Roubini warns of fiscal train wreck

Economist Nouriel Roubini, writing in Financial Times, warns that the election of so many GOP’ers will cause an even deeper recession on the order of the 10 year Japanese stagnation. He writes that what Obama did was correct, although the stimulus should have been larger and another one is need right now. However, the GOP/TEA party will never allow it or any of the tax increases required to bring down the deficit. As a result of the coming gridlock, he expects the bond holders to wake up one day soon after the election and start demanding their money. That will spell doom to the economy and may result in a worse recession.

The upshot is that the current gridlock in Congress will soon get much worse. Of course, Mr Obama cannot entirely be blamed for his limited progress, when the Republicans take that Leninist approach of “the worse the better”, and offer no co-operation on any issue. That they now see Mr Obama as a one-term president will soon mean the worst open warfare inside the Beltway in 30 years.

The coming stalemate will only be made worse by the lack of a reason to act on the deficit. The bond vigilantes are asleep, while borrowing rates remain unusually low. Near zero rates will continue as long as growth and inflation are low (and getting lower) and repeated bouts of global risk aversion – as with this spring’s Greek crisis – will push more investors to safe dollars and US debt. China’s massive interventions to stop renminbi appreciation will mean purchasing yet more treasuries too. In short, kicking the can down the road will be the political path of least resistance.

The risk, however, is that something on the fiscal side will snap, and the bond vigilantes will wake up. The trigger could be a debt rollover crisis in a major US state government, or perhaps even the realisation that congressional gridlock means bipartisan solutions to our medium-term fiscal crisis is mission impossible. Only then will our politicians suddenly remember that, on top of our federal debt, the US suffers from unfunded social security and Medicare liabilities, state and local government debt, and public pension bills that add up to many multiples of US GDP.

Scared? You should be.

It really angers me that the GOP played politics and that the TEA party GOP’ers lack so much economics knowledge. They’re leading the country to certain fiscal stagnation or worse. If the Tea party/GOP win this election, we will all live to regret it. Already, some TEA party GOP’ers are taking about defaulting on the debt. “It would be a shame, but it might be necessary.” If that happens, the current recession will look like a stroll in the park on a sunny morning. It will make the Great Depression look like a serious Recession. It will ruin the country.

Financial Times: Why US voters are suing Dr Obama

Martin Wolf, Chief Economics writer for the Financial Times, voices his opinion on why the American public is misledPresident Obama and the U.S. economy and how the Republicans are fostering that misleading idea.

Published: October 26 2010 22:28 | Last updated: October 26 2010 22:28

An ambulance stops by the roadside to help a man suffering from a heart attack. After desperate measures, the patient survives. Brought into hospital, he then makes a protracted and partial recovery. Then, two years later, far from feeling grateful, he sues the paramedics and doctors. If it were not for their interference, he insists, he would be as good as new. As for the heart attack, it was a minor event. He would have been far better off if he had been left alone.

That is the situation in which Dr Barack Obama finds himself. A large part of the American public has long since forgotten the gravity of the financial heart attack that hit the US in the autumn of 2008. The Republicans have convinced many voters that the intervention by the Democrats, not the catastrophe George W.Bush bequeathed, explains the malaise. It is a propaganda coup.

Does President Obama deserve blame for this outcome? No and yes. No, because his treatment was right, in principle; yes, because it was too cautious, in practice.

It is essential to remember the context. Large financial crises do long-lasting damage. As the University of Maryland’s Carmen Reinhart and Harvard University’s Kenneth Rogoff note in an update of previous work: “More often than not, the aftermath of severe financial crises shares three characteristics. First, asset market collapses are deep and prolonged … Second, [it] is associated with profound declines in output and employment … Third, the real value of government debt tends to explode.” As ever, the risks built up, disregarded, in the boom and materialised in the bust.

Click here to listen to Martin Wolf.

How A Wall St Guy Worked to Save the Auto Industry

This Monday evening on Oct 25, I watched an interview by Charlie Rose with Steve Rattner. Rattner oversaw the transition of GM and Chrysler from near bankruptcy – and what that would have meant in lost jobs to millions of hardworking Americans all along the supplier chain – to companies that are now seeing profits. I remember reading stories at the time in which Nissan and Toyota begged the Federal government to save at least GM because if GM failed their supplier chain would fail too.

Rattner is both an experienced journalist and a successful Wall St trader who currently works for Mayor Bloomberg.

Rattner’s new book, Overhaul: An Insider’s Account of the Obama Administration’s Emergency Rescue of the Auto Industry, details how the people inside the Administration argued for and against the loans to the auto companies, and why he ultimately chose to save GM and sell Chrysler to Fiat.

In his interview, he remarked how grateful he was that he had the TARP funds to rely upon in this emergency because getting Congress to act speedily was a non-starter…and far too parochial and partisan in March of 2009 to resolve a financial problem that meant the eminent loss of nearly 300,000 jobs when the stock market was not just in free fall but the credit markets were locked up.

His biggest surprise, he told Charlie Rose, was coming from an investor viewpoint to having to deal with the large number of Congressional members, from both sides of aisle, who contacted him to demand that dealerships in their districts be saved, even though those dealerships were not viable from a business viewpoint. Essentially, he said, these Congressional members from both parties put politics ( their jobs) over the necessity of rebuilding the auto companies to be viable businesses again. He said that was his greatest frustration was dealing with partisan Congress and a Wall St impression of itself that was and continues to be incorrect.

Over and over again, he remarked that Obama and his staff is neither anti-business or far left wing. He compared Obama with President Clinton as a centrist, stating that Obama had been thrust into a far more difficult position than any recent President and had to balance the scales between the self-perception of Wall St and that of the American people.

One of Rattner’s more enjoyable anecdotes, at least for me, occurred a month or so ago when he spoke to a group from Wall St. In his speech, he told Wall St that the people of the Country were angry at Wall St and that Obama was not anti-business but only attempting to reflect to Wall St the country’s populist sentiment. As he told Rose, he was booed. When he said that Obama, a truly business friendly president, was caught with one foot between business and an angry populace, he was booed. When he told them of the simmering anger across the country against them, again he was booed. When he told them they needed to change their ways to prevent a populace backlash against them, they booed him again.

My impression from the interview is that Rattner believes that Wall St is so out of touch with the rest of America and so insular and self-seving that they suffer in the long term.

Will that populace revenge occur? It’s difficult to see into the future. But it wouldn’t be the first time. In the dark years of 1930’s, the revenge against the rich was so great that even the movies – the great depicter of American values – represented the “average Joe,” the guy who cared more for average people than the wealthy, as more intelligent than Wall St moguls. But one thing these average heroes in the movies had in common was their belief that all Americans deserved an even shake and even stake in the economy.

Rattner – and even Obama – have tried to tell this story each in his own way. A fiscal crisis is not an easy economic matter from which to recover. It’s not a simple downturn in the market or a matter of inflation, but a serious disruption in the market caused by irresponsible speculation. How that irresponsible works out over time has yet to be defined, but President Obama should not be the fall guy for everyone’s failures or ideology.

The failure lies with Wall St and a market that has yet to come to come to terms with its own self-interest and the good of the country.

Ted Talks: Game Changing Ghandian Engineering

Disruptive innovation: doing more for less for more and more people.

The United States needs these kinds of Game Changers as we move further into the 21st Century. We can’t live in the past. 1950 will never return. We will not and cannot lock our borders to goods and people and hope to thrive. We’ll just get left behind.

Instead, we have to innovate our way out of structural unemployment. Take existing problems and challenges and think about them a new way with new low cost requirements. Then let the imaginations of the best and brightest go to work.

Watch the video:

Palin Loyalty

Eddie Burke: Sarah Palin’s forgotten baby grizzly. If ever there was anyone who worshiped at the shrine of Ms.Gov.VP.Princess-for-Life Palin, it was Eddie. But now comes election day — for Eddie, not for Palin — and where is the former governor, failed candidate for vice prez, and national political endorsement machine? Where is the Palin endorsement of Eddie Burke for lieutenant governor? Couldn’t she at least have thrown poor dog Eddie a bone?

Palin is a huge draw for the TEA party and Republicans, even though her poll ratings across the country is quite low, nearly in the single digits. But what surprises me when I look at Alaska politics is how she has abandoned her almost lavish supporters in her climb up the political ladder.

Yes, as all Alaskans know, grizzlies aren’t like wolves. They don’t run in packs. They don’t care who has been loyal to the clan. But for crying out loud, Eddie was almost a cub to Sarah. He was there, in his past life as a talk-show host, pushing her brand almost from the beginning. But in the end, he was left to run as nothing but another “common-sense conservative,” because he couldn’t actually get the endorsement of the all-powerful mama grizzly.

It is hard not to feel for Eddie at this point. It is hard not to want to rub his bald head and say, “It will all be OK some day.”

All the polls are predicting Eddie the Burke, the former gas station owner, will finish a distant third behind Mead Treadwell and Jay Ramras in the Republican primary for light gov when the day is done. Granted, there is no reason to believe Palin’s endorsement would have vaulted him past two better qualified candidates and into the lead. But it couldn’t have hurt.

And didn’t she owe him? When others in Alaska were beating up on Gov./Ms. Palin (including, sadly, at times, the author of this screed), Eddie was always there to defend her. Eddie was the ultimate in reliable troopers. And where is he today? Well, we don’t know for sure yet, but it would appear that he’s going down in flames.

I don’t believe that a politician should succumb to the idea of supporting for public office every would-be aspiring fan to public office, after all public office requires a great deal of intelligence, intellectual curiosity, and negotiation skills to handle the many challenges required in public office. But when someone watches your back and supports you as much as Mr. Eddie Burke has done for Sarah Palin, it seems that a little consideration is in order. Or maybe Ms. Palin doesn’t think even a little loyalty to her supporters is relevant in her climb up the political ladder.

How to Return Confidence in Government

As everyone who reads my blog knows, I support a major change in campaign finance in order to bring more public confidence to policy and funding decisions.

The massive amount of rhetoric – and finger pointing – that exists right now surrounding all the secretive funding by unknown donors only lends credence to the argument that campaign financing needs to be changed. Whether or not candidates are being funded with foreign donations, undoubtedly, is a big issue.

But even more important, perhaps, is the issue of whether those donations are purchasing favorable legislation or are being used as a lever for or against a candidate to obtain legislation a particular donor wants.

How does the public know? How can the voters have confidence that the decisions being made by our elected politicians are in the national interest…or in a specific donors interest? How do we know who they really represent?

Watch this video:

Needed now: Innovation Game Changers

I spent today watching the Daily Beast Innovation Summit on C-SPAN. If you did not watch it, you should. [See C-SPAN videos]

No one could have imagined where we are now, with nearly 10% officially calculated unemployment with probably unofficial unemployment numbers – and underemployment – of nearly 20%. But here we are nonetheless as a result of the fiscal policies that led to a decline in our overall fiscal and economic health. No one anticipated the rise of China, Taiwan, Singapore, and India so rapidly…nor did they plan for it.

No one thought beyond the next quarterly report or the next 2-year election cycle. As a result, our leaders in both government and business failed all of us. So caught up in the story Wall St. fed us through their constantly improvised story of self governance and market perfection that even skeptics of all political persuasions were won over…or just retired. Thus, when the crash occurred in 2008 that threatened the entire economy, everyone was taken by surprise.

Regardless, it’s going to take time to climb back out of the debt hole we dug ourselves into over the last 30 years, just as it always has to come back from a financial meltdown. But the US has done it many, many times before. The 1800s was an era of financial booms and busts, with long decades of growth and long decades of stagnation and economic pain, culminating in the rise of workers strikes, books from the likes of Sinclair Lewis, bloody deaths of workers by company henchmen, and finally governmental intervention to calm the volatile conflicts.

As the past has shown, we cannot return to the decades when financial services was the country’s major domestic industry. Nor will Big Oil bring prosperity to us.

Our country needs innovation to move us forward. The federal government may not be able to create private sector jobs, per se, but it can enable those jobs to come into being through its policies of capital investments in a 21st century infrastructure; investments in innovation through agencies such as the NIH, DARPA, and ARPA-E; an innovation infrastructure bank; rewarding and helping companies that invest in R&D (20 years ago we were number one; now we place well below China, Singapore, Taiwan and India); demanding our schools to recreate themselves with more STEM classes as well as creativity/imagination/problem solving learning and skills; restructuring our entire tax system to encourage businesses to invest here rather than abroad; eliminate short term investment incentives (speculation) in favor of long term investment (growth); push for and continue the evolution of health care cost (currently at 17% of GDP or $1 Trillion per year) containment strategies; and last but certainly not least a financial system based less on speculative gambles and more on investment in our country and our people.

But that’s not all that needs to be done. We need to reduce wasteful military and unnecessary expenditures on projects that even the Pentagon doesn’t want or need; reduce the number of Cold War bases/posts [currently over 800 worldwide] and restructure our military post-Cold War to face our 21st challenges; eliminate automatically funded tax payer subsidies to highly profitable legacy industries such as Big Oil (think Exxon-Mobil), Big Ag (think Con Agra), Big Coal (think Massey Mines) and a whole host of other companies/industries that use their lobbying power to force the tax payer to pick up their risk while paying them (the companies) financial benefits. These kinds of corporate welfare reduce not just free market fairness (leveling the playing field/free market creative destruction, i.e. horse drawn buggies vs automobiles) but stifles innovation and growth.

If Republicans, including the so-called Libertarian TEA party Republicans, are returned to power, none of the needed policies will occur. We’ll go back to the same tired, disproved policies that even the most highly respected Reagan economic officials recently have railed against.

We’ve been bamboozled for nearly 30 years. It’s time to change direction. Democrats – not that they are all perfect by any means – see the writing on the wall and some of them are willing to step up to the challenge our President articulated during the 2008 election campaign. As he rightly said then, it’s not an easy challenge because we’ve been stuck and been losing ground for so long our policy makers hardly know where to start. But we can reinvent our society and our businesses and our lives for the better if we make that choice now.

I know it’s hard and we all want a quick, easy solution. But the fact is we’ve been living on a debt fueled economy for so long that it’s going to take a long time to get out of that hole. Bank speculation induced recessions historically take nearly 10 years to recover from. We’ve already seen modest growth. We can see more if we choose to not go backwards.

We cannot afford to go backwards if we want our children to have better lives than we have had. The current field of Republican candidates, in my opinion, will not lead us forward, but, instead, lead us backwards causing the United States to lose its competitive edge to the BRIC countries and creating even fewer jobs as well as a deeper deficit and long term debt problem.

Do not vote Republicans this year!

Force Republicans to field candidates who are not stuck in 1950s and who recognize that we are living in an entirely new world of global competition…and we have to compete!!!!!

I’ve forgotten who said it, but the line was; “either change – to compete – or die”. (Actually that’s a business “line” but it works for countries just as well.)

Republicans, currently, are not focused on this maxim which is why they should not be given majorities in Congress. When they develop better strategies that move the country forward against the global economic environment we face, then vote them in by all means. But so far they have no ideas which they’ve elucidated to change the current global economic dynamics now in play.

Darryl Issa wants to impeach the president, spending millions of tax payer money on fruitless “witch hunts”.

McConnell and Boehner want defund the commission which holds the only the chance of bending the medical care cost curve for families and businesses. Medical care currently costs 17% of GDP or $1 trillion a year. That is a budget deficit that is unsustainable for governments, businesses, and families as they will be required to pick up ever higher premiums and costs. Health care costs, throughout the last two decades at least, have grown at twice or three times the rate of inflation. As a result, businesses need to leave the country to contain their costs…or go broke.

In addition to all the other economic threats posed by a Republican Congressional takeover, Paul Ryan, an Ayn Rand acolyte, wants to hand over Social Security to the vagaries and speculations of Wall Street which, per his plan, could cost the taxpayers billions more.

Plus, potential Republican newbies are advocating eliminating consumer protections in the name of the free market philosophy (citing, by his own words, the discredited 1944 macro economic model that never occurred in the U.S. – Hayek – or the self-centered, anti-Christian view of Ayn Rand) they imagined from the 1950s but which does not exist now in a globally competitive economic world.

Long story short, handing over Congress to the Republicans – no matter how much you dislike your current Democratic Congressional representatives – would be a huge mistake simply because the Democrats at this point in time are the only ones who appear to recognize the important changes needed for the U.S. to become competitive again.

Religious freedom in the U.S. rears its head…again!

Much has been made during the last election several election cycles regarding religion. With the rise of TEA party candidates such as Sharron Angle and Christine O’Donnell as well as controversial Islamic mosques, many arguments surround religious freedom in the U.S. Historically, here is what the founders thought.

A Bit of History

Prior to the various state constitutions, parishioners of all church sects were forced to pay “taxes” to support individual State churches. During the state constitutional conventions, people of differing sects petitioned their representatives to eliminate that tax, stating that they were being discriminated (taxed without representation) against. They were being forced to pay a tax to support a church to which they did not adhere. They found those taxes unfair, unjust, and just plain wrong. If memory serves, Patrick Henry spoke eloquently before the Virginia legislature about people of other religious beliefs having to pay taxes to support the State religion and how much that reduced freedom and freedom of religious expression.

Values did not enter into the conversation, since most held the same WASP values. But the idea of being taxed to support a church to which they did not belong did.

As a result, Virginia and Massachusetts, in particular, wrote into their state constitutions that the state would not interfere with religion nor would religion become a state affair. Separation of church and state, for the first time in human history, would exist, giving the maximum freedom to church goers of every creed.

When the Constitution of the US was being drafted, the men who had worked on state constitutions – men such as Madison, Jefferson, Adams – chose the same methodologies they had found so desirable – and approved of – by the populace in their states.

Of course, these men knew the history of religion in Europe: the Inquisition in Spain, the St. Bartholomew’s Day Massacre in France in which hundreds of thousands of Calvinists were slaughtered over the course of a week, the several Bishops Wars in Scotland up to and including Culloden, and the burning of Protestants in England under Mary.

Nevertheless, these uniquely Americans’ primary motive in choosing to separate religion from the state was not what had occurred in Europe but their motive was to provide the maximum amount freedom of religious expression in the U.S.

They essentially said no matter what your religious persuasion, the state will not discriminate against you, by levying taxes against you or prohibiting you, in any way, from worshiping as you choose.

Essentially our Founders in writing the First Amendment stated, as Queen Elizabeth I told her Protestant ministers who urged her to prosecute Catholics, “I am not the conscience of mens’ souls. That is between them and their God.”

Therefore, our Founders stated the Federal State will not take sides between one religion or another. All religious expression from whatever church or belief will be treated equally and none will take precedence in the law. Each person may practice their religion as their conscience dictates and as they believe, but no one religion will take precedence in the law of the land.

NOTE: For a more complete explanation of the Founders’ thinking as noted in the Federalist Papers, concerning the establishment of the Constitution of the United States, as its primary doctrine, go to this site.

Seniors Beware!

Lawrence A. Hunter, Ph.D., president of the Social Security Institute and of the Alliance for Retirement Prosperity and previously served as Republican staff director for the Joint Economic Committee, writes in Roll Call:

Reports from inside Obama’s bipartisan National Commission on Fiscal Responsibility and Reform — what one wag called “18 unrepresentative, inordinately wealthy individuals meeting regularly in secret behind closed doors, until safely beyond this year’s midterm election” — reveal that Social Security is on the chopping block. Several Republicans on the commission have indicated their eagerness to go along with these plans to cut Social Security, which could be shoved to the top of the agenda of the upcoming lame-duck session of Congress.

According to news reports, one Republican member of Obama’s deficit commission, Rep. Jeb Hensarling (Texas), said, “Democrats are kidding themselves if they believe Social Security will be preserved without major benefit cuts,” and he repeated the line disseminated by the conservative wonk network, which has become a mantra inside the GOP establishment: “Social Security benefits will have to be cut 24 percent in the coming decades, as the baby-boom bulge of retirees outstrips funding.”

House Minority Leader John Boehner (R-Ohio) also has said he supports raising the retirement age and other reforms.

The Republican Party appears to have been intimidated into embracing drastic Social Security cuts both as a means of eliminating the program’s long-run actuarial deficit and reducing the federal deficit — “bending the Social Security cost curve down” right onto the backs of seniors. That is why seniors and baby boomers would be well-advised right now, before the election, to demand that the Republican Party commit itself unequivocally to taking Social Security and Medicare off the chopping block before voters hand the GOP a mandate to cut a deal with the Obama administration.

The Alliance for Retirement Prosperity has asked all Members of Congress and candidates for Congress to sign a pledge committing to oppose any cuts to Social Security and Medicare benefits.

Seniors, are really sure you want to vote in all those new Republicans?

Would a Divided Government, At This Time, Resolve Our Challenges?

Under normal economic conditions, I would agree that a divided Congress works best for the country as it modifies the extremes of both parties, thereby guaranteeing policies that work best of the populace and for business. However, we are not in normal economic conditions. Yes, the country needs a Congress in which the extremes of the majority is moderated by the minority. But right now, it appears that partisan politics is playing a larger role than is good for the country.

As a result of our “global competition deficit” which has been fostered by both parties,

-we have a tax system that requires a major overhaul to foster increased global competitiveness;

-a financial system that is still out of control and fails to understand its role in society and business;

– a health care system, regardless of the new ACA, that still eats up 17% of GDP, hampering business;

-$500 Billion/yr in tax payer subsidies to legacy highly profitable corporations and industry sectors at the expense of new businesses;

-a continuing decline of the manufacturing sector within the US which prohibits non-college graduates from obtaining jobs and participating in the growth of the economy;

-a decline in infrastructure that is not only physically dangerous but also greatly reduces global business competitiveness;

-an educational system that has been in decline (the US ranks lower than Kurdistan and something like 11th in innovation and R&D);

-an inequality of income between the top 1% and the vast majority of the middle class that makes the conditions prior to the French Revolution appear on par with now;

– and an inability to foster new businesses to meet the needs of the 21st Century and global climate change.

Gridlock will not solve these problems. Two years of Congress playing “Is it Constitutional?” or not will not put the American people back to work, increase tax revenues, rebuild the middle class, or solve our fiscal problems or global competitiveness. What most probably will occur, as a result of all the ideologically-speaking odd TEA party candidates being voted into office, is an accelerated stagnation of the economy and loss of global competition.

If Republican had put forth serious minded candidates, rather than ideological extremes, then I would have greater confidence in a divided government as a divided government often improves policy. In this particular case, I do not have that confidence, regardless of whether or not Obama wins in 2012…because Obama winning in 2012 is the least of my concerns.

My concern is our nation and our people in a world in which global competition can make or break an economy. I do not see, at present, Republicans being serious about this threat to our national economy.