Archive for November, 2010

Morning in America?

November 30, 2010

“It is time for America to get over its funk, stop listening to alleged experts who make their fortunes coming up with novel theories of national catastrophe.” Tony Blankley, ‘The great American funk’, The Washington Times, November 30, 2010

The last two years have not been good ones economically for most Americans. Many have lost jobs, others have confronted pay freezes, others have seen their businesses flounder in the wake of the ongoing banking crisis, many have seen their savings fluctuate wildly as the stock market experienced almost unprecedented turbulance.  Most have seen the value of their houses plunge, following the bursting of the house price bubble in late 2006.  In such times, it is difficult indeed to remain optimistic.

Yet, as Tony Blankley stresses, optimism in bad times is what has always distinguished Americans from other peoples. America’s ‘can-do’ spirit has been the wonder of the ages, the principal reason why the 20th century legitimately can be called the American century.

So for a moment in this column let us look on the bright side of the U.S. economy, and ask whether Americans are now ready once more to make it ‘Morning in America’. There are many beams of sunshine out there to warm our frozen spirits.

First, let us remember that the gross domestic product of the United States is larger than the next three national outputs – China, Japan and Germany – combined. Second, the United States remains the acknowledged leader in almost all technologies. Third, United States universities dominate the world league table .  Fourth, the United States enjoys the youngest population of all developed nations. Fifth, the United States, though its rule of law is battered, still leads the world in this regard. Sixth, the United States has enjoyed 200 years of democracy and capitalism.

Most important of all, despite the growth in the size and scope of the U.S. government, the private sector also has grown. As long as the private sector outraces the government, all should be well for the future generations. Yes, we have much to be thankful for, and even more to be optimistic about.

Iceland elects ordinary citizens to write a new Constitution

November 29, 2010

When Iceland was granted independence from Denmark, the new sovereign country simply accepted the Danish Constitution, with minimal titular adjustments (such as President for King). This appears to have sufficed for the small  ethnically homogeneous island country  – 350,000 population – until now, as the country slowly adjusts to its black hole economic collapse two years ago. Of all non-failing countries, Iceland’s collapse was the worst, its banks proving to be the most over-extended and corrupt, and its government the least able to deal with the ensuing crisis.

Iceland has always been notable for its Viking independence and willingness to experiment with new institutions. It is home to the world’s first parliament and it is now on the path to writing a new constitution based on the notion of the popular will.

The constitutional assembly will comprise between 25 and 31 delegates, the final number to be determined by a gender and equality ratio. Any Icelandic citizen is eligible to stand for election, with the exception of the president, the lawmakers, and members of the committee appointed to organize the assembly. The election will take the form of direct personal voting by all eligible citizens of Iceland.

The election race is already under way, with 523 candidates competing for membership of the constitutional assembly. University professors, truck drivers, lawyers, journalists, and computer specialists are numbered among a diverse range of candidates.  Those elected will receive a salary equal to that of Iceland’s lawmakers for the duration of the assembly.  Icelandic employers are legally obliged to grant leave to any employee elected to the assembly.

The assembly will draft a proposed new constitution during 2011, based in part on consideration of materials provided earlier in 2010 by 1,000 randomly-chosen Icelanders – between 18 and 89 years of age – who offered their views of what the constitution should contain.

Here is a project worthy of close attention. It differs markedly from the concept advanced by most constitutional scholars, where an intellectual elite (they fondly imagine just like themselves) is chosen to write a draft constitution. In the case of the United States, each of the confederate states sent its brightest and best educated to Philadelphia, with the likes of James Madison, Benjamin Franklin and John Adams, steeped in the ideas of the Enlightenment, well-versed in the wisdom of  John Locke, William Blackstone, David Hume and Adam Smith, and knowledgeable about the weaknesses of all the earlier republics that had failed; the sad legacies of Athenian democracy and of republican Rome.

Now it may come to pass that the Icelandic assembly will embrace such accumulated wisdom. But that is not in the usual nature of the popular will. It will be fascinating to see whether the common man can write a constitution superior to that crafted by the elitist assembly that gathered in Philadelphia.

 The common Icelandic man should not prematurely be written off. After all the United States Constitution, just like those of Athens and Rome before it, is now tattered and torn, distorted beyond the possible imagination of any great thinker who participated in that historic Philadelphia experiment. Of one thing we can be certain. The Icelandic democracy will obtain a constitution that it truly deserves.

When socialists fall out

November 28, 2010

In July 1963, at the height of the Cold War, I joined a small group of adventurous British academics on a four-week visit to Poland. Our hosts were Polish academicians at the University of Lodz.  It did not take our group very long to determine that there were two categories of academic at Lodz, a majority, who were members of the Communist Party, and who for the most part were stupid hacks, and a minority, who were Catholics, and who tended to be much more intelligent. For the most part, our group steered clear of the Communists, though this was not easy because the Catholics were held on an extremely short leash throughout our visit.

We traveled extensively through Poland during our visit, to Krakow and Zakopane in the south, to Oswiecim ( Auschwitz) in the East, to war-battered Warsaw, and to the Katyn Forest, where 22,000 Polish prisoners had been massacred in 1940, during the early years of  World War Two. It was during our visit to the Katyn Forest that we witnessed a serious dispute over the facts concerning that massacre. All the Poles expressed anger about the event. But they fought between themselves over who had perpetrated that act of genocide.

The Communists fingered Adolf Hitler and the German National Socialists as the murderers in question. The Catholics fingered Josef Stalin and the Russian Communists (well actually they referred to Russians always as ‘those primitive savages’).   The site officially – and inevitably given that Poland was subjugated under Russian jackbooted soldiers – blamed Hitler and National Socialism. Our group, in public, took the issue under advisement, though privately we understood that the ‘primitive savages’ most likely were responsible, just as they had been towards the end of the war,  when they deliberately held back their armies outside the gates of Warsaw to allow the Germans to annihilate the Poles during the Warsaw ghetto uprising.

Well, when  the Russian archives were unveiled during the early 1990s, under the briefly benign rule of President Yeltsin,  the Russian dictator Josef Stalin (Uncle Joe,  as FDR fondly called him)  was exposed as being uniquely culpable for the Katyn massacre.  President Yeltsin forthrightly and then- Prime Minister Putin more circumspectly, conceded this responsibility. Not so the Russian parliament (the Duma) which until now has consistently foot-dragged against making any formal statement of Russian responsibility.

On Friday November 26, 2010, after a two-hour debate, the Russian parliament acknowledged that the archives ‘show that the Katyn crime was carried out on the direct orders of Stalin and other Soviet leaders.’  The Communist Party minority in the Duma angrily voted against this acknowledgement.  Even now, the socialists deny the truth about the evil of Josef Stalin’s rule.

The issue of the origin of the Katyn Forest massacre pitted two versions of socialism – Communism and National Socialism –  against each other. As Karl Popper had noted much earlier in his seminal book, The Open Society – the truth inevitably suffers under either variant of this common-based, virulent disease.  The Poles now know who was responsible. As Russia slides backwards into dictatorship, any chance of financial compensation for the families who lost their loved ones to an act of genocide is remote indeed. So far, there is no indication that the Russian government will apologize to Germany for this slander on its (admittedly otherwise dreadful) wartime  reputation.

If two or three more green bottles should accidentally fall…

November 27, 2010

The Eurozone was officially formed on January 1, 1999 when the euro was introduced to world financial markets as an accounting currency, replacing the ECU at a ratio of 1:1.  Euro coins and banknotes entered circulation on January 1, 2002. The eurozone consists of Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Estonia is due to join the eurozone on January 1, 2011.

The euro is the second largest reserve currency as well as the second most traded currency in the world, after the U.S. dollar.  The eurozone is the second largest economy in the world, again after the United States. The euro is managed and administered by the Frankfurt-based European Central Bank and the Eurosystem, comprising the central banks of each eurozone country.  As an independent central bank, the ECB has sole authority to set monetary policy. Effectively under German control, the ECB imposes a conservative monetary corset on all eurozone members. This poses significant problems for members, of which there are many,  who are unwilling to impose upon themselves equally conservative fiscal policies.

So, of the 16 green bottles until recently standing on the wall, two  – Greece and Ireland – have already toppled, while two more – Portugal and Spain – may yet accidentally fall, as bond-market contagion spreads through a realistically vulnerable eurozone system. If yet another – Italy – were also to follow suit, the eurozone is finished and will unravel like so many earlier ill-matched monetary unions.

The only  country capable of holding the eurozone together is Germany, whose hard-working, industrious citizens stand far apart from much of the rest of the eurozone. But Germany is a democracy, and any German Chancellor who continuously bails out dissolute and profligate non-Germans deservedly will be removed from office. So, if you were Angela Merkel, what would you do?  Surely, I would not be trekking to Lisbon, Madrid, Rome and ultimately to  Paris, dragging enormous German soup kitchens in my wake. But then, I would not have trekked already to Athens and to Dublin bearing undeserved  German gifts.

Many of the world’s so-called poor do not feature among the deserving poor. They have brought their own troubles down upon themselves. This is surely true of every struggling member of the eurozone. Work houses, and not soup kitchens, should be the expectation for such dissolute members. And if that is the end of the eurozone, so be it. And the current United States government should learn well, and put its own shambolic fiscal house in order.

United Auto Workers pulls off a ‘sting’ at Government Motors

November 26, 2010

“General Motors Co.’s recent stock offering was staged to start paying back the government for its $50 billion bailout, but one group made out much better than the taxpayers or other investors: the company’s union.” Patrice Hill, ‘GM’s union on road to recovery after stock sale’  The Washington Times , November 26, 2010

When the Obama White House forced GM into bankruptcy, it controlled the behavior of the courts in such a way as to place the interests of the UAW ahead of everyone else: stockholders, bondholders, suppliers, dealers, and taxpayers. President Obama’s first priority seemingly was to serve the interests of the union, in repayment for its  funding of his presidential election campaign.

Union claims ordinarily do not receive such privileged attention. Typically, they are right down at the bottom of the creditor heap, fractionally above the stockholders. Instead, the generous share of taxpayer-subsidized GM stock awarded to the union trust fund under the White House deal puts the UAW ahead not only of the Treasury, but on a par with secured creditors such as banks, that normally receive the most favorable treatment from a bankruptcy court.

With GM’s recent limited stock offering, the UAW is cashing in on its White House promissory note. The U.S Treasury sold one-third of its shares last week at approximately $33.45 per share. For taxpayers to break even, the stock sales must average between $52 and $103 per share, levels that will take many years, if ever, to achieve.

Not so, the UAW, which is already well on the way to recouping the billions of dollars owed to it by GM. The union’s health care and pension trust fund earned $3.4 billion through the sale of one-third of its shares in GM last week.  It will break even if it offloads the remainder of its shares at an average price of $36 per share, close to levels shortly after the offering hit the market.

The White House is now providing a second boost to the UAW. The U.S. Treasury has agreed not to sell any more of its GM stock for another six months. The UAW is free to keep selling off its portfolio in a restricted market. The first ‘sting’ is well under way.

Nor is this the end of the UAW rip-off  of GM assets. UAW President, Bob King, hinted last week that in the next round of collective bargaining, that begins in mid-2011, the UAW will seek to recoup the wage and benefits concessions that it made in bankruptcy. With its ‘legacy costs’ fully reimbursed by U.S. taxpayers, and with the Obama administration still in office, it is not unlikely that GM will lurch back to its former status as a wage-bloated, legacy-laden, low-productivity corporation, once more in search of taxpayer bailouts. If GM pumps enough green into the campaign coffers of  Republican congressmen, who is going to stop the second sting?

Fannie Mae and Freddie Mac, here we go again!

Tom DeLay goes under the hammer of a court

November 25, 2010

Former Republican House Majority Leader, Tom DeLay, was convicted on November 24, 2010 by a Texas court on two charges related to the illegal funneling of $190,000 in corporate donations to Republican candidates in Texas legislative races.  The State of Texas has banned corporations from donating to candidates, either directly or indirectly, since 1903. Delay, who earned the knickname, ‘the Hammer’ for his style of leadership as Republican whip, faces sentences of two years to 20 years for conspiracy to commit money laundering and of five years to 99 years, or life in prison, for money laundering. The Judge has wide sentencing discretion and will hand down his sentence before Christmas Day, 2010.

A Texas grand jury indicted DeLay together with two political associates in November 2005, forcing the House’s second-ranking Republican, and its most assertive member, to step down from his leadership position.  DeLay was the first House leader to be indicted while in office for over a century. 

 The indictment played a role in the 2006 unraveling of the Republican majority in the House of Representatives as a billowing cloud of political sleaze hovered over a GOP  that had swept into power in 1994 with a mandate to clean up the corruption of the departing Democratic majority. Although DeLay repeatedly has denied wrong-doing throughout the past five years, few individuals apparently believe his protestations. Basically, he has been side-lined into political oblivion by those who formerly had experienced his dictatorial reign over House Republicans.

DeLay no doubt will appeal the judgment, even though he stands convicted by his own comments regarding the maneuvers that he pursued to secure a Republican majority in Texas that would then gerrymander districts in order to return more Texas Republicans to the U.S. Congress. It is unlikely at this stage that a jury verdict will be overturned by the appellate courts. No doubt he will receive a mere wrap on the wrist by the Judge, possibly even probation rather than jail time, as former celebrities in any walk of life take as their due reward.

In truth, the Texas court’s judgment is a good sign for this Republic. When leading politicians act as though they stand above the rule of law – as so many do – and when the courts defer to such individuals, there is no rule of law in the country.  And without the rule of law, there is no true liberty for the individual. Serious jail-time for Tom DeLay would send a powerful and much-needed message to Congress. Subject yourself to the laws that are written for everyone else, or face the full consequences for criminal behavior!

Tom DeLay will have a ready-made occupation to keep him busy while behind bars. Prior to his election to the House of Representatives, Tom DeLay ran an extermination business. There are a multitude of roaches in Texas jails, or so I am led to believe. No doubt DeLay will control the roaches with the same authority that he controlled his colleagues in the House. Whether or not  he will be allowed to wield a hammer, however, is more problematic.

The First Thanksgiving

November 25, 2010

When the Pilgrims

first gathered together to share

with their Indian friends

in the mild autumn air,

they lifted their voices

in jubilant praise

for the bread on the table,

the berries and maize,

for field and for forest,

for turkey and deer,

for the bountiful crops

they were blessed with that year.

They were thankful for these

as they feasted away,

and as they were thankful

we’re thankful today.


Non-optimal EU currency union will run out of bazookas

November 24, 2010

“Now that the EU has made it clear it will bail out any nation in trouble, it is faced with a choice: Either help its member countries return to growth, or run out of bazooka shells bailing them out one by one.  If Ireland alone costs close to E100 billion to stabilize, the cost of bailing out a medium-size European economy starts to look downright terrifying.”  ‘Europe Takes out the Bazooka” The Wall Street Journal, November 23, 2010

A currency union represents a strong form of monetary arrangement between different countries or regions within a country. The use of a single currency as the medium of exchange characterizes this kind of an arrangement.  Members of a currency union share a common currency and relinquish independent control over monetary and exchange rate policies. Frequently, members of such a currency union are also constrained with respect to independent fiscal policies, notably by rules that limit the ratio of budget deficits to gross domestic product. Euroland is such a currency union, containing a majority of the members of the EU.

Whether or not such a currency union will survive through a sequence of business cycles depends critically on whether it is optimal or non-optimal in nature. If it is optimal – or has time to transition to optimality – it has a good chance of long-term survival. If it is non-optimal, it is likely to fracture and disintegrate as its members’ economies react differentially to cyclical diusturbances and inside shocks. The nature of the member economies, and the domestic institutions available to adjust to shocks in the absence of independence over monetary and exchange rate instruments, determine the issue of optimality.

From the outset it was clear that Euroland was a non-optimal currency union (See JenniferMartin Das* 2002). None of the other members was ever likely to respond effectively to the efficient economic behavior of the dominant member, Germany, while the European Central Bank would clearly operate under conservative German criteria. Worse still, the peripheral members of Euroland – notably Portugal, Ireland, Greece and Spain, the appropriately-abbreviated PIGS – were essentially adventurists hopeful of benefiting from German-induced low interest rates to fund highly speculative financial and fiscal adventures. So two incompatibilities would challenge Euroland, namely German exceptionalism and a center-periphery divide.

Jennifer Martin Das’ 2002 prediction has come to pass. Euroland is on the verge of unraveling as a consequence of the financial crisis and economic contraction that began in September 2008. The first to collapse was the weak sister of Euroland, Greece, the indolence of whose citizens and the prodigality and corruption of whose fiscal institutions constitute an international disgrace.  The second to follow was the Emperor Without Clothes, Ireland, whose dramatic growth rate had been grounded on a Bernie Madoff style Ponzi- banking system that was exposed,  just like Bernie’s, and Iceland’s, once the bubbles began to burst.

Where do the bazooka’s feature in all this?  Well, in July 2008, when Treasury Secretary (ex-Goldman Sachs operative) Hank Paulson explained why he needed power and money to rescue Fannie Mae and Freddie Mac, he advised Congress: ‘If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” Congress gave him the bazooka; and Congress is still reloading it to prop up those corrupt mortgage-finance bankrupts .

Ignoring the Hank Paulson experience, in May 2010 Euroland acquired its own bazooka – almost over the dead body of wary German Chancellor,  Angela Merkel – in the form of a E750 billion stabilization fund for euro-zone members confronting unsustainable amounts of fiscal debt.  The bazooka failed to serve its purpose. It has now fired twice, in attempts to bail out Greece and Ireland, to the disgust of hard-working, fiscally prudent German voters. These shots have failed entirely to reduce borrowing costs in Madrid and Lisbon, whose governments now wait anxiously in the wings for more bazooka shots. If  Spain and Portugal should  collapse, there goes the entire bazooka, and with it, Euroland.  Back to the original ‘magnificent’ EU six, may be the ultimate outcome. Charles de Gaulle may have had the right idea.

How wise the United Kingdom was to stay out of this monetary cess-pit!  The decision to stay out, of course, does not entirely insulate the UK  from the economic repercussions of chaos in Euroland.  But it surely helps a lot, as  German Chancellor, Angela Merkel, must now truly understand.

* Jennifer Martin Das, The European Monetary Union in a Public Choice Perspective, The Locke Institute Series, Edward Elgar Publishing, 2002.

Ben Bernanke’s QE2 is designed to punish the prudent and reward the profligate

November 23, 2010

“Here’s one fact that is indisputable.  The intent of Quantitative Easing 2 (QE2), as Fed Chairman Ben Bernanke’s initiative is known, is to push intermediate – and long-term interest rates even lower than they already are.  Here is a conclusion that can be stated with certainty: Lower interest rates will bail out the profligate and punish the prudent.” James A. Bacon, ‘Bernanke’s raid on the middle class’, The Washington Times, November 23, 2010

Ben Bernanke justifies QE2 on the ground that it will lower the rate of unemployment in the United States without significantly elevating the rate of price inflation. Even within the Keynesian mesh that seemingly has engulfed a significant proportion of the U.S. economics profession, there are increasing doubts about the model that underpins such an aspiration. World wide, professional opinion considers the argument entirely specious, merely cover talk designed to hide Bernanke’s bid to depreciate the value of the U.S. dollar. Rising gold and other key commodity prices offer strong empircal support for the view that wary investors are hedging their bets against Bernanke’s explicit  hypothesis.

When a policy has never delivered on its promise in recorded history, and yet a senior and once widely respected  government official, such as Bernanke, continues to roll out a long-falsified theory, thoughtful individuals recognize that something else is afoot. And James Bacon has identified what is really underpinning Bernanke’s policy: as always with government policy, wealth redistribution is central to his behavior.

In this instance, the wealth redistribution planned by the Chairman of the Federal Reserve  is of the most despicable kind, and likely to prove most harmful to the citizens of his country. To put it crudely, Ben Bernanke is betraying his oath of office in a bid to redistribute wealth from the prudent and productive to the profligate and unproductive members of society.

Who are the prudent citizens that I have in mind?  They comprise the many hard-working families who scrimp and save, often from limited budgets, to set aside retirement funds, to pay down their mortgages responsibly, and to avoid building up unsustainable credit card debt. These households do not consume beyond their means, do not gamble excessively in the stock market casino, to make quick high-risk returns. Without such households no country can thrive and grow its economy.

They also comprise those businesses who pay circumspect attention to the bottom line, who do not seek out false gold in untenable markets, who do not pay excessive wages to indolent unionized employees, and who do not engage in networks inhabited by those deemed to be less circumspect in their financial dealings. Without such businesses, no country can thrive and grow its economy.

They also comprise governments who stay within their budgets, who do not expand their activities into areas unsuited to their talents, who do not create or tolerate unsustainable debt, and who save to fund their future financial commitments.  Without such  governments, no country can thrive and grow its economy.

Who are the profligate citizens that I have in mind?  They comprise the significant minority of households that do not adhere to budget discipline, who live high on the hog in the good times, without any thought for the bad, who enter into unsustainable mortgage commitments, and fail to pay up on time, who run up unsustainable credit card debt, and then  seek taxpayer help to avoid bankruptcy.  With too many such citizens, no economy can thrive and grow.

They include businesses that ignore all rules of budgetary prudence, that pay no attention to the bottom line, save for the pockets of their senior management and unionized work forces,  that gamble recklessly in suspect markets, and ultimately that run up unsustainable levels of indebtedness. With too many such businesses, no economy can thrive and grow.

They include governments that spend without reference to revenue inflows, that create unsustainable levels of public debt and unsustainable ongoing budget deficits simply to satisfy vote-seeking goals, and that do not put aside savings to meet their future financial commitments. With any  such central government, no economy can thrive and grow.

So what is Bernanke’s clear intent in lowering U.S. interest rates across the board through QE2?  The policy self-evidently harms the prudent: it reduces the return on savings held conservatively for retirement. It slows the compounding miracle relied upon by those who are saving conservatively to build their pension pots. It reduces the return on business assets held conservatively to deal with bad times. It reduces the returns on the investments of prudent governments who have invested monies conservatively to meet their public employee pension promises. Evidently, Bernanke has it in for this important segment of society.

The policy self-evidently benefits the profligates who do not live within their budgets. The low interest rates bail out some of the debt-ridden households who cannot meet their mortgage payments, who cannot pay their credit bills and who now can borrow at low interest further to accumulate their levels of indebtedness. They bail out the irresponsible risk-takers, most specifically the big banks and investment houses that financed trillions of dollars on residential and commercial real-estate projects that were clearly toxic from the outset. They bail out irresponsible governments – those of Bush and of Obama – that have recklessly allowed deficits to rise and public debt to increase. Bernanke clearly loves the profligates: spend, spend, spend and end up in Ben Bernanke low-interest rate Paradise!

Political games over Medicare

November 22, 2010

In order to keep the official price tag  on the final Obamacare bill under $1 trillion, the U.S. Congress omitted a ‘permanent’ fix in Medicare physician payments from the bill.  That fiscal fix is necessary to prevent an automatic 23 percent cut in Medicare physicians payments. The cost of the fix is $250 billion.

In order to avoid opposition to the bill from the American Medical Association, the Democratic-majorities in both Houses promised to pass a separate bill that would provide this permanent fix. Because of election considerations, they failed to do so. As a result, the lame-duck Congress is playing games designed to thrust the fiscal responsnibility onto the incoming Republican-majority House of Representatives.

Last week, the lame-duck Senate voted to postpone the automatic 23 percent pay-cut – but just for four weeks – at a cost of $1 billion, to be paid for by reducing certain outpatient therapy payments by $100 million per annum over the next 10 years.  The lame-duck  House plans to approve the same deal within the coming several days. In the New Year, a new Congress will confront the responsibility for irresponsible health care reform legislation. The President is completely silent on this important issue.

If  Medicare physician payments are cut by 23 percent, there will be a major exodus of physicians from that system. This would be unconscionable at such short notice. So the Republican House confronts a serious problem.  The real solution is to engage in removing the Medicare price-control model and reforming the system, in part by raising the age limit for access, in part by means-testing some benefits, in part by allowing eligible individuals to pay extra for preferred services, and in part by changes in the tax code. This should have been dealt with as part of the health care reform debate. For political reasons, the Democrats rushed a bad bill into law. A new Congress now has to deal with the largely intended consequences of such overtly political behavior.