To love and be loved is to feel the sun from both sides.
David Viscott
Clinton Revisionism:
Reality Check Quote of the Day
Progressives who now remember the Clinton Presidency with nostalgia weren't quite so generous back then. Disgruntled former Clinton Labor Secretary Robert Reich had this to say back in 1997: "You now have a balanced budget that may even be in surplus and you have a legacy that up to now is primarily a Republican one, in the sense that it achieved some long-term Republican goals -- balancing the budget, getting rid of welfare, cutting capital gains taxes and widening global trade." [The progressives want to discredit us legitimate fiscal hawks by trying to tie us to George W. Bush. George W. Bush pulled a bait-and-switch on us, speaking the rhetoric of limited taxation and government, but spending, regulating, and intervening like a Democrat.]
Bill Clinton's "fiscal discipline" was during the era of unsustainable capital gains during the stock market bubble in the late 1990's aided and abetted by the Fed's easy money policies. There is a myth that Clinton ran a surplus; it is true that we were able to reduce the public debt, but net inflows to the social security trust fund are a captive government loan which more than offset reductions to the public debt. We had net inflows since 1984, until it ran $49B in deficit (excluding interest income) last year. One explanation with political consultant Dick Morris was "triangulation", but in a sense there was another reason:
"A decade after forcing Bill Clinton to abandon his spending plans in favor of a balanced budget, investors in Treasuries are bedeviling President Barack Obama as he embarks on the most costly spending plan in U.S. history [Stimulus], driving up borrowing costs for the government and consumers. Treasuries have lost 3.6 percent this year [2/10/09], their worst annual start since 1980...Bond prices fell amid concern that the Federal Reserve may not buy U.S. debt to keep yields low while the government increases its borrowing."James C. W. Ahiakpor, "Contradicting Keynes: Bernanke’s Debt Default Scare":
Thumbs UP!
Fear-mongering occurs on many issues, including foreign policy. One of the things that really bothered me during the economic tsunami leading up to TARP legislation was how the Treasury Secretary, the Fed Reserve chief, and others were playing Chicken Little, insisting the $700B was necessary to save a $15T GDP economy. And then paradoxically we didn't see the purchase of toxic assets (MBS) but an alternate approach, suggested from the UK, to invest in bank equity (whether they needed it or not!) The one thing the Fed could do, without major legislative constraints, was to handle liquidity problems...
The U.S. Financial Crisis Inquiry Commission concluded:
"The crisis was avoidable and was caused by: Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages; Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk [my note: AIG!]; An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis; Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw; and systemic breaches in accountability and ethics at all levels"This essay focuses on Fed Reserve chief Ben Bernanke's alarmist warnings during the recent summer's debt limit ceiling kerfuffle. In particular, he raised the issue of interest rates skyrocketing adversely affecting the economy and jobs. And that's the core point behind the title of this paper. In essence, a raise in interest rates would reflect the supply and demand of Treasury notes; for an imbalance to occur, Bernanke seems to be suggesting the Fed couldn't control relevant liquidity issues (unless he was engaging in political posturing: certainly an independent agency would never do that, would it?) So presumably there's more to the market of financial assets than cash/liquidity (at least beyond the short-term). In fact, that's the point: what commercial banks rely on is savings for lending: the Fed controls lending by the percentage of reserves (i.e., an increase of reserves shrinks lending).
Classical economic liberalism (Hume's contribution) discusses 3 explanations for high interest rates: competing strong demand with a limited amount of money to lend; credit-worthiness of the borrower; the borrower is willing to pay a premium interest rate because he expects to clear profits even after taking into account however high interest rates.
The author suggests that a default implies the buyers of Treasury notes may require a modest premium due to the risk of Uncle Sam's creditworthiness, although its guaranteed liquidity by the Fed is still an advantage (and one motivation for a purchase would be an overdone correction in bond prices), but the lack of political will for politicians to agree doesn't reflect on the intrinsic worthiness of existing or upcoming commercial notes (say, issued by Blue Chip companies). It's possible what would happen is a narrowing of the spread between Treasury rates and commercial note interest rates.
The author points out that money (fiat currency on its own merit) has only temporary liquidity advantages. What really matters is savings and robust economic conditions. Savings, say discretionary income from well-paid individuals, provide the basis for lending; more aggregate savings mean naturally lower interest rates; the government by taxing more shrinks the amount of savings, making lending capital more scarce (and hence naturally higher interest rate). Furthermore, if the government doesn't cut spending/deficit, its debt competes against private sector debt, which results in higher interest rates and undermine the feasibility of private sector business expansion and job growth, a zero-sum game.
Musical Interlude: My Favorite Groups
Fleetwood Mac, "Little Lies"
