Obama's grab for populism

Commentators across much of the political spectrum have lauded President Obama's hardly coincidental announcement that he is going to regulate the US banking sector on a grand scale.

It came less than a day after voters in Massachusetts gave the Democrats, including Obama and indeed government a bloodied nose. This was largely due to the ham-fisted attempts by Obama, but most disturbingly by the indisputably corrupt forces in both the House and the Senate, to reform healthcare. Instead of taking a breath, Obama decided to go on the front foot and wage war against what has been portrayed as public enemy number one by the left - the banking sector.

The message was simple:

- The banking sector caused the recession (untrue);

- The government was forced to bail out the banking sector as a whole because of its own failings (mostly untrue)

- The banking sector is full of people who earned a lot of money doing the wrong things (partly untrue);

- Time to punish them all and stop it happening again.

What he didn't say was:

- The banking sector took risks because of the fiat money of the Federal Reserve effectively encouraging such behaviour;

- The Federal government through Fannie Mae and Freddie Mac funded a boom in housing investment including loaning to those who couldn't sustain the borrowing;

- Hundreds of thousands of Americans borrowed far too much money making foolish investment decisions;

- Bad banks could have been allowed to fail and it is time to have a fundamental review of the entire monetary system.

The crisis came about because loose money, combined with rules requiring a portion of lending to risky borrowers, saw a bubble of lousy investment in property. It was a bubble seen in many countries, and it has only partially burst. Had it fully burst there would have been hundreds of thousands of more mortgagee sales across the US, UK, Europe and elsewhere. It would have hurt those property owners, but it would have opened up enormous opportunities for many others to buy homes and engage in the sector.

No. Obama is completely uninterested in this. He is far more interested in gaining kudos from the popular masses for bashing bankers. He is "doing something" to divert attention from the Massachusetts result, whether it is right simply wont be understood by most in the media (who have little understanding of economics or finance), and 99% of the public.

So is he not justified, will his measures make a difference? Alastair Heath at City AM thinks not:

Was the financial crisis due to the fact that some banks own private equity firms? No.

Would Lehman have been saved by the restriction on size or any other of the proposals? No. Just one firm, Bear Stearns, a pure investment bank which would not therefore be covered by the new rules, was destroyed because of its ownership of a hedge fund which invested in sub-prime mortgages.

Would any of these rules have protected Northern Rock or HBOS? No.

Did the losses racked up by the state-sponsored Fannie Mae and Freddie Mac mortgage giants have anything to do with prop trading or hedge funds? No – and neither did the failure of Wachovia, Washington Mutual, Countrywide or the over 100 US banks and many others around that world that have gone bust.

In truth, banking losses were caused by bad property loans – and the purchase of this sub-prime debt by other banks and funds in the belief that they were safe. Wall Street was crippled because it was so leveraged and didn’t hold enough high quality, truly liquid capital. AIG insured packages of sub-prime debt through credit default swaps but didn’t set capital aside in case things went wrong.

Obama’s pseudo-remedies completely miss the point.

Heath believes banks should have living wills and it should be made abundantly clear to banks and to depositors that governments wont bail them out again. Banks' creditors and debtors would need to learn to pay more attention to what is behind their assets. In other words, a deal needs to be struck whereby the state turns it back.

However, this cannot be while fiat money continues to be manufactured by central banks at interest rates barely above zero. What is happening right now is a new series of asset bubbles because of it, with property picking up again in London, share prices getting an unholy boost because bank deposits offer nothing, and the cycle starting once again.

It is most telling and disturbing that Conservative Shadow Chancellor George Osborne supports Obama's proposals. A man who hasn't a clue about the banking sector seeking to show his solidarity with the "common folk" when to get votes (when in fact he has never had a real job, and lives primarily off of vast inherited wealth). City Am notes that Obama's proposals would hurt RBS, now primarily taxpayer owned, showing Osborne's foolishness in speaking in such a kneejerk manner.

However, what's being cultivated is not solutions to problems that are primarily about how individuals react to incentives, but envy. Bankers are public enemy number one, and the foolishness of some, who were paid very well, is a fertile breeding ground for hatred of the whole sector.

It's a sector that bores most, that is largely not understood, and ignorance breeds suspicion. Be sure that few politicians will point out that both the Obama and the Bush Administrations (and Clinton before) all bear much responsibility for the monetary policy, and the investment regulatory environment that inspired and rewarded irrationality.

Sadly, what all of this shows is how incapable democracy is at handling complicated public policy. Politicians are mostly clueless, the media similarly so, those who do understand are often accused to seeking to protect vested interests, and most media seeks sales based on massaging public anger. Few will dare profile the average people who took out self certified 120% mortgages at the peak of the property boom and ask them why they took such risks, yet they too contributed to it all.

However, Obama dare not ever say that banks shouldn't be forced to lend to people who are a bad risk, nor that the Federal Reserve system be subject to a fundamental review. It's blame banks, whether they received taxpayer largesse or not, were foolish or not.

The main winners from this will be those countries that don't follow in line - I expect Zurich, Geneva, Hong Kong, Singapore and Shanghai will all be looking for opportunities to attract more of the financial sector from the West.

Principles for tax reform

Following on from Not PC's excellent post, here's a simple guide to where the government should start from in what it calls tax reform:

Step One: Stop increasing spending. You don't have the money. You're borrowing money from future generations to pay for current consumption.

Step Two: Determine what the role of government is. The core functions. Be open about it, and be open about what government shouldn't be doing.

Step Three: End funding for anything inconsistent with what you determine in step two.

Step Four: Look again at the role of government, look at what incentives and impacts your involvement in any portfolio creates. End funding for anything negative.

Step Five: Change local government legislation to require it to do the same.

Step Six: Remember that when some areas of the economy are taxed less than others (e.g. property) that means that you should cut taxes in other areas. The lower, the flatter the taxes, the less distortions.

Step Seven: When you run out of ideas to cut spending, look at Hansard from 1999 to 2008. You voted against just about every spending increase Labour introduced, why don't you show some damned backbone and convictions, and reverse the lot. By simply doing that you'd eliminate the budget deficit and have enough surplus to cut taxes.

Step Eight: When you run out of backbone, remember this....

TAXES ARE NOT THE GOVERNMENT'S MONEY, THEY ARE LEGALISED THEFT

Say this every single night 100 times

It might just help you realise who your employers.

Massachusetts shrugged?

For Scott Brown, a Massachusetts lawyer and state senator - and Republican - to take the Senate seat of Massachusetts that was vacated when Ted Kennedy finally went into oblivion, is quite something. With 52% against the Democrat candidate Martha Coakley on 47%, it is a clear mandate.

You see in 2006 Ted Kennedy won the seat with a healthy 69% majority. For the Democrats to bleed almost a third of that support in such a short time will be a shock. However, what does it reflect on?

Did Brown campaign better than Coakley and was clearly the better candidate?

Probably yes, but not by THAT much. He travelled by pick up truck, painted himself as the outsider who was fiscally conservative and opposed to Obama's health reforms. Coakley by contrast seemed to assume she'd inherit the seat from Kennedy. His social views put him more in the middle of the Republican Party. He supports civil unions, but opposes gay marriage. She was far more socially "liberal", moreso than Obama. She wants US withdrawal from Afghanistan, supports heathcare reform, but has also been involved in a number of controversies as state attorney general. She played a negative campaign against Brown claiming he wanted hospitals to turn away rape victims, misconstruing his belief that religious hospitals can choose not to offer emergency contraception if they so wish. Coakley was close to trade unions, but they were clearly not decisive in Massachusetts.

However, whilst she wasn't much of a candidate, that shouldn't have meant she would get defeated on that alone. Surely Ted Kennedy personally wouldn't command an extra 20% of votes?

Was there a poor turnout, as Democrat supporters stayed home?

Apparently not. The total vote turnout in 2006 was 2,165, 490 votes. This time it is 2,249,026, a slight increase. It could be argued Republicans turned out this time because they knew they'd have a better chance, but then Ted Kennedy was a polarising figure. It is quite likely many Republicans would have wanted to vote against him on principle, even though the odds of removing him were not high.

Is this an endorsement for the Republican Party?

Well not really. After all, there is no effective Republican leadership at the moment. Mitch McConnell as Senate Minority Leader, and John Boehner as House Minority Leader are hardly household names. Sarah Palin remains one of the highest profile Republicans, but she wasn't seen (thankfully) on this campaign. The Republicans are a rallying point for opposition to the Obama Administration, but really that's about it. It is still a party pulled in different directions by evangelicals (who can't win an election), conservatives and small government liberals (in the classical liberal not US leftwing liberal) sense. Scott Brown is a blend of the last two.

Is this a rebuke of Barack Obama?

Perhaps a little. Obama won Massachusetts by 62% to 36% to McCain, so you'd think most of his supporters would vote for the woman he endorsed. Clearly not all is well with independent ly minded voters.

However, it's worth noting that neither Obama nor McCain won their party's primaries here. Hilary Clinton beat Obama 56% to 41% for the Democrat nomination. Mitt Romney beat McCain 51% to 41% for the Republican nomination. So Massachusetts is a little different from other states. It may well be that the Presidential elections reflected more disenchantment with McCain than Obama as second choice.

Obama's health care reforms have clearly rattled many voters. Given the vast majority of Americans have health care coverage, and see the looming budget deficits under the Obama Administration, there is some serious fear that they may have to pay more and get less because of it. Brown has campaigned clearly on the fact that a win for him would enable the Republicans to filibuster bills in the Senate, including health care. In other words, this very election means that Obama's health reforms will at least be delayed, at most could be seriously compromised. Brown campaigned that the Democrats wont consider tort reform to reduce healthcare costs because they are beholden to the legal fraternity, this perhaps struck a chord.

Furthermore, it has become increasingly clear that the grand promises of "change", and taking a different approach to government, have proven rather feeble. Yes, Bush is gone, but Obama has become beholden to the vast range of special interests and lobby groups that Democrats are in the pay of. It's just a change of personnel, not a change of technique. Pork barrel politics remain as much as they ever were. The hype has not met expectations. Obama is simply another politician.

Is this a rejection of big government?

I'd like to think it is, of course, and it would seem, in part that this is what it is about. Evangelical Republicans may want to pay special attention, as it is NOT social issues that have motivated the change, but it is money.

The amounts of money the Obama Administration is looking to pour into subsidising compulsory health insurance are substantial. Indeed, the Obama Administration has shown virtually no real appetite for fiscal conservatism, with the so-called "stimulus" package often going into consumption and poorly planned projects.

American taxpayers see the bailouts, see the willingness to engage in all sorts of new government projects as an unwillingness to face up to the need to cut spending. In the US, there is a particular degree of wariness about how well government can spend your own money. This is something the Obama Administration doesn't even start to understand, and it is a movement that has been catalysed by the proposals on health care. Bear in mind that nothing in the health care package would cut the burgeoning costs of Medicare and Medicaid, both of which comprise half of all US health spending. Yes - the government's health care plans have poor cost control, so why wouldn't Americans fear state run health care?

Massachusetts interesting has a public health care plan run by the state, which effectively subsidises health insurance for those on low incomes and penalises, through the tax system, those who don't have health insurance schemes. It means 4.1% of people don't have health insurance, which represents those preferring to pay the tax penalty and those who are still unwilling to buy insurance with low incomes. So do the people of Massachusetts simply not want an additional federal healthcare plan, or is it simpler than that?

Conclusion

Coakley might not have been the best candidate for the Democrats, but she didn't lose because of that. Brown might have been quite a good candidate, but he didn't win just because of that. The election was a judgment on the growth of government by the Obama Administration, particular fear of what health care reforms could mean for individual health insurance schemes and for taxation.

Ed Rollins, former political director for Ronald Reagan said on CNN:

Mr. President, don't run away from or misinterpret Tuesday's results. Don't let the Chicago sycophants surrounding you in the White House tell you this defeat had nothing to do with you or your health care legislation or your style of governing. It did big time, and every poll said it did.

You have three more years before the next inaugural. It may be yours or it maybe someone else's. But don't let your team convince you that this loss was only about Martha Coakley being a lousy candidate. (She was.) But she was good enough to win the state attorney general's job three years ago with 73 percent of the vote. She was good enough to trounce three other candidates, including a sitting congressman to win the primary a few weeks ago.

By contrast, House of Representatives lead Marxist with a silver spoon Nancy Pelosi couldn't have lied better than what she said: "We heard, we will heed, we will move forward with their considerations in mind, but we will move forward".

No Nancy, you heard, you're ignoring. This year there are mid-term elections. After two years of Bill Clinton and Hilary trying to introduce more government healthcare, Americans voted in droves to turn both houses of Congress Republican. The Republicans are not consistently small government fiscal hawks, and they are by no means great believers in slashing the size of the state, but if Massachusetts is a sign of wider discontent, the mid-term elections could cauterise Obama's plans on health care and his budgetary ambitions over the next three years.

How can John Key cut income tax?

According to the NZ Herald, the Prime Minister said "The Government would like to lower personal taxes"

Great stuff.

The solution involves two words.

CUT SPENDING.

Don't increase GST - that simply increases the viability of a free (black) market in secondhand goods, and adds to compliance costs for business.

Don't create new taxes, because it will create new ways of evading and avoiding them.

Don't even start to believe taxation on real property will address speculative bubbles in the housing market, look at how the RMA, the absurd obsession of councils with the discredited "smart growth" philosophy, the central banking system and most of all, taxes on other investment, create distortions.

So think about this John.

If income and company tax were reduced to a simple 20% with the first $10k tax free (hardly radical and not Libertarianz policy), then how much MORE would that encourage a shift of investment from land to business? Do you really think you and your crew know better how to spend more than that proportion of New Zealanders' income than they do?

If the RMA and tinpot planners in local authorities (especially the new uber council for Auckland) stopped restricting how people can build housing on land, without threatening the property rights of their neighbours, how much supply would be unlocked to ease pressure on prices?

How about a bottom up review of the central banking system, inflation targets and prospects for reform of that?

Who would Matt McCarten prefer?

Oh yes, it shouldn't be a surprise. Matt McCarten's tired old Marxist rhetoric about US foreign policy. Apparently wanting to be an ally of the US is "fawning support", something no country apparently should seek. Why? Because it Matt's world, the US is bad - very bad. In fact given his political heritage I wouldn't be surprised if he missed the Soviet Union, given that the anti-nuclear policy he supported was, in effect, New Zealand opting out of the Western alliances that saw it siding clearly with the US, NATO and Australia against the Soviet Union and its satellites. The middle ground was the middle ground of not giving a damn about which side won.

So what does he believe in?

1. That after 9/11 the US should NOT have attacked Al Qaeda and the Taliban in Afghanistan and overthrown the regime that provided safe haven and support for the 9/11 attacks. Of course not. Did the US deserve it Matt? Do you believe it was a conspiracy? So you prefer the stoneage misogynists of the Taliban who deny girls an education? No, you wont answer them. It's simple enough, the US shouldn't respond militarily when attacked. Of course not. The US is to blame anyway, right Matt?

2. Israel shouldn't build settlements in the West Bank. Well funnily enough Matt, the Obama Administration doesn't believe in that either. However, what would you do? Cut all aid from Israel? Tell Israel it's on its own? Let all of Palestine become a bloodbath of Islamist terror against the state of Israel? No. He doesn't have an answer to this.

3. Gaza should have open borders, and Israel should allow Hamas to import whatever it wishes, presumably including rockets to start attacking Israel again. Oh but it's ok for war to be waged by heroic militants isn't it Matt? You relate to them. After all, just because they attacked Israel proper doesn't mean anything. Not that you're going to tell Hamas to stop waging war, because it's only peace if the US or Western side surrenders right?

4. Iraq is apparently "occupied". Who by Matt? I guess that democratically elected government is illegitimate, although you claim the war against the Saddam Hussein criminal gangster regime was illegal. That means you believe the Hussein clique was legitimate. You'd prefer the Iranian back Islamist insurgents ran Iraq? The same ones who impose draconian sharia law in areas they controlled? Ahh they're not backed by the US so MUST be ok right? Yes, would have been far better to let the insurgents win. Better still to have left Saddam in power. After all, he didn't occupy Iraq did he?

5. New Zealand shouldn't be in a military alliance with the USA. Why? Because Matt and his buddies on the left don't like it. Would it harm New Zealand? Well hardly, but it does put New Zealand squarely against a whole range of rogue states that Matt presumably would like to appease. So why not Matt?

Or is it just your inherent hatred of individual freedom and capitalism that the US still (with many flaws) represents that drives you?