Free Markets, Free People

Economy

EPA Set To Kill The Economy

Here’s an item which, in the midst of the financial crisis, will probably be overlooked and underreported. However, it has the potential to destroy any economic recovery should we ever get one rolling.

The Environmental Protection Agency sent a proposal to the White House on Friday finding that global warming is endangering the public’s health and welfare, according to several sources, a move that could have far-reaching implications for the nation’s economy and environment.

The proposal — which comes in response to a 2007 Supreme Court decision ordering EPA to consider whether carbon dioxide and other greenhouse gases should be regulated under the Clean Air Act — could lay the groundwork for nationwide measures to limit such emissions. It reverses one of the Bush administration’s landmark environmental decisions: In July 2008 then-EPA administrator Stephen Johnson rejected his scientific and technical staff’s recommendation and announced the agency would seek months of further public comment on the threat posed by global warming pollution.

“This is historic news,” said Frank O’Donnell, who heads the public watchdog group Clean Air Watch. “It will set the stage for the first-ever national limits on global warming pollution. And it is likely to help light a fire under Congress to get moving.”

Actually I prefer to think of it as the excuse the Democratic Congress has been looking for to implement cap-and-trade. “The Court has required the EPA to consider whether CO2 is a pollutant and the EPA has so declared – our hands are tied!” And in such a convenient way.  Al Gore thanks you.

Naturally business interests are not at all happy with the development.  

 In December 2007 EPA submitted a written recommendation to the White House urging the Bush administration to allow EPA to state officially that global warming is a threat to human welfare. But senior White House officials refused to open the document and urged Johnson to reconsider, saying such a finding would trigger sweeping regulatory requirements under the 45-year-old Clean Air Act. An EPA analysis had found the move would cost utilities, automakers and others billions of dollars while also bringing benefits to other economic sectors.

Any guess as to which “economic sectors” EPA’s analysis says will “benefit” from sweeping regulatory requirements costing the utilities and automakers billions? My guess is they really don’t exist in any major form at this moment, and what does exist is chasing vaporware. But those millions of “green collar jobs” have to be funded somehow, don’t they?

But can you guess what else is lurking out there?  

Our old friend, the “Law of Unintended Consequences”.  Not only would every business in our land be effected, so would every “stimulus” project aimed at improving the infrastructure:

“This will mean that all infrastructure projects, including those under the president’s stimulus initiative, will be subject to environmental review for greenhouse gases. Since not one of the projects has been subjected to that review, it is possible that the projects under the stimulus initiative will cease. This will be devastating to the economy.”

Some of the defenders of all of this will try to wave it away by claiming the administration will make exceptions for various industries and it will certainly do so for the infrastructure projects.

But Bill Kovacs, vice president of environment, technology and regulatory affairs at the U.S. Chamber of Commerce knows how this process will end up working, having witnessed similar scenarios over the years:

“Specifically, once the finding is made, no matter how limited, some environmental groups will sue to make sure it is applied to all aspects of the Clean Air Act.

That’s not a threat – that’s a promise. It is precisely how environmental groups have leveraged every environmental ruling and finding in the past. Of course, those who don’t learn from history are doomed to repeat it. And here we go …

~McQ

Obama and the Economy: Incompetence, Disinterest, or Something Else?

Over the past several weeks we’ve been pondering Pres. Obama’s handling of the economic crisis. For the most part we’ve all agreed that Obama’s lack of leadership (whether from a dearth of experience or ability) is only serving to exacerbate the situation. But we also have somewhat divergent views as to whether there is a method to Obama’s madness.

Bruce is pretty convinced that the problem is a lack of executive experience, and the fact that Obama is learning on the job, while in the one government position that simply won’t allow for that sort of training. Being devoid of leadership skills or abilities, and being overly confident in his abilities to talk his way out of trouble, is driving Obama into mistake after mistake. Call this the Boy-King scenario.

Dale has suggested that Obama is simply disinterested in things like foreign and economic policy, thus he’s put little effort into guiding those efforts, and instead has handed these messy areas off to subordinates. That those on whom he is depending are not terribly proficient is not helping matters (e.g. Hillary and the “reset” button). But at bottom, the real problem with Obama is that his only real concern is with implementing his social agenda. This is bascially the Louis XVI problem (the King who famously recorded “Rien” as the sole entry to his July 14, 1789 diary, referring to his hunting exploits that day).

Last night on the podcast, I ventured that, in addition to a lack of experience and a disinterest in anything other than social policy, Obama is perfectly happy to let the economy flounder because (he thinks) it will drive more people into the arms of government dependency, and allow him to push forward with the radical transformation he envisions for this country. What he wants most, in my opinion, is to greatly expand the desire and need for government, to instill “democratic” controls into as many areas of life as possible (and especially in economic affairs), and to revise what he sees as a top-down power structure into a bottom-up one. Regardless of whether Obama is right or wrong in any of his thinking, it seems to me that his apparent lack of concern with respect to the economic crisis (only one of seventeen post filled in Treasury, despite the frightening prospects of a new depression?) has more to do with the fact that he does not envision the crisis interfering with his social agenda, and perhaps sees it as an enabler of that agenda. Call this the Commodus explanation.

I’m loathe to suggest that Obama is some sort of Manchurian Candidate, aiming to secretly impose socialism on the US, primarily because we’ve been teetering on that edge for several decades now, and he’s not been shy about wanting to give the final nudge. At the same time, I believe that Obama truly wants what’s best for this country. It’s just that what he views as “best” is something similar to European social-democracy, to which I am absolutely opposed.

So, I’m curious. How do you all see it? Is Obama the Boy-King, Louis XVI, or Commodus? Some combination of the three? Something different altogether?

The Honeymoon Is Definitely Over

Yesterday I mentioned Paul Krugman’s trashing of the Geithner plan, now the NYT op-ed page triumvirate of MoDo, Thomas Friedman and Frank Rich take a few shots as well.

Friedman tried mightily to temper his criticism by claiming the that GOP was using this horrible crisis as an opportunity for partisan bashing.

We’re in a once-a-century financial crisis, and yet we’ve actually descended into politics worse than usual. There don’t seem to be any adults at the top — nobody acting larger than the moment, nobody being impelled by anything deeper than the last news cycle. Instead, Congress is slapping together punitive tax laws overnight like some Banana Republic, our president is getting in trouble cracking jokes on Jay Leno comparing his bowling skills to a Special Olympian, and the opposition party is behaving as if its only priority is to deflate President Obama’s popularity.

Interesting. Friedman was no where in sight, of course, when Democrats were engaged in precisely what he accuses the Republicans of doing during the war in Iraq. As with many on the left, apparently history started on January 20th of this year.

OTOH, deflating Obama’s popularity is politically important to the GOP, because anyone who watches politics knows full well that Obama plans to trade on his popularity to pass the economy killing legislation he want to see passed. This ain’t bean bag, Mr. Friedman.

Frank Rich likens this crisis to “Bush’s Katrina moment”:

A charming visit with Jay Leno won’t fix it. A 90 percent tax on bankers’ bonuses won’t fix it. Firing Timothy Geithner won’t fix it. Unless and until Barack Obama addresses the full depth of Americans’ anger with his full arsenal of policy smarts and political gifts, his presidency and, worse, our economy will be paralyzed. It would be foolish to dismiss as hyperbole the stark warning delivered by Paulette Altmaier of Cupertino, Calif., in a letter to the editor published by The Times last week: “President Obama may not realize it yet, but his Katrina moment has arrived.”

Rich implies that Obama doesn’t recognize the depth of political risk this crisis carries for him. And I agree. Obama, it appears, thinks he can lay this all off on “inherited” problems. But he can’t. It’s his now. While it may have been right to say New Orleans Mayor Ray Nagin and Louisiana Governor Kathleen Blanco were the real reason Katrina was a fiasco, that’s not who much of the public ended up blaming. Bush too seemed not to understand the depth and breadth of the anger (whether right or not) that Katrina spawned. Obama seems even less aware of the risk, jetting around the country having moved on to defending his budget and appearing on comedy shows while the financial crisis lingers and deepens. As I’ve said a number of times on this blog, it is all about leadership, or the lack thereof. In reality, it is the “lack thereof” on which both Rich and Friedman are actually commenting.

Maureen Dowd wonders if, after watching Michelle Obama talk about the White House garden, perhaps the wrong Obama is in the Oval Office.  She then let’s the male Obama have it with both barrels:

It’s a time in America’s history where we need less smooth jazz and more martial brass.

Barack Obama prides himself on consensus, soothing warring sides into agreement. But the fury directed at the robber barons by the robbed blind in America has been getting hotter, not cooler. And that’s because the president and his Treasury secretary have been coddling the Wall Street elite, fretting that if they curtail executives’ pay and perks too much, if they make the negotiations with those who siphoned our 401(k)’s too tough, the spoiled Sherman McCoys will run away, the rescue plan will fail and the markets will wither. (Now that Mr. Obama has made $8,605,429 on his books — including $500,000 for letting his memoir be condensed into a kids’ book — maybe he’s lost touch with his hole-in-the-shoe, hole-in-the-Datsun, have-not roots.)

Despite all the appeals to class warfare, what is at the base of her criticism?

Lack. Of. Leadership.

The nation elected someone who has never once been in a position in which he had to lead. Mr. Obama is a charmer and someone who knows what to say to please his audiences. But he’s never had to translate what he says into action. He’s never had to really take full ownership of his agenda, at whatever level, and implement it. He has never had to ‘make it happen’.

Where does one learn to do those sorts of things? From experience. Take a new lieutenant and make him a battalion commander and I can promise one poorly led battalion which will fail at its first leadership test. That’s because the LT isn’t a leader yet. He first had to serve as a platoon leader and learn leadership skills. Then if he does well there and is advanced in rank, he’ll eventually get a chance to become a company commander and fine tune those skills with a larger organization. Again, if he shines and is further advanced in rank and responsibility, he may get a shot at a battalion command. But he will first prove himself to everyone’s satisfaction at the lower level leadership positions before he is even considered for that job.

Anyone – what lower level position held by Barack Obama did he demonstrate the leadership necessary to do the job he now holds? Why is charm more important politically than experience and leadership abilities?

Apparently Krugman, Dowd, Rich and Friedman are suddenly discovering what many of us have understood from the beginning – Obama is completely unqualified for the job he holds.

Unfortunately for all of us, if ever there was a worst time for such a man to be President of the United States, this is probably it.

~McQ

Obama to seek caps on all executive pay

The CEO’s of banks and financial firms that received bailout money may not be the only executives to see their pay regulated:

The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.
[...]
The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.

You are not free to make as much money as you want. You are not free to succeed because government will tax you at the point of a gun to make sure you aren’t making more money than they approve of.

Welcome to Obama’s America.

The Banking Plan

Thanks to last night’s White House info dump, we now have gotten the outlines of the White House’s banking recovery plan.  As I mentioned earlier this week, the banking problem is the fundamental issue in the current financial crisis.  We’ve been waiting for the White House to give it to us.  Now that we’ve got it, I don’t like it much.

The details, as reported, are as follows:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending…

Although the details of the F.D.I.C. part were still being completed on Friday, it is expected that the government will provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.

The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of the country’s banks.

The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value.

That last paragraphs is a howler, since it’s so self-evidently untrue.  As Ezra Klein at The American Prospect–hardly an enemy of the Obama Administration–notes:

You almost wonder if that’s a typo. It seems to imply that the protection comes because private investors will accurately price the assets. After all, they don’t want to lose money.

But it’s not their money. It’s our money. The plan uses public funds to protect and subsidize private investors. As such, a private auction will not price the assets. It will price the potential upside of the assets given that taxpayers will assume the brunt of the losses. [Emphasis mine--EDF]

As illustration, imagine an art auction. Now imagine an art auction where Sotheby’s loans money to the participants and promises to pay the losses if the paintings fall in value. Think the pricing will be the same? And who would you say is being protected: Sotheby’s or the private investors? As Calculated Risk says, “With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.”

As for the contention that “the government will be buying the troubled loans of the banks at a deep discount to their original face value,” I’m not even sure what to say about that. Their original face value was a lie. If I pretend this beautiful bic pen is worth $60 million and then sell it to you for $1.00, you’re not getting a $59,999,999 discount because I’ve come down from the imaginary price where I started. The question is what these assets are actually worth, and whether taxpayers are paying more or less than that. We’re in this mess because the original face value is wrong.

I don’t know how to explain it any better than that.  Moreover, Ezra links to Yves Smith, who further comments:

First, the banks, as in normal auctions, will presumably set a reserve price equal to the value of the assets on their books. If the price does not meet the reserve (and the level of the reserve is not disclosed to the bidders), there is no sale; in this case, the bank would keep the toxic instruments.

Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.

So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank’s reserve, which would be the value on the bank’s books now.

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

The last point is another big problem.  There are a number of other ways to accomplish recapitalization, from just purchasing the assets from the banks for cash to outright nationalization of the banks.  Whether we would actually like those options is another story, but at least they have the virtue of simplicity.  Even laymen would be able to grasp their essentials.  That certainly isn’t true is the case of what the Obama Administration has released. It is complicated.  It’s made of three different parts, all of which are complicated in their own special ways.  Ezra Klein again:

If it goes bad — and it really might go bad, and the details might prove galling in much the way that AIG’s bonuses did — the byzantine approach could well leave voters feeling tricked. That risk might make sense if this were the only viable path forward. But it’s actually hard to imagine the set of questions you ask that ends in this particular answer.

And it’s difficult to see how this  actually becomes an answer in the real world.  The trouble with these kinds of complicated plans is that they so often crash against the rocks of reality.  When one part of the plan goes awry, the whole plan breaks up.  With the triple complications of the plan leaked by the administration, there is a not insignificant chance that the plan will fail due to it’s unnecessary complexity.

I don’t think that will be helpful.

Zombie Ideas And Moral Hazard

Paul Krugman has seen the new Treasury plan (the “Geithner plan” as he calls it) that addresses the problem with the banks and he finds it wanting:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

The plan itself is a three part plan as described here:

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Securities Loan Facility, a joint venture with the Federal Reserve.

The Geithner Plan

The Geithner Plan

The goal of the plan is to leverage the dwindling resources of the Treasury Department’s bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.

 As noted, Krugman is not impressed. In fact, he suddenly discovers the problem of “skewed incentives” and “massive” moral hazard:

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard.

How in the world could the level of intrusion contemplated by the government create anything but “skewed incentive” and “massive moral hazard”? But that aside, will it work?

Per Krugman, probably not:

This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work.

What an awful mess.

Indeed. And an amazing admission by Krugman who was as sure as anyone in the tank for Obama that he’d be “the answer” to all of our problems. Instead he’s discovering what a lot of Obama supporters are discovering – Obama’s an empty suit who is more interested in the perks and rewards of the office than the work it entails.

Quote Of The Day

From, of all people, Paul Krugman (discussing the AIG debacle specifically and financial policy generally):

This administration, elected on the promise of change, has already managed, in an astonishingly short time, to create the impression that it’s owned by the wheeler-dealers. And that leaves it with no ability to counter crude populism.

Uh, I guess the honeymoon is over?!

~McQ

Former CBO Director Now Finds CBO Numbers Not So Good

This parallel world that exists only within the DC beltway and where the laws of economics don’t apply has got to be merged again with the real world we all live in as soon as possible:

Despite new estimates that say President Barack Obama’s budget would generate unsustainable large deficits averaging almost $1 trillion a year, the White House insisted Friday that the flood of red ink won’t swamp its costly agenda.

The Congressional Budget Office figures released Friday predict Obama’s budget will produce $9.3 trillion worth of red ink over 2010-2019. That’s $2.3 trillion worse than the administration predicted in its budget just last month.

Worst of all, CBO says the deficit under Obama’s policies would never go below 4 percent of the size of the economy, figures that economists agree are unsustainable. By the end of the decade, the deficit would exceed 5 percent of gross domestic product, a dangerously high level.

Just feast your eyes on those statements. First – 10 years of trillion dollar deficits “won’t swamp” the “costly agenda” of the Obama administration? Really? Or is it just that the administration refuses to acknowledge the reality of the coming deficits and intends to imperil the economy to push its social agenda forward? Which is more likely true?

And how does the administration address the CBO projections?

White House budget chief Peter Orszag said that CBO’s economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.

About those deficits?

About those deficits?

Orszag, the former director of the CBO, now finds the CBO just isn’t an entity in which we should put much stock when it comes to budget analysis – especially when it finds such budget numbers “unsustainable”. Nope. Instead we should heed the Fed – which has proven to be such an economic font of solutions in this current crisis – and unnamed “private economists” whose only claim to fame is they agree with the administration’s projections. The organization Orszag previously led suddenly has a credibility problem.

However Orszag did have to admit that if the CBO is right, well, that’s a horse of a different color:

Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained. “Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.

Of course there have been many economic analysts prior to the CBO projections who have found the administration’s projections to be very optimistic in outlying years, in fact the term “rose colored glasses” seems most apropos.

So which makes more sense to you in this particular time of financial crisis- listen to those who say your projections are too rosy and trim them back (and the deficits they produce) to ensure that should it happen as the more pessimistic projections hold, you don’t chance pushing the nation into a period of unsustainable debt, or waive them off and take the chance that you’re right and they’re not?

“Caution” seems like a very important watch-word at this point, or it should be.

Instead we’re seeing a “damn the icebergs, full speed ahead” attitude from the crew of the economic Titanic.

~McQ

Quote Of The Day

Disgust is a bi-partisan concept. Michael Goodwin again:

Ronald Reagan’s famous line that “government is the problem” kept going through my head as the AIG hearing demonstrated the dangers of Washington’s role in the economy. The very people, Republicans and Democrats alike, who can’t balance America’s budget now claim the expertise to run banks, insurance companies and automakers.

If we let them, we’re dumber than they are.

Amen.

~McQ

Quote Of The Day

Even AP seems to be figuring it out. Here’s an analysis by AP’s David Espo discussing the AIG debacle:

Which goes to the crux of the Democrats’ current political problem.

Gone are the days when they could merely bludgeon the Bush administration and promise to seek bipartisan solutions to the nation’s economic problems.

Now, in control of the White House and Congress, they are struggling to come up with an explanation for what no one in either party seems moved to defend.

You can’t help but snicker a bit, can you?

~McQ