James Pethokoukis

Politics and policy from inside Washington

Hello, they must be going

Jan 27, 2010 19:30 UTC

David Goldman lays it all out:

Drastic steps are required to restore credibility and confidence.

1) Ben Bernanke should withdraw from consideration for a second term as Fed Chairman. President Obama should appoint former Fed Chairman Paul Volcker in his place. If Volcker, who is 82 years old, feels unable to accept the nomination for a full term, he should serve as Interim Chairman and head a search committee including bipartisan Congressional representation to find a permanent successor. If Bernanke insists on pursuing a second term, the Senate should vote him out.

2) Treasury Secretary Geithner should resign. Whether or not he engaged in wrongdoing, his capacity to execute his office is damaged beyond repair.

I took issue with Paul Volcker’s proposal to ban bank proprietary trading, but that is a minor issue. Volcker’s distinguished career and unimpeachable integrity make him the man of the hour. I’ll take Volcker’s worst moments over Bernanke’s best.

This is not a partisan issue. The alleged malfeasance occurred under the previous administration, and Volcker became Fed Chairman under the Carter Administration. America can’t afford to heap onto the present economic crisis yet another crisis – of integrity.

Just how bad is the US debt problem

Jan 27, 2010 19:21 UTC

Some interesting factoids over at Capital Gains and Games:

Point One:  We often hear that the US government debt load is  lower as a share of GDP than those of many other large, wealthy nations, including Japan, Germany, the UK and France. But a more apples-to-apples comparison, which combines federal, state and local government borrowing, suggests that the US is in worse shape than most other AAA-rated countries.

By that measure, the United States general government totalled 78.6 percent of GDP in 2009 and  will hit 90 percent by the end of 2010, Fitch says.  That would make us the the most highly leveraged of all AAA-rated countries — Germany, France, the UK,  as higher than that of almost all other AAA-rated nations.  (Japan’s debt is still much  higher, but it lost AAA status back in the late 90′s.)

Point Two: the  picture is even grimmer if you look at US government borrowing as a share of revenues.   US goverment debt (federal, state and local) was 330 percent of revenues in 2009 — the  highest ratio of any AAA country.   And that 330 percent doesn’t include additional trillions of dollars in new “contingent liabilities” — bank guarantees, federally insured mortgage-backed securities, and so on.


He’s just driving it up and up until he can declare a crisis.

When that happens, what do you think his “recommendation” will be?

Posted by proreason | Report as abusive

Yup, spending is the problem

Jan 27, 2010 19:19 UTC

Great point made by the Heritage Foundaiton:

After building a true budget baseline, the sobering result shows ten-year deficits of $13 trillion. The annual budget deficit never falls below $1 trillion. By 2019, the debt is projected at $22 trillion, or 98 percent of GDP.

These deficits are driven by spending. Even if all the 2001 and 2003 tax cuts were extended and the AMT were patched, 2020 revenues would be just 0.7 percent of GDP below the historical average. Yet 2020 spending would be 5.2 percent of GDP above the historical average. This means that 88 percent of the additional deficits would come from higher spending and only 12 percent would come from lower revenues.

CBO paints nightmare scenario for Democrats in 2010

Jan 26, 2010 18:06 UTC

According to the new CBO economic and budget forecast,  the US economy will grow at just 2.2 percent next year, keeping unemployment above  10 percent. In fact, it has the jobless rate averaging 10.1 percent vs. 9.3 percent in 2009. As the CBO puts it:

First and most important, output is expected to grow fairly slowly in this recovery. Following the two previous severe recessions in the postwar period, output rebounded particularly rapidly, as did employment. Real GDP grew by 6.2 percent in the four quarters following the 1973–1975 recession and by 7.7 percent in the same period following the 1981–1982 recession. In both instances, all of the jobs lost during the recession were regained within four quarters. In contrast, GDP rose modestly and employment remained much weaker following the two most recent recessions.

Employment changed little during the four quarters following the 1990–1991 recession, when real GDP rose by 2.6 percent. And employment fell by more than 1 million in the six quarters following the 2001 recession, when real GDP grew at an average annual rate of 2.1 percent.


4 ways to grow GDP close to 6% and to decrease unemployment by 4 pts

1. Capital gains tax cut to effective rate of 10% on all asset classes
2. Incentivize promising job growth industries such as healthcare. Instead of crippling healthcare with burdensome regulation and government control, enable the industry by offering incentives for creation of self funded, self directed medical savings accounts. Other promising sectors are energy – export natural gas and other commodities to developing nations.
3. Dramatically reduce non-critical federal spending. Cut most foreign aid other than spending that is critical to national defense.
4. Across the board sustained coordinated income tax cut

Posted by dutchboyinvestor | Report as abusive

The Obama Freeze

Jan 26, 2010 15:58 UTC

A few thoughts on the Big Budget Freeze:

1) Estimated annual savings of $25 billion over the next decade aren’t much when annual budget deficits will likely average a trillion dollars.

2) The freeze would use current spending levels, elevated to fight the recession, as a reference point. The stimulus gets locked in!

3) The 2011 budget deficit, according to the Congressional Budget Office, will be $980 billion, or 6.53 percent of GDP. With the Obama freeze, the deficit would be 6.43 percent of GDP.  Rounding error!

And while I am on the topic, instead of a budget commission, I would prefer a commission on how to boost economic growth.


The “freeze” is the latest scene in the Impressionist Lanscape.

We will see dozens of similar ploys, all designed to hazily paint the marxist as the people’s friend. Meanwhile, he will continue to undermine the country by leveraging the most powerful position in the world for 7 more years.

They no doubt are angling to keep their majorities in the November elections, but it isnt likely they think that is critical. No matter what happens with legislation, they will be working their magic with executive orders and by stocking the bureaucracy with true believers.

But don’t worry, Lenin afficionadoes!! They won’t make the mistake again of praising Mao in public.

Posted by proreason | Report as abusive

More on the Bernanke Meltdown

Jan 25, 2010 16:05 UTC

Intrade says Beranke is lock, but maybe not, according to the always insightful Dan Clifton of Strategas Research:

Contrary to this morning’s headlines, we believe Chairman Bernanke’s reappointment this week is still far from certain and may become eerily reminiscent of the first TARP vote. After last week’s confirmation vote for Fed Chairman Bernanke was called off due to insufficient votes, the Administration and Congressional leaders are in the headlines this morning claiming he has the votes now and will be confirmed. Intrade odds for Bernanke’s confirmation bumped higher on the news. But our review of the numbers suggests Bernanke still faces a tough road, virtually all of the undecided Senators must break for the Chairman in order for him to secure reappointment.

The case against Bernanke

Jan 25, 2010 15:33 UTC

From AEI’s Desmond Lachman:

Bernanke’s sole claim for a second term rests on the masterful and bold way in which he prevented the U.S. economy from falling into the abyss following the Lehman debacle in September 2008. However, this begs the question as to who led us to the abyss in the first place. Throughout 2006, when the worst of the sub-prime lending was taking place, Bernanke was conspicuously silent in sounding the alarm about the dangers of the U.S. housing bubble. Similarly, he was painfully slow in recognizing how severe the fallout from the bursting of the housing bubble would be and he displayed the poorest of judgments in allowing Lehman to fail in as disorderly manner as it did.

If there is one more item that should sink Bernanke’s bid for a second term it has to be his recent statement that the Federal Reserve’s extraordinarily low interest rate policy between 2001 and 2004 contributed little to the creation of the largest U.S. housing market bubble on record. The Senate would do well to ask itself whether the economy’s interests would be best served by again choosing a Fed chairman who seems to have learned so very little from the Federal Reserve’s past monumental mistakes.


Bernacke was singing the praises of the economy in June 2008, along with King Paulsen.

Three months later they were in Bush’s office declaring the world as we know it would end if Bush didn’t immediately grant them the power of gods.

Maybe Ben isn’t as brilliant as people would have you believe. Or at the very least, he either isn’t a very good forecaster or he’s an outright liar.

Posted by proreason | Report as abusive

A chat with Nicole Gelinas (part three)

Jan 25, 2010 14:34 UTC

This is part three (part one and part two here and here) of my recent email chat with the Nicole Gelinas, author of the wonderful After the Fall: Saving Capitalism from Wall Street and Washington.

Why should capital standards be uniform across different asset types; why is this important?
Consistent capital standards are an acknowledgment of humility. For example, the next financial crisis could come from government debt. Yet governments around the world say for regulatory-capital purposes that sovereign debt is the safest investment imaginable. They said the same thing about highly rated mortgage-backed securities four years ago.

Regulators should allow financial firms and investors to do their own assessments of risk, rather than decree what debt is safe and what is not. Bottom-up risk assessment would protect the economy as a whole. If one financial firm makes a mistake in thinking that a class of securities is perfectly safe, the rest of the system will survive its failure. But if the government makes a similar mistake in one of its universal decrees of safety, the mistake multiplies itself over the entire financial industry.

Consistent capital requiremens would also make ratings agencies irrelevant – a much easier way of “reforming” them than what Washington is trying to do.

You brings up lots of reform ideas that don’t necessarily coalesce into a specific plan. But a common theme seems to be bright, clear rules instead of regulator judgment? Is that right?
Right. Of course, there’s always some human judgment involved. Back in the Eighties, hen-Fed chairman Paul Volcker, for example, used human judgment when he applied old-fashioned margin rules to limit speculative borrowing to the new-fashioned junk bond markets. Investors – and people in the Reagan administration – howled. But Volcker was humble enough to know that neither he, nor the financial industry, was able to predict the future and obviate the need for consistent rules.

The theme of my book is that free-market principles should govern the financial system. How do we make that happen? Big and/or complex financial firms must operate under a credible threat of failure. Lenders to such firms must know that that failure comes through a consistent, predictable, transparent system, in which losses come according to a creditor’s place in the capital structure – not through arbitrary, opaque government bailouts.

How do we make that happen? We must make the economy better able to withstand financial-industry losses. And we do that through everything that I talk about here and in the book.  Moreover, we know that this works. It worked from the Thirties until the Eighties, until financial innovation began to evade the regulatory system and thus market discipline.

Do you buy the John Taylor idea that the credit crisis escalation in September 2008 was caused not by Lehman but rather lack of investor confidence in Paulson/Bernanke/TARP?
No, although I do not think that Lehman caused the crisis, either. If our “free market” financial system is dependent on “investor confidence” in the competency of government as it executes arbitrary bailouts, then we’ve got a real problem! I do agree, however, that arbitrary government actions starting in 2008 have prolonged the recovery and made it less robust. The answer to that problem, though, isn’t for the government to perfect its arbitrary actions. It’s to make such actions unnecessary by making the economy safer for financial-firm failures.

Would you have let Lehman fail
Yes.  The financial system’s business model was itself a failure. That model was to borrow every last dollar based on Panglossian assumptions multiplied decades into the future. It was fatally brittle even to the slightest wavering in assumptions, and thus worked only in an environment of too big to fail.

When we took that veil of government protection away even for a moment, as we did with Lehman, what was underneath wasn’t pretty. It revealed that a financial system that’s immune from market discipline and exempt from prudent regulations is a system that can destroy the economy.

I hope that Washington learns this lesson, and takes it to heart. If not, the next time the financial system cashes in on its implicit government guarantees, it may overwhelm the government’s ability to bail it out. Markets will work, in such a case – but will exact a cruel economic and social price.


Why is there so little interest in the causes of the most important financial event since 1929….the crash of September / October 2008?

It’s shockinbg to even hear Mr.P and Ms. Gelinas devote 50 words to the events of September 2008, which of course, are immediately dismissed.

You would think that an event that threw millions of senior citizens into poverty, a market drop much greater than in any other presidential election year, the seminal event in a chain that reduced the country’s net worth by more than 10 trillion, a disaster that will have repercussions for decades, a shock that got Barack Obama elected immediately after McCain had finally taken a lead in the premier Gallup poll, would generate a tiny bit of interest in the media. But no. How could that compete with the crispness of the pleat in Obama’s trousers?

Did you know, as an aside, that George Soros has been convicted of market manipulation by the state of Hungary for his activities in the fall of 2008?

I guess the geniuses in the press know that George would NEVER try something like that in America. Maybe in the UK, maybe in Malaysia, maybe in Hungary, but certainly not here. As Obama’s dominant financier, he simply couldn’t risk that, could he?

Posted by proreason | Report as abusive

Yup, the Senate may be in play

Jan 25, 2010 14:22 UTC

New polling by Rasmussen shows Evan Bayh in danger. Remember, one of the big impacts of the Scott Brown victory was a boost to recruitment. RealClearPolitics has the details:

Indiana Rep. Mike Pence (R) leads Sen. Evan Bayh (D) by 3 points, according to a new Rasmussen poll. Pence, the third ranking Republican in the House, is considering a Senate bid but hasn’t indicated publicly which way he is leaning.

Bayh leads two other Republicans, ex-congressman John Hostettler and State Sen. Marlin Stutzman, but still polled below 50% — not a good sign for an incumbent.

Bayh 44 – Pence 47

Bayh 44 – Hostettler 41

Bayh 45 – Stutzman 33

UPDATE: It now looks like Beau Biden isn’t going to run in Delaware. With Mike Castle in for the GOP, there is a good chance of a Republican pickup of Veep Biden’s old seat.


If a State Senator with youthful vigor and grassroots determination can win in Massachusetts, I think State Senator Marlin Stutzman can defeat Bayh in Indiana as he displays those same characteristics. Hostettler got in too late and is too bland to woo the independents. Behney uses too much rhetoric. And Bates seems a little too slick. They’re all good conservatives, but Marlin is a common sense conservative, who has a proven record.

After meeting State Senator Stutzman at a local event, I’m convinced about him and I signed up at http://GoMarlin.com/team51.aspx to donate $20 and volunteer.

You should, too.

Posted by Thomas | Report as abusive

Bernanke Confirmation Watch

Jan 22, 2010 19:38 UTC

I would not say his support is collapsing, but it is eroding. He is going to need some GOP help to make it. Keep an eye on the “yes” votes from the Banking Commitee to see if they start wavering and how much Obama supports him in the next few days. BB is on the wrong side of the populist wave.