And the race drags on...

This week's Economist.com KAL cartoon.


As you might have heard, Hillary Clinton won Pennsylvania on Tuesday. I was hoping for her to lose so that this race could be over. So, that didn't happen. Instead she's still in the race, brandishing her unique brand of populism. Chris Matthews suggested that Obama be more of a "firebrand" and a "torch-bearer" speaking for the working man. It really made me think about the contrast of this race. If you know some political science, then you know that the bulk of the voters are in the center. On the extreme left and extreme right are the minority. Most of the time the one who becomes elected President is the one most successful in collecting the majority of the center (moderates). But, this isn't so in these Primaries, why not?.

It seems that both Hillary Clinton and Barack Obama used to be far more center than they are today. Perhaps it was their centrist appeal that made them each "inevitable," albeit it at different times. Hillary was unstoppable when she declared her candidacy in 2006. How far she has fallen. Barack Obama seemed inevitable after a decisive Wisconsin vote, remember? Then a shellacking in Ohio, Texas(popular vote) and lately, Pennsylvania. It seems they've each flown from the center to the left. It seems the longer this race goes on, the more populist it becomes.

Look at the key issues, Universal Health Care, the Economy and good ole fashioned gossip! Each of these issues offers a vision for a better tomorrow, what they fail to mention is the cost. Populist sermons tend to leave out those pesky details. But who really cares about that when we hear that someone's preacher gave a bad sermon, or that someone conjured up memories of past battle in Bosnia? This is what the race has come down to: who can appeal most to both a populist media (Thank you Glenn Beck, Chris Matthews and Lou Dobbs), and a blue-collar worker who just lost his job. This is a recipe for some government intevention. That is why Hillary Clinton will be the next FDR.

Social Programs, Price Controls (she proposed them in her previous medical care plan in 1994), and so on can be relied upon if she is elected. She will have a friendly congress, she will probably have a friendly majority. Spend, Spend, Spend. Historically, this has gotten us into big trouble. We're just coming off a spending Republican Congress and President. In with a spending Democrat? I may not like either candidate right now, but I can't see Hillary as president, it's a scary proposition. I just hope the one who is the least left wins. Democrat or Republican, our economy will thank you in the end.
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Please don't politicize the Olympics

Anyone who has been following the news this week knows that the Olympic torch relay, which precedes the Olympic games is under way. You may also know that that relay has been fraught with interruptions, protests and lots of grand-standing. The subject of all this distress is China's treatment of Tibet, a small region that most Americans would have trouble finding on a map. It is true that China has been represssing Tibet for over 50 years now, and it is true that they are heavy-handed in dealing with the small Himalayan region, but my question is what does this have to do with the Olympics? I understand that the Olympic Games cast the host city into a limelight, but that doesn't mean they need to be politicized. The Olympics are supposed to be beyond politics, Hu Jintao won't be throwing the javelin, Nicholas Sarkoszy won't be running the 100m dash, and George Bush and Vladimir Putin won't be involved in synchronized swimming this summer. These world leaders have nothing to do with the Olympic Games, it should stay that way. I truly hope, for the athletes sake, that this doesn't turn into the 1980 and 1984 Summer Olympics.

In 1980, Jimmy Carter believed it to be the duty of the United States to boycott the Olympics in Moscow to protest the Soviet's invasion of Afghanistan. Sixty-two other countries joined in this protest. The Soviets retaliated by boycotting the Los Angeles Games in 1984. Political posturing won the day, but it was the athletes who lost. These athletes trained their entire lives to compete against the best in the Olympics. They gave their proverbial blood, sweat and tears to get to compete, and they could not. Why? Because their home country didn't like the politics of another's.

Politics and Policy have their time and their place. Every day, there is some speech by some politician, either applauding or decrying some country's foreign or domestic policy. That opinion can change from day to day, as politicians are notorious for this activity. The summer of 2008 will come and go, and eventually the world will again forget about Tibet, as they have for the last half-century. But, if we boycott the Olympics for that purpose, what have we gained? A headline today and a Wikipedia article tomorrow, not much else. All these athletes who have worked all their life for the opportunity to compete on the world stage, they will lose. For many, this is their only chance to compete. Politics and the Olympic Games should not mix. The world leaders can say what they want, they always do, but leave the games to the athletes.
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Africa and the Lessons of the American Revolution

What was the greatest test of the American Revolution? Was it when the signers of the Declaration of Independence sealed their document and watched it sail toward England, knowing what they had started? Or was it when the Articles of Confederation were determined to be inadequate as a governing document, and a new Constitution was needed? Perhaps it was all those bloody battles during the Revolutionary War, where men suffered from malnutrition and hypothermia, ready to quit. Though each of these events are considered important to the Revolution, they were not the greatest test. The greatest test was in 1800. Long after the Constitution had been ratified and George Washington had served his two terms as this nation's first President. John Adams had just lost the Presidential Election of 1800 to Thomas Jefferson. When John Adams ceded power to his political rival, I believe that to be the cementing of the greatness of the American Revolution. It would be a lesson that some current African leaders would be keen to heed; losing an election may be hard, but relinquishing control can be the greatest gift an ousted leader can give.

When George Washington died in 1799, the Federalist Party was in deep trouble. They had lost their uniter, and thus were destined to lose power. John Adams lost a hard fought election to a most bitter rival, Thomas Jefferson. It could have been so easy for Adams to turn his back on the system of government he himself had fought so hard for decades before. It most certainly would have been the end of the American Revolution if John Adams had ignored the will of the electors. It would not have been the first time a leader refused to acknowledge the will of the people. Kings and Queens had been doing it for centuries, why should the Americans be any different? John Adams, of course did not betray America, and handed the keys of power to his opponent. This changeover set the standard for this country to follow long after Adams died in 1826. It is this lesson that two recent African leaders have chosen to ignore at their own countries' peril.

This past December, Kenyan President Mwai Kibaki seemed to have lost an election to his rival, Raila Odinga. Allegations of ballot-stuffing and vote-fixing tarnished both sides of the election, and Kenya descended into chaos. Kibaki showed just how difficult it can be for a leader to heed the will of an election. He had stymied his country's growth and lost his bid for the Presidency. Instead of ceding power, he clung to it, ensuring the near-destruction of his own country. More recently, Robert Mugabe of Zimbabwe seems to have lost his latest bid to remain President. So far, there has not been violence on the scale of Kenya, but nothing is concluded yet. After nearly 30 years of power, Mugabe has nearly destroyed his country with 100,000%inflation, astronomical unemployment, and an administration frought with corruption. It appears that his time is at an end, but will he leave?

John Adams did more for his country by leaving than will ever be acknowledged in the history books. His presidency was marred by the Alien and Sedition Act as well as a near war with France. Power is not an easy thing to release, just ask Fidel Castro. Next January will be a lesson for the American people as President Bush will hand power over to most likely a political opponent. Change is necessary to correct the ills of the past and guide a new future. Kenya lost that opportunity in December, Zimbabwe will likely miss theirs, thankfully we will not miss ours. Good governance does not just mean just laws, and a working legal system. It can also mean leaving when your time is up. That is the unsung legacy that John Adams gave to the Revolution in 1801.
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How the government can help

As many people may know, the Fed has changed its long-standing policy of being the lender of last resort only to regulated-commercial banks. This turn became apparent with the backed rescue of Bear Stearns two weeks ago. They have provided the credit market with liquidity and has done its job of making sure the credit markets don't completely collapse, along with any consumer confidence in the markets. But what of the housing market? Is there anything the government can do to facilitate the recovery of the housing market? We read of Hillary Clinton's call for the government to buy up sub-prime mortgages and Barack Obama's call for additional stimulus money (about $30 billion last I heard). Most approaches from the fiscal side embraces the idea of the state solving the problem. I propose that they not solve the problem per se, but do their part to allow the market to solve the problem itself. What I speak of is the real estate short sale and what the government can do to facilitate them.

A short sale is when a homeowner sells his or her house for less than what they owe on the house. This leaves a remainder for the houseowner to pay. In a short sale, the bank can agree to forgive the remaining debt on the mortgage basically in exchange for the home being sold. The down side of this deal is that the difference between the selling price and the mortgage debt is taxable income. In some markets, houses are losing hundreds of thousands of dollars in value. That is a lot of money to be added on someone's tax return as income. So much so in fact, that homeowners may still choose bankruptcy or foreclosure because they cannot afford this loss. This is where the government can help.

A well-regulated fiscal policy by the US government can forgive that loss through legislated tax policy. The government through its tax policy can facilitate short sales all over the country. If that loss is not counted as income, then this may lubricate the market better than any liquidity policy by the Federal Reserve.

This will revive the real estate market in several ways. First, it will allow buyers to enter the market again through short sales. Banks, needing better collateral to loan again, will have a lower price to loan a potential buyer. A lower price means a higher likelihood of having the 10-20% down on a new home. The mortgage market can move away from the fast-cash, no collateral, interest-only ways toward a more stable credit market with buyers with better credit. Second, this prevents the banks from taking on countless assets on their balance sheet through foreclosure, which will be sold at a loss anyway. Why not take that loss upfront, with someone not only still occupying the house, but still paying a mortgage? It may be less, but it is a lot more than if the bank was forced to bear the costs of foreclosure. Lastly, it will guide the housing market toward a more natural equilibrium. No one can argue that the housing market was inflated by the time of this downturn. A downward correction is needed, encouraging short sales will facilitate this correction.

If the government regulates these short sales to prevent misuse and fraud (and this is a big IF), then tax-forgiveness can be the lubrication the real estate market needs to move toward stability. A poorly regulated financial market, facilitated by the Fed's cheap money policy from 2001 to 2007 caused a white hot rise in real estate prices. They are coming down, and some argue they have further to fall. Now, this can be an absymal crash or it can be guided landing. The government has the fiscal authority to change tax law. Forgiving this mortgage debt is how the state can help. It is a minimal intervention, but it can have maximum effectiveness if it is done soon. The state will intervene at some point, let's just hope it is with the feather touch and not the iron fist. We may all lose in the end if that fist comes crashing down.
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1929 all over again?

As anyone reading this blog may realize, my eyes have turned on to this country's current economic crisis. I've been seeing a few news articles that suggest that this recent turmoil in the financial markets is dangerously similar to the crash that occurred in October 1929. When historians remember the Great Depression, they point at one moment as the turning point: Black Friday. Normally, the way it is read is that of some kind of cause; what most may not realize is that Black Friday was an effect. We would be wise to remember the lessons of 1929-1930. If we do, then we will see that today's problems are not that of the Great Depression, at least not yet.

A myth, propagated by the likes of J.K. Galbraith, blame the crash of 1929 on impetous investment and an immature margin system. Too many people bought too much stock with credit, and a chain reaction of margin calls sent the stock market into a downward spiral that caused the Great Depression. Though the stock market did in fact crash, this was a response to government legislation, not irrational investing. The legislation I refer to is the Smoot-Hawley Tariff of 1930 which sliced this country's imports in half, nearly overnight. An Act that spurred retaliation tariffs from other countries and ground international trade to a virtual halt. The crash of 1929 was in response to the likelihood that Herbert Hoover was going to sign the Tariff into law. Investors were not irrational as some would believe. They knew what was coming, and a massive sell-off was the result. This sell-off culminated on Black Friday. This sell-off was the result of a government's attempt to heal an economy by restricting international trade. It was the greatest backfire in this country's history.

There are similarities between today's markets and those of the late 1920's. The tariff was passed in response to a recession in 1929. A recession that occurred as countries were still healing from the First World War. Our government tried to "fix" our economy and ended up destroying it instead. What will we do now that our economy has faltered? Xenophobic rage is boiling up again, with hatred for China, India and other countries that have "stolen" our prosperity. Will we again try to block international trade in response to a recession? It could happen. Listen to today's rhetoric, especially from the Democrats. Free trade is the cure to this mess not the disease. The lessons from history are laid bare for all to see, do not ignore it; for a wise man once said those who ignore history are bound to repeat it.
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Why buy American?

If anyone is unaware, let me be the first to let you know that this economy is, in fact, in a recession. Now that is not official, but last month private industry shed over 100,000 jobs. There should be little doubt at this point that our economy is shrinking. But, what does this mean? Besides the obvious fact that many Americans are now out of work, or looking for work, there is the predictable backlash against some scapegoat. Our economic woes aren't our fault, they must be someone else's. I recently received this email that perfectly illustrates what I'm talking about:

As you may have heard the Bush Administration said each and every one of us would now get a nice rebate. If we spend that money at Wal-Mart, all the money will go to China. If we spend it on gasoline it will all go to the Arabs, if we purchase a computer it will all go to India, if we purchase fruit and vegetables it will all go to Mexico, Honduras, and Guatemala, if we purchase a good car it will all go to Japan, if we purchase useless crap it will all go to Taiwan and none of it will help the American economy.

We need to keep that money here in America, so the only way to keep that money here at home is to buy beer, since those are the only businesses still in the US.

What these statements show is a sign of the times, and a shallow knowledge of economics and trade. It is short-sighted to assume that since we buy something from somewhere, that money is gone and we are at some net loss. We are living in a global economy, and America is losing its status as the powerhouse. I imagine that upsets a lot of people. I guess many Americans believe that we should be manufacturing goods, and if we are not, then we are somehow worse off. There is a reason we get all these products from the abovenamed places. They are less expensive! We are buying these products at a lower price than what can be produced here, and we end up with more money in our pocket to spend on something else. We have a net gain! We are better off, why can't anyone see this?

Buying our products at lower prices not only helps consumers, but it also spawns new industries. There is a reason why sales is one of the hottest jobs today. Someone has to package and distribute all these foreign products in America. Who do you think does all this? Americans! Jobs are also created by international trade. For the last ten or so years, we have been trading with these international partners. I didn't hear people complaining then. Only now, after our own housing market and financial industries have collapsed do we turn to the foreign monster.

It is time that we move on from this pointless xenophobia. International trade is a boon to all who participate. Shift can sometimes be painful, as many Americans are noticing, but new jobs and new industries come from this shift. New opportunities will come. Trying to persuade an otherwise ignorant consumer to buy American simply for the fact that it is American is a great way to ensure that this recession continues. You want them to spend more money than they did yesterday for a product because of where it is made? If a product is good, then buy it, it doesn't matter where it comes from. A prosperous global economy makes the world better off and in the long run it will make America better off. Look past the foreign-bashing, and you will see that.
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Why Keynesian Economics won't end this

I've written on the ideas of why Keynesian economics does not work in the past. Simply put, an unproductive government cannot be trusted to make better decisions with people's money than they themselves. The saddest thing is that voices like this are being drowned in a sea of populist economics.

Since the time of FDR and the disastrous policies of the New Deal, governments have been trying to ease economic woe with policies fraught with unintended consequences. We've already seen the first strike from fiscal policy. The Congress and President made record time in passing legislation giving everyone in the country a tax rebate check. This reeks of political posturing in an election year. That check will do as much for the economy as attempting to put out a forest fire with a squirt-gun. But, this is the playbook for economic downturns. Encourage consumption through either government programs (WIC, Welfare, Social Security, etc.) or through direct payment (rebate checks). These programs will do nothing to consumption in the long-run, even in the short-run its effects are questionable.

It appears to me that this economy is undergoing a general deflation from an artificial inflation. Two examples lend credence to this idea. First, the housing market. Thanks to the Fed's cheap money policy and perverse economic incentives, housing prices skyrocketed far past anything that can be attributed to a rise in value. People with awful credit were allowed to take out hundreds of thousands of dollars in loans and credit. Even some with reasonable credit dove in over their heads. Now the market is shrinking, there will be a lot of casualties.

But what about the weakening dollar? Through this government's excessive and destructive spending on credit, the dollar became very strong through foreign investment. The dollar kept its status as long as our economy was strong. Now that the economy has turned, those investments aren't so great. That investment is starting to wane, and this is showing up in the flight to commodities (ahem, gold and oil). If the government sticks by its Keynesian guns and tries to spend its way out this, then you can expect even bigger problems than we have today.

An unbridled government spending spree will weaken the dollar even more. This means higher oil prices (oil price is tied to the dollar), as well as higher overall prices, since cheapness in exports will have been washed away in a high exchange rate. Remember, there are consequences to unwise spending. We found that out in the 1930s with the depression, in the 1970s with inflation and gas lines, and today with both a crumbling housing market and a freefalling dollar. Unless the government reins in spending (through perhaps a Balanced Budget Amendment), we can expect to see a lot more widespread suffering, as the State tries to "fix" this problem. Unlikely, but we can always hope though, can't we?
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