Coming Soon to a Neighborhood Near You: Mexico’s War on Drugs

February 28, 2009

Mexican president Felipe Calderon’s war on drugs has been an absolute failure in that country.  Last year, more than 6000 murders were committed linked directly to the drug war in Mexico – which was two times the number from the previous year.  Kidnappings, beheadings and other atrocities are on the rise in Mexico involving not just drug addicts, but innocent bystanders, police officers, judges, and other government officials.  Of course, because of the proximity of the United States to Mexico there is a fear that the violence will spread to our soil.  Based on news reports this week, the fears are more than justified as they soon may become a reality.

According to the National Drug Intelligence Center

(NDIC) Mexican drug cartels have a distribution network that involves at least 230 U.S. cities.  Recent arrests by American law enforcement of Mexican drug traffickers in California, Minnesota, Maryland and Stow, Ohio indicate the threat is nationwide and located in urban as well as rural areas.  The NDIC believes the Mexican cartels are “the greatest drug trafficking threat to the U.S. as they control most of the U.S. drug market and have established varied transportation routes, advanced communications capabilities and strong affiliations with gangs in the United States”.

Because the drugs being distributed are illegal, other illegal activity accompanies their distribution.  There has been an increase in police discoveries of grenades, and other military-style weaponry headed for Mexico in the U.S.  The Phoenix police are inundated with reports of home break-ins, hostage takings, and kidnappings.  Last year, the Maricopa County attorney’s office said such cases rose to 241 from 48 in 2004.  Many of the incidents involve heavily armed assailants with survival and huge profits on their minds.

It is clear that the situation on our streets is about to spiral out of control unless something different from current policy is done.  The Mexican drug cartels effectively use their huge drug profits to arm and supply illegal immigrants and established gangs in the U.S. to carry out their trade.  As the economies of both Mexico and the U.S. continue to deteriorate from the worldwide economic crisis the labor pool for the cartels will expand as individuals seek new ways to feed their families.  Illegal immigration from Mexico will skyrocket even more.  Money for drug interdiction and crime prevention will be short as localities already feeling the pinch of the economic crisis go broke and Washington is paralyzed by the need to fund with a bankrupt treasury so many other needs in the nation.  With high profits from the illegal trade in the U.S., cartels will make our neighborhoods into battle zones.  Left with little help from the government, Americans will increasingly be forced to take the law into their own hands.  They will be no match for the well-financed, ridiculously armed thugs that will roam our streets.

But, America does have the ability to prevent this scenario.  First, we must bring home the hundreds of thousands of U.S. troops serving abroad to protect the country they swore an oath to protect.  This not only will save Washington hundreds of billions of dollars annually, but their services are needed to maintain the integrity of our border with Mexico and keep the bad guys out.

Second, the federal government should repeal all drug prohibition laws and leave the matter to the states where it belongs under the 10^th Amendment.  The Obama Administration is to be commended for announcing this week that federal raids on medical marijuana facilities in the various states will be stopped.  This is a great first step, but more needs to be done.  Ultimately the people, through their state lawmakers, must decide what regulations on drugs are appropriate for their state.  As some states legalize currently illegal drugs and experience a decline in violence other states will follow.  Making illicit drugs legal will eliminate the profit bonanzas of the cartels and destroy incentives for illegal immigrants and gangs to terrorize our neighborhoods.  

In June I wrote a post that beseeched American voters to consider a presidential candidate that would end the War on Drugs.  That didn’t happen, but now faced with the largest economic crisis since the Great Depression and drug violence about to spill over into our country from Mexico perhaps President Obama will seize the moment and end a catastrophic policy that has senselessly ruined many lives, brought lawlessness and disorder to our streets, and threatens the very existence of our civil society.

 

Considering the Future, Because Somebody Should

February 20, 2008

Economic actions are moving fast and furiously in Washington.  President Obama railroaded his so called $787 billion “stimulus and “recovery” plan through Congress.  Now, the President is moving quickly to address other issues negatively affecting our economy.  On Wednesday the President announced a new bailout plan for distressed homeowners and began considering further loans to the bankrupt American auto industry.

Of course all of these actions are knee-jerk reactions to a situation that continues to spiral out of control.  Based on politics and not sound economic considerations, the President and Congress continue to spend us into oblivion in an effort to heal our economic ills.  The $12 trillion Uncle Sam has committed or already spent has done nothing to save our sinking ship.  If the consequences of this federal largess were just temporary and carried no future repercussions then we could all sleep more soundly at night.  However, what Washington has already done and is about to do will have enormous negative consequences for many years to come.

By following their political instincts, policymakers in DC aren’t considering the future consequences of their current economic policy actions.  Take their position on the auto industry for instance.  On Tuesday night, GM and Chrysler got back to Washington with a restructuring plan and their hands out looking for $14 billion more.  Of course, the billions already loaned to them by the taxpayer was simply a stop gap measure to prevent them from going belly up on the watch of President Bush.  Now, President Obama faces the same political consideration.  So, forget about whether giving Detroit more money makes any economic sense, they will get it because politicians don’t like to look uncompassionate.

The problem is that whatever amount the President gives them will not be the end of it.  GM and Chrysler’s woes have been building for decades and now they are trying to restructure during the biggest economic downturn since the Great Depression.  If the market doesn’t think the two carmakers are a good investment, then why should the government?  By continuing to finance these failures someday we will face the choice of either losing all of our money or continuing to throw money at them for the sake of the money we already spent.  What a great choice that will be.

Then there is the increased support that Fannie Mae and Freddie Mac will be receiving with the President’s plan to “help” homeowners.  Already slated to receive $66 billion in taxpayer support for projected losses, the two mortgage giants would receive up to an additional $400 billion under Obama’s plan.  Treasury Secretary Geithner was quoted as saying that the support “will provide forward-looking confidence in the mortgage market and enable Fannie Mae and Freddie Mac to carry out ambitious efforts to ensure mortgage affordability for responsible homeowners.” 

Weren’t Fannie and Freddie big culprits in causing this current mess?  Since nothing has changed including the provisions of the Community Reinvestment Act why should we retool the mortgage giants with hundreds of billions of taxpayer dollars?  What does “ambitious efforts” mean?  Is this another recipe for disaster?

More automaker bailouts and strengthening Fannie and Freddie are troubling propositions to say the least.  But, an even bigger concern is the Federal Reserve’s monetary policies combined with Obama’s plans to stem the tide of foreclosures.  As mentioned earlier, the Fed along with the Congress has pumped in almost one hundred percent of GDP in dollars into our economy in the last year.  The federal funds rate still stands at an artificially low 0 percent.  Of course, the Fed has lowered the rate to this ridiculous percent not because that is what the market called for, but to stimulate the housing market.  However, last week, refinancings made up 74.2 percent of all mortgage applications.  So, instead of stimulating new buying, the policy is encouraging refinancing.  That’s fine, but then President Obama comes along and proposes helping distressed homeowners refinance their homes with hundreds of billions of dollars in subsidies. 

This combination of Fed monetary policies and Obama’s homeowner bailout will lay the foundation for another banking crisis.  As millions of homeowners lock into artificially low rate, long term mortgages this will set the stage for future bank failures.  When consumer prices begin to rise significantly because of Fed monetary policies and Congressional spending, the Fed will have no choice but to raise interest rates to quell inflation.  Banks will experience difficulties because on the one hand they will be taking in much less money through their loans than they have to pay the Fed for new money and they will lose deposits on savings accounts as customers move money to higher yielding money market accounts.  This is what caused the savings and loan crisis of the late seventies and it will cause another banking crisis in the future if Washington continues with these reckless economic policies. 

At the end of the day, the Fed’s monetary policies and the government’s fiscal program to end this economic crisis are all about politics over sound economic policy.  They represent nothing more than a massive expansion of the socialist welfare state, which has been discredited time and time again.  Our policymakers’ lack of creativity in dealing with this crisis is appalling.  Their neglect in considering the future consequences of their actions is criminal.  

Do Fed Officials Read Fed Publications? They Should!

February 13, 2008

It is mindboggling when considering the amount of newly printed money Washington has dumped into our economy in the last ten months or so.  The Federal Reserve, Treasury, and the Congress have poured in over $9 trillion worth of stimulus, loans, stock purchases, and loan guarantee money.  That figure represents about two-thirds of our GDP.  However last night, Treasury Secretary Tim Geithner indicated in an interview on Bloomberg that what has been done so far is “too little too late”.  Thus he proposed a new $2 trillion big bank bailout plan.  The plan coupled with Obama’s stimulus bill will saturate the market with an addition $3 trillion.  The new printing of dollars will bring the total to $12 trillion – if this doesn’t stabilize home prices, increase lending, and create four million jobs then I don’t know what will.

But, the President doesn’t seem convinced all this spending will work.  Speaking in Ft. Myers, Florida, on Tuesday, he stated his belief that his winning a second term in office could depend on whether he can turn the country’s economy around.  The President stated, “If stuff hasn’t worked, if people don’t feel like I’ve led the country in the right direction then you’ll have a new president”.  If history is any guide then chances are likely we will have a new president in 2013.

At the Federal Reserve Bank of Minneapolis, from 2000 to 2007, Timothy Kehoe, Edward Prescott and a team of 24 economists from around the world studied economic depressions that happened in the Twentieth Century.  Instead of focusing on what caused each severe downturn, their study examined government’s reaction to the downturn and the consequences thereof.

First, they looked at the economic experiences of Chile and Mexico in the 1980s.  Both countries suffered from falling international prices for the commodity they exported – copper for Chile and oil for Mexico.  This in turn exposed a weakness in each country’s banking sector.  In 1982, Chile took control of its banks; it liquidated the insolvent ones and reprivatized the solvent ones.  It set up a new regulatory structure which allowed the market to dictate interest rates and allocation of credit to business.  The immediate effect was severe pain, but by 1984 the Chilean economy began to grow and is still the fastest growing in Latin America.

Conversely, Mexico pursued policies which nationalized banks, provided credit at below-market interest rates to some large firms and no credit to others, and provided massive fiscal stimulus schemes to grow employment.  Even though both nations arrived at the same place for the same reasons, it was in how each nation’s government dealt with the crisis that determined their economic futures.  Since 1982, Chile has experienced significant GDP growth while Mexico has languished with a slight GDP growth increase.  See graph on page three:  http://www.minneapolisfed.org/research/SR/SR421.pdf

The researchers also looked at Japan and Finland in the 1990s.  Both countries experienced economic downturns in the early part of that decade.  Japan pursued similar policies to Mexico’s in the previous decade – massive fiscal stimulus, propping up of insolvent banks, and discriminatory credit allowances.  Japan’s economy is still stagnant to this day.

Finland’s response was more like Chile’s.  Its government paid the price of reform and let the market decide the allotment of credit to the private sector.  The Finnish economy has experienced robust growth since.    

From their seven year study, Kehoe and Prescott have concluded that bad government policies cause depressions.  Specifically, they are convinced that it is the “overreaction” by government which “prolongs” and “deepens” economic downturns.  Based on their research, they believe unproductive firms should be liquidated, including banks and auto makers.  Bailouts which prop up unproductive firms do nothing but “depress productivity” further because they take labor and capital away from productive enterprises that would use them more effectively.  Lastly, they have more faith in markets than the government to make better decisions when it comes to resource allocation.

Their findings have been published in the book Great Depressions of the Twentieth Century, published in 2007 by the Federal Reserve Bank of Minneapolis.  The big question is, have Geithner (former chair of the New York Federal Reserve) and Bernanke (current chair of the Federal Reserve Bank) read it?  How can there be such a disconnect between the Fed’s publication and Geithner and Bernanke’s words and actions?  History does repeat itself.  Perhaps if Geithner and Bernanke in 2007 had read the wise analysis of their colleagues, we wouldn’t be repeating history and well on our way to the next great depression.  Kehoe and Prescott would have to agree that $12 trillion is a hell of an overreaction by government.  Thus, we should expect the mother of all depressions.