Opinion

The Great Debate

The danger in shutting down national security

The nation awoke Tuesday to find much of the federal government closed for business. The Republican-controlled House of Representatives had refused to fund essential government functions until the rest of Congress and President Barack Obama agreed to reverse a healthcare law passed three years ago and deemed constitutional by the Supreme Court. By doing so, they put reversing healthcare reform ahead of protecting the nation.

Hundreds of thousands of national security professionals are now on furlough. The latest Office of Management and Budget guidance notes no function has been discontinued that would “imminently threaten the safety of human life or the protection of property.” The Defense Department made clear that “military personnel would continue in normal duty status.”

But even furloughing “non-essential personnel” undermines U.S. security. It hits three critical areas: the Defense Department’s civilian employees, the intelligence community and the agencies that respond to health emergencies.

As of October 1 at 12:01 a.m., hundreds of thousands of national security personnel that are not on duty, including as many as 400,000 Defense Department civilian personnel were told not to come to work. According to the Pentagon’s own guidance, this includes all intelligence activities not in direct support of excepted activities — like the conflict in Afghanistan.

Across the intelligence community more broadly, 70 percent of all employees are now forced to stay home in the government shutdown. The Central Intelligence Agency has 12,500 fewer personnel. We might now miss critical intelligence related to the chemical weapons in Syria or Iran’s efforts to further develop a nuclear weapons program.

The economy needs a ‘unity Cabinet’

The election left us with a status quo political lineup, one that failed to make any meaningful fiscal progress over the past two years. So is it realistic to expect that we can avoid the fiscal cliff and achieve some sort of “grand bargain”? Yes, it is possible, and here is how to do it:

First, President Barack Obama should form a “unity Cabinet” to demonstrate to the public and Congress that he wants to bring the nation together and accelerate progress on key challenges. It should include Democrats, Republicans and independents. All should be respected in both parties, have meaningful private-sector experience and credibility within and outside the Washington Beltway.

These criteria are especially critical when it comes to the president’s top economic team. Obama will almost certainly change the leadership at the Treasury Department, since Treasury Secretary Timothy Geithner has talked about leaving after the first term, and the Office of Management and Budget. Smart appointments could help reboot Obama’s relationships with Congress and increase the chance of success.

Markets make prisoner of the Fed

“Market participants should not direct policy,” Kansas City Fed President Thomas Hoenig warned listeners at a town hall meeting in Lincoln, Nebraska, back in August. Unfortunately that is precisely what is now happening.

Hoenig noted that Wall Street’s clamour for cheap money was not disinterested: “Of course the market wants zero rates to continue indefinitely … they are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.”

Now the same pressure groups want the Fed to launch a second round of asset purchases so they can sell U.S. Treasury bonds to the central bank (in effect back to the federal government) at inflated prices.

Senate vote exposes Wall Street impotence

Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.

Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.

But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.

The uncharted waters of government ownership

lou-lataif– Louis E. Lataif, a former president of Ford Motors of Europe, is dean of the Boston University School of Management. The views expressed are his own. —

Government ownership of General Motors (60% U.S. and 12% Canada) will be fraught with difficulties.

Given the large taxpayer stake in the company, it will be impossible for elected officials to stay out of the fray. Congress inevitably will interject itself in business decisions affecting employment, the kind of vehicles the company builds, or the company’s position on nationalizing health care – just as it is now asserting itself on the question of dealership closures.

from The Great Debate UK:

Darling gambles with Britain’s credit

REUTERS-- Neil Collins is a Reuters columnist. Christopher Fildes is a guest columnist. The opinions expressed are their own --

LONDON, April 22 (Reuters) - The Treasury is the UK government's finance ministry. There are many other government departments, but in the years since 1997, all have been turned into subsidiaries of the Treasury, the power base of Prime Minister Gordon Brown when he was chancellor.
His ambition was to micro-manage in every one of them. Today we saw the true cost of this disastrous experiment. All major countries have serious problems with their government deficits, but the most entrenched of Britain's are home-made.
Britain's public finances, which had been deteriorating for years, are wrecked. Even on his successor's rose-tinted projections, they will not return to a balanced Budget for at least the next nine years.
Given that no Treasury projection for more than three or four years out bears any resemblance to reality, and given the there will have been at least two elections between now and then, this is a post-dated cheque drawn on the Bank of Fantasy.
Alistair Darling has learned at the feet of the master of obfuscation, double counting and footling detail. So we heard all about the green recovery, from a government that sees no contradiction between raising the cost of fuel and granting tax concessions to North Sea explorers. There may be more oil there, but for the state, this is now a dry well.
The Chancellor did not dare say what he and his advisers really think about the green-tinted scheme wished on them by Peter Mandelson, the Trade Secretary, to scrap your old banger for 2,000 pounds towards a new one.
At least they managed to limit the damage to a single year. If your car is not 10 years old by next March, it will be junked in the ordinary way.
Junk is what the last Treasury forecast has now become. It's barely five months since Darling's last emergency package. It looked like a work of fiction then, and now there's no doubt. In his Budget a year ago, he was expecting to borrow 43 billion pounds in 2008/09, crowing that the previous peak was much higher, at 7.8 percent of gross national product. The sum would come down after that.
By November, there was no crowing. The projected borrowing requirement was 78 billion pounds, and was going up, to 118 billion in the following year, not down. Even those horrible figures have now been left far behind. Last year he needed 90 billion pounds, and in 2009/10, he says, it will be 175 billion pounds, or 12.4 percent of GNP.
The forecast is then for a fall, although not by much. In 2010/11 he - or his successor - will still be 173 billion pounds short of balancing the books.
So in three years the government will have borrowed 5,600 pounds for every man, woman and child in the country. That's over 20,000 pounds for what the prime minister routinely calls the average hard-working family.
In any business, from a corner shop to a multi-national, this arithmetic would be immediately fatal to those who had put it forward. Their credit would be ruined, and the business's credit could not be restored while they were still in charge.
Britain's credit is ultimately expressed in the external value of sterling, as Brown himself has said. The pound has already been devalued informally by a greater amount than the two previous formal devaluations in 1967 and 1992.
The short-term effects have been mostly benign, but the possibility of a flight from the currency is always there. This Budget makes it a little more likely.
In this context, everything else is detail. The biggest detail is the attack on what Darling describes as "those who gained the most". This is a sop to his fractious party in parliament.
From next April anyone earning over 150,000 pounds a year will be paying 51.5 percent on every extra pound earned, the highest rate in Britain for 21 years. They will also lose their tax-free allowances and half the tax relief on their pension contributions.
The small print betrays that the government is relying on these measures to bring in 7 billion a year, sometime in the middle distance. This looks as unconvincing a forecast as any in Darling's portfolio. Well-paid labour is highly mobile nowadays, and will go where the prospects are high and the taxes low.
Nothing else in the 250 pages of the Budget Report is worth a row of green beans. Even the Treasury can't put a price on the measure to reduce VAT on children's car seat bases.
Despite its name, "enhanced capital allowances" will actually raise more money -- 10 million pounds, or enough to run the government machine for about eight minutes.
Thrashing around for something cheerful to say, Darling kept telling us how much worse off other people were. To assert that "we and other countries have been battling against a succession of shocks which have hit the world economy" suggests that our luckless planet had crossed orbits with a large economic meteorite.
The former chancellor, now prime minister, assumed the sun would shine forever, and that he had somehow managed to suspend the usual rules of economics -- or as he himself put it, "no more boom and bust." In recent years, he produced growth by borrowing, pouring the money into the public services for ever-decreasing returns.
Each time he borrowed more than he had forecast. Now the bill has arrived, and it's plain that neither he nor his successor has the slightest idea of what to do. Marc Ostwald of Monument Securities summed it up within minutes: "a Budget of tinkering with the public sector financial sector meltdown, with no substance or obvious strategy whatsoever."
One day the Treasury will remember how to mind its own business, under a chancellor who grasps that until the public finances are put in order, nothing else will go right. The longer the wait, the worse will be the reckoning.

Goldman’s TARP out: give up ALL state aid

goldman-crop – Jonathan Ford is a Reuters columnist. The views expressed are his own –

Goldman Sachs wants to do its duty by the American people and give them their TARP money back. Some spoilsports have urged the government simply to say no because allowing the investment bank to repay the cash would make other banks look bad.

But this seems rather un-American. Why shouldn’t taxpayers get their money back if Goldman really doesn’t need it? The point to insist upon is that they get all of it back — and on commercial terms.

Geithner’s naked subsidy redefines toxic

jimsaftcolumn31– James Saft is a Reuters columnist. The opinions expressed are his own

Treasury Secretary Geithner is all but admitting that U.S. banks are suffering not from market failure but self-inflicted collateral damage.

The U.S. Treasury on Monday detailed an up to $1 trillion plan to buy up assets from banks in partnership with private investors, using financing bankrolled by the government, financing that is only secured by the value of the doubtful assets the fund buys.

One portion will be dedicated to buying complex securities from banks employing capital contributed by private investors and the government topped up with funds borrowed from the Federal Reserve. A second portion will buy older securities that are, or were, rated AAA, using, you guessed it, more non-recourse funding.

A show trial for AIG?

 Diana Furchtgott-Roth– Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. —

Republicans and Democrats in Congress, along with President Obama and Treasury Secretary Geithner, have been raking AIG over the coals in hearings and speeches for paying employees bonuses totaling $165 million. But today’s Los Angeles Times reports that the Treasury Department specifically agreed to the bonuses in a 586-page agreement signed on November 25. The deal allows AIG to pay out bonuses for the 2009 year that equal bonuses paid for 2007.

It stands to reason that the contracts to pay bonuses would have been known to Treasury officials a half-year ago, when they reviewed AIG’s financial position before funneling $85 billion into the firm to prevent its collapse. Basic due-diligence scrutiny of the firm’s books would have revealed the contractual obligations to make bonus payments to retain talented staff. What is puzzling is why the administration pretends not to know.

First 100 Days: Fix the banks

morici– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. —

For every new president, campaign promises and inaugural idealism must give way to the hard choices that measure the mettle of their leadership.

Now Barack Obama must act pragmatically to fix the banks or the economy will sink under their weight.

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