Freedom Line Blog

Over at the Wall Street Journal, James Grant, editor of Grant’s Interest Rate Observer has a perceptive review of the new book, “White House Burning: The Founding Fathers, our National Debt, and Why it Matters to You,” by former IMF Chief Economist Simon Johnson and University of Connecticut law professor James Kwak. Two passages deserve special attention.

On the banking system, Grant writes:

Here’s an idea: Let’s try capitalism for a change.

Rather than the bureaucratic monstrosity called the Dodd-Frank Act, for instance, why not hold the bankers personally accountable for the solvency of the institutions that employ them? Until 1935, bank stockholders would get a capital call if the company in which they had invested became impaired or insolvent. It was their problem, not the government’s. In the same spirit, suggests the New York investor Paul J. Isaac, let the bankers forfeit a portion of their past compensation—say, that in excess of 10 times the average manufacturing wage—if they steer their employer on the rocks. And let them surrender not just one year’s worth but rather seven year’s worth—after all, big banks don’t go broke all at once. Proceeds would be distributed to the creditors, as in days of yore. Bankers should not only take risks. They should also bear them.

And on the endless invocation of the Great Depression as the sole object lesson in how to respond to a severe economic downturn:

Messrs. Johnson and Kwak, who draw the usual conclusions from 1929-33, fail to mention the depression of 1920-21. Yet this cyclical downturn was as instructively brief as it was ugly. Peak to trough, nominal GDP plunged by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment, as it was then inexactly measured, soared to 14% from a boomtime low of 2%. And how did the successive administrations of Woodrow Wilson and Warren G. Harding, along with the Federal Reserve, meet this national disaster? Why, they balanced the budget and raised interest rates. Yet for reasons never examined in the pages of this book, that depression promptly ended and the 1920s roared.

Grant’s theme? Responsibility, both personal and collective. That has the great virtue of being the right thing to do. It also has one even greater virtue: it works.

As I note in my new weekly column, out today, President Obama’s State of the Union address on Tuesday night was littered with risible claims, not the least of which was his defense of the hundreds of billions of dollars poured into the financial and auto industries at the height of the nation’s economic crisis (efforts, in fairness, that began with the Bush Administration). Contrary to the president’s rosy recitations, however, the bailouts were not an unimpeachable success. As the AP reports today:

A government watchdog says U.S. taxpayers are still owed $132.9 billion that companies haven’t repaid from the financial bailout, and some of that will never be recovered.

The bailout launched at the height of the financial crisis in September 2008 will continue to exist for years, says a report issued Thursday by Christy Romero, the acting special inspector general for the $700 billion bailout. Some bailout programs, such as the effort to help homeowners avoid foreclosure by reducing mortgage payments, will last as late as 2017, costing the government an additional $51 billion or so.

This report won’t get much attention, simply because of the fact that a majority of the money has been paid back. That fact, however, reveals what may be the most damning legacy of the bailouts’ gonzo economics: the ability to think of a $133 billion shortfall as a rounding error.

Skim through this week’s commentary pieces here at CFIF, and you’ll notice that all of us at the Center are incensed by President Obama’s recess appointments to the NLRB and the Consumer Finance Protection Bureau yesterday, all of which seemed to clearly overstep the president’s constitutional authority.

According to the invaluable James Pethokoukis, however, we ain’t seen nothing yet. Writing at the American Enterprise Institute’s Enterprise Blog, Pethokoukis notes that there’s an ominous implication from yesterday’s appointments — that the president could use a similar tactic to appoint a new head of the Federal Housing Finance Agency. He writes:

And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process, here’s what might happen next, according to [the Washington Research Group’s Jaret] Seiberg:

“That could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election.”

Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen.

There are more grisly details in Pethokoukis’s original post. The upshot? President Obama — without approval from Congress — could commit taxpayers to a quarter-trillion dollars of spending in order to bail out imprudent homeowners in an election year. Essentially, we’d all be financing the president’s reelection campaign. And, in a tight race, the resulting bribe stimulus might just do the trick.

Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

From the Australian Comedy duo of Clarke and Dawe. Sadly this may be more accurate and succint than anything you’ll see on network news:

Two weeks ago, in a commentary entitled Obama’s Big Fat Greek Bailout, we noted the alarming parallels between Greece’s meltdown and America’s trajectory.  Following years of unsustainable welfare-state spending, Greece’s deficit stands at 13% of gross domestic product (GDP), and its cumulative debt stands at 110% of GDP.  Unfortunately, America isn’t far off, with a deficit approaching 11% of GDP and cumulative debt under Obama heading toward 90% of GDP.

Well, other observers are beginning to draw the same parallel we did.  Robert Samuelson notes his commentary The Welfare State’s Death Spiral that “virtually every advanced nation, including the United States, faces the same prospect.”  Pat Buchanan echoes our observation in his commentary The End of La Dolce Vita:

For the nations of Europe have made commitments beyond their capacity to keep, given their growing debts and aging populations.  And America is not all that far behind.  While the federal deficit is not 14% of GDP, it was 10% in 2009 and may reach 11% in 2010.  Trillion-dollar deficits are projected through the decade, bringing the public debt – held by citizens, companies, foreign governments and sovereign wealth funds – close to 100% of GDP.  And the unfunded liabilities of Social Security, Medicare and federal pensions rival those of Western Europe.  States like California and New York, larger than Greece, look a lot like Greece.”

And today, we wake up to the news that Fannie Mae seeks yet another $8.4 billion federal lifeline.  Fannie was originally rescued by the federal government in September 2008, but at least that bailout was capped at $400 billion.  Last year, however, the Obama Administration agreed to remove even that limit, pledging unlimited loss coverage. Fannie’s total now stands at $83.6 billion, with Fannie Mae’s and Freddie Mac’s cumulative bailout costing American taxpayers $145 billion.

But just like Greece, whose original bailout estimate of $45 billion has now risen to $1 trillion, there is no end in sight for Fannie, Freddie or the United States.  Who knows how many more bailouts will be sought by Fannie and Freddie, not to mention other dysfunctional states like California and industries dominated by unions whose bosses are on Obama’s speed dial?

Can you hear the Greek wedding music growing louder?

Below is one of the latest cartoons from Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

It’s nice to see a piece in Time Magazine worthy of linking to. Over the last few years, Time has led the charge of weekly news magazines becoming equal parts liberal opinion journals and People Magazine derivatives. Newsweek isn’t much better (only George Will and Robert Samuelson redeem it). And U.S. News and World Report has become entirely virtual, while simultaneously losing its only compelling columnist (Michael Barone, who’s now with the D.C. Examiner).

But Time’s new issue features a piece called “What’s Still Wrong With Wall Street” by financial journalist Allan Sloan. If you can get past the purple prose of his first few paragraphs (including a breathless passage about the “green shoots” appearing in the cracked driveways of the newly impoverished) and the occasional populist nonsequitur (Mr. Sloan apparently thinks the financial crisis should relieve him of the need to pay overdraft fees), it’s worth your time.

With great analytical clarity, Sloan explains how TARP wasn’t the real bailout (new federal lending standards were); how the bonuses that the public is crowing about aren’t really bonuses; and how it was incompetence much more than greed that drove the financial collapse.  One exemplary passage:

The two divisions at AIG that brought down the firm — financial products and stock-lending — didn’t understand what they were doing. Financial products wrote credit-default swaps — sorry I’m not pausing to explain them, but most eyes would glaze over if I did — that they thought were riskless but turned out to be ultra-risky.

The stock-loan department, AIG’s other disaster, took the cash it got for lending out stock owned by AIG and invested the money in esoteric securities rather than in risk-free Treasuries, the standard practice. The idea was — I’m not kidding — to make an extra one-fifth of 1% in interest. When the esoterica, which the stock-loan folks thought was riskless, crumbled, so did the firm.

It’s an admittedly uneven piece, but the good outweighs the bad.  Read the whole thing here.

“Exxon’s Profit Drops 68% as Prices Tumble,” according to the Wall Street Journal.

Is it time to move away from the windfall profits tax and start discussing bailouts?

When Ford abstained from accepting federal bailout dollars, observers rightfully worried that it would suffer a competitive disadvantage compared to its new Obama-favored counterparts General Motors (GM) and Chrysler.

But so far, a funny thing has happened thanks to American consumers.  Ford has actually gained in its share of American market sales, whereas GM and Chrysler have declined.  According to CNW Marketing Research, Ford jumped from approximately 12% of domestic auto sales in the third quarter of 2008 to approximately 17% in the third quarter of 2009.  In contrast, GM fell from approximately 27% to 22%, and Chrysler fell from approximately 8% to 6% during that span.  The only other major automaker to gain in market share over the past year was Toyota, but its increase isn’t nearly as dramatic as Ford’s.

Several factors may have contributed to Ford’s improvement, but Americans have sent a clear signal in rewarding it for righting its course the old-fashioned way, while rebuking GM and Chrysler for jumping onto the Obama bailout bandwagon.