Government Is Furiously Dancing the Two-Step
by Robert HiggsHow do once-free people lose their liberty? The formula may be stated succinctly: crisis and leviathan. Alternatively, and somewhat more fully stated, the procedure for the government officials and their supporters who hope to gain by quashing the people’s liberties is (1) cause a serious crisis, thereby heightening the public’s fears, and (2) blame others for the crisis, pose as the people’s savior, and thereby justify the seizure of new powers allegedly necessary to remedy the crisis and to prevent the recurrence of such crises in the future. This gambit is as old as the hills, yet, given the right ideological preconditions, it works every time. Strange to say, the people never learn (in part because these experiences produce ideological change that fortifies the fiscal and institutional changes the government makes during the crisis).
Today’s news brings us a perfect illustration — one of many during the past year of financial debacle and worsening economic recession. According to an AP report, “Treasury Secretary Geithner asked Congress on Tuesday for broad new powers to regulate nonbank financial companies.” Geithner, of course, earnestly expressed the finest motives: “We must ensure that our country never faces this situation again.” Geithner’s partner in crime, Fed chief Ben Bernanke, joined him in “calling for greater governmental authority over complicated and troubled financial companies.” These rulers of the universe want the legal power “to seize control of institutions, take over their bad loans and other illiquid assets and sell good ones to competitors.” (Extra-credit question: haven’t they been taking precisely such actions for the past year or so?)
Given what a manifestly big deal this bureaucratic power-grab appears to be, why would anyone in Congress want to go along with it? Simple: failure to hand over these powers to the apparatchiks might result in the complete destruction of civilization. Speaking of the government’s having already poured more than $180 billion into AIG, Bernanke told the House Financial Services Committee that the big insurance company’s “failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.” You heard him – catastrophic implications for jobs. That’s all that members of Congress needed to hear. Faux job creation is their very lifeblood when they run for reelection.
Since the onset of the current financial troubles, government officials have made repeated use of a new mantra to justify shoveling mega-tons of the taxpayers’ money to favored firms: systemic risk. So, naturally, at today’s hearings, Geithner trotted out this new hobby-horse: “As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can.” But did we really see systemic risk hovering over AIG, or have we merely been told repeatedly that it was hovering? One wonders whether Bernanke and Geithner are also on record as having reported that they have definitely sighted flying saucers.
In the true spirit of neoclassical economic scientism, I say let’s stage an empirical test: let AIG or Citi or B of A or some other giant, mismanaged financial institution go down, and then let’s see whether the world comes to an end. If it does, we’ll know that these transparent power-grabbers were right about systemic risk; but if it goes right on spinning more or less as before, we’ll know that they’ve been selling us a bill of goods. I think the odds are so greatly in our favor that I’m more than willing to see the experiment carried out. After all, it’s not as though these financial geniuses have demonstrated a great deal of prowess so far, despite having tossed more than $8 trillion to the wind.
It’s possible, of course, that some people failed to see what was going on at today’s hearing, because, as usual, all parties tried to throw the bloodhounds off the scent by dragging a red herring across the trail. This time the rotten herring is the $165 million in bonuses that AIG recently attempted to pay certain employees to retain their services. Joe Sixpack got mighty hot under the collar about these bonuses, of course, goaded by the news media’s usual efforts to make their emphasis inversely proportional to an event’s actual importance. Yes, people are furious about the bonuses; these payments are the populist outrage d’jour. People seem not to have noticed, however, that the $165 million scheduled to be paid in AIG bonuses amounts to approximately 0.00002 of the total amount the government has dispensed in its recent commitments for loans, capital infusions, “stimulus” spending, loan guarantees, asset swaps, and other utter (and utterly destructive) wastes. The public might just as well have become inflamed about how Tim Geithner combs his hair.
A Brief History of Gold in America
Did You Notice? – A Brief History of Gold in America
By Byron King
Would you like to review some history? The Founding Fathers established the United States as a nation on the gold standard. There were enough problems with the worthless paper scrip from the Revolutionary War, called “Continentals.” So in 1789, at the Philadelphia Convention, the Founders helpfully wrote the “Gold Clause” into the U.S. Constitution (Article I, Section 10, Clause 1).
The subsequent growth of the U.S. from a coastal enclave of 13 disjointed states into a continent-spanning world economic and political power sort of speaks for itself. No, not everything in U.S. history happened in a straight line. The U.S. had more than its share of political and economic problems in the 19th century. But something worked right. By the early 20th century, the U.S. was a wealthy land and a world industrial powerhouse. Do you think that the overall success of the American nation-state may have had anything to do with the quality of the nation’s money? Or was it just a long string of good luck?
In 1933, a mere 144 years after the Founders penned their quaint homage to gold, President Franklin D. Roosevelt determined that he did not want the U.S. to be a nation on the gold standard. FDR was planning to spend very big sums money (even he did not realize what he was getting into) to fight the Great Depression of the 1930s. And if the U.S. government had to pay its bills in gold or gold-backed dollars, then the funds would soon run out. FDR’s New Deal would not work.
So early in FDR’s first term — within two months of taking office — he made it illegal for private citizens to own most forms of gold. FDR was subtle about it, of course, because deep down, the American people liked having real money in their pockets. At first, FDR just asked the American people to “loan” their gold to the government. FDR said that the loan was “for the duration of the economic crisis,” as the Great Depression was sometimes called. And by the millions, Americans emptied their purses and strongboxes and took their gold coins down to the local banks to trade for “gold certificates.” But after that, no one ever redeemed their certificates and got their gold back from the U.S. government.
In essence, FDR confiscated most of the nation’s gold coins in circulation. He ordered they be melted down. Then FDR put the gold bricks in an armored vault at Fort Knox, Ky., with an Army tank division next door to keep things under control.
By an act of Congress in 1974, Americans won back the legal ability to own gold bullion. In the 1980s, the U.S. Mint even started issuing gold coins for sale to the public. By then, gold was so out of favor as a monetary tool that most college textbooks snidely dismissed its importance, quoting the dead economist John Maynard Keynes calling gold a “barbarous relic.”
Yet for the past 25 years, there has been an underground wave of gold buying in the U.S. and across the world. When gold is remonetized — as will almost surely happen within a few years — those who hold gold will be in a highly advantageous position.
Joel’s Note: As you know, we’ve published tens of thousands of words dedicated to gold investing. If, however, you are looking to supercharge your metals position, perhaps silver might also be worth your consideration. Byron recently updated a “Better Than Gold” report for us, outlining the argument for the perennial bridesmaid of metals. To learn why Byron is guaranteeing three-to-one gains for every dollar invested in silver, read on here.
Job Losses Continue to Mount
Job Losses Continue to Mount
04/03/09 St. Louis, Missouri Good day… And a Happy Friday to one and all! A Fantastico Friday, as I head to my fave city in the country, San Diego. I’ll be heading to the airport shortly after sending this out. The currencies rallied nicely yesterday, and I’ll tell you why… So, let’s go to the tape!
Well… Remember all the talk about relaxing the FASB mark-to-market rules in the past couple of months? The announcement was made in the communiqué’ of the G20 meeting. The Financial Accounting Standards Board (FASB) revised the rules to allow companies to use their “judgment” to a greater extent in determining the “fair value” of their assets. The board also made it easier for companies to avoid having to take impairment charges against earnings when they suffer losses on their investments.
Talk about opening Pandora’s Box of risk appetite! Stocks soared… And everyone was feeling the euphoria of the day… Well, everyone but me! I can guarantee you this, folks… If little old Joe’s Bank had complained that these rules were too stringent they would have fallen on deaf ears… But… Let’s see if it works, right? Shoot, these financial institutions made such “great” decisions to own the junk they “used to have to write down” I bet they’ll make even “better” decisions when using “judgment” on what gets marked down and by how much…. You make the call…
So… With risk appetite on the rise, the currencies are cooking with gas once again… The euro (EUR), Aussie (AUD), Canada (CAD), and Swiss (CHF) were BIG WINNERS on the day…
Another thing that pushed the euro higher on the day was the European Central Bank’s (ECB) decision to cut rates by only 25 BPS or 0.25%. It was widely expected that the ECB would do 50 BPS to keep up with the Joneses of the world. Not so fast, Tim! There was a hint from ECB President Trichet about quantitative easing, but at this point, it hasn’t happened, and as I explained yesterday…. That’s a good thing!
And what do we have here? Oh! It’s a Jobs Jamboree Friday! But before we go there… Let’s recap this week’s employment numbers leading up to the Jobs Jamboree, eh? First we had the ADP report show 742K jobs were lost in March… Then yesterday we had the Weekly Initial Jobless Claims show that 669K new claims were filed, and that the previous week’s 630K figure was revised up to 672K… What’s really scary here folks is that the 4-week moving average is now up to 649.5K…
All the king’s men and all the king’s horses that believe the Humpty Dumpty economy will be recovering by the end of this year, might want to look over those forecasts and come clean on what they really think, not what the government wants them to say, to make it look like everything will be right on the night, because… These unemployment numbers are not shaping up to be anything close to a recovering economy!
Getting back to G20 for a minute… G20 also announced that they would give the IMF $1 trillion to help countries in crisis… Well… Just whom do you think the majority of that $1 trillion came from? Well, that’s right, it would be the only country currently running their printing presses 24-hours a day, and 8 days a week… It’s not enough to show I care!
OK… I read a story on the WSJ website yesterday that said, “Hey, Chuck! This story’s for you!”
So… Here you go…
“Anticapitalist protesters gathering in London for two days of demonstrations are missing the point. If there is one myth the credit crunch has surely exploded, it is that the financial system is a free market. The world is in a mess because the financial system wasn’t capitalist enough.
“True, there were some terrible regulatory failures, and politicians lacked the stomach to stop excess as bubbles formed. But successive bailouts over many years also distorted the banking system to the point where real price signals were swamped. Nothing in the current global recovery proposals suggests this lesson has been learned.
“In a capitalist system, prices are set in the free market and providers of capital bear responsibility for their losses. Neither of these characteristics hold true of the banking system. The price of credit, the basic commodity of the financial system, was distorted first by implicit government guarantees to depositors and other providers of capital, and second by the tendency of governments to cut interest rates at the first sign of financial trouble.
“Financial theory says the cost of capital to an enterprise should rise in line with risk. But banks during the boom were able to leverage themselves more than 50 times yet see their cost of funding fall.
“That is hardly the sign of a well-functioning free market. Those who provided funding to banks correctly gambled that governments would ride to their rescue. Since the crisis began, implicit guarantees have become explicit and thresholds have been raised. The U.K. is even proposing to raise depositor protection in certain circumstances to £500,000 ($717,360), further undermining the principle of personal responsibility.
“This government protection effectively extends to wholesale funding, too. With a few exceptions, including Lehman Brothers, bondholders have been spared losses as a result of bank failures.
“Indeed, it has been axiomatic of the policy-maker response that bondholders should be kept whole to avoid the threat that the banking system would seize up completely or that the insurance industry, with large bond portfolios, would become the next domino to fall. Most Western bank bonds are now issued with an explicit government guarantee. The result is a distorted global financial system in which the true cost of capital is obscured.
“In a fully capitalist system, there would be no guarantees. The market would ensure banks didn’t become too big or too leveraged.
“At least the current crisis is sure to lead to higher common-equity buffers for all. But since removing the guarantees and breaking up the banks is outside the realm of political reality, an alternative solution is to charge banks explicitly and upfront for all guarantees. The charges would rise in line with leverage. That at least would raise the cost of funding, helping to generate a price signal to the market.
“Instead, global governments are taking the opposite tack. Unable to remove the guarantees and unwilling to properly charge for them because the banks remain too weak, they will try to limit the risks through more intrusive regulation.
“The results, if that goes too far, should be clear enough: lower bank profits, less capital generated, less credit created, lower economic growth and more bureaucratic control over the banks and the wider economy.
“The protesters should be careful what they wish for.”
It was as if this writer basically interviewed me! WOW! That was really strange! But right up my alley of beliefs!
OK, back to the return of risk appetite once more before we head to the Big Finish… Now, if you’ve been paying attention in class for the past couple of years this will be an easy pop quiz for you…. What currency will NOT perform well when risk appetite returns to currencies? (Sure wish I could do a sound bite here, and play the Jeopardy music) Ready? YEN (JPY)! By Jove I believe that everyone was on board!
Japanese yen briefly weakened above 100 for the first time since November 4th 2008, in the overnight markets… It has slipped back below 100 as I write. G20 didn’t do yen any favors that for sure!
Currencies today 4/3/09: A$ .7140, kiwi .5830, C$ .8065, euro 1.3450, sterling 1.4740, Swiss .8810, rand 9.1660, krone 6.5660, SEK 8.0560, forint 219.90, zloty 3.32, koruna 19.79, yen 99.70, sing 1.5050, HKD 7.75, INR 50.40, China 6.8355, pesos 13.75, BRL 2.23, dollar index 84.33, Oil $53.07, Silver $12.81, and Gold… $905.30
That’s it for today… Thanks to Cheryl Harper for making me my fave cake (pineapple upside down cake) for my birthday. She waited until I returned… What a sweetheart! It was great to come back and see everyone in the office yesterday. Well… I was watching the weather forecast on TV last night, and the forecast for Monday’s Home Opener for my beloved baseball Cardinals is not very baseball like! Snow Flurries? Only 37 degrees? YIKES! I just came from watching games in sun and 80 degrees! Oh well… Who knows, by Monday it could all change, this is St. Louis weather I’m talking about! I was thinking about traveling this weekend to San Diego for the Richard Russell Tribute without my laptop… Dare I? No… I get there this afternoon, and will work the rest of the day… Almost left without it though… Man, wouldn’t it be nice to… Oh, never mind, I almost went into a Beach Boys song there, and that would have really thrown us off course! So… Strap yourself in for this wild ride of the Jobs Jamboree, and have yourself a Fantastico Friday!
Fidel Castro appeals over summit
Fidel Castro appeals over summit
 Fidel Castro said the US should acknowledge calls for better ties |
Fidel Castro has called on Latin American countries to support an end to Cuba's isolation when they meet the US president at a regional summit.
Cuba is not invited to attend the Summit of the Americas, which opens in Trinidad and Tobago on 17 April.
In a newspaper editorial, the former president said that the summit would be a "trial by fire" for the region.
He urged leaders to ensure that both Cuba's isolation and the US trade embargo against it were on the agenda.
Almost all the countries in Latin America and the Caribbean now support an end to the embargo and want Cuba re-admitted to the organisation of American states, says the BBC's Michael Voss, in Havana.
Mr Castro said that he had seen a draft text of the final statement which the US wants to be signed at the summit.
It contained "a great number of inadmissible concepts", he wrote, and did not acknowledge the calls for better Cuba-US ties.
"Who is now demanding our exclusion? Perhaps they don't understand that times of exclusionary agreements against our people have been left far behind," he wrote.
US President Barack Obama has taken a less confrontational approach to the communist nation than his predecessor, George W Bush, our correspondent adds.
But his administration continues to insist that there must be progress towards democracy and on human rights before the trade embargo can be lifted.
The US began imposing restrictions on Cuba after Mr Castro took power in 1959, making it the only Communist state in the Americas - and a Cold War flashpoint.
Mr Castro's younger brother, Raul, formally took over the presidency from him in February last year.
From Bubble to Depression?
From Bubble to Depression?
STEVEN GJERSTAD VERNON L. SMITH
Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed.
We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer.
But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets -- momentum trading, liquidity, price-tier movements, and high-margin purchases -- combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy.
![[Review & Outlook]](http://s.wsj.net/public/resources/images/ED-AJ284A_smith_NS_20090405205234.gif)
In just the past 40 years there were two other housing bubbles, with peaks in 1979 and 1989, but the largest one in U.S. history started in 1997, probably sparked by rising household income that began in 1992 combined with the elimination in 1997 of taxes on residential capital gains up to $500,000. Rising values in an asset market draw investor attention; the early stages of the housing bubble had this usual, self-reinforcing feature.
The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.
But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.
The price decline started in 2006. Then policies designed to promote the American dream instead produced a nightmare. Trillions of dollars of mortgages, written to buyers with slender equity, started a wave of delinquencies and defaults. Borrowers' losses were limited to their small down payments; hence, the lion's share of the losses was transmitted into the financial system and it collapsed.
During the 1976-79 and 1986-89 housing price bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, "leaning against the wind," helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the fed-funds rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than in any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.
![[Review & Outlook]](http://s.wsj.net/public/resources/images/ED-AJ285A_smith_NS_20090405204429.gif)
Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!
By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.
How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.
With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.
With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.
The unraveling of the bubble is in many ways the most fascinating part of the story, and the most painful reality we are now experiencing. The median price of existing homes had fallen from $230,000 in July to $217,300 in November 2006. By the beginning of 2007, in 17 of the 20 cities in the Case-Shiller index, prices were falling. Serious price declines had not yet begun, but the warning signs were there for alert observers.
Kate Kelly, writing in this newspaper (Dec. 14, 2007), tells the story of how Goldman Sachs avoided the fate of many of the other investment banks that packaged mortgages into securities. Goldman loaded up on the Markit ABX index of credit default swaps between early December 2006 and late February 2007, as their price dropped from 97.70 on Dec. 4 to under 64 by Feb. 27. But the market was not yet in free-fall: The insurance on AAA-rated parts of the mortgage-backed securities (MBS) remained inexpensive. By mid-summer 2007, concern spread to the AAA-rated tranches of MBS.
At the end of February 2007, the cost of $10 million of insurance on the AAA-rated portion of a mortgage-backed security was still only $68,000 plus a $9,000 annual premium. Housing-market conditions deteriorated further in the first half of 2007. Case-Shiller tiered price sequences in Los Angeles, San Francisco, San Diego and Miami all show serious declines by the summer of 2007. Prices in the low-price tier in San Francisco were down almost 13% from their peak by July 2007; in San Diego they were off 10% by July 2007. Startling developments began to unfold that month. Between July 9 and Aug. 3, 2007, the cost of insuring AAA MBS tranches went from $50,000 upfront plus a $9,000 annual premium for $10 million of insurance to over $900,000 upfront (plus the annual premium).
Once the cost of insuring new mortgage-backed securities skyrocketed, mortgage financing from MBS rapidly declined. Subprime originations plummeted from $160 billion in the third quarter of 2006 to $28 billion in the third quarter of 2007. Mortgage-backed security issuance fell comparably, from $483 billion in all of 2006 to only $30.7 billion in the third quarter of 2007. Other measures of new loan originations were falling at the same time. The liquidity that generated the housing market bubble was evaporating.
Trouble quickly spread from the cost of insuring mortgage-backed securities to problems with credit markets generally, as the spread between short-term U.S. Treasury debt and the LIBOR rate increased to 2.40% from 0.44% between Aug. 8 and Aug. 20, 2007. Since U.S. Treasury debt is generally considered secure, but a bank's loans to another bank carry some risk of default, the spread between these rates serves as an indicator of perceived risk in financial markets.
In one city after another, prices of homes in the low-price tier appreciated the most and then fell the most; prices in the high-priced tier appreciated least and fell the least. The price index graphs for Los Angeles, San Francisco, San Diego and Miami show that in all of these cities, prices in the low-price tier have fallen between 50% and 57%. Moreover, housing prices have continually declined in every market in the Case-Shiller index. According to First American CoreLogic, 10.5 million households had negative or near negative equity in December 2008. When housing prices turned down, many borrowers with low income and few assets other than their slender home equity faced foreclosure. The remaining losses had to be absorbed by the financial system. Consequently, the financial system has suffered a blow unlike anything since the Great Depression, and the source is the weak financial position of the people holding declining assets.
Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a measure of financial system performance, the Keefe, Bruyette, & Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007. The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.
How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?
In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.
In an important paper in 1983, Ben Bernanke argued that during the Depression, severe damage to the financial system impeded its ability to perform its economic role of lending to households for durable goods consumption and to firms for production and trade. We are seeing this process playing out now as loan funds for automobile purchases have withered. Auto sales fell 41% between February 2008 and February 2009. Retail and labor markets too are now part of the collateral damage from the housing debacle. Housing peaked in early 2006. Losses from the mortgage market began to infect the financial system in 2006; asset prices in that sector began to decline at the end of 2006. Meanwhile, equities and the broader economy were performing well, but as the financial sector deteriorated, its problems blindsided the rest of the economy.
The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.
The Great Depression has been attributed to excessive speculation on Wall Street, especially between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers' loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash. But the banking system did not show serious strains until the fall of 1930.
Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands. Had the mounting difficulties of the banks and the final collapse of the banking system in the "Bank Holiday" in March 1933 been caused by contraction of the money supply, as Milton Friedman and Anna Schwartz argued, then the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis.
The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn.
What we've offered in our discussion of this crisis is the back story to Mr. Bernanke's analysis of the Depression. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.
Mr. Gjerstad is a visiting research associate at Chapman University. Mr. Smith is a professor of economics at Chapman University and the 2002 Nobel Laureate in Economics.
Mark Levin Writes the Most Important Book of the Year
Mark Levin Writes the Most Important Book of the Year
Liberty and Tyranny is an instant classic for everyone who opposes socialism in all its deceptive forms. (Also read Michael Ledeen: "Why They Hate Us")
Given the state of the country and the Democratic Party’s stranglehold on government, the challenge to the political right has never been greater. Conservatives desperately seek answers as a leftist Leviathan vacuums up huge sectors of our once (mostly) free economy.
In light of events, Liberty and Tyranny proves timely. Its narrator urges a return to basics. Republicans must learn to speak the language of conservatism and offer the public a true choice at the ballot box. Watered-down statism — such as the kind hawked by Senator John McCain last fall — is a recipe for permanent Republican oblivion and will allow our country to devolve into an East Germany of the mind.
Levin urges fidelity to the Constitution, devotion to federalism, and the adoption of a hard, rather than conciliatory, line with environmentalists and radicals of every stripe. His positions should be taken seriously by everyone associated with the Grand Old Party. Republican Chairman Michael Steele has already endorsed the book, and hopefully more rightist officials will discover its merits in the future.
Put simply, Liberty and Tyranny invigorates. It provides ammunition and clarity for those who oppose President Obama and socialism in all its deceptive forms. Unfortunately, the first step in using the book as a catalyst is successfully securing a copy, and that is a bit of a challenge at the moment.
At the time of this writing, the work sits at number one atop Amazon’s bestseller list. As a result, it is sold out and will not be available there for one to three weeks’ time. I was not sent an advance copy and do not know Mr. Levin personally, but obtained one out of luck. After being told by a clerk at the local Borders that their shelves were bare, I stumbled across an edition hiding among the weight loss classics at Target.
The astronomical success of Liberty and Tyranny is an obvious tribute to its worth along with the esteem by which the author is held in conservative circles. Nowadays Mark Levin is primarily known for being the star of a blockbuster talk show bearing his name. Before he became famous for fifteen hours of weekly leftist vivisection, he was an accomplished writer, lawyer, and member of the Reagan administration.
On the surface, Levin’s radio dominance is perplexing. His voice is not of professional quality and no Paul Shanklins contribute hysterical songs to endlessly humor the audience, as is the case with the Rush Limbaugh Show. However, part of what it means to be a conservative is to remain unmoved by surface issues.
What makes Mark Levin a shouting paragon of AM excellence is that he stays ruthlessly on topic and possesses intellectual wattage which far surpasses that of his peers. Further, vocal tone and a sensitive demeanor are qualities usually appreciated by shallow people. “Hope and change” may titillate idiots but “substance over style” is the mantra of patriots.
On the air, Levin scores point after point against our foes. He leaves Democratic callers spinning from his (well-deserved) rudeness and precision logical strikes. Liberty and Tyranny is a continuation and elaboration of the cerebral excellence displayed to listeners on Monday through Friday.
It is Levin stripped of personality and a compendium of the best positions our side has to offer. These are the essential arguments and there is no question that his message — both in verbal and written form — is integral to the future of conservatism.
Levin has predicted that the left will assault his work in the fashion they did previous books which questioned the Obamamessiah, although I suspect his assumption will prove false. In all probability, Democratic Party smear merchants by and large will ignore it.
To attack his historical overview and contemporary analysis would draw attention to contentions the left cannot defeat and which undermine their anti-liberal mission. In ten airtight, concise chapters Levin demolishes the edifice of statism and refutes the fallacious claim that there is anything “liberal” about power-drunk politicians lording over us with treacherous bureaucracies.
In the author’s words, “The modern liberal believes in the supremacy of the state, thereby rejecting the principles of the Declaration and the order of the civil society, in whole or part. For the modern liberal, the individual’s imperfection and personal pursuits impede the objective of a utopian state. In this, modern liberalism promotes what French historian Alexis de Tocqueville described as a soft tyranny, which becomes increasingly more oppressive, potentially leading to a hard tyranny (some form of totalitarianism). As the word ‘liberal’ is, in its classical meaning, the opposite of authoritarian, it is more accurate, therefore, to characterize the modern liberal as a statist.”
Yes! Yet why would the mainstream media ever want to acknowledge his words when Levin comprehends that they are an entity entirely beholden to the Democratic Party? My guess is they will not. His archenemies at Media Matters will still vilify him, but carefully eschew discussing the specifics of his book while doing so.
Furthermore, much of Liberty and Tyranny is theoretical and “the One” is generally vicarious to the discussion. Sober and trenchant elucidation of the views of the Founders and chapter titles like “On Prudence and Progress” are not the stuff to electrify the drones who worship Jon Stewart and The Colbert Report.
Due to its merits, to call it The Conscience of a Conservative for the twenty-first century is not hyperbole. Levin persuades at both the abstract and concrete levels. His treatment of immigration brims with fact and detail that fully highlight the sick extent by which leftists are willing to destroy our future in exchange for electoral advantage.
Concerning immigration he observes, “No society can withstand the unconditional mass migration of aliens from every corner of the earth. The preservation of the nation’s territorial sovereignty, and the culture, language, mores, traditions, and customs that make possible a harmonious community of citizens, dictate that citizenship be granted only by the consent of the governed — not by the unilateral actions or demands of the alien — and then only to aliens who will throw off their allegiance to their former nation and society and pledge their allegiance to America.”
Well, why shouldn’t citizens decide who joins us on these shores? Why is it xenophobic to oppose unlimited immigration? What number of third-world guests will be enough to assuage the leftist’s endemic guilt? Our elites refuse to answer questions like these. They hold “the people” to be an entity best bullied rather than consulted. If we were left to our own devices then we would live in a manner we choose — a result far too humane for statists to accept.
Where Levin departs most radically from other authors is in his inclusion of an epilogue that functions as a call to action. He split his manifesto into ten elements containing thirty-three suggestions that should allow for the taking back of our country.
As he often points out on his program, if all of us together manage to convince a friend or associate to walk away from the Democratic Party, we will have ensured America’s future. While erudite and scholarly, Liberty and Tyranny is rooted in common sense and Levin’s concluding injunction is sound. We all need to get busy.
CURSES, FOILED AGAIN
CURSES, FOILED AGAIN
Reuters quotes diplomatic sources as saying that UN Security Council is unlikely to impose any sanctions on North Korea for firing a missile in defiance of earlier Security Council Resolutions.
U.N. Security Council diplomats have told Reuters on condition of anonymity that no country was considering imposing new sanctions but the starting point could be discussing a resolution for the stricter enforcement of earlier sanctions.
Both Russia and China have made clear they would block new sanctions by the Security Council, where they have veto power.
“If the United States and Japan insist on a new resolution and new sanctions at the United Nations, China will most likely use its veto,” said Shi Yinhong, professor of international security at Renmin University in Beijing.
Unless something drastically changes, then the likely outcome of a diplomatic offensive to make North Korea pay for its missile launch is nothing. “Stephen Bosworth, Washington’s special envoy for North Korea, said ahead of the launch last week that he hoped to bring the North back to the talks once the ‘dust’ had settled.” The matchup between North Korea and the UN is an interesting one. North Korea is short of every quality except audacity, but the UN so lacks anything remotely resembling audacity that the deficit negates all of its other advantages. One the one hand you have a comical tyrant firing missiles over the second richest country on earth towards the most powerful country on the planet, and on the other you have a “World Body” that can barely say — anonymously — that they aren’t going to do anything about it, though they may carry out sanctions they had announced earlier but had never quite enforced. They’re so timid they can’t even bring themselves to throw in the towel openly.
Nobody should have been disappointed, though I sure that some people are. The question is: what were they expecting? Politics in the modern world has become something like episodes of the Mighty Morphin Power Rangers, where nothing happens without hours of posturing. Today you can’t simply go on a diplomatic offensive. You have to announce it first. Nor is it possible for organizations to just fold, like the Security Council. They have to leak the fact they will fold. Only Israel, with a kind of Old Testament quaintness, seems to think that secret strikes should be secret. They are behind the times.
The BBC has announced that the North Korean missile has reached orbit where it was reportedly playing the “Song of General Kim Il-sung” and “Song of General Kim Jong-il” to anyone who will listen. But there we go again. It’s not enough to broadcast such a musical masterpiece without having to announce the fact on the media. Here’s a rendition of that rousing number so that readers don’t have to listen to the music from the stars. But personally I think that the “Song of General Kim Jong-il” is less a testimony to the Dear Leader’s greatness than the absurdity to which modern statecraft has descended. Two generations ago, to have been conquered by the likes Hitler would have been a tragedy; but to bow and scrape before this clown — that is truly farce.
embedded by Embedded VideoYouTube Direkt
Obama Is the ‘Arrogant, Dismissive, and Derisive’ One
Obama Is the ‘Arrogant, Dismissive, and Derisive’ One
The president's comments in Europe are the most classic case of projection exhibited by an American president to date.
While in Strasbourg, President Barack Obama told an audience in a townhall meeting that America needs to change its attitude toward Europe. He said America was wrong for not celebrating Europe’s “dynamic union” and not seeking “to partner” with them to better address the “common challenges” that face our nations. He even went so far as to say past American policy was misguided because it had “shown arrogance and been dismissive, even derisive,” an obvious rebuke of former President Bush. The president made these highly critical comments of his own country on foreign soil in an effort to “rebuild” the transatlantic relationship between the United States and Europe by offering an olive branch.
The president’s comments were greeted with cheers. They were described as electrifying and inspiring. And they are the most classic case of projection exhibited by an American president to date.
Just a few days ago in a meeting with American CEOs of American banks, President Obama’s tone and attitude were rife with the arrogance, dismissiveness, and derision he had just criticized in Europe. A participant in the meeting told Politico that when the CEOs tried to explain that the nature, complexities, and competition of the finance and banking industries required that they continue retention bonuses for their employees, the president became impatient. He interrupted them and said, “Be careful how you make those statements, gentlemen. The public isn’t buying that. My administration is the only thing between you and the pitchforks.”
The imagery behind Obama’s threat couldn’t be more obvious: comply with my demands or I will make sure you are harassed, intimidated, and run out of town on a rail. He made them an offer they couldn’t refuse. Don Corleone couldn’t have said it better.
We can not forget, however, that it was Barack Obama himself along with his fellow Democrats who agitated this mob-like frenzy about the banks, the CEOs, and the bonuses. It was Obama who said the bonuses were an “outrage” and a “violation of our fundamental values.” Democrat Barney Frank hauled AIG’s CEO in front of the House Financial Services Committee and interrogated him, demanding to know why he approved the hundreds of millions of dollars of bonuses. Conveniently, Congressman Frank failed to mention that the approval was inside the very stimulus bill Obama championed and the Democrats overwhelmingly voted for.
This wasn’t the first time Obama bared his political teeth. Back in January he responded to the House Republicans’ concerns about not having enough tax cuts in the stimulus package with an arrogant and dismissive “I won.” Karl Rove reported in a recent Wall Street Journal column that Obama told fellow Democrat Rep. Peter De Fazio that he needed to watch his political backside after he voted against the president’s stimulus package: “Don’t think I’m not keeping score, brother,” he warned him.
Obama’s most recent pitchfork threat, however, was not just for his private audience of CEOs. He had a much wider audience in mind: the Democrats in Congress and the American people.
While the president continues to inflame the outrage surrounding the executives’ bonuses by threatening bank CEOs with angry mobs wielding pitchforks, he’s quietly working behind the scenes to help these same CEOs avoid the limits Democrats in Congress are trying to place on the salaries of the executives that receive bailout funds. In fact, the president himself has called for these limits. That means we can add another descriptor to Obama’s list: duplicitous. The Washington Post gives us the details:
The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.
Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.
The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.
It seems the president is trying to play both sides of this issue. On the one hand, he wants to continue to stoke the populist outrage set ablaze by the lavish bonuses; on the other hand, he is trying to help the CEOs keep those same lavish bonuses.
This epitomizes arrogance, dismissiveness, derision, and duplicity toward the American taxpayers and his own party. The president was elected with the grand expectation that he would transform the way Washington does business, but his new scheme of circumventing Congress is nothing more than the old policies of the Chicago political machine. If President Obama keeps it up, he may find the pitchforks with which he threatened the CEOs pointing at him.
The Obama effect
The G20 summit
The Obama effect
From The Economist
If atmospherics were all that mattered, the American president would be well on the way to curing the world’s ills
BARACK OBAMA had difficulty pronouncing the name of his Russian counterpart, Dmitry Medvedev, but people forgave him. In fact, they forgave him for almost everything: his aura seemed to glow ever brighter as he made his first foray into global, crisis-busting diplomacy.
A general willingness to give Mr Obama the benefit of the doubt was palpable even among the exuberant anti-capitalist demonstrators jamming the streets of London’s financial district—a minority of whom turned violent and clashed with police as they attacked a branch of the Royal Bank of Scotland. “He’s got good morals,” conceded a graffiti artist called Monkey, while helping his friend scale a traffic light and drape a banner: it depicted a grim reaper clutching fistfuls of banknotes.
Nico, a French resident of London who sported a cardboard box over his head (to denounce climate-change denial), said in muffled tones that he was “not sure about Obama—but he can’t be worse than George Bush.” Anyway, he opined, “the problem is the madness of the economic system—growth wrecks the environment.”
Even the Russians, so determined to wrong-foot America for the past few years, were gracious after the two presidents met and agreed to seek deeper cuts in their strategic arsenals than those foreseen by an existing treaty, which could slash each side’s stockpile to 1,700 warheads by 2012. Negotiators were told to set new goals by July, when Mr Obama will visit Moscow.
Recent strains in American-Russian relations had not been good for either country, said Mr Medvedev, as he and Mr Obama vowed to begin a “constructive dialogue” on everything from curbing terrorism to economics. Konstantin Kosachev, head of the Russian parliament’s foreign-affairs committee, claimed that the two presidents had broken a “closed circle” in which each side felt the need to respond forcefully to a perceived provocation by the other. These upbeat noises from a hitherto grumpy Russian official marked a change of tone.
These days, America’s ties with China probably matter more to the world than the remnants of superpower diplomacy. And on that front, too, the chemistry was good. With China’s President Hu Jintao, Mr Obama agreed that his treasury secretary, Timothy Geithner, would start a Sino-American “strategic and economic dialogue” beginning in Washington, DC, this summer. The Americans said Mr Hu assured them of his commitment to boosting demand as well as improving economic management.
London hails the chiefVisiting Downing Street earlier in the day, Mr Obama was at once emollient, self-critical and articulate, in a way that put an initially bashful Gordon Brown at his ease. “I came here to put forward ideas but I also came here to listen and not to lecture,” the president said, setting the tone—one that subtly combined humility with firmness about the responsibilities of others—for his meeting with the leaders of 19 developed and emerging economies.
The president admitted that the United States “has some accounting to do” over the failures in its regulatory system. He said the world had become used to viewing American consumers as the engine of global growth—with a clear hint that his country could no longer play this role, and that spenders in other countries should now be doing their bit. But he rejected the idea of American decline, saying that was an old theory, which had been repeatedly belied by the existence of “a vibrancy to our economic model, a durability to our political model, and a set of ideals that has sustained us through difficult times.”
The Economist went to press before the G20 summit ended. But if any of the participants arrived in London spoiling for a fight, it was the leaders of France and Germany, who were at pains from the beginning to stress their absolute accord with one another and their differences with everybody else. At a splashy joint appearance, President Nicolas Sarkozy and Chancellor Angela Merkel said Europe had done a lot already to provide economic stimulus. What was needed was far tougher regulation, whose targets would include hedge funds, traders’ pay, rating agencies and tax havens. Both of them seemed keener on trying to prevent financial crises in future than on dealing with the one that is raging now.
But Mr Obama was anxious not to let the Franco-German duo spoil the party. Instead he stressed the “enormous consensus” that existed on the need to reinvigorate the sagging world economy. Among governments, anyway: Nico the box-wearer might beg to disagree.
Elsewhere on the sidelines, more conventional voices were stressing that there could be limits to Mr Obama’s ability to dissolve global problems at a stroke: the warming of the American-Russian atmosphere was not a breakthrough comparable with the one achieved by Mikhail Gorbachev in the last days of the cold war.
Dmitri Trenin, director of the Moscow Carnegie Centre, a think-tank, said Messrs Obama and Medvedev had merely “plucked some low-hanging fruit” by signalling that rows over Georgia were no longer the key to their relationship. It was now conceivable, Mr Trenin said, that Russia and America could talk business over NATO expansion and possible Russian help to America over Iran. But Russia might not really want American-Iranian ties to improve too much—and the mood of anti-Americanism which was fanned under ex-President Vladimir Putin (now prime minister) would not disappear from the Russian scene. There are some tricks that even Obama magic cannot pull off.
Trade Gap Probably Held at Six-Year Low: U.S. Economy Preview
April 5 (Bloomberg) -- The U.S. trade gap in February probably held at a six-year low as the worst global slump since World War II caused exports and imports to collapse, economists said ahead of a government report this week.
A deficit of $36 billion, the same as in January, is the median estimate of economists surveyed by Bloomberg News before the Commerce Department’s April 9 report. Other figures the same day may show the cost of imported goods increased in March for the first time in eight months as fuel prices rebounded.
Flagging sales overseas will keep depressing U.S. economic growth as manufacturers, already in a yearlong freefall, cut payrolls, output and inventories. The gloomy outlook prompted world leaders, meeting in London last week, to pledge more than $1 trillion to stem the slump in world trade.
“The combination of a global recession and the global credit crunch are causing worldwide trade to dry up,” said Jay Bryson, a global economist at Wachovia Corp. in Charlotte, North Carolina. “The worst part for the trade deficit will be here in the first half of the year.”
While consumer spending has shown signs of stabilizing this year after plunging in the last six months of 2008, the improvements may not be enough to lead to a pickup in import purchases, economists said.
Any gain would probably be caused by the rebound in fuel costs. The price of crude oil on the New York Mercantile Exchange averaged $48.11 a barrel in March, up from $39.26 the month before.
Prices Up
Rising oil probably contributed to a projected 0.9 percent gain in the cost of imported goods, the first increase since July, according to the survey median ahead of a Labor Department report on April 9.
Forecasts are calling for a decline in global trade, sapping overseas demand for American-made goods. The World Bank last month projected trade will fall 6.1 percent worldwide. Earlier in March the World Trade Organization predicted a 9 percent drop.
Another report from Commerce this week is likely to show inventories at U.S. wholesalers fell in February for a sixth straight month, indicating companies may trim orders going into the second quarter.
Weak sales are contributing to job cuts as firms rein in labor costs to weather the recession, now in its second year. Employers cut 663,000 workers from payrolls in March, and the jobless rate surged to 8.5 percent, the highest level in more than a quarter century, the Labor Department reported last week.
FedEx Corp., the second-largest U.S. package-shipping company, said last week it is eliminating 1,000 jobs as part of a plan to save $1 billion as sales drop.
The “global economic reality” made the job cuts “unavoidable,” Maury Lane, a FedEx spokesman, said in an April 3 telephone interview.
Bloomberg Survey
================================================================
Release Period Prior Median
Indicator Date Value Forecast
================================================================
Cons. Credit $ Blns 4/7 Feb. 1.8 -3.0
Whlsale Inv. MOM% 4/8 Feb. -0.9% -0.6%
Trade Balance $ Blns 4/9 Feb. -36.0 -36.0
Import Prices MOM% 4/9 March -0.2% 0.9%
Import Prices YOY% 4/9 March -12.8% -14.6%
Initial Claims ,000’s 4/9 28-Mar 669 660
Cont. Claims ,000’s 4/9 21-Mar 5728 5800
Federal Budget $ Blns 4/10 March -48.2 -150.0
================================================================
Asian Stocks Advance on Bernanke Comments; Mizuho, Nissan Gain
April 6 (Bloomberg) -- Asian stocks rose for a fourth day, led by finance and mining companies, after U.S. Federal Reserve Chairman Ben S. Bernanke said policies to unfreeze credit markets are working.
Mizuho Financial Group Inc., Japan’s second-largest publicly traded lender, climbed 2.9 percent in Tokyo. Nissan Motor Co. added 2.4 percent as Merrill Lynch & Co. boosted its price estimate on the company and the yen weakened to a five-month low. Panasonic Corp., the world’s biggest maker of consumer electronics, jumped 4.3 percent after Nomura Holdings Inc. raised the shares to “buy.”
“The comments by Fed officials are boosting confidence in the efficacy of the response to the financial crisis,” Tomochika Kitaoka, a strategist at Mizuho Securities Co., said in an interview with Bloomberg Television.
The MSCI Asia Pacific Index gained 0.6 percent to 87.29 as of 10:37 a.m. in Tokyo, paring its drop this year to 2.6 percent. The MSCI Asia Index has rallied 24 percent from a more than five-year low reached on March 9.
Japan’s Nikkei 225 Stock Average jumped 1.6 percent to 8,886.87. South Korea’s Kospi Index rose 0.9 percent even after North Korea launched a rocket yesterday that flew over Japan. The S&P/ASX 200 Index gained 0.1 percent in Australia, where clocks turned back on hour over the weekend for the end of daylight savings. All markets open for trading advanced.
Futures on the U.S. Standard & Poor’s 500 Index added 0.3 percent. The measure gained 1 percent on April 3, as the VIX index, an index of market volatility known as Wall Street’s “fear gauge,” fell below 40 for the first time since January, indicating traders are becoming more confident about the market advance.
Rising Valuations
“Relieving disruptions in credit markets and restoring the flow of credit to households and businesses are essential if we are to see, as I expect, the gradual resumption of sustainable economic growth,” Bernanke said the same day. “So far the programs are having the intended effect.”
The four-week stock rally has boosted the average valuation of companies on the MSCI Asia Pacific Index to 18 times reported profit, the highest since Nov. 30, 2007, according to data compiled by Bloomberg.
North Korea launched a Taepodong-2 rocket yesterday purportedly to orbit a communications satellite. The United Nation’s Security Council adjourned yesterday without agreeing to additional sanctions on North Korea called for by Japan and the U.S.
Japanese exporters climbed after the yen weakened to a five-month low against the dollar and the euro, as last week’s worldwide equities rally added to speculation that the global financial crisis is easing. A weaker yen boosts the value of overseas sales for Japanese companies.
Undoing Limited Government
The Libertarian
Undoing Limited Government
Richard A. EpsteinPositive rights under the 14th Amendment?
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Our basic constitutional structure firmly defends negative rights. But through the fine art of judicial interpretation, it can fall prey to authorizing state creation of positive rights. One provision subject to this transformation is Section 1 of the 14th Amendment, set out in full below, ratified in 1868 when theories of limited government were at their zenith.
By any standard, it counts as the major constitutional legacy of the reconstruction era. But the star-crossed history of its privileges or immunities clause shows how easy it is for judges to blur the line between positive and negative rights. The amendment's initial clause, in defining citizenship, reversed the notorious decision in the Dred Scott case by treating all former slaves as citizens of the U.S.
The "privilege or immunities" clause that comes next then cashes out the distinctive advantages that citizenship confers upon citizens, as opposed to the due process and equal protection clauses of the 14th Amendment, immediately thereafter, which apply to all persons.
Unfortunately, the phrase "privileges or immunities" is not self-defining. Historically, its content comes from the famous catalogue of such rights contained in Bushrod Washington's famous 1823 opinion in Corfield v. Coryell. That case construed the "Privileges and Immunities" clause in Article IV, which provides that "The Citizens of each State shall be entitled to all Privileges and Immunities in the several states."
The clause helps usher in a national free-trade zone by preventing one state from imposing extra burdens on traders from other states. Corfield delineates rights of "citizens of all free governments," which include the "right to acquire and possess property of any kind," and the "right of a citizen of one state to pass through, or to reside in any other state, for purposes of trade, agriculture, professional pursuits or otherwise."
This is good, classical liberal material. The breadth of these protections is quite extraordinary even if we recognize, as we must, that the ownership of property does not allow for its unlimited use, but is constrained, for example, by the ordinary law of nuisances dealing with filth and pollution that crosses property lines.
The sensible interpretation of the privileges or immunities clause confirms its radical reorientation of the American constitutional order. Now the federal government, including its courts, is charged with protecting the citizens of each of the states against its own state government. Or at least it did until the infamous Slaughter-House Cases of 1873 gutted the clause by a puny rendition that read it to cover only narrow situations, as when individuals in their capacity as federal citizens crossed state lines to petition the national government.
A charter of liberty was left dead in its tracks. In its wake the Supreme Court jammed all federal protection against state abuses into either the due process or the equal protection clauses. But this shift in emphasis comes at a high cost. First, the text of neither clause supports the added weight. The due process clause concerns process. The equal protection clause applies chiefly to prosecutions under criminal law. These noble protections extend to aliens as well as citizens.
As such, the rights they cover should be limited in their scope to reflect the recurrent political acceptance, found everywhere, of a two-tier constitutional structure that affords greater protection to citizens than to aliens. So all persons can be incarcerated or fined only after some appropriate process, equally administered. But aliens do not have the same rights to acquire and retain property as citizens.
Modern American decisions and scholarships have tried to extricate us from the grasp of the Slaughter-House cases. Yet they do so in ways that further undermine the original libertarian, small-government orientation of the 14th Amendment. Ten years ago, Justice Stevens, in Saenz v. Roe, invoked the "right to travel" under the privileges or immunities clause to upset a California law that limited new California residents to the (lower) level of welfare benefits they received from their prior residence.
In quoting Justice Washington in Corfield, Stevens just omitted the words "for purposes of trade, agriculture, professional pursuits or otherwise." One deft excision converts a charter of negative liberty into a source of positive rights, without any reference to the text, structure or history of the privileges or immunities clause.
In more recent originalist scholarship, the tireless advocacy of Professor Akhil Amar pulls a similar tour de force. Amar sees the drafters of the 14th Amendment as "radical redistributivists" because of their willingness to free the slaves without compensating their owners. The narrow point is true, owing to slavery's unique status. But any larger implications are wholly misplaced.
The purpose of the initial clause of the 14th Amendment was to put former slaves on par with all other citizens. But that historically justified form of redistribution was accomplished by the opening sentence of the Amendment. With that, all citizens now benefit from the full panoply of rights of property and contract that are the foundation for prosperity.
To over-read the 14th Amendment ironically converts a provision that was intended to limit state power to an open invitation for government expansion. To this libertarian, these movements offer a sobering reminder of how difficult it is to preserve a constitutional heritage of strong limited government and strong individual freedoms.
"Section 1. All persons born or naturalized in the United States and subject to the jurisdiction thereof are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law, which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."
Richard A. Epstein is the James Parker Hall Distinguished Service Professor of Law, the University of Chicago; the Peter and Kirsten Bedford Senior Fellow, the Hoover Institution; and a visiting professor at New York University Law School. His most recent book, The Case Against the Employee Free Choice Act, will be out shortly from the Hoover Press.
The Song of Kim Jong Il
The condemnations will probably soon become concessions.
A few hours after the launch Sunday of a long-range multistage rocket, North Korea's state media proclaimed that a communications satellite was in orbit and transmitting "immortal revolutionary paeans" back to Earth. The U.S. military, which apparently had trouble tuning in the "Song of General Kim Il Sung," announced that the satellite had fallen into the Pacific somewhere between Japan and Hawaii.
The technology may have failed to put a satellite into space, but North Korea's launch has succeeded in getting the world's attention. Most of the civilized world spent yesterday denouncing dictator Kim Jong Il's latest provocation, which violated a United Nations Security Council resolution barring the North from testing ballistic missile technology. However, if the international response keeps with past practice, the condemnations will soon give way to concessions. No wonder Kim keeps launching missiles.
The launch was a success, too, as a global advertisement to those in the market for vehicles to deliver weapons of mass destruction. That includes the North's No. 1 customer, Iran, which in February launched a small satellite thanks in part to North Korean missile technology. Iranian observers were reportedly on hand over the weekend at the launch site.
Sunday's fizzle doesn't mean the North didn't learn anything useful for the future of its long-range ballistic missile program. As learning tools, failures can be more instructive than successes, and the Taepodong-2 missile under development has the potential to reach the U.S. West Coast.
Pyongyang's action ought to prompt the Obama Administration to advance the fledgling missile defense system started by President Bush. Instead, the White House reportedly has told the Pentagon to cut spending on missile defense by $2 billion, or about 20%. Defense Secretary Robert Gates is expected to announce these and other budget cuts today.
Programs in jeopardy include the Airborne Laser, a modified 747 designed to take out ballistic missiles seconds after liftoff; expansion of the ground-based interceptor program in Alaska and California; and space-based missile surveillance and tracking. All three are part of the vision for a layered defense, in which the U.S. has several chances to destroy incoming missiles. The Obama Administration has already indicated it wants to go slow in building the "third site," the Europe-based radar and interceptors that would provide another layer of defense from Iranian missiles for the U.S. East Coast.
In 2006, Mr. Bush and Secretary of State Condoleezza Rice squandered the moment after the North's nuclear test when China was ready to apply serious pressure. Instead, they bought Kim's promise to give up his weapons, then let him delay and renegotiate the terms as he went, including agreeing to Kim's demand to take North Korea off the U.S. list of terror-sponsoring nations. Now he's playing the same brinksmanship with the Obama Administration.
This is Mr. Obama's chance to do better. But based on his comments during the campaign, as well as his statement yesterday urging renewed efforts through the Six Party Talks, the President seems unlikely to change course. Kim has every reason to expect that he will eventually get what he wants -- more recognition, more money and energy supplies from the U.S., China and South Korea, and a high likelihood that he'll get to keep his nukes and missiles too.
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