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My grass was very dry and brown at the beginning of the summer this year. My wife asked me to do something about it, but I told her I turned on the sprinkler system. There’s nothing more I could do about it than that. It’s not my fault the grass is so brown. It must be some other problem over which I have no control. And, besides, it’s grass! It’s supposed to grow when it has water. But it turns out I was wrong.

For starters, I had the system set to run for ten minutes every three days. Now, if you’re reading this, I can assure you of one thing: You’re not grass. But even with that impediment, you are smart enough to know that in the high desert area of Front Range Colorado, grass must receive a healthy dose of water from sprinkler systems to survive. And 10 minutes every three days is just not enough. So I increased it to about 30 minutes every three days which had worked well in the past. But I had a second problem.

You see, I didn’t take the time to check the sprinkler heads to make sure they were in alignment. I went out to a particularly dry part of the front yard wondering why it was so brown. So I turned on the sprinkler system and–lo and behold!–the sprinkler head was turned askew. Well, I straightened that puppy out and the grass started to green up a bit. Same thing in the back yard too on the far right corner. So I adjusted the sprinkler head and wow! Results! It turns out that grass does grow if I keep the system in shape.

Based on this experience, I’ve come to the conclusion that Harry Ried is a lot like me. Now, I have to admit here that I just turned to my trash can, thinking I would get sick. But I cannot ignore the reality. I have the same it’s-not-my-fault disease with my grass that he has with the economy.

You see, Harry Ried is not to blame for the present state of the economy. He turned on the water back in 2009 with the stimulus package , but that darned George Bush really messed things up so badly he couldn’t do any better by now. Those brown spots in the economy are proof that the yard he inherited had already been trashed by the previous owner. But what Harry seems to miss is that it is the nature of economies to grow as long as the watering system is in proper shape.

You see, you need to use sprinkler heads in order for the grass of the economy to grow. Throwing money at infrastructure projects, for example, is like taking a bucket of water you just got from the spigot on the side of your house and dumping it on your lawn and expecting it to turn green. Only the grass in that one place may turn green and only for a short period of time. But all the rest of the grass turns brown. And you can’t keep running back and forth to the house refilling the bucket. You’ll get too tired and you have no method for spreading the water evenly across the entire lawn.

And what if the pipes in the sprinkler system have dirt in them. This is like regulation which gunks up the the sprinkler heads. You need a clean system for the water to flow properly. And you can’t turn the sprinkler heads in just one direction. They all must work in unison covering every part of the grass with an even spray or else you’ll have brown spots in the lawn. Economies don’t react well to similar approaches in government policy. Everyone must win or the whole system falls apart.

Harry Ried’s Washington, DC is a corrupt system which rewards only those whom he sees as worthy of his support. If you can put up the money or provide a few perks, Ol’ Harry will give you what you need. If you’re a big bank, well, as long as you allow us to demonize you, we’ll give you “too big to fail” status and protect you from destroying yourself. If you’re a car company with a lot of union workers, we’ll bail you out and give your stock to the union. If you allow your workers to unionize, we’ll praise you and give you preference in government contracts. If we can get your vote, we’ll give you a handout of some sort. But if don’t vote for us, we’ll not only withhold the handout, we’ll tax you more. And rich people are mean and cruel, but the middle class union worker is one of the gods.

The problem is, the grass of our economy is brown in most spots. And no matter how many times Harry Ried keeps running back to the Treasury Department to get a bucket of cash, he can’t get the economy back on track. And as long as interest group/voting bloc politics continues to dominate the policies coming out of Washington , we’ll have patches of brown just waiting to grow if only the caretakers would get the system in shape.

But Harry Ried can’t be bothered with such ideas.

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When former Labor Secretary Robert Reich offered his solutions for ending the Great Recession in the New York Times, he repeated the same errors expressed in a CNBC debate the week before.

Reich appears to have all the credentials for knowing what he is talking about: degrees from Dartmouth College, Yale Law School, and a Rhodes Scholarship to Oxford University. Having served as a law clerk to the chief judge of the U.S. First Circuit Court of Appeals and then assistant to the U.S. Solicitor General, followed by an appointment by President Jimmy Carter as Director of Policy Planning at the FTC, most would accept his opinions and suggestions for ending the recession as useful and relevant.

An early indicator that something might be wrong with his thinking, however, was revealed in his blog in April, 2008, when he publicly announced his support for Obama in the presidential election. He said that “although Hillary Clinton has offered solid and sensible policy proposals, Obama’s strike me as even more so:

His plans for reforming Social Security and health care have a better chance of succeeding. His approaches to the housing crisis and the failures of our financial markets are sounder than hers…He has rightly identified the armies of lawyers and lobbyists that have commandeered our democracy, and pointed the way toward taking it back…Finally…his life history exemplifies this, as do his writings and his record of public service. For these…reasons, he offers the best possibility of restoring America’s moral authority in the world.

In his Times article, Reich admits that much of what the Obama administration has done to boost the economy hasn’t worked, pointing out correctly that the private sector isn’t generating anything like the number of jobs needed just “to keep up with the growth of the potential work force”:

The national economy isn’t escaping the gravitational pull of the Great Recession. None of the standard booster rockets are working: near-zero interest rates from the Fed, almost record-low borrowing costs in the bond market, a giant stimulus package and tax credits for small businesses that hire the long-term unemployed have all failed to do enough.

But then he reveals, not what’s wrong with the economy, but what’s wrong with his thinking about the economy: “Consumers no longer have the purchasing power to buy the goods and services they produce as workers; for some time, their means haven’t kept up with what the growing economy could and should have been able to provide them.” (Emphasis added.) And he further exposes his lack of understanding of basic economics by adding: “Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.”

The problem, he says, is the rich. They don’t spend enough by themselves to keep the economy rolling, and the best thing to do is to relieve them of their wealth and give it to those who didn’t earn it, who are much more likely to spend it buying the goods they are producing. Reich says: “The rich don’t…invest their earnings and savings in the American economy…They send them anywhere around the globe where they’ll summon the highest returns.” Furthermore, “the rich also put their money into [hard] assets [such as] commodities and real estate.”

Then Reich dusts off the myth that only such redistribution of wealth got the country out of the Great Depression: “There is only one way back to full recovery: through more widely shared prosperity.” (Emphasis added.) From that underlying provably false assumption, Reich offers his solutions to ending the Great Recession: exempting the first $20,000 of income from payroll taxes and paying for it with an additional tax on incomes over $250,000.

Early childhood education “should be more widely available, paid for by a small 0.5 per cent fee on all financial transactions. Public universities should be free; in return, graduates would then be required to pay back 10 per cent of their first 10 years of full-time income.”

He offers something called “earning insurance” for workers who lose their jobs and have to settle for positions that pay less, and would be paid “half the salary difference for two years [which] would probably prove less expensive than extended unemployment benefits.” He concludes that these are “policies that [would] generate more widely shared prosperity…and that’s good for everyone.” (Emphasis added.)

Peter Schiff, one of those “rich” entrepreneurs who is Reich’s target (he is the founder of Euro Pacific Capital), explains the problem with this thinking: “Reich believes that the cart pushes the horse. In his worldview, businesses produce goods and services simply because consumers spend. Therefore, anything that increases spending fuels growth.” But that is exactly backwards. It takes capital formation, and the incentives only provided by a free market (which rewards success by providing products and services that customers need and want and are willing to pay for, and punishes failure to provide such products and services), to create production. Schiff puts it neatly:  “capital formation must precede production, which then allows for consumption.”

Schiff adds:

Every consumer either lives off his own productivity or the productivity of someone else. When individuals work, the wages earned result from the productivity of [their] labor. The ability to consume is directly related to the production of goods or services that result from one’s efforts…In the Soviet Union, everyone had a job, yet workers had to stand in line for hours for basic necessities…If stimulus could produce demand, then no nation would be poor…African poverty would be wiped out if African governments simply printed money more freely. Africans are not poor because they lack currency to spend [consider Zimbabwe]; they are poor because their governments inhibit production, deny [private] property rights, abrogat[e] contracts, prevent the accumulation of capital, and nationaliz[e] profits.

Schiff says that Reich should call for greater savings by reducing taxes on the rich, allowing them to invest in the new business ventures that are the driving force behind new jobs and higher employment.

Economist Thomas Sowell agrees with Schiff:

What would probably get the economy recovering fastest and most completely would be for the President of the United States and Congressional leaders to shut up and stop meddling with the economy…[but] true believers [like Reich] have to believe that it is only because [government intervention and redistribution efforts haven’t] been tried long enough, or with enough money being spent.

Investors.com said on September 3 that “all the actions this government has taken…haven’t ‘saved or created’ 3.8 million jobs, as claimed. Instead, they’ve destroyed millions of jobs. But the administration remains clueless, hinting that it may seek another “stimulus” costing billions. This bunch is either willfully doing damage to the U.S. economy, or [is] completely incompetent.

With Robert Reich’s credentials, it’s hard to believe that he is clueless or incompetent.

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The Obama administration is “taking the first steps to confiscate retirement dollars,” according to Dr. Jerome Corsi who predicts that the end result will be retirees with 401(k) plans holding near-worthless government debt “that will be paid off in a devalued currency worth…pennies on the dollar.”

The move to confiscate those retirement dollars for government purposes was best illustrated by Christina Kirchner, President of Argentina, in 2008 when she announced plans to seize her citizens’ private pension funds. Writers at the Heritage Foundation said that while Kirchner claimed such seizure was necessary to protect her citizens’ investment accounts from the global meltdown, “most observers believe[d] her real motive [was] to use the $30 billion in seized assets to ease the massive debt obligations her leftist spendthrift government [had] run up.” The Wall Street Journal agreed, saying that “taking over the…pension fund assets [would] ease the cash crunch faced by [her] government.”

Corsi said he has a letter from the Treasury Department, Bureau of Public Debt, informing U.S. citizens that the federal government is rolling out a new program called “Treasury Direct” that will allow citizens “to purchase, manage, and redeem…savings bonds” electronically, as well as offering an option to purchase such bonds automatically through payroll savings or a personal checking account. This happened to coincide nicely, according to Corsi, with a bill offered by Senator John Kerry (D-Mass.) to create “Automatic IRAs” that would require all employers and employees to invest in IRAs using that automatic deduction option, “whether they want to do so or not.”

And this happened to coincide also with a program being pushed by the Service Employees International Union (SEIU) called “Retirement USA” which would create a government-forced retirement program with assets being directed into special Treasury Retirement Bonds, or R-Bonds. “Retirement USA” is promoting the idea that all workers have a “right” to a government retirement account, in addition to Social Security and any private pension plans those workers already have in place. Others behind “Retirement USA” also support more government dependency for workers, including the AFL-CIO, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare and the Pension Rights Center.

All of this is being promoted by the idea that individual citizens aren’t saving enough for their retirement, and that consequently government has to “do something.” Rep. Jim McDermott (D-Wash., above photo), Chairman of the House Ways and Mean’s Committee’ Subcommittee on Income Security and Family Support, is confused about whose money is in those 401(k) plans: the individual contributor, or the government. He said that “since the savings rate isn’t going up for the investment [Congress is making] of $80 billion [in 401(k) tax savings], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”

The worldview of Rep. McDermott is revealing, and brings clarity to the point of view of many in the Washington establishment that the $4.5 trillion currently invested in 401(k) plans and other private pension plans that enjoy tax breaks actually belong to the government, and that when Congress loses $80 billion that would otherwise flow to Washington due to those tax breaks, it’s an “investment” that must “generate what we say it should”, or else it must be replaced with something else that works better.

The real “story behind the story” was revealed by Joe Wolverton here when he said,

…since the day of his inauguration, Barack Obama and his congressional co-conspirators have consistently and unapologetically set out to systematically nationalize the economy of the United States: first the banks; then the insurance companies; then the auto industry; then healthcare; and now the piece de resistance, the private savings accounts of millions of middle-class Americans.

But, thanks to the SEIU and their program “Retirement USA,” it’s all dressed up to look like a good deal for unsuspecting owners of retirement plans. In “Making the Case for a New System” they take the view that “A secure retirement is part of the American dream. Yet our retirement system is failing many Americans. Social Security is the cornerstone of our system, but as currently structured, is not meant to be our only retirement program. Pensions and savings plans are supposed to fill the gap, but too many workers don’t have plans, and too many plans don’t do the job.” They complain that:

• Private retirement plan coverage is not UNIVERSAL…
• For millions of Americans, private retirement benefits are not SECURE…
• And Private retirement benefits are not ADEQUATE…

And, continues “Retirement USA”’s website, “Social Security must be preserved and strengthened… [and] we must encourage employers to offer and maintain them.”[emphasis added]

Underlying all of this is, of course, the statist presumption that government knows best what’s good for the citizens, and when the citizens’ behavior fails to meet government expectations, then mandates and force must be used to do for those citizens what the government thinks is best.

And the fact that Washington is looking at annual trillion-dollar deficits “for as far as the eye can see,” that $4.5 trillion of private monies is just too tempting to ignore.

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Notable in the statement from the Securities and Exchange Commission (SEC) last week that it was charging the State of New Jersey with securities fraud was the lack of fines, punishment, or names of the guilty. The fraud began in 2001 and wasn’t uncovered until the New York Times exposed it in April of 2007.

What the SEC did say was that New Jersey failed to make disclosures 79 times in the sale of $26 billion worth of municipal bonds, creating “the false impression that the Teachers’ Pension and Annuity Fund (TPAF) and the Public Employees’ Retirement System (PERS) were being adequately funded, [while] masking the fact that New Jersey was unable to make contributions to TPAF and PERS without raising taxes, cutting other services, or otherwise affecting the budget.” Robert Khuzami, Director of the SEC’s Division of Enforcement, said:

All issuers of municipal securities, including states, are obligated to provide investors with the information necessary to evaluate material risks. The State of New Jersey didn’t give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.

New Jersey got into trouble in 2001 when the legislators increased retirement benefits for employees and retirees in both plans but failed to provide funding for those increases. Instead, a paper account created “Benefit Enhancement Funds (BEF)” into which monies were to be placed to pay for the increases. But no funds were ever placed into those accounts, even though the state budgets showed that amounts of either $551 million, $56 million, or nothing at all were set aside, depending upon which state documents were considered. According to the Times, New Jersey said the state contributed $551 million to the BEF in 2005, according to a bond offering statement. The $56 million figure appeared in an audited financial statement for the BEF. In fact, nothing was ever placed in the BEF, and the whole paper game folded 5 years later.

The SEC’s Chief of Municipal Securities and Public Pensions Unit, Elaine Greenberg, said “Issuers of municipal bonds must be held accountable when they seek to borrow the public’s money using offering documents [which contain] false and misleading information. New Jersey hid its financial challenges from the very people who are most concerned about the state’s financial health when investing in its future.” However, nowhere in the SEC press release was a single name mentioned, not even those who did the auditing of the books or those who sold the bonds.

They do have names, however. Frederick Beaver, director for the Division of Pensions and Benefits in the New Jersey Treasury Department, when pressed by the Times for an explanation about various questionable practices involved in hiding the truth, pointed out that “other places had taken similar steps occasionally when dealing with a budget crunch.” He said, “The problem we had was doing it on a repeat basis.” Donald DiFrancesco, acting governor of New Jersey in 2001, when the pension increases were approved, said he recalled “people thought it was good public policy,” which was devised to attract the best people. He said he did not think the measure was financially unsound and “did not recall” anyone challenging it or calling it improper.

Jon Corzine (above, former chairman of Goldman Sachs) took office in January 2006 and warned that the pension funds were in bad shape, saying publicly that “It’s impossible for us to stay on the course that we are on today, and deliver what people are asking for. The money will not be there.” Although Corzine succeeded in persuading the legislature to increase contributions to the funds, they were not nearly enough to restore them to financial health.

John Megariotis, the Deputy Director of New Jersey’s Division of Pensions and Benefits, claimed innocence: “We were [only] the bean-counters…Those are not my numbers.” And then he assured theTimes that New Jersey would not fudge the numbers ever again.

John Bennett, majority leader of the Republican State Senate at the time of the increase, blamed DiFrancesco’s administration which had pushed for the increase, assuring him that “there would be money to cover it.”

Those responsible for promoting the fraud to bond investors include Citigroup, J. P. Morgan, Morgan Stanley, Bank of America, Merrill Lynch, Barclays Capital, and, of course, Corzine’s former employer, Goldman Sachs.

The SEC said its action was its first ever against a state government, and that its order “requires the State of New Jersey to cease and desist from committing or causing any violations and future violations…New Jersey consented to the issuance of the order without admitting or denying the findings.”

In a separate interview, Greenberg said that “Hopefully, [the SEC’s action] will send a message to other states or local governments.” However, it may just be too late for New Jersey. As noted here, it is going to take much more than “conjuring magic” and “pension fairies” to restore the state’s fiscal balance sheet. As CNBC put it,

By the time Gov. Chris Christie took office this year, the pension funds had been deprived of contributions for so long that it had become near[ly] impossible to catch up. The state needs to come up with billions of dollars every year, something it cannot do without raising taxes, cutting public services or going even deeper into debt.

Ian Mathias, writing for the Daily Reckoning, hopes that some lessons have been learned: “Now you have all but absolute proof that State administrators are not only unable to balance their books, but they’re willing to cook ‘em too.” Because the action came without pain, punishment or exposure, it provides little incentive for those administrators to change their ways. In fact, only one state has ever defaulted on its bonds: Arkansas defaulted on its obligations back at the bottom of the Great Depression, in 1934.

So, he adds, “The odds are still in your favor [if you own municipal bonds]. But reason is not. Now ethics aren’t, either.”

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The Jackson Hole conclave of central bank chiefs came and went, leaving hardly a ruffle behind. The remarkable fact is that it had so little effect, despite the much expected speech on the U.S. economy by Mr. Bernanke of the Federal Reserve Bank.

Mr. Bernanke’s main field of study as an academic economist has been the Great Depression. As the current “Great Recession” developed the Fed’s primary concern therefore was to avoid the policy mistakes that turned the 1929 stock market crash into a disastrous ten-year downturn. Chief among these errors was the failure to provide abundant liquidity to the financial system.

Accordingly super-abundant liquidity was provided this time around, under the form of an intensive bank bailout, huge deficit spending, the creation of money, zero interest rates and a raft of financial facilities. As a result there was, initially, an economic bounce. But as this “recovery” now appears to be rapidly fading, the question bears asking: “Everything that should have been done has been done, but the effects are not up to expectations. Was something missed?”

Yes, it was. While study of the Great Depression can certainly teach us a lot, it was over 70 years ago.

Today we would not make a study of transportation on the basis of 1930 technology. At that time air transport was a minor factor. Today it is a major one.

In a similar vein, in 1930 our economy was almost entirely national, and all its components were within the reach, if not the control, of federal authorities. Today’s economy is globalized.

Global finance means that the sums moved daily around the world by private interests (many of them speculative) dwarf anything the U.S. government can muster. Foreign exchange transactions alone involve $4 trillion per day. In other words, the value of our currency is out of the government or anyone else’s control.

Global “free trade” translates into entire industries being transferred, within a few years, to whatever locations multi-national company executives may choose. With the industries go the jobs, services, investments and taxes.

In other words, whatever the government does might have a bigger impact in another country than it does in the United States, and much of the money spent will end up in China rather than Virginia or California. The same happens to jobs, whether they are existing ones that disappear abroad, or “newly created ones”, which materialize directly in foreign, low-cost locations.

The U.S. government and the Fed are pumping air into a leaky tire. Unless the leak is fixed, they can pump for years, but the tire—our economy—will stay flat.

U.S. authorities are treating the economy as if it was a constant entity, to which government spending can add, thereby creating growth. But the economy, and the wealth that goes with it, are no longer tied to the national territory and its population. Because U.S. political and economic leaders have chosen to practice an “open border” economic policy, wealth and activity have been flowing out for the past two decades. As a result, many “American” corporations have more interests abroad than they have here. They will invest, and create jobs, where their interests are.

If it is more profitable, short-term, to manufacture in China, that is where investments will be made. Profits will rise (and they have) but so will U.S. unemployment (and it has). The Fed will keep the money printing press running, and the administration will increase the deficit, and the “jobless recovery” will go on, until something gives.

If we want a real return to prosperity, we need to deal with this issue. Otherwise we will slide into another depression, with all the consequences this entails, political as well as economic.

Globalization has been presented to us as progress, the “next economic thing”, the way to world prosperity, and so on. Given the situation that the world economy is in, as well as our own, we need to reconsider.

On today’s The Jim Pfaff Show, I talked with Economist Paul Prentice , Ph.D about the current state of our economic system, the effects of government action in managing an economy and the moral case for capitalism.

It’s always an excellent discussion with Paul because he takes a libertarian approach based on the Austrian School of economic theory which is what I also hold. But he comes from a Judeo-Christian perspective on the justice and morality of markets and market forces.

The rights of individuals to undertake their personal activities with limited influence by government is a biblical as well as a strong economic principle. Paul and I always have an interesting and enlightening discussion on these topics. You’ll find it difficult to pull away from this podcast.

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It was news to many when Scott Powell announced that an obscure novel published in 1957, Atlas Shrugged, “may be second to the Bible as the most influential book read in America.” His statement that BB&T, the 12th largest bank in America, which resisted taking TARP bailout funds, requires reading of that same book as part of its management training program astonished many more.

American Conservative Magazine noted that “a week before the President’s inauguration, more people were buying it than Obama’s Audacity of Hope.

Says Powell, the novel “explains our current economic woes more straightforwardly than most of what we hear from today’s experts…What happened in Rand’s narrative is coming to pass today, with an anti-business administration reviling private industry and capitalizing on [the current] crisis to expand and redirect investment within and between sectors of the economy—setting quotas, prices and compensation.” Noting that the economy has ground down essentially to a standstill, due to business owners ceasing to invest because of the continuing threat of government mandates, rules and regulations, Powell points out that while the private sector has lost eight million jobs in the last 2 ½ years, the federal government has expanded both in employment and in spending.

The biggest obstacle to getting the economy working again is government unions, according to Powell, with members of those unions becoming “the country’s most powerful entitlement group,” with no accountability. “Thus,” he said, “government-run schools controlled by the teachers’ unions can fail decade after decade without consequence or substantive reform.” In a free economy, the whole point of Rand’s novel, such obstacles wouldn’t exist. He says,

The media…largely ignore the most consequential story of our time: the Obama administration’s drive to shift wealth and power from the productive private sector to the nonproductive public sector. Rand calls this appropriation of wealth by the government nothing less than looting.

Edward Younkins describes Atlas Shrugged as “an apocalyptic vision of the last stages of conflict between two classes of humanity—the looters and the non-looters. The looters are proponents of high taxation, big labor, government ownership, government spending, regulation and redistribution.” They include:

Politicians and their supporters, intellectuals, government bureaucrats, scientists who sell their minds to the bureaucrats, and liberal businessmen who, afraid of honest competition, sell out their initiative, creative powers, and independence for the security of government regulation.

The non-looters—the thinkers and the doers—are the competent and daring individualists who innovate and create new enterprises. These prime movers love their work, are dedicated to achievement through their thought and effort, and abhor the forces of collectivism and mediocrity. The battle is thus between non-earners who deal by force and profit through political power and earners who deal by trade and profit through productive ability.

When the looting exceeds the ability of the earners to fork over the loot, the looters then destroy the currency. From one of the heroes of Atlas Shrugged comes this broadside:

So you think that money is the root of all evil?…Have you ever asked what is the root of money? Money is a tool of exchange, which can’t exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or the looters who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?…Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into bread you need to survive tomorrow…Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values…Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it becomes marked: ‘Account Overdrawn.’”

Yaron Brook, President of the Ayn Rand Institute, says the reason for the novel’s current popularity is its relevance. Quoting Rand in her Capitalism: The Unknown Ideal, he said, “If you understand the dominant philosophy of a society, you can predict its course.” He adds,

Why do we accept the budget-busting costs of a welfare state? Because it implements the moral ideal of self-sacrifice to the needy. Why do so few protest the endless regulatory burdens placed on businessmen? Because businessmen are pursuing their self-interest, which we have been taught is dangerous and immoral. Why did the government go on a crusade to promote “affordable housing,” which meant forcing banks to make loans to unqualified home buyers? Because we believe people need to be homeowners, whether or not they can afford to pay for houses.

All of which is exactly wrong as Rand tells the story of John Galt, the ultimate free-market entrepreneur. At the end of the novel, the politicians come to Galt and beg him to help them get the economy going again. Here is the dialogue:

Galt: You want me to be Economic Dictator?
Mr. Thompson: Yes!
Galt: And you’ll obey any order I give?
Mr. Thompson: Implicitly!
Galt: Then start by abolishing all income taxes.
Mr. Thompson: Oh, no!  We couldn’t do that. How would we pay government employees?
Galt: Fire your government employees.
Mr. Thompson: Oh, no!

Powell is optimistic that something similar can still be done here: “The catalyst for course correction is [just] around the corner…President Obama can be thanked for making this midterm election an overdue referendum on liberalism. Average Americans are now more informed and engaged than they have been in generations, and they are highly motivated to vote…The most credible and successful candidates…are likely to be those resolutely committed to deficit– and debt-reduction and getting the government out of the way of private-sector job creation—the essence of Ayn Rand.”

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I talked recently with Sandra Solin, Executive Director of the Coalition for Colorado Jobs. Votes using a secret ballot for union organizing will be a thing of the past if the so-called Employee Free Choice Act (EFCA) passes in Congress. This bill would allow union organizers to come on the workplace site and personally interview every employee to gain their support for establishing a union. The problem is, this process is done publicly under EFCA proposed guidelines, and the union will be able to keep the results of this open survey and use it to encourage those who say “no” to change their vote to a “yes.” Well, “encourage” is really not the best term to use here. Intimidation will ultimately be the result of union organization efforts in the future if EFCA passes.

We are encouraging Senator Michael Bennet to stop being coy about his support for EFCA. If he supports it, say so. If not, announce it now so that this legislation will be officially dead. It gives all the benefits to unions and takes away the right to a secret ballot from employees. And, of course, it puts employers in a weaker bargaining position. Union organizing efforts should be fair and free from the types of intimidation that would occur if EFCA passes.

You might think it is a bit heavy-handed to use the term “intimidation,” but it’s not. Unions bring in billions of dollars every year in dues payments from organized labor. They expend hundreds of millions of dollars in union dues every election cycle. And union executives make loads of money in salaries. Organizers have in some ways more at stake than employees in keeping and growing union membership so that they can maintain their jobs and increase the income needed to support their large organizations.

Not convinced? Check out this video:

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When Kevin Hall, writing for McClatchy Newspapers, said “the Obama administration got what it was looking for at its summit on the future of housing finance,” he was very close to the truth: No matter who spoke at the summit or what “new” ideas might be proposed, nothing would change—the government would remain fully in charge of mortgage financing for the country.

Hall said the summit (officially called, the Conference on the Future of Housing Finance) designed to develop a proposal for Congress by January, “was a starting point for [the] debate, [which will] carry consequences for all Americans,” even including taxpayers who don’t have mortgages.

How this debate is decided could affect everything from the supply of affordable rental housing to tax deductions for mortgage interest to whether Americans pay significantly more to be homeowners.

Treasury Secretary Timothy Geithner made it clear from the start that the private market would have no influence on the conversation: “We will not support returning Fannie and Freddie to the role they played before conservatorship [in September 2008] where they fought to take market share from private competitors while enjoying the privilege of government support. We will not support a return to the system where private gains are subsidized by taxpayer losses.”

Naturally, the people involved in the summit have been enjoying the fruits of government intervention in the housing market for years, as confirmed by Jim McLeod, the president of Coastal States Bank, a community lender in Beaufort County, South Carolina: “I’m impressed with the fact that they’re asking the right people.” One of those heavily involved in profiting from such intervention was Bill Gross, the managing director of PIMCO, the world’s largest bond fund, who opened the summit by proposing still more government intervention to protect lenders from their errors during the housing bubble. His first proposal was “that the Obama administration order Fannie Mae and Freddie Mac to refinance all outstanding mortgages that they back…into today’s historically low interest rates.”

Speaking as one who would profit from such a move, and also as a Keynesian, Gross said that such an order “would free up a significant amount of income for millions of Americans,” who would then go out and spend the money they were previously paying for housing, which would then “boost the economy.” The fact that previous such efforts to stimulate the economy have failed miserably was missing from his comments. In addition, however, Gross said that the new lower-interest mortgages created should continue to be guaranteed by the taxpayer. In short, Gross was proposing that the taxpayer “eat” the difference between the old, toxic, high-rate mortgages that banks are continuing to hold on their books and the newly-created low-interest rate mortgages, which would continue to enjoy government backing just in case they go bad as well. Either way, Gross and PIMCO would continue successfully to game the system.

Gross made sure that there would be no discussion of reinstituting private market entities to resolve the government-created difficulties by adding that “the private sector can’t return to the pre-crisis market share…because the psychological scars of the deep recession will change investors’ and consumers’ behavior for decades.”

One participant at the summit, however, did propose doing just that. Alex Pollock, a fellow at the American Enterprise Institute, said that privatizing all the functions of Fannie and Freddie would allow the market to operate more efficiently, pointing out that “70 percent of the mortgage market involved prime loans to borrowers with good credit histories…[and] hence the private sector should be pooling those plain vanilla loans for sale to investors, not some government-chartered company.”

Investor’s Business Daily scoffed at the reluctance of participants to point out the role these entities, along with the Department of Housing and Urban Development (HUD), played in creating the problems in the mortgage industry in the first place. IBD reminded its readers that as far back as 1996 HUD “required that 42 percent of Fannie’s and Freddie’s mortgage financing go to ‘underserved’ borrowers with unproven or damaged credit.” In 2000 HUD required the mortgage giants to raise their targets to 50 percent. And by 2008, at the top of the bubble, 56 percent of all mortgages were going to those borrowers, which turned “toxic” as the market imploded.

Just to make sure that this summit was headed in the right direction, Ellen Seidman, who enforced the Community Reinvestment Act (CRA) under the Clinton administration, argued that whatever the final proposals the summit came up with, that Fannie’s and Freddie’s support for “low-income and minority communities…[remains] absolutely critical…The private sector will not do it on its own, and we should just stop having that debate.” As IDB editorialized, “In other words, Fannie and Freddie aren’t going anywhere. They’ll just be absorbed into the government.”

As the summit continued its inevitable march to the inescapable conclusion that more intervention in the mortgage market is just what the banks need to protect themselves and their balance sheets, ordinary Americans have the opposite opinion. A new Rasmussen Reports survey finds that “most Americans remain opposed to government intervention,” with 56 percent saying that the “government should stay out of the housing market all together.”

Remarkably, Rep. Ron Paul (R-Texas) saw the housing bubble coming as far back as 2003. In a hearing with Treasury Department officials, Paul said that the “explicit promise by the Treasury to bail out GSE’s [like Fannie Mae and Freddie Mac] in times of economic difficulty…is a promise on behalf of the government to engage in a huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt [the banks]…By transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market.” (Emphasis added.)

Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

The mortgage summit should listen to Dr. Paul instead of those profiting from the government’s continuing intervention in the mortgage market.

When Fed Chairman Ben Bernanke speaks on Friday at the Fed’s annual meeting in Jackson Hole, Wyoming, Fed-watchers from around the world will be hanging on his every word, phrase, and nuance for clues. They’ll be listening to hear that the chairman knows what’s happening in the economy, and that if things get worse, he has a plan.

The economy continues to suffer as shown by weak demand for housing, high unemployment, and declines in hard goods manufacturing. As Randall Forsythe put it, “Every data point on employment and housing since midyear has fallen short of expectations, in some cases, far short.” The numbers just
released by the National Association of Realtors for July were horrific, despite the Fed’s efforts to “re-flate” the housing market, as Tom Eddlem pointed out.

And it’s foolish to look for a recovery in housing without a recovery in employment. As noted here there are three main reasons why housing isn’t likely to rebound anytime soon: 1) There is a mountain of unsold homes on the market, more than a year’s supply; 2) There aren’t enough qualified buyers trying to purchase a home right now; and 3) bankers are still holding onto their cash, preferring to keep it invested in risk-free Treasuries.

Michael Feroli of JP Morgan Chase said that July’s durable goods report on Wednesday was “disastrous,” with “core” capital goods off 8 percent in one month and the most since January, 2009. Looking forward, he said that business capital spending looks “atrocious,” while Nouriel Roubini,the New York University economist, expects that growth next quarter will be “well below” 1 percent, adding, “With growth at a stall speed of 1 percent or below, the stock markets could sharply correct … [creating] a negative feedback loop between the real economy and … risky asset prices [that could] easily then tip the economy into a formal double-dip.” David Wyss, chief economist at Standard & Poor’s, agrees with Roubini: “The economy is surely not in good shape — the odds of a double dip are a long ways from zero.”

The trouble is that policymakers themselves are divided about what to do. The Washington Post pointed out that the Fed’s policy intentions “have been unusually muddled in the past two months,” and according to the view shared by many mainstream economists, “it is unclear how likely it is that the Fed will undertake major new efforts … [or] what form those actions would take.”

Those attending the conference have differing opinions. President of the St. Louis Fed James Bullard said that the Fed should consider pumping additional billions of dollars into the moribund economy, while Kansas City Fed chief Thomas Hoenig says the Fed should raise interest rates to choke off incipient inflation. Most of them, however, favor muddling through, taking a wait-and-see attitude.

What are the Fed’s options? At bottom, the Fed can do only two things: speak, and print. If the Fed follows Bullard and expands the money supply even further (inflation), rising prices will eventually be the result. Some will say that a cheaper dollar will make American goods look cheaper abroad, which will stimulate exports. But the long term course of that policy is the ultimate destruction of the dollar. If the Fed follows Hoenig and stops the printing press, the resultant rise in interest rates will add another burden to the struggling economy.

Some Fed people admit that they don’t know what to do. Dennis Lockhart, president of the Atlanta Fed, just trusted his gut when the Fed’s balance sheet started shrinking because of mortgages being paid off due to refinancings. Said Lockhart, “The shrinking of the balance sheet just didn’t feel right to meunder the circumstances.” (Emphasis added.)

And equivocating isn’t good either. Fed governor Kevin Warsh argued that an abrupt change in either direction would spook the markets since the public would believe that the Fed is more worried about the economy than it is letting on. This may explain the nervousness shown by investors of late. As David Callaway succinctly put it, “If this group can’t tell whether we’re headed for Japanese-style deflation or German-style hyperinflation, then investors certainly don’t want to be in the game at all.”

Hans Sennholz claimed that “faith in the Fed” to know what it is doing is not only foolish but dangerous.

It is the federal moneybag which can finance any government expenditure and come to the rescue of any number of banks and financial institutions, it can create new money with the speed of a computer command and transfer it in seconds by high-speed modem. It can create deposits of one dollar as efficiently as it can create one million, one billion, or even one trillion dollars. The Fed derives this magical power from its position as money monopolist, from the legal tender force of its money, and from its regulatory powers over financial institutions. Its power is purely political, created and granted by the United States Congress, sanctioned by the courts, and enforced by the police….

When the Chairman speaks, the financial world holds its breath.…

Most economists view the vast powers of the Fed with favor and applaud its managers. Unfortunately, they seriously overestimate the Fed’s power and take no heed of the fateful role played by the Fed. Their blind faith in political power cannot bear to look.

On Friday, the chairman will use one of the only two tools the Fed has at its disposal: words. In a rational, free-market world, Bernanke would be sight-seeing in Jackson Hole, and nobody would care. And the free market would determine the the value of money, with no one granted monopoly power to create it out of thin air.