Copyright 2002 thru 2009 Donald L. Luskin don-at-luskin-dot-net All rights reserved. "The Conspiracy to Keep You Poor and Stupid" and "Krugman Truth Squad" are trademarks of Donald L. Luskin www.poorandstupid.com
"The road is cleared," said Galt. "We are going back to the world." He raised his hand and over the desolate earth he traced in space the sign of the dollar.
Chronicle of the Conspiracy
Join us as we discover, document, expose and challenge the bad people, the bad institutions and the bad ideas that stand in the way of wealth creation -- and show you how to fight back!
Friday, February 12, 2010
A MARRIAGE ON THE ROCKS?
Steven Hales contributes,
What came first the relation or the law? I posit that the relation came first or there would be no need for the law. Disagreements and conflict form the basis of much of our legal code so it was the relation or the behavior that had to come first not the law. If we can agree on that point we can agree that government arose from relations and as those relations grew more complex more conflicts arose and the law responded and grew more complex. They are part of a symbiotic evolutionary process. I view all inventions as technology, ala Brian Arthur and other "new institutionalist" economists. Government and the law are inventions and by definition are technologies. They have all the elements of a technology. They are assembled from other technologies and something new is created. The last great evolution of government came in the 18th Century. It was assembled from a variety of other ideas or technologies. Liberty and Equality, Self Government, Representative Democracy and our greatest innovation, the separation of powers. At about the same time as our evolutionary experiment began another great invention was born, Capitalism. It was born out of the Industrialization of production and together our experiment in governing and capitalism became intertwined into a single system of production and governance. Shortly after the union of these great technologies a third invention was born, the corporation. Not only did the organizing principles of the corporation extend to the production of goods but also to the government. Our government began to look like a corporation with all the attendant complexities. Like all transformative technologies it reached into every part of life. This marriage of government and capitalism under a corporate governance structure is often in conflict and like all marriages each spouse, at times, wants a divorce. Bad things are said but the marriage endures and grows stronger. We see the current estranged spouse in the White House regularly throwing tantrums and hurling dishes in the direction of capitalism now symbolized by the corporation and its financiers, the evil bankers. But this is just so much theater and the marriage will endure, it has to, each depends on the other.
Currently, our government is trying to get capitalism to do the dishes and take out the trash and like most stay at home spouses feels generally unappreciated. It has also taken to comparing itself favorably to capitalism's last spouse and is saying how good it is compared to that bitch and how messy she left the house and what a shamble the finances are, she was a spendthrift, blah, blah, blah. It gets so bad that you have to tune her out. What's worse is that her sisters chime in from time to time to berate capitalism and give him a good talking to. But like all dutiful spouses capitalism takes it and continues to support them.
My point here is not just humorous but informative when looking at the growth of government and the increasing complexity of our economic relations, they are intertwined and spring from a common heritage. There is a dynamic tension between them but each needs the other to survive and thrive. Capitalism needs the institutions of government to reduce uncertainty from investments. It needs intellectual property protection, it needs a system of regulation to enforce standards, whether they be building codes or a system of weights and measures or any of a host of more arcane regulations that on their face may seem burdensome or unnecessary. But government also needs capitalism to flourish so that its goals of wealth and prosperity for its citizens is fulfilled. The complexities of reaching those goals seems at times overwhelming because economic growth lags its citizens expectations. When economic growth fails to emerge fast enough the dynamic tension between government and the institutions of capitalism come into sharp relief. But government can't rush innovation or changes in our economic life it can only provide an environment for capitalism to flourish and evolve.
Jefferson borrowed the expression from an Italian friend and neighbor, Philip Mazzei. ...Thomas Jefferson first used the phrase in the Declaration of Independence as a rebuttal to the going political theory of the day: the Divine Right of Kings.
Paul Krugman needs to move next door to some Italians. Maybe even above a restaurant. He needs to be around people who count history by the century in double digits. Walk next to those who dance around any obstacles to happiness. Dine with those who open bottles of wine by the hour. Or half-hour.
Now, let us ask the question: Is it true that “All Men Are Created Equal”?
Does that include baseball players, bankers and columnists?
Tell ole Paul Krugman if it’s true, because he’s got it all wrong. See, if we’re all equal, we ought to be judged by our individual merits and neither favored nor disfavored by the whims of government. There is no Divine Right of Kings.
Why does he say “we’re doomed”? He wants to incite greater anger by government at bonuses to bankers. Krugman was reacting to a Bloomberg BusinessWeek story entitled:
Obama Doesn’t ‘Begrudge’ Bonuses for Blankfein, Dimon
Krugman was bitchin’ and moanin’ because President Obama didn’t condemn every single bonus.
Krugman asserts that banks are wards of the state. Ahem, no. There is plenty of blame to go around for all the causes of the financial crisis. The banks deserve a fair share and some reforms are necessary; much has already been done. What about the King’s mistakes? Fannie & Freddie? The Cuomo HUD? Friends of Angelo? (They were over-served.)
Krugman, in his juvenile burst of anger, didn’t comment on why Obama didn’t lambast them. Referring to the CEOs of Goldman and JP MorganChase, read the President’s own words:
“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday. “I, like most of the American people, don’t begrudge people success or wealth. That is part of the free- market system.”
See, there is a system for governmental butt-in-ski over corporate compensation after all!
Are you a banker with a bonus? If so, answer the next two questions:
1. Are you personally known by the President?
2. Are you, in his sole discretion, “savvy”?
Then you earn the following grade: “NB”, meaning, “No Begrudge.” (Roughly the equivalent to those “S” grades we got in kindergarten for satisfactory lavatory skills.)
How about flogging the tens of thousands of unknown (and/or “not savvy”) bonus babies? Will that make Krugman smile?
No! Not until each and every bonus banker is bleeding in diagonal stripes from the cuts of the whip -- including these so-called K&S’s (known and savvy) -- Paul Krugman will remain bluer than blue.
He updates here, just to berate some silly White House PR types who tried to “clarify” the president’s previously clearly worded niceness to the two K&S’s. Essentially but not literally, Krugman blurts back, insults from imbeciles*!
A brief history lesson: In the 17th and 18th centuries, the Polish legislature, the Sejm, operated on the unanimity principle: any member could nullify legislation by shouting “I do not allow!” This made the nation largely ungovernable, and neighboring regimes began hacking off pieces of its territory. By 1795 Poland had disappeared, not to re-emerge for more than a century.
In the 16th century no single person or small group dared to hold up proceedings, but from second half of 17th century the liberum veto was used to paralyze the Sejm and brought the Commonwealth to the brink of collapse. The liberum veto was finally abolished by the Constitution of 3rd May in 1791.
But why was the liberum veto established? It has to do with the Polish Magnates. Turning again to Wikipedia we find
In Poland and Lithuania all members of the nobility (szlachta) were equal under the law. "Magnate" (Polish: magnat) was thus not an official title but rather a position of social class, based on wealth. Magnates (or higher nobility) vied for political power with the lesser and middle nobility (see Ruch egzekucyjny) and the Król (Monarch). From the second half of the 17th century, the magnates emerged as the victors in the struggle for power in the Polish-Lithuanian Commonwealth, as they were able to concentrate most of the land in their own hands and bribe smaller nobles to preserve the appearance of democracy: "Golden Liberty" in the parliaments, not only the local Sejmiks but also in the national Sejm.
The structure and rules of the Sejm were dictated by Polish law that seems to date to Feudal times. The consolidation of this power of equality, the illusion of democracy, in the ossifying use of the liberum veto for personal gain, could be a response by the nobility to the growing democratic movements in Europe and elsewhere in the 18th century, after all it was the Enlightenment and if nothing else it was getting increasingly easy for the nobility to lose their collective heads. It is this nobility who enabled and conspired with Russia, Prussia and Austria to carve Poland up through the three partitions. So, from the beginning the Sejm was not truly a Parliament from the second half of the 17th Century onward. It was the personal puppet of these landowners who dictated what the Sejm could or could not accomplish, it didn’t help that the diplomatic delegations of foreign powers bribed petty and landless nobles to use their liberum veto at strategic moments for the gain of their respective countries. Of course, it also didn’t help that Polish Kings were incompetent politicians and plunged Poland into ruinous wars both marshal and civil.
But what happened in Poland after the first partition in 1772? The democratic forces of change went against the nobility of Russia, Austria and Prussia. The Sejm under King Augustus pulled itself out of its lethargy and through his leadership, in defiance of his Russian masters (never mind that he and Catherine the Great were lovers), began a series of institutional and economic reforms that so alarmed his Monarchist buddies and the Magnates that they immediately began plotting the eradication of the Polish State. Therefore, it was the democratic ambitions of the Polish people, the bold action of King Augustus and the passage of the 1791 constitution that led to Poland’s demise not the liberum veto as alluded to by Krugman. In fact it was the exact opposite of what Krugman’s allusion claimed. It might be a useful rhetorical device, these historical allusions, but it does help if you get your facts straight and not be hoisted on your own petard.
...the big step by extremists will be an attempt to eliminate the filibuster, so that the courts can be packed with judges less committed to upholding the law than Mr. Greer. We can't count on restraint from people like Mr. DeLay...
Senators themselves should recognize this fact and push through changes in those rules, including eliminating or at least limiting the filibuster. This is something they could and should do, by majority vote, on the first day of the next Senate session.
REPUBLICANS AND THE POPULIST TEMPTATION
My op-ed in Tuesday's Wall Street Journal:The best stock market rally in 74 years may have ended on Jan. 19, the same day Republican Scott Brown won the Massachusetts U.S. Senate seat held by Democrats for 57 years. We don't know yet whether the alarming move down in stocks since then is simply a correction or something more serious. But the coincidence of these two history-making events raises troubling questions -- especially since a Republican resurgence, on the face of it, would seem to be good for business and good for stocks.
From the beginning of this historic rally of 73% over the 316 days since last March's market bottom, politics has been an important theme. That horrific bottom was reached after Democrats in Congress rammed through a $787 billion stimulus bill so quickly that no senator or representative could have possibly read all 1,073 pages of it. That hastily concocted porkfest should not be credited with turning stocks around. Rather, it should be blamed for the more than 18% loss that stocks suffered in the 24 days from the date of its enactment to the day of the March bottom.
The haste with which the stimulus bill was enacted made it seem certain that the cap-and-trade energy tax, unionization "card check," mortgage "cramdown" and health insurance nationalization would become law as soon as votes could be taken. It wasn't only the antigrowth implications of these initiatives that had investors terrified in March. It was the sheer recklessness with which they were being stuffed through the legislative pipeline under the Rahm Emanuel doctrine of never letting a good crisis go to waste. The crippling uncertainty of it all was making that good crisis worse.
Since then the historic stock market rally has tracked the demise, one by one, of all these initiatives, because investors could see that a political environment that had been far out of equilibrium was quickly finding its balance. Republicans stayed unified in their opposition, while in every case key Democrats lost their nerve. Since the stimulus, precisely nothing has been accomplished by the Obama administration or the Democratic Congress. The good crisis went to waste, and stocks soared.
Seemingly, the election of Scott Brown in Massachusetts should only be a continuation of that beneficent trend back toward political balance. At a stroke, it denied the Democrats their filibuster-proof Senate majority -- and opened up the real possibility of the Republicans taking control of one or both houses of Congress in November. Perhaps in 2011 a dream team, the same party configuration that proved so fruitful in the 1990s: Democratic president and GOP Congress.
So why did stocks collapse the moment the vote was tallied in Massachusetts?
It's because the immediate reaction to the Brown election -- in both parties -- has been a dangerous lurch toward antibusiness populism. The Obama administration's strategy has been to latch onto something that both parties can agree on: lynching Wall Street.
Just 24 hours after Mr. Brown's upset win, the White House let it be known that a radical plan to break up the largest banks, and to limit their size, was about to be announced. The next day the plan was revealed, and christened "the Volcker rule." What better way to lure Republicans onto a populist, antibank bandwagon than to associate it with the legendary Reagan-era figure?
Days later came the ordeal of Ben Bernanke's confirmation for a second term as Fed chair. Surely there are principled reasons for denying his confirmation, as there would be for any Fed chairman (they all have a way of being far from perfect). But it hardly seems possible that senators facing tough re-election challenges this year -- such as John McCain (R., Ariz.) and Barbara Boxer (D., Calif.) -- would just happen to discover those principled reasons in the hours immediately following the Brown election in Massachusetts.
More likely, they seem to have interpreted the fact that Mr. Brown wore a barn-jacket and drove a beat-up truck as indicating a voter preference for least-common-denominator populism. It's the low road to be sure, but desperate people do desperate things. And it might work. A recent NBC/Wall Street Journal poll showed that Americans with college degrees, and with more than $50,000 invested, supported Mr. Bernanke's confirmation. But those with only a high-school education, and with no money invested -- the classic populist audience -- opposed Mr. Bernanke's confirmation.
These developments have been profoundly destabilizing for stocks not because some version of the "Volcker rule" would necessarily destroy America's financial system, or because Ben Bernanke is utterly irreplaceable at the Fed. The crux of it is that it reveals a political process so dangerously narcissistic that it would use core institutions of the nation's economy as pawns in its own power struggles.
It's so dangerous because it potentially involves both parties, just when the Brown victory in Massachusetts holds out the hope of benign gridlock.
Don't think that Republicans can't be sucked in when an anti-Wall Street lynch mob gets its blood up. Recall that Sarbanes-Oxley, the devastating antigrowth response in 2002 to the Enron and WorldCom scandals, was passed with virtually unanimous support by Republicans in Congress, and signed by a Republican president. Recall that last year 85 House Republicans voted for a 90% tax on bonuses for any employee of any bank that took more than $5 billion in TARP money.
Investors got some good news last Friday. Stocks resisted following through on Thursday's sharp plunge after it was announced that the Senate Banking Committee's Democratic Chairman Chris Dodd and Republican ranking member Richard Shelby have reached an impasse on bank re-regulation. That's a nice downpayment on what investors need a lot more of now: proof that the GOP won't join Democrats in an anti-Wall Street race to the populist bottom.
CUOMO: CREDIT CRIMINAL
Grandstanding New York attorney general Andrew Cuomo brings charges against Bank of America leaders. But the Wall Street Journal points out that he himself did so much more to blow up the economy in the recent credit crisis:
Before he pursued statewide office in New York, Andrew Cuomo was Secretary of Housing and Urban Development during Bill Clinton's second term. And lest you think his tenure is forgotten, the HUD Web site has an instructive item in its Archives section.
Entitled, "Highlights of HUD Accomplishments 1997-1999," the document chronicles the "accomplishments under the leadership of Secretary Andrew Cuomo, who took office in January 1997."
HUD's Web visitors learn that in 1999 "Secretary Cuomo established new Affordable Housing Goals requiring Fannie Mae and Freddie Mac—two government sponsored enterprises involved in housing finance—to buy $2.4 trillion in mortgages in the next 10 years. This will mean new affordable housing for about 28.1 million low- and moderate-income families. The historic action raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent—a 19 percent increase—in the year 2001."
It's a sign of Washington's continuing failure to examine its own failures that HUD still views such a policy as an "accomplishment." It's as if the Pentagon described Pearl Harbor as a victory.
We know that in the wake of Mr. Cuomo's agitation, Fannie and Freddie's purchases of subprime loans skyrocketed. Subprime and "liar" loans became loss leaders that eventually caused the two mortgage giants to fail—with taxpayers so far on the hook for $111 billion in losses and perhaps hundreds of billions more to come.
The problem wasn't merely that HUD under Mr. Cuomo was raising the volume of risky loans for which taxpayers were guaranteeing. HUD was also encouraging a dangerous decline in underwriting standards at these government-sponsored enterprises (GSEs). Says former Fannie Mae chief credit officer Edward Pinto, "HUD commissioned much research aimed at forcing the adoption of more flexible lending standards by the GSEs."
In 1999, the Urban Institute published a HUD-commissioned study of Fannie and Freddie's credit guidelines. Among its findings: "Almost all the informants said their opinion of the GSEs has changed for the better since both Fannie Mae and Freddie Mac made substantive alterations to their guidelines and developed new affordable loan products with more flexible underwriting guidelines."
Keep in mind that Mr. Cuomo was doing this Fan and Fred cheerleading even as his colleagues in the Clinton Treasury were publicly raising red flags about their too-rapid expansion. Had Larry Summers, who was then Treasury Secretary, and Republican Paul Ryan, prevailed in their reform attempts, Fan and Fred wouldn't have been able to pile up so much rotten debt and turbocharge the housing boom.
In 2008, Wayne Barrett wrote in detail in the Village Voice about the changes Mr. Cuomo also wrought at the Federal Housing Administration, encouraging bigger loans with smaller down payments.
Mr. Barrett wrote that Mr. Cuomo "made a series of decisions between 1997 and 2001 that gave birth to the country's current crisis. He took actions that—in combination with many other factors—helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down . . . ."
Mr. Barrett summed up Mr. Cuomo's tenure in the Clinton cabinet by noting that "the country will be living with his HUD mistakes, ill- or well-intended, for a long time to come."