Archive for July, 2009
First Principles: My Commentary on Detroit CBS TV Michigan Matters
Monday, July 27th, 2009Debt Clock…EVERY American should follow this!
Sunday, July 26th, 2009Click here: Online LIVE U.S. Debt Clock!!!
Obama vs Bush: Six months of Stupidity
Thursday, July 23rd, 2009Posted on Facebook by Paul R Smiley-Oyen
SIX months of stupidity?
If George W. Bush had given Gordon Brown a set of inexpensive and
incorrectly formatted DVDs, when Gordon Brown had given him a
thoughtful and historically significant gift, would you have approved?
If George W. Bush had given the Queen of England an iPod containing
videos of his speeches, would you have thought this embarrassingly
narcissistic and tacky?
If George W. Bush had bowed to the King of Saudi Arabia, would you
have approved?
If George W. Bush had visited Austria and made reference to the
non-existent “Austrian language,” would you have brushed it off as a
minor slip?
If George W. Bush had filled his cabinet and circle of advisers with
people who cannot seem to keep current on their income taxes, would
you have approved?
If George W. Bush had been so Spanish illiterate as to refer to “Cinco
de Cuatro” in front of the Mexican ambassador when it was the fourth
of May (Cuatro de Mayo), and continued to flub it when he tried again,
would you have winced in embarrassment?
If George W. Bush had mis-spelled the word advice would you have
hammered him for it for years like Dan Quayle and potatoe as “proof”
of what a dunce he is?
If George W. Bush had burned 9,000 gallons of jet fuel to go plant a
single tree on “Earth Day”, would you have concluded he’s a hypocrite?
If George W. Bush’s administration had okayed Air Force One flying low
over millions of people followed by a jet fighter in downtown
Manhattan causing widespread panic, would you have wondered whether
they actually “get” what happened on 9-11?
If George W. Bush had been the first President to need a teleprompter
installed to be able to get through a press conference, would you have
laughed and said this is more proof of how he inept he is on his own
and is really controlled by smarter men behind the scenes?
If George W. Bush had failed to send relief aid to flood victims
throughout the Midwest with more people killed or made homeless than
in New Orleans , would you want it made into a major ongoing po
litical issue with claims of racism and incompetence?
If George W. Bush had ordered the firing of the CEO of a major
corporation, even though he had no constitutional authority to do so,
would you have approved?
If George W. Bush had proposed to double the national debt, which had
taken more than two centuries to accumulate, in one year, would you
have approved?
If George W. Bush had then proposed to double the debt again within 10
years, would you have approved?
If George W. Bush had reduced your retirement plan’s holdings of GM
stock by 90% and given the unions a majority stake in GM, would you
have approved?
If George W. Bush had spent hundreds of thousands of dollars to take
Laura Bush to a play in NYC, would you have approved?
So, tell me again, what is it about Obama that makes him so brilliant
and impressive? Can’t think of anything? Don’t worry. He’s done all
this in 6 months — so you’ll have three years and six months to
come up with an answer.. No-common-sense, naive, incompetent,
uninformed and media-brainwashed voters did this to themselves.
Insanity is widespread. Americans are waking up.
“New” Europe to Obama – A Letter Worth Reading
Friday, July 17th, 2009
July 16, 2009
An Open Letter To The Obama Administration From Central And Eastern Europe
We have written this letter because, as Central and Eastern European (CEE) intellectuals and former policymakers, we care deeply about the future of the transatlantic relationship as well as the future quality of relations between the United States and the countries of our region. We write in our personal capacity as individuals who are friends and allies of the United States as well as committed Europeans.
Our nations are deeply indebted to the United States. Many of us know firsthand how important your support for our freedom and independence was during the dark Cold War years. U.S. engagement and support was essential for the success of our democratic transitions after the Iron Curtain fell twenty years ago. Without Washington’s vision and leadership, it is doubtful that we would be in NATO and even the EU today.
We have worked to reciprocate and make this relationship a two-way street. We are Atlanticist voices within NATO and the EU. Our nations have been engaged alongside the United States in the Balkans, Iraq, and today in Afghanistan. While our contribution may at times seem modest compared to your own, it is significant when measured as a percentage of our population and GDP. Having benefited from your support for liberal democracy and liberal values in the past, we have been among your strongest supporters when it comes to promoting democracy and human rights around the world.
Twenty years after the end of the Cold War, however, we see that Central and Eastern European countries are no longer at the heart of American foreign policy. As the new Obama Administration sets its foreign-policy priorities, our region is one part of the world that Americans have largely stopped worrying about. Indeed, at times we have the impression that U.S. policy was so successful that many American officials have now concluded that our region is fixed once and for all and that they could “check the box” and move on to other more pressing strategic issues. Relations have been so close that many on both sides assume that the region’s transatlantic orientation, as well as its stability and prosperity, would last forever.
That view is premature. All is not well either in our region or in the transatlantic relationship. Central and Eastern Europe is at a political crossroads and today there is a growing sense of nervousness in the region. The global economic crisis is impacting on our region and, as elsewhere, runs the risk that our societies will look inward and be less engaged with the outside world. At the same time, storm clouds are starting to gather on the foreign policy horizon. Like you, we await the results of the EU Commission’s investigation on the origins of the Russo-Georgian war. But the political impact of that war on the region has already been felt. Many countries were deeply disturbed to see the Atlantic alliance stand by as Russia violated the core principles of the Helsinki Final Act, the Charter of Paris, and the territorial integrity of a country that was a member of NATO’s Partnership for Peace and the Euroatlantic Partnership Council -all in the name of defending a sphere of influence on its borders.
Despite the efforts and significant contribution of the new members, NATO today seems weaker than when we joined. In many of our countries it is perceived as less and less relevant – and we feel it. Although we are full members, people question whether NATO would be willing and able to come to our defense in some future crises. Europe’s dependence on Russian energy also creates concern about the cohesion of the Alliance. President Obama’s remark at the recent NATO summit on the need to provide credible defense plans for all Alliance members was welcome, but not sufficient to allay fears about the Alliance´s defense readiness. Our ability to continue to sustain public support at home for our contributions to Alliance missions abroad also depends on us being able to show that our own security concerns are being addressed in NATO and close cooperation with the United States
We must also recognize that America’s popularity and influence have fallen in many of our countries as well. Public opinions polls, including the German Marshall Fund’s own Transatlantic Trends survey, show that our region has not been immune to the wave of criticism and anti-Americanism that has swept Europe in recent years and which led to a collapse in sympathy and support for the United States during the Bush years. Some leaders in the region have paid a political price for their support of the unpopular war in Iraq. In the future they may be more careful in taking political risks to support the United States. We believe that the onset of a new Administration has created a new opening to reverse this trend but it will take time and work on both sides to make up for what we have lost.
In many ways the EU has become the major factor and institution in our lives. To many people it seems more relevant and important today than the link to the United States. To some degree it is a logical outcome of the integration of Central and Eastern Europe into the EU. Our leaders and officials spend much more time in EU meetings than in consultations with Washington, where they often struggle to attract attention or make our voices heard. The region’s deeper integration in the EU is of course welcome and should not necessarily lead to a weakening of the transatlantic relationship. The hope was that integration of Central and Eastern Europe into the EU would actually strengthen the strategic cooperation between Europe and America.
However, there is a danger that instead of being a pro-Atlantic voice in the EU, support for a more global partnership with Washington in the region might wane over time. The region does not have the tradition of assuming a more global role. Some items on the transatlantic agenda, such as climate change, do not resonate in the Central and Eastern European publics to the same extent as they do in Western Europe.
Leadership change is also coming in Central and Eastern Europe. Next to those, there are fewer and fewer leaders who emerged from the revolutions of 1989 who experienced Washington’s key role in securing our democratic transition and anchoring our countries in NATO and EU. A new generation of leaders is emerging who do not have these memories and follow a more “realistic” policy. At the same time, the former Communist elites, whose insistence on political and economic power significantly contributed to the crises in many CEE countries, gradually disappear from the political scene. The current political and economic turmoil and the fallout from the global economic crisis provide additional opportunities for the forces of nationalism, extremism, populism, and anti-Semitism across the continent but also in some our countries.
This means that the United States is likely to lose many of its traditional interlocutors in the region. The new elites replacing them may not share the idealism – or have the same relationship to the United States – as the generation who led the democratic transition. They may be more calculating in their support of the United States as well as more parochial in their world view. And in Washington a similar transition is taking place as many of the leaders and personalities we have worked with and relied on are also leaving politics.
And then there is the issue of how to deal with Russia. Our hopes that relations with Russia would improve and that Moscow would finally fully accept our complete sovereignty and independence after joining NATO and the EU have not been fulfilled. Instead, Russia is back as a revisionist power pursuing a 19th-century agenda with 21st-century tactics and methods. At a global level, Russia has become, on most issues, a status-quo power. But at a regional level and vis-a-vis our nations, it increasingly acts as a revisionist one. It challenges our claims to our own historical experiences. It asserts a privileged position in determining our security choices. It uses overt and covert means of economic warfare, ranging from energy blockades and politically motivated investments to bribery and media manipulation in order to advance its interests and to challenge the transatlantic orientation of Central and Eastern Europe.
We welcome the “reset” of the American-Russian relations. As the countries living closest to Russia, obviously nobody has a greater interest in the development of the democracy in Russia and better relations between Moscow and the West than we do. But there is also nervousness in our capitals. We want to ensure that too narrow an understanding of Western interests does not lead to the wrong concessions to Russia. Today the concern is, for example, that the United States and the major European powers might embrace the Medvedev plan for a “Concert of Powers” to replace the continent’s existing, value-based security structure. The danger is that Russia’s creeping intimidation and influence-peddling in the region could over time lead to a de facto neutralization of the region. There are differing views within the region when it comes to Moscow’s new policies. But there is a shared view that the full engagement of the United States is needed.
Many in the region are looking with hope to the Obama Administration to restore the Atlantic relationship as a moral compass for their domestic as well as foreign policies. A strong commitment to common liberal democratic values is essential to our countries. We know from our own historical experience the difference between when the United States stood up for its liberal democratic values and when it did not. Our region suffered when the United States succumbed to “realism” at Yalta. And it benefited when the United States used its power to fight for principle. That was critical during the Cold War and in opening the doors of NATO. Had a “realist” view prevailed in the early 1990s, we would not be in NATO today and the idea of a Europe whole, free, and at peace would be a distant dream.
We understand the heavy demands on your Administration and on U.S. foreign policy. It is not our intent to add to the list of problems you face. Rather, we want to help by being strong Atlanticist allies in a U.S.-European partnership that is a powerful force for good around the world. But we are not certain where our region will be in five or ten years time given the domestic and foreign policy uncertainties we face. We need to take the right steps now to ensure the strong relationship between the United States and Central and Eastern Europe over the past twenty years will endure.
We believe this is a time both the United States and Europe need to reinvest in the transatlantic relationship. We also believe this is a time when the United States and Central and Eastern Europe must reconnect around a new and forward-looking agenda. While recognizing what has been achieved in the twenty years since the fall of the Iron Curtain, it is time to set a new agenda for close cooperation for the next twenty years across the Atlantic.
Therefore, we propose the following steps:
First, we are convinced that America needs Europe and that Europe needs the United States as much today as in the past. The United States should reaffirm its vocation as a European power and make clear that it plans to stay fully engaged on the continent even while it faces the pressing challenges in Afghanistan and Pakistan, the wider Middle East, and Asia. For our part we must work at home in our own countries and in Europe more generally to convince our leaders and societies to adopt a more global perspective and be prepared to shoulder more responsibility in partnership with the United States.
Second, we need a renaissance of NATO as the most important security link between the United States and Europe. It is the only credible hard power security guarantee we have. NATO must reconfirm its core function of collective defense even while we adapt to the new threats of the 21st century. A key factor in our ability to participate in NATO’s expeditionary missions overseas is the belief that we are secure at home. We must therefore correct some self-inflicted wounds from the past. It was a mistake not to commence with proper Article 5 defense planning for new members after NATO was enlarged. NATO needs to make the Alliance’s commitments credible and provide strategic reassurance to all members. This should include contingency planning, prepositioning of forces, equipment, and supplies for reinforcement in our region in case of crisis as originally envisioned in the NATO-Russia Founding Act.
We should also re-think the working of the NATO-Russia Council and return to the practice where NATO member countries enter into dialogue with Moscow with a coordinated position. When it comes to Russia, our experience has been that a more determined and principled policy toward Moscow will not only strengthen the West’s security but will ultimately lead Moscow to follow a more cooperative policy as well. Furthermore, the more secure we feel inside NATO, the easier it will also be for our countries to reach out to engage Moscow on issues of common interest. That is the dual track approach we need and which should be reflected in the new NATO strategic concept.
Third, the thorniest issue may well be America’s planned missile-defense installations. Here too, there are different views in the region, including among our publics which are divided. Regardless of the military merits of this scheme and what Washington eventually decides to do, the issue has nevertheless also become — at least in some countries — a symbol of America’s credibility and commitment to the region. How it is handled could have a significant impact on their future transatlantic orientation. The small number of missiles involved cannot be a threat to Russia’s strategic capabilities, and the Kremlin knows this. We should decide the future of the program as allies and based on the strategic plusses and minuses of the different technical and political configurations. The Alliance should not allow the issue to be determined by unfounded Russian opposition. Abandoning the program entirely or involving Russia too deeply in it without consulting Poland or the Czech Republic can undermine the credibility of the United States across the whole region.
Fourth, we know that NATO alone is not enough. We also want and need more Europe and a better and more strategic U.S.-EU relationship as well. Increasingly our foreign policies are carried out through the European Union – and we support that. We also want a common European foreign and defense policy that is open to close cooperation with the United States. We are the advocates of such a line in the EU. But we need the United States to rethink its attitude toward the EU and engage it much more seriously as a strategic partner. We need to bring NATO and the EU closer together and make them work in tandem. We need common NATO and EU strategies not only toward Russia but on a range of other new strategic challenges.
Fifth is energy security. The threat to energy supplies can exert an immediate influence on our nations’ political sovereignty also as allies contributing to common decisions in NATO. That is why it must also become a transatlantic priority. Although most of the responsibility for energy security lies within the realm of the EU, the United States also has a role to play. Absent American support, the Baku-Tbilisi-Ceyhan pipeline would never have been built. Energy security must become an integral part of U.S.-European strategic cooperation. Central and Eastern European countries should lobby harder (and with more unity) inside Europe for diversification of the energy mix, suppliers, and transit routes, as well as for tough legal scrutiny of Russia’s abuse of its monopoly and cartel-like power inside the EU. But American political support on this will play a crucial role. Similarly, the United States can play an important role in solidifying further its support for the Nabucco pipeline, particularly in using its security relationship with the main transit country, Turkey, as well as the North-South interconnector of Central Europe and LNG terminals in our region.
Sixth, we must not neglect the human factor. Our next generations need to get to know each other, too. We have to cherish and protect the multitude of educational, professional, and other networks and friendships that underpin our friendship and alliance. The U.S. visa regime remains an obstacle in this regard. It is absurd that Poland and Romania — arguably the two biggest and most pro-American states in the CEE region, which are making substantial contributions in Iraq and Afghanistan — have not yet been brought into the visa waiver program. It is incomprehensible that a critic like the French anti-globalization activist Jose Bove does not require a visa for the United States but former Solidarity activist and Nobel Peace prizewinner Lech Walesa does. This issue will be resolved only if it is made a political priority by the President of the United States.
The steps we made together since 1989 are not minor in history. The common successes are the proper foundation for the transatlantic renaissance we need today. This is why we believe that we should also consider the creation of a Legacy Fellowship for young leaders. Twenty years have passed since the revolutions of 1989. That is a whole generation. We need a new generation to renew the transatlantic partnership. A new program should be launched to identify those young leaders on both sides of the Atlantic who can carry forward the transatlantic project we have spent the last two decades building in Central and Eastern Europe.
In conclusion, the onset of a new Administration in the United States has raised great hopes in our countries for a transatlantic renewal. It is an opportunity we dare not miss. We, the authors of this letter, know firsthand how important the relationship with the United States has been. In the 1990s, a large part of getting Europe right was about getting Central and Eastern Europe right. The engagement of the United States was critical to locking in peace and stability from the Baltics to the Black Sea. Today the goal must be to keep Central and Eastern Europe right as a stable, activist, and Atlanticist part of our broader community.
That is the key to our success in bringing about the renaissance in the Alliance the Obama Administration has committed itself to work for and which we support. That will require both sides recommitting to and investing in this relationship. But if we do it right, the pay off down the road can be very real. By taking the right steps now, we can put it on new and solid footing for the future.
[Signed] by Valdas Adamkus, Martin Butora, Emil Constantinescu, Pavol Demes, Lubos Dobrovsky, Matyas Eorsi, Istvan Gyarmati, Vaclav Havel, Rastislav Kacer, Sandra Kalniete, Karel Schwarzenberg, Michal Kovac, Ivan Krastev, Alexander Kwasniewski, Mart Laar, Kadri Liik, Janos Martonyi. Janusz Onyszkiewicz, Adam Rotfeld, Vaira Vike-Freiberga, Alexandr Vondra, Lech Walesa.
Radio Free Europe/Radio Liberty © 2009 RFE/RL, Inc. All Rights Reserved.
A Powerful Tribute EVERY American Should Watch
Friday, July 10th, 2009Killed in action the week before, the body of Staff Sergeant First Class John C. Beale was returned to Falcon Field in Peachtree City, Georgia, just south of Atlanta, on June 11, 2009. The Henry County Police Department escorted the procession to the funeral home in McDonough, Georgia. A simple notice in local papers indicated the road route to be taken and the approximate time. People lined the route for miles to pay tribute to one of our fallen.
This sort of restored some of my shaken faith in ‘the silent majority’ of our country. Nowadays one can be led to believe that America no longer respects honor and no longer honors sacrifice outside the military. Be it known that there are many places in this land where people still recognize the courage and impact of total self-sacrifice. Georgia remains one of those graceful places. The link below is a short travelogue of that day’s remarkable and painful journey. But only watch this if you wish to have some of your faith in people restored. Please share widely.
God Bless America!
A Video Tribute of his Final Journey
Bailouts: An Excellent Analysis
Friday, July 10th, 2009http://www.realclearpolitics.com/articles/2009/07/10/the_case_for_doing_nothing_97382.html
July 10, 2009
The Case for Doing Nothing
The first thing to note about the financial crisis is that the federal government never had any business intervening in the personal decision of whether you want to own a home. There is no rational economic argument, or any argument I know of, that says the market of buying and selling homes is imperfect in some way, requiring government action. Construction firms have plenty of incentive to build homes and sell them. People who have the wherewithal have plenty of incentive to buy homes if they so choose. For the government to intrude into homeownership was an off-budget, nontransparent, backdoor attempt at redistributing income. And when the policy became a way of transferring income to people who couldn’t afford those homes, it was doomed to failure.
This provision of risky debt to low-income homeowners was exacerbated by a second misguided federal policy: the longstanding practice of bailing out private risk taking. Although this has gone on for decades in the U.S. and other countries, the Federal Reserve played a special role during the tenure of former chief Alan Greenspan. The Fed’s implicit and almost explicit policy before the housing crash was to say to the financial markets: “Don’t worry about the fact that there’s a bubble. We’ll lower interest rates and keep them low enough to prevent a collapse in asset prices.” This logic, broadly applied, was commonly called the Greenspan Put. The Federal Reserve was basically selling the market an option for getting out comparatively unscathed when things turned bad. The result has been a widely held assumption that market actors would not have to bear the full losses from their own risky behavior.
When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it’s important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone’s mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.
Unfair in the Short Term, Inappropriate in the Long Term
By doing nothing, I mean we could have done nothing new. Existing policies were available, which means bankruptcy or, in the case of banks, Federal Deposit Insurance Corporation receivership. Some sort of orderly, temporary control of a failing institution for the purpose of either selling off the assets and liquidating them, or, preferably, zeroing out the equity holders, giving the creditors a haircut and making them the new equity holders. Similarly, a bankruptcy or receivership proceeding might sell the institution to some player in the private sector willing to own it for some price.
With that method, taxpayer funds are generally unneeded, or at least needed to a much smaller extent than with the bailout approach. In weighing bankruptcy vs. bailouts, it’s useful to look at the problem from three perspectives: in terms of income distribution, long-run efficiency, and short-term efficiency.
From the distributional perspective, the choice is a no-brainer. Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they’d get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there’s money to be made. Distributionally, we clearly did the wrong thing.
From the perspective of long-run efficiency, the question is also relatively straightforward. By the end of 2005, it should have been apparent that the U.S. economy was fundamentally misaligned. We had significantly overinvested in housing and significantly underinvested in factories, plants, and equipment. In effect, we needed a recession: a period to readjust the balance between the different types of capital.
More broadly, failure is an essential aspect of free markets. Failure shows capitalism is working, because it means resources are moving from bad uses to good uses.
There are other long-term problems with the bailout approach. Bailouts create moral hazards going forward, meaning market players will be more inclined to take excessive risks. Bailouts encourage inappropriate goals, such as propping up insolvent banks. Bailouts give the government ownership stakes in these institutions, which means that politics, not economics, is going to decide where these firms invest in the future. And bailouts set the wrong precedent for other industries.
The Only Plausible Argument
There is therefore only one reasonable argument for choosing bailouts over bankruptcy. Bailouts might make sense if bankruptcy imposed an externality – an unwelcome spillover effect. The argument for that goes as follows: When a given bank fails, it loses intermediation capital, or the ability to make loans. Any given bank knows a particular sector of the economy, a particular region of the country, or a particular kind of loan market. So if that bank fails, that specialized knowledge gets destroyed; therefore, at least in the short term, no one can easily make that kind of loan.
If that happened to one bank, you’d say it was no big deal; there are plenty of banks that have lots of knowledge. But if one large bank fails and defaults on obligations to lots of other banks, forcing some of them to fail, you might worry that contagion could lead to a lot of intermediation capital disappearing in a short period of time.
That story sounds somewhat plausible. But it has two key weaknesses, one theoretical and one empirical.
The theoretical weakness is that if a bank fails but its assets and its employees are bought by another bank, there is no reason for the intermediation capital to disappear. It just gets transferred to someone else. If you think that the good ideas for making productive loans are in the brains of the people of the failed bank, those people are probably going to go work at some other financial institution – a hedge fund, an insurance company, another bank. So you’re not necessarily going to lose all the intermediation capital as a result of the failure. Indeed, the failed bank’s employees may be put to work in more productive ways.
The empirical problem with the claim that bank failures destroy intermediation capital is that there isn’t strong evidence to support it. Some evidence does show a correlation between bank failures and declines in output. But since declines in output should lead to bank failures, we don’t know which is causing which. Thus, there isn’t much quantitative data showing that bank failures lead to a large excess loss, over and above what you would expect when a negative shock hits the economy.
Because housing prices have declined, some people and institutions are worse off. Maybe it’s the first bank in the chain that takes most of the hit. Or maybe the first bank passes some of the hit along because of its counter-party claims to some other bank. But that hit has to be taken. And in the U.S., it was a big hit indeed – plausibly several trillion dollars in housing wealth. The size of that loss doesn’t demonstrate a spillover effect; it just shows that somebody has to experience the loss that the economy has already taken.
Twisted Incentives
The problem isn’t only that the bailout wasn’t necessary in the first place. The bailout may have made the credit situation worse. When banks hear that the Treasury Department is dangling hundreds of billions of dollars out there to purchase their toxic assets, what are they going to do? Sell their assets for 20 cents on the dollar, or hold onto them in the hope that the government will eventually buy them for 80 cents on the dollar?
The moment Treasury Secretary Henry Paulson got in front of the cameras last fall and announced that we were on the brink of catastrophe, Wall Street was bound to freeze, because bankers wanted to figure out how much money was available and how they could get some. Let’s not realize any losses we don’t have to realize, they figured, because Treasury’s going to bail us out.
Of course, the bankruptcy approach is itself messy, and there are some legal issues concerning whether existing procedures apply to bank holding companies or just banks. But what the administration should do now is stop giving banks money and start being open to the bankruptcy approach when existing law allows it. Further, the administration could push Congress harder to expand and clarify the FDIC’s receivership authority. As long as regulators keep giving banks money, nothing is going to clean the mess in the financial sector.
The latest government program, the Public-Private Investment Program, is just another handout to the banks. It sets up a system where a small amount of private money is combined with a small amount of government money and a big loan guaranteed by the government to buy the toxic assets from the bank.
So what are the incentives to private-sector actors? Well, they’re putting hardly any money in. If it turns out that the toxic assets they bought aren’t worth anything, they haven’t lost much. If the assets are worth a lot, they make some money. Either way, the Treasury Department is guaranteeing everything. Reasonable estimates indicate that these toxic assets are not worth very much, so this is just another way of transferring resources to the banks by buying their toxic assets at inflated prices.
That’s not the only area where the Obama administration has twisted incentives. President Obama’s mortgage plan uses $275 billion in tax funds to help homeowners refinance and lower rates, to subsidize payments from borrowers to lenders, to get lenders to modify loans, and so on. It gives another $200 billion to the government-created home mortgage companies Fannie Mae and Freddie Mac. This is exactly the wrong approach.
The aim is to reduce foreclosures, so the delinquent or nearly delinquent borrowers can stay in their homes. That sounds like a laudable goal, but it ignores a fundamental reality: This money is coming from somebody else. So what the plan is doing is penalizing relatively responsible homeowners or renters – everybody who pays taxes – and rewarding those people who should have known, or at least should have had some inkling, that the loans they were being offered were too good to be true. This program creates exactly the wrong incentives for people deciding whether to borrow and whether to be homeowners.
More generally, it continues the policy of promoting homeownership. We got in this situation because the government wanted to promote homeownership. Until we create a situation where people make decisions based on their own resources and have to think about bearing the consequences of the decisions they make, the root cause of the financial crisis will only get worse.
Shrinking the Pie
Add in Obama’s $787 billion stimulus and his $3.6 trillion budget, and a picture emerges of an administration totally unapologetic about its designs to expand the size and scope of government. There is no question that the people advocating this spending want much more government intervention with respect to unions, energy, health care, infrastructure, and other areas. The crisis has given them the opportunity to ram through a bunch of things they’ve been pursuing for a long time.
As a matter of accounting, they are almost certainly understating the budgetary implications of their programs. Their assumptions about economic growth are optimistic relative to those of private forecasters. Furthermore, many of the items in the stimulus package that were supposed to be temporary are not going to be temporary. Thus, my guess is that deficits will be much bigger than the administration predicts.
The stunning thing about Obama’s spending proposals is that there’s almost nothing you could defend from the perspective of efficiency. It’s all about redistribution – not redistribution to the poor but redistribution to Democratic interest groups: to unions, to the green lobby, to the health care industry, and so on. At some point these everescalating government interventions will affect the size of the economic pie. If we start looking more like France, with more than 20 percent of GDP controlled by the federal government, output growth and economic freedom will all suffer.
The fundamental problem underlying the financial crisis was government policy. Instead of undertaking enormous new policies, we should try to fix or eliminate bad policies and focus on efficiency rather than redistribution. Doing nothing new and simply working with pre-existing procedures would have been much better than anything we’ve done so far.
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