Nicole Gelinas has been one of the most astute observers of how government has screwed up the financial system and her column in the Washington Examiner
is an excellent summary of why the Dodd-Frank bill is a step in the wrong direction.
For 25 years, Washington has done everything in its power to subsidize Americans’ profligate borrowing habits. Debt became the fuel for economic growth. Washington subsidized the financial industry’s borrowing through implicit guarantees against loss. The feds first started rescuing creditors to “too big to fail” banks in 1984. Since then, it’s become clear to lenders — Wall Street’s global bondholders and trading counterparties — that the government would save them anytime a large financial firm foundered. Indemnified against losses, bondholders could lend nearly infinitely to Wall Street. Wall Street found creative ways to lend that money right back to the public, through mortgage brokers and credit card marketers. …The Dodd-Frank bill is a monument to the status quo. Despite promises that the bill will end bailouts, it enshrines bailouts into law. It provides for an “orderly liquidation authority,” for example, which allows “systemically important” financial firms to escape bankruptcy and to escape, too, consistent losses for their creditors. It also sets up a fast-track procedure through which the White House can ask Congress for guarantees for Wall Street’s lenders in a future crisis. In effect, the government is saying to Wall Street’s lenders: Carry on as you did before 2008. Ordinary Americans, though, understand that they can’t go on as before. Since 2008, they’ve started paying their debt back. The process is painful. As Americans borrow less, they spend less and pay less for houses. But as Americans pare back their debt, the economy will begin to heal permanently. As house prices fall, for example, because less borrowed money exists to send them higher, Americans will have more money left over after paying the mortgage. They can invest that money in the stock market for retirement. Those funds, in turn, will go to entrepreneurs who create jobs outside of the financial industry. The Dodd-Frank bill would pervert this healthy process. It would pit Washington’s too-big-to-fail subsidies and Wall Street’s creativity against Americans who are trying to do the right thing for themselves and the country.
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Posted in Big Government, Class warfare, Debt, Deficit, Fiscal Policy, Government intervention, Government Spending, Great Depression, Higher Taxes, Keynes, Keynesian, Obama, Recession, Roosevelt, stimulus, Tax Increase, Taxation, tagged Class warfare, Higher Taxes, Keynesian Economics, Obama, Roosevelt, Soak the Rich, stimulus, Tax Increases, Taxation on July 11, 2010|
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Much of the economic debate in Washington revolves around the silly Keynesian notion that politicians can stimulate an economy by borrowing money from the private sector and using the funds to make government bigger. That didn’t work for Hoover and Roosevelt during the 1930s, Japan during the 1990s, Bush in 2008, or Obama last year and this year, but the theory is convenient for politicians seeking ways to justify their natural tendencies. There are other factors that impact economic performance, however, and Amity Shlaes explains in the Washington Post
that Obama is making the same mistakes as Roosevelt in some of these other areas. Here’s a blurb from her column, comparing Obama’s class-warfare tax agenda with FDR’s disastrous “soak the rich” law.
By fixating on the debt and stimulus plans, Obama and Congress are overlooking challenges to the economy from taxes, employment and the entrepreneurial environment. President Roosevelt’s great error was to ignore such factors — and the result was that sickening double dip. …Income taxes, the dividend tax and capital gains taxes are all set to rise as the Bush tax cuts expire. The Obama administration portrays these increases as necessary for budgetary and social reasons. …The administration and congressional Democrats are also striving to ensure that businesses pony up. …Roosevelt, too, pursued the dual purposes of revenue and social good. In 1935 he signed legislation known as the “soak the rich” law. FDR, more radical than Obama in his class hostility, spoke explicitly of the need for “very high taxes.” Roosevelt’s tax trap was the undistributed-profits tax, which hit businesses that chose not to disgorge their cash as dividends or wages. The idea was to goad companies into action. The outcome was not what the New Dealers envisioned. Horrified by what they perceived as an existential threat, businesses stopped buying equipment and postponed expansion. They hired lawyers to find ways around the undistributed-profits tax. In May 1938, after months of unemployment rates in the high teens, the Democratic Congress cut back the detested tax. That bill became law without the president’s signature.
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Posted in Big Government, Deficit, Fiscal Policy, Government Spending, Keynes, Keynesian, Obama, stimulus, tagged Debt, Deficit, Government Spending, Keynesian Economics, Obama, stimulus on July 11, 2010|
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I’m out in Sin City for the annual FreedomFest conference, where I moderated a debate earlier today on whether consumer spending or investment spending was the key to economic growth.
As you can imagine, it was horribly painful for me to keep from injecting my two cents in the discussion, so I figured I would rant and rave a bit on the blog.
To be succinct, consumption is the ultimate purpose of all production, so there certainly is nothing wrong with consumer spending. That being said, investment (capital formation) is one of the most important determinants of economic growth.
The Keynesians would respond by agreeing, but then arguing that sometimes the economy falls into a ditch and needs a “stimulus.”
That’s a well-intentioned sentiment, but the traditional Keynesian prescription of deficit spending doesn’t work.
If I had the chance to participate in the debate, this video captures what I would have said about whether Obama’s so-called stimulus was a success.
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