The Rest of the Credit Story

Here in the US we are naturally concerned about the damage that the mortgage meltdown has done to the domestic US economy.

Just on cue, as the federal government announced a 0.3 percent decline in real GDP last quarter, the stock market this week seems to a have turned a corner, starting with a 900 point climb in the Dow in the aftermath of the short squeeze on Volkswagen stock.

Don’t look now, but when the US catches cold the rest of the world gets wiped out. The Asia Times columnist Spengler has the story.

The financial crash exposes the fragility of large swaths of the world. The political consequences will be terrible... Worst affected are the most populous Muslim countries, and Russia’s "near abroad".

In the US we have had a credit squeeze. But you can still get a mortgage to buy a house. In the rest of the world the credit faucet has been completely turned off, and many emerging countries are facing economic Armageddon as their currencies tank. Spengler uses the cost of five-year default protection as a gauge of just how bad things are going to get. For countries like Argentina and Venzuela, it’s not available.

The solution is pretty obvious. The US is going to have to use its credit to bail out not just the banks but a number of nations, especially including the countries that escaped recently from the old Soviet Empire. Already the Fed and the IMF are working to spread money out around the globe.

[Treasury Secretary] Paulson said he welcomes the Fed’s decision to create swap lines with four central banks as well as the IMF’s decision to establish a short-term liquidity facility to provide various countries with loans. The Fed Wednesday announced swap lines totaling up to $120 billion with Brazil, Mexico, South Korea and Singapore.

Let’s propose that the bank bailout is working, that the major credit markets in the US and Europe are returning to normal as LIBOR rates decline from the mid 4s to the mid 2s.

That is fine and dandy. But the rest of the world is still completely frozen. The next step is to help them.

Because it doesn’t do the US any good if the rest of the world suffocates on a total credit seize-up.

And it also looks like the gleeful reports of the end of the US hegemony were greatly exaggerated.

Poisoning the Chalice

For the past thirty years conservatives have been trying to reform the vast empire of government subsidy and patronage we call the welfare state. Conservatives have worked to ease the distortions built into the economy from a peverse tax system. They have worked to enable the forces of “creative destruction” through deregulation. They have tried to unwind the cruel and unjust system of welfare benefits. They have tried to introduce choice into the monolithic system of compulsory education. And they have tried to move away from the first dollar free-at-the-point-of-delivery model of health care.

Not surprisingly, our liberal friends have resisted the forces of change. A century ago they began their program of legislation to provide free education, free health care, generous assistance because they believed that it was the right thing to do. They enacted their program confident in the knowledge that every educated, progressive-minded person agreed with them.

But now, a century later, their rigid programs of education, health care, and welfare assistance are long past their sell date. Initiated with boundless hope they have slowly wound down, year by year, and how exist mainly as patronage programs by which our liberal friends maintain themselves in their sinecures and their clients in their pensions.

In the last decade, especially, our liberal friends have struck out with remarkable venom against those who would seek to reform their welfare state colossus, and in doing so they have poisoned the chalice of US democracy. By blocking all reform, especially in the subsidies for home mortgages, they have brought on a perfect financial storm, and true to the chapter and verse of their tactics manual, have ruthlessly blamed it all on the incumbent Republicans.

That means that Americans will likely elect Sen. Barack Obama (D-IL) next week to be president. And he has promised more of the same: more pensions for Democrats, more subsidies for liberal-favored constuencies and initiatives, and more government direction of the national life.

Conservatives believe that we are already long overdue for root-and-branch reform of the welfare state. We believe that Americans should be in charge of the efforts to enhance and improve their communities. We believe that government programs are the least effective way of adapting to the future. We think that the bureaucracy-and-subsidy model has be tried and has failed.

But our Democratic friends are determined to give it one more college try, and if they win they will have a mandate to do so. Unfortunately they will be handed a chalice that they have tarnished and poisoned. In their intransigence they refused, while in opposition, to allow it to be refreshed and renewed. We saw this intransigence before, in 1990, when Democrats led by Senate Majority Leader George Mitchell refused to allow a capital gains tax reduction to ease the pain of recession.

The American people are fed up with the poisoned chalice that politicians in Washington have been soiling for the last decade. They want sensible, practical reform. Next week, most probably, they will call for a change in the national executive branch. That is the one great power they possess.

But they will expect that change to lead to reform. If it doesn’t—and we believe here at Road to the Middle Class that they are unlikely to get it from President Obama, Speaker Pelosi, and Majority Leader Reid—they will be back in two years or four years with a firmer demand for change.

That is what democracy is all about.

Spread-the-Wealth

Conservatives have been pushing the Obama-is-a-socialist meme pretty heavily in the last few days.It’s probably the only thing that can pull the election out of the bag for John McCain. A recent Gallup Poll shows that, if you ask the right question, Americans oppose fixing the economy with spread-the-wealth programs by 84% to 13%. As Gallup report it:

When given a choice about how government should address the numerous economic difficulties facing today’s consumer, Americans overwhelmingly — by 84% to 13% — prefer that the government focus on improving overall economic conditions and the jobs situation in the United States as opposed to taking steps to distribute wealth more evenly among Americans.

And, of course, the Obama program leans heavily on finding ways to spray money at its supporters through tax credits and the like. (Of course, elite liberals get a look in with a renewed tax credit for buying a hybrid car.)

It’s not so much the spread-the-wealth that annoys me. After all, Republicans spread the wealth to Republicans with tax rate cuts. It is merely an incidental factor that lower marginal tax rates benefits not just Republicans but all Americans.

It’s the subsidies that I don’t like, and the distortions they introduce into the economy. First dollar health coverage. Subsidies for alternative energy. Subsidies for low-income homebuyers. “Free” education.

Everyone wants to help poor people, but how? Subsidies? Welfare? Free this and free that? It all seemed so simple a century ago when social democracy really got started. Everyone agreed on the problem: the poor lacked material resources. Give them the resources, and justice would reign.

It didn’t turn out that way. The poor did not just lack material resources. They lacked “spiritual resources,” as Robert William Fogel put it in The Fourth Great Awakening and the Future of Egalitarianism.

The way that the poor build up their spiritual resources is with religion and with love and with hard work and intact families. The welfare state has been a stunning success in breaking up families and turning low-income young men into feral beasts.

That is why we here at The Road to the Middle Class have just two words for the welfare state: Cruel and Unjust.

Because there is another way.

From Smarts to Song

You can often tell someone by trying to understand their enemies. You ask what the folks attacking your favorite politician have in the game. And then you start to understand what’s going on.

There must be something really important about Gov. Sarah Palin (D-AK). Else she wouldn’t have so many enemies. But even an occasional enemy can see the good in her, like feminist Elaine Lafferty in The Daily Beast. Palin’s smart, writes Lafferty, but not in a crude street-smarts way.

I mean, instead, a mind that is thoughtful, curious, with a discernable pattern of associative thinking and insight. Palin asks questions, and probes linkages and logic that bring to mind a quirky law professor I once had. Palin is more than a "quick study"; I’d heard rumors around the campaign of her photographic memory and, frankly, I watched it in action. She sees. She processes. She questions, and only then, she acts. What is often called her "confidence" is actually a rarity in national politics: I saw a woman who knows exactly who she is.

That, of course, is exactly the sort of leader that anyone would want at the top of their political party or movement.

But this is just the intellectual and political side of things. What about the cultural question? What about casting around for a good campaign song for for Palin 2012. It would have to be based on a good old patriotic song so that everyone knows the tune. I have an idea:

O beautiful designer specs,

And amber waves of hair,

Reformer of the female sex

Who’s smart and tough and fair!

America! America!

Let’s end the liberal bile.

And crown thy good with brotherhood

And Sarah Palin’s smile!

It looks like America The Beautiful is out of copyright, so folks could sing it at rallies without having to pay for performance rights.

And it would drive our liberal friends crazy.

One Tough Politician

You can’t tell a dog when it’s out hunting. You can only tell how good it is when it’s being hunted.

That’s why we don’t have a clue what Sen. Barack Obama (D-IL) would be like as president.

A couple of months ago we had the same problem with Gov. Sarah Palin (R-AK). Yes she could give a boffo speech, but what would she be like when the going got tough? Would the tough get going? Would she have a future as a national Republican politician, or would she turn out to be a flash in the pan?

Now we are beginning to get her measure. After an unprecedented firestorm of invective and criticism, including ruthless gotcha interviews from Charlie Gibson and Katie Couric, she has not lost her nerve.

When criticized about her $150,000 wardrobe she didn’t miss a beat but came right back and played the sexism card on the liberals that criticized her.

And now we have the unsourced article from CNN. “Palin’s ’Going Rogue,’ McCain Aide Says.” If your liberal friend has caught onto the article, he’s probably sneered knowingly about it.

On the contrary, the news couldn’t be better. Palin has determined that the McCain campaign is mishandling her, so she is ignoring them and taking her own counsel. That may not be too good for anonymous McCain aides, but it portends well for the future.

It means that Palin is not out for a Sunday drive. She is an ambitious politician thinking of the long term, running for president in 2012, for starters.

So now we are beginning to take her measure. She is gutsy. She can take a punch. She won’t lie down meekly and allow people to drive her into the political wilderness.

What we have here, it seems, is a politician of remarkable courage and talent. She seems to have Bill Clinton’s talent to turn lemon into lemonade, and never, never, never, let anyone think that you are whipped.

Republicans aren’t used to this kind of leader. Even Ronald Reagan often reckoned that discretion was the better part of valor.

Fasten your seatbelts. It’s going to be a bumpy ride.

An Obama Market Panic?

Are the markets panicking at the prospect of an Obama presidency and his presciption of more spending and higher taxes? Or are they just panicked?

The New York Post advanced the Obama Panic meme a while back, but I think that the panic is more about the fact that we are heading into a pretty nasty patch of economic weather.

And the markets sense that the politicians really haven’t a clue what to do about it. Let’s be frank. If McCain wins in November he’ll want to lower tax rates. And if Obama wins he’ll want to send out tax rebates. How about something we can agree on: tax rate cuts for corporate taxes? How about a cut from 35 percent to 25 percent?

Just as big as the Obama uncertainty problem is the fact that nothing will get done until the new president and the new Congress take office in January.

Here’s an idea from good old J.P. Morgan in the 1907 Panic. He did triage on the companies asking for a bailout. If he figured that the company would survive anyway he refused to extend credits. If he figured that the company would fail anyway, he refused to extend credits. But if he figured that the company could survive if he gave them a loan then he did.

Do you imagine that the new president and the new Congress could rise to something so practical and sensible?

I have my doubts.

Stimulus, for Sure, But What Stimulus?

We’re at the point of the business cycle where governments enact bold stimulus programs.

Yes, but what stimulus? What package of economic measures will get us out of the present economic malaise most effectively?

We’ve already done the monetary thing, and how. The Federal Reserve System is pumping liquidity into the world like there was no tomorrow.

But what about fiscal stimulus? It is over fiscal stimulus that the two political parties disagree, as Michael J. Boskin, a McCain adviser, makes clear. The Democrats believe in helicopter money, and the Republicans believe in changing the rules, principally by manipulation of marginal tax rates.

The big risks are higher taxes, protectionism, regulatory micromanagement, vast new spending, subsidies and mandates. Recall that the stock market crash of 1929, and the ensuing recession, were turned into the Great Depression by tax increases and protectionism (and bad monetary policy).

It doesn’t take a genius to see that Democrats would find it very hard to resist a program of vast new spending, subsidies, and mandates. After all wasn’t that what FDR did to beat the Great Depression?

Yes, he did, and conservatives believe that it was the spending and the subsidies, and the new mandates in labor law that prolonged the Great Depression.

Capitalism, wrote Joseph Schumpeter, is a process of creative destruction. It is continually creating new businesses out of the ruins of old businesses. As such it is anathema to the politician, who creates new programs to last, he imagines, for all eternity, and to the homeowner, who builds a house to last for a lifetime.

We are going to see a lot of creative destruction in the next year or so. But it’s the only way. The malinvestments must be liquidated in a bonfire of the vanities, and out of the ashes will rise a new economy.

What the government can do is help people in the painful transition from today to tomorrow. It is human and compassionate to give people a hand as they pick their way over the rubble. But the heavy lifting will come from intrepid businessmen starting new businesses and expanding old ones in the teeth of the present panic. What does the government propose to help them?