New Economic Order. Several articles help paste together the New Economic Order that now is emerging. They do not paint a pretty picture. Robert Samuelson calls the federal government a giant hedge fund--Geithner's highly-leveraged toxic asset investment plan. Reagan-era Justice Department official Victoria Toensing warns business folks that when taxpayer money is invested, rigid rules of frugal financial conduct will follow for private firms. WSJ pundit L. Gordon Crovitz sees transparency as central to the new regime, and notes an accounting system that may help give answers that inform investors and avoid the panic caused by opacity.
David Brooks sees General Motors as sure to survive as a zombie firm, creating the world's most expensive jobs program, because no politician dares to kill it. The WSJ reports on the West Wing remake of Detroit that put the Big Three into federal receivership. The WSJ editors note that GM's best-sellers --11 of its top 20 models--are not Green, but Green cars are what Obama Autoworks will produce.
Partnering with government is no picnic. Technology maven Peter Huber warns that the government will prove a poor high-tech investor. Baby Boomers who will be hit with a negative lifetime return on their Social Security investment will not be pleased to learn that several huge state pension plans invested in private equity ISO high returns; the top 20 public pension funds took a total plunge of $140B, and now face losses likely greater than that for the S&P 500's 44 percent drop in 2008, as the funds were highly leveraged.
WSJ economics maven Stephen Moore fears the financial calamity of the Presidents "fuzzy math" and what it will likely produce:
Here are the unhappy totals: the debt is $6 trillion higher from 2010 to 2019 than Obama's forecast. In no single year over the next decade, even when counting the Social Security trust fund surpluses, does the budget deficit fall below $800 billion. The interest on the national debt rises to $850 billion a year by the middle of the next decade, which will be the largest single expenditure item in the budget--eight times more than we now spend on education and four times more than we spend on homeland security. Federal spending remains well over 25 percent of GDP and in some years creeps closer to 28 percent of GDP under the Obama budget, which ironically enough is entitled "A New Era of Responsibility."
We are closing in on stagnant Western European levels of government intrusion into the economy. That economic model, by the way, which the left in the United States openly wants to emulate, has created half the jobs that the United States has over the past two decades and generated half the growth rates. Is it any wonder that the Chinese want an extra guarantee on U.S. Treasury debt and say it might be time for a new reserve currency?
I have never been a fear monger when it comes to deficits and debt. If the economy grows faster than the debt, as occurred in the 1980s and 1990s then the nation's burden of financing government borrowing becomes smaller over time. Incurring debt is legitimate, moreover, if the borrowing is paying for future prosperity. The 1980s deficits were probably one of the highest-return investments in American history. We bought a victory over the Evil Empire in the Cold War and borrowed to finance reductions in tax rates that launched America's greatest ever period of wealth and prosperity: 1982-2007. The national debt grew by about $6 trillion while U.S. net wealth grew by $40 trillion. A pretty good trade.
This debt we are now incurring is paying for windmills, unemployment benefits, new cars for federal employees, weatherizing homes, high-speed trains to nowhere, and the like. It buys almost nothing of long-term economic benefit. Most of the money that has been borrowed since September 2008 has been used to bail out irresponsible borrowers, failed financial institutions and car companies, and for expansions of welfare programs. The three biggest areas of government expenditure increases sought by the Obama budget are education, energy, and health care. Any unbiased assessment of the return on investment--to use an Obama term--for these programs would find dismally low payoffs for taxpayers. Government programs are the only things in the world that when they yield failing results, we reward them with more money.
All it takes is worse performance than Team 44 dreams of, and we will face trillion-dollar annual interest payments. This will come from the political party whose leaders and supporters bemoaned GOP deficits one decimal point (one order of magnitude) smaller.
New Legal Order. Enter Richard Blumenthal, the Democrat who is Connecticut's long-serving Attorney-General, on Glenn Beck's show yesterday. RB admitted, under questioning by GB, that payment of bonus sums to AIG's Financial Products group violated no state law--the best RB could manage it that state law did not require such payments, which no one suggests is the case. RB, asked by GB if an A-G's job is to enforce the laws, said that advocating change is part of his job as well. But what RB did a fortnight ago was put pressure on AIG--which might gain public popularity if it changed its corporate name to Al-Qaeda Insurance Group--to give the dough back. GB avowed that while the bonuses were an outrage (a position I have taken on LFTC and on radio), the A-G should not have acted, because no law had been broken. Point to Beck, but Blumenthal gave Beck's viewers a glimpse into the New Legal Order, where public scolds can force undoing of legal acts deemed reprehensible by public officials, if enough folks share the view.
But there is political peril for Team 44 in all this. Witness this AP report on auto worker attitudes toward how they were treated, versus how Wall Street types were treated:
"It's the age-old Wall Street vs. Main Street smackdown again," said Brian Fredline, president of UAW Local 602 at a plant near Lansing. "You have all kinds of funding available to banks that are apparently too big to fail, but they're also too big to be responsible."
"But when it comes to auto manufacturing and middle-class jobs and people that don't matter on Wall Street, there are certainly different standards that we have to meet -- higher standards -- than the financials. That is a double standard that exists and it's unfair," Fredline said.
Many workers -- not generally known for their affection toward executives -- even sympathized with Rick Wagoner, who was forced to step down as chief executive of General Motors Corp. He was by turns called a "sacrificial lamb," "scapegoat" and "fall guy."
"We knew someone was going to have to take the proverbial `bullet,' and it would have made it a lot easier to accept that had the CEOs of the banks also been required to give up their jobs," said Jim Graham, president of a union local in Lordstown, Ohio, where GM produces the Cobalt and Pontiac G5 fuel-efficient cars.
Bonus Tip: Congress v. Stock Market. When Nancy Pelosi is in town, Sell, warns Forbes. The Congressional Effect Fund (launched May 2008) invests in T-bills when Congress is in session, and in the S&P 500 when Congress is out of session. In 2008 the strategy returned an 0.6 percent loss, compared to a 44 percent loss for the S&P 500; for the 44 years through end-2008 (1965 - 2008), the numbers would have been an average annual 0.3 percent S& P 500 return (dividends excluded) with Congress in--7,244 days, versus 16.1 percent return during the 3,21 days Congress was away.