Let's Have a Class War

Our Occupy friends want to string up the bankers.  I see their point.  The bankers do seem to have screwed things up pretty badly.



But if you want any street cred as a conspiracy theorist you really need to be able to see behind the guy who is saying "pay no attention to that man behind the curtain."



The power of bankers is limited.  They do the bidding of the central bankers.  And the central bankers do the bidding of the politicians.  This is true even of the best financial system, the "Dutch finance" of the old Dutch Republic, the Bank of England prior to World War I, the financial system of Alexander Hamilton and J.P. Morgan.  The government sets the tune.



It's the same with the corporate chieftains.  As ruthless as they may be, they are under the thumb of the politicians.  After all, who has the guns?  Who pays tribute with political contributions?  Who pays taxes?  Who gets to hand out subsidies of Other Peoples' Money?



When we talk about the one percent, we need to think clearly.  Who are the guys with the power?  Sorry Charlie, it's not the Wall Street bankers.  They have power because they serve the interests of the political elite.  It's not the corporate CEOs.  They have power because they sell good products or, in their crony capitalist version, because they suck up to the right politicians.



If we are going to have a class war in this country, let it at least be between the people and the powerful, not the people and the toadies.  The powerful today are the folks in the permanent educated elite, the New Class of top academicians, journalists, activists, politicians, and bureaucrats.  They are the people with political and cultural power, and they have economic power because of their political and cultural power.



Glenn Reynolds has a bunch of good links to today's Power Elite, and it's worth following them up.  Anne Applebaum speaks of the upper-middle class that has detached, and differentiated itself from the middle-middle.  Reynolds himself links the anti-American sneer to the New Class.



And here is Ross Douthat:

The public-sector workplace has become a kind of artificial Eden, whose fortunate inhabitants enjoy solid pay and 1950s-style job security and retirement benefits, all of it paid for by their less-fortunate private-sector peers...



Our entitlement system, meanwhile, is designed to redistribute wealth. But this redistribution doesn’t go from the idle rich to the working poor; it goes from young to old, working-age savings to retiree consumption, middle-class parents to empty-nest seniors... Then there’s the public education system, theoretically the nation’s most important socioeconomic equalizer. Yet even though government spending on K-to-12 education has more than doubled since the 1970s, test scores have flatlined and the United States has fallen behind its developed-world rivals...



The story of the last three decades, in other words, is not the story of a benevolent government starved of funds by selfish rich people and fanatical Republicans. It’s a story of a public sector that has consistently done less with more, and a liberalism that has often defended the interests of narrow constituencies — public-employee unions, affluent seniors, the education bureaucracy — rather than the broader middle class.

View in this light, the Occupy protesters are clearly useful idiots of the New Class, helping the elite rough up innocent scapegoats while the guilty go free.



Sooner or later the American people are going to remove this self-interested clique that imagines itself born to rule, while it corrupts itself with its sinecures and impoverishes America with its folly.  But, in the way of politics, the American people will probably not get it right first time.  And that's a shame.

Targeting the Fed

If there is anything that demonstrates the failure of expert-led government it is the Federal Reserve Board. Every time the economy tanks we find out that the Federal Reserve Board screwed up again and we hear demands for a new target to guide the Fed in its monetary policy.



In the 1920s the Federal Reserve was sterilizing gold flows; after the late 20s boom that was declared a failure.  In World War II and after the Fed targeted long term interest rates and monetized World War II debt.  In the early 50s that policy was abandoned that when inflation increased.  Then in the 70s Nixon turned back to inflationism in order to get reelected.  In the late 70s, after the dreadful inflation, the new target was the rate of increase in the money supply.  In the Greenspan years the target became inflation.



Now everyone agrees that inflation targeting is all wrong.  What is needed, according to economist Scott Sumner is "NGDP targeting."  Instead of targeting consumer prices or the GDP deflator, we should just increase nominal Gross Domestic Product by a sensible amount each year.



Maybe this new target would be better than the old target.  Who knows?  The problem is that central bankers are, first of all, the government's banker.  Central bankers make sure to smooth credit conditions for the government.  Smooth credit conditions for the government may not be the best policy for the economy.



Central bankers sit in the hot seat, so ever since government took over the central banks central bankers have been government bureaucrats and they have wanted a simple rule to govern their actions.  And there lies the problem.



The central problem in economic management is not money supply or inflation or economic growth.  It is to keep the credit system healthy.  Borrowers must make payments on time and people must have confidence that the balance sheets borrowers and lending institutions are healthy.



The proximate cause of the current crisis was that the holders of home mortgages failed on both these counts.  Overextended borrowers started failing to pay their mortgages.  That meant that their mortgages, considered as assets at the bank, were worth a lot less.  Thus the balance sheets at the banks got hammered.  Everyone headed for the exits.



Sensible bankers would have said by the mid 2000s: Wow!  Housing prices have shot up.  We should clean up our balance sheet and make sure that, if this developing bubble should pop that we have good assets that won't melt away if home prices drop.



But they didn't.  They couldn't, because the government had forced them to originate lots of loans at high loan-to-value (risky because a slight decline in home prices would put the loans under water) and lots of loans to borrowers with poor credit (risky because those borrowers are more likely to default).



There's a lot of mumbo jumbo around banking and credit.  So it helps to look at the experience of a banker like the young W.T. Sherman, of Marching Through Georgia fame.  This inexperienced banker became manager of a small bank in San Francisco in the mid 1850s.  He didn't like the look of the economy so he cleaned up the bank's balance sheet.  A key action was in reducing the loan balance of a politician that he didn't trust.  When the politician skipped town, leaving millions in defaulting debts, Sherman's bank easily survived a run, while other banks went under.



How hard can it be?  OK, it helps if the government isn't breathing down your throat forcing you to do stupid things.



The problem with government financial regulation is that it is always backward looking.  The time to stiffen credit terms is on the upswing of the business cycle, to say: Wow, asset prices are really climbing; we should not be originating any 80 percent or 90 percent loans.  Instead we get Barney Frank calling for Fannie and Freddie to roll the dice.  The time to relax credit conditions is right now, when asset prices have tumbled for a couple of years and aren't likely to decline much more.  Instead we get the Dodd-Frank bill that stiffens credit standards with impenetrable regulations.



There's a way forward here, but it isn't some new simple-minded target for the Fed.  What we desperately need is for the financial system to be run by leaders like old J.P. Morgan who really know what they are doing.  Politically-connected chaps like Alan Greenspan and Ben Bernanke just don't cut it.

Three Big Problems

In a way, the Occupy Wall Street protesters are right.  Wall Street is the epicenter of our problems.  But not in the way the protesters think.



Actually, the left has rigidly determined to misunderstand everything about the modern era.  The interesting question is Why.  Why would they be so superstitiously determined to call this age of prosperity and opportunity a monstrous age of exploitation?



The big problems we face today are a consequence of the vanity of the current ruling class, the educated elite.  Our present rulers began in the middle of the 19th century as a moral witness against the huge dislocations of industrialization.  That was a useful, if widely overblown critique.  The industrial revolution was and is rough and tough, just like Major Bagstock.  But then any transition is rough and tough, J. B.



The great mistake the modern educated elite made was that it wasn't satisfied with moral critique.  It wanted to get its hands on the levers of political power.  One thing we know in the modern age; the combination of moral and political power is a recipe for disaster.  Then it gets worse.  Pretty soon, when you combine political and moral power, you find it is not enough, so you decide to get your hands on the levers of economic power as well.  Then you have totalitarianism.



It is telling that there is idle talk among the Obamis about the need to postpone elections.  They just don't get it.



So let's get to the three problems.



Government is lousy at pensions, health care, education, and welfare.  Government is only good at things that require force, like policing and warmaking.  They are lousy at everything else.  On pensions, they have turned savings programs into vote-buying programs,  On health care they have tried to regulate the details when the details, indeed the whole system, keeps changing.  On education they have turned teaching into a pension program, and gutted the learning.  On welfare they have broken up  the low-income family.



Government is lousy at finance.   There is an argument for government getting control of the financial system.  But only during a war when government ought to have access to every instrument for winning the war.  But in all other times, government is a financial pest, because it manipulates the financial system to buy votes with low interest rates and subsidies and it abuses its debt issuing power until it ends up in debauching the currency and/or defaulting on its sovereign debt.



Government is lousy at long-term anything.  It is comical that politicians and their bribed apologists like to criticize business for short-term thinking.  Politicians are worse.  Government really cannot be allowed to do anything long-term, because it loses interest after a couple of years and then the special interests and the crony capitalists take over.



The Occupy Wall Street folks are right that Wall Street is a problem.  But only as a symptom of the bigger problem, that government is a failure and it always tries to paper over its failures with debt.  And Wall Street is where you go when you need to issue debt.



Every politician needs a friendly banker.  And that's the problem.

Never Mind Who Lost Arabia

Before we start arguing about "who lost Arabia" let us  revisit the previous argument over "who lost China."



When Mao won the half-century civil war in China after the collapse of the Manchu dynasty, the reaction in the US elite was to argue about who allowed Mao to win.  As it happened, it didn't matter. Mao managed to make China into an economic midget with his crazed socialist plans.  He managed to wreck China on both socialist fantasies: first, that a political elite can manage the economy better than business people, and second, that political activists running around annoying people are anything other than a nuisance.  The first fantasy wrecked China in the Great Leap Forward and the second fantasy wrecked China in the Cultural Revolution.  Mao's great achievement was to utterly discredit the lefty menu and clear the decks for Deng Xiaoping to inaugurate a capitalist economy and an economic takeoff.



When we look at the "Arab Spring" and start arguing about whether Bush or Obama made it worse, we are missing the point.  The peoples of the Middle East have to figure out how to get out of the economic, political and cultural mess they are in.  Whatever they do it is obviously going to be uncomfortable for us in the West.  In Tunisia, the election Sunday produced a victory for the main Islamic party and for moderate parties that ran on accommodation with the Islamists.  Does that mean that Tunisia will now go on a rampage and try to eliminate Israel?  Maybe, but if it does the US has the power to help Israel stop it.



What about Egypt?  Well, the Muslim Brotherhood might win power and it might want to go on a jihad in the Middle East to restore the glory of Egypt.  And that means they might use Israel as a foil.  But if they do, the US has the power to stop it.



The fact is that almost every political regime that takes power after a revolution tends towards aggressive behavior.  The Brits won a global empire in the century after the Glorious Revolution.  The French invaded the rest of Europe after their Revolution.  And the US conquered a continent after the Revolutionary war.  We should expect the same from the Islamic revolutions and develop plans to contain any aggression that damages our interest.



There is one problem for the Islamic forces if they plan on conquest.  War needs money, and the way you get money in the modern era is to have a thriving modern economy.  That is something that is sadly lacking in most of the Islamic world, in particular in Egypt.



Let us look at Iran, which spent the ten years after its 1979 Revolution in a fruitless war with Iraq.  For all its meddling, what has it achieved?  Anyway, at 30 years after its revolution the revolutionary generation will be soon dying out.  Normally, the fiery revolutionaries get replaced by less impressive time servers.



The bigger threat from Islamism is the migration of the Islamic peoples into Europe where they are inheriting the rotting corpse of the welfare states.  Over the past half-century the native peoples of Europe have seemed too materialistic to suffer the costs of childbearing and childraising.  There is a cost to that.  It means that someone else will inherit the future.

You Must Remember This

It's 31 years ago now.  I remember the moment exactly, driving home from work in the summer of 1980.  Ted Kennedy was delivering "The Dream Shall Never Die" speech, and it terrified me.  How could the lightweight Ronald Reagan ever win against rhetoric like that?



The answer then, and probably now as well, is that Americans aren't persuaded by left-liberal class warfare rhetoric.  It makes them want to upchuck.  And anyway, back then the "lightweight" Ronald Reagan beat incumbent President Carter in a landslide, and went on to become America's most beloved and successful president since whenever.



That's what David Brooks is saying today in "The Fighter Fallacy."  It is one thing to promise big government when Americans trust government, and back in the middle of the last century, about 70 percent did.  Today, "only 15 percent of Americans asked said that they trust the federal government to do the right thing most of the time."  Writes Brooks:

This is a problem for Democrats. But Democrats can win elections in this climate if they defuse the Big Government/Small Government ideological debate.

Bill Clinton did it with the Third Way, and snuck a bunch of liberal policies through.  Barack Obama did it in 2008 as the post-partisan candidate.  Then he governed as the left-liberal president.



After the 2010 election Obama tried compromise with the Republicans (he did?) but it didn't work.  So now he is running as a fighter.

If Obama were a Republican, he could win with this sort of strategy: Repeat your party’s most orthodox positions and then rip your opponent to shreds. Republicans can win a contest between an orthodox Republican and an orthodox Democrat because they have the trust in government issue on their side.

In other words, "The Dream Shall Never Die" won't work today either.



And then there are the facts, or rather the myths.  John Hawkins has an article on five myths the Occupy crowd believe in.  He does it well, but I've boiled it down further.

1. Wall Street Created Housing Bust. Oh no kiddies. The government did it.  They told banks to lend to bad credit risks or they might have an "accident."  Now the whole economy had an accident.


2. Obama hates Wall Street.  Yeah, I've got a bridge to sell you.


3. Iraq War created deficit.  CBO says war cost $709 billion.  Doesn't seem so big any more after the bailouts and stimuli.


4. GOP wants to kill SoSec, Medicare. However much GOP hates old people, there's a $100 trillion hole there that won't get filled by class warfare.


5. Tax the Rich. Sorry chum.  Not enough money there to make a difference.

The Occupy chappies also believe the government should forgive their $1 trillion in student debt.  Sounds like a real vote winner among the young set.  But probably poison to the other 99 percent.

Too Little Too Late on Housing?

With the news that the president will announce a plan to make it easier for homeowners to refinance their underwater mortgages and a Larry Summers article boosting the idea in the Washington Post it is clear that the Obama administration is "doing something" about the housing meltdown.



Just how much it will help is a good question.  After all, if the government lets underwater borrowers refinance at lower rates then it is forcing the bankrupt GSEs like Fannie Mae and Freddie Mac back to subsidizing high-risk debt.  The only way that we will finally get out of the mess is when the market clears and the foreclosed homes are no longer hanging over the market and home prices start to climb.



Larry Summers, at least, has a good idea.  It is nonsensical for the government's conservators at Fannie and Freddie to stiffen their lending requirements at the bottom of the business cycle.

[C]redit standards for those seeking to buy homes are too high and too rigorous. The characteristics of the average successful applicant in 2004 would make that applicant among the most risky today. The pattern should be the opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations.

That is a universal problem.   People are wildly optimistic at the top of the business cycle and pessimistic at the bottom of the cycle.  The risks to lenders are highest when asset prices are high after a strong run-up, and lowest after a substantial decline.  If government has a role to play in credit, it should be to lower credit standards at the bottom of the cycle and raise them as a bubble develops.  If home prices increase by 20 percent in a couple of years, then lenders should stop offering 80 percent mortgages and crank back to 75 percent or 70 percent.  But try telling that to geniuses like the Sen. Dodds and Rep. Franks of the world.



The administration's moves seem to have moved the homebuilder stocks a little.  But I wonder if it isn't all too little too late for the president and his reelection.  Even with these efforts at tweaking the housing market the economy is hardly likely to be a barn burner by next summer.  If Obama wanted to run on the economy, he should have had the economy in good shape by summer 2011 at the latest.



The president and his party are paying for the mistakes of 2009.  They thought back then that it was first and ten, and they could fix the economy and enact the liberal agenda at the same time.  They were wrong; it was first and twenty on the five yard line, and now they are reduced to a Hail Mary on fourth down with a quarterback not known for his strong arm.

Steve Jobs and the Coolness Factor

Now they tell us.  Steve Jobs apparently told Barack Obama in 2010 that he was on track to be a one term president.  From HuffPo:

"You're headed for a one-term presidency," he told Obama at the start of their meeting, insisting that the administration needed to be more business-friendly. As an example, Jobs described the ease with which companies can build factories in China compared to the United States, where "regulations and unnecessary costs" make it difficult for them.



Jobs also criticized America's education system, saying it was "crippled by union work rules," noted Isaacson. "Until the teachers' unions were broken, there was almost no hope for education reform." Jobs proposed allowing principals to hire and fire teachers based on merit, that schools stay open until 6 p.m. and that they be open 11 months a year.

But Jobs offered to author campaign ads for the president in 2012.  So here's a question.  Just how bad would it have to get for the cool kids like Jobs to vote for a Republican?  Here was Jobs, who lived and worked in the most anti-business state in the Union, yet he obviously went to his grave a Democrat.



We know why, of course.  Democrats and liberals have managed to define Republicans and conservatives as narrow-minded bigots, "anti-science," racists, and bitter clingers.  So they have persuaded generations of Jobses and "economically conservative, socially liberal" educated people that Republicans and conservatives are radioactive extremists.



Jay Cost describes how this process of political irradiation works.  He calls it "front-lashing."  Here's how it got Harry Reid reelected to the Senate in Nevada even though Nevadans were both anti-Obama and anti-Reid.

A solid majority of Nevada voters disapproved of both President Obama and Senator Reid, yet the latter was able to win a secure victory. The reason? A decisive minority of this group found Angle to be unacceptable. She only won 78 percent of the Obama disapprovers and a terrible 82 percent of the Reid disapprovers.

Over 90 percent of the Obama/Reid approvers voted for Reid.  Only 80 percent of the Obama/Reid disapprovers voted for Angle.  "A staggering 45 percent of voters thought that Angle's positions were "too conservative," and 75 percent of them voted for Reid.



Obviously, Cost writes, the Obamis are going to be trying this strategy.

Any time you hear the Democrats squawking about how the Republicans are “anti-science,” that’s the frontlash in action. The goal is to tag the GOP as a bunch of flat earth throwbacks who are too extreme for the independent swing voters to support.

Notice that in 2008 it was difficult for Republicans to play this game by painting Obama as "too liberal" without running into the race card, especially as Obama was presenting himself as "post partisan."



It really is about time that conservatives broke out of the box we've been put in, and start to define liberals as narrow-minded and intolerant and anti-science.  It's not as if there's no evidence to prove it, e.g., political correctness and climate "science."



Some day we conservatives are going to have to get Steve Jobs and the cool kids back on the side of conservatism.  After all, conservatism ever since Edmund Burke has been a moderating influence against the craziness of modern secular religion, from Jacobinism to Communism to environmentalism. What could be extreme or uncool about that?