The 2011 Second Plunge Recession

Arthur Laffer makes a convincing and terrifying argument that we’re heading for an economic cliff next year. It’s going to happen. Make your plans accordingly.

"Tax Hikes and the 2011 Economic Collapse," Wall Street Journal, June 6, 2010. The subtitle: "Today's corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market." When the cash for clunkers program was paying people significant incentives to buy cars, sales spiked. Lo! Incentives work! But when the program ended, sales plummeted. Much of the sales spike was just people shifting their purchase plans forward.

The same thing happened with the $8,000 that the government offered as an incentive last year for people to get out and buy a house. When the incentive ended, sales...you guessed it...plummeted. Much of what the publicly funded incentive either subsidized people who were buying anyway or concentrated in a shorter period of time sales that would have happened over a longer period. Undoubtedly it brought some people into the market who otherwise would not have entered, but Laffer's point is that the numbers are far overstated, and that we can see this in the collapse that followed the spike.

Now, consider that the Bush tax cuts are set to expire on January 1, 2011. Given that this Democratic Congress that grasps at people's money, but succeeds only at getting deeper into debt, has no plans to make those cuts permanent, people are doing what you can expect them to do in response to incentives and disincentives. They are using every means to move 2011 income into 2010, giving the misleading impression that the economy is recovering. But it's just a sugar high. 2011 will see a tremendous crash as a result of the massive tax hikes that are scheduled to hit the people who have money. Laffer details those taxes.

But, really. Obama's technocrats have it all figured out. They don't hand out Nobel Prizes like candy at a parade, you know. What could possibly go wrong? Here, Nassim Taleb, author of The Black Swan, his book on unexpected events (oh, say, housing bubble bursts, devastating oil spills, that sort of thing), has dark things to say about our economic situation and the people trying to steer us through it. Bloomberg reports that he considers President Obama "clueless."



As if that were not enough, the housing crisis is not over. The government, via the Federal Housing Administration, is fueling its continuation. Stephen Meister, in "The Next Disaster: Federal Mortgage Insurance," explains how.

In 2006, the FHA insured just 3 percent of home mortgages; today, it insures one of every three. Together with Fannie and Freddie, the FHA is putting the risk for the entire, $11 trillion US home-mortgage market on the back of the American taxpayer.

FHA also insures one in five refinances. Whereas private lenders--who are in the business of managing risk--are asking10-20 percent down when they lend at all, FHA requires as little as 3.5 percent down. As before, people in risky situations who really shouldn't be in the housing market are being facilitated into homes for political reasons, not market based ones. Also as before, many of them will default. But unlike the last time, the bulk of the loss will fall on the public treasury. That's a huge chunk of $11 trillion.

Thanks to the FHA, subprime-mortgage lending is alive and well. And thanks to Obama's latest program, private-mortgage investors will be able to pick the riskiest of their not-yet-defaulted underwater loans, and get them off their books and onto the FHA's. Bottom line: The Federal Housing Administration is continuing the toxic policies that produced the housing bubble and the subprime crisis, and putting the taxpayers on the hook for it. Expect it to be the next big bailout. 

Feeling down? Now meet the third Spirit of Crisis Yet to Come. Kevin Hassett of the American Enterprise Institute examines the Greek debt crisis and sees, if not an inevitably collapse, then at least a terribly brittle and shaky sovereign debt situation stretching from the east end of Europe to this side of the Atlantic. ("Greece's Bailout Heroes Arrive in Leaking Boats," Bloomberg Businessweek, May 16, 2010.

During the financial crisis, faith was restored in large financial institutions because toxic assets were essentially exchanged for government bonds. If government bonds become toxic, there will be no effective treatment options remaining. The collapse will have no bottom. And that collapse could happen at any moment.

Oh my. And our President is speaking to us from the Oval Office about energy-efficient windows.

A 2003 working paper by the International Monetary Fund puts in chilling perspective the debts we have been running  for the last couple of years.

The paper...studied historical sovereign-debt crises, exactly the situations that Western nations are hoping to avoid. They found that external debt levels -- money owed to foreigners -- exceeding 50 percent was a key indicator that debt default may occur. Here is the chilling fact: the average external debt as a percent of GDP among countries in their sample the year before a sovereign debt crisis was 54.7 percent, and 71.4 percent in the crisis year. The U.S. external debt on Dec. 31, 2009, was $13.77 trillion, or almost 100 percent of GDP. For much of Europe, the story is worse.

The lesson in each of these cases is that economics, something like physics, is unforgiving. There's no free lunch. Debts come due. You can put them off, but not indefinitely (though politicians like to fool us into thinking we can). The bigger you let them get and the longer you put them off, the deeper they bury you when they come back at you.

A more polished version of this appears at Worldmag.com under the title, "We're Doomed."

Dems Are Hunting Bulls To Extinction

It seems that the ruling Democrats are marshaling every arms of their power to neuter every expression American national virility--economic, financial, military, and diplomatic.

 

Here is the latest assault, this time to make sure that we never see another bull market.

 

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions. The Fed's plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks' corporate boards and executives.

 

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees -- from chief executives, to traders, to loan officers -- to take too much risk. Bureaucrats wouldn't set the pay of individuals, but would review and, if necessary, amend each bank's salary and bonus policies to make sure they don't create harmful incentives.

 

The plan under consideration "requires a vote by the central bank's board, but no congressional approval" ("Bankers Face Sweeping Curbs on Pay," Wall Street Journal, September 18, 2009).

 

Sen. Chris Dodd, that trustworthy steward of the public weal and co-author of the housing collapse, is taking up the task of combining the four banking agencies—the Federal Reserve, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and the Comptroller of the Currency—into one superagency. Ever larger and more powerful government agencies always result in greater liberty for citizens and efficiency in government, right? ("Leading Senator Pushes New Plan to Oversee Banks," New York Times, Sept. 19, 2009.

 

The Democrats are the party of risk aversion. Prosecuting the CIA discourages risk taking by agents for our national security. Discouraging risk taking on Wall Street dampens our general prosperity. Government health insurance is just another step toward removing risk from daily American life generally. This is what Franklin Roosevelt had in mind when he proposed in his Four Freedoms speech (1941) that the federal government should guarantee everyone "freedom from want" and "freedom from fear." Just months before dying in office, in his 1944 State of the Union Address to Congress, he called for "a second Bill of Rights under which a new basis of security and prosperity can be established for all regardless of station, race, or creed." The first Bill of Rights was inadequate. These rights were to include:

• "The right to a useful and remunerative job in the industries or shops or farms or mines of the Nation;
• The right to earn enough to provide adequate food and clothing and recreation;
• The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;
• The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;
• The right of every family to a decent home;
• The right to adequate medical care and the opportunity to achieve and enjoy good health;
• The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;
• The right to a good education."

 Roosevelt states his purpose in this clearly: "All of these rights spell security. And after this war is won we must be prepared to move forward, in the implementation of these rights, to new goals of human happiness and well-being." As FDR saw it, the purpose is government is not to allow for the "pursuit of happiness," as the Founders and the authors of the original Bill of Rights saw it, but to provide "happiness and well-being" itself.


Of course, government has a legitimate, natural, and divinely appointed role in securing those under its care from threats to life, health, and property. But the purpose in this is to secure people in the liberty to live adult lives with all the challenges involving success and failure which that entails.

Castrating the Wall Street Bull

King's College alum, Anthony Randazzo of the Reason Foundation, explains the proposals for reforming the way Wall Street is regulated in his report entitled, "Storming Wall Street." The Fulton County Independent Examiner highlights and summarizes it for us.

If you are more inclined to the oral tradition, Randazzo will summarize it for you himself.



The Wall Street bull will soon be forever a cow.

Dr. Obama Does Economic Heart Surgery

In his speech yesterday at Federal Hall in New York's financial district, President Obama, speaking on the financial crisis, proposed what he called "the most ambitious overhaul of the financial regulatory system since the Great Depression." But if Wall Street is to the economy what the heart is to the body, this legislation is like open heart surgery. It is no work for mechanics or butchers, nor for herbalists and conjurers. Yet, he openly boasts that he is entrusting this task to the most anti-capitalist, anti-business, socialism-first-and-prosperity-second Congressional leadership this country has ever seen. It is for good reason that they are universally distrusted outside the hard-line, ideological left.

Here President Obama in his introductions before the speech draws special attention to one Congressman in the audience: "he is going to be helping to shape the agenda going forward to make sure that we have one of the strongest, most dynamic, and most innovative financial markets in the world for many years to come--and that's my good friend, Barney Frank."



If "Barney Frank" is how the President summarizes what he means by "strong, dynamic, and innovative financial markets," then we need an interpretive key like this for understanding his speeches: "War is peace; freedom is slavery; ignorance is strength." Think of Democratic "health care" reform in that context.

Sen. Jim DeMint spoke at The King's College yesterday saying some of the things he says here regarding the socialistic direction of the administration's reforms. Watch his FoxNews interview here.

His book is Saving Freedom We Can Stop America's Slide Into Socialism.

TKC Grads Hit the Presses

Two recent graduates from The King's College in New York City have shown up in prominent print this week.

Anthony Randazzo (Class of 2008) published "The Myth of Financial Deregulation: Government action caused the economic crisis, not the free market" in Reason Online: Free Minds and Free Markets (June 19).

For the past nine months, Wall Street critics have painted a damning picture of the housing bubble as the product of deregulation and reduced governmental oversight. To read the Obama administration's new financial sector regulation overhaul proposal, the government didn't have anything to do with the current crisis. According to this view, our economy wouldn't be facing a recession with almost 10 percent unemployment if the government had been more involved with the market. This picture is about as historically accurate as the famous portrait Washington Crossing the Delaware. ...

The core problem of the regulatory proposal is its view of the causes of the crisis. Everything is built on a belief that the market failed and that deregulation created a system of excessive risk and irresponsibility. Ironically, it was government action that created incentives for financial firms to be less risk adverse, not a lack of regulation. As Washington prepares to debate regulatory overhaul this summer, it is more important than ever to wrestle the myth of deregulation to the ground.

Given all the talk of deregulation, you would expect to find dozens of deregulating laws put in place over the past few years. Surprisingly, there have only been three major deregulatory actions in the past 30 years. Ultimately, the data points to bad regulation as complicit in the creation of the financial crisis, not deregulation.

Those three major deregulatory actions were the Depository Institutions Deregulation and Monetary Control Act of 1980, the Garn-St. Germain Depository Institutions Act of 1982 (co-sponsored by then-Rep. Charles Schumer, as Randazzo nicely observes), and of course the 1999 Glass-Steagall Act.

Anthony Randazzo is a policy analyst for Reason Foundation. Read his Reason archive here.

David Lapp (Class of 2009) gives us "For Better or for Worse: When Marriage Vows Get Creative" on the Houses of Worship page of the Wall Street Journal (June 19). (I have previously cited Mr. Lapp in my obituary for Richard John Neuhaus for his words introducing Rev. Neuhaus at his King's College Interregnum address.)

In this custom-made vows market there is plenty of opportunity for mockery, although it is also easy to dismiss the writing of one's own wedding vows -- or farming them out to professionals -- as a harmless exercise, just another way for a couple to personalize their love for each other....

But let's imagine for a moment that, instead of reciting the oath that his 43 predecessors have taken, President Barack Obama had insisted at his inauguration on personalizing it, perhaps replacing "I will faithfully execute the office of president of the United States" with the more flexible "I will try as hard as possible to do the job of president of the United States." That sounds a little more natural and honest, he might have argued: How does he know if he'll always be able to live up to his word? Besides, he might have stated, "The traditional oath is what every other president has said. I want mine to be original."

We, the people, would have been outraged -- and rightly so. The very specific words our Constitution requires the president to recite demonstrate the gravity of the obligations he assumes. They can't be reduced to the whims of one person.

Lapp draws attention to the place of marriage within a larger community, and, in a Christian context, within a covenant community. Also, he points out, he vows people write for themselves often reflect their own immaturity. The vows certainly express who they are as a couple, but they do not express who they should aspire to be, drawing on the wisdom of those who have preceded them in marriage, some of whom are present at the ceremony. "The more casual attitudes toward the vows are probably a symptom of our more casual attitude toward marriage."

I"m glad he was able to give Dietrich Bonhoeffer some spotlight, who told one couple, "it is not your love that sustains the marriage, but from now on, the marriage that sustains your love." Words to the wise.

Lapp presents this practice of writing your own vows as something new. But I seem to recall that it was featured on an episode of All In The Family in the early 1970s when it became faddish. Certainly the practice of shopping for vows on the Internet is new. That reduces wedding vows to the level of a greeting card sentiment. Do people even know what a "vow" is?

So there you have it: two Christian philosophico opinion shapers for the twenty-first century.

The Boomers Behind the Bust

David Brooks reports some sobering statistics in his column today, "The Great Unwinding."

"The ratio of debt-to-personal-disposable income was 55 percent in 1960. Since then, it has more than doubled, reaching 133 percent in 2007."

He adds: "Consumption as a share of G.D.P. stood at around 62 percent in the mid-1960s, and rose to about 73 percent by 2008. The baby boomers enjoyed an incredible spending binge." The post-WWII baby boomers have brought us new blessings with each successive decade of their self-absorbed lives.

When credit froze up last year, the government "replaced private borrowing with public borrowing." The result has been a dramatic increase in public debt: "In 2007, the federal deficit was 1.2 percent of G.D.P. Two years later, it’s at 13 percent."

The effect of this and the various bailouts in general has been a historically unprecedented spike in the money supply. This has ominous implications for inflation.

Source: research.stlouisfed.org

To move the country from a mostly consumption based economy (easy credit and imports) to an investment and production dominated economy (which requires much higher rates of savings), "[t]he members of the political class face a set of monumental tasks. First, they have to persuade a country to postpone gratification for the sake of rebuilding the country. This country hasn’t accepted sacrifice in 50 years." Fifty years takes us back to 1959. Again, that's when the boomers started to dominate American society, even as children.

Brooks says the Obama administration is aware of the need for this shift and of what it requires, but he is skeptical that Congress is up to the task. "Congressional leaders have been fixated on short-term conventional priorities throughout this entire episode. There is no evidence that the power brokers understand the fundamental transition ahead. They are practicing the same self-indulgence that got us into this mess." Congressional leaders are...baby boomers.

The baby boom generation is not solely responsible for this and every other mess, but since they were toddlers, they have had the shaping influence on our culture and economy. Brooks subtley identifies the characteristic excesses of his own generation in this present crisis too.

GM Mission Creep

The Obama people are having a hard time coming up with a way to pay for their universal government health care program. But now that they own General Motors, it may cross the minds of more than a few that this corporation might be useful for paying for the health plan.

The problem is that government (and unions, also big stakeholders now) are incapable of running an industry, i.e. making good products that people want, providing good customer service, and, in all of this, making a profit. So to the extent that government is involved in GM, the car maker won't be turning a profit and funding anything.

But government will certainly get involved in actually running GM. It will prove too tempting not to. That means that business concerns will be subordinated to political concerns. Just yesterday I saw a Senate committee excoriating GM executives for shutting down dealerships and the manner in which they did it. What these politicians were thinking was obvious. We own this company now, so we'll use it to keep people in their jobs. That is, they'll use it as a welfare system, not a business. Think of the way factories functioned in the old Soviet Union.

We are also seeing gleeful Democratic pols pushing to shut down the production of moneymaking SUVs (vehicles that liberals see as evil planet-destroying machines in general, but useful and cool when they own them themselves because, well, a few don't make that much difference) and expand the production of fuel efficient "green" cars that nobody wants but that everyone should want.

But really what difference do markets and profit make? If government should run the health care industry because everyone needs health care that is affordable and accessible regardless of ability to pay, then surely the same is true of cars. Think of it this way. Everyone needs a job, and cars are necessary for most people to get to their jobs. Government can now help put people in cars regardless of their ability to pay. Furthermore, for the sake of our health and for "the survival of the planet," we all need to be driving the right cars. Given what's out there, clearly the market is not able to direct either producers or consumers to socially and environmentally responsible cars. But the government can help there too.

Government ownership and management of, and political fiddling with, the auto industry may provide Americans a valuable lesson in what the government can and cannot do well, regardless of what in principle is should be doing. Or those lessons may come too late. On the other hand, the GM deal may prove to be a great leap for the government even more deeply into providing for everyone's "basic human goods," such as health care, cars, houses, schooling (with hot breakfast and lunch), retirement, and perhaps even tucking you in at night.

Consider the disastrous British experience with government ownership of the auto industry, especially when militant unions are involved. Follow this series of videos.

And here again for the fun of it is the Congressional Motors ad you've seen before:

I saw another mock ad for a new American car that reads this way: "You wouldn't buy our lousy cars. So now we're taking your money anyway. The Bailout. Coming in January."

Harold adds:
Our friend Iowahawk found this ad:



David responds:

The thing about these spoofs is that you can never be too ridiculous when anticipating secret liberal ambitions. Remember when charges of "Homosexual marriage will be next" was thought to be an hysterical scare tactic? Now they treat you like an Ayatollah if you question it in any way. The stakes could not be higher for these people. They're out to "save the planet." Why should we not expect them to impose wartime rationing like use of the car only on odd numbered Saturdays?

After the Recovery, the Hyperinflation

Former hedge fund manager Andy Kessler does a fine job explaining the basics of money supply and inflation in relation to the recent trillions that have been flowing out of Washington DC. (And, yes, I expect you to be interested.)

Here is how he starts "Putting the Toothpaste Back Into the Tube" (The Weekly Standard, April 27, 2009).

So how is Fed chairman Ben Bernanke going to get all that toothpaste back into the tube? The Fed has been cranking money out like water over Niagara Falls. The monetary base has increased by a trillion dollars in just the last six months. And he's not done, furiously printing dollars (bank credits, really) and buying Treasuries in an attempt to flood the economy with dollars. When will it end? $3 trillion? $4 trillion? And then what? A functioning economy doesn't need all that cash sloshing around. Is runaway inflation our next crisis?

Let's go back to fundamentals for a second. Money is a placeholder of value--the price of a cold Heineken or the value of work already done, a hole dug, a piece of software written, whatever. When things work just right, prices seek the right level and we get a match between that cold beer and the sweat from working for it.

Money supply is how much money is floating around the economy to handle all the transactions. No one quite knows how much money is needed. The classic formula is the output of the economy equals the amount of money times the velocity of money, or how many times the same dollar is spent during the year. You buy the beer, the bartender buys beer nuts, the nut farmer buys a Ford pickup truck, the auto worker buys a cell phone, which you the programmer just finished writing the location-based service code for, so you are out celebrating buying a beer and on and on. Of course, no one really knows what the velocity of money is. If times are tough, you may hold off buying that Heineken for a few months, and when times are good you may party every night.

I like to think of the economy as a giant bucket filled with money (money supply) sloshing around the bucket (velocity). We all hope the bucket is filled to the rim. But, in normal times, the economy grows every year. Population increases, too, so the size of the bucket has to grow to handle the transactions of more people who like to eat and drink. So more money needs to be created to fill the bigger bucket. That's pretty straightforward.

But now the hard part. ...

Read on, then hold onto your seats. Given the way we have chosen to ride out this recession, we could be in for a bumpy landing.

Wealth Creation and Public Policy

One of the defining questions for thoughtful and morally serious human beings pertains to material prosperity: "How is wealth created?" How does a people lift itself out of poverty into widely enjoyed abundance? This question of not-mere-academic debate between American liberals and conservatives. Thus, we are asking how best to respond to this recession that is bordering on a depression. President Obama talks about the wealth creative capacity of the private sector, but he throws trillions of borrowed, government dollars into spending on just whatever Congressmen pull off their wish lists, as well as a some sensibly targeted investments in infrastructure, and the like.

Yesterday at The King's College, David Blankenhorn of the Institute for American Values hosted Cornell economist and New York Times contributor Robert H. Frank and Time magazine columnist Justin Fox in a discussion of the paradox of thrift. Prof. Frank defended the President's stimulus spending, saying that if we are going to borrow money in order to spend more to create demand for production, it makes more sense for the government to borrow at 3% than for private citizens to borrow at 22% on their credit cards--as though those were the only two alternatives. He also contrasted government spending on projects like bridges and tunnels that facilitate commerce and prevent death by bridge collapse which passes all sorts of costs on to the rest of us over against private spending on silly consumables. (He did mention comparable investments that individuals could make, but of course at a much higher rate of interest.)

The problem that some in attendance pointed out is that when given the go ahead to spend, government directs the spending largely in ways that are politically advantageous to officeholders, not economically advantageous to the country as a whole. Furthermore, once given the green light for a prudent burst of public spending, government just keeps going and going. A businessman in the audience suggested somehow arranging a 4% interest rate for mortgages so people could refinance their homes, and spend the resulting income that it would free up on whatever they see fit. Business would boom. Government revenues would rise. Et cetera.

This is why economists are not the most trusted profession. They are not the scientists they boast of being. On this point, read Harvey Mansfield's recent article, "A Question for the Economists" (Apr. 13, 2009, The Weekly Standard).

Mary Anastasia O'Grady recently entertained this question of wealth creation and general prosperity in relation to Latin America with foreign aid in mind "Aid Keep Latin America Poor," Wall Street Journal, Apr. 9, 2009). Among other sources of wisdom on the subject, including Lord Peter Bauer, she cites Alvaro Vargas Llosa's Lessons From the Poor: The Triumph of the Entrepreneurial Spirit (Independent Institute, 2008):

"The decisive element" in bringing a society out of poverty is "the development of the entrepreneurial reserves that exist in its men and women," Mr. Vargas Llosa writes. "The institutions that grant more freedom to their citizens and more security to their citizens' possessions are those that best facilitate the accumulation of wealth."

In an earlier post on development in Africa, I cited John Locke whom I will cite again. In his great Second Treatise on Civil Government (section 42), Locke appeals to the shrewdness of every ruler, saying:

This shews how much numbers of men are to be preferred to largeness of dominions; and that the increase of lands, and the right employing of them, is the great art of government: and that prince, who shall be so wise and godlike, as by established laws of liberty to secure protection and encouragement to the honest industry of mankind, against the oppression of power and narrowness of party, will quickly be too hard for his neighbours.

The lessons concerning "established laws of liberty" and the encouragement of the "honest industry of mankind" is a lesson that is continually in need of review, whether you are President of these prosperous United States or a South American oligarch.

Bubble and Crash. The History of Now.

Yesterday, the Wall Street Journal gave four of the five columns of its opinion page to Steven Gjerstad and Vernon Smith for explaining housing bubbles, the present financial crisis, and the possibly repeatable Great Depression ("From Bubble to Depression?"). It is highly unusual for the Journal to devote that much of the opinion page to one essay, and I can see why they did. It is the most informative brief explanation (I only read brief ones) of the crisis I have read yet.

Gjerstad and Smith explain what brought about this housing bubble. "Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!"

Then they get to the good stuff. "The unraveling of the bubble is in many ways the most fascinating part of the story, and the most painful reality we are now experiencing." I didn't now that statistics could make for such a riveting tale.

He concludes this way:

It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn. What we've offered in our discussion of this crisis is the back story to Mr. Bernanke's [1983] analysis of the Depression. Why does one crash [the dot com bubble] cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution [DCI: thanks to the compassionate interventions of Rep. Barney Frank and Sen. Chris Dodd], can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.

The Socialist Global Moment

Hobbes's Leviathan

With economies collapsing worldwide (or seeming to), people are panicking. They are pointing to capitalism--the system of economic liberty that supports the system of political liberty--as the culprit. The New York Times recently reported, in connection with this week's G-20 gathering in London, "The American banking collapse, which precipitated the global meltdown, has led to a fundamental rethinking of the American way as a model for the rest of the world." Freedom means personal vulnerability, mutual destruction, and widespread misery, or so they say. When the cost of freedom outweighs the benefits, people willingly exchange their freedom for relative safety under the protection of a strongman of some sort, whether it is a warlord, a pimp, or the progressive state.

Seventeenth century philosopher Thomas Hobbes argued that human beings are by nature radically individual and free to order their actions however they choose. We are thus not naturally political, but naturally free and fundamentally selfish. Alas, in what he called a "state of nature" in which everyone is simply free, unrestrained by any government or civil society of any sort, life is "solitary, poor, nasty, brutish and short." Freedom being an intolerable condition, people flee it for the security of life together under a political sovereign.

This same logic was the leftist gospel in the 1980s. The claim on the left was that the nuclear standoff between NATO and the Soviet Bloc, threatening as it did the destruction of "the planet," made one world government the only rational option. It is better to be red (communist) than dead. But the logic of achieving security through the threat of mutually assured destruction was founded on better premises, and thankfully prevailed in the minds of most free citizens. Nation states survived, as did political and economic liberty, and the world socialist movement seemed to slip irrecoverably into the history of foolish ideas.

Once again, however, we are being tempted to flee into the arms of Leviathan, and The Wall Street Journal has given the president of the Party of European Socialists and former Danish prime minister, Poul Nyrup Rasmussen, space on their opinion page to make his case for "The Socialist Solution to the Crisis" (April 2, 2009), namely, global socialist government.

He begins his manifesto with this "blood of the oppressed drips from your fingers" declaration: "The job losses, repossessions, uncertainty, fear and misery faced by the people of Europe, the United States and Japan are a terrible stain on the consciences of those bankers and politicians whose doctrine of neo-liberal markets plunged us all into this crash." For the poor in the developing nations (which, interestingly, he still calls "the Third World"), this has meant "hunger, disease, and death." His socialist analysis calls forth a socialist solution. He sees this crisis as "a unique opportunity to develop a new approach," viz. "a Global New Deal."

His most troubling expression of glee comes when he describes the Global Progressive Forum (GPF) which will meet soon meet in Brussels.

This is the world conference of the Global Progressive Forum (GPF), which will bring together speakers from five continents to develop a new vision of a globalized world which benefits all. The GPF will take place in the European Parliament and will be opened by Bill Clinton. It will feature debates and discussions on the issues of global governance, trade, financial markets, decent work, migration and climate change, all aimed at coordinating global answers to what are global crises. It shows that the world's progressives are serious about making a solidaristic social model a reality for all.

Sadly, we have no Reagan at the helm to fight against this latest totalitarian thrust against the dignity of liberty. But the defense of liberty always depends on the education for liberty among free citizens. Thankfully, at least for now, we still have the freedom to discuss these ideas.

AIG and The People's Republic of America

Let's not be fooled. A politician's outrage is generally a trick skillfully employed either to profit politically from someone else's wrongdoing or to cover up his or her own malfeasance.

The Democrats now running--and at the same time ruining--the country have opened wide all the valves of their outrage now that the A.I.G. bonus payments they approved have become public.

In this clip, Shepard Smith of Fox News lays out the facts exposing the present government's indignation as a contrivance to distract attention from their complicity in the scandal itself. "They could have stopped this. They made it happen." This is an impressive and passionately delivered step by step account of Congressional incompetence and cover-up. Barney Frank, Chris Dodd, and their pals have been like 10-year-olds driving an 18-wheel rig.



With the proposed 90% tax on executive bonuses in select companies, Congress is abusing their power to grab particular people's money in righteous indignation, either feigned or real, or a bit of both. This tax system is for funding legitimate government activity. Often it is also used for social engineering. This is neither. It is just grabbing the money of people you don't like. Government orchestrated lawlessness of this sort makes places like Russia and Africa regions that scare off investment, and thus become places of poverty that should be prosperous. Mark Steyn ("The Outrage Kabuki," National Review Online, Mar. 21, 2009) makes this point.

The massive expansion of government the president is planning is forever, and will ensure you that end your days in what Peggy Noonan calls “post-prosperity America.” More immediately, what message do you send to the world when legal contracts can be abrogated by retrospective confiscatory bills of attainder? You think that’s going to get anyone investing in America again?

The investor class invests in jurisdictions where the rules are clear and stable. Right now, Washington is telling the planet: In our America, there are no rules. Got a legally binding contract? We’ll tear it up. Refuse to surrender the dough? We’ll pass a law targeted at you, yes, you, Mr. Beau Nuss of 27 Plutocrat Gardens, Fatcatville. If you want a banana republic on steroids, this is great news.

The danger in all of this concerns not only economic liberty, but also political liberty. Here is Congressman Barney Frank (D-MA) demanding the names of people at A.I.G. who received the bonuses. CEO Liddy is concerned not only for the privacy but also the safety of these people. Frank doesn't care. He needs to put faces on the public enemies and give them names for fear that the face might become his. These people have broken no law. They are entitled to the protection of the law, and to the service of their government in enforcing contracts, not abrogating them.



John Hinderaker at Power Line asks, "Are We a Banana Republic?" (It's short, forceful, and right. Read the whole thing.)

If the Pelosi bill is actually enacted into law (which I still think is doubtful) and upheld by the courts, there is no limit to the arbitrary power of Congress. In that event, we have no property rights and there is no Constitution--no equal protection clause, no due process clause, no impairment of contracts clause, no bill of attainder/ex post facto law clause. Instead, we are living in a majoritarian tyranny.

Harold and I have written in this blog about the fascist or tyrannical tendencies of the Obama people in particular and the Democrats in general when they are fully empowered, as they are now. Once they identify you as an enemy or as an impediment to what they want to accomplish, they target you for destruction with every instrument of the public trust at their disposal, whether it is to silence you (conservative talk radio) or plunder you (the top 1% of income earners).

Our founding generation was certain of at least two things: the value of liberty because of human nobility, and the value of limited government because of human depravity. By contrast, radicals like V.I. Lenin and his Bolshevik cadres were entirely certain not only of the perfectibility of man through politics according to Marxist theory, but also of their own righteous incorruptibility on account of their ideological commitment. For this reason, they concentrated power in the state without restraint or scruple.

The Democrats who control Congress and the White House today are convinced that human vulnerability in a system of liberty is morally unacceptable, and thus that concentrating power in hands of the federal government is politically unquestionable. But in these certainties, they are closer to Lenin than Madison philosophically. The eager abandon with which they are concentrating and wielding power in Washington betrays an unblinking confidence in the implicit and unwavering public spiritedness of politically empowered Democrats--but only Democrats because the Democratic party is the People's Party.

That is not the political theory that has preserved liberty and generated prosperity for the last 220 years.

Killing the Economy With Good Intentions

The Constitution should require entrance exams for elected public office. Too many Congressmen, for example, do not understand the basics of economics, and yet they throw themselves into "fixing" the economy or using economic policy to remedy what they see as social ills.

One basic principle of economics and of public policy is the so-called law of unintended consequences. Rob Norton, former economics editor at Fortune magazine, explains it this way:

The law of unintended consequences, often cited but rarely defined, is that actions of people—and especially of government—always have effects that are unanticipated or unintended. Economists and other social scientists have heeded its power for centuries; for just as long, politicians and popular opinion have largely ignored it. …

Most often, however, the law of unintended consequences illuminates the perverse unanticipated effects of legislation and regulation. In 1692 the English philosopher John Locke, a forerunner of modern
economists, urged the defeat of a parliamentary bill designed to cut the maximum permissible rate of interest from 6 percent to 4 percent. Locke argued that instead of benefiting borrowers, as intended, it would hurt them. People would find ways to circumvent the law, with the costs of circumvention borne by borrowers. To the extent the law was obeyed, Locke concluded, the chief results would be less available credit and a redistribution of income away from “widows, orphans and all those who have their estates in money.” (Concise Encyclopedia of Economics)

We have seen this in the current housing/credit/economy crisis. Well meaning Democrats pressured Fannie Mae and Freddie Mac and banks in general to make housing loans to poor people who could not afford houses. Banks developed loan products that in turn attracted people of all sorts to purchase them. What we are now calling "toxic loans" flooded the system. Housing demand shot up, and then home prices followed, creating a price bubble. When the bubble burst, as inevitably it had to, the collapse was systemic and catastrophic. Here we are. Good intentions. Bad policy. Unintended consequences.

Iowahawk's adaptation of Margaret Bourke-White's 1937 original

It's the poor who pay the price for ill-advised government "help"

A "must read" on this subject is The Economist's View of the World by Steven Rhoads (Cambridge, 1985). This University of Virginia professor explains what basic economic concepts people people need to understand in order to be effective public servants in the modern world. He then brings political wisdom to economics, explaining how a fuller, political perspective needs to supplement the economist's understanding of human affairs.

The Measure of Our National Distress

In this video clip, Senator Lindsey Graham (R-SC) admits that we may have to nationalize the banks, and my own Congressman, Pete King (R-NY), is open to the idea. Rep. Maxine Waters (D-CA), who is as far off in left field as anyone in Congress, says with great satisfaction, "We've come a long way!" Yes, Congresswoman, but it's not progress. It's plummeting.



Actually, when Pete King is seriously entertaining the notion of nationalizing banks, it makes me wonder what they know that I don't know.

The Economist is also talking along those lines.

Here is an excerpt from this week's cover story, "The Obama Rescue," which it calls "a huge wasted opportunity in the economic crisis."

America cannot rescue the world economy alone. But this double offensive [the stimulus bill and Geithner's proposed fix for the financial system] by its biggest economy could potentially have broken the spiral of uncertainty and gloom that is gripping investors, producers and consumers across the globe.
Alas, that opportunity was squandered. Mr Obama ceded control of the stimulus to the fractious congressional Democrats, allowing a plan that should have had broad support from both parties to become a divisive partisan battle. More serious still was Mr Geithner’s financial-rescue blueprint which, though touted as a bold departure from the incrementalism and uncertainty that had plagued the Bush administration’s Wall Street fixes, in fact looked depressingly like his predecessors’ efforts: timid, incomplete and short on detail. Despite talk of trillion-dollar sums, stockmarkets tumbled. Far from boosting confidence, Mr Obama seems at sea.

They explain that a fiscal stimulus without fixing the financial system cannot bring lasting economic recovery. But the bad news is: "The scale of troubled loans and the estimates of likely losses—which are now routinely put at over $2 trillion—suggest many of the country’s biggest banks may be insolvent."
The Economist proposes "some form of 'bad bank' for toxic loans (with temporary nationalisation part of that cleansing process, if necessary) and guarantees to cover catastrophic losses in the “good” banks that remain." Of course, nothing is temporary in a Democrat power grab. The scary thing is, sadly, there may be no choice.
Feb. 24, 2009 update: In today's Wall Street Journal ("Bank Nationalization Isn't the Answer"), William Isaac, chairman of the FDIC from 1981-1985, says, "People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization -- government seizing control of ownership and operations of a company -- is not a viable option."

The Trouble With Trillions

One of the best known and best loved episodes of Star Trek was one titled "The Trouble with Tribbles", where fuzzy little creatures with no apparent purpose threaten the good order of the entire Enterprise as well as a large Federation government project with their irrepressible reproduction. The unleashing of so many trillions of dollars into our economy, which like tribbles, have a soothing effect on human beings, will have a similar inflationary effect: at first, the crew views these tribbles with affection, but as they come to multiply and appear everywhere, interfering in a seemingly benign way, they begin to get sick of them, as too much of a good thing overwhelms their serious business.

Take a look at the episode here, either for the first time, or as a nostalgic return.

And consider the inflationary hangover awaiting us as the trouble with trillions makes itself known to us. You could be forgiven for thinking this is a Klingon plot to destroy us.

Good Morning Comrades!

Glen Beck wonders "why not go all the way?"




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Innes adds: When you take government money, you have to submit to government regulation. So now we see the government telling companies how much they can pay their executives, whether they should have private jets or even fly first class (or even fly at all!), where they can have their executive retreats (it's Wisconsin Dells this year, boys; enjoy the waterslide), and how much they can pay for a toilet stool. Yet businesses and industries are lining up to get in on this "free money."


George Bailey, in It's a Wonderful Life, learned to resist the allure such an offer of help. Like Mr Potter's seemingly kind offer to help the Savings and Loan survive their liquidity crisis, it's not a bailout, but a buyout. And he who pays the piper calls the tune.

But what's our problem with this? Who are we to question the Dear Leader? The government runs everything so cost efficiently and with such people-friendly service, perhaps it's better that they take charge of everything that's important.

But seriously, perhaps we all need to read Hayek's The Road to Serfdom.

Larry Summers, Save Our Stimulus!

Barack Obama has a team of very smart people helping him address the current economic crisis. So we should be fine.

That would be true, more or less, if they were simply free to do what in their best judgment was good for the economic health of the nation. But they are not. Political considerations at both ends of Pennsylvania Avenue distort the goals, and compromise the policy. The resulting legislation becomes what David Brooks in his column today calls "a sprawling, undisciplined smorgasbord" ("Cleaner and Faster," New York Times, January 29, 2009).

Larry Summers has the most to lose in this legislative circus. He is the President's chief economic adviser, and he made a very public case in 2008 for a disciplined and surgically targeted stimulus for the economy. His criteria, Brooks tells us, were these:

First, the stimulus should be timely. The money should go out “almost immediately.” Second, it should be targeted. It should help low- and middle-income people. Third, it should be temporary. Stimulus measures should not raise the deficits “beyond a short horizon of a year or at most two.”

Departure from these strictures, Summers warned, could produce "worse side effects than the disease that is to be cured.” Read Brooks's column for the ways this proposed stimulus package despises every one of Summers' warnings.

Alice Rivlin, budget director under President Clinton, told Congress this week, “A long-term investment program should not be put together hastily and lumped in with the anti-recession package. The elements of the investment program must be carefully planned and will not create many jobs right away.” So Rivlin has shown that she knows what's fatally and obviously wrong with this plan of action, and as such stands in public contrast with her former associate in the Clinton administration.

I am told that, wherever he goes, Larry Summers is viewed as the smartest man in the room. This is no doubt why Obama has brought this Harvard economist on board as Director of the National Economic Council. This bill, however, as fundamental to Obama's presidency as Reagan's 1981 tax cut bill was to his, leaves Summers standing off at the side with his firm counsel ignored. It leaves him covered with shame.

This situation brings to mind the worldly wise Ahithophel in the Bible whom the handsome and ambitious young Absalom brought into his council of advisers.

Now in those days the counsel that Ahithophel gave was as though one consulted the word of God; so was all the counsel of Ahithophel esteemed, both by David and by Absalom (2 Samuel 16:23 ESV).

From what I gather, Summers sees his own advice in those terms and expects others to do the same. Absalom's life-and-death challenge at start of his reign was not an economic crisis but his father David whom he had displaced from the throne. Of course, Ahithophel recommended precisely the right course of action that would have put an end to David, but Absalom followed the advice of others. Ahithophel, seeing that he was put to utter shame, did not wait for the miserable outcome.

When Ahithophel saw that his counsel was not followed, he saddled his donkey and went off home to his own city. He set his house in order and hanged himself... (2 Samuel 17:23).

As it stands, the bill is a self-defeating mixture of immediate economic stimulus and long-term domestic agenda funding. Larry Summers should threaten to resign if President Obama does not move right away to put an end to this legislative monster, this pushmepullyou response to our continuing economic slide into catastrophe.

Obama needs Summers more than Summers needs Obama. The President should especially wish to avoid someone of Larry Summers' stature resigning in protest, and just two weeks into the administration. If our young President hasn't the good judgment to take this step, Summers should quietly force his hand.

A Merely Political Stimulus

Harvard economist Robert Barro, also at the Hoover Institution, gives a technical, though simple-so-that-I-can-understand-it, explanation of why the Democrats' "stimulus" spending package will fail to stimulate anything, apart from perhaps Chris Matthews' leg.

Read "Government Spending Is No Free Lunch" (Wall Street Journal, Jan. 22, 2009).

But, in terms of fiscal-stimulus proposals, it would be unfortunate if the best Team Obama can offer is an unvarnished version of Keynes's 1936 "General Theory of Employment, Interest and Money." The financial crisis and possible depression do not invalidate everything we have learned about macroeconomics since 1936.

Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates -- especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant.

I find it interesting that we are speaking of this stimulus package as something necessary for "jump starting the economy," as though the economy were a car, and as though it were at a stand still.

But this is rhetoric in the service of covering up a duplicitous government. The Democrats are not interested primarily in economic recovery. That will come eventually, one way or another, in the natural cycle of things. They see this crisis and the unprecedented breadth of power we have handed them as an opportunity to fund "just about every pent-up Democratic proposal of the last 40 years" ("A 40-Year Wish List," Wall Street Journal editorial, Jan. 28, 2009).

Also of interest is that 57% of Americans believe that tax cuts are generally good for the economy compared to 17% who believe they are bad, according to Rasmussen Reports.

Eat More Donuts

Fred Thompson explains how the stimulus package(s) coming our way actually work: its like telling a fat guy he can lose weight by eating more donuts. Call it the Homer Simpson Recovery Act.




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Innes adds: Fred is good at this. But while this video is entertaining, I doubt that the former Senator from Tennessee and recent candidate for the Republican presidential nomination is going to all this bother simply for our entertainment.

The "comment from Fred's den" that I have given you here was Thompson's response to Michael Moore after he challenged Thompson to a debate. When I saw it I thought I saw the next president. I saw strong principles, republican principles, and an ability to communicate such principles that we haven't seen in years.



But he delayed announcing his candidacy, he had severe organizational problems, and an appearance of sleepy indifference, something I have never seen before in any aspirant for the executive office.

So is Fred back on his feet? Are these videos to parallel Reagan's many radio addresses that he delivered on a myriad of political, economic and cultural issues in the 1970s? Is Fred positioning himself and building his base for a better organized run in 2012? I see that Chris Cillizza does not list him in the GOP Ten Mostly Likely list. So much for early lists.

We Need More Than A Little Christmas

We and our journalists, when faced with a crisis, have a tendency to focus on its immediate causes, and then tinker with them while attempting to affix blame in the partisan debate. Thus, in what may become known as the Financial Crisis of 2008, we focus on better regulation and troublesome government intrusion into the market while mustering arguments for the culpability of either the Bush years or the ideological and self-serving liberal Democratic Congress. Of course, there is helpful truth to be found in those investigations. But there are more important truths, and ultimately more helpful ones, to be found in pulling back to look at the bigger human picture and see the deeper problems embedded in our souls, or if you will, the contemporary American character.

Daniel Henninger takes this broader approach in his little newspaper essay, "Mad Max and the Meltdown" (Wall Street Journal, Nov. 20, 2008). He states his thesis metaphorically, saying, "A nation whose people can't say "Merry Christmas" is a nation capable of ruining its own economy."

Skipping his step by step summary of how this crisis unfolded, we come to his conclusion. The problem has been fundamentally not one of inadequate regulation, though there certainly was that. The problem was one of inadequate moral restraint on the part of many of the people involved, from the greatest to the least of them. This widespread moral wandering was made possible by a larger society that is aggressively discouraging religion among its citizens.

What really went missing through the subprime mortgage years were the three Rs: responsibility, restraint and remorse. They are the ballast that stabilizes two better-known Rs from the world of free markets: risk and reward. Responsibility and restraint are moral sentiments. Remorse is a product of conscience. None of these grow on trees. Each must be learned, taught, passed down. And so we come back to the disappearance of "Merry Christmas." It has been my view that the steady secularizing and insistent effort at dereligioning America has been dangerous. ... Northerners and atheists who vilify Southern evangelicals are throwing out nurturers of useful virtue with the bathwater of obnoxious political opinions.

John Adams tells us, "Our Constitution was made only for a moral and religious people. It is wholly inadequate to the government of any other." He said this not because he lived in a religious society and was so immersed in that point of view that he could not imagine the liberating possibilities of atheistic secularism. Late eighteenth century moral, political, and religious thought gave him a vivid awareness of the alternative. His claim on this point is based instead on his understanding of liberty and the human soul. Our constitution oversees a system of political and economic liberty. That system is not self-sufficient. It cannot govern what Immanuel Kant called "a nation of devils." Such a people, unable to govern themselves from within, would need a very powerful, active, and omnipresent state to restrain them.

C.S. Lewis saw this problem in his day. In The Abolition of Man, he argues that the Enlightenment project to refound all knowledge on an amoral, or "value-neutral," scientific basis, together with its philosophic collapse into nihilism or what we are calling post-modernism, have landed us in an inhuman and unsustainable situation by debunking the very means by which we make moral judgments or even recognize their possibility. "In a sort of ghastly simplicity we remove the organ and demand the function. We make men without chests and we expect of them virtue and enterprise. We laugh at honor and are shocked to find traitors in our midst. We castrate and bid the geldings be fruitful" (Harper edition, p.26).

People want to be free of religion, especially Christianity, but they want to retain the morality that derives from and requires that religion for it to make any sense and to give it force in the human heart.

We see this vain hope expressed in a recent atheist ad campaign in London that has migrated to Washington DC in time for the Christmas season. It asks, "Why believe in a god? Just be good for goodness' sake." It is yet another effort not only to take Christ out of Christmas, but also to remove Christ from Christian character.

Mere exhortations of this sort are notoriously ineffective, however, because people, left to themselves, are incorrigibily self-centered. They must be governed from above by the looming consequences of violating the divinely established moral order. It was the irreligious Thomas Jefferson who confessed, "I tremble for my country when I reflect that God is just, that His justice cannot sleep forever."

Even better, however, is when people are governed from within by a heart transforming spiritual grace that restrains selfishness and inclines the heart in charity toward not only one's family and neighbors, but also to strangers--both seen and unseen--and, yes, even to one's enemies. If we sow the wind, we can expect to reap the whirlwind (Hosea 8:7).