As another G20 meeting rolls around, this time on home soil, the time comes once again for the economically curious but politically unconnected to wonder what is really happening behind closed doors. But while admiring the pageantry, chuckling at the awkward group photos, and parsing the joint communiqués like newly found Dead Sea scrolls, the overwhelming majority of observers will miss the meeting’s dominant theme: hypocrisy.
Everyone agrees that the principal agenda item in Pittsburgh will be the need to rein in the ‘global imbalances’ that created the late economic crisis. Everyone also agrees that these imbalances involve too much spending and borrowing by Americans and too little of both by the Chinese and other developing nations. In his remarks this week at the United Nations, President Obama used his peerless rhetorical skill to frame the issues clearly and plainly. Noting that a return to pre-crisis economics is impossible, the president assured the world that his administration will pursue policies to increase savings and decrease spending at home and challenged his Chinese counterparts to enact measures with the opposite effect in their own country.
While this is roughly what needs to happen, President Obama is actually doing everything in his power to prevent it. In point of fact, every policy move undertaken by his administration has exacerbated the very imbalances he supposedly wants to curtail. To so seamlessly profess one goal while simultaneously undermining it is an impressive piece of political theater. Unfortunately, this particular drama is likely to have an unhappy ending – and the ticket price will be staggering.
What exactly are the federal fiscal stimuli other than deliberate, but clumsy, efforts to get people, companies, and governments to spend money they don’t have? Programs like tax credits for new homebuyers or ‘cash for clunkers’ are intended to encourage consumers to spend money that they otherwise might have saved. Grants to municipalities allow them to hire workers and spend money locally that they otherwise would have forgone.
As we pass the one year anniversary of the fall of Lehman Brothers, journalists, politicians and market analysts have seized on the occasion to offer seemingly sober assessments of what went wrong and what went right in the lead up and aftermath of the biggest financial event since Black Tuesday.
The most popular storyline offered by these Monday morning quarterbacks is that the mistaken decision to allow Lehman to fail resulted from the Bush Administration’s misplaced faith in the free markets. In this telling, the real crises began in the days following the Lehman bankruptcy, which unleashed a financial panic that would have caused complete economic collapse – if not for the subsequent federal intervention.
In reality, Lehman’s demise was simply the result of an unfolding crisis that began years before. Popular belief aside, allowing the institution to succumb to the overwhelming debts on its balance sheet was perhaps the only correct decision made by government since this crisis began. The propagandists’ complete reversal of cause and effect now threatens to spur the government to compound prior mistakes and bring on the next phase of the financial crisis. Unfortunately, this chapter will likely be much more dangerous than what we saw last fall.
In March of 2008, in the aftermath of the Bear Sterns “bailout” (which itself was a major mistake), equity shareholders walked away with a generous ten dollars per share, all creditors were made whole, and most employees got jobs and bonuses from JP Morgan. As a result of this largess, the Fed created a very serious problem for itself. After Bear, the perception took hold that investment banks were too “interconnected” to fail. The resulting moral hazard decreased the financial stability of the banking system and exposed taxpayers to open-ended risks. The Bush administration rightly determined that a message needed to be sent that Bear was an isolated case, and that capitalism still held sway on Wall Street. The fall of Lehman, which was helped along by the unrealistic recalcitrance of its chairman Richard Fuld, would be that clear signal.
However, politics quickly trumped economics, and the Lehman trial balloon soon turned into the Hindenburg. Washington had no stomach for the ensuing financial carnage, and when other institutions began to topple, Bush, Paulson and Bernanke abandoned their prior convictions and threw all they had into the ensuing bailout bonanza. As a result, the moral hazard that they had sought to avoid now exists on a scale unprecedented in our history. Capitalism has been extinguished on Wall Street, and our financial institutions now exist as public utilities. The presidents of our biggest banks are now the highest paid civil servants in the world!
Here is the video from MSNBC’s “Morning Joe” of Peter Schiff officially announcing his bid for Senate in Connecticut. Everyone seems to be focused on his potential opponent Chris Dodd and overlooks the fact that he must win the GOP primary first. He’s not even the front runner in the primary…. yet.
Just minutes ahead of his announcement on MSNBC this morning Schiff sent out an email to his mailing list announcing his candidacy for U.S. Senate. So chalk Schiff up as yet another “Ron Paul Republican” running for office in 2010.
You’re the First to Know
Dear Friend,
Well, it looks like you have made a difference.
Based upon the unbelievable support that I have receieved from 10,000 supporters like you, I have decided to throw my hat into the ring to challenge Chris Dodd for the honor of representing the state of Connecticut in the United States Senate. I will announce my candidacy on MSNBC’s Morning Joe show on Thursday, September 17 at 8:15am eastern time. Sorry for the short notice, but its important to honor commitments and keep these things under raps until the day the news breaks.
At this time last year I could not have imagined that that I would be making such an announcement today. I had never intended to become a candidate for public office. But these are extraordinary times. Our economy is falling apart in front of our eyes and Washington seems intent on making the wheels come off even faster. At a time when we desperately need adult supervison, the economically illiterate are running the show. As I love my country, it now seems clear that I must try to do something to help. The emotional and material support I have received from across the country has made the decision much easier.
So today it begins. As I’m sure you are aware, the rules in politics bear only scant resemblance to those which govern polite society. As a result, I am wading into strange waters, and I’m sure strange things will happen. But I promise to maintain my composure and give it my best shot. Based on the support that I have received thus far, I fully expect to be facing down Chris Dodd in the general election just 14 months from now.
As my campaign takes flight, I appreciate the patience and trust that you have shown. To commit time and money to a long shot candidate for high office is a hard choice. I hope to repay that trust with a first class campaign.
I look forward to your feedback and your continued support.
Peter Schiff has raised more than $1 million for a U.S. Senate bid he has yet to formally announce. But that could come on Thursday, when Schiff said he will state his decision on MSNBC’s Morning Joe show.
Schiff has an uphill battle, but he hasn’t really done much campaigning or fund raising yet is very close in the few polls that have been released. The GOP primary field is crowded and while many are focused on Dodd the primary must be won first.
by Peter Schiff, president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets
Ayn Rand wrote, “when you see corruption being rewarded and honesty becoming a self-sacrifice – you may know that your society is doomed.”
America is not doomed, but the fellows in Washington are pushing for that outcome. It seems that all the characters that encouraged this financial crisis are being rewarded, and Ben Bernanke’s re-nomination is no exception to this rule. He was on the Board of Governors when Alan Greenspan grew our bubble economy. Known as ‘Helicopter Ben,’ Bernanke was the most vocal supporter of low interest rates to combat the bogus threat of deflation, even if it meant dropping cash from helicopters. He succeeded in his aim – as it is hard for prices to decline while the money supply is growing by double digits.
Of course, much of that new money went into speculative bubbles, first in tech and then real estate. When the misallocation became too great to ignore, the credit markets froze and leveraged institutions started failing. Now, Bernanke says that he doesn’t want to preside over another Great Depression. That doesn’t mean he doesn’t want another Great Depression; he just doesn’t want to preside over it. His plan seems to be continuing to print money so that the depression isn’t apparent until after he leaves office. However, while Greenspan was able to get out of Dodge, Bernanke will probably not be so lucky, as his reappointment virtually guarantees that he will be in the middle of the action when the bullets start to fly. Left to clean up his own mess, Bernanke will soon regret not quitting while the going was good.
by Peter Schiff, president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets
After having given away billions faster than even the optimists had anticipated, it was announced today that the federal government’s “Cash for Clunkers” program is coming to an early end. But, based on the standards of economic analysis which prevail in Washington, Wall Street and academia, the program must be considered a master stroke of public policy. These experts will tell you that by mandating that citizens destroy older (but still working) vehicles to receive $4,500 toward the purchase of a new car, the program not only revved up the economy by encouraging Americans to borrow more, but it may have, perhaps, made some great strides in saving the planet by reducing carbon emissions.
With this solid win-win now on the books, the time has come to put the strategy to work in other areas. For instance, the government could use these lessons learned to help the moribund housing sector. I propose the “Dough for Dumps” stimulus program. Here’s how it would work:
Homeowners struggling to make payments on environmentally inefficient homes can apply for government aid to destroy their old homes and receive guaranteed loans to buy newly constructed houses, provided they are furnished with the latest “green” advancements in energy systems and building materials. As with the “Cash for Clunkers” program, this plan would solve many problems at once.
First, it will help put a floor under falling home prices by reducing the glut of houses currently on the market. The best way to stop prices from falling, and thereby reduce the foreclosure wave, is to reduce supply.
Left alone, the market would do this by lowering prices, which would bring more buyers into the market. But this approach falls on the back of homeowners whose only crime was to overpay for a house. A more socially equitable method would be for all taxpayers to shoulder the burden through a government bulldozing program.
In addition to contracting the supply of homes, the program would also stimulate the economy by providing funds to hire environmentally savvy builders and contractors (not to mention the workers needed to demolish the old homes). The resulting demand would help to reduce unemployment, especially in the housing sector. Government incentives and subsidies could also give an important boost to the developers and manufacturers of “green” windows, solar heating systems, furnaces and water systems.
Once this program has rejuvenated the real estate market, citizens should also be encouraged to burn their old furniture and clothing, thereby sparking demand for new goods from our nation’s struggling retailers. When you think about it, the possibilities are endless.
by Peter Schiff, president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets
The nationwide revelry surrounding our apparent economic recovery was disrupted this week by the release of lower-than-expected retail sales data. However, rather than sending a chill up the spines of those hoping for a quick end to the downturn, the numbers should be welcomed. Though this may come as a surprise to most observers, lower retail sales are precisely what our economy needs.
To return our economy to health, we must first allow market forces to ring out the excesses of the bubble years. Even government economists acknowledge that this decade’s spending boom resulted from a combination of asset bubbles and the dangerous overextension of consumer credit. Yet the same economists balk at the logical need for spending to drop now that the stimuli are no longer in effect. They argue for the resumption of spending by any means, regardless of its ultimate cost. This is a recipe for momentary gain and lasting pain.
America’s economic vitality will never be restored until we rebuild our savings and pay down our debts. To build back up, we must change the pattern of capital flows from the phony economy. It is a painful process, but one that will leave our economy on a stronger foundation. Unfortunately, Americans cannot accomplish these goals unless they stop shopping, live within their means, and replenish their savings. Though this may be problematic for retailers, it is beneficial to the overall economy.
But rather than accepting the market’s medicine, our government is overriding its own citizens’ responsible behavior. To do so, it has put borrowed money into consumers’ pockets, and then conjured various incentives for them to go out and spend it. This process requires more government bureaucracy, more debt, and more regulation at a time when we can’t afford any of it.
In contrast, I believe that we must restore the conditions that led to our economic preeminence. We must once again become the leader in economic freedom. This entails dismantling a significant portion of our federal and state governments, repealing countless unnecessary regulations, significantly lowering and simplifying taxes, and reinstituting sound money. If we accomplish these tasks, conditions will be ripe for a lasting recovery that solidifies our place at the top of the global economic totem pole.
I apologize for the obvious headline. I couldn’t resist. It’s beginning to look like Peter Schiff may run against Chris Dodd in 2010. The Schiffathon, a money bomb held yesterday and continuing today has helped Schiff’s exploratory committee raise over $750,000 dollars in total for his potential campaign thus far.
Once the $750k was reached a small thank you message was displayed on his website and a new goal of $850k was created. While the sum of money isn’t as great, it is reminiscent of those huge money bombs for Ron Paul back in the primary season of 2007 and 2008.
Given the amount of enthusiasm for Schiff running against Dodd along with the fund raising it is hard to believe Peter won’t officially declare his candidacy at some point soon. An announcement either way may come around Labor day weekend according to Schiff.
by Peter Schiff, president of Euro Pacific Capital and author of The Little Book of Bull Moves in Bear Markets
There is an inexplicable, but somehow widely held, belief that stock market movements are predictive of economic conditions. As such, the current rally in U.S. stock prices has caused many people to conclude that the recession is nearing an end. The widespread optimism is not confined to Wall Street, as even Barack Obama has pointed to the bubbly markets to vindicate his economic policies. However, reality is clearly at odds with these optimistic assumptions.
In the first place, stock markets have been taken by surprise throughout history. In the current cycle, neither the market nor its cheerleaders saw this recession coming, so why should anyone believe that these fonts of wisdom have suddenly become clairvoyant?
According to official government statistics, the current recession began in December of 2007. Two months earlier, in October of that year, the Dow Jones Industrial Average and S&P 500 both hit all-time record highs. Exactly what foresight did this run-up provide? Obviously markets were completely blind-sided by the biggest recession since the Great Depression. In fact, the main reason why the markets sold off so violently in 2008, after the severity of the recession became impossible to ignore, was that it had so completely misread the economy in the preceding years.
Furthermore, throughout most of 2008, even as the economy was contracting, academic economists and stock market strategists were still confident that a recession would be avoided. If they could not even forecast a recession that had already started, how can they possibly predict when it will end? In contrast, on a Fox News appearance on December 31, 2007, I endured the gibes of optimistic co-panelists when I clearly proclaimed that a recession was underway.
Liberty Maven
by Peter Schiff, president of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit from the Economic Collapse
by Peter Schiff, president of Euro Pacific Capital and author of 
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