Contra Obama, We Need To Be Quitters

The witty saying on the t-shirt goes, "Rehab is for Quitters"; well maybe members of the Obama administration should think about becoming quitters. Obama is intoxicated with using government power-- witness his delusional statements from last night's speech before a joint session of congress:

"The fact is our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for. "

So the stock market and the housing market collapsed because of our importing oil, our increasing health care costs, and our lousy education system? Are we to believe that if the stock market and the housing market didn't collapse we would still be deficit spending to the tune of over a trillion dollars?

"And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before."

The obvious solution to this problem is that both individuals and the government should run up even more debt? Obama said we need to get the banks lending again. But as James Grant said so succinctly, banks made a lot bad loans when times were good, what kind will they make now in bad times? The Fed could easily open the flood gates on a new round of excessive bank lending by simply refraining from paying interest on the reserves banks have with the them. If this did not work the Fed could charge a fee on bank reserves. This would lead to a new inflationary era of lowered lending standards just like the one that caused our current mess. We cannot get out of our current situation by doing more of what got us into it. Obama says this himself, but does it anyway--delusional.

"In other words, we have lived through an era where too often short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election. A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future...People bought homes they knew they couldn't afford from banks and lenders who pushed those bad loans anyway."

If Obama can get away with this type of rhetoric it only indicates that our national delusion matches Obama's. Prizing short terms gains is the way government always works; the rest of us can be driven to this by the kind of inflationary credit environment we've been living. Murray Rothbard explains:

"[During a period of inflation]: people become enamored of "get-rich-quick" schemes, seemingly within their grasp in an era of ever-rising prices [think housing and stocks], and often scorn sober effort. Inflation also penalizes thrift and encourages debt, for any sum of money loaned will be repaid in dollars of lower purchasing power than when originally received. The incentive, then, is to borrow and repay later rather than save and lend. Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of "prosperity."

What institution is responsible for the flood of credit which built the stock and housing bubbles? That bastion of government-sponsored central planning, the Federal Reserve. One might disagree saying that Wall Street, Fannie Mae and Freddie Mac were the source of much of the credit that fueled the housing boom in particular. Actually through securitization and sale of mortgages, they merely recycled credit. Often it was recycled by way of foreign central banks, like that of China, which buy these mortgage-backed securities. But why does China have so many dollars with which to buy these securites? Because our Fed-inflated dollar is the number export of our economy; the dollar is the world's reserve currency. These dollars are all exported Fed-driven inflation.

"Regulations were gutted for the sake of a quick profit at the expense of a healthy market."

It is likely that Obama is referring here to the Gramm-Leach-Bliley Act of 1999 which broke the separation between commercial and investment banking established by the Banking Act of 1933. The "deregulation" of 1999 was really more of a re-regulation which true free-marketeer Congressman Ron Paul criticized at the time:

"...today we are considering a bill aimed at modernizing the financial services industry through deregulation. It is a worthy goal which I support. However, this bill falls short of that goal. The negative aspects of this bill outweigh the benefits. Many have already argued for the need to update our financial laws. I would just add that I agree on the need for reform but oppose this approach...My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill."

Far from deregulating banking, Gramm-Leach-Bliley was 900 pages of different regulations that failed to do the job. Among the most troubled banks are those, like Citigroup, that were under the regulatory supervision of Tim Geithner's New York Federal Reserve. Geithner’s promotion to Secretary of the Treasury is a classic case of how promotion works in government--the most incompetent sycophants rise. Those who foretold of our current crisis like Ron Paul, Peter Schiff, and James Grant are left out of the official conversation on solving the crisis. Those who failed to foresee it, denied it as it unfolded, and then blamed all of the wrong people (like short sellers and hedge fund managers) are still in charge.

"And all the while, critical debates and difficult decisions were put off for some other time on some other day."

Make no mistake, critical debates are still being put off. The stimulus bill was voted on without even being read by congressmen. Medicare and Social Security are ticking fiscal time bombs that the huge current deficits make even more dangerous.

“Now is the time to act boldly and wisely -- to not only revive this economy, but to build a new foundation for lasting prosperity. Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. That is what my economic agenda is designed to do…”

Obama’s claim that his porcine fiscal stimulus law will grow the economy so as to offset, by way of tax revenues, the borrowing done to pay for it is patently absurd. While the massive spending in the stimulus law may create some jobs for the short term, other jobs that would have been created with those resources will be lost and the economy’s structure of production will be thrown even more out of whack, creating more economic pain down the road.

What Obama fails to grasp is the distorting effects of money creation. We had massive, unsustainable malinvestment in housing due to the Fed’s easy money policies. Not only was the house building business unsustainable but a whole array of housing-related businesses, also fed on the Fed’s easy money, were also unsustainable. Now Obama wants to create some unsustainable malinvestment in energy, health care and education. This will fail to bring future prosperity.

“I reject the view that says our problems will simply take care of themselves; that says government has no role in laying the foundation for our common prosperity...For history tells a different story. History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas. In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry. From the turmoil of the Industrial Revolution came a system of public high schools that prepared our citizens for a new age. In the wake of war and depression, the GI Bill sent a generation to college and created the largest middle class in history. (Applause.) And a twilight struggle for freedom led to a nation of highways, an American on the moon, and an explosion of technology that still shapes our world.”

Sorry, but this is nonsense from someone in need of history lessons. The transcontinental railroads built with government money were monuments to waste, fraud and abuse that illustrate virtually everything wrong with government infrastructure “investment”. Shoddily built along routes chosen to wring maximum subsidy from the government rather than to operate efficiently, every government-subsidized transcontinental would go bankrupt by 1893. If one thinks that government subsidy was the only way to build a transcontinental railroad, one should think again. James J. Hill’s Great Northern Railroad was built "without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash." I guess a business can grow without an endless stream of easy credit, the Great Northern did not go bankrupt when the other transcontinentals did.

The wonder of the G.I. Bill is another of the great myths that we labor under. As Thomas DiLorenzo so boldly put it, “In truth, the G.I. Bill was a budget-busting middle-class entitlement scheme that had destructive effects on higher education, and set the stage for virtually all our current educational problems.”

His allusion to the wonders of NASA leads nowhere as well, Tim Swanson:

“The perceived benefits of a vain, nationalized space program include, among others, the fallacious need to fight the mythical shortage of scientists and engineers. Whereas in reality, it has stymied private tourism, exploration, and research for nearly half a century…It is a monumental drain of capital resources to simply satisfy a nationalist ego; and its motto should be changed to reflect the only groups that benefit from its existence, politicians and contractors: For Benefit of Few.”

With Obama’s speech said and done, one recommendation can be made: we need to become a nation of quitters. We need to quit believing that the government can save us from the problems it has caused. We need to go into rehab to rid ourselves of our addiction to believing any government promises, not just those of the latest messiah of salvation via government.