Problems of Democracy

Democracy is an incredibly difficult form of government to have. Throughout the years I have come to certain conclusions about this "least worst" form of government. Two topics that I have been thinking about are transparency and growth. Below are my thoughts about these topics. As always, let me know what you think!

Transparency is a hallmark of a good government and often times it requires that the government release potentially embarrassing items. The Obama Administration recently released memos and photos about the acts of "enhanced interrogation methods" and they will probably have more documents released in the future. I am of the opinion that a transparent and accountable government requires that, even though it might produce a backlash among Middle Eastern countries. The stains and dirty laundry of our past ought to be revealed, debated and examined. In addition to the memos, the outcome of the interrogations should also be fully revealed (within reason, not all of the intelligence can be fully revealed only a few years after the fact). The American people should be informed to an extent. Sadly, the hyper partisan nature of political debates and the constant barrage of infotainment journalism on the cable news channels will not provide a true quiet place to think, deliberate and decide on the proper course of action for our country.

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Another issue that democracy encounters is in regards to growth and the ability to compete with authoritarian regimes. Fareed Zakaria's book "The Post-American World" shows that democratic India has many more hurdles in the way of it and economically flourishing than the authoritarian China. China can build large projects to advance growth with limited opposition in a short period of time. India has such a diverse and democratic system that there is bound to be several roadblocks to complete modernization. Stability produces (and needs) a slow, conservative growth pattern. China can and does grow quickly, but it does not cause a true societal transformation. India is being made by its diverse, vibrant society with the private sector causing a good chunk of the growth (Does this sound familiar?). Ultimately, the societal makeup of a country needs to drive the state, not the state driving society.

Financial Jargon

In case you've been living under a rock or are Amish (which in the latter case, you probably won't be reading this post...), you might have noticed that the financial system is struggling. Insolvency, balance sheets, FDIC and TARP are only a few terms that have been launched into the consciousness of the American public. While it is certainly confusing, I have found myself personally struggling to keep up with the jargon and inside baseball stats that have been thrown around. Luckily, I have stumbled across a podcast that clears up some of the confusing language surrounding the financial debacle. It is a 59 minute broadcast from This American Life that explains the cause and effects of the crisis in common terms.

As of right now, various banks have received TARP funds that were meant to be given out in the forms of loans, unfreezing the credit market. However, this purpose was not met since the balance sheets (see podcast or transcript to learn about this) were worse than originally anticipated. The banks gave out too many loans prior to TARP, becoming immensely overstretched. Once people began to default on their repayment of the loans, the banking system began to falter and crumble. As the show explained, to merely lend more is to go back to the root origin of the problem, over-lending. While members of congress are grandstanding on many issues and dumbing down the problem into populist nonsense, they do not confront the problems of the banking industry openly. The remedy to this could come in the form of letting banks fail, making the Bank of America truly become the Bank of America by nationalizing banks or anything in between (click here for one view that lies somewhere in between). We must talk openly and frankly about the crisis. Hopefully this podcast will allow more people in on that important conversation!

Because Wall Street affects Main Street (Part 3)

Final entry in the "Wall Street impacts Main Street" series.

It is a somber day for the American economy.

Plan Will Save Free Market, Not Destroy It

By REP. JOHN CAMPBELL

This free-market, Milton Friedman devotee, conservative Republican congressman will be voting strongly in favor of the $700 billion bailout for Wall Street. What, you ask? Has the California sun fried my last brain cell?

No. I will vote for this bill because it will likely not cost anything, is not a bailout of anybody and will help every American with a bank account, a job or a retirement plan. It also will save the free market, not weaken it.

Allow me to explain.

The $700 billion figure so often mentioned will not be spent, but actually entirely invested with three different mechanisms to ensure that the taxpayers get all their money back.

First, these "troubled assets" will be purchased at less than the expected net present value of their cash flow. That means taxpayers should make a profit by holding them to maturity.

Second, taxpayers will get warrants to purchase stock in the companies from whom these assets are bought. That is more profit potential if the companies recover.

Third, whoever is president five years from now is required to offer to Congress a proposal to recover from these same companies any net loss incurred by the taxpayers to that point. No investment's return is certain, but this one looks pretty good. It for sure will not cost anything close to $700 billion over time.

Furthermore, you are not bailing out companies when you buy assets from them at 30%-60% of what they paid for the asset. That's a bath, not a bailout.

And they should take a bath. They made an investment decision, and it turned out to be a bad one, so they lose money. The purpose of the purchase plan is to create a market where one does not now exist and allow these companies to move that capital back into productive use in the economy. It is not giving them any kind of deal.

If this bill does not pass and Congress does nothing, Wall Street will suffer for sure. But so will everyone with a retirement plan as those values drop precipitously and their nest egg disappears.

Just imagine a whole week of days like Monday. People with bank accounts or money market funds may find their money inaccessible as the debt markets freeze over. And nonfinancial businesses that rely on short-term borrowing to meet payrolls and finance inventory spikes may be unable to get that credit, resulting in layoffs. In short, we all lose, whether we live in Manhattan or Peoria.

So has the free market failed us and that's why we need the government to take it over in this way?

No again. Free markets work. They are still working. They are rational. But on both sides of any free market transaction are two human beings who are subject to emotional behavior. The market cannot correct for overwhelmingly irrational behavior, whether that behavior is fear and panic or risk-ignoring exuberance.

When the short-term debt of some of the world's most profitable companies has no buyers, that is evidence of widespread fear bordering on panic. The objective of this bill is to remove the object of that fear, the bad mortgage-backed securities, from the market so that rational behavior will return.

In some ways, this bill is more of a free-market solution than other actions that have been taken. The government will not take over any companies here. Even the warrants will be nonvoting. No one will be compelled to sell the government their assets if they don't want to.

Even the "reverse auction" process of establishing pricing for the assets, where sellers submit bids to one buyer rather than the other way around, is a market-based pricing method.

Other ideas are out there to correct this problem. I have seen most of them. None has a better chance than this one to stabilize the credit and equity markets. Furthermore, no other plan has the broad base of political support that this plan has from leaders in both parties.

The credit markets in particular are too fragile. We cannot afford the time delay of starting over.

If we do not pass anything, I shudder to think of how bad things might get as that fear turns to full-fledged panic.

If we pass this plan, some banks and other companies will still fail. The world economy will still struggle and have problems for months if not years to come.

But markets will function again, and we will likely avoid the abyss. That will save our free-market economy, not jeopardize it. I hope and pray that at least 217 of my colleagues in the House of Representatives will see it that way on Friday.

Because Wall Street affects Main Street (Part 2)

I cannot say it any clearer than David Brooks. Unfortunately, much of the GOP is stuck in this perpetual time warp. Wake up! To do nothing is unacceptable and to tout populist ideals is dishonest. If Wall St. fails, it will impact every single person in the US- regardless of class or occupation.

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Revolt of the Nihilists
By DAVID BROOKS

In 1933, Franklin Roosevelt inherited an economic crisis. He understood that his first job was to restore confidence, to give people a sense that somebody was in charge, that something was going to be done.

This generation of political leaders is confronting a similar situation, and, so far, they have failed utterly and catastrophically to project any sense of authority, to give the world any reason to believe that this country is being governed. Instead, by rejecting the rescue package on Monday, they have made the psychological climate much worse.

George W. Bush is completely out of juice, having squandered his influence with Republicans as well as Democrats. Treasury Secretary Henry Paulson is a smart moneyman, but an inept legislator. He was told time and time again that House Republicans would not support his bill, and his response was to get down on bended knee before House Speaker Nancy Pelosi.

House leaders of both parties got wrapped up in their own negotiations, but did it occur to any of them that it might be hard to pass a bill fairly described as a bailout to Wall Street? Was the media darling Barney Frank too busy to notice the 95 Democrats who opposed his bill? Pelosi’s fiery speech at the crucial moment didn’t actually kill this bill, but did she have to act like a Democratic fund-raiser at the most important moment of her career?

And let us recognize above all the 228 who voted no — the authors of this revolt of the nihilists. They showed the world how much they detest their own leaders and the collected expertise of the Treasury and Fed. They did the momentarily popular thing, and if the country slides into a deep recession, they will have the time and leisure to watch public opinion shift against them.

House Republicans led the way and will get most of the blame. It has been interesting to watch them on their single-minded mission to destroy the Republican Party. Not long ago, they led an anti-immigration crusade that drove away Hispanic support. Then, too, they listened to the loudest and angriest voices in their party, oblivious to the complicated anxieties that lurk in most American minds.

Now they have once again confused talk radio with reality. If this economy slides, they will go down in history as the Smoot-Hawleys of the 21st century. With this vote, they’ve taken responsibility for this economy, and they will be held accountable. The short-term blows will fall on John McCain, the long-term stress on the existence of the G.O.P. as we know it.

I’ve spoken with several House Republicans over the past few days and most admirably believe in free-market principles. What’s sad is that they still think it’s 1984. They still think the biggest threat comes from socialism and Walter Mondale liberalism. They seem not to have noticed how global capital flows have transformed our political economy.

We’re living in an age when a vast excess of capital sloshes around the world fueling cycles of bubble and bust. When the capital floods into a sector or economy, it washes away sober business practices, and habits of discipline and self-denial. Then the money managers panic and it sloshes out, punishing the just and unjust alike.

What we need in this situation is authority. Not heavy-handed government regulation, but the steady and powerful hand of some public institutions that can guard against the corrupting influences of sloppy money and then prevent destructive contagions when the credit dries up.

The Congressional plan was nobody’s darling, but it was an effort to assert some authority. It was an effort to alter the psychology of the markets. People don’t trust the banks; the bankers don’t trust each other. It was an effort to address the crisis of authority in Washington. At least it might have stabilized the situation so fundamental reforms of the world’s financial architecture could be undertaken later.

But the 228 House members who voted no have exacerbated the global psychological free fall, and now we have a crisis of political authority on top of the crisis of financial authority.

The only thing now is to try again — to rescue the rescue. There’s no time to find a brand-new package, so the Congressional plan should go up for another vote on Thursday, this time with additions that would change its political prospects. Leaders need to add provisions that would shore up housing prices and directly help mortgage holders. Martin Feldstein and Lawrence Lindsey both have good proposals of the sort that could lead to a plausible majority coalition. Loosening deposit insurance rules would also be nice.

If that doesn’t happen, the world could be in for some tough economic times (the Europeans, apparently, have not even begun to acknowledge their toxic debt) — but also tough political times.

The American century was created by American leadership, which is scarcer than credit just about now.

Because Wall Street affects Main Street

Call it the bailout bill, Paulson plan or socialism on steroids, the US Treasury plan is all over the papers. Liberals yell that this is throwing free money at the CEO's of failing corporations and Conservatives cite that no government intervention is required. Many high-profile Republicans are standing firm against any solution, because principles must stay when financial hell has risen. As we sit on the brink of a grave situation, there are handfuls of congressman who actually get the situation. There is no good answer right now, but no answer would be the worst solution to it all.

Doing nothing is not a valid option. Conservatives do not realize how close we are to the brink of an economic catastrophe. The markets must be stabilized. We must restore trust to the banking industry. The shrinking of credit will affect every person in the United States, regardless if you have direct contact with Wall Street. The implosion of the financial structure will freeze all of your assets, hurt every business and will touch every American.

In the 1930s, a lot of people who had nothing to do with Wall Street were deeply impacted by the crash. Today, we are incredibly entangled with the financial sector. The bad choices of a few will dramatically impact the many. Irresponsible people should and will be punished. CEO's should not obtain the "golden parachutes" and oversight should be created for the implementation of the plan. These and other issues should be discussed and included in the legislation. Bad lending and greed will be reckoned with, but the crisis has gone by too far to stand back and do nothing out of principle.

Is this plan anti-markets? Hardly. The market is not this mystical force with no players, instead it is made up of people and these people engage in transactions and investments. Human beings can act completely irrational, stoking fear into outright panic. People do not realize how close we were to financial panic last week in regards to money market accounts and the ongoing exodus from these accounts. The trust has dissipated between financial institutions, banks and consumers. Markets cannot correct itself if fear remains within the system. Take the fear out of the system (through the removal of bad assets) and the market will correct. And besides, the assets that the government will acquire are less than what they were worth. The government stands to make a profit on these purchases and loans.

If action is not taken everything that you and I own financially will be cut dramatically. The savings account that we have will not yield the original amount. Retirement accounts will be hammered. I cannot stress this clearer that the financial system is in grave danger. A point can be made that one's ideology should trump all circumstances. A quote from a respected thinker says it best, "My ideology guides my thinking, but it does not replace my thinking." Ideology must not get in the way of logical decisions. There is no good solution, but out of all of those solutions lie the controlled crash solution. Quick, consistent government intervention is necessary to the health of the economy. Otherwise, the ramifications will be unconscionable.