Victor Davis Hanson: Perverse Thoughts about this Perverse Recession

I do not understand at all this going into debt for almost another trillion dollars, and then immediately promising to balance the budget soon (like blowing off your foot near an emergency room), or how “stimulate” differs from “borrow”, or why the more noble victim is the one who sought to borrow too much for too much house and then defaulted, rather than he who chose to borrow less for less house and paid his mortgage on time each month and now subsidizes the less responsible. (The former apparently will still have the larger house, the latter the smaller.)

1) If one were, say, to have $400,000 in cash in a passbook account at either Citibank or Bank of America (both about broke), and also separately owed them $150,000 on a home mortgage; and if they went under, or had to recapitalize and then informed one that only the first $250,000 of the passbook was covered under FDIC (you laugh? But why have such deposit insurance limits, if all money in all savings accounts were really to be covered?), and thus admitted that they had lost one’s balance of $150,000 that exceeded federal insurance, could one then just say, “No problem, you canceled what you owed me, so likewise I just cancelled what I owe you on the house and we will call it even?”

2) If we put salary caps on CEOs whose companies beg for federal hand-outs (I have no objection to this), why not do the same for those who want mortgage bail-outs? If the government rescues their loans (through reduced principle or interest or both), then why can it not say that if the house is ever sold at a profit over the renegotiated and readjusted debt, the government is entitled to at least half the ensuing profits?

3) Can we ask politicians to give back monies received from now failed like entities like Countrywide? It is said that those who cashed out with Bernie Madoff, may, if the closing out was done recently, have to return their cash. Why then would not a Chris Dodd or Barney Frank not have to do the same thing—since at the time they were given the contributions, their benefactors were obviously insolvent, and had hid that fact from their share-holders? (I don’t know whether the now broke Tony Rezko would qualify under such a proposed statute, but he seemed to have little real capital when he blessed the Obamas, through a subsidized low price, with that strip of land adjoining their yard. His debtors, at any rate, would not have liked him to be so free with their money.)

4). Politicians have become like the CEOs they caricature. The only difference is that their poorly-run corporations cannot go broke. How odd to see a spendthrift Bank of America or Citibank mogul chewed up by a profligate Senator who is responsible not for $100 billion in subprime toxic assets, but for $13 trillion in run up deficits. Strange it is to see Nancy Pelosi rail about private jets for corporations that indirectly get US subsidies when she flies on one through direct government subsidies. The truth is that now it is far better to be Speaker of the House, Senate Majority Leader, or House whip making a paltry $200,000 or so than to be the head of Goldman-Sachs or GM. The jets are better, the traffic-interrupting motorcades are quicker, the perks, free food, gas, car, or limo are as good or superior, and the deference and status outdo those in the corporate world. A cabinet officer or Congressional leader gets all the slush of the CEOs without the risk or liability of going broke. There is no broke—ever. You come into office, spend, take the perks, and go out leaving a greater debt to your successor who likewise prints more money. And if you are a Ted Stevens, Charlie Rangel, Chris Dodd or John Murtha, instead of obscene stock options, your freebies aren’t even taxed—or known.

5) If we specify spending, cannot we line item debt? Imagine a formula— $1 trillion deficit = $333 billion more that Hillary begs from the Chinese to borrow; $333 billion in printing more money and inflating the economy; $333 billion we raise by appealing to the ‘patriotism’ of the “rich” who are to pay more taxes. It would be quite honest to match every borrowed dollar with every new spending plan: “Harry, you want that $6-8 billion rail line from Vegas to LA? Well then, fly to Tokyo and float a loan with Honda.” Or “Nancy, really want to save those poor mice in the mud of San Francisco Bay? Fine—but first inform 200 or so elites in Piedmont, Atherton, and Pacific Heights that they have to fork over $150,000 each for the extra $30 million.”

February 23rd, 2009

Some Reflections in the Times of Hysteria

Imagine…

Had anyone said a few months ago that the federal government would step in to provide a trillion dollars to subsidize gasoline—to bring it down to $1.85 a gallon nationwide from prices that were exceeding $4 a gallon—we would have had a national debate. And yet as quietly as the Iraq war cooled down and was ignored, so too we think nothing of the hundreds of billions of dollars saved in reduced energy costs. For the average driver who puts 15,000 miles on his car per year, the annual savings (depending on regional prices, miles per gallon, and the amount and type of miles driven) could reach $1500-2000.

Or contemplate again: What if the Chinese had announced three years ago that in a spirit of good will they would begin buying trillions of US Treasury bond at a .5% interest rather than the 3-5% of the recent past. The result, of course, would be a multi-billion-dollar stimulus for the indebted US economy that would enjoy a temporary reprieve from the cost of its indebtedness. (Remember, in the Carter years T-bills and US bonds were paying out 8-12% and more).

Natural Stimuli

In other words, there are natural stimuli—quite substantial ones—occurring that are lost amid the hysteria of foreclosure. Cheaper energy prices permeate throughout the entire economy from tractor fuel to fertilizers. Cheap foreign capital means renegotiating loans down to near 4% and several hundred dollars per month in savings on one’s mortgage. We are in a recession that has self-remedying qualities rather than justifications for the most radical changes in the economy since the Great Depression.

Haves and sorta have nots

Are we seeing an enormous transference of wealth? Those with capital who lost their stock accounts, and those who sold homes at a loss in some ways subsidized those who walked away from homes and credit card debt, or are renegotiating with the IRS and banks for reduced obligations. The illogical exuberance that resulted in purchase of “things” like televisions, cars, and vacations, financed in some cases by additional second and third (defaulted) mortgages (or 5th and 6th credit cards), was ultimately paid by someone else when the crash occurred—first by the lending agencies themselves, but ultimately (and soon) by the public through higher taxes or decimated retirement accounts, or those average Joes who had securities bundled among real estate debt.

Not Quite a Depression, After all

Another sobering thought. Over 92% of Americans are still at work. Over 90% are still servicing their mortgage debts each month. For these, the “depression” so far doesn’t mean a radical need to reinvent America. They plan to stay in their homes, even if they have negative equity in them; again, loss of equity doesn’t mean catastrophe if they don’t have to sell quickly, refinance, or remodel.

Ditto 401(k)s. If you are retired—terrible. If you are nearing retirement as many of us are—worrisome. But for those under 50, who still put away pre-tax dollars each month, there is a weird sort of solace. I have friends in their 40s who say they won’t pull anything out for a quarter-century, and would prefer to buy stocks and mutual funds now at rock-bottom prices, rather than as was true in 2005 or 2006 at the peak of the market. Quite logical—if the entire market doesn’t go belly up.

Meanwhile, gas, food, cars, houses, and consumer goods fall in price, a tremendous benefit for those still working, and one that translates in a rise in the purchasing power of their incomes.

Postmodern Poverty

And for the less fortunate? Here is southern Fresno County, at ground zero of the illegal immigration explosion, where unemployment reaches 14%, agriculture is in the doldrums and construction and manufacturing fare worse, the depression among the poor is still ambiguous, at least in historical terms.

I went into the local Food 4-Less again the other day, a cut-rate, bulk-buy chain food store. The parking lot was full of late model trucks and cars—not the sort I prefer, but those V-8 monsters, loaded up with high-priced rims, wide tires, custom paint, tinted windows, oversized trailer hitches, the whole American shebang so to speak that tops out at around $40,000. The customers may have been out of work, but I counted nine, just nine, of some 100 (this was a research trip for this blog posting), who did not have one of the following four appurtencies visible—cell phone, Bluetooth, blackberry-like device, I-pod. On the way out of the parking lot, the car radio was blaring with three sorts of ads: get out of credit card debt, get out of mortgage debt, get out of back IRS payments—now! Easy! Little cash upfront! This is not Bleak House as we are led to believe.

We are hurting, but not in 1933 fashion, due both to expanded government entitlements; Chinese-made cheap consumer goods; the fumes of past easy credit; black market, untaxed temporary cash and carry jobs (a vastly underestimated source of enormous income); and a culture that absolves one of the shame of reneging on debt (or perhaps even admires the possibility of a phoenix-like resurgence from loser to winner, and has a grudging admiration for the machinations involved in such rebirth).

I’m not sure this is even the 1979-83 recession where finally we got 10%-plus unemployment, 18% interest, and 12% inflation—a topic I once devoted a book to, Fields Without Dreams. Then I remember seeing Cryolite bags go up 10% every six months. I remember raisin prices going down from $1400 a ton to about $450. I remember vineyard prices falling from $15,000 an acre to $3500. I remember taking out Federal Land Bank loans at 13%, and short-term Bank of America crop loans at 15%. And I remember pickers getting 22 cents a grape tray in 1980—and 11 cents in 1983. I bought a used Pontiac Grand Prix (a fixer-upper that had been totaled) for 12% interest. So, I am sorry. This is not quite yet the early eighties recession, and I am not yet convinced that the baby-boomer generation that has come of age cannot ride this out without adopting European-socialism as a cure.

Thoughts on a Wrecked State

Meanwhile a popular parlor game out here is to argue over what caused California’s mess—an inept Terminator as governor; a wacky state legislature that is the dividend of insanely gerry-mandered districts; refined, out of touch elite environmentalists who sued and blocked everything from agriculture and forestry to oil, natural gas, and nuclear energy production?

Or was it the murderous tax code that, to pay for income redistribution, demands the highest sales and income taxes in the nation, and drives out the best and brightest, while welcoming in the high-school dropout and eighth-grade graduate?

Or was the problem state regulations that make it almost impossible to run profitably a small business in compliance with rules that no one can fathom, and which seem designed only to employ more unproductive state bureaucrats?

Or was it the 4-million plus illegal immigrants who over a span of some 30 years, on average per capita will draw well over $50,000 more in entailments than they contribute in taxes?

Or was the rub a powerful state employee bloc, one that consistently demanded raises not tied to performance, but often well over the rate of inflation? (Indeed, many making over $100,000 got raises this year while the state remains nearly $40 billion in debt).

Or was it the out-of-control unionized, overcrowded prison system, that, after hundreds of law-suits and hundreds of millions in court costs, elevated incarceration into some utopian enterprise?

Or was it, to be candid, the screwed-up, shared California mentality, that wants everything now and in perfection, but has not a clue how to pay for it, or a care about the nebulous distant, but evil “they” who are to provide for it. (And a growing state work force that votes for its own excess, since it rarely sees any more the entrepreneur who once paid for it [and is on his way to Idaho or Nevada]).

I don’t know the precise calculus of failure.

Cry the Beloved State

But I do suggest that one culprit was the state proposition system, our bi-yearly experiment in direct democracy in which for the last three decades we voted in all sorts of unfunded mandates, bonds, borrowing schemes and environmental prohibitions about this and that. And we did all this in a state whose high schools in many regions are only graduating 60% of their students. And of those who do graduate and go to college at the popular state college system, 50% must first take remedial math and English classes.

A half-educated, or indeed illiterate, electorate at the polls, voting for instantaneous entitlement, is, as thinkers as diverse as Aristophanes and Alexis de Tocqueville warn us, a rather dangerous thing indeed. And so it is as we see in our late, great California

We should have a Dantesque sign on freeway 80 as you enter the State:

“Abandon hope all ye who enter here.”

No More Farm Handouts? [Victor Davis Hanson]

If President Obama were to end outright ALL direct cash subsidies to farmers, then we indeed would owe him a debt of gratitude for his wisdom, courage, and skill in ending such a corrupt and ossified program. The last time George W. Bush tried it, farm state Senators — both Democratic and Republican — brought out all the Depression-era rhetoric about "family farmers" and "national security" for their subsidized corporate clients, and we got nothing. If Obama continues the program and just adds means testing, it will simply remain a boondoggle and morph back into what it was in no time. (Remember how farm subsidies started.)

02/25 08:28 AM

A not-a-voodoo economics lesson: (from an e-mail - so, no source):

Shortly after class, an economics student approaches his economics professor and says, “I don’t understand this stimulus bill. Can you explain it to me?”

The professor replied, “I don’t have any time to explain it at my office, but if you come over to my house on Saturday and help me with my weekend project, I’ll be glad to explain it to you.” The student agreed.

At the agreed-upon time, the student showed up at the professor’s house. The professor stated that the weekend project involved his backyard pool. They both went out back to the pool, and the professor handed the student a bucket. The professor said, “First, go over to the deep end, and fill your bucket with as much water as you can.” The student did as he was instructed.

The professor then continued, “Follow me over to the shallow end, and then dump all the water from your bucket into it.” The student was naturally confused, but did as he was told. The professor then explained they were going to do this many more times, and began walking back to the deep end of the pool.

The confused student asked, “Excuse me, but why are we doing this?” The professor matter-of-factly stated that he was trying to make the shallow end much deeper. The student didn’t think the economics professor was serious, but figured that he would find out the real story soon enough.

However, after the 6th trip between the shallow end and the deep end, the student began to become worried that his economics professor had gone mad. The student finally replied, “All we’re doing is wasting valuable time and effort with unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before, so all you’ll really have accomplished is the destruction of what could have been truly productive action!”

The professor put down his bucket and replied with a smile, “Congratulations! You now understand the stimulus bill.”

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