their own yields and then charge borrowers higher rates for mortgages. As a matter of fact, mortgage rates are higher now than they were before the Fannie/Freddie
bailout was launched.
Higher mortgage rates are an old problem, as this
week two other concerns were voiced from Washington over the effectiveness of government measures to fix the economy. It seems that nine Wall Street banks have been asked by Congress to justify billions
of dollars in pay and bonuses after they accepted nearly $125 billion of taxpayer funded bailout money. The nine banks include the usual suspects: Bank of
America, Bank of New York, Mellon, JPMorgan, Chase & Co., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group,
and Wells Fargo & Co.
Then there was the revelation from the White House this week that banks receiving taxpayer
money were “hoarding” the funds and not making new loans. Apparently,
the
London Interbank Offered Rate (LIBOR), a key indicator of international lending, remains at elevated levels. Not good. But in all fairness to the banks, at least one of
them will not be hoarding their federal largess. It has been reported that the
government has approved PNC Financial Services Group Inc. to receive $7.7 billion of taxpayer funds and to use $5.58 billion
of it to purchase National City Corp - so much for the funds being used to unclog the markets.
The problem ultimately is that the government should not be doing what it is doing in the first place. But beyond that, the capital infusion program has very few strings attached to it. It was felt that too many strings would discourage bank participation.
Undoubtedly, too few strings are allowing the banks to take full advantage of the taxpayer. The bottom line is that we are giving hundreds of billions if not trillions of dollars of our money to
banks that got us into this mess in the first place with virtually no restrictions with the hope that they won’t do
it to us again? How stupid or corrupt is that?
Here’s hoping that the banks continue to hoard our money.
Beyond the reported ill effects on Main Street
of the government’s actions to fix the economy, there are other hidden bad consequences as well. Because the Federal Reserve has decreased interest rates to artificially low levels over the last nine
months to stimulate lending (by the way this hasn’t worked either) the earnings of many small community banks have been
adversely affected. Many of these banks were responsible and took no part in
subprime lending. These institutions are important to millions of Americans on
Main Street who rely on them for loans and savings accounts. One of the last
things we need is a crisis in the community banking industry. Current government
policy is already making it hard for these institutions to succeed.
Lastly, another hidden bad consequence of the government’s
actions is a lowering of the yields on money market and savings accounts. Again,
as the Fed lowers interest rates artificially, savings and money market rates also decline.
Go online or check your next bank statement to notice that your savings rate has gone done. With more people on Main Street hurting, especially pensioners and those on fixed incomes, the last thing
they need is for their last safe haven to be upended by government policy. But
that is what is happening.
We could take Washington at its word that it is doing its best to help Main Street through
this crisis. The consequences of its actions speak otherwise. Then again, maybe Washington is doing its best; because when it does its best, we are at our worst.
Hoovernomics Revisited October
24, 2008
Herbert Hoover is recognized
as one of the worst presidents in American history. The historical depiction
of his non-handling of the Great Depression is legendary. We have all been taught
that he was a do-nothing executive who let the country’s economy fall apart at his feet.
Further, if Franklin Roosevelt had not thumped him in the presidential election of 1932 the United States would have
eventually been reduced to a fifth world cesspool. This historical account taught
to millions of American public school students each year cannot be farther from the truth.
In fact, Hoover’s activist policies during the Great Depression are the real reason he was a horrible president
and it’s a shame our current leaders learned nothing from his folly during the early 1930s.
The goal of Hoover’s economic policies after the onset of depression was to re-inflate prices
back to pre-depression levels. He sought to achieve this through two mechanisms
– government spending and credit expansion. Sound familiar? First of all, he instituted a federally financed program of public works.
The concept was supposed to put money in peoples’ pockets so they could spend their way to recovery. By 1932, this scheme nearly doubled federal construction projects from 1929 levels. The program was very expensive by 1930s standards - $1200 per aided family.
The biggest problem with federal public works, as far as Hoover was concerned, was that the program was unavailable
to those hurting in remote parts of the country and to those folks unable to perform such labor. Of course, the real problem, economically speaking, with make work schemes, is that they do not work in
stimulating a beaten down economy.
Instead of continuing the program,
his administration increased federal relief aid to the states so they could carry out projects that would aid displaced workers. The increase in aid was phenomenal in such a short period of time. In 1929, aid to the states totaled $33 million. By 1931, the
figure rose to $173 million. By 1932, aid was $308 million, which represented
an astronomical amount at the time.
Then there was Hoover’s Reconstruction
Finance Corporation (RFC) which was approved by Congress in 1932. In that
year, the RFC made $2.3 billion in loans to banks, railroads, and farmers. Most
of the money went to paying off debts, supposedly to ensure the solvency of the credit markets. Still more money flowed from the RFC to the states to further finance make work schemes. In addition, $25 million was allocated to the Treasury Department so it could invest in the stock of the
12 newly created Federal Home Loan Banks.
It was the Federal Home Loan Bank Act (FHLBA) which showed the enormous interest Hoover had in interfering in
the market in a way that no previous administration ever had. He wanted ultimately
to build a huge mortgage discount banking system that included all financial institutions in America. He wanted mortgages to be discounted by these institutions up to 80 percent of the value. Thwarted in his efforts, he settled for a system that forced building and loan associations to discount
mortgages to 50 percent of value. So, contrary
to popular belief, Herbert Hoover, for his time period, was a radical government spender and interventionist in the economy. Indeed, this article has only represented a few of the more egregious measures of
his administration. Without question, Roosevelt’s New Deal was much larger
and more comprehensive a program. But, what is important to understand is that both Hoover and Roosevelt’s policies
are what put the “Great” in Great Depression by prolonging the recovery by about 15 years. The increased government spending of the time, like this year’s stimulus package, did nothing to
spur recovery. The expansion of credit through the RFC and FHLBA was as effective
as current Fed and Administration policies will be in restoring faith in the banks and getting the economy moving again. Tighten your belts, because If Bush is our Hoover and Obama is going to be our Roosevelt,
then we are in for many years of economic despair.
The
Best Laid Plans of Mice & Governments Often Go Astray
October 18, 2008
The founders of
the United States were brilliant human beings who developed and left us a framework for existence that we continue to ignore
to our detriment. The framework I am talking about, of course, is the Constitution. In the current economic crisis, the regime in D.C. is ignoring it by devising new
ways to “stabilize” our economy. The harmful effects of which are
already appearing.
According to Bankrate.com, average mortgage
rates on 30-year fixed home loans have increased more than one half a percentage point to 6.74 percent in the last week. This represents the largest weekly increase since April 1987, when
the 30-year rate rose 0.84 points. For the average borrower with a $200,000 loan,
this means they will pay $1,296 a month – an increase of $100 more a month and $1,200 more a year than the same loan
would have cost just a few weeks ago.
But, weren’t the policies enacted by the Bush Administration, Federal Reserve,
and Congress supposed to “unfreeze” the credit markets and relieve the pressure on our financial system so that
it could work again? The answer is yes, but once again, the unintended consequences
of federal actions have prevailed. You see, in order to fund Washington’s
rescue of the economy and the new government debt guarantees, the Treasury is selling a bundle of new Treasury bills to raise
money (more debt). Treasury has to offer higher interest rates to sell these
debt assets and since mortgage rates move in step with 10-year Treasury yields they have risen with the actions of Paulson,
et al.
Additionally, because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and
creating more competition for his own firms - Fannie and Freddie, when they seek to sell their securities. To compete for investors, the nationalized companies must raise their own yields and then charge borrowers
higher rates for mortgages. As a matter of fact, mortgage rates are higher now
than they were before the Fannie/Freddie bailout was launched. Naturally, this
was not the government’s intention, just the consequence of its actions.
Rates are expected to decline as credit
availability increases due to the liquidity added by the feds. This won’t
help those homeowners whose adjustable rate loans are due for adjustment in the near term.
And before we get too excited about easy money again, let’s not forget that in the long term the Federal Reserve
will have to raise rates, probably significantly, to fight the inflation that will emerge as a result of the Treasury’s
spending right now. What this situation will mean for the foreclosure rate in
this country is clear – it will go through the roof.
If only our leaders would read the Constitution before they
take an oath to it. They would learn that it does not allow the federal government
to transfer wealth, bailout industry, or own banks. The founders knew that to
give this authority to the politicians would infringe on the rights of citizens and screw up the economy. Recently, while reassuring the American people that the United States was not fundamentally changing its
economic system through all of this government intervention, President Bush said, “democratic capitalism is the greatest
system ever devised.” I suggest the President heed his own words and let
our free market system fix itself.
Congress is a Rotten,
Stinking Corpse
October
12, 2008
At the end of August, Rasmussen Reports released data from a poll it conducted on the approval rating of Congress. The
poll found that an incredibly anemic 9 percent of Americans surveyed felt that Congress was doing an excellent or fair job. You heard right – only 9 percent of Americans approve of the way Congress is
doing its job! This is the lowest approval rating of any Congress since the statistic
was first kept track of in the 1970s; and it was taken before Congress passed Bush’s Big Bank Bailout Boondoggle so
does not reflect probably an even lower view of Congress today.
With these poll numbers most Americans agree that Congress
is not doing its job. But, let’s be honest; the current Congress is a rotten,
stinking corpse. It has worked against the will of the American people, legislated
against the best interests of our country, and totally abdicated its sacred responsibilities by giving the President, Treasury
Secretary, and Federal Reserve chief carte blanche in further ruining our economy all in the name of political expediency
and campaign contributions.
Take the $800 bailout package for instance. Congress
passed this measure in the face of at least 70 percent opposition from the American people.
Whatever happened to representative government? It was discarded for campaign
contributions. The Washington watchdog group, Center for Responsive Politics, reported that the senators who voted for the bailout have received on average contributions to their campaigns totaling
$3,986,723 since 1989 – this is 139 percent more than was received by those senators opposing the bailout over the same
time period. To give a specific example, Sen. Joe Lieberman of Connecticut supported
the bailout while receiving nearly $10 million from the finance sector over his career; Sen. Bernie Sanders of Vermont opposed
the bailout while receiving just $167,045 while in Congress.
The behavior of House members is better, probably owing
to the fact that all members are up for reelection this November, but still a correlation exists between contributions from
Wall Street and voting for the bailout. House members who voted for the corporate
welfare to Wall Street received an average of $833,077 from the finance sector since 1989 as opposed to $589,417 for members
who opposed the scheme.
Of course, we were told by our “leaders” that the measure was necessary to “unclog”
the credit markets, thereby saving the economy from total collapse, and consequently protecting the assets of ordinary Americans. Nonsense! The bailout will do no such
thing. During the Great Depression, the government instituted similar measures
to revive the economy; this included government spending to increase aggregate demand (stimulus package anyone?) and injections
of government debt to stabilize prices and the banking industry. Sound familiar? These measures in the 1930s prolonged the recovery all the way to 1939. They will also delay a recovery today. One of the following
three things is true about our “leaders”: they don’t know history; they think it will be different this
time, or they care more about their political futures than the constituents they have sworn an oath to serve. You decide. In any case, all three are good reasons to throw
the bums out this November.
But, perhaps the biggest outrage from Congress’s behavior over the last 10 months
is its abdication of Constitutional responsibility. It has allowed the Fed and
Treasury chiefs to bailout Bear Stearns and AIG, nationalize Fannie Mae and Freddie Mac, and potentially buy up vast sums
of corporate debt - all without a Congressional vote. With passage of the bailout
scheme, the Fed and Treasury are now authorized to invest capital into financial institutions and get ownership in return. Paulson and Bernanke have effectively become the nation’s stockbrokers. Additionally under the bailout scheme, foreign banks doing business in the U.S. are
eligible for Treasury payments, which means Uncle Sam will be borrowing more from foreigners to bail foreigners out. Not only has Congress violated the constitutional principle of separation of powers
by giving authority both directly and through acquiescence to unelected officials in another branch of government to do what
they are not constitutionally authorized to do, it has also condemned us and future generations of Americans to more debt
and a lower standard of living.
This
November 4th Americans all over the country will have an opportunity to vote for every representative in the House
and at least a third of the Senate. With some rare exceptions, they should vote
their members out of Congress and not replace them with a reasonable facsimile thereof from the other major party. Americans should vote for minor party candidates because America desperately needs a multiparty system
like the ones we have fought for in other countries - most notable Iraq. Only
then can the will of the American people, not the narrow interests of Wall Street be heard.
Only then can the best interests of our country be served; and only then can we have a representative legislative body
that will be less apt to abdicate its sacred responsibilities to the people. Yes,
Congress is a rotten, stinking corpse. With its job approval rating at 9 percent,
maybe the time is right for giving it a proper burial.
Congress Has Sold Us Out to the Big Banks
October 3, 2008
Ronald Reagan said, “Government's view of the economy could
be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize
it”. Even before Bush’s Big Bank Bailout Bill was passed by Congress
we were in the “subsidize it” phase of the cycle. We have been told
by our “leaders” that more subsidizing through the bailout legislation is in the best interest of the millions
of Americans in the middle class. It was done to preserve our savings accounts,
education and retirement funds and to help small business in securing the necessary loans they need to survive. It was done to rescue us from economic calamity.
In fact, the $700 billion bailout (ignoring the
pork and tax breaks which make the legislation worth more than $800 billion) will only do harm to the middle class. First of all, this $700 billion dollars is in addition to nearly $1 trillion that the Federal Reserve has
already pumped into the economy in just the last month. Secondly, where will
the Treasury get the money called for in the bailout package? Answer: it will borrow the money from the banks. But, I thought the banks had no money, hence the need for the bailout.
They don’t, so they will create the money through a system called fractional reserve. In addition, because the banks are a cartel headed by the Federal Reserve they
can also fire up the printing press to produce dollars. The banks will loan these
new dollars to us, with interest, so we can then give the money back to them. The
nearly $1 trillion already pumped into the economy by the Fed and the new funds called for by the bailout package are an artificial
increase in dollars. Of course, the banks will get to use the new money first
before inflation sets in and then the rest of us can borrow the money back (again) from banks at higher rates because of the
inflation. The banks can’t lose.
If you think this is a good deal for middle class Americans then you probably own one of the subprime mortgages that
got us into this mess in the first place.
In addition to the government using our money to get us into an insane financial
arrangement with the banking industry, the bailout will not solve our economic problems and indeed make them worst. How does throwing borrowed money at bad assets make any sense? It
is equivalent to borrowing money and then flushing it down the toilet. If the
bad loans that the bailout is going to purchase had any value they would have been bought on the open market at some price. They have not been bought so it is safe to assume that they lack any value. Consequently, the bailout will simply relieve the banks of the ramifications of their bad behavior and
leave taxpayers holding a bag of worthless assets. When the Treasury writes off
these assets, the loss to the federal treasury will be well over a trillion dollars (this includes bureaucratic costs, opportunity
costs and interest costs on the $700 billion). Folks, Uncle Sam already owes
over $9 trillion dollars with at least another $50 trillion of future obligations through entitlements. It is only a matter of time before these debt obligations have to be met.
Because foreigners will be unwilling to lend us any more money and the Federal Reserve will be unable to print more
because of hyperinflation, the politicians will have to raise taxes. High taxes
in recessionary times will be the death knell for our economy.
And don’t think that future misallocations of
resources won’t be encouraged by this federal largess. It has already begun
to happen. Bank of America probably bought Merrill Lynch with its bad assets
to ensure that it was “too big to fail”. Citigroup and Wells Fargo
will fight to the death for the right to buy Wachovia and its $74 billion of bad assets because they both know that the Treasury
will now offload those bad assets onto the taxpayer. Once these bad assets are
removed from the balance sheets of the banks what guarantees are there that they won’t turn around and make more high
risk, bad loans? Aren’t the banks still under the federal mandate through
the Community Reinvestment Act to make loans to high risk debtors? By passing
the bailout package hasn’t Congress shown that it will be there for the banks when they fail?
The bailout package
will prove to be harmful for the middle class. It will cause inflation, burden
taxpayers with hundreds of billions of dollars in bad assets, and encourage irresponsible economic decisions. Someone also once said, “the more you subsidize something, you more you get of it”. By subsidizing the bad decisions of Wall Street we can only expect more of the same bad decisions.
A Call to Arms
September 28, 2008
America, we have reached the point of no return! The government of the United States is about to embark on a course that will prove to be ruinous for our
country. This morning, Congress is jubilantly announcing a tentative agreement
on the Wall Street bailout plan. The plan, if approved this week by the full
Congress and signed by the President, is a betrayal of the constitutional oath taken by our leaders. It is a violation of the public trust and an extreme abuse of the fiduciary responsibilities that each
member of Congress and the President has to the American people. In short, any
member of Congress who votes for the measure is guilty of treason and should be dealt with accordingly.
Why is voting
for the plan a treasonable offense? One reason is because it gives enormous power
to the Treasury Secretary, who is an unelected official. He will have power to
buy deeply distressed mortgage-backed securities and other bad debts held by banks and investment firms with taxpayer money. This includes bad debts held by foreign banks that do business in the U.S. So essentially, by approving the plan the Congress will be handing over $700 billion of taxpayer money
to an unelected official and an imperial president.
The whole thing reeks of fascism.
In all of the debate over the bailout plan, no one (except Ron Paul) has questioned whether the move is constitutional. Congressional leaders are ignoring the will of the people where polls indicate that
only thirty percent of Americans approve of the legislation. The Treasury Secretary
and the President are being given extraordinary new powers to act as economic dictators.
And the federal government through the plan is again turning to public debt to stimulate the economy to presumably
put us back on sound economic footing. As this government induced crisis worsens,
Washington is acting more and more like Italy under Mussolini than America under Jefferson.
Without question, it is
a government induced crisis. For nearly twenty years, Alan Greenspan as chairman
of the Fed embarked on a policy of easy money – low interest rates and expanding money supply. He became the parent who just couldn’t say no to the American people.
His policies as Fed chairman led to the dot com bubble and bust in the late 90s.
To stimulate the economy after 911 he lowered the federal funds rate to an unbelievable one percent! The rate stayed there for a year and was increased slowly for the next three years after that. Rates were low enough for a long enough period of time to cause severe misallocations in the economy. Thus, the housing bubble was born. Of
course, it also took the absolute stupidity of many Americans to get into debts that they could not afford - a concept that
seems to be an implied right of American citizenship which is expressed through laws like the Community Redevelopment Act. Lastly, by sprinkling in some fraud by lenders and borrowers alike you have the recipe
for the disaster that looms over us today.
So, what do our esteemed leaders propose to get out of this mess? They are proposing more of the same things that got us into this mess.
Passing a $700 billion bailout package is easy money to the politicians and says to the stupid and fraudulent that
any mistakes or criminal actions you may have committed will be remedied by the deep pockets of the American taxpayer. Congress will appropriate this money as if there will be no repercussions down the
road. This sounds very familiar to the mindset of Fed governors when they lowered
rates to one percent.
Congress is also being as stupid as those Americans who got themselves into debt that they couldn’t
afford. The U.S. government doesn’t have $700 billion dollars to spend. Hell, it doesn’t have $10. It has
$9 trillion in debt on the books with at least another $50 trillion in future obligations like Social Security. At some point soon, foreign countries will stop loaning the U.S. money.
Our currency will become worthless and our standard of living will deteriorate.
Yes, debt does matter whether you are a business, a family, or a huge government.
Lastly, fraud is a component
part of our leaders’ proposal to get us out of this mess. We are being
told that this “rescue” plan is for Main Street not Wall Street. We
are being told that somehow putting up huge sums of taxpayer money to buy bad assets is the best answer to get out of the
mess that deregulation of the financial industry caused. The lies go on and on. Make no mistake about it, the politicians will pass this plan to help their benefactors
on Wall Street - those that have helped them get elected. It is a fraudulent
use of taxpayer money.
If not the politicians’ plan than what should be done to remedy the crisis? Immediately, the government should cease intervening in the crisis.
Let the market determine its own equilibrium. Former private assets like
Fannie and Freddie should be liquidated. Government spending, especially military
spending, should be reduced. The budget should be balanced, taxes cut and regulations
on businesses eliminated. Any protectionist measures enacted by Uncle Sam should
immediately be repealed.
In the area of foreign affairs, the U.S. should
bring troops home from bases around the globe and stop riling up hostilities with Pakistan, Iran, North Korea, Russia, and
Venezuela. These moves would free up funds to be used at home where they are
needed and not on high-risk, no gain military adventures.
In conclusion, any member of Congress who votes for the
bailout package is betraying their constitutional oath, violating the public trust and abusing their fiduciary responsibility
to the American people. On November 4th
they should be thrown out of
office and not replaced with a clone from the other major party. Instead, minor
party candidates should be elected to return our government to “We the People”. I urge all Americans to write letters to the editor, talk to community groups, friends and family, become
involved in minor party candidate campaigns and vote your conscience. The vicious
cycle perpetrated on us by the politicians in Washington must end. But it cannot
end without the efforts of all of us.
In Defense of Capitalism
September 20, 2008
The economy of the United States is not a pure capitalist
system. We operate economically under what economists like to call a “mixed
system”. This is a system that combines elements of a market economy
with elements of a planned economy. It is because of this mixed economic approach
that Treasury Secretary Paulson and Federal Reserve Chairman Ben Bernanke determined that it was within their authority to
nationalize Freddie, Fannie, and AIG in the name of stabilizing the financial markets.
In a purely capitalist system, these bailouts would have been impossible. Quite
frankly, the crisis that caused those bailouts to happen in the first place would not have happened if we were a pure capitalist
country.
That is not to say that capitalism is perfect. But, in the current
environment we must brace ourselves against the endless onslaught against the system which has made our country number one
economically for some time now. You see the politicians are really just poor
sports that have never grown up and never like to admit fault for anything. McCain,
Obama, members of Congress, and the Administration will babble on about how the greed and unbridled actions of others are
the culprits for the subprime crisis. They will talk tough about how they are
going to go after the bad guys and bring them to justice. They will propose new
regulations to prevent this from ever happening again. In short, they will attempt
to socialize us to believe that only a capitalist system with the ruling elite (themselves) in charge is good for the country. They are all liars and are hereby permanently banned from the shrine of Free Market
Economics.
Throwing out accusations and speaking in vague generalities is easy.
That is what the politicians do all the time. So instead, let’s
look at some examples of where capitalism has been blamed for a crisis that the politicians actually started. We have all heard about the greed and lack of regulations that caused the savings and loan crisis of the
1980s. But, it is never mentioned by the politicians how the crisis came to be
in the first place. For that we go back to the year of my birth, 1964. Lyndon Johnson, the patron saint of the welfare/ warfare state, had just begun to rebuild that institution
on our shores. With the passage of his so called “Great Society”
and increased funding for a military conflict in Southeast Asia, the United States government, through the Federal Reserve
Bank, printed money over and above the limit mandated by the gold reserves held by the government at the time. By the late 1960s, foreign holders of U.S. dollars realizing that their asset would soon be worth much
less, demanded, as they were entitled to, an exchange of their devalued dollars for American gold. The hemorrhaging of U.S. gold reserves that ensued was so great that Richard Nixon closed the gold window
in 1971 to prevent a default. He effectively opened the door to future wild spending
by Uncle Sam.
These actions by our leaders: increased spending and lifting
the last vestige of the gold standard would set the stage for the savings and loan crisis.
Little did policy makers know at the time, that printing money to monetize debt was addictive and would eventually
lead to inflation. This was probably because most of them had never heard of
the Austrian School of Economics and because some years later Richard Nixon declared that “we are all Keynesians now”. Nonetheless, savings and loan banks through the 1970s played by the rules paying interest
on savings accounts and providing mortgages to borrowers. The problem came in
the late 1970s when faced with high inflation from the spending binge the Fed had to increase interest rates to 21 percent
in an attempt to control rising prices. This hurt the savings and loan banks
in two ways. First, a government regulation that placed a ceiling on the interest
rates savings and loans could offer to their depositors caused a transfer of funds from low rate savings and loan savings
accounts to new higher rate money market accounts in other banks. Second, savings and loan banks had much of their money tied up in low, fixed rate, long term mortgages. As the Fed increased interest rates it made these mortgage backed assets virtually
worth nothing. Thus, government spending which forced the Fed to raise interest
rates ultimately caused the savings and loan crisis. By 1980, before deregulation,
many savings and loans were already insolvent. Politicians are disingenuous when
they say the savings and loan crisis was caused by the greed of the bankers; it was caused by the misguided policies of the
politicians of the time.
Now, flip the calendar forward a decade to the 1990s.
Through the decade, the “Maestro” Fed chairman Alan Greenspan, had kept interest rates artificially low
while continuing to pump more dollars into the economy to keep the good times rolling.
By the end of the decade, we had the dot.com bubble. Of course, we were
told by Washington that this was the fault of greedy techies who were corrupt and had unbridled behavior. At the end of the day, I didn’t expect Washington to come clean and admit culpability, but I did
expect them to learn from their mistake so it wouldn’t happen again.
Then, it did happen again. The “Maestro” lowered interest rates to one percent to stimulate the economy after 911. In the meantime, Congress revised the Community Reinvestment Act, which cajoled
community banks to make loans to bad risk borrowers. With an implicit guarantee
from Uncle Sam, Fannie and Freddie took on more and more mortgage loans. With
more money in the pipeline, laws forcing banks to make at least some bad loans, and moral hazard, the federal government had
tied and given the noose to the financial community to hang itself.
Again,
like in the 80s and the 90s, the cause of the crisis according to the ruling elite is with those greedy bankers. Again they are being disingenuous. In the 1980s, Congress
instituted the Resolution Trust Corporation to liquidate the bad assets of the insolvent savings and loans. In the end it cost the taxpayers $150 billion. Today, Congress
is considering a similar approach to liquidate the bad assets of the insolvent financial institutions. This time the costs will be in the trillions.
The
capitalist system is not perfect, but it is eons better than the bastardized economic system Washington has given us. History has proven that the price of money is better determined by the market than
a central bank. History has also proven that a commodity backed currency not
the political whims of politicians and financial bureaucrats is the best way to rein in the size of government, protect purchasing
power and asset value, and in the end avoid catastrophes like the one we are about to encounter.
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