Barclays and HSBC
Happier days
HSBC and Barclays battle bad debts, but their investment banks boom
WHEN the rug was pulled from under Britain’s big banks, only HSBC and Barclays remained upright, avoiding state rescue by raising capital from private sources. Now their sense of superiority is likely to be compounded by first-half results. On Monday August 3rd both banks reported big profits. By contrast, Lloyds Banking Group and Royal Bank of Scotland, which are now state-controlled, are both forecast to make losses.
Along with most lenders at the moment, Britain’s healthy pair have been boosted by their investment banks. Barclays’ division saw profits double compared with last year, and HSBC’s unit did even better. Pent-up demand from companies to raise funds, as well as wider trading spreads and low interest rates, explain the windfall.
Since this boom in investment banking is expected to fizzle, investors ask what the likely state of bad debts may be. As in America’s diversified banks, traders cheer record profits while on the other side of firms’ Chinese walls the retail bankers are being bludgeoned. Barclays’ bad-debt charge rose by 86% from a year ago and HSBC’s remained at the very high levels seen late last year. In the first stages of the credit crisis most write downs came from securities, now rising unemployment means bad debts come from bog-standard credit cards and mortgages.
Oddly though, it is bad-debt levels that provide the most optimistic sign from the two banks’ results, specifically those in HSBC’s American consumer-credit arm. This specialised in subprime lending and was one of the first big businesses to suffer serious problems. Half-way through 2006, when the rest of the financial world still partied, delinquencies on its loan book were soaring. HSBC’s 2006 results were marred by what it called the “US mortgage issue”. Since then it has suffered $19 billion of pre-tax losses in North America.
The past three months have brought hints that the worst is over. Overall, fresh bad debts in America fell compared with the first quarter, and in mortgages in particular the bank ran down slightly its stock of bad-debt reserves, suggesting it does not see things getting worse. HSBC gives warning that credit trends can be seasonal and that a boost to the economy from the government stimulus package may wear off. Still, as a sign that things are improving, this is more reassuring than an unseemly boom in investment banking.
Japan’s election
Promises, promises
One of the world’s most entrenched political parties faces the fight of its life in Japan
FOR more than half a century the Liberal Democratic Party (LDP) has ruled Japan, with only a brief hiatus in the early 1990s. But its monopoly on power is likely to end on August 30th. With less than month to go before general elections, it has issued a manifesto focused on bringing Japan’s economy—still the world’s second largest—back to health. But after years of broken promises, voters appear to be unimpressed, according to a poll published on Monday August 3rd by Asahi Shimbun. The newspaper suggests that the Democratic Party of Japan (DPJ) is almost twice as popular as the LDP.
The LDP promises to restore Japan to 2% growth by March 2011, create 2m new jobs in three years and boost household disposable income by ¥1m ($10,505) in a decade. The focus on the economy reflects the main anxiety of voters. Unemployment is at the highest level in six years and the spectre of deflation has re-emerged. Not only are consumer prices broadly falling, on Monday the government reported that cash wages fell in June at their fastest pace since 1990.
That is why both parties are so keen to boost household incomes. But the LDP also says it will raise the consumption tax from its current level of 5% once the economy improves—a pledge that is meant to suggest the LDP is a responsible set of hands. An emerging campaign strategy is to challenge the DPJ’s fiscal probity, because it has expensive campaign pledges, too, but no plans for tightening fiscal policy. Yet the Asahi poll suggests voters are far more confident in the opposition’s ability to manage the economy than the discredited lot now in charge.
The electoral battle is unlikely to be ideological. Indeed the opposition, which released its own electoral manifesto on July 27th, claims that the LDP has stolen many of its best ideas, such as free pre-schooling and more accessible child care. It sets out to go further than the LDP on social services, however. It wants free high schools as well as pre-schools. It says it will provide families with ¥26,000 per child every month until age 15. It talks of a medium-term goal of rebalancing the economy and ending an over-dependence on exports. But it has not said how it expects to reduce the budget deficit if its pump-priming measures take effect.
The election is really about whether the LDP’s time is up. The party has staged miraculous recoveries in the past, but this time it is further undermined by GDP that is expected to contract by as much as 6% this year, and desperately poor leadership; there have been four prime ministers in the past four years. For a decade and a half the party has been losing support. The notable exception was the 2001-06 tenure as prime minister of Junichiro Koizumi. Yet his popularity partly rested on his vow to destroy the party itself.
The election result is not a foregone conclusion. In a telling sign of public dissatisfaction with politics, about half the electorate supports neither party. Many are looking to smaller parties, which means that the winner may have to forge a coalition to govern effectively.
But the DPJ is already a broad church, encompassing socialists, social democrats and former members of the ruling party. If it wins, it will be enough of a challenge to persuade these disparate groups to act as one. Moreover, in 2010 voters will return to the ballot box for the Diet’s less powerful upper house. So the DPJ would have only a year to show some success.
One of its trickiest tasks would be handling Japan’s unwieldy bureaucracy. The DPJ’s most prominent campaign pledge is to neuter the power of the civil service; it hopes that by cutting administrative expenses some money could be found to pay for its largesse to ordinary households. But as a party inexperienced in command, it would need to rely on bureaucrats to get things done. The bureaucracy, for its part, has begun to prepare for change, by using the annual personnel changes during the summer to send senior officials that are close to the LDP to sinecures in Japan and at international organisations overseas.
Neither party has spelled out a vision of what Japan might look like in the longer term. That is understandable; wrenching political change, after all, is a lot for a country to have to cope with amid an economic slump. On the other hand, Japan has huge long-term problems, such as the highest debt-to-GDP ratio in the rich world, an ageing and shrinking population, protected service industries and young people who are disaffected with politics. A first step towards dealing with these problems is to reassure society that power can alternate between parties and that politicians who do not get things done can be kicked out. But Japan is crying out for bolder policy proposals, too.
Indirection is the Mother of Liberty
I have two sons, eleven months apart. They do not read Mother Goose rhymes for the political implications, yet one is a libertarian; one a socialist.
The older boy, Hunt, a three-and-a-half-year-old towhead, has a lovable personality. He wanders off by himself into the fields below my home and standing there, hip deep in wildflowers, he looks like a New World Christopher Robin.
Hearing my typewriter pound, Hunt stares at me (I cannot make out his expression at this distance). He begins to run towards me. He stops to investigate some scratchy thing at his ankle. A butterfly has sidetracked his attention, and now he is completely entranced by the swoops and loops of our barn swallows. There he goes, chasing them.
The younger boy, Job (named with calculating flattery after the richest man in the Bible), is cast from a different mold. He stays close to his mother when she is around, preferring people to nature. He is less agile, having a squat, pugilistic figure and a temperament to match. He has red hair.
If you think you know what I am going to say, do not jump at conclusions.
Yesterday, these two bundles of tax-exemption were playing with a train. It is a wooden thing, badly built and expensive to buy. The hooks and eyes that attach car to car constantly come loose. Particularly when our Chesapeake puppy mistakes the train for a snake, snatches it up by the neck (coal car) and shakes it thoroughly. They don't make these things the way they used to.
Anyhow, the hooks and eyes from several of the cars had come apart. Try as Job would, making the motion over and over again of hooking the cars to each other, the train would not assemble itself into a fascinating continuity of joints – as good trains should.
"Naughty train!"
My Boy Will Change, God Wot
When I came upon them, towhead Hunt looked up at me. He had been watching Job's efforts with a frown. Now his blue eyes shone. He had found the solution: Daddy!
Hunt jumped to his feet and brought me the refrigeration car and the caboose. "You fix," he said, with the trust of a soul in its creator.
Job did not give me more than a passing glance. It said: "I love you, Daddy, but" – he gave his head an impatient twist – "but don't bother me now. I got some real problems on my mind."
So it turns out that Job is a libertarian. My independent, nature-communing, towheaded Hunt is by temperament a Socialist.
I don't mean that he has fixed tendencies, that he is headed for a bureaucracy that sucks up liberty from the land. He may change, God wot. He may suppress a natural bent for socialism by using his head. Maybe.
But as of now, he thinks, unconsciously, like a Socialist. No sooner does he come against something difficult – like Gordian-knotted shoelaces – than he runs to me, or his mother, or his nurse. This is very touching. It is nice to play at Big Brother.
You see, in Hunt's mind, we are the State from which solutions flow like water out of the tap.
But here's a strange thing: we don't have to succeed in fixing the train. Once Hunt disavows self-reliance, the performance of the leader he turns to is beside the point.
Failure dampens his trust in me. But if I can't do it, maybe Mother can; and if Mother can't do it, nurse will surely succeed. And if nurse can't do it? Why, then it simply can't be done!
So that yesterday, if I had failed to make the eyes and hooks screw back into the cars (a probability, since as the son of a man who cannot turn on a radio, I can't master the television set), he would have walked off perfectly satisfied that it was in the nature of things that his train should cease to act as a train ought to.
That, too, makes me think that Hunt, aged 3½, leans toward socialism. He accepts our failure uncomplainingly. At least for a long period of time, he accepts the failure of authority to live up to its promises. One master may be exchanged for another, but the citizen still depends on the State.
My red-haired Job stayed with the problem. It may have been naive of him to keep trying to hook cars together that had no hooks, but biting his tongue, and scowling fiercely, he tried. And it didn't occur to him to ask me to meddle.
We're Wasting Our Time
He has, somehow, arranged his mind so that he feels most comfortable as an individualist. His failures don't shake his self-confidence. Tomorrow he will again beat his head against walls and tilt against windmills.
When he grows up, unless he changes substantially, he will look skeptically on socialism's "successes." And he will praise private action in spite of its failures.
Certainly human beings can change their characters, change themselves completely. All I want to point out is this: when we argue on the expedient level that socialism is failing, that this blue-eyed boy of our times, like Buffalo Bill, is defunct, we are wasting my time and yours. Our arguments show conclusions at which our hearts have already arrived.
That old dragon, Frank Chodorov, in a Freeman editorial, pointed out ineluctably that when A and B read the same books, they tend to come to widely diverse conclusions. Each reader is exposed to identical arguments – just as my children grow up in the same environment. And like my children, one may become a Socialist, the other, an individualist.
Bottles Were Flying
Certainly this is a logical contradiction, but that needn't bother us here. What I'm concerned about is this. Considering these unpredictable differences of temperament and character, can we get anywhere with a logical campaign against socialism?
A state of mind, for most of us, comes right down to a state of heart. This is an unsurprising truism, gravely bemoaned for centuries. But anti-Socialists give it a nod without heeding it, plunging right back into their logical arguments.
Which reminds me of a friend, who in the midst of a barroom brawl, fists flying and beer bottles crashing, hied himself up on top of a counter, raised his right hand in benediction and enjoined us:
"Gentlemen, gentlemen, please let's be reasonable, shall we?"
He was immediately cracked in the face by a flying mustard pot, and that wound up his contribution to the festivities.
This raises some rhetorical questions. Didn't the Socialists get where they are by unreason? By nonsense even? Didn't their scurrilous name-calling, slander, smears, but above all, their appeal to sentiment – heart-rending pictures of evicted widows, starving coal miners, exploited sharecroppers – work to make "reasonable" men daily approve socialism?
We might ask: have we been too sober, too academic, too poker-faced, too scholarly, in trying to remind the world that freedom is good? Can't we tell a man why freedom is good in terms of his heart? A state of heart is affected by the food he eats, the sleep he gets, the woman he mates.
Logic can wear down opposition, but the slogan revolutionizes. "Give me liberty or give me death." This I can throw at you. It will hit you harder than all the pithy weight of Human Action.
"We can't win the battle with the theory of value," Frank Chodorov said. Socialists snap our arguments like dry sticks and throw them into the cauldron of their invective. Go try our fine logic on a campus orator, a man pounding his fist from a soap box, a sophisticated columnist writing for an adult comic book; he will answer:
"What about the starving children?"
"What about the man selling apples on the corner?" Or "Down with Wall Street!"
He will give a cheer for barbarism. He will promise the Kingdom of Heaven on Earth. And all the little children with socialism in their hearts will queue up for the dole.
Socialism is not a system of economics. Would that it were only that! It would then surely die of its incompetence. But it does not.
The failure of socialism has become a political cliché. In country after country, socialism has gone bankrupt. New Zealand gave it up. England has been in red-faced retrenchment. China can't meet even a one-year plan. Russia doesn't grow enough food.
Yet people persist in being Socialists; and good Republicans today enact laws Norman Thomas endorses.
So socialism can't be just a system. It must be that something else, that muddled state of heart.
Sorry, Son –
I cannot explain to Hunt why I must not always fix his toys for him. He will blink his incomprehension and ask himself why I prefer to set him to the futile exertions of his less resourceful younger brother. Self-reliance does not make sense to him. Unless I can find a way to sell it to his interior castle, all my logic will not help.
So I won't try to explain it to him. When Hunt asks my help, I will be sparing of it, and when he does something on his own, I will try to encourage him, to help him associate self-reliance with joy.
By such indirection does the desire for liberty grow.
Brad DeLong’s Erroneous Defense of Greenspan
Even as the Austrian critique of Greenspan's housing bubble gains more adherents, some economists have tried to exonerate the former Maestro. Previously on these pages, I have responded to Henderson and Hummel's defense of the former Fed chairman, and I also took on Greenspan's own list of excuses.
In today's article I'll go through Brad DeLong's recent defense of Greenspan's policies.[1] DeLong's argument is of particular interest to Austrian economists, because he relies on Wicksell's "natural rate" of interest, a concept that Ludwig von Mises adopted for his own explanation of the business cycle.
As we'll see, I find DeLong's defense somewhat perplexing. Even on the Wicksellian criteria that DeLong sets up, Greenspan failed and should be held at least partially accountable for the housing boom.
Greenspan, Wicksell, and the "Natural Rate" of Interest
To his credit, DeLong admits that, "In hindsight, Greenspan was wrong." However, DeLong argues that perhaps Greenspan took a proper gamble when he began slashing interest rates following the dot-com crash. At the very least, DeLong claims, the conventional critique of Greenspan misses its mark:
People claim that Greenspan's Fed "aggressively pushed interest rates below a natural level." But what is the natural level? In the 1920s, Swedish economist Knut Wicksell defined it as the interest rate at which, economy-wide, desired investment equals desired savings, implying no upward pressure on consumer prices, resource prices, or wages as aggregate demand outruns supply, and no downward pressure on these prices as supply exceeds demand.
On Wicksell's definition…the market interest rate was, if anything, above the natural interest rate in the early 2000s: the threat was deflation, not accelerating inflation. The natural interest rate was low because, as the Fed's current chairman Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency).
You can argue that Greenspan's policies in the early 2000s were wrong. But you cannot argue that he aggressively pushed the interest rate below its natural level. Rather, Greenspan's mistake — if it was a mistake — was his failure to overrule the market and aggressively push the interest rate up above its natural rate, which would have deepened and prolonged the recession that started in 2001. [emphasis added]
Before looking at the substance of DeLong's claims, let's pause to note a rhetorical trick. Remember, we are talking about Alan Greenspan, who was the head of a nationwide cartel of banks established by the government in 1913. From January 2001 to January 2004, Greenspan wrote electronic checks backed up purely by his charisma, in order to expand the monetary base $140 billion — a 23 percent total increase over the three-year period. Now whether you think Greenspan acted wisely or foolishly, surely we can agree that his behavior should not be classified as a "failure to overrule the market"!
The very existence of the Federal Reserve is a slap in the face to the purely free market. Back in 1913, when the Fed was established, the big bankers' propagandists told the American people that a central bank (though they didn't use such a scary term) was necessary to (1) avoid business fluctuations and (2) preserve the value of the dollar. The Fed's record on those two counts is about as good as the record of any other massive government program. No matter what happened since 1913 — and that includes the Great Depression as well as our current crisis — it is on the heads of Fed officials. They said they had the expertise to steer the market, and they were frequently proven wrong by a crashing economy.
Did Greenspan Really Follow Wicksell's Advice?
I know that some Austrians historians of economic thought have, in private email discussions, challenged DeLong's interpretation of Wicksell.[2] I am not an authority on the subject, so I leave that question aside.
What's ironic is that even if we accept DeLong's reading of Wicksell at face value, he still hasn't exonerated Greenspan. According to the portion I italicized in the block quotation above, if Greenspan had actually kept the market rate of interest equal to the Wicksellian natural rate, then consumer prices, wages, and resource prices would have remained stable throughout the years when the housing bubble really took off.
Yet this is obviously not what happened. All three categories of prices rose during the period of ultralow interest rates. Thus, even if DeLong's interpretation of Wicksell is correct, Greenspan still fails the test. Let's give some examples to see with our own eyes.
The following chart shows the year — year percentage increase in the Consumer Price Index over the last twenty years:
Clearly, Greenspan didn't obey Wicksell's dictum when it came to consumer prices. They rose throughout his tenure, even during the early 2000s when he was allegedly removing upward pressure on prices.
Perhaps DeLong would argue that the rate of consumer price inflation was lower than usual during the housing boom years, but even there the 2002 experience was not qualitatively different from the 1998 experience, and by 2003, annual price inflation was back up to 3 percent, which is a far cry from zero percent — the target that DeLong's own test requires.
The situation is more extreme when it comes to commodity prices. First let's look at oil prices as an example:
Here, it looks like Greenspan generally followed Wicksell's advice until the housing boom really kicked in. Now in DeLong's defense, he could point out that oil prices fell sharply following the dot-com crash, and they remained flat into 2002.
But then they took off like a rocket. From June 2003 to June 2004, Greenspan held the federal funds target at an unusually low 1 percent, so this is where the action would occur, if we want to test just how "natural" his policy was. The annual average price of oil jumped more than $10 a barrel from 2003 to 2004, a whopping 34 percent increase in a single year. As the chart shows, there was no looking back. Oil zoomed ever upward, finally peaking at more than $140 per barrel in July 2008.
Greenspan fared no better at containing gold prices, either. From June 2003 to June 2004 — the period when he pinned the fed funds target at 1 percent — gold increased more than $35 per ounce, an annual increase of almost 10 percent.
As the chart above illustrates, there were large portions of Greenspan's tenure when he held gold prices steady, or even allowed them to fall — but not in the low-interest rate years of the housing boom.
Rather than crediting him with maintaining stable commodity prices, the chart above shows that we should accuse Greenspan of setting off a boom in gold prices as early as 2001.
Conclusion
The evidence against Alan Greenspan continues to mount. Brad DeLong's invocation of Knut Wicksell in an attempt to defend Greenspan turns out to be just one more indictment of him. No matter how you slice it, the former Maestro spawned housing, commodity, and stock booms with his reckless policies.
The Bankers' Cartel
Murray Rothbard begins this outstanding book by calling attention to a paradox. The Federal Reserve System enjoys virtual immunity from congressional investigation. The few who propose to subject the Fed to even minimal scrutiny, such as Henry Gonzales of Texas, at once find a consensus arrayed against them (pp. 1ff.). They threaten the stability of the market, since – it is alleged – only the Fed's independence blocks the onset of uncontrollable inflation.
Here lies the paradox. Inflation results from the infusion of new money into the economy, and it is the Fed that is responsible for its creation. "The culprit solely responsible for inflation, the Federal Reserve, is continually engaged in raising a hue-and-cry about 'inflation' for which virtually everyone else in society seems to be responsible" (p. 11). How did this odd situation come about?
As one would expect from a top-flight economist, Rothbard responds by tracing the problem to its roots. He briefly and clearly explains how money originated in a barter economy. Some commodities are much easier to market than others, and "[o]nce any particular commodity starts to be used as a medium, this very process has a spiraling or snowballing effect" (p. 13).
Soon, one or two commodities emerge into general use as a medium of exchange. And this, precisely, is money. Gold and silver have almost always been the commodities that win the competition for marketability. "Accordingly, every modern currency unit originated as a unit of weight of gold or silver" (p. 17).
Why has Rothbard gone to such pains to describe a historical process that seems very remote from the Fed? By beginning with a simple case, he can elucidate the basic mechanism that underlies the Fed's operation. To explain a complex event by starting with a simple method and gradually complicating it is a basic procedure of modern science. Galileo termed this "resoluto-compositive" method, and Descartes described it at length. Once one grasps how money has emerged, the key to understanding the mysteries of the Fed lies at hand.
We already can answer the following question; what is the optimum quantity of money? If one has understood the explanation of money's genesis, the answer is apparent. An increase in the supply of money does not increase real wealth, since money is used only in exchange. (The exception owing to nonmonetary uses of gold and silver can, for our purposes, be ignored.) "Any quantity of money in society is 'optimal'" (p. 20). And, to add one complication, the answer remains the same when paper money has been introduced.
A problem now arises for the analysis so far presented. If an increase in the supply of money does not increase real wealth, why have governments continually resorted to inflation?
Rothbard's response involves another fundamental insight of Austrian economics. Inflation does not affect everyone equally; quite the contrary, those who first obtain new money gain a great advantage, since they can purchase goods and services before most people become aware that the purchasing power of money has fallen. Inflation is thus a form of counterfeiting (pp. 27–9).
But it is not the only form; another type of counterfeiting arose out of deposit banking. Because of the inconvenience of carrying gold and silver, people often deposited the metals in banks, obtaining in return a receipt. These receipts, since they are promises to pay gold or silver, soon began to circulate as money substitutes.
However, a temptation presented itself to the bankers. The receipts normally did not specify particular gold or silver coins to be returned to the depositor; they were, rather, entitlements to specified amounts of the money commodity. (Rothbard notes that the great nineteenth-century economist W. S. Jevons warned against these "general deposit warrants" [p. 37]).
Since they need only return the amount of money specified in the receipt, bankers might give out more receipts than they had gold or silver on hand, trusting that not all depositors would demand redemption at the same time. For those willing to assume this risk, the prospect of vast profits called appealingly.
But is not this practice a blatant instance of fraud? So it would appear, and so Rothbard firmly avers that it is. Unfortunately, several nineteenth century British legal decisions held otherwise, and these verdicts were adopted by the American courts as well. Rothbard describes the legal situation with the sure hand of a master historian (pp. 42–4).
Our banker-counterfeiter, one might assume, can now proceed happily on his way to illicit fortune. But an obstacle confronts him; should he issue more receipts than he can redeem, the clients of other banks may ruin him through demands for payment that he cannot make good. The solution is obvious; by unifying the banks in a centralized system, this check to fraudulent wealth creation would be ended. Hence the movement for a central banking system, whose history in Britain and the United States Rothbard deftly summarizes.
The Federal Reserve System, as Rothbard makes crystal clear, was the culmination of efforts that continued throughout the nineteenth century to centralize banking.
By the 1890s, the leading Wall Street bankers were becoming disgruntled with their own creation, the National Banking System … while the banking system was partially centralized under their leadership, it was not centralized enough. (p. 79)
As he describes the movement to cartelize banking, Rothbard introduces a dominant theme in his interpretation of twentieth-century American history: the struggle of competing groups of bankers for power.
From the 1890s until World War II, much of American political history … can be interpreted not so much as 'Democrat' versus 'Republican' but as the interaction or conflict between the Morgans and their allies on the one hand, and the Rockefeller-Harriman-Kuhn, Loeb alliance on the other. (p. 92)
In the agitation to establish the Fed, the House of Morgan was in the ascendant; and Rothbard stresses the importance of the conference – under Morgan control – held at Jekyll Island, Georgia, in November 1910 (pp. 114ff). The entire section of the book (pp. 79–118) that deals with the origin of the Fed shows Rothbard's incredibly detailed historical knowledge. Though he was too modest to do so, he could had he wished have echoed the boast of Fustel de Coulanges: "It is not I who speak, but history who speaks through me."
Rothbard brings the historical section of the book to a close with a discussion of the Fed's early years in which the governor of the New York Fed, Benjamin Strong, guaranteed Morgan control (pp. 124–9). Only with the coming of the New Deal were the Morgan interests relegated to a lesser role, as the Rockefellers assumed leadership of the Eastern Establishment. Rothbard draws attention to the research of Thomas Ferguson, who has interpreted the New Deal as an anti-Morgan coup (p. 131n40).
"Philosophers have only interpreted the world; the point however is to change it." For once, Rothbard agreed with his ideological antipodes, Karl Marx; and the present work is not only an academic study but a plan for action. And the plan in question is a radical one.
If Rothbard is correct, the entire basis of modern deposit banking, the fractional-reserve system, is a type of counterfeiting that must be abolished. Under present arrangements, "the Fed has the well-nigh absolute power to determine the money supply if it so wishes" (p. 144). In response, the Federal Reserve System must be liquidated and the gold standard restored "at one stroke" (p. 146).
Again and again, the reader will be struck by the way in which Rothbard's grasp of fundamental economic principles enables him to overturn conventional thinking. A brilliant example of this is his unmasking of the fallacy involved in deposit insurance (pp. 134–7).
Wittgenstein says in his Tractatus, "Whatever can be said, can be said clearly," but few have been able to live up to his exacting dictum. Murray Rothbard's writing always displayed the clarity of a first-rate mind. Those who wish to see this mind in action, as well as learn from someone in total control of the literature of American economic history, should immediately secure a copy of The Case Against the Fed.
Sunday, August 2, 2009
Obama's 32 Czars
By Eric Cantor
"The biggest problems that we're facing right now have to do with George Bush trying to bring more and more power into the executive branch and not go through Congress at all. And that's what I intend to reverse when I'm president of the United States." -- Sen. Barack Obama, March 31, 2008
To say President Obama failed to follow through on this promise is an understatement. By appointing a virtual army of "czars" -- each wholly unaccountable to Congress yet tasked with spearheading major policy efforts for the White House -- in his first six months, the president has embarked on an end-run around the legislative branch of historic proportions.
To be sure, the appointment of a few special officers to play a constructive role in a given administration is nothing new. What is new is the elevation of so many czars, with so much authority on endless policy fronts. Vesting such broad authority in the hands of people not subjected to Senate confirmation and congressional oversight poses a grave threat to our system of checks and balances.
At last count, there were at least 32 active czars that we knew of, meaning the current administration has more czars than Imperial Russia.
The administration has a Mideast peace czar (not to be confused with the Mideast policy czar), a Sudan czar and a Guantanamo closure czar. Then there's the green jobs czar, sometimes in conflict with the energy czar, who talks to the technology czar, who sometimes crosses paths with the urban affairs czar. We mustn't forget the Great Lakes czar or the WMD czar, who no doubt works hand in hand with the terrorism czar. The stimulus accountability czar is going through a rough time right now, as is the TARP czar -- but thankfully they have to answer to the government performance czar. And seemingly everyone falls under the auspices of the information czar. In a government full of duplicative bureaucracies, adding more layers with overlapping responsibilities hardly seems the way to go.
Even Democratic Sen. Robert Byrd (W.Va.) was fearful enough to pen a letter to President Obama in February highlighting his concerns with the administration's tactics. The Constitution mandates that the Senate confirm Cabinet-level department heads and other appointees in positions of authority -- known as "principal officers." This gives Congress -- elected by the people -- the power to compel executive decision-makers to testify and be held accountable by someone other than the president. It also ensures that key appointees cannot claim executive privilege when subpoenaed to come before Congress.
As we move forward, proper oversight of the growing lineup of czars is essential. From orchestrating bailouts to making industrial policies to moving toward government-run national health care, Washington seems intent on sailing into uncharted waters -- and the czars are often steering the ship.
The car czar, who stepped down this month amid controversy over his former firm's role in a scandal, had been managing government's recent takeover of a huge swath of the domestic auto industry and making decisions for auto companies. The pay czar -- also known in White House circles as the "special master for compensation" -- has the power to reject or accept any current and future compensation for the top 100 earners at companies that received, in some cases under pressure, money from the Troubled Assets Relief Program. In the coming months he will decide the fate of $235 million in pending retention bonuses at AIG. And the health czar, meanwhile, has become as influential as perhaps anyone in the Obama administration, spearheading White House negotiations with doctors, hospitals and other health providers. She will play a key role in determining which medicines, treatments and cures are deemed necessary for the public.
The point here is not that President Obama's reliance on czars is illegal (although it does raise significant, unresolved constitutional issues). Nor is it that these czars are bad people. It's that we have not been able to vet them, and that we have no idea what they're doing. It's that candidate Obama made a pledge to keep Congress in the light. Yet less than six months after his inauguration, the president appears intent to keep Congress more and more in the dark. Dozens of czars at a time.
The writer, a Republican from Virginia, is the House minority whip.
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