Sharia-1, First Amendment-0

The short version: a Muslim assaults an atheist in Pennsylvania for wearing a zombie Mohammed costume in a Halloween parade.  In court, the judge, also a Muslim, throws out the case and reprimands the atheist for provoking the attack.  

No, I’m not making this up.  It gets even more outrageous in this article.

If you need more, here’s the audio clip from the trial.

In the U.S. even a ‘dufus’ is afforded federal constitutional rights and is protected by state statutes from being battered by another person.  I’d never dress up to mock a religious leader, but I’m darned happy to live in a country where knuckleheads are free to do precisely that.    

If you’re picturing Islam in a peaceful religions lineup alongside Catholicism, Presbyterianism, Lutheranism, Mormonism, and Judaism, please stop. 

Islam is a mixture of religious, cultural, and jurisprudential practices and beliefs.  It has never been “just a religion.”  To believe so foists a Western mindset on a non-Western philosophy.   

We’ve all known peaceful Muslims.  No one should condemn them for their beliefs.  But in this country—under our constitution—we must take seriously the threat Islam’s legal practices pose to our republic. 

  

Default, Devaluation, or Something Else?

Good idea: appoint Erskine Bowels & Alan Simpson to address spiraling federal debt problem.

Bad idea: flip Bowles-Simpson the bird and propose a budget which completely ignores the looming crisis because actually solving it would be politically uncomfortable.

Good idea: force political leaders to recognize that we cannot eat our cake (enjoy expanding entitlement obligations) and have it, too (not be required to pay for those obligations).

Bad idea: take a pledge that you won’t raise any taxes, ever.  

Here are Paul Ryan and Tim Geithner—regardless of your political preferences, these are two pretty forthright guys—having a relatively calm discussion about financial Armageddon.

Now check out this piece from The Economist.

You read that correctly: economists debating how—not whether—the U.S. will welsh on its financial obligations.  Option 1: devalue the U.S. dollar so that our repayment of Treasury bond principal & interest is cheaper in real terms.  Option 2: wait for the markets to tell us that we shouldn’t be borrowing so much, and raise our cost of debt, thus prohibiting all future debt ceiling increases.  Option 3: Pre-arrange a default with the International Monetary Fund in order to provide Democrat & Republican politicians the requisite political cover.

Can you imagine us calling in the IMF to help us default on our obligations?  

Blech!

If you put a gun to my head and said “choose one,” I guess I’d go with Option 1.  But, the dollar’s decline as reserve currency would accelerate rapidly.  And, there’s only so much you can do there now that our own central bank (the Fed) owns such a huge piece of debt.

Maybe the Fed could start investing in Chinese Yuan denominated assets, while our Treasury issues dollar denominated debt? 

But seriously, is that it?  Are our choices limited to devaluation or default?

I don’t think so.  I think growing our way out is still an option, but it’s going to require some painful changes, and fast.  Here's what growing our way out entails:  

1.  Tax receipts have to go up.  BUT, the only way this makes sense economically is through broad, permanent tax reform, not through goofy sunsets and holidays.   Drop corporate income taxes completely, then raise taxes on dividends & capital gains to ordinary income tax rates.  Close loopholes.  Eliminate deductions for interest.  Maintain some progressivity, but flatten the curve considerably.  Turn individuals into savers / capital providers and make American business uber competitive in the global environment.  Send a message to entrepreneurs that we’re done screwing up their strategic plans with tax games.  America is open for business—we’ll help you excel here like no other place on this earth. The idea that we can just coerce the rich to pay for our fiscal indolence is a mark of extraordinary silliness.  Capital flows freely in this global economy—the more you tax it, the greater incentive it has to move to other countries.  But not even a global Marxist revolution would actually satisfy our financial obligations.  It might allow us to erase them, but it would also lower standards of living in the process.
2. The retirement age / Medicare eligibility age has to be raised.  Trying to balance budget by cutting the non-discretionary stuff and even defense, to a lesser extent, is like rearranging the deck chairs on the Titanic.  Extending the eligibility ages needn't (and shouldn’t) be done for anyone 50 and above.  But it’s absurd that we still promise our citizens a pension and a gold-plated health care plan to begin at the same age in life we did 70 years ago--when the lifespan was two decades shorter.  And, of course, we should push as many of these kinds of social issues as possible back to the 50 states.  We need 50 local laboratories, not a detached federal bureaucracy, working on these problems.   

There are other good ideas that we should consider (e.g., a national sales tax to replace the income tax; Paul Ryan’s proposal to convert Medicare into a health insurance premium subsidy, etc.), but that’s about it, really.  Stop spending as much on major entitlements and enact serious tax reform.  If we do those two things, we can turn the ship before it runs aground.  

Will we? 

Giving President Obama Credit (Really)

It’s no secret that I’m not a fan of the Obama Administration.  I do still respect the office—honestly.  Unlike so many others drawn to “public service”, Mr. Obama seems to me to be a committed husband and father and is decidedly not a philandering narcissist (ala WJC).  Integrity seems important to President Obama—I respect that, too.  And if conventional wisdom is accurate that he loathes Washington politics, I actually find that quality sort of endearing.     

BUT [“C’mon Simone, let’s talk about your big but.”], the things he desires for and from American citizens are antithetical to what I hold dear.  The times where his instincts have been exactly wrong are so numerous, and his leadership skills are so inadequate, that I’d fire Mr. Obama yesterday if I could.  Wait: Vice President Biden is next in succession—on second thought... 

       

Analysis precedes advocacy.  I try to live by that principle.  I'm often lousy at it, but I try.  Here are two recent examples of when I think the president has gotten it almost completely right.

Housing Finance Reform 

On February 2, Treasury Secretary Tim Geithner delivered his update on the state of financial reform.  About ¾ of the way through came this little gem:

“Our plan will wind down the GSEs and bring private capital back into the market, reducing the government’s direct role in the housing market and better targeting our support towards first-time homebuyers and low- and moderate-income Americans.”

Yep, you read it correctly, their plan is to “…bring private capital back into the market, reducing the government’s direct role in the housing market…”  

We got the sense that this might be happening in 2011 (read about it here), but the statement above illustrates how far we've come.  This is the first time in the last 37 months that I’ve heard anything—actual policy, that is—remotely positive about private capital from this administration.  Except for occasional, vague, pandering, positive remarks about “small business”, the president has consistently portrayed private enterprise as something one might accidentally step in while mowing the lawn.  What’s important here is Mr. Obama’s implicit recognition of private capital’s importance: it can accomplish things the government simply cannot.

And they want to "wind down the GSEs"?  Fannie Mae and Freddie Mac were the mechanisms through which Washington helped create this mess.  I'm tearing up.  

An encouraging juxtaposition: the conclusion of the government’s $25 billion foreclosure suit means banks can begin to process the huge backlog of properties needing to be repossessed and sold.  Painful for the families involved, yes, but a critical healing step for the housing market.

State Exemptions from No Child Left Behind

On February 9, the U.S. Department of Education announced that 10 states, which had proposed their own school evaluation mechanisms, had been released from the dictates of No Child Left Behind.  “The goals of No Child Left Behind were the right ones,” the president noted in a statement.  But as Education Secretary Arne Duncan recognized: 

“rather than dictating educational decisions from Washington, we want state and local educators to decide how to best meet the individual needs of students.”

Excuse me?  “rather than dictating…from Washington”?  Who are you guys?

I know, I know—Mr. Duncan’s statement indicates that he wants power to go to the educators, not to school boards.  But, gee whiz, did you see that power back to the states thing?  

I can’t completely fault President Bush for NCLB.  It was an attempt to inject some measure of accountability into an industry (yes, industry) for the benefit of our children and their educations.  But let’s be honest: in NCLB he created a massive new federal program.  Would that he just deleted the whole U.S. Department of Education…but, I digress.  

What’s so heartening about these two pieces of policy—delivered only one week apart—is that they display awareness of the federal bureaucracy’s limits.  The more local our focus, the more effective our solutions.  My hunch is that these policies are just subtle enough that they’re not simply election year stunts.

 

So, nice job, Mr. President.  I’m still going to try to get you fired, but these changes are worthy of our hope.        

C'mon, John, Just Say it!

If you didn’t happen to catch House Speaker John Boehner’s summary of why congressional Republicans caved on their earlier demands to pay for the payroll tax cut with spending cuts, here it is.  His accusation that Democrats are playing political games isn’t at issue, rather it’s the insinuation that he and his cadre are taking the high road and not playing games.   

Really, Mr. Speaker?  Blech!

How refreshing would it have been to hear the Speaker say instead: “Look, everybody, we did our level best to force these spendthrift redistributionists to pay for their economically-ineffective-but-politically-popular, vote-buying tax cut with spending cuts elsewhere, but we failed.  And, in case you numbskulls hadn’t noticed it’s a rather big election year; it would’ve been political suicide for us to try to take the high-fructose corn syrup laden lollipop away from the diabetic toddler.”  

 

People love free stuff.  OK, the stuff’s not really free, but they don’t have to pay for it now and if we finance the purchase of the stuff with debt, chances are pretty good that eventually someone else will have to cover the tab.  Over time, people come to believe that the free stuff should always be free to them.  It becomes something to which they feel entitled.     

The Democrats clearly get that restoring taxes during a weak economic expansion won’t help anything.  But, surely, they also must know—deep down—how ineffective a temporary FICA tax holiday is, right?  I don’t know, maybe they’ve never been exposed to permanent income theory, but I'm inclined to give them the benefit of the doubt. Maybe that's too much to assume: our last president didn't seem to get that one and he was, a 'conservative'. Still, Democrats are always saying how much smarter they are than Republicans, so I think I'm safe.

Anyway, assuming Democrats do actually understand how silly tax holidays are, then we should expect them to propose a date or set of economic conditions as a trigger for restoring the tax to pay for Social Security’s obligations. 

On the other hand, when will it be politically feasible for Democrats to raise taxes on 'middle class families'?  Might the underlying strategy be a permanent shift of financial obligation for funding Social Security—from the beneficiaries to the 'rich'?

There’s one way to tell.  Someone should ask the Democrats at what point it makes sense to fully reinstate payroll taxes, and see what they say.  What kind of response would Rep. Boehner get if he asked that question?

It Looks Good on You, Though

With the closing of the comment period for the so called "Volcker Rule" ("The Rule"), the public waits to see what, if any, amendments are offered to this Glass-Steagall redux. The Rule prohibits banks (read: institutions whose capital is in part backed by FDIC guarantees) from engaging in proprietary trading (read: trading securities for the purpose of extracting profits).   Removing that sort of moral hazard is something many can agree on.

One common criticism of The Rule is that it bans a legitimate business model in toto rather than subjecting that practice to more stringent risk controls.  As is, it's a tacit admission by federal regulators that they really have no clue how to create and enforce risk controls and therefore, they'll just regulate the complexity right out of the picture.

It's a baby and bathwater thing. 

The public—still smarting from the financial crisis—and the Obama administration—still eager to shift all responsibility for the housing bubble away from Washington's failed policies—are both content to keep beating up on banks, so that objection hasn't gotten very far.

There’s another snag developing.  US government securities would be exempt from The Rule in its current form.  Why?  Well, those things are "risk free" of course!  Now, per the Wall Street Journal, Bank of Canada governor Mark Carney has weighed in saying, in essence, "But ours should be exempt, too!"  He has a point: the Canucks and their Loonies have been models of fiscal sanity compared to their drunken-sailor neighbors to the south.  Other foreign governments and some state and municipal governments may also be exempt, according to the WSJ.

But, as the article points out, why draw the line between governments and corporations?

Liquidity.

If large banks quit trading certain securities for their own accounts, the trading volume of those securities will decline dramatically.  If that should happen, any neophyte student of capital markets will tell you that the price / value relationship of those securities becomes more murky and investors, at the margin, will be less attracted to those instruments.

From the Obama Administration's perspective, a liquidity decline would be just fine for the securities of corporations—big, bad profit centers that they are.  But when you start talking about declining liquidity for Treasurys, well, that's a horse of a different color!

How much harder would it be to monetize the federal debt if the market for those bonds should become less liquid?  DC says simply: "Let's not even go there." 

The double standard reminds one of the scene in Caddyshack where Al Czervik (Rodney Dangerfield) notices "the worst looking hat [he] ever saw", only to realize that Elihu Smails (Ted Knight) is wearing that same plaid eyesore and quickly responds, "Oh, it looks good on you though!"

Washington seems to think that the prop trading restriction is an ugly hat for Treasurys.  But it looks just fine on corporations.