United Liberty

I.O.U.S.A., a great documentary on the problems with our nation’s debt, has been put online for streaming. I don’t agree with some of the suggestions offered, but it’s well worth watching to get a sense of how much trouble we’re in.

While you’re watching, keep in mind that the national debt has soared since this documentary was released in 2008 to $13.1 trillion.

You can watch it below in its entirety.

In doing some research I came upon the following quote:

“Whenever commodity prices are far removed from a stable relationship with the alleged gold content of the monetary unit concerned, there is something, probably more than one thing, seriously wrong. Included in the maladjustments may be extensive abuse (misuse, unwise use) of the banking system with resulting inflation, serious overexpansion of capital facilities in various lines, unwise speculation in tulip bulbs, commodities generally, Florida lots, common stocks, Canadian mining stocks, or what have you, and possibly serious distortions among wages with steel workers getting more than college professors, etc.

“How anyone can imagine that all such distortions, maladjustments, abuses, etc. can be miraculously cured by devaluation is beyond me. Devaluation simply satisfies the most ardent pressure groups for the time being and greases the skids for the next slide by gradually destroying the stable middle-class element of society; it confirms all the unwise in their unwisdom; makes unsound banking look like sound banking; and, after two or three doses, virtually assures the ultimate destruction of the monetary unit as the strengthened pressure groups demand more and more. Such, in my opinion, is the obvious lesson of history, ancient, medieval, modern, and recent. Perhaps things will some day be different, but I doubt that.”

As I read this I couldn’t help but think how right he was. Everything he described has come to fruition today.

The date? 1953. The writer? Edward C. Harwood, founder of the American Institute for Economic Research. Would that such wise men were still around today.

Nick Gillespie of Reason.tv explains why financial “reform” will do nothing to prevent taxpayer-funded bailouts. The video points that Congress will “codify the idea that the government will make sure certain institutions can never fail.”

Yesterday, I posted an article by Art Laffer about the chances of a double-dip recession due to the expiration of the Bush tax cuts in 2011. Before I go any further, it’s worth noting that Laffer, a Keynesian, tends to be more political in his work. He toes the party line at almost all costs.

My friend, Jorge Gonzalez, notes that not all free-market economists are predicting this, citing information posted over at Carpe Diem by Mark J. Perry.

Perry is referring to the recent model released by the Federal Reserve Bank of New York, which paints a rosy picture of the economy:

The Fed’s model (data here) shows that the recession probability peaked during the October 2007 to April 2008 period at around 35-40%, and has been declining since then in almost every month. For May 2010, the recession probability is only 0.17% (about 1/6 of 1%) and by a year from now in May of next year the recession probability is even lower, at only 0.12%.

According to the NY Fed Treasury Spread model, the recession ended sometime in middle of 2009, and the chances of a double-dip recession through May of 2011 are essentially zero.

Fair enough. Federal Reserve Chairman Ben Bernanke says the economy is recovering, just slowly. He was also blindsided by the recession that hit us in 2008.

The financial bill that is being pushed in the Senate will give the federal government more power to collect information about purchasing habits of Americans:

Big Brother wants to watch you more closely. Especially how you spend your money.

His latest snooping plan comes from provisions in the banking bill being debated in the Senate. The bill is being pushed by Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee. Among other things, the bill is supposed to alert regulators to hazards in the industry to prevent another financial meltdown like the one that started in September 2008, and to make it easier to spot rip-off artists like Bernard Madoff.

The bill sets up two new supersnooping federal agencies to collect data on ordinary Americans:

•The Office of Financial Research. This supposedly would predict risk in the system by collecting massive amounts of new financial data, such as patterns of credit card use.

•The Consumer Financial Protection Bureau. It would collect data, especially on consumer transactions.

The data are supposed to be “scrubbed” of individual identifiers, so your privacy would be protected. But that might not work, Mark Calabria told us; the director of financial regulation studies at the Cato Institute formerly was a member of the senior professional staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

As noted on Monday, Sen. Bernie Sanders (I-VT) sold out on his amendment to Audit the Fed, opting for version that doesn’t audit monetary policy. It was passed without opposition by the Senate yesterday.

As Rep. Ron Paul (R-TX) pointed out in his weekly Texas Straight Talk column, there is some good to the Sanders amendment, but it wasn’t enough:

[A]greements with foreign central banks are not touched by the new Sanders Amendment language. At a time when Greece, Portugal, Spain and other countries are experiencing dire financial crises and have their hands out to the international community, we need to know if our Federal Reserve is at all involved in bailing them out. As weary as we are of bailing out companies, the American people would not stand for bailing out entire countries. Our government is wasteful enough in its own affairs without contributing to the waste of other countries. Yet the Fed currently has the tools it needs to do just this, and to do it in secret.

Those of us that support the Audit the Fed legislation were snubbed last week by Sen. Bernie Sanders (I-VT) as he accepted a watered-down version of the measure:

Senate Democratic leaders cleared two major obstacles Thursday to winning passage of a Wall Street reform bill, beating back a Republican effort to curb the reach of a new consumer agency and striking a compromise on a watered-down bill to shine a light on Federal Reserve activities.
[…]
it took an aggressive last-minute lobbying effort by White House, Treasury and Federal Reserve officials to win a compromise on the Fed amendment. The original language called for a “comprehensive” audit of the Fed’s activities, most of which historically have been kept from public view.

Sen. Bernie Sanders (I-Vt.), the chief sponsor, struck a deal on the Senate floor to limit the scope of the one-time audit to only the Fed’s emergency lending to banks, allaying concerns that a review would have interfered with interest rate decisions.

“At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer. The American people have a right to know,” Sanders said. “This amendment is not a radical idea.”

Rep. Ron Paul (R-TX) says that Sanders sold out since the compromise, which can be read here, leaves out an audit of monetary policy. Sanders admits the version passed by the House was stronger, but still feels his compromise is meaningful.

If current projections hold, the United States may find itself in Greece’s position in eight years, or maybe sooner:

Spiraling debt is Uncle Sam’s shock collar, and its jolt may await like an invisible pet fence.

“Nobody knows when you bump up against the limit, but you know when it happens it will really hurt,” said fiscal watchdog Maya MacGuineas of the Committee for a Responsible Federal Budget.

The great uncertainty about how much debt is too much has tended to make fiscal discipline seem less urgent, rather than more. There is no obvious threshold beyond which investors will demand higher real yields for holding U.S. debt. Vague warnings from ratings agencies about the loss of America’s ‘AAA’ status haven’t added much clarity — until recently.

In the wake of the financial crisis and recession, Moody’s Investors Service has brought new transparency to its sovereign ratings analysis — so much so that 2018 lights up as the year the U.S. could be in line for a downgrade if Congressional Budget Office projections hold.

The key data point in Moody’s view is the size of federal interest payments on the public debt as a percentage of tax revenue. For the U.S., debt service of 18%-20% of federal revenue is the outer limit of AAA-territory, Moody’s managing director Pierre Cailleteau confirmed in an e-mail.

Under the Obama budget, interest would top 18% of revenue in 2018 and 20% in 2020, CBO projects.

Click on the image, on the next page the poster allows you to zoom in.  It’s the best way to view the Federal Budget.  It compares it to the previous year.

For a couple of years now we’ve heard that deregulation is responsible for the financial crisis. Veronique de Rugy sets the rhetoric straight:

The great villain in the deregulation myth is the Gramm-Leach-Bliley Act, signed into law by Bill Clinton in 1999, which repealed some restrictions of the Depression-era Glass-Steagall Act, namely those preventing bank holding companies from owning other kinds of financial firms. Critics charge that Gramm-Leach-Bliley broke down the walls between banks and other kinds of financial institutions, thereby allowing enormous systemic risk to percolate through the financial world. This critique is the keystone of the “blame deregulation” case, but it doesn’t hold up: While Gramm-Leach-Bliley did facilitate a number of mergers and the general consolidation of the financial-services industry, it did not eliminate restrictions on traditional depository banks’ securities activities. In any case, it was investment banks, such as Lehman Brothers, that were at the center of the crisis, and they would have been able to make the same bad investments if Gramm-Leach-Bliley had never been passed.

Another common claim, that credit-default swaps and other derivatives left unregulated by the Commodity Futures Modernization Act of 2000 were a cause of the financial crisis, doesn’t stand up to scrutiny, either. Research by Houman Shadab of the Mercatus Center has shown that this argument is undermined by its failure to distinguish between credit-default swaps, which are simply insurance against loan defaults, and the actual bad loans and mortgage-backed securities at the root of the crisis. Stricter regulation of credit-default swaps wasn’t going to make those subprime mortgages any less likely to go bad.