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Archive for the ‘Economic Issues & Economy’ Category

Every once in a while, the political left shows its true colors such was the case with Paul Krugman during a recent appearance on MSNBC.  Krugman says we don’t need to worry about cutting entitlements in the next ten years.  Former Republican Congressman Joe Scarborough took Krugman to task in an editorial for saying that we do not need to cut federal spending.  Scarborough went a step further when he reprinted the conclusions of a Rand Corporation study about the negative impact of the growing federal debt.

Scarborough’s attack on Krugman prompted an Atlantic columnist to say that Scarborough “flunked” economics for citing an economist for the proposition that our rising national debt matters.   That’s become the party line at the Washington Monthly as well.  There’s humor in the efforts of all these journalists to label one of their own a hack.  Even more interesting was that none of these esteemed journalists managed to figure out who wrote the piece cited by Scarborough.  The original author was C. Richard Neu.  Neu makes a simple point:  get to work on the debt.

Far from the mistakes of a freshman economics student, Neu is a Harvard Ph.D in economics.  In other words, Krugman’s views disagree with a fellow international economist.  Perhaps since Krugman is a graduate of Yale and MIT, this is simply another example of Ivy League tribalism.

Markets remain uncertain about the long-term trends, but they aren’t good.  Without reform, the wave of baby boomer retirements will outstrip outstrip our tax base.  Krugman insists we need more stimulus spending now to create jobs.  Just as important is letting people know what their retirement will look like decades hence.  Waiting until the crisis arrives is unconscionable.

 

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This is a non-partisan video produced by an accountant, Hal Mason, who retired after 27 years with IBM. He looks at the federal budget’s revenues and expenses and illustrates the deficit problem.   There are tough choices coming.  You wouldn’t know it from listening to the federal candidates in most cases.   
 

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Book Review:  “Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present,” by Jeff Madrick.

Jeff Madrick is a former economics columnist for the New York Times and a senior fellow at both the Roosevelt Institute and the Scwhartz Center for Economic Policy Analysis, The New School.  It therefore isn’t surprising that Madrick views the financial bubble through the prism of favoring bigger government.

Age of Greed chronicles the story of various financiers, economists and political figures over the past few decades, including some of the left’s favorite villains.  Madrick’s thesis is that de-regulation led to the economic crisis.  He singles out Howard Jarvis and Jack Kemp as key figures who tapped into anger at the malaise era of Jimmy Carter.  In 1978, Jarvis’ Proposition 13 passed in California with 65% of the vote.  Prop 13 limited taxes at a time that California outstripped the rest of the country in high property taxes.  Kemp advocated the Laffer Curve, which posits that reducing high marginal tax rates can increase both growth and total revenue receipts.  Madrick contends that the desire to restrain the growth of government led to what he calls the Age of Greed.

Madrick excels at providing an overview of pivotal moments in the careers of various business and finance figures.  Madrick covers everyone from George Soros to Alan Greenspan.  GE’s Jack Welch transformed a conglomerate into a finance-driven titan.  Joe Flom was one of a handful of attorneys who oversaw the era of the leveraged buy-out.  Other figures appear as clear villains: Ivan Boesky and Michael Milken; Ken Lay of Enron and Angelo Mozillo of Countrywide Financial.

Although the stories are entertaining, there’s little evidence that greed was invented in the 1970s.  Nor can Madrick explain how his pro-Keynesian economic view will prevent such problems in the future.

Madrick ascribes the decline of American manufacturing and other jobs sectors to the rise of finance.  He believes that the growth in finance led to a misallocation of resources, pointing to recurring financial bubbles.  Excessive compensation attracts top students to finance over other more “productive” industries.  Yet higher executive compensation hasn’t been limited to the financial industry.

The growth of U.S. financial firms is due to much more than “greed.”  American financial firms are global giants in a global market for capital.  The capital allocated to U.S. real estate investments was international as well.  Given the continued importance of the U.S. economy, U.S. financial firms have been uniquely positioned to assume a global role.

America’s loss of manufacturing has been a gain for other countries.  From 1950 to 2000, World GDP grew about ten-fold, while U.S. GDP grew about six-fold.  We’ve gone from being one-half of the world economy to about one-quarter.  Manufacturing growth in other countries is lessening income inequality in a way that government programs never could.  That also reveals a tension in Madrick’s thesis.  Does he favor a robust manufacturing America like the 1960s–at the expense of other nations–or is he simply opposed to American preeminence in the world of finance?  If American finance hadn’t grown (and grown at times through excess), American manufacturers in some sectors still could not have competed with their emerging international competitors.

Read Madrick’s book for a portrait of a mix of financial titans from the past several decades.  Recognize, though that new regulatory schemes show no signs of ending human greed.  Nor have various strong-government kleptocracies managed to avoid the perils of human greed.

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Book Review:  “Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Let to Economic Armageddon,” by Gretchen Morgenson and Joshua Rosner.

Reckless Endangerment tells the story of how crony capitalism led to the financial crisis of 2008.  Morgenson is a business reporter for the New York Times and Rosner a research consultant on the mortgage industry.  Both conducted interviews concerning the mortgage industry and Wall Street over the last decade.

Reckless Endangerment identifies the powerful people whose actions led to the financial crisis.  In the wake of the Wall Street bailouts, “the American people realize they’ve been robbed.  They’re just not sure by whom.”  The authors explain in detail the key players who profited from the decades-long relationship between Wall Street and Washington.

The financial collapse of 2008 resulted in part from the concept of public-private partnerships.  Rather than serve as a neutral enforcer of the rules, the federal government became a “partner” of Freddie Mac and Fannie Mae.  Freddie and Fannie are GSEs (government sponsored enterprises) benefitted from the guarantee of government credit long before the bank bailouts of 2008-09.

The book details the career of James A. Johnson, who served as CEO of Fannie Mae from 1991 to 1998.  Johnson came to Fannie Mae from politics and Wall Street.  Johnson served as the campaign manager of Walter Mondale’s 1984 presidential campaign and also worked on George McGovern’s 1972 presidential campaign.  From 1985 to 1990, Johnson became a managing director at Lehman Brothers.

Johnson recognized that defending and expanding Fannie Mae’s relationship with the federal government would prove lucrative.  Many of Fannie’s political champions were Democrats, including Barney Frank and Maxine Waters.  One of Johnson’s initiatives established regional Fannie Mae Partnership offices intended to promote ever-expanding homeownership by working with elected officials.  These regional offices became a political network designed to thwart any efforts to reign in Fannie Mae.  In 1995, the new House Speaker, Rep. Newt Gingrich, attended the opening of the Atlanta office.  Gingrich hailed “Fannie Mae as an excellent example of a former government institution fulfilling its mandate while functioning in the market economy.”  The GSEs, however, existed to rely on government support, not compete on an equal playing field.

Fannie Mae also used its regional offices to hire former congressional staffers from the offices of men like Sen. Robert Bennet (R-Utah)(defeated by the liberty movement in a 2010 GOP primary) and Sen. Tom Daschle (D-N.Dak.) who became Senate Majority leader and nearly became a member of President Obama’s cabinet. Fannie Mae also hired Herb Moses, Rep. Barney Frank’s partner.  Rep. Frank became a key defender of both Fannie and Freddie Mac.

Other financial firms also benefited from lobbying Congress and the White House. Sandy Weill the then-CEO of Travelers Group led the push to repeal the Glass-Steagall Act.  Clinton Secretary of the Treasury Robert Rubin was instrumental in the push to allow commercial banks to combine with insurance companies and investment banks into firms “too big to fail.”  Rubin became the Vice-Chair of Citigroup shortly before the full repeal of Glass-Steagall.  Glass-Steagall’s repeal did not create a “free market” banking system.  Banks took greater risks, with ever less financial transparency.   As events proved, these mega-firms could count on government support to privatize their profits while piling their losses on the U.S. taxpayer.  Long-Term Capital Management failed in 1999.  The Federal Reserve responded with a bail-out, creating the conditions for future bail-outs.  At the same time, the Fed expected the banking industry to do the right thing with little or no oversight.  Capital reserve requirements were watered down, allowing ever greater leverage, especially when combined with accounting gimmicks to manipulate profits & losses and potential liabilities.  Such policies were inconsistent with the sort of ad hoc government bailouts that followed.

Reckless Endangerment also chronicles the story of some of the subprime lenders, such as Countrywide Financial, NovaStar, and Fremont, all companies that pursued loose lending standards in search of short-term profits.

Many firms engaged in accounting fraud, including Fannie Mae.  In his last year as CEO, James Johnson received millions more in bonuses due to manipulations of the timing of earnings.  Johnson’s successor, Franklin Raines, suffered the consequences of such shenanigans.  Fannie Mae was later forced to restate earnings by $6.3 billion.  Still, Raines was allowed to resign and received substantial bonuses at his departure.  Years later, Raines paid millions of dollars in civil penalties.  The penalties were a small fraction of his total compensation from Fannie.  In 2008, Johnson was appointed Senator Barack Obama’s three-member Vice-Presidential candidate search committee, but resigned after the McCain campaign made his involvement an issue.

The authors contend that “the failure to hold central figures accountable for their actions sets a dangerous precedent.”  Many of those responsible for the financial debacle still remain in positions of influence.  Reckless Endangerment provides a glimpse of the crony capitalism that is motivating average citizens to take action. It is not the complete story of the financial crisis, but is one element of the problem that should be addressed.  Instead of recognizing the shortcomings of such purported “partnerships,” Congress and the Obama Administration are creating more regulatory agencies with even more layers of bureaucracy.  Read Reckless Endangerment, then you can decide whether you believe the political system is capable of refining crony capitalism and public-private partnerships into a workable economic system.

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The environmental agenda has been infected by extremism—it’s become an economic suicide pact. And Free Market America is here to challenge it. Visit www.freemarketamerica.org

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by Mary Duryea

The big budget, big deficit, big regulation trajectory of our present administration appears headed toward big losses for small business and small towns. Consider the proposed 2013 budget that adds 1.3 trillion to the already astonishing national debt. There is no clear path forward to alleviate that debt. We could just expect our children to pay or we could increase taxes for those with incomes over $250,000. This presumes those “rich” folks are faceless and have lavish lifestyles. The truth is that many of the small businesses that create jobs file as individuals. Those “rich” folks may just be our friends and neighbors struggling to keep a business opened right here in our small town. The truth is that taxing the “rich” can never generate the revenue needed to remove our debt anyway and broken small businesses will decrease revenue instead.

Consider the cost of regulation. One friend recently described the 30 plus documents that were filed in opening a small business. In one case two members of the regulatory commission agreed that the purpose of the regulation had been met but because they couldn’t agree on how to fill out the form the filing was denied. How does that promote jobs?

As the government grows small towns, businesses and individuals lose. When there is deregulation, debt reduction and local control everyone wins.

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English: President Obama had called on the two...

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by Roger Galloway

Let’s establish a little timeline for the events leading up to our situation in 2012:

–          Jimmy Carter established the Community Reinvestment Act

–          Bill Clinton had his attorney general, Janet Reno, coerce banks into making mortgage loans to people with “questionable” credit

–          With Clinton people running Freddie Mac and Fannie Mae, making “questionable” loans morphed into making loans to people with no credit, no jobs, no income, with no questions.  Since Freddie and Fannie were purchasing these bad loans, banks were quite comfortable making them.

–          In order to keep the housing bubble from bursting on Obama’s watch, democrat operatives made sure it occurred right at the end of the Bush administration.  Insurance companies, banks, and securities companies were threatened by the bad loan paper they held.  “They were too big to fail.”  Democrats and their “fairness” policies created the crisis.

–          President-elect Obama and all the smartest people in Washington insisted we must bail out the financial institutions (of their choice).  $789 billion dollars went to buy insurance companies, give GM to the United Auto Workers union (while disenfranchising GM bondholders), bail out Chrysler, banks, and Wall Street firms.

–          Once President Obama and his democrat-controlled House and Senate were in place, we were told we must have a stimulus plan to keep our economy afloat and keep unemployment under 8%.  Another $800 billion is given out to save government union workers jobs in states, counties, and cities.  Also private companies who supported Obama’s election and were also “green companies” received the administration’s largesse.  Much will flow back to the Obama reelection campaign.

–          Obama jammed through Obamacare, with the cooperation of Nancy Pelosi and Harry Reid.  It was hard, but with things like the Cornhusker Kickback and tons of exempted states, unions, and companies, they got the job done.  It is the biggest jobs killing government takeover in the history of our country.

–          George Bush amassed a national debt of $5 trillion during his 8 years in office while dealing with 9/11 and fighting two wars.  Obama will add over $5 trillion in 4 years!

If you do the math, $16 trillion of federal debt equals $53,333 for everyone who is alive in our country!  That’s 300,000,000 people divided into $16,000,000,000 of debt.  And that number doesn’t include the debts of the states, counties, and cities.  The federal government is borrowing 40 cents of every dollar it is spending.  The feds have spent our Social Security taxes, crippled our economy, starved us of our own natural resources, devalued our money, regulated every aspect of our lives, and impoverished every citizen.  Another term for Obama and a democrat controlled Senate will have America devolve into something worse than Greece!  Obama’s “Change” has been to pursue every failed and flawed idea of the last 150 years!

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