The Right's Current Transformational Moment

One of the biggest reasons for the Right's decline in the Bush era is that we had long since completed most of the items on our to-do list. Low marginal tax rates? Check. The Soviet Union gone? Check. Welfare reform? Check.

This empty cupboard of ideas had led to progressively more minimalist Republican governing agendas and campaign platforms. If John McCain proposed any big, game-changing policy shifts in the last election, I must have missed them. It's true that Obama's ideas were not new either -- but he was able to sell them as "change" because they had been not tried in toto since the Johnson Administration, and people had forgotten how badly they had crashed on the rocks their last time out. Obama's central thesis -- that government ownership and central planning can outpace returns in the private market -- is actually very, very old. His playbook is that of FDR in 1933, Attlee in 1946, and Mitterand in 1981.

The effect on the Right even before Obama had been so corrossive that the institutional right was utterly incapable of offering any competing thesis of the economic crisis, leaving government ownership and bailouts as the only "appropriate" policy response. Even the previous Administration, made up of men of the Right, justified the bailouts -- and particularly the auto bailout that precipitated the White House putsch at GM -- as inevitable, "temporary," "emergency" measures.

Fast forward two months into the Obama era. Pro-forma denials of nationalization and socialism aside, the White House feels responsible enough for the insurance and automobile industries to dictate their management and maximum salaries -- the classic hallmarks of ownership. The Federal budget has swelled to $3.6 trillion, and revenues cover barely half the bill. To an extent probably never seen before in our history, there are no consequences for business failure, no consequences for individuals who took out loans they couldn't pay for, and no consequences for government that overspends.

The Welfare State mentality of the '60s that created the conditions for 1980 and 1994 systemically excused bad behavior at an individual level, creating millions of individual tragedies. Obamanomics systematically excuses bad behavior at the wholesale macroeconomic level, creating a vicious circle of irresponsibility with major consequences for every American.

If nothing else, the first 70 days of Obama -- with an assist from the last 4 months of Bush -- has left government economic policy so off-kilter that it may take a decade or more to fix. Remember that exhausted to-do list? Not a problem any more.

For the first time in decades, Republicans could run on a platform of cutting government by a third and not seem wild-eyed or mean-spirited. When we talk about the dangers of governments running private businesses, we will have contemporary object lessons to teach with, not bogeymen that are decades old or oceans away. When we talk about getting the government out of our lives, more people will nod their head knowing exactly what we mean, having just footed the bill for bailout after bailout, instead of yawning or dismissing it as a non-issue as they did in the prosperous, laissez-faire post-Reagan America.

The end result of this agenda, the size of government at 2007 levels, may seem minimalist in any broad sweep of history, but it is galvanizing in a way it wasn't before because of the sheer scope of what's changed in six months. The yawning gap between where we are now and where we were two years ago gives conservatives an ambitious goal to reach for and a reason for being again, even if the end result is little change over time. And if we get a mandate to actually cut government significantly -- and I think the public mood will shift there in a few years if not sooner -- it might not be that much harder to cut it to below pre-Obama or pre-Bush levels because current levels are so out of whack that people would not be able to tell the difference between that and what the status quo was in the mid-2000s -- only that it is change.

Though it has apparently triumphed, this is a dangerous moment for liberalism. Long-planned moves toward redistribution like universal health care or the repeal of the Bush tax cuts are being conflated with and to some extent elbowed aside by emergency nationalizations and Mr.  Geithner's experiments. The White House is not selling the de-facto AIG and GM nationalizations as such, because they know the stigma the S-word carries. It becomes harder to sell the long-standing liberal policy agenda as urgent and necessary when the Administration is busy putting out ten different fires first. And after Year One, it becomes exponentially harder for a new President to push wants instead of needs.

Meanwhile, it becomes easy for Republicans to point to real-life consequences of government control to nullify the entire Obama agenda. Screw ups like the AIG bonuses will inevitably happen and be magnified by the fact of government investment, and this will have a chilling effect on the public's view of interventionism more broadly in areas like health care. Barack Obama standing behind your new muffler will not be looked upon with warm and fuzzies in the years to come. The best case for Obama is that this time in history is seen as sober and necessary. But that's not a rallying cry and a movement-builder. The right will be galvanized to action by the theft of the free enterprise system. What will the left be galvanized by?

 

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This is just sad...

 ...calling Obama "communist" is the best you can come up with?  After all, "government ownership and central planning" is essentially communism.  Yet, where has Obama proposed either of these, other than continuing the practice with companies which the previous Republican administration invested in/took over?  I mean, has the demise of the USSR left Conservatives so bereft of identity that you have to clutch at straws like this?

And by the way, it's "corroSive", and the Fed budget is $3.6 TRillion.

I always have liked the founding principles of the Republican party - as in, small, localized government - ever since I came stateside in 2000 and became familiar with US politics.  All I have seen from Republicans, however, is government over-reach and interference in the most personal of decisions (think Terry Schiavo, gay rights) and a promotion of Christianity as the sole moral force on Earth.  Poor Barry "you don't have to be straight to be in the army, you just have to shoot straight" Goldwater must be turning over in his grave.

I have listened to Limbaugh on occasion, and seeing someone reasonably intelligent like you, Ruffini, defend Rush as a beacon of Conservatism sends a chill down my spine.  As another "icon" might say: Thanks, but no thanks.

I THINK WE ARE ALL GLAD BUSH IS OUT OF OFFICE

I'm left to wonder at what point are people that are supporting the current direction we are heading going to stop whinning about how Bush built this road.

We know, we know.  But that doesnt change the facts of today.  Regardless of exactly which point the country was at on 1/20/09 it is CLEAR that we are no longer anywhere near that point today.  Rest assured history will show that the economic downturn/crisis nor Bush took us from that point to the cliff's edge.  That will fall on squarely on the shoulders of the Obama Administration and the Democratic Congress.

If you thought the Republican Uprising in the 90's was significant just wait until you the results of 2010 and 2012.  The Congress as you know it today will be dismantled and you will see what sweeping change really is.  And fortunatley for everyone that will include the replacement of many Republican members that have forgotten their own principles.

I challenge you to back up this claim

You claim that Obama's "central thesis" is that government ownership and central planning can outpace returns in the private market.

Prove it.

Can you provide any statement from Obama that predate last fall's economic collapse that indicate that he thinks that nationalized industry is a good thing?

Can you provide any indication that Obama is interested in retaining "government ownership and central planning" over the finance sector and auto industry once the current crisis is resolved?

Obama is not a socialist, he isn't interested in occupying the commanding heights of industry in order to finance the government. He is interested in fixing the shitty situation that we find ourselves in - and BTW, that was a creation of 8 years of the the Bush Administration, not just the last 4 months.

When the authorities declare martial law after a major disaster, is that because their "central thesis" is that military dictatorship is the best form of government? Or is it an acknowledgement that extraordinary situations call for extraordinary measures, so that life can get back to normal as quickly as possible.

 

I judge based on actions, not

I judge based on actions, not words. By his actions, Obama is strengthening and deepening Bush's nationalization of these companies. But the argument is not about Bush. It's about the Right. At the time, conservatives vociferously opposed the nationalization of AIG, the Wall Street bailout, and the auto bailout -- fearing exactly what has come to pass, namely management of the firms for political not business ends. The fact that AIG and GM made their own bed by inviting this mess does not make it right.

Had GM entered a structured bankruptcy and the UAW contract been shredded that would have been fine with us. It's not like we somehow supported Bush's policies and are now ruing the same policies with Obama in office. We opposed Bush when he did this.

"political ends"?

So... exactly how are AIG and GM being managed for "political not business ends"? Has the UAW - a big Democratic constituency - gotten better, fatter contracts?  No, on the contrary, many jobs will be lost! And the Obama administration's first concern over AIG was - gasp - legality of pre-existing contracts!  Not exactly a political decision, as we know.

And as far as I can tell, the WH has been very careful - once past the initial Congressional hysteria and populist rage on both sides of the aisle - to calm people down, telling them that business would be scared if such "bill of attainder" acts continue.  That again is pro-business, not a political tactic.

You give an example of GM - accompanied by typical union-busting.  What would your solution be for AIG?  Let it collapse a la Lehman brothers?

There are no atheists nor (fiscal) Conservatives in a foxhole, my friend...

Yes, political ends

You are misrepresenting a couple of things in your statements.  I live in the Detroit area and follow the situation with the auto makers.

While the UAW is putatively a Democrat leaning institution, the power they have over elections is becoming smaller by the year.  The McCain-Feingold election finance reforms prevent the UAW from airing political commercials leading up to a national election.  The legislation that allows union members to specify that their donations cannot be used for political purposes has led a significant number of UAW members to exercise that option.  You do not realize that while the UAW organizationally supports the Democrats, a large number of their members tend to vote Republican or even third party.  The influence of the UAW on politics has become nearly inconsequential.

The bailouts that were given to the auto makers also contained increases in the CAFE standards.  How can you say that is not a politically motivated condition on the bailout money?  If California has their way, they will add standards that lower greenhouse gas emissions through state law.  The American auto makers may soon find themselves in a position where they cannot sell an automobile in California.  Meeting the combination of both requirements may be unattainable for decades.  But the foreign auto makers do not have the burden of the CAFE standards imposed by the bailouts.  Of course, neither does Ford Motor Company.

So you believe those are businessl decisions?  It would be much better if you tried to be more honest instead of just presenting a purely political bias yourself.  There is plenty of politics interspersed with the business of bailing out the auto companies.  As usual, the truth lies someplace between where the cheerleaders from both sides will argue.

Damned if you, damned if you don't...

 So... the Obama administration's decisions are political *because* they are bad for union workers?  Amazing!

Second, get your facts straight about the CAFE standards.  The recent increase was not, as far as I can tell, linked to the auto bailout.  Rather, it was a long overdue increase - the CAFE standard hasn't changed in ten years, and second, it applies to *all* companies.  Though apparently: [link]

"According to Environmental Protection Agency figures, none of the Big Three U.S. automakers currently meets the 2011 combined car-truck CAFE standard of 27.3 mpg. Toyota, Honda and Nissan already exceed the 2011 standard, as do most other Japanese automakers, Germany’s Volkswagen and Hyundai and Kia of Korea."

so who PAYS for the rotten, shitty bloody fucking contract

that was negotiated back in 1950?

Fuck you and your concepts of personal responsibility. Personal responsibility ain't worth shit when the authors on both fucking sides are dead.

GM is already in the process of dismantling Ford's dream -- and Ford would probably have been heard complaining about miscegenation, what with all of his company's jobs going to brown Mexicans. He was a racist ol' bastard that way.

I'm glad to hear that you support Martial Law and were against holding elections. I don't know where you live, but I sincerely hope that you live in Southern California. Folks like yourself deserve to be exposed to the reality that they're advocating.

I'm glad to see you support Straw Man Arguments.

Please try again.

Where did anyone say they were against elections with secret ballots? 

Stop this. You just want more campaign swag for the Democratic Party that forced unionization would give you. 

Watching the Obama Administration sieze control of General Motors is like reading the early chapters of Atlas Shrugged. The problem, of course, is that Obama, Plouffe, and the other passengers in the Second-Rater Mobile know as much about the design and marketing of automobiles as Ron Jeremy. Probably less, since Jeremy was actually a success at marketing a good that people needed: porn.

Speaking of Ron Jeremy, like the Rennaissance Man of Porn, I assume you're from Southern California as well. As am I. A part of the world that has been run into the ground by the Democratic Party under the local Guevarist jefe, Villagrosa.

Forty percent of the population of L.A. is on some form of public assistance. Small businessmen are fleeing L.A. because they can't bear the burden of an absurdist, Dadaist regulatory structure designed to feed the maw of Downtown and the parasitic Democratic Party that feeds off it. Waiting for pro-growth oriented change to come to Southern California is like waiting for Godot: there aren't enough Republicans, Reagan is dead,  and Tom McClintock left town. 

Someone wrote a book about California recently, about how the Democrats ran the state of my birth into a jumped up version of Paraguay. It's called, The Future Used to Begin Here. I always think of what California became when Democrats got all their wishes fulfilled whenever I get an online lecture by some sanctimonious liberal. 

Democrats: preparing America to be Slaves to the Chinese. 

What the Left Blogosphere can't comprehend, simply because online lefties are full of Triumphalism, is that there is no way for them to go but straight down. Smart guys like Patrick have been here before. Eventually, the American people will rebel at the thought of their children being slaves to the Chinese Mandarinate just to feed Barack Obama's mighty ego. And unfortunately, because Obama really doesn't have a plan to get us out of this sh*t, they will turn on him.

The Big Character Posters and Mao Cult that got him elected won't save him in the end. It never does. The worm always turns. 

you're way off base.

Believing that we didn't need bailouts, and believing that bailouts shouldn't have occurred, is tantamount to saying "whatever happens, happens, so long as I don't get billed for it"

... what would have happened was Martial Law, and no November elections, due to an utter collapse of food supply in the cities.

This has absolutely NOTHING to do with card check.

Also, amusingly, if you

Also, amusingly, if you substitute "9/11" for "economic crisis" and "terrorism" for "extraordinary situations" in your argument, you have essentially have the reasons for Guantanamo, "torture," and other sundry Dick Cheney hobbyhorses -- at least according to the Left.

Funny how the Left is not above manipulating "crisis" for its own political ends (which align felicituously with its rapacious appetite for more spending and bigger government) after decrying the same for 8 years.

9/11 was more of a shock to the system psychologically than the current situation, which can be classed as a deep, 1982-style recession, but not a depression requiring the economic equivalent of martial law. We got over those situations, and we'll get over this. Indeed, even Obama is talking about the economy bottoming out in 2009.

We now know without a dbout that the Bush Administration

We now know without a dbout that the Bush Administration was planning on invading Iraq and then seized on 9/11 to justify the invasion, despite the fact there was no connection.

Show me some evidence that the Obama Administration was planning on nationalizing industry and that they siezed on the financial crisis to justify it.

Think for yourself

This talking point doesn't hold up to critical examination. 

People who became members of the second Bush administration believed that the first Bush administration would have been wiser, in the Gulf War, to finish the job and remove Saddam Hussein from power.  Which, by the way, is almost certainly correct.  And some thought that it was still in America's interest to remove Saddam Hussein from power--for precisely the reasons that were shown to be important after 9/11, such as concerns about weapons of mass destruction and cooperation between states that developed WMD and non-state terrorist organizations that could deliver those WMD without fear of reciprocity. 

So was 9/11 "seized" as a "pretext"?  No.  9/11 illustrated the dangers they had been concerned about from the beginning.  It was underlined, for everyone to see, just how important it was not to leave these terrorist organizations out there (as Clinton had) developing in their safe havens, supported by various autocratic regimes.  So Bush decided that the US should go about dismantling terrorist networks, including the terrorists and their training camps as well as the states that give them funding and cover. 

Think about it this way.  A wife and husband are moving into an expensive home, and the husband thinks they should get a security system, but the wife balks at the price.  They don't get a security system.  Then they're robbed, and they go ahead and get the security system.  Did he seize upon the robbing as a pretext?  No.  His original point was borne out by events. 

You say: "Well, Saddam wasn't responsible for 9/11."  Fine.  He had ties with al-Qaeda and had helped them on occasion, but let's stipulate they were not cooperating at the time.  So what?  We weren't concerned only with vengeance.  We had to prevent the next 9/11.  Whose to say they would not cooperate in the future?  And we're not concerned only with al-Qaeda, but with anti-American terrorist organizations and states that support them or were likely to put expensive weapons--the kinds of weapons only states can develop--into their hands.  If you think the Hussein regime was not a legitimate concern in a world of WMDs and terrorists, well, I won'd descend to name-calling, but you're wrong. 

nah... if you wanted to prevent the next 9-11

you'd have made peace with Iran, and then steamrolled Israel and Palestine into some sort of workable agreement.

I'm no dove,b ut anyone can tell you that OUR ALLY KSA was the fount and birthplace of most of the hijackers, and that GWB sent their relatives home on 9-11, and then lied about it to the american public.

This is childish ranting.

 The Iranians have national interests in building an atomic weapon that transcend making "peace" with the U.S. until such time as they have a bomb.  Clueless leftists don't get this because they don't get the concept of rational self-interest. 

The notion that 9/11 or a subsequent attack could be prevented by, say, an Israeli-Palestinian agreement presupposes that the first one had anything to do with the Israel Palestine conflict, and nothing in the record of the 9/11 attacks indicates anything of the sort. Only later did Bin Laden mention Israel Palestine, and then as an opportunist, not out of any conviction. 

Nobody in the Arab World really gives a damn about the Palestinians. We do, however. 

The Iranians have their interests, and AQ had theirs. The notion that everything could be solved by pursuing the chimera of Peace in the Middle East is a fantasy. Adults don't believe this. Neither should you. 

Obama will find out this hard truth, much to his sorrow. 

You are factually wrong

Bin Laden's Holy Fatwa against the United States, issued way back in 1998, specifically mentions the Al-Aqsa Mosque in Israeli-occupied Palestinian East Jerusalem as reasons for the fatwa, which calls on all Muslims to kill Americans "and their allies".

 

"Jihad Is an Individual Duty"

For more than seven years, the United States has been occupying the lands of Islam in the holiest of places, the Arabian Peninsula, plundering its riches, dictating to its rulers, humiliating its people, terrorizing its neighbors and turning its bases in the peninsula into a spearhead through which to fight the neighboring Muslim peoples.

The best proof of this is the Americans' continuing aggression against the Iraqi people, using the peninsula as a staging post, even though all its rulers are against their territories being used to that end, but they are helpless.

...These crimes and sins committed by the Americans are a clear declaration of war on God, his messenger and Muslims. And ulema [Muslim scholars] have throughout Islamic history unanimously agreed that the jihad [Holy War] is an individual duty if the enemy destroys the Muslim countries.

On that basis, and in compliance with God's order, we issue the following fatwa to all Muslims:  The ruling is to kill the Americans and their allies is an individual duty for every Muslim who can do it, in order to liberate the Al Aqsa mosque [Jerusalem] and the Holy Mosque [Mecca]... This is in accordance with the words of Almighty God...

 

Here is an excerpt from is 2002 letter to America:

 

 

As for the first question: Why are we fighting and opposing you? The answer is very simple:

(1) Because you attacked us and continue to attack us.

a) You attacked us in Palestine:

(i) Palestine, which has sunk under military occupation for more than 80 years. The British handed over Palestine, with your help and your support, to the Jews, who have occupied it for more than 50 years; years overflowing with oppression, tyranny, crimes, killing, expulsion, destruction and devastation. The creation and continuation of Israel is one of the greatest crimes, and you are the leaders of its criminals. And of course there is no need to explain and prove the degree of American support for Israel. The creation of Israel is a crime which must be erased. Each and every person whose hands have become polluted in the contribution towards this crime must pay its price, and pay for it heavily.

 

 

Here is an excerpt from his audiotaped message last year:

"...The Palestinian cause has been the main factor that, since my early childhood, fueled my desire, and that of the 19 freemen (Sept. 11 bombers), to stand by the oppressed, and punish the oppressive Jews and their allies," ......"We shall continue the fight, Allah willing, against the Israelis and their allies, in order to pursue justice for the oppressed, and we shall not give up one inch of Palestine, as long as there is still a single true Muslim alive."...

of course they have national interests in making a bomb!

when the MOST POWERFUL COUTNRY in the world declares you part of the Axis of Evil.... yup, definite interest there.

There are other interests, most chiefly in keeping the leaders in power in a country with a population that is rapidly growing younger.

I love the concept of realpolitik, and I just wish I could have trusted GWB to have acted on "rational self interest"

Just like Reagan, if the other side thinks you're NUTS, MAD breaks down. ;-)

Iran has little interest in Al Quaeda surviving. It has a lot of interest in finding new markets for its goods -- and the world's largest economy is up there.

I think history has shown

I think history has shown that Bush 41 was right. Bush 43 went in with haste and a one sided view from the neocons. The first war was accomplished and Bush 41 stopped General Schwartzkopt short of Baghdad as he knew it would be quagmire. This was the feeling of many people including Brent Scrowcroft, James Baker, Bog Gates, and even Colin Powell. Hussein was a secularist and did not like Osama Bin Laden. A little homework and cooler heads and we would have had Osama Bin Laden and most of Al Qaeda by now.

Bush 41 had 500,000 troops and the war paid for. Bush 43 had 170,000 troops and the war not paid for. We had a quagmire, the borders were not secure, many soldiers and civilians died needlessly and this has cost us 1 trillion dollars to date.

The policy for several administrations was to keep Iraq and Iran as equals. So what we have now is that Afghanistan is a mess with the Taliban and funding Al Qaeda. Al Qaeda is in Pakistan. And Iran as the new leader of the Middle East with possible nuclear material. Bush 43 never talked to his father about going to Iraq and when asked he said "I believe in a higher authority."

I can't see getting one bad guy and not getting the one that attacked us makes it proper. And now we may be confronted with a bigger mess in Afghanistan and Pakistan. And if fighting every country that we don't like, then we have another 20 countries to go. Better have a draft and come up with some tax money. At least get the intelligence and logistics right.

People who became members of the second Bush administration believed that the first Bush administration would have been wiser, in the Gulf War, to finish the job and remove Saddam Hussein from power.

That was the neocons who supported the Wolfowitz doctrine that went up against past policy. It became a small circle of yes men and they controlled the airwaves for the case for war. The rest is history.

 

1982? you've got to be fucking kidding me.

Would you class 1982 as a worldwide depression? Japan's exports are down fifty fucking percent.

Ripple effect is a bloody witch, and her talons cut deep.

No, we do not need martial law in this situation! I'm glad we can agree on that! Now, can you please get with the program? Bailouts were necessary to prevent LITERAL martial law, not whatever you want to namby pamby about "economic equivalent".

Now, we honestly do need the economic equivalent of nationalization, as the failure banks are too big to be bought out by other corporations. And just trashing them seems economically unwise, particularly when the lending is slowing again.

capiche?

What exactly is so wrong with the gov't becoming a large stakeholder in companies? It's wrong if it's not in the government's own interest.

Let me ask you a question? Can you name three national security enterprises that we've bailed out in the past year?

His central thesis? Really?

Obama's central thesis was, very clearly, 'Change we can believe in.' It's more sentiment than sentence, but no one seemed to mind.

I never remember him giving a speech with 'government ownership and central planning can outpace returns in the private market' on his podium's placard. In fact, I never remember him saying anything of the kind.

Sometimes your posts feel like you're testing red meat rhetoric to see what sticks, but this seems like you in your 'cool, rational analysis mode', in which case you're doing yourself a disservice by misreading Obama. It's very clear that he is approaching nationalization cautiously, applying it only to two industries, and hoping to get out of the business of nationalization as soon as possible.

That's a far cry from your 'central thesis' claim. Again, you are fundamentally misreading what's going on. If that's for the sake of rhetoric, fine. If that's truly what you think, God bless you.

Frederick II

The Enlightened Despot

Most speeches were about taxing the rich and Rewarding Democrats

Frederick,

Most speeches by Obama before beore the elction were about taxing the crap out of the rich, white people on Wall Street and giving the money to core Democratic groups such as blacks, Hispanics, government workers, and colege professors. Up until September 2008, Obama and his advisors anticipate a continuation of the good times and were just interested in taxing it and extracting as much wealth as possible for themselves.

Remeber how the Democrats complained about the deficts of the Bush Administration.  Now deficits do not matter at all and Democrats are sounding dick Cheney is saying that deficits do not matter in the long run.  Remeber how Obama was ready to reguate the domestic automatic industry, the oil and gas industry, and all heavy industry out of existence in the U.S. through new energy and environmental regulations?

Look at how insane the Obama Administration is that one week they are talking about amensty and open borders and the next week they will probably cause the unemployment rate to go to 20% in Michigan.

umm what?

most of the speeches were about taxing the top 5% and giving to the other 95%. i didnt know whites were only 5% of the population.

remember how republicans were saying deficits dont matter and now they are complaining about obama's spending plans? is this your strategy? to whine? both sides do what is convenient for them at the time. but since republicans are the party  of "fiscal responsibility" don't you think they should lead by example? what is your point? "democrats complained about republican deficits so republicans will complain about democrat deficits!" this solves nothing.

so now that obama has the courage to say GM and Chrysler may fail (they are losing billions...duh) this is a bad thing? so you would rather have another auto bailout than see unemployment go up? that doesnt sound very conservative. what is your solution? a non-bailout/non-bankruptcy hybrid? cant wait to hear details.

No more bailouts.

We, grassroot, fiscal conservatives, have been against the bailout since day-one. So let's not fool anyone here. The Marxist Obama will not allow GM to go into bankruptcy.

ex animo

davidfarrar

shoot the military brass in the head

that's what would be required to let our American Automakers die.

National Security Issues get dealt with by the National Security Folks.

They're the ones you pay to fight for you -- DON'T DESTROY THEIR ABILITY TO FIGHT.

If Obama was a Marxist

If Obama was a Marxist, would he not be happy to see GM go into bankruptcy?

Obama is a Marxist

"If Obama was a Marxist, would he not be happy to see GM go into bankruptcy?"

What, and waste an opportunity to take over the means of production?

ex animo

davidfarrar

How does returning to Clinton-era rates

How does returning to Clinton-era rates constitute "taxing the crap out of the rich"?

 

Medicare Prescription D

they couldn't afford the program in the clinton, area, we have it now, just returning to those rates won't produce a surplus anymore.

 

times have changed since then, the budget has changed simply saying hey it worked in the 90s but ignoring the budget changes since then doesn't help any. so we tax more but still have deficits, then what's the next answer?

 

tax even more right?

war bonds.

what? stop looking at me funny...

Don't conservatives save? ;-)

A cultural practice of Americans buying US Treasuries would serve to push down prices, and mean that the gov't wouldn't have to pay usurious interest rates.

 

Long-winded and boring response.

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Patrick wrote:

9/11 was more of a shock to the system psychologically than the current situation, which can be classed as a deep, 1982-style recession, but not a depression requiring the economic equivalent of martial law. We got over those situations, and we'll get over this. Indeed, even Obama is talking about the economy bottoming out in 2009.

 

Hey-ho -- First-time commenter here; long-time reader/lurker however from Day One of the site.  Apologies for the long response.... :-0  Ignore at your leisure.

You're certainly not obliged to agree with Obama's prescription to the financial crisis -- even among those sympathetic to what he is doing, there is considerable dissent.  But you should at least properly diagnose the condition if you want to be credible in your arguments; because the current crisis has almost nothing in common with the 1980s recession.

-- Early 1980s recession was primarily about taming inflation, so the Fed jacked up interest rates to record highs; current crisis is primarily about halting a deflation, so the Fed has slashed interest rate to record lows.

-- Early 1980s recession was fought mainly using monetary tools; current crisis is being fought mainly using fiscal tools.

-- Early 1980s recession was preceded by a period of slow/stagnant economic growth and flat or declining asset prices; current crisis was preceded by a period of steady/benign economic growth and rapidly rising asset prices.

-- Prior to the 1980s, the US posted a high national saving rates and it was a large creditor nation; prior to the current crisis, the US had a savings rate of near zero (or less) and was a large debtor nation.

-- Prior to the 1980s, the US typically posted current account surpluses; prior to the current crisis, the US consistently posted large current account deficits (meaning that exports will not provide a positive contribution to GDP recovery, particularly against backdrop of significant slowing elsewhere in the world).

-- Early 1980s recession was a hangover from 1970s oil price shock, Nixon price controls and Carter economic policy; current crisis is a hangover from a debt-fueled asset bubble, easy credit and a borrow-to-consume culture.

 -- Early 1980s recession was part of a normal business cycle, but exacerbated by the Fed's necessary anti-inflation measures; current crisis is primarily a balance sheet recession led by collapsing asset prices.

-- During the early 1980s recession, there were almost no derivative financial instruments; at the start of the current crisis, total notional value of derivatives outstanding was approximately 15 times total global GDP. (Yes, yes, I know, some of that is double-counted and it's a notional amount rather than transactional cash flows, but the point is that the global financial system is linked in ways previously unimaginable.)

Etc., etc., etc.

As far as the economy "bottoming out" in 2009:  there are many ways to measure economic data, and I am sure that the Obama administration will find some way to show that the picture is improving by the end of the year.  But the reality is that even if real economic growth stops falling by year-end -- and it may not -- any recovery will basically be marked by no/slow growth until the medium- and large-sized US banks are able to recapitalize their equity bases from private sector sources, AND consumer and businesses are willing to begin investment and consumption again.  Remember that there will be a huge global shortage of capital, both debt and equity, even when growth stops falling, because of deleveraging and the almost unprecedented destruction of equity capital.  So whatever diminished capital is available, it will demand very high rates of return, which of course won't readily available because of the slow growth environment...which will remain slow until more private investment capital is deployed to increase growth...etc.

Consider:  for most of the past decade, US private savings rate was approximately 1-2 percent, and then it slipped negative in 2007-08 by about one percent.  But in the fourth quarter 2008, the savings rate went to 5+ percent, and is now probably above 6 percent.  This kind of speed is practically unprecedented, but still is a rational response by consumers who are now repaying credit cards and cutting spending in the face of personal economic uncertainty, job losses, falling home values, etc.  But it also means that any stimulus package (I believe the term in vogue is "porkulus") needs to be at least 5-6 percent of GDP for every year that the savings rate remains at that level to offset the decline in spending -- such is the problem that you have when your economy is more than 70 percent based on consumer spending because only the government has the balance sheet to make up the gap.  [The Obama stimulus package was around 5 percent over two years, and much of that was a tax cut, which has no stimulus effect because it's being saved, or used to reduce debt, rather than spent.]

 Of course, one might argue: "No, we should just let the chips fall where they may.  No stimulus package, no extra deficit spending.  It's time to get back to basics and if the economy needs to contract to a 'normal' level, then so be it.  The government should not be doing everything."  That's a compelling argument, and one that will resonate with a lot of people who are reading about AIG bonuses, Wall Street bailouts, money for volcano monitoring, etc.  I like it too.

But it's wrong, because the economy is dynamic, not static (we live on the first derivative, not the function itself!) -- so the risk is not that growth turns negative by 5 percent for 1-2 years and the economy hits a normal level and everything starts over; instead, the risk is that a deflationary spiral gets locked in, and there is no way to arrest the year-on-year declines, which feed on the previous year.  It's like a bubble in reverse, an anti-buble.  The logical, though not inevitable, end result of that is, indeed, economic ruin; and we won't be looking at the "economic equivalent" of martial law, but the real thing; and to go with it, you'll have real socialists running the place by the end, not the bogey-/strawman kind.

Now, you may or may not agree with that prescription -- which is fine, there is room for debate and adjustment as necessary -- but as I said at the begining, you should at least get the diagnosis correct to be in the debate.  We ain't in 1982.

 

 

As one who argues to let the chips fall where they may....

...that doesn't necessarily mean the government doesn't react at all. We have government in place to deal with failing businesses. We have bankruptcy courts. We have foreclosure laws, or did have. And, in the end, if your worse scenario threatened, the government could have then stepped in by cutting government spending, lower taxes and, yes, deficit spending as the last resort.

In the end, as I am sure you know, there is really no way to prop up a falling economy. It will sooner or later reach its true market value. The best government should do is try not to stand in the way of market forces, but to try and mitigate its effect and spur its growth after it reaches its true value.

But, of course, doing what should have been done -- what needed to be done -- means paying the political price as well. Unfortunately, our democracy elected leaders who were not willing to pay the political price, but instead chose to stay in office and pass the price on to the silent future electorate.

ex animo

 

 

 

 

 

 

 

 davidfarrar

on the contrary, there are plenty of ways to shift investment

from overinvested portions of the economy to underinvested.

Remember rural electrification? ;-) Gave us thirty, fifty, eighty years of new inventions. more productivity, more growth.

Let's hope we can get something similar out of this depression.

yes but no

davidfarrar -- I've been seeing your comments here for quite a while, so I know that you're an intelligent and thougtful guy, and there is probably a lot of common ground we could find; but in this case, I think you've got some things the wrong way around.

-- my point isn't that we don't have mechanisms for handling bankruptcies, foreclosures, business failures etc. as part of normal creation and destruction of economic entities.  They can of course even be applied to large entities, including those supposedly "too big to fail".  Rather, my point is that  if the economy locks in a deflationary cycle, it will not simply be the froth-fat-excess that goes down, it will be healthy businesses and responsible consumers also, and that there is not a logical reason for the cycle to stop once it starts.

-- there is no "true value" to the economy:  the value is whatever the value is across two points in time.  GDP = C + I + G + Net X for a given period.  Today, in the US, the C portion (Consumption) is collapsing by something like 5-7% of GDP, as consumers are both choosing, and being forced, to de-lever themselves.  [For reference in 2007, C was >70 percent of total GDP, which is higher than in any recorded economy in history.  Total C exceeded income by a wide margin.]  The I (Investment) is turning negative as businesses lose availability to refinance and cut capital investment in the face of uncertainty.  Net X (Net Exports) has been negative for more than 20 years, though it might slightly improve if C falls. That means that only G (Government Spending) is available to fill the gap from the falling C and I.  So in that sense, yes, you can prop up the economy if you want to.

-- your point though is:  should you?  Normally no.  But this is a balance sheet recession so the prescription needs to be different.

1982:  inflation-driven recession

1974, 2001:  external event-driven recession (oil shock, 9/11)

1991: normal business cycle recession

Because if the deflationary cycle is not arrested (brought on by de-leveraging in the face of crashing assets prices and high personal debt levels), the outcome will not be that we fall back to some historically sustainable level, say 2004, and rebase from there.  The outcome will be a spiral that  continues to fall in on itself.

-- and the saddest of the sad part is this:  incremental government action is not sufficient.  Because if you tinker with the highest marginal tax rates or agree to some modest deficit spending a couple of years out, you're behind the curve, not ahead of it.  So those efforts are actually not helpful -- it's like you're shooting at where the duck was a second ago, not where it's going to be a second or two from now.

-- now you may think that I'm some crazy wild-eyed closet commie who wants to usher in a new age of world socialism.  But I'm not:  I'm in the highest tax bracket.  I'm a private equity investor and macro strategist.  I'm the furthest guy in the world from wanting gov't to run businesses and bail out failures, because it distorts the market, crowds out private capital and is generally sub-optimal.  But in this once-per-75-year set of events, the collateral damage that would come from doing too little, rather than too much, would far surpass the ~50 percent of GDP we have to spend to deal with a 20-25 year credit bubble.

-- and people who blame Bush or Obama or Clinton or Dodd or the Congress or AIG or Freddie or Fannie or CRA or Wall Street have it completely wrong.

But who is to blame?  We are.  All of us.  Every one.  We got the HiDef oversized flat-screen TeeVees and 120 gig iPods; we drank the five-dollar cafe lattes; we bought houses on cheap credit and thin equity that went up in value; we drove nicer and bigger and even more environmentally-friendly cars; we got tax cuts (in the US) or more government for the same level of taxation (elsewhere); we all got paid higher salaries and had better jobs and improved standards of living; we all benefited from 20+ years from the "Goldilocks economy", which in retrospect was not "just right" but "too hot" in the final years; we wanted that free lunch, that growing pie-in-the-sky; we wanted that cake and we wanted to eat it too; we thought the economy was best understood by reading Atlas Shrugged, but really it was Notes From Underground

 Now, we're gonna pay for all that shit we didn't need and couldn't afford; and it's gonna come in the form of higher taxes or higher eventual inflation, plus a lower standard of living. 

What would be great is that if folks on the Right understood that, and that the debate was not about whether, but how.  Because that is where the Left needs help.  Chanting "Socialism!" on one side, and "Jobs!" on the other is not going to solve this.

yeah, we need some skeptical conservatives

willing to get their hands dirty doing things that aren't good in the long term.

Welcome aboard!

If you don't mind me asking, what are you investing in?

Thanks for the welcome, RisingTide.

Personally, I have had everything in cash (though not USD) for a couple of years.  I expect to keep it that way for a while, and at the same time removing all debt possible (pay off credit cards, rent rather than buy property, etc.).  I mean, I did say it's a balance sheet recession and deflationary cycle right...?

US equities are actually still quite expensive on a number of metrics, and I could make a case that you would need to see another 50 percent drop before there may be an inflection point.  Though it may not be that bad -- it very much depends on the success or failure of Geithner's Plan (Version 2.0); and if it fails, which is highly possible though not inevitable, what happens as the next step. Fingers crossed...

Institutionally, I can't really comment.  We're a large global investor but highly concentrated relative to assets.  Mostly, just trying to optimize the existing portfolio and make sure the underlying businesses are all ready for the worst possible set of outcomes.  Better safe than sorry. Mostly those questions revolve around two points:  (i) do they have the right cost structure if growth stays negative another 12-18 months and then goes flat/slow for some lengthy period beyond that; (ii) can they self-fund capital requirements from operating cash flow; and if not, how/where do we find external capital today, because it may become even more scarce, and come with a higher price tag tomorrow.

yeah, the inflation is bound to hit sometime

with Obama running the printing presses like dat.

(What kind of cash are you keeping it in? again, just curious).

It seems odd to see someone who's in finance paying down credit card bills... ;-) I know, I know, they deliberately hook you guys so you won't leave your job.

Geithner's Plan (v 2.0) has been getting horrible reviews. I want nationalization, and I want it now! (Yes, I'm a liberal. my econ friend is an Austrian School Liberal -- who liked the Stimulus bill).

Are you working for a hedge fund? ;-)

what you're doing sounds reasonable, though a lot less risky/profitable than what I've been looking at -- which involves more macro betting, and less on a company by company basis.

You will probably get your nationalization

I know that the Geithner plan has been panned by both Right and Left.  I probaly won't go into all the details of it here and now, but I think that fundamentally it is a clever and theoretically correct approach -- though there is a good chance that it still may not work, or it may not work for every bank.  Ideally, the UST hopes they will solve several inter-related problems:

-- obtain price discovery, by involving private sector buyers, of the toxic and illiquid assets sitting on banks' balance sheets;

 -- provide a mechanism for removing the toxic assets by selling them to private investors (equity tranche) alongside Uncle Sam (equity and debt tranches), which is really a subsidy in the form of cheap and available finance;

-- allow banks to recapitalize:  partly this is done through the subsidy to existing shareholders.  By giving generous terms for the financing, and forcing the sale through an auction, the government is hoping that prices for topic assets clear at a level above what the assets would fetch if they were simply dumped on purely commercial, "fire sale", terms.  This is turn reduces the hit to the equity capital base that the banks have to take.  But even beyond that, the private sector will still need to recap the banking system -- just by a somewhat lesser amount -- and clearing the balance sheets is a prerequisite for that to happen;

 -- once the banks are properly recapped, and have relatively clean balance sheets, they should be in a position to operate normally again, which is instrumental to the overall recovery;

-- re-start the market for the mortgage-backed securitiess, which would result in more efficient pricing (which the gov't hopes would be the same as higher pricing).

 

But there are clear risks, and it's not certain that the plan will succeed, as I said above.

-- economy is still slowing in the US, and housing prices are not yet be at a bottom -- which means that even private sector investors may be resistant to bid on toxic assets, even with the financing guarantees; moreover, the quantity of toxic/legacy assets may simply continue to expand, so that any plan is moving too slowly to get ahead of the problem;

 -- the amount of money may not be sufficient:  US Treasury estimates that it may be able to generate a trillion USD worth of capital (but even then, only if the initial TARP pool is expanded, which would require further congressional approvals).  Total credit losses are likely to exceed 3 trillion (according to Roubini they may be 3.6 trillion).  So even if the whole one trillion is treated as a direct subsidy (which it isn't), it doesn't plug the entire hole.  You don't need to cover the "whole hole", but you need to cover enough to be credible.  No one knows what the portion is;

-- political will for bold strokes is a lot less in a post-AIG-bonus world.  There's a bloc comprised of almost all republicans plus some rightish democrats that will invoke a newly rediscovered fiscal conservatism to oppose almost any initiative.  They may be joined by some leftish democrats that oppose another bailout for "the Wall Street Banksters".  Because UST will be using residual funds from the TARP passed last year, they don't need a new approval today.  But if they want to expand it -- which will be necessary under almost any scenario -- they'll need to go back to congress for a fresh approval;

-- even if banks are willing to lend again, the consumer may not be willing to borrow -- deleveraging is a two-way street -- so the threat of a deflationary spiral still exists;

-- finally, and most critically, what would happen if the private bidders, even with gov't subsidies, lowball the bids in the auction, out of fear or uncertainty or whatever?

Presumably the bank will set a reserve price. If the highest offered price is less than that, the auction would fail and there would be no transaction. The bank could of course cut the reserve price, but if they start to dump assets at a price too far below the carrying value, the equity slices takes the extra hit -- which is the reason they don't want to sell (or mark the assets to market) based on the firesale price today.

If the auctions all fail, because banks and bidders have wildly different expectations, then the next logical step is receivership because the banks are then insolvent -- even with a capital subsidy, the market values their assets at a level that leaves no equity left. No amount of window dressing will help if banks are carrying the assets at a price beyond the reach of even a heavily subsidized deal. And it will become impossible for the government just to buy the assets at/near the banks' marks (marks=the carrying value that the bank is using) later, because the price discovery revealed a much lower price for a willing commercial buyer. And if the banks are insolvent post-Geithner 2.0, then we probably go through the process I discussed yesterday.  Gov't recaps them at zero value, wipes out all non-secured, non-guaranteed claims, and dumps the toxic assets at distressed firesale prices.

I still think that that is a possible (though not inevitable) end state outcome for at least some of the large lenders.  Others may be fine, just as JPM.

But I don't think that the UST can just jump to that end state -- they have to go down the path to get there, so that nationalization/receivership is seen as the last and only resort.  Also, if you just announce you're going to start taking over banks, the likelihood of a panic dramatically increases, which is not in anyone's interest. 

So I think that Geithner perfectly understands that Citi or BoA or others have a reasonable probability of ending up in receivership, but his plan (1) allows banks that can auction off their assets at/near their marks to be spared; (2) shows that all possible avenues have been tried to resolve the issue; (3) keeps the final end state always available -- (4) and of course, if the plan fails because there is no uptake of the assets, the Gov hasn't spent the money...so it's not actually that expensive to run it a few months and see what happens.

But even if the plan does succeed in solving some or all of the problems set out above, it is at best a first step that sorts out some specific issues in the US.  Europe will need to find its own solutions, and it has been slow to start looking.

you're missing Nemo's point...

That this gives banks 16% profit with no risk, and that's even before they get into the malfeasance that they've shown in the past eight years (spawning little corporations which will go bankrupt if their particular tranch fails, thus shielding the big corporation from the risk, and letting it take all the profit).

If this was a paper-tiger, I'd be a lot happier. As it is, it appears to have taken the "fiscal audit" off the table, which troubles me greatly.

I'm seeing this as a naked "lets throw money at the banks", not so much as "something that won't work"

I get the point

I get the point. I think that the purchasers of the assets should have an opportunity to make money.  Otherwise there is no price discovery.

Like I said, the whole thing may not work -- but there are differernt ways it can fail:

1.  It fails at the auction stage -- i.e., no buyers take up the assets, even with the subsidy in place, at prices that the selling banks are willing to accept.  In ths case, the next step really is nationalization.  But if the auctions failed, the Gov didn't spend any money, so it's actually low-cost, low-risk to test the waters.

2.  A bunch of auctions occur, with the subsidies in place.  Banks rid their balance sheets of bad assets (to whatever extent the market requires for a private sector recap), and get recapped by the private sector.  And then, it subsequently turns out that the bidders all overpayed.  Equity of the purchasers is wiped out, and some portion of the Gov-provided capital is wiped out.  There will of course be various combinations of this -- some buyers will win and lose.  But definitely the taxpayer is on the hook for the losses beyond the investors' equity.  But the objective was not to keep taxpayers "off the hook" -- the point was to get the banking system working.

And even if they go to nationalization, taxpayers are on the hook.  In fact, they're on the hook in every plan:  Good Bank/Bad Bank; receivership; debt swap with public entity; direct Gov purchase, etc.  Even if you say you're willing to let the whole US finanical system go underwater (which is insanity), taxpayers will still be on the hook -- just that the cost will be in the of collapse of potentially every commerical entity in the country.

Is that fair?  No it's not -- but it is reality. 

if we let the whole financial system go underwater

we're talking martial law, riots, you name it.

Just In Time ought to be known as Nearly Fail Logistics.

but you knew that ;-)

 

I'm partially concerned that this will cost more than it should (the bad bank costing more than nationalization) -- even a crazy old liberal like me likes to know where her shekels are going.

I'm not exactly opposed to letting there be a profitable outcome for those willing to take the risks... I just see far too much potential for rigging the system...

I'm PE, not hedge fund

Also I'm not a liberal or dem by birth or predisposition.  But they're practically the only ones with ideas these days.  Even if someone doesn't like the ideas, at least they're well-articulated and out there for discussion -- they deserve to be engaged and debated.

And looking to move back to USD.  Problems with the EUR and GBP are almost unfathomably large.

Miliukov, This is one of best

Miliukov,

This is one of best articulate posts I have read. Good work. 

Thank you; thank you very much

I assumed no one bothers to read anything longer than 140 characters anymore.

oh, I just skimmed it... (heard most of it before)

you do read Calculated Risk, right? ;-)

There is indeed nothing new under the sun

CR is a daily stop of course, along with a few others.

Great stuff, miliukov

I am not an economic expert, nor am I a private equity investor, or macro strategist. Nevertheless, I don't believe in scare politics, nor do I believe in a deflationary spiral falling in on itself -- to what, to something approximating the Great Depression?  It's not going to happen. We have far better communication today, far better transportation, far better rail service, far better banking system -- even now -- far better everything to allow a great depression to occur again to such a level.;

Your last paragraph was most interesting and serves to illustrate my point"

"But who is to blame?  We are.  All of us.  Every one.  We got the HiDef oversized flat-screen TeeVees and 120 gig iPods; we drank the five-dollar cafe lattes; we bought houses on cheap credit and thin equity that went up in value; we drove nicer and bigger and even more environmentally-friendly cars; we got tax cuts (in the US) or more government for the same level of taxation (elsewhere); we all got paid higher salaries and had better jobs and improved standards of living; we all benefited from 20+ years from the "Goldilocks economy", which in retrospect was not "just right" but "too hot" in the final years; we wanted that free lunch, that growing pie-in-the-sky; we wanted that cake and we wanted to eat it too; we thought the economy was best understood by reading Atlas Shrugged, but really it was Notes From Underground."

Hogwash. This depression was almost solely caused by the impact of the government sponsored housing bubble. After all, the economy was largely driven by the housing industry. That's not to say, we weren't in for an adjustment, from time to time, but it took government intervention to turn a normal market adjustment into a full blown depression. We can't spend our way out of this depression. We cannot borrow our way out of this debit.

The main objective to these bailouts is not to protect us poor little taxpayers from the misfeasance of Congress, but to keep their own necks from being strung up at the nearest lamppost for the economic injury they have caused the public. And rather than taking responsibility for their own actions, they sold our future out to the state, and see themselves innocent of the charge.

ex animo

davidfarrar

davidfarrar --

 

You wrote:

...I don't believe in scare politics, nor do I believe in a deflationary spiral falling in on itself -- to what, to something approximating the Great Depression?

The "Great Depression" scenario is still remote, in part because the policy response has been much faster and smarter, and for some of the other reasons you mentioned (better information, better banking system, etc., which is a good point).  I would call it the extreme downside case, because it would require serious and concurrent policy failures by several major actors, not just the US.  For instance, trade wars, crack-up of the Eurozone.  Of course, a 9/11-style attack and all bets are off...

The downside case is probably Japan 1980s -- 10+ years of a deflationary cycle, a liquidity trap and very low/no economic growth or wealth creation during that period.  Japan had the benefit of an export-oriented economy, which we don't have today, but its debt-fueled real estate bubble was certainly bigger.  They also had wretched corporate governance and a zombie banking system in place the whole time.

That said, bear in mind that Japan spent well over 100 percent of GDP in various stimulus packages.  If they hadn't spent the money, they would've ended up with a localized depression (when the rest of the world was booming).  In other words, the outcome they got was a comparative success.  But they didn't kill the zombie banks, so that dented the effect of the stimuli -- using a previous metaphor, it was like shooting where the ducks were, not where they were going.

I don't believe that equity markets are shorthand for everything that's good or bad about an economy, but consider nevertheless:  the Nikkei, Japan's equivalent of the S&P500 Index or Dow,  hit its high in December 1989 of around 39,000.  Today, nearly 20 years later, it is at 8,700.

The base case is probably something half as bad as Japan, assuming the policy response is correct.  But the US is somewhat dependent on other countries:  Europe has been slow off the mark; China has made a lot of announcements, but execution has been slower.

Upside case:  stimulus works in arresting the collapse in consumption, while Geithner's plan encourages private investors to buy toxic assets and recap the banks.  The economy begins to recover in 4Q2009, posts modest growth (less than one percent) in 2010, and 2011-2012 see a recovery to three percent growth.  Fed gets off the monetary gas, and on the brakes:  raises interest rates and sterilizes the M2 money supply.  Dow goes up to 10,000, unemployment starts to fall and housing market stablizes.  Obama/SloJoe beat Romney/Jindal in a landslide.

By the way, I don't believe in scare politics either; but there's no value in not understanding the situation in which one finds oneself.

You continued:

This depression was almost solely caused by the impact of the government sponsored housing bubble. After all, the economy was largely driven by the housing industry. That's not to say, we weren't in for an adjustment, from time to time, but it took government intervention to turn a normal market adjustment into a full blown depression. We can't spend our way out of this depression. We cannot borrow our way out of this debit.

This is a very popular line of reasoning, but it's not correct.  Subprime was a small slice of the market that acted as a spark, but that very quickly started a flame, that blazed into an inferno across almost all asset classes; if the crisis was just about CRA or a certain tranche of low-end Freddie and Fannie loans, it would have already been contained.  Banks could just write those assets off, take the haircut directly to equity, raise a bit of capital if necessary and move on.  That's what everyone believed was the case in late 2007, when the various Sovereign Wealth Funds were "saving Wall Street" -- ain't none of those investments gonna ever recover, because it wasn't a subprime crisis, or CRA, or whatever slice of the residential real estate market you want to look at -- it was the beginning of a balance sheet recession caused by 20+ years of people consuming stuff that, we, as a nation couldn't afford.  Indeed, not even "we" as in the US, but much of Europe also.  (See, Iceland, Ireland; or the sad case of Austria that lent 70+ percent of its own GDP, in foreign currency, to Eastern Europe. That money is long gone...) But hey, the market demanded, and the market supplied.  That's capitalism at work.

But who cares?  There's probably nothing that I or anyone else could write that would convince you otherwise, which is fine.  As I said earlier, you're a thoughtful and intelligent guy, and I find myself agreeing with a lot of your comments.  If you have facts -- not opinions, not assertions -- to support the statements you made above, I'd really like to see them and discuss them here.

Finally, about "borrowing our way out" of the debt/crisis.  Of course you are 100 percent correct -- you have to grow your way out (or inflate, but that's not really "getting out", except in a technical sense, just better to raise taxes to pay for it, it actually costs less most likely).  But as I have been saying, when there's a deflatioary cycle, you don't grow, you get smaller and prices fall.  Meaning that the debt you already have becomes even greater.  So the process should go something like this:

1.  Spend like hell and run a huge deficit, probably even more than the first Obama stimulus will be required each year for 2-3 years.  My preference is all spending, but politically, if you need some tax cuts also, that's ok too.  Lean on Europeans, Chinese and Japanese to do the same.

2.  Kill the zombie banks.  Give Geithner's plan a chance to work by encouraging private sector investors to buy up toxic assets through a subsidy.  If it doesn't work (or if it doesn't work for specific banks), put them into receivership and sell the toxic assets at firesale prices, exposing that the whole system is insolvent probably.  Gov't recaps the equity at a price of zero and wipes out all non-secured claims.  Set a firm time period to sell the banks back to the market -- maybe 24-36 months.  Meantime, you can distribute shares to taxpayers or something creative for fun...  :-)

3.  As soon as you see the first sign of economic light at the end of the tunnel, beging to edge up interest rates (possibly pushing economy back into a slow down) and start to sterilize M2.  If growth comes back fast, jack rates up. 

4. Ease off discretionary government spending.  Submit an "austere budget".

5.  Cut middle class taxes, keep Clinton-era rates on highest bracket.

6.  Throughout the process, manage any large corporate failures -- not saying don't let them fail, but manage the failures.  Bear Stearns model, not Lehman.

In the end, it'll be fine, if we get the policy correct today.  US gross public debt-to-GDP is about 80 percent, which is definitely higher than we'd like (a good benchmark is 60 percent -- that's the level that the EU required its members to target when they were rolling out the Euro), but it does include the SS trust.  Public debt is only 40 percent.  Maybe we need to spend 40-50 percent of GDP (but it may be less), which would put us/near at the post-WWII level.  Follow that with 7-10 years of growth, a reasonably sane fiscal policy and it will look like a blip.

But as I've said, the key is to get the policy right today:  because if we're deflating, the existing debt is already too much, and is actually increasing in value relative to the economy's size; so the corollary to "you can't borrow your way out"actually is "you also can't not-borrow your way out".

But again, just my thoughts -- happy to discuss further.

You make some rather interesting points.

 

Unfortunately, I haven't the time to respond to them all, but hope to do so eventually. Please bear with me.

The first issue I would like to pull-apart and examine is this notion that Japan's lost decade was unnecessarily prolonged not by the government trying to artificially prop up a market that was trying to reach its own market level, but because of its "debt-fueled real estate bubble, together with poor corporate governance and a zombie banking system."

"The downside case is probably Japan 1980s -- 10+ years of a deflationary cycle, a liquidity trap and very low/no economic growth or wealth creation during that period.  Japan had the benefit of an export-oriented economy, which we don't have today, but its debt-fueled real estate bubble was certainly bigger.  They also had wretched corporate governance and a zombie banking system in place the whole time."

As I have said, I am not an expert in these matters, but Japan's lost decade has been used by many here as the perfect example of what not to do.  Not that it is, in itself, necessarily a bad thing. After all, to many, allowing the market to adjust directly to its natural level may, indeed, cause a world of hurt to a lot of people. But here again, when you look at the over all economic picture of this country, what with its Social Security and Medicare obligations coming due, the issue of commercial real estate, as you mentioned, not to mention, state pension plans now aligning themselves up for massive government intervention at taxpayer's expense, and many other unforeseen expenses directly related to a prolonged economic recovery (5% to 6% annual growth),  many my rightfully wonder if we can afford to prolong this recovery by a decade or longer at this time.

In any case, as just one humble fiscal conservative, Republican taxpayer to another, I would have much preferred our President stayed true to his core values and used the power of the presidency to mitigate the effects of the market reaching its true value rather than prolonging it.

ex animo

davidfarrar

ps: By the way, if you will look at the top row of your "function" tools, on the far right, you will see a (") quotation make symbol. These are used to "block quote" a section. Simply align your cursor to the beginning of your copied quote and click the quote symbol at the top.

Sometimes you may have to hit "Source" to get your post into HTML and physically move the <blockquote> marker around a bit to make it come out right.

okay, so we let the US economy regress to pre-Reagan levels.

then what? while we're doing that, china is leaping ahead, and our "free market values" are being left in the dust.

Thanks!

ps: By the way, if you will look at the top row of your "function" tools, on the far right, you will see a (") quotation make symbol. These are used to "block quote" a section. Simply align your cursor to the beginning of your copied quote and click the quote symbol at the top.

 

That is fuckin' cool...thanks!

I'll respond to other stuff when I have some more time, and look forward to any new thoughts or questions. 

But suffice to say that Japan in the 1980s is like a giant economic Rorschach test. Everyone can find something different.

Definitely Japan's leadership made a lot of mistakes; but they also did some things right -- the result was mixed, but it could've been worse.  But they didn't, and don't, have a model of capitalism (the stakeholder over shareholder is but one characteristic) that would have provided a much better result -- can't get water from a stone as they say.

Have a good weekend, One and All.