Tocqueville as Prophet

August 14, 2010

“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”

Alexis De Tocqueville, Democracy in America (1835)

Last week the economic central planners at the Federal Open Market Committee (FOMC) of the Federal Reserve Bank issued a statement tempering their previously optimistic forecast for recovery from the “Great Recession”.  In its statement, the Ben Bernanke led FOMC indicated that the weakening recovery has made it necessary for the Fed to keep interest rates at “exceptionally low levels…for an extended period”.  Additionally, the FOMC stated it will change course.  Instead of shrinking its historic $2 trillion balance sheet, the Fed will reinvest money from maturing mortgage bonds to buy up more assets (notably government treasury bonds).  All of this will be done in an effort to further stimulate the markets to recovery.

No one doubts that something needs to be done to reverse the downward spiral that our economy is once again taking.  After all, consumer confidence is down, factory orders are down, the real unemployment rate which takes into account discouraged and underemployed workers is still north of 16 percent, Food stamp usage has skyrocketed to a record high of 40.2 million recipients, and  Bank repossessions and foreclosures are still a massive problem.  No, nobody doubts that something needs to be done, but that something should not be more of the same that got us into this mess in the first place and is keeping us in it in the second.

Now, I would not question the intelligence of anybody on the FOMC.  Bernanke and his comrades are smart folks.  They all have fancy degrees and have spent years on Wall Street and/or in the government cutting their teeth becoming seasoned economists and financiers.  They certainly are not “wet behind the ears” as is said in the business.  So then if it is not mental ability maybe it is motives that drive the FOMC members to pursue what appear to the reasonable layman as an insane policy.  Let’s analyze the situation further by looking at historical examples.

Faced with double digit inflation and an unemployment rate of 11-12 percent in the early 1980’s, then Fed chairman Paul Volcker did exactly the opposite of what our current Fed commander has done.  He raised money market rates to 19 percent.  It was painful at first, but in the long run the policy broke the decade long grip that stagflation had on our economy and ushered in a decade of solid economic growth.

Then we can point to Japan’s horrible experience with “quantitative easing” in the 1990’s as another example for objecting to the FOMC’s lamebrain policy.  Japan’s financial meltdown in the early 1990’s like ours this time was caused by government induced easy money and real estate speculation.  Once the bubble popped the Japanese powers that be pursued a policy of massive fiscal stimuli, propping up of insolvent banks, and discriminatory credit allowances. Sound familiar?  All in all, in the decade of the 1990s Japan passed 10 fiscal stimulus packages worth more than 100 trillion yen.  Instead of curing its economic ills the spendthrift policy led to what is now known as the “Lost Decade” in Japan.  In fact, many economists claim Japan has still not recovered.

Of course, Bernanke will make up excuses why the same policy he is pursuing for the U.S. didn’t work for Japan but will work for us.  Actually, all he really has to do is reference noted Keynesian economist Paul Krugman who says both Japan in the 1990s and the U.S. today simply did/have not spent enough to stimulate their respective economies.  Unfortunately for Bernanke at least two of his underlings don’t buy the argument.  In March of 2009 Timothy Kehoe, Edward Prescott of the Minneapolis Fed and a team of 24 economists from around the world published a report indicating that it is the “overreaction” by government which “prolongs” and “deepens” economic downturns.  In fact, if you look at the three crisis in the last 100 years where government has overreacted the most (the Great Depression, Japan’s Lost Decade, and our current crisis) they are also the longest lasting.  This is a fact that seems to solidify Kehoe and Prescott’s conclusion.

Lastly, the U.S. government has tried quantitative easing and Keynesian economics to solve our most recent troubles for close to 3 years now.  When the “Great Recession” began in December 2008 the national debt was a little over $9 trillion.  As I write this article, our debt is more than $13.3 trillion.  And this doesn’t count the trillions of dollars in easy credit doled out by the Fed to induce banks to loan again.  The longevity and size of the effort can only make one wonder about the motives of the FOMC to pursue more of the same.  Could it be that we are missing some information only available to the Fed?  Or could it be that Tocqueville was correct when he prophesized that Congress would discover that it can bribe the public with the public’s money.  We are talking about the Federal Reserve but who chartered the Fed and refuses to audit its books – Congress.  What’s unknown, given our current circumstances, is how much longer our republic can endure?           

Article first published as Tocqueville as Prophet on Blogcritics


Calderon is a Welfare Pimping Hypocrite; Congress is out of Touch

May 23, 2010

Mexican president Felipe Calderon used his state visit to the United States this week to lambaste Arizona’s new self-defense, anti-illegal immigration legislation and the 2nd Amendment to our Constitution.  Speaking before a joint session of Congress, no less, the Mexican leader criticized the new Arizona law because it “criminalized migration and could encourage discrimination” against Mexican “citizens”.  He also blamed U.S. gun laws for the increase in violence in his country.  For his remarks Calderon was given a standing ovation by more than half the members of Congress.  By allowing Calderon to use such a privileged forum as a joint session of Congress to lambaste our laws and to applaud him so loudly, Congress has once again shown how demagogic it is and how far out of touch from the American people it has become.

In the first place, the Arizona law is a good one.  It allows law enforcement to stop suspected illegal aliens only if they are suspected of breaking some other law.  This happens every day in America.  Police stop a motorist for speeding or because a headlight is out, they check the tag number and the next thing you know a different crime has been detected.  The state of Arizona is also providing further safeguards against violations of civil rights by ordering the state’s law enforcement licensing agency to mandate a training course on how to implement the law without violating civil rights.  Lastly, according to Jack Cafferty of CNN, parts of the Arizona law are word for word the same as the federal immigration statutes on the books.  Thus, in his criticism of the law, Calderon was way off base and members of Congress who rose to their feet to applaud his remarks were also showing their ignorance.  But, what can we expect from a legislative body that doesn’t read its own bills let alone those of other bodies?

Secondly, Calderon is nothing more than a welfare-pimping hypocrite.  He supports all types of migration to the U.S by his people because more than $17 billion is sent back to Mexico each year.  This amount that migrant workers, some of them illegal aliens, send back to their families in Mexico is more than the total amount of direct foreign investment in the country.  Calderon appreciates having this side welfare program sponsored by American business to prop up his economy.  Of course, Mexico also enjoys welfare courtesy of our state and federal government.   Billions are spent each year in the U.S. that doesn’t have to be spent in Mexico to educate, medicate, and incarcerate illegal aliens.  It is no wonder Calderon went all out in criticizing the Arizona law since its enforcement may cost his regime a bundle in the long run.

But, that is not all.  Calderon is also a hypocrite.  Amnesty International has reported that illegal immigrants on their way through Mexico to the U.S. from Central America regularly face beatings, rape, and even murder at the hands of the Mexican people.  What’s worse is that evidence has been uncovered linking government officials at various levels to these crimes.  Perhaps Calderon should tend to the problems in his own country before criticizing ours.

And boy does he have problems in Mexico.  Thing is, he made them himself.  Since his intensified war on drugs was instituted in December of 2006 close to 23,000 people have been killed in Mexico in drug related crimes.  The victims include judges, police, politicians, and a U.S. Embassy family.  The really bad part is that Calderon’s war is spilling over our southern border with Mexico and is already responsible for numerous kidnappings and the murder of at least one American.  Thus, there can be no question that Arizona is justified on the grounds of self-defense to enforce the new anti-illegal immigration law.  Recent polls indicate that more than a majority of Americans agree.  Again, Felipe Calderon should clean up the mess that he caused in his own country before he comes to America and criticizes ours.

Getting back to America, Article 4 Section 4 of the U.S. Constitution guarantees each state that the federal government … “shall protect each of them against invasion.”  Arizona and other states of the southwest are under attack from illegal aliens from Mexico and other parts of Latin America.  This is yet another provision of the Constitution that Washington has ignored for too long.  Members of Congress can use demagoguery to defame Arizona’s law all they want.  Rep. Yvette Clarke (D-N.Y.) can claim the statute is “akin to apartheid” and Rep. Jared Polis can proclaim the law was like Nazi Germany.  The bottom line is that Americans are in danger in Arizona and Washington doesn’t seem to care.  Arizona acted justly in its own self-defense.  Outrageous remarks and especially inviting the welfare pimping hypocritical president of Mexico to lecture Americans on the errors of our ways is just another indication of how far from reality this Congress has become.       

Article first published as Hold DN: Calderon Is a Welfare-Pimping Hypocrite and Congress Out of Touch  on Blogcritics.

Why the Constitution Matters in Military Affairs

April 18, 2010

Week after week it’s easy for me to blog with compelling arguments that most things Congress does is unconstitutional.  But, up until about two years ago with the advent of Ron Paul’s Freedom Revolution and last year’s birth of the Tea Partiers, most Americans would have said, so what if something is unconstitutional?  That document is outdated and irrelevant.  These are modern times with issues unimaginable to the Founders.  Nonsense, the eternal truths contained in the U.S. Constitution are as relevant today as they were in the 1700s.

Take making war for instance.  Article 1 Section 8 gives Congress, not the president, the power to declare war.  In that same section, Congress has the power to finance the endeavor.  Since the end of World War II, the clause pertaining to declaring war in the Constitution, like many others, has been almost totally ignored by both the Congress and president.  Additionally, Congress has rarely if ever invoked its power to restrain presidential power by controlling the purse strings of the military during times of war.  The consequences have been horrendous. 

In the 1960s and 1970s it led to an 11 year war in Southeast Asia.  Instead of a declaration of war the military action was justified on the basis of the Gulf of Tonkin Resolution passed in 1964.  The resolution gave President Johnson the authorization to do whatever was necessary in order to assist “any member or protocol state of the Southeast Asia Collective Defense Treaty.”   This vague and open ended wording led to much criticism of the president and his Secretary of Defense over how they conducted the war.  Specifically, President Nixon’s expanding of it to include the bombing of Cambodia made an already unpopular war almost an event that tore the country in two.  It also led to over 50,000 American and countless Southeast Asian lives being lost.  The conflict ended in defeat for the U.S. and spending for the war caused high inflation which hurt American households, facilitated our manufacturing base to move overseas, and eventually brought on problems like the Savings and Loan crisis.

In current times we find ourselves mired in two conflicts in Afghanistan and Iraq.  To be sure, Congress did not declare war in either circumstance.  For Afghanistan, it passed a resolution authorizing the president to use all “necessary and appropriate force” against those whom he determined “planned, authorized, committed or aided” the September 11th attacks, or who harbored said persons or groups.  For Iraq, the resolution authorized the president to use the Armed Forces of the United States “as he determines to be necessary and appropriate” in order to “defend the national security of the United States against the continuing threat posed by Iraq; and enforce all relevant United Nations Security Council Resolutions regarding Iraq.”

It seems like Washington never learns from its mistakes.  Again, loosely worded resolutions instead of firm declarations with a narrow objective allowed President Bush to abuse his powers by spying on Americans, holding prisoners at Guantanamo Bay indefinitely, and expand the bombing to include other countries other than Afghanistan and Iraq, namely Pakistan.  In addition to over 1 million Iraqi and Afghani deaths from the main theaters of war, 1 in 3 people killed in the expanded bombings of Pakistan have been civilians. 

Because Washington has not followed the eternal truth that war should be entered into and conducted carefully, our government is primarily responsible for the destabilization of the Middle East.   It doesn’t take a rocket scientist to understand that because of the threats of invasion that came from the previous administration and with American military might all around it Iran is attempting to acquire nuclear weapons.  Even though Saddam was a vile and ruthless tyrant his Iraq acted as a counterweight to Iran.  Today, Iraq is in chaos and if U.S. forces do ever leave it will be ripe for a takeover by Islamic extremists.

A Republican Congress unfortunately did not deny George W. Bush the ability to launch an unjust war on Iraq based on lies, misinformation and his desire to avenge Saddam Hussein for allegedly sending a hit squad to assassinate his father.  One man made the decision to start the war in which Americans would die and hundreds of billions of dollars would be spent.  This was not the intent of the Founders who were wise enough to give the powers of declaring wars and financing them to the Congress.  The Founders gave them to Congress because it is a deliberative body that represents the many viewpoints of Americans.  These viewpoints, like in the enactment of laws, place a check and balance on the solitary power of the president.  Congress has abdicated this constitutional power and consequently has propped up an imperial presidency – something the Founders, other than Hamilton and Adams, would have vehemently rebelled against.

In 2006 the Democrats took back control of Congress with a pledge to end the wars in Afghanistan and Iraq.  For a time there was hope that they would restore the constitutional balance of power in war making. They simply could have done this by cutting funding for the wars.  But instead, Congress continues to finance the wars and in fact has gone along with President Obama’s wishes to continue funding bombings in Pakistan and to escalate the war in Afghanistan – so much for the hope that Congress would exert control over the powers granted to it and rein in the powers usurped by the president.

Wars are costly both in terms of human life and monetary expense.  Unless an attack on U.S. soil is imminent, Congress must retain its constitutional power to declare war and use its authority over funding it to limit the president’s actions.  By not following these constitutional mandates we have become a militaristic society almost constantly at war in adventures far beyond what the Founders envisioned.  This has caused a drain on our families, our finances, and our country’s reputation in the world.  Fortunately, many Americans are finally waking up to this reality.

Congress is Still a Rotten, Stinking Corpse

March 19, 2010

I have said it before and I will say it again, Congress is a rotten, stinking corpse.  It is no wonder that it currently has the lowest approval rating of all time.  This week more ridiculous legislation was introduced in that body that will only make our lives worse.  The bipartisan bill that was introduced would punish any country that practices currency manipulation as an unfair trade subsidy.  It would give President Obama the ability to impose retaliatory protectionist measures to level the playing field.  Of course, the impetus for the legislation is China’s alleged undervaluing of its currency, the yuan, in order to support Chinese exports to other countries.

Now, it’s funny, how the legislation comes in an election year when there is a very strong anti-incumbent mood amongst the electorate.   Many Americans who have lost their jobs in this depression are naturally fixated on statements from Washington dealing with job creation.  So as not to disappoint, Democratic Senator Charles Schumer was quoted as saying, “”There is no bigger step that we can take to promote job creation here in the US than to confront Chinese currency manipulation.”  This sounds logical on the surface, but upon closer analysis the senator as usual has it all wrong.

In the first place, to even threaten protectionist measures in such a fragile economic environment as we live in is dangerous.  The Smoot-Hawley Tariff was passed in 1930 and placed protective tariffs on thousands of imports coming into the United States from abroad.  At the time, during the Great Depression, its purpose was to protect American jobs.  Sound familiar?  Instead, the tariff caused our trading partners to retaliate with tariffs of their own thereby exacerbating an already horrendous employment situation.  What makes our politicians believe that China would not retaliate with protective measures of its own or worst yet cause the collapse of our currency by flooding the world markets with hundreds of billions of dollars it keeps in reserve?

But secondly, and much more importantly to our situation, we need inexpensive Chinese products otherwise our inflation rate would be through the roof and unemployment would be right there with it.  Here is the vicious cycle of events that is American/Chinese trade relations.  China’s products are cheaper because the cost of doing business there is less than in the U.S.  Thus, we purchase Chinese goods with dollars and treasury notes. China holds these dollars and interest-bearing bonds in reserve and then prints yuan to pay off the Chinese suppliers of our purchases.  When the smoke clears, we get cheap Chinese goods to buy, the Chinese manufacturer makes a profit, and the Chinese government acquires more units of the world’s reserve currency.  Everybody wins, right?

If the Obama Administration ends this cycle by imposing protective tariffs on Chinese goods coming into the United States, not only will the Chinese government reciprocate with retaliatory measures of its own, the prices of goods in the U.S. will rise sharply.  You see right now we export our inflation to China by way of treasury bonds and newly printed Federal Reserve notes.  Without the ability to export our debt and a lot of the dollars the Federal Reserve has been printing, all of that liquidity will be spent in the U.S. instead on more expensive goods.  As more money enters our economy prices in general will be bid up and will rise and given how much the Federal Reserve has inflated the money supply over the last few years prices will rise by a lot.  At that point, Economics 101 tells us that high prices will squelch demand and huge increases in unemployment will result.

Since the 1970s, the politicians in Washington have placed us in this no win situation with regard to trading with China.  They have destroyed our industrial base with unconstitutional mandates and regulations, and collective bargaining laws.  They have spent us into oblivion by financing a welfare/warfare state unmatched in human history.  If we impose protectionist measures against China we will incur inflation in the short run and high unemployment in the long run.  If we continue to borrow from China to buy their inexpensive goods we put ourselves on an unsustainable course.  At some point, if it isn’t happening already, China will stop financing our purchases and absorbing our inflation.  They will sell their goods elsewhere and Americans will pay higher prices.  Our standard of living will plummet and China will replace us as the world’s number one economic superpower.

But, Chuck Schumer and his colleagues on the Hill are oblivious to all of this.  Of course, they also ignore the fact that the Federal Reserve is the biggest currency manipulator in the world.  Ben Bernanke and his cabal of economic central planners better known as the Federal Open Market Committee fix interest rates and determine the supply of money.  These actions directly determine the value of the dollar.  Before Congress complains about China for not using market forces to value the yuan it should look in the mirror. 

And that is really why I consider Congress a rotten, stinking corpse.  Time and again its members grandstand for personal political gain and leave the American people with the mess.  Its hypocrisy is appalling.  Lastly, it seems like it is constantly coming up with cockamamie schemes to ruin our economy further.  This latest scheme places the blame on China for our own financial incompetence.

It’s Washington’s Fault!

March 22, 2009

It never ceases to amaze me how the U.S. government can make a huge mistake, blame it on others, and have a large portion of the American people either believe it or just not care.  This past week, with grand theatrics, official Washington raised a huge fuss over the spending by AIG of $165 million of taxpayer bailout funds for bonuses to top executives.  On NBC’s Today Show Rep. Barney Frank, D-Mass charged that the decision by the economically impaired AIG to pay millions in executive bonuses amounts to “rewarding incompetence.”  On 60 Minutes, Fed chairman Ben Bernanke stated, “It makes me angry.  I slammed the phone more than a few times on discussing AIG.  It’s – it’s just absolutely – I understand why the American people are angry.”  House Speaker Nancy Pelosi assured the public that Congress was working on legislation that would correct this injustice quickly.  And of course the Administration weighed in with a guarantee that the financially feeble insurer would be forced to repay the U.S. taxpayers before it gets the next $30 billion from taxpayers approved on March 2.  All of this and several dozen quotes from lawmakers that all included the word “outrage” in its various conjugations and you have good theater coming out of Washington.

Let’s make one thing perfectly clear, if you are angry with AIG for using your hard earned tax dollars to pay millions out to incompetent executives in the form of bonuses then your ire is severely misplaced.  The “retention” bonuses were contractual agreements that had to be honored by AIG.  They were not performance bonuses like Congressman Frank through his “rewarding incompetence” remark would like us to believe.  They were bonuses paid to people who put in the time and effort to finish a task.  Under our system of government, contracts cannot be arbitrarily broken.  I give kudos to AIG for upholding that long standing American tradition.

Your anger and vengeance (peaceful of course through the ballot box) instead should be directed toward official Washington.  As we are all well aware, the Federal Reserve, Congress, and two administrations have been very generous with our money by giving huge amounts of it to many failed banks. Of course, they had neither the constitutional nor logical authority to do so.  The AIG bonus scandal is just the beginning of many to come because of the government’s reckless spending.   AIG has already given almost half of what it has received to Goldman Sacs and several foreign banks for financial obligations. Executives at other financial firms receiving bailout money have also been paid bonuses – these firms include Merrill Lynch and Morgan Stanley.  Fannie Mae, one of the largest culprits in the whole financial crisis, is expected to pay retention bonuses using taxpayer funds worth between $470,000 and $611,000.  Freddie Mac also has bonus plans not yet announced.  Citigroup is going to use $10 million of taxpayer funds to build a new office building and according to Rep. John Lewis, D-Ga at least 13 firms that have received or will receive taxpayer funds owe a total of more than $220 million in back taxes. These are the outrages we know of.  Certainly there will be more announced in the future.

Of course, if Washington had not appropriated the money in the first place we wouldn’t be talking about any of this.  As this columnist has maintained all along, these irresponsible firms should have been left to fail.  Bankruptcy would have been the efficient way to clean up the mess they made.  Mal-investment in the economy would have been avoided as productive firms would have purchased the good assets of the failed banks at market rates and taxpayers would not be on the hook for what will eventually amount to trillions of dollars in new debt spent on failed enterprises.  The integrity of the dollar and the future purchasing power of American consumers would have been preserved.  Yes, some folks would have suffered, but we are not supposed to be living in a communist society.  The government has no legal or moral right to take from one to give from another.  If that were true than why doesn’t Uncle Sam right the injustices to investors caused by Madoff and Stanford?

This week’s events in Washington amount to nothing more than a smokescreen by policymakers to cover their own butts.  They gave our money to AIG and did it with no strings attached.  Paulson, Bernanke, Geithner, Bush, Obama, and any member of Congress who has voted for these bailouts should be held to answer for their actions.  In terms of Congress, hopefully by the next election cycle there will be enough Americans who blame them and care enough to make that happen.

Congress Has Reached New Depths of Stupidity

November 28, 2008

November 28, 2008

This week the government reported several statistics that indicate that the $7 trillion Uncle Sam has committed to economic stabilization is having little real effect.  On Wednesday, the Labor Department reported that the four-week average of initial requests for unemployment benefits was at its highest level since January 1983.  The Commerce Department reported that consumer spending plunged by 1 percent in October.  Commerce also reported that orders for big ticket manufactured goods plunged in October by the largest amount in two years.  Orders for durable goods dropped by 6.2 percent which was more than double the decline economists expected.  Lastly, the unemployment rate hit a 14 year high of 6.5 percent.

So, with all of this grave news and the seemingly ineffectiveness of the government to spend our way out of depression, unbelievably Washington with an increased Democratic majority in Congress and a Democratic president-elect is planning a bevy of new pro-union measures when they take office in January.  It is unbelievable because the last thing we need right now, other than a tax increase, is for Washington to increase costs on business.  After all, it is business that is being relied upon to supply the jobs that will eventually lead us to recovery.

What are the measures the new administration is considering imposing on business?  They are essentially the same old left-wing schemes that have been pushed for years.  They include:  mandatory paid sick leave, ergonomics regulations, and expansion of the Family and Medical Leave Act.

These measures that the president-elect and his socialist buddies in the Congress are considering are of course unconstitutional.  This blogger is going to sound like a broken record, but Congress has no authority under Article 1 Section 8 of the U.S. Constitution to legislate benefit packages for workers of private business.  There is a good reason for this.  The founders realized the only way for a people to be truly free was by guaranteeing their economic freedom.  It works both ways – freedom of individuals to use private property as they see fit and freedom of workers to use their labor as they see fit.  Forced regulation puts business at a competitive disadvantage because it usurps the power of the market to make the most efficient decisions possible.  These measures seem just, but how does Congress know what the ramifications will be for the health of American business?  They don’t and remember again that we are relying on business to reinvigorate the economy with jobs.

One thing is certain each of the measures will increase the costs of doing business.  Cost estimates for the ergonomics regulations alone total about $100 billion a year to implement.  The proposal to expand the Family and Medical Leave Act includes small firms and applies to events such as parents attending school conferences with their child’s teacher.  It is naïve to think that businesses can or will simply absorb the increased costs of production due to government regulations.  These costs will be passed on to workers through less job growth and higher prices for products and services.  If Washington truly believes that consumer spending will get us out of our current economic mess then policies that increase business costs will be counterproductive to that effort.

The cornerstone of the pro-union, anti-business measures is the card-check legislation.  Card-check is Obama’s reward to his union supporters like the Department of Education was Jimmy Carter’s reward to the National Education Association’s for their support in 1976.   It would force companies to recognize a union if a majority of its workers signed cards.  This is different from today’s law which requires a month-long campaign ending in a secret vote and would make unionization of a business much easier to attain.  Government meddling in this matter is ridiculously unconstitutional.  Beyond that obvious fact, why is government still supporting a dinosaur whose historical record is filled with hooliganism, and putting whole industries out of business in the U.S. (see steel and automobiles)?  Has Congress learned nothing from its recent study of how the UAW has contributed to the collapse of the Big Three?

It is illegal for Congress to enact the above measures anytime, but is particularly irresponsible for them to do it now while we are headed for a depression.  Having already committed close to $7 trillion of money we do not have to fix our economic problems, now they want to compound our difficulties by placing unreasonable regulations on the sector that is charged with reviving our economy.  Congress has reached new depths of stupidity.

Potholes Ahead for Main Street

November 1, 2008

November 1, 2008

Congress, the Administration, and Federal Reserve Chairman have repeatedly told us that they are working hard to fix the economy for the American people.  They claim that every action they have taken has been done with the best interests of Main Street not Wall Street in mind.  Whether their intentions can be believed is questionable.  After all they are politicians.  One thing is certain; the ramifications of their actions at least in the short term have not benefited Main Street.

As we all know by now, the goal of Washington’s gross intervention in the economy is to unfreeze the credit markets with injections of massive amounts of liquidity.  This unfreezing will allow financial institutions to resume regular lending thereby putting us on the road to recovery.  In other words, the same device (debt) that got us into this mess will get us out of it.  That argument aside, as was reported in this column a couple of weeks ago, the best laid plans of Washington are once again going astray.  In that column, I reported that instead of unfreezing the credit markets allowing for a freer flow of capital and lower lending rates, the government’s actions so far have actually resulted in higher mortgage rates and consequently less borrowing.  This is a result of more government debt pushing up the yields on Treasury notes which in turn raises mortgage rates.  Additionally, because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and creating more competition for his own firms – Fannie and Freddie, when they seek to sell their securities.  To compete for investors, the nationalized companies must raise their own yields and then charge borrowers higher rates for mortgages.  As a matter of fact, mortgage rates are higher now than they were before the Fannie/Freddie bailout was launched. 

Higher mortgage rates are an old problem, as this week two other concerns were voiced from Washington over the effectiveness of government measures to fix the economy.  It seems that nine Wall Street banks have been asked by Congress to justify billions of dollars in pay and bonuses after they accepted nearly $125 billion of taxpayer funded bailout money.  The nine banks include the usual suspects:   Bank of America, Bank of New York, Mellon, JPMorgan, Chase & Co., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group, and Wells Fargo & Co.

Then there was the revelation from the White House this week that banks receiving taxpayer money were “hoarding” the funds and not making new loans.  Apparently, the London Interbank Offered Rate (LIBOR), a key indicator of international lending, remains at elevated levels.  Not good.  But in all fairness to the banks, at least one of them will not be hoarding their federal largess.  It has been reported that the government has approved PNC Financial Services Group Inc. to receive $7.7 billion of taxpayer funds and to use $5.58 billion of it to purchase National City Corp – so much for the funds being used to unclog the markets.  The problem ultimately is that the government should not be doing what it is doing in the first place.  But beyond that, the capital infusion program has very few strings attached to it.  It was felt that too many strings would discourage bank participation.  Undoubtedly, too few strings are allowing the banks to take full advantage of the taxpayer.  The bottom line is that we are giving hundreds of billions if not trillions of dollars of our money to banks that got us into this mess in the first place with virtually no restrictions with the hope that they won’t do it to us again?  How stupid or corrupt is that?  Here’s hoping that the banks continue to hoard our money.

Beyond the reported ill effects on Main Street of the government’s actions to fix the economy, there are other hidden bad consequences as well.  Because the Federal Reserve has decreased interest rates to artificially low levels over the last nine months to stimulate lending (by the way this hasn’t worked either) the earnings of many small community banks have been adversely affected.  Many of these banks were responsible and took no part in subprime lending.  These institutions are important to millions of Americans on Main Street who rely on them for loans and savings accounts.  One of the last things we need is a crisis in the community banking industry.  Current government policy is already making it hard for these institutions to succeed.

Lastly, another hidden bad consequence of the government’s actions is a lowering of the yields on money market and savings accounts.  Again, as the Fed lowers interest rates artificially, savings and money market rates also decline.  Go online or check your next bank statement to notice that your savings rate has gone done.  With more people on Main Street hurting, especially pensioners and those on fixed incomes, the last thing they need is for their last safe haven to be upended by government policy.  But that is what is happening.

We could take Washington at its word that it is doing its best to help Main Street through this crisis.  The consequences of its actions speak otherwise.  Then again, maybe Washington is doing its best; because when it does its best, we are at our worst.