This speech was given by Herbert Hoover as the country was caught in the depths of the Great Depression 6 December 1932, as he was leaving office, largely perceived as a failure.

I have sympathy for Hoover and rightfully so. For many years I saw his portrait every time I would visit the headquarters of the IEEE in New York City. I read about his magnificent acts of logistical organization and the relief of suffering in the European famines. He was an accomplished and talented person.

And yet he failed, or at least has been judged a failure as President, because of a timidity and unwillingness to act, boldly and in a timely manner.  He was constrained by bad advice, and an ideological bent that prevented common sense action from moving the country forward. Afterwards in his Memoirs he blamed the advice he received from his Treasury Secretary, Andrew Mellon, the great liquidationist, who had been appointed by Warren Harding in 1921, and who throughout the 1920′s preached the gospel of tax cuts for the wealthy to stimulate growth.

“Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

This speech could be given with little alteration by Barack Obama today, although I am sure he would add quite a bit more flair.

The Too Big To Fail Banks are still with us, but even larger and more dangerous and powerful. Obama himself, despite pledges to the contrary, is taking large amounts of funds from the corrupt campaign process.

Instead of acting quickly to correct the causes of the financial collapse, he expended most of his early political capital on a healthcare plan that, despite some genuinely beneficial changes, serving to increase the control and reach of a few private healthcare monopolies by requiring all people to purchase insurance from them.

Fed policy still serves the few and is largely opaque in its dealings, becoming even more powerful as regulator.

And the markets are dominated by even fewer players, and tainted by a major scandal in which over a billion dollars was stolen from the customers.

Corporate profits are excellent and the very wealthy few are making enormous strides in increasing their wealth. And yet the bulk of the nation suffers from fear and uncertainty.

The people’s vehement objections to the bailout, marked by faxes, calls and emails in their millions, were ignored.

A Message on the Need to Reform the Financial System — From Herbert Hoover

 

The issue of crony capitalism should be front and center in this campaign. President Obama defends his cronies instead of the so called 99 percent. That’s his contradiction. Big Labor, Big Business and Big Green Energy are collections of cronies with big jobs, big salaries and big privileges. Nothing to do with the 99 percent.

But Romney can go even further to slam crony capitalism. This is where tax reform and deep spending cuts come in. A flattening of tax rates should be accompanied by the elimination of cronied tax deductions, exemptions and carve-outs. Even more, we should get rid of crony corporate welfare wherever it exists, including crony government subsidies to energy, exports and agriculture. Wherever it exists.

Let’s say you went to two tax brackets at 10 and 25 percent, as per Paul Ryan’s plan, or even the next step of a single-rate flat tax. Here, all the crony tax advantages should be wiped out. They won’t be necessary at lower rates, and their removal would end crony favoritism.

Finally, Romney can punctuate his crony-capitalism attack by telling folks he will overturn and upend the prevailing Washington, D.C., establishment.

Sadly, with the exception Rick Santorum making the case for lower tax rates, Thursday night’s debate had virtually no discussion of tax reform. Newt Gingrich never even once mentioned his 15 percent flat-tax plan. Unfortunately, Newt still leaves most deductions and carve-outs in place, and that needs to be fixed.

That aside, Romney capped his strong performance with a Reaganesque summation. As he has in the past, he criticized Obama for trying to “transform” America from a merit society — an opportunity society where people are free to choose — to a European-style entitlement society. Romney said, “We need to restore the values that made America the hope of the Earth. … (President Obama) has made it almost impossible for our private sector to reboot. … I will defeat Barack Obama and keep America as it’s always been, the shining (city) on a hill.”

Make Crony Capitalism the Issue in 2012 – Larry Kudlow, National Review

 

GROWING WORRIES IN ATHENS

A Greek Default Would Hit the ECB Hard

Hopes that Greece can be saved are dwindling. Athens had hoped to reach a deal with its creditors on a 50 percent debt haircut, but banks have now made it clear that efforts to reach an agreement could fail. Should the country go bankrupt, the European Central Bank stands to lose the most.


 

I think the most notable development this week was Thursday’s big release of global factory activity surveys. It wasn’t pretty. Overall, the JP Morgan Global Manufacturing PMI dropped for the third straight month and fell below the 50 level — the line of demarcation between growth or contraction in monthly factory activity — for the first time since recession was descending upon us back in early 2008. Scary stuff.

 

Although U.S. activity was buoyant (no doubt a remnant of the sentiment tailwinds enjoyed from the market rally in October), we cannot remain an island of tranquility as Asia and Europe fall into the abyss.

 

Here are the highlights (any reading under 50 indicates a drop in activity):

 

*Brazil PMI: 48.7 vs. 46.5 prior
*Ireland PMI: 48.5 vs. 50.1 prior
*Sweden PMI: 47.6 v. 49 estimated
*Norway PMI: 48.6 vs. 50.2 estimated
*Denmark PMI: 47.7 vs. 43.6 prior
*Poland PMI: 49.5 vs. 51.7 prior
*Spain PMI:  42.8 vs. 43.9 prior
*Swiss PMI: 44.8 vs. 46.6 estimated
*Czech PMI: 48.6 vs. 51.7 prior
*Italy PMI: 44 vs. 42.8 estimated
*France PMI: 47.3 vs. 47.6 estimated
*Germany PMI: 47.9
*Greece PMI: 40.9 vs. 40.5 prior
*South Korea PMI: 47.1 vs. 48 prior
*Taiwan PMI: 43.9 vs. 43.7 prior

 

And, now for the big boys:

 

*Eurozone PMI: 46.4 — lowest reading since recession ended in July 2009
*U.K. PMI: 47.6 vs. 47 estimated — lowest since June 2009
*China PMI: 49 vs. 49.8 estimated — lowest reading since February 2009
*China HSBC PMI: 47.7 vs. 51 prior — 32-month low

 

In addition to signs of economic weakness — which was enough for a Chinese vice finance minster to say the global economy faces a “worse situation” than in 2008 — there was evidence that the financial system remains under severe stress despite the freak out over Wednesday’s move by the Federal Reserve to lower dollar funding costs for foreign banks (which, as I discussed at the time, wasn’t really a game changer). The European Central Bank reported that eurozone banks borrowed nearly €9 billion in overnight emergency cash — up from €2.7 billion earlier this week. Not good.

 

Other signs of strain could be seen in the way German 12-month bill yields dropped below zero on Wednesday as European investors were willing to pay Berlin for the luxury of lending it money. The motivation is that, if you’re holding a big wad of euros, German short-term debt is one of the few “sure bets” left out there. It’s a sign of extreme risk aversion and fear.

 

Of course, the epicenter for all this is Europe.

 

Adding to concerns were comments this week from new ECB chief Mario Draghi that while downside risks to the economic outlook have increased, he cannot ride to Europe’s rescue by engaging in unmitigated money printing and bond buying; instead, it must adhere to its founding principles, including an inability to engage in monetary financing of government debts (exactly what the likes of Italy would love right now).

 

Draghi’s comments were akin to yelling “fire” in a crowded theater before announcing all the fire extinguishers are empty. Whoops.

According to the team at Capital Economics, based in London, the eurozone economy is on track to contract by 1% next year and by 2.5% in 2013, with risks to the downside for both forecasts. Recession will only deepen the budget deficits at the center of the eurozone debt crisis. The only way out is growth. And the only way the likes of Greece, Portugal, and Italy can restore growth is via massive currency depreciation and domestic inflation — something that’s not going to happen as long as they’re in the eurozone.

 

Sure, there will be distractions like Wednesday’s move by the Fed or additional stimulus measures out of places like China and Brazil. That’s just how the market gods like it. All the better to keep the masses confused and complacent as the fundamentals just get worse and worse.

 

To put it differently: When you look around the theater, everyone’s still focused on center stage blissfully unaware what’s happening around them. Turn around. The balcony level is in flames.

The Economy Is About To Get A Lot Worse – Anthony Mirhaydari, MSNBC

 

 

One of the things that I suspect has brought many of you to Naked Capitalism is the hard lesson that conventional wisdom in finance and economics has been very costly to ordinary citizens around the world. If you had believed the prevailing world view of early 2007, that markets were efficient and bad actors would of course be found out and shunned, that were were in the midst of a Great Moderation and could expect to enjoy continued prosperity, punctuated by shallow recessions, and that financial innovation was a boon and therefore to be encouraged, you had an ugly awakening. The global financial crisis imposed tremendous costs on investors and society at large, via unemployment, a housing bust, plunging tax revenues, cuts in government services and increasing political discord.

Yet no one in power before the crisis has been punished or even suffered much. In fact, 2009 and 2010 Wall Street bonuses exceeded the record levels of 2007. As former IMF chief economist Simon Johnson described in a May 2009 Atlantic article, the US instead suffered a quiet coup, with the top end of the financial services industry becoming more concentrated, more powerful, even more concentrated and more firmly in charge of the political apparatus.

Most of you understand this. It’s awfully hard not to notice that we have a two-tier system of justice, in which the major financial firms get to flout the law and violate their own contracts, yet are able to get their agreements enforced against seemingly everyone, from credit card, mortgage, and student debt borrowers to municipalities who entered into risk-laden swaps they didn’t understand to nations like Greece, where a clearly insolvent borrower cannot get a deep enough restructuring out of fear of triggering payouts on credit default swaps. But complexity, leverage, and opacity have been the big banks’ best friends in executing this program of looting. You’ve come here to get educated so you won’t be so easily taken next time.

So the lies that the elite financiers have peddled appeared to be free, when in fact, many of them were sold via clever messaging and lobbying.
Read the Rest…

At Naked Capitalism

 

Inside the Doomsday Machine with the outsider who predicted and profited from America’s financial Armageddon.

by Michael Burry, MD’97

 

I worry about the future of a nation that would refuse to acknowledge the true causes of the crisis. A historic opportunity was lost. America instead chose its poison as its cure, and the second “Greatest Generation” would never be born.

Today I expect the U.S. government to attempt continuing an easy money policy into the next presidential term—past the meat of the foreclosure crisis, and past the corporate and public financing humps that are upcoming. Junk bonds, incredibly, again are at all-time highs. Quantitative easing seems to be working for now. But this is an invalid validation of what America is doing, a Pyrrhic gamble. As we continue to debase our currency, Bernanke says he is not printing money. Yet I receive an email every day from the Fed saying we just bought another $7 billion or $8 billion in treasuries, monetizing the debt. The scope and breadth of quantitative easing raise severe questions about the Treasury’s needs.

Government borrowing of money for the purpose of injecting cash into society, bailing out banks, brokers and consumers, is an easy decision for a population that has not yet learned that short-sighted easy strategies are the route to long-term ruin. We never quite achieved the catharsis necessary to stoke a deep reevaluation of our wants, needs and fears.

Importantly, the toxic twins—fiat currency and an activist Fed—remain even more firmly entrenched with the financial reforms of last year. The Federal Reserve, having acquired new powers of regulation, has insisted that nothing in the field of economics or finance was of any help in predicting the crisis—period, no more comments. It’s a worthless conclusion that guarantees we’ll make the same mistake again and again.

We need better leaders, but frankly this isn’t going to happen. A problem cannot be solved if it is never acknowledged.

Taxes need to be raised, spending needs to be cut, and loopholes need to be shut if we are to have any hope of returning to a stable base. Home ownership should not be a policy of the U.S. government. The banking system needs substantial reform and bank breakups. Glass–Steagall needs a second run in a strong form. And 22.5 million public workers have no business unionizing against the taxpayer. The list of things that won’t happen—but should happen—goes on and on.

By 2020, interest expense on our national debt could very well exceed $1 trillion. All personal income taxes collected in the U.S. in one year do not total $1 trillion. Our country’s math is scary big, but even scarier is that it simply doesn’t work…

Read the rest here.

 

How 9/11 Triggered America’s Decline

The events of Sept. 11, 2001 led to a wave of solidarity with the US. But the superpower has lost that goodwill over the course of the wars it subsequently waged. Now America is mainly seen not as the victim of terrorism, but as a perpetrator of violence itself.

*****************

Ten Lost Years

Ten years have passed since Sept. 11, 2001, and today only losers remain. Islam has been taken hostage by blinded ideologues. The West has betrayed its values in its struggle against terror, and we are now burdened with Islamophobes. Without 9/11, the crimes of Anders Behring Breivik and the rise of right-wing populists in Europe would be inconceivable.


 

“On the eve of a national election, it is well for us to stop for a moment and analyze calmly and without prejudice the effect on our Nation of a victory by either of the major political parties.

The problem of the electorate is far deeper, far more vital than the continuance in the Presidency of any individual. For the greater issue goes beyond units of humanity—it goes to humanity itself.

In 1932 the issue was the restoration of American democracy; and the American people were in a mood to win. They did win. In 1936 the issue is the preservation of their victory. Again they are in a mood to win. Again they will win.

More than four years ago in accepting the Democratic nomination in Chicago, I said: “Give me your help not to win votes alone, but to win in this crusade to restore America to its own people.”

The banners of that crusade still fly in the van of a Nation that is on the march.

It is needless to repeat the details of the program which this Administration has been hammering out on the anvils of experience. No amount of misrepresentation or statistical contortion can conceal or blur or smear that record. Neither the attacks of unscrupulous enemies nor the exaggerations of over-zealous friends will serve to mislead the American people.

What was our hope in 1932? Above all other things the American people wanted peace. They wanted peace of mind instead of gnawing fear.

First, they sought escape from the personal terror which had stalked them for three years. They wanted the peace that comes from security in their homes: safety for their savings, permanence in their jobs, a fair profit from their enterprise.

Next, they wanted peace in the community, the peace that springs from the ability to meet the needs of community life: schools, playgrounds, parks, sanitation, highways—those things which are expected of solvent local government. They sought escape from disintegration and bankruptcy in local and state affairs.

They also sought peace within the Nation: protection of their currency, fairer wages, the ending of long hours of toil, the abolition of child labor, the elimination of wild-cat speculation, the safety of their children from kidnappers.

And, finally, they sought peace with other Nations—peace in a world of unrest. The Nation knows that I hate war, and I know that the Nation hates war.

I submit to you a record of peace; and on that record a well-founded expectation for future peace—peace for the individual, peace for the community, peace for the Nation, and peace with the world.

Tonight I call the roll—the roll of honor of those who stood with us in 1932 and still stand with us today.

Written on it are the names of millions who never had a chance—men at starvation wages, women in sweatshops, children at looms.

Written on it are the names of those who despaired, young men and young women for whom opportunity had become a will-o’-the-wisp.

Written on it are the names of farmers whose acres yielded only bitterness, business men whose books were portents of disaster, home owners who were faced with eviction, frugal citizens whose savings were insecure.

Written there in large letters are the names of countless other Americans of all parties and all faiths, Americans who had eyes to see and hearts to understand, whose consciences were burdened because too many of their fellows were burdened, who looked on these things four years ago and said, “This can be changed. We will change it.”

We still lead that army in 1936. They stood with us then because in 1932 they believed. They stand with us today because in 1936 they know. And with them stand millions of new recruits who have come to know.

Their hopes have become our record.

We have not come this far without a struggle and I assure you we cannot go further without a struggle.

For twelve years this Nation was afflicted with hear-nothing, see-nothing, do-nothing Government. The Nation looked to Government but the Government looked away. Nine mocking years with the golden calf and three long years of the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! Powerful influences strive today to restore that kind of government with its doctrine that that Government is best which is most indifferent.

For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up.

We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.

Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.

I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second Administration that in it these forces met their master.

The American people know from a four-year record that today there is only one entrance to the White House—by the front door. Since March 4, 1933, there has been only one pass-key to the White House. I have carried that key in my pocket. It is there tonight. So long as I am President, it will remain in my pocket.

Those who used to have pass-keys are not happy. Some of them are desperate. Only desperate men with their backs to the wall would descend so far below the level of decent citizenship as to foster the current pay-envelope campaign against America’s working people. Only reckless men, heedless of consequences, would risk the disruption of the hope for a new peace between worker and employer by returning to the tactics of the labor spy.

Here is an amazing paradox! The very employers and politicians and publishers who talk most loudly of class antagonism and the destruction of the American system now undermine that system by this attempt to coerce the votes of the wage earners of this country. It is the 1936 version of the old threat to close down the factory or the office if a particular candidate does not win. It is an old strategy of tyrants to delude their victims into fighting their battles for them.

Every message in a pay envelope, even if it is the truth, is a command to vote according to the will of the employer. But this propaganda is worse—it is deceit.

They tell the worker his wage will be reduced by a contribution to some vague form of old-age insurance. They carefully conceal from him the fact that for every dollar of premium he pays for that insurance, the employer pays another dollar. That omission is deceit.

They carefully conceal from him the fact that under the federal law, he receives another insurance policy to help him if he loses his job, and that the premium of that policy is paid 100 percent by the employer and not one cent by the worker. They do not tell him that the insurance policy that is bought for him is far more favorable to him than any policy that any private insurance company could afford to issue. That omission is deceit.

They imply to him that he pays all the cost of both forms of insurance. They carefully conceal from him the fact that for every dollar put up by him his employer puts up three dollars three for one. And that omission is deceit.

But they are guilty of more than deceit. When they imply that the reserves thus created against both these policies will be stolen by some future Congress, diverted to some wholly foreign purpose, they attack the integrity and honor of American Government itself. Those who suggest that, are already aliens to the spirit of American democracy. Let them emigrate and try their lot under some foreign flag in which they have more confidence.

The fraudulent nature of this attempt is well shown by the record of votes on the passage of the Social Security Act. In addition to an overwhelming majority of Democrats in both Houses, seventy-seven Republican Representatives voted for it and only eighteen against it and fifteen Republican Senators voted for it and only five against it. Where does this last-minute drive of the Republican leadership leave these Republican Representatives and Senators who helped enact this law?

I am sure the vast majority of law-abiding businessmen who are not parties to this propaganda fully appreciate the extent of the threat to honest business contained in this coercion.

I have expressed indignation at this form of campaigning and I am confident that the overwhelming majority of employers, workers and the general public share that indignation and will show it at the polls on Tuesday next.

Aside from this phase of it, I prefer to remember this campaign not as bitter but only as hard-fought. There should be no bitterness or hate where the sole thought is the welfare of the United States of America. No man can occupy the office of President without realizing that he is President of all the people.

It is because I have sought to think in terms of the whole Nation that I am confident that today, just as four years ago, the people want more than promises.

Our vision for the future contains more than promises.

This is our answer to those who, silent about their own plans, ask us to state our objectives.

Of course we will continue to seek to improve working conditions for the workers of America—to reduce hours over-long, to increase wages that spell starvation, to end the labor of children, to wipe out sweatshops. Of course we will continue every effort to end monopoly in business, to support collective bargaining, to stop unfair competition, to abolish dishonorable trade practices. For all these we have only just begun to fight.

Of course we will continue to work for cheaper electricity in the homes and on the farms of America, for better and cheaper transportation, for low interest rates, for sounder home financing, for better banking, for the regulation of security issues, for reciprocal trade among nations, for the wiping out of slums. For all these we have only just begun to fight.

Of course we will continue our efforts in behalf of the farmers of America. With their continued cooperation we will do all in our power to end the piling up of huge surpluses which spelled ruinous prices for their crops. We will persist in successful action for better land use, for reforestation, for the conservation of water all the way from its source to the sea, for drought and flood control, for better marketing facilities for farm commodities, for a definite reduction of farm tenancy, for encouragement of farmer cooperatives, for crop insurance and a stable food supply. For all these we have only just begun to fight.

Of course we will provide useful work for the needy unemployed; we prefer useful work to the pauperism of a dole.

Here and now I want to make myself clear about those who disparage their fellow citizens on the relief rolls. They say that those on relief are not merely jobless—that they are worthless. Their solution for the relief problem is to end relief—to purge the rolls by starvation. To use the language of the stock broker, our needy unemployed would be cared for when, as, and if some fairy godmother should happen on the scene.

You and I will continue to refuse to accept that estimate of our unemployed fellow Americans. Your Government is still on the same side of the street with the Good Samaritan and not with those who pass by on the other side.

Again—what of our objectives?

Of course we will continue our efforts for young men and women so that they may obtain an education and an opportunity to put it to use. Of course we will continue our help for the crippled, for the blind, for the mothers, our insurance for the unemployed, our security for the aged. Of course we will continue to protect the consumer against unnecessary price spreads, against the costs that are added by monopoly and speculation. We will continue our successful efforts to increase his purchasing power and to keep it constant.

For these things, too, and for a multitude of others like them, we have only just begun to fight.

All this—all these objectives—spell peace at home. All our actions, all our ideals, spell also peace with other nations.

Today there is war and rumor of war. We want none of it. But while we guard our shores against threats of war, we will continue to remove the causes of unrest and antagonism at home which might make our people easier victims to those for whom foreign war is profitable. You know well that those who stand to profit by war are not on our side in this campaign.

“Peace on earth, good will toward men”—democracy must cling to that message. For it is my deep conviction that democracy cannot live without that true religion which gives a nation a sense of justice and of moral purpose. Above our political forums, above our market places stand the altars of our faith—altars on which burn the fires of devotion that maintain all that is best in us and all that is best in our Nation.

We have need of that devotion today. It is that which makes it possible for government to persuade those who are mentally prepared to fight each other to go on instead, to work for and to sacrifice for each other. That is why we need to say with the Prophet: “What doth the Lord require of thee—but to do justly, to love mercy and to walk humbly with thy God.” That is why the recovery we seek, the recovery we are winning, is more than economic. In it are included justice and love and humility, not for ourselves as individuals alone, but for our Nation.

That is the road to peace.”

Franklin D. Roosevelt
Madison Square Garden, October 31, 1936

http://jessescrossroadscafe.blogspot.com/2011/07/fdr-speech-1936.html

The Rise of the Wrecking-Ball Right

 A Moral Question - Not A Political One, A State of Distress, BANK RESERVES FOR TBTF, Bilderbergers 1 USA 0, Constitutional Questions, Coup d'etat in America, Deleveraging, Devaluation, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, Federal Reserve-Discussion, Figures don't lie but Liars can figure, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, HEY AMERICA-STICK 'EM UP!, History of Finance, Insolvency, Integrity and Responsibility, Is The Market Rally Real?, IT'S ALL ABOUT POWER AND MONEY, Jacksonian Democracy, Moral Hazard, Obama's Hypocrisy, Objectivism, Our phony middle class, Patience is a virtue...Delusion is a vice, Political Chaos, Regulatory Failures, Robert Reich, Small Business-Bedrock of America, Smaller Can Be Better, Subsidiarity, TARP fruit loops, The American Financial Oligarchy, The Big Fat Greek Question, The Consequences of Greed, The Democrats Blew It Again, The Dollar's Demise, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Growing American Fascist State, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, USA Is the New Japan, Wage Deflation, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who owns Congress-Still!  1 Response »
Jul 162011
 

One would have thought the last few years of mine disasters, exploding oil rigs, nuclear meltdowns, malfeasance on Wall Street, wildly-escalating costs of health insurance, rip-roaring CEO pay, and mass layoffs would have offered a singular opportunity to explain why the nation’s collective well-being requires a strong and effective government representing the interests of average people.

The Rise of the Wrecking-Ball Right

 

Howard Gold recently noted that the economy’s failure to thrive is a refutation of the work of two dominant 20th-century economists: John Maynard Keynes and Milton Friedman.

Keynes was the great advocate of massive government spending as an economic “stimulus,” which President Obama tried as his first act in office, and which failed to produce the expected “multiplier effect” that was supposed to boost the economy. So this was a failure of the economics of the left. But what about Friedman? While Friedman is usually remembered as one of the great economic defenders of the free markets–which in some ways, he was–he was also one of the chief advocates of monetarism, which promoted the notion that the central planners at the Federal Reserve could manipulate the economy by adjusting the money supply. And as Gold points out, Fed Chairman Ben Bernanke was a self-confessed adherent of Friedman’s theories. So along with the Keynesian stimulus, we got an even bigger monetary stimulus from the Fed, and we got it twice: QE1 and QE2. Yet this also failed to produce the expected multiplier effect.

There is some legitimate mystery as to why. I have inveighed against all forms of bailouts and stimulus, arguing that every dollar pumped into the economy by the government eventually destroys more than a dollar of private economic activity. But the key word is eventually. Money pumped into the economy by the Fed usually goes into “bubbles” of malinvestment, putting the capital to an unproductive use (like building houses that people can’t afford) and creating destructive inflation over the long term. But we would still expect that a tsunami of cheap credit from the Fed would create some short-term credit expansion, even if we have to pay for it later on.

Yet this credit expansion hasn’t happened. The Fed has extended the banks trillions of dollars in easy money, but this hasn’t produced a commensurate expansion of lending. Why not?

The answer is a larger refutation of the theories of monetarist stimulus. The Great Recession demonstrates that the money supply is not the ultimate driver of the economy. The ultimate driver is very simple: has the government created a safe climate for investment?

The Obama administration and the Democratic Congress have done the opposite. They have created a hostile climate for investment, and they have done so through one measure that is directly smothering the economic recovery: the Dodd-Frank financial reform bill. Dodd-Frank has injected a lethal dose of uncertainty into the very heart of the financial sector–and we’re only halfway through the worst of this effect.

The problem is not any specific provision of Dodd-Frank. The problem is the lack of specific provisions. Despite being more than 2,300 pages long, which would be more than enough space to spell out a comprehensive system of regulation in exacting, concrete detail, this is not what Dodd-Frank did. Instead, as the New York Times noted last year when it passed, the bill “is short on the details necessary for enforcement. Enactment has set off a scramble by financial regulators to write the rules needed to put the bill’s broad framework into practice.”

“Richard Murray, chairman of the US Chamber of Commerce’s Center for Capital Markets and Competitiveness, says the burden placed on regulators is unprecedented. ‘It’s a law comprised of goals and objectives much like the preliminary blueprints for the design of a very complex building,’ he said at a July 27 chamber conference on the bill.

“He noted that the law calls for 530 rulemakings, 60 studies, and 90 reports to Congress. ‘The wiring and the piping and the internal decor that will become financial regulation will emerge from that process,’ he said.

A financial consultant quoted in the article described the bill as a “blank slate,” while another provided the best analogy: we’re in “the eye of the storm”: “We have been through a great amount of legislative work…. Now we have to wait for the regulations.”

A year later, we’re still there. Just last week, House Democrats were urging regulators to speed up work on giving actual meaning to the Democrats’ vaporous legislation. This probably won’t help because “much of Dodd-Frank remains tied-up with regulatory agencies that must abide by a standard process laid out by the Administrative Procedures Act, which mandates a string of proposal requirements, commentary periods, and economic impact analyses before new regulations go into effect. Agencies like the Consumer Financial Protection Bureau, FDIC, and Office of the Comptroller of the Currency still need to finalize half of the approximately 387 rules needed to execute Dodd-Frank-related provisions.”

So it will be at least another year at the least before bankers and investors find out what laws they are living under. And it gets worse: the provisions that are yet to be decided are not minor details but go the very heart of the financial industry.

Dodd-Frank formalized the institution of “too big to fail” for companies that are considered large enough to pose a “systemic risk” to the financial sector. In return, these companies are subjected to stringent new requirements intended to prevent them from failing. But it is still not clear which companies will be regarded as “systemically important” and which will not, so hundreds of big financial firms are living under the cloud of restrictive regulation. And to make things worse, Federal Reserve Governor Daniel Tarullo suggested a few weeks ago that systemically important banks should have their capital requirements raised from 7% to as much as 14%.

That’s just a wee, tiny little detail that nobody has quite worked out yet.

Capital requirements are the heart of the investment banking business. They determine, directly and mathematically, how much credit bankers can extend. A 7% requirement means that if your bank has $700 million in its own assets, you can lend up to $10 billion of your depositor’s money. But if the capital requirement is raised to 14%, you can only lend $5 billion. Double the capital requirement and you halve the credit.

And what happens if regulators can’t make up their mind, so no one can tell whether their capital requirements will be doubled or not? Everyone sits on their extra cash, just in case. No wonder the economy is just lying there, flopping and gasping like a fish in the bottom of a bass boat.

Dodd-Frank is a monument to the modern practice of anti-legislation. This has been the pattern of the left’s expansion of the regulatory state for decades, but the Obama administration and Democratic leaders in Congress have raised it to an art form. They pass giant, 2,000-page epics which still manage not to spell out any concrete details. What does the legislation do, instead? Mostly, it lays out an organizational chart of regulators and then empowers these unelected bureaucrats to dictate all of the actual details.

Dodd-Frank is not legislation but the abdication of legislative power. In effect, Congress has given up writing laws and instead vested that power in unelected bureaucrats appointed to executive-branch agencies.

Some details may never be fleshed out. One analysis of Dodd-Frank concludes:

“You will soon find that the regulations themselves are secondary to the new measuring stick called ‘unfair or deceptive acts or practices.’ Under the new environment, being in compliance with regulatory requirements is only a piece of the puzzle. That’s the black and white piece so to speak. You will also have to meet the grey matter test of unfair or deceptive acts or practices…. No matter how you slice it, just about any particular act or practice can fall within the grey area of someone’s interpretation.

Why create a system of such mind-boggling, stultifying uncertainty? I will evoke the “Law of Intended Consequences.” They did it on purpose. The goal of Dodd-Frank was to shift the blame for the financial crisis to the private sector. As the analysis I just quoted notes: “The battle cry for unfair and deceptive acts and practices is born from the mortgage crisis as many consumer and community groups cried foul play after the mortgage bubble burst.” In other words, don’t blame the mortgage bubble on the politicians who agitated for easy credit and for the reckless expansion of Fannie Mae and Freddie Mac–you know, a couple of guys named Dodd and Frank. No, blame the banks, and then come up with a system to punish those wicked bankers and bring them more fully under the government’s yoke.

That the goal is to exact revenge on the bankers is given away by a nasty little “clawback” provision that allows the government to seize the previous two years of a banker’s pay if he is deemed to be “responsible” for an institution’s failure. It’s an excellent way to increase the risks and decrease the rewards of going into the banking business. Yet when a banker sets out to make decisions about how to run his business successfully, he never knows when a regulator will choose to change his capital requirements or decide that his acts or practices are unfair or deceptive. So if the goal was the bring bankers under the control of bureaucrats, mission accomplished.

But this is not a good way to revive the economy or ensure the nation’s financial health. By overturning the rule of law, Dodd-Frank’s non-legislation legislation has created crippling uncertainty in the heart of the financial sector, neutralizing the Fed’s monetary stimulus and smothering the economic recovery.

Non-Objective Law Is Smothering the Recovery – Robert Tracinski, RCM

The End of QE2 Is Going to Be a Disaster

May 152011
 

The end of the second round of quantitative easing (QE2) is going to be a complete disaster for the paper markets — specifically commodities, stocks, and then finally bonds, in that order, with losses of 20% to 50% by the end of October. The only thing that will arrest the plunge will be QE3, although we should remain alert to the likelihood that it will be named something else in an attempt to obscure what it really is. Perhaps it will be known as the “Muni Asset Trust Term Liquidity Facility” or the “American Prime Purchase Program,” but whatever it is called, it will involve hundreds of billions of thin-air dollars being printed and dumped into the financial system.

A Premature Victory Lap

Ben Bernanke recently stood at a lectern and announced to the assembled audience that the Fed’s recent policies could be credited with elevated stock prices and an improved employment statistic while somehow keeping inflation low.

It was his own version of a “mission accomplished” speech, just like the one G. W. Bush gave. Similarly, it does not mark the end of significant difficulties, but the probable beginning of a very long period of treacherous economic and financial disruption.

Here’s one recent version of how the Fed’s actions are being interpreted, courtesy of Bloomberg:

Bernanke’s QE2 Averts Deflation, Spurs Rally, Expands Credit

Ben S. Bernanke’s $600 billion strike against deflation is paying off, as stock and debt markets rise, bank lending grows and economists forecast faster growth.

The Standard & Poor’s 500 Index has gained 13.5 percent since the Federal Reserve chairman announced on Nov. 3 the plan to buy Treasuries through its so-called quantitative easing policy. Government bond yields show investors expect consumer prices to rise in line with historical averages. The riskiest companies are obtaining credit at the cheapest borrowing costs ever and Fed data show that commercial and industrial loans outstanding are rising for the first time since 2008.

“Looking at market indicators, you have to be convinced it’s been a success,” said Bradley Tank, chief investment officer for fixed-income in Chicago at Neuberger Berman Fixed Income LLC, which oversees about $83 billion. “When you get into periods of aggressive central bank easing, and we’re clearly in the most aggressive period of easing that we’ve ever seen, the markets tend to lead the real economy.”

A rising stock market, low inflation expectations, and lots and lots of cheap credit for even the riskiest companies. What’s not to like?

The main problem is that this is all an illusion.
The End of QE2 Is Going to Be a Disaster – Chris Martenson, Minyanville

 

How can so many Americans believe that we’re in a depression, when the stock market and commodity prices have been booming?
Read the Rest…

 

‘Euro-Zone Leaders Need the Courage to Tell the Truth’

A day after Portugal formally requested aid from the European Union to help ease ongoing debt problems, Madrid on Friday insisted that it was “out of the question” that Spain would be next. German commentators aren’t so sure, and say that it’s time for European leaders to reveal the true extent of the problems.

 

If 2008 was the year of the financial crisis, and 2009 the year of the recession, then 2010 was the year of unemployment. The good news is that things are starting to look up, if modestly. The number of workers making initial unemployment claims—a good indicator of where the unemployment rate is heading—fell to its lowest level since July 2008 this week. Employers have started filling more available positions. And economists expect December’s unemployment rate, to be released next week, to be lower than last month’s.But none of this changes the fact that, by most yardsticks, 2010 was the worst year for jobs since the Great Depression. The year’s average unemployment rate will clock in at about 9.7 percent—higher than last year’s 9.3 percent and tied for the highest annual rate since the government started keeping official counts in 1948. For all of 2010, in any given month, about 15 million Americans—the population of New England—were looking for work. And, really, in any given month, more needed work. Underemployment—that’s the “official unemployed,” plus people in part-time or temporary positions looking for full-time work, plus people discouraged from the labor market and no longer looking—totaled as many as 25 million.

And the recession has not meant just more joblessness. It has also meant longer joblessness. The average length of a spell of unemployment now sits at 30 weeks, after hitting a high of 35 weeks in July. About 6.3 million people, 42 percent of all unemployed Americans, have been out of work for more than six months. And more than 1 million have exhausted their unemployment benefits. They’re called 99ers. (The term, coined this year, refers to the maximum weeks of benefits in the states with the highest unemployment rates.) There are about 1.6 million of them, according to the Department of Labor. And they raise the question: What happens when unemployment insurance ends?

 

The bipartisan Financial Crisis Inquiry Commission was established by law to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The hope was that it would be a modern version of the Pecora investigation of the 1930s, which documented Wall Street abuses and helped pave the way for financial reform.

Instead, however, the commission has broken down along partisan lines, unable to agree on even the most basic points.

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.

Then the bubble burst, with hugely disruptive consequences. It turned out that Wall Street had created a web of interconnection nobody understood, so that the failure of Lehman Brothers, a medium-size investment bank, could threaten to take down the whole world financial system.

It’s a straightforward story, but a story that the Republican members of the commission don’t want told. Literally.

Wall Street Whitewash Paul Krugman, New York Times

 

Invest by the numbers, not the political rhetoric. Right now the numbers are lousy and downright frightening.



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Robert Lenzner


In housing, the Case-Shiller home price index fell almost 3% on an annualized basis in August and September, the weakest performance since May of 2009 when the recession still going on. In 19 of the top 20 cities, prices were down on a seasonally adjusted basis. During the July, August, September period sales of new homes fell at a sickening 41% annual rate to 293,000 units the lowest level ever recorded going back to 1963, when the figures were first kept.

In unemployment, emergency benefits to extend 99 weeks (almost two years) of unemployment benefits are running out or for some 4 million to 5 million people from December through April. This is proof positive that we are on the cusp of a deepening poverty at the very moment of political stalemate. Rosenberg says government handouts are responsible for 20% of disposable income in the country, so pray for the stability of the Social Security system. In personal Income, this loss of unemployment benefits means a loss of income equal to about $300 a week, or about $80 billion totted up, unavailable for consumption

I have seen no other market strategist get down to the prospects for the people at the bottom of the income ladder. Did you know that 38% of middle income families plan to spend less than $500 on holiday gifts, double the number last year?

Nitty Gritty Numbers Suggest a Downward Spiral – Robert Lenzner, Forbes


 

Tomorrow, a bank—not your bank, but any bank—could evict you from your home. Even if you didn’t know the bank was foreclosing. Even if your mortgage is paid off. Even if you never had a mortgage to begin with. Even if the bank doesn’t hold a single piece of paper that you signed. And major banks not only know this fact, but have spent millions of dollars to defend it in court. Why? The answer starts with a Jacksonville homeowner named Patrick Jeffs.

In 2007, Deutsche Bank sued Jeffs for his home, which is a necessary step in the process of foreclosing on a homeowner in the state of Florida. Curiously, despite the fact that he immediately hired a law firm to defend his property when he found out about the foreclosure, neither Jeffs nor his attorneys were at the trial. That’s because it had already happened. Deutsche won by default because Jeffs wasn’t able to travel backwards in time to attend, even though the trial featured a signed affidavit indicating that he had been served his court summons.

The only problem with the summons Jeffs supposedly received was that it had been conjured out of thin air.


One nation, under fraud Joseph Tauke, The Daily Caller

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