The Fed Gooses: Dutch Finance or French Finance?

Today the markets have soared in response to the Fed's latest ploy: making dollars available to foreign banks.  But it hasn't solved the problem.

At best, analysts said the move could buy the 17 nations of the euro zone a little more time to agree on a broader plan to stabilize financial markets.

Why is that?  Because all the Fed has done is solve the liquidity problem.  It has not solved the solvency problem.



The solvency problem is that a number of European nations have run up debts that cannot be repaid.  There will be sovereign default, and there will be haircuts for bondholders, and there will be welfare state spending cuts.



Why are these nations in this mess?  The reason is quite simple.  They follow the principles of what I call "French Finance."



The modern era has two models of national finance.  There is Dutch Finance, invented by the Dutch Republic in its war with Spain back in the 16th century.  Then there is French Finance, invented by John Law in France in the early 18th century.



The difference is simple, and understandable by any of us financial ignoramuses.  Let's start with French Finance.



In French Finance the resident wizard, be he John Law or Benjamin Strong or Alan Greenspan or Ben Bernanke, manipulates the financial system to get the government out of its latest jam.  You get inflation, government-sponsored companies like the Mississippi Company and Fannie and Freddie.  It always ends in tears. And the reason is pretty simple.  The credit system runs on trust (credit means faith).  It requires the participants to believe that the other participants can be trusted.  Obviously, under French Finance with its John Laws and Alan Greenspan and Ben Bernankes the question always is: how can I manipulate the markets so my political masters can coast through to the next election?  They spend and borrow and don't give a damn about the long term.  And in the long term the government ends up with debts that cannot be serviced.  After the election comes the deluge.



But what about Dutch Finance?  Now you are talking.  The idea of Dutch Finance is that you take all the government's mess of IOUs and convert them into long-term government bonds.  Then you create a tax and allocate it to the payment of interest on the bonds.  The tax is big enough that the market has confidence that the interest can be paid,.  And paid, and paid.  The result is a big boom, because the government's rock-solid bonds become the best kind of collateral for individuals and the best kind of reserves for banks.  The Dutch did it, and then they invaded Britain in 1688 and set up the same system up with the Bank of England and the "funds," i.e., the National Debt "funded" with earmarked taxes.  If you read your naval fiction you will find that your Jack Aubreys always put their prize money in the "funds."  Alexander Hamilton gave the US Dutch Finance in 1792 when he converted all the Revolutionary War debt into government bonds serviced by import tariffs and excise taxes.  Pretty soon the US had actually paid off its National Debt.



There is always a temptation for governments to cheat, to pretend that they are doing Dutch Finance when they are actually veering towards French Finance.  The Germans had their fill of French Finance in the first half of the 20th century with hyperinflations that reduced money to zero twice after defeat in war.  They want a financial system that will never again ruin the German people.



In the present crisis, as the Wall Street Journal opines, everyone wants the Germans to write a blank check for the defaulters.  The German people, perhaps more than their leaders, are dead set against it.  And who can blame them?



No doubt we will soon get to the end game on this mess, and nobody knows how wide the damage will be.  Will the contagion spread to the US and push the economy back into recession?  Nobody knows.



But one thing we do know.  French Finance always ends in tears.  Dutch Finance is different.  It leads to peace and prosperity.

What's Wrong With Obama Center-left Coalition

I'm still thinking about the news that the Democrats are abandoning the white working class.  Thomas B. Edsall gave us the news in the New York Times:

All pretense of trying to win a majority of the white working class has been effectively jettisoned in favor of cementing a center-left coalition made up, on the one hand, of voters who have gotten ahead on the basis of educational attainment — professors, artists, designers, editors, human resources managers, lawyers, librarians, social workers, teachers and therapists — and a second, substantial constituency of lower-income voters who are disproportionately African-American and Hispanic.

 It seems to be that there are three things that don't compute with this over-under strategy.

1. There aren't enough "professors, artists... social workers, teachers, therapists" to make up for the departed white working class.  Let's think a little more broadly about the "socially liberal, economically conservatives" that voted Democrat during the Bush years.  I'd say it was easier to get those educated suburbanites to vote for Democrats during the Bush years than it will in 2012.  Today they are not worrying about whether Pat Robertson is going to be invading their bedrooms.  They are worrying about their children's careers.  Sure, the educated class that works for government will vote Democratic.  But that just means that they will be voting their pocket books.  The rest of the educated class needs a growing economy to fatten their pocket books.


2. Don't count on the Hispanic vote.  Bush got the Hispanic vote up to 40 percent GOP.  Obama took it back to 30 percent.  Democrats shouldn't count on keeping that 30 percent.


3. Don't count on turning out the black vote.  Obama was elected on a huge enthusiasm in the African American community.  Word is that blacks are deeply disappointed with Obama.  They won't be voting Republican, of course, but many won't be voting at all.

If you ask me the Obama strategy for 2012 is a strategy of desperation.  They are going the center-left over-under class warfare strategy because that's the only way they have a prayer of winning.



But if you think of it, the Obamis are leaving the center wide open for the Republican nominee.  Instead of class warfare, the Republican can invoke all the hoary all-American themes, of hope, hard work, freedom, opportunity, and making America better for our children.



And getting government off our backs.

Entitlements and Realignments

This just in: The Democrats are abandoning the white working class.  The New York Times Thomas B. Edsall says so.

All pretense of trying to win a majority of the white working class has been effectively jettisoned in favor of cementing a center-left coalition made up, on the one hand, of voters who have gotten ahead on the basis of educational attainment — professors, artists, designers, editors, human resources managers, lawyers, librarians, social workers, teachers and therapists — and a second, substantial constituency of lower-income voters who are disproportionately African-American and Hispanic.

Now, of course, the Democrats have always been an over-under party.  But the point of the New Deal coalition was that the "under" included the working stiff, the white working class.



It's interesting that the Dems are trying this right now, especially in the light of an article on the same day from Michael Barone.  He points out, using a study done by the indispensable Paul Ryan (R-WI) that entitlements actually contribute to inequality.  How?   Well, a smaller share of entitlement spending is going to the poor these days. According to Ryan:

[T]he distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers.

Can anyone spell "Medicare"?



Now, I'm all in favor of reducing middle-class entitlements.  I think that middle-class people like me in their 60s should be paying for their own retirement and their own health care.  But I also understand Irving Kristol's argument that, in order for government to do something for the poor you have to deal in the middle class.



You can see what the Democrats are planning.  They are planning to energize their over-under coalition by taking monies from the middle class, including the white working class, to fund their redistributive programs.  They want to send more money to the poor (oh, and quite accidentally, the overclass that will manage the redistribution.)



There is one problem with Baldrick's cunning plan.  If the Dems start moving money away from the middle class they will reduce middle-class support for entitlement programs and government spending in general.  The middle class likes to vote itself free money like anyone else.  But if the ruling class decides that the middle class doesn't need so much of the free stuff then the middle class is liable to make the obvious judgment.  It will say that if I can't get my share of the loot then nobody else should either.



All of which just shows what we knew already.  The upcoming 2012 election will be a momentous election that decides the direction of US politics for decades to come.  It won't just be a "wave" election.  Or even a "realignment."  It will be an earthquake.

The Real Obstructionists

Democrats have been having a grand old time recently accusing Republicans of poisoning the well by refusing to consider tax increases.  But, as Charles Krauthammer writes, that's a lie.  Republicans have too proposed tax increases, by proposing loophole-closing measures.  Remember when Democrats used to be all wigged out about loopholes?  Here is the list of Republican tax increase proposals, as listed by Krauthammer.

1. Sen.Tom Coburn (R-OK) last year signed on to the Simpson-Bowles tax reform that would have increased tax revenue by $1 trillion over a decade.
   
   
   
   


2. During the debt-ceiling talks, House Speaker John Boehner (R-OH) agreed to an $800 billion revenue increase.
   
   
   
   


3. Supercommittee member Pat Toomey (R-PA), proposed increasing tax revenue by $300 billion as part of $1.2 trillion in debt reduction.

So much for the eevil obstructionist Republicans.  Of course, Republicans aren't exactly innocent lambs about this.  They don't want to increase taxes on millionaires and billionaires; they would rather reduce the tax loopholes that disproportionately benefit blue-state taxpayers.



The real obstruction to progress on the budget is Democrats.  There's President Obama, for starters, who produced three dead-on-arrival budgets last year: the February budget, the April budget speech, and whatever it was he was proposing in the debt-ceiling debate.  Then there is the Democratic Senate that has failed to produce a budget resolution as required by law since the beginning of the Obama administration.



There is a simple reason for the Democratic obstruction.  They don't want to face up to the one incontrovertible truth of today's politics.  Entitlements must be cut.  No, not just entitlements.  Medicare must be cut.



In my view, the real agenda behind ObamaCare is/was to cut Medicare by the back door, by forcing everyone in America into a system that would ultimately ration care.



The Medicare problem is pretty simple.  Medicare as presently structured does not encourage seniors to economize on health care.  As soon as a majority of seniors (like me) start facing deductibles on Medicare then they will start bargain-hunting.  As I like to say: wait till the Jewish bubbies of South Florida start treating Medicare like they treat grocery shopping.  But Democrats don't want to face up to that.  Their idea of politics is that the American people come to them for "benefits".  A Medicare system with a fixed subsidy and deductibles doesn't fit their patron-client political paradigm, because it will refocus seniors' attention on bargain-hunting rather than benefit-hunting.



But the current system is heading straight for the rocks.  And when it does, it will hurt Democratic voters the most.  Hey, who cares?  Not the Democrats.

Giving Thanks

I'm a lucky guy, all thing considered, and I'm thankful.



In the first place I'm a lucky guy to have two beautiful daughters and six strapping grandchildren.   One daughter is married to the $2 billion man, and the other has a debut novel, OVERSEAS, coming out next year.



In the second place, things always seem to turn out all right for me on the work and money front.  Like right now, when I've "retired" and am now busy writing.  But wouldn't you know, my little website, usgovernmentspending.com, is turning in $2,000 per month in Google advertising revenue.  Next year, very likely more. Who knew, back in March 2007 when the site debuted?



Then we get down to the details.  I'm grateful for President Obama.  He is doing more than anyone to bring on the conservative millennium.



I'm grateful for the Tea Party.  Only in America is there a movement of sensible, measured conservative renewal, in our case based on the founding principles in the Declaration of Independence and the Constitution.  Other nations should be so lucky.



And I'm grateful for the Occupy folks.  If they didn't exist we would have to invent them!



I'm grateful for Mitt Romney.  Is America ready for a Mormon president, liberals?



I'm grateful for Newt Gingrich.  Somebody had to ignite a presidential campaign by needling the mainstream media.



I'm grateful for the climate deniers.  They have stuck it to the climate science community and shown to the world that the headline climate scientists are not doing science, they are doing politics.  It turns out that they are not very good scientists, and not very good politicians, either.



I'm grateful for American workers and American businessmen working away, trying to make the economy recover, even as the government makes things worse and worse.



And of course, I'm grateful for the lovely Lady Marjorie.

Obama Won't Talk

I always say that you can tell what you are good at with one simple test.  What do you like to do at 9:00am on Monday?  If you dread getting back to work at that moment, then you know something important about yourself.  You are in the wrong business.



There's a reason why I'll never make a good politician.  I don't like to get on the phone at 9:00am on Monday and talk to people.  And neither, it appears, does President Obama.  That's not me saying that.  It's MSNBC's Chris Matthews.  Says Matthews of conversations with people on Capitol Hill:

He doesn’t call. He doesn’t write. Matthews continues, “I keep asking them, when did you hear [from the president] last? Silence. He doesn’t like their company.”

When he first got elected as Governor of California, Ronald Reagan's aides pushed him in a different direction.  Forget about going home at five pm, they said:

You have to get to know the legislators, especially the leaders, especially the Democrats. You have to have drinks with them. Tell jokes with them. They have to get to know you, like you, and trust you.

Over at the Wall Street Journal Holman Jenkins details how his isolation worked against President Obama on the recently failed Supercommittee.  The president could have picked up the tax-increase idea floated by Sen. Pat Toomey (R-PA) and fashioned a compromise.  But he didn't.

Mr. Obama, if he had the political creativity he credits himself with, would now pick it up and run with it, instantly redeeming the super-committee "failure" with an act of presidential leadership.

Ah yes.  Leadership.  What voters are generally looking for in a president.  But leadership, according to Ronald Reagan's aides, means getting out and talking with the players.  Because unless you get out among them, you will find it impossible to twist their arms when the moment comes to make the final push on a key piece of bipartisan legislation.



Napoleon said that in battle, the moral is to the physical as three to one.  When Gen. Sherman was marching through Georgia, his troops liked to get a look at their "Uncle Billy" to make sure that things were still all right.



When things get tough in 2012, how will Obama's troops get the same reassurance from the man that nobody knows?

Teeing Up For 2012

The Supercommittee, writes John Podhoretz, was never meant to work.  Or rather, it was designed to kick the can down the road once more.  And it did.  Forget about "dysfunction."  The debt ceiling debate of July 2011 demonstrated the current stalemate between the two parties.  Republicans don't have the power to change, and Democrats have the power to stand pat.  Only an election can decide it.

The central dispute between the camps of the supercommittee — the Republicans wanted no tax increases to stimulate economic growth and entitlement cuts to shrink the size of government, while Democrats wanted tax hikes on the wealthy — will certainly be the central debate of the upcoming national election.

And that is as it should be.



It is also right and proper, writes Yuval Levin, that the Democratic Party should be demonstrating the two sides of progressive liberalism: its technocratic side in the yearnings of people like Peter Orsag for less democracy, and its populist side in the envious ravings of the OWS crowd.



Yuval proposes two types of liberalism, the conservative liberalism of constitutionalism and limited government and the progressive liberalism of progress towards an ideal society.

One view, which has always been the less common one, holds that liberal institutions were the product of countless generations of political and cultural evolution in the West, which by the time of the Enlightenment, and especially in Britain, had begun to arrive at political forms that pointed toward some timeless principles in which our common life must be grounded, that accounted for the complexities of society, and that allowed for a workable balance between freedom and effective government given the constraints of human nature. Liberalism, in this view, involves the preservation and gradual improvement of those forms because they allow us both to grasp the proper principles of politics and to govern ourselves well.



The other, and more common, view argues that liberal institutions were the result of a discovery of new political principles in the Enlightenment — principles that pointed toward new ideals and institutions, and toward an ideal society. Liberalism, in this view, is the pursuit of that ideal society.

The Tea Party, a popular movement to restrain government, is today's instantiation of conservative liberalism, and the Democrats, with technocrats and populists blazing away, exactly represent what you would expect from progressive liberalism: frustration in the technocrats that they can't execute their well-crafted plans, and envious rage from the street that the ideal society hasn't happened yet.



Everyone thinks that next Fall the decision will be a pretty close-run thing.  But I don't.  I think we are going to see a 55-45 Republican win.  It's true that the president is stirring up his base and lambasting the Republicans at every turn and he is moving the needle on his popularity.  But the problem is that the president doesn't have a plan that gets us out of the jam.  Raise taxes?  Steady as she goes?  You must be joking.



The American people are frightened, and are looking for someone to lead them forward.  They know that government is too big, and they know that we need jobs.  Obama's plan isn't working, and it doesn't look as if things are going to be much better by next fall.  The Euro debt debacle will take care of that.



But don't think that a resolution of the Euro debt mess would help the president.  If the Europeans turn the corner then the hot money presently sitting in US debt as a safe haven will be looking at Europe for safety.  That would not be good for US Treasury debt yields, and it would not be good for President Obama's reelection.