WILL THE DEREGULATION STUPIDITY NEVER END?

Here’s an article written by Newt Gingrich in Forbes.com. It's not his best work ...

Newt’s trying to set a story-line that suggests the market collapse we’re seeing today is a result of faulty regulations, and not underlying structural problems. In a few words, he’s saying don’t just look at collapsed prices. Think about what you could get for financial instruments if the markets were fine. To fix the problem Newt’s calling for another set of accounting standards because … well, it will help fix market prices.

Let’s see. At the end of each day, financial instruments are valued at the price they can fetch out on the open market … and that's a bad thing? It is according to Newt Gingrich. Here’s Newt’s explanation (Mumbo-Jumbo Fair Warning ... skip to the next paragraph, for my translation):

Because existing rules requiring mark-to-market accounting are causing such turmoil on Wall Street, mark-to-market accounting should be suspended immediately so as to relieve the stress on banks and corporations. In the interim, we can use the economic value approach based on a discounted cash flow analysis of anticipated-income streams, as we did for decades before the new mark-to-market began to take hold. We can take the time to evaluate mark-to-market all over again. Perhaps a three-year rolling average to determine mark-to-market prices would be a workable permanent system … It is not widely understood that the adoption of mark-to-market accounting rules is a major factor in the liquidity crisis which is leading companies to go bankrupt. But it is destructive to have artificial accounting rules ruin companies that would have otherwise survived under previous rules.

Got that? Don't worry. I've put this through my "Newt B.S. 'O Meter." Here’s the English language translation ...

Newt Gingich wants to change the rules so we can revalue all the ugly financial instruments that are currently worth 20-30 cents on the dollar (if that). He thinks we should value these financial instruments on a three year average. You know, so the financial instruments, and the financial institutions holding them, don’t have to suffer the consequences of “impaired” values of a collapsed market. Best of all, no one gets their feelings hurt because they're sitting on trash (OK, I threw in that last one).

If you’re still having trouble getting a hold on Newt’s proposal, let’s try this. Assume you own a home with an average value of approximately $500,000 over the past three years. Today, the home is worth $325,000. According to Gingrich’s logic you should be able to value your home according to its three year average.

This might be enticing (and exciting) if Newt was talking about your home. However, Newt’s not talking about your home. He’s talking about the market instruments that got us into this mess! Under Newt’s plan the value of your home will still be sucking wind. And the market instruments that got us into this mess? Well, they’ll start going up.

But don’t worry, says the Newtster. Once the big guys start making money, the markets will stabilize, so you’ll win in the long run (if you've heard that story before you're not alone).

But let’s assume Newt was talking about the value of our homes. Can you imagine going to your bank, and then saying “How about an equity loan? My house is worth $325,000 on the market … but the average value has been $500,000 … so give me $100,000 … even though I'm up-side down and owe $400,000.” Or, can you imagine turning over your $325,000 house to the bank and telling them "It’s worth $500,000, so pay me the difference"? Better yet … well, you get the picture.

Does this make sense to you? It does to Newt, and a whole bunch of republicans too. And it’s all proposed in the name of deregulation … you know, to help markets function better.

This is the kind of republican-led deregulation proposal that got us into the market mess in the first place. Rather than look at the real problem (poor oversight, greed, and stupidity) Newt Gingrich wants to do some creative accounting …

And here’s the kicker. CFO.com is telling us that the nations’ chief financial officers are saying we don’t need Newt’s plan. A couple of turns of the screws have already helped.

Worst of all for Newt is that the investment community actually like the bailout plan. They also reject the notion of suspending current accounting methods - which Newt wants to do - because rock bottom prices will keep the government from paying too much for garbage in a bailout. They're actually looking out for America's financial interests.

I wonder who Newt's lobbying for these days ...

- Mark

PALIN'S "DO-OVER"

Incredible. Sarah Palin gets a "do-over" with Katy Couric. And she brings her Dad along.



It was bad enough that the McCain camp wouldn't let her out in public to comment on the first presidential debate. Now McCain's running around holding her hand during her Couric "do-over"? Palin should have gone alone.

This clip is uncomfortable to watch, and embarrassing.

- Mark

CONGRESSMAN COSTA COMMENTS ON THE BAILOUT VOTE

Here's Congressman Costa's comments on the vote for the financial rescue package ...

“American business owners on Main Street are feeling the effects of the current crisis on Wall Street, and I was not willing to put American businesses and farms at risk. I supported this legislation to avert a financial crisis that, in a worst case scenario, could turn our current recession into a deep depression. It’s the economic irresponsibility of the Bush Administration’s financial policies over the last seven and a half years that have largely put us in this problem.

However, we now must go back to the drawing board to craft legislation that can receive bipartisan support to ensure that our financial system does not crumble before our eyes. I am disappointed we did not pass this legislation and I will work with my colleagues to see our nation through this challenge.”

Congressman Costa hits the nail on the head when he points to the Bush administration's policies as contributing factors to this mess.

Some republicans, it appears, don't appreciate such straight talk and voted against the bailout proposal because Nancy Pelosi said pretty much the same thing when she announced the proposal yesterday.

We have perhaps the greatest financial crisis in our nation's history staring us in the face, and republicans are whining because of a little straight talk? We can't fix a problem if we never acknowledge what it is. Republicans would rather kick things around until they can cloud the analysis with double-talk ...

Kudos to Costa for pointing out the obvious.

- Mark

WHAT A MESS ...

Congress rejected the bailout proposal with 228-205 vote and market players are starting to panic. When it became clear what was going on in Washington the Dow dropped almost 700 points ...

Here's how our representatives voted: Rep. Jim Costa, YES; Rep. Kevin McCarthy, NO.

Here's what we have: Republicans killed the deal ... George W. Bush no longer has any influence over his party ... John McCain's "return to Washington" publicity stunt has been exposed for being just that, a publicity stunt ... the global market MSCI index has tanked 5.9%, the steepest decline in its 38 year history ... and global market players are so spooked that the Fed appears to be taking matters into their own hands ...

What a mess. Stay tuned.

- Mark

THE ROOTS OF MARKETS AND WEALTH

As per my comments on the radio program today, here's a segment from my forthcoming book, THE ROOTS OF MARKETS & WEALTH. This portion - from Chapter 10, "An Empire of Debt ... Violating Adam Smith's 'Laws of Nature'?" - examines the republican myth about Reaganomics. Specifically, I argue that "laissez-faire" policies (taking government out of the market) played a supporting role, at best, in helping the nation's economy recover and grow during the 1980s. The implications for policymaking are obvious ...

REAGANOMICS: STATE-LED RECOVERY … DEFICIT SPENDING ORGY
Upon entering the White House in 2001, the center-piece of President George W. Bush’s economic program was rooted in Ronald Reagan’s supply-side economic policies. He reasoned that by putting more money in the hands the nation’s wealthy that investments would increase, which would create more jobs and generate more tax revenue.

Insisting that the Reagan administration’s policies got the economy moving the Bush administration promised that just as Reagan saved the American economy from stagflation and misery that his tax-cutting, favor-the-rich, plan would reinvigorate the American economy. While the rhetoric was strong, a careful read of the facts illustrates that the Bush administration misread both Reagan’s accomplishments and history.

To understand what President Bush was trying to emulate in 2001 it’s necessary to recall the conditions that Ronald Reagan inherited, and supposedly tamed while in office. With inflation (12-13 percent) and interest rates (20 percent) reaching new heights in the late 1970s, and with unemployment on the rise (around 6 percent), both confidence and investment were lagging in America. The result was a new term in the field of economics and a fresh challenge in American politics: Stagflation (recession, low productivity, and inflation). By the time Ronald Reagan left office inflation and interest rates were back down to single digits, while unemployment hovered around a more acceptable 5 percent.

Because of these developments, conservatives and ill-informed talk show hosts like to claim that a combination of tax cuts, deregulation, bureaucratic reform, and assorted incentives created the environment for investment that energized the economy. Indeed, according to revisionist historians the Reagan administration was able to get America moving by reducing the size of government, cutting government spending, and getting “government off of our backs.” This would be an interesting by-line except for one thing. It’s not true.

First, it’s interesting to note that job creation under Ronald Reagan never matched the levels achieved under Jimmy Carter, while the size of the federal government’s workforce grew from 2.8 million employees to 3.1 million. In fact, the number of federally subsidized programs under Ronald Reagan was scaled back only to 1970-1975 levels, which helps explain why the Reagan administration hardly put a dent in the size of government.

Acknowledging this, in 1985 Fortune magazine wrote that the “budget is way out of balance because of a little-known fact: real federal spending, adjusted for inflation, has climbed even faster under President Reagan than it did in the Carter years.” In the end, in spite of what the supply-side supporters promised, the national debt almost tripled from approximately $930 Billion to $2.7 Trillion under Reagan.

So what created the conditions for the American economy to stabilize in the late 1980s, and take off during the 1990s? Primarily three factors: all of which undermine the Bush administration’s second-coming-of-Reagan claim (they also pretty much debunk the “first-coming-of-Reagan” claim too).

On the inflation front, we find that OPEC – an oligopoly that depends on cooperation to sustain itself – found its solidarity undermined by late 1981. With the beginning of the Iran-Iraq War, which Saddam Hussein initiated in part because the ayatollahs were fomenting fanatic revolution in Iraq, black markets in the oil industry grew as cheating on the part of the two combatants began (to fund their war efforts).

In addition, conservation efforts, alternative energy sources, new oil discoveries, among other developments, helped to stabilize oil prices. But these efforts were initiated by President Ford and, to a larger degree, by President Carter. Still, the reality was OPEC unity – one of the primary catalysts behind price hikes – had unraveled, while government-inspired conservation efforts paid off. As the price for oil dropped, so did inflationary pressures.

We also need to recognize a second force on the inflation front. Recall the strategy employed to control inflation was taken up by Federal Reserve Chairman Paul Volcker. In spite of pressure from the Reagan administration, who initially wanted to expand the money supply, most economists agree that by sticking to his guns, and maintaining a stringent monetary policy, Mr. Volcker helped to slay the inflation dragon. Critical here is that Mr. Volcker was appointed by Jimmy Carter, and not Ronald Reagan.

Finally, the Reagan administration’s deficit spending broke all previous records. In fact, his administration spent twice as much as the previous 39 presidential administrations combined, in the process using taxpayer funded debt to deposit hundreds of billions of dollars into the national and global economy each year. This government induced “pump priming” was an artificial stimulus – what economists call a “Keynesian stimulus” (Chapter 9) – and was hardly a vote of confidence for laissez-faire economics.

In sum, cracks in OPEC unity, conservation efforts, a tight monetary policy, and a state-led stimulus to our larger economy suggest that the Reagan administration’s policies were, at best, a supporting rather than leading factor in reversing the dismal economic environment of the 1970s.

Perhaps more importantly was how Ronald Reagan used the state to make favorable legislation for industry a standard state function, while turning hostility toward labor into a conservative virtue. Combined with record budget deficits, the Reagan years helped create an economy supercharged by deregulation and debt. But worst of all is how his policies worked to undermine the laws of justice Adam Smith argued was necessary for markets to function efficiently and equitably ...

- Mark

BAILOUT HUMOR

While bailout politics is serious stuff, this TT comic captures the moment ...


As usual, if you can't read the font, click on the comic.

- Mark

DEBATE COMMENTS ...

While I think the blow by blow on the foreign policy issues produced a draw, Obama clearly won on style and expectations.

This was McCain's stage, and his opportunity to bury Obama on foreign policy/commander-in-chief issues. It didn't happen. John McCain never looked at Obama, and seemed surly. Obama looked calm and patient. Perhaps more importantly, because foreign policy was supposed to be his primary weakness, by standing toe to toe with McCain on the issues Obama came out ahead on this one.

McCain did make a couple of mistakes. Pakistan was not a "failed state" when Musharraf came to power (in a military coup). He also seemed to elevate Obama's foreign policy mojo by trying to paint Obama as potentially wreckless for wanting to go after al Qaeda in Pakistan. Obama actually looked better, and more presidential, after the fact.

Again, this was McCain's stage. It should have been a cakewalk. Instead, it was a draw on the issues. Obama won.

- Mark

UPDATE: I can't believe I forgot to write this one down ... As Joe Biden points out, McCain made another mistake. McCain can't distinguish between strategy and tactics. Here's Biden explaining it ...

ALASKA MUST BE PROUD, II ...

Jack Cafferty nails it ...



- Mark

P.S. I showed this to my 10-year old (as a lesson) and she started laughing. I'll discuss the part she started laughing at during the program.

McCAIN'S RETURN TO WASHINGTON ... PATHETIC GRANDSTANDING

From TheHill.com, it looks like John McCain - who has already said he's clueless about economic issues - really had no business returning to Washington.

Specifcially, McCain (1) sits on none of the congressional committees doing the bailout proposal work and (2) hasn't sponsored a single banking bill during this Congress. Barack Obama, on the other hand, has 5 bills within the Banking Committee's jurisdiction. From what I can see, 3 of them touch on bailout proposal issues.

John McCain ... Putting McCain First.

- Mark

ALASKA MUST BE PROUD ...

I don't know how Tina Fey or the crew at SNL can top this material ..



- Mark