"2016"

Sydney M. Williams
                                                            Thought of the Day
                                                                     “2016”
August 27, 2012

While the remarkable movie “2016”, based on Dinesh D’Souza’s book, Obama’s America, shows the President to be obsessed with anti-colonialist feelings he inherited from his father, the more haunting message was what the movie and the book say about us, as a people – that our innate sense of decency (coupled with an attitude of political correctness) precludes us from delving too deeply into obvious questions about Mr. Obama’s background – and what they say about an independent press, theoretically here to inform us, without prejudice, about those who would lead us.

While our own willing susceptibility can perhaps be forgiven (at least once,) there is no excuse for journalistic blind avoidance of tough questions no matter how sensitive they may be. The media fell down in their responsibility to allow the electorate to make informed decisions. We all knew in 2008, from college transcripts that had been withheld to knowing nothing of his friends as a young man, that we knew little about the real Barack Obama. In his book, Mr. D’Souza includes an exchange that took place shortly before the election in 2008 between two of the most respected (and, one would think, two of the most curious) journalists in America – Charlie Rose and Tom Brokaw. Tom Brokaw speaks: “We don’t know a lot about Barack Obama and the universe of his thinking about foreign policy.” Charlie Rose responds, “I don’t know what Barack Obama’s worldview is.” “I don’t either,” replies Tom Brokaw. It was (and is) that lack of curiosity that stands out.

It is not as though, Barack Obama was a new face on the block. Ever since his speech at the 2004 Democratic convention, he had been in the public eye, and had been running for President for at least two years. He had written two autobiographies – Dreams From My Father (1995 and revised in 2004) and The Audacity of Hope (2006). Both were designed not to illuminate, but in fact to obfuscate the real person.

Partisanship has increasingly become an unfortunate aspect of the press. Instead of skepticism, too many reporters simply become accomplices for their favorite politicians. Nobody minds a shill as long as they are upfront about what they are doing, but when they masquerade as independent news sources their lies demean their profession and do a disservice to their readers and/or listeners.

In the case of Mr. Obama questions were never asked, or when they were asked, they were never pressed. Why? It is hard to know. Certainly, the fear of being considered racist was critical. The very fact that Mr. Obama was treated differently than others in his position is indicative that we have not advanced very far, in terms of Civil Rights. And that is especially true of the Left, which considers themselves to be at the forefront of the movement, yet are reluctant to apply the same standards to all people. The media’s neglect, in this instance, was a case of political correctness trumping reportorial responsibility.

It was not what we knew about Mr. Obama that caused people to vote for him in 2008. It was what we wanted to believe. And the message he carried of unifying a nation divided by an unpopular President, made more so because of dragged-out wars in Iraq and Afghanistan and an unprecedented financial crisis, resonated with voters. Home prices, the largest asset for most people, had collapsed. The economy was in recession and unemployment was rising. Mr. Obama, characterized by the press as the “smartest man in the room”, promised to heal a nation wracked with problems and crying for help.

Almost everyone wanted to believe that this attractive, articulate man of African-American heritage, a man who when he spoke at the Democratic Convention in 2004 spoke not of red states or blue states, but of purple states. We believed he would bind us together and lead us toward the promise of the American dream. The Civil Rights movement was only a generation in the past, so people felt good about voting for a man who seemed the heir to Martin Luther King’s “dream.” His erudition and mixed-race heritage caused us to unquestioningly take him at face value, and superseded any natural skepticism we might normally have felt. We each saw what we wanted to see. In fact, our response was anticipated by Mr. Obama who portrayed himself in The Audacity of Hope: “I serve as a blank screen on which people of vastly different political stripes project their own views.” Those words, eerie in the light of having seen Mr. D’Souza’s movie and reading his book, were written only two years after he was elected to the U.S. Senate. This was a man who knew himself well, and who also recognized and took advantage of weaknesses in the American electorate.

Dinesh D’Souza was the perfect person to have created this film. He was born in India, a country occupied and colonized by the British, as was Mr. Obama’s father’s Kenya. Both Mr. D’Souza and Mr. Obama were born the same year. Both traveled to the east coast of the United States to attend college in the same year, both going to Ivy League institutions. (Initially, Mr. Obama attended Occidental College in California, but then transferred to Columbia.)

In the film, Mr. D’Souza takes the viewer to Hawaii where Mr. Obama was born, and to Indonesia where he was raised. He takes us to Kenya, to the home of Mr. Obama’s grandmother and to the grave of his father. We see the unbelievable poverty and the tiny hut where his half-brother George Obama lives, but who, unlike Barack, broke with the radical, anti-colonialism of their mutual father – a breach for which our President has never forgiven his brother. We are introduced to those who mentored the young Barack Obama. We meet Frank Marshall Davis, an avowed Communist, living in Hawaii and who Mr. Obama refers to as ‘Frank;’ the Brazilian socialist Roberto Mangabeira Unger who taught at Harvard Law School, a man who has called upon developing nations to “gang up” on America with a view toward containing her hegemony; Edward Said of Columbia who has supported violent Palestinian resistance against “Zionist colonial occupation of Muslim land;” and, of course, the Reverend Jeremiah Wright, Mr. Obama’s pastor for twenty years, the man who married him and who baptized his daughters.

There will be many who choose not to see the movie. Supporters of Mr. Obama will assume it to be one more example of conservative racial prejudice. But I suspect most of those who like what they see in the President are not averse to filling in the blanks. Mr. D’Souza is uniquely qualified, for reasons expressed above, to have made the journey that produced the book and the film. He is not trying to argue against Mr. Obama’s politics. He wants us to understand the forces that drive the man.

A democracy only works when the electorate is informed. With the right of citizenship comes the responsibility to make informed decisions. We need to better know the most powerful man in the world. This film helps. It was not Selma, or Birmingham or Mobile that created Barack Obama; it was the anti-colonialism of his father. The title of Mr. Obama’s autobiography was not Dreams of my Father; it was Dreams from my Father. It is not written in stone that Dinesh D’Souza is right in his diagnosis, but he makes a very convincing case. No matter one’s views, everyone will be better off for having seen the film. An old adage has it: “Fool me once, shame on you; fool me twice, shame on me.”

“A Canary in the European Coal Mine?”

Sydney M. Williams

Thought of the Day

“A Canary in the European Coal Mine?”

August 22, 2012

August is the traditional month when Europe shuts down and the powerful (and even the not so powerful) retreat to shores or mountains. The problems left behind do not dissipate. They are simply ignored, while they continue to fester. Chancellor Angela Merkel returned from her holiday to quash rumors that the European Central Bank (ECB) would be setting caps on government yields in Spain, Italy and other debt-burdened nations. Investors Business Daily reported on Tuesday that the ECB downplayed the report, “but did not deny it.” Nevertheless, it seems highly improbable they would do so, as it would mean a commitment to unlimited purchases of debt. The ECB has been buying short-dated government notes, but the Bundesbank, according to yesterday’s Wall Street Journal, considers even those purchases by the central bank “a dangerous move into the realm of fiscal policy.” And therein lies the rub. The euro, as a currency, may be at risk, but any risk to the euro should not extend to the sanctity of the European Union.

The world, as we know it, can live with a failed currency. It cannot live with a failed European Union. Guy Sorman, the French economist was quoted in the weekend edition of the Wall Street Journal. “Europe was not built for economic reasons, but to bring peace between European countries.” Amartya Sen, a Nobel economist from India, expressed similar sentiments in a recent piece in The New Republic: “…the movement for European unification began as a crusade for political union, rather than for financial unification and a common currency.”

While the currency is not the cause of Europe’s problems, it has become symptomatic. Everybody is looking for the canary in the coal mine. Perhaps “Spiegel on Line” has discovered one. On August 13th they reported that, according to the ECB, cross-border lending among euro-zone banks has been steadily declining, especially since the summer of 2011. In June such lending hit its lowest level since the financial crisis first broke out five years ago. It may signal that lending institutions are fearful that the common currency may fail.

The problem, as I see it, is the sense that many people feel that both the EU and the euro are inextricably linked. Such feelings have created confusion between the desire for eternal peace among European nations that caused these countries to form a common political union in the post War years, and the more recent felt need for a common currency. Two wars over a thirty year period (1914–1945) devastated the continent, caused tens of millions of deaths, reduced cities to rubble and destroyed their industrial base. Despite rebuilding, the fear of repetition has haunted European leaders for sixty-seven years.

War has been a constant presence in Europe from time immemorial. The Holy Roman Empire, with its constant battles, dominated central Europe from 962 to 1802. The Hundred Years War pitted England against France from 1337 to 1453. The Thirty Years War, fought mostly in Central Europe, lasted from 1618 to 1648. The Napoleonic Wars (1803–1815) were fought against Napoleon’s aggression from Spain to Russia. The Franco-Prussian War (1870–1871) established Germany as a continental power. And then, forty-three years later, came the Great War. Establishing a common political base was seen as a way to eliminate (or, at least, greatly reduce) the prospect of another war. For a continent that had been racked by such devastation over more than a thousand years, nothing could be as important.

Europe is like a manic depressive that vacillates between periods of abhorrence and times of reconciliation. The dream of European unification is ancient. But so is the hatred. On the eve of World War II, in 1939, the poet W.H Auden wrote:

In the nightmare of the dark

All the dogs of Europe bark,

And the living nations wait,

Each sequestered in its hate.

In the aftermath of World War II, in 1952, seven countries – Belgium, France, Germany, Italy, Luxembourg and the Netherlands, former enemies and allies – joined to form the European Defence Community. From that beginning, the European Union, conceived as a federation of states, was formed. Today it consists of 27 member states, with a population of a little over 500 million people and a GDP of about $16.5 trillion, making it the largest economy in the world. In 1957, the Treaty of Rome created the European Common Market. Thirty-five years later the Maastricht Treaty allowed for the European Union as we know it today, and seven years later, on January 1, 1999, the euro began trading.

The crisis Europe faces now, as M. Sorman notes in his interview, was not caused by the currency; it was a function of demographics and promises made to welfare recipients that were unaffordable and which created a culture of dependency. The Keynesian stimulus spending in 2008-2009 only added to the problem. Declining economic growth has further exacerbated the situation. So, today the economies of the Mediterranean nations are faced with the herculean task of ratcheting down spending and expectations, but without sending their economies into a death spiral. It will require a Clark Kent in the guise of free markets and less regulation.

Among the questions with which Europe should be wrestling include: What steps must be taken so that the euro can be dissolved with the least disruption? How to preserve and strengthen the political Union should the euro unravel? How to wean people from a culture of dependency to the practice of personal responsibility? When to recognize that monetary policy alone is not sufficient to handle the problems Europe (and the United States) faces? How to address what Victor Davis Hanson calls the pernicious cycle “in which the perceived medicine [less regulation and freer markets] seems worse than the known disease?” When to acknowledge that the statement “growth versus austerity”, as it is used by politicians, applies to government, not the private sector?

Democracies are difficult to form and easy to lose. Many of Europe’s are young and untested. If we accept the hypotheses that democracies are fragile in their infancy, but that they are critical to long term financial health and political stability, then it is important to understand that other than France and England, most of Europe is relatively new to the concept. While some democracies were created in the aftermath of World War I, it has only been in the post-World War II period that democracies began to thrive. Even Greece (the fountain from which all democracies flowed) has a current democracy that dates back only three decades, and the former Soviet satellites extend back just over twenty years. Europe’s currency, in my opinion, arrived betimes, before a fiscal and political union. As such, I fear it may not survive. If Europe can handle its dismantlement while strengthening its political and fiscal union then the 21st Century could well be Europe’s.

Is the euro finished, as Niall Ferguson seems to believe and as Milton Friedman expected upon its introduction thirteen years ago? Again, I don’t know, but declining cross-border lending by banks does not bode well. It could be the canary in the coal mine. But the end of the euro does not mean the end of the European Union.

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I will be out until Tuesday September 4, part of the time out of the country. That will provide a respite from my ramblings, and perhaps an opportunity to unclog your in-box. However, should events or personalities prove irresistible, I may not be able to restrain myself.

“Pussy Galore”

Sydney M. Williams

Thought of the Day

“Pussy Galore”

August 21, 2012

The ability to protest and to peacefully dissent is a hallmark of liberalism. While the United States has never been a paragon – lynchings in the Deep South during the ninety years following the Civil War, McCarthyism in the 1950s, and the inexplicable refusal by too many liberal arts colleges to entertain opposing views – it remains the most envied country on the planet. The Reverend Jeremiah Wright is allowed to rant unmolested about the “God damn United States”. The Tea Party is free to express their concerns about debt, deficits and moral turpitude. Occupy Wall Streeters can defecate on doorsteps, when not railing against one percenters, and still receive favorable press in the New York Times.

But in Russia three young women, dressed in short skirts, tights and balaclavas are not free to express dissent against the decision by the leader of the [theoretically] non-political Orthodox Church to strongly endorse Vladimir Putin in last March’s presidential race. For the crime of “hooliganism” they were sentenced last week to two years in a labor camp. The three girls are part of the ten-member band Pussy Riot, a punk-rock band that spent forty seconds lip-syncing to a rendition of “Mother of God, cast Putin out” in the early morning last February 21st, before they were hauled off by guards and arrested. They performed before the altar – a place where women are not allowed – in the mostly empty Cathedral of Christ the Saviour. Russian Patriarch, Kirill I of Moscow had called Putin a “miracle from God” who had “rectified the crooked path of history.” The three women claimed their protest was a political statement, but the prosecutors (Putin’s boys) said the band was “trying to incite religious hatred.” At sentencing, the judge said, “[You] have deeply hurt and insulted the faithful. As The Atlantic noted, the women were found guilty of “religious hatred,” a euphemism, I guess, for hooliganism.”

Pussy Riot was formed a year ago, in response to what the members claimed were government policies that discriminate against women. In December they performed atop a garage beside a prison playing, “Death to Prison, Freedom to Protest,” and in early February they played a song in Red Square, mocking then Prime Minister Putin. They recently released a new song entitled, “Putin is Lighting the Fires of the Revolution.” There is no question that the three women knew they would be arrested; though they probably had little idea as to the depth their controversy would provoke.

Support for the group has come from Western pop culture mavens: Madonna, Paul McCartney, Bjork and Sting, according to The Atlantic. Forbes notes that Alexei Navalny, a popular Russian anti-corruption blogger, described the court proceedings as “reminiscent of the dark ages” and that it sends the signal, “we can arrest anyone and everyone.” In yesterday’s Wall Street Journal, Gerry Kasparov, former chess master and leader of the Russian pro-democracy group United Civil Front, was arrested as he stood in a doorway answering questions from journalists. He writes: “Mr. Putin could not care less about winning public-relations battles in the Western press, or fighting them at all. He and his cronies care only about money and power. Friday’s events make it clear that they will fight for those things until Russia’s jails are full.”

Nevertheless, Mr. Putin appears to have been reasonably successful in deflecting the arrest and sentencing from being an attack on political liberties and dissension to being an attack on Russian cultural values and the Orthodox Church. The Financial Times argued on Sunday that the Russian public is divided between those who feel the right to dissent is inherent and those who feel the young women violated a holy place. In fact, the FT reported that the majority believes “it [the two years hard labor] was a just punishment for desecrating a holy place.” This episode is unlikely to go quietly into the night. There is little question that Russia is marching backwards. Despite that, President Obama’s meek response seemed to synthesize the ambivalence of the West: “While we understand the group’s behavior was offensive to some,” the punishment was “disproportionate.”

Russia is the country to which the Obama Administration famously provided a red re-set button in 2009 to symbolize a new “era of good feelings.” There is no question that President Bush made an awful misjudgment when he spoke, in 2001, of looking into Putin’s eyes and claiming he was able “to get a sense of his soul.” That observation spoke poorly of President Bush’s intuitive sense. But in later years, Mr. Bush became decidedly tougher, as he unequivocally supported global democracy movements and promised a missile defense along Europe’s eastern border in Poland. By 2008, relations with Russia were decidedly strained. In Russia, individual liberties, since the commencement of Vladimir Putin’s second term as President, have been restrained. Mr. Putin has allowed parliament to toughen criminal libel suits against journalists, while seizing and enacting laws against street protests.

That the mild rebuke from Mr. Obama over the weekend followed the earlier caving to Putin on missile defense is a telling reminder of the diminished influence of the United States in foreign affairs, during the past three and a half years. In the cover story of the current issue of Newsweek, Niall Ferguson writes in a piece entitled Hit The Road Barack: “America under this president is a superpower in retreat, if not retirement.” More darkly, it may be indicative of Mr. Obama’s grab for power at home with his nearly three dozen czars – super aides who work across agency lines to push the President’s agenda and who have no need for Senate confirmation. As Senator, Barack Obama criticized President Bush’s use of signing statements – a questionable process by which duly enacted laws can be modified. But as President, Mr. Obama has increased their use.

Last evening the President implied he might use force to rid the world of Syria’s President Assad should there be proof that he has used chemical weapons on his people. The man is a cold-blooded killer who consistently allies himself with the civilized world’s enemies. He is a man who has killed between 15,000 and 20,000 of his subjects. However, what is the difference between using chemical weapons and shooting them? Either way they are dead. The only civilized response is to get rid of Assad. But, one cannot help thinking that Mr. Obama is playing the race card, as in the Presidential race. His numbers are falling and he is losing support. A show of strength, as he heads toward the convention, may be just what the good doctor, David Axelrod, has ordered. As an aside, keep in mind that Mr. Obama was against ousting Saddam Hussein from Iraq, despite his having killed about 1,000,000 of his own people, and somewhere between 100,000 and 200,000 with chemical weapons. But, then a Republican was in the White House.

We may feel we live in an enlightened age, but so did those in Western Europe in the waning days of the 19th Century, yet the world never experienced a more brutal Century than the 100 years that followed. The fact is that no matter how advanced we become technologically, despite the great strides we have made artistically, or how civilized we may feel, we are all subject to the emotions of fear and greed, vulnerable to charismatic but inept or evil leaders. Dictators survive in two ways: Their constituents either love them or fear them. The people of any nation should always remember that in democracies government exists to serve the people; the people don’t live to serve the government. When that happens, freedom is lost and the ominous path that follows leads to men like Putin and a resurrection of either Tsars or dictatorial Communist commissars. The United States is the only country that routinely supports those struggling to be free. To allow that beacon to be extinguished would be dispiriting to struggling people everywhere.

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As for the title, for a group that has only ten members, “galore” may seem an exaggerated modifier; however, since the episode and its consequences have universal interest, the word seemed fitting.

“Point of No Return”

Sydney M. Williams

Thought of the Day

“Point of No Return”

August 20, 2012

The stock market was once seen as a barometer for the economy. It tended to be reasonably predictive in its behavior of future economic behavior. (I say “reasonably” because, as Paul Samuelson once said, “The market has predicted nine of the last five recessions.”) It was never foolproof – nothing could ever be that easy – but it reflected the dreams and hopes of millions of small investors, and the considered expectations of thousands of professional portfolio managers.

Its original purpose was to raise capital for fledging businesses and to allow more mature ones to raise funds. For investors, it provided a means of valuing one’s portfolio and the liquidity to buy and sell. In time, it proved a means by which millions of small investors could accumulate savings for retirement. The New York Stock Exchange was also, however, a club that provided a venue for members to accumulate wealth – though certainly not with the rapidity of today’s hedge fund managers, or corporate beneficiaries of option grants.

The forty-five years that my yoke has been hitched to the stock market have seen a lot of changes. Individuals who once dominated have been replaced by institutions. Commissions, which were once fixed, became “negotiated” (though in name only, as institutions now dictate terms.) Volume has increased by a magnitude of a factor of almost 1000. Tickertapes, which once ran along the front of every brokerage firm’s front room, have been replaced by Bloomberg, Reuters and Thompson screens. Paper tapes are unknown by the vast majority of Wall Street participants. Information, which once seeped slowly out, is now available instantly, twenty-four hours a day, seven days a week.

As damaging, in my opinion, is the news last Friday that Jon Corzine will face no charges, despite the apparent validity to the accusation that his firm did comingle customer funds with those of his firm. While he disclaims any responsibility, had events turned out otherwise there is little question in my mind that his hockey stick would have poked new holes in the sky. The whole episode does little to restore confidence in a system that most people see for the cronyism that it is. Having friends in high places means something, whether the symbol of your party is an elephant or a jackass. While cronyism impairs confidence, it is not new.

In my opinion, the single biggest change has been the commoditization of the market. Investing in individual companies and holding those investments for months, if not years, was the preferred venue for investors. Today, individual securities are packaged in myriad instruments from indexes to derivatives to ETFs. They all serve useful purposes, but collectively they have altered the landscape beyond recognition for many traditional investors. Computers have made the trading of these instruments (and individual stocks) capable of being bought and sold at lightening speed, creating havoc when something goes awry, as it did on October 19, 1987 when “portfolio insurance”, designed to protect investors against loss, instead created its own self-fulfilling cascade of falling prices. The “Flash Crash” on May 6, 2010 and the Knight Securities loss of $440 million in a few minutes are more recent examples.

It is not as though markets did not crash in earlier days. They did. We have all heard of October 28th and 29th, 1929 when the Dow Jones lost 20% over two days, and 40% over the next several weeks. By June of 1932, the market was down almost 90% from the highs it had reached in August 1929. In 1974, the markets lost about 40% of their value from their highs to their lows in December of that year. Panic knows no venues, and neither does greed. But today we are not only susceptible to age-old patterns of behavior, but to glitches in technology that have nothing to do with fear and greed.

Last Monday, the New York Times ran a front page article on the rising costs of high speed trading. High frequency traders, in my opinion, essentially serve their own purpose – making money. Thus far, regulators have left them alone, believing them when they claim to have brought liquidity to markets. They speak of the sharp increase in shares traded daily and of the enhanced competition between exchanges. They cite the declining spreads between bid and ask prices, and the fact they have helped reduce the time it takes to execute a trade from 3.2 seconds to 48 milliseconds, an astounding 98.5% improvement. They have helped reduce the average commission paid on a per share basis. But it is hard to argue that they in any way have helped fundamental investors. In helping to turn an exchange on which were traded pieces of paper representing ownership in businesses to trading spreads based on some esoteric algorithmic formula has done little to differentiate between companies performing poorly and those doing well. Each of these computerized trades, for the most part, are done for a relatively small number of shares (a few thousand shares at a time and having nothing to do with underlying fundamentals of the companies involved), while institutional investors’ ownership of companies are generally represented by millions of shares. A doubling or tripling of volume based on algorithmic formulas does little to provide real investor liquidity. It is unclear to me that two computers or more, trading a thousand shares at a time, but doing millions of trades in a day, has done much for liquidity. There is also, in my opinion, the very real risk of a firm front-running customer orders. Chinese walls on Wall Street are usually made with rice paper.

The article in the Times shills for these trading firms when they write that “the total cost for an investor to get into and out of a single share of stock fell by more than half between 2000 and 2010, to 3.5 cents per share. They fail to note that the individual investor has largely forsaken the stock market giving their money to mutual funds whose fees have remained as high as ever; so it’s hard to understand exactly how the individual investor has benefitted. Certainly, ten years of generally flat markets have not tempted the investor back into the waters made muddy by increasingly complex strategies and derivative instruments.

Over the years, John Bogle has demonstrated the great advantage of index funds for those small investors who have neither the inclination nor the capabilities of picking a portfolio of stocks. The advantage of index funds is both in their low costs and broad diversification. Studies have also shown that the majority of actively managed funds, after fees, underperform the indices. Like ETFs, index funds, definitionally, make no distinction between well managed and poorly managed companies.

Adding to the uncertainty was the failure of Dodd-Frank to not only fail to address the problem of “banks too big to fail”, but, in fact, to make those banks bigger. In his book Bailout, Neil Barofsky notes that since early 2008 assets at JP Morgan Chase have grown by 36%, those at Wells Fargo have more than doubled, while Bank of America’s assets have increased by 32%. Not only are banks bigger today, they are more politically influential than ever. Breaking them up (my preference) may prove impractical. Simple rules demanding higher capital ratios as assets expand would alleviate – though not eliminate – the risk of failure. The bigger one’s balance sheet, the less leverage one should be able to deploy. And, when determining capital ratios, all off balance sheet items should be considered.

All of the above: High frequency trading that benefits a small number of people at the expense of the majority; the consequences of algorithmic, quantitative trading schemes that cause markets to be vulnerable to flash crashes, and the fact that risk to the financial system is bigger than ever, have added uncertainty to a market that has produced subpar returns for a dozen years. It is little wonder that people view markets as casinos, not barometers of economic activity. On the positive side, on the other hand, many of these strategies may have inadvertently mispriced individual equities, providing opportunities for research-intensive investors.

In Point Of No Return, John P. Marquand’s 1929 novel, he wrote: “To him politics was like the weather. You could make occasional forecasts, but you could not control it.” Markets are different than they were forty-five years ago, though they are similar in that no one has ever been able to control them. Many of the changes have been positive. Technology has allowed markets to be more efficient and more available to increasing numbers of people. But technology has done little to improve transparency and has done even less to prevent criminal behavior. Additionally, myriad products have rendered our markets more commodity-like, allowing for more of a casino-like atmosphere, in which immediate self-gratification has replaced long term investing. Ultimately such changes are detrimental to our capitalist system, in that start-up businesses have found access to capital more elusive, and the confidence has been sapped from the millions who rely on investments for saving and retirement. However, nothing in life is constant. We must learn to adapt, accepting what’s best and rejecting what’s worst.

If Professor Samuelson was correct about the predictive qualities of past markets, today it is more likely that they will predict twenty of the next two recessions, or none of the next two – in other words, any predictive quality the market may have had has been neutered. One cannot help wondering whether, with high frequency trading models, commoditization and the crony capitalism manifested in the Washington-Wall Street revolving-door policies, we have reached our own point of no return. This is not to suggest markets cannot rally, but it may inhibit any near term return to the kind of bull market we had in the 1980s -1990s.

"Put Y'all Back in Chains"

Sydney M. Williams
                                                               Thought of the Day
                                                          “Put Y’all Back in Chains”
August 16, 2012

The use of “Y’all” by a white man from Scranton, Pennsylvania – never mind the word “chains” – while speaking to a largely African-American crowd in Wyethville, Virginia, is condescending to his audience and insulting to his target. The use of such language is based on the concept that if people hear lies repeated continuously they will be considered truths. Campaign managers, like David Axelrod who conceive of such slogans assume the electorate is stupid. There are many who are convinced that nasty campaigns help win elections. I don’t know. I find it supercilious and unattractive. I have to believe that people are smarter than that. It was good to hear the stolid and respectful Mr. Romney finally hit back at Mr. Obama: “Mr. President, take your campaign of division and anger and hate back to Chicago.”

Mr. Biden’s comments that headline this piece represent the modern role of Vice Presidents – attack dogs on the campaign trail. Perhaps it is because they have so little to do. Conventional wisdom suggests that it is the head of the ticket that determines for whom an elector votes, freeing up the Vice Presidential candidate to become the aggressor, while the Presidential candidate can assume a role of composure and decorum. You wouldn’t know that from some of Mr. Obama’s rhetoric, but then he has a record he cannot defend; so attacks have become his favored venue. It is certainly possible, though, that a Vice Presidential candidate may have negative consequences, as was likely true in 1992 with Dan Quayle on the ticket with George H.W. Bush, and almost certainly was a negative when John McCain selected Governor Sarah Palin to serve on his ticket. Joe Biden added maturity to a relatively youthful and inexperienced Barack Obama in 2008. However, four years later and at 69 getting long-in-the-tooth and with a propensity for gaffes, he may prove more of a hindrance than a help. That may be especially true running against a youthful and highly intelligent Paul Ryan. It is worth keeping in mind, though, that the last time a President dumped his Vice President was in 1944, when Franklin Roosevelt tossed Henry Wallace out in favor of Harry Truman. That doesn’t mean, though, that the “win at any price” Mr. Obama won’t scuttle Mr. Biden. He could well do so.

From the earliest days of the Republic, the Vice Presidency has been considered an office of very little worth. John Adams, the nation’s first Vice President once described the office: “The Vice Presidency is the most insignificant office that ever the invention of man contrived or is imagination conceived.” Since Mr. Adams had been present at the creation, those are telling words. Daniel Webster, a few years later, refused the offer, saying, “I do not propose to be buried until I am really dead.” The most famous comment about the office of Vice Presidency was said by the Southern Democrat John Nance Garner who served as FDR’s Vice President for his first two terms. He described it as being “not worth a bucket of warm piss.” After helping to defeat Mr. Roosevelt’s attempt to pack the Supreme Court in 1937, he was summarily dropped from the ticket in favor of the aforementioned Mr. Wallace whose Socialist credentials were just what FDR wanted.

Once President Eisenhower was asked by a reporter as to whether his Vice President, Richard Nixon, had ever contributed to a major policy decision. The former General responded: “If you give me a week, I might think of one.”

Richard Nixon was one of seven Vice Presidents in the 20th Century to become President. The others were Theodore Roosevelt, Calvin Coolidge (who once said that being Vice President allowed him to get his nightly allotment of eleven hours of sleep), Harry Truman, Lyndon Johnson, Jerry Ford and George H.W. Bush. Interestingly, the first President Bush and Martin Van Buren have been the only Vice Presidents, since the 12th Amendment was passed in 1804, to be elected President directly from serving as Vice President.

Curiously, with the exception of the crook, Nixon, most of the Vice Presidents who later became President have had their reputations enhanced with time, unlike the reputations of those they served – exceptions being Franklin Roosevelt and Ronald Reagan, whose reputations remain strong.

As dust settles over musty old history books, and memories fade, most of us cannot recall the names of Vice Presidents from the previous century. Fortunately or unfortunately, depending on one’s point of view, that is unlikely to happen today with the advent of the internet, YouTube and a 24-hour news cycle. The current resident of the Victorian mansion on the grounds of the Naval Observatory, whether he makes it on to the ticket again, will long be with us. Who else but Mr. Biden would have said, with a live microphone still on, at the signing of the President’s healthcare bill, “This is a big f***’n deal.” We cannot forget the numeracy-challenged Mr. Biden once saying: “If we do everything right, if we do it with absolute certainty, there’s still a 30% chance we will get it wrong.” And, once, but this time speaking to a largely white audience while stumping for Mr. Obama in 2007, Mr. Biden said: “I mean, you get the first mainstream African American who is articulate and bright and clean and a nice looking guy. I mean that’s a storybook, man.”

And this is the guy who calls Republicans, and Mr. Romney in particular, racist! When Mr. Obama was elected President in November 2008, unemployment stood at 6.5%, and for African Americans it was 11.1%. Today, unemployment is 6.5% and for African Americans it is 14.4%. And the 14.4% was up from 13.6% the month earlier. It is hard to argue that the Obama-Biden team has been good for the economy and even harder to argue that they have been good for African Americans.

Words mean something; so you should tone it down, Joe. And, given the sorry state of unemployment, you should focus on helping find jobs for the people you were elected to serve, rather than focusing on your own.

“Values Still Matter”

Sydney M. Williams

Thought of the Day

“Values Still Matter”

August 15, 2012

Years ago we were taught that values matter, because the ultimate judge of our behavior would be ourselves. We were asked, “Can you live with that decision?” It meant that immediate gratification should be considered within the context of any longer-term negative consequences of decisions made. It was the threat of those consequences that would keep excessive behavior at bay. If that seems like a distant memory, it’s because it is.

For many, the long term no longer exists. Wall Street reacts to short term events. Politicians have become adept at kicking the pail down the road. Democrats have pushed a culture of dependency. With half of all workers not paying any federal income tax, and half of all citizens receiving some form of government assistance, have we reached the point that Alexis de Tocqueville warned about in 1831? “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” Politicians understand that for voters a government that pays, but does not charge is difficult to toss out.

We have been fortunate as a society. We have benefitted from our geography, which is not only blessed with abundant resources, but has provided the natural protection of two oceans. We are an aspirant people that have grown wealthy due to hard work, a sense of personal independence and self reliance, and the ideals embedded in our Declaration of Independence and Constitution. In a speech to the Alexander Hamilton Society in Washington, D.C. last summer (as cited by Bret Stephens in yesterday’s Wall Street Journal), Congressman Paul Ryan noted that America’s real interests are derived from our deepest values: “America’s foundations are not our own – they belong equally to every person everywhere.” It explains the concept of American exceptionalism.

Russell Kirk (1918-1994), political theorist, historian and author of The Conservative Mind, in a 1982 essay Virtue, Can it be Taught?, wrote “We Americans have grown very well fed, [but] very much starved for virtue.” In his essay, Professor Kirk questioned whether virtue can be taught. He wondered if it is adversity that opens the “impulse” toward virtue. He cited the example of Alexander Solzhenitsyn. “The terrible adversity endured by decent folk in Soviet Russia forged the virtue of Solzhenitsyn, a hero for our age.” Nobody would disagree with that depiction of the man, but, also, no one would argue that Russia, freed from the yoke of Communism, has become a virtuous nation with values we can all admire. Our national values spring from the foundation of our souls, souls that were forged in the hardship of the American Revolution and in the wisdom that became our Constitution. It is why an understanding of that period is so elemental to all Americans.

Political correctness has provided an escape hatch through which many of our traditional values have disappeared. Two examples from Georgetown University manifest that loss. Congressman Paul Ryan spoke there this spring. Before he spoke, ninety faculty members signed a letter protesting what they claimed were points in his budget that disproportionately cut services to the poor and therefore failed to meet their “moral criteria.” The letter went on to claim that his budget reflected “the values of his favorite philosopher Ayn Rand rather than the gospel of Jesus Christ.” In truth, the letter made clear that the authors could not comprehend simple math, had not read Mr. Ryan’s budget and had no understanding of Mr. Ryan’s philosophy. While Mr. Ryan admires Ms. Rand’s indictment of socialism and celebration of the individual; as a devout pro-life Catholic he totally rejects her secular, atheistic worldview, saying “…[it] is antithetical to my worldview.” On the other hand, when President Obama spoke at Georgetown he asked that the oldest Jesuit College in the nation cover all signs and symbols, including the Cross and the monogram IHS, which represents the name of Jesus Christ. Not a peep was heard from the faculty and/or administration that meekly complied with a request antithetical to the stated beliefs of the college.

What makes the upcoming election so distinctive and important is that the two parties are on very different trajectories. They both claim the same goal, in terms of providing a more perfect world, but the societies they each envision are totally different and are, in fact, incompatible.

My guess is that the President was speaking personally when he spoke of success being a collective effort, and that he was aided, as were so many African Americans, women and other minorities, by Affirmative Action. Affirmative Action was a necessary antidote for the decades of prejudice and exclusion that characterized our society for most of the hundred years following the Civil War. Women had always been treated as second class citizens. Participating in such a program was a right for those like Mr. Obama and is nothing to be embarrassed about. But it is also a program whose very success should see it disappear when it becomes no longer necessary. It was our collective values that created such a program. It is our individual values that should, at some point, render it superfluous. If affirmative action were afforded everybody, what advantage would that provide? I don’t know if we have reached that point, but at some time we will, or at least, we all better hope we do.

The values for which we as a nation should aspire are those in which equality means that we are equal under the law and are provided equal opportunities. Not all will seize that opportunity. Not all will have success. We do not have the same talents, nor do we share the same hopes and dreams. We work at different levels and we measure success in different ways. But it is the promise of opportunity that has driven people to our shores, people who have strengthened our nation with their reaffirmation of our values. To lose them is to lose our future.

The President seems to be mired in the past – in a time of the decade of his birth, when Civil Rights was the right movement at the right time. We have come a long way from that period, and we are far healthier as a nation for having done so, but part of that maturity means permitting more freedom to individuals, not less. As our children grow, we do not tighten the boundaries. We, perhaps reluctantly like my wife, let them go. Successful parenting means a child who can stand on his or her own. I believe our nation has increasingly been successful in its treatment of people – we are far from perfect, but better than we had been – so the tools we have provided should lessen, not increase, people’s dependency on the state.

Both Mr. Obama and Mr. Romney have the interests of the American people at heart. Of that I am sure. Both are motivated by a belief that their vision is the best to achieve a productive economy that is fairest for the people. But, they are on very different paths, reflecting different values. One puts his faith in government; the other in the people. It behooves everyone to consider long and hard as to which society they would choose to live in and which provides the greatest opportunity for their children and grandchildren, and which one represents the values you would like to propagate.

“Conservatism and a Social Conscience”

Sydney M. Williams

Thought of the Day

“Conservatism and a Social Conscience”

August 14, 2012

For at least eighty years there has been an implicit understanding among both major political parties that government has a role to play in the responsibility to look after the needs of the elderly, the sick and the poor. There may be debatable variances of the definition of the terms, but there are no differences when it comes to a sense of obligation. Fiscal conservatives, though, differ from their compatriots in their willingness to speak out about the fact that the path we are on will lead to the bankruptcies of our entitlement systems. They understand the importance of economic growth in addressing government’s obligations. While the elderly, the chronically ill and the disabled will need life-long care, fiscal conservatives feel the mission of most welfare programs should be to wean recipients from dependency, ala the welfare-to-work program of 1996. Most importantly, conservatives understand that the worst thing that can happen to the needy is for society to become poorer, which is the inevitable result when social programs crowd out economic growth.

Republicans are often cast by Democrats and mainstream media as the Neanderthals of the American political system. They are portrayed as insensitive and selfish, placing fiduciary responsibilities before the needs of the poor and the sick. While there may be a few deserving of that moniker, just as there are Leftists who believe in a total equal redistribution of wealth, in both cases their numbers are small.

There is no question of the needs of many people, and of the responsibility for society to care for the elderly and indigent. However, an inhibiting factor – one that many Democrats and leftists don’t like discussing – is the one of money. There are three important components. First, as mentioned above, the growth of entitlement spending is unsustainable. Second, as a nation, we are all (no matter if we work in the public or private sector) dependent on the growth of the private sector. Tax revenues generated by the private sector pay for the public sector. The larger the slice of GDP represented by the public sector, the smaller is the part available to the private economy – the engine that provides funds to the public sector. Third, in order to support this increase in federal spending, government has had to borrow, increasing the federal deficit by $5 trillion in the past four years. They have been borrowing at what are, in effect, teaser rates – rates so low that “balloon” payments will be coming soon.

Federal spending over the past three years has consumed 24% of GDP, versus a number closer to 20% for the prior few decades. Since the recession ended in June 2009 economic growth has been far below expansions emanating from earlier recessions. Spending on Social Security, Welfare, Medicare and Medicaid today comprise 56% of the federal budget. The rate of growth in those programs greatly exceeds both the growth rate of the economy and the budget as a whole. In doing so, it threatens private sector growth. The unilateral decision of the President to amend the definition and intent of the Welfare Reform Act of 1996, along with his executive decision to enact the Dream Act greatly increases the number of people on welfare and the concomitant costs to taxpayers. The Heritage Foundation estimates that by 2020 the United States will be spending a trillion dollars a year on welfare programs, versus $435 billion this year – a compounded increase of 11%, in an economy likely to grow between 2.5% and 3%. Social Security and Medicare reform should include the adoption of a means test and increasing the age of eligibility.

Tax revenues are closely aligned with economic growth. As economic growth increases, so do tax revenues. When the economy goes into recession, tax revenues shrink. Revenues are influenced by incentives. When capital gains taxes are high, investors hold on to their stocks. When income tax rates go up, wage earners, especially the wealthy, seek out tax shelters, such as municipal bonds. While bureaucrats in Washington use static accounting to determine the expected success or failure of any given tax plan, it is the behavior of people that should be measured. People and businesses respond to incentives. Last Wednesday, the Wall Street Journal noted: “Every major marginal rate income tax cut of the last fifty years – 1964, 1981, 1986 and 2003 – was followed by an unexpectedly large increase in tax revenues…” Over the past thirty years, the marginal tax rate on all categories of income has declined. In 1980, the highest earning Americans (the top 1%) paid a tax rate of 70% on their marginal earnings. They paid 18% of all taxes. In 2007, the top 1% of wage earners paid 35%, yet contributed 40% of all income tax revenue. We can debate what is “fair”, but it is only fair to acknowledge a trend that has been in place for more than thirty years. Ironically, but mathematically accurate, reductions in marginal rates have increased the progressivity of the tax code. As marginal tax rates increased, in the years following the passage of the 16th Amendment, so did the demand for deduction. Complexity followed. California Republican Congressman Duncan Hunter notes that there have been almost 5000 changes to the tax code in the past decade. Such unending alterations create income for lawyers and accountants, but breed uncertainty for individuals and businesses.

The third factor – interest rates – seems insignificant at the moment, but is likely to grow significantly in importance over the next few years. In 2012, interest costs are expected to cost U.S. taxpayers about $224 billion, or about 6% of the annual Federal budget. In 1997, interest expense on Federal debt was $244 billion, or about 15% of the Federal budget. The difference has been interest costs. Today, the average interest rate on U.S. Federal debt is 1.98%. In 1997, it was 6.4% and total Federal debt was about $5.4 trillion. Today, it is about $16 trillion. Interest rates will not stay at this low level forever. I don’t pretend to know when they will rise. I just know it is inevitable that they will.

Conservatives are neither dispassionate nor mean. No conservative wants to do away with welfare, but we need to understand where this flood of spending is leading us. We need to understand that spending so much on entitlements limits options for other endeavors. Where, for example, will we find the funds to repair our infrastructure? Could we afford to send a man to the moon today? How will we respond should our nation be hit by another 9/11 type attack? Including interest expense, about eighty-six percent of the Federal budget is considered non-discretionary. We can raise marginal tax rates, and the Congressional Budget Office can provide an analysis that says doing so will raise x number of dollars. But what they can’t factor in is how doing so will affect behavior on the part of individuals and businesses. When, for example, does the law of diminishing returns kick in? We need meaningful tax reform, similar to what we got in 1986, with lower marginal rates and far fewer deductions and exceptions.

Reining in government spending is a herculean task. The bigger it gets, the more powerful are its constituents and defenders. Years ago, in my 20s, I was elected as a Democrat to the library board in the small Connecticut town in which my wife and I lived. Despite getting the fewest votes (or perhaps because I did!) I was named treasurer. That meant I had to go before the town meeting and request funds for the upcoming fiscal year. A wise, older board member pulled me aside and told me the first thing you have to do is make sure you spent every dime in last year’s budget, for if you don’t they will cut you back. It was a lesson, not only in government, but in bureaucracies as well. Neil Barofsky, the Special Inspector General, TARP, from December 2008 to March 2009, in his recent book Bailout, writes of a similar experience when he went to Washington in late 2008: “The priorities of government agencies, in order of importance, are: maintaining and increasing their budgets; giving the appearance of activity; and not making too many waves.” Government bureaucracies have little incentive, other than to get bigger. For government bureaucrats there are no virtues in shrinking budgets, or in reducing costs. My experience in that small Connecticut town changed me from a lefty Democrat to a fiscal conservative. We all know the road ends; we just do not know where. But the consequence of reaching the terminus unprepared should concern us all.

A country (or a state or a city) that impedes its ability to grow economically will end up forcing draconian cuts, as Greece and many European countries are discovering today, and as have states and cities within the United States. To peer into the crystal ball, one has to look no further than Central Falls, RI; Stockton, CA; or Jefferson County, AL. As Pogo once said, “We have met the enemy and he is us.” We are fortunate that the Dollar is the world’s reserve currency, so remains in demand, which helps keeps interest rates low. But that will not go on forever.

So when the current Administration, or the New York Times or Washington Post make sardonic and patronizing comments about Tea Party meetings, or when Hollywood, CNN and network TV studios speak derisively and condescendingly of Middle Americans marching for fiscal sanity, consider their fears. The Administration and mainstream media have chosen to demonize Paul Ryan because of his attempt to discuss issues they would prefer to ignore, hoping the future never arrives. It is not xenophobia that concerns them about illegal immigration and it is not a lack of compassion that drives them to cut welfare spending, it is fear that the country we all love and respect has been acting in a manner that bears no resemblance to common sense. It is the knowledge that forced cuts to social welfare programs will be far more draconian that those adopted willingly and preemptively.

It is, in fact, because Republicans like Paul Ryan and Mitt Romney have a social conscience that causes them to address current and future problems from which we, as a nation, can no longer hide, no matter the comfort that the darkness of ignorance provides. Who would be most responsible for deteriorating entitlements – those who acknowledge today’s problems, or those who will let the ship of state sail forth only to be dashed on the rocks of fiscal irresponsibility tomorrow?

“Intentional and Unintentional Consequences”

Sydney M. Williams

Thought of the Day

“Intentional and Unintentional Consequences”

August 13, 2012

The law of unintended consequences is immutable. It happens most often when the desire to achieve a particular end is so focused it ignores the consequences of the means employed to reach that goal. In contrast, there are times when the policy of an entity – government or otherwise – knowingly sacrifices people or some moral principal, in order to achieve a desired conclusion.

The most outrageous examples of the latter were the mass killings that seemed endemic to the Twentieth Century (and into the Twenty-first Century) and which were undertaken by a number of governments, from Hitler’s Germany to Stalin’s Russia; from Mao Tse-tung’s China to Pol Pot’s Cambodian killing fields; and, most recently, from the ethnic cleansings in Yugoslavia to Assad’s murder of his own people in Syria. In all cases, the governments involved clearly understood the consequences of their actions.

A more recent, but far less horrifying, example (but no less unintentional) was the decision by the Obama Administration to deliberately violate contract law in putting the interests of creditors behind the pension and healthcare obligations owed unionized workers in the “saving” of General Motors. During that same “saving” of GM, the pension plans for 20,000 non-unionized employees at GM’s Delphi auto parts unit were sacrificed, while unionized workers were made whole on their pensions. Recognizing what he had done and implicitly acknowledging that the end justified the means, Mr. Obama, in a chilling interview last Thursday, said he would like to repeat what he had done to GM across all industries.

It remains to be seen what the consequences will be of Mr. Romney’s choice for Vice President. In my opinion, Paul Ryan was a good and bold choice that could well elevate the debate over what type of country we want. Do we want to tackle the difficult questions today, or do we want to wait until such decisions are forced upon us, as is happening in California cities from San Diego to Sacramento? President Obama, thus far, has chosen to ignore the freight train bearing down upon us. Whether or not Democrats are prepared for such a discussion assumes, of course, that they will withdraw the ad that depicted Representative Paul Ryan tossing an old lady over a cliff. That the selection upsets the Obama crowd was exemplified in a piece in Sunday’s New York Times by Nate Silver who characterized the choice as indicative that his [Romney’s] team “is losing.” I would argue that the opposite is true. Mr. Romney felt confident enough to choose policy over politics. The fact is that unless entitlement reform is passed, both Medicare and Social Security will become bankrupt. Two years ago, Social Security began paying our more than it takes in. Even my grandchildren know that if they take out more from their piggy banks than is put in, the banks will, at some point, be empty. While Democrats may criticize Mr. Ryan’s policies, a $16 trillion federal debt means $53,000 for every man, woman and child in America. It is a debate that must be engaged. At nay rate, in less than three months we will learn the consequences of Mitt Romney’s pick.

Thursday’s front page article in the New York Times, “Carbon Credits Gone Awry Raise Output of Harmful Gas” told the tale of the unintended consequences of bureaucracies usurping capital markets. The United Nations and the European Union both wanted to halt, or slow, climate change. As part of their plan they established a system of credits based on what the Times refers to as a “scientific formula.” Carbon Dioxide, the most prevalent warming gas, “released by smokestacks and vehicles” (as well as all mammals, including humans), was given a value of one. All other gasses, based on their “warming effect,” were assigned values relative to that. The credits could then be sold in the market place, with the natural buyers being power plants that need to offset emissions that exceed European limits.

HCFC-22, the gas that is the subject of the Times article, is one of the world’s most environmentally destructive gasses and was assigned a value of 11,700, making the destruction of that particular gas very profitable. And, as the article points out, destroying the gas is both cheap and simple.

Third world entrepreneurs immediately saw the flaw, and therefore the opportunities, that these somewhat naïve plans offered. Since the destruction of the gas was both simple and cheap, the answer was simply to produce much more of it. David Doniger of the Natural Resources Defense Council was quoted in the article: “It turns out you get nearly 100 times more from credits than it costs to do it. It turned the economics of the business on its head.” The manufacturing of a widely used coolant gas, proved to be the most efficient way of also producing HCFC-22, which then, as mentioned, could be simply and cheaply destroyed, providing saleable credits to the manufacturer. The fact that the coolant was destructive of the ozone layer was never a concern, for their business was to produce credits for sale. Since the program began about a decade ago, 46% of all credits have been awarded to nineteen coolant factories in Argentina, China, India, Mexico and South Korea. The Times article notes that more than half the plants operated each year only until they had maxed out on the amount of gas eligible for the carbon credit subsidy. Even worse, the plants used inefficient manufacturing processes to generate as much waste gas as possible, spewing even more coolant gasses into the atmosphere.

The President has chosen a similar path in encouraging renewables in the production of energy, via the issuance of tax credits for wind and solar. Private markets develop and individuals and businesses adapt, as part of what economist Joseph Schumpeter called “Creative Destruction.” Energy is indispensible in the lives of all people, and cheap energy increases everyone’s standard of living, especially the poor. This is not the first time the world has had to change how it creates energy. In the past 200 years, the world has gone from wood to whale oil, to coal, oil and natural gas. More recently, it has adopted nuclear. There are advantages and disadvantages with all forms. The decision by the Bush Administration to push ethanol, has done little to decrease our dependency on oil, but has done a great deal in raising food prices for people around the world. It stands as another example of the unintended consequences – no matter how honorable the intent – of a bad decision made by government, while ignoring markets.

As free market advocates have argued for years, incentives drive entrepreneurs, and markets tend to work most efficiently when they are left unhampered. The involvement of government in markets, whether it is producing Chevy Volts that only the wealthy can afford (at $39,000, the Volt is priced 30% above the average price of a new car) or the crony capitalism that went into a taxpayer investment in Solyndra solar panels, too often government involvement provides the wrong incentives. This is not to say that regulation is always bad, or that a wild-west atmosphere should drive capital markets. There must be rules, but people must be wary lest the desired goal of their government causes them to be blind to the unintended consequences of their actions.

“A Future for Stocks?”

Sydney M. Williams

Thought of the Day

“A Future for Stocks?”

August 8, 2012

When the government cannot keep its own house in fiscal order, what sort of a message does that send to struggling households? When political cronyism allows a small group of investors to walk away whole from investments that cost taxpayers hundreds of millions of dollars – I am thinking of Solyndra – is it a surprise that cynicism about cronyism between finance and politics is on the rise? When criminal behavior in markets – I am thinking of Jon Corzine and MF Global – go unpunished, is it surprising that people perceive markets to be rigged? When individual investors read that Knight Capital, a firm that most have never heard, loses $450 million in a matter of minutes what does that do to investor’s confidence? With stocks lower than they were a dozen years ago, what message does that send regarding future returns?

There are certain truisms in markets. Extrapolation of the recent past generally governs behavior. Markets are not static. Greatly overvalued markets become grossly undervalued and vice versa. Because markets reflect behavior and expectations, they are impossible to quantify with any precision, despite protestations to the contrary by analysts, technicians and strategists.

The economy and politics are joined like Siamese twins. However, the more closely the two are linked, the less predictable becomes the behavior of the market. Empirical evidence suggests that government cannot make intelligent investments, as we all know too well. On the other hand, commentators like George Friedman, who wrote in an August 7th piece “Financial Markets, Politics and the New Reality,” find that, in terms of allocating capital, the recent performance of the financial community “has been equally unacceptable.” The statement, as it stands is true, but much (but not all) of the bad performance of financial institutions was forced on them by complying with regulations laid down by agencies such as the Community Reinvestment Act, and with an unnecessary assist provided by the Federal Reserve with artificially low interest rates that encouraged reckless behavior on the part of banks and individuals. Would leverage have become so universally employed had money not been so cheap?

In a recent “Investment Outlook”, Bill Gross wrote, “The cult of equity is dying.” That was news to me, because I thought it already was dead. As Vince Farrell wrote yesterday, “Money has been flowing out of equity funds like water into the Titanic. Fifteen years ago today the S&P 500 closed at 933.54. Yesterday it closed at 1401.35. That provided investors, before dividends, an annual compounded return of 2.8%. Over that same decade and a half, inflation compounded at 2.4%, leaving very little in terms of a real return. Twelve years ago, the S&P 500 closed at 1482.80, 5.5% above where it closed yesterday. Inflation only worsened returns. Andrew Ross Sorkin is right when he wrote in yesterday’s New York Times: “Let me offer a more straightforward explanation of why investors have left the stock market: it has been a losing proposition. An entire generation hasn’t made a buck.”

Trading on the consolidated exchanges has been in decline for the past three or four years. Aggravating that trend has been a concomitant increase in high frequency trading, programs in which algorithmically programmed computers trade for fractions of pennies. Such trading strategies now account for an estimated 70% of all trading. What purpose do they serve, apart from enriching a few while providing potential chaos for the many? While they purport to add liquidity, anecdotal evidence suggests the opposite. Index funds and ETFs have permitted investors to purchase baskets of stocks, ignoring individual stock selection in favor of a commodity-like approach, in which all companies within one category are treated the same. Increasingly professional portfolio managers have been able to disregard the tax effect of trading, because more and more of the portfolios they manage are comprised of tax-exempt retirement funds. This has led to shorter holding periods; technicals have subsumed fundamentals in importance. Average holding periods for stocks, which in 1975 were around seven years, have fallen to six months.

More than anything, and no matter the cause, it is a lack of confidence that is spooking investors. In large part this is simply the natural reaction of markets to compensate from previous excesses. The length of the hangover must roughly equate to the length of the party – the party which came to an end twelve years ago this past March. Market returns since have been abysmal. Technology has changed markets drastically, in terms of portfolio structure and trading; allowing high frequency traders to distort markets and front-run traditional orders. Criminal behavior has too often gone unpunished, especially in those cases where the market participants have political ties. Cronyism is a blemish difficult to erase. But most important, in my opinion, is the lack of investor confidence, which is a function of what John Taylor, the Stanford economist and author of First Principles, calls the failure of government to adhere to a “predictable policy framework.”

Businesses are sitting on about $2 trillion in cash, hesitant to invest, as they wait to see what will happen at the end of the year. Temporary fixes do not work. (One exception would be the temporary lifting on restrictions on repatriating corporate overseas cash.) The Republican plan to extend all the Bush tax cuts for a year, while better than the do-nothings in the White House and Senate, will not work. What will revise investor confidence are policies that are permanent in nature: reforming the tax code – lowering overall rates, eliminating myriad deductions and broadening the base – and dropping most of the 4000 federal rules that are sitting in the wings and which are expected, according to Investor’s Business Daily, to “saddle businesses with $500 billion in compliance costs.” Greater predictability would allow businesses to invest the money sitting on their balance sheets, which would then allow corporations to start hiring.

In 1980, Ronald Reagan was elected President. The Dow Jones closed that day at 937.20. Two months later it was up 7.25%. It then declined over the next year and a half until August 1982, as the effect of the sharply higher interest rates, instituted by Paul Volcker and supported by President Reagan, placed the country in a short but steep recession. However, their policies rid the country of inflation that had been destroying asset values, and then set it on a course for a sustained two-decade run. The problems are different today. For years, we have spent what we could not afford. As a consequence, we have too much debt. But today’s lack of confidence, in markets and institutions, mirrors the experience of the 1970s.

There are too many people in positions of power who are either ignorant of the consequences of their financial policies, or who choose to ignore them. Private and public pension plans are using too-high discount rates to determine their unfunded liabilities – meaning they are underestimating the magnitude of the problem. Bill Gross points out that the 100-year 6.6% return to stocks may prove too aggressive for a nation that is far more mature than it was a century ago. And returns to bonds, given current rates, may well prove negative over the next decade or so. Thus, using discount rates of 7% to 8% is misleading, and is another example of kicking the can down the road. The bigger question asks: Is this trend of moving away from equities more secular than cyclical in nature? I don’t know, but I suspect we remain in a long-term, secular correction from a greatly inflated market. However, unlike bonds that have seen their bull market persist in this time of economic uncertainty, stocks have been in correction for more than a decade. Valuations may not be dirt cheap, but relative valuations look attractive. There are dozens of S&P 500 companies with dividend yields in excess of the Ten-year U.S. Treasury Bond, stocks with reasonable likelihoods of dividend increases. They would appear more attractive than their bond equivalents.

We are, as I wrote at the top of this piece, prisoners of our most recent experiences. That means we are less likely to experiment with something new. The tendency is to disappear into a cocoon. As George Friedman puts it, “The latest generation of investors wants to control risk, rather than take advantage of new realities.” The bear markets of 2000-2002 cost investors $6 trillion. Much, but not all, of that loss was recovered by 2007. The subsequent market decline and collapse of housing prices cost investors and homeowners twice as much as the earlier loss. Like groggy boxers trying to lift themselves from the canvass, investors are skeptical of stepping back into the ring.

No matter which way the election goes in November, the economy will face headwinds, including an over-indebted Federal government, deleveraging consumers and a disjointed Europe. But attitudes can change quickly. A greater reliance on markets, incentives to work and predictable policies can cause investors to become convinced that tomorrow will be better than today. Renewed confidence will inject new life into the economy and our markets. Such confidence is unlikely to come from our incumbent President. Our best shot is with Mr. Romney.

“Yes! We Have No Bananas!”

Sydney M. Williams

Thought of the Day

“Yes! We Have No Bananas!”

August 7, 2012

With less than three months to go before the election (Tuesday, November 6), the rhetoric has already heated up. Once the conventions are behind us – Republicans will convene in Tampa the week of August 27th and the Democrats in Charlotte the week of September 3rd – we can expect even more explosive comments – attacks on the opposition, while pandering to one’s base.

Nevertheless, Senator Harry Reid, the grating (and certainly not ingratiating) senior Senator from Nevada, has set a standard that will be hard to beat. When syndicated columnists from such leftwing newspapers as the New York Times (Frank Bruni) and the Washington Post (Richard Cohen) call him out, we know he has overstepped the bounds of decency. Senator Reid took to the floor last week, claiming that Mitt Romney had not paid taxes for an unstated ten-year period. His alleged source was an unnamed “former Bain employee” who “whispered in his ear.” Mr. Bruni wrote that it was not enough for Mr. Reid to level the charge, but “as days pressed on, to double and triple down on it, his language and manner growing more righteous even as his evidence grew no more detailed or persuasive.” Mr. Cohen was far more direct. He referenced “The Godfather Part II”. Mr. Cohen wrote that in that movie, “…a senator from Nevada is portrayed as corrupt. His name is Pat Geary. In real life, a senator from Nevada is a jerk. His name is Harry Reid.”

Now, Godfather II was made in 1974 and Nevadans have only suffered with Mr. Reid as their U.S. Senator since 1987; so Francis Ford Coppola’s reference to a corrupt U.S. Senator was obviously not aimed at Mr. Reid. However, it is worth noting that the Senator has accumulated assets of between $7 and $10 million – not bad for a man who spent virtually his entire working life in public office. Straight out of law school he became Henderson’s city attorney; at the age of 28 he was elected to the Nevada State Assembly; in 1968. Two years later he became Nevada’s Lieutenant Governor. In 1977 he served four years as Chairman of the Nevada Gaming Commission; a year later he was elected to the House of Representatives. In 1987, he became a U.S. Senator where he has served since. Not ever having made public his tax returns, we have no idea how he accumulated so much wealth on so little income. Presumably his response would be like that of Senator Huey Long who, when asked how he had garnered so much wealth while earning so little, allegedly responded, “Thrift, my son, thrift.” However, it is more likely that we would discover that special real estate deals available only to compliant members of Congress played a role, an example of the crony capitalism that has permeated Washington.

There are examples of crony capitalism on both sides of the aisle, but to keep kicking Senator Reid while he is down: The Senator blocked plans by NV Energy to build coal-fired plants in Nevada. Thanks to Mr. Reid the request was rejected on the basis that not enough of their energy production was generated through renewable sources, even though the utility has exceeded all necessary. It turns out that the Senator has been fronting for a Chinese company – ENN Mojave Energy LLC, a firm he helped recruit to Nevada – to build a billion dollar solar energy and generating plant. By an odd coincidence, Mr. Reid’s son’s law firm has been hired by ENN. Certainly, an increase in the solar generation of electricity has long term benefits, but the costs include increases in the current cost of electricity – costs borne by the electorate. In an unrelated matter, David Plouffe, Mr. Obama’s 2008 campaign manager, accepted a $100,000 speaker’s fee in 2010 from MTN Group, a South African telecommunications company with known business ties to Syria and Iran. In a difficult economic environment, the mixture of business and politics has proved a good way to keep the wolf from the door, just ask Mr. Clinton or Mr. Gore.

Politics has always been a messy business. Party affiliation and support, with rare exceptions, has always been more important than taking the morally correct, but more difficult, high road. Richard Nixon is perhaps the most reviled President of all time. Yet, when Connecticut’s junior Senator Lowell Weicker began his investigation into the Watergate break-in in early 1973, he was blasted by his fellow Republican senators. Turning on one’s own has never been considered good for one’s future, despite the righteousness of the act. Only five Democratic House members and no Democratic Senators voted to impeach President Clinton in 1998. The Affordable Healthcare Act was passed solely along Party lines. Not one Republican voted for the Act that the President claims was the people’s choice. When House members have been cited for corruption, votes are almost always along Party lines. When Harry Reid made the accusations he did, with no supporting evidence, not one Democrat even gently chastised him. We frequently read that loyalty is a lost art in our internet-dominated world, but in politics loyalty trumps integrity every time.

The war of words, particularly those emanating from the mouths of Democrats and which are getting increasingly nasty, is a sign of growing desperation – a good thing, I believe, for the fiscally conservatives among us.

The biggest problem facing Democrats is the economy. President Obama goes out and says that the private sector has added 4.5 million jobs since his inauguration. That may be true, but he does not mention the far more important fact that there were about 146.6 million people working when he assumed the Presidency and today the number is about 140.5 million. In the meantime, the workforce has increased by about 3.5 million. Job creation has not come close to offsetting firings and new entrants. He can spin the numbers, but that will not help put people back to work. Those that are working have seen their standards of living decline. The cost of living has increased, especially for low and middle income people, with oil prices up 114% and corn prices up 59%. Stocks and bond prices have done well, but that has done little for the middle class, for whom Mr. Obama claims such devotion. And, Mr. Obama has been able to achieve these dubious results while adding $5 trillion to the national deficit.

The President knows his cause is on very thin ice, and the people do as well, which explains his personal nastiness toward Mr. Romney. It also explains the recent victories by Governor Scott Walker in Wisconsin and Ted Cruz in Texas. Further, it explains why the citizens of San Diego and San Jose said no to out-of-control spending and unfunded budget-breaking pensions. And last week we had Chick-fil-A. The President knows that his only hope is to demean Mitt Romney by taking the campaign into the gutter, a place not unfamiliar to a man who spent years listening to the hate-filled sermons of the Reverend Jeremiah Wright, reading “Rules for Radicals” by Saul Alinsky and spending time with friends like Bill Ayers.

Gallop polls put the election at a dead heat, which may or may not be accurate. But I suspect that the Democrats should be less concerned as to which voting bloc they intend to target, and more concerned with a general lack of enthusiasm for their candidate. In 2008, enthusiasm for Mr. Obama was broad, if not deep; keep in mind that John McCain, who ran perhaps the worst campaign in American electoral history and was attempting to follow a President with one of the lowest approval rates in history – a situation not unlike that of Adlai Stevenson in 1952 – still garnered 46% of the popular vote. If people stay home this November, the President’s cause may be hurt more than Mr. Romney’s.

The antics of those like Mr. Reid may be colorful, but as one commentator put it: “Like Pelosi, his mental skills are unimpressive and his personality is grating at best.” If these are the Democrat’s warriors, this fall’s elections should prove interesting to Republicans. Enough is enough. The people do not want a banana republic.

“Leftist Intolerance”

Sydney M. Williams

Thought of the Day

“Leftist Intolerance”

August 6, 2012

Intolerance is only a virtue when it is applied against intolerance. There are few people so irritating as sanctimonious Leftists masquerading as liberals, while expressing sentiments of intolerance that would be at home in Nazi Germany.

Dan Cathy, the CEO of Chick-fil-A, recently responded to a question as to whether he supports “traditional” marriage. His answer, “We are very much supportive of the family the biblical definition of the family unit.” Now I understand that Leviticus, in the Old Testament, spends a lot of time on the evils of incest, but I have no idea if elsewhere the Bible defines marriage. Nevertheless, Mr. Cathy’s comments sent supporters of gay marriage into a frenzy, despite the fact that they were the opinions of an American free to express himself.

About six hundred mayors – political correctness being the god to whom they genuflect – across the country said that Chick-fil-A was not welcome in their hallowed cities. Mayor Thomas Menino of Boston sent a letter urging them to stay away. “I urge you to back out of your plans to locate in Boston.” Mayor Edwin Lee of San Francisco said that since your company doesn’t “share San Francisco’s values” that “I strongly recommend [you] not try to come any closer.” Ron Emanuel, the compassionate Mayor of Chicago, said “that if you’re going to be part of the Chicago community, you should reflect Chicago’s values.” On the same day, the windy mayor of the Windy City put his arm around Louis Farrakhan, the notorious anti-Semite, welcoming him and his vigilantes for coming to Chicago to help end the violence that has seen a 40% increase in homicides this year. Incidentally, Farrakhan is anti-gay marriage.

Chick-fil-A began operations in 1946 and now has over 1600 stores in 39 states with sales of $4.1 billion. It is family owned and family run, but I guess government doesn’t mind telling them where they can and where they cannot locate their stores, because, of course, the family didn’t build it.

The supercilious disregard by Leftist twits for fundamental individual liberties is breathtaking. They care not for the Law or the Constitution. They are intolerant of anything or anybody who differs in opinions from the ones they express. This is not an isolated case. For years, Ivy League colleges refused to allow the military to recruit on their campuses and denied ROTC programs the right to set up shop. Right-wing speakers have been denied access to elite campuses. The Occupy Wall Street (OWS) crowds had a total disregard for the rights of people living in the neighborhoods they occupied. Left-wing media and politicians regularly gave them a pass.

For once, New York’s Mayor Michael “Nanny” Bloomberg was correct on a social issue. Mr. Bloomberg who has probably done as much damage to the concept of individual liberties as anyone around (last week he announced plans to penalize those who choose to bottle-feed their babies), so it was good to hear him criticize those who would harm a private business because of the beliefs of its CEO. “It isn’t the right thing to do and it isn’t what America stands for.” Amen, Mr. Mayor. It’s too bad you don’t feel the same way about bottle-feeding babies or 20oz sugary sodas.

People are getting fed up with government that condones this type of criminal behavior when it is done in the name of “political correctness.” A consequence (surely unintended) of these feckless Mayors’ attempts to bully a business into submission was that the fast food chain had its biggest day ever on Wednesday. Mike Huckabee went on Facebook encouraging a Chick-fil-A Appreciation Day for Wednesday August 1. More than 20 million viewed his Facebook page to learn of his suggestions. Hundreds of thousands flocked to Chick-fil-A outlets. The line at the Burlington Mall outside of Boston had an hour’s wait. Drive-thru windows were jammed. But, despite the crowds, there were no reported instances of foul tempers and misbehavior. Even Thursday’s New York Times had an article on the crowds amassing in lines waiting their turn for a Chick-fil-A sandwich. Of course they never mentioned Constitutional questions raised by so many patronizing and lawless Mayors around the Country. They did, of course, mention a BrandIndex survey which suggested that the “company’s positive perception among consumers has fallen sharply…”

In response to the overwhelming turnout on Wednesday, gay activists organized a counter demonstration on Friday – a National Same-Sex Kiss Day. With their noted, impeccable good taste, the organizers ordered a “kiss-in”, with gays descending on Chick-fil-A outlets, lips puckered and ready for love. On his regular Fox News program, Governor Huckabee indicated his support for the rights of those to protest: “If they believe that this will help their cause – to put people of the same sex kissing each other in front of families – if they believe that will encourage people to be more sympathetic, then more power to them.”

Leftist organizers have never gotten over their days of demonstrating for Civil Rights, and the antiwar protests over the Vietnam era. While I believed strongly in the Civil Rights movement, but was skeptical of the anti war demonstrations, there was a refreshing spontaneity about both. Since that period, the Left has been searching for causes. Contrivance has replaced spontaneity. The Occupy Wall Street movement was an example. A few protestors showed up in Zuccotti Park. The New York Times swooned, as did much of main stream media, giving them far more coverage than their numbers deserved. The same thing happened Friday. The Los Angeles Times reported that “the event appeared to draw far fewer people than an event earlier this week in support of the chicken chain.”

It has been protests on the right that have been spontaneous, the Tea Party being by far the most significant and important development, a fact greatly underreported by mainstream media.

The bigger message is that instinctively people understand that the country is on a dangerous track, both financially and culturally. Politicians in Washington and state capitals have been reckless with our money, promising what can never be delivered. At the same time the concept of a universal morality has been replaced with one of relativism – that there are no absolute moral truths, only subjective ones. Last week, we saw an example of the Left’s refusal to admit the primacy of culture in economic development when mainstream media condemned Mitt Romney for making such references when he was in Israel and speaking of the differences in terms of economic development the Palestinians and Israelis. Such attitudes have damaged the rules of civility that bound us as a society of diverse human beings, a society that replaced the social strata of countries from which we all emigrated.

We may disagree on many issues, but when we lose a sense of tolerance we become uncivilized in our behavior. The issue is much larger than gay rights. The L.A. Times quoted the Reverend Sarah Halverson of Fairview Community Church who said she respects Cathy’s right to speak, but couldn’t help herself, so called his comments “hate” speech. Her words are endemic with what’s wrong with the Left – intolerant illiberalism in the name of fairness and political correctness.

“Liar! Liar! Pants on Fire!”

Sydney M. Williams

Thought of the Day
“Liar! Liar! Pants on Fire!”

August 3, 2012

In response to a question Wednesday morning in Europe, Treasury Secretary Timothy Geithner said that Congress should be taking advantage of low interest rates and increase investment (spending) to bolster growth. He said that the low rates on U.S. debt indicate confidence in the American economy. “We pay about 1.5% for a 10-Year Treasury now, to borrow long term now, because fundamentally people have faith in the ability of the U.S. to solve its problems.” Either Mr. Geithner is ignorant or lying. We know he is intelligent. He must be lying.

Treasury prices (and therefore rates) are not being set by the market. They are being set by the Federal Reserve. Typically, according to Bill Gross of PIMCO, the Federal Reserve buys 10% of Treasuries issued. Last year, the Fed bought 61% of all the government debt issued by the U.S. Treasury. Net issuance last year, according to the Wall Street Journal, amounted to 8.6% of GDP, or about $1.3 trillion. Before the crisis, net issuance ran about 5% of GDP. Fed intervention makes demand seem higher than it really is, and, therefore, interest rates lower. Where the rate on the 10-Year would be without the Fed’s intervention no one knows, but it would be higher than 1.5 percent.

In 2007, just before the crisis, total Federal debt amounted to $9.0 trillion. Today, it is $15.9 trillion. Five years ago the Fed’s balance sheet was $870 billion. Today, it is $2.9 trillion. In other words, the Fed now owns approximately 18% of all Federal debt. In 2007 it owned 9.7 percent. Should the Administration continue to increase spending, as Mr. Geithner is suggesting, it places the Federal Reserve in a difficult predicament. If they do not go along with QE3, what happens to interest rates? If they do go along, how do they eventually unwind an even larger position?

As the Wall Street Journal put it in a lead editorial on Wednesday, “Sooner or later we’ll discover that their [central bankers] money illusion can’t save our economy from its more fundamental problems.” What is needed is tax reform and regulatory simplification.

Thus far, all the heavy lifting, in terms of effective economic policy, has been done by the Federal Reserve. The Administration attempted a heavy dose of Keynesian economics in 2009-2010 with the ill-fated, and now infamous, stimulus. There was a moment when it appeared bi-partisanship might work, when the President, in early 2009, appointed a debt-deficit commission. But when he ignored their findings, any hope for bi-partisanship dissipated. Following the interim elections, when Republicans took control of the House, Washington became deadlocked. So the Fed has been the only game in town. Neither the President nor the Congress has taken responsibility. Blame has been tossed every which way. There have been no mea culpas. The losers have been the American people, especially the middle class.

Nobody knows where interest rates will go, when the Fed vacates the scene, which they will do at some point. The only thing we do know is that they will go up. Interest rates have been declining for thirty years. Would the bull market in bonds have come to an end without the Fed? Nobody knows. How long will this trend continue? Again, no one knows. What we do know is that the Federal Reserve kept short rates too low for too long beginning in the mid 2000s, encouraging subprime borrowers, speculators in financial markets and helping to overheat the housing market, all of which were instrumental in causing the credit crisis of 2008. It is fair to assume that without the Fed’s intervention, interest rates today would be higher, but again we cannot know by how much. But the Treasury Secretary is being deceptive when he tells us that our low interest costs are due to the demand and faith of investors. If only that were the case. When he blithely calls on Congress for more stimuli he risks raising the costs substantially for future generations, in order to satisfy his one short term goal – the reelection of his boss.

The Administration is playing a dangerous game. They persist in the pursuit of a Keynesian answer, with government playing a leading role in markets, whether it is with General Motors and the Volt, wind and solar farms, or with the nationalization of student loans and the expansion of the Community Reinvestment Act. With a focus on the short term, they have lowered predictability and confidence, damaging to both job creators and consumers. At the same time, they are imposing enormous burdens on future generations, while limiting the ability of free markets to regenerate.

The only policy that has been deployed over the past three and a half years has been monetary. Yet, in each successive intervention, the yields have produced diminishing returns. Among the losers are savers and the retired with interest rates on commercial paper, for example, of 0.20% versus 5% four years ago. Also, losers include low and moderate income families who have seen spikes in food and energy prices, as too-low interest rates have encouraged commodity speculation.

Franklin Roosevelt once offered some good advice, but unfortunately never took it himself: “Do something. If it works, do more of it. If it doesn’t, do something else.” President Obama, in almost perfect imitation, said the same thing in Ohio a couple of weeks ago. Yet he and his Administration persist in interventionist policies, which have kept unemployment high, produced mediocre economic results and that has relied on the Fed to keep rates low and his Czars to implement executive-ordered mandatory regulatory change. Instead of heeding his own words or those of his predecessor, the President and his Administration more closely fit Albert Einstein’s definition of insanity: “Doing the same thing over and over again and expecting different results.”

The American people are intelligent. Duping them, as Mr. Geithner attempted to do earlier this week in London, is neither good economics, nor good politics. The title of this piece stems from the poem “Liar”, written by William Blake in 1810, which is somewhat more elegant than the playground taunt, but the meaning is still the same:

Deceiver, dissembler

Your trousers are alight

From what pole or gallows

Do they dangle in the night?