On saying one thing, and doing another...

Investor's Business Daily:

Fiscal Policy: The Senate's new $3 trillion budget for 2009 is big, but it fails to do something vital to the U.S. economy: extend President Bush's tax cuts. If this isn't fixed, we'll soon face the largest tax hike in our history.

The Senate's action on Wednesday to approve the spending plan came on a 48-45 vote over Republican objections. The House is also expected to pass the measure this week.

Democrats sounded almost giddy. The budget "will strengthen the economy and create jobs," said Senate Budget Committee Chairman Kent Conrad, a North Dakota Democrat. "It will provide tax cuts for the middle class, and it will restore fiscal responsibility by balancing the books by 2012 and maintaining balance in 2013."

Fine-sounding sentiments all. But parse those words for a moment. Virtually everything Conrad says is false, and in no small way.

Read it all.

Incidentally, budgeting like this is exactly what we will get, and worse under an Obama Administration.

Cap and spend

Forget for a moment the very real argument over whether or not a so-called cap and trade bill would help the environment. Focus instead on exactly what dirty politicians in Congress are doing with this massive transfer of wealth. They are enriching themselves, while screwing the economy. The Wall Street Journal nails it:

Sponsored by Joe Lieberman and John Warner, the bill would put a cap on carbon emissions that gets lowered every year. But to ease the pain and allow for economic adjustment, the bill would dole out "allowances" under the cap that would stand for the right to emit greenhouse gases. Senator Barbara Boxer has introduced a package of manager's amendments that mandates total carbon reductions of 66% by 2050, while earmarking the allowances.

When cap and trade has been used in the past, such as to reduce acid rain, the allowances were usually distributed for free. A major difference this time is that the allowances will be auctioned off to covered businesses, which means imposing an upfront tax before the trade half of cap and trade even begins. It also means a gigantic revenue windfall for Congress.

Ms. Boxer expects to scoop up auction revenues of some $3.32 trillion by 2050. Yes, that's trillion. Her friends in Congress are already salivating over this new pot of gold. The way Congress works, the most vicious floor fights won't be over whether this is a useful tax to create, but over who gets what portion of the spoils. In a conference call with reporters last Thursday, Massachusetts Senator John Kerry explained that he was disturbed by the effects of global warming on "crustaceans" and so would be pursuing changes to ensure that New England lobsters benefit from some of the loot.

Of course most of the money will go to human constituencies, especially those with the most political clout. In the Boxer plan, revenues are allocated down to the last dime over the next half-century. Thus $802 billion would go for "relief" for low-income taxpayers, to offset the higher cost of lighting homes or driving cars. Ms. Boxer will judge if you earn too much to qualify.

Read it all.

Viva la Regulacion?

Many of my musings over the last several months (again sorry for that brief hiatus) concerns attempts to legislate our way out of the Credit Crisis. Since I rarely attempt to match wits with someone that has an British accent, I defer to an article in this week's Economist, which succinctly argues the success of the current financial system and the danger of the alternatives.

Here are few of the highlights:

As this week's special report on international banking makes clear, the main structural causes of trouble—the collective misjudgment of risk; a zealous search for yield; and the failure of oversight—are deep-seated. In financial history they crop up time after time. Financiers are rightly rewarded for taking risks, which by their nature cannot be entirely managed away or anticipated. The tendency for success to breed complacency and recklessness is as ingrained in financial markets as it is in any other walk of life. However bankers are paid, they cannot just sit out a credit boom; they have to keep dancing. Regulators lack the knowledge, the clout (and often the talent) to keep up with the banks' next brilliant scheme.

That reads like an indictment, until you consider the alternatives. Western finance, to paraphrase Churchill, is the worst way to allocate capital, except for all those other forms. It is obviously better than the waste and dysfunction in China, where centrally planned capital is dished out to the well-connected. But it is also better than the financial system the West used to have. Thanks to the astonishing innovation of the past few decades, derivatives can help firms and investors to hedge risks (there are plenty of Chinese manufacturers who would be grateful for an easy way to soften the impact of exchange-rate shifts). Securitisation widens access to capital for borrowers and to assets for investors: it can finance everything from water utilities to film studios. Leverage brings more lazy companies within reach of determined investors and more homes within reach of poorer consumers.

It is true that financiers have enjoyed vast profits—and the vast salaries that go along with them (pay at American investment banks has been nearly ten times the national average). But the collapse of the credit bubble will bring that down. And despite all the disasters, there are signs of finance's resilience. In the past few months the banks have commanded enough confidence to raise $200 billion in new capital from investors. Bear Stearns and Northern Rock were calamities, but rare ones, because the vast overall losses were spread far and wide. This time, there has been no industry-wide government recapitalisation. After 20 years of growth, the flaws of modern finance are painfully clear. Do not forget its strengths.

The Newest Thing Congress Will Regulate

Today's WSJ, has an article that discusses a bond known as the PIK-toggle. The article explains that the PIK-toggle (payment-in-kind) is allowing companies that issued these bonds to turn off the cash interest payment and replace it with more debt.

This means that $100 of interest income you expected to get will come in the form of $100 of additional bonds. Or in personal terms, its like having a $1000 credit card bill but instead of paying that $100 bill you just send your envelope back to the card company with a note that says "I'm short on cash this month IOU sometime in the future." Private Equity firms inserted the PIK-toggle provision in lending agreements to preserve cash in times of credit crises such as the one we find ourselves in today. The use of the PIK speaks to the severity of the cash crisis since compounded interest will cost these firms more in the long run.

I'm sure that Barney Frank already has drafted a bill to outlaw the PIK as well as force PE firm CEO's to wear chicken suits as just compensation for being smarter than everyone else. In all seriousness though, I expect Congress to weigh-in based on its incessant need to legislate that which it does not understand.

No recession

Good news:

A funny thing happened to the economy on its way to recession: It's taken a detour.

That, at least, is the view of a growing number of economists -- including some who not long ago were saying a recession was all but inevitable. They note that stock and credit markets have steadily improved since the Federal Reserve intervened to keep Bear Stearns Cos. from bankruptcy in early March, while a series of economic reports have been stronger than expected.

Rebate checks coming soon

What will Americans spend their tax rebate checks on? NBC news investigates (click image to watch):



In the meantime, who could not have seen this coming. Retail outlets are already starting their "stimulus" sales. Here is a screen grab from the Restoration Hardware website:

Political hot potato: rising gas prices

Harry Reid is taking steps to further regulate the gas industry in the name of low gas prices:

Nevada Senator Harry Reid says it may be time for Congress to do something about soaring gas prices.

The Senate majority leader says he has directed key committee chairmen to begin assembling a package of proposals aimed at addressing the growing impact that high gasoline and other energy prices are having on the economy.

Reid declined to say what proposals are being considered. But he says the plan is to bring a package to the Senate floor before Memorial Day.

Whenever an issue gets hot, this is always the first instinct of the Democrats. Whatever package they produce, you can bet it will include major punitive actions towards energy producers while having zero positive effect on the long-term price of gas. It is always a show with these guys.

The reality of the situation is that it has been years of this kind of behavior that has produced the inflated prices we see now:

For decades, Congress has led our government into disastrous decisions by being the patsy of radical environmentalists, naysayers and prophets of doom. Recent presidents have done little to resist.

Now American consumers pay the price while politicians try to evade and shift the blame.

However, we can lower gas prices by reversing misguided federal policies, and lower food prices, too. It's all about what we learned (or should have) in Economics 101 – supply and demand.

The stifling of domestic oil and gas production and the suppression of new refineries and nuclear power plants have choked off the supplies of domestic energy, forcing us to rely on foreign oil. In the international market, we must bid against the growing energy appetites of China and India, and we're held hostage by the oil cartels of OPEC. The world market is unstable and expensive, and we shouldn't be at its mercy.

Reducing regulation is the last thing any Democrat is inclined to do. Reagan's old saying about a big government view of the economy is apt here; "If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

There is another side to this coin though. Republicans in Congress are dropping the ball too. Where are the Republicans who are willing to call the Dems out on their hypocrisy? How can Nancy Pelosi demand perpetual $2.00 a gallon gas prices while also demanding we break our addiction to foreign oil and promote "green" energy? The Dems are completely inconsistent on this point yet never are called on it. Republicans should begin to hit this point while also promoting clean nuclear energy (for heaven's sake, even the Greenpeace founder now agrees with us on this issue).

We should then promote a systematic deregulation of the gas industry to provide some relief from artificially government-inflated high prices. But that does not mean prices will go back to where they were 5 or 10 years ago. And what is so terrible about prices slowly rising as long as it is determined by the market?

As market prices rise incentives for developing alternative forms of energy rise as well. This moves us closer to breaking our addiction to foreign oil, which I believe is a national security imperative.

Republicans also should be aware that rising gas prices are the only hope of moving the issue of ANWR through the Congress. Democrats who continually refuse to allow us to tap our own resources here at home while prices rise are in peril of being exposed politically.

Will this ever end?

2008 should be known as the Year of the Bailout. The Wall Street Journal explains the latest:

Guess who's asking Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke for a bailout now? Hint: They are members of an exclusive club who bet wrong on the credit markets last fall. No, it's not a cabal of Wall Streeters, but Democrats in Congress.

We're referring to the "student loan crisis" now appearing in a media outlet near you. In September, Congress vowed to make education more affordable by passing the "College Cost Reduction and Access Act." The law reduced the interest rates borrowers pay on federally insured student loans. Backed by the Federal Family Education Loan Program, these loans account for more than 70% of education lending. Taxpayers will fork over $7 billion by 2012 to pay for the rate cuts.

WSJ: McCain-omics

The WSJ editorial board today on John McCain's economic platform:

John McCain gave his big economic speech in Pittsburgh Tuesday, and many of the policies he proposed are laudable – the highlight being an optional flat tax for individuals. The weakness – especially heading into a general election amid a struggling economy – is that his pudding still has no theme.

Being able to provide a guiding economic narrative is not just a matter of having a catchy soundbite, a la the "ownership society." It's essential for two reasons. First, it offers voters an explanation of how we got to the current moment, which means why the economy is struggling. The two Democrats already have their story: The 1990s were a golden age for the middle class that has been ruined by Republican tax cuts that rewarded only rich lenders and speculators. Mr. McCain needs a different policy narrative.

Second, a guiding philosophy shows voters that future decisions will be made according to a set of principles they can understand. Example: A month ago, Mr. McCain gave a speech saying it wasn't the government's obligation to rescue those who took out loans they couldn't afford. Then last week he, ahem, supplemented that view by supporting an FHA-guaranteed loan-restructuring program in what looked to be a bid to compete with Democrats in the housing bailout auction.

Without some guiding principles, voters are left to wonder whether Mr. McCain's next lurch will be to the populist left, where his instincts sometimes run, or to the fiscally conservative right, where he is also sometimes found.

Read the rest here. George Bush talked about an "ownership society" -- a good narrative sold by a less than stellar salesman. Ronald Reagan talked about the "opportunity society" that lay in wait for Americans. The Journal is right, McCain needs his own narrative.

The cost of freedom

Antiwar liberals in Washington have taken too a new line of attack of late. With the 5-year cost of the war in Iraq closing in on $1 trillion, they sense an opening. The war, they say, is the reason for a declining economy. The war is the reason we cannot have universal government-run health care. The war is the reason we cannot be responsible and reign in entitlement spending that threatens to bankrupt the nation in the near future.

Thankfully, Larry Kudlow blows this argument up in his column today:

First point: The U.S. has spent roughly $750 billion for the five-year war. Sure, that's a lot of money. But the total cost works out to 1 percent of the $63 trillion GDP over that time period. It's miniscule.

But here's the real question we ought to be asking: What is the cost of freedom? While the Left refuses to acknowledge it, the U.S. homeland has not been attacked since September 11. Right there is a big economic plus. Since President Bush went on the offensive and took the battle to Iraq, al Qaeda and other extremist terrorist groups have been utterly routed by U.S. forces. But in tying the jihadists down on their home turf, and keeping them from mounting another coordinated attack on the U.S., our economy has benefited incalculably.

Then again, the anti-war forces might want to recall John F. Kennedy's inaugural address, in which he called on Americans to "Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe, in order to ensure the survival and the success of liberty."

Do these folks actually think 1 percent of GDP is too large a price, too heavy a burden? I sure hope not.

Now, let's talk numbers:

And by the way, despite the current slowdown, the U.S. economy has performed remarkably well during the five years of the Iraq war. Real GDP has increased by 16 percent, or 3 percent annually. The unemployment rate has hovered below a historically low 5 percent for quite some time. Nearly 10 million jobs have been created. Household net worth has increased by $20 trillion. Industrial production has expanded by 13.5 percent. Even home prices, despite the current correction, have increased by 20 percent.

But this matters not to Washington liberals. They see a sticker price approaching $1 trillion and they immediately begin to think of a liberal wish list of policies that they could purchase for the same price. This is their real motivation for cutting funding for Iraq; to funnel it towards their big-government Utopian schemes.

Losing our pain threshold

George Will's latest column is worth reading. He exposes the misplaced hype behind the economic downturn. Compared to years past, we are not in a "crisis" by any measure. Perhaps the most powerful line in the piece is this one in reference to a report about a man who will have to wait until he is 62 to retire:

Deranged by the entitlement mentality fostered by a metastasizing welfare state, Americans now have such low pain thresholds that suffering is defined as a slight delay in beginning a subsidized retirement often lasting one-third of the retiree's adult lifetime.

I'm worried that if we cannot find it in ourselves to abstain from bailing out every person who faces hardship, we're not going to be able to meet the challenges ahead. Maybe one good outcome of the softening economy will be a greater pain threshold for everyone. We're going to need it.

McCain caves in

To date I have been impressed with John McCain. He has been consistently conservative on all the big issues, but yesterday he veered from the straight and narrow path. So much for straight talk, at least on this issue:

John McCain called for an aggressive federal government role aimed at stabilizing the housing market, rejecting a largely hands-off approach he outlined two weeks ago.

The likely Republican presidential nominee's prescription included a heavy dose of policy more typically associated with Democrats, as he sought to show voters he understands their economic pain. Most significantly, he urged the federal government to guarantee new mortgages for homeowners at risk of foreclosure.

The plan "offers every deserving American family or homeowner the opportunity to trade a burdensome mortgage for a manageable loan," he told New York-area small-business owners Thursday.

The plan's price tag is estimated at anywhere between $3 billion and $10 billion.

Ugh...$10 billion in government spending -- especially spending that encourages risky behavior -- is not what the doctor ordered to treat an ailing economy. McCain was right when he first talked about this issue. The economy is correcting itself. There must be some pain before the ship can be righted. Clearly, John McCain's political advisers got to him, and that, frankly, is lame.

Memo to McCain's political team: let McCain be McCain. His gut reaction was right. The nansy pamby politicos who are scared of their shadow are wrong.

Dems planning to hold war funding hostage for liberal spending

Congressional Democrats have been buzzing incessantly of late about a second "stimulus" package in the wake of Bush's package past last month. The Bush economic stimulus bill, which conservatives rightly criticized, has given Democrats license to spend like the drunken sailors they are. Despite the fact that the checks for the first stimulus have not even been printed, Americans are about to be saddled with more deficit spending.

This time though, it will be tied to funding for the Iraq war and it will be directed to liberal spending priorities rather than direct tax rebates. The NY Times reports on the high-stakes game of political chicken:

It is not easy to draw a straight line from the slumping economy to the war in Iraq and a trade deal with Colombia, but Democrats are trying to connect those dots.

Party strategists say that President Bush’s opposition to additional economic recovery proposals and his strong support of the trade pact provide an opportunity to portray Mr. Bush and his Republican allies, notably Senator John McCain, as being insensitive to the economic struggles of Americans while spending billions each month on Iraq.

“There is an economic argument to be made,” said Senator Amy Klobuchar, Democrat of Minnesota. “This administration has not done what it should for the middle class.”

Senator Harry Reid of Nevada, the majority leader, said Tuesday that he was preparing to link the war spending directly to the economy at home by using a pending bill to finance combat in Iraq as a proxy for a second stimulus measure. He plans to try to attach to the Iraq money Democratic favorites like an extension of unemployment benefits, a summer jobs program and perhaps local building projects.

“That will be war,” promised Senator Richard M. Burr, Republican of North Carolina.

As it should be.

The Senate bail out party

Senators this week will debate and pass a so-called housing measure that they claim stabilizes housing prices and provides economic stimulus. It will likely do neither, but then again, what does that matter? The real impetus for this legislation is CYA, which politicians in Washington have become extraordinarily good at. The Wall Street Journal this morning has a must read editorial on the subject:

Majority Leader Harry Reid's bipartisan "housing stimulus package" hits the Senate floor on Tuesday afternoon, and what it proves is that, whatever their other differences, both parties can agree to throw good money after bad. The bill is a $15 billion list of subsidies that won't do much for housing markets but will please the homebuilders, local politicians and other influential lobbies.

Among the largest items is $4 billion for notorious Community Development Block Grants. The money is intended to purchase and redevelop foreclosed properties. It's hard to think of a less promising vehicle than the CDBG program, which is managed after a fashion by the Department of Housing and Urban Development. A February 2008 report from the White House budget office calls the program "ineffective," which is putting it mildly. On a 100-point scale of achieving results, CDBG scored a 27. In 2005 and 2006, the Government Accountability Office recommended more oversight and better methods of targeting grant recipients.

In addition to being a proven-failure of a program, this funding for CDBG will take housing out of private hands and put it in the government's hands. According to the legislation, the local governments are not obligated to do anything with their new-found property. It could be sold, turned into low-rent housing, redeveloped or whatever they want. Since when should the government be in the business of flipping houses?

It could work but probably won't

This morning our diligent friends at the Treasury Department released a 200+ page document entitled A Blueprint for a Modern Regulatory Structure. Before I begin I will preface my remarks with the fact that since I'm not being paid to review the fine print of monetary and regulatory policy I didn't read all 200 pages. From what I can tell though this proposal seems to make sense.

Treasury is proposing that overlapping regulatory bodies be combined to eliminate complicated questions of jurisdiction and improve the efficiency of the current framework. In addition Treasury recognizes that these steps should be taken in the intermediate to long-term in order to eliminate knee-jerk reactions (See Barney Frank, Hillary Clinton, or Barak Obama's websites for said reactions) that could extend the current financial market crisis.

The generality of this statement does leave me with concern though:

The structure will consist of a market stability regulator, a prudential regulator and a business conduct regulator with a focus on consumer protection.

If these three consolidated bodies expand the regulatory framework this proposal is a means by which to entrench new larger bureaucracies. This will likely be the case when the new charters are put through a Congress controlled by a pro-regulation party.

On the surface the proposal seems to be a free market idea. That is that the current patch worked regulatory environment was the cause of the current crisis. If the Federal framework kept pace with the new efficiencies of the market the associated risks would not have been introduced into the system.

The bottom line is the current proposal seems well intentioned, the unfortunate reality is that this proposal will morph into a new animal by the time it snakes its way through the halls of the Capitol.

And for those fans of Federalism, the proposal would expand Federal Government power to regulate the insurance industry by way an "optional federal charter". Currently that power resides with the States. As with all legislation, what starts off optional can quickly become required.

Barney Frank meet your new best friend Hank Paulson

The Wall Street Journal is reporting that Hank "Bailout King" Paulson delivered a speech today to the Chamber of Commerce urging new regulation of Wall Street. First of all, Hank apparently never took a public speaking course that emphasized the know your audience credo. Why do you deliver a pro-regulation speech to the US Chamber of Commerce? Was he trying to see how few rounds of applause he could get? But then again why would you orchestrate the most massive government intervention in the financial markets in our history?

The only hope we have at this point is that this speech is a way to preempt congress from instituting burdensome new regulation. I get the funny feeling that this is not the case. Paulson is the former CEO of Goldman Sachs and I've been a supporter of his until the three months or so. This speech just reinforces my idea that its time for Paulson to step down and return to his roots. He's obviously been drinking too much water from the Potomac and has forgotten what it takes to remain the most competitive and innovative financial market in the world.

It is absolutely imperative that we maintain this competitive advantage. Our financial expertise is a major factor contributing to our economic might and makes up the vast majority of US GDP. Per the State Department's website:

Services produced by private industry accounted for 67.8 percent of U.S. gross domestic product in 2006, with real estate and financial services such as banking, insurance, and investment on top.

Regulation is not the means by which to maintain the advantage.

McCain's economic plan

Jack Kemp promotes the McCain economic plan:



Key quote from Kemp: "[McCain] said that creating a better investment climate, cutting the corporate income tax rate, repealing the amt, making permanent by 15% dividend and capital-gains tax will encourage a stronger demand for the united states dollar here and around the world. that's something that separates him from the bush white house and certainly separates him from the democratic party."

That menu right there is a smart menu of tax cuts. They are not sweeping across the board cuts, but rather targeted, pro-growth cuts that will yield results. I like the menu because it is designed with one thing in mind: to keep America's economy humming along as a global leader. We need them now more than ever as we are falling behind many of our global competitors.

What does this signify?

Perhaps Free Trader will see fit to analyze this data today. Sales of existing homes rose by 2.9% in February. Indulge me while I ask the first question. What are we to make of this?

Government is getting dumber

I have referenced David Frum's work here before. Needless to say, I am a fan. In this interview with Marketplace, Frum reminds us that politicians today -- on both sides of the aisle -- are guilty of turning back the clock on lessons we have already learned.

The whole notion of a fiscal stimulus bill in Washington these days necessarily ignores past lessons learned in the market. As Frum points out, "Fiscal stimulus almost always arrives too late, after the recovery has already begun. Worse, the usual result is a net economic nothing. The government borrows to give to consumers, who in turn use the money to reduce borrowing. Demand remains constant."

But our politicians today are not as concerned with good policy based on past learning as they are with good politics based on poll numbers in their home states.

More Frum:

A third lesson, big banks are stuck with hundreds of billions in bad real estate loans. That's also happened before, in the 1980s savings and loan crisis. Back then, everybody had to learn that the best way to unravel bad credit was fast. Yet once again we're hearing prominent politicians urging rate freezes and foreclosure moratoriums, postponing the inevitable at great cost.

We like to think that we get smarter as we get older, and that society makes intellectual progress from year to year -- not on present evidence. It would be bad enough if we did not know better. It's worse. We have unlearned what we do know.

Amen to that. Hat Tip: Kendall Harmon.

"Slow down our economy"

We here in the Cloakroom commend Bill Clinton for his candor.

Now, if Mrs. Obama is inclined to advocate for emboldening our enemies by withdrawing from Iraq, we would gladly provide a forum for her comments.