Debt Ceiling Chicken

Count me stupid, but it seems to me a no-brainer that whatever deal comes out of the debt-ceiling talks it can't include a tax increase.

Why? Because it's pretty obvious to me that, after the gigantic spending increases and tax increases of the Obama administration, the only thing left is spending cuts. The run up of the national debt in the last couple of years is putting the nation in sovereign debt default territory, and that is something that will press especially hard on Democratic spending constituencies (from spending cuts) and government employee pension funds (from dollar devaluation and debt restructuring). To protect their supporters the Democrats must come up with a deal.

Radio-host Rush Limbaugh understands this instinctively when he says that there is no pressure on Republicans to come up with a deal. It is President Obama that has a problem. The economy is floundering on his watch. The national debt is climbing into the stratosphere on his watch. And the health of all those Democratic spending programs depends on the health of the tax-paying economy.

Don't forget that a majority of Americans are against any lifting of the debt ceiling. Gallup's May 13 poll found Americans 47% to 19% against any increase in the debt. (Yes, I know. They would certainly prefer an increase in the the debt to giving up their government benefits).

I suppose that the president and the Democrats believe that they can win the PR battle over a debt default just like President Clinton won the battle over the government shutdown in 1995. To which I say: Maybe. There's a big difference between now and then, and the #1 difference is that Bill Clinton was a political genius and President Obama is not.

But the political gamesmanship, of course, is merely a sideshow. The bigger reality is that the Keynesian prescription for getting out of a recession has failed. It has failed because it misunderstands the problem. A recession is not a temporary period of indigestion that can be cured by a couple of pills of stimulus. A recession is the result of the failure of investments made in the previous boom. In the immediate case, a huge boom in housing has collapsed. For growth to resume we must repair the credit system (i.e., the underwater borrowers) by liquidation of the malinvestments of the previous boom so that all loans are once again above water and paying interest.

Right now the economy is still in the process of liquidation. There are still millions of people with underwater and/or non performing loans. The capitalist system depends on a functioning credit system, and that means that more or less every loan is collateralized by assets that are worth more than the principal loan amount, and that the debtor is currently paying interest on the loan and is expected to continue to do so.

President Obama's big mistake was to take his eye off the ball. He should have focused like a laser on getting the bad loans off the books and/or properly valued so that bank balance sheets and individual consumer balance sheets were restored to health. But he didn't, and now he is reaping the whirlwind.

And it will get worse before it gets better.

Modernity's Original Sin

Hey, said the serpent to Eve. Eat that apple and you could learn a thing or two.

So she could and so she did. But the thing about the apples from the tree of knowledge is that the knowledge they bring doesn't solve anything. It just raises the stakes.

That is the point about Original Sin. It isn't the sin itself, its the self-consciousness. Back in the old Garden of Eden you can live your life away in the bliss of ignorance. If you live, you live. If you die, you die. But after acquiring knowledge and the power it brings, life is no longer the simple bliss of ignorance. Life is serious; life has responsibilities.

So it was in the Dawn of the Modern Age. Bliss it was to be alive, and to be young was very heaven. Mankind ate anew from the Tree of Knowledge, and the new sciences, the triumphs of instrumental reason, burst like flowers into bloom. But then came the bitter fruit, the responsibilities of power, and the reality of the modern Original Sin.

Instrumental reason, the Enlightenment, write Horkheimer and Adorno is a dance of domination, domination over nature and domination over man. "What men want to learn from nature is how to dominate it and other men."

It was the businessman that first applied this dictum in the years right after the Crusades. They built rational, efficient plantations on Cyprus, and eventually in the West Indies, to grow and refine sugar. They made tons of money, and they enslaved men and women to work the plantations, first Muslim slaves on Cyprus, and then Africans from West Africa. It ended up a huge, global business, and many fortunes were made and country houses built upon it. But the ruthless pursuit of wealth, made by rational planning and by enslaving men and women as mere factors of production, inspired a moral movement of rejection, the anti-slavery movement, that curbed and humbled this pure application of instrumental reason to business. And from that time we have always demanded of businessmen that they limit their appetites and their plans, treading lightly on the earth, and dealing gently with men. It turned out, anyway, that it was better that way.

But it was not just in business that the modern knowledge of instrumental reason could be applied. The new educated elite wanted to apply instrumental reason to politics, to make government equal and rational, to build a perfect society, carefully administered in every department, articulated in every joint, peaceful and just. But, Horkheimer and Adorno warned: "Enlightenment behaves towards things as a dictator towards men." And so it was that the effort to build a perfected, articulated society led to the most awful and cruel dictatorships ever known. In Nazi Germany, 6 million Jews killed; in Russia 10 million Ukrainian peasants killed. In China 30 million peasants killed in the Great Leap Forward alone.

When capitalism committed its Original Sin with plantation slavery, the educated middle class rose up in a moral movement that socialized this new force, creating a new moral culture to critique and to humanize capitalism, the efficient calculating monster.

But it has proved much harder to socialize instrumental reason when applied to politics and government. This is not hard to understand. The new educated class was just the social agent to critique and tame the economic monster. But it has proved remarkably resistant to the many critiques of its own monument to instrumental reason: big government and administrative bureaucracy. Instrumental reason applied to business created the bourgeoisie of merchants and manufacturers and barons of finance. Instrumental reason applied to politics created the educated class that occupies the commanding heights of government, education, and culture. It has the means to marginalize its critics and it uses it.

We humans must socialize the government monster, and tame this monstrous force. It will take a moral movement, just like the anti-slavery movement. It was already envisioned, two hundred years ago by Edmund Burke, but his sentiments did not grow into a moral movement. Not then.

But now that we see the failures of big government all around us, and its profoundly mechanical, un-social, in-human culture, it is time to rise up and develop the moral critique of rational, instrumental, big-government politics. It is time to put the "social" back in society.

Obama Whistling Dixie

Even the Los Angeles Times recognizes that President Obama is in political trouble for relection in 2012. Doyle McManus retails the line from the Obama campaign, and then critiques it. Here's the Obama line:

1. He can improve his standing with independent voters by compromising with Republicans
2. He has moved towards the middle
3. Next year's electorate should include more minorities.
4. Obama's a good campaigner with the same team as 2008.

The problems with the Obami scenario are obvious.

1. Indpendents just aren't going to vote 52 percent for Obama like in 2008.
2. Move to the center? Tell that to Boeing and Delta.
3. More minorities? First, the minority turnout is bound to be less. Second, Hispanics will almost certainly deliver a lot less to the Democrats; they are workers, they want a good economy.
4. Same team? Let's face it. The vital team members were the MSM that refused to tell us who Obama was and where he had been. Much as they want to, the MSM just isn't going to be able to deliver in 2012 like in 2008.

Back in the 1960s the media used to blather on endlessly about "credibility" and how President Johnson had lost it over Vietnam. They meant, I suppose, that LBJ had "lied" over Vietnam, or told liberals things they didn't want to hear on Vietnam. But "credibility" means simply that the American people had stopped listening to Lyndon Johnson. That's the problem facing President Obama. Chances are that in 2012 the American people just aren't going to be willing to listen to a word that President Obama and his crack campaign team tell them. As far as they are concerned, the economy is in a recession, and things don't look to be getting much better. It's hard to see that things could get to appear much better by November 2012. Investors Business Daily has the bullet points:

• Jobs: -2 million; Unemployment up 1.5 percent.
• Most long-term unemployed ever.
• US dollar down 12 percent.
• Americans on food stamps up 37 percent.
• Misery Index up 62 percent.
• National Debt up 40 percent.

Candidate Bill Clinton famously ran on the slogan "worst economy in the last 50 years" in the early stage of recovery from a mild recession. But the 2012 Republican nominee doesn't need such fancy footwork. All he or she has to say is "Obama made it worse."

2012: The Liberal Annus Horribilis

Like I always say, the ageing liberal dynasty could have learned a lesson or two on economic policy from Ronald Reagan in the 1980s. The corrupt liberal dynasty could have learned a thing or two from Newt Gingrich's 1994 win and subsequent efforts to balance the budget. The fortunate liberal sons of the 2000s could have paid attention to the travails of the Bush administration. But they didn't. Great imperial dynasties never do see the end coming.

But next year, 2012, will see the liberals experience their annus horribilis. If you have a liberal friend, have mercy on them and don't rub it in.

Why is it possible to predict, a year out, how bad things will be for liberals next year? It just takes a little knowledge of economics and a lot of common sense.

The whole liberal program of tax, spend, and elect relied on the fact that you could always raise taxes on the rich, or promise new spending to the poor and/or the well-connected. Because the US had a staggering wealth that could be mortgaged with a fresh issue of government bonds.

But after a big financial crash the old game can't go on. As we have seen, the US National Debt has zoomed up to the 100 percent of GDP mark. That is when government debt gets to be a problem. You can tell liberals know they are in trouble because all of a sudden they don't want to pass budget resolutions or appropriations bills. Last year, the Democratic Congress failed to pass budget resolutions and failed to pass most of the appropriations bills. But they still lost 63 seats in the House.

Just today we learned that President Obama has agreed to a "big" deal on the debt ceiling. That means he wants a deal that will get him past November 2012. Of course he does. And no doubt in the last few weeks his staff have been working up a deal with as much in the way of phony spending cuts and as much in the way of real tax increases as they can.

But it really doesn't matter. The die is already cast for 2012 and it almost certainly means slow growth, high unemployment and rising inflation.

And then, after 2012, we have to get the economy back on track. That means swingeing spending cuts, because all government spending is waste. It means tax rate cuts, swapping special interest subsidies for lower overall tax rates. It means hard money, getting back to zero inflation. And it means repealing all the crazed hyper-regulation of the last two years. Oh, and it means reforming health care so that average people spend more of their own money on routine health care, economizing on health care just as they do on groceries and everything else they buy.

At the end of it all, we'll have a leaner, better, more hopeful America. But in the next couple of years we are going to see liberals trying every trick in the liberal play-book to put off the inevitable: the race card, the class card, the sob story, the civility card, the mean-spirited card. Don't forget the "it's for the children" card!

But I think that the game is up. Jonah Goldberg reports that young people are using the insult "that's racist!" as a joke. The Senate's class warfare resolution that the rich should pay more is already a joke to the chaps at Wizbang.

That President Obama and his staff are already playing race and class cards is an indication that they are going for a "base" election, and they are giving up on getting the independent vote. You mean the independents that elected the president back in 2008? And just how are Democrats going to get improved turnout from a base that turned out in record numbers in 2008?

As I say: next year is going to be an annus horribilis for liberals.

Liberal La-la Land

There's a big New York article by Frank Rich on "Obama's Original Sin." Obama oughta have dealt out a "reckoning from the moneyed interests who brought the economy down" in 2008, he writes.

Good idea. But why wasn't there a mention of Fannie Mae or Freddie Mac in the article? Just a tear-jerker about a retired policeman that got a foreclosure notice on his debt-free home.

Now that the New York Times's own financial reporter Gretchen Morgenson has a book out on the Times imprint, Times Books, and that book, Reckless Endangerment, fingers the Community Reinvestment Act, Fannie Mae, and Fannie Mae CEO James A. Johnson as the culprits for the meltdown, you'd have thought that Timesman Frank Rich would at least make a nod towards the CRA/Fannie explanation. But he doesn't, and I trawled through the comments looking in vain for a commenter that got it. OK, there was one commenter that referenced George Will's review of Reckless Endangerment.

Look, I understand that the liberal line is that the meltdown was caused by greedy bankers and slack regulation, but even liberals need to know the time of day. As Noam Chomsky wrote about the Wall Street Journal: the news side is solid because the rich need to know the truth about the economy for they need to manage their riches. But it doesn't matter to them that the opinion side is deluded right-wing craziness.

Liberals need to know the truth about their favorite government programs, especially when they are going badly wrong.

Then there's Medicare. According to Michael F. Cannon:

The three most salient characteristics of Medicare and Medicaid fraud are: It’s brazen, it’s ubiquitous, and it’s other people’s money, so nobody cares.

A conservative estimate of Medicare fraud is that it is 10 percent of spending. Maybe it's worse; maybe it's 20-30 percent.

The point is, of course, with Medicare and with the financial meltdown, that the problem is not the fraudsters. The problem is the government. Medicare was set up as a fee-for-service operation, so medical providers have an interest in gaming the system to maximize the number of reimbursable procedures. The government's affordable housing programs forced lenders to lend to borrowers without proper income and credit. So of course we ended up with toxic debt swilling around all over the world.

You can fool some of the people all of the time, said Abraham Lincoln, and it certainly seems that liberals are completely fooled about the financial meltdown and about Medicare.

But at some point, the people that understand what is going down are going to have to stand up and be counted. It was government that set up the financial meltdown and nearly broke the economy. It is government that is breaking Medicare, and forcing the end of Medicare as we know it. Until we get to that point, where the American people understand this and insist on it, we are still heading downriver for the waterfall.

Liberals Tiptoe Around "Reckless Endangerment"

For three years liberals have insisted that the financial meltdown of 2008 was the fault of Republican de-regulation of finance and greedy bankers. The New York Times has not been any more shy in the propagation of this narrative than the Democrats' financial point man, Phil Angelides, chairman of the Financial Crisis Inquiry Commission set up by law in October 2009.

But now comes Reckless Endangerment by Gretchen Morgenson and Joshua Rosner. Morgenson is a financial editor for The New York Times. You'd think from the subtitle "How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon" that Morgenson and Rosner continue the official Democratic line, but it is clear from the reviews that they don't. What emerges from the book, surprise, surprise, is the Republican line, that the problem was the convergence of federal housing regulation in the form of the Community Reinvestment Act and the government-sponsored cheap money from the two mortgage giants, Fannie Mae and Freddie Mac. Morgenson and Rosner even go so far as to finger former Fannie Mae CEO James A. Johnson as the #1 culprit. Johnson was the campaign manager for Vice-president Mondale's 2004 presidential campaign, so he knew a lot about finance.

When George Will pointed all this out in the Washington Post the commenters went ballistic.

But The New York Times has now published two reviews of the book by its "assistant business and financial editor" and published by its own imprint. Both reviews, by Robert A. Reich in the Sunday Book Review, and business journalism professor Pam Luecke, acknowledge the central role of Fannie Mae and James A. Johnson in the debacle, and then scurry for the exits.

Even Michael Barone, reviewing the federal role in subsidizing property ownership over two centuries, doesn't make the obvious judgement, that government interference in the financial system has been a disaster for ordinary Americans. Let's follow his argument, anyway.

First, the government subsidized ownership of farms.

Government sold land cheaply and on credit, and under the Homestead Act gave it away free to those who worked it for a few years.

Yes, but President Andrew Jackson's efforts in that department led to the Specie Circular and a ten year deflationary depression in the 1830s and 1840s. After the Civil War, of course the US experienced a financial war between and the Free Silver movement and the deflationary effort to resume gold payments at the pre-war price of $20.75 an ounce. In other words, the efforts of the government to subsidize farm ownership led to eye-watering booms and crashes and untold misery.

When people moved to the cities and bought homes, government stepped in there too.

Government stepped in to subsidize that property, too, in the form of low- or no-interest mortgages and tax deductions for interest payments.

This all worked pretty well for many years, according to Barone.

Then, as with farm programs, government went too far. Fannie Mae and Freddie Mac, with support from administrations of both parties, financed loans to uncreditworthy borrowers on the theory that, hey, you didn't really need a down payment or steady income to be able to afford a house.

In fact, we have had a 50 year inflationary boom in housing which has pushed housing above the level it would have reached absent the subsidies, and that has, all along, put an immense burden on the young and the poor trying to buy a first home. Housing subsidies tend to give windfall profits to people that already own homes.

Now, of course, the whole sordid game has blown up, and who are the people hardest hit? Why women and minorities, of course. They got to buy houses that they couldn't afford and now they are kicked out of their dream homes and back into rentals. Canny speculators (people with money) are already out there picking up bargains. And people that bought homes 20 years ago are doing fine. Sure, their homes aren't worth millions any more, but they still represent a decent return on investment.

The lesson here, and it is a big one, is that government is clueless when it comes to economic management. If it subsidizes farms, then farm prices get caught in a tornado that sends prices soaring one moment and crashing to the ground the next. In housing, the government's meddling has caused untold misery and unemployment for millions.

There are two kinds of government finance in the world. There is Dutch finance, invented by the Dutch in the 17th century, that keeps the financial system pretty well in the hands of the bankers, with the government benefiting by getting low interest rates on its funded debt. Then there is French finance, invented by Scotsman John Law, where the government tries to manipulate the financial system to maximize its seignorage from cheap money and subsidies. Dutch finance (copied by First Treasury Secretary Alexander Hamilton) leads to prosperity and economic growth. French finance leads to inflation, misery, and collapse.

Which would you choose?

Obama vs. Reagan

Back in 1981 an extremist conservative was inaugurated President of the United States in the middle of a teeth-rattling recession and immediately executed on a program of spending cuts, income tax rate cuts, deregulation, strong defense, and continuing the Volcker policy of hard money.

In 2009 an extremist liberal was inaugurated President of the United States in the middle of a teeth-rattling financial crisis and immediately executed on a program of increased spending, tight regulation, and easy money.

We know now that President Reagan's policies were followed by an astonishing boom that continued more or less for the next 20 years. We do not know what the economy will look like 20 years after President Obama's 2009 policy mix, but things are not looking good.

Columnist David Limbaugh experiments today with a column imagining President Obama admitting that he got everything wrong.

I'm going to ask my party to join with Republicans in focusing on the national debt instead of ginning up envy, jealousy and animosity among people who earn different amounts of money... It may involve some cuts in benefits, but if we don't do this now, eventually everyone will lose his benefits, because Medicare, Medicaid and Social Security are headed for insolvency -- and much sooner than we thought.

Limbaugh's imaginary president continues: "Endless government spending, I now see, will not stimulate economic growth... I'm also going to get real about discretionary spending cuts because trillion-dollar deficits are hardly sustainable." Forget defense spending cuts. "I can now see... that my [ObamaCare] will in fact increase costs... I'll also have to temporarily back off my demand for high-speed rail... [and] my various quixotic renewable energy ruses... My party was instrumental in pushing affordable housing on everyone, which was the biggest culprit in our financial meltdown. I was in the Senate for much of this time, and I went along with Barney Frank and others in obstructing remedial action proposed by President Bush."

Put like that, you can see why the president's Wednesday news conference was such a bust. There he was, mouthing empty but presumably focus-group tested political insults at the Republicans, demonstrating to all the world that he is fresh out of ideas.

The best thing for the nation is a blowout election next year that will cure the Democratic Party for a generation of its tax and spend and subsidize and divide big government politics.

After that blowout, my fellow Americans, by all means put the Democrats back in power. For now, you have the opportunity to teach them a powerful lesson.

But only if you really want to.