Thursday, May 28, 2009

Required Reading

If you want to truly understand how this nation and the world got to this terrible economic juncture, but more importantly if you want to contemplate where we are heading under the Obama Presidency you really, really need to read this long, but excellent report. Seriously, this could change the way you "feel" about what Obama is doing...

Here's the bottom-line: if we (the US, the world) are to avoid complete ruin - policies must be adopted that maximize economic growth since faster growth is the only way to generate those higher revenues needed to reduce mushrooming government deficits. Is Obama fostering pro-growth policies? Umm, no, not at all.

The following is the most important point made in the article and could spell the end of capitalism in the greatest country the world has ever known.

Lingering Doubts: Even longstanding Democratic Party liberals are now expressing shock at the staggering growth of long-term government debt the US now confronts. Nonetheless, the President's cheerful rhetoric suggests little concern with the growth of the numerator. To be sure, his administration's OMB budget projections blithely assume that very high growth rates will magically return after the next three years, and nothing solves fiscal problems as well as rapid growth. Yet everyone acknowledges that these projections are smoke-and-mirrors, constituting a leadership default of the first magnitude.

Yet could all of this be deliberate? Could the administration's choice to tax and spend ad infinitum have been politically strategic in nature? After all, haven't both President Obama and his chief of staff Rahm Emanuel openly admitted that "the new budget is a means to altering the very architecture of American life, with government playing a much larger role than before"? The likelihood that their new architecture would drive the growth of numerator of the Debt-to-GDP ratio ever-higher and the growth of the denominator lower was never mentioned.

Do financial commentators even understand this risk? While the press has expressed appropriate "concern" about the sea of red ink to come, there is little sense of the true End Game at stake:

So, I am not the only one who suspects that this administration is planning and executing the ruin of this capitalist republic (see my early blog piece called "Can We Possibly Be This Blind?").

Capitalism is the engine that drives all prosperity on Earth, that's it, simple as that. With this administration we are literally taking ourselves out of the game. The game is prosperity and financial well being. Is this what the people of America really want? Certainly not those fine Americans I saw at the TEA Party in St. Paul Minnesota on April 15th 2009.

To those who will inevitably ask what was Obama to do with this mess that George W. Bush left? This article that I have implored you to read points to a triad of conditions that constituted a "perfect storm" that dragged the US economy and then the global economy down.

That would be:
(i) A mistaken market forecast of some exogenous event that impacts security prices (in this case, a vastly higher than expected default rate on mortgages); (ii) A high level of Pricing Model Uncertainty bedeviling bank assets (the true cause of the "toxicity" of those complex securities that have clogged the arteries of the banking sector); and (iii) An unprecedentedly high degree of leverage in the financial sector (money center banks had off-and-on balance sheet leverage of about 40:1 in contrast to the socially optimal leverage of 10:1)

None of these conditions was set in motion by Bush era policies. In fact until the collapse of the credit market in late 2008 the Federal deficit as a percentage of the GDP was shrinking. Bush can be blamed or a lot of things - but he did not create the "perfect storm." We have never seen anything like it!

With Obama at the helm - we aint seen nothing yet!