Category Archives: Credit Crisis

Barney Frank On Ron Paul’s Federal Reserve Transparancy Act

As Stephen noted last night, Ron Paul has introduced a bill that would require the Federal Reserve to open it’s books to Congress. According to Thomas, that bill now has 79 co-sponsors.

I agree with Stephen that this is an issue that all libertarians, all Americans indeed, need to pay more attention to and, in that spirit, here’s a very interesting clip of House Banking Chairman Barney Frank answering a question about Paul’s bill:

At the very least, Frank’s comments would seem to indicate that the bill will get a fair hearing by the committee, which is more than can be said about previous legislative efforts to crack open the doors of the Fed.

There are no hearing dates set right now, but that doesn’t mean that it isn’t time to contact your Representative and tell them they need to get on board, especially if they’re on the Banking Committee.

It’s time for libertarians to start taking Federal Reserve issues seriously

For years, a lot of libertarians and paleoconservatives have focused a lot of attention on the Federal Reserve.  Some have gone overboard, blaming the Fed on virtually every lost freedom in America.  Others have focused too hard at the wrong time; I remember one person speaking at a gun show looking pretty foolish because he was talking about Fed issues while everyone in the audience was concerned about the upcoming passage of Clinton’s Assault Weapons Ban.

On the other side of the coin, our recent economic situation has raised a lot of issues about the role of the Federal Reserve, what alternatives there are to it, and how the system really works in practice.  Ron Paul supporters are particularly well-versed on these issues and the general public is becoming more interested in them, as well.

On February 26, Ron Paul introduced legislation to audit  “the Board of Governors of the Federal Reserve System and the Federal reserve banks” before the end of 2010.  While bills introduced by Paul are often disregarded by the rest of Congress, this one is starting to show some legs. According to Paul’s website, the bill now has 71 co-sponsors.

I’ve taken a lot of heat over the years for trying to protect the movement from being disregarded by mainstream Americans because of our internal kook factors.  When Ron Paul can obtain 71 sponsors for a bill, it’s time for hesitant libertarians to jump on board the Federal Reserve bandwagon.  You might start by contacting your Representative today.

UPDATE: Just received the following on Twitter:

If you don’t think the Federal Reserve issue is too arcane, then I’m up for it! Heard it for a while-can’t pretend I understand it. Freedom!

Bad News From Fannie/Freddie: Especially Freddie

As a renter in Southern California, I’m torn between the happenings in the housing market. I see some of the lower-end properties get listed low leading to bidding wars, and see the DJIA appearing to keep strength on the banks’ earning claims, but at the same time I don’t feel the trouble has worked its way through the system yet, and prices are going to continue falling.

We’re watching the dominoes fall. With each new domino, our market prognosticators aren’t really yet asking when the dominoes will be set back up again, they’re just hoping against hope that another won’t fall. Well, with the recent record high in foreclosures for Q1, and now an apparent problem with prime defaults at Fannie & Freddie, we might be watching another one drop.

Increasing Defaults, image c/o The Big Picture blog

Increasing Defaults, image c/o The Big Picture blog

How bad is it? Well, the CFO of Freddie Mac was discovered this morning, dead by apparent suicide:

The acting chief financial officer of mortgage finance giant Freddie Mac, David Kellermann, was found dead Wednesday morning, police said.

The death “may have been an apparent suicide,” said Lucy Caldwell, a spokeswoman for police in Fairfax County, Va.

Authorities said there were no signs of foul play when officers were called to Kellermann’s home in Vienna shortly before 5 a.m. ET, Caldwell said. A source familiar with the investigation said Kellerman apparently hanged himself.

In all seriousness, we wish the Kellermann family our condolences at this time. While we at TLP have [rightly] savaged Fannie & Freddie’s business practices, it was professional, not personal. Even to the extent that Freddie’s woes were even partially caused by any specific employees, it’s simply should not come to a tragedy like this.

So how do I think the economy is doing right now? It isn’t over, folks. The bottom is still in the future.

A Tea-Party Postscript

According to Nate Silver’s estimate, something approaching a quarter million people took part in the tea party protests that took place around the country yesterday. That seems like a large number, and maybe even the start of something big, right ?

Ross Douthat thinks not, and doubts that they’ll have any more impact on the growth of the state than the protests against the Iraq War did in stopping that conflict:

They resemble nothing so much as the anti-war protests during Bush’s first term.


But they do have all of the weaknesses of the anti-war marches: Their message is intertwined with a sense of disenfranchisement and all kinds of inchoate cultural resentments, they’ve brought various wacky extremists out of the woodwork (you know, like Glenn Beck), and just as George W. Bush benefited from having opposition to his policies identified with peacenik marchers in Berkeley and Ann Arbor, so Barack Obama probably benefits from having the opposition (such as it is) associated with a bunch of Fox News fans marching through the streets on Tax Day, parroting talk radio tropes and shouting about socialism.


Still, here we are in the sixth year of the Iraq War, and all those anti-war protests, their excesses and stupidities notwithstanding, look a lot more prescient in hindsight than they did (to me, at least) when they were going on. So if you’re inclined to sneer and giggle at the Tea Parties, keep in mind that just because a group of protesters looks ragged, resentful, and naive, that doesn’t necessarily mean they’re wrong to be alarmed:

Alarmed, yes, just as the anti-war protesters were alarmed at the idea of their country engaging in pre-emptive war based on dubious intelligence that latter proved to be entirely wrong, and fought a war without any idea of how to end it or what would follow in the wake of Saddam Hussein’s removal from power.

In hindsight, it seems clear that the anti-war protesters were more right than wrong but, despite their vocal opposition, we’ve lost thousands of troops and hundred of billions of dollars and have very little to show for it.

Along the same lines as Douthat, and echoing a question I raised yesterday, Alex Knapp believes that the movement’s biggest mistake is not figuring out what it’s for:

[I]ncreasing government spending is alarming. There’s no question about that. The higher deficits being predicted under an Obama Administration should be a cause for concern. But you can’t argue against higher deficits and for cutting taxes at the same time. Real life doesn’t work that way. You can’t simply wish federal revenue into being.

By the same token, you can’t just go around saying we need to “cut spending.” That’s just mindless handwaving. Let’s put this simply. 80% of the budget falls into five categories: Social Security, Medicare/Medicaid, Defense, Veteran’s Benefits, and Interest on the Debt. EIGHTY PERCENT. So if you don’t tell me what you’re going to be able to feasibly cut in those categories, you are not approaching the problem seriously.

Knapp is, of course, entirely correct.

The problems that we face are far bigger, and far more serious, than the relatively paltry sums that most people point to when they talk about government waste (earmarks, for example, account for less than 1 percent of the total Federal Budget). We aren’t going to solve are problems by nibbling at the margins, it’s going to take real sacrifice, it’s going to cause real pain, and it’s something we need to be talking about now.

Standing around calling Obama a socialist, or wearing a t-shirt that says “Who is John Galt ?” accomplishes nothing.

Andrew Sullivan, astroturfing Republicans and GOP hypocrisy

Andrew Sullivan gets it right, and wrong, at the very same time.  He scribed:

The remarkable thing about today’s partisan Republicans is their capacity to forget instantly and entirely anything that went on for the past eight years. And so suddenly we are rushing toward socialism, even though by far the biggest jumps in state power and debt occurred under a president they worshiped and worked hard to re-elect. There were no tea-parties to protest the $32 trillion Medicare prescription drug benefit. There was no Randian rumbling as Bush took over local schools. There was no defense of the Constitution as Bush and Cheney secretly suspended the fourth and first amendments. But put a moderate Democrat in office tackling a historic collapse in demand – and spending must be frozen! Reading the partisan right blogs, this ability to disappear the past is striking, and it helps explain base GOP loathing of Obama (even if the base is much smaller than it was).

Sullivan has noted what many of us have been complaining about since the Tea Party craze started. At this site (even as late as last night), and many others, we’ve been screaming about hypocritical, astroturfing, big-government Republicans.  So much so that it may be time to coin a new term: RINOturfing.

However, some of us have always been vocally and actively opposed to the very issues Sullivan raises. Ron Paul supporters, Libertarians, libertarians, paleoconservatives and even some (primarily) fiscal conservatives have been hitting the streets as well as the blogs for years.  That we are frequently ignored by publications like The Atlantic (Sullivan did cover Ron Paul fairly well) may have something to do with Sullivan’s apparent forgetfulness on the issue.

Essentially, Sullivan is disregarding publications like Reason and American Spectator, organizations like Cato (and Heritage on some days), candidates like Ron Paul and Bob Barr, personalities like John Stossel and Andrew Napolitano, parties like the Libertarian Party, elected officials like Ron Paul and Jeff Flake, conservative icons like Bruce Fein and Richard Viguerie, pretty much any self-described libertarian, ad infinitum.

A good definition of partisan is “a fervent, sometimes militant supporter or proponent of a party, cause, faction, person, or idea.”  It’s my opinion that all of the individuals and groups listed above indeed qualify.

There was plenty of  “Randian rumbling” and “defense of the Constitution” during the Bush years.  Perhaps Sullivan chose to ignore most of it.

In March, I wrote:

To be clear, I think it is cool that it appears that libertarians have some newfound friends on the small-government team.  However, it’s fair to color us a bit skeptical, as we are still licking our Republican-inflicted wounds.  It may take a bit of time for us to recover from the political PTSD we are suffering after fighting Republicans for the last eight years over government spending issues.

I still stand by these words.  It’s possible that April 15th may be the day that begins the healing process.  It could also be the day that the more cynical of us are proven correct.

UPDATE: I’d like to welcome our The Other McCain and The League of Ordinary Gentlemen readers.  I’d like to send a special medical marijuana smoking and lesbian loving shoutout to Moe Lane and our good friends at RedState.  I’m sort of curious about why the folks at RedState don’t approve of two women getting married to each other.  This sort of stuff is fantasy material for most red-blooded males that I know.

Obama’s April Fool’s Joke

This just landed in my inbox:

Friend —

In just 24 hours, Congress will begin voting on President Obama’s budget. It’s a big test not only for President Obama, but for our entire movement. Taking just a few minutes to call Congress now could make a major impact on this crucial vote.

Will you call your elected representatives to let them know you support a budget that tackles the long-term challenges to our prosperity?

Use our simple tool to look up your elected representatives and tell them where you stand right away.

With this vote, we have a historic opportunity to create jobs, restore our economy, and invest in energy, health care, and education for our future.

Don’t let this important moment slip away. Pick up the phone for President Obama today:

Thank you,


Mitch Stewart
Organizing for America

I’d recommend calling your congressman to demand that he/she oppose Obama’s budget, one which further erodes our chance of prosperity.

Russia Considering Return to Gold Standard

Here’s some irony for you. Perhaps Obama, Reid and Pelosi might consider following Russia’s lead:

Arkady Dvorkevich, the Kremlin’s chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.[…]

[…]Mr Dvorkevich said it was “logical” that the new currency should include the rouble and the yuan, adding that “we could also think about more effective use of gold in this system”.

The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities.

It was revived as part of fixed dollar system until US inflation caused by the Vietnam War and “Great Society” social spending forced President Richard Nixon to close the gold window in 1971.

The world’s fiat paper currencies have lacked any external anchor ever since. It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible – or less likely – under the discipline of gold.

Of course, this would make bailouts and excessive federal spending less palatable politically, so it ain’t gonna happen here until it’s forced on our governmental leadership.

White House Blackmails General Motors’ CEO To Resign

In what can only be described as yet another one of those “crossing the Rubicon” moments that we’ve seen so many of since this economic crisis began, the CEO of General Motors has resigned in response to political pressure from the President of the United States:

The Obama administration asked Rick Wagoner, the chairman and CEO of General Motors, to step down and he agreed, a White House official said.

On Monday, President Barack Obama is to unveil his plans for the auto industry, including a response to a request for additional funds by GM and Chrysler. The plan is based on recommendations from the Presidential Task Force on the Auto Industry, headed by the Treasury Department.

The White House confirmed Wagoner was leaving at the government’s behest after The Associated Press reported his immediate departure, without giving a reason.

General Motors issued a vague statement Sunday night that did not officially confirm Wagoner’s departure.

“We are anticipating an announcement soon from the Administration regarding the restructuring of the U.S. auto industry. We continue to work closely with members of the Task Force and it would not be appropriate for us to speculate on the content of any announcement,” the company said.

The surprise announcement about the classically iconic American corporation is perhaps the most vivid sign yet of the tectonic change in the relationship between business and government in this era of subsidies and bailouts.

The strong implication, of course, is that Wagoner’s departure was at least part of the price that General Motors must pay for additional taxpayer largesse.

Of course, as with much else of what the Obama Administration is doing, the precedent for this move was set by his Republican predecessor:

Obama’s move against Wagoner hearkens back to September 2008 when President Bush’s Treasury Secretary, Hank Paulson, insisted that AIG CEO Robert Willumstad step down as part of an $85 billion bailout of the insurance giant. Paulson installed in his place Edward Liddy, a former Allstate executive.

Much of this, of course, can be chalked up to the idea that if you talk the government’s money, you pay the price for that by agreeing to listen to it’s dictates. And, as I’ve said elsewhere many times, many American businessmen are far from being the champions of free market capitalism that their opponents on the left would like to think they are.  To use the Atlas Shrugged example, they are more James Taggart than Dagny Taggart; and that fact is no better demonstrated than by the spectacle that Wagoner and his fellow auto executives made of themselves in December when they went to Congress begging to be bailed out.

Moreover, it’s absolutely true that Wagoner, and most of the other people in charge of General Motors have done a pretty good job at only one thing; ruining the company. By all rights, they should have been ousted long ago, and if the company were forced into the Chapter 11 Bankruptcy that it deserves, they’d be out as soon as the ink of the Judge’s First Day Orders was dry.

Nonetheless, there’s something shockingly wrong about this. The President of the United States has fired the Chief Executive Officer of an American corporation whose shares are held by millions of people. If the American people don’t realize that there is something horribly wrong about the precedent that this sets, then we are truly screwed.

Quote Of The Day

So we’re supposed to trust the people who didn’t see it coming to make sure they stop their intervention before they’ve over-intervened?

Fed Pres Lockhart in a speech a few hours ago in Paris is summing up well what is the growing angst in the markets that the Fed is sowing the seeds for big inflation with their aggressive steps by saying, “there’s reasonable concern related to the growth of the balance sheet of the central bank in response to the economic difficulties we’re having, that this could over the long term fuel inflation if the monetary aggregates are not managed well and if the Fed doesn’t react at the right time to remove some of the stimulus.” We are thus relying on a Fed that thought subprime was contained at a loss of maybe $150b in 2007 to somehow reverse their massively aggressive initiatives at the exact right time.

Is Dollar Hegemony About To End?

Just over two years ago, I offered a worst-case prediction of where this economic crisis could lead.

Wait, though, it gets worse. America isn’t an empire in the conventional sense of the word, but we are an economic empire. The dollar is the currency of the world, from middle eastern oil to the reserve currencies of countless nations. During the Great Depression, or during the stagflation of the 1970’s, other nations were stuck with the dollar, because nothing else was suitable. But if the dollar starts dropping in a major inflation, they now have options. And if they drop the dollar, it’s all over. All of a sudden, America won’t draw on the world for our own stability. Considering the actions of our politicians, that’s a bad, bad thing.

We may be witnessing the end of America as the world’s superpower. It may be the end of our status as the economic empire of the world. Some across the globe, of course, will cheer. After all, they feel like America is the premier force of evil in the world. For all the bad that we’ve done, though, we’ve been a pretty stable force, and worked to prevent the spread of fascism and communism, across the globe. America’s economic system has been the safe-haven for the world. When a position of power is vacated, what typically fills it is rarely positive. The end of the American empire will likely result in more instability worldwide.

There are two reasons that I’m very, very concerned about this.

First, American dollar hegemony has actually been, for all the stupidity we’ve encountered upon over the last few decades, a pretty stabilizing force. To bastardize an old quote, America’s economic system is the worst, except for all the others. There’s no reasonable guarantee that anything that follows dollar hegemony will actually increase stability. Rather I think it will be worse.

Second, I don’t want to pay for our government. While we’ve been pretty well looting the other nations of the world, printing money and sending it to them in exchange for durable goods, only to have them lend it back to our own government to pay for programs we’re unwilling to tax ourselves for. Essentially we’ve been taxing other nations to pay for our own government, with the unspoken understanding that we’d probably slowly print our way out of debt rather than actually pay our debt. I can understand why they don’t want to continue that, especially since we’re dramatically increasing the size of the government that we’ll be expecting them to pay for.

But that doesn’t mean it won’t happen.

Russia, as reported by QandO, made noises last week about putting an end to the dollar as the reserve currency of the world:

The Kremlin published its priorities Monday for an upcoming meeting of the G20, calling for the creation of a supranational reserve currency to be issued by international institutions as part of a reform of the global financial system.

The International Monetary Fund should investigate the possible creation of a new reserve currency, widening the list of reserve currencies or using its already existing Special Drawing Rights, or SDRs, as a “superreserve currency accepted by the whole of the international community,” the Kremlin said in a statement issued on its web site.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

Now, QandO again (along with Doug @ BTB) reports that one of our far bigger creditors, China, is making the same suggestion:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC

I’d like to believe that this is merely a warning to the Obama administration that destroying our currency won’t be accepted by the international community. It would be a very clear warning that if we proceed down this path, those who are currently tied into our dollar will try to quickly cut our losses and leave us out to dry.

But I really don’t think the Obama administration, the Bernanke Fed, and the Geithner Treasury will heed those warnings. You want a reason to fear Great Depression II? This is it.

In fact, it may already be starting. China is worried about the $1 Trillion they’ve already lent us, but the real key to ending dollar hegemony is to stop lending us more. If other countries stop buying US Treasury Bonds, we must find a way to fund our own deficits internally… And there’s some evidence that’s already happening:

Thanks to Brad Setser for the graph

Thanks to Brad Setser for the graph

Yep, foreigners are getting close to their limit. Will it hold? I don’t know, but in the meantime, the Fed is starting the printing press to make up the shortfall (h/t Calculated Risk):

The first outright Treasury coupon purchase will be conducted on Wednesday, March 25, 2009, and will settle Thursday, March 26, 2009. Results will be posted on the New York Fed’s website following the operation.

Starting on Wednesday, April 1, 2009, and continuing every two weeks, the New York Fed will issue a tentative operation schedule for its purchases of longer-dated Treasury securities, including the maturity sector or sectors to be targeted.

The signs are pointing to a major change in world structure.

  • The world is slowing down their purchases of American debt, fearing it won’t be repaid.
  • The world is threatening to liquidate the US Dollar as the de facto reserve currency, because they fear an impending devaluation.
  • The Obama administration, the Fed, and the Treasury appear to be willing to spend historic sums in the face of these developments in the hopes the world is bluffing.

I don’t want to be a doomsayer, but the outlook sure as hell ain’t rosy. America has been gorging at the buffet for the last 40 years, ever since the collapse of Bretton Woods system. The bill is about to come due, and we’re sure to be surprised when we realize it’s pay-per-item, and not all-you-can-eat.

Open Thread: Stock Market Edition

Two weeks ago, the Dow hit a major low at 6440, closing slightly higher. This made a lot of sense to me, given the fundamentals of the economy. In fact, I nearly posted a rather snide article on CNBC “calling the bottom” that morning.

But then things changed. The Dow has been on a tear ever since, culminating yesterday in a 500-point rise. This is a 20% rise since its lows of merely two weeks ago. And I just don’t understand why.

I see three potential explanations:

  • We’ve hit the bottom of the recession, and the 6440 low was an undershoot on the downswing, which was bound to be quickly reversed.
  • This is a sucker’s rally, and the Dow will soon drop again.
  • We haven’t hit the end of the recession, but the inflationary policies of our government are going to cause a rise in equity and asset prices.

I don’t believe the first. I can be wrong on that, but I think there are structural monetary and economic issues that are still bound to unwind. The government is trying to reinflate the bubble, but I think there’s too much leverage working against them.

I can easily believe the second. I think there’s quite a lot of downside risk, and after such a phenomenal drop, I actually believe there’s plenty of suckers who thought we’d hit bottom.

What really worries me is the third option. If the inflation is starting, this has significant impact on my personal situation. As a renter, I want to purchase real estate before the inflation really hits, locking in a nice low fixed interest rate on a home that’s going to rise in value with the devaluation of the dollar. If the interest rates spike before I can buy, I may be locked out of ownership in any of the neighborhoods I’d actually want to live in.

So what does everyone think? Where will we be in a month, in 6 months, and in 18 months? Is this a sucker’s rally, is this the start of the great inflation, or is this simply the bottom of the recession and things are looking up?

Another Step Down The Road To Serfdom

Today’s New York Times brings news that the Obama Administration is set to unveil a series of unprecedented regulations:

WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.


The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.

The transparency of this move is really quite obvious. This has nothing to do with stimulating the economy, and even less to do with the root causes of the financial crisis. Instead, what we’re looking at here is naked redistributionism timed to tap into the populist rage that has erupted over the phony scandal surrounding the AIG bonuses. It’s an “us vs. them” game that Obama thinks he can win, and he may well be right.

Make no mistake what this is really all about, though:

You are not free to make as much money as you want. You are not free to succeed because government will tax you at the point of a gun to make sure you aren’t making more money than they approve of.

Welcome to Obama’s America.

Any resemblance to previous Americas is purely coincidental.

Quote Of The Day

I was talking to a coworker this morning about the stock market and the Fed’s injection of $1.2T newly-printed money into the economy. I made a point that I think bears repeating:

The stock market can lose value, while going up.

This is the insidious nature of inflation. They’ll inject this money and nominal prices will move up (houses, DJIA, S&P500, etc) — at which point they’ll claim that they’re fixing the economy.

Just like Germany did in the early 1920’s.

The Dastardly Bonuses: AIG, Fannie, and Freddie

Those eeevvviiilll capitalists at AIG have been taking quite a beating. Now it’s time to spread the “wealth”:

Fannie Mae plans to pay retention bonuses of at least $1 million to four key executives as part of a plan to keep hundreds of employees from leaving the government-controlled company.

Rival mortgage finance company Freddie Mac is planning similar awards, but has not yet reported on which executives will benefit.

The two companies, which together own or back more than half of the home mortgages in the country, have been hobbled by skyrocketing loan defaults. Fannie recently requested $15 billion in federal aid, while Freddie has sought a total of almost $45 billion.

Fannie Mae disclosed its “broad-based” retention program in a recent regulatory filing with the Securities and Exchange Commission. The company was only required to disclose the amounts for the top-paid executives, who will pocket at least $470,000 on top of their base salaries.

The bonuses are more than double last year’s, which ranged from $200,000 to $260,000. Another round of bonuses ranging from $330,000 to $429,000 are planned for next February.


What’s the over/under on how soon Barney Frank calls for the heads of the top folks at Fannie and Freddie?

Hat Tip: Cafe Hayek

Who is John Galt?

This question is asked repeatedly in Ayn Rand’s Atlas Shrugged until Galt himself introduces himself to a world in crisis. In light of this new phenomenon of “Going Galt” being encouraged by Michelle Malkin, Rush Limbaugh, Glenn Beck, and many others (particularly on the Right), this question deserves a serious answer. How else would it be possible for individuals to “Go Galt” without answering the question: Who is John Galt?

I would begin answering the question by explain who Galt is not. John Galt is not someone who merely caps the limits on his productivity to avoid being pushed into a higher tax bracket. What Galt does in Atlas Shrugged is much more radical: going on strike by refusing to produce anything for the benefit of society. Galt seeks out other high achievers and convinces them to do the same and help him build a society of their own.

Are these folks who claim to be “Going Galt” prepared to do this? Would Michelle Malkin et. al even be considered by Galt to be invited into his society?


To be invited to Galt’s Gulch one has to demonstrate that s/he has rejected the false virtues of altruism, collectivism, and mysticism (religion) and embrace his virtues of selfishness, reason, objective reality, and capitalism. While Malkin and Co. pay lip service to capitalism (especially when their people are not in control of the levers of power), their remaining values run counter to that of Galt’s. Is it not these very people who wish to erect religious monuments on government property, demand that Intelligent Design (Creationism) be taught alongside evolution in government schools, encourage individual sacrifice for the “greater good,” and wish to ratchet up the War on (Some) Drugs despite the evidence that the policy is completely counterproductive?

Now that I have pointed out what John Galt is not, perhaps I should allow the man to speak for himself in this modern dramatization* from the novel:

How many of those who say they are “Going Galt” prepared to embrace this philosophy by taking the following pledge:

“I swear, by my life and my love of it, that I will never live for the sake of another man, nor ask another man to live for mine.”

While I am pleased that the Galt trend is bringing some much needed attention to Atlas Shrugged, it’s my hope that more individuals will actually read the book and learn exactly what Going Galt is all about. That way when someone says “I am John Galt,” those who have been educated can respond by saying: “I know John Galt and you sir are no John Galt!”

UPDATE: XCowboy2 has released a newer version called “This is John Galt Speaking 2.0.” Enjoy!

» Read more

Spot The Flaw In Ezra Klein & Kevin Drum’s Reasoning

Here we go — unfortunately I have to quote this nearly in its entirety, or the error will not be quickly apparent.

Noam Scheiber says “our political system isn’t ideally suited to dealing with financial and economic crises.” Ezra Klein begs to differ:

Indeed, I think our political system is actually fairly well-designed for short-term crises. The problem is long-term crises like global warming or health costs. As Peter Orszag wrote back on his CBO blog, “our political system doesn’t deal well with gradual, long-term problems” that require “trading off up-front costs in exchange for long-term benefits.” Few Congressmen want to raise taxes tomorrow to reduce carbon a decade from now. Lots of Congressmen don’t want the economy to collapse if they have to run for reelection next year. For that reason, I’m much more confident in the system’s ability to react agilely and seriously to the economic crisis than global warming. The economic crisis, after all, threatens their reelection. Incumbents often don’t survive depressions. Conversely, I think conventional wisdom is that it’s fixing global warming, rather than global warming itself, that poses the largest political threat to incumbent legislators.

I think that’s right. In fact, I’d go further: not only can we respond fairly well to short-term crises, we actually have responded fairly well to the current economic meltdown. There have been plenty of miscues and half measures along the way, but in the space of 18 months the Fed has created an alphabet soup of term lending facilities; Fannie Mae, Freddie Mac, and AIG have been nationalized; interest rates have been reduced to near zero; TARP was passed and hundreds of billions of dollars pumped into the banking system; the Fed has launched plans to rescue the commercial paper market, the money market, and the consumer loan market; FDIC insurance has been raised to $250,000; Detroit has been bailed out; and an $800 billion stimulus measure has been passed. Some of these actions might have been late or misguided — it could hardly be otherwise considering the depth and freakishness of the financial implosion — but all things considered, the willingness of our political system to deal with this crisis hasn’t been all that bad. If we could muster half this much energy, mistakes and all, on behalf of global warming I’d be ecstatic.

A hole like this is big enough to drive a truck through.

Consider the premise that both of them seem to take for granted — Klein explicitly and Drum implicitly. Legislators, due to electoral incentives, are unwilling to take politically risky positions even if they’re in our long-term best interest. They fail to do so, even if it means letting festering problems* go unsolved, because the benefits are far off in the future but the cost and political risks are immediate.

So what’s the converse of this belief? Legislators will take short-term positions that are politically rewarding today even if it means that they will be creating or exacerbating problems for people down the road. That’s the flaw. You can’t accept the former paragraph without accepting this statement. Legislators and public officials are notoriously short-term thinkers. They’ve shown time and time again that they’re willing to spend today what need not be repaid until the next election cycle.

Drum quotes approving about the new alphabet soup of bailout and stimulus packages, and throwing billions after billions at shoring up AIG, Fannie and Freddie. In fact, his only criticism is that some of it might have occurred later than he would have liked. What’s noticeably missing from the analysis are questions of moral hazard and long-term debt. He seems to accept the rationale that it’s more important to start acting boldly and immediately, and only question whether we’re acting intelligently as a secondary matter. This is the exact sort of political incentive that our legislators and public officials are responding to. Spend today, and deal with it tomorrow.

When they suggest that our legislators ignore long-term problems for short-term politics, I completely agree. In fact, for that reason I suggest that their short-term actions are suspect as well, because they make those short-term decisions with a blind eye to long-term consequences.

Is government good at dealing with short-term or long-term crises? No. As with anything else, government is going to take the easiest and least painful way out, even if it’s not the best way.
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Alan Greenspan Says — Not My Fault

Alan Greenspan is one of the most highly respected financial minds in the world. He was Chairman of the Federal Reserve under four consecutive Presidents, and was laughed at when he uttered the words “irrational exuberance” foretelling the eventual collapse of the dot-com bubble.

But even if he was expected to be so by the Presidents he served, he’s not superman. He missed a call, and explained to Congress in Oct 2008 “that we’re not smart enough as people. We just cannot see events that far in advance.”

He’s right, and while I would have suggested some humility about his power while he was in office, I respect that he realized that he doesn’t know everything.

So I was a bit surprised to find out today that he’s got an op-ed in the Wall Street Journal about something he seems very sure of: it wasn’t his fault.

The Mises Guys Don't Believe You

The Mises Guys Don't Believe You

There are at least two broad and competing explanations of the origins of this crisis. The first is that the “easy money” policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today’s financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages. Between 2002 and 2005, home mortgage rates led U.S. home price change by 11 months. This correlation between home prices and mortgage rates was highly significant, and a far better indicator of rising home prices than the fed-funds rate.

The Federal Reserve became acutely aware of the disconnect between monetary policy and mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. Moreover, the data show that home mortgage rates had become gradually decoupled from monetary policy even earlier — in the wake of the emergence, beginning around the turn of this century, of a well arbitraged global market for long-term debt instruments.

To some extent, I think what he is saying is correct. There were factors in the economy holding interest rates down and leading to the liquidity glut that we experienced — and some of those factors were outside of the control of the Federal Reserve. But if there were worries about what was going on as early as the middle of 2004, why wasn’t Greenspan on television talking about “irrational exuberance” again?

There were a lot of factors leading up to this. Easy money policies by the fed were one of them. Fannie and Freddie were another. Government endorsement of corrupt ratings agencies that turned crap into AAA bonds played a big part. And the natural belief of the market to believe that the bottom will never fall and keep levering up was a big part of it. Most of those issues were either direct government intervention into the market or an enabling government factor that gave investors and lenders the confidence to overreach.

The structure of our economy incentivized leverage, and I explained a while ago how dangerous excessive leverage can be. At the scale we’ve reached globally, trying to unwind it will be very, very painful. And if anything, you would be expecting the Fed to be standing athwart the trend yelling “STOP”. It’s not like there weren’t warning signs (and doomsayers predicting this eventual end), but the Fed wasn’t paying attention. The guys responsible for it didn’t see it, and if they can’t see it, you wonder what the purpose of having them is at all. For that, I place the blame at the top, on Greenspan.

The problem, as I see it, is that we expect these supposed supermen to be perfect regulators and perfect forecasters of our economy. It’s just not possible. Hayek said it best:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

The problem isn’t that they don’t know. The problem is that we entrust them with power as if we expect them to know.

How Effective Would Reduced Withholding Be?

In my post two days ago, I suggested that as many Americans as possible reduce their withholding to the minimum allowable levels. It’s a new type of tax protest, one that might actually hit the feds in the pocketbook:

So here’s my suggestion. April 15th, go to your HR department and change your W-4 claimed exemptions. Go with the maximum exemptions that you calculate will keep you from over-withholding, but small enough to avoid penalties. Budget (save or invest) the difference, so that you can pay the necessary tax next April, and don’t dare postmark the check to them before April 14, 2010.

Two folks (including my old blogging friend Perry Eidelbus and regular commenter jpm100 at QandO) suggest that it wouldn’t be as effective as advertised.

After all, it just defers the time at which the government gets paid, it doesn’t actually stop them from getting the funds.

But that’s not how the government operates. They’re expecting to get the money up front, and when the inflow drops, it is noticed:

Lower tax revenue and massive government spending on the bank bailout pushed the federal deficit to $765 billion in the first five months of the budget year, well on its way to hitting the Obama administration’s projection of a record annual imbalance of $1.75 trillion.

The Treasury Department also said Wednesday that the February deficit reached $192.8 billion. That’s a record for the month and up 10 percent from a year ago, but below analysts’ expectations of $205.7 billion.

The slow economy sharply reduced the government’s tax revenue last month to $87.3 billion, 17 percent below the previous year. The government has collected $860.8 billion in revenue through February, 11 percent below the year-ago period.

When government has to borrow the money up front, instead of simply having it withheld from your paycheck, it functionally increases the cost of their activity. It doesn’t mean that they won’t continue spending, but it certainly doesn’t make it as easy to increase it.

Of course, the question is still there of what to do with the extra money. I suggested to save or invest it, and my old college buddy Jim laughed at the investment idea. Considering the market over the last 6 months, I don’t blame him.

So here’s an idea. Take the extra money in your paycheck. Invest it in short-term T-bills. Instead of the Feds paying interest in China for use of their money, or getting yours interest-free, or hitting the printing press, they’ll be paying you interest on the use of your money. Obviously, if you’re an investment whiz, you can find ways to make a better return than what you get from T-bills. But if not, at least you’re earning SOME return for lending your money to the feds before they seize it next April.

Keep your money as long as you can, folks. Put it to use for yourself!

Ruining Our Economy Is A Domestic Matter — No Foreigners Allowed

From a NYT story about new banking regulations attached to the bailout funds (and the desire for some of these banks to now return the money):

The list of demands keeps getting longer.

Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

Now, I understand canceling employee training. After all, you wouldn’t want to teach the people who got us into this mess to change their behavior. When nationalization is complete, they’ll be government employees, so no accountability is necessary! And morale-building is also out — they should be happy following the dictates of Dear Leader, and no morale building should be necessary for our properly conditioned citizens subjects.

But withdrawing job offers to foreign citizens? Do we really need another protectionist dictate coming out of this administration? Don’t we want to extend jobs to the most qualified of anyone who applies, not limit this to only Americans? This sounds like exactly the sort of provision I’d expect from the Bush administration and Republicans, and we’re supposed to believe that this is Change&#153?!

Hat Tip: Economist Free Exchange Blog

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