Wednesday, December 16, 2009

The brink


Paul Volcker administered strong medicine to the U.S. economy when he was the Fed Chairman in 1979, driving interest rates to 20 percent to slay the dragon of inflation. Today, he thinks, banks still have their golden parachutes and regulators are doing nothing to prevent the next debacle. (Tip of the hat: P.W. Bailey's What Is That Whistling Sound?)
Paul A. Volcker visited nine cities in five countries in the past eight weeks to warn that bankers and regulators “have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years. …

Two years after the start of the deepest recession since the 1930s, no U.S. or European authority has put in force a single measure that would transform the financial system, based on data compiled by Bloomberg. No rule- or law-making body is actively considering the automatic dismantling of banks that Volcker told Congress are sheltered by access to an implicit safety net.
Bailey comments:

After being brought in as an advisor to the Obama administration, Paul Volcker has discovered his appointment was for appearance only. Volcker's warnings have been repeatedly dismissed and ignored by policy makers in the US and Europe. Volcker understands the risks to the system that are building threaten to disrupt the global economic system. Economic heavyweights Joseph Stiglitz and Simon Johnson of MIT have thrown their support behind his proposed reforms. The issue is a lack of political will to do "the right thing".

If the high level of leverage remains in the system, with banks and financial institutions failing to build adequate reserves and increase Tier 1 capital, a major crisis is inevitable. The path governments and central banks are on that, to quote Volcker, "brought us to the brink of a great depression", pushes us past the brink, and into the abyss.

But it's doubtful that just passing more laws and creating another layer of bureaucratic oversight will help the U.S.S. Titanic dodge the iceberg. Much more important is what he told a college audience, that "we need to produce more, spend less." It should be obvious by now that you can't endlessly base an economy on credit, people borrowing to buy things, the government borrowing from foreign countries to finance its own debt.

Far from learning anything from the past two years, the Obama Gang has been determined to rebuild the house of cards. Whether out of ignorance, short-term political advantage, or a deep if perhaps unconscious desire to destroy a country he is alienated from, our spender-in-chief is ignoring the economic facts of life.


The only real path to prosperity is to create wealth by producing goods and services that can be sold at a profit. The process can't be short-circuited by creating yet more debt, and it certainly can't work by squeezing "the rich" (however that is defined) and the middle class and redistributing the proceeds through various welfare state programs.

Leaving to one side the moral aspects of government larceny, the very rich won't put up with it — they'll simply find ways to keep their money outside the system or the country. The middle class can be bled white, but at the cost of destroying the nation's economic backbone.

Before long, there'll be no wealth to spread around. It's happened elsewhere often enough, mostly in countries with Marxist governments. We have no special mandate from Heaven to protect us from radical leftist politicians.


To return to fiscal sanity, we shouldn't be thinking about what to do. We should be thinking about what not to do. More specifically, what not to spend (borrowed) money on.

We need to recognize that subsidies and programs that might — or might not — be good in themselves are collectively dragging us down. We need to curb our appetite for all kinds of spending, even when it's "useful" to some part of the population. The U.S. needs to go on an appropriation crash diet.


Strong medicine: Put many federal agencies out of business. Cut the number of federal employees by half. Take the central government's dead hand out of education. Use the armed forces for the purpose they were designed for, national defense, not refereeing fights between Muslim death squads in Kulawiznistan.

Quit taxing the American citizens to pay for illegal immigrant women ejecting their anchor babies. Stop giving out green cards and HB-1 visas for foreigners to replace U.S. workers.

We can think of hundreds more things to not spend money we don't have on. But that means we have to think. And stand up to the Washington vote-buying machine.


12.17 Karl Denninger, the fire-breathing economics blogger, is thinking along the same lines. (I had not seen his post before I wrote mine, above.) He tells Congress:

I stand impressed that you got away with this for as long as you did, but I also stand behind the view I expressed in 2007 - that the root problem is an excessive level of debt in the system at all levels, a level of debt that exceeds capacity to pay, and as a consequence any and all attempts to restart the credit-driven consumption economy would fail, and if pressed too far the government will fail.

The evidence strongly suggests that you are getting awfully close to your last chance to stop being stupid before the market hands you a lesson that has the potential to destroy both our economy and government.

Denninger is something of a sensationalist, so don't fall on your sword yet. But his posting is worth considering.

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