Chairman Bernanke and Trickle Down Monetary Policy

Chairman Bernanke & Trickle Down Monetary Policy

“It’s pretty clear that the stock market is the most important transmission mechanism of monetary policy right now,” said Peter Hooper, chief economist at Deutsche Bank AG in New York. 

Bloomberg (10-3-12), Bernanke Seeks Gain for Stocks in Push for Jobs: Economy

By J.M. Hamilton (10-14-12)

How bad is it when, within the last sixty days, nearly every central bank in the world has added monetary stimulus to the global economy, or intimated that they are about to pop the clutch on the printing presses once again?  Answer: Pretty bad.

We are into year four of this crisis, and the politicians have largely abdicated responsibility, and instead relied upon central bankers to lead the way.  As J.M.H. has written before, monetary policy is a crude instrument to conduct the affairs of state; and some would argue, myself included, that central banks have only aggravated the situation, with economic contagion spreading.  Those European governments that are acting to address fiscal policy and structural reform are doing so under duress, at the expense of those citizens who can least afford the hardship.  Moreover, these states are addressing these problems at the point of a financial gun; that is, the threat of having the next ECB or IMF subsidy/bailout withheld.  Even left of center governments, elected because the populace it tired of choking on bank mandated austerity, find that once they are in power – they still have to answer to the banks (granted many southern periphery nations are already under bank management).

Meanwhile the 99% suffer, and the one percent prosper.

Any reasonable leader would suggest that it is in Greece’s or Spain’s best interest to let the banks go under, and reboot their sovereign pre-euro currency.  Iceland defaulted, let their banks fail, and today they are economically as right as rain.  German politicians, opposed to bailing out their southern neighbors, are beginning to advocate that the PIIGS leave the euro.  Apparently, not all Germans are enthralled with Ms. Merkel’s commitment to the banks, I mean Euro, and bailing out their neighboring states.  But its not that simple, and no leader, even left of center politicians, wants to be responsible for breaking clear of the Euro, or declaring bankruptcy; because to do so would constitute a credit event, and more than likely set off economic Armageddon, via a web of credit default swaps (CDS).

CDS, of course, are insurance products issued by banks that are used to insure government bonds against default, and are also speculative instruments used to bet upon sovereign debt and against sovereign nations.  It is these instruments that caused the global crisis in 2008, and it is these very instruments that prevent the world from clearing the decks, and breaking free from the economic malaise that binds most Western democracies to the banking cartel.  And as of this date, reform of these CDS instruments, including clearing houses, putting up collateral to back these instruments (an impossibility because who has tens of trillion in security to support a gambling addiction), and transparency, has yet to transpire.  It is these instruments that prohibit governments from restructuring, or rebooting old or creating new currencies.  Why?  Because the banks call the shots and the banks own the governments and the politicians, and again, nobody wants to responsible for setting off a global doomsday scenario.

The symbiotic relationship between banks and governments works like this:  the banks screw up in another speculative frenzy; tapped out governments bailout the banks at taxpayer expense; governments borrow to bailout the banks harming their credit rating; interest rates rise; and central and national banks invest in what is by now rapidly becoming junk sovereign debt (witness Spain’s credit rating).  Hence, creating another bubble, a very un-virtuous cycle, indeed.  The politicians fail to rein in the banks, because politicians are owned by them.  Meanwhile, the banks and the right-wingers say the problem is not the bank bailouts, but social policies and social spending of the various governments – which leads to calls for austerity.  However, in many countries the social spending is but a fraction of the money and welfare spent on the banking cartel.

The great enabler in all this are the central banks.  The Fed’s stated mandate of course, is maximum employment and price stability, but their real master is the banking cartel, who is calling the shots.

Take the U.S. housing market for instance, which has laid like a dead dog in the street for four to fives years now.  The engine of economic growth, the arbiter of Main Street health, and the storehouse of the public’s wealth – I write of course of the residential housing market – has languished, losing in some markets as much as thirty percent of it’s value.  Why?  Because nobody has untangled the mess that the bank created: MBS and CDO products, and the MERS registry system.

The banks, of course, don’t want engage in traditional lending (preferring instead speculation in securities, commodities, private equity/hedge funds, and public debt), and so have held the economy and the nation’s housing market hostage, by insisting that the collateralized mortgage market – or debt securitization – be reinvigorated, so that they can generate huge fees, w/out maintaining any underwriting responsibility for their loans or tying up bank capital. 

Whew!

Entre Fed and Chairmen Bernanke, once again: and rather than announce QE4, QE5, etc, etc, etc… the Fed has said it will continue to purchase MBS from the banks in perpetuity to the tune of 40 billion per month, at taxpayer expense.

Gee, do you see another housing bubble on the horizon, with the taxpayer holding the bag yet again?  Instead, however, when this blows, the banks will be able to point their collective fingers at the Fed, and blame the public sector once again.  Much of the MBS undoubtedly ends up with the GSEs, Freddie and Fannie, which is a favorite whipping boy of the GOP.

With the Fed buying MBS, this frees the banks to pump up a stock market that no rational or sane adult will invest in, because the stock market is now about as safe as a crack den in a very bad part of town.

Mr. Jamie Dimon, on the heals of Chairmen Bernanke’s announcement of unlimited MBS purchases, states that the housing recovery is now underway.  His bank and the cartel got their way, a reinvigorated collateralized debt market, and now the taxpayer sponsored lending can begin in earnest.  There’s just two problems: one in five mortgage owners is underwater, and there are still millions of unsold homes in the inventory, many of which are kept conveniently on the sidelines so that home prices can begin to reflate.

Meanwhile, the consumer – the engine of economic growth – is tapped out, mired in debt, and in many instances upside down or underwater on their home loan.  The banks refuse to write down the home loans, and do not have to because of the Fed’s easy money policies and interest rate suppression.  The consumers only means of getting out from under their debt is wage inflation, but wages in this country are suppressed by unemployment and free trade and globalization -which SURPRISE benefit the one percent and the banks.  As evidenced by Japan, both the banks and the politicians are willing to wait a generation or more until a real recovery ensues, and home prices reflate; as they control the Fed and global central banks, and as they are wrapped in a cocoon of liquidity – the cartel feels little pain.

In short, Keynesian policy is working very well for the one percent, and has shielded the banks from their responsibility in this crisis.  However, Keynesian policy is doing very little for the rest of the nation, because the Cartel is not lending the money out, and it is having little stimulative impact upon the economy.

They say the definition of insanity is doing the same thing over repeatedly, and getting the same negative outcome; but nobody has the cojones to call Fed policy insane.  The savers in this country are being robbed, via interest rate suppression, so that the folks who put this nation into the tank can prosper in the stock market and with alternative speculative investments, like commodities and fuel (which again, give the 99% the shaft).

Having failed in their endeavor to rescue the American economy, the Fed’s monetary policy now appears to be trickle down, at best.  That is, the reflation of asset prices, like stocks and commodities, in the hopes that the rich and the elites will spend more, and the breadcrumbs will come floating down to the 99%.  This is the very policy that Democrats decry, when Republican reverse engineer taxation in favor of the wealthy.  There’s just two problems with trickle down policies, whether they be tax or monetary policy:  wealth has become increasingly concentrated into too few hands, and the consumer is tapped out… both of which leads to a decreased economic demand.

In short, trickle down monetary policy does not work.  And QE3, et al., only prolongs the very painful deleveraging process.

An alternative path?  Having failed in its endeavor, and because Keynesian monetary policy is now facing the roadblock of a very nasty cartel, the Fed could consider an alternative solution, which is to raise interest rates, like Mr. Volker did in the late seventies and early eighties.  This will force banks to write down asset prices, and offer to restructure or forgive debt on home loans.  This will allow housing to bottom and recover.  Higher interest rates would stop commodity inflation.  It will put interest income back into the hands of savers and the consumer who have fled the stock market for good reason, and spread the wealth of monetary policy throughout all saving classes of society – instead of into the hands of a few.  And it would help get this country on its feet again, as savers began to spend.  This in turn will generate growth and opportunity, and an expand the tax base and reinvigorate the economy. Higher interest rates would also force politicians to finally put their fiscal house in order, as well as reform the stock market, since capital would flow to bonds and money market funds. Outlawing CDS until this crisis is over, and unwinding these bets, means that the bank’s financial gun held to our collective head simply disappears.  It’s one thing to ask taxpayers to bailout a nation, it’s another thing, entirely, for the public support those who bet and gambled against a nation and her people, in the first place.  Telling FHFA director DeMarco to move forward and compete against the cartel is also the appropriate thing to do, since lending rates have not fallen as rapidly as the banks borrowing costs.

Of course, there could be short-term side affects to increasing interest rates… some banks might fail, some governments might default, and some of the one percent might get burned betting against nation states and their economies.  In the short run, there would undoubtedly be economic hardship and dislocation, but for a finite period of time.  The alternative, however, and the path we are presently on, is a stagnant economy, sub par growth, a more polarized society, higher headline inflation, and a Federal Reserve/GSEs loaded up with MBS and CDOs.  Not to a mention the ticking time bomb of a disorderly default scenario.

And yet, another housing bubble on the horizon, instigated by the Fed.

Isn’t it time for the Fed to reconsider its bank-centric economic policies, and failed trickle down monetary policy?

Copyright JM Hamilton Publishing 2013

In some cases, we have favored more radical proposals, including debt restructuring...

April 25, 2013 NYTIMES

Debt, Growth and the Austerity Debate

By CARMEN M. REINHART and KENNETH S. ROGOFF

CAMBRIDGE, Mass.

IN May 2010, we published an academic paper, “Growth in a Time of Debt.” Its main finding, drawing on data from 44 countries over 200 years, was that in both rich and developing countries, high levels of government debt — specifically, gross public debt equaling 90 percent or more of the nation’s annual economic output — was associated with notably lower rates of growth.

Given debates occurring across the industrialized world, from Washington to London to Brussels to Tokyo, about the best way to recover from the Great Recession, that paper, along with other research we have published, has frequently been cited — and, often, exaggerated or misrepresented — by politicians, commentators and activists across the political spectrum.

Last week, three economists at the University of Massachusetts, Amherst, released a paper criticizing our findings. They correctly identified a spreadsheet coding error that led us to miscalculate the growth rates of highly indebted countries since World War II. But they also accused us of “serious errors” stemming from “selective exclusion” of relevant data and “unconventional weighting” of statistics — charges that we vehemently dispute. (In an online-only appendix accompanying this essay, we explain the methodological and technical issues that are in dispute.)

Our research, and even our credentials and integrity, have been furiously attacked in newspapers and on television. Each of us has received hate-filled, even threatening, e-mail messages, some of them blaming us for layoffs of public employees, cutbacks in government services and tax increases. As career academic economists (our only senior public service has been in the research department at the International Monetary Fund) we find these attacks a sad commentary on the politicization of social science research. But our feelings are not what’s important here.

The authors of the paper released last week — Thomas Herndon, Michael Ash and Robert Pollin — say our “findings have served as an intellectual bulwark in support of austerity politics” and urge policy makers to “reassess the austerity agenda itself in both Europe and the United States.”

A sober reassessment of austerity is the responsible course for policy makers, but not for the reasons these authors suggest. Their conclusions are less dramatic than they would have you believe. Our 2010 paper found that, over the long term, growth is about 1 percentage point lower when debt is 90 percent or more of gross domestic product. The University of Massachusetts researchers do not overturn this fundamental finding, which several researchers have elaborated upon.

The academic literature on debt and growth has for some time been focused on identifying causality. Does high debt merely reflect weaker tax revenues and slower growth? Or does high debt undermine growth?

Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places. In a paper published last year with Vincent R. Reinhart, we looked at virtually all episodes of sustained high debt in the advanced economies since 1800. Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested.

We did find that episodes of high debt (90 percent or more) were rare, long and costly. There were just 26 cases where the ratio of debt to G.D.P. exceeded 90 percent for five years or more; the average high-debt spell was 23 years. In 23 of the 26 cases, average growth was slower during the high-debt period than in periods of lower debt levels. Indeed, economies grew at an average annual rate of roughly 3.5 percent, when the ratio was under 90 percent, but at only a 2.3 percent rate, on average, at higher relative debt levels.

(In 2012, the ratio of debt to gross domestic product was 106 percent in the United States, 82 percent in Germany and 90 percent in Britain — in Japan, the figure is 238 percent, but Japan is somewhat exceptional because its debt is held almost entirely by domestic residents and it is a creditor to the rest of the world.)

The fact that high-debt episodes last so long suggests that they are not, as some liberal economists contend, simply a matter of downturns in the business cycle.

In “This Time Is Different,” our 2009 history of financial crises over eight centuries, we found that when sovereign debt reached unsustainable levels, so did the cost of borrowing, if it was even possible at all. The current situation confronting Italy and Greece, whose debts date from the early 1990s, long before the 2007-8 global financial crisis, support this view.

http://www.nytimes.com/2013/04/26/opinion/debt-growth-and-the-austerity-debate.html?nl=todaysheadlines&emc=edit_th_20130426

---

April 25, 2013/NYTIMES

The 1 Percent’s Solution

By PAUL KRUGMAN

Economic debates rarely end with a T.K.O. But the great policy debate of recent years between Keynesians, who advocate sustaining and, indeed, increasing government spending in a depression, and austerians, who demand immediate spending cuts, comes close — at least in the world of ideas. At this point, the austerian position has imploded; not only have its predictions about the real world failed completely, but the academic research invoked to support that position has turned out to be riddled with errors, omissions and dubious statistics.

Yet two big questions remain. First, how did austerity doctrine become so influential in the first place? Second, will policy change at all now that crucial austerian claims have become fodder for late-night comics?

On the first question: the dominance of austerians in influential circles should disturb anyone who likes to believe that policy is based on, or even strongly influenced by, actual evidence. After all, the two main studies providing the alleged intellectual justification for austerity — Alberto Alesina and Silvia Ardagna on “expansionary austerity” and Carmen Reinhart and Kenneth Rogoff on the dangerous debt “threshold” at 90 percent of G.D.P. — faced withering criticism almost as soon as they came out.

And the studies did not hold up under scrutiny. By late 2010, the International Monetary Fund had reworked Alesina-Ardagna with better data and reversed their findings, while many economists raised fundamental questions about Reinhart-Rogoff long before we knew about the famous Excel error. Meanwhile, real-world events — stagnation in Ireland, the original poster child for austerity, falling interest rates in the United States, which was supposed to be facing an imminent fiscal crisis — quickly made nonsense of austerian predictions.

Yet austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

But it’s not just a matter of emotion versus logic. You can’t understand the influence of austerity 

doctrine without talking about class and inequality.

What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do. 

http://www.nytimes.com/2013/04/26/opinion/krugman-the-one-percents-solution.html?nl=todaysheadlines&emc=edit_th_20130426&_r=0

Monopolies & Double Standards….

  The BP Gulf Oil Disaster (aka Deepwater Horizon oil spill): 4-20-2010

 

Monopolies & Double Standards…

By  J.M. Hamilton  6-19-2010

A little over thirty years ago, Jeane Kirkpatrick, the first woman U.S. ambassador to the U.N., wrote her master work, Dictatorships and Double Standards.   The work was brilliant, and she soon became a key member of the Reagan foreign policy establishment, and her analysis from Dictatorships and Double Standards became a cornerstone in Reagan’s foreign policy.   In it, Doctor Kirkpatrick posited that the Carter administration, and indeed members of the Democratic establishment, were prone to coddle leftist dictatorships (who were anti-American), while castigating right-wing dictatorships (who were often neutral to American interests).   Ms. Kirkpatrick went on to argue that left wing dictatorships were prone to, marching towards, or already socialist in nature, and therefore, far more oppressive to their citizens, than most right wing dictatorships.  Remember this was written during the crucible on the cold war, when it was feared that Communism’s stated goal of global hegemony, still might be achieved.

Republicans and the political right rallied around Mr. Reagan, and his new found apostle, Doctor Kirkpatrick, and the rest is history. Republicans were right to oppose both communism and left wing dictatorship, and history would seem to support their assertions that private enterprise and freedom produce greater amounts of prosperity, per capita, than the economic misery created under, say a socialist regime.  Even China, the last of the communist hold outs, appears on board with this notion.

This begs the question:  Why then have Republicans turned their back on their march against socialism, by embracing democracy’s equivalent, or the private sector equivalent to socialism, monopoly?

Anyone who has taken Econ 101 knows the inherent evils of socialism and monopoly, and indeed, if we review what those evils are, they are not dissimilar:  they include, but are not limited to, inefficiencies in production and the utilization of scarce resources; services and products tend to be shoddy, as there is no competition; and creativity, innovation and merit are not rewarded and are stifled, as there is only one game in town.  Consumers, employees, and society suffer under both socialism and monopoly.  Socialism by definition, and its cousin monopoly, also lead to, or are a product of, outsized political control over the citizens of the state.

Therefore, Americans, correctly enough, has been taught to abhor socialism; but on monopoly, rarely discussed, the conversation in democracies goes rather quiet.

During the Reagan, and Thatcher revolutions, and over the last thirty years, we have been fed an ideological diet expressing the virtues of the free market, private enterprise and laissez faire doctrine.  Rightfully so, but again, little is said against the evils of monopoly.

If we look closely at the writings of Adam Smith, we discover that he abhorred monopolies, probably for the very reason Mr. Smith would have disdained socialism.  Even Mr. Hayek, founder of the Austrian and Chicago school’s of economics (and a Free Market deity), had his concerns and issues with laissez faire capitalism.

Why(?), because laissez faire unchecked leads to the jungle, and the elimination of competition, and hence, monopoly.

In a nation governed under the rule of law, and as we do not operate in the jungle, monopolies do not occur naturally.   The referee of the private sector, government, allows monopolies to occur and allows them to operate.  And there are legitimate/societal reasons for monopolies to exist.   The classic example is utility services and power companies, because of the massive infrastructure involved, there is merit and societal value in monopoly, in this instance.  But what about other sectors of the economy where monopolies operate for no good societal reason?  What we find is that combination has been allowed to occur for the enrichment of a few,  the ruling class, and the private citizens in whose hands the grant of monopoly has been placed, all to the detriment of society.

So if socialism is bad, and monopoly is bad, why have the last thirty years seen an increase in the concentration of economic power, and a record number of mergers and acquisition, all granted and authorized by the U.S. and Western European governments?

One rationalization for the combinations authorized by democracies is economies of scale, efficiencies in production, and synergies in supporting departments and management.  However, we also know that too much concentration leads to diseconomies of scale, that is the organization is so big that management loses control, risk management falls apart, and chaos ensues.

But this is rarely discussed, or written about, and that is because in this country anyone who speaks out against corporate combination is immediately branded a communist, socialist or worse.  The reality, however, is one can be pro- capitalist, pro- democracy, and pro-free enterprise and have a complete disdain for monopoly and oligopoly for the very same reasons one would oppose socialism.

If we look very closely at the situation, we discover that monopoly is socialism by private proxy.

Corporate endeavor has become synonymous with free enterprise, and in many instances, it is an absolute truism; but when corporations pass the Rubicon, and by government sanction, become monopolies or oligopolies, it is then that citizens of a democracy should exercise their duties, query their elected leaders, and vote accordingly – as it is those elected leaders who are trusted to protect society from the deprivations of socialism and monopoly.

Americans witnessed both the subservience to untrammeled economic power, and the inefficiencies of combination this week, as the drama between Representative Barton and B.P. continues to unfold.   By now, nearly all Americans, and indeed much of the world, are well aware of the total lack of risk management and corporate control executive management (to hear the CEO tell it) exerted over B.P.  B.P. is the classic example of a corporation growing so big that it no longer operates in the interest of society, or itself, but rather, to the complete and absolute detriment of society, its shareholders and partners.  Rep. Barton is tragically confused, apparently, between allegiance to the citizens he serves, free enterprise that benefits his constituents, and absolute subservience to the B.P. corporation.  The latter is not alligned with the former!

As we witness diseconomies of scale play out in the gulf, and the abdication of responsibility – and the failure of sound risk management principles – by B.P.’s management, it’s important to remember the systematic risk and catastrophe imposed on the citizens of the world by another oligopoly, and that would be the Wall Street banks.  The economies of the world are still reeling from the total lack of accountability by the biggest concentration of power known in the Western world, and that is by the banking sector.  Unfortunately, democracies have done little to rein in the worst tendencies of the banking cartels they have created; and if a government does attempt to do something, say in the case of the Obama administration, said government is immediately branded as socialist or anti-business.

Let’s be clear on this issue: monopolies, cartels and oligopolies are not pro-business or even capitalist structures, but are the antithesis of the same.  They are by their very natures anti-competitive, predatory and government authorized or created.  Monopolies play out the economic double standard by wrapping themselves in the cloak of the free market, while doing everything in their power to eliminate competition and obtain extraordinary profits.

Corporations are but one of many vehicles/organizations for democracies to achieve their economic hopes and dreams, and great good can come from corporations (for society, management, stockholders, governments and employees); but blind subservience to the worst tendencies of corporations (e.g. combination for the elimination of competition) are something that prudent and responsible governments must hold in check, manage, supervise, and guard against.   And if government does allow monopolies and oligopolies to exist, the price that those entities should pay for economic concentration is government oversight, regulation, and vigilance, all the better to guard against socialism by private proxy!

Jeane Kirkpatrick, on the international stage, was noted to have said, “Russia is playing chess, while we are playing Monopoly. The only question is whether they will checkmate us before we bankrupt them.”

Such irony that multi-national monopolies, in the form of too big to fail banks, and the oil industry (through its diseconomies of scale playing out it the Gulf), may do what the Soviets never could do, and that is bankrupt the great Western democracies.  Both oligopolies operate behind the facade of the free market.

 Copyright JM Hamilton Publishing 2013

 

Thatcher

Thatcher

"There is no week, nor day, nor hour, when tyranny may not enter upon this country, if the people lose their supreme confidence in themselves, and lose their roughness and spirit of defiance.  Tyranny may always enter - there is no charm or bar against it."  - 1984 - P.M. Margaret Thatcher

"I'm not pro-business.  I'm pro-free enterprise."  --  Representative Hensarling (Republican, Texas) - W.S.J.

By J.M. Hamilton   4-13-13

What ovaries!  She was Tea Party before there was a Tea Party.  Making most of her peers look like indecisive castrati, say what one will about her policies, P.M. Thatcher's will was indomitable.  Mrs. Thatcher died this week, and her legacy is with us to this very day.  This lady talked the talk, and walked the walk.  And like many iconoclasts she thrived on adversity and bruising debate.  There are few politicians who can achieve what P.M. Thatcher achieved, not even in war time let alone peace time, and that is bending a nation by shear force of will.

The best way to illustrate both Mrs. Thatcher's defiance of the established order, and her iron will, is to compare Mrs. Thatcher to her political peer and soul mate, President Reagan.  Where Reagan and Thatcher both talked a great neo-classical economics game, our President often moderated, where she rigidly stayed the course.  Deploying classic Keynesian economics (all rhetoric aside), the debt to GDP ratio soared under Reagan, who pushed both guns and butter in order to defeat the former Soviet Union.   Whereas, the U.K.'s debt to GDP ratio went into dramatic decline, under P.M. Thatcher, dropping enviably to approximately 25% by 1990.

Mrs. Thatcher was austerity unchained.

Both leaders talked down government and the welfare state, but Reagan did not have the heart to cut entitlements, like social security.   Mrs. Thatcher took out the axe on social spending and government owned enterprise, even cutting off milk to grade school children in need.  Both leaders cut taxes, and yet, Mr. Reagan raised taxes no fewer than eleven times.

Reagan, like Thatcher, was capable of breaking unions, like PATCO; but as noted by the ultra-conservative institute, CATO, Reagan was actually one of the greatest protectionist Presidents of the 20th Century, saving countless American jobs (jobs that both Democrats and Republicans would rush to send offshore in the 90s and 2000s, via the doctrine Reagan had endorsed, free trade).

By comparison, Mrs. Thatcher dined on unions.

P.M. Thatcher deployed the foreign policy classic "wag the dog" strategy, before anyone knew what it was, when she reclaimed the Falkland Islands from an Argentinian invasion.  Hence, the P.M. bucked up national pride, invoked patriotism, and the war provided a convenient distraction from England's domestic woes - all of which allowed her to secure a second term.  Mr. Reagan would deploy P.M. Thatcher's same strategy a year and a few months later with the invasion of Grenada, to liberate a hand full of second-string American medical students from Cuba's communist invasion, which also helped to secure his second term.

Years from now what both leaders will be remembered for is: uniting their respective nation's will in crushing an evil empire, bashing their respective governments, and unleashing - what Lord Keynes referred to as - "animal spirits."  A move towards laissez faire economics (LFE) may have been the right call for the early eighties, but some thirty odd years later, LFE has corrupted into the extreme -  in the mistaken belief that whatever business wants it should have without question.  In short, LFE has metastasized into crony capitalism; an overarching dependence upon the banking sector - and speculation - for jobs and GDP (and the deployment of trickle down economics and monetary policy); and monopoly and cartels.  As we are all keenly aware, today,  crony capitalism, the Wall Street and London banking cartel, and monopolies in various sectors of the economy, have all but eviscerated the middle class, from which both Mrs. Thatcher and Mr. Reagan came and both dedicated their professional careers attempting to protect.  The most virulent form of LFE, Private Equity (which was just beginning to take off during the Thatcher/Reagan era), has been highly instrumental in gutting businesses for financial gain, responsible for a large number of bankruptcies, outsourcing jobs overseas, stripping the tax base, and engineering profits through financial chicanery and by making a perfidious hash out of the tax code.

Mrs. Thatcher, in the quote above, spoke of the evil tyranny of unions... today,
the Republican Party might be finally waking up to a similar tyranny imposed upon the economy and our country, by the international banking cartel, and the economic oppression imposed upon our citizens and the economy by monopolies and crony capitalism.  The classic example being the tax imposed upon the citizenry, in the form of monopolistic profits, which are sanctioned, authorized, and encouraged by the federal government.

Large banks, in the name of capitalism, have been bailed out repeatedly at the expense of fiscal and monetary sanity, and the middle class.  Government, politicians, regulators, and the tax code are often captured and owned by these risk management nightmares.   And one could argue that the LFE takeover of the Republican Party was complete with Mr. Romney's nomination.

In America, however, there are signs that the GOP maybe changing and pulling away from the excesses conducted in the names of Thatcher and Reagan, and most importantly, may be coming to realize that government has a role to play in the economy.   Senate Republicans recently passed a non-binding resolution decrying too big to fail banks.... can a break up of the cartel be too far behind?  And Representative Hensarling (R.), the new head of the Financial Services Committee, has correctly drawn a line between monopoly, and free enterprise.  Seems that not all Republicans pander to the cartel or will Mr. Hensarling cave?

This blog has said it before and it bears repeating, the moral imperative of capitalism is to provide quality goods and services at a competitive price, offer opportunity and employment, and provide a tax base so that essential government services can provide a back stop and support for a capitalist economy.  And clearly there is nothing wrong with profit taking in a competitive market.   Adam Smith, of course, pointed out that capitalism’s natural tendency is towards the elimination of competition and monopoly.   Therefore, in order to protect the moral imperative and the middle class, both political parties must say "no" to business when warranted (particularly M&A activity that leads to market domination and is anti-consumer and anti-free market), break up monopolies and cartels, and guarantee competition throughout the economy, or heavily regulate, cap, and contain the profits of those sectors that are dominated by monopoly.

This is what government should do: establish the rules of the road of capitalism, protect the economy and the middle class from the plutocracy's excess, and repeat, as necessary.  Ultimately, our government should be just as vigilant in protecting the market, and the consumer, as it historically, proclaimed to be in protecting freedom and democracy.

As the GOP does not want to fade into oblivion some senate and house members, like Messrs. Paul and Hensarling, have taken on a renewed interest in the middle-class.  That's something both Mrs. Thatcher, and Mr. Reagan would applaud and support.  The future of the GOP is libertarian on social issues, anti-theocracy, fiscally prudent, and pro- free market and anti-cartel.  This is the path back to the White House; and this is what will appeal to the youth vote.  Mr.Santorum need not apply.

Just as it took an iron lady to stand up to both unions and the Soviet Union, it will take an iron will to stand up to crony capitalist and monopolist, who would ruin our nation for their personal enrichment.

A renewed commitment to the middle class, with the preeminent goal of maximum employment, by both political parties - and the Federal Reserve - would do a great deal to revive the country and the economy; and fear not, the rich will still make money.  In my mind, one simple measure/mandate is called for today by our government:  if you sell in America, you hire American labor in direct proportion, whether your company is foreign or domestic based.  How painfully simple!

Ironically, if Mrs. Thatcher and Mr. Reagan were to run for the top job in America today, based upon their respective records, it is Mrs. Thatcher who would triumph over Mr. Reagan for the Republican nomination, such was her unshakable will --- no matter how misguided some of her policies.  We often forget that Mr. Reagan was a democrat before he became a republican, which might explain why his heart was slightly bigger than his will.

P.S.

On a final note, Mrs. Thatcher eschewed the precursors to the European Union or Monetary Federation, and the Euro.  Given the state of the E.U., it would appear that she led wisely.

 Copyright JM Hamilton Publishing 2013

The Ultimate GOP Candidate has yet to Step Forward….

The Ultimate GOP Candidate has yet to Step Forward…. 

By J.M. Hamilton (1-8-12)

“Today we have a similar debate over this… anyone know what this is… class?  Anyone, anyone, anyone seen this before?… the Laffer Curve.  Anyone know what this says?  It says at this point on the revenue curve you will get exactly the same amount of revenue as at this point.  This is very controversial.  Does anyone know what Vice President George Bush called this in 1980?  Anyone, Anyone?  Something D-O-O economics… voodoo economics.” 

- Ben Stein from the movie, Ferris Bueller’s Day Off

Happy New Year!

I don’t get it.  The GOP candidates are running around destroying each other, trying to figure out who will lead them out of diaspora and back to the White House.   Debate after Republican debate only shows which leper has the least spots (hopefully that’s not politically incorrect?)

Have you ever seen such a fatally flawed crew?

The only one in the mix with real gravitas, who could pose a serious challenge to the incumbent, is the only one who hasn’t bubbled up as the monthly Republican candidate du jour, that would be Mr. Huntsman.

Romney,who seems destined to get the nod, is going to become the “Bain” of private equity.   Seriously, if you are an executive officer for TPG Capital, Blackstone Group, KKR, Carlyle, or any number of private equity firms, you’ve got to be pouring money into the campaign coffers of anybody other than Romney.

Why?  Because with a Romney nomination will come intense and withering scrutiny of what private equity is and does:  which is kill jobs; liquidate, flip and merge companies; and increase the concentration of political power and wealth in this country into fewer hands.

And the real irony of a Romney nomination (?)… Evangelicals, who make up a substantial percentage of the core Republican base, fear a new world order and one world power.   Evangelicals believe a one world power cabal is a sign of the end times and the antichrist…. if I have that right.  If that’s the case imagine evangelical dismay when they learn that private equity is probably one of the largest single contributors to globalization and the concentration of power on the planet, aside from the Wall Street Cartel.  Yep, the likely Republican nominee, Mr. Romney, is the poster boy for private equity and the concentration of economic, and hence, political power.  President Reagan was not a huge fan of concentrated power, by the way.

Separately, just imagine the scrutiny Mr. Romney is going to bring to the “carried interest tax?”   A tax benefit that is near and dear to every private equity exec’s heart.

Moving right along… as much JMH finds the most interesting Republican candidate by far, to be Ron Paul, he unfortunately carries with him some baggage; baggage that afflicts many of his generation, and unfortunately successive generations, as well.   That people, and even political candidates, can grow, evolve, and shed intolerance over time appears lost on many who rabidly oppose Mr. Paul.   Nevertheless, racism of any kind is a very serious charge, rightfully so, and is likely to stick to his candidacy, even with earnest disavowals.  The real irony is that the twisted brother of racism, he goes by the name of Religious Bigotry, would appear to be on full display with another Republican candidate, Mr. Santorum; and yet, Religious Bigotry appears more widely tolerated in Republican circles.  J.M.H. is not the first to write it, but it bears repeating…. at least a President Ron Paul would not seek to legislate religious beliefs/morality from the White House (shucks, a President Paul just might close up shop and sell the White House), while a President Santorum would likely set up a theocracy, and a religious police force that would make the Taliban pale in comparison.

As this blog has suggested before Mr. Paul and his follower’s single biggest contribution to this election cycle is to draw attention to just how similar both parties, Republican and Democrat actually are, and how both parties are addicted to big government.   J.M.H. actually believes in the importance of the U.S. government, but also acknowledges, as Mr. Paul does so well, that our government often overextends its reach into our personal lives, through incursions upon our civil rights, and globally, in the form of taxpayer funded foreign adventures, aiding and abetting war profiteering, and nation building.

Mr. Paul, personal failings aside, has a contribution to make to these upcoming elections, that of providing competition to the duopoly that runs our country; let’s hope he stays in the race, and starts a third party.

Which brings me finally to the uber Republican candidate…  this man has out “republicaned” the Republican party, by stealing their foreign policy thunder.  On foreign policy, he is second to none in protecting America from her enemies.   He hunted down and killed Osama bin Laden, and made significant contributions to Dictator Gaddafi’s immolation (both were Republican targets).  He brought our troops home from that legacy catastrophe of a war in Iraq – handed down to him from the Bush administration; and this individual has plans to exit Afghanistan.

This gentlemen has shown international leadership and the path to how America can enlist allies, and not go it alone, in Libya, a preferred model for future martial efforts; and he has also shown us how 21st century military engagements can often be handled with technology, manless drones, and lightening quick raids.   He has almost made Al Qaeda leadership extinct.  And he is the process of stream lining the DOD to fit our national interest and budget.   On foreign policy, President Obama makes the prior Republican administration look like amateur hour, and I would suggest to my readers that no current Republican candidate could step into his shoes and do as well.

And like prior Republican administrations, President Obama has kept strong ties to our ally in the middle-east, Israel.  As quoted in the Washington Post, Chicago Mayor Rahm Emanuel had the following to say about the President’s commitment:  “As I listened to the president’s speech on the Middle East, I heard him reaffirm his strong commitment to Israel’s safety, security and prosperity.”

On domestic policy, corporations have never been richer, profit margins are high, and balance sheets – in many instances – are rich with cash.   Fed policy under the President’s watch has been very generous to: the wealthy, Wall Street Banks, and multi-national corporations.   As for the Wall Street bail-out, again, this was a legacy project – initiated – by the Bush administration and Mr. Henry Paulson.   How this President handles the next, and inevitable, financial crisis remains to be seen; Mr. Obama’s administration will own the next crisis.

And while jobs are scarce – how much of this present economic environment is created by the plutocracy, via capital strikes, globalization, and unfair trade agreements?   These are issues that could be addressed, if the nation had a fully functioning Republican Congress that was interested in helping out the American economy, instead of holding same hostage for prospective political gain.  Unlike a President Romney, whose economic policies call for “borrowing and spending” as reported by Bloomberg last week, President Obama is more fiscally conservative and would prefer to pay as we go through a combination of spending cuts and tax increases.

President Obama does not appear to believe in what former President H.W.  Bush referred to as “voodoo economics.” He’s a pragmatic man and probably understands that politicians/congress doesn’t have the self- discipline to increase taxes in good economic times, which is the Keynesian paradigm’s shortcoming.

The argument I’m clumsily attempting to make is that, in essence, a moderate Republican already occupies the White House, and that by the standards of a H.W. Bush, or say, either an Eisenhower or Nixon, Obama should be the Republican nominee.   It is because the zealots within the Republican Party have moved the political center of this nation so far right, as to be rendered unrecognizable to many establishment Republicans from yester-year, that we have such a conservative and pro-business Democratic administration.

What this says for the economic and political aspirations of Democrats and Liberals is another story.  If I didn’t know better, it’s almost as if the plutocracy installed into the White House a Trojan Republican President, wrapped in the Democratic Party’s mantle.  It is because President Obama is the calmest, most rational, and most presidential choice, versus the Republican field of candidates, that J.M.H. supports him for a return to the White House.   Besides, the nation hasn’t had a foreign policy guru in the White House this gifted, since Nixon/Kissinger teamed up to conquer the world.

 Copyright JM Hamilton Publishing 2013

“In the long run we are all dead.” – Keynes

Was Mr. Keynes a Victim of his Own Success?

By J.M. Hamilton (2-17-12)

“In the long run we are all dead.” – Keynes

It’s been nearly thirty years now. I sat in an elective economics class, kind of a low key introduction to Econ, taught by the Dean of the Business School.  I was still a child.  Economics was dazzling.  It was the mid-eighties.   Reagan was in charge, and had overwhelmingly won a second term.  It was morning in America.  Inflation and unemployment were fading, and the Neo-Classical school of economics was on the march.   Markets were impervious and self-correcting.  Keynes was, well, dead.

He received about a chapter of attention in the course, and his ideas seemed to be on the wane.

Keynes primary idea being that government has a moral obligation to step into the breach during an economic downturn, and via fiscal and monetary policy, stimulate demand, until  the private sector could get back up on its feet again.  Once the private sector is off the canvas, government then should retreat from its role of supporting demand, and let capitalism and free markets resume their prosperous march.   Keynes also argued that during the good times governments should raise taxes, so as to save up for the inevitable, the next economic down turn.  There was something else I was picking up about Mr. Keynes in the conservative journals of opinions I read at the time, something about his personal life.  And Republicans did not like it.  By inference, the personal attack then was sometimes used to discredit to some degree the man and his ideas.  It was the eighties, and as Dan Savage might say the equivalent to the dark ages in terms of gay rights.

The anti- Keynesian position, at the time, was government is evil.  The Private Sector rules!  Milton Friedman uber alles…. All hale Chicago School of Economics!

My hand timidly rose up in the lecture hall.

“Yes, Mr. Hamilton.”

“Ummm…. Could President Reagan actually be using Keynesian policy to stimulate the economy, presently, with the record deficits he’s been running?”

“Mr. Hamilton, see me after class.”

Oh $H!T!  But there was nothing to worry about, the Dean was cool.  There were no protest movements on campus, and I certainly wasn’t running with any fast or liberal crowds.  What was there to protest:  No War and Maximum Employment!   After class, the dean sized me up and said,

“Now Jay, in regards your question…  you’re a Republican right?”

“Well, yes sir.”

“Okay, then…. let’s move on.”  The subject turned to post graduation, employment and grad school prospects, etc., and my question went unanswered.   I inferred from the Dean’s evasion that one did not bring up Keynes in polite conversation.

Almost everything I have read, as of late,  indicates that Keynes ideas hit their apogee post-great depression, culminating with FDR and World War II, and enjoyed a glide path into the fifties and sixties; and then are seen as being discredited by the seventies (economic shock, high unemployment and higher inflation).  Then thirty years of indoctrination about infallible/self-correcting markets; Capitalism rules; and Keynes/Socialism was bad.  Just cut taxes, give the money back to the peeps (particularly the well to do), and all will be well.  And there were plenty of numbers that seemed to support Neo-Classical economics, like rising GDP and the Dow.  A rising tide did, indeed, seem to be raising all ships/boats/dinghies.

And I look back now over the last thirty years of economic history, and I believe I was right back in that lecture hall: Keynes ideas and thoughts had never left us.  Even in the 80′s, 90′s and 00′s, he was in the driver’s seat all along.  Oh sure, the jargon had changed, the ideology and mantras  were clearly different, but in the long run there was a permanence about Mr. Keynes and his ideas.  And in fact, I argue that the greatest Keynesian Presidents were not whom we would naturally think, FDR and Truman (for much of his presidency FDR was fixated on balancing the budget), but rather, Messrs. Reagan and Bush (W.).  These latter two Presidents may have talked a good Capitalist/Neo-Classical game, but in fact, both administrations were highly addicted to big government and government spending.  Their respective economies, and second terms, were dependent upon Keynes.

If we go back and look at the last thirty years we know the Federal debt to GDP ratio escalated significantly under Reagan, Bush (HW), flattened with Clinton (who actually ran budget surpluses), and continued to rise again under Bush (W).   The crisis thirty years of free market dogma and financial deregulation left on Obama’s doorstep has caused the debt to GDP ratio to climb even higher, 80% to 100% of GDP – depending upon whose figures one believes (and obviously, these ratios do not include underfunded liabilities such as social security, Medicare and Medicaid).   Moreover, government spending as a percent of GDP has seen a similar trajectory over the last thirty years, so that it’s now north of 40%.

That’s a lot of government redistribution for a nation of hardcore capitalist.

Republican administrations that pre-dated President Obama, starting with Reagan, actually, enjoyed a triple kick to the economy:  first there was growth in government spending (financed by foreign lenders) which helped demand; second tax cuts helped boost the economy on the supply side; and finally, the Maestro at the Fed basically placed a very large brick on the accelerator of monetary policy and the economy went into hyper-drive.   Many economists will tell you that government spending is a great boon to the economy, until such time as the debt to GDP ratio begins to hit 90% or greater.   It is at that point, which is now, that the debt burden can actually become a drag on the economy, due to interest payments on same, and expectations by the public and business community of higher taxes to bring the debt burden down.   In essence, at this debt level (90%) financing becomes a contractionary force (think of the crowding out effect alone).  Look at the major corporations and multi-nationals sitting on an estimated trillion in cash, due to fiscal uncertainty and the global banking crisis.

As a result, was Keynes a victim of his own success (?)… at the slightest hint of economic contraction in the last thirty years, Federal government spending went into overdrive; and even when the economy was on the mend, the spending still did not let up, and tax rates have been on a – relatively – steady decline, from Reagan through Bush – W (again with Clinton being the outlier). None of these Presidents seemed to want to raise taxes once the economy turned the corner, a key Keynesian prescription for fiscal sanity.

Keynes Blind Spot:  As of late, however, Keynesian policy seems to have hit the wall.   Trillion dollar deficit spending and ultra- loose monetary policy doesn’t seem to be spurring the economy in the manner they once did.   I’m no expert but did and could Keynes foresee that a massive banking cartel, the world is presently faced with, could and would refuse to lend out monies generated by expansionary Fed and E.U. central bank policy?  The Cartel in essence refusing to lend out money to stimulate growth – instead largely engaged in speculation or hoarding, due to impaired balance sheets or simply out of political spite, via capital strike.  Did Keynes foresee that Republicans deploying Keynesian policy and supply side economics, coupled with three decades of untrammeled mergers and acquisitions, would create massive monopolies and oligopolies, which via regulatory and government capture, would siphon off a not insubstantial share of fiscal and tax policy benefits?  Here, Keynesian policy was not directed, as he intended, for the betterment of the working man and to achieve maximum employment; but rather, Keynesian policy – wearing Neo-Classical garb – appears in many instances to have been bastardized and government expansion, rules and regs, were utilized for the enrichment of the few, the proud, the elite!

One can only speculate, but my guess is:  If he was here with us today, faced with the tremendous success of his own policies, and faced with the present limits of same, no matter how perverted and warped by successive Republican administrations, Mr. Keynes would have been a fan of the Volcker rule (which thwarts utilization of Fed monies for speculative purposes and deploys monetary policy to its traditional role of lending money); and he may have been positive about the breakup of the too big to fail banking cartel, which seems to be sucking the heart and soul out of expansionary monetary policy.  My guess is the humanistic Keynes, who had a vision of a harmonious world, would have wanted to shift the largess of government – both demand and supply-  away from the wealthy and the powerful, and back to those most in need, the ninety-nine percent – arbiters of top line growth, an expanding economy, and greater corporate profitability.   In the present, Keynes’ policies may have not been limited to objecting to proposed cutbacks in the welfare state, but instead, Keynes probably would have been for positions that limited – at least ameliorated – the impact of globalization, and protected workers rights and wages.

The old saw of a “rising tide lifts all ships,” also works in reverse, if you catch my drift; that is, we’ve all heard of “trickle down,” well perhaps a good term for the inverse is “flood up.” Imagine if you will, banks and GSE’s refinancing, or better yet, restructuring residential mortgages in this country, and we could all see “flood up” in action.

Mr.  Keynes’ proscribed policies are said to have only begun to break through to FDR, later in his presidency.   Such irony that Keynes greatest ideological detractors should end up being his greatest practitioners, the Republican Party for the last thirty years.

Copyright JM Hamilton Publishing 2013