Geithner's Lies - A Preview

The famous “bank stress tests” are in their final stages right now. On May 4, Geithner is going to present the results, and those are certainly rather predictable.


The tests were created in order for the Treasury to be able to paint as rosy a picture as possible, of the situation that the country’s banks are in. This has not been denied, and in fact, it has been confirmed, although using different words.


“The point of doing this is to avoid a panic, not cause one”, said Geithner recently.


What happens if the government finds something that is worthy of a panic (which it probably has)? That’s where Geithner’s lies and acting skills come in.


Early this week, results of the tests started to leak out. The rumor on Wall Street is that 16 of the 19 major banks are actually insolvent. If that shouldn’t cause a financial panic, I don’t know what should.


I don’t know if this is true, but it certainly could be. Like I said, it’s a rumor.


The government released the details of how the tests were conducted today. This is how the stress test works:


The banks have to figure out what would happen to them if:


1. unemployment went up to 10.3%,


2. home prices fell an additional 22%, and


3. the economy contracted by 3.3% and remained flat in 2010.


Note that the banks are conducting these tests themselves, and it is not exactly in their interest to tell anyone that they’re insolvent. Supposedly, if the government does not find the information coming from the banks to be credible, the banks will have to explain themselves.


In short, there is no independent auditor, only two vested parties who both want to paint a rosy picture and reveal as little as possible.


So, Geithner’s speech on May 4th is rather predictable, no matter what the government finds. In fact, I can give you the short version right here right now, so you won’t have to spend time listening to it on May 4th.


Dear members of the press, (this is Geithner speaking)


For three months, the U.S. government has been conducting stress tests on the nation’s major banks. I’m here today to present the findings of these tests.


The tests were conducted in the most stringent of ways, in order to make sure that the nation’s banking system can hold up in our current economic times. We tested the banks under fictitious, harsh economic scenarios that are very unlikely to become a reality.


Our findings show that despite continuing difficulties in our economic system, and even under a scenario of significant further deterioration, our nation’s banking system remains safe and well capitalized.


In recent months, the banks have taken unprecedented steps to shore up their liquidity positions by writing down legacy assets and by attracting new capital. This, along with an apparent improvement in the overall economic condition of the country, makes it clear to us that our financial system is on the road to recovery.


Blah, blah, blah, banks are great and Wall Street should love me…


Thank you, and no questions please.




I have a strong feeling that the actual speech that Geithner will give, is going to consist of absolute rubbish. Everybody on Wall Street knows he’s lying, but they don’t care, they only care about how convincing his lies are, because that is what will move the market in the weeks to come.


For ordinary people, all this means that even more vital information is being swept under the rug in order to preserve the financial oligarchy, which is the mission that Geithner seems to think that he was given by the American people.




Moreover, I advise that the winner-takes-all voting system should be destroyed.

AIG Can't Believe We're Letting Them Do This

As several newspapers have reported, AIG has as of Sunday, March 15, paid out an additional $165 Million in bonuses to its executives and other employees.


This money is obviously coming right out of the pockets of taxpayers, and the situation has now gone from ridiculous and criminal to something worthy of a march with flaming torches.


When will the American people wake up!!?? The United States is being robbed in the most real sense of the word. The executives of AIG have no intentions of cleaning the mess up, nor could they, nor would they ever even know where to begin.


What is happening now is pure and simple theft, and it is happening as the amount of unemployed Americans is nearing 15% (counting those who have given up looking for work, who are curiously not included in most official statistics), and the number of Americans without health insurance is nearing 100 Million.


America’s big corporations have been laughing working Americans in the face for decades, and are continuing to do so even as those Americans lose their jobs, their homes, their health insurance, their very way of life and hopes for the future.


How far are working and formerly working Americans willing to go in order to protect the incredible transfer of wealth to the top 1% of the population?


How far are they willing to go to stand up for the right of robber barons to rip everyone off by staving off regulation, labor rights and consumer rights?


Pretty far it seems, if you are to believe what the Obama administration is saying. Even though Obama received the strongest of mandates for change in decades, particularly with respect to social justice, he has apparently decided that that mandate meant something completely different.


Obama’s mandate apparently meant galvanizing the rights for robber barons to rob, not giving Americans an actual healthcare alternative (this can be solved by private means alone, according to Obama) and continuing bonus payments to bankers who brought the world economic system down (don’t even think about firing them, they must be retained with bonuses for their great skills…).


AIG has received $170 Billion in taxpayer money already, which is money that will definitely never be seen again. That money went to satisfy claims for a fraction of the speculation insurance payments called “credit default swaps”.


AIG could be on the hook for, literally, trillions of dollars for these swaps. What is important to understand is that AIG has, for a long time, not had any intention of running a successful business.


When you run a successful business, you carefully consider the pros and cons of a certain investment, and act accordingly. AIG, Lehman Brothers, Bear Sterns and many others had a different plan: shuffle money through the company, take a fee, and let the government hold the bag when the party’s over.


The largest banks and financial institutions in the U.S. knew that they would be bailed out when the shit inevitably hit the fan, and that is what Lehman Brothers was counting on, but didn’t receive.


These companies acted accordingly: they enriched themselves for as long as they could, and would run for the hills as soon as it all came crashing down.


AIG is still in the process of being bailed out, so naturally, the executives are still trying to enrich themselves until the very end. They probably can’t believe that we’re still going along with this.


What the hell is wrong with people? Is there nothing left of self-respect in Americans? Is there no sense of justice left? Is there no pride?

It is your duty to claim your right.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Libertarianism and the Crisis

As the economic crisis continues to deepen, a lot of Americans are questioning the system that allowed it to happen, for good reasons. The writing was on the wall when Barack Obama was elected President, in a move that sent a very strong signal of the desire for political change in America.


As the U.S. government has struggled to deal with the economic crisis, the American public has grown more skeptical of the ability to solve it, when it seems that bailouts, stimulus packages and housing programs have little effect on economic recovery.


If an economic recovery is unattainable, then the only alternative is economic restructuring, meaning that current systems will have to be replaced by new ones. The Obama administration’s response has recently been to move left on the political spectrum, for instance by proposing national health care (as an eventual goal) instead of privately provided health care. This is actually a type of restructuring, as it amounts to the replacement of a system.


The response from Republicans has been confused and offered little else than calls to curb spending. With respect to the economic structure that allowed the crisis to build up, Republicans were the ones to create it (along with Clinton). As a result of that, the incumbent American right has little to say in terms of criticisms of the economic structure, and that is where Libertarians come in.


Voices from the Libertarian movement have grown stronger in recent months. the reason for that is simple: Libertarians advocate economic restructuring from the perspective of people on the right that is unrelated, and in some cases goes in contrast to, the views of traditional Republicans.


To sum up so far, Libertarians and Democrats currently claim to have economic solutions, whereas Republicans, in essence, don’t.


The Libertarian movement in The United States is multifaceted and sometimes confusing. The thinking behind the philosophy is always based on individual liberty, if you leave aside some more unusual philosophical currents such as “communist libertarianism”. The libertarian movement is by far the strongest in the U.S. out of any country, and perhaps as many as over 10% of the population describe themselves as libertarians.


Libertarians don’t like to be placed on the traditional political scale, but I would argue that there is no problem doing that, and that anything else would be philosophically incoherent. The political scale is rather simple: the more government intervention one supports, the further left one is, and the less government intervention one accepts, the further right one is. The furthest right is an anarchist, and the furthest left is a communist.


The reason that libertarianism in America is surrounded by confusion is that cultural issues have a much stronger position in politics than in most other countries. In the public consciousness, things like abortion, gay marriage and drug politics have been thrown into the traditional political scale. This however, is not philosophically coherent. The traditional political scale is based on notions of government intervention, or lack thereof.


Both Libertarians and Republicans support a hands-off approach to income distribution and the economy in general, but Republicans do not support a hands-off approach to cultural issues, which Libertarians do. That fact sometimes makes Libertarians appear, in the eyes of Americans, to be further to the left than Republicans. I argue that this cannot be so.


You cannot create a working political scale based on inherently different and complex issues such as abortion and gay marriage, which is why you must break such issues out of the political equation in order to reach philosophical coherence.


Libertarians support even less government intervention than Republicans, often dramatically so, which makes them further to the right than Republicans, and indeed further to the right of any other significant political movement in the world.


As I mentioned earlier, the reason that Libertarians have come into the spotlight more recently is that they have offered different ideas as solutions to the economic crisis. These ideas are meant to deal with the problem that there is an enormous mountain of debt in America, and that the current state of the economic system is unsustainable. The ideas are not without merit, considering how deep the crisis is, but I believe them to be far too dramatic, and very misguided.


A lot of Libertarians believe that the gold standard should be re-introduced, and that the Federal Reserve should be abolished. The results of doing that are very complex, but it has to do with the money supply.


By re-introducing the gold standard and getting rid of the Federal Reserve, the government would be much more constrained in its spending, and the size of government programs would have to be dramatically reduced. In other words, such a move is completely in line with the philosophy of as little government as possible.


Citizens would, for the most part, not rely on the government for the stability of their money, they would rely on gold itself. If the gold standard were introduced today, either the value of everything in society would have to go down dramatically, or the price of gold would have to go up dramatically. Either way, it would completely change the country.

Making these suggestions a reality would almost amount to a dismantling of the government as we know it. This in addition to the further and dramatic deregulation in most areas of economic, financial and private life that Libertarians support can only be described as anarchism. “Freedom of choice” can usually be translated as “every man for himself”, but that doesn’t sound as good.


It is therefore strange that Libertarians should come into the spotlight during this crisis, which was created to a large extent by deregulation, weak government oversight and a weak government in general.


Furthermore, Alan Greenspan, whom many today recognize as one of the major culprits of the crisis, is a life-long libertarian and follower of Ayn Rand’s philosophy. And although he was working within an institution that Libertarians wish to have abolished, he was doing so in the most Libertarian way he knew how: by deregulating and supporting an unfettered market in any way he could.






Moreover, I advise that the winner-takes-all voting system should be destroyed (which, by the way, would almost certainly lead to The Libertarian Party becoming much more influential in U.S. politics. But that’s OK, because all I care about is that every vote is counted!)

Promises and Ideology

The budget plan that was recently presented by the Obama administration is definitely more in line with Obama’s campaign promises as compared to the actions of the administration since the inauguration. Decoding Obama’s actions since he became president is a very puzzling exercise.


There are three major things that Obama has done since he became president, namely:


1. Appointing administration officials who don’t even remotely agree with his political ideals, and even oppose them vigorously in some cases


2. Stomping on his own ideals in dealing with the economic crisis, alienating progressives who helped him get elected, and


3. Presenting a budget proposal that represents a 180-degree turn from numbers 1 and 2 in this description. The budget proposal is completely in line with what Obama campaigned, and won, the election on


How do you explain this seemingly strange and incoherent behavior? There are two important factors at play: economic crisis management and bipartisanship.


Obama does not know very much about economics and finance, which is a bit of a problem during times like these. I believe that Obama has been manipulated by Geithner and his henchmen (who all stem from Wall Street), into believing that propping up Wall Street with taxpayer money is the only thing that can be done to solve to crisis.


With respect to Obama’s bipartisan efforts, it seems that he has some sort of historic hang-up with Lincoln’s “team of rivals”, which makes him want to go down the bipartisan path. However, I think that this is the most incongruous and strange political strife in recent history.


Even though Americans hate to talk about ideology, there is no escaping the existence of it. In reality, the issue of ideology is very simple: it begins and ends with income distribution. The distribution of money in society is the very reason that ideologies came about in the first place.


Americans like to think about ideology in terms of specific issues, such as abortion, budget deficits, the military or gay marriage. However, in the big scheme of things, these issues will always be mere distractions compared to income distribution. That is, unless politicians are able to convince voter that these “issues” are more important than income distribution, which American politicians have been able to do for 30 years.


A budget proposal like the one that Obama just presented is exactly what Republican politicians have been trying to avoid for 30 years. How can anyone with any amount of political clarity of vision think that Republicans would go along with Obama after that? Republicans know that if Americans get a taste of, among other things, free health insurance, they will never want to go back.


Obama’s budget is definitely not bipartisan, and it is highly ideological. The only thing that this means, is that the American political landscape has finally broken free of the fear mongering surrounding issues like abortion, and is now actually focusing on issues that concern everyone.


Obama promised to deliver change, and this budget proposal is it.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Upholding the Illusion

Upholding the illusion that America’s financial system is simply going through a crisis which can be resolved is becoming increasingly more difficult for the U.S. government. After an enormous bailout package, a stimulus package worth about 6% of GDP and guarantees of bad assets worth much more than that, the government has nothing to show in terms of recovery.


It is also an illusion that many U.S. financial institutions are not already nationalized. AIG has received $150 Billion from taxpayers. The company has far more in losses, and it will report what is expected to be the biggest losses in U.S. financial history on Wednesday.


AIG has now asked for more taxpayer money, although the government already owns 80% of the company.


Citigroup has received $45 Billion from taxpayers, and is now asking for much more. Citigroup is only worth about a fourth of that, around $10 Billion, so why the hell are there any shareholders left other than the U.S. government?


The U.S. government’s ideological opposition to nationalization has wound up costing American taxpayers 4 or 5 times more than what a nationalization would have cost.


Citigroup’s shares are as I just mentioned worth $10 Billion, yet taxpayers have paid the company $45 Billion just so that the shareholders won’t lose their investments (of which there is only 10% left since Citigroup’s stock lost 90% of its value), and so that the executives won’t have to be fired.


It would have been a lot cheaper to simply buy all the stock. Cheaper yet would have been the only morally sound thing to do: wipe out shareholders and nationalize the bank.


Furthermore, banks are failing across the United States every week now, and the FDIC (which nationalizes such banks every week so that they can be liquidated and/or sold off) has had to hire more staff, and is currently bringing people back from retirement.


The U.S. government also has a secret list of which banks are in serious trouble, and are in imminent danger of failing. Many have called for this list to be made public, but the government refuses.


In addition to all this, the U.S. government is engaging in the sort of “creative accounting’ that played a large role in creating this crisis. It is trying to sweep all the losses of big institutions under the rug by “not estimating assets too conservatively” as Geithner has stated.


What that means is that when the government has given taxpayer money to big banks and other institutions, it has valued their assets much higher than the market (which values them at zero), creating the illusion that these institutions are much better off than they really are.


Also, the government has helped institutions like AIG to set up “special purpose entities” where the company can hide bad assets away from the balance sheet, again creating the illusion that things are much better than they really are. This is what Enron did, and a lot of people went to jail after that…


All these efforts are obviously counterproductive and ultimately detrimental. The government is lying about many things relating to the financial crisis, but most people don’t realize it. Why is the government doing this? Well, I think it feels that it MUST uphold the illusion that the system can indeed go on as it has before. If it cannot, what is the alternative?


They know what the alternative is: a European-style regulated society where citizens are guaranteed a standard of living rather than being left to hope for that standard amidst cycles of boom and bust. In a country where all politicians are either right or right-wing, this is a terrifying prospect.


I recently realized that the upholding of illusions is exactly what Keynes based his theories of spending and crisis management on, and that’s why it makes perfect sense for Keynes’ theories to be back in the spotlight.


It is widely believed that Keynes developed his theories in response to the Versailles Treaty after World War I, and the treatment of Germany in economic terms.


The Versailles Treaty made it so that Germans’ standard of living went lower and lower each year after it was enacted. This, according to Keynes, destroyed confidence among Germans, and the economic crisis started feeding off itself (which is something that was echoed by Ben Bernanke in a speech before Congress today).


So, after the war, Germans were obviously bankrupt. Even so, thought Keynes, they should keep spending, and if they could not, the government should enable them to do so. Even if you don’t have money to spend, you must uphold the illusion that you do, by borrowing money to spend, otherwise the economic crisis will get worse. That is in essence what Keynes thought.


Expressed in that way, Keynesian economics sounds like a really bad case of “keeping up appearances”, don’t you think? Upholding the illusion is what it is all about.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

A Better Stimulus Package - Research and Education

Obama’s recent stimulus package will help to plug a lot of holes in state budgets across the country. It will also marginally improve the infrastructure situation. However, 40% of the package is made up of tax cuts, and for that and other reasons, I believe that it will be very unsuccessful in actually helping the economy recover.


I believe that the road to economic recovery for the United States is not one of tax cuts or stimulus packages, but one which made this country great in the first place: massive spending on scientific research and education.


I do not believe in trickle-down economics, like the Reagan/Bush/Clinton policies, because that theory is based on a belief that excess money, spent by wealthy individuals, floating around in society, will somehow create wealth for all citizens.


I also do not believe in Keynesian economics, like the stimulus package, because that theory is based on a belief that excess money, spent by the government, floating around in society, will somehow create wealth for all citizens.


You can probably tell where I’m going with this: the basic flaw of both trickle-down and Keynesian economics is that the money that the government spends and/or controls in other ways has no direction or purpose.


I’m not saying that the government should tell people what to spend money on, or that there isn’t a large role for the so-called “invisible hand” for people in society. I’m saying that when the government spends money, it must do so with a specific purpose, and do it well.


There are two important issues to consider when delving deeper into this: economic growth and job creation. These are favorite expressions of politicians, but most politicians have only a vague idea of what they actually mean.


Economic growth occurs when something is added to society. If someone gets up off the couch and starts growing potatoes, he or she has contributed to economic growth. Economic growth does not occur if the government gives someone a tax cut or chooses to spend tax money on road maintenance.


Job creation occurs when someone hires an unemployed person and pays that person’s salary with the revenue from increased production. When the PC was invented and Silicon Valley hired thousands of people, that was a perfect example of actual job creation.


Job creation does not occur when the government hires someone to work on road maintenance or when a company hires someone and pays the salary out of money left over from a recent tax cut. (the government could create jobs by actually starting their own business enterprises, but that is rather unusual).


Hence, both trickle-down and Keynesian economic policies are ineffective for economic growth and job creation, especially in times of crisis. In order to actually spur job creation and economic growth, you need something specific, something new, and American history provides excellent examples.


After World War II, The United States started spending massive amounts of money on higher education and scientific research. Young people were able to go to college for free, and scientific researchers were making strides like never before. This enabled the U.S. to go to the moon, invent vaccines and computers, and become the most industrially and economically powerful country in the history of the world.


In sector after sector, The United States became the world leader with the help of education and research, and this laid the foundation for the immense prosperity that the country still enjoys today. Unfortunately, since Nixon, all that prosperity which was originally created by everyone in society, has been funneled only to the top.


It would be very difficult to make the case that these industrial advances came about as a result of trickle-down, low tax economics. Nor could it be argued that Keynesian economics was behind it, because it was not used.


It is crystal clear that America’s prosperity mainly came about as a result of massive government spending on research and education, and it is to this that we must return.


In order to actually create jobs, and to achieve actual economic growth, the U.S. government should:


- make college education much cheaper, and free for as many people as possible


- fund research into as many areas as possible and help industries with the practical application of research results


- create national standards in the most important school subjects, such as the natural sciences and English


- end the system where local schools depend on local real estate taxes, and centralize funding for schools


These are only a few ideas for a new stimulus package with a real potential to help the American economy, and there are myriads of other things that could be done quite easily. A stimulus package full of tax cuts will do nothing to help the American economy recover, but research and education will.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Government Incompetence and the Creation of the Crisis

The vast majority of severe economic crises start with an unexpected bursting of a speculative bubble. These speculative bubbles are usually very complex, and are made more potent by complex financial instruments that only the people who created them can understand. This is also the idea behind these complex instruments; it will make them seem worth more than they are because people don’t realize what they are made up of.


During crises in the past, governments have always been unable, or in the case of the U.S., unwilling, to keep up with the ever increasing complexity of the financial instruments. In the end, that leads to a situation where nobody knows what anything is worth, so prices can only go down.


In the panic of 1873, which led to the “Long Depression”, speculation in complex bonds relating to railroad construction was a large contributing factor. Before the “Great Depression”, traders were mailing complex trades across state borders in order to evade any financial regulation (which only existed as local law at the time).


In the crises in Sweden and Japan in the 90s, complex financial products related to real estate speculation were almost fully responsible for the crisis, as they are in the crisis in The United States today.


As I mentioned above, governments are usually unable to keep up with financial markets when complex financial products are being created. This is mainly a result of the lack of competence within the government, and a lack of understanding of the financial markets on behalf of its staff. George W. Bush was famous for having repeatedly mixed up inflation and deflation. More importantly, however, the SEC has been largely absent in recent years.


Many traders that I have talked to here in New York, as well as traders in the media, say that they have never once been contacted by the SEC in any capacity over the last decade. This is especially true for the most complex trading, including trading with mortgage-backed securities and CDOs “squared” (don’t ask). Similarly, the ratings agencies were left alone to prosper as they saw fit.


The long-term commitment to self-regulation has obviously contributed a lot to the current situation. And U.S. politicians have failed the country in more ways than one in the creation of this crisis. Self-regulation becomes a vicious cycle in the following way: when the government does not engage in regulating, it loses the capacity and competence to do so.


Hence, after two decades of self-regulation, the U.S. government has no idea what’s going on in the financial markets because they haven’t touched them, studied them or regulated them. The SEC has under 4,000 employees, which I’m guessing is less than the amount of shoe shiners in New York City. Needless to say, this lack of competence is very problematic in trying to deal with this crisis.


An unfortunate “solution” to the problem of not being able to deal with a complex financial crisis has been to bring in the people who created the crisis in order to solve it. Of course, these people have their own agendas, and are easily able to enrich themselves as taxpayers pay money to resolve the crisis. This is the “solution” currently being pursued by Obama and Geithner, which has already turned out to be very detrimental, as taxpayer money has been thrown into a black hole, only to enrich individuals on Wall Street.


The much talked about Swedish solution to the crisis also dealt with this problem. In Sweden, executives were fired, and representatives from the financial industry were not made a part of the team that would clean up the mess, or at least they were included to the smallest extent possible. The Swedish government had to create competence within its agencies in order to deal with the problem and get the best deal for taxpayers. It did so mainly with the help of academia.


The belief that the government can never be competent enough to engage in issues such as these is misguided. When it comes to the IRS, the U.S. government is very competent. The IRS has vast, in-depth knowledge of anything that pertains to taxes, domestically and abroad, and in immensely complex arrangements. I’m not saying that the IRS is perfect, but that the SEC MUST become more like it. The IRS has over 86,000 employees, which is more than 20 times as many as the SEC.


The SEC is, at present, completely incompetent. The people that are advising Obama and Geithner are nothing but self-serving Wall Street insiders, as the people who advised Bush and Paulson also were. The Obama administration and the Treasury need to turn to international and domestic academia (except for those who used to work on Wall Street) and to Sweden, Japan, The IMF and The World Bank for help in resolving this crisis. By gradually building competence, the U.S. can hope to avoid some of these problems in the future.






Moreover, I advise that the winner-takes-all voting system should be destroyed.

Taxpayer Bonuses to Failed Bankers... Is Obama Serious??

Chris Dodd is s sneaky fellow. Towards the end of the stimulus package negotiations, he snuck a provision in, severely limiting bonuses for executives receiving taxpayer money through the TARP or in other ways.


Tim Geithner has filled his cabinet with ex-Wall Streeters, so he and the Treasury have been fighting, tooth and nail, against limits on executive pay, just like Paulson did. Dodd’s provision was meant to counter the Treasury.


Now Obama has sided with the Treasury, and is trying to come up with ways for taxpayer money to be paid to these executives.


On Fox News on Sunday, senior Obama adviser David Axelrod said that the administration will: “seek changes in the government's approach to executive compensation”. That can only mean one thing: Obama will refuse to implement to provisions that he will sign into law on Tuesday.


Obama is prepared to break the law in order to give failed bankers million dollar bonuses paid by taxpayers! As someone who supported Obama fully, I am now left speechless, only able to say: are you serious Obama!!??


If a corporation feels like its executives deserve multi-million dollar bonuses and is willing to pay that, I have no problem with that. And if that corporation keeps paying the bonuses even in the face of multi-billion dollar losses, that is also fine with me. It’s just stupid, and I don’t understand why the shareholders accept that.


However, when the corporation receives taxpayer money, it is very much my problem how that money is being spent.


This is a really, really serious crisis. In Florida, there are actual bread lines. In Nevada and California, local governments have designated and fenced in land for people who live in their cars, reminiscent of the “Hoovervilles” of the Great Depression. Food banks are out of food in the Northeast, and the beggars in New York City are no longer mostly made up of addicts.


The President of The United States is currently weighing these problems against the need for multi-million dollar bonuses to failed bank executives. You have to ask yourself if he has lost his mind.


The heat is turning up in the battle for taxpayer money and the continued roll of Wall Street in the American economy. On outlets for Wall Street employees like CNBC and Fox News, the rhetoric is really changing dramatically.


The financial sector seems united in a battle against taxpayers, eerily reminiscent of crises in countries with financial oligarchies and mafia control like South Korea and Russia. The gloves have come off, and the financial oligarchs seem to be winning. People on these networks, such as Larry Kudlow and Charlie Gasparino, are absolutely mocking efforts to use taxpayer money to help taxpayers, as opposed to giving it to individuals on Wall Street.


For decades, The United States has been dictating what countries receiving aid from the IMF should do during bank crises. The advice has always been the same when corrupt countries have been receiving aid: fire bank executives, nationalize banks, and under no circumstances give the banks money with no strings attached.


Now, The United States is going down the very road it has warned against so many times, and the results have already proven to be disastrous. Bankers and other Wall Street executives are demanding taxpayer money while hiding even the slightest hint of the extent of their losses. They have insiders from Goldman Sachs, Citigroup and many other firms in the Treasury, and they are even using TARP money to lobby for these things.


I don’t know what Obama is thinking at this time. What he’s actually doing, though, is taking food from the mouths of starving Americans and putting the money in the pockets of bank executives who have brought down the American financial system.





Moreover, I advise that the winner-takes-all voting system should be destroyed.

Good Versus Bad Protectionism

For the longest time, The United States had a firm commitment to protectionism. Protectionism is a policy under which a country limits imports by different means so that the country consumes primarily its own goods. In the early 20th century, America’s commitment to protectionism was ended, and a commitment to free trade was started instead. Of course, protectionism has its clear advantages. It is clearly better for the U.S. economy on the whole if Americans buy Fords instead of Toyotas, because the money would stay in the U.S. instead of being transferred to Japan. The story, however, is much more complicated than that.


During times of a severe crisis when job losses mount and industries shut their doors, calls for protectionism usually grow louder. That happened during the Great Depression, and it is happening now. Much of Barack Obama’s campaign rhetoric was centered on domestic industry and a return to consumption of domestic goods, and more recently, Timothy Geithner has repeatedly alluded to the fact that China is manipulating its currency to stimulate exports. What Geithner is effectively saying is that China should raise the value of its currency, so that Chinese goods will become more expensive in the U.S., so that Americans will buy American goods instead. So, what are the benefits of free trade, and is there such a thing as “good protectionism”?


Free trade has many advantages. Most importantly, it lowers the price of goods dramatically, and makes goods available everywhere. 20 years ago, the prices of food, furniture, clothes, electronics, appliances and much more were considerably higher than they are today. The globalization of free trade have made these goods much cheaper in the West and provided jobs in the Third World. Today, most types of trade is global, and many countries even import the same goods that they export (this is also called “counter trade”). Globalization has, in short, put millions of people to work, and brought cheaper goods and greater prosperity to everyone.


During a crisis, globalization and free trade do little good. The enormous forces of the global economy cannot be controlled or steered towards a certain goal, such as job creation in the U.S.. Protectionism can do that, but at a cost to the global economy, and global growth. An increased amount of protectionism would likely cause some problems in trade relations around the world, but those problems may not be as large as those that would occur if the unemployment rate were to go up to 15-20%. There are definitely some excesses in global trade that could be addressed, while local goals could be achieved.


Not every country can produce everything, and it would make little sense for advanced, industrialized countries to start producing basic goods again just to create jobs. For the government to sponsor a pencil factory next to a bio-tech lab would be stupid. That would be an example of bad protectionism. We need trade to a large extent, but we don’t need trade for everything, and in some cases, trade can be a liability.


There are certain goods that are not suited for global trade, for various reasons. I’m thinking primarily of food, defense and government contracts. If a country does not have its own food production, it becomes very vulnerable to political insecurity in the world. If a food exporting country has a choice between feeding its starving citizens, or breaking a deal with a food importing country, the former will obviously be chosen.


A country that is dependent on imports for its defense is also very vulnerable to insecurity. Again, if a weapons exporting country is faced with a choice of defending itself or breaking a deal with another country that wants to buy weapons, the former will be chosen.


With respect to government spending in general, it makes little sense not to buy domestically when buying police cars, fire trucks, steel for bridges, energy, and so on. To directly take taxpayer money and transfer it to foreign taxpayers through government imports results in a dramatic hemorrhaging of money for the country’s finances.


The conclusion one can draw from these examples is that there is such a thing as “good protectionism”. If the American government wants to create jobs at home, it should primarily focus on supporting domestic production in food, defense and whatever goods the government purchases. Good protectionism is protectionism that makes economic and philosophical sense.


No country can be legitimately blamed for implementing such policies, so the impact on global trade is minimized using this approach. Focusing on good protectionism can also lower the trade imbalance and strengthen the dollar. When it comes to free trade, the story is very similar to that of public goods and public utilities: there are times when the free market is unmatched in providing what is needed, but there are other times when the free market is completely unsuited to the task at hand.

Share your thoughts in the comment section

Crowd Them Out!

President Obama and his administration is currently working on a new stimulus package that includes large amounts of spending on public goods, such as infrastructure, health care and the environment. Traditionally, a public good is something that is available to all citizens of a country at little or no cost, to the benefit of everyone. However, in The United States, goods that are considered “public” in most other countries, are considered “private”. For example, health care is considered a right (by extension a public good) in the EU, whereas it is considered a privilege (a private good) in The United States. Such thinking is the reason why a lot of commentators are voicing opposition to Obama’s stimulus package at the moment.


The free market philosophy is deeply ingrained in American culture, and stretches back hundreds of years. A lot of Republicans and other free market proponents are now criticizing Obama’s plan, saying that it would “crowd out” the private sector from the provision of certain goods and services. “Crowding out” is a phrase that is used to describe a situation where the government provides a service that could have been provided by the private sector. For instance: if the government were to provide free health care for U.S. citizens that was as good as private health care, why would anyone pay for health care? As a result, private health care companies would be “crowded out”.


It is important to remember that Obama’s stimulus plan is concerned almost exclusively with public goods, or at least what the administration considers to be public goods. Obama is not suggesting that the government should start producing toaster ovens to sell for a profit. He is proposing to use public money for public goods. Very few people would argue that the government would be better at producing toaster ovens than the private sector. They tried this in the Soviet Union, but wound up with toaster ovens that could barely toast one piece of bread, as well as a mountain of them that was never sold. As I eluded to earlier, the Republicans don’t consider health care to be a right. The current debate is hence a highly ideological one. The real question here is: can the private sector provide the goods in Obama’s plan 1. affordably and 2. reliably?


Let’s go through a few examples. The most important sectors that this plan is concerned with are electricity, roads and health care.


Electricity - does anyone remember the Enron scandal? If not, this company pioneered a new approach to the provision of electricity and natural gas. Before Enron, electricity was considered as something that should be provided to citizens at the lowest cost possible. There was literally a direct link between the government’s not-for-profit production and distribution of electricity and the citizen’s outlet. Unbeknownst to citizens, Enron convinced politicians that that should no longer be so.


By introducing itself as an intermediary between the energy source and the electrical outlet, Enron was able to charge customers vast sums of money, while making electricity much more expensive. Enron bought up power grids (which were built up with taxpayer money) and charged more. It bought power plants, and charged more. It intentionally choked the supply of energy, and charged more. In the ground zero of free market philosophy, Texas, electricity prices rose by 800%, and are still at that level today even though Enron is gone. California experienced countless blackouts when Enron was in charge of electricity provision in that state. These blackouts were partly intentional to choke the supply, and partly due to incompetence. So, the result was blackouts and price increases of 800%... - guilty on both counts.


Roads - Americans are always screaming about high gas prices, but I never hear anyone screaming about road tolls. In the New York area, a trip to the shopping mall can easily wind up costing $40 in tolls. It’s important to remember that almost all roads in the country have been built with taxpayer money at some point in the past. As such, they are the property of taxpayers, as much as the White House itself is. Local governments all over the country have been selling roads to private companies since the 1980:s, in the same way that electricity grids were sold to Enron. Road tolls inhibit citizens from driving on roads that they themselves paid for, and in many cases, the money goes to private companies. These private companies have no incentive to make the roads as good as possible, their only incentive is, and should be as a corporation, profit. Hence, it makes no sense to sell a road to a private company to run it for profit, when the government can run it without a profit motive. It’s a question of good governance.


The very reason that the country’s roads are crumbling is the outsourcing of roads to private companies. By doing this, The United States now has a more expensive, and lower quality transportation system. Guilty on both counts.


Health care - need I even mention the 50 million Americans who do not have access to health care? That number is growing as the economic crisis gets worse. The United States ranks very low on measures of population health, far behind all other Western countries, and even behind Cuba. Also, I never understood why employers should be saddled with health care costs. The duty of an employer is first and foremost to pay a salary and adhere to labor laws.


A little known fact is that The United States spends around twice as much tax money per capita on health care compared to the countries in the EU that provide the most comprehensive free health coverage, such as Germany, France and Sweden. In The U.S. you are covered for nothing, and in the EU you are covered for everything, at half the cost! What does that tell you about the efficiency of the market in the provision of health care for citizens?


So, what we have is truly second-rate health of the population and non-existent coverage at astronomical prices. Guilty on both counts.


The private sector absolutely cannot provide these things affordably or reliably. In an economy, there are certain things that are suited to be provided by the market, and others that are definitely not. The motive of a health care organization should be to keep citizens healthy at the lowest cost possible. Anything other than that reflects a medieval state of mind. Profit cannot be a part of the equation, because dead patients are more profitable than surviving ones. The motive of an electricity infrastructure is to keep citizens warm and able to feed themselves. Anything other than that severely threatens the security of citizens. The motive behind a national infrastructure is for citizens to be able to move around and for goods to be able to travel. Anything other than that amounts to a country giving up sovereignty over its land.


Selling out public goods to private companies is highly detrimental to a country, and indeed immoral. Obama’s plan would crowd these companies out. The plan will not bring the short-term boost that Wall Street is praying for, and will actually do the opposite of what Wall Street wants in terms of the policy on public goods. However, people on Wall Street are too stupid to figure that out.


The selling of America’s resources must be stopped and reversed. Therefore I say: crowd them out!

The Hope For A New Financial Order

On this day that Barack Obama is inaugurated, I would like to talk about the need for big ideas for the world’s financial future. As the U.S. and the world is in a state of hope for a better future, now is the time to think big, and to think fundamentally about how we can move forward. What we need is a truly global effort to change our financial system for a sustainable future.


The financial crisis is getting worse every day, and there are some very good reasons for this. As a result of the developments of the last 20-30 years, the world’s financial state is worse than most people realize. I usually don’t list a heap of numbers on this blog, but this time, a bit of a reality check is called for. The current crisis actually has a pretty straight-forward cause, which is a rather simple question of plus and minus. Consider the following facts:


The GDP for the entire world in 2007 was around $54 Trillion.


The outstanding value of financial derivatives is currently over $200 Trillion


At least $100 Trillion of these financial derivatives are estimated to be so-called toxic assets, by several independent estimates. In essence, these assets are worthless, but someone has to take the hit…


So there is a slightly delicate question of $50 Trillion that needs to be resolved. I recently had a conversation with a plumber about the economic crisis. He was, understandably, confused about the crisis. He couldn’t understand how there could be more debts than there was money in the world. Though he was more familiar with plumbing than the world of high finance, his reasoning about the economy was positively more profound than that of any Wall Street trader.


The answer to the plumber’s question has to do with what is known as credit expansion. In essence, when speculators borrow money to bet on all sorts of different things, a bubble is created that will make it seem as if there is more money than there actually is. A speculator can hence own lots of “fantasy money”. However, the catch is that, if things go bad as they have now, the speculator cannot pay his debts back with fantasy money; he has to pay them back with real money (because the fantasy money is now worthless). Since there is considerably less real money than there is fantasy money, something’s got to give. That is why Lehman Brothers, Bear Sterns and all the other institutional speculators no longer exist, and that is why we are in a global financial crisis right now.


So, how do we deal with this problem? In society there are many rules. If rules were gotten rid of, does anyone really believe that everyone would behave responsibly anyway? If we took down all the road signs and got rid of all the traffic rules, would everyone drive safely down the road at an appropriate speed? I don’t think so, and the same is true for high finance.


Commerce is truly global again today, which it was not 30 years ago, and hence the same regulations as those that were gotten rid of in the 1980:s (which led to the crisis) cannot be applied today. The new legislation doesn’t necessarily need to be more draconian, but it needs to be comprehensive, simple, uniform as well as prohibitive.


I think it’s time for the U.N. to get involved in financial regulation. We need an International Treaty of World Commerce. We need clear and well thought out rules that will prevent a global meltdown like the one that we are seeing today. Here are some suggestions of what should be included in an International Treaty on World Commerce:


Prohibition on overly leveraged speculation - in other words, a prohibition on borrowing 20-30 times more than you own, in order to make financial bets. Leveraged speculation is what leads to credit expansion and asset bubbles, the cause of this crisis. In many countries, it is illegal to buy lottery tickets or place bets with a credit card (borrowed money). This law would be in the same spirit.


Tax on stock market investments - this would discourage small-scale investing by vulnerable individuals and also breed prudent investment strategies among institutions. Less volatility and less vulnerability would be the outcome. The tax money could go to a reserve fund of the IMF to fight economic crises wherever they occur.


Uniform accounting standards - these standards would be constructed so that hiding assets away from, or within a corporation’s balance sheet, would be next to impossible. The tactic of hiding bad assets or large liabilities, pioneered by Enron and perfected on Wall Street, is also an important cause of the crisis.


Prohibition on complicated derivatives - most financial derivatives were intentionally constructed in such a complicated way that the buyers were not meant to be able to understand what was in them or how they worked. The food industry could serve as inspiration for more transparency, and any financial product would have to have a strict declaration of its “ingredients” as well as the exact plan for growth and how that makes sense.


There are many more things that could be added. Readers are encouraged to add their own suggestions in the comment section.

Why Didn't They Listen?

It has been announced today that Obama, by way of President Bush, has asked for Congress to release the second half of the TARP fund. The institution of this requirement may have been the only sensible thing to come out of the TARP plan. If it had not been instituted, all the 700 billion would have already been given away to Wall Street institutions and banks, never to be seen by taxpayers again.

The Democrats now say that they have a plan to use this money to help Main Street instead of Wall Street because the original TARP plan produced so much “unhappiness”, according to Barney Frank (who, by the way, has received millions in donations from Wall Street firms over the years). The question then becomes, in light of the hundreds of thousands of emails, letters and phone calls from voters telling politicians not to vote for the TARP plan: why didn’t they listen?


Economics is not as difficult an issue as some make it seem. Most of what it’s about is pluses and minuses. The public rightly understood that the original TARP plan was a huge cry for help by Wall Street firms that were about to go under. Simply giving them money without strings attached would not achieve anything. The public understood this too. What the public did not understand was the concept of “Voodoo economics”, where money magically appears if you leave financial markets alone. The reason that the public didn’t understand this was that it makes no sense. It makes no sense because it doesn’t work. End of story.


Politicians, however, strongly believed that they had mastered the art of Voodoo economics. They listened to who they referred to as “the smartest people in the room” (Wall Street executives), in addition to taking millions in donations from those same people. “The smartest people in the room” had for years told them that the free market can provide all the security Americans need, so taxes could be kept low and the government would not have to take responsibility for the well-being of Americans. It’s a pretty sweet deal if you think about it: in your job you get to:


1. have less responsibility (by not insuring pensions, wages, affordable education and more)


2. get millions in donations


3. not have to take any tough decisions that will anger and disappoint people (raising taxes)


The politicians were able to outsource their own jobs, while also keeping them and receiving millions of dollars in donations from the ones they outsourced to. Sweet deal! That is why they didn’t listen.

Question: what possible upside could there be to allowing large-scale campaign donations, for instance by Wall Street firms? The argument that it is essential for freedom of speech is a pretty weak one...

Obama Knows

I have recently been quite disturbed by the appointments that Obama has made, especially with respect to his economic team. Yesterday, my wife tried to console me by saying: “he has a plan”. By that she meant that the appointments don’t necessarily translate into the policy favored by the people Obama has chosen, who largely constitute a restoration of the Clinton economic team. I put a lot of blame on Clinton for the situation we are in today, and I also blame Reagan and Bush Jr., but I don’t blame Bush Sr.


In a speech at George Mason University, Obama spoke in very serious terms about the economic state, and he, I believe, correctly identified many of the upcoming challenges. What Obama realizes is that the challenges we face are not limited to the restoration of confidence in the financial markets. This is not about even about the financial markets anymore. We are unavoidably facing a paradigm shift in the way that this country functions.


To put this in perspective, we seem to be facing a budget deficit of around 2 Trillion dollars with the Obama plan. The current estimated value of “toxic” financial assets is now around 8 Trillion dollars. If it would take 8 Trillion dollars to clean up the financial markets so that those markets can again provide America with across-the-board prosperity (which they can’t), but 1 Trillion dollars to provide direct relief according to the Obama plan, then the choice seems easy. Obama suggests something pretty simple: to funnel taxpayer money directly back to the taxpayers who need it, instead of giving it away to financial institutions in the hopes that, some day, that money will trickle back to the taxpayers. The latter was the Paulson plan.


I am definitely not a fan of deficit spending, even in a crisis. Normally, I would have argued that fiscal restraint, followed by a time of a baptism of fire would be called for. However, since the people of The United States have essentially no societal protection with respect to incomes, pensions and healthcare, such a harsh experience would probably be too devastating. To set the record straight, what we really should be talking about now are things like the following:


real dangers to future American competitiveness, a deterioration of the fabric of society, hunger, poverty, crime and the like.


Obama makes the case that the only way to deal with the situation is to mortgage our economic future. I reluctantly agree.


Here’s an important quote from Obama’s speech:


“We could lose a generation of potential and promise, as more young Americans are forced to forego dreams of college or the chance to train for the jobs of the future, and our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse.”


We cannot move forward thinking that the financial markets are going to provide prosperity and security for Americans, we must provide that among ourselves. That is the only way.

Like it or not - Burris is right

The Governor of Illinois, Rod Blagojevich, certainly seems to be a criminal. There are phone conversations in which he’s talking about selling Obama’s Senate seat, and the circumstantial evidence of Governor Rod being a crook is overwhelming. However, in the eyes of the law he is not a criminal, yet. He has not been convicted, and he has not even been indicted yet; he has only been accused of criminal activity. That means only one thing: he is still legally the Governor of Illinois, with all the powers of such a Governor.


Last week, Governor Blagojevich named Roland W. Burris as the junior Senator of Illinois to replace Obama, and Burris accepted. Today, Burris showed up in Washington for the 111th Congress, eager to get to work. However, he was shown the door by the Secretary of the Senate, Nancy Erickson because she did not accept his credentials. Burris proceeded to make the following statement to the media:


“Members of the media, my name is Roland Burris, the junior senator from the State of Illinois.”


For a replacement Senator to be named by the Governor, paperwork has to be signed by both the Governor and the Secretary of State. This is an old tradition dating back to English colonial times. In Illinois, the Secretary of State, Jesse White, has refused to sign. Theoretically, it is now argued by the Senate, this fact makes it impossible for Burris to become a Senator until White has signed. I beg to differ.


The Constitution specifically mentions that no specific tests should be required for membership in the Senate. In this case, what the Senate is actually trying to do is to:


impose a test on a would-be Senator with respect mere accusations of wrong-doing of the Governor who appointed him


It is clear that the Constitution overrules Illinois state law in this matter. The Constitution says nothing about signatures from the Secretary of State, and the Supreme Court has ruled that the Senate cannot impose any additional tests on would-be Senators. We’re not even talking about the appropriateness of the would-be Senator himself, but that of the one who appointed him. I believe that it would be very difficult to make an actual legal case that Burris should not be the Senator of Illinois. Like I said, Governor Blagojevich still has all the powers of a Governor, end of story.


This debacle certainly raises some important questions, however. The most important one, in my view is:


Who can veto a Senate appointment?


From the Burris debacle, one could deduct that the ones who can veto such an appointment is: 1. a Secretary of State, 2. a Secretary of the Senate, and 3. the Senate collectively.


Imagine if all Secretaries of State were to get together and decide to block all Senate appointments. They could then do so until people that they liked were appointed instead. These Secretaries could gain control of the Senate. Imagine if the Secretary of the Senate were to start blocking would-be Senators to achieve political goals. That would become an enormously powerful position. If the Senate started imposing all kinds of different tests on would-be Senators, the American political system would become infinitely more gridlocked than it already is.


I think the whole thing stinks, but if you want to follow the law, Burris must become Senator. The American political system fosters corruption because private donations to politicians are allowed, which makes it possible for criminals like Blagojevich to become Governors.

Fighting Off Depression

Paul Krugman writes today in The New York Times about what the new administration should do to fight off a depression. Krugman believes that large-scale Keynesian deficit spending is what is needed in a situation like the current one. He also rejects the Friedmanite theory that capital injections into banks can be a way to fight off a depression.


Krugman is certainly a decent economic thinker, but he is not known for his consistency. He used to advocate capital injections into banks, but is now apparently against those. He used to call Thomas Frank’s theories on the so-called “Southern Strategy” “erroneous” (theories having to do with poor people voting for Republicans, even though that goes against their economic self-interest), whereas he now writes about them all the time, as if he came up with them himself. Krugman, like Bernanke, lacks an ideological determination and clarity of vision.


Now, I agree that something has to be done to try to avoid a depression, but things are more complicated than Krugman make them seem. First of all, Keynesian spending is just a band-aid approach. Second, Friedmanite bank capital injections usually work, but only if they are highly controlled by the government. Third, a depression in The United States is something very different compared to a depression in every other industrialized country, because The United States does not have a social safety net.


Short-term solutions is without question the usual name of the game in terms of American politics, and also in terms of American academic economics. As I wrote in my last post, ideology is absent from American politics. If the government does not have a clear-cut ideological vision, a series of band-aid approaches tends to dominate politics. The result is the same if the ideological conviction is a conservative one, in which case (according to conservatism) band-aid approaches constitute the second-best solution, second only to doing nothing. Keynesian spending can indeed provide some short-term relief if a depression is looming. Perhaps more than anything, it can provide a “psychological stimulus”, where people see other people working, building things, and things happening in general. This can bring back confidence in the system. The question that I’m asking, however, is: should confidence in the system be quickly brought back by Keynesian spending?


I would argue that the problems we are experiencing today are much deeper than a problem of confidence. To apply a series of band-aid approaches so that we could go on as before would be a grave mistake. Like I said, there is nothing wrong with spending during a crisis per se, but you should never spend money you don’t have. Spending is good, deficit spending is bad.


I turn again to Sweden, that went through a very, very similar crisis in the early 90s. Sweden had tried the Keynesian model for 30 years, but ultimately rejected it when it became clear that it was artificially supporting a system that was not sustainable. That system came to an end in the early 80s. With these lessons in mind when the crisis came, the Parliament worked out a crisis package with broad, multi-party (yes, there are more than just two parties in Sweden…) support. The solution, thought the government, was not deficit spending, but:


1. spending reduction,


2. capital injections into banks (where the government took control of those banks, not just gave away the money like a bunch of idiots…) and,


3. Long-term commitment to budget surplus and a pay-as-you-go system for government spending


This may sound like some type of anti-government Republican credo, but keep in mind that government spending makes up over 40% of GDP in that country, whereas it makes up less than half that in The United States. Let me say this once and for all: sound fiscal policies should have nothing to do with what ideology you subscribe to.


Number 1 and 2 in the list above were meant to stave off the crisis, but by no means quickly get rid of it and continue like before. The government realized that something had to give, and the recovery was painful, but real. The third action, or commitment, was actually realized, and it was meant to set the country up in such a way that the next big crisis would be easier to get through.


This is exactly what ended up happening. To be sure, Sweden is currently going through a lot of pain and job losses, but the government’s coffers are full because budget surpluses for over 10 years have created a readiness for the crisis that we see today. As a result, Sweden can use the surplus that has been built up to spend its way out of the crisis without running a deficit. That’s the beauty of the whole thing: you achieve crisis relief without setting the country up for the next crisis by means of deficits, loans, and all the rest of it.


The United States now has a chance to set the country up in the same way that Sweden did in the early 90s. By doing that, the country will be more sustainable in the future, and be able to weather the next crisis as Sweden weathers the current one now.

Obama's Healthcare Plan

Obama is a mysterious man. Ever since he started talking about his healthcare plan, I have not really understood what the plan actually is and how it is supposed to help Americans. He has made vague statements about lowering healthcare costs by implementing changes to make medical records electronic, increasing regulation and so on. The overall goal is supposedly to bring “affordable healthcare” to every American. Moreover, this affordable healthcare is supposed to be purchased by individual citizens or companies.


Obama has said that he believes that healthcare is a right. That is a very significant statement, the essence of which every modern country in the world except for The United States has long ago put into practice. The cost saving measures I mentioned above will do absolutely nothing to reach the goal of bringing healthcare to all Americans, for one simple reason:


Everything medical in this country comes with a 15-20% mark-up


That, and that alone is the thing you need to know when trying to compare the American healthcare “system” to that of any other country. If you go to the doctor, or if you need surgery in the hospital in France, Germany, Japan, Canada, Italy, Australia etc, there isn’t anyone slapping on 15-20% at every stage in the process. The mark-up there is usually closer to 0%. In The United States, from the time that you gaze upon the face of the hospital receptionist, to the time when you file for bankruptcy because of high medical bills, private companies have profited from your illness in every conceivable way.


Recently, tangible details about Obama’s future plans for American healthcare have started to leak out. It turns out that the plan is not as lame and useless as it first appeared, but cunning and circumventing in what seems to be the Obama style of doing politics when he’s in charge. It remains to be seen if he will be able to get this through Congress, but, in essence, what Obama wants to do is to create a new healthcare provider that is 100% owned by the government! Obama did mention this during the campaign in small ways, but he certainly did not make a big deal out of it, and now it seems that this is where he aims to put the emphasis. It is a brilliant plan, in that it directly addresses the issue of mark-ups on medicine in general.


Obama has said that he also wants to increase regulation of healthcare providers, define quality of healthcare, and more, but those measures will have very little effect compared to government health insurance that directly competes with private health insurance. Why would anyone buy something with a 20% mark-up if you can buy the same thing with a 0% mark-up?


If the U.S. Government made it so that both individuals and companies could buy high quality healthcare with 0% mark-up, the health insurance companies would be in big trouble very rapidly. If you also couple that with stricter regulation, the health insurance companies would have no choice but to lower premiums, increase coverage or get out of the business. It all hinges upon whether or not Obama would be able to scale up such an insurance enough, so that it would grab a sufficient market share to corner the market. A 0% mark-up health insurance would surely come in handy for a lot of struggling companies right now.


No sane person in this country should defend the health insurance companies. They have tried everything in the book to squeeze as much as they possible can out of sick people while attempting to give them as little care as possible for decades now. What’s left for a health insurance company when they’ve done all that? They support a referendum on assisted suicide in Vermont for one simple reason:

you dead = more profit

Unite and Conquer

Obama’s latest announcements of people who will make up his administration has left many scratching their heads. There must be a thousand quotes from the campaign when Obama criticized the old ways of Washington and the people responsible, including Bill and Hillary Clinton. Obama repeatedly promised change in terms of political policy on almost every major issue, and this defined his campaign more than anything else. Why then, are we seeing something that almost amounts to a restoration of the Bill Clinton administration? A lot of people thought that Obama had a secret agenda during the campaign, but who would have thought that he was actually a “Bill” in disguise?


Until Barack Obama came along, I thought I had a pretty good handle on figuring out the desires and motivations of most politicians. There are usually a number of things you can point to, like party affiliations, geographical origin, personal history, education and so on. However, Obama has spent most of his career hiding his personal agenda behind a shield of pragmatism, so most of us are left in the dark when it comes to the knowledge of the full spectrum of his actual convictions. Actual convictions are, of course, a much better indicator of what is going to happen when a politician takes office than are campaign promises.


I am going to base my analysis of the issue of Obama’s true convictions on a few things that stand out about him as an American politician. I am further taking it as a given that the American political system, in its present state, does not allow a progressive political movement in the form of a political party. The examples should be seen as functional analogies. Not much else is possible in the world of comparative governmental policy analysis.


Here are a few important examples: Obama worked as a community organizer after having graduated from Harvard, when he easily could have earned an enormous salary soon after graduation at a big law firm. Obama believes that healthcare is a right, and he believes in a more equitable distribution of income in society through a progressive tax code. These examples pertain to some of the most important convictions in what has always been the true essence of domestic politics: the economics of distribution.


Had Obama been a politician in, for instance, Germany, he most definitely would have been a member of the Social Democratic Party. (The Democratic Party would have been labeled as a conservative party in Europe, whereas The Republican Party is so far to the right that it does not have any equivalent anywhere in the rest of the industrialized world).


Conclusion: I am basing my analysis on the assumption that Obama is a progressive Democrat. As such, his true convictions should guide him towards goals such as: increased market regulation, consumer rights, free higher education, guaranteed pensions and so on (it would obviously be a stretch for me to claim that, deep down, Obama believes in all these things, but you get the picture). So why is he filling his administration with people who don’t believe in these things?? (meaning people like Gates, Geithner and Romer) There are only two options. He is either:


1. Weak and/or stupid, or

2. Cunning and/or opportunistic


1. Let’s first seriously explore the first option. Ever since Obama was elected, the political establishment and the press have been screaming about the dangers of too much change. We have heard countless calls for Obama to “govern from the center”, “reach across the aisle” and to “be a centrist”. All these comments are thinly veiled attempts of saying: “don’t pursue an un-American, progressive agenda”. Obama ran on political change, and there can be little dispute over the fact that he ran on change towards the left, not towards the center.


Is it possible that Obama has faced a storm of criticism from politicians, lobbyists and other influential people that has made him bow down to the pressure and abandon large parts of his campaign agenda? Or maybe he thinks that the current economic crisis is so severe that the Democratic “business-as-usual” is a safer play? Does he think that he won’t be able to get Congress on board with his agenda? All are, unfortunately, possibilities. If any of these examples are true, then Obama’s weakness and/or lack of understanding (aka stupidity) of the current political and economic climate has guided him to select people for his administration that have agendas that significantly differ from his own.


2. Obama’s agenda always differed rather greatly from the those of the other significant Democratic Presidential candidates in that it was more progressive, all things considered. Contrary to what I mentioned above, an opposite explanation is possible:


- maybe Obama never really thought that he would be able to push his progressive agenda through, until the economic crisis came


It certainly wouldn’t be the first time that such a development came to pass. The story of FDR’s ability to create a host of institutions and pieces of legislation in order to help the common man, as a direct result of the Great Depression, is known to most Americans. However, The United states never went as far as European countries with respect to the creation of a social safety net, and later completely reversed what had been created by FDR. As a result, the social situation with respect to income distribution, consumer rights, poverty relief, healthcare, childcare, eldercare, is currently almost identical to what it was in both The United States and Western Europe in the 1920s.


During the Great Depression, the need for political changes towards a more citizen-friendly country became apparent, and the changes were carried out comparatively swiftly. In America today, there are more parallels to the time of the Great Depression in terms of the political climate. Then as now, the influence and reverence of the capital class was in steep decline. The public disgust of Wall Street firms and executives is a good indicator of this. This tends to create a climate where political need meets political will amongst politicians and voters alike, even if the political system is in a state of permanent gridlock, which is arguably the case in The United States. I come, then, to a stipulation of a general political rule of mine for this country’s political climate:


REAL POLITICAL CHANGE ONLY COMES TO AMERICA AS THE RESULT OF A CRISIS


Presidents in the past, such as Jimmy Carter, have wanted to push through progressive agendas
by appointing outsiders who share their convictions, to important posts in their administrations. What has often become apparent after a while, though, is how difficult it can be to actually get legislation through Congress without Washington insiders. With outsider firebrands, you might have a more philosophically coherent administration, but with political insiders, you might be able to get things done. HOWEVER, if you appoint people who disagree with you, you must make sure that the various views of these people do not translate into legislation that you may not agree with, at the end of the day. Can anyone say “Dick Cheney”? In order to control his administration, Obama must rule the people in it with much authority.


To conclude this rather complicated reasoning: I think it would be pretty hard to say that Obama is stupid, or that he is a complete pushover. By appointing Washington insiders it seems that Obama is seeking efficiency of political action. Obama ran on political change, even though he may not have believed that such change would be possible. The economic crisis has given Obama an opportunity to pursue his true agenda.


Obama is on a quest to unite and conquer.

Rubinomics Revisited and Rejected

There seems to be a lot of ideological, philosophical and institutional confusion going on at the moment as the new President is awaiting inauguration amidst an economic crisis. That may not be so surprising, considering the simultaneous seismic shifts in Washington and Wall Street, but if early indications are any guide, change and renewal seem to have been replaced by old patterns of behavior. The economic lessons of the 90s are seemingly being remembered, but rejected in favor of the attempts of the 70s. Both of these decades offered seriously misguided economic policies in this country, and those policies should not be recycled; they should be remembered and amended.


Robert Rubin was Bill Clinton’s Treasury Secretary, and he became famous for an economic formula, Rubinomics, that advocated the following:


1. Balanced budgets


2. Free trade


3. Deregulation


This formula was used by a number of governments, with significant variations, in the 90s, such as Great Britain, Germany and Sweden, in addition to the United States. The formula has often been seen as one that set the stage for sustained economic growth. It is not an easy formula to implement, because it is often unpopular with voters because of the spending restraint it requires. Germany’s Gerhard Schröder lost his position as Chancellor as a result of pushing for ever more reforms and spending cuts. The way that economic policies in the West manifested themselves in the 90s, whether the policies were directly responsible or not, was generally through: lower prices of goods, greater access to credit and lower government spending.


Obama has recently appointed, for the most important economic posts, three disciples of Robert Rubin, namely: Timothy Geithner, Peter Orszag and Lawrence Summers. The President is, after all, the policy maker, but these appointments nevertheless clearly make Rubinomics the most prominent current in terms of economic philosophy in the coming Obama administration.


However, the three goals that I mentioned above do not seem to correlate very well at all with Obama’s campaign issues with respect to economic policies, and even less so in light of recent statements and the evolution of ideas among commentators close to Obama. A renewed, composite view of what I believe to be Obama’s economic policies at the present time looks something like this:


1. Budget deficits (as a result of a much higher amount of government spending to stimulate the economy)


2. Less free trade (as a result of re-negotiations of free trade treaties, energy policies, new focus on domestic production, and more)


3. More regulation (which most people realize the United States needs like the desert needs the rain)


A lot of prominent economists, such as Paul Krugman, are currently calling for the government to run budget deficits and spend its way out of the crisis. The problem of the deficit can simply be dealt with later, it is felt. In a recent New York Times piece, Krugman describes these deficits as something completely benign, and money that “we owe ourselves”. He’s right about the last part, but is that so benign? No it is not, and at the current pace of incurring government debt, this almost amounts to the government taking out a sub prime mortgage. In the end, all the government can pay for, in this situation, is amortizations on its debts. It’s a simple question of plus and minus.


I believe that there are some important lessons to be learned from Rubinomics, and the most important one being fiscal restraint. Whether you’re left or right, everyone knows deep down that you can’t actually have the cake and eat it too (otherwise you really don’t understand the issue). Both the political left and right tend to run budget deficits to please voters. If you want real, lasting political change, or if you want any kind of coherent and long-lasting strategy for the future, the answer is not to shackle the country’s future to mortgage payments that will inhibit spending everywhere else. With large budget deficits, the government becomes cash poor, and hence unable to take effective action on all issues. Politics becomes the art of the permanent crisis management. So, again, whether you’re left or right, your government will not be able to realize your political dreams in a state of permanent budget deficits. “He who is indebted is not free”, said the Prime Minister of Sweden in the 90s, and proceeded to turn the country’s budget deficit into a permanent budget surplus.


With respect to free trade, that was one of the unique aspects of the 90s. After the end of the Cold War, a whole new world of trade opened up, and a globalization that had not been seen since before WW I created lower prices on many goods and commodities. Because of the unique nature of the 90s’ free trade opportunity, I believe that free trade as an economic factor tends to be exaggerated in models and discussions of policy. The main problem with the economic models that we have is that they can only look backwards, which is why they don’t work. Economists are currently pointing to the importance of free trade as a result of what happened in the 90s, which I believe was an almost unique, one-time occurrence.


Barack Obama has, rightly, during his campaign focused on increased local production of goods and services through infrastructure investment and other measures. I believe that much more goods could be produced well, and cheaply in the United States, as opposed to in Asia. This would create jobs, make products safer, reduce global warming, help local economies and housing prices and renew domestic infrastructure. Who said less free trade was such a sin?


I need not even speak of financial regulation to anyone but the most delusional reader. But to he or she who still believes that the unfettered markets can bring the answer to your prayers, I say:


- Financial deregulation is solely responsible for this crisis, which may lead to a depression. No matter what happens, we need a massive new wave of regulation to restore what has been destroyed, and expand regulation to protect us from ourselves in the future. If you know anything about people, you must know that voluntary self-restraint seldom works, especially not in the country of lavish spending and material dreams: The United States of America.


I offer, then, the blueprint for the future economic philosophy that I believe should guide Obama and his team over the next few years, with the same three-step plan:


1. Balanced budgets (“He who is indebted is not free”. In order to achieve a balanced budget, 2 things need to happen: 1. cut military spending drastically, and 2. increase tax revenue by taxing the rich)


2. Less international trade (as a result of a push to increase domestic production as a substitute for imports)

3. Much, much more regulation

Homeowner Help?

Lately, there has been a lot of talk about helping homeowners who have mortgages that they cannot afford, and risk going into foreclosure. A lot of anger has, rightly, been directed at politicians who authorized $700 billion for a financial bailout, while much less, if anything tangible, has been done for homeowners.

During the course of this year and the last, many different proposals have been thrown around as ways of altering mortgages so that homeowners would be able to pay them. These proposals have usually included measures such as the following:

- negotiating with lenders to reduce interest rates

- negotiating with lenders to switch to fixed interest rates

- negotiating with lenders to reduce the principal of the loan

- negotiating with lenders to allow homeowners to stay in their homes until a payment plan can be devised

None of these efforts have been successful, for one simple reason:

They are unconstitutional

The reason for that is, if banks were to try to alter the lending contracts (mortgages), they would be in violation of the contracts that they have with the people who also own all these mortgages, and by extension, a part of all the homes. This was clearly and eloquently expressed in a Senate hearing yesterday by Senator Charles Schumer. For 20 years, mortgages have been broken up and sold in pieces to thousands of investors, so that lenders don’t own the mortgages anymore. The ones who really own them are hedge funds, pension funds, mutual funds and other Wall Street firms. Trying to force lenders to alter mortgages is useless, because they can’t do it even if they wanted to. If this were 20 years ago, negotiating with banks might have worked.

Imagine if 5 neighbors on a block got together and bought an expensive lawn mower by means of a loan. They don’t really need to mow that often, and by pooling their resources they can get a nicer machine than they otherwise would have been able to get. They agree to make equal payments monthly until the lawn mower is paid for. One day, one of the neighbors tells the others that he does not think the lawn mower is worth what they paid for it, and says that, as a result, he will decrease his monthly payment by 30%. Obviously, the other neighbors are angered by this, because, regardless of the actual value of the lawn mower, the bills still have to be paid based on what the original price of it was.

That is a similar situation to what would happen if banks were to modify any mortgages to make them cheaper for home owners. Because the banks don’t own the whole amount, they cannot unilaterally change the terms of the payments. If they did, it would be a unilateral breach of contract, hence unconstitutional, and the banks would be sued by the hedge funds and other owners of the mortgages.

There is only one solution to the problem of making expensive loans cheaper: to alter the bankruptcy laws, so that when a homeowner files for bankruptcy, the bankruptcy judge can alter the mortgage and make it cheaper. That would not be unconstitutional. This has been suggested by Senator Durban, and supported by Senator Schumer as well as Barack Obama. The present prediction is that, by early next year, this proposal will go through. A bankruptcy judge can do this same thing with other forms of loans today, such as loans for farms, so it’s a procedure that is well established. This could potentially help tens of thousands of homeowners and maybe stabilize the housing market somewhat. At the very least, it would save some houses from being abandoned and eventually torn down.

So what are the problems with this proposal? Well, because the ownership of the mortgages is so spread around the country and around the world, a lot of people would have to take a loss if the values of the mortgages were to be written down. If one day, a certain investment were worth $100, it could be worth $50 the next, after a bankruptcy judge has altered mortgages. Obviously, this will make the stock market go down further, and a lot of hedge funds and other investment firms would go under.

I say, let that happen. These firms are already on the brink of collapse, and Wall Street is so thoroughly corrupt that the solidity of the assets that people in the financial industry sell, can barely even be likened to a house of cards. The United States must move forward without any sort of reliance on Wall Street. That means: no more 401(k)s with stocks in them, no more college savings accounts with stocks in them, higher fees and taxes on buying stocks, no more advertising of financial products and so on and so on.

To illustrate the point of the weak content of financial products these days, consider the following story of a home that was bought in Bakersfield, California in 2005: a Mexican strawberry picker who did not speak any English and made $14,000 per year got a loan to buy a house for $720,000…

Loans such as this one are what make up many “assets” in people’s retirement portfolios these days. Happy retirement!

Advice for Republicans: Split Up!

The recent political developments and the recent election have shown how deeply split the Republican Party is on a whole range of issues. In my view, the Republican Party could very well be split up into five or six different parties. The Republican Party’s internal dynamics has, for a long time, been based on the philosophy that “my enemy’s enemy is my friend”. This has brought together a group of people whose inherent philosophical differences are many, and whose different convictions are sometimes even contradictory in nature.

The merging of the motley crew that consisted of white Southern racists opposed to civil rights, stock brokers on Wall Street opposed to regulation, fundamentalist Christians opposed to science and Catholics opposed to women’s rights, somehow created a powerful formula that would, for the most part, control national politics for four decades. They were all against something that would benefit society as a whole, and united in order to destroy it. The very notion of a “society” was to them a spurious one.


The beginning of the end of the motley crew alliance started with Bush. The complete failure to govern during the Bush years was not isolated to the financial markets, disaster relief, health care or education, it spanned across all the sectors that the government was previously supposed to manage. The Bush administration believed that the government should not govern, and hence did not.


Apart from the politicians in the administration who held these anarchistic views, the administration appointed, throughout the country, administrators who shared these views. Appointing anti-government administrators is like making an atheist the Pope. As a result, banks were told to regulate themselves, food importers were told to inspect themselves and vendors in government procurement deals were told to give the American tax payers a good price without competition. We all know that you can’t have a fox run a hen house, so the outcome was always rather predictable: a government in shambles and a country in deterioration. The fox ate the hens.


This intentional failure made Bush and his administration more unpopular than any administration in history, and put into serious question the oldest of conservative mantras: small government. The intellectual wing of the Republican Party is currently asking itself: why didn’t small government work? The answer they usually come up with is that what we had was not, in fact, small government, it was BIG government, and that’s why it didn’t work. Unsurprisingly, yet another erroneous analysis has come out of an anti-intellectual “intellectual” movement.


Then came John McCain. As a self-styled “maverick” and Republican Presidential candidate, history may judge McCain as the ultimate divider of the Republican Party. McCain was never part of the mainstream of the party, nor was he a part of the fringe on either side. Having a political maverick as a leader of a party is sure to divide a party simply because such a person will inevitably have limited appeal to everyone in it. In a best case scenario, a maverick could have broad appeal, but that broad appeal would probably still be limited in terms of intensity. The social conservatives didn’t like him because he wasn’t socially conservative. The Wall Street conservatives didn’t like him because he didn’t understand, and had no interest in, economics. The fundamentalist Christians didn’t like him because he was lukewarm about faith, and the list goes on.


Then came Sarah Palin. The amazon in the shape of a 1960s culture warrior emerged, preaching small-town values and anti-intellectualism with the eloquence of a 10-year-old. In the end, she appealed only to the least educated, most bigoted and backwards elements of the Republican Party. This obviously turned off tens of millions of voters around the country and greatly upset many elements of the Republican Party. The intellectual wing of the Republican Party was in uproar about Palin, and David Brooks famously described her as a “fatal cancer” to the party. He was probably partly right, but as we have seen, Palin was far from the only problem facing the Republicans. What did Palin actually stand for? I’m not sure, but she seemed to hold in high esteem, activities that included drinking beer and playing ice hockey. There’s nothing wrong with that, ask any Canadian, Swede, Finn or Czech, but most people don’t see these issues as critical to national politics.


Then came the economic crisis. It came down on America like a ton of bricks, and created further divisions between Republicans. A strong division started to show between the social conservatives in the South and the Wall Street conservatives in the North. The Wall Street conservatives argued for an enormous bailout of Wall Street that would save individual companies, individual investors, and enable Wall Street to continue to play a main role in the American economy as a whole. The philosophies of Wall Street conservatives are usually linked to a modern, diluted form of anarcho-capitalism, represented by people such as Alan Greenspan and Larry Kudlow. Although social conservatives and others have usually gone along with these philosophies as a part of the alliance of the motley crew, when the time came to vote for a bill that would endorse these philosophies to the tune of 700 billion dollars, it was too much. Social conservatives in the South who represent poor people with a low degree of education had never benefited from anarcho-capitalist philosophies. Those who actually benefited lived in Manhattan and not Alabama. The split became apparent when the first bailout bill was struck down by the House of Representatives, much as a result of social conservatives in the South.


Then came Obama’s victory. Obama was able to further split up the Republican Party, not by sowing seeds of division in their ranks, but by making people unite and flock around him. He spread an almost entirely positive message and introduced new solutions to problems, problems that the Republican Parties had considered non-issues that could hence be handled by the market. It turned out that voters did not want the market to provide them with health care or infrastructure. Obama’s message was, in essence, that the market could not do this. Obama offered solutions, the Republicans did not.


I’m saying that the Republican Party should split up. I’m saying that conservative ideology is not as much an ideology, as it is the absence of one. If your political goal is to leave most things in place, without having guided them there in the first place, which is in essence what conservatism means, then I would not call that much of an ideology. It is precisely because of that that I don’t think that the motley crew that is the Republican Party can stay together. The crew does not really have anything to rally around as a group, and will be unsuccessful if it tries because of the inherent contradictions and philosophical conflicts within the party. Only as a coalition of different parties can these political elements move forward. Inspiration can come from other conservative parties around the world, and I will now give a few suggestions on the formation of new parties:


- A Christian Conservative Party. There are several examples of these parties all over Europe. It seems to me that a party such as this would be very appealing to a lot of people in the South and mid-west. Social and religious issues are very important to these parties.


- A Moderate Conservative Party. This type of party usually advocates healthy budgets, entrepreneurship, lean government and low taxes. No importance is placed on socially conservative issues. Examples: The Tory Party in England, and Moderaterna in Sweden.


- A Libertarian Party. I know this already exists in America, but it could be re-vamped by the splitting of the Republican Party. There are hardly any examples of these parties anywhere else in the world.


- A Regional Southern/Rural Party. There are parts of the southern United States that have such different views based on regionalism as compared to the rest of the country, that the only way to accurately represent these views would be to create a regional interest party. There are many examples of these parties around the world, some more ”interesting” than others.


The future success of American conservatism hinges on splitting up.