American Disease, 2010

Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I'm going to say is my theory. Ready?

TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.

(From Monty Python’s Flying Circus)

I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.

This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industries following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this led to inflows of investment, which pumped up the exchange rate and altered terms of trade in such a way that exports became uncompetitive. In this perverse fashion, Dutch Disease describes how a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.

America, my theory proposes, has a version of that, only the resource is money. I want to name the problem “American Disease,” but I read in an article by Bryan Caplan that that's the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “American Disease, 2010” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?

America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure. These remain visible in the present day, residual wealth as monuments to our peak of economic power.

(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)

Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel, glass, and plastic and outputs autos; the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw and intermediate goods and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.

The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.

However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets for tradeable goods and services. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits right across the U.S. labor economy, another blow to the competitiveness of any entrepreneur bold enough to defy the odds and manufacture a product for sale in America.

While the American political class stands in the way of development of our (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as effectively infinite. The people entrusted to run the country give no thought to the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. They use static models that fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism and public spirit while the returns on their capital and labor are collapsing.

The impoverishment of the United States by the Argentine model is thus well under way.

Oh, and why do I say California has the most advanced case of the “American Disease, 2010?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to protect mudfish habitat; but California's fiscal position continues to deteriorate as its political class absolutely will not live within its means, as dictated by the state’s reduced economic circumstances.

As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification.

The mindlessness with which the American money resource is to be run down puts me in mind of a passage from Atlas Shrugged:

As they proclaim their right to consume the unearned, and blank out the question of who's to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as 'change' is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.

The establishment in the bluest of blue states, Massachusetts, . . .

. . . is so accustomed to referring to the seat being contested in the special election as "Teddy Kennedy's seat" that the supposedly even-handed moderator of the debate, David Gergen, used that construction in questioning Scott Brown. To which Scott Brown replied with the soundbite of the night: "It's not the Kennedys' seat, it's not the Democrats' seat, it's the people's seat."

Slam dunk. Gergen knew he'd been stuffed, and is honest enough to say so.

The American Revolution would never have happened without the radicalism of Massachusetts as its animating force. Over time, their radicalism has morphed from the robust libertarianism of the founders to the effete leftism of the college campus, and ironically the people who led the rebellion against Divine Right of Kings have settled into the habit of ratifying the Divine Right of Kennedys.

It could end on Tuesday. Now that would be another American Revolution.

Scott Brown, Republican candidate for senate in Massachusetts . . .

. . . raised $1 million on the internet with strong support of the #tcot #SGP #ocra gangs on twitter.

He did this -- we did this -- in the bluest of blue states.

Change is coming to America.

¡Nuevo! Read Reed Hundt's book, "In China's Shadow."

If you want to understand Democrat fantasies in the absence of financial constraint or common sense, read Reed Hundt's book, "In China's Shadow." Reed Hundt is a permanent member of the American politcal class, a Yalie, a partner in a high-powered law firm, head of Bill Clinton's FCC, and a member of Barack Obama's transition team.

Free money is Reed Hundt's great idea.

Here's how it works. Muggins, that is you & me, the hard-pressed American taxpayer, should buy everyone from Nome to Tierra del Fuego a pension, healthcare, and education. By these means, the United States will win in the economic competition with China that furnishes the title of his book and a small fraction of its other content.

No, it's not a joke! He is being serious -- if you're an American with a job, you should spread the wealth around the hemisphere.

The leftist cabal currently in power and the pointy-headed intellectuals who influence them really think this way.

Shutters are closed up & down Main Street but Wall Street is in the money.

Shutters are closed up and down Main Street but Wall Street is in the money. How could that be? The bull market in stocks has gone farther for longer than I thought possible.

Just surveying the salient points of the economic situation in 2009 led me to a more bearish view. The anti-business party controls the presidency and both houses of Congress, and they are turning the bad US fiscal situation disastrous. They are in love with budget-busting, price-increasing government solutions: stimulus programs that are really giveaways to Democrat constituencies, universal health care, a cap-and-trade energy regime. But in the hard-pressed profit-seeking sector, labor faces an employment outlook as bad as any time in the last twenty-five years, and the government's response is make-work schemes that waste money and; management is unable to plan in the rapidly changing tax and regulatory environment.

So again, what possible reason is there for the stock market to rally this hard? It must be discounting a much better day ahead, a day that according to a strict economic accounting is not easy to see. I said in July:

Some of this bounce is almost certainly due to the business and investment interests of this country re-assessing President Obama's grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that most of this stuff will never come to pass. On this view, Obama has expressed extreme initial positions just as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. One way or another, the entire Obama agenda can and will be resisted.

As the popularity of Barack Obama, congressional Democrats, their radical leftist economic schemes and unconstitutional power grabs plumb new depths, this is seeming more and more likely. They have mounted a counter-revolution to the American Revolution, and Americans are not standing for it.

Without doing anything to deserve it, the nominally pro-business, nominally loyal opposition Republicans stand to benefit from the ass-whipping American voters are fixing to administer to Democrats in November. To really capitalize, the Republican leadership needs to learn from the Tea Party movement, which has emerged over their heads as the true opposition to the schemes of the left. If the leadership gets smart and understands that the American people demand a response to fiscal sanity, national security, and constitutional government, their recovery can be remarkable and enduring.

Of course the poet WB Yeats used the language better than I can when he told his political opponents in the Seanad Éireann:

You victory will be short, and your defeat final, and when it comes this country will be transformed.

Ardently to be wished.

Jobs Summit at the White House

From Politico 44: You're invited -- On the jobs summit list ...

"CONFIRMED ATTENDEES INCLUDE: Eric Schmidt, Google; Randall Stevenson, AT&T; Surya Mohapatra, Qwest ; Frederick Smith, Fed Ex; Brian Roberts, Comcast; Bob Iger, Disney; James McNerney, Boeing; Andrew Livens, Dow; Peter Solmssen, Siemens; Stephanie Burns, Dow Corning; Phaedra Ellis Lamkins, Green for All; Reed Hundt, Coalition for the Green Bank; Larry Mishel, EPI; Alan Blinder, Princeton; Paul Krugman, Princeton; Joe Stiglitz, Columbia; Bob Greenstein, Center on Budget and Policy Priorities; and Jeffrey Sachs, Columbia. PLUS SMALL BUSINESS OWNERS, including David Ickert, Air Tractor; Woody Hall, Diversapack; and Rose Wang, Binary Group. AND Anna Burger, Change to Win; Leo Gerard, United Steel Workers; Joe Hansen, United Food and Commercial Workers; Randi Weingarten, AFT; Mayor Frank Cownie, Des Moines; Mayor Julian Castro, San Antonio; and Mayor Ed Pawlowski, Allentown, Pa."

In other (Grayling) words, we have (1) big contributors whose large corporations have been laying off workers, (2) union leaders who represent barely one-in-ten US workers and whose grasping has sent jobs overseas, (3) leftist economists, (4) war-horses of the DC policy establishment, (5) members of the red-green coalition, (6) political allies, and (7) a few small business people of whom nothing is known.


THE CRISIS IN EMPLOYMENT IS REAL. Nothing that will come out of this jobs summit will have any effect on it, however. Exhorting industry to hire will not. Shaming banks into extending more credit to business will not. Temporary subsidies and $3000 new-hire tax credits will not. Make-work schemes will not. Enterprises will not hire or commit any new resources as long as their tax and regulatory regimes are totally unsettled, as they are with this anti-enterprise statist administration. Business owners do not know what they face in terms of higher taxes and giant mandates for health care, cap-and-tax, and other pet "make-the-rich-pay" schemes of the left. But they do know for certain that these things will be burdensome, and maybe fatal. No sensible business person will hire or invest under such threat.

Better to milk your business for cash to consume while you can. Maybe now's the time to move offshore. The Chinese Communists are more business friendly than the US Democrats, and probably easier to deal with than the United Steel Workers or United Food and Commercial Workers.

Mao nostalgia in China

On October 1, the People's Republic of China marked its 60th anniversary with an impressive military parade, musical performances and portraits of Sun Yat-sen, Deng Xiaoping, and Mao Zedong.

It's the occasion for a boomlet for Mao nostalgia in China. This, one can kind of understand. He was the founder of the PRC. After liquidating his rivals, he was the maximum leader of the Chinese Communist Party.

Here's today's article on the nostalgia for Mao in China: Mao presides again in China as nostalgia runs high. It's fun stuff. Young people who don't know more about him than his name and image are taking the commercial opportunity to sell T-shirts, hats, badges and snow globes.

In the US, within the Obama administration, Mao Zedong is also enjoying a revival. Communications Director Anita Dunn commends him as a political philosopher to the graduating class of a parochial school. Manufacturing Czar Ron Bloom cites with approval Mao's saying that "Political power grows out of the barrel of a gun" ["Problems of War and Strategy" (November 6, 1938), Selected Works, Vol. II, p. 224].

The thing is this. In China, it is not Mao's Communism that is being celebrated; the country has spent the last thirty years correcting the leftist errors of the previous thirty. Apart from the retail opportunity, Mao's real reputation in China is as a nationalist (not a Nationalist, which in China is a different thing):

1 Mao would work with anyone, anywhere to resist Japanese aggression, including the Nationalists or the Americans, even to the extent of putting the Red Army under their command.

2 Mao unified the war-torn Chinese mainland under Chinese rule for the first time since 1644.

3 In its first five years, the PRC under Mao was drawn into superpower conflict with the US in Korea, and managed to stay in the fight with the nuclear-armed US to secure a draw on the peninsula.

4 When Mao fell out with Khruschev, the PRC found itself surrounded by enemies: the USSR to the north, Taiwan with its US backing to the east, India with its designs on Tibet and implicit backing of the UK, US, and USSR to the south. Mao prosecuted a war in the Himalayas and backed them all down, sustaining the country's independence through a dangerous time.

5 Forty-five years ago this week, the PRC got the bomb; if any of the other powers thought attacking China would be easy, after that it meant mutually assured destruction.

6 When the time came for a new way forward, Mao came to terms with Richard Nixon, and it was easy for the two cold warriors, as if getting reacquainted with old friends. This upset the balance of power in the far east, putting the USSR on the defensive. As much as the US played the China card, China played the America card.

Seek truth from facts, as Deng Xiaoping always said. Mao Zedong's reputation in his homeland has very little to do with his Communism at this stage, and everything to do with his nationalism. Which is fine -- it is his homeland after all.

But like many others, I would like to know just what it is that his highly-placed admirers in the US Obama administration are getting out of Mao Zedong at this time.

Read Reed Hundt's book, "In China's Shadow"

If you want to understand Democrat fantasies in the absence of financial constraint or common sense, read Reed Hundt's book, "In China's Shadow." Reed Hundt is a permanent member of the American politcal class, a Yalie, a partner in a high-powered law firm, head of Bill Clinton's FCC, and a member of Barack Obama's transition team.

Free money is Reed Hundt's great idea. Muggins, that is you & me, the hard-pressed American taxpayer, should buy everyone from Nome to Tierra del Fuego a pension, healthcare, and education. By these means, the United States will win in the economic competition with China that furnishes the title of his book and a small fraction of its other content.

No, it's not a joke. People with power and influence really think this way.

Does Cash-For-Clunkers tell anything about Healthcare Reform?

Last night the government announced it was suspending the Cash-For-Clunkers program. In my twitterstream I reacted as follows:

dhsmith24 Cash for clunkers suspended w/i a week. What the heck are these guys doing? And they want to run #healthcare?

The doubt this #fail creates is real enough, but there is more, and Hugh Hewitt has expressed it best:

Just as with the tax credit for new home purchases, consumers altered their behavior when presented with an opportunity. Democrats thus have received a second example of an iron law of economics: People respond quickly to significant cash incentives.

The Democrats never get this. They never believe economic actors respond to incentives. There are alway massive unitended consequences of their great economic projects because they are constitutionally unable to work through all the implications of these projects. Democrats are working on a root-and-branch restructuring of the U.S. healthcare system that cannot work as they have currently proposed, they have passed a Cap and Trade energy restucturing plan that may more correctly be called the China Opportunity Act of 2009, and they think they can raise taxes on producers without limit. In every case they totally fail to reckon with the fact that producers will produce less, arrange their affairs to minimize the tax, or in the limit just bail out -- "Go Galt" in the emerging parlance.

But the people are sovereign, this is what they voted for, so all we in the reality-based community can do for now is speak out against things we know cannot work and hope they can be changed in process.

Laura D'Andrea Tyson Moots New Stimulus

VP Joe Biden says they misread the economy and maybe that's needed.

Minority Whip Eric Cantor says sure, let's talk about it.

Stock market votes on the idea, down 140.

UPDATE for market close: down 161. Ouch.

Financial Market Conditions at Mid-Year

As one of the many Americans who depends on a positive business and investment environment for his prosperity, I regarded the election of Barack Obama as president with Democrat supermajorities in the House and Senate with some concern.

More than the usual number of my fellow businesspeople and investors went over to that side, contrary to their own interest as it always seemed to me. Of course many of these unlikely Obama voters were as eager for hope and change after eight years of George Bush as anyone else. But if they gave consideration to the implications of Democrats supermajorities led by Obama for the economy from which they draw life and livelihood, they allowed their desire to believe to outweigh more sober analysis.

Obama took them in with the charisma, the gaseous uplift, and the promise of racial reconciliation; they convinced themselves that the redistribtionist, high-tax, anti-business, anti-capital policies to which he rallied his party constituted red meat for the Democrat base, not a program for governing.

This misapprehension survived the election, and permitted modest financial market recovery through the end of December 2008, followed by modest declines through Inauguration Day. On Inauguration Day, President Obama delivered a speech that any fair-minded listener would have to admit was far less than a rhetorical tour de force, and far more evocative of class envy and racial struggle than everyone expected.

Financial markets tanked that day and kept tanking for weeks, pressured further by the stimulus package that offered precious little real economic stimulus, but rather a shocking grab bag of packages to traditional Democrat constituencies, with not the merest nod to the rights or concerns of the minority.

We experienced headlong collapse from Inauguration Day through first week of March. Obama Democrats in the business and investment community awoke too late to the realization that the Democrat program now encompasses nationalization of vast swathes of industry on the pretext of emergency (autos and banks) or necessity (health care); that owners' property rights are provisional and expendable; that the ideological attachment of our rulers' to the green agenda trumps their duty of care to the free-market economy; and that they mean to bleed the productive sectors of the economy to feed the non-productive to the fullest possible extent they can get away with.

So far, so bad. But then something interesting happened -- we had a dramatic bounce in stock markets from March through early May. Some of this is probably discounting the possibility of a 1929-37 depression, correctly. Some might even be what I regard as an unrealistic pricing in of a rapid economic recovery, when what we still have in prospect is a deep and long recession as in the 70s and early 80s.

But some of the bounce is almost certainly due to the business and investment interests of this country re-assessing President Obama's grand and ambitious schemes and concluding that they represent impossible over-reach. Rightly or wrongly, they came around to the view that most of this stuff will never come to pass. On this view, Obama has expressed extreme initial positions just as a negotiating tactic to get more than he could with conventional bipartisanship, but less than he asks. Republicans and responsible Democrats in Congress will push back on the crazier ideas. The American people will not go along, will resist with mute passive aggressiveness and loud argumentation, once the full implications are clear. And if it is not just a tactic, if Obama really insists on every bit of what he says, Republicans will gain enough seats in 2010 to apply the brakes, if not an outright majority. One way or another, the entire Obama agenda can and will be resisted.

This is a bull item in the market since March.

After stock price gains of over 30% from March to May, markets have stalled since then, and fallen into a few air pockets. The public policy problems for the markets at this point remain the administration's apparent readiness to overturn our carbon energy-based economy and its radical intentions toward the 15% of the economy that health care represents.

But the overarching sentiment problem comes from yet another reassessment among business people and investors: even if the entire Obama agenda can be resisted and its worst effects rolled back later, on this new view a tremendous amount of violence can still be done to the U.S. economy now. In the meantime, we are still losing jobs at a sickening pace while Obama and the Congress waste unimaginable sums of money on projects lacking any other point beside paying off their friends and allies.

In the background the Chinese, our principal creditors, are objecting more and more forcefully to American fiscal unsustainability and the debasement of the U.S. Dollar that this portends. The managers of other erstwhile basket-case economies, Russia, India, and Brazil, tut-tut their agreement and back calls for changes to the global reserve system.

At the very least, these mid-year movements call upon investors to review their portfolio allocations with care. My own view is currently defensive on U.S. Dollar assets, light in risk assets in general, and seeking for growth mainly in Chinese stocks.

State Dept. Pronounces North Korean Missile Launches "Not Helpful"

Gives North Korea time-out, water instead of apple juice at snack time.

Coming Soon: New Currency Order

Whatever you think of the young administration of President Barack Obama, you have to admit the man does not lack for ambition. He promised that sea levels would fall and the lame would walk, and everyone understands that will take at least a couple more months. But taking over the motor industry, well that's just the work of a couple of the President's bright sparks over the weekend. It's great knowing that I'll be able to go into my Congressman's constituent services office when I need parts for my old Dodge truck.

My sources in Washington tell me that the next thing to come out of the salvation lab is a major currency reform. The American Dollar, the Yankee Greenback, it has served us so well for so long, but now it's lame too. Better just to repudiate all claims and start over, as they are wont to do in the countries of South America that have lately emerged as models of public administration.

I hear the new buck will be called the O-buck, and this is its symbol:

At least he didn't say "Inherited"

AIG Chairman and CEO Edward M. Liddy has an op-ed in the Washington Post entitled "Our Mission at AIG: Repairs, and Repayment" this morning. He is trying to justify the payment of the $165 million bonuses. Good luck with that there, Mr. Liddy. But for one thing we can be grateful: in telling the tale of his appointment at AIG after the hapless Martin Sullivan, he spares us the word "inherited."

I suppose that word is government property.

The Government is Too Much With Us

The people are sovereign and this is what they voted for.

Obama's speech the other night sounded great, if you paid no attention to the words, which were a lot hair shirt and class struggle guff. Then came the budget announcement, in which those who did not really believe the new president is determined to move the country hard left finally had to face the facts that he means it -- the class warfare, the redistribution, the anti-business, anti-capital worldview -- all of it. Thursday we had attacks on health care and finance, Friday the 40% dilution of Citigroup's common equity. (Citigroup should henceforward be known as Citi Government.) The Dow loses 100 points every day, which wasn't so bad when it was at 14,000 but smarts a bit when it's at 7,000.

One of the most interesting fields of finance is "real options", not the familiar listed options but the features of optionality that are embedded in so many facets of everyday life. It helps me to think of our current predicament in terms of real options: in the face of 100% uncertainty and 200% hostility, the option to withhold my money for investment and keep it in my hip pocket instead is more valuable than ever.

Multiply that attitude by millions of investors and business people, and this economy is heading for a total breakdown.

One half wonders whether the Obama administration actually wants that breakdown in order to be able to ratchet up the class warfare even more . . . "Look, we offered them $3000 to hire new workers, but they laid of people and moved to China instead -- these rotten business people are your class enemies, let's fix them good!" That then is a pretext to move things rapidly in an even more revolutionary direction. It was chief of staff Rahm Emanuel who said crises are great opportunities for rapid and radical change.

On the other hand, the masses of the American people did not really vote for socialism, they voted for charisma and smooth talk and racial reconciliation. Democrats in Congress, who stand for election every two years, are showing their misgivings that when the people see where this is going, how rapidly we are heading towards breakdown, they may change their minds.

What the capital and business class of this country wants, apart from not being demonized and shaken down, is clarity on bailouts, budgets, and the very integrity of the system that produced the wealth and is now under attack for its pains.

There's a sense that the driver does not know the way to go but is driving 110 miles per hour trying to get there. Until we get clarity, or dare we hope a touch on the brakes from a Congress that realizes this is an electoral disaster in the making for them, capital will strike.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Confiscation of Retirement Assets?

There is a lively discussion under way at the Legal Insurrection blog with a post "The Revolt of the Kulaks Has Begun." In the comments it is suggested that the administration will come after tax-advantaged savings assets of American retirement savers.

This is dynamite. It is hard to believe the administration would overreach this way, but congressional Democrats exposed them to the charge by taking advice from Teresa Ghilarducci, a critic of the retirement savings system at the New School. In effect she suggests confiscating private accounts and supplying guaranteed government accounts in their place.

Promoting my Household Initiative Plan or something like it is one way to make the administration tell us what it really has in mind for private retirement accounts.

I have been making free-market proposals to liberalize the current rules for the 46 million IRAs, SEPs, SIMPLE and Keogh retirement accounts and permit them to invest in real estate without the heavy restrictions which pertain to them now. Retirement-minded people who are in good shape, not behind on their bills, and not struggling, could benefit from this opportunity to use retirement savings to take advantage of low real estate prices in popular retirement areas.

If you believe that the money people have contributed to their retirement accounts belongs to them, then it should be their free choice to do with as they think best, to take advantage of such opportunities as they perceive, or to bail themselves out of the trouble they are in. And if the administration thinks differently, then it would have to knock down proposals like my HIP.

Let's speak more generally about the restrictions and penalties that apply to these accounts. They are making a terrible situation even worse by restricting liquidity. Many people are being severely penalized for tapping their retirement accounts in order to try to save their homes and credit scores. Others who are behind on their mortgages and other bills, thereby damaging their credit, are nevertheless unwilling to incur the penalties they would pay to access their money in these accounts to get current on their bills. This is just madness. For the duration of the crisis, let's free things up, and let people access their own money in these accounts to work themselves out of trouble without penalties.

The Household Initiative Plan is posted at Household Initiative Plan Blog

Federal Open Mouth Policy is a Big Sell

The first time I realized that the Federal Open Mouth Policy is a Big Sell was over a year ago, when Fed Chief Ben Bernanke made some innocuous remarks about financial conditions that at that point did not yet rise to the level of panic. The stock market sold off hard.

Bear Stearns rescue -- short term relief, after which market sold off hard.

The statements that have followed every one of the Fed's and Treasury's Sunday evening interventions -- short term relief, after which market sold off hard.

Every one of these schemes to expand the type of security they'll take at the Fed window to include S&H green stamps, Pokemon cards, Indian wampum and pocket lint -- short term gain, after which, well, you know.

TARP, TALF . . . barf.

George W. Bush, Ben Bernanke, and Hank Paulson -- just the headline on CNBC that any of them would make any kind of a statement those last many months of 2008 unleashed a blizzard of sell orders. If the latter two had to go to Congress, same thing, only worse. It has been singularly unedifying to see the people who run the world questioned by the likes of Maxine Waters, Ron Paul, and Bernie Sanders.

The sands ran out of the glass on the hapless Bush administration, and everyone hoped for change. Just the good feeling and positive energy engendered by the new Obama administration would improve the economy in short order, or so I was told by business friends including some Wall Street people.

The Inauguration Address went over like a lead balloon. Big, big sell.

But there were high hopes for the Stimulus Bill . . . until that turned out to be a carnival of wasteful payoffs to favored constituencies, of which capital is emphatically not one. Sell.

The president's first press conference. Surely even his fans can't think this was a great performance. Apart from the oddly angry demeanor, the one takeaway is the he didn't want to steal the thunder of Treasury Secretary Timothy Geithner. Geithner, the indispensable man who had to be confirmed, despite his defects, because he is the career financial policy fixer who lives breathes eats and drinks financial and economic policy, and only he can prevent the ailing system of free market capitalism from falling about our feet. He will have a banking plan for us the next day. Can't steal his thunder.

The finger was on the sell button, but we held back on pressing it.

It turns out there's no thunder! Timothy Geithner may be a career financial and economic policy geek whose entire life has been preparation for the moment. He may have been Treasury Secretary in waiting for many months, during which time he presumably could have given some thought to our systemic issues and what he might like to do to address them. But on the day he had nothing. The indispensable man had no plan. There was some hand waving and some expressions of good intentions. What a disappointment. Big, big sell.

The bank chieftains went to Washington to get punched out by Congress. You knew what to do. It's become routine.

So yesterday we had the housing plan, and a speech by Ben Bernanke at the National Press Club. Bernanke sounded at ease, and very sensible. What do you know . . . these have actually been taken on board without another tsunami of selling. Maybe the capital interests of this country are exhausted, or have put as much into gold and Chinese stocks as they care to for now, or maybe they actually think that socializing the debts of the fiscally unsound is the way to move America forward.

Or maybe they will wait till later in the day. It's early yet.

While I wait, I'll express my hope that everyone in government would reconsider their open mouth policy for a while.

UPDATE: No mistake, they sold it hard in the afternoon. After the close, a few companies blew up, portending more of the same tomorrow.

MORE UPDATES: The selling continued all week, taking the indices down to 1997 levels. In other words, if you have been investing since 1997, you needn't have bothered.

And It Was Not Good

AND it came to pass in those days, that there went out a decree from Caesar Obamus, that all the world should be taxed.



(And this taxing was first made when Corzinus Corruptus was governor of Nova Ieiursii.)



And all went to his own city to be taxed.



And lo, the Stimulus came upon them; and they were sore afraid.



And a chorus of Pelosim descended from on high, and said unto them, Fear not; for I bring a million million simoleons which shall be to some people.



And even unto the ACORNs of the field, who toil not, neither do they spin, but do turn out a heavenly host on election day; unto ACORN shall be two thousand million gold simoleons.



Hosannah in the highest.

Word of the Day 02/10/09 from Steve Sailer

Obama's Bank Bailout Lays an Egg

"S&P 500 Index closes down 4.8% after Treasury Secretary waves hands around for awhile."

That's about it, I guess.

Geithner, Obama, Pelosi

Before they talked: Dow + 70
After they talked: Dow - 116

Dangerous New Phase of Financial Crisis (2)

In the inaugural address and on every subsequent working day of the new administration, the president has made remarks related to the economy and the financial situation. I already commented on the political theater aspects of the inaugural address; these were fully understandable, and even necessary.

But in the following days, the president has kept up the same line of discourse -- hammer the previous administration, talk down the economy. This is not uniting the public or restoring confidence, but rather the opposite. If there is very much more of this kind of talk, it will reinforce the lack of confidence in the economy and deepen the recession.

On Friday the president lowered himself to comment disparagingly on the office renovations of John Thain, late of Merrill Lynch; hours later he told congressional Republicans, "You can't just listen to Rush Limbaugh and get things done."

Both Thain and Limbaugh are private citizens engaged in legitimate business, just like the other bankers and business-people that the administration appears to want to use regularly as foils in their play.

I expected this to be a less business-friendly administration, but I admit I did not expect it to be outright anti-business, or that there would be personal attacks on individual private citizens engaged in legitimate business. There is just something not right about an American president going in for this stuff . . . is "unseemly" the word for it?

Note the political theater aspect of some of the economic discourse

In this trading week, the DJIA has been down 300+, up 200+, and as I write this note, down another 200+.

A significant part of Tuesday's drop occurred during and after Barack Obama's inaugural address. Whether you were wowed by the address or not, you have to admit there was a lot less gaseous uplift than we have come to expect from his speeches, and a bracing amount of sober description of the economic problems we now face.

There was also considerable weakness during our up 200+ Wednesday, as Treasury Secretary nominee Tim Geithner was telling the Senate Finance Committee confirmation how gravely serious these problems are.

Unquestionably, there are real difficulties now, but it is necessary to bear one thing firmly in mind when the new president and his administration talk down the US economy. This is necessary and effective political theater. Now that they have taken ownership of the situation:

1) The new administration has to blame everything on the old administration.
2) They have to accentuate the old administration's responsiblity for all problems, so that they can take full credit for their remediation.
3) They have to set low expectations that they can expect to exceed.
4) And they have to enhance the crisis atmosphere, because that is the environment most receptive to their proposals for radical action.

I recall dark days during the Asian Financial Crisis, one of the several hundred-year floods I have experienced in an 18-year financial career. It was Christmas week, 1997. In Korea, Kim Dae-Jung won the election to succeed Kim Young-Sam, and the next day he made his inaugural speech. In so many words, this what he said: "Wow. Holy $h|t. Things are way more screwed up than even we thought. I don't know whether we are going to go bust tomorrow or the day after tomorrow."

The KOSPI did another belly-flop off the 10-meter board. But recognizing the speech as just great political theater rather than pure reasoned analysis, I thought that market break was buyable. And that buy turned out very well indeed.

If the theatrical elements follow the same script, this market break may also turn out very well, or so I may, ahem, hope.

The administration has a fine line to walk, however. They want to pursue the script only far enough to meet their political objectives, but not so far that everyone takes an even greater fright than they already have, killing confidence and tipping the economy into a depression from which it can't be pulled out.

Found on www.usaservice.org

[Next week: Remedial literacy training?]

Parnell, by W.B. Yeats

I called my best friend today, who is an Obama supporter and an African American gentleman, to congratulate him on the occasion of the inauguration. There's a two line poem by W.B. Yeats called "Parnell" that might have some relevance to the African American community at this time. Or not. But here it is:

"Parnell came down the road, he said to a cheering man;
'Ireland shall get her freedom and you still break stone.'"

(New Poems, 1938)

The Street didn't care for it

The Dow Jones Industrial Average went from -130 to -200 during President Obama's Inaugural Address, and kept dropping through the rest of the day. Finally -330 with hardly a skidmark, for the worst Inauguration Day in the history of the index.

Those looking for an "Obama Bounce" can hope it will be stronger as it begins from lower levels.

Inauguration Day

Whether Barack Obama was your choice or not, this is a great moment for the country. Wish him well, and hold on to the hope that the next four years will be also be great.