Krauthammer On Target about 2012 Budget Cuts; Will Obama Allow Default?

U.S. Treasury Dept. building (Dreamstime.com)

Where are we on the debt-ceiling negotiations? Do we need to raise the debt ceiling? What if there is a default? Will the military get paid? Will Social Security and disability checks, and veterans’ benefit checks go out?

We are faced with a weird combination of actual danger and fear mongering. There are some facts to be considered when following the “negotiations,” which increasingly look like a stalemated process, but which, as August 2 nears, are likely to end in some kind of agreement to raise the debt ceiling. Conservatives can only hope that the GOP leaders can manage to assert their House majority power and hold firm on (1) real cuts and (2) no tax increases.

One way of addressing this is the “cut, cap and balance” legislation the House Republicans are uniting behind. It addresses the issues of the day and offers a mechanism to bring spending under control for the longer term.

I think GOP should consider the advice of Charles Krauthammer, and require substantial cuts in the 2012 fiscal year. The president wants everything to happen after the 2012 elections, giving him an election-year pass on these issues. Also, Mr. Krauthammer suggests, wisely, I think, that the GOP should point out the president’s way of framing all his arguments, that only he is the one trying to resolve the issue, while his opponents are only seeking to help billionaires and special interests, and further their own political interests. If the president is so serious about budget cuts, where was he in the last two years? Along with the congressional Democrats, who presented no budget at all, he was very busy not presenting a budget that might cut spending, knowing full well that a serious, extended agreement on the debt ceiling was needed. Now, he’s suddenly the hero of the hour?


Social Security checks’ status in the event of default represents a curious issue. Mr. Obama, cynically using seniors’ and veterans’ checks as a bargaining chip in the negotiations, says August checks may not go out if default happens. This contradicts his Office of Management and Budget Director’s statement that the Social Security Trust Fund is solvent through 2037, so no discussion is needed. However, this is untrue. As pointed out, again by Charles Krauthammer, as well as others (Gary North, for example), the Social Security Trust Fund has no tangible assets. It has been raided and spent by the politicians for decades. What it has are non-negotiable government bonds (IOU’s). It’s not only not solvent through 2037, it’s barely, if at all, solvent now.

In fact, the big three programs, Social Security, Medicare, and Medicaid, are a ticking financial time bomb, representing unfunded obligations of tens of trillions of dollars. Yet the Democrats have no desire to deal with this.

It has been said that military and Social Security checks, etc. for August will go out unless either President Obama or Treasury Secretary Timothy Geithner issues orders to stop them. If there is any real possibility of them not going out, then the Administration needs to get its priorities in order. And they ought to apologize for lying to us about the solvency of the Social Security Trust Fund. Rep. Allen West views Obama’s threat as “sad, pathetic, and fear mongering” (video via CNS News):



Of course there are other consequences if default happens: Markets will respond negatively, America’s creditors may be ready to cash in, etc. The world’s safest investments, U.S. Treasury bonds, may be seen as not so safe after all. Anyway, a default would be bad. How bad, we’ll have to wait and see, if it happens.

A few points to remember:

1. Even though G. W. Bush over-spent, his deficits pale in comparison to what the Obama regime has added to our debt.


2. Obama has never been serious, and is not now serious about spending cuts. He still wants a trillion-dollar tax increase (in addition to what we’re scheduled to get under Obamacare). He wants any spending cuts that are agreed to, to happen in the out years, well past election day.


3. He constantly says the Republicans are only interested in political posturing, when what they are trying to do is the thing they were elected to do. Obama is the one who wants smooth sailing into the 2012 elections. He wants to blame the GOP for anything that goes wrong, and he steadfastly refuses to show actual leadership on anything to do with the debt or budget. He threatens to veto “cut, cap and balance” if the Congress passes it. His strategy is to stir up class warfare.


4. As has been pointed out numerous times, even if Obama could take all the money from all the rich, it wouldn’t even begin to solve the problem.

If “cut, cap, and balance” somehow passes both houses of Congress and lands on Obama’s desk, the GOP should not offer any further deals. In fact, they shouldn’t anyway. Let Obama deal with the default. It will be his choice. Sen. Mitch McConnell is right about one thing: these problems cannot be adequately dealt with while Obama is still in office. But Republicans need to stand strong if they are serious about spending cuts. Otherwise, it’s just more of the same tax-and-spend and the Republicans will be weakened as a result of caving.

Related articles

• Social Security benefits, the trust fund and why the federal budget and deficit matter (quinnscommentary.com)
• Obama officially threatens to veto 'Cut, Cap and Balance' (thehill.com)
• Call Obama's bluff? YES! (thedaleygator.wordpress.com)

Senator Dodd’s Toxic Financial Regulatory Bill

Let’s start with some assumptions most people could agree with, or at least understand:

1. If people (such as creditors or customers) know that the government or the Federal Reserve is going to bail out any failing large bank (especially, politically-favored ones), they will lend to it with less concern about the risk than would otherwise be the case. In 2008, the government forced the nine largest banks to accept TARP money whether they wanted it or not, and also bailed out others.

2. If big bankers know that government will step in and help them if they make bad decisions that result in big losses, they will be less careful than otherwise in operating their banks. Also, their response to competition will be skewed, because they know other big banks enjoy that same assurance. Thus we have essentially a cartel of large banks, protected by the Fed (whose main purpose is to protect large banks) and the government.

3. When the government creates a multi-billion-dollar special fund, the expense ultimately belongs to the taxpayers.

4. A government program to protect any “too big to fail” bank or private business of any kind is a violation of public trust, and an unjust burden on taxpayers.

In Treasury Secretary Timothy “Bailout” Geithner’s Washington Post op-ed, he says,

Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts. Instead, we will have a bankruptcy-like regime where equityholders will be wiped out and the assets will be sold.

These are important steps, but they are not enough. Ending "too big to fail" also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows… [1]

No more bailouts? Read on.

Geithner also says,

All of that [new regulation] means major global financial institutions -- whether they look like Goldman Sachs, Citigroup or AIG -- will be required to operate with less leverage and less risk-taking.

No exposure to taxpayers? As Conn Carroll at The Heritage Foundation reports,

But does the Senate bill’s “bankruptcy-like regime” solve the “too big to fail” problem? No. In fact it makes it worse. What the Dodd bill actually does is create a new $50 billion fund to be used in “emergencies” for restructuring firms deemed too close to bankruptcy. And who gets to decide when there is an emergency and which firms are too close to bankruptcy? You guessed it: Treasury Secretary Timothy Geithner. The Dodd bill is thus nothing but a permanent extension of Secretary Geithner’s TARP powers. [3] (Emphasis added)

So, put briefly, the government wants to take unto itself micro-management of financial institutions, telling them what kinds of business and risks they can and cannot deal with, and also the government would acquire the ability to take over any financial institution they please, whenever they please, and force it to quit business and be split up.

If the Administration is actually concerned about “too big to fail,” they would simply say OK, no more bailouts, period. If bankers know they will never be bailed out, they will choose to operate with less risk, and will be more careful in their decisions. If you go under, you go under, and normal procedures (bankruptcy, etc., not a “bankruptcy-like regime”) will be followed. If it messes up the system, so be it, the market is self correcting. With the government’s “bankruptcy-like regime,” the Administration, not a bankruptcy court, will rule, and Geithner (read: Obama) gets to pick board members, etc. Also, he will pick winners and losers since he would have complete authority to decide what institutions need to be dealt with under this bill.

The government seeks to impose new regulations, and some regulations are needed. The needed items could be added simply by updating some SEC rules (such as overseeing derivatives). But this is the wrong approach, and, in effect, just makes TARP permanent and arbitrary enforcement inevitable. What this government “regulates,” beyond existing rules, they will seek to take over. When Congress gives them a blank check, they will use it to redistribute wealth and take more control. Geithner also discusses an “international” system of similar controls which the Administration would like to see. Our entanglement in other countries’ financial troubles is already beyond reasonable limits. We don’t need any more.

As usual, in President Obama’s proposed laws, the “Secretary” gets vast power. Thus Obama gets vast power. His already fascist regime is constantly working on new takeovers and ways to remove individual freedom and decimate the private sector. Even if the Supreme Court eventually rules some of his initiatives unconstitutional, it may be too late to stop the destruction they cause. That happened under the New Deal.

An AP article by Jim Kuhnhenn reports,

Aides said Senate Republican Leader Mitch McConnell in the meeting urged Obama not to cut off bipartisan talks. Afterward, McConnell still insisted that the Senate bill “will lead to endless taxpayer bailouts of Wall Street banks.”

That was the message McConnell delivered earlier Wednesday on the Senate floor — the second such attack on the bill in as many days. He said the White House plans the same approach on financial reforms that it took on health care: “Put together a partisan bill, then jam it through on a strictly partisan basis.”

White House economist Austan Goolsbee dismissed the GOP objections as “totally disingenuous.”

“Bailouts are forbidden,” he said in an interview. “There will only be wipeouts. They (the banks) will clean up the messes. If somebody fails, they're done — they're toast. The management is fired. They're broken up or sold off or liquidated.” [4]

But McConnell is correct. One may hope the Republicans can filibuster this.


[1] Timothy Geithner, “How to prevent America’s next financial crisis,” 04/13/2010, Washington Post.

[2] Ibid.

[3] Conn Carroll, “Wall Street Bailouts Forever,” 04/14/2010, The Foundry blog, Morning Bell, The Heritage Foundation.


[4] Jim Kuhnhenn, “Obama, GOP wrangle over Wall Street regulations,” 04/14/2010, Associated Press via Google News.

Photo: Dreamstime.com

How’s That War on Wall Street Going?

“The government’s key policy lever should be to make sure that institutions hold enough capital to reflect the risks that they run and the threats that they pose to the rest of the financial system.” – Financial Times editorial [1]

There is broad consensus that regulatory measures should be taken in regard to Wall Street firms in order to lessen the likelihood of a financial meltdown such as we saw in 2008. There are several options ranging from tweaking to government takeover. President Barack Obama has reportedly declared war on Wall Street, and it is doubtful that this approach will end up helping the situation.

Treasury Secretary Timothy Geithner is not the front man for Mr. Obama on his reform effort. Instead, former Federal Reserve Board Chairman Paul Volcker is the spokesman. This leads us to wonder what Geithner’s role is now. Is Volcker the “reform czar”? Obama is championing the Volcker plan that would stop big banks from their proprietary trading, and set up measures to sell or merge “failing” financial institutions.

While these measures seem doubtful of approval, the stated goals are worthwhile: no more bailouts and no more institutions “too big to fail.” This should be the government’s and the Fed’s position immediately. The bailouts of 2008 should never have happened.
Christopher Dodd, Senate Banking Committee chairman, had said the Volcker plan is too ambitious. But what would it be replaced by? Something not so strong, or nothing at all?

Atlantic has an online article by Daniel Indiviglio titled “Dodd’s Resistance To Volcker Plan Should Signal Its Death.” The article states that while Dodd is not opposed to new regulations in theory, he thinks Obama’s plan is too far-reaching and seems to step on the toes of his committee. [2]

While Geithner has reportedly been working with Wall Street executives during and following the bailouts, Obama seems to be undermining his efforts through his populist rhetoric painting Wall Street as the enemy. Obama does his best to play up the executive bonuses as “shameful” as Americans are struggling with unemployment, etc. Several banks were forced to take bailout funds in 2008 (in exchange for government equity positions), fearing this same type of government opposition, and those who wanted the bailouts should have been aware something like this was coming. Government funds equals government control, roughly in proportion to funds provided.

Now that much of the bailout money has been paid back, Obama is still not satisfied and wants to further press control. Regulation is one thing, but putting Wall Street on his enemies list is another. It’s there, along with Fox News and Las Vegas.

“‘We have to get this done,’ Obama said at the White House. ‘If these folks want a fight, it's a fight I'm ready to have.’” [3]

Banks Don’t Want a Fight
According to Richard Schmidt’s article of 01/27/2010, “Industry officials said they were stunned. ‘We did not know it was coming, that’s for sure,” said Scott Talbott, a lobbyist for the Financial Services Roundtable, which represents large banks and insurance companies …’

“We don’t want to fight the administration,” said Rob Nichols, whose trade group, the Financial Services Forum, represents the chief executive officers of the largest financial companies. “We just want to sit at the table and have a productive conversation about the kinds of reforms needed to address the real causes of the recent crisis.” [4]

But after Obama’s disappointing loss of a Democratic Senate seat for Massachusetts, he’s putting increased emphasis on some of his populist villains, whom he has characterized as “fat cats.” Not exactly presidential terminology. But politics comes first.

The president has announced plans to recover the TARP bailout money through a new fee on large banks, even including those who have paid back TARP money or never received any. He wants to impose strong new regulations on them, i.e., the Volcker plan. And he wants to severely restrict executive compensation. There is strong opposition to all these plans.

Wall Street and NY Officials Will Fight Back
According to an AP article appearing at CNS News, “Financial industry officials are especially frustrated by a proposed change they see as political and punitive without doing anything to prevent future crises. They say the changes would not have prevented the largest bank failures of the crisis.” [5]

Some New York Democratic politicians are going to oppose Obama on this, recognizing that a large amount of tax revenue (state and city) normally comes from the large bonuses paid to Wall Street executives. Mayor Michael Bloomberg recognizes this, and previously voiced concerns over the state’s proposed “millionaires’ tax,” because much of New York City’s budget is provided by taxes on wealthy people, and increasing them more will motivate many to move out, potentially causing a (more) serious financial crisis for the city.

Henry Blodgett of Business Insider reports as follows: “Mayor Bloomberg said the banks and Wall Street are part of the bedrock of the city's economy, and efforts to slash their business just means less tax revenue for the city, which brings up the dreaded ‘L’ word.

“‘If that's the case then we'll have to lay off people because it will really hurt our industry,’ Bloomberg said…”

“‘Maybe we should hold back their [Congress’s] salaries for a decade or so and see whether the laws they pass work out,’ Bloomberg said.” [6]

To which Politico adds:
“‘They may be an enormous amount of money for one person,’ Bloomberg said last year when Obama proposed capping executive pay, ‘but they are how our people in the city in all industries get paid.’”

New York Governor David Paterson (D) objects to Obama’s plans to restrict Wall Street. “‘In New York, Wall Street is Main Street,’ Paterson told a receptive audience at the Museum of American Finance in December.” He is joined in his objections by Senate candidate Harold Ford, Jr., and Congressional candidate Reshma Saujani, both Democrats. [7]

Wall Street executives are reluctant to complain too much, knowing that their large bonuses don’t attract any sympathy from the public, but they are attempting to defend their interests through lobbying, possible legal actions, and even some public relations efforts. The following video is an example:



Conclusion:
No one appears to be claiming that banks’ proprietary trading caused the financial crisis. On the other hand, such trading seems to lead inevitably to conflicts of interest by undermining the interests of the banks’ customers. This does not seem to be the heart of the issue at hand, although it deserves some attention.

Banks need to be put on notice that they aren’t going to be bailed out any more, and can’t be “capitalist” with profits but “socialist” with losses. They likely have the idea, supported by government bailouts, that they are “too big to fail,” and government will bail them out again if they have big losses. Thus they have less incentive than they should to operate efficiently and safely.

There are several issues of regulatory change for the financial sector that need to be worked out. But there need not be a “war” waged for political purposes.


[1] Financial Times editorial, “A declaration of war on Wall Street,” 01/20/2010.

[2] Daniel Indiviglio, “Dodd’s Resistance To Volcker Plan Should Signal Its Death,” 02/03/2010, Atlantic.

[3] Philip Elliott and Daniel Wagner, Associated Press, “Obama Says He’s Ready for a Fight With Wall Street Firms, As He Calls for New Regulations,” 01/22/2010, CNS News.com.

[4] Robert Schmidt, Bloomberg, “Wall Street Firms Don’t Want to Wage War on Obama,” 01/27/2010, Business Week.

[5] Elliott and Wagner, see [3].

[6] Henry Blodgett, “Bloomberg Blasts Obama's War On Wall Street, Says Congress Salaries Should Be Held In Escrow For 10 Years Until We See How Their Laws Worked Out,” 01/22/2010, Business Insider.

[7] Ben Smith, “N. Y. insurgents stand up for Wall St.,” 01/30/2010, at Politico.

Photo: Dreamstime.com