Housing Market is Awful

Clown Government

Ponzi Scheme Unravels

What the Economy Needs

“… all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different.” Sprott Asset Management

Belief in the economic recovery story is akin to belief in Santa Claus. Both make us feel better, but both are unlikely. We may have another quarter or two of government-driven GDP growth, but we will not have a recovery, at least not with the next several years. Government spending may be able to raise GDP, but the ability to continue spending is near an end.

The government has no money and diminishing possibilities for continued borrowing. The chart to the left shows rapid decreases in debt support from foreigners. Without foreign funding, the government will be unable to spend at anywhere near current levels. (Of course, the possibility of “printing” money might provide a short-term extension before the dollar collapsed and/or hyperinflation occurred.)

Sprott Asset Management issued a report entitled “Is It All Just a Ponzi Scheme?”( Sprott December.pdf). The report addressed the unsustainable financial situation:

We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. If our research proves anything, it’s that the regular buyers of US debt are no longer buying, and it amazes us that the US can successfully issue a record number Treasuries in this environment without the slightest hiccup in the market.

The chart to the right shows the decline in China’s purchases of US assets. Additional background on China can be read here.

For decades, the political establishment avoided the cleansing economic effects of recessions by stimulating the economy. Each attempt created more economic distortions and required yet bigger stimuli. Coupled with expanding government spending and social obligations, the government went deeper and deeper into debt.

The economic crisis in 2001 should have terminated the ability to continue this game. However, a Houdini-like escape was engineered by a massive credit expansion. This expansion fueled multiple economic bubbles, all of which were historically unprecedented. The inevitable collapse of some precipitated our current economic downturn.

Once again, we are desperately engaged in another effort to thwart a necessary purge of the economic system. It is likely that it will be impossible for another stimulus-based recovery. After decades of such efforts, we are out of bullets. The debt and social obligations became impossible to service more than a decade ago. But politics is not played like poker or roulette. Politicians play with our money, not their own. Personal political survival is all that counts, no matter what the odds or cost. Folding one’s hand is political suicide. Thus the game will continue until the economy turns around or collapses. The odds strongly point toward collapse.

Sprott described the situation as follows:

As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different. 2009 has been witness to spectacular government intervention in almost all levels of the economy. This support requires outside capital to facilitate, and relies heavily on the US government’s ability to raise money in the debt market. The fact that the Federal Reserve and US Treasury cannot identify the second largest buyer of treasury securities this year proves that the traditional buyers are not keeping pace with the US government’s deficit spending. It makes us wonder if it’s all just a Ponzi scheme.

Sprott focused on the inability to sustain current government borrowing, which looks like it is slowing rather quickly. In many respects it is surprising that it has taken so long for markets to exact this disciplinary force. Given the debt and social obligations, the Federal Government became incurably insolvent years ago. That was known by many, yet foreign financing continued to support additional deficits. Perhaps now that we cannot generate the mass trade deficits with China, China has both fewer resources and less inclination to continue to be our banker.

Karl Denninger actually takes a stronger view on Sprott’s idea of a Ponzi scheme:

Or is the truth that there were in fact no buyers for upwards of half of the total Treasury issue in the last year and it was instead monetized – one third openly via Federal Reserve “open market” purchase, and the other two-thirds via “covert” or “stealth” means, complete with bucketing the alleged “buyers” into categories in The Fed’s and Treasury’s data releases?

Rather large movements up in Treasury interest rates in the past week or so may indicate that markets have finally focused on the fact that real buyers are diminshing.

If the government can no longer finance its deficits overseas, there are two probable alternatives left. Alternative 1 is living within its means. That involves cutting government spending back to levels that can be covered by tax revenues. There is nothing to suggest that the political will or courage exists for such cuts. Alternative 2 is to engage in quantitative easing (money creation) to fund the deficits. This alternative is highly risky in that it raises the real possibility of hyperinflation which would destroy the economy.

A third alternative is possible but highly unlikely. That would involve the Federal Reserve telling the government that they are through buying Treasury bonds (quantitative easing), and the government can no longer count on them as “papering over” their deficits. Such action would either force the government into sovereign bankruptcy or force them to shrink back to spending levels that would be funded by tax revenues. Although the Fed was made independent just for such situations, does anyone believe they are still independent enough to actually execute such a maneuver?

In my opinion, we end up with Alternative 2. One can only hope that this route is abandoned prior to hyperinflation. If so, we then default back to Alternative 1 or 3.

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Masses or Prostitutes?

Will Keynesians Please Answer?

There is not much to add to this post by Steven Horwitz. Obviously, the Keynesians will say that it is too simplistic; that economics is more complex, more “nuanced.” Well, no it isn’t! Only if you are selling snake oil do you have to avoid simplicity and straight-forward questions. Only if you are on the government payroll or aspiring to get there do you have to be afraid of questions like these. Or only if you are a technician, incapable of independent thought and brainwashed by a government-funded economics department should such questions upset you.

Bravo Professor Horwitz.

Five Questions for a Keynesian

posted by Steven Horwitz, Guest Blogger at 10:28 AM on 12/24/09

Obamacare a Pallbearer for American Freedom?

Saving the Needy or Creating the Needy?

When a graph like the following develops, one has mixed emotions:

On the one hand, there is the obvious sorrow and empathy for the less fortunate. This economic downturn is serious and probably has a lot further to run both in terms of unemployment and in terms of those requiring help. It is not improbable that the economy will be in a rut for a long time, perhaps a decade or so. Thus, continued need for assistance to the needy is highly likely.

On the other hand, one knows how devastating the longer-term impacts of welfare and assistance can be.

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer. Benjamin Franklin

For a sub-set of the economy, the welfare system has become a lifestyle choice. The siren song of assistance, once accepted, easily corrupts subsequent generations. How many lives have been negatively affected, if not ruined, by the perverse incentives? How many people now accept it as a way of life? How many talented children failed to bloom into scientists, businessmen, doctors and geniuses because of its corrosive effects?

Real needs will grow more severe as this economy continues to deteriorate, and a compassionate people will and should meet them. But it is a fine line between helping the needy and creating the needy.

Newspapers recently reported that there is no longer a stigma attached to food stamps, as if that were a good thing. If true, the loss of stigma is terrible, because it makes it easier to rationalize away the traditional habits and values that produce success. If true, our welfare system will continue to destroy the potential and lives of additional generations.

Ben Franklin advocated a form of “tough love.” To many, that approach is unthinkable and cruel. Ultimately, which approach is more compassionate?

Tennessee Williams Was Smarter than US

The United States is now dependent on the rest of the world to finance its government deficits. As the sovereign version of Tennessee Williams’ Blanche du Bois in Streetcar Named Desire, we are truly “dependent on the kindness of strangers.” The government has no way to finance itself other than to borrow from strangers (or to print money and risk hyperinflation).

Unlike Blanche, who never harmed her benefactors, the US financial industry played our now-needed creditors as marks in their gigantic Ponzi scheme. All of this occurred with the implied if not explicit seal of approval of the US government. As a result, much of the world was victimized in the same manner as US investors and taxpayers. As a result, their economies are in the same financial and economic hole as the US. As expressed in Insecure Securities:

For years, hundreds of billions of new mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment. Now virtually the entire market for new issues of such securities – all but 3% of the original market volume – has vanished.

While the polite and quaint customs of international diplomacy has muted the criticism deserved by the US, it is clear there is a great deal of animosity. Slowly and deservedly some of this is starting to surface. China, India, Russia and other countries have admonished the US for its profligate ways.

The US, in spite of warnings and growing complaints, has increased its deficit spending and effectively nationalized the mortgage and other parts of its lending industry:

To compensate for the disappearance of that market, and for the simultaneous disappearance of non-securitized bank lending to American homeowners, 95% of US mortgages today are channeled through the state institutions Fannie Mae, Freddie Mac, and Ginnie Mae. Just as there was a time when collateralized securities were safe, there was also a time when economies with so much state intervention were called socialist.

US dependence on the kindness of strangers has only increased at a time when the strangers are overtly criticizing our policies and adjusting their actions as well:

Two years ago, Ben Bernanke, chairman of the US Federal Reserve, argued that foreigners were buying US securities because they trusted America’s financial supervisory system and wanted to participate in the dynamism of its economy. Now we know that this was propaganda intended to keep the foreign money flowing, so that US households could continue to finance their lifestyles. The propaganda was successful. Even in 2008, the US was able to attract net capital inflows of $808 billion. Preliminary statistics suggest that this figure has now fallen by half.

At this point, the US has greater needs than ever before. Benefactors have been scammed. Their advice and warnings have been consistently ignored.

Foreigners have cut their funding support in half. Even if the strangers continue to tolerate our behavior at their current reduced levels of support, we cannot fund government deficits. Nor can we obtain the capital necessary for the private sector to expand.

Had Tennessee Williams developed his Blanche du Bois in the fashion of the US, there would have been no play. The character would not have been credible. My bet is that the sovereign version of Blanche is no longer credible and will be booted out into the cold before long.

All quotes were from Insecure Securities.

Medicine Dies in America

For those who want an explanation of how our health care system got so bad, the following article written in 2000 in The Freeman provides an answer. It was not the free market, but government intervention that brought us to this point. Sadly, we are now going to “fix” the system with the same medicine that has created the mess. We will turn the best health care system in the world, despite its faults, into a bigger disaster than most are capable of imagining.

Why Medicine Is Slowly Dying in America

Most Doctors and Patients are Clamoring for Increased Rights without Increased Responsibility

Michael Hurd (www.drhurd.com) is a psychologist in private practice in the Washington, D.C., area. He is the author of Effective Therapy (Dunhill, 1997) and Grow Up, America! (forthcoming). Dr. Hurd is the president of Living Resources, Inc., and publisher of “The Living Resources Newsletter.”

The American Medical Association recently voted to form a national union for physicians. It’s official. Doctors are now unionized—just like public school teachers, postal workers, and truck drivers.

In one sense, unionizing is a good step for doctors. Everybody asserts their health-care “rights” today except for physicians. We hear about patient rights and HMO rights and government rights. We never hear about the doctors’ rights. It’s time doctors stood up for themselves too—for their patients’ sake as well as their own. If they don’t, the quality of medical care will deteriorate (as we already see happening), and we’ll all suffer the consequences.

Why didn’t doctors need unions in the past while they do today? Turn back the clock to the 1960s when Medicare became law. Medicare, for all practical purposes, socialized medicine for the elderly. At first, it seemed like a good deal for everybody. The best health care imaginable—all for free! Who could argue with the goodies? Excellent reimbursement rates for physicians. High-quality care for elderly patients—with little or no cost. Low payroll tax rates—at least initially.

Then reality set in, slowly, as it usually does. By the 1980s, it was clear that medical costs were skyrocketing. It’s not hard to figure out why. Elderly patients no longer had to worry about costs. Doctors felt no competitive pressure to keep rates reasonable to stay in business. Guess what happened? Demand for health care skyrocketed. So too did cost.

The Law of Mandates

The extent to which the government mandates a product or service as free is the extent to which demand for it will rise. If the government suddenly legislated that all cars were free, then everybody would clamor to have three or four cars, rather than one or two. People who normally would be content not owning a car at all—perhaps because they lived in a city or relied on a close friend—would want a car because, what the heck, the government’s paying for most or all of it anyway. And people who used to be content with Chevrolets would want BMWs and Mercedes-Benzes.

With demand for Medicare shooting ever upward, the government had to do something. If not, we would all soon be paying 85 percent of our income in payroll taxes just to cover Medicare. In a strange sort of way, government and HMO bureaucrats have saved us from this fate. They started to make the cost-cutting decisions that we, as individual patients in the medical marketplace, righteously refused to face. When costs began to skyrocket, voters in effect told their politicians, “For heaven’s sake, do something. I don’t care what. Just something.”

And “do something” they did: in the form of ever-increasing controls. Somebody has to do it. If patients and doctors are not going to control costs—and it is most certainly not in their interest to do so under a free-lunch, socialized program like Medicare—then clearly the government will have to do it for them.

Ironically, as legislation has sought to remove capitalism from the medical sector, medicine has become more concerned with money than ever before. Prior to Medicare and government regulations, you did not hear horror stories of patients who were turned away from life-preserving surgery or medication because bean-counting bureaucrats were trying to save money. Now such tales are commonplace.

Yes, the sanctimonious Great Society “liberals” of the 1960s were successful at removing the “stench” of business from medicine. And look what they gave us in its place. The kindly family doctor has been replaced by the cool, terse HMO physician—whose primary incentive is to see as many patients as possible, as rarely as possible.

Medicine is slowly evolving into a war of all against all. Doctors find patients increasingly demanding and greedy in their use of medical services they do not have to pay for. Patients find doctors increasingly arrogant and uncaring because, after all, the doctors don’t really answer to them. Thanks to government regulations, doctors now answer to the third party who pays their bills and tells them how to do treatment. No wonder there’s a call for a “patient bill of rights” as well as a union for doctors.

Has the elimination of freedom and capitalism really been good for patient and doctor? Has our four-decade experiment with socialized medicine been a success? No, most would reply. Yet these same people cling to Medicare and government regulation with the tenacity of a child clinging to his teddy bear.

Spreading Control

In the 1990s government controls slowly spread from Medicare to what remained of the “private” sector. Non-elderly patients were, for the most part, shoved into HMOs and other managed-care programs. In 1993 the government tried to force everybody into managed care by decree. The infamous Clinton plan sought to equalize the mediocrity. The plan failed to pass, but for the most part medical care today is managed care. Government- inspired managed-care companies are running the show, much more than doctors and patients are. Instead of socialized medicine, we have fascist (superficially private) medicine.

In formerly communist countries, and in socialist democracies such as Canada, France, and Great Britain, citizens are used to things being this way. They don’t even have HMOs. Instead, monolithic government agencies, similar to our Department of Health and Human Services, control medicine. It’s called “single-payer” insurance, which will become the next big push in the United States if people like Ted Kennedy and Hillary Clinton have their way.

Most Europeans and Canadians have no concept of genuine medical excellence because they’ve never experienced private medicine. Americans are different. We prefer to have more control over our lives than people do in other nations. We used to have private medicine here, and to a limited degree we still do. We liked—and still like—the results of private medicine, which include dignity and respect for both doctor and patient.

Yet most of us have accepted a lethal contradiction. We have endorsed the idea that trading value for value—in the form of dollars—is somehow tasteless or wrong in the medical arena. So we call on government to handle the dirty economic business for us. Observe the results.

In a sense, medical care is less valued by today’s patient, because it’s cheap and looked on as a “right.” Such a mentality is a breeding ground for mediocrity. Look at how the public school system has evolved into mediocrity (and even violence). Kids have a right to “free” education, run by the government and unionized teachers—but how much of a value is it?

The same is starting to happen in health care. We’re in the earlier stages of the same kind of breakdown currently becoming more obvious in the public school system. How long before some crazy patient shows up in a doctor’s office with a gun, frustrated by the lack of service his $5 copayment is buying him? (Indeed, indignant that he has to pay the $5 at all.) It happened to public education. Why will it be any different with public medicine? Consider Medicare.

People cling to Medicare just as they do to the public schools. They seem to think it’s some kind of mystical oracle that can make something out of nothing—when in fact (as even its government overseers admit) it’s a fiscally bankrupt actuarial disaster that destroys the rights and responsibilities of doctors and patients.

Watching pressure-group representatives shriek on the evening news that “Our Medicare must be preserved!” is like watching grown, educated adults cry, “The tree that grows money must not be cut down! How dare anybody think of cutting it down!” It’s absolute madness.

Today, most doctors and patients clamor for increased rights without increased responsibility. Yet if they are going to support government programs like Medicare and the many state and federal regulations that increasingly grant a “right” to this or that form of medical care on demand (or, at most, for a small copayment), they have to live with the consequences of such legislation.

The consequences include losing control over who your doctor will be and over medical decisions that affect you. Neither doctors nor patients like those consequences, but they continue to push for more government regulations and mandates anyway.

If you want less government control (including indirect government control, such as HMOs and managed care), you need to support privatization of the medical care system. This will require all patients to shop more carefully and rationally for services, the same way they now shop carefully for cars, computers, and groceries.

Privatization will also require doctors and insurance companies, competing in the marketplace, to keep costs reasonable in order to meet the demands of the patient-consumers. If Dr. Jones charges too much for foot surgery, Dr. Smith can open a clinic across the street and charge less. In a free market, where rates are not uniformly imposed by the Health Care Financing Administration or some HMO board of directors, Dr. Smith will have every incentive to do so.

The new government policy must be: “Take responsibility for your own health care—and we’ll lift the legal and tax burdens off your shoulders immediately.” Young and middle-aged people must be put on notice that Medicare’s days are numbered, and they must start saving and investing on their own.

If you don’t want all this added responsibility, then just leave things the way they are now. Don’t pressure your representatives to privatize health care. The government will just keep taking more and more control, which means: taking more and more control over your bodies and your lives.

Then in another few years everything will probably be run by the state or federal Department of Health and Human Services. (They will call this “streamlining.”)You’ll have lengthy waits for surgery, just like they have in Britain and Canada. Doctors will already be unionized, making them more defensive, arrogant, and adversarial than ever. Lawsuits will increase, driving medical costs still higher. Medicine, for everyone except the highest government officials, will work like the post office—only the stakes are much higher than the delivery of your mail! The waits will probably be longer too.

Today, most Americans righteously expect the best health care in the world. Government and intellectual elites have convinced them that they have a right to it on demand, whether they want to pay for it or not. But sooner or later reality always asserts itself. He who picks up the tab eventually runs the show—indeed, has to run the show. Patients and doctors are getting what they voted for and demanded. In the end, the politicians are simply following the voters’ orders.

At the dawn of the 21st century we enjoy a window of opportunity. A strong economy makes ending government programs such as Medicare more feasible than ever. It may be our last chance to privatize medicine without even more painful results. We had better move quickly.

Stansbury on Precious Metals, Currencies and Government Desperation

Getting Gold and Silver may not be enough to protect your wealth according to Stansbury.

Another excellent read by Porter Stansbury. While primarily focused on precious metals and currencies, and the possibility of returning to some commodity-based currency, Stansbury touches on many interesting topics. We are entering the period where government failure becomes apparent. Ultimately, it will result in a redefinition of government unlike anything we have experienced in our lifetimes. The history books written a hundred years from now will refer to our time and the preceding century as “The Myth of Government.”

As we approach sovereign bankruptcies and the utter uselessness of government as currently constructed becomes apparent, sacred laws and traditions will come under attack.  Governments, especially the most powerful ones, will do everything to resist loss of power and revenue. The analogy of a wounded and cornered animal willing to do literally anything to survive is probably a reasonable one.

Governments will not go quietly or quickly. The next twenty years are apt to produce actions and reactions that were previously unthinkable. Stansbury speculates about the need to raise revenues:

“You wouldn’t want to underestimate the perfidy of the government. I have no doubt that the government will need to increase revenues substantially to avoid default on either debt or social welfare promises. How they will increase those revenues, I can’t predict. It seems unlikely that they’ll be able to effectively increase revenues by raising taxes because it just doesn’t work. People will find ways to reduce their income to avoid the taxes or simply leave the country. So I wouldn’t be surprised at all to see some kind of a land grab or an asset grab. I don’t believe it will focus on gold because there just isn’t enough privately held gold in the country to make a real big difference in revenues. I think they’ll go after something else, perhaps a tax on net worth, which I’ve seen discussed in Congress already.”

For a very interesting, non-traditional analysis of what is happening, read the entire Stansbury article.

Obama Wins Oscar

The recent performance of President Obama on ABC News’ Charles Gibson was extraordinary. He warned that if his healthcare legislation was not passed, the US government “will go bankrupt.” Additionally, “If we don’t pass it, here’s the guarantee….your premiums will go up, your employers are going to load up more costs on you… “Potentially they’re going to drop your coverage, because they just can’t afford an increase of 25 percent, 30 percent in terms of the costs of providing health care to employees each and every year.”

Quite the performance, just not something most would expect from the President of the United States. The exchange seemed more appropriate for used car salesmen or “boiler-room” stock scams.  In short, the performance seemed both desperate and dishonest. My thought was, “Would I buy aluminum siding from this man?”

The desperation and dishonesty reminded me of the powerful performances in the movie, Glengary Glen Ross. The plot summary: “High-pressure salesman are always walking a thin, dangerous line between their main purpose in life (which is to deceive) and how they must appear (which is honest and genuine) . Whether or not a salesman truly believes he is selling a good product is immaterial. His main function is tell you what he thinks you want to hear so you will buy. He has to seem like he’s doing you a favor by letting you buy from him.”

The description seemed perfect for many modern day politicians. For those who have not seen the film, I highly recommend it. It was a drama with an outstanding cast. The language was intense, as might be expected from the likes of  Al Pacino (Ricky Roma), Jack Lemmon (Shelley Levene), Alec Baldwin (Blake), Ed Harris(Dave Moss) & Kevin Spacey (John Williamson) in their particular roles. Despite this line-up, the film did not gross particularly well.

As I reminisced about the film and its unforgettable characters, I fantasized about owning the rights to a remake and casting President Obama in one of the roles. I used the following list and description of the characters to refresh my thoughts:

Al Pacino as Ricky Roma: He is the most successful salesman in the office. He is ruthless, dishonest and immoral, but succeeds because he has a talent for figuring out a client’s weaknesses and crafting a pitch that will exploit those weaknesses.

Ed Harris as Dave Moss: He is a big-mouthed salesman with big dreams and ambitions. Harris describes his character as “the kind of guy who, when anything’s wrong, it’s not him. Blames everybody else”.

Kevin Spacey as John Williamson: He is the office manager. The salesmen despise Williamson, but need him because he is the one who hands out the sales leads. Spacey saw his character as “the catalyst for events, since people are either struggling for or against him”.

Alec Baldwin as Blake: He is brought in by Mitch and Murray to motivate the salesmen in a ruthless manner; this character was created for the film and did not appear in the stage version.

Alan Arkin as George Aaronow: He is an aging and nervous salesman with low self-esteem who lacks confidence and hope. Despite this, he means well.

Jack Lemmon as Shelley “The Machine” Levene: He is an older man, a once-successful and respected salesman who has recently fallen on hard times, and has not closed a big deal in a long time. Lemmon said of his character, “Shelly’s actions question where the morals and ethics are in America and how they have eroded in the quest for success.”

The roles of Arkin and Lemmon were quickly rejected. They just did not fit. The other four roles could not be dispensed with so quickly. Each had good possibilities. Each had recognizable Obama traits. Obama could play any one of them and probably effortlessly.

Then, my “Eureka moment” occurred. Together the four represented a nearly perfect composite of Obama. Why shouldn’t he play multiple roles? Why shouldn’t he play all these roles?  He was certainly talented enough. Each role involved substantial degrees of type-casting, presumably requiring little preparation for a talented actor.

What a breakthrough! It was perfect, possibly pure genius. Obama’s persona and talent made him a natural to handle all four roles. He could be the only salesman for the Glengary Glen Ross properties. If he could sell the health care turkey, surely he could sell swamp land in Florida and other states.

Another advantage from the insight was staffing. It would be easier hiring one actor than four individuals. Furthermore, I doubted whether any other actor(s) could surpass what I perceived to be the greatest actor of all time. One actor presumably would also be cheaper. That would enhance the probability of profits.

At this point, I was ecstatic, dreaming of newly-found Hollywood mogul status complete with money, glory and lots of chicks. Obama would surely receive an Oscar upon announcement of his role(s).  It would be the first Oscar ever awarded before filming even commenced. Wow. Making movies and history at the same time!

Then my wife woke me for dinner and back to the reality that this actor would not be available for at least three more years. Tis a pity, because I know Obama would be better in my movie than in his current acting role.

Obama’s Keystone Cop Regime

Obey The King or The Law?

The current economic crisis had its own unique economic and financial aspects. The political response did not. Politicians initially reacted by blaming everyone in sight (save members of their own party). The blame-game was then followed by posturing about how legislators would act to prevent any possibility of a future occurrence. Then, cobbled up legislation was drafted that would “solve” the problem.

This political script is timeless. It fits all situations, no matter what the crisis or when. Only the actors on stage change. Dialog does not. The political theater is akin to the old Keystone Cops routine. It would be just as comical if so much weren’t at stake.

At this point, it appears little meaningful legislation will occur, primarily because the government has been co-opted by the financial sector. Re imposition of Glass-Stegall type legislation would preclude banks from taking the undue risks that created this crisis. Paul Volcker and many other outsiders have called for such change. Restricting banks in this manner would restrict future financial industry profitability. Therefore it is unlikely, and meaningful change will not be implemented.  The same moral hazard that produced the problem will drive behavior in the future.

In lieu of meaningful legislation, politicians resort to bloviation. President Obama, quite skilled in this technique, demonstrated his skills yesterday with his chastisement of the banks. Whether such populism works politically is moot. It clearly accomplishes nothing in terms of economics. What made Obama’s performance especially egregious was browbeating banks to increase lending. Does he not understand that is how banks make money? Is he so naive to believe that they would not lend to reasonable credit risks? Or is he trying to force banks to return to the risky lending that brought us to this point? Regardless of how one answers, no answer reflects well on Obama’s intelligence or leadership.

Another element related to the banks raises competency questions. At the same time that banks are being told to lend more by President Obama, the regulatory apparatus of the government is telling banks to lend less. While no de jure change has occurred, bank regulators are requiring increased margins of safety through higher bank reserves. That can only be achieved via less lending and higher lending standards. From an economic perspective, the regulators are almost surely correct.

The banking industry has no clear message. The leader of the country tells them to behave exactly opposite of what their regulators tell them they must do. Do they listen to the  bloviating politician or follow sound economic principles?

In a less imperfect world, the answer would be simple — sound economics. In our world, where politicians have the power to ruin a business, it is less clear.

What to do, what to do?

A version of this blog appeared on American Thinker today.

How Broke Is England?

The Great Depression — Revisiting the Past

Periodically, I include older articles that are pertinent to what is happening now. Here is one that about the Great Depression and the New Deal. I believe it has historical and current relevance.

Myths of the New Deal

By Burton W. Folsom Jr. • August 2002 • Volume: 52 • Issue: 8

A persistent myth in American history is that Franklin Roosevelt and the New Deal created jobs during the Great Depression and helped the poor “forgotten man” who was thrown out of work. Almost every American history text echoes this myth in its pages. Irwin Unger, for example, who won a Pulitzer Prize for a book on economic history, recounts it this way in his textbook These United States: “By 1935 millions of Americans had reason to thank the New Deal and the Democratic party for their compassion and help. Creative men and women were grateful for the opportunity under the WPA to do productive work. . . . Unemployed factory workers could thank the president for the relief that kept them from hunger.”

Henry Hazlitt

Let’s look carefully at the claims that the New Deal created jobs and that these jobs especially helped poor people. It’s true that the New Deal, through the WPA, the PWA, and the CCC, did put many Americans to work building bridges, paving roads, and planting trees. But this didn’t necessarily create jobs. As Henry Hazlitt reminded us in Economics in One Lesson, “Every dollar of government spending must be raised through a dollar of taxation.” Hazlitt elaborated, “[F]or every public job created by bridge project a private job has been destroyed somewhere else.” In the textbooks we see the bridge, the workers toiling, and government spending seemingly creating jobs. “But there are other things that we do not see,” Hazlitt noted, “because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion because of the project.” No wonder unemployment during FDR’s second term was almost as high as it was when he took office.

The New Deal, however, did more harm than just shuffling workers out of textile mills and car factories and into government jobs. Because of the inevitable political manipulations, the tax dollars collected during the New Deal were skewed in their distribution. Who got what government money depended not necessarily on need, but on where you lived, whom you knew, and which party you supported.

The whole welfare program was often a grab bag for whichever politicians could make the strongest case for bringing federal money to their states. For example, the first federal relief program, started under President Hoover and expanded by FDR, put up $300 million. Illinois received $55.4 million-almost 20 percent-and Massachusetts got zero. In other words, if you were destitute, but lived in a Democratic congressional district in Illinois, you had a much better chance of receiving federal help than if you were similarly destitute but lived in a Republican district in Massachusetts.

The politicization of government spending needs more emphasis. Those politicians (for example, Boss Kelly in Chicago and Boss Pendergast in Kansas City) who were Democrats and supporters of Roosevelt received disproportionately large amounts of government jobs for their districts. And those people who received these jobs often had to prove their loyalty to the Democratic party. In 1938 in 32 counties in Kentucky, WPA workers had to pledge to support Alben Barkley, the Democratic Senator, or lose their jobs. Pennsylvania Democrats were even bolder. The Democratic chairman of Indiana County, Pennsylvania, sent the following letter to a woman employed as a government worker on a sewing project:

Dear Madam,
I am very much surprised that you have not responded to our previous letter requesting your contribution in the amount of $28.08 to Indiana County Democratic Campaign Committee, as I was sure that you appreciated your position to such an extent that you would make this contribution willingly and promptly. I must, however, now advise you that unless your contribution in the above amount is received promptly it will be necessary to place your name on the list of those who will not be given consideration for any other appointment after the termination of the emergency relief work, which as you know will terminate in the near future.

Whether the “forgotten man” was helped by the New Deal, then, often depended on how willing he was to use his time and the little money he had to help Democratic candidates.

Hardships Created

What about the story the textbooks neglect, the story of how the tax dollars were extracted so that they could be sent to Boss Kelly in Chicago or to Indiana County? In a real sense, the New Deal created special hardships for the “forgotten man.” During the 1930s Roosevelt shifted the tax burden from hitting the rich almost exclusively (through income taxes) to hitting mainly middle- and lower-income groups (through excise taxes). In 1929, the income tax only affected the top 2 percent of earners; they paid almost $1.1 billion in income taxes that year. Excise taxes, which were mainly imposed on tobacco, were less than half that, or $539 million. In other words, if you didn’t smoke and you were not a corporate officer, what money you earned was yours to keep.

During the 1930s (starting under Hoover and expanded by FDR), a host of new excise taxes were passed on such popular consumer items as alcoholic beverages, movie tickets, telephone calls, bank checks, telegrams, gasoline, cars, car tires, and even grape concentrates. In 1936, after FDR helped raise the top income-tax bracket to 79 percent, the revenue collected from income taxes dropped to $674 million, as rich investors withdrew their capital from taxable investments. The excise taxes, which hit the middle- and lower-income groups with full force, were over $1.5 billion. These new excise taxes, much more than income taxes, were helping fund the New Deal programs. In other words, the “forgotten man” who pumped gas into his car and drove it to a theater to smoke a cigarette and watch a movie paid four new taxes (and one old one) to pay the WPA worker in Chicago to build a bridge and the wheat farmer in Kansas to take his land out of circulation (so that the farmer could then receive a higher price for wheat, which translated into more expensive bread for the “forgotten man”).

When we study why the New Deal failed, we can better appreciate the alarm of James Madison in Federalist No. 51: “In framing a government . . . you must first enable the government to control the governed; and in the next place oblige it to control itself.”

Burton Folsom, Jr., is historian in residence at the Center for the American Idea in Houston, Texas, and author of The Myth of the Robber Barons.

Self Aggrandizement Is Not Public Service