James Pethokoukis

Politics and policy from inside Washington

The right response to America’s Sputnik Moment?

Jan 27, 2011 19:56 UTC

I am a little late on this, but AmSpec’s John Guardiano is dead on:

Kennedy didn’t think America was “as strong as [it] should be.” And the reason, he surmised, was that the heavy hand of big government was too onerous. The feds, he realized, were stifling initiative and entrepreneurship. He knew the solution was to cut marginal tax rates. And so he did just that.

Kennedy cut the top marginal rate from 91 percent to 70 percent. He also cut tax withholding rates, instituted a new and more generous standard deduction, and increased deductions for child care and other familial expenses. The result: the economic boom of the 1960s.

FCIC report: 10 causes of the financial crisis

Jan 27, 2011 18:40 UTC

The other dissent (written by Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas) to the main Financial Crisis Inquiry Commission report identifies 10 causes for the meltdown. They run through them in a WSJ op-ed:

Starting in the late 1990s, there was a broad credit bubble in the U.S. and Europe and a sustained housing bubble in the U.S. (factors 1 and 2). Excess liquidity, combined with rising house prices and an ineffectively regulated primary mortgage market, led to an increase in nontraditional mortgages (factor 3) that were in some cases deceptive, in many cases confusing, and often beyond borrowers’ ability to pay.

However, the credit bubble, housing bubble, and the explosion of nontraditional mortgage products are not by themselves responsible for the crisis. Our country has experienced larger bubbles—the dot-com bubble of the 1990s, for example—that were not nearly as devastating as the housing bubble. Losses from the housing downturn were concentrated in highly leveraged financial institutions. Which raises the essential question: Why were these firms so exposed?

Failures in credit-rating and securitization transformed bad mortgages into toxic financial assets (factor 4). Securitizers lowered the credit quality of the mortgages they securitized, credit-rating agencies erroneously rated these securities as safe investments, and buyers failed to look behind the ratings and do their own due diligence. Managers of many large and midsize financial institutions amassed enormous concentrations of highly correlated housing risk (factor 5), and they amplified this risk by holding too little capital relative to the risks and funded these exposures with short-term debt (factor 6). They assumed such funds would always be available. Both turned out to be bad bets.

These risks within highly leveraged, short-funded financial firms with concentrated exposure to a collapsing asset class led to a cascade of firm failures. The losses spread in two ways. Some firms had large counterparty credit risk exposures, and the sudden and disorderly failure of one firm risked triggering losses elsewhere. We call this the risk of contagion (factor 7). In other cases, the problem was a common shock (factor 8). A number of firms had made similar bad bets on housing, and thus unconnected firms failed for the same reason and at roughly the same time.

A rapid succession of 10 firm failures, mergers and restructurings in September 2008 caused a financial shock and panic (factor 9). Confidence and trust in the financial system evaporated, as the health of almost every large and midsize financial institution in the U.S. and Europe was questioned. The financial shock and panic caused a severe contraction in the real economy (factor 10).

Me: I really like that they looked globally to try to find the common elements between the crises here and there. It is pretty hard to ignore this graphic:

housing

COMMENT

The list of “causes” should have included comparisons to previous great financial manias. This would have observed that since the 1825 example the final phase ran some 12 to 16 months against an inverted yield curve.

The problem during such a boom is not rising interest rates. This confirms that the boom is on. The problem arrives when the curves reverses to steepening, with T-bill rates declining.

This fateful reversal started in May 2007, which was the 15th month of inversion.

The rest, as the saying goes, became history. There are two “rules” that worked. Short rates plunge during the initial bear market and economic contraction. The notion that “cuts” in the Fed rate will reignite a boom is not supported by history.

The other “rule” is that the post-bubble recession starts virtually with the bear market. Using NBER determinations, the 1873 bubble ended in September and the recession started that October. The 1929 bubble ended in that September and the recession started that August. The 2007 bubble ended in October and the recession began in that December.

There are other “rules” but that would take a lot of space.

Posted by Subtle | Report as abusive

FCIC report: So why did U.S. have a financial crisis?

Jan 27, 2011 16:40 UTC

The Financial Crisis Inquiry Commission report is out, and it also includes two separate dissents. There’s a metaphor contained in the dissent by Peter Wallison of the American Enterprise Institute which does a pretty good jobof  describing the majority take and his critique of it:

In a private interview with a few of the members of the Commission
(I was not informed of the interview), Summers was asked whether the mortgage
meltdown was the cause of the i nancial crisis. His response was that the i nancial
crisis was like a forest i re and the mortgage meltdown like a “cigarette butt” thrown
into a very dry forest. Was the cigarette butt, he asked, the cause of the forest
i re, or was it the tinder dry condition of the forest?
44
h e Commission majority
adopted the idea that it was the tinder-dry forest. h eir central argument is that the
mortgage meltdown as the bubble del ated triggered the i nancial crisis because of
the “vulnerabilities” inherent in the U.S. i nancial system at the time—the absence
44
FCIC, Summers interview, p.77.470 Dissenting Statement
of regulation, lax regulation, predatory lending, greed on Wall Street and among
participants in the securitization system, inef ective risk management, and excessive
leverage, among other factors. One of the majority’s singular notions is that “30
years of deregulation” had “stripped away key safeguards” against a crisis; this
ignores completely that in 1991, in the wake of the S&L crisis, Congress adopted the
FDIC Improvement Act, which was by far the toughest bank regulatory law since
the advent of deposit insurance and was celebrated at the time of its enactment as
i nally giving the regulators the power to put an end to bank crises.
h e forest metaphor turns out to be an excellent way to communicate the
dif erence between the Commission’s report and this dissenting statement. What
Summers characterized as a “cigarette butt” was 27 million high risk NTMs with
a total value over $4.5 trillion. Let’s use a little common sense here: $4.5 trillion in
high risk loans was not a “cigarette butt;” they were more like an exploding gasoline
truck in that forest. h e Commission’s report blames the conditions in the i nancial
system; I blame 27 million subprime and Alt-A mortgages—half of all mortgages
outstanding in the U.S. in 2008—and a number that appears to have been unknown
to most if not all market participants at the time. No i nancial system, in my view,
could have survived the failure of large numbers of high risk mortgages once the
bubble began to del ate, and no market could have avoided a panic when it became
clear that the number of defaults and delinquencies among these mortgages far
exceeded anything that even the most sophisticated market participants expected.
h is conclusion has signii cant policy implications. If in fact the i nancial
crisis was caused by government housing policies, then the Dodd-Frank Act was
legislative overreach and unnecessary. h e appropriate policy choice was to reduce
or eliminate the government’s involvement in the residential mortgage markets, not
to impose signii cant new regulation on the i nancial system

In a private interview with a few of the members of the Commission (I was not informed of the interview), [Obama economic adviser Larry] Summers was asked whether the mortgage meltdown was the cause of the financial crisis. His response was that the financial crisis was like a forest i re and the mortgage meltdown like a “cigarette butt” thrown into a very dry forest. Was the cigarette butt, he asked, the cause of the forest fire, or was it the tinder dry condition of the forest?

The Commission majority adopted the idea that it was the tinder-dry forest. Their central argument is that the mortgage meltdown as the bubble deflated triggered the financial crisis because of the “vulnerabilities” inherent in the U.S. financial system at the time—the absence of regulation, lax regulation, predatory lending, greed on Wall Street and among participants in the securitization system, inef ective risk management, and excessive leverage, among other factors. One of the majority’s singular notions is that “years of deregulation” had “stripped away key safeguards” against a crisis; this ignores completely that in 1991, in the wake of the S&L crisis, Congress adopted the FDIC Improvement Act, which was by far the toughest bank regulatory law since the advent of deposit insurance and was celebrated at the time of its enactment as finally giving the regulators the power to put an end to bank crises.

The forest metaphor turns out to be an excellent way to communicate the difference between the Commission’s report and this dissenting statement. What Summers characterized as a “cigarette butt” was 27 million high risk [non-traditional mortgages] with a total value over $4.5 trillion. Let’s use a little common sense here: $4.5 trillion in high risk loans was not a “cigarette butt;” they were more like an exploding gasoline truck in that forest. The Commission’s report blames the conditions in the financial system; I blame 27 million subprime and Alt-A mortgages—half of all mortgages outstanding in the U.S. in 2008—and a number that appears to have been unknown to most if not all market participants at the time. No financial system, in my view, could have survived the failure of large numbers of high risk mortgages once the bubble began to del ate, and no market could have avoided a panic when it became clear that the number of defaults and delinquencies among these mortgages far exceeded anything that even the most sophisticated market participants expected.

This conclusion has significant policy implications. If in fact the financial crisis was caused by government housing policies, then the Dodd-Frank Act was legislative overreach and unnecessary. The appropriate policy choice was to reduce or eliminate the government’s involvement in the residential mortgage markets, not to impose significant new regulation on the financial system

COMMENT

Regarding the FCIC’s report, there is another looming issue that contributed to economic crisis & as yet goes unexplored.

Robert Wood Johnson Foundation (RWJF) activism was a major contributing factor to the home foreclosure meltdown and subsequently our economic crisis. More here:

http://cleanairquality.blogspot.com/2009  /03/worldwide-economic-meltdown-and.htm l

Posted by mwernimont | Report as abusive

As U.S. debt goes up, Obama’s concern goes down

Jan 26, 2011 17:34 UTC

In the space of less than 24 hours, the Congressional Budget Office managed to stomp all over President Barack Obama’s dovish debt speech. That Obama failed to use the State of the Union address to explicitly endorse any of his own debt panel’s major budget-cutting recommendations was, shall we say, a glaring omission. Now that failure appears absolutely blinding. Give us the bad news CBO bean counters:

For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO’s baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021.

The deficits that will accumulate under current law will push federal debt held by the public to significantly higher levels. Just two years ago, debt held by the public was less than $6 trillion, or about 40 percent of GDP; at the end of fiscal year 2010, such debt was roughly $9 trillion, or 62 percent of GDP, and by the end of 2021, it is projected to climb to $18 trillion, or 77 percent of GDP.

Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

If Medicare’s payment rates for physicians’ services were held constant as well, then deficits from 2012 through 2021 would average about 6 percent of GDP, compared with 3.6 percent in the baseline. By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97 percent of GDP, the highest level since 1946.

Well, at least Obama didn’t ignore the debt issue completely. Deficit reduction was included as one of his five economic “pillars,” along with innovation, education, infrastructure and government reform. And he did call for a temporary freeze on some spending categories. But his narrow formulation exempts sixth-sevenths of federal outlays for savings of less than $400 billion over ten years (only a quarter of the $1.6  trillion his commission called for) vs. perhaps $12  trillion in total new debt. Last week, a group of influential Republicans called for $2.5 trillion in cuts over a decade.

There had been hope Obama would at least suggest trimming Social Security, as his bipartisan debt commission suggested last December. But the idea was dropped after much howling from liberal interest groups. Yet, strangely, Obama said it was necessary to “find a bipartisan solution to strengthen Social Security for future generations.” He should check his in-box because it’s been sitting in there for more than a month.

The White House has clearly decided that a “pro-growth” message will serve Obama well in his 2012 reelection bid, with the space race reference meant to evoke the can-do 1960s.To hammer home the point, Obama emphasized the need to keep investing in the “Apollo projects” of today. In other words, let the GOP be the Party of Austerity and root-canal economics.

The speech isn’t necessarily Obama’s final take on the matter, of course. Progress can be made outside the media spotlight. In 1997, secret talks between the Clinton White House and congressional Republicans almost led a bold deal to fix Social Security.

Obama might want to try a similar tactic and quietly meet with the guy who gave the Republican TV response, Rep. Paul Ryan. The rising GOP star and debt panel member has created a plan with a former Clinton economist to sharply cut future health costs, the primary driver of America’s long-term debt woes. Otherwise, U.S. debt may just keep rocketing higher.

COMMENT

What do you people not understand about the fact that the Social Security budget is handled separately and has a savings built up.

Even if you doubled the retirement age you are not allowed to touch the money social security has collected.

Further Social Security is more and more often the only income for the retired and disabled. Without it people die. Do you want to be held responsible for a large number of deaths and blatant theft for what people have themselves paid for? You see whats happening in the middle east?

Posted by toyotabedzrock | Report as abusive

Thoughts on Obama’s SOTU speech

Jan 26, 2011 06:44 UTC

Whenever I would ask folks at the White House about how they planned on dealing with America’s long-term debt problem, they would more or less tell me the same thing: “Wait for the deficit commission.” Well, Obama’s panel has come and gone. And in his speech last night, he failed to explicitly endorse any of its budget-cutting recommendations. This part particularly frosted my pumpkin:

The bipartisan Fiscal Commission I created last year made this crystal clear. I don’t agree with all their proposals, but they made important progress. And their conclusion is that the only way to tackle our deficit is to cut excessive spending wherever we find it – in domestic spending, defense spending, health care spending and spending through tax breaks and loopholes.  … To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations.

What, did Obama not check his in-box? His bipartisan commission gave him a Social Security fix, not to mention a host of other ideas. Now perhaps this is all about some grand negotiating strategy. But it sure seems like the White House has clearly decided that a “pro-growth” message will serve Obama well in his 2012 reelection bid, with the Sputnik space race reference meant to evoke the can-do 1960s. To hammer home the point, Obama emphasized the need to keep investing in the “Apollo projects” of today. In other words, let the GOP be the Party of Austerity and root-canal economics. Except, sunny and smiling Paul Ryan refused to play the role. He gave a common-sense perspective on the budget deficit, an issue which the 2010 midterm results suggest is a big one with many Americans.

Yes, the corporate tax cut stuff was pretty good. But nothing in the speech hinted at any sweeping tax and spending reforms on the horizon. Maybe with Obama’s approval ratings back over 50 percent, the White House thinks it can afford a cut-and-paste agenda and squeeze out a 51-48 victory in 2012. A nod to tort reform here, more R&D investment there.  More to come later …

COMMENT

We are all aware that, re the change in corporate taxes, that almost no major corporation actually pays taxes at the 35% rate. If there is a change, it would certainly help the smaller corporation but it would also allow for more crony capitalism as those “preferred”, ie solar and wind companies, will get special offsets. Not sure what the final result will look like but it’s doubtful that our corrupt Congress will bite any hand that feeds them.

Posted by apberusdisvet | Report as abusive

It would be nice if Obama’s SOTU included some of this stuff

Jan 25, 2011 22:13 UTC

The folks at Americans for Tax reform have assembled a pretty solid list of ideas.  Since Obama is apparently going for growth in an attempt to get reelected, he might want to take a gander at a few of these:

1.  Cut the corporate income tax rate.  The United States has the highest corporate income tax rate in the developed world.  This puts American employers at a disadvantage to our international competitors, and costs U.S. jobs.

2.  Move from “worldwide” to “territorial” taxation.  The U.S. is one of the few developed nations that not only seeks to tax all profits earned within her borders, but also the profits of her taxpayers earned all around the world.  Most other countries are closer to a “territorial” system.  The U.S. should move toward this type of system, which would make the complex maze of international deferrals and credits unnecessary.

3.  Make full business expensing permanent.  As part of the tax increase avoidance deal in December, Congress and the President agreed to one year of full business expensing (as opposed to multi-year deductions called “depreciation”) for new business machinery and equipment.  This should be expanded to real property and made permanent to further equalize the tax treatment of investment versus consumption.

4.  Call on Congress to repeal Obamacare taxes on families making less than $250,000 per year.  Obamacare contained nearly two-dozen new or higher taxes, at least seven of which are directly-levied on families making less than $250,000 per year.  At the very least, those taxes which violate President Obama’s “firm pledge” not to raise “any form of taxes” on any family making less than $250,000 should be repealed first.

5.  Remove uncertainty from small employers and investors by making current tax rates permanent.  The top personal rate of 35 percent is also the rate at which a majority of small business profits face taxation.  The capital gains and dividends rate of 15 percent has been priced into the value of every American’s IRA and 401(k) balance.  To restore certainty to the economy, businesses and families need to plan with steady and permanent tax rates.

6.  Call for a moratorium on new federal regulations.  According to the annual “Cost of Government Day” report issued by Americans for Tax Reform Foundation and the Center for Fiscal Accountability, regulations impose a cost of $1.5 trillion annually on our economy.  There were over 60,000 pages added to the Federal Register in 2009.  Americans had to work nearly 75 days just to pay for the regulatory burden of government.  At the very least, no more damage should be allowed to occur, starting with harmful Obamacare regulations.

7.  Admit “stimulus” failures and rescind the unspent funds. This could save taxpayers almost $200 billion. Famously threatening that absent an influx of cash in the form of government “stimulus” unemployment would crest 8 percent, two years of economic stagnation and unemployment holding steady above 9 percent shows the plan to be a failure by the White House’s own standard. Admit defeat and move on to proven pro-growth policy.

8.  Promise to veto any further state government bailouts.  Refuse to reward the fiscal recklessness of the states by pledging to end state bailouts. Due in part to the snake oil of “stimulus” funds, states expanded rather than restrained their bottom lines during the economic recession, and are facing a cumulative $72 billion overspending problem, on top of a $3 trillion hole dug by unsustainable pension promises. If the President is serious about fiscal restraint, he should make clear states are responsible for their own spending habits.

9.  Keep your promise on earmarks. According to Citizens Against Government Waste, earmark spending has topped $36 billion over the past two years of the Obama Administration, to say nothing of the trillions of dollars of spending that have been enabled by greasing the palms of elected officials.

10.  Support lasting reform to permanently shift the bias away from spending. Prudent measures such as allowing taxpayers to read bills online for five full days before they receive a vote would ensure lawmakers are diligent stewards of taxpayer dollars.

Did Wall Street nix GOP push to let states go bankrupt?

Jan 25, 2011 17:49 UTC

As they used to say in the Soviet Union, “It’s no coincidence.” At least, I suspect is isn’t. Yesterday, House Republican Majority Leader Eric Cantor came  out strongly against the idea of changing the federal bankruptcy code to let states declare bankruptcy, an idea being pushed by some Republicans, including Newt Gingrich:

“I don’t think that that is necessary because state governments have at their disposal the requisite tools to address their fiscal ills,” Cantor said. ”They’ve got the ability to enter into new negotiations if there are any collective bargaining agreements in place. They’ve got the ability to adjust levels of spending as well as revenues at the state level.”

Yes, but filing for bankruptcy would allow states to restructure government union contracts. Even the threat of doing so could make negotiations easier. That’s arguably how it worked for U.S. automakers. Despite incremental concessions over the years due to the vague threat of bankruptcy, only the reality of an actual bankruptcy, instigated by Washington, achieved sweeping change — whether at General Motors and Chrysler, which filed, or Ford, which avoided doing so. States don’t have that ability right now.

But let’s speculate a bit, let’s try and connect a few dots:

1. In 2010 election cycle,  Wall Street campaign contributions shifted to Republicans from Democrats. For instance, Goldman Sachs, via its PAC and employees, allocated 59 percent of political contributions to Republicans in 2010 against just 26 percent in 2008.

2.  Wall Street does not like the idea of states being given the power to file for bankruptcy. Such a move might spook markets, or spook them even more:

The municipal bond market, which has recently been rocked by fears of possible defaults, could suffer another blow, driving up borrowing costs further, if the legislation gained traction. The idea is “clearly not beneficial to an already fragile municipal market,” said Chris Mauro, municipal strategist for RBC Capital Markets, in a statement.

It might hurt their holdings of state bonds. Overall, banks own some quarter-trillion bucks worth of state and local debt.

3. Also, some Wall Street firms make a lot of money off the public pension system and don’t want to get on the wrong political side of the issue. Take the Blackstone Group, a private equity firm.  More than a third of its investors are public pensions. Here is the text of  a press release it put out last week:

Blackstone’s view on public employee pensions is clear and unambiguous: We believe a pension is a promise. Working men and women should not have to worry about their retirement security after years of service to their communities. We oppose scapegoating public employees by blaming them for the structural budget deficits that cities and states face. We at Blackstone are committed to helping public employees retire with confidence in the strength and reliability of their pensions.

4. Billionaire Blackstone CEO Steve Schwarzman is a big Republican moneyman who famously likened Democratic efforts to impose higher taxes on private equity firms to Adolf Hitler’s invasion of Poland. “It’s a war. It’s like when Hitler invaded Poland in 1939.”

5. Many Republicans would love to cement their rekindled financial relationship with Wall Street heading into 2012 when they have a good chance of retaking the Senate.

Now there is a reasonable argument against giving state’s this new power. But the anti-bankruptcy GOPers have yet to supply it. Perhaps other forces are at play. If not, more explanation is needed.

COMMENT

For those of you citing the Contracts clause and arguing that this would be unconstitutional:

“No state shall . . . pass any law . . . impairing the obligation of contracts.”

This would be a federal law–as bankruptcy courts are arms of the federal judiciary. When you hear about “Chapter 7 bankruptcies,” for example, we are talking about Chapter 7 of Title 11 of the United States Code. The Contracts Clause does not restrict the ability of the federal government to interfere with existing contracts.

Posted by Johnny_Lawrence | Report as abusive

More on states going bankrupt

Jan 21, 2011 18:48 UTC

Lots of buzz about this NYTimes story that says Washington policymakers (Republicans, really) are “working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.” (My blog post from six weeks ago that said the same thing is here.)

Government unions don’t like the idea, of course. Neither does Reuters’ Felix Salmon, always a reliable guide to what the liberal blogosphere is thinking. He and others have several objections. A big one is this: States wouldn’t be able to borrow, being shut out from credit markets.

I supposed for a time that might be true, but only for a time.  Orange Country eventually returned to borrowing, as has Argentina. In the case of the OC, it took five years for their debt to return to investment grade. So their borrowing costs rose.  In the meantime, would states need some sort of bridge loan to from Uncle Sam to keep paying their day to day bills? Not necessarily. Tax revenue would continue to flow in. Budget cutting would commence in earnest. Assets, such as roads and bridges, could be sold or privatized. Would bankruptcy mean a radical reorganization of state government? Yes, that’s the whole point.

In his recent WSJ op-ed Prof. David Skeel, a bankruptcy expert and intellectual godfather of this idea, make a couple of great observations:

First, the governor and his state could immediately chop the fat out of its contracts with unionized public employees, as can be done in the case of municipal bankruptcies. In theory, the contracts could be renegotiated outside of bankruptcy, and many governors are doing their best, vowing to freeze wages and negotiate other adjustments. But the changes are usually small, for the simple reason that the unions can just say no. In bankruptcy, saying no isn’t an option. If the state were committed to cutting costs, and the unions balked, the state could ask the court to terminate the contracts.

Second, the state could reduce its bond debt, which is nearly impossible to restructure outside of bankruptcy. While some worry about the implications for bond markets, the alternative for the most highly indebted states—complete default—is far worse. Randall Kroszner, a former Federal Reserve governor now at the University of Chicago Booth School of Business, showed in a 2003 study that the price of corporate bonds went up during the New Deal when the Supreme Court upheld legislation that reduced payments to bondholders. The reduction increased the prospect that bondholders would get paid. The prospect of state bankruptcy could have a similar effect, and even if it didn’t a reasonable reduction in state bond debt is essential to restructuring their finances.

I am not sure a state bankruptcy would look exactly a municipal bankruptcy. The details are still being worked out. But I do know the status quo with government unions cannot hold. Also in the NYT this week was this story:

As San Francisco struggles under ballooning pension and health care costs, the city’s retirees will receive unexpected cost-of-living bonuses totaling $170 million. The city’s anticipated budget deficit for the coming year is $360 million. …

On Jan. 4, an actuarial firm reported that the $13.1 billion San Francisco Employees’ Retirement System now had an unfunded liability of $1.6 billion — triple its shortfall a year earlier. Gary A. Amelio, the system’s chief since January 2010, did not respond to questions.

In spite of the shortfall, Mr. Amelio and the system’s board quietly decreed in mid-December that “excess” earnings on investments in 2010 entitled retirees to an unexpected cost-of-living increase of as much as 3.5 percent this year. The special $170 million bonus is in excess of regular cost-of-living adjustments, or COLAs.

“The irony of issuing bonus payments to retirees at a time the pension fund is a billion dollars down is insane. It really is,” said Jeff Adachi, San Francisco’s public defender and the chief proponent of Proposition B, which he says would have saved the city $120 million this year. “It’s like a bankrupt corporation paying dividends to its shareholders.”

On the GOP, bankrupt states and government unions

Jan 21, 2011 12:58 UTC

The NYTimes finally picked up on a story I had six weeks ago:

Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers. … For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.

And from my post on Dec. 7:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds. Republicans in the House of Representatives already want to stop state and local governments from issuing tax-exempt bonds unless they are more forthright about these future obligations.

But it’s about more than just openness. Some Republicans hope the shock of the newly revealed debt totals will grease the way towards explicitly permitting states to declare bankruptcy. Indeed, legislation  amending federal bankruptcy law is currently being prepared by congressional Republicans.

A few additional thoughts:

1) The NYT article raises the specter that states would be shut out of credit markets if allowed to declare bankruptcy, or if one should actually take that step if federal law is changed. That seems unlikely, although  some may have to pay higher interest rates. Municipalities and even countries repudiate debt and yet continue to borrow. And even investor apprehension would be balanced by states getting their finances in order, which should appeal to potential lenders.

2) Republicans aren’t afraid of bankruptcies — though not on the national level — believing they restore market discipline and reduce moral hazard. Lehman is a good example. While the common narrative is that its failure caused a market panic and financial crisis in 2008, many conservative GOPers think the real problem was that Bear Stearns was bailed out, distorting investor expectations. They also believe it was Hank Paulson’s rushed TARP proposal that sent markets reeling, a hypothesis  pushed by economist John “Taylor Rule” Taylor of Stanford.

3)  Republicans have seen the debt problems in places such as Greece and New Jersey and believe government unions undermine long-term fiscal soundness. They want to spread the Chris Christie’s battle against them nationwide. And of course it also doesn’t hurt that unions are a key Democrat constituency. But Rs think it is possible to pit public and private unions against each other by making the case that plumbers and construction workers are paying higher taxes to support cushy benefits and jobs security for teachers and bureaucrats.

4) Don’t be surprised to next hear some Republicans question whether state and local bonds should remain tax exempt, arguing it only encourages fiscal profligacy.

COMMENT

All levels of government in the USA have more money than the rhetoric from both sides of the isle would have us believe; no theory here folks, just hard facts. Read on:

Dear Reader, please consider what Walter Burien is doing over at http://www.cafr1.com .He traded in derivatives for 30 years, has a gift for comprehending the big numbers in government financial statements, and is educating people about the fact that collective “government” now literally owns controlling interests in all the Fortune 500 companies and more through thousands of investment accounts held at the municipal, county, state and federal levels.

The proof is revealed in the “Comprehensive Annual Financial Reports” in the public domain. Thus when government bails out various corporate entities, taxpayers are unknowingly simply rescuing government investment portfolios. Naturally, no one explains this to the public; they only get the usual half-truths, lies and obfuscation from New York and Washington D.C.. The profits from these government investments are not shared with the very taxpayers whose money was used to create them.

Fascism, American style.

According to Walter, “taxes” account for a mere third of the money collective government takes in; the rest is obscene levels of profit from investments, carefully not talked about in the mainstream media. All the talk of “budget deficits” does not take into account the “profits from investment” revealed only in the CAFRs that every level of government issues as required by law, and are in the public domain for anyone to look at.

States “going broke” is only partly true; yes, they are usually spending more than their budget funds. However, the profits outlined above are carefully not mentioned to the public. The purpose? To scare the public into putting up with their present tax burden, and to prepare for more because, after all, “the government is going broke and needs our money”.

It is identical to me pulling my empty pocket inside-out and saying to you “See? I’m broke! Please give me money!” while every other pocket is stuffed full with one hundred dollar bills.

Walter Burien explains what I’ve stated here in a new 1 hour 14 minute online documentary he created called “The Only Game In Town”. A 48-hour pass costs $3.00 available here:

http://cafr1.com/ViewNow.html

I watched it twice. Walter ends his video proposing a smart simple way to address the issue of taxes: create “Tax Retirement Funds” (“TRFs”) that are financed by a small percentage of the profit that every level of government is already making.

Example: Wisconsin’s Real Financial Situation taking into account the above facts:

http://realitybloger.wordpress.com/2011/ 03/01/wisconsins-real-financial-situatio n-explained/

May truth and compassion prevail….

Posted by Bhaktidev | Report as abusive

U.S. politicians could learn from Chinese moms

Jan 20, 2011 21:50 UTC

By James Pethokoukis
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Chinese President Hu Jintao’s visit to Washington has triggered debate about whether the United States should copy his country’s hands-on economic model. But the Middle Kingdom’s feisty “tiger mothers” may provide a better guide. A new book extolling their tough-love approach could help America escape its debt trap and boost growth.

America is in a funk over the fear of decline and a still-wobbly economy. The age of anxiety started with the financial meltdown. The crisis and subsequent government bailouts prompted some U.S. policymakers to wonder if their steadfast belief in minimal state intervention had run its course. To make matters worse, while America plunged into its worst downturn since the Great Depression, China kept right on growing and adding to its massive dollar hoard.

But the solutions to America’s long-term economic woes won’t be found by aping the mercantilist industrial policy coming out of Beijing. That’s how poor countries play catch-up, not the way rich countries lead and innovate. Even China understands that at some point it will need to export less, consume more and loosen its financial system to more efficiently allocate capital.

So rather than turn to Hu for answers, ask author Amy Chua. The child of ethnic Chinese immigrants, Chua is critical of the lax parenting style of many American parents. In “Battle Hymn of the Tiger Mother,” she says they’re too quick to praise mediocrity and too reluctant to enforce sacrifice for better academics. In short, Americans are not preparing their kids as well as the Chinese are to compete and succeed as adults.

Whether the thesis is true or not, Chua’s critique still manages inadvertently to capture the essence of what’s wrong with U.S. economic policy. Too much spending and consumption today, too little savings for investment tomorrow. A dysfunctional education system. A tax code that rewards lobbying over productivity.

Americans need to demand more of themselves and of government, even if that means some days of unpleasant sacrifice. Chinese mothers, according to Chua, set high expectations of their children because nothing helps confidence like achieving what didn’t seem possible. That spirit would serve the United States well about now.

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