Is The Obama Administration Covering Up What Really Happened In Treasury Meeting?

One watchdog group is accusing President Obama's administration of covering up what really went down during the major Treasury meeting that ended with 9 major banks selling equity stakes in their companies to the government for $250 billion. The Treasury originally stated that it had no documentation from the meeting, however, some documents were later obtained. The watchdog group insists some documents — potentially implicating current Treasury secretary Timothy Geitner — are being withheld. Who knows what is true and not in all this, but it will certainly be interesting to see how it all plays out. For more details about the meeting, along with what the watchdog group thinks happened, read the following article from Money Morning.

Despite promises of open government, the Obama administration tried to “cover up the very existence of smoking-gun documents” prepared for a meeting in which former U.S. Treasury Secretary Henry M. Paulson allegedly coerced major banks to allow the government to take equity stakes, according to conservative watchdog group Judicial Watch.

Judicial Watch said the Treasury initially said it had no records about the meeting. It didn’t release a transcript of discussions between government officials and bankers.

However, documents obtained under a Freedom of Information Act request confirm that Paulson and other Treasury officials gave nine major banks no options other than allowing the government to take $250 billion in equity.

Judicial Watch said on its Web site that after it made inquiries, the Treasury insisted on Feb. 4 it had no documents about the historic meeting.

Furthermore, “the cover-up continues, as the Obama administration protects Timothy Geithner by withholding a key document about his role in this infamous bankers meeting,” Judicial Watch president Tom Fitton said in a statement.

The group says suggested edits of the “talking points” for the meeting by Treasury Secretary Tim Geithner, then President of the New York Federal Reserve are being withheld by the Obama administration.

Saying the nine U.S. banks were “central to any solution” of the credit crisis, Paulson told their leaders in the meeting in Washington on October 13, 2008, to take the government aid voluntarily or be forced to by regulators.

“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” the document said, citing Paulson talking points. “If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.”

Within four hours of the start of the meeting the CEOs wrote by hand the names of their institution and multibillion dollar amounts of “preferred shares” to be issued to the government, the documents show.

“These documents show our government exercising unrestrained power over the private sector,” Fitton said in a statement.

The banks were represented by Vikram Pandit of Citigroup Inc. (NYSE: C), Kenneth Lewis of Bank of America Corp. (NYSE: BAC), John Thain of Merrill Lynch & Co., now part of BofA, Jaime Dimon of JP Morgan & Co. (NYSE: JPM), Richard Kovacevich of Wells Fargo (NYSE: WFC), John Mack of Morgan Stanley (NYSE: MS), Lloyd Blankfein of Goldman Sachs Group Inc. (NYSE: GS), Robert Kelly of Bank of New York Mellon Corp (NYSE: BK), and Ronald Logue of State Street Corp. (NYSE: STT).

A spokesman for the Treasury, Andrew Williams, didn’t return calls seeking comment from Bloomberg News.

The Treasury has invested $199.1 billion in the bank-preferred share program, with $1.2 billion since returned by 12 institutions, according to government data, Bloomberg reported.

Despite his heavy-handed nature, Paulson succeeded at stabilizing the financial services industry, J.P. O’Sullivan, an SNL Financial bank analyst in Charlottesville, Va., told Bloomberg.

“It was a calming mechanism,” O’Sullivan said.

This isn’t the first time Paulson has been accused of strong-arming bankers to bend to his will.

As previously reported in Money Morning, Bank of America CEO Kenneth Lewis said in testimony before New York’s attorney general that Paulson and Federal Reserve Chairman Ben S. Bernanke pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

Lewis went on to testify that he felt Paulson threatened him with losing his job if he didn’t go along with completing the Merrill Lynch deal.

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said.

This article can also be viewed on moneymorning.com.

Could The Yuan Become The World's Next Reserve Currency?

The U.S. dollar has faced some serious attacks lately, and our economy here in the U.S. is struggling, but have things really gotten so bad that the USD could lose its place as the world's reserve currency? And even if it did, wouldn't the Euro be next in line to take its place? According to Nouriel Roubini, the next world reserve currency could in fact be the Chinese Yuan, and the transition could happen sooner than we think. For more on this, read the following blog post from Mark Thoma which looks at Roubini's recent article on the subject.

Nouriel Roubini is worried that the dollar will lose its status as a reserve currency if we don't change our ways:

The Almighty Renminbi?, by Nouriel Roubini, Commentary, NY Times: ...While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear. ...

The... downfall of the dollar may be only a matter of time. But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi. ...

At the moment,... the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. ...

We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports. ...

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. ... For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

This post can also be viewed on economistsview.typepad.com.

What Is The Likelihood Of The U.S. Losing Its AAA Credit Rating?

A few months back — after Moody's issued a warning — there was a lot of talk about the possibility of America losing it's AAA credit rating. Of course that never materialized. Now after a recent report on the health of Social Security and Medicare, the talk is resuming. The question still remains though of whether all this talk, is just talk, or if there is any merit to it. Kathy Lien looks closer at the question in her blog post below.

In today’s Financial Times, there is an op-ed article by David Walker, the CEO of the Peter G. Peterson Foundation pondering the possibility of the U.S. losing its prized AAA credit rating. The paper focuses on a warning that was issued by rating agency Moody’s months ago. Moody’s has not issued a new warning, yet Walker and in turn, the FT has decided to re-inject uncertainty into the financial markets by resurrecting this fear. What has prompted this article is most likely the recent comments about the insolvency of the Social Security and Medicare systems. According to the trustees for the systems, the Social Security trust fund could be depleted by 2037 while Medicare could be insolvent by 2017. These dates of insolvency have been pushed up as the weak labor market reduces contributions. The Obama Administration has pressed the importance of gaining control of the growth in Medicare costs and their desire to tackle Social Security insolvency once health care reform is passed.

According to Walker, if the health care reforms strains finances further or if the federal government fails to monitor spending, tax or budget control, rating agencies could strip the U.S. of its credit rating.

Is Losing AAA Rating that Big of a Deal?

But is losing the AAA rating that big of a deal? Yes. A credit rating reflects the risk of default. Therefore a lower credit rating means that a country is at greater risk of defaulting on their debt. Some global funds are mandated to invest only in AAA debt and therefore if the U.S. loses its AAA rating, we could see a massive outflow of foreign investment. Also, a credit rating downgrade is the perfect excuse to push through an alternative reserve currency to replace the dollar because it would strip the confidence of sovereign funds like China that have been buying dollars to prop up the U.S. economy. Yes, investors will still buy U.S. Treasuries, but their purchases will be less. It could also have a spillover effect on corporate debt and will raise the cost of borrowing for the U.S. government.

How Real is the Risk?

Now with the risk in mind, I think that ratings agencies talk a good game but they will face problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.

With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations.

This post can also be viewed on kathylien.com.

Obama Pushes For $17 Billion In Budget Cuts...That's It?

In what seems like joke, President Obama has sent lawmakers a proposal that aims to cut over a hundred programs, and save us $17 billion. When you look at the fact our deficit this year will be a projected $1.85 trillion, you can start to see that $17 billion in cuts is next to nothing. It's almost as if Obama is simply trying to appear like he is making an effort to trim spending. The worst part is that it appears Obama will be fought tooth and nail to get these cuts through. If he can't manage to get $17 billion cut off the budget, what hope does this country really have forbalanced budget? For more on this, read the following article from Money Morning.

President Barack Obama sent lawmakers a budget package today (Thursday) that proposes to shrink or eliminate 121 federal programs and save almost $17 billion in the fiscal year that begins Oct. 1. But the budget plan contains cuts that will face vigorous opposition in Congress and fierce resistance from special interest groups.

The package of proposed reductions fills in the fine print of a $3.55 trillion budget outline approved by lawmakers in April that contains Obama’s top agenda items, including a health care overhaul, a push for renewable, clean-energy sources and changes in education funding.

The President wants to cut or end a number of programs that he feels are wasteful or ineffective to take the first toward getting spending under control. But the administration’s attempt at bringing fiscal discipline to Washington has already been met with skepticism by analysts.

“Every government program - no matter how wasteful - will be defended by its recipients and congressional champions,” Brian Riedl, a budget expert at the Heritage Foundation, a Washington-based research group told Bloomberg News. “Unless Obama puts the weight of the White House behind his spending cuts, Congress will ignore them.”

The cuts are miniscule compared to the overall budget package and deficits that will be ushered in the next few years. The $787 billion stimulus package Obama pushed through Congress combined with the $700 billion Troubled Asset Relief Program (TARP) bank bailout will come on top of the $1 trillion deficit the administration inherited when he took office in January.

Total savings from the cuts, even if they were accepted by Congress in their entirety, would represent a paltry 0.4% of the overall budget. The Congressional Budget Office projects the deficit will be $1.85 trillion this year, about four times the previous record, and $1.38 trillion in fiscal 2010.

“Even if you got all of those things, it would be saving pennies, not dollars. And you’re not going to begin to get all of them,” Isabel Sawhill, a Brookings Institution economist who waged her own battles with Congress as a senior official in the Clinton White House budget office, told the Washington Post. “This is a good government exercise without much prospect of putting a significant dent in spending.”

Only about 80 of the proposed cuts are new - the others had been previously revealed. And most of the cuts will be from the “discretionary” budget, avoiding the so-called untouchable “third-rail” entitlement programs of Social Security and Medicare.

Those two programs account for more than 40% of government spending, meaning the more difficult work on deficit reductions has been left for another day.
“More serious efforts at deficit reduction are going to require entitlement and tax reform - that’s where most of the money is.” Marc Goldwein, policy director of the bipartisan Committee for a Responsible Budget, a Washington-based research group, told Bloomberg. “To really get the deficit under control, we’re going to have to start thinking bigger,” he said.

But some in Congress defended the administration’s approach, saying the list of program reductions is just the start of a more comprehensive effort to cut spending and pull the reins on the skyrocketing deficit.

“It depends on what it means over the scope of five and 10 years.” Representative John Larson (D-Conn.) told Bloomberg. It’s a “deep, cavernous hole where we have been left, we’re looking a long way up but it’s a steady climb” using the budget plan agreed to by Obama and Congress, he said.

This post can also be viewed on moneymorning.com.

We Need A Root-And-Branch Reorganization Of The Financial System

Some people are open to the government handing over trillions of dollars to the banks, but no taxpayers want the money handed over without proper controls in place that will ensure it goes to good use. This has been one of the biggest issues the public has had with the bailout efforts thus far. For that reason Steve Waldman is calling for a root-and-branch reorganization of the financial system. For more on this, read the following blog post from Mark Thoma.

Steve Waldman says "we need a root-and-branch reorganization of the financial system":

Value for value, Steve Waldman: Would it have been better if Timothy Geithner had had the power to guarantee all bank debt early on? As James Surowiecki reminds us, that was part of the Swedish solution. Justin Fox plausibly suggests that we might have avoided a lot of pain with a fast, full guarantee.

But that's not the point. The question isn't whether we could have avoided this crisis, if only we had cut a big check. We could have, and that was not lost to any of us debating these issues more than a year ago. (See e.g. me or Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have been less than they probably will be now. So, with 20/20 hindsight, would it have been a good idea?

How you answer that question depends upon how you view the crisis. Is it an aberration, a shock to a basically sound financial system, or is it a painful symptom of an even more dangerous condition? ...

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of temporary receivership for insolvent banks, believe.

If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions, does that mean pain is the only way forward, "the worse the better" in the old revolutionary cliché? It need not mean that. But it does mean that palliative measures, like giving the banks money, would have to be attached to curative measures, like enacting capital requirements and imposing regulatory burdens that would force financial behemoths to break themselves up or become boring narrow banks. For almost two years, policymakers at the Fed and the Treasury, including Secretary Geithner, have offered bail-out after bail-out and asked for nothing serious in return.

Do I regret that Henry Paulson was not empowered to issue a blanket guarantee of bank assets early on, as the Swedes did? No, I don't regret that at all. Why not? Because I think that "Hank the Tank" was a crappy negotiator... He would have offered the financial system sugar without requiring it to make the medicine go down. He may believe, quite sincerely, that a cure would be worse than the disease. He may believe that, but he is wrong. ...

You may believe that we have learned our lesson, that if we can just get some stability and comfort for a while we are prepared to do what must be done. That's a respectable position. But I don't share it, and neither do the majority of Americans who are unwilling to allow their representatives to sign off on any more expensive aspirin. We want value for value, an ironclad commitment of root and branch reform in exchange for the unimaginable sums of money we are being asked to hand over. ... Congress would, because the public would, support large, explicit transfers, if they were attached to reforms sufficiently radical to prevent a recurrence, and suitably punitive towards the people who managed the system that brought us here. Value for value. ...

I ... would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is ... a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode... I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would imply making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)

It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over suitcase after suitcase of freshly printed Federal Reserve notes.

This post can also be found on economistsview.typepad.com.

Is $250,000 A Year Really "Wealthy?"

President Obama keeps saying he plans to pay for much of his new spending with taxes on the wealthy, but what should be considered "wealthy?" According to Obama's campaign speeches "wealthy" means families earning more than $250,000 a year, but $250,000 isn't worth as much in New York City as it is in Des Moines, Iowa. Many of these families are challenging Obama's assessment of what should be considered "wealthy," saying how they make more than that but are struggling to get by. Tim Iacono doesn't offer these families much sympathy, but looks closer at the situation in his blog post below.

There have been more than a few comments left here by readers over the years about families with big salaries and/or bonuses carping about how tough it is to get by on just a couple hundred thousand dollars a year in income.

Always of modest means, never having had to foot the bill for little ones around the house, and having avoided living and working in the Bay Area, my view of things is probably a bit slanted in the other direction but, to me, a quarter million dollars a year looks to be a huge opportunity to sock money away for retirement.

Via the Wall Street Journal comes this tale of the difficulty some have in making ends meet.

Ellen Parnell and her husband, Donald Parnell Jr., seem like the kind of well-off couple President Barack Obama has in mind when he suggests raising taxes on families earning more than $250,000 a year. A surgeon at Fort Sanders Sevier Medical Center in Sevierville, Tenn., he drives an Infiniti. They vacation at a beach resort every year.

Yet, right now he is working seven days a week. The car is more than a decade old, the vacation home in Sandestin, Fla., comes at a moderate weekly rate because members of Ms. Parnell's extended family own it. Her family of five would like more room than they have in their 2,500-square-foot home, yet they can't afford anything larger. The downturn has them skittish about paying for renovations.

While not familiar with the local real estate market at all, clearly, you can get a lot of house for not too much money in Sevierville.

The story continues:

"I'm not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class," says Ms. Parnell. "Our needs are being met, but we don't have a load of cash to cover wants."
...
Wealth and comfort "depends on where you're coming from," said Lois Avitt, a sociologist and founding director of the Institute for Socio-Financial Studies in Charlottesville, Va. To a family earning $50,000, $250,000 is well off, but for the family earning $250,000, rising college and medical costs and dropping home values make the perception debatable.

The reasons for the insecurity are that net worth is declining at the same time that expenses like education and health care, two of the biggest concerns cited by members of that income group, are going up faster than wages and income, says Heidi Shierholz, an economist at the Economic Policy Institute in Washington. "Those are the biggies. They are huge parts of the set of middle-class aspirations, and the prices of those have increased way faster than income." The bursting of the housing bubble makes that more stark.
...
San Jose, Calif., Mayor Chuck Reed calls a family living in Silicon Valley earning $250,000 "upper working class." That is about what two engineers working at a technology firm can expect to make, but "a family earning $250,000 a year can't buy a home in Silicon Valley," he said.

James Duran owns a human-resources company in Silicon Valley and is president of the Hispanic Chamber of Commerce in California. He supported Mr. Obama, but is worried about the tax proposals. He has laid off some employees in recent months and has been wondering how he can fund an extension of those workers' health-care benefits.

Mr. Duran said he and his wife earn about $400,000 annually, but "I'm barely getting by." They have high property and state taxes, as well as college tuition and savings to cover. "I'm an Obama man, but this side of him is a difficult pill for me," he said.
...
For the Parnells, their perception of themselves is based on the math. The value of their house is down $60,000. Ms. Parnell says the couple's gross income last year was about $260,000. Taxes, premiums for medical care and deductions for Social Security and their 401(k) contributions cut the gross to about $12,000 per month. The family tithes $1,300 a month at their church. Their mortgage, second mortgage and payment on land they bought is nearly $4,000 a month. Other expenses, including their family car payment, insurance and college funds, as well as basics like food, utilities and donations to charities, leave them with about $1,200 left over each month.

"I'm not after sympathy. We are blessed. What I want is a reality check on what rich means," Ms. Parnell says. "I can pay my mortgage and I can buy some clothes. I'm not going without, but I'm not living a life of luxury."

The Parnells should probably take a basic personal finance class or two and many of their problems might quickly be solved - that $4,000 a month in mortgage payments for a house that's too small, and some other property, should have set off alarm bells long ago.

Also, that top line of $260K that erodes to $144K after 401k contributions, medical care premiums, and taxes sounds a bit excessive - you can quickly get to about $40K for the first two items leaving their tax hit at $75K.

Does that sound right?

It's a good thing Ms. Parnell is not asking for sympathy because she's not likely to get any.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Geithner's Bank Bailout Plan: Privatizing Gains And Socializing Losses

There is no shortage of opposition to Treasury Secretary Timothy Geithner's new bank bailout plan, and while some arguments are unfounded, Joseph Stiglitz does make a good point. According to Stiglitz the worst part about the bailout plan is that it will privatize gains while socializing losses. With this in mind it makes it an overall losing proposition for taxpayers. In addition to this argument Stiglitz makes several others against the bailout plan in his article below as presented by Mark Thoma.

Joseph Stiglitz is not a fan of the Geithner bank bailout plan:

Obama’s Ersatz Capitalism, by Joseph E. Stiglitz, Commentary, NY Times: The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks ... is based on letting the market determine the prices of the banks’ “toxic assets”... The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. ... This is exactly the same as being given an option. ...

Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership! ...

But Americans are likely to lose even more ... because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets ... the market ... is willing to pay too much for...But the market is likely to recognize this, which will drive down the price... Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. ...

The main problem is not a lack of liquidity. ... The real issue is that the banks made bad loans... They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks... What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. ...

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

This post can also be viewed on economistsview.typepad.com.

Obama's Stimulus Plan Won't Be Enough, And Could Even Ruin Him

Politics is a tricky game, and President Obama could be setting himself up for a tremendous fall. Right now his approval rating is sky high, but so too are his expectations. As famed economist Paul Krugman points out in his article, Obama's recent economic stimulus plan is much too small, and in all likelihood he is going to be forced to ask for more money. When that time comes people are going to assume the last stimulus package was a failure, and naturally Obama will take the brunt of the blame for it. He had a hard enough time garnering the necessary Republican support (3 votes) to get the first bill passed, and you can bet the next time around will be 100 times harder. For more on this, read Mark Thoma's blog post below:

I've heard people say the debate over the size of the stimulus package was misrepresented in the media, that the media rarely presented the view that the plan was too small.

President Obama’s plan to stimulate the economy was “massive,” “giant,” “enormous.” So the American people were told... Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.

Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.

Why do you say that? Won't his plan create millions of jobs?

Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It’s a credible promise... But 3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.

Ah, I see. Even though it's likely to create 3.5 million jobs as promised, it's still millions short of what is needed. So how do we improve the plan?

There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?

What are the answers?

On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring.

“Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. ... And there was no hint in the interview of readiness to do more.

Do you mean he doesn't seem ready to do more in terms of fiscal policy, or that he's not ready to do more of anything, in particular, more to help the banking system recover?

A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan... But he went on to dismiss calls for decisive action... As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery ... well, you get the picture.

Yep. It's like one of those bad dreams where your feet won't move fast enough to get away from the impending doom closing in on you. Will the administration wake up and get moving?

Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along?

One side won't, that's pretty clear, and I'm not so sure about the Democratic side of the aisle either.

Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do... If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed.

And if there are any small successes to point to Republicans will, of course, insist it was because of the tax cuts in the first round of stimulus. Where does the public stand at this point?

The broader public ... favors strong action. ... But will that support still be there, say, six months from now?

I wouldn't count on it.

Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.

I don't suppose we can borrow political capital from China?

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

And at that point, he begins pushing a new plan?

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

Would you bet some of your Nobel money on that prediction?

O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.

This post can also be viewed on economistsview.typepad.com.

Is Obama Killing Capitalism?

Most of Obama's recent moves have been heavily opposed by Republicans, but is he single handedly killing Capitalism — and Wall Street — as some are claiming? Economics professor Mark Thoma thinks that the claim is absolutely absurd, and in fact agrees with Robert Reich that Republicans are more responsible for the falling markets than Obama is. Thoma looks at a couple articles, and gives his input on the subject in his blog post below.

Republicans made the bed, now they want someone else to sleep in it:

Is Obama Responsible for Wall Street's Meltdown? Where Populist Rage is Heading, by Robert Reich: Is Obama responsible for the meltdown of the Dow? The consistently wrong-headed Wall Street Journal's editorial page says so, as does Republican Fox News, CNN's reliably demagogic Lou Dobbs, and now CNBC... CNBC's Jim Cramer, who bloviates nightly about stock picks, says Obama is pushing a "radical agenda" that's destroying investor's wealth. My friend Larry Kudlow, who rants nightly about nearly everything, says Obama is destroying capitalism. CNBC reporter Rick Santelli's ballistic nonsense about Obama's mortgage plan made him a pop-populist icon for a week or so.

The argument that Obama is somehow responsible for the collapse of Wall Street is absurd. First, every major policy that led to this collapse occurred under George W's watch (or, more accurately, his failure to watch). The housing and financial bubbles were created under Bush and exploded under Bush. The stock market began to collapse under Bush.

Second, it's inevitable that stocks, led by the bloated financial sector, would lose their remaining hot air as the new administration begins "stress-testing" the big banks, many of which are technically insolvent. After all, their share prices were built on a tissue of lies and dreams. Other sectors whose values were similarly distorted and distended by years of financial deception and regulatory disregard, such as housing and insurance, will also have to return to the real world before they can recover. Which could mean more stock losses.

Finally, none of the financial wizards who are now charging Obama with leading America into the abyss has offered an alternative plan for getting us out of the mess that, not incidentally, many of these same wizards happily led us into. For years, the Wall Street Journal editorial page and the financial gurus of cable news cheered as Wall Street leveraged its way into oblivion.

This bizarre charge wouldn't be worth mentioning were it not a market test for a more intense attack from Wall Street and Republican media outlets next year as the nation moves into ... range of the 2010 midterm elections. Republicans have made no secret of their wish to blame Obama for the bad economy, and to stir up as much populist rage against his so-called "socialist" tendencies as politically possible. History shows how effective demagogic ravings can be when a public is stressed economically. Make no mistake: Angry right-wing populism lurks just below the surface..., ready to be launched not only at Obama but also at liberals, intellectuals, gays, blacks, Jews, the mainstream media, coastal elites, crypto socialists, and any other potential target of paranoid opportunity.

To complicate matters for Republicans, however, grass-roots populist rage is also building against Wall Street itself, and with some justification. Top Wall Streeters who raked in tens of millions of dollars a year for more than a decade have now effectively eviscerated the pension fund savings of millions of middle-class American workers and destroyed millions of Main Street jobs. The public is understandably appalled that its tax dollars are being used to pay and prop up the very people and institutions responsible for this debacle. And there seems to be no end in sight... Yet no one seems to know exactly where these dollars are going, or why. ...

The Wall Street and Republican media attack machine doesn't know exactly what to make of this. The Wall Street Journal's editorial page, along with CNBC, alternates between attacking Obama for bailing out Wall Street and excusing Wall Street's excesses. But then again, Obama doesn't seem to know exactly what to make of it either. He seems to vacillate as well -- one moment scorning Wall Street, the next moment justifying further bailouts. I do hope he takes a firmer hand, drawing a clearer distinction and making a clearer connection between clearing up these financial balance sheets and helping average people. Otherwise, the next populist uprising will be born in this moneyed quagmire. It is here -- within the muck that was created by AIG, Citigroup, Fannie and Freddie, other giant financial institutions, now in combination with the U.S. Treasury and Fed -- that the public is most confused, bears its most serious scars, and is potentially most burdened in future years...

Why people should ignore Larry Kudlow:

The Housing Bears Are Wrong Again, by Larry Kudlow, NRO, June 2005: This tax-advantaged sector is writing how-to guide on wealth creation.

Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong... So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.

None of this has happened. ... Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades. ...

Which leads to a final thought: Why not apply the same tax laws that have benefited home owners to stock market investors and home buyers? If this were to come about, even more wealth would be created in America, leading to even more new business and job creation. ...

Yes, too bad we didn't make the bubble even bigger. If capitalism is destroyed, something that's highly unlikely, it won't be Obama's fault. It will be the fault of people like Kudlow who "haven’t done their homework" and who opposed any and all attempts to temper the housing bubble through regulation or any other means - see the ridicule of "bubbleheads" above - and who continue to oppose such measures today. Capitalism may change, in fact it needs to change - the excesses that allowed the housing bubble to develop need to be tempered through regulation and other means - but if Kudlow and company have their way and continue to assert that what's good for the rich is good for America, that regulation was the problem not the solution, and that tax cuts are the answer to every problem, the change that is needed won't happen. It's easy to understand why they are so vocal in their opposition to the kinds of changes that are being proposed. The change that is needed to help stabilize the system will bring about destruction (creatively we hope), and people like Kudlow will likely be the ones who feel the brunt of that change as the advantages unregulated markets brought them disappear. But they shouldn't confuse the destruction of the elements that allowed them to take advantage of the system with the destruction of the system itself.

This post can also be viewed on economistsview.typepad.com.

Obama's Housing Plan Will Just Create Another Housing Crash

Obama's new housing stability plan has some blatant flaws, including most notably that it is setting us up for another crash 5 years from now. In addition the way the plan is structured it is setting itself up for abuse — this will cost taxpayers a lot of money when all is said and done. Tim Iacono looks at the new housing plan details, and addresses some concerns he has about the program in his blog post below.

Details of the Treasury Department's Homeowner Affordability and Stability Plan were announced today. It's quite an interesting undertaking that seems like it will be good fun for at least the next couple years as stories of abuse and odd goings-on come to light.

There are three basic components - aid for refinancing, foreclosure avoidance, and more support to Fannie Mae and Freddie Mac. It is the middle component, more properly known as the "Homeowner Stability Initiative", that is most intriguing and most likely to be abused in ways that can only be imagined today. Here's how the plan will work:

- The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower's monthly mortgage payment is no greater than 38% of his or her income).

- Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.

- To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.

The old days of a maximum 28 percent of income toward servicing a mortgage have almost returned. Over the years, many have been turned down for mortgages because they failed to meet this requirement - it's crazy to think that this figure got as high as 50 or 60 percent a few years back and then, well beyond that, when people started to lie about how much they made.

In the second step above - where government money enters the picture - there is a downward limit of two percent for the mortgage rate which, effectively, creates a lower limit on income for qualifying.

In other words, your mortgage payment won't get reduced to zero if you lost your job.

Here's an example of how it would work for "Family C" who, back in 2006, took out a 30-year subprime mortgage of $220,000 at 7.5 percent, on a house worth $230,000 at the time. Since the purchase, their home's value has fallen 18 percent to $189,000 and their income has shrunk such that their monthly mortgage payment of $1,538 is now 42 percent of their $3,650 monthly income.

Here's how lucky "Family C" gets their mortgage payment reduced by $406.
Here's the part about the lower limit on the new interest rate:

Protecting Taxpayers: To protect taxpayers, the Homeowner Stability Initiative will focus on sound modifications. If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible. For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and lenders to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on lenders, borrowers and communities alike. Moreover, Treasury will not provide subsidies to reduce interest rates on modified loans to levels below 2%.

In the first part of the passage above, it's not clear how they'll determine if it makes more sense to modify the loan or to foreclose, but the two percent lower limit is very clear.

You can just see some of the possibilities here where people will figure out what they need to do to get their income down to that two percent rate - it will usher in a whole new wave of "liar loans", only this time people will be wanting their income to show up on the paperwork at a lower level.

Most importantly perhaps, this sets up a whole new wave of mortgage rate resets in five years as all of these loans revert to market rates which are sure to be much higher than the temporary rate.

This is, effectively, a government subsidized 5-year ARM with rates as low as 2 percent.

My, what progress we're making...

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Obama's Budget Looks Great According To Krugman

President Obama at least has one big supporter of his new budget, famed economist Paul Krugman. Krugman believes that this budget is just what the country needs to turn things around and applauds Obama for his efforts. Mark Thoma looks at a recent article from Krugman in his blog post below.

Paul Krugman finds lots to like in Obama's proposed budget:

Climate of Change, by Paul Krugman: Elections have consequences. President Obama’s new budget represents a huge break, not just with the policies of the past eight years, but with policy trends over the past 30 years. If he can get anything like the plan he announced on Thursday through Congress, he will set America on a fundamentally new course.

The budget will, among other things, come as a huge relief to Democrats who were starting to feel a bit of postpartisan depression...: fears that Mr. Obama would sacrifice progressive priorities in his budget plans ... have now been banished.

For this budget allocates $634 billion over the next decade for health reform. That’s not enough to pay for universal coverage, but it’s an impressive start. And Mr. Obama plans to pay for health reform, not just with higher taxes on the affluent, but by putting a halt to the creeping privatization of Medicare, eliminating overpayments to insurance companies.

On another front, it’s also heartening to see that the budget projects $645 billion in revenues from the sale of emission allowances. After years of denial and delay by its predecessor, the Obama administration is signaling that it’s ready to take on climate change. ...

Many will ask whether Mr. Obama can actually pull off the deficit reduction he promises. Can he actually reduce the red ink from $1.75 trillion this year to less than a third as much in 2013? Yes, he can.

Right now the deficit is huge thanks to temporary factors (at least we hope they’re temporary)... But if and when the crisis passes, the budget picture should improve dramatically. ... So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery — two big ifs, to be sure — getting the deficit down to around $500 billion by 2013 shouldn’t be at all difficult. ...

So we have good priorities and plausible projections. What’s not to like about this budget? Basically, the long run outlook remains worrying.

According to the Obama administration’s budget projections, the ratio of federal debt to GDP. ... will soar over the next few years, then more or less stabilize ... at a debt-to-GDP. ratio of around 60 percent. ... [S]ooner or later we’re going to have to come to grips with the forces driving up long-run spending — above all, the ever-rising cost of health care.

And even if fundamental health care reform brings costs under control, I at least find it hard to see how the federal government can meet its long-term obligations without some tax increases on the middle class. Whatever politicians may say now, there’s probably a value-added tax in our future.

But I don’t blame Mr. Obama for leaving some big questions unanswered in this budget. There’s only so much long-run thinking the political system can handle in the midst of a severe crisis; he has probably taken on all he can, for now. And this budget looks very, very good.

More on the budget:

• Finally a Progressive Budget, Robert Reich
• Higher Taxes: Will The Republicans Cry Wolf Again? - Bruce Bartlett
• Obama’s Budget Plan Sweeps Away Reagan Ideas, by David Leonhardt, New York Times

This post can also be viewed on economistsview.typepad.com.

$15,000 Homebuyer Tax Credit Trimmed In Negotiations

The Senate’s version of the economic stimulus package included a $15,000 homebuyer tax credit that would have been made available to all homebuyers. As I expressed in a blog post earlier this week, I didn’t think that it was such a good idea, and definitely not at the cost of almost $40 billion in taxpayer money. Thankfully, this credit was cut in House and Senate negotiations. The final version of the bill includes an $8,000 tax credit, which will be available to only first time homebuyers. A previous version of this tax credit was for $7,500, and was required to be paid back. This new tax credit will not need to be paid back as long as the homebuyer lives in the home for at least 3 years. The cost for this version should only cost taxpayers around $6.6 billion according to CNNMoney.

I’m not one to support any amount of artificial support for the real estate market, because I see it as unsustainable. However, if anyone is going to get a tax credit to buy a home, it should be first time homebuyers. These are the people that are entering a real estate market where prices are too high to begin with, and they need all the help they can get. I would have preferred a minimum ownership timeframe longer than 3 years, though. Anyone who was able to sell their home during the bubble should qualify. Turn that 3 years into 6 or 7, and that should do the trick.

Will this $8,000 tax credit be enough to turn the real estate market around? I doubt it, but at least taxpayers are only going to lose $6.6 billion instead of almost $40 billion, and the people getting the money will be more deserving. It is a small victory, but better than nothing I suppose.

Geithner's Misstep

Treasury Secretary Timothy Geithner's recent speech failed to inspire investors, and if anything spread more doubt. The market's expected a clear solution to be laid out, and that just did not happen. One thing was for certain, though, huge numbers were being thrown around by Geithner. As James Picerno details below in his blog post, Geithner is promissing to release more details about the rescue plan in the coming weeks. We'll have to wait and see if he actually delivers as promised this time?

It's big, it's bold, but it's also vague. And that's the problem.

Treasury Secretary Timothy Geithner yesterday explained the new new plan to solve the financial crisis that ails America. Alas, as articulated yesterday, the plan is short on solution details and long on general notions of what needs to be done.

The challenge is figuring out how the latest effort will work and, more importantly, deciding if it'll fare any better than its misguided predecessors. At the moment, that's a challenge with no immediate answer. As the David Byrne and Brian Eno audio montage intones, "America is waiting for a message of some sort or another."

Certainly the size of the announced plan is a bold stroke. How could $2 trillion be otherwise? We know that some of the money will go to buying up the so-called toxic securities that weigh heavily on the health of banks, and that's a step in the right direction, as the experience with the Resolution Trust Corp. suggests. Taking some of illiquid assets off banks' balance sheets should, in theory, help increase lending, which remains tight even at low interest rates. But the details matter, and it's not yet clear what the fine print will say.

“We need more details from Treasury on how exactly it plans to remove bad assets while protecting the taxpayer,” Senator John Kerry, a Democrat and a senior member of the Senate Finance Committee complains via The New York Times. “We have zombie banks that are weighed down because their liabilities exceed their assets. Without a precise mechanism for addressing toxic assets, it will be difficult to increase lending.”

Similar opining can be heard from economists, including a former IMF economist who now teaches at Harvard. “Tim Geithner did a great job in painting the broad strokes of the problem and laying out general principles, but it was a big disappointment not to have more details,” Ken Rogoff tells Bloomberg News.

Yes, Geithner promised to "flesh out the details" soon, presumably within the next few weeks, maybe in the next few days. Unfortunately, in the current climate, the only thing the secretary managed to do was to stoke more anxiety by introducing yet another strain of uncertainty into the marketplace. The last thing we need now is more indecision and ambiguity.

Sure, the government needs to act, but it needs to act intelligently. If yesterday's Geithner show is an indication, the latest round of talking points isn't quite ready for prime time. We feared as much when we learned over the weekend that the Treasury Secretary's scheduled speech to the Congress would be delayed 24 hours. As it turns out, Geithner should have delayed it a few more days, perhaps by a week or even more. As we learned yesterday, in the wake of a sharp selloff in the stock market, it's better these days to say nothing than to make broad comments that leave much to the imagination.

Meanwhile, the administration has been at fault by lifting expectations over the past week that it was going to announce a solution. The President has been talking up Geithner's big debut in Congress. But the optimist talking points, as much as they're welcome, were premature. No wonder, then, that the markets suffered an attitude adjustment as the reality set in that the big solution was really just another bout of talking without backing up the chatting with a concrete plan of action.

The good news is that the Geithner has only lost the first battle rather than the war. But time's running out, and so is patience. Certainly he'll have another chance to repair some if not all of the damage. But neither the Obama administration nor the economy can afford another halfway effort at explaining what happens next. The stakes now are higher than they were on Monday for bringing clarity and intelligence to the fore. Another stumble may result in even bigger financial pain, and not just in the price of equities.

"The uncertainty the government has created has made it nearly impossible to price many securities," says Douglas Dachille, chief executive of First Principles Capital Management, tells The Wall Street Journal.

At this point, no one's sure how the money will be deployed or what the rules are that will govern its usage. That's a problem. Yes, the White House is talking to Congress about just those details and a clearer plan will undoubtedly be hammered out, perhaps within a few days. Meanwhile, this is water torture, and the Obama administration probably recognizes the misstep in speaking out before a sufficient level of specifics was available for public consumption. Meanwhile, we're told that the plan was intentionally vague. Really? The White House reportedly says it wanted to be warm and fuzzy on the plan so as to give everyone an opportunity to put their two cents into the $2 trillion idea. So much for good intentions.

"First, we're going to require banking institutions to go through a carefully designed comprehensive stress test," Geithner advised yesterday. Apparently he's not kidding. But stressing out the financial industry with half-formed commentary isn't helping.

So far, however, the damage is still minimal, at least in terms of the term spread in government bonds, which is one measure of the credit crunch that's taking a toll. Nonetheless, the spread in the 10-year Note and 3-month T-bill is still over 250 basis points while the 10-year/2-year spread is just a hair under 200 basis points. By comparison, a year ago the 10-year/3-month spread was 130 basis points and the 10-year/2-year spread was 169 basis points. At the extreme low levels of interest rates generally in 2009, a wider spread would reflect running for cover into the arms of short-term government paper. That's a sign of distress in this climate if the spread is primarily a function of near-zero rates on the short end, which basically describes the current situation.

One test of the Obama administration's success on its bailout plan in the coming weeks and months will be to convince investors to move assets out of T-bills and into risky assets. An indication of that will be higher yields in T-bills, which are just hovering above zero. So far, no one's budging.

This post can also be viewed on capitalspectator.com.

Krugman Rips Into Senate Centrists

If you have read a newspaper, or watched the news, recently you are probably aware of the difficulties that Republicans and Democrats have had in coming to a consensus on the new stimulus bill. It appears that Democrats have been able to win the vote of at least a few Republicans, enough to get the bill passed, however, at what cost have those votes come? According to well known economist Paul Krugman, the price was extremely high. Mark Thoma from The Economist's View, looks at Krugman's article in his blog post below.

President Obama's net return on his investment in bipartisanship isn't very good:

The Destructive Center, by Paul Krugman, Commentary, NY Times: What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses?

A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even ... the original Obama plan — around $800 billion ... with a substantial fraction ... given over to ineffective tax cuts — ...wouldn’t have been enough to fill the looming hole in the U.S. economy... Yet the centrists did their best to make the plan weaker and worse.

One of the best features of the original plan was aid to cash-strapped state governments... But the centrists insisted on a $40 billion cut in that spending.

The original plan also included badly needed ... school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut..., with the great bulk ... falling on ... measures that would do the most to reduce the depth and pain of this slump.

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers...: it will cost a lot of money while doing nothing to help the economy.

All in all, the centrists’ insistence on comforting the comfortable while afflicting the afflicted will, if reflected in the final bill, lead to substantially lower employment and substantially more suffering.

But how did this happen? ... Mr. Obama ... offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support...

Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate...

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan...

In the Senate, Republicans ... decried the bill’s cost — even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, that’s right, $3 trillion in tax cuts over 10 years.

So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh — not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.

Such are the perils of negotiating with yourself.

Now,... it’s possible that the final bill will undo the centrists’ worst. And Mr. Obama may be able to come back for a second round. But this was his best chance to get decisive action, and it fell short.

So has Mr. Obama learned from this experience? Early indications aren’t good.

For rather than acknowledge the failure of his political strategy and the damage to his economic strategy, the president tried to put a postpartisan happy face on the whole thing. “Democrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands,” he declared on Saturday, and “the scale and scope of this plan is right.”

No, they didn’t, and no, it isn’t.

This post can also be viewed on economistsview.typepad.com.

Concerns About The Economic Stimulus Package

The Senate is expected to vote on the new economic stimulus bill on Tuesday, according to the Wall Street Journal, and it appears it will be able to squeak through. Once the Senate passes the bill it will need to go through House-Senate negotiations, but it should just be a matter of time before the bill ends up on the President’s desk for signing. The bill has not seen the sweeping bi-partisan support that President Obama was hoping for, but could we honestly expect anything but controversy? Senate Democrats only needed a couple Republican votes to make it happen, and that is exactly what they were able to get. So what exactly about this bill has Republicans up in arms? And do their concerns have any merit?

The biggest complaint coming from the Republican side is that the bill is full of wasteful spending. According to an analysis in the Washington Post, the new version of the bill is 78 percent spending and only 22 percent tax cuts. Naturally this type of break down isn’t going to sit well with most Republicans. To make matters worse, the urgency with which supporters want to pump money into the economy has many questioning how well this massive spending will be regulated—if at all. According to the Post, “The stimulus plan presents a stark choice: The government can spend unprecedented amounts of money quickly in an effort to jump-start the economy or it can move more deliberately to thwart the cost overruns common to federal contracts in recent years.”

“’You can't have both,’ said Eileen Norcross, a senior research fellow at George Mason University's Mercatus Center who studied crisis spending in the aftermath of Hurricane Katrina. ‘There is no way to get around having to make a choice.’”

The objections to the spending portion of the bill prompted Obama to make the following statement at a recent House Democratic retreat, according to the Wall Street Journal: “So then you get the argument, ‘Well, this is not a stimulus bill, this is a spending bill.’ What do you think a stimulus is? (Laughter and applause.) That's the whole point. No, seriously. (Laughter.) That's the point. (Applause.)”

The Republicans continue to claim that tax cuts are more efficient than many of the spending proposals being included in the bill. If you are interested in hearing more about that, here is a good opinion piece recently published in the WSJ.

The way that I look at it, we have already tried tax cuts, and they didn’t work out quite as well as we had hoped. Though I don’t think that means we should give up on them all together, I am willing to give other things a try. What I don’t like is the lack of oversight on the spending. If we are going to spend $600 billion, I sincerely hope that we can spare a few million to ensure that these billions are used effectively. I don’t want to see us squander this stimulus money the way that we have the in past. This article in the Post gives a good walk-through of the potential problems with spending oversight as it sits now. Leaders would do well to read this and think hard about how they can ensure that we stimulate the economy in the most efficient and cost-effective manner possible.

Is Free-Market Ideology Flawed?

In a controversial article published in the Guardian, Jeffrey Sachs calls out free-market ideology as flawed and applauds the measures being taken by Obama to get the government more involved in business. America is known for its relatively free-market economy, and for years it seemed to work great, but Sachs argues that things have changed. Whether or not one agrees with Sachs it is interesting to hear his perspective on things. Mark Thoma from the Economist's View presents Sach's article in his blog post below.

Jeff Sachs seems to be pleased with the new administrations commitment to "a new age of sustainable development":

Rewriting the rulebook for 21st-century capitalism, by Jeffrey Sachs, CIF, The Guardian: One of President Barack Obama's historic contributions will be a grand act of policy jujitsu - turning the crushing economic crisis into the launch of a new age of sustainable development. ... Obama is already setting a new historic course by reorienting the economy from private consumption to public investments directed at the great challenges of energy, climate, food production, water and biodiversity.

The new president has taken every opportunity to underscore that the economic crisis will not slow, but rather will accelerate, the much-needed economic transformation to sustainability. ... The fiscal stimulus ... will lay down the first steps of a massive generation-long technological overhaul...

Obama has started with the most important first step: a team of scientific and technological advisers of stunning quality... He has also focused on two core truths of sustainable development: that technological overhaul lies at the core of the challenge, and that such an overhaul requires a public-private partnership for success. Taking shape, therefore, is nothing less than a new 21st-century model of capitalism ... committed to the dual objectives of economic development and sustainability...

Consider the challenge of a bankrupt automobile sector... In the Obama strategy, GM will not be closed to punish it... It's worth far too much as a world leader in the electric vehicles of the 21st century. ...

Conservatives are aghast. The bail-out of the auto industry was hard enough to swallow. Government investments in infrastructure and research and development are viewed with scorn, compared with the tried and true (if disastrously failed) tax cuts of the Bush era. Rightwing pundits bemoan the evident intention of Obama and team to "tell us what kind of car to drive". Yet that is exactly what they intend to do (at least with regard to the power source under the hood), and rightly so. Free-market ideology is an anachronism in an era of climate change, water stress, food scarcity and energy insecurity. Public-private efforts to steer the economy to a safe technological harbour will be the order of the new era.

There is plenty of room for blunders... Government activism can founder on the shoals of massive budget deficits, tax-cutting populism pushed by the right, politically motivated investments such as corn-based ethanol..., and more. Yet Obama is absolutely correct that we have no choice but to try...

This post can also be viewed on economistsview.typepad.com.

All States Are Suffering From Job Losses

A report issued by the Labor Department yesterday indicated that unemployment rose in every single state in December. When oil was still near record highs a few months ago, at least the big energy-producing areas were doing well, but now they are suffering like everyone else. This goes to show you that no area is being spared from economic turmoil. The states that lead the housing boom—such as California, Nevada and Florida—were the first ones to really feel the pain from the downturn. One would think that because they led the downturn they might also lead the rebound, but if that is the case then we still have more pain coming because things are still going from bad to worse in those states. According to the Wall Street Journal, California saw an increase in unemployment of 0.9 percent in November and December, while Florida and Nevada saw increases of 0.7 percent and 1.0 percent respectively.

The last 4 months of 2008 were especially bad. Around 2 million jobs were eliminated from September 2008 to the end of the year. Then on Monday this week—now dubbed “Black Monday”—over 70,000 jobs were cut on a single day. So when is the carnage going to end?

Certainly the new stimulus package won’t hurt the employment outlook, with early projections estimating that the bill will create or save around 4 million jobs, according to the Associated Press. The bill is being reviewed by the House and it is expected to be passed later in the day according to the Wall Street Journal. After passing the House, the bill will then make its way to the Senate. There is still some lobbying to change parts of the bill, but it is widely expected that it will pass in one form or another and arrive on the President’s desk within the next few weeks.

It remains questionable at best whether the bill will work as planned. This current economic environment is different than anything we have ever seen before, and we are really just guessing on the true impact of these initiatives. Will $825 billion be enough? Is the money being allocated to the appropriate places? Will borrowing the money to finance the programs cause problems in the debt markets? These are just a few of the many questions that lawmakers are trying to answer. The truth is, though, that no one knows the answer. They can make educated guesses at best. Let’s just hope that Obama knows what he is doing...and wishing for a little luck won’t hurt either.

Unemployment Rate Now 7.2 Percent And Rising

The U.S. Labor Department just released the latest jobs report, and—surprise!—it wasn’t pretty. For the first time in the history of the report, there were back-to-back monthly job losses in excess of 500,000—584,000 jobs lost in November, followed by 524,000 jobs in December—bringing the total for 2008 to 2.6 million—the largest yearly drop (by number) since 1945.

"We have a bigger economy now, but even on a proportional basis, the last months have been the worst since [1945]," said Kurt Karl, head of economic research at Swiss Re, according to CNNMoney . "It's just an enormous acceleration of job losses."

It doesn’t end there: In addition to unemployment, there is an increasing number of under-employed workers. The under-employed rate jumped to 13.5 percent, up from 12.6 percent, which is the highest level on record since measurement began back in 1994, according to CNNMoney.

Experts don’t envision things turning around anytime soon either. Tig Gilliam, chief executive of Adecco Group North America, a unit of the world's largest employment firm and Karl both expect about another 1 million jobs to be lost in January and February before the declines begin to shrink to about a 200,000 level in June. Both said stimulus will help, but they doubt that infrastructure jobs will have as quick of a boost as lawmakers hope, according to CNNMoney.

Obama is attempting to enact an economic stimulus plan that will create or save 3 million jobs. In addition to major tax cuts for businesses and consumers, the plan also calls for huge investments in infrastructure. This could help put to work the legions of unemployed construction workers, although experts think that benefits wouldn’t be heeded until the end of the year. Even if that is the case, "Putting money into highways won't by itself end the recession, but it will put a lot of skilled workers back on job," said Ken Simonson, chief economist for The Associated General Contractors of America in a CNNMoney article.

It is difficult not be pessimistic about the employment prospects for Americans, "We're seeing a complete unraveling of the labor market and are on track for getting beyond 10 percent unemployment," said Lawrence Mishel, president of the Economic Policy Institute in a CNNMoney article.

It is hard to envision the government allowing unemployment numbers to surpass 10 percent, but unless they act quickly it is a definite possibility. I think Obama will do everything he can to prevent unemployment from spiraling out of control, but will it ultimately be enough?

A Case Against New Tax Cuts

One major debate among economists and politicians is whether or not tax cuts actually stimulate the economy. Yesterday President-Elect Barack Obama shared details about his new economic stimulus plan where he is calling for around $300 billion in tax cuts. Many people are in support of these cuts, however, there is also an opposition side as well. Jeff Madrick is one such opponent, he believes in higher taxes and bigger government. While you certainly do not have to agree with his views, it is interesting to hear his arguments. Economics professor Mark Thoma takes a closer look at Madrick's article, and adds some thoughts in his blog post below.

Jeff Madrick makes the case for government:

No New Tax Cuts, by Jeff Madrick, Boston Review: ...Even Friedman acknowledged that free markets do not adequately supply some public goods, like primary education and roads. ... And there are other strong theoretical arguments to be made for state intervention in areas of information economics, behavioral economics, agency problems..., and institutional economics and the power of the firm.

However, it is possible to look at the question ... empirically rather than theoretically. ... One argument against government is that public spending is unproductive and crowds out private spending. But, time and again, [Peter H. Lindert, a leading economic historian,] found that studies claiming that high taxes reduce economic growth simply did not hold up. ... No matter how he juggled the data, he found no relationship between the growth of GDP per capita and productivity and the level of taxes or the extent of social spending. There is a dramatic “conflict between intuition and evidence,” he writes. ...

Other economists have ... shown that one of the other anti-tax arguments—that it significantly reduces incentives to invest and work—is highly exaggerated. ... Then there is the argument that government is always inefficient. Sometimes it surely is. But Medicare’s administrative expenses consume only 2 or 3 percent of outlays compared to 15 to 20 percent for private medical insurance. The administrative expenses of Social Security, a marvel of efficiency, are miniscule.

Indeed, the economic history of the United States is one of consistent and vigorous government action... Even when government expenditures were low, government established regulations that seriously affected the nation. Thomas Jefferson was one of the early regulators of land-distribution policies, which were radical by any standard we know today... As a consequence, land was widely distributed at a fair price in the nation early on, and speculators (to the degree possible) kept at bay.

State and local government spent on public improvements aggressively in the early 1800s, building canals and roads. By 1850 the United States had one of the the world’s great free primary education systems. Through land donations—a form of spending—the federal government supported the new agricultural and technical colleges, such as MIT and the University of California, Berkeley, and invested heavily in railroads. In the late 1800s and early 1900s, government built the sanitation, water, and sewer systems that made urban life possible. In the 1900s, government built the new high schools necessary for an advancing economy, along with new roads, dams, bridges, and all manner of public works. Look at your own city. After World War II, the federal government built the national highway system, subsidized college for GIs, supplied the polio vaccine, developed the Internet—and on.

That is where tax dollars go. The reason higher-tax nations do well economically is that government spending can and often does succor economic growth. All rich nations today have robust government. ...

America’s to-do list is now very long..., and many, with an unnecessary fear of budget deficits, believe it cannot do what it must. The first step will be to jettison ideology and return to America’s pragmatic roots. That has not happened yet, but push-back has already started...

[Read other pieces in this special economics feature by Dean Baker and Robert Pollin.]

I have argued that targeted tax cuts need to be a part of the stimulus package for a variety of reasons, e.g. the speed with which tax cuts can be implemented, and as part of a portfolio of policies that recognize we aren't sure whether tax cuts or changes in government expenditures work the best to name just two. So I don't agree with the title's call to not cut taxes, in the short-run we may need to lower taxes as part of a recovery package. To the extent that tax cuts support the goal of economic recovery, and do so better than any other option, they are needed. But if the goal of the tax cuts is simply to use the crisis as leverage to exploit a ratchet effect, or at least an asymmetry where taxes can be lowered much easier than they can be raised and hence squeeze government in the future, then that's another matter entirely. Republicans have a history of using crises to try and ram through their favorite policy, e.g.:

Just two days after 9/11, I learned from Congressional staffers that Republicans on Capitol Hill were already exploiting the atrocity, trying to use it to push through tax cuts for corporations and the wealthy.

That's not the only example from the past, and in the present we've already heard calls to repeal the capital gains tax as a stimulus measure. I'm sure if the GOP could come up with an estate tax repeal argument that sounded even remotely plausible as a stimulus measure, we'd hear that too. So while I can support targeted tax cuts to some degree, I am worried that we'll avoid the tough political battle in the name of expediency, go too far, and compromise the best economic options in order to satisfy ideological demands. (And that is true not only of the magnitude of the tax cuts versus spending other polices such as infrastructure and aid to state and local governments, but also of the type of tax cuts -- I am not thinking of the trickle down variety when I use the word "targeted".)

This blog post can also be viewed at economistsview.typepad.com.

President-elect Barack Obama Asks Americans For Patience

During his presidential campaign Barack Obama made many promises to the American people, and there will be a lot of pressure to deliver when he takes office. Americans are losing their jobs, and to say that the economy is struggling is an understatement. The voters who showed up in record numbers to select Obama as our next president expect results, and fast. Knowing that he is going to be on the hot seat, Obama has done the smart thing by reminding people that fixing these problems isn’t going to happen overnight. "The economy's likely to get worse before it gets better. Full recovery will not happen immediately," Obama said Monday, according to CNN.

In a society that wants and demands immediate results, this is a hard pill to swallow, but Obama is right. If we want to fix the economy—and by fix I don’t mean slap a band aid on—it is going to take time and things will get worse before they get better. Americans need to understand this and give Obama a little slack. We need to look at the big picture, not at what will just get us through the next year.

However, though Obama is saying the right things right now, whether he will actually do the right things is an entirely different matter. I don’t agree with many of Obama’s plans to correct the financial crisis, but no one on this planet knows for certain how to fix this thing. There are various and potentially valid opinions on the best course of action, and I don’t intend to sit here and say that I have the perfect plan. I also don’t envy the position Obama is in. He will listen to plan after plan from top economic experts, and then choose the one that will either save us or sink us, and forever bear the weight of that decision on his legacy. Not a pleasant task. I think Obama is a very smart man, and I think that it is important that we give him a chance. This is the man that America selected to get us out of the current crisis and we need to accept that. It is scary to think that one man will have such a huge role in deciding our future, but Obama is the man chosen for the job.

So, President-elect Obama: Even though I might not agree with all of your decisions, this blogger promises to give you the time that you’ve requested. Just do your best to make the right decisions, because my daughter’s future is in your hands.

Homebuilders Next In Line To Beg For Bailout Funds

Detroit automakers recently received the cold shoulder from Congress on their quest for a piece of the $700 billion bailout pie; next in line are the homebuilders. Hopefully they will learn from the automakers and won’t fly to Washington in private jets to beg for these funds, although at this point it appears doubtful that their wishes will be answered anyway. The homebuilders are prepared to request an aid package estimated at $250 billion and aptly called “Fix Housing First”, according to the Wall Street Journal. The homebuilders are trying to convince Congress that the rest of the financial system will continue to deteriorate until home prices stabilize.

The “Fix Housing First” plan calls for two parts, a large tax credit for homebuyers and a government subsidy of mortgage rates. The tax credit that the homebuilders are proposing would equal 10 percent of the home’s purchase or $22,000, whichever is less according to the Wall Street Journal. The mortgage subsidy requested by the homebuilders would aim to bring interest rates on government backed 30 year fix loans down to 3 percent for loans made in the first half of 2009, and 4 percent for loans made in the second half of the year, according to the Wall Street Journal. The Wall Street Journal also notes that Realtors are pushing a 4.5 percent interest rate buy down for new mortgage loans. It is their estimation that for each 1 percent that rates fall, 500,000 to 800,000 additional homes could be sold.

It seems very unlikely that any variation of the “Fix Housing First” plan will get passed before Obama takes office, but once he does all bets are off. I seriously doubt that the plan would remain intact as is, but some variation of the proposal could be possible. There is a lot of support for the idea that the housing crisis is the underlying cause of the greater financial crisis, and most Americans are more likely to approve of measures that will aid the housing and mortgage markets before aiding banks and other financial institutions. We have been trying to prop up the financial industry for a long time, without much avail. Why not give housing a try?

Of course the problem is that this will simply artificially inflate housing prices yet again. We did that before and look where that has left us. If we are able to inflate housing prices, that will alleviate many of the problems plaguing the financial industry and homeowners alike, but it is not sustainable. Housing simply became too expensive, and it will become too expensive again if we inflate it, and the next time it will cost us even more to fix the fallout. Housing prices need to rise in correlation with a rise in income, which is the only sustainable way. I hope that Congress and the next administration know better than to rely on biased research when looking to spend hundreds of billions in taxpayer money.

How Much Damage Can Be Done Before Obama Takes Office?

The economic prospects of this country are getting worse everyday, and the current administration seems content to sit back and do nothing. This transition period, before the new administration officially takes power, has caused problems before, way back in 1932, and we all saw how that turned out. It makes you wonder, just how much can the current administration further mess things up before Obama takes power? Economics professor Mark Thoma looks at an opinion piece from Paul Krugman on the topic in his blog post from Economist's View.

The outlook for the economy is deteriorating, yet economic policy "seems to have gone on vacation":

The Lame-Duck Economy, by Paul Krugman, Commentary, NY Times: Everyone’s talking about a new New Deal, for obvious reasons. In 2008, as in 1932, a long era of Republican political dominance came to an end in the face of an economic and financial crisis that, in voters’ minds, both discredited the G.O.P.’s free-market ideology and undermined its claims of competence. And for those on the progressive side of the political spectrum, these are hopeful times.

There is, however, another and more disturbing parallel between 2008 and 1932 — namely, the emergence of a power vacuum at the height of the crisis. The interregnum of 1932-1933, the long stretch between the election and the actual transfer of power, was disastrous for the U.S. economy, at least in part because the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now. ...

How much can go wrong in the two months before Mr. Obama takes the oath of office? The answer, unfortunately, is: a lot. ... The prospects for the economy look much grimmer now than they did as little as a week or two ago.

Yet economic policy, rather than responding to the threat, seems to have gone on vacation. In particular, panic has returned to the credit markets, yet ... Henry Paulson ... has announced that he won’t even go back to Congress for the second half of the $700 billion already approved for financial bailouts. And financial aid for the beleaguered auto industry is being stalled by a political standoff. ...

What’s really troubling ... is the possibility that some of the damage being done right now will be irreversible. I’m concerned, in particular, about the two D’s: deflation and Detroit.

About deflation: Japan’s “lost decade” in the 1990s taught economists that it’s very hard to get the economy moving once expectations of inflation get too low (it doesn’t matter whether people literally expect prices to fall). Yet there’s clear deflationary pressure on the U.S. economy right now, and every month that passes without signs of recovery increases the odds that we’ll find ourselves stuck in a Japan-type trap for years.

About Detroit: There’s now a real risk that, in the absence of quick federal aid, the Big Three automakers and their network of suppliers will be forced ... to shut down, lay off all their workers and sell off their assets. And if that happens, it will be very hard to bring them back.

Now, maybe letting the auto companies die is the right decision, even though an auto industry collapse would be a huge blow to an already slumping economy. But it’s a decision that should be taken carefully, with full consideration of the costs and benefits — not a decision taken by default, because of a political standoff between Democrats who want Mr. Paulson to use some of that $700 billion and a lame-duck administration that’s trying to force Congress to divert funds from a fuel-efficiency program instead.

Is economic policy completely paralyzed between now and Jan. 20? No, not completely. Some useful actions are being taken. For example, Fannie Mae and Freddie Mac ... have taken the helpful step of declaring a temporary halt to foreclosures, while Congress has passed a badly needed extension of unemployment benefits now that the White House has dropped its opposition.

But nothing is happening on the policy front that is remotely commensurate with the scale of the economic crisis. And it’s scary to think how much more can go wrong before Inauguration Day.

This article has been reposted from Economist's View. The full post can also be viewed on Economist's View.

Bush And Paulson Tell Obama To Clean Up Their Mess

It appears that Bush and Paulson are content to leave their mess for Obama to clean up. Rather than push forward with new initiatives that can help relieve pressure on the financial system, they would rather wash their hands of the situation. Considering the magnitude of our problems, though, the economy might not be able to wait for Obama to take command. Kathy Lien investigates this issue in more depth in her blog post below.

There are increasing signs that the Bush Administration wants to leave the clean up job to Barack Obama.

According to Treasury Secretary Paulson, even though the first half of the $700 billion bailout package is being used up quickly, the Bush Administration will not be asking Congress for the remaining $350 billion.

With 8 weeks to go before Bush leaves office, the current Administration is more focused on wrapping things up than starting new initiatives.

Paulson said it best:

“I’m going to do what we need to do to keep the system strong but I’m not going to be looking to start up new things unless they’re necessary, unless they make great sense” and “I want to preserve the firepower, the flexibility we have now and those that come after us will have.”

This was the same spirit that Bush took at this weekend’s emergency meeting of G20 nations that I talked about this morning. The meeting was a big disappointment as the Group failed to deliver any specific solutions. Instead, they set an action plan for March 31 and another meeting for April 30th. The G20 is clearly waiting for the new Administration to take charge before putting the pedal to the medal. The only question is, will the global economy be able to wait that long.

This article has been reposted from Kathy Lien. The full post can also be viewed on KathyLien.com.

World Enters Recession: Time For Global Action?

So while the U.S. may not have officially entered into a recession, those who don’t realize a recession is among us are in denial. Recessions are always announced well after they actually begin, and you can bet the announcement will come soon enough. The U.S. isn’t alone, though; the Euro Zone and Hong Kong recently announced a recession, along with several other countries. This economic downturn is a global phenomenon and everyone is being affected. The Prime Minister of Britain, Gordon Brown, has even started campaigning for a global response to the economic problems plaguing the world. Even if Brown can convince all the developed countries to act in unison, will it be enough?

Brown is coming to Washington in an attempt to get the U.S. on board with his plan, but many of his ideas--such as creating so-called colleges of supervisors for the world's largest financial institutions, where regulators from the countries in which the firms operate would meet to swap information and coordinate responses in an emergency--have not been received well in the past, according to the Wall Street Journal. Brown is also trying to restart the Doha round of international trade talks that collapsed earlier this year. Maybe governments will change their minds and be more willing to make compromises considering the magnitude of the economic problems, but it is hard to say.

I like what Brown is trying to do, as it seems that the world working together would be able to fix the problem better than everyone working individually, but I doubt his success. Trying to get this many countries on the same page working together for one purpose is going to be extremely difficult. Obviously everyone is going to be looking out for their own best interests, and trying to weed through that to come to an acceptable compromise is going to require a lot of time and a small miracle. I just don’t think Brown is going to be able to pull it off. Even if he is able to do it, though, would it really fix our problems?

I doubt that it will be able to make everything better, however if anything is going to work, I suppose a major global effort would be near the top of the list. In my mind, though, there are too many problems that need to be worked out, especially in the U.S. Sure, we might be able to put a Band-Aid on the problems and stop the bleeding for a while, but the wound isn’t going to heal with just a Band-Aid. We really need to address the problems and take action, action that will require diligence and time. Unfortunately in our “now” society, we want the problems fixed right now, even if those fixes are only temporary.

What Does Barack Obama Have In Store For Us?

President-elect Barack Obama certainly will have his hands full when he takes office in January. Considering all the problems that he will be faced with what can we really expect him to deliver? Mark Thoma takes a closer look at this below in his post from the Economist's View.

Thinking bigger than the small-minded pundits:

The Obama Agenda, by Paul Krugman, Commentary, NY Times: ...If the election of our first African-American president didn’t stir you, if it didn’t leave you teary-eyed and proud of your country, there’s something wrong with you.

But... Can Barack Obama really usher in a new era of progressive policies? Yes, he can.

Right now, many commentators are urging Mr. Obama to think small. Some make the case on political grounds: America, they say, is still a conservative country, and voters will punish Democrats if they move to the left. Others say that the financial and economic crisis leaves no room for action on, say, health care reform.

Let’s hope that Mr. Obama has the good sense to ignore this advice.

About the political argument: Anyone who doubts that we’ve had a major political realignment should look at what’s happened to Congress. ... Democrats have won back-to-back victories, picking up at least 12 Senate seats and more than 50 House seats. They now have bigger majorities in both houses than the G.O.P. ever achieved in its 12-year reign.

Bear in mind, also, that this year’s presidential election was a clear referendum on political philosophies — and the progressive philosophy won. ...

Mr. Obama ran on a platform of guaranteed health care and tax breaks for the middle class, paid for with higher taxes on the affluent. John McCain denounced his opponent as a socialist and a “redistributor,” but America voted for him anyway. That’s a real mandate.

What about the argument that the economic crisis will make a progressive agenda unaffordable?

Well, there’s no question that fighting the crisis will cost a lot of money. ... And on top of that, we badly need a program of increased government spending to support output and employment. Could next year’s federal budget deficit reach $1 trillion? Yes.

But standard textbook economics says that it’s O.K., in fact appropriate, to run temporary deficits in the face of a depressed economy. Meanwhile, one or two years of red ink ... shouldn’t stand in the way of a health care plan that, even if quickly enacted into law, probably wouldn’t take effect until 2011.

Beyond that, the response to the economic crisis is, in itself, a chance to advance the progressive agenda.

Now,... it would be fair for the new administration to point out how conservative ideology, the belief that greed is always good, helped create this crisis. What F.D.R. said in his second inaugural address — “We have always known that heedless self-interest was bad morals; we know now that it is bad economics” — has never rung truer.

And right now happens to be one of those times when the converse is also true, and good morals are good economics. Helping the neediest in a time of crisis, through expanded health and unemployment benefits, is the morally right thing to do; it’s also a far more effective form of economic stimulus than cutting the capital gains tax. Providing aid to beleaguered state and local governments, so that they can sustain essential public services, is important for those who depend on those services; it’s also a way to avoid job losses and limit the depth of the economy’s slump.

So a serious progressive agenda — call it a new New Deal — isn’t just economically possible, it’s exactly what the economy needs.

The bottom line, then, is that Barack Obama shouldn’t listen to the people trying to scare him into being a do-nothing president. He has the political mandate; he has good economics on his side. You might say that the only thing he has to fear is fear itself.

This article has been reposted from the Economist's View. The full post can also be viewed on the Economist's View.

History Sides With Barack Obama’s Tax Plan, But What About The Future?

The New York Times published a compelling opinion piece this weekend written by Alan Blinder, an economics professor at Princeton and Democratic advisor, titled, “Is History Siding with Obama’s Tax Plan?” In his article Blinder uses historical figures to make the statement that Obama’s tax policy will be better than McCain’s. On the other end of the spectrum, the Wall Street Journal published an opinion piece this morning by Martin Feldstein and John Taylor, economic professors at Harvard and Stanford and advisors to McCain, titled, “John McCain Has a Tax Plan to Create Jobs.” Both articles make great points, but the authors are obviously biased. So who are we to believe? Which Presidential nominee ultimately has a better tax plan?

Of course, what candidates say in a campaign and what they do in office can be completely different, but even if we assume that the winner will follow through on his tax promises, we can only make an educated guess. McCain plans to keep the existing Bush tax cuts in place, which will help wealthy Americans and investors who pay capital gains taxes. McCain also wants to cut business taxes among other things, which Feldstein and Taylor believe will create jobs, spur growth and benefit virtually everyone. That certainly sounds lovely, but Blinder makes some great points that seem to counter such praise of McCain’s plans.

Blinder makes the case in his article that Democratic Presidents have greatly outperformed Republican Presidents while in office, economically speaking. From 1948 to 2007 the U.S. economy has grown 1.64 percent per year under Republican Presidents and 2.78 per year under Democratic ones. Blinder estimates that this difference in growth over an 8 year period would mean an additional 9.33 percent of additional income for every American. Blinder then goes on to point out that income inequality widens when Republicans are in office and shrinks when Democrats are in office. This point of course is fairly obvious given the policy of Republicans and Democrats, but worth noting nonetheless.

So where exactly does this leave us? One article focuses on the future, while the other focuses on the past. Can one really look at the past as an accurate predictor the future? The past certainly does not guarantee future results, but by what other means can we make projections?

Blinder’s article had the bigger impact on me because he actually supports his points with statistical facts. Whether or not they accurately represent what the future holds for Obama or McCain, they do give us a basis for conjecture. Feldstein and Taylor claim that jobs will be created, but they don’t support this claim with anything. Though the logical side of my brain tells me that tax cuts for businesses will lead to job creation, where is the proof? After reading Blinder’s article one is certainly left to wonder.

Another interesting piece of information I learned watching I.O.U.S.A. was that the national debt has tended to increase at a much faster pace when Republicans were in office. This coincides well with the GDP growth mentioned in Blinder’s article, but also, as pointed out in the movie, is a result of tax cuts. This again leaves one to wonder and even rethink one’s perceptions about the validity of certain tax policy reforms, though one must still question whether the past performances of a few Presidents can accurately predict future results.

Are McCain and Obama likely to follow in the footsteps of past Republican and Democratic economic performance, or are their plans different? Voters must decide for themselves, and I urge anyone who hasn’t yet read these two articles to do so, as they might encourage readers to think more seriously about this issue.

Housing Bill Signed By Bush; Now What?

President Bush signed the housing bill this morning, so the biggest housing legislation in decades is now officially on the books. The bill finally came together when opposing sides were able to agree that the bill as is was better than nothing. Republicans got their Fannie Mae and Freddie Mac support and Democrats got their foreclosure bailout. Neither side is 100 percent happy, but then, when does that ever happen in politics? So now that this housing bill is official, what happens? Can we expect to see dramatic changes in the housing market for the better now? Well, not exactly…

It is no secret how I feel about the housing bill, and if you aren’t familiar with my blog, read this prior post on the housing bill to get caught up. There are also officials who share my same discontent for the bill. According to BusinessWeek, a top official in the Bush administration admitted that this housing bill will probably help fewer people than the previous expansion of the FHA. This new housing bill is estimated to help around 400,000 people, compared to the previous FHA bill, which was slated to assist 500,000. This news, of course, made me even more upset because the FHA bill certainly didn’t live up to its billing (see previous post about FHA Secure loans). It turned out that many of the people the FHA bill helped were people who really didn’t even need the help, but instead elected to take a nice little government (read: taxpayer) subsidy for their mortgage. So if this new housing bill is going to help even fewer people, and cost us more, then pardon me if I don’t exude excitement.

I’m not sure of the exact cost of the bill, and to be honest, no one does. It ultimately depends on how many insured loans go bad and whether or not Fannie and Freddie will need the assistance that we are now offering. Estimates from the Congressional Budget Office put the price tag on the Fannie and Freddie package as high as $25 billion. As far as how many of the $300 billion in new FHA loans will go bad, your guess is as good as mine, but I’d assume it will cost us a few billion. In addition, there is a $3.9 billion foreclosure bailout provision included, along with a tax credit for first time homebuyers. I don’t know about you, but all the uncertainty of potential costs is a little scary to me. Sure, officials have made estimates, but those are just that: estimates. This is the equivalent of dropping your car off at the repair shop and getting a repair quote of between $500 and $10,000, but in order to get the repairs done, you have to agree to pay the final tab, regardless of where it might end up. I guess when you have debt approaching $10 trillion, what’s a few billion more?

Housing Bill Set To Pass: Bush Drops Veto Threat

It appears that the proposed housing bill has all but passed now that the threat of a veto from the White House is gone. It is expected that the bill will easily pass through the House and Senate and then be signed by President Bush within the next week or so. Whether this bill will ultimately help or hinder our economy remains to be seen, but unless you are a bank, chances are this bill probably isn’t too exciting for you.

The main opposition to this bill all along has been that it represents a bailout of lenders and really doesn’t offer homeowners much relief. Now that Fannie Mae and Freddie Mac are on the ropes, Bush was willing to cut a deal and withdraw his veto in order to get a support measure for the two companies through. The following are some of the key components of the bill:

• Fannie and Freddie support (see previous post: Foreclosure Bill and $300 billion Housing Bill could pass thanks to Fannie and Freddie)
• Allow the government to insure up to $300 billion in refinanced mortgages
• $4 billion program for local governments to buy and rehab foreclosure properties
• Regulation changes for Fannie and Freddie ($625,000 loan limit, oversight of top executive compensation)
• Raise national debt limit to $10.6 trillion from $9.8 trillion

Of these, the most controversial one has been the $4 billion foreclosure program for local governments. On several fronts it represents a bailout of lenders, and considering the poor lending decisions they made, it is something that is hard to support. We will have to see how the $300 billion allocated for refinanced mortgages ends up helping, but if it goes anything like the other programs which have been rolled out of late, it is doubtful all that many homeowners truly in need will get assistance. Most likely, we as taxpayers will end up subsidizing the mortgages of a few homeowners who probably would have been okay (though they probably would have gone through some struggles) without our help.

Personally I’m against this bill, and I would have loved nothing more than to see it vetoed by President Bush. Unfortunately, it doesn’t appear like that is going to happen. If you want to know why we should be so opposed to this bill, look no further than the last bill component listed above. Our national debt is about to pass $10 trillion, yet we keep throwing more money at every problem we come across. The Fannie and Freddie rescue plan is probably something that needs to be in place, because if they fail, our economy is doomed for the most part. But we really need to look long and hard at whether these companies should be our long-term solution. I can probably live with bailing them out once, and learning from our mistake. But if they just keep doing what they are doing, what is to stop them from needing another bailout down the line? If we hang out an implied government guarantee then taxpayers are in essence subsidizing the shareholders of these companies. This is a long-term problem that needs to be evaluated and addressed. In the meantime, get ready for the latest attempt to resurrect the housing market. This attempt is bigger than ever, but unfortunately I foresee it falling short just like its predecessors. The housing market needs more than this housing bill to turn around--bottom line, it needs to get more affordable for the masses.

Foreclosure Bill And $300 Billion Housing Bill Could Pass, Thanks To Fannie Mae and Freddie Mac

Democrats have been pushing a foreclosure bill that would provide $4 billion to states and cities to repurchase foreclosures and rehabilitate them, along with a more encompassing $300 billion housing bill. Republicans have strongly opposed the bills saying they represent a bailout of lenders, among other things. Now that the White House and Republicans want to get their Fannie Mae and Freddie Mac rescue bill passed ASAP, Democrats are trying to strike a deal.

The Fannie and Freddie rescue plan involves extending the government sponsored entities an unspecified line of credit (basically unlimited), along with establishing the right for the government to step in and buy equity positions in the company if they need to, according to the Wall Street Journal. The Congressional Budget Office estimates the cost of Treasury's proposals to the federal government to be in the tens of billions of dollars, according to the Wall Street Journal. This doesn’t sound so hot to us taxpayers, but if you consider what would happen if we let Fannie and Freddie fail, tens of billions of dollars doesn’t sound too bad. These two companies run the mortgage market, and if they go under, so too does the entire U.S. mortgage industry. It is one of those "you’re damned if you do, damned if you don’t" things.

While Democrats do recognize the importance of Fannie and Freddie, most are reluctant to give the companies a blank check. They want to make adjustments to the proposal, but Republicans want to see this thing done now. This is where politics comes into play: Now the Democrats are trying to push their foreclosure and/or housing bills to be passed in conjunction with the Freddie and Fannie one, and are threatening to hold talks up unless Republicans comply.

Whether or not Republicans give in remains to be seen, but I can’t help to think as a taxpayer that I’m getting the short end of the stick here. So you’re telling me that not only do you want to pass a bill that is going to cost us tens of billions of dollars, but now you want another $4 billion minimum (possibly $300 billion if the full housing bill is included) on top of that to bail out lenders who made dumb choices?

What Is The Gravest Long Term Threat To The U.S. Economy? Radical Islam, Says John McCain

In an interview with Fortune, Republican presidential candidate John McCain was asked what the single gravest long term threat to the U.S. economy was. This is not an easy question, with so many choices and all. Is it the housing crisis or the credit crisis? What about the huge deficit the country is running, or the rising cost of energy? How about Social Security? McCain didn’t select any of those options; instead, he said that radical Islam was the single biggest threat to the U.S. economy. Pardon me a moment while I let this sink in a bit…nope, still don’t see it…oh well, maybe it’s beyond me. Why don’t we analyze it a little more and see if that helps?

Okay, so 9/11 did a number on our economy, I give him that. I can also understand the argument that terrorist attacks, or even the threat of them, can upset consumers, thus affecting the economy. So radical Islam can have an impact on the economy, but is it really the biggest threat? Wait…I think I get what he is trying to say--maybe McCain is telling us that radical Islam is the biggest economic issue because it is forcing us into war and costing us not only billions of dollars each year to fight abroad, but also billions to fight here at home. Oh, and it is also a problem because the movement keeps growing stronger the more we fight it--kind of like using fire to put out fire. Wow, I totally understand now, this fight is going to go on forever--man, that is going to be a downer for our economy. Okay, so now I see why it is such a huge problem…

In all seriousness, I could go on for awhile about why radical Islam is, and has, been fueled by our actions, but for the sake of brevity I will not (for more information here is a good write up). Based on the fact that we in essence created (in many cases) and have fueled radical Islam, maybe the biggest long- term threat to the U.S. economy is not radical Islam, but rather poor foreign policy. That might not be such a bad selection after all. We could look at the national debt as a big one, but we can also say that a lot of that debt was created because of poor foreign policy decisions. We could make the same case for several other problems as well.

At the end of the day, we know exactly why McCain chose radical Islam as the biggest problem, and that is because he is riding the “national security” ticket. If any voter has serious doubts about our national security, McCain is their man. The politics of fear, as it is called, is probably the biggest thing McCain has going for him right now, and he wants to milk it for all he can. The more American voters he can convince that national security is an issue, the better chance he has to win. It also doesn’t hurt that Barack Obama, the Democratic candidate for president has family ties to Islam, a point which has unfairly caused accusations that he is supporting terrorists--despite the fact that Obama himself is a Christian, not a Muslim. Long story short, McCain chose this reason for political purposes, yet he might not be too far off in actuality--only he needs to focus less on the effect and more on the cause.

Senator Christopher Dodd Implicated In Mortgage Scandal

Senators Christopher Dodd (D-Conn.) and Kent Conrad (D-N.D.) have been implicated in a mortgage scandal involving Countrywide bank. This is obviously a touchy issue considering that Dodd is the chairman of the Senate banking committee, it is an election year and a $300 billion lender bailout is supposed to be voted on today in the Senate.

In Dodd's case, the accusations basically boil down to whether or not he was given special pricing in relation to a couple refinance loans he got from Countrywide in 2003. Dodd denies receiving any special rates and adamantly claims that the rates were at market, but he does admit that he was likely on Countrywide’s VIP list.

Dodd's accusers have e-mail evidence apparently showing that Countrywide did, in fact, give Dodd preferential treatment. Countrywide sent an internal e-mail message that said to give Dodd a 0.5 discount on his rates because he was a U.S. senator, according to Portfolio.com.

Dodd denies any wrongdoing and is prepared to fight all allegations against him. Considering the facts that I have read, I don’t think they will ultimately find him guilty, yet the effects could be hard-felt nevertheless. The major $300 billion mortgage bailout bill has already been delayed while this investigation is underway, according to the New York Times. In a time when Democrats are trying to support their presidential candidate, Barack Obama, any bad press for the party certainly affects him. Dodd is a high-ranking Democrat who was a candidate in the 2008 presidential election himself, and whether or not Obama has anything to do with Dodd, it won’t change how the Democratic party in general is perceived by some.

Personally, I’m all for the investigation. If Dodd did, in fact, take advantage of his position, then he should have to pay the consequences. More importantly, this has held up the $300 billion bailout bill. Since I am adamantly opposed to a mortgage bailout, I hope that this bill gets delayed permanently.

Barack Obama And John McCain Battle Over Economic Policy

Does Barack Obama or John McCain offer the best hope for the U.S. economy? This, of course, is the number one issue on everyone’s mind for the upcoming presidential election. The candidate who is able to best answer this question, and do so in a way that Americans can understand, stands a great chance of becoming our next president. So which candidate does offer the best hope for our economy anyway? Well, it depends on who you ask.

Yesterday in Raleigh, Obama attacked McCain’s economic policy, calling it a repeat of Bush’s miserable failure. Obama’s own plans for the economy include an expansion of unemployment benefits, another economic stimulus package of $50 billion, tax cuts for the middle and lower classes and relief for homeowners facing foreclosure, according to the International Herald Tribune. Obama was quoted in the article as saying, "We were promised a fiscal conservative. Instead, we got the most fiscally irresponsible administration in history. And now John McCain wants to give us another. Well, we've been there once. We're not going back."

The McCain campaign didn’t take the attacks sitting down, though. "While hardworking families are hurting and employers are vulnerable, Barack Obama has promised higher income taxes, Social Security taxes, capital gains taxes, dividend taxes and tax hikes on job-creating businesses," McCain spokesman Tucker Bounds said in a statement issued before Obama's remarks, according to the International Herald Tribune. "Barack Obama doesn't understand the American economy, and that's change we just can't afford.” McCain’s plans for the economy include keeping the Bush tax cuts in place as well as tax cuts for businesses.

In the end it comes down to two schools of economic thought. Obama believes that government spending and policies can help us get out of the economic rut. His policies are going to increase government spending, and overall government involvement in the economy. McCain, on the other hand, belongs to the school of thought that says the economy revolves around businesses. In his mind, the best way to stimulate the economy is to put money into the hands of businesses, who will then be able to add more workers and so on, which ultimately will lead to improvement in the economy.

One thing I haven’t talked about yet is the Iraq war. Obama, of course, wants to start drawing troops out of Iraq, potentially saving us a lot of money (money he wants to put back into our economy). On the other hand, McCain plans to keep troops there for a long time, continuing to add to our government spending on the war (much of this spending is not directly aiding America's economy). That being said, Obama’s overall plans for government spending far exceed McCain's. For the most part I tend to agree more with McCain’s policies than Obama’s, but I do side with Obama in relation to the Iraq war. While I don’t agree with pulling out altogether at this point (because it would hang those Iraqis who trusted us with their lives out to dry), I do think we need to figure out a better plan. The plan to occupy Iraq indefinitely is not a good plan. We never should have gone there in the first place, in my mind. It has cost us billions of dollars and many American lives, but that is another post for another day.

The bottom line is these two candidates differ greatly in their policies: One thinks the government can get us out of this mess, and the other is going to rely on business and the markets to turn things around. Which one is correct? We will have to wait and see. Either way, though, the new president is going to have their hands full, and I seriously doubt either one is going to be able to come up with the magic elixir that rights this thing over night. Turning this ship around is going to take some time and diligence.

FHA In Jeopardy?

With all the talk coming from politicians about how they plan to use the FHA to save the housing market and the economy, it may be a shocker to know that the FHA is struggling mightily right now. The FHA had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover losses, according to the New York Times.

“Let me repeat: F.H.A. is solvent,” FHA commissioner Brian Montgomery said Monday in a speech at the National Press Club, according to the New York Times. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

Something has to change or else the FHA will soon be under water. This is a bit scary to think about because right now, FHA loans make up a good portion of the mortgage market, and an even larger portion in many low income areas. If the FHA were shut down, the real estate market would be in for a huge blow. In reality, though, it is unlikely the FHA will actually shut down even if they become insolvent. Instead, the government would float them the money they needed to continue operations until such a time as they could stand on their own two feet again. As you probably guessed that means taxpayers would ultimately be subsidizing the FHA.

There is one glaring reason why the FHA is struggling right now, according to Montgomery. He blames the seller financed down payment program, otherwise known as down payment assistance. In this program the seller donates the required down payment (typically 3 percent) to a non-profit corporation which then gives the money (minus a fee, of course) to the buyer, who uses it as the necessary down payment. Sound a little sketchy to you? I can assure you I feel the exact same way. Nonetheless, this program has been around for years--and it has been a problem for years as well. 60 percent of the FHA losses can be directly attributed to this program, according to the New York Times, even though these loans only make up around 35 percent of the FHA’s portfolio.

The FHA has been trying to get rid of this program for years, but has met strong resistance and been unsuccessful. Backers of the program say it provides much-needed assistance to low income and minority families who would otherwise be unable to buy homes, according to the New York Times. Naturally, the FHA is continuing its fight against the program, but based on their past experience, it doesn’t appear they are likely to be successful.

“If there’s any justice in this country, they will fail yet again,” Scott Syphax, president of Nehemiah Corporation of America, which provides such loans, said in the New York Times. Wow, you’ve got to love that mentality--if there is any justice in America, we should continue putting people in houses they can’t afford and potentially break the FHA, which would cost taxpayers billions upon billions of dollars. Is it just me or is this guy’s idea of “justice” a little skewed?

Ultimately, whether the down payment assistance programs stay or go, the housing market will likely suffer. If they stay, the FHA will probably need taxpayer support; if they go, then we are losing 35 percent of the FHA loans out there which means we would have even fewer people buying homes. In my mind, though, the right way to go is to ban these programs. The statistics show beyond a doubt that these loans result in an extremely high default rate (about 3 times the FHA norm) and it is not fair to pass this burden on to taxpayers.

Global Warming Plan Of Action Created: Now We Just Need $45 Trillion

The International Energy Agency (IEA) has created a comprehensive plan on how the world should combat global warming. The price tag? $45 trillion. Essentially the goal of the IEA is to have the world cut greenhouse gas emissions by half by 2050. Their plan to accomplish this feat, among other things, includes the creation of 1,400 nuclear power plants and approximately 700,000 new wind turbines, according to the Associated Press. The catch--beyond the price tag, that is--is that we can’t wait to act. All of these things take time to build and the longer we wait, the worse things will get and the higher our chances of a cataclysmic environmental disaster.

When I read this report I thought it sounded like a good and fairly reasonable solution. After all, the IEA is only trying to spur action, and in order to do so, wanted to prove that it could be done. Are there other ways to accomplish the same end? Of course, but now we can physically see at least one of these ways. Since the report projects 40-plus years out and only uses technology available to us today, there will certainly be adjustments made, but it acts as a great starting block.

I’m not a scientist by any right, and I can’t even opine on whether or not global warming is real. But what I can see is that there are without a doubt changes going on in our environment, things that don’t make sense to me. I don’t know if these changes are natural, or if they are being caused by humans, but I can see they are causing damage. At the end of the day I know for a fact that pollution is harmful to humans and animals; whether or not it has anything at all to do with global warming is a separate issue. So in my mind I feel like we are better off assuming that global warming is being caused by humans and working towards reducing harmful pollutants. Worst case, if in 100 years we find out that global warming was a natural occurrence, so be it; at least we made the earth a cleaner and healthier place to live. But on the flip side, what if global warming is caused by humans? If we fail to take action now it will soon be too late, and then not only do we still have all the harmful pollutants, but we also are going to have to deal with a bunch of new environmental problems. We are talking rising oceans, the extinction of numerous species (in fact, just today it was announced that the Caribbean monk seal is extinct) and so on.

My investment philosophy has always been to plan for the worst and hope to be pleasantly surprised. When I look to buy a property I take the worst case projections, and if the numbers still work, I do the deal; if not, I walk. I would much rather be pleasantly surprised (which I typically am) than be overly optimistic going in and end up with a money-sucker. I think the same philosophy can be used in regard to this issue as well. The worst case scenario if we fail to act is much worse than the worst case scenario if we act but are proven wrong. The difference is so incredibly skewed toward the one side that it seems like this decision should be a no brainer. So what’s the hold-up?

Ultimately, as you probably guessed, the hold-up revolves around money. Any action we take to attack global warming is going to come at the expense not only of governments and taxpayers, but of big fossil fuel businesses. The last thing these businesses want is added expenses for the clean-up of their pollution, or loss in revenue because people are using other energy sources. It is bad for their business, and since they have money, they also have a lot of clout with politicians. They are going to hire scientists to disprove the global warming theory, and they are going to talk about how many jobs would be lost and how the economy would suffer. In addition, another of the big hold-ups is with developing countries such as China, which rely heavily on fossil fuel to power their economic growth. In their mind it isn’t fair that the U.S. got to enjoy the economic benefits of growth spawned by fossil fuel usage while they don’t get the same opportunity.

There is certainly some weight to the economic argument, however, they are likely forgetting the fact that many jobs in the fossil fuel industry would be replaced by new jobs in the alternative fuel industry. Instead of working at the coal power plant, now workers will have to be trained to work at the nuclear power plant, and so on. Sure, in the end some jobs will probably be lost, but better a few jobs lost than a world ruined by the effects of global warming.

In response to the developing country dilemma, this one is much harder, as these countries certainly have a case to be made. In my mind, the developed countries who contributed the most to the problem should have to compensate for that. So the U.S., for example, should have to pay a large portion of China’s expenses to combat global warming and help pay for new alternative energy sources or the cleaning up of their coal power plants and so on.

What does this mean for investors? Well, if the world starts getting behind the IEA’s plan, or some similar one, there is going to be a huge surge in the alternative energy industry. 1,400 new nuclear power plants and 700,000 new wind turbines is a huge number by any stretch and since there are only so many companies that can make these things you can bet they are going to be extremely busy.

Thailand Heading For Another Military Coup?

After the military coup in 2006, which stopped Thailand’s surging markets in their tracks and created fear in the eyes of investors, the last thing Thailand needs now--after rebuilding that confidence somewhat--is another coup.

After Samak Sundaravej was elected prime minister, many people feared that another coup may be imminent. After all, Samak is a close ally of the former prime minister Thaksin Shinawatra, who was the one ousted by the coup, so the precedent for such action has been established. Already protests have begun in opposition of Samak, just as they were going on in protest of Thaksin. Many Thais believe that Samak is just a proxy for Thaksin according to the BBC.

The bottom line here for Thailand is that if they want to restore investor confidence they need to quell this problem, and fast. The bigger these protests grow, the more speculation of a coup there will be and the lower investor confidence will shrink. Already Thailand’s stock market has fallen for five straight days, and the rumors of a coup are mounting, according to the BBC. If Thailand can put an end to the uprisings (in an acceptable manner) and cool down the rumors, it would go a long way towards proving that this administration is here to last.

Investors don’t like uncertainty, and when you are investing in a foreign country in particular, the last thing you want to see is problems with the country’s leadership. Thailand is a beautiful country with loads of potential, but in order to maximize this potential the country is going to have to establish some level of stability within their government.

Senate Puts President Bush In His Place But Was It Warranted?

Over President Bush’s pleas to the contrary, the Senate almost unanimously (97 to 1) approved a measure that will halt the further purchase of strategic oil reserves. Since it was passed by such a large majority, the measure cannot be vetoed by the President, so it looks as if President Bush has lost this battle for good. "Why on earth should we be putting oil underground at a time of record high prices?" Sen. Byron Dorgan (D-N.D.), the measure's chief sponsor, argued in a LA Times article. Democrats have been calling for this action for quite some time, but more recently Republicans have taken their side on the argument as well. Considering how much oil has been going up, though, this hoarding of oil might prove to be one of President Bush’s best investment decisions yet.

Under President Bush’s guidance the government has been adding about 70,000 barrels of oil a day, in comparison to the approximately 21 million barrels of oil the U.S. consumes each day, according to the LA Times. Since the amount being hoarded is minimal compared to total usage, the impact of suspending further stockpiling won’t be that great, but some economists figure it could save consumers as much as 3 to 5 cents per gallon on gas, according to the LA Times.

It is not hard to see that the motivations of many of these politicians is to get re-elected, but Bush doesn’t have that problem, so logic would say his only incentive is to do what is best for the country going forward. The main reason he gives for the stockpiling is energy security, which certainly has validity, yet I think it is proving to be an even better investment.

Here are some numbers to consider: Our national oil stockpile sits at approximately 702.7 million barrels, with an average price paid of $28.42 a barrel, according to the U.S. Department of Energy website. Since oil is more than $125 a barrel, that means that thanks to the policies upheld and pushed by Bush, we have created almost $68 billion of “oil equity,” so to speak. Considering many of the other dumb decisions Bush has made over the years, this might actually be one of his better ones, so let’s cut him a little slack. If the U.S. were now to release oil reserves to ease oil prices until we hit the stockpile point we would have been at had we listened to the previous Democratic oil outcries, we would be able to reduce gas prices by much more than the 3 to 5 cents we may see because of the current measure just passed by the Senate. So maybe there really is some method to Bush’s madness.

Barack Obama: Guilty By Association?

By now everyone knows the Rev. Jeremiah Wright and what he has done to the Obama campaign, but what about another of Barack Obama’s friends, Deval Patrick, the governor of Massachusetts? I just read an interesting opinion piece in the Wall Street Journal by Jon Keller in which Keller essentially called out all of Patrick’s faults and proceeded to say that Obama would end up just like Patrick. The article brings up many similarities between Obama and Patrick: They are both African American, they both attended Harvard Law and they both frequently focus on “change” in their rhetoric. Earlier this year in a campaign speech, Obama even borrowed some words from one of Patrick’s speeches and was accused of plagiarism. The two are close friends, and may be similar in some ways, but is the assumption that Obama will follow the same path as his friend really fair?

I am not personally an Obama supporter, and I am not planning to vote for him come election time, but this is not because of the actions of his friends and acquaintances. To judge him solely on that would be short-sighted, and I feel for the guy for enduring so much judgment, even if this sort of scrutiny does come with the territory. While I do think Obama might be promising more than he can deliver, the main reason I don’t support him is that I don’t agree with many of his major policies. One of Keller’s major criticisms of Obama in the article revolves around these promises of change. Deval Patrick has failed on several occasions to see his promised changes through, and Keller thinks Obama is likely to do the same. I, too, question whether Obama will be able to carry his changes to completion, as I am always skeptical of politicians that make grand promises, but one thing makes me think that he perhaps isn’t just paying lip-service.

A gas tax holiday has recently been proposed, which McCain and Clinton are supporting and Obama is opposing. I firmly agree with Obama on this, and I respect that he is holding his ground. Most Americans don’t understand economics all that well, and many will jump on the gas tax holiday bandwagon. It would have been easy for Obama to support the tax holiday along with Clinton and McCain and gain the goodwill of millions of Americans who are faced with the reality of $4 a gallon gas, but it wouldn’t have been the best move for the country. Obama may be more perseverant than people think, and these allegations that he will be another Deval Patrick may prove to be a bit premature.

Barack Obama Could Win The Election Thanks To Ron Paul?

The fact that the Ron Paul Revolution is still kicking, despite the fact that the Republican nominee has already been decided, could potentially help Barack Obama and hurt John McCain’s chances at the presidency. I read an interesting blog post from Tommy Christopher at the Political Machine that brought up a key point. According to Christopher, one of the strongest ties of the Ron Paul revolutionaries is that they strongly oppose the war in Iraq. Since McCain plans to keep the Iraq war going indefinitely, this will likely lead to many Ron Paul supporters crossing party lines to vote for the Democratic candidate, which will likely be Obama.

McCain’s party hasn’t worried too much about the Ron Paul fallout, probably assuming that it would taper off once he clearly won the nomination, but that doesn’t appear to be happening. In the recent Pennsylvania primary, Ron Paul won 16% of the vote, which in itself is not a huge number, but if a majority of these Ron Paul supporters turn to Obama come election time, they could easily swing the race.

Ron Paul seems intent on continuing to use his platform as a presidential candidate to spread his revolutionary ideas for as long as he can. The more people who hear Paul’s message, about the Iraq war in particular, the more people who could demand the end to this war, which would likely only come if Obama is elected president.

By staying in the race Ron Paul is in effect helping Obama. I don’t think that Ron Paul supporters are truly excited about the prospects of McCain or Obama, or they would be supporting one of these candidates by now. Which way they go in the end though could possibly decide the presidential race, and it is hard to ignore that the biggest issue in many of the Ron Paul Revolutionaries minds is the Iraq war. I can’t imagine many things more upsetting to Republican leaders than the idea of the Ron Paul Revolution helping Obama win the presidency, but it just might happen.

As Obama And Clinton Fight, McCain Is Closing In On Presidency

There have been some interesting turns of events in the Presidential race. Last month, Barack Obama enjoyed a huge lead over Hillary Clinton, and was largely favored to win over John McCain. Obama is now only slightly ahead of Clinton, and the margin seems to be getting tighter. Even worse for the Democratic Party, the new Reuters/Zogby poll released on Wednesday shows that McCain is now favored over Obama.

The problems began for the Democrats for two main reasons: 1) McCain clinched the Republican nomination early on, and has been able to focus his full efforts on the race for the Presidency. 2) Tactics and arguments have gotten dirty between the two Democratic nominees. Clinton especially has bombarded Obama with attacks in an effort to expose alleged weaknesses.

Whether or not the attacks on Obama are warranted, they have changed public opinion. If nothing else, they have worked to cast doubt in voters’ minds about the chances of Obama to win against McCain. During the Republican primaries, McCain’s biggest problem was fundraising, and his early victory has aided him greatly. Not only was he able to conserve funds, but his clear nomination allows him an advantage in raising additional funds going forward.

Results differ greatly from poll to poll, and many voters don’t really decide until the very end, so no poll will be perfectly accurate. Democrats probably shouldn’t worry about the Reuters/Zogby poll at this point, but they should be aware that the longer the battle for the Democratic nomination draws out, and the more intra-party fighting goes on, the more advantage McCain will gain.

Summary of Barack Obama, Hillary Clinton and John McCain Tax Policy

I came across an article today by Jeremy Siegel on Yahoo Finance that gives a nice summary of each Presidential candidate’s tax policy. I will attempt to summarize the summary.

Barack Obama

Obama wants to increase the dividend and capital gains tax rate to 24 percent. At the same time, Obama recognizes the power of start-up companies to create jobs, and wants to eliminate capital gains tax on them. Obama would also like to raise the top income tax bracket to a 39.6 percent tax rate.

Hillary Clinton

Clinton is essentially advocating for the same rates as when her husband was in office, before the Bush tax cuts. That would mean capital gains taxes would be raised to 20 percent from their current 15 percent rate, and dividend income would be taxed at a maximum 35 percent. Clinton also supports a raise in the upper tax bracket rate to 39.6 percent, same as Obama.

John McCain

McCain wants to keep the current tax rates, but Siegel points out that he may not be able to. The Bush tax cuts are set to expire in 2011, and taxes will revert to pre-Bush rates if the cuts are not re-approved. Seeing as the Democrats strongly oppose the Bush cuts, and that they are likely to control Congress, McCain could have a difficult time getting the necessary laws passed. It should be noted that McCain and several other Republicans voted against making the Bush tax cuts permanent, which is why Bush had to settle for a test run of the current rates.

Barack Obama Is Taking Shots From The Left And The Right

Barack Obama is getting attacked from all sides now, and it appears that no place is safe for him. On the left he is being attacked by Hillary Clinton, with accusations of plagiarism among other things. On the right he is being bombarded by supporters of John McCain, who are setting him up as a supporter of terrorists. I sincerely feel bad for the guy right now.

I’m not a big supporter of Obama, but I’m also not a supporter of low blows (I don’t support Obama because of his huge spending proposals and other polices, not personal issues). The latest blow coming from McCain supporters at a recent rally was especially distasteful. There the speaker who introduced Obama repeatedly called out his full name Barack Hussein Obama, and suggested that he was being friendly with our terrorist enemies. I was upset with Clinton’s plagiarism accusations, but this is 100 times worse. It would be one thing if they had proof that he is working with terrorists. But to accuse him of what amounts to treason just because the guy was born into a Muslim family (although it is debated whether they were even practicing) and has the middle name Hussein...give me a break. Not that religion even matters, but they guy is a renowned Christian now, not Muslim. All this does is make the McCain campaign look like an ignorant bunch of bigots, which is not exactly the image one wants to portray in a campaign.

To his credit, McCain did repeatedly apologize for the remarks made by his supporters, and he said that he expects that it won’t happen again. I certainly hope that is the case.

In every election, things eventually turn nasty, and it has been one of the biggest turn-offs to me for politics. For once, I would like to see the candidates fight a nice, clean fight and stick to the issues. If you have a problem with a candidate’s proposals...great, let’s debate them. Topics involving religion, race, and family...lets keep those out of it. Here’s hoping for a good clean Presidential race, whichever candidates it may involve.

The Fed Seems To Be Surprised By Inflation Yet Again

A report released this morning by the BLS showed an increase in the consumer price index (CPI) of .4 percent for January. The year-over-year CPI grew to 4.3 percent from 4.1 percent the month before (and this is just what is being reported, see a previous inflation post for an alternative view on what the real inflation numbers are). The policies being implemented by the government and the Fed are not favorable to containing inflation, and this news is no surprise to most people in the financial world . Yet somehow these numbers seem to surprise the Fed each month, and then they downplay inflation in order to back up their policies.

I have to believe that the Fed knew good and well what the consequences were going to be for all of their rate cuts and cash injections, They are simply telling people, ‘Be happy now and don’t worry about the future,’ as they keep sweeping the dirt under the rug. That’s certainly how Greenspan ran the Fed, and it doesn’t seem like Mr. Bernanke is any different, but they can’t just keep passing the broom because the rug is going to run out of room someday.

As long as the Fed continues with their easy money policies, inflation will continue to get worse and worse and the dollar will continue to decline. Other countries are already taking notice. The U.S.’ enormous debt is being financed by foreigners, namely China and Japan. As their investments continue to lose value, they might have second thoughts about lending, and if the U.S. loses its ability to borrow at low rates, the economy could be in for a shock like nothing seen before in this country. Since the U.S. relies on borrowed funds even to pay on the current debt, the U.S. would have only the two options: defaulting on the debt, or printing more money. Default probably isn’t the first choice, so that leaves printing a lot more money, which would lead to astronomical inflation.

Financing debt with debt can’t go on forever. It may not be today or tomorrow, or even in the next 20 years, but eventually this thing will have to right itself. I sincerely hope that Bernanke, or even our next Fed chairman, can grow a spine and do what has to be done. It won’t make people happy in the short term, but when they are old and living on their fixed retirement incomes, they will be grateful that the country was able to rein in inflation.

Ron Paul is one of the few politicians that has acknowledged this problem and been willing to speak up about it. His willingness to do so, however, and how the majority of people have responded to it is evidence that it might be some time—and only after some painful realizations—before people truly embrace this message. I don’t expect it to happen anytime soon though, and will be making my investment decisions with that in mind.

Hillary Clinton Accuses Barack Obama Of Plagiarism: Who Cares?

The gloves are apparently off in the race for the Democratic nomination…well at least Hillary Clinton’s gloves are off. Clinton has now accused Barack Obama of plagiarizing one of his speeches from Massachusetts Governor Deval Patrick.

All I have to say is: Who cares? Obama responded that borrowing a few lines without attribution—and from a close friend I might add—was not a big deal. I agree that it isn’t a big deal, and I think most people would agree as well.

Message to the Clinton campaign: Focus your energy on stuff that matters…maybe the fact that Obama is proposing an enormous amount of new spending (even more than you) and has not yet explained how he intends to fulfill any of his wonderful promises. If you can force yourself to visit the GOP website, you might enjoy their Obama Spend-O-Meter.

Obama is certainly on a roll, and it appears Clinton is feeling desperate. Obama has done a great job drumming up support among the masses with his public speaking and rallying among youth and celebrities. Just for kicks, I even watched Obama’s YouTube video, and it was actually pretty amusing. More importantly, the video has received over 4 million hits, and there are other non-official Obama campaign videos with even more hits. A search for Hillary Clinton on YouTube brings up countless videos which poke fun at her, it takes some effort sifting through them to find a positive one. The point is, Obama is doing a much better job marketing himself and appealing to the masses than Clinton is.

I don’t think Clinton really stands much of a chance right now, but if she wants to make a run for it, she needs to start focusing her attention on things a bit more important than weak plagiarism claims. Considering that Clinton has herself been accused of plagiarism in the past it also seems a bit ironic. Accusing Obama of plagiarism of this sort just makes her look desperate. In addition it undermines faith in her maturity and belies a lack of confidence in her own campaign (and a potential hypocrisy, as stated in my last comment): unattractive features for a potential leader.