Congrats Obama

OK, so I guess I'm about a week late, but then again, no one really reads my blog anyways so I have a pretty flexible schedule. Regardless, congratulations President Elect Barack Obama. I didn't vote for you, I think many of your policies are wrong, but I think you're a good, honorable person and will be a major improvement over our current president (of course, my last bowel movement would have probably been an improvement).

Given that the election really came down to Obama and McCain, I'm glad Obama won. His vicotry is basically a rejection of the the Iraq War. And while I doubt Obama will start withdrawing our troops from all over the world, I do think he'll at least slowly bring that awful war to a close.

As I stated earlier, his economic policies do make me a bit nervous. Then again, McCain wasn't an improvement. I could barely stand the irony of McCain calling Obama the "redistributionist and chief" a week or so after he voted to pass the $700 billion dollar bailout (the biggest wealth redistribution in American history). Obama is not a socialist by any means, still a new New Deal is definitely not what we need right now. Hopefully he'll keep it within reason. Although with all the problems this country is facing and pressure he's facing, I kinda doubt it. Oh well. Good luck President Obama.

Getting My Vote On

Who to vote for, who to vote for? That was my dilemma last weekend as I went through and filled out my mail-in ballot. It was probably the most mind-numbingly boring experience of my entire life... so I'd like to share it with you. Don't worry, I'll skip the boring ballot measures and annexation requests and State Treasurer runoff and jump right to the real meat of the matter: Who should I vote for President.

I'll start with the Republicans. Wow, have they proven they don't deserve my vote over the past eight years. I'll say that no matter what happens, this election can't be all bad given that George Bush will be out of office in two months. And while I like John McCain as a person and definitely respect him for what he had to go through in Vietnam, I simply can't vote for him. I won't even consider it. The reason being is his steadfast support for the war in Iraq and his almost romantic disposition toward US militarism. Every prediction made by the war's supporters - that it would be a cake walk, that there wouldn't be an insurgency, that the insurgency was in its last throes, that oil would pay for the war, that there wouldn't be any sectarian violence - has been proven wrong. The surge seems to have helped stabilize the situation, but I think it has more to do with the Iraqi people segregating themselves along sectarian lines. Basically McCain was wrong about Iraq in the beginning and he is still unwilling to budge. To me, this is unacceptable.

Unfortunately it's not just Iraq with him. McCain is a super hawk, through and through. He even said in one of the Republican debates that "we lost in Vietnam because we didn't have the will to finish the job." Really John, really? Were 13 years not enough (1960-1973)? Were 55,000 dead Americans not enough? I'm just afraid that he is such a hawk that not only will we stay in Iraq for a 100 years but that Iran may be next. To fill out his resume he has admitted he's doesn't know much about the economy and Sarah Palin is inexperienced and looks kind of lost on the campaign trail. At least she's helped Saturday Night Live produce a much needed revival.

So let's turn to the Democrats, Barack Obama is tempting. All that talk of change, well it makes me think of this. He did oppose the Iraq War and comes of as uniting figure. However, if you read his anti-war speech closely, it's really not very anti-war, it's just anti-this-war. While obviously very few people would oppose all wars regardless of circumstance, Obama felt it necessary to reiterate that four times in a 921 word speech. And since when does one short speech make you passionately anti-war prior to the conflict. So Barack may just bring us back to the ineffective, scattered, naive interventions a la Bill Clinton. Oh and he hasn't pushed any legislation to end the war of even voted against funding it. Some change there buddy.

What worries me more about Obama is his economic ideas. As I mentioned in the previous post, the government is the root of our financial crisis, but the junior senator from Illinois simply blames Wall Street and only Wall Street. Overall he wants to raise taxes during a recession. Come on Barack, economics 101! Sometimes his economic policies are just plain ridiculous, such as when he was asked why he wants to raise the capital gains tax even though the last two times that was done it brought in less revenue. His answer: it's more fair. Really Barack, really? He also wants to increase spending, which will mean more borrowing, even with the tax increases he has proposed. Thereby increasing our ever growing and unsustainable national debt, which I will have to write a blog about sometime later.

So I'm saying no to the two major candidates. Aren't I throwing my vote away then? Well, I live in Oregon, which is easily in Obama's camp. So no matter who I vote for I'm throwing my vote away. I'm not against democracy by any means (although it needs to be restrained by a strong constitution, separation of powers and federalism). And I do know that if many people vote for a third party candidate en masse it could swing the election, such as with Ralph Nader in Florida in 2000. However I also know that it is simply a fact that no election has ever been decided by one vote and Oregon will go blue no matter how I fill out my ballot. So screw the major parties and call it a protest vote if you want, but I'm voting for who I want regardless of their odds.

So then who? Well I liked Ron Paul a lot during the primaries, so maybe I could write him in. He's not on the ballot, but did gain quite a following during the primaries. Paul's libertarian conservatism may be a bit simplistic, but he's one of the few politicians that Washington hasn't corrupted. I supported him until those ugly, racist newsletters saw the light of day. Paul says he didn't write them and I believe him, but it's hard to believe he had no idea what was going on. I mean the newsletter was called the Ron Paul Newsletter for crying out loud. So I guess I still respect him (and by the way his book, The Revolution: a Manifesto, is quite good), but I'm not going to write him in.

So, given my moderate libertarian beliefs I guess I'll just go with Bob Barr and the libertarian ticket. I have some beefs with the former congressman too - such as his support of the Defense of Marriage Act, a very unlibertarian piece of legislation if there ever was one - but overall he's a more restrained version of Ron Paul with out the racist charade circling him. Hey, he's as good as anyone to throw my vote away on.

Should We Blame the Market?

Watch five minutes of coverage on the financial crisis and you'll come across one general theme: the markets are to blame. We need more regulation. Go ahead, turn on CNN. How about that, huh.

With the presidential election closing in fast, both candidates, but especially Barack Obama have been pushing for more federal oversight, regulation and assistance. John McCain is less enthusiastic about the regulation, but went ahead and joined Obama in supporting the 700 billion dollar bailout among other measures. And plenty of polls have been showing that people are losing trust in the free market and believe more regulation is required.

Well is this what we should do? Did capitalism fail? Did the markets let us down like they always seem to do? Do we need our benevolent government to step in and save the day? Well if you trust the government to fix this mess you might as well ask the guy who just stabbed you to perform the surgery.

First let me start with a disclaimer, a big one at that. I do not mean to absolve Wall Street of its responsibility. On the aggregate, they screwed up badly. Some, such as Wells Fargo and Bank of America, did the right thing. They played it conservatively when housing prices were skyrocketing and now they're the one's with enough money to buy up all those who got caught up in what Alan Greenspan called "irrational exuberance." However, most of the major firms and CEO's behaved irrationally, irresponsibly and sometimes criminally.

What started this train a rollin' were the flood of sub prime mortgages made by financial institutions to borrowers who had no business buying a home. Many of these loans were interest only or negatively amortized, which basically means that the owners were relying on continued appreciation or otherwise they would be upside down (owe more than the home was worth). Many banks accepted stated income, which boiled down means the borrower simply states how much they make and that's good enough. The stupidity here needs no further elaboration. In addition, many mortgage brokers would do anything and everything they could to get people into these loans because the risk didn't matter to them, they were just in it for the commission. Finally, these mortgages were packaged into mortgage-backed securities that were then sold to investors thereby infecting the entire financial system with garbage loans. Here's a nice little primer on how the whole process worked.

Anyways, when the real estate market finally and inevitably started to take back some of its ridiculous gains, the whole deck of cards collapsed. So again, Wall Street deserves plenty of blame, especially AIG, who after being bailed out is now spending $140,000 on a party for their "top sellers."

Given all of this, you may ask how is not the market's fault you ask? Well gee, where should I begin?

Let's start with the Federal Reserve and its ridiculous monetary policy during the real estate boom. After the dot com bubble burst, the Enron and World Com scandals and the 9-11 attacks the markets looked shaky. Alan Greenspan and the Fed thought that dramatically lowering interest rates could help avert a recession. They lowered the discount rate to 1% and kept it there for about two years! This is a stupidly low rate for a ridiculously stupid period of time. It probably prevented a longer recession after 9-11 (there was still a short one) but the prosperity was all an illusion.

What such a monetary policy did was push floods of liquidity into the market. With people scarred of a tumbling stock market they turned to real estate and the bubble began to form. Housing prices and starts accelerated at record paces and builders built far too many homes and apartments. Why did they do that? Simple, they supplied what demand told them to. Unfortunately the demand was artificial, pumped up by the low interest rates. In turn people started refinancing their newly found equity and used it for all sorts of things (like big screen TVs, new cars, etc.). This spending was what made the economy run. Unfortunately, that money was not only borrowed, it was borrowed against equity that shouldn't have existed in the first place! When the market finally adjusted people found themselves with what amounted to unsecured credit card debt. And predictably the foreclosures started coming en masse.

Unfortunately, this was not the only mistake the government made. Thomas Sowell made a pretty good list, but I'll highlight a couple of the other ones for you. First it was the goal of both the Clinton and Bush administration to increase home ownership. It sounds great, but like most political inventions, these great sounding goals come with unintended consequences. One of the major ways they attempted to influence this trend was with the Community Reinvestment Act. What this program did was push lenders to make loans in poor communities. Sounds altruistic and all, but these lenders need to justify risky loans with higher rewards. So whereas politicians used to be praising banks for making risky, higher interest loans, now they are condemning them. Say what, politicians can be hypocritical... who would have thought?

Then there's the whole Fannie Mae and Freddie Mac thing. These are both government created firms that have made it easier to make home loans. Again nice sounding, but it has lead to a steady and artificial growth in real estate prices for a long time. And a little digging will expose how again the politicians cheered Fannie Mae when it made it its goal in 2002 for every American to own a home. Same old goal, same old political cheering and same old unintended consequences. Now look where we are.

There are a litany of other government offenses, but I'll stop there. The main question is do we need more regulation now? There are probably some helpful regulations here and there, but going back to a strictly regulated economy is not the answer. Whenever that temptation befalls you, just remember the airlines used to be heavily regulated and now they are not. If they still were there would be no Southwest or Jet Blue to give you cheap flights to one of the few other countries that we still have a good exchange rate with. Same goes for many other industries. In addition, we would be regulating to prevent this crisis, not the next one. As the famous military slogan goes "we must be prepared to fight the first day of the next war, not the last day of the last war." Unfortunately, the best medicine for this whole mess is probably just time. Time for the market to liquidate the bad debt so we can get back to some sense of normalcy. Then hopefully our government can maintain some semblance of a reasonable fiscal and monetary policy. Damn, good thing you can't see me because I couldn't even write that with a straight face.

Why Our Manufacturing Jobs Are Leaving (Hint: It’s Not Free Trade)

OK, pose the following question to anyone: “why has the US lost over 3 million manufacturing jobs in last 15 years?” I’d bet good money that the answer will be free trade or maybe NAFTA. It’s just common knowledge. Duh. As paleoconservative Pat Buchanan puts it “Between January 2002 and January 2007, the gargantuan U.S. trade deficit set five straight world records…If this is the fruit of a successful trade policy, what would a failed trade policy look like?” (1) Or Barack Obama who agrees with Pat on approximately nothing is actually in perfect harmony here “It's a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart.” I’ve even heard Lou Dobbs isn’t a fan. I guess John McCain still supports free trade, but never really gives a rationale for it. That seems pretty standard these days, I mean, look at the embarrassing attempts the guy defending free trade makes in this debate. Countries like China have much lower wages, fewer labor protections and environmental standards so of course every company that can would up and leave the United States if there were no trade barriers. It’s that simple.

Well, that’s a pretty good argument with only one small flaw… it’s complete, utter bullshit. It’s actually not very hard to prove this too, which I just happen to be in the mood to do. Actually, scratch that, I’ll let renowned economist Henry Hazlitt do it for me, suppose

An American exporter sells his goods to a British importer and is paid in British pounds sterling. But he cannot use British pounds to pay the wages of his workers, to buy his wife’s clothes or to buy theater tickets. For all these purposes he needs American dollars. Therefore his British pounds are of no use to him unless he either uses them himself to buy British goods or sells them to some American importer…” (2)

For all intensive purposes the United States is the only country that uses the dollar.* Every dollar that leaves our country must eventually come back. Foreigners could buy up some manufacturing plants here, but if they move them out of the country, any profits they got from the United States would still have to be spent in the United States.

So there really shouldn’t ever be a trade deficit of any major significance. Oh, but you’re saying there are. Well two points need to be made, first in general and then specifically with regards to the United States.

In general, obviously currencies don’t leave and come back instantaneously. There will be up and down cycles. It’s also hard to account for every economic transaction-taking place between individuals in one country and another. This is especially true given there are often large black markets in even the freest economies. And lastly, well governments just lie sometimes. This all becomes obvious when you look at the CIA factbook for 2007, which says the world as a whole is running a $178 billion dollar trade surplus.** This of course is impossible.

Accounting issues only explain small discrepancies though. The United States is a very peculiar case. We just happen to hold the reserve currency of the world. To explain what this is and how it came about we have to go back to the end of World War II. After the war, the Allied governments wanted to set up a system that would facilitate international trade and prevent the hyper nationalistic protectionism of the 1930’s that helped spur the Second World War. John Maynard Keynes and Harry Dexter White designed a system known as Bretton Woods, in which every country in the American sphere of influence tied their currency to the US dollar at a fixed exchange rate and the dollar was in turn tied to gold at $35 and ounce.

Unfortunately, this system was doomed from the beginning; the problem was well, it relied on a wise fiscal policy by US politicians. In 1971, after a decade of paying for guns and butter (the Vietnam war and the Great Society) by inflating the dollar, the US government could no longer justify the $35/ounce exchange rate. Foreign investors started asking for their gold and Nixon responded by closing the gold window (effectively declaring bankruptcy).

The fixed exchange rate system was eventually replaced with floating exchange rates with no gold backing. This allowed investors to set currencies values by bidding on them in relation to each other. Now this system works in principal, but unfortunately it opens up countries to currency attacks. If a government enacts poor policies, investors can leave that currency en masse. Or powerful countries can simply defund a weaker country if they don’t like its policies. Regardless, it leaves countries vunerable as illustrated by the most famous example of such currency implosions, the Asian Financial Crisis of 1997.

To avoid these crises (and store a "risk free" currency in case of other problems), governments started stockpiling dollars in reserve to act as a bulwark in case their own currency is attacked. While the dollar was the reserve currency under Bretton Woods, as well as the 70’s and 80’s, governments stockpiles really accelerated 1990’s and 2000's when China started taking off and the fall of communism brought with it a whole host of new countries who, lacking Soviet support, needed to start stockpiling dollars.

Hopefully you can see where this is going. The dollars are no longer coming back to the United States. We buy toys from China and oil from Saudi Arabia and cars from Japan and electronics from Taiwan and cocaine from Mexico and they turn around and stuff those dollars in their central banks. This does two things; first companies no longer have to buy anything from the United States, they can simply outsource their factories and then sell the dollars they collect to the host countries central bank and thus our manufacturing sector is hollowed out. Second, it gives the US government a license to print just about infinite money with out producing inflation.

So now we can have guns and butter part deux but with out the inflation. How wonderful! Unfortunately, as Herb Stein once said, “things that can’t go on forever don’t.” The dollar currently makes up 63.8% of foreign reserves with the euro in a distance second at 26.4%. Unfortunately, as you’ve probably noticed the dollar is sinking in value like a rock. We are printing so much money that central banks are becoming nervous and diversifying into the euro and other currencies. Eventually, if our dollar continues to sink they will pull the plug and all those dollars will come rushing back to the United States. If this happens, the dollar will hyperinflate overnight.

While we may very well be starring a crisis in the face, free trade has nothing to do with it. And free trade certainly has nothing to do with our dwindling manufactuing sector. Anyways, we really don’t even have free trade, as NAFTA and the WTO are managed trade agreements that have plenty of tariffs and subsidies snuck into them. As Milton Friedman said when Charlie Rose asked him about the proposed Central American version of NAFTA “I discovered it was a thousand pages long and every page has exceptions to free trade. It’s not a free trade agreement.” (3) Still, what we have isn’t rampant protectionism either. However, if we just throw up a bunch of tariffs right now other countries would simply retaliate (or possibly sell off their dollars) and prices would rise with out our manufacturing sector returning. It would be Smoot-Hawley all over again. It’s that simple.



*There are technically 10 small countries that also use the dollar (usually secondarily to another currency). However, since the dollar is usually secondary and the countries are small this has a relatively small effect on trade balances. In addition, the fact these countries use the dollar is simply more evidence of the whole dollar hegemony problem.

**The CIA doesn’t have data on seven small countries and a few have old data. However, every country with old data has a deficit/surplus fewer than 100 million dollars and similar estimations can be made for the seven exclusions which include the likes of North Korea. These discrepancies certainly wouldn't even get close to adding up to 178 billion dollars.


(1) Patrick Buchanan, Day of Reckoning: How Hubris, Ideology, and Greed are Tearing America Apart, Pg. 203, Thomas Dunne Books, Copyright 2007

(2) Henry Hazlitt, Economics in One Lesson, Pg. 70, Laissez Faire Books, Copyright 1979

(3) Milton Friedman, An Hour with Nobel Prize-winning economist Milton Friedman, Charlie Rose, PBS, 12/26/2005