Capitalism and Oligarchy

James K. Gailbrath takes the Obama administration to task on their handling of the bailouts.  Economically, I tilt towards the folks over at Econolog, but like Arnold Kling, this post resonated with me:

Up to a point, one can defend the decisions taken in September-October 2008 under the stress of a rapidly collapsing financial system. The Bush administration was, by that time, nearly defunct. Panic was in the air, as was political blackmail — with the threat that the October through January months might be irreparably brutal. Stopgaps were needed, they were concocted, and they held the line.

But one cannot defend the actions of Team Obama on taking office. Law, policy and politics all pointed in one direction: turn the systemically dangerous banks over to Sheila Bair and the Federal Deposit Insurance Corporation. Insure the depositors, replace the management, fire the lobbyists, audit the books, prosecute the frauds, and restructure and downsize the institutions. The financial system would have been cleaned up. And the big bankers would have been beaten as a political force.

Team Obama did none of these things. Instead they announced “stress tests,” plainly designed so as to obscure the banks’ true condition. They pressured the Federal Accounting Standards Board to permit the banks to ignore the market value of their toxic assets. Management stayed in place. They prosecuted no one. The Fed cut the cost of funds to zero. The President justified all this by repeating, many times, that the goal of policy was “to get credit flowing again.”

The banks threw a party. Reported profits soared, as did bonuses. With free funds, the banks could make money with no risk, by lending back to the Treasury. They could boom the stock market. They could make a mint on proprietary trading. Their losses on mortgages were concealed — until the fact came out that they’d so neglected basic mortgage paperwork, as to be unable to foreclose in many cases, without the help of forged documents and perjured affidavits.

But new loans? The big banks had given up on that. They no longer did real underwriting. And anyway, who could qualify? Businesses mostly had no investment plans. And homeowners were, to an increasing degree, upside-down on their mortgages and therefore unqualified to refinance.

These facts were obvious to everybody, fueling rage at “bailouts.” They also underlie the economy’s failure to create jobs. What usually happens (and did, for example, in 1994 - 2000) is that credit growth takes over from Keynesian fiscal expansion. Armed with credit, businesses expand, and with higher incomes, public deficits decline. This cannot happen if the financial sector isn’t working.

The GOP is making noise about more robust financial oversight of Fannie and Freddie.  That's a positive development, but unfortunately, there are no signs they are ready to take on the banking oligarchy.  I don't see any real attempts to deal with the moral hazard accompanying the bailouts, either.  Alan Greenspan has finally joined the chorus of pointing out moral hazard plus fraud has become an issue we need to deal with in the banking sector. My own view of the causes of the economic crisis is here, which came about as a a confluence of several factors. It spears some sacred cows on both the Left and Right but ultimately, crony capitalism emerges as the common theme.

Political Musings of the Day

I took a hiatus due to work related demands but I'm back.  The midterm election results have been analyzed ad naseum.  The results were about what I expected, and frankly, we need a check on a larger and increasingly intrusive government, even if it means gridlock.  So here are some cartoons to enjoy for now (via Townhall and About.com):

 

Chart of the Day

Obamacare bends the cost curve...up. Completely predictable given all the mandates on insurers. The WSJ explains: (H/T:  Hotair)

Regardless of the health law, national health spending has been rising in recent years and economists expect that to continue. In February, the federal Centers for Medicare and Medicaid Services projected that overall national health spending would increase an average of 6.1% a year over the next decade.

The center's economists recalculated the numbers in light of the health bill and now project that the increase will average 6.3% a year, according to a report in the journal Health Affairs. Total U.S. health spending will reach $4.6 trillion by 2019, accounting for nearly one of every five U.S. dollars spent, the report says.

"The overall net impact is moderate," said lead author Andrea Sisko, an economist at the Medicare agency. "The underlying impacts on coverage and financing are more pronounced."

The Role of Religion in Democracy

Christopher Hitchens has an illuminating column in Slate protesting the "untrammeled" free exercise of religion. As a Christian, I don't share his hostility to organized religion, but he is in a sense correct in pointing out that religious freedom cannot be used to justify intolerance or radically different cultural practices that subvert one's allegiance to the Constitution beneath that of their church.  He takes on many  denominations: Jews, Christians, the Catholic Church, Mormons, Scientology. He saves Islam for last as he mocks the ridiculous comparison some Muslims draw between folks who protest the ground zero mosque, and those of bigoted anti-Semites:

Now to Islam. It is, first, a religion that makes very large claims for itself, purporting to be the last and final word of God and expressing an ambition to become the world's only religion. Some of its adherents follow or advocate the practice of plural marriage, forced marriage, female circumcision, compulsory veiling of women, and censorship of non-Muslim magazines and media. Islam's teachings generally exhibit suspicion of the very idea of church-state separation. Other teachings, depending on context, can be held to exhibit a very strong dislike of other religions, as well as of heretical forms of Islam. Muslims in America, including members of the armed forces, have already been found willing to respond to orders issued by foreign terrorist organizations. Most disturbingly, no authority within the faith appears to have the power to rule decisively that such practices, or such teachings, or such actions, are definitely and utterly in conflict with the precepts of the religion itself. 

Reactions from even "moderate" Muslims to criticism are not uniformly reassuring. "Some of what people are saying in this mosque controversy is very similar to what German media was saying about Jews in the 1920s and 1930s," Imam Abdullah Antepli, Muslim chaplain at Duke University, told the New York Times. Yes, we all recall the Jewish suicide bombers of that period, as we recall the Jewish yells for holy war, the Jewish demands for the veiling of women and the stoning of homosexuals, and the Jewish burning of newspapers that published cartoons they did not like. What is needed from the supporters of this very confident faith is more self-criticism and less self-pity and self-righteousness.

Those who wish that there would be no mosques in America have already lost the argument: Globalization, no less than the promise of American liberty, mandates that the United States will have a Muslim population of some size. The only question, then, is what kind, or rather kinds, of Islam it will follow. There's an excellent chance of a healthy pluralist outcome, but it's very unlikely that this can happen unless, as with their predecessors on these shores, Muslims are compelled to abandon certain presumptions that are exclusive to themselves. The taming and domestication of religion is one of the unceasing chores of civilization. Those who pretend that we can skip this stage in the present case are deluding themselves and asking for trouble not just in the future but in the immediate present.

This is why multiculturalists are deluding themselves in believing many cultures can wholly retain their autonomy yet still peacefully co-exist in a democratic society. One only needs to look at the angry  nativism rising in Europe, a frustrated response to the the carving out of separate Islamic sectors in society, to see how such a policy has balkanized those countries.  Different cultures have thrived in America only because they assimilated themselves to the enduring values of America being founded on a civic ideal; of a nation-state not built on race, ethnicity, or religion, but instead, on dedication to a limited government where individuals participate in self-governance, and respect the rule of law which applies equally to all.  Immigrants to America retain some of their culture; they speak their own languages, create their own communities, and practice some of their customs in both the private and public sphere. But as Hitchens notes, just as we demanded that the Mormons in Utah give up polygamy before joining the union, we must also ask Muslims to do the same to be part of western society.  So in a sense, we do ask they give up some of their culture to be part of the ideal of America.  

Was Iraq Worth It?

As Operation New Dawn unfolds in Iraq, Anne Applebaum asks the pivotal question. Like Applebaum, I supported the Iraq war, the surge, and believe it became an integral part to the war on terror.  However, she rightfully captures our actions came at some high costs to include:

America's reputation for effectiveness. The victory was swift, but the occupation was chaotic. The insurgency appeared to take Washington by surprise, and no wonder: The Pentagon was squabbling with the State Department, the soldiers had no instructions and didn't speak the language. The overall impression, in Iraq and everywhere else, was of American incompetence—and, after Abu Ghraib, of stupidity and cruelty as well. Two years ago, a poll showed that vast numbers of our closest friends felt that the "mismanagement" of Iraq—not the "invasion" of Iraq—was the biggest stumbling block for allies of the United States.

No wonder, then, that America's ability to organize a coalition has also suffered. Participation in the Iraq war cost Tony Blair his reputation and the Spanish government an election. After an initial surge of support, the Iraqi occupation proved unpopular even in countries where America is popular, such as Italy and Poland. Almost no country that participated in the conflict derived any economic or diplomatic benefits from doing so. None received special U.S. favors—not even Georgia, which sent 2,000 soldiers and received precisely zero U.S. support during its military conflict with Russia.
It will be a lot harder to get any of the "coalition of the willing" to fight with us again. Indeed, "Iraq" is part of the reason why there is so little enthusiasm for Afghanistan and why it is so difficult to put organized pressure on Iran.

Another victim of the conflict was America's ability to influence the Middle East. Admittedly, we were never as good at this as we would like to be, but the chaos in Iraq has clearly strengthened Iran. It has had no positive impact on the Israeli-Palestinian conflict. By helping raise the price of oil for a few years—this was supposed to be a "war for oil"; remember that?—it has also strengthened Saudi Arabia, the regime that produced 15 of the 19 Sept. 11 hijackers.

Of course, the high oil price also strengthened Russia and Venezuela—not that anyone has much noticed—because another casualty of the Iraq war has been America's ability to think like a global power. Even if we eventually pull out of Iraq altogether, we will have been bogged down in that country for the decade that also saw China's rise to real world-power status, Latin America's drift to the far left, and Russia's successful use of pipeline politics to divide Europe—all trends that commanded hardly any attention from the Bush administration and so far even less from Obama.

In the end, the jury is still out on this.  We cannot leave Iraq anytime soon if we have any hopes of containing Iran. Already, the Iraqi Defense Minister is making statements that the US needs to maintain a presence in Iraq until at least 2016. It's still unclear whether Turkey, the one regional power that can counter Iran, would be willing to do so, with the Islamists gaining political power. Despite the grand bargain wishful thinking of the Obama administration, the Iranians have little reason to enter into comprehensive diplomatic negotiation with us, that is, unless they truly believe we will strike them. And not just their nuclear facilities--but take away their ability to project offensive power in the region, and cripple their hegemonic ambitions. But I simply don't believe it's in the President's DNA to launch a new war.  An if they assess that as well, they just have to wait for our withdrawal out of both Iraq and Afghanistan.

If our diplomacy is adept enough though, a stable Iraq that is not betrothed to Iran, or permanently Lebanon-ized in sectarian factions, will be a remarkable force for political and cultural reform in the Middle East for decades. If the earlier outcomes prevail though, the whole project will have to be deemed a failure. Time will only tell.

The Conservative Revival

Peter Berkowitz in the WSJ pens an eloquent articulation of conservatism, highlighting its strengths that progressives often ignore: 

Progressives like to believe that conservatism's task is exclusively negative—resisting the centralizing and expansionist tendency of democratic government. And that is a large part of the conservative mission. Progressives see nothing in this but hard-hearted indifference to inequality and misfortune, but that is a misreading.

What conservatism does is ask the question avoided by progressive promises: at what expense? In the aftermath of the global economic crisis of 2008, Western liberal democracies have been increasingly forced to come to grips with their propensity to live beyond their means.

It is always the task for conservatives to insist that money does not grow on trees, that government programs must be paid for, and that promising unaffordable benefits is reckless, unjust and a long-term threat to maintaining free institutions.

But conservatives also combat government expansion and centralization because it can undermine the virtues upon which a free society depends. Big government tends to crowd out self-government—producing sluggish, selfish and small-minded citizens, depriving individuals of opportunities to manage their private lives and discouraging them from cooperating with fellow citizens to govern their neighborhoods, towns, cities and states.

It really is a must read-all piece, for Berkowitz reminds conservatives they must accept the political realities of the New Deal, and demonstrate how they will dedicate government to "effectively discharge" duties of reigniting the economy, making health care more affordable, and getting people back to work. He points out to conservatives that free markets and liberty, for all their benefits, can also bring instability and erosion of respect for tradition. When conservatives recognize these disruptions can have profound impacts to people's lives, and convey to voters they want to preserve a safety net to help one navigate capitalism's potholes while preserving its best effects--innovation, a continual raise in standards of living, and most of all--opportunity for the American dream, voters will gravitate back to these principles. It's a timeless message that reminds us that economic freedom is inextricably entwined with individual freedom, and an attractive reflection of traditional American values that imparts that with freedom comes responsibility.

Chart of the Day: Housing Price Trends Since 1890

From the Atlantic's Daniel Indiviglio:

Conclusion: Indiviglio believes home prices may drop by another 25%:

This is a pretty fascinating picture. First, it shows just how incredibly absurd the housing boom was. Beginning in the 1940s, inflation-adjusted homes prices have settled around the 110 value according to the Case-Shiller index. Yet, the index value exceeded 200 in 2006. Prices began a descent when housing collapsed, but as of May the index remained well above the natural value of 110. 

Eyeing the chart, the value looks to have hit around 147 in May. For it to drop back down to 110, home prices would have to decline another 25%. That's still a pretty long way to fall.

More homebuyer tax credits are not going to solve this.