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Obama economics

Thursday, November 8th, 2012

I have digested the results of the election. I was bitterly disappointed but I have to admit that the Obama campaign did a superlative job of getting him re-elected. For other comments on the election, see the other blog where I am one of the boyz.

Today, I have see a post that is so good I have to post it here. It is by John H Cochran

I’m a professor at the University of Chicago Booth School of Business. This is a blog of news, views, and commentary, from a humorous free-market point of view. After one too many rants at the dinner table, my kids called me “the grumpy economist,” and hence this blog and its title. I’m not really grumpy by the way!

John Cochrane’s blog
Wednesday, November 7, 2012
Predictions
I did a short spot on NPR’s Marketplace this morning (also here). The announced topic was what I thought would happen to economic policy after the election. Jeff Horwich, the interviewer wanted to stitch together a story about everyone is going to get together and play nice now, which seemed like a fairly pointless line to pursue. What “I would do” is now off the table, and I didn’t think it worth arguing with Jared Bernstein’s repetition of Obama campaign nostrums.

But it gave me a chance to put some thoughts together. I usually don’t predict anything, because I (like everyone else) am usually wrong. But I’ll make an exception today

Forecast in three parts: The sound and fury will be over big fights on taxes and spending. They will look like replays of the last four years and not end up accomplishing much. The big changes to our economy will be the metastatic expansion of regulation, let by ACA, Dodd-Frank, and EPA. There will be no change on our long run problems: entitlements, deficits or fundamental reform of our chaotic tax system. 4 more years, $4 trillion more debt.

Why? I think this follows inevitably from the situation: normal (AFU). Nothing has changed. The President is a Democrat, now lame duck. The congress is Republican. The Senate is asleep. Congressional Republicans think the President is a socialist. The President thinks Congressional Republicans are neanderthals. The President cannot compromise on the centerpieces of his campaign.

Result: we certainly are not going to see big legislation. Anything new will happen by executive order or by regulation.

1. Taxes and spending

The tax negotiations fell apart last summer. Why should exactly the same deal revive now? The President will not give in on raising taxes on “the rich,” and go for a revenue-neutral reform, especially after campaigning on it. The house will not give in: They will note that even the President’s rosy revenue forecast of $1 trillion in 10 years is $100 billion a year, 1/10 of our deficit. They will look across the ocean and see that every European country that has tried to balance its books by raising (marginal) taxes, especially on investment, is raising pathetic amounts of revenue and creating a double dip recession.

If you have the same situation, you have the same outcome: every January a free-for-all chaos to plug the holes for one more year. Every lobbyist comes to Washington to get his piece renewed. Occasional debt ceiling fights. No budget for 4 more years.

2. Regulation:

With no big legislation coming, the unfolding of regulation will be the big story. It is news to most Americans, but the ACA and Dodd-Frank are not regulations written in law. They are mostly authorization to write regulations. They are full of “the secretary shall write rules governing xyz” with a timetable. Most of that timetable starts today, November 7 2012. You don’t have to think the administration is a bunch of willy nilly regulators to foresee a metastatic expansion of regulation. You just have to look at the time-table of regulations already legally mandated and pending.

I fished around a little on the net. The EPA has regulations under development that by its own estimates will cost hundreds of billions of dollars a year. I’m all for clean air, but there is a question of just how clean and at how much cost. A few small examples, picked for their obviously intrusive nature, questionable cost/benefit or humorous values

Greenhouse gases. Detailed industry controls focusing on greenhouse gas emissions. They’re even going to regulate cow farts. Sorry, Farm Methane Emissions. It’s funny unless you’re a dairy farmer. Hundreds of billions
Between greenouse gases, much tighter mercury limits, and designating coal ash a “hazardous substance” like nuclear waste (I’m exaggerating, but that’s the idea), the end of coal.
Tight fracking regulations.
Much tigher ozone standards. Many cities are now way over the limit.
Cut sulfur in gas from 30 ppm to 10 ppm. EPA: $90 billion a year
Temperature standards to protect fish in powerplant cooling ponds
Tighter standards for farm dust. Farms have to submit mediation plans.
Water quality control for every body of water in the country.
Strict regulation of industrial boilers ($10-20 billion)
Formaldehyde emissions from plywood. I didn’t know Home Depot was a dangerous place to hang out.

ACA/Obamacare. The big parts are all coming in the next four years. Medicaid expansion, Exchanges, the mandate to buy insurance, the ban on charging people different amounts based on preexisting conditions, “accountable care organizations,” and most of the regulatory bodies are all coming.

Dodd Frank. For number of rules that a law commands be written this takes the cake. If you want to scare your libertarian kids on Halloween, just read from the Fed’s admirably transparent regulatory reform website. Just for fun here is a sampling of Final Rules Due in one three day period, Dec 31 – Jan 2

Expiration date for CEA exemption for swaps
Broadened leverage and risk based capital requirements
FDIC Investment grade definition
Final rule OCC credit rating alterinatives
Joint final rule Market risk capital
OCC lending limit rule compliance
Supervision of consumer debt collectors
Incorporating swaps
Clearing agency standards

I have no idea what any of this means either. I do know that hundreds of billions of dollars are at stake, and the involved industries, their lawyers and lobbyists, are furiously “helping” to write all these rules.

This is the real news. It’s baked in. Any new regulatory agendas come on top of this. And it will remake the American economy in the next four years.

The point here is not good or bad. I’m just forecasting what is going to happen — and it seems clear to me that writing, haggling over, implementing, challenging, and repairing all this regulation is going to be the main story about actual economic policy for the next four years.

With no legislation forthcoming, any new initiatives will be by new regulations, or by executive orders.

3. Deficits, entitlements, reform

I see no chance that the new government, a repeat of the old government, will make any substantial progress. I wish they would, but hope is not a forecast. Deficits will be $1 trillion per year, plus or minus due to the usual effects of any economic growth or lack of it on taxes and spending, so long as some chumbolones somewhere are willing to lend our government the money at negative real interest rates. 4 more years, $4 trillion more debt. Entitlement bomb 4 years closer.

4. Economic forecast

Slow growth. Recovery is a bit natural, no matter how much sand the government puts in the gears. So, sclerotic but positive growth is the baseline. That’s all conditional on my forecast that not much new comes out of Washington. With big tax hikes, slower growth or a double dip recession. With (in my dreams) a revenue-neutral, marginal-rate cutting dramatic simplification, or a miracle of sanity hitting our regulators, we get much more growth.

We’re still sitting on a debt bomb. Remember 2004, when a few chicken-littles were saying “there is trouble brewing, there is a huge amount of debt (mortgages) that is in danger of defaulting, and the banks are stuffed with it?” And how everyone made fun of them? That is our situation now, but it’s sovereign debt. (There’s an interesting tidbit in today’s news that Exxon and Johnson and Johnson bonds are trading with prices above / yields below US Treasuries)

Advice? If you run a business, get a lot of lawyers and lobbysists. He who writes the regulations will make a lot of money. He who does not will lose. Make sure you make the right political contributions and don’t say anything critical of those in power. You will need a discretionary waiver of something, and these rules are so huge and so vague, the regulators can do what they want with you. Don’t be the one to get “crucified” (EPA). We live in the crony-capitalist system that Luigi Zingales describes so well. Live with it. Political freedom requires economic freedom, taught us Milton Friedman. You don’t have the latter, don’t expect the former.

If you’re an investor, get out of long term nominal government debt. I have no idea who is holding 10 or 30 year treasuries at slightly negative real rates of interest, and bearing the risk of inflation and interest rate rises. Not me.

I hope I’m wrong. I really, really hope I’m wrong.

I hope he is too. But I don’t think so.

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Posted in economics, financial, health reform, politics | 1 Comment »

It’s apparently Ryan.

Friday, August 10th, 2012

I am a big fan of Paul Ryan and hope that Romney choose him as VP tomorrow.

The Ryan budget is here.

Health care–
Provides a refundable tax credit – $2,300 for individuals and $5,700 for families – to purchase coverage in any State, and keep it with them if they move or change jobs.
Provides transparency in health care price and quality data, making this critical information readily available before someone needs health services.
Creates state-based health care exchanges, so individuals and families have a one-stop marketplace to purchase affordable health insurance without being discriminated against based on pre-existing conditions.

Equips states with tools like auto-enrollment programs and high-risk pools, so affordable health coverage can be accessed by all.
Addresses health care’s growing strain on small businesses, by allowing them to pool together nationally to offer coverage to their employees.
Encourages the adoption of health information technology and assists states in establishing solutions to medical malpractice litigation

The critical factor here is price transparency. All health care now is discounted with the discounts secret. Even Medicare is discounted and the discounts are concealed from patients.


It preserves the existing Medicare program for those currently enrolled or becoming eligible in the next 10 years (those 55 and older today) – So Americans can receive the benefits they planned for throughout their working lives. For those currently under 55 – as they become Medicare-eligible – it creates a Medicare payment, initially averaging $11,000, to be used to purchase a Medicare certified plan. The payment is adjusted to reflect medical inflation, and pegged to income, with low-income individuals receiving greater support. The plan also provides risk adjustment, so those with greater medical needs receive a higher payment.
The proposal also fully funds Medical Savings Accounts [MSAs] for low-income beneficiaries, while continuing to allow all beneficiaries, regardless of income, to set up tax-free MSAs.
Based on consultation with the Office of the Actuary of the Centers for Medicare and Medicaid Services and using Congressional Budget Office [CBO] these reforms will make Medicare permanently solvent
Modernizes Medicaid and strengthens the health care safety net by reforming high-risk pools, giving States maximum flexibility to tailor Medicaid programs to the specific needs of their populations. Allows Medicaid recipients to take part in the same variety of options and high-quality care available to everyone through the tax credit option.

The Medicare option has been denounced as “vouchers” but it also allows price negotiation using honest prices.


Preserves the existing Social Security program for those 55 or older.
Offers workers under 55 the option of investing over one third of their current Social Security taxes into personal retirement accounts, similar to the Thrift Savings Plan available to Federal employees. Includes a property right so they can pass on these assets to their heirs, and a guarantee that individuals will not lose a dollar they contribute to their accounts, even after inflation.
Makes the program permanently solvent – according to the Congressional Budget Office [CBO] – by combining a more realistic measure of growth in Social Security’s initial benefits, with an eventual modernization of the retirement age.

This is similar to the Bush attempt to reform Social Security. Again, keeping the benefits unchanged for those (like me) who cannot modify our plans, is wise and will add only minor costs.

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Posted in economics, financial, politics | Comments Closed

Bourgeois Dignity

Saturday, August 4th, 2012

I was struck yesterday by a post on Ann Althouse’s blog, and by a Virginia Postrel piece that makes the same point, how wrong Obama was to say “You didn’t build that..”

The incident, so characteristic of this leftist ideologue president, is the stimulus for theorizing about how economies work, and perhaps why this one is so stuck with Obama in the White House.

There is an excellent analysis by David Warren printed last years in Canada and which I have saved. It is a comparison of Obama with Gorbachev and brings considerable light on the subject of success of nations.

Yet they do have one major thing in common, and that is the belief that, regardless of what the ruler does, the polity he rules must necessarily continue. This is perhaps the most essential, if seldom acknowledged, insight of the post-modern “liberal” mind: that if you take the pillars away, the roof will continue to hover in the air.

Gorbachev seemed to assume, right up to the fall of the Berlin Wall and then beyond it, that his Communist Party would recover from any temporary setbacks, and that the long-term effects of his glasnost and perestroika could only be to make it bigger and stronger.

There is a corollary of this largely unspoken assumption: that no matter what you do to one part of a machine, the rest of the machine will continue to function normally.

This brief discussion fits well with the book that was recommended by the Postrel piece.


The Bad History Behind ‘You Didn’t Build That’
By Virginia Postrel Aug 2, 2012 4:05 PM PT

The controversy surrounding President Barack Obama’s admonishment that “if you’ve got a business — you didn’t build that. Somebody else made that happen” has defied the usual election-year pattern.

Normally a political faux pas lasts little more than a news cycle. People hear the story, decide what they think, and quickly move on to the next brouhaha, following what the journalist Mickey Kaus calls the Feiler Faster Thesis. A gaffe that might have ruined a candidate 20 years ago is now forgotten within days.

Three weeks later, Obama’s comment is still a big deal.

(more…)

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Posted in corruption, economics, education, financial, History, politics, social issues | Comments Closed

Obama and economics

Sunday, June 10th, 2012

Obama’s statement at his weird press conference Friday has been the topic of much discussion since he said it, and then “walked it back” four hours later.

President Obama’s comment Friday that the “private sector is doing fine” continued to dominate television political debates Sunday, with surrogates trying to minimize the impact of his remarks, and opponents seeking to take maximum advantage, despite Obama’s retraction of the comment Friday afternoon.

The defense of his statement is odd and shows ignorance of how the economy works.

Jonathan Cohn, writing in TNR, is right about one thing.

Following three months of disappointing job reports and with unemployment still above 8 percent nationally, critics are likening Obama’s statement to Romney’s statement in January of “I like being able to fire people” and, perhaps more ominously, to John McCain’s statement in the fall of 2008 that the “fundamentals of the economy are strong.”

The Romney comment was not a gaffe, although he opened himself to creative editing, when he said, ““I want people to be able to own insurance if they wish to, and to buy it for themselves and perhaps keep it for the rest of their life, and to choose among different policies offered from companies across the nation. I want individuals to have their own insurance. That means the insurance company will have an incentive to keep you healthy.

“It also means if you don’t like what they do, you can fire them. I like being able to fire people who provide services to me. If someone doesn’t give me the good service I need, I’m going to go get somebody else to provide that service to me.”

Of course, the news media and the Democrats clipped the quote to the “I like to fire people.” He should have seen that and restructured the sentence to “I like to see people able to fire those who provide bad service.” But he didn’t and now knows better. It has nothing to do with his beliefs in economics, except he likes the free market.

The Obama quote is different. He means just that. The full quote:

The private sector is doing fine. Where we’re seeing weaknesses in our economy have to do with state and local government. Often times cuts initiated by, you know, Governors or mayors who are not getting the kind of help that they have in the past from the federal government and who don’t have the same kind of flexibility as the federal government in dealing with fewer revenues coming in.

The “flexibility” he mentioned involves the fed’s ability to print money. The states can’t do that. Thank God. The “help” that the state and local officials were getting was the misnamed “stimulus” from 2009. Now it has run out. States are starting to reform, as in the Walker recall rejection by voters in Wisconsin. Also, even in California, voters are using the ballot box to rein in public union pensions and fringe benefits. The left does not understand that public employees do not create wealth. They are “overhead” on the economy. When a business sees a decline in revenue, it cuts overhead, if possible. If not, it will eventually go out of business. Government doesn’t go out of business.

Cohn’s reply ?

Broadly speaking, the analysis is correct. The private sector has been creating jobs at a steady pace, but the public sector has been shedding them, slowing growth. And there is no reason why that has to happen. Stabilizing the public sector workforce or, better still, increasing it would be among the very easiest things for the federal government to do: It can simply write checks to state and local government, as it did with the Recovery Act and has traditionally done during times of economic distress.

Republicans disagree. Downsizing the public sector is very much their goal and Romney said as much in his quick response:

[Obama] wants to hire more government workers. He says we need more fireman, more policeman, more teachers. Did he not get the message of Wisconsin? The American people did. It’s time for us to cut back on government and help the American people.

The economic theory behind this seems rather questionable: I’ve yet to see the study suggesting that the recent decline in government workers has been good for growth or jobs.

There are so many fallacies here that I will take them one by one.

The population is growing and new workers are entering the job market each month. Retired and dead (and those who have given up looking for a job) are leaving it and the difference is what sets the unemployment rate. What is the steady state for monthly jobs ?

It is about 150,000 per month. In fact, that was what was expected in May.

Employers are expected to have added 150,000 new workers to
their payrolls, according to a Reuters survey of economists,
after creating a meager 115,000 new positions in April, the
fewest in six months.

So, what happened in the economy that is doing “fine?”

The job creation rate fell off a cliff.

Employers created a paltry 69,000 jobs last month, the Labor Department said on Friday, the fewest since May last year. Economists polled by Reuters had expected nonfarm payrolls to increase 150,000.

In addition, employers added 49,000 fewer jobs than previously estimated in March and April. The unemployment rate rose to 8.2 percent from 8.1 percent as people flocked into the labor market.

So the private economy is “fine.” When Obama says the economy added 800,000 new jobs, he doesn’t understand that the economy has to add 250,000 new jobs every MONTH to stay even. Recovery from the present unemployment rate will require more. The left also doesn’t understand that public employees are a net loss to the economy as they have to paid from taxes paid by everybody else.

Keep in mind, too, that a downsized public sector is one with fewer teachers and firefighters, not to mention civil servants who may go by the ugly name “bureaucrats” but provide more essential government services than most people seem to realize. Sometimes we need fewer of these workers, but sometimes we actually need more of them.

They just don’t understand. We don’t need more, especially if they are unproductive. Picking up garbage needs to be done. Lots of public employee jobs don’t need to be done. The TSA replaced thousands of private security jobs. The air traffic controllers could be privatized and provided by the airlines in a private company paid for by the airlines. There is little doubt that it would be more efficient. The millions of federal employees could be cut in half with no loss of productivity. Most of what they do impedes the economy.

The left, including Obama, thinks “capitalism doesn’t work”.

Posted in economics, financial, politics | Comments Closed

The Coming Election

Thursday, January 12th, 2012

I don’t think that a more important election has occurred in 75 years than the one later this year. I am not all that enthusiastic about any of the current candidate in the primary. Mitt Romney will probably win but he has been wounded seriously by attacks from other Republican candidates which alleged that his career as a venture capitalist and management consultant was an ethical issue. One expects this sort of thing from Democrats, about 53% of whom prefer Socialism.

53% of Democrats feel positively towards it.

Romney has defended himself with some vigor, which is a positive development. Others have defended him with a more effective argument.

We are now in an election campaign that may well be centered on our country’s economic system. Is capitalism (or free market economics as preferred by some) the best way for our economy to work? History has been written by people who are not positive about capitalism. Recently, revisionist history has appeared that tries to balance the story. Academic studies have been published that suggest that the Depression was a result of Roosevelt’s policies.

The writings of John Maynard Keynes have been quoted in support of leftist economic policies. The problem is that his policies have never been tried. He advocated countercyclical programs which ran deficits in times of economic slowdowns and recessions but surpluses in good economic time. The net result was zero deficits, a marked contrast with policies followed since 1960.

In fact, politicians of both parties have never been willing to run the surpluses that Keynes advocated. In good times, spending rose whether taxes were raised or not. Jimmy Carter said he would balance the budget with higher taxes. Instead, his compatriots (not allies) in Congress spent even more, leading to an inflation and stagnation crisis.

Ronald Reagan reinvigorated the economy with a large tax cut in 1980. The beneficial effect was delayed to 1982 when Bob Dole, the Senate Majority Leader, succeed in delaying the tax cut. The result was a predictable delay in economic activity as taxpayers waited for the lower rates, and the loss of the Senate majority in 1982.

Bill Clinton raised taxes in 1994 (His wife, Hillary, avoided the higher tax rates by taking her bonus prior to January 1, 1993, when the higher rates took effect. The result showed her prudence but also suggested hypocrisy in the Democrats’ enthusiasm for higher taxes.

George Bush I raised taxes in 1992 in spite of a promise not to do so. He lost the 1992 election, mainly because of Ross Perot’s candidacy splitting natural Republican voters. I was interested in Perot at the time but he started acting strangely before the election and I voted for Bush with reservations. Had he not raised taxes, I think he would have been re-elected. I have had some suspicion in spite of denials, ever since that the Democrats extracted a promise to raise taxes in return for voting for the first Gulf War. It is well known that All Gore required concessions in return for his vote for the war.

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Posted in financial, History, iraq, middle east, politics | 2 Comments »

The debasement of the currency

Wednesday, December 21st, 2011

I see almost nothing about the severe inflation of the past 50 years. It is astonishing and annoying to see comments about the rise in the stock market by people who have no idea why this occurs. The peak of the Dow Jones Industrial Average in 1929, before the crash, was 381.17. The dollar was valued at 1/20 of an ounce of gold. Certainly, the Dow Jones Average has changed the companies included but the principle is same, to show the average value of the large companies that anchor the US economy.

In 1934, Roosevelt outlawed the private ownership of gold and took the country off the gold standard. He set the value of gold at $35 per ounce, a substantial devaluation. This gold price held until Nixon took the guarantee of the gold price away in 1971, placing the country, and the world economy on what is called “fiat money”. A number of friends of mine were buying Swiss gold francs in spite of the law against US citizens owning gold. They kept their gold coins in Switzerland, which charged negative interest on such accounts.

In 1969, I bought my first house for $35,000, in South Pasadena. IN 1968, I bought my first new care, a 1968 Ford Mustang convertible for $3050. I paid $95 / month to the LA County Hospital Credit Union and, in three years, the car was paid for. My first house in Mission Viejo, where I had decided to settle and open a surgery practice, cost $67,000. Three years later, the bank told me it had tripled in value. Jimmy Carter had been president two years.

Now cars now cost around $30,000, ten times the 1968 price. Some of this is related to safety measures, most of which are of little use. The plastic bumpers do little but provide expensive repair bills for minor fender-benders. What has been the history of inflation since 1968 ?

Here is a chart showing inflation since 1980 The chart shows a 50% decline in the value of the dollar since 1980. I think that may understate the case. The change in value of the dollar has also tracked the gold price since the 1920. In 1928, gold was $20 per ounce. In 2011, gold is valued at roughly $1700 per ounce. That works out to the dollar being worth 11.8 cents.

As I am personally dependent on a fixed income, supplemented by a variable additional income which has declined severely the past two years, inflation worries me. It destroyed the German economy in the 1920s.

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Posted in economics, financial, personal, politics | 4 Comments »

The cause of the financial crisis

Thursday, December 15th, 2011

Peter Wallison has a piece in the Atlantic that explains the basic policy error that led to the housing bubble and the subsequent financial crisis. Barney Frank has been trying to evade his share of responsibility for the problem. He has been telling people that a failure of bank regulation is the source of the problem. In fact, it is the opposite. Banks were obliged by regulators to offer mortgages to people who were not credit worthy. This was an attempt by politicians like Frank to respond to ACORN and similar activists who complained that poor people and minorities had a hard time buying houses.

His most successful effort was to impose what were called “affordable housing” requirements on Fannie Mae and Freddie Mac in 1992. Before that time, these two government sponsored enterprises (GSEs) had been required to buy only mortgages that institutional investors would buy–in other words, prime mortgages–but Frank and others thought these standards made it too difficult for low income borrowers to buy homes. The affordable housing law required Fannie and Freddie to meet government quotas when they bought loans from banks and other mortgage originators.

The GSEs, like Fannie and Freddie, were required to buy these subprime loans. The bankers, and mortgage brokers like Countrywide, responded by shifting the business plan of lenders from buying and servicing mortgages to selling mortgages and then flipping the loans to a third party who bundled them into the notorious “mortgage backed securities” that sank the economy. I have bought several homes over my lifetime, the first in 1969. Each time, I was required to document my ability to repay the loan and make a 20% or greater down payment. In fact, I sold my first home in 1973 when I moved to Orange County for the same price I had paid for it, thus losing my equity to the selling agent’s commission. Appreciation of housing prices did not start until inflation took off in 1976 with Carter’s election. By 1978, my house in Orange County had tripled in value. Even so, when I bought another house in 1979, I had to document my income and pay 20% down.

These requirements had disappeared by 2003 and mortgage brokers were making good incomes by processing loans they would not service and which they cared little about long term solvency of the buyer. It wasn’t their problem.

By 2000, Fannie was offering no-downpayment loans. By 2002, Fannie and Freddie had bought well over $1 trillion of subprime and other low quality loans. Fannie and Freddie were by far the largest part of this effort, but the FHA, Federal Home Loan Banks, Veterans Administration and other agencies–all under congressional and HUD pressure–followed suit. This continued through the 1990s and 2000s until the housing bubble–created by all this government-backed spending–collapsed in 2007. As a result, in 2008, before the mortgage meltdown that triggered the crisis, there were 27 million subprime and other low quality mortgages in the US financial system. That was half of all mortgages. Of these, over 70% (19.2 million) were on the books of government agencies like Fannie and Freddie, so there is no doubt that the government created the demand for these weak loans; less than 30% (7.8 million) were held or distributed by the banks, which profited from the opportunity created by the government.

There is no doubt where the source of the problem lies. Now, we have to figure out how to get out of it. Cutting government spending and cutting regulation, which failed to do anything about the housing bubble, will help but that will take an election. If through mischance Obama is re-elected, we will have a ten year Depression. We are nearing the middle of one right now.

UPDATE Why I am not voting for Newt Gingrich.

This is a devastating report on Newt’s relationship with Freddie Mac. I was undecided and quite impressed with Newt’s debate performance until I read about his deals with Freddie Mac. He has denied lobbying but I find that very hard to believe. I reproduce the WSJ article because it may be behind a subscription wall.

Newt Gingrich’s opponents aren’t letting up in their criticism of his lucrative ties to the failed mortgage giant Freddie Mac after he resigned as House Speaker in the late 1990s. More damaging to his Presidential candidacy is that Mr. Gingrich doesn’t seem to understand why anyone is offended.

In his first response after news broke that he’d made $300,000 working for Freddie, Mr. Gingrich claimed he had “offered them advice on precisely what they didn’t do.” As a “historian,” he said during a November 9 debate, he had concluded last decade that “this is a bubble,” and that Freddie and its sister Fannie Mae should stop making loans to people who have no credit history. He added that now they should be broken up.

A week later Bloomberg reported that Mr. Gingrich had made between $1.6 million and $1.8 million in two separate contracts with Freddie between 1999 and 2008. The former Speaker stuck to his line that “I was approached to offer strategic advice” and had warned the government-sponsored enterprises (GSEs) to stop lending to bad credit risks.

Then on December 2 our colleagues at the Journal reported that as late as April 2007 Mr. Gingrich had defended Fannie and Freddie as examples of conservative governance. “While we need to improve the regulation of the GSEs, I would be very cautious about fundamentally changing their role or the model itself,” Mr. Gingrich said in an interview at the time.

Mr. Gingrich added in that interview that there are times “when you need government to help spur private enterprise and economic development.” He cited electricity and telephone network expansion. “It’s not a point of view libertarians would embrace, but I am more in the Alexander Hamilton-Teddy Roosevelt tradition of conservatism,” he said, adding “I’m convinced that if NASA were a GSE, we probably would be on Mars today.”

This doesn’t make it OK and he has some explaining to do. His attack on Romney this week, talking about his career at Bain Capital as if it were deplorable, was even worse.

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Posted in corruption, economics, financial, politics | 7 Comments »

Congress is a criminal enterprise.

Friday, November 18th, 2011

Mark Twain once said, ” There is no true criminal class in America with the possible exception of Congress.” It’s time to withdraw the qualifier. It is now apparent that, with a few rare exceptions, Congress is a criminal enterprise and the Obama Administration is, as well. Here is the story of part of it.
“To entrench Fannie’s privileged position, Morgenson and Rosner write, Johnson and Raines channeled some of the profits to members of Congress — contributing to campaigns and handing out patronage positions to relatives and former staff members. Fannie paid academics to do research showing the benefits of its activities and playing down the risks, and shrewdly organized bankers, real estate brokers and housing advocacy groups to lobby on its behalf. Essentially, taxpayers were unknowingly handing Fannie billions of dollars a year to finance a campaign of self-promotion and self-­protection. Morgenson and Rosner offer telling details, as when they describe how Lawrence Summers, then a deputy Treasury secretary, buried a department report recommending that Fannie and Freddie be privatized. A few years later, according to Morgenson and Rosner, Fannie hired Kenneth Starr, the former solicitor general and Whitewater investigator, who intimidated a member of Congress who had the temerity to ask how much the company was paying its top executives.”The latter item is just to show that the corruption was bi-partisan. The quoted text above was written by Robert Reich, the left wing former Clinton Labor Secretary.

Johnson was the man chosen by Obama to vet his possible VP choices. When his history came to the public’s attention, he quickly withdrew. He had no financial background at the time he became the chief of Fannie Mae. He was a pure political animal.

The most telling recent blow is the bankruptcy of MF Global, a commodity trading firm run by Job Corzine, former governor of New Jersey. It appears that he stole $600 million of investor’s money. Another commodity trader has now closed her fund and returned her customer’s money. Here’s why: “The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

I do not agree with some of her theories, she appears to be a “birther,” for example, but that doesn’t matter. If Obama is a legal citizen, his corruption is just as bad.

“A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seem “complex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon. Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.”

The bankruptcy petition may have been responsible for freezing the accounts but criminal law should deal with this. Corzine should spend years in prison. Here is a depressing comment: “If Obama doesn’t win next year, watch for a January 19, 2013 pardon.”

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Permanent deficits are not Keynesian

Wednesday, September 7th, 2011

John Maynard Keynes, in addition to being the brother of the author of the first book on blood transfusion, was a famous economist whose policy recommendations have been widely abused by politicians for 50 years. His first widely known book was on “The Economic Consequences of the Peace.” It predicted that the harsh peace treaty would ruin Europe, a prediction that came true in 1929.

Reparations were set at a level that Keynes perceived would ruin Europe, Woodrow Wilson refused to countenance forgiveness of war debts and would not even let the US Treasury officials discuss the credit program. While Keynes’ proposals were far sighted, few others at the Versailles Conference understood their importance and Keynes’ proposals would have been controversial in nations such as France, Britain and the US.

Another critical insight was his prediction of the consequences of inflation.

Keynes outlined the causes of high inflation and economic stagnation in post-WWI Europe in The Economic Consequences of the Peace.

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some… Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

Keynes explicitly pointed out the relationship between governments printing money and inflation.

“The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance.”

It is significant that the US has debased its currency the past 40 years far more than the average citizen realizes. The present dollar is worth about 40 cents in 1970 dollars. Using the methodology at this site, which uses US Department of Labor data, a $100. item in 1970 would cost $582.60 in 2011 dollars. That uses a cumulative inflation rate of 482.6%. Using that calculation, the present dollar is worth 20 cents in 1970 currency.

The most common attribution to Keynes is the “pump priming” role of running budget deficits. However, his theory was the “countercyclical” principle of government budgets. That supposes that the government runs surpluses in good economic times, then deficits in bad economic times. Keynes assumed that these two phases of government action would cancel each other out. His work was based on his theories of how the Great Depression occurred. His apologists have used the Second World War as an example of Keynesian economics. They do not mention that the high deficits that were run during WWII were funded by US citizens who bought war bonds. Inflation was limited by price controls and consumption was limited by rationing. The excess income that was generated in war industries was invested in the national debt. We were not borrowing from another country and, after the war, the budget rapidly paid off the war debt.

What we have today is very different. Here is a useful explanation. There is more explanation here.

If Keynes were alive today, what would he think of President Obama’s fiscal policies?

He would roll over in his grave if he could see the things being done in his name. Keynes was opposed to large structural deficits. He thought that they chilled rather than stimulated the economy. It’s true that we’re stuck with large deficits now. The goal should be to reduce them, not to take on new spending that makes them worse.

Today, deficits are getting bigger and bigger with no plan to significantly lower them. Keynes understood what the current administration doesn’t understand that the proper policy in a democracy recognizes that today’s increase in debt must be paid in the future.

Read the rest.

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Posted in economics, financial, History, politics | 1 Comment »

Would Creating Hyperinflation be Treasonous ?

Sunday, August 21st, 2011

Last week Rick Perry made a comment that got wide attention in mainstream media.

Mr. Perry brought the Fed directly into the campaign debate Monday night by saying it would be “almost … treasonous” for the central bank to play politics by expanding the money supply.

“If this guy prints more money between now and the election,” Mr. Perry said in Cedar Rapids Monday night, without naming Mr. Bernanke, “I don’t know what y’all would do to him in Iowa, but we—we would treat him pretty ugly down in Texas.”

Today, on Meet the Press, Peggy Noonan showed that she is completely clueless on this subject by going off on a riff about how a president has to appear “nice.” She never did address the subject.

Others, who appear to know more about monetary policy had a different take.

Thomas Gallagher, a principal and economic policy analyst at the Scowcroft Group in Washington who advises Wall Street firms, said Mr. Perry’s comments will be the first thing many investors learn about his candidacy. And the comments are “drawing a fair bit of attention.”

“Voters may not care as much, but investors, like the chattering class, expect a candidate to know what he’s talking about when he talks about the Fed,” he said. “It’s one thing to oppose what the Fed is doing, but it’s another to call it almost treasonous.”

I don’t know that treason was the right word to use but the point is that the Fed is feeding inflation which is far more apparent to those of us who buy our own groceries than most politicians. Ron Paul has been railing at the Fed for years and he is gaining allies.

Libertarian Rep. Ron Paul, who fell 152 votes short of winning the Iowa GOP’s straw poll on Saturday, has been railing against the Fed for years, and former House Speaker Newt Gingrich has joined in with an “Audit the Fed” petition. Other conservatives complain that the Fed’s policy of using monetary policy to stimulate the economy, which it indicated last week it might renew, could be sowing the seeds of inflation.

I would say we are past the “seeds” stage.

The US Treasury has been the largest buyer of new Treasury bonds. How can this be ? The Federal Reserve is printing more money that is then used to buy the debt. Is this an example of the elusive perpetual motion machine ?

• Turning government bonds into circulating money is called monetizing the national debt.

• Quantitative easing is a euphemism for creating money out of thin air. In the vernacular, we call it “printing money,” even though it really has nothing to do with the U.S. Bureau of Engraving and Printing.

• The way it’s supposed to work is that the Fed buys securities in the open market, paying with a government “check.” (That’s how the money is created.) The sellers deposit those checks into their banks. The banks redeploy those deposits as loans to consumers and business. The money supply expands and, in turn, so does the economy.

What effect will this have on the dollar ? The economy hasn’t exactly expanded while this has been going on.

One factor may be saving us the worst of the effects of this reckless policy. Troubles in Europe and elsewhere in the middle east have caused many investors to engage in a “flight to quality,” although I wouldn’t call the dollar “quality” right now. The Euro, however, seems to be in even worse trouble.

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Posted in economics, financial, politics | 1 Comment »

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