Tuesday, March 31, 2009

The Pain of Being Right

I can say with the utmost sincerity that I take no comfort in being right in my warnings about President Obama and some other things - like the dangers of FANNIE and FREDDIE (which can be found on this blog over the few months preceding the election and in my many emails over the last few years).

In fact, I write now with a heavy heart. I wish I had been wrong, I really do. I wish I could have been pleasantly surprised by the moderation and incipient conservatism of President Obama. Maybe I still will; I hope so. But, as I am coming to learn more about "what makes him tick" I have less and less expectation of this. My wife has taught me that one's strengths are often also one's weaknesses. So it is with Obama. He is a man of vision (maybe a vision borrowed from an earlier time, but a vision nevertheless). He has opinions, he has insight. He is eloquent, despite the increased use of the teleprompter. But it is this very vision that is his problem. He is dedicated to it and he is going to pursue it even in the face of severe obstacles. He displays these qualities of dedication and perseverance, admirable in themselves, but fatal in pursuit of flawed goals.

Here is what I was right about.

  1. For years I have warned about the dangers of taxpayer exposure resulting from the government underwriting of the exploding mortgage debt in quasi-government agencies. Not my insight of course. I used the authority of those I respected from the WSJ, Barrons, and other publications to alert my students and my email list participants. But, in truth, I never anticipated that it would be this bad. Denial is a strong mechanism. And by the way, the real villains are not the AIG executives who received bonuses, or the bankers. The real villains are, among others, Barney Frank, Chris Dodd, and Nancy Pelosi. We ought to throw garbage on their lawns or, better still, indict them. 
  2. For years I have warned about the dangers of propping up the American automobile companies. There is no doubt in my mind that the auto unions played a large role in this fiasco. And this ought to teach us something. 
  3. I warned that Senator and candidate Obama had endorsed the bill now going through Congress that will do more to strengthen the declining power of labor unions than any piece of legislation in the last fifty years. This bill will scrap the right that workers now have to vote by secret ballot on the issue of unionization. The President is behind it. While he is talking tough on GM and Chrysler he is supporting the establishment of union power elsewhere. This is VERY bad news. Unions are a curse on prosperity. They are violence-prone legal monopolies. We are going precisely in the wrong direction at the worst possible time. 
  4. I warned repeatedly about this president's environmentalist inclinations. I warned that he would try to use the crisis to foist expensive, "clean" cars on the American public. And with his increased power over the auto manufacturers this is exactly what is talking about doing – at the taxpayers' expense of course. Carbon taxes and jobs "created" by subsidizing clean energy are also in the mix. And for what? For economically destructive outcomes that do little if anything at all to reduce the pace of this alleged global warming. Everyone agrees that, if it is true, there is very little we can do about it short of crippling the world economy into starvation. 
  5. I warned repeatedly about the potential for crisis to bring protectionism. The world has made giant strides in expanding world trade and benefiting hundreds of millions of people at home and abroad in the period since WWII. Now with the crisis, predictably, but stupidly, countries, the U.S. included, are putting up trade-barriers in the name of protecting jobs. This is a recipe for Depression (with a capital D). Trade creates jobs. Even expanding imports create domestic jobs. Restraints and barriers to trade destroy jobs. 
  6. And, with appropriate irony, heavy-handed environmentalism, in the name of climate-policy, has now been linked to protectionism. There is talk now of using trade policy to punish those countries who do not match our levels of carbon taxes on their industries! A double whammy – high taxes and higher tariffs. One could be forgiven for thinking that the aim is to destroy the economy to achieve a kind of pathetic equality – we will all be equally poor and miserable – but at least we won't be envious any more, right?

It all adds up to rapidly expanding power. The president's inclination to use the first person, as in "this is what I am going to do" should give us pause. This is a power-grab, have no doubt. His supporters know this. They have forgotten the lesson that power, in itself, is a dangerous thing. No matter that when the cronies of the much-maligned Bush the younger stealthily pushed the power of government through mechanisms like the Patriot Act, executive initiative, etc., the current Obamites cried bloody murder in the name of freedom. But, now that their government is expanding its reach into our lives and our pockets at a rate which dwarfs even the worst of the Bush excesses, they are strangely overjoyed. This is easily explained of course. Its not arbitrary power that they are against. It is power for those with whom they disagree that is the problem. As long as the "right people" are in charge (an echo from J.M. Keynes) we will be alright. Then it is power for good. This is hubris at its most dangerous, this is, as F.A. Hayek has taught us, the Fatal Conceit, this is the Road to Serfdom.

The right people do not necessarily know what to do and how to do it. The right people have to rely on others in a giant and unpredictable and slow, corrupt bureaucracy. And the right people invariably get replaced or controlled by the wrong people.

Here are some things I hope I will be wrong about.

  1. The current bailout will not work. Because of it the recession will deepen and last longer than we expect and hope. Attempts to "save" homeowners amount to trying to re-inflate the bubble at precisely the time when resources ought to be moving elsewhere. So recovery will be postponed and savings further depleted. And bailout money will continue to be spent in ways that produce scandal and outrage.
  2. The liquidity behind this bailout, an explosion of the money supply, accomplished by Federal reserve purchases of Treasury bonds, will produce inflation, rising interest rates, rising government debts, rising taxes, falling real incomes and wages. Chairman Bernake tells us inflation is no problem and the money will be "mopped-up" when the time is right. When will that be? And how will it be done? In order to reverse the explosion in liquidity the Fed will have to sell the bonds it has been purchasing. Who is going to buy them? At what prices? In order to sell them, when the economy is healthy again, the Fed will have to lower their prices (aka raise interest rates). This is politically very unpopular, especially during recoveries. (Even if it could be done, it would mean a massive increase in the national debt held by the private sector, implying large future tax liabilities to pay the interest.) So forgive my skepticism. Kiss those bonds good-bye. The money is here to stay, and once it begins to circulate more rapidly, prices will rise, and the rest will be history. Remember that American word Stagflation. 

I REALLY hope I am wrong.

Monday, March 16, 2009

I Protest

NPR - The Diane Rehm Show. 

Dear Diane,  

I am a long-time listener. Although I frequently find myself in disagreement with your guests, and also with your implicit and sometimes explicit, presumptions, I respect the quality of your program and your own particular dedication as a radio-journalist-editorialist.  

I am writing to register my strong protest against the un-rebutted slurs and misstatements made recently on your program - in the two morning shows, one after the other. The subject concerned the withdrawal of the nomination of Charles Freedman as President Obama's chairman of the National Intelligence Council. The statement was made, a few times, that his withdrawal was simply another instance of the power of the Israel Lobby that has produced a reluctance on the part of the media in general to have an open discussion of the Israel-Palestinian situation. Reference was even made to the scurrilous and largely discredit article by Melshheimer and Walt. 

Space considerations prohibit my providing a complete response to these remarks. However, I urge you please to consider doing some in-depth research on these issues. You might start with two of Alan Dershowitz's recent books - The Case for Israel and The Case Against Israel's Enemies (I wonder if you have ever had Professor Dershowitz on your show). The truth is the exact opposite of what was asserted. The media (excepting the shrill right-wing radio talk shows, and Fox in general) is actually constitutionally biased against Israel. It has been well documented that the media coverage during the latest Gaza action was scandalously distorted - to the point of reporting as news what later turned out to be outright lies (as in the case of the UN school that was never bombed). There has never been an honest, open accounting of the activities and finances of Hamas who steals American taxpayer money donated to the UN. Israel's enemies are all dictatorships. They lie with impunity and refuse open investigation by the media. Israel is a democracy with a critical internal press. Israel's actions are routinely and openly examined and criticized in spite of the power of AIPAC or any other pro-Israel lobby.  

On the other hand, there are numerous, effective pro-Arab-anti-Israel lobby groups. Billions of dollars of Saudi money is being used to fund "Islamic Studies" departments in this nation's universities in which hatred of Israel (and America) is being taught. Numerous "panels" are being organized in which pro-Israel proponents are denied a voice. I have personally witnessed one of them at Binghamton University - (see for yourself here). There is absolutely no shortage of analysis of Israel's actions.

Charles Freedman's views need to be examined. When they are you will find him unfit to fill the position for which he was nominated. Both in regards to the far-east and the middle-east his position is quite extreme and very idiosyncratic. To attribute his withdrawal to the actions of the "Israel Lobby" was quite unjustified. The rush-to-judgment of your guests, without so much as a mild protest from you, was most unfortunate.  

I will continue listening to your show and hope never to encounter this type of event again.  

Best wishes, 
Peter Lewin 
Clinical Professor, Economics 
University of Texas at Dallas 
School of Management