Gut Check

By Steven Pearlstein
You're angry. I'm angry. House Republicans are angry. We're all angry at having to put up huge amounts of cash to rescue a financial system because a lot of very rich people rolled the dice with other people's money and lost.

Now let me tell you something very simple and very important: You can try to prevent a financial meltdown or you can teach Wall Street a lesson, but you can't do both at the same time.

So which will it be?

You say you want straight talk -- no spin, no bull, no sugar-coating. Okay, here goes.

First, stop fixating on Wall Street executives -- there will be time to deal with them later. Even if you clawed back every dime they made over the past decade, it would come to several billions of dollars. That's a rounding error compared with the size of the financial problem we're facing here.

Second, we need to act quickly. The financial situation is now downright scary. Don't look at the stock market -- that's not where the problem is. The problem is in the credit markets, which are quickly freezing. I won't bore you with technical indicators like Libor and Treasury swap spreads, but if you talk to people who work these markets every day, as I have, they report that the money markets are in worse shape than they were last August, or even during the currency crises of 1998.

Banks and big corporations and even money-market funds are hoarding cash, refusing to lend it out for a day or a week or a month. Even the best companies are having trouble floating bonds at reasonable rates. And the shadow banking system -- the market in asset-backed securities that ultimately supplies the capital for most home loans, car loans, college loans -- is almost completely shut down.

People are so nervous, and there is so much distrust, that all it would take is one more hit to trigger the modern-day equivalent of a nationwide bank run. Financial institutions would fail, part of your savings would be wiped out, jobs would be lost and a lot of economic activity would grind to a halt. Such a debacle would cost us a lot more than $700 billion.

Third, the latest proposal hammered out between the Treasury and Democratic leaders won't cost anywhere near $700 billion unless we get a 1930s-like Depression, in which case we'll have much bigger problems to worry about. Depending on how the program is managed, and how things turn out with the economy and the housing market, the best guess is that the government could wind up either losing or making a couple of hundred billion dollars. The final tab is simply unknowable -- it depends on how much the government winds up paying for the securities it buys from banks and other financial institutions, and what price it resells them at after the market and the economy recover.

Fourth, this isn't primarily a bailout for Wall Street -- it's an attempt to jump-start certain credit markets that have broken to the point that nobody is buying, driving down prices to the point where they are well below any reasonable estimate of their long-term economic value.

The basic idea is to use special auctions to recreate a market for these securities with many competing sellers and one buyer (the Treasury), so that a credible "market" price can be established. If that price turns out to be below what those securities are now valued at on the banks' balance sheets, then banks will have to take the loss. If the price turns out to be higher, then banks may be able to record gains. The point isn't to bail out institutions that have made bad bets and suffered credit losses, but to provide a buyer of last resort so the market can begin pricing again.

Are there other ways to structure this market rescue? Sure. You could try to deal with the underlying problem by taking additional measures to prevent foreclosures. Or you could create a mechanism for the government to invest fresh capital in troubled banks, in exchange for stock. In fact, both approaches are possible and envisioned under the administration proposal now under discussion. But neither, by itself, is likely to quickly restore confidence in the financial system and relieve the current crisis.

My own suggestion would be to structure the rescue around a new government-owned corporation that would be capitalized, initially, with $100 billion in taxpayer funds. The company would use auctions or other mechanisms to buy the troubled securities from banks and other regulated institutions, but instead of paying for them in cash, the government would swap them for an equal number of preferred shares in the new company. (Preferred shares are something of a cross between a bond and common stock.) Those preferred shares would pay a government-guaranteed dividend and could be redeemed by the government at any time. But they could also be used by banks to augment the capital they are required to maintain by regulators.

The beauty of this arrangement is that, rather than protecting taxpayers by having the government take an ownership stake in hundreds of privately owned banks, it would be the banks that would own a stake of the government's rescue vehicle. The government would suffer the first $100 billion in losses from buying and selling the asset-backed securities, but any further losses would be borne by the other shareholders. And should the rescue effort actually wind up making a profit, then the banks would share in that as well.

I mention this idea to make a final point -- namely that it is important to give the Treasury secretary and the people he hires a good deal of flexibility in designing and experimenting with the mechanics of this rescue. The reality is that these guys will be operating in uncharted territory, making things up as they go along. That means there are no assurances that any particular approach will work and no assurances that this will be the final solution. It also means that, just as we entrust generals to fight a war, we are going to have to trust the Treasury to find a way out of this crisis.

It doesn’t add up

source : articles.latimes.com
Evolution accounts for a lot of our strange ideas about finances.

Would you rather earn $50,000 a year while other people make $25,000, or would you rather earn $100,000 a year while other people get $250,000? Assume for the moment that prices of goods and services will stay the same.

Surprisingly – stunningly, in fact – research shows that the majority of people select the first option; they would rather make twice as much as others even if that meant earning half as much as they could otherwise have. How irrational is that?

This result is one among thousands of experiments in behavioral economics, neuroeconomics and evolutionary economics conclusively demonstrating that we are every bit as irrational when it comes to money as we are in most other aspects of our lives. In this case, relative social ranking trumps absolute financial status. Here’s a related thought experiment. Would you rather be A or B?

A is waiting in line at a movie theater. When he gets to the ticket window, he is told that as he is the 100,000th customer of the theater, he has just won $100.

B is waiting in line at a different theater. The man in front of him wins $1,000 for being the 1-millionth customer of the theater. Mr. B wins $150.

Amazingly, most people said that they would prefer to be A. In other words, they would rather forgo $50 in order to alleviate the feeling of regret that comes with not winning the thousand bucks. Essentially, they were willing to pay $50 for regret therapy.

Regret falls under a psychological effect known as loss aversion. Research shows that before we risk an investment, we need to feel assured that the potential gain is twice what the possible loss might be because a loss feels twice as bad as a gain feels good. That’s weird and irrational, but it’s the way it is.

Human as it sounds, loss aversion appears to be a trait we’ve inherited genetically because it is found in other primates, such as capuchin monkeys. In a 2006 experiment, these small primates were given 12 tokens that they were allowed to trade with the experimenters for either apple slices or grapes. In a preliminary trial, the monkeys were given the opportunity to trade tokens with one experimenter for a grape and with another experimenter for apple slices. One capuchin monkey in the experiment, for example, traded seven tokens for grapes and five tokens for apple slices. A baseline like this was established for each monkey so that the scientists knew each monkey’s preferences.

The experimenters then changed the conditions. In a second trial, the monkeys were given additional tokens to trade for food, only to discover that the price of one of the food items had doubled. According to the law of supply and demand, the monkeys should now purchase more of the relatively cheap food and less of the relatively expensive food, and that is precisely what they did. So far, so rational. But in another trial in which the experimental conditions were manipulated in such a way that the monkeys had a choice of a 50% chance of a bonus or a 50% chance of a loss, the monkeys were twice as averse to the loss as they were motivated by the gain.

Remarkable! Monkeys show the same sensitivity to changes in supply and demand and prices as people do, as well as displaying one of the most powerful effects in all of human behavior: loss aversion. It is extremely unlikely that this common trait would have evolved independently and in parallel between multiple primate species at different times and different places around the world. Instead, there is an early evolutionary origin for such preferences and biases, and these traits evolved in a common ancestor to monkeys, apes and humans and was then passed down through the generations.

If there are behavioral analogies between humans and other primates, the underlying brain mechanism driving the choice preferences most certainly dates back to a common ancestor more than 10 million years ago. Think about that: Millions of years ago, the psychology of relative social ranking, supply and demand and economic loss aversion evolved in the earliest primate traders.

This research goes a long way toward debunking one of the biggest myths in all of psychology and economics, known as ”Homo economicus.” This is the theory that “economic man” is rational, self-maximizing and efficient in making choices. But why should this be so? Given what we now know about how irrational and emotional people are in all other aspects of life, why would we suddenly become rational and logical when shopping or investing?

Consider one more experimental example to prove the point: the ultimatum game. You are given $100 to split between yourself and your game partner. Whatever division of the money you propose, if your partner accepts it, you each get to keep your share. If, however, your partner rejects it, neither of you gets any money.

How much should you offer? Why not suggest a $90-$10 split? If your game partner is a rational, self-interested money-maximizer – the very embodiment of Homo economicus – he isn’t going to turn down a free 10 bucks, is he? He is. Research shows that proposals that offer much less than a $70-$30 split are usually rejected.

Why? Because they aren’t fair. Says who? Says the moral emotion of “reciprocal altruism,” which evolved over the Paleolithic eons to demand fairness on the part of our potential exchange partners. “I’ll scratch your back if you’ll scratch mine” only works if I know you will respond with something approaching parity. The moral sense of fairness is hard-wired into our brains and is an emotion shared by most people and primates tested for it, including people from non-Western cultures and those living close to how our Paleolithic ancestors lived.

When it comes to money, as in most other aspects of life, reason and rationality are trumped by emotions and feelings.

Michael Shermer is the publisher of Skeptic magazine, a columnist for Scientific American and the author of “The Mind of the Market: Compassionate Apes, Competitive Humans, and Lessons from Evolutionary Economics.”

Fighting Off Depression

By Paul Krugman

“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

Fred R. Conrad/The New York Times

Paul Krugman

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out.

We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologized to Friedman on his institution’s behalf: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”

It turns out, however, that preventing depressions isn’t that easy after all. Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.

Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.

But these plans may turn out to be a hard sell.

News reports say that Democrats hope to pass an economic plan with broad bipartisan support. Good luck with that.

In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years.

More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.

The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.

This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment “which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles.” What gets lost in such discussions is the key argument for economic stimulus — namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.

All of this leaves me concerned about the prospects for the Obama plan. I’m sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr. Obama is right: We really do need swift, bold action.

Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.

So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?

An output crisis: Manufacturing lags all major economic sectors in growth

By Frank O Smith

A recent study of the performance of economies of eight industrial “battleground” states in the 2008 elections reveals those business sectors most affected by U.S. trade policies grew the slowest over the last 10 years. Manufacturing—commonly thought to be central to the formulation of trade policy—was in fact the loss leader, according to the U.S. Business and Industry Council’s (USBIC) report, released in September.

The eight states studied were Illinois, Indiana, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, and Wisconsin.

“U.S. domestic manufacturing has not only been suffering from an employment crisis that gained so much publicity in the campaign, but also from an output crisis,” says Alan Tonelson, USBIC research fellow and author of the report, Globalization and the 2008 Battlegrounds: How U.S. Trade Policies are Weakening the Economies of Key Industrial States.

Say Tonelson, “Though manufacturing output has gone up—26 percent cumulative growth over the 10-year period—that’s pretty miserable compared with overall GDP grow in all sectors of 66 percent.”

During the period, manufacturing’s contribution to economies of all eight states—as well as to the nation’s—shrank as a percentage of the total economy.

“In our view the key change followed the passing of NAFTA in the 1990s—the first U.S. trade agreement that was an outsourcing deal,” says Tonelson. “Following that, it was China being admitted to the World Trade Organization—which gave them protection from U.S. unilateral action against their predatory trade practices. Washington’s response has been very ineffectual against those practices.”

According to the report, “Trade is widely considered to be a major plus for the U.S. economy and especially for economic growth… but it seems clear that current U.S. trade policies are failing the economies of these politically critical, manufacturing-heavy states—and the U.S. economy as a whole.”

Illinois, cited as a “typical example of a state where growth has been undermined by trade and globalization policies,” saw its share of contribution from manufacturing shrink from 16.10 percent to 12.57 percent.

“The affect of U.S. trade policy on manufacturing in Illinois—in a word—has been devastating. We lost several important customers within months of NAFTA being signed,” says Alan Petrucci, founder of BA Die Mold Inc., a small manufacturer of injection molds based in Aurora, Ill. “Our sales are a third of what they were.”

The mainstay of BA Die Mold’s business used to be automotive and telecommunications, but Petrucci has retooled his business due to diminished business from those industries. “We switched gears and started focusing on specialty products—especially threaded parts for water filtration connections, medical products, and fiber optic connectors.”

Petrucci lost a major customer that moved its entire operation to Mexico immediately after NAFTA was signed.

“It was a bitter pill to swallow," he says. “We probably did a million dollars a year in business with them. We went through some trying times.”

Though several other small manufacturers in the area have since closed shop, Petrucci invested in new automation that enabled him to run 24/7 with significantly reduced labor, enabling him to stay competitive and stay in business.

The report grouped national and state economies into three super categories: 1) most heavily exposed to global challenges and opportunities (manufacturing, agriculture, and mining); 2) partly exposed (finance, retail trade, professional and technical services, hospitality, and IT services); and 3) virtually unexposed (government, health and welfare, construction, real estate, and corporate management services).

Based on data from the U.S. Commerce Department’s Bureau of Economic Analysis, manufacturing saw the least growth by far, lagging agriculture, the second-worst performing sector by nearly 20 percentage points.

OPINION: Americans $1 Trillion in Credit Card Debt

By Jose Garcia

At the beginning of the new year the Federal Reserve announced that in November of 2008 credit card debt totaled $973.5 billion--a decrease of 3.4 percent from October 2008. While that may sound like some good news for consumers, the numbers fail to reflect the debt that has already been written off the books and landed into the debt collection market. The third quarter of 2008 reported the highest credit card write-offs since 2002. While not all this debt will be passed onto debt collectors, enough of it will be snapped up by debt junk buyers to expose consumers to the unscrupulous and minimally regulated world of debt collection.

Credit card companies sell their bad debt--debt they have already written off the books--to debt buyers for just pennies on the dollar. The debt buyers then break up the debt into smaller chunks and resell them to collection agencies who try to collect on the old debts for more than they paid.

The growing profitability from debt collection--from the publicly traded firms who buy debt to the local collection agents who hound people at home--has resulted in the creation of an overly aggressive industry with questionable business tactics. The latest numbers from the Federal Trade Commission (FTC) show that in 2007 consumers filed 70,951 complaints against debt collectors up from 13,950 in 2000. The bulk of the complaints were for the misrepresentation of the amount, nature or legal status of the debt by demanding a larger payment than was permitted by law--a violation of the Fair Debt Collection Practices Act (FDCPA).

Debt collectors are not just interrupting families' dinner anymore. Stories abound of calls made to family members, neighbors and even employers in an attempt to track down their target. Worse are the stories of Americans who have been harassed for the repayment of debt that they never even owed.

Consumers have fallen victim to these tactics because consumer protections from debt collection are severely limited. According to a recent article in the New York Times, changes to the debt repayment industry should begin before the collection process. Rather than the current model of individually working with creditors, Financial Services Roundtable, one of the industry's biggest lobbyists, and the Consumer Federation of America recently proposed a credit card loan modification program. As part of the plan, lenders would have to forgive 40 percent of what was owed by the borrower over five years. The benefit to the industry is less to write off while consumers would be able to pay off their debt.

The hard economic times befalling American families calls for a rethinking of fearless competition and greed as standards for determine economic policy. As we just witnessed in the aftermath of the mortgage debacle, little regard for the consumer is an unsustainable guiding principle both for families and the economy. Reacting to this new economic reality, credit card companies have begun to make it easier for borrowers to repay their debt. But in a deregulated market, such as the one we still have today, they are free to do as they please in the realm of debt repayment. If we should walk away with anything from the economic bust of 2008 it is that consumer protections should not only be a priority for regulators but consumer protection should be a guiding principle for market behavior and corporate pricing.

Forbes Opinion Article: Massive Dollar Devaluation will resolve economic woes

Dollar Devaluation To Fix The Great Recession
by Frank Beck
A quick dollar devaluation would work wonders for submerged borrowers. Don't kid yourself: It could happen.

What began as government social tinkering--with implied threats to banks and mortgage companies to extend home loans to even the most marginal of borrowers--led to a greed-blinded mortgage banking business and the meltdown we are experiencing today. Now we are asked by the same congressional leadership to go along with taxpayer-funded bailouts of the very banksters who, while making millions, created the mess.

Despite the trillions of dollars already expended recapitalizing banks, there is very little, if any, progress to show. Will a few trillion more do the trick? That seems to be the consensus among Congress and the banks. "They are simply too big to let fail," or are they really just too big to save? We can go back to "Plan A" and buy the toxic assets. If so, at what price? What if a few trillion does not remove enough toxic waste from the system or doesn't get credit flowing again and the economy bustling?

Some argue that it is time to help Main Street, not Wall Street. So, we should "forgive" some of the mortgages for those who are 90 days or more behind on their payments. Have you quit paying yet?

If we are to save bankers, shouldn't we at least distinguish between those who possess the intelligence to renegotiate their loans to workable terms? If we are to save homeowners, should not we first define the term "homeowner?" Perhaps it is not only someone who agreed to and signed a mortgage and is living in a house. Just perhaps, it should also include the stipulation that this individual paid some amount of a down payment: 20%, 5%, a dollar. I can tell you who is not a homeowner. It is not someone who paid zero down and ridiculously low payments for two years; that, my friend, is a renter.

The problem with all these ideas is the money is only directed at those who created or benefited from the problems. Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside?

Here it is. Stand back. World currencies should be devalued overnight.

It can be done on a country-by-country basis, but a coordinated devaluation would work best. A devaluation of 30% would raise the dollar value of all assets by 43%. A $200,000 home with a $230,000 mortgage would become a $286,000 home with the same mortgage. Presto! The homeowner who was $30,000 upside-down now has $56,000 equity and a good reason to make his payments. Both the homeowner and the bank are immediately better-off.

It would even benefit those who purchased their homes responsibly, as the value of their homes would rise by the same 43%. The current course of throwing trillions of dollars at the culprits is without any benefit to those who acted responsibly.

Admittedly, this is not a solution without the price of inflation, but the inflation would be short-lived. The current course will ultimately cause massive inflation that cannot be accurately estimated, and it may not even solve the problem.

Currency devaluation proved effective in ending the Great Depression. In 1930, Australia was the first to leave the gold standard, immediately devaluing the aussie by more than 40%, and the economy quickly recovered. New Zealand and Japan followed suit in 1931, each with the same result. By 1933, at least nine major economies had enacted a devaluation of their currency by removing it from the gold standard, all of whom emerged from depression.

In 1933, through a series of gold-related acts, culminating in the Gold Reserve Act of 1934, America realized a dollar devaluation of 41% when the price of gold was adjusted from $20.67 per ounce of gold to $35 per ounce. America, like the others before, had its economy bottom and recover as a result. Of the larger economies, only the French and Italians continued to adhere to the gold standard, and their economies remained depressed until finally, in 1936, they allowed their currencies to devalue, and their economies then recovered.

I see no reason to believe we would have any different result today. Only debt would remain the same. All other assets would immediately be worth more (in nominal terms), whether it be a home, a stock, an ounce of gold or a used car. Bank balance sheets would immediately improve, as many loans would be moved from non-performing to performing status. Banks would be paid with devalued dollars, but they made millions creating the mess. The current use of government stimulus through the creation of dollars will certainly lead to a similar or worse devaluation, so this is likely a net gain for the banks too.

Businesses would instantly become more profitable, and workers' pay would increase, allowing each to pay their debts more easily, even while sending more tax dollars to Washington, without raising tax rates. As assets are sold, the capital gains would send even more taxes to Washington. States and locales would receive more revenue via sales and property tax, improving the fiscal condition of school districts and local governments. The national debt would effectively be reduced by the same 25%, giving future generations a chance. Combine the move with a congressional pledge to only raise the budget by half the devaluation, and we could be on track for a balanced budget and paying down the debt.

As the old Saturday Night Live skit said, "Think of inflation as your friend. Wouldn't you like to wear $1,000 suits and smoke $100 cigars?" I know I would.

Frank Beck is Chief Investment Manager of Capital Financial Group and ProPlayer Investing in Austin, Texas, an affiliate of Partnervest Securities of Santa Barbara, Calif. Mr. Beck may be reached at Frank@FrankBeck.com.

Leading article: Mr Clegg makes his mark

source : independent.co.uk

Nick Clegg celebrates his first anniversary as leader of the Liberal Democrats today – and he does have cause for celebration, however muted. After a closely-fought leadership contest, Mr Clegg has established himself, unchallenged, at the head of his party. He has survived several setbacks, not least the contentious walk-out of his MPs over the refusal to allow a vote on Britain's future in the European Union, and most recently the conversation, overheard by a journalist, in which he criticised some of his closest colleagues. In between came much rethinking and a thorough overhaul of the party's economic policies. He enters his second year as leader stronger by some way than he began his first.

The greatest difficulty he has faced, and one he acknowledges with some frustration, is in projecting the policies, even the presence, of the third party at a time when there are two strong main parties in the Commons and a global economic crisis dominates the news. Carving out a distinct identity has been difficult, but his greater difficulty has been to make his voice heard above the two-party hubbub.

In one way, his cause – and his party's appeal – have been greatly enhanced by the authority of his deputy, Vince Cable. As acting leader, he was the right man at the right time and put the party back on the political map. A heavyweight on economic issues, Mr Cable's judgement has repeatedly been vindicated. Solutions he advocates have a way of reappearing as Government or Opposition policy a few months or even weeks later. The trouble is that Mr Cable, through no fault of his own, sometimes seems to be regarded as an economic authority first and a Liberal Democrat second. So while the party remains more forward-thinking than others – especially on ways to help over-mortgaged home-owners and staying "green" in austere times – it has not received as much credit as it deserves.

Still, the party's position in the polls has held up better than might have been expected. And there are signs that Liberal Democrats may be benefiting a little from the dip in the fortunes of the Conservatives. Overall, Mr Clegg has laid a promising foundation. We look forward to his second year.

Howard's track record as second-longest serving PM

By Peter McMahon

John Winston Howard recently became the second longest serving prime minister in the history of Australia and (much to Peter Costello’s chagrin) he looks like being PM for some time yet. This longevity is an undoubted achievement, especially given that no one is ever likely to surpass the record of Sir Robert Menzies who was leader for 23 years.

But what has John Howard been like as national leader?

Before we examine his premiership, a few comments on the quality of his achievement. Menzies led at a time of unprecedented, sustained prosperity, a time when governments could hardly fail given the long period of economic growth resulting from post-war reconstruction. It is also arguable that Robert James Hawke might still be number two if the Federal Parliamentary Labor Party had not replaced their most successful prime minister (at least in terms of longevity) with the unpopular ex-treasurer Paul Keating. Indeed, Labor might have remained in power to benefit from the economic reforms it put in place in the 1980s and Howard would not have got his chance.

But now let us consider Howard’s record as the most powerful man in Australia. With (hitherto) unchallenged leadership of the Liberal Party and now the luxury of a Senate majority, Howard stands as one of the least fettered leaders in our national history.

Howard’s great achievement is without doubt the national economy. Never mind that the bread and butter economic issues are increasingly determined outside this country due to globalisation, the Howard government has managed to maintain a very good economic score card. That is, according to the narrow criteria we use to assess economic well being.

Of course, any nation with the social and political stability of Australia, with the substantial economic benefits that this brings, with a highly educated population, with one of the best communications, transport, legal and educational infrastructures in the world (although it is degrading fast), with abundant natural resources and located right next to the most expansionary markets in the world, should be doing okay.

Certainly, given these conditions, any government that privileges economic growth over all other considerations (such as social justice, environmental sustainability, cultural diversity, amenable labour relations, occupational health and safety, maintaining the general health and educational infrastructure, and maintaining the material infrastructure) is going to get results. And since the mass media and the corporate sector usually assess national well-being in terms of the usual limited economic indicators (while, for instance, unemployment and under-employment rates are rigged by category shifting), it is no wonder that Howard is so highly feted by these same vested interests.

In a real sense, Howard has pursued the same basic agenda of economic transformation originating in the US and Britain in the 1970s. Indeed, the argument can be made that Howard has done little more than implement the political strategy worked out in right wing corporate think tanks overseas, strategies essentially designed to reassert the interests of big business and rein in the welfare state.

And what about the rest of the national interest, has Howard been as effective there?

Perhaps not.

First, Howard has singularly failed to make any genuine improvements in regard to that running sore, the predicament of Indigenous Australians. Although he acknowledged this failure after the last but one election, all he has done since is to oversee demolition of the little structural power Indigenous Australians had in ATSIC.

Second, in regard to international relations Howard has shifted away from the more balanced reliance on international collective action, regional alliances and strong relations with the global superpower (once Britain, now the US). Instead, he has put Australia in the pocket of the US, now led by the most extremist government in decades, in regard to both military-diplomatic and economic relations. As a result, he has led Australia into an unfinished illegal war in Iraq and aligns us with aggressive Bush administration policies elsewhere.

hird, Howard has followed the Bush Government’s example and refused to support the Kyoto Protocol, only serious attempt to ameliorate the impact of climate change. He has similarly failed to show any leadership in other environmental issues, such as bio-diversity, the water shortage or salinity.

Fourth, Howard shows no interest in Australian culture being swamped by overseas (especially American) cultural products. Indeed, he seems bent on removing any barriers to American influence, especially in relation to the highly contentious but important question of intellectual property. In fact he has never shown any interest in national cultural life, excepting in the already over-supported realm of sport.

Fifth, Howard has undermined the credibility of the office of Prime Minister, national government, parliament and politicians generally through his dissembling, outright lying and refusal to maintain high standards of behaviour by himself and his colleagues. He has been arguably the most cynical exponent of opportunistic wedge politics in our short history as a Federation, a strategy that will inevitably weaken party and parliamentary politics itself.

Sixth, Howard has signally failed to support one of our most definite national successes, multiculturalism. Instead he clings to a 1950’s version of culturally conservative white Australia.

Seventh, Howard’s harsh treatment of refugees has established new lows in regard to basic human rights.

Eighth, using the issues of industrial relations and GST money to states, Howard has overseen a sustained attack on the ideals and practice of federalism. Federalism is one of the core concepts of the Australian constitution, and changing it should only follow full and open public debate.

These are major changes, and looking back from the future, Howard’s time may well be seen as a crucial period when Australia changed from one kind of country to another. From a socially cohesive, economically healthy country proud of its unique cultural identity and with a high standing in international affairs, to one reflecting the most conservative American political, economic, cultural and social values.

“Was there another way for Australia?” historians may well ponder. Perhaps one with less economic growth but more social cohesion, more environmental sustainability, more open collaboration with the wider international community?

“Yes, there is always another way”, they might conclude, but it would take a different kind of leadership to that provided by the long-lasting John Winston Howard.

Don't Blame Capitalism

By Peter Schiff
Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
For the political left, which has long championed the need for such limits, this crisis is the opportunity of a lifetime.

Absent from such conclusions is the central role the government played in creating the crisis. Yes, many Wall Street leaders were irresponsible, and they should pay. But they were playing the distorted hand dealt them by government policies. Our leaders irrationally promoted home-buying, discouraged savings, and recklessly encouraged borrowing and lending, which together undermined our markets.

Just as prices in a free market are set by supply and demand, financial and real estate markets are governed by the opposing tension between greed and fear. Everyone wants to make money, but everyone is also afraid of losing what he has. Although few would ascribe their desire for prosperity to greed, it is simply a rose by another name. Greed is the elemental motivation for the economic risk-taking and hard work that are essential to a vibrant economy.

But over the past generation, government has removed the necessary counterbalance of fear from the equation. Policies enacted by the Federal Reserve, the Federal Housing Administration, Fannie Mae and Freddie Mac (which were always government entities in disguise), and others created advantages for home-buying and selling and removed disincentives for lending and borrowing. The result was a credit and real estate bubble that could only grow -- until it could grow no more.

Prominent among these wrongheaded advantages are the mortgage interest tax deduction and the exemption of real estate capital gains from taxable income. These policies create unnatural demand for home purchases and a (tax-free) incentive to speculate in real estate.

Similarly, the FHA, Fannie and Freddie were created to encourage lending by allowing primary lenders to turn their long-term risk over to the government. Absent this implicit guarantee, lenders would probably have been much more conservative in approving borrowers and setting interest terms, and in requiring documentation of incomes and higher down payments. Market forces would have kept out unqualified buyers and prevented home-price appreciation from exceeding the growth in household income.

Interest rates contributed the most to creating the housing boom. After the dot-com crash and the slowdown following the attacks of Sept. 11, 2001, the Federal Reserve took extraordinary steps to prevent a shallow recession from deepening. By slashing interest rates to 1 percent and holding them below the rate of inflation for years, the government discouraged savings and practically distributed free money.

Artificially low interest rates invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes appear affordable. Alan Greenspan himself actively encouraged home buyers to avail themselves of these seeming benefits. As monetary policy caused houses to become more expensive, it also temporarily provided buyers with the means to overpay. Cheap money gave rise to subprime mortgages and the resulting securitization wave that made these loans appear safe for investors.

And even today, as market forces deflate the credit bubble, the government is stepping in to re-inflate it. First came the Treasury's $700 billion plan to purchase mortgage assets that no one in the private sector would buy. Now it has recapitalized banks to the tune of $250 billion, guaranteeing loans between banks and fully insuring non-interest-bearing accounts. Policymakers say that absent these steps, banks would not be able to extend loans. But given our already staggering debt burden, perhaps more loans are not the answer. That's what the free market is telling us. But the government cannot abide solutions that ask for consumer sacrifice.

Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation. By refusing to allow market forces to rein in excess spending, liquidate bad investments, replenish depleted savings, fund capital investment and help workers transition from the service sector to the manufacturing sector, government is resisting the cure while exacerbating the disease.

The United States reached its economic preeminence on the strength of its free markets. So far, the economic disaster exacerbated by government policies is creating opportunities for further government interference, which will lead to bigger catastrophes. Binding the country to a tangle of socialist ideals will seal our fate as a second-rate economic power.

The writer, who was economic adviser for Ron Paul's 2008 presidential campaign, is president of Euro Pacific Capital. He is the author of "The Little Book of Bull Moves in Bear Markets."

Expediency over economic need speeds stimulus

by Bill Conerly

More harm than good. That's the sad case of the economic stimulus proposals from Gov. Ted Kulongoski and President-elect Barack Obama; they reflect political expediency rather than economic need.

The argument for public works projects or other fiscal stimulus is much weaker than our political leaders suggest. Classroom explanations of stimulative policy talk about "multipliers" of four or five -- meaning that each dollar we spend leads to four or five additional dollars in the economy. The best empirical estimates are much lower, with some economic research finding trivial net gain.

Stimulus effects are temporary. The old metaphor was "priming the pump," suggesting that a small amount of water added at the right time could lead to many gallons coming out later. The better analogy is pouring liquid into a toilet: It adds a little to the water level now but is soon flushed away.

Remember the stimulus checks that the IRS mailed out last summer? Can you feel them stimulating the economy today? No, neither can I.

The timing of fiscal stimulus is usually too late. The fastest we could expect to see any stimulus spending is the second half of this year, and even that would be pushing the bureaucracy and planners pretty hard. By that time, though, the economy will be expanding anyway.

The consensus of the economic forecasting profession, as surveyed by the Philadelphia Federal Reserve and The Wall Street Journal, is that economic growth will resume this summer. This point may need some explanation, because many of us have trouble believing that things will ever be different. (Digging out from a major snowstorm it's hard to believe that we'll be sweltering come August.)

Here's how the economic recovery will unfold. First, the economy tends to be self-correcting. If not, we would have spiraled out of control many times already. Second, the Federal Reserve has pushed a tremendous amount of stimulus into the economy. There's a long time lag between cause and effect, but monetary policy always works -- it just appears not to be working for months before it finally kicks in. Third, consumers are cutting their spending disproportionately to the decline in incomes. Eventually, the money they are saving will burn a hole in their pockets, leading to a resumption of spending.

At the state level, stimulus efforts run into another problem: leakage. A good deal of the money we spend in Oregon goes out of state, even out of country. Not only do we buy steel and cement from companies in other states, but we even buy labor from outside of Oregon. One of the engineering contracts for Oregon's bridge rebuilding program went to a Dutch company. If you want to see the stimulus, take a trip to Amsterdam.

What's the harm in trying? After all, our estimates of the timing of recovery, the multiplier and the other issues are somewhat uncertain. However, there's good reason not to go overboard. Spending decisions should result from a vigorous debate about costs and benefits. When the president or governor plays the recession card, he's trying to short-circuit that debate.

Let's talk about the most cost-effective way to solve our transportation challenges rather than railroading a spending bill through the Legislature.

Errors in stimulus decisions are damaging to our economy. Wasting resources on poorly conceived projects leaves us worse off. Borrowing money now will slow growth in the future. The recession is no justification for bad public policy.

Bill Conerly is the principal of Conerly Consulting LLC and chairman of the board of Cascade Policy Institute.

Fighting Off Depression

By Paul Krugman

“If we don’t act swiftly and boldly,” declared President-elect Barack Obama in his latest weekly address, “we could see a much deeper economic downturn that could lead to double-digit unemployment.” If you ask me, he was understating the case.

Fred R. Conrad/The New York Times

Paul Krugman

The fact is that recent economic numbers have been terrifying, not just in the United States but around the world. Manufacturing, in particular, is plunging everywhere. Banks aren’t lending; businesses and consumers aren’t spending. Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.

So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out.

We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy. In 2003, Robert Lucas of the University of Chicago, in his presidential address to the American Economic Association, declared that the “central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”

Milton Friedman, in particular, persuaded many economists that the Federal Reserve could have stopped the Depression in its tracks simply by providing banks with more liquidity, which would have prevented a sharp fall in the money supply. Ben Bernanke, the Federal Reserve chairman, famously apologized to Friedman on his institution’s behalf: “You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.”

It turns out, however, that preventing depressions isn’t that easy after all. Under Mr. Bernanke’s leadership, the Fed has been supplying liquidity like an engine crew trying to put out a five-alarm fire, and the money supply has been rising rapidly. Yet credit remains scarce, and the economy is still in free fall.

Friedman’s claim that monetary policy could have prevented the Great Depression was an attempt to refute the analysis of John Maynard Keynes, who argued that monetary policy is ineffective under depression conditions and that fiscal policy — large-scale deficit spending by the government — is needed to fight mass unemployment. The failure of monetary policy in the current crisis shows that Keynes had it right the first time. And Keynesian thinking lies behind Mr. Obama’s plans to rescue the economy.

But these plans may turn out to be a hard sell.

News reports say that Democrats hope to pass an economic plan with broad bipartisan support. Good luck with that.

In reality, the political posturing has already started, with Republican leaders setting up roadblocks to stimulus legislation while posing as the champions of careful Congressional deliberation — which is pretty rich considering their party’s behavior over the past eight years.

More broadly, after decades of declaring that government is the problem, not the solution, not to mention reviling both Keynesian economics and the New Deal, most Republicans aren’t going to accept the need for a big-spending, F.D.R.-type solution to the economic crisis.

The biggest problem facing the Obama plan, however, is likely to be the demand of many politicians for proof that the benefits of the proposed public spending justify its costs — a burden of proof never imposed on proposals for tax cuts.

This is a problem with which Keynes was familiar: giving money away, he pointed out, tends to be met with fewer objections than plans for public investment “which, because they are not wholly wasteful, tend to be judged on strict ‘business’ principles.” What gets lost in such discussions is the key argument for economic stimulus — namely, that under current conditions, a surge in public spending would employ Americans who would otherwise be unemployed and money that would otherwise be sitting idle, and put both to work producing something useful.

All of this leaves me concerned about the prospects for the Obama plan. I’m sure that Congress will pass a stimulus plan, but I worry that the plan may be delayed and/or downsized. And Mr. Obama is right: We really do need swift, bold action.

Here’s my nightmare scenario: It takes Congress months to pass a stimulus plan, and the legislation that actually emerges is too cautious. As a result, the economy plunges for most of 2009, and when the plan finally starts to kick in, it’s only enough to slow the descent, not stop it. Meanwhile, deflation is setting in, while businesses and consumers start to base their spending plans on the expectation of a permanently depressed economy — well, you can see where this is going.

So this is our moment of truth. Will we in fact do what’s necessary to prevent Great Depression II?

VOX POPULI: The same old economic story

by Alexandra Swann
Similar to environmental problems, we seem to talk about the economy in cycles of delusion and despair. In the roaring 90s, America was unrealistically jubilant about the telecommunications and computer "revolution" changing the face of global economics. Some people claimed that recessions were a thing of the past and ignored lessons learned from previous speculative bubbles.

The recent global downturn is drawing semi-hysterical comparisons to the Great Depression of the 1930s, a period that saw the abandonment of world trade, the collapse of some 4,000 commercial banks, and American unemployment soar as high as 25 per cent. Compare this to the recent collapse of approximately 21 banks and most analysts' estimates that unemployment should peak at about 7.6 per cent. The Great Depression meant millions of Americans could no longer afford food. This recession means millions of Americans might not be able to afford a big-screen television. My ironic characterization doesn't mean that the current downturn is negligible or doesn't impact the lives of many individuals. Rather, I urge criticism of emotionally laden analogies, and some reflection on the general volatility that necessarily characterizes liberal economic systems.

Consider the 1990s. That decade started off with a North American recession in 90-91, and saw three international financial crises: the British defection from the European exchange rate mechanism in 1992, Mexico's peso crisis in 1993 and 1994, and the very serious Asian financial crisis beginning in 1997. Or remember the American savings and loan crisis in the 1980s, where deregulation of thrifts helped fuel risky loans and imprudent real estate leading, directly contributing to serious banking problems at the end of the decade. (Does this sound a little familiar?) All of these crises involved tightening credit, production downturns, stock market drops, rising unemployment, and concerns about the future of the global economic system. All of these crises were weathered by the countries affected, and we averted the collapse of civilization as we know it. Yes, the U.S. is in a recession that will affect both the international economic system and its domestic prosperity. But that doesn't mean the end of days or another Great Depression.

However, there's an important lesson to be drawn from these analogies: our interdependence makes us both prosperous and vulnerable. The Great Depression's material effects directly contributed to the social chaos that nourished totalitarianism and led to the Second World War. There was devastating loss of life and new technologies allowed for unprecedented kinds of atrocities. After the war, we tried to establish international regimes out of the realization that despair, poverty, and strife will not remain confined within artificial borders. Our well-being is intimately linked to the well-being of others in our international system. The "beggar-thy-neighbour" policies adopted by countries in the downturn of the 1930s-the economic punishment of Germany, predatory currency devaluations, and protectionist trade policies like the 1931 Smoot-Hawley tariff in the U.S.-were a key part of what turned this recession into a decade-long depression. Uncertainty makes us selfish, and fear makes us fools.

Whether we like it or not, the incredible interdependence of the modern economic system means that we must be concerned about the welfare of others. We must resist the temptation to close ranks and raise walls, because the effects could be worse than higher unemployment. The lesson of this crisis is not that the U.S. is collapsing today, or tomorrow, or next year, but that countries like China, India, Russia, and Brazil are projected to equal the U.S. in gross domestic product within forty years. The hegemon is declining, and this will cause fundamental changes in the international system. The lesson we should learn from the Great Depression is that when times are hard, turning inward makes them worse. The international institutions we supported in our period of prosperity may be necessary for the peaceful ascendance of new economic powers. The short-term appeal of economic protectionism must be balanced against the long-term risks to global order.


Alexandra Swann is a U3 political science and environmental studies student.

TOP ARTICLE | Our Responsibility To Deliver

by Ban Ki-moon

The past year was difficult for us all. I have called it "the year of multiple crises". The next promises to be even more so. The challenges
that lie ahead in 2009 ranging from climate change to the economic meltdown will test our commitments and good intentions as never before.

In the realm of human rights, we speak of the responsibility to protect. In the larger sphere of common international endeavour, we should speak of the responsibility to deliver. Looking back at 2008, our record has been mixed. I am pleased, for example, at the way the world has come together in the face of the economic recession. I fear though that we are only at the end of the beginning. This crisis will challenge the sense of global solidarity that is key to any solution.

We responded well to natural disasters from Myanmar to Haiti. I am disappointed, however, by the unwillingness of the government of Myanmar to deliver on its promises for democratic dialogue and the release of political prisoners.

UN forces have held the line in the Democratic Republic of Congo, with bravery under the difficult circumstances. Yet we have not been able to protect innocent people from violence. Our record on human rights is on trial in many places, in many ways. But we must continue to stand strong on the principles enshrined in the Universal Declaration of Human Rights.

I believe we coped well with one of the year's most serious issues. The food crisis no longer dominates news headlines but it has not gone away. The United Nations system has come together to tackle this problem in all its complexity: nutrition, agricultural production, trade and social protection. We are well on the way to changing decades-old policies in agriculture and public health mainstays of our work in promoting the Millennium Development Goals and protecting those most vulnerable to climate change, poverty and economic crisis.

Of all the challenges before us, none is more important than climate change. A few weeks ago, i joined world leaders in Poznan, Poland. We recognised that climate change cannot await a resolution of the global economic crisis. Most accepted the need for what i call a "Green New Deal". Investment in eco-friendly technology should be part of any global economic stimulus. All agreed that there is no more time to waste. We have only 12 short months before Copenhagen. We must reach a global climate change deal before the end of 2009 one that is balanced, comprehensive and acceptable to all nations.

Success will require extraordinary leadership. The UN plans to convene a climate change summit at the beginning of the 64th General Assembly. But world leaders will need to meet before then if we are to conclude 2009 in triumph. Working together, we can fulfil our responsibilities to the planet and its people our responsibility to deliver.

We should see the challenges of 2009 as opportunities for collaborative international action. We are entering a new multilateral era. We face the immediate imperative of ending the violence in Gaza and southern Israel. The escalation and suffering of civilians are deeply alarming. A ceasefire must be put in place without delay. Regional and international partners must use their influence to bring about dialogue and a return to the negotiations that had been showing modest but encouraging signs of progress. There is an urgent need for Israelis and Palestinians to continue on the road to peace.

In Iraq, security has vastly improved. Provincial elections are scheduled for January. I urge Iraqi leaders to work together in a spirit of reconciliation as they assume full responsibility for their national affairs. All this requires strong UN support, and we shall give it.

The humanitarian situation in Zimbabwe grows more alarming every day. The nation stands on the brink of economic, social and political collapse. President Robert Mugabe, in Doha, promised to allow my envoy to enter Zimbabwe to facilitate a political solution. Now we are told that the timing is not right. If this is not the time, when is?

In Somalia, the danger of anarchy is clear and present. So is the need to act. I proposed to the Security Council a series of steps to advance the Djibouti peace process, deal with piracy and issues of humanitarian access, reinforce the current African Union mission in Somalia and set the stage for a possible UN peacekeeping operation.

The worsening humanitarian and security situation in Afghanistan is of grave concern. A political "surge" and a clear change of direction are required. We have made a great many promises to the people of this ravaged country. It is our responsibility to keep them.

The demands on the UN are growing. The challenges of our time are increasingly collaborative in nature. They require our full engagement, all nations working together rich and poor, north and south, developed and developing. The world expects no less. It is our responsibility to deliver.

The writer is secretary-general of the United Nations.

Several Recent Editorials, Opinion Pieces Discuss Economic Stimulus Package

source : medicalnewstoday.com
Several recent editorials and opinion pieces recently addressed an economic stimulus package under consideration by Congress and President-elect Barack Obama. Summaries appear below.

Editorials

• Akron Beacon Journal: "The leading spending priority" for the economic stimulus package "must be money for states struggling with requirements to balance their budgets," a Beacon Journal editorial states. The editorial adds, "The federal government has the tools to offset the dampening effect of such mandated fiscal discipline, targeting money for Medicaid, unemployment compensation, food stamps and other elements of the safety net" (Akron Beacon Journal, 1/7).
  
  
• Denver Post: "Slowing down the pace just a notch" on the expected completion of the economic stimulus package from Jan. 20 to mid-February "is a wise move, one that is almost certainly designed to give everyone ... a chance to understand, and perhaps get on board with" it, a Denver Post editorial states. The "chosen projects" included in the stimulus package "must make a difference," the editorial states, adding, "Medicaid assistance to states has to be constructed in a way to help the nation's safety net institutions take care of the growing number of people who've lost their jobs and health insurance" (Denver Post, 1/7).
  
  
• Detroit News: "If Congress agrees to take on this enormous debt in the name of stimulating the economy, it better do everything possible to keep it from becoming history's biggest pork barrel," a News editorial states. According to the editorial, Obama has proposed a number of needed provisions, such as "helping states meet unemployment insurance and Medicaid obligations," but the "hundreds of billions of dollars he wants for infrastructure projects could wind up as the biggest boondoggle since the Hurricane Katrina relief project" (Detroit News, 1/7).
  
  
• Milwaukee Journal Sentinel: Proposals by Democrats to extend unemployment benefits and allow certain unemployed workers to become eligible for Medicaid as part of the economic stimulus package "have merit as emergency measures, as long as Congress draws a bright line to demark how they would be phased out once the crisis passes," a Journal Sentinel editorial states. "Any expansion of Medicaid shouldn't take the place of real health care reform that aims to control costs and ensure universal coverage," according to the editorial (Milwaukee Journal Sentinel, 1/6).
  
  
• St. Louis Post-Dispatch: "The ideal stimulus package would meet a Three-T test: Spending would be 'timely, targeted and temporary,'" a Post-Dispatch editorial states. The stimulus package should include provisions such as "increasing unemployment compensation, food stamp payments and grants to governments that are struggling to provide their residents with essential local services," in which "spending can be accounted for relatively easily," the editorial states, adding, "Tax cuts, on the other hand, might not be nearly as effective" (St. Louis Post-Dispatch, 1/7).
  
  
• Washington Post: The economic stimulus package "must not bloat the government's permanent financial commitments," in part because, in the long term, "investors will finance the U.S. government at reasonable rates only if it tackles its huge unfunded health care and pension commitments," a Washington Post editorial states. "Unchecked, the cost of providing Social Security, Medicare and Medicaid to 77 million retiring baby boomers could push the debt-to-GDP ratio" to almost 300% by 2050, according to a report recently released by the Congressional Budget Office, the editorial states. The editorial concludes, "Hard as it is, jump-starting the U.S. economy will be easy compared with securing its financial future," but "Obama and the Congress must do both" (Washington Post, 1/8).

Opinion Pieces

• Alfred Smith/Henry Amoroso, Albany Times Union: "If Congress does not act" to increase the Federal Medical Assistance Percentage for state Medicaid programs, "states will be forced to make draconian cuts affecting hospitals, nursing homes, homes care agencies and many other areas of health care," Smith, chair of the board of St. Vincent Catholic Medical Centers, and Amoroso, president of St. Vincent, write in a Times-Union opinion piece. They add, "Increasing FMAP reimbursement is a reasoned and careful response to an emergency situation and one that has been used before." In addition, they write that Congress "can block or reverse other changes in Medicaid that will cut hundreds of millions of dollars to hospitals throughout the nation" (Smith/Amoroso, Albany Times Union, 1/8).
  
  
• Scott Gottlieb, Wall Street Journal: Medicaid "beats being uninsured" but often "relegates the poor to inferior care," and state programs likely will "receive a bolus of federal money ... with no obligation that the program does anything to reverse its decline," American Enterprise Institute resident fellow and former senior CMS official Gottlieb writes in a Journal opinion piece. He writes, "Insurance coverage has become the end itself, with states spreading resources widely but thinly -- without enough attention to the quality of care, accessibility, or whether coverage was actually improving health," adding, "States have no obligation to rigorously measure health outcomes in order to qualify for more federal money." According to Gottlieb, additional funds alone "won't fix the program's woes" and "will simply allow states to siphon off more of what they would have spent on Medicaid to other uses." Gottlieb writes, "The troubling evidence about the quality of Medicaid patients' services is a cautionary tale for Mr. Obama as he sets about to administer more of our health care inside government agencies," adding, "Turning Medicaid around should be the least we demand before turning over more of our private health care market to similar government management" (Gottlieb, Wall Street Journal, 1/8).
  
  
• Cal Thomas, Washington Times: "Like pigs waiting in line to get their snouts in the feeding trough, come many of the nation's governors" who "want Washington to pony up $1 trillion for their absolutely-essential-non-negotiable-if-we-don't-get-the money-people-will-starve programs," such as Medicaid, syndicated columnist Thomas writes in a Times opinion piece. He writes, "New York Gov. David Paterson (D) claims that, because tax revenues have plunged, 43 states now have deficits totaling around $100 billion," adding, "No, those states have deficits because when times were good and the money was rolling in they thought they could get away with endless new programs, while putting little or no money aside for the inevitable rainy day." According to Thomas, the "governors' request for more money from Washington is also about unfunded mandates, the rising cost of Medicare and Medicaid and a lot of other 'entitlement' programs that could have been made solvent during the Bush administration, which tried, but was unable to succeed due to opposition from Democrats who preferred to have an issue rather than a solution." Thomas concludes, "If this growing dependence on ever more costly and overreaching government continues, we may have to change the familiar letter abbreviation for this country from USA to ATM" (Thomas, Washington Times, 1/7).

The Economic News Isn't All Bleak

We may be in for a long slide. But there are also reasons to think the economy could rebound quickly.

By ZACHARY KARABELL

The recent economic news has been dismal, and it's now almost universally assumed things will get worse before they get better. Conventional wisdom also dictates that this recession will be longer, deeper and cause more long-term pain than any financial crisis since the Great Depression.

Chad Crowe

Yet, less than two years ago, conventional wisdom dictated that the housing bubble would be painful but that global economic growth would remain stable. That assertion was proved dramatically incorrect. Why then is there so much conviction in today's forecasts of a dire future?

Predictions about the rate of unemployment by the end of 2009 are based on how high that rate went during and after other recessions, and how steep those recessions were compared to today. Forecasts of GDP growth are grounded in the nature of past contractions and how long it took the system to begin expanding again. But none of these past patterns are necessarily a useful guide to the circumstances of today. The way events have unfolded over the past few months simply has no precedent.

It's common to hear comparisons to the Great Depression, when economies around the globe shrank precipitously, or to the 1970s, when an oil shock gave way to steep contraction of GDP growth in the developed world and a concomitant collapse in energy prices. But those occurred over the course of years. What happened since the collapse of Lehman on Sept. 15 was a global, synchronous cessation of all but nondiscretionary economic activity in the wake of the near-collapse of global credit markets. And it happened over the course of weeks, not years. Data from October and November show shrinkage of 10%, 20% and often considerably more in corporate earnings, car sales, home prices, commodities and a host of other areas. But analysts and strategists now take this as the "new normal" and are projecting into 2009 and beyond as if it were.

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True, this global halt is the dark side of the information technologies and globalization that have created so much wealth and generated so much activity in the past 20 years. The frictionless, instantaneous flow of capital is possible only because of the Internet and electronic exchanges. The supply chain for industrial metals, from copper to iron ore, has gone from being regional and fragmented to global and unified. Semiconductors have become one global industry with pricing and inventories determined based on aggregate world-wide demand. Few industries are local, and almost everything is linked.

In good times, that meant credit expanded and activity magnified geometrically. China for one has undergone more transformation in 20 years than most countries have seen in 100. But when the system was infected with toxic assets, the effects spread everywhere and fast. The collapse of Lehman led to fewer cars being sold in China in a matter of weeks, and the decline of Dubai real-estate prices to boot.

And yet, if things came to a halt more quickly than ever before, they could also restart more quickly than ever before. This is not to say they will, only that the possibility is more than marginal. And there are signs things are not everywhere as bad as conventional wisdom suggests.

First, we haven't seen war, revolution, the collapse of states and governments or massive demonstrations sweeping the globe. Crowds have demonstrated in China, Greece and Thailand -- for reasons sometimes related to the economic crunch and sometimes not. Pakistan is teetering for multiple reasons -- of which economics is only one. But major economic crises in the 20th century almost always led to those types of major breaks, especially during the 1930s. While no one can say whether they will come in the months ahead, for the time being we should be remarking on how relatively stable things are in light of what has happened.

Second, consumers in many parts of the world are in relatively good shape. That statement might strike many as absurd, given the mantra of "consumers have been living beyond their means." But it's not just the third of American households that have no mortgage, or the 50% savings rate in China, or the still massive wealth accumulation in the Gulf region, Brazil and Russia. It's that the credit system, even at its most promiscuous, didn't allow consumers to take on the obscene leverage that financial institutions did. Millions of people who shouldn't have been lent money were, either in mortgages or through credit cards. But they couldn't be levered 40-to-1 as investment banks and funds were.

Opinion Journal

REVIEW & OUTLOOK

• Obama's Secretary of Earmarks
• Bridges to Everywhere
• Still Oklahoma's Most Wanted

COLUMNIST

• Declarations: A Year for the Books
  – Peggy Noonan

COMMENTARY

• Obama Picks a Moderate on Education
  – Collin Levy
• The Economic News Isn't All Bleak – Zachary Karabell
• Donor Disclosure Has Its Downsides
  – John R. Lott Jr. and Bradley Smith
• Bush Is a Book Lover
  – Karl Rove
• A Brother's Plea: Remember Burma
  – Min Zin

People have also reacted swiftly to the current problems, paying down debt and paring back purchases out of prudence or necessity. That's a short-term drag on economic activity, but it will leave consumer balance sheets in good shape going forward. Low energy prices and zero inflation will boost spending power. Even if unemployment reaches 9% or more, consumer reserves in the U.S. and world-wide are deeper than commentary would suggest. Household net worth in the U.S. is down from its highs but is still about $45 trillion. As the credit system eases, historically low interest rates also augur debt refinancing and constructive access to credit for those with good histories and for small business creation in the year ahead. Entrepreneurs often thrive when the system is cracking.

In addition, corporations generally have very clean balance sheets with little debt and lots of cash, unlike the downturns in 2002 and in the 1980s. And government has more creative ways to spend, which both the current Federal Reserve and the incoming Obama administration intend to do.

The last months of 2008 will go down as one of the most severe economic reversals to date, and on a global scale. But it is foolish to assume that this period provides a viable guide to what lies ahead.

The rush to declare the future bleak has obscured the fact that no one knows the outcome of an unprecedented event. No one. The worst course in the face of uncertainty is blind faith in conventional wisdom and past patterns. The best is to stay humble in the face of the unknown, creative and unideological about solutions, and open to the possibility that as quickly as things turned sour they can reverse.

Mr. Karabell is the president of River Twice Research. His book on China and the United States will be published by Simon & Schuster next year.

Economic morality

by By Sinclair Davidson
According to the US betting market, Intrade, there is a 55 per cent probability that the US economy will experience a recession sometime in 2008. Some argue that the US is already in recession. Equity markets have been particularly volatile over the past six months and credit markets have tightened up. The bad news is that economic growth in 2008 is likely to be low; the good news is that this isn’t the end of civilisation as we know it. Indeed the world has been in similar situations many, many times before and survived.

Australia is in a somewhat different situation to the US. Here the Reserve Bank believes inflation is too high and the economy growing too quickly and has raised interest rates to slow economic growth. Contrast that with the US where the Fed has lowered interest rates and the US Congress has passed an economic stimulus package.

Many commentators take a “morality play” approach learning the lessons of financial crises. We hear much about greed and fear, the instability of markets, and the need for greater government intervention. The current financial crisis is no different. A new term - predatory lending - has entered our vocabulary. Apparently, US financial firms have been forcing the poor and minorities to take on “exotic” loans that they can ill-afford. Further they have then on-sold these loans to “unsuspecting investors”. As interest rates have increased so default on these loans also increased and over-all we now have huge investment losses.

We are led to believe that if only government would prevent these unscrupulous financial institutions from exploiting both the borrowers and investors that this sort of thing could never happen. There is a morality play lesson to be learned, but it isn’t the stock standard lesson I have just laid out. Some parts of the current financial crisis are due to private sector failures. Yet the major culprit is government policy failure. Three public policy failures contributed to the current global financial crisis; low interest rates over the past several years, restrictive building policies, and affirmative action.

In 1992, the Boston Federal Reserve published a working paper, subsequently published in the prestigious peer-reviewed American Economic Review, which provided empirical evidence showing that banks were discriminating against minorities on the basis of race. It subsequently transpired that the data used in the 1992 Boston Fed paper was deeply and fundamentally flawed.

The damage, however, had been done. The Boston Fed published a document entitled “Closing the gap: A guide to equal opportunity lending” (PDF 240KB); it is still available on their website. This is a document refers to underwriting standards that are “arbitrary or unreasonable”. For example, “Policies regarding applicants with no credit history or problem credit history should be reviewed. Lack of credit history should not be seen as a negative factor.”

Fast forward to 2008 and financial institutions are being pilloried for poor lending practices, yet they were sanctioned by the financial regulator in 1993.

Sloppy research leading to bad microeconomic policy is only part of the story. The other part of the story was occurring in the macroeconomy. Restrictive housing policy caused housing prices to rise. These artificial price increases were related to restricting the amount of land that was available for new housing. Similar restrictive policies are being followed in Australia.

Of course a large contributor was the level interest rates in the first half of the decade. John Taylor of Stanford University - famous for his Taylor Rule that very accurately models the US Fed Funds rate - has argued that US interest rates were far below what they should have been and this caused over-investment in the housing market and over-pricing of the housing stock. This type of argument is consistent with business cycle theories originally posited by Ludwig von Mises and Friedrich von Hayek.

The supply of funds into the housing market also had the effect of reducing loan delinquency and foreclosure rates. This distorted downwards estimates of risk and risk premiums leading to mispricing in the secondary markets. As interest rates increased ad eventually housing prices decreased so it all unravelled.

There are many lessons to be earned from this sorry story. Most importantly government intervention always has unintended consequences. Anti-capitalistic bureaucratic prejudice led to the view that financial institutions would discriminate against minorities. Sloppy research then led to a justification for further government intervention.

The Australian government are about to embark on a massive bank regulation project. This contains many dangers for banks, their shareholders, their customers and the Australian economy. In particular we may see an outbreak of “credit snobbery” - by this I mean efforts to reduce access to credit. It is best to leave banks and financial institutions to make credit decisions.