As you probably know, I am no fan of a gold standard (see my http://haroldblack.blogspot.com/2011/06/all-that-glitters.html). The best solution is the Fed to limit discretionary monetary policy (now used to hold down Treasury rates) and to prohibit the fed from monetizing the national debt (purchasing Treasurys directly from the Treasury). So says monetary theory. So says the empirical evidence. However, I was sent this absolutely brilliant speech to the NY Fed and felt compelled to share it.
A Piece Of My Mind
By Jim Grant
My friends and neighbors, I thank you for this opportunity. You know, we are friends and neighbors. Grant's makes its offices on Wall Street, overlooking Broadway, a 10-minute stroll from your imposing headquarters. For a spectacular vantage point on the next ticker-tape parade up Broadway, please drop by. We'll have the windows washed.
You say you would like to hear my complaints, and, on the one hand, I do have a few, while on the other, I can't help but feel slightly hypocritical in dressing you down. What passes for sound doctrine in 21st-century central banking—so-called financial repression, interest-rate manipulation, stock-price levitation and money printing under the frosted-glass term "quantitative easing"—presents us at Grant's with a nearly endless supply of good copy. Our symbiotic relationship with the Fed resembles that of Fox News with the Obama administration, or—in an earlier era—that of the Chicago Tribune with the Purple Gang. Grant's needs the Fed even if the Fed doesn't need Grant's.
In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body "to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes." By now can we identify the operative phrase? Of course: "for other purposes."
You are lucky, if I may say so, that I'm the one who's standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as the father of the Fed, would skewer you. He had an abhorrence of paper money and government debt. He didn't like Wall Street, either, and I'm going to guess that he wouldn't much care for the Fed raising up stock prices under the theory of the "portfolio balance channel."
It enflamed him that during congressional debate over the Federal Reserve Act, Elihu Root, Republican senator from New York, impugned the anticipated Federal Reserve notes as "fiat" currency. Fiat, indeed! Glass snorted. The nation was on the gold standard. It would remain on the gold standard, Glass had no reason to doubt. The projected notes of the Federal Reserve would—of course—be convertible into gold on demand at the fixed statutory rate of $20.67 per ounce. But more stood behind the notes than gold. They would be collateralized, as well, by sound commercial assets, by the issuing member bank and—a point to which I will return— by the so-called double liability of the issuing bank's stockholders.
If Glass had the stronger argument, Root had the clearer vision. One can think of the original Federal Reserve note as a kind of derivative. It derived its value chiefly from gold, into which it was lawfully exchangeable. Now that the Federal Reserve note is exchangeable into nothing except small change, it is a derivative without an underlier. Or, at a stretch, one might say it is a derivative that secures its value from the wisdom of Congress and the foresight and judgment of the monetary scholars at the Federal Reserve. Either way, we would seem to be in dangerous, uncharted waters.
As you prepare to mark the Fed's centenary, may I urge you to reflect on just how far you have wandered from the intentions of the founders? The institution they envisioned would operate passively, through the discount window. It would not create credit but rather liquefy the existing stock of credit by turning good-quality commercial bills into cash— temporarily. This it would do according to the demands of the seasons and the cycle. The Fed would respond to the community, not try to anticipate or lead it. It would not override the price mechanism— as today's Fed seems to do at every available opportunity—but yield to it.
My favorite exposition of the sound, original doctrines is a book entitled, "The Theory and Practice of Central Banking," by H. Parker Willis, first secretary of the Federal Reserve Board and Glass's right-hand man in the House of Representatives.
Writing in the mid-1930s, Willis pointed out that the Fed fell into sin almost immediately after it opened for business in 1914. In 1917, after the United States entered the Great War, the Fed set about monetizing the Treasury's debt and suppressing the Treasury's borrowing costs. In the 1920s, after the recovery from the short but ugly depression of 1920-21, the Fed started to implement open-market operations to sterilize gold flows and steer a desired macroeconomic course.
"Central banks," wrote Willis, glaring at the innovators, "...will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grinding of the axes of speculative interests with their suggestion that by doing so they are achieving some sort of vague 'stabilization' that will, in the long run, be for the greater good."
Willis, who died in 1937, perhaps of a broken heart, would be no happier with you today than Glass would be—or I am. The search for "some sort of vague stabilization" in the 1930s has become a Federal Reserve obsession at the millennium.
Ladies and gentlemen, such stability as might be imposed on a dynamic capitalist economy is the kind that eventually comes around to bite the stabilizer.
"Price stability" is a case in point. It is your mandate, or half of your mandate, I realize, but it does grievous harm, as defined. For reasons you never exactly spell out, you pledge to resist "deflation." You won't put up with it, you keep on saying—something about Japan's lost decade or the Great Depression. But you never say what deflation really is. Let me attempt a definition. Deflation is a derangement of debt, a symptom of which is falling prices. In a credit crisis, when inventories become unfinanceable, merchandise is thrown on the market and prices fall. That's deflation.
What deflation is not is a drop in prices caused by a technology-enhanced decline in the costs of production. That's called progress. Between 1875 and 1896, according to Milton Friedman and Anna Schwartz, the American price level subsided at the average rate of 1.7% a year. And why not? As technology was advancing, costs were tumbling. Long before Joseph Schumpeter coined the phrase "creative destruction," the American economist David A. Wells, writing in 1889, was explaining the consequences of disruptive innovation.
"In the last analysis," Wells proposes, "it will appear that there is no such thing as fixed capital; there is nothing useful that is very old except the precious metals, and life consists in the conversion of forces. The only capital which is of permanent value is immaterial—the experience of generations and the development of science."
Much the same sentiments, and much the same circumstances, apply today, but with a difference. Digital technology and a globalized labor force have brought down production costs. But, the central bankers declare, prices must not fall. On the contrary, they must rise by 2% a year. To engineer this up-creep, the Bernankes, the Kings, the Draghis—and yes, sadly, even the Dudleys—of the world monetize assets and push down interest rates. They do this to conquer deflation.
But note, please, that the suppression of interest rates and the conjuring of liquidity set in motion waves of speculative lending and borrowing. This artificially induced activity serves to lift the prices of a favored class of asset—houses, for instance, or Mitt Romney's portfolio of leveraged companies. And when the central bank-financed bubble bursts, credit contracts, leveraged businesses teeter, inventories are liquidated and prices weaken. In short, a process is set in motion resembling a real deflation, which then calls forth a new bout of monetary intervention. By trying to forestall an imagined deflation, the Federal Reserve comes perilously close to instigating the real thing.
The economist Hyman Minsky laid down the paradox that stability is itself destabilizing. I say that the pledge of a stable funds rate through the fourth quarter of 2014 is hugely destabilizing. Interest rates are prices. They convey information, or ought to. But the only information conveyed in a manipulated yield curve is what the Fed wants. Opportunists don't have to be told twice how to respond. They buy oil or gold or foreign exchange, not incidentally pushing the price of a gallon of gasoline at the pump to $4 and beyond. Another set of opportunists borrow short and lend long in the credit markets. Not especially caring about the risk of inflation over the long run, this speculative cohort will fund mortgages, junk bonds, Treasurys, what-have-you at zero percent in the short run. The opportunists, a.k.a. the 1 percent, will do fine. But what about the uncomprehending others?
I commend to the Federal Reserve Bank of New York Financial History Book Club (if it doesn't exist, please organize it at once) a volume by the British scholar and central banker, Charles Goodhart. Its title is "The New York Money Market and the Finance of Trade, 1900-1913." In the pre-Fed days with which the history deals, the call money rate dove and soared. There was no stability—and a good thing, Goodhart reasons. In a society predisposed to speculate, as America was and is, he writes, unpredictable spikes in borrowing rates kept the players more or less honest. "On the basis of its record," he writes of the Second Federal Reserve District before there was a Federal Reserve, "the financial system as constituted in the years 1900-1913 must be considered successful to an extent rarely equaled in the United States." And that not withstanding the Panic of 1907.
My reading of history accords with Goodhart's, though not with that of the Fed's front office. If Chairman Bernanke were in the room, I would respectfully ask him why this persistent harking back to the Great Depression? It is one cyclical episode, but there are many others. I myself draw more instruction from the depression of 1920-21, a slump as ugly and steep in its way as that of 1929-33, but with the simple and interesting difference that it ended. Top to bottom, spring 1920 to summer 1921, nominal GDP fell by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment, as it was inexactly measured, topped out at about 14% from a pre-bust low of as little as 2%. And how did the administration of Warren G. Harding meet this macroeconomic calamity? Why, it balanced the budget, the president declaring in 1921, as the economy seemed to be falling apart, "There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures." And the fledgling Fed, face to face with its first big slump, what did it do? Why, it tightened, pushing up short rates in mid-depression to as high as 8.13% from a business cycle peak of 6%. It was the one and only time in the history of this institution that money rates at the trough of a cycle were higher than rates at the peak, according to Allan Meltzer.
But then something wonderful happened: Markets cleared, and a vibrant recovery began. There were plenty of bankruptcies and no few brickbats launched in the direction of the governor of the New York Fed, Benjamin Strong, for the deflation that cut an especially wide and devastating swath through the American farm economy. But in 1922, the first full year of recovery, the Fed's index of industrial production leapt by 27.3%. By 1923, the unemployment rate was back to 3.2%. The 1920s began to roar.
And do you know that the biggest nationally chartered bank to fail during this deflationary collapse was the First National Bank of Cleburne, Texas, with not quite $2.8 million of deposits? Even the forerunner to today's Citigroup remained solvent (though for Citi, even then it was a close-run thing, on account of an oversize exposure to deflating Cuban sugar values). No TARP, no starving the savers with zero-percent interest rates, no QE, no jimmying up the stock market, no federal "stimulus" of any kind. Yet—I repeat—the depression ended. To those today who demand ever more intervention to cure what ails us, I ask: Why did the depression of 1920-21 ever end? Given the policies with which the authorities treated it, why are we still not ensnared?
If you object to using the template of 1920-21 as a guide to 21st-century policy because, well, 1920 was a long time ago, I reply that 1929 was a long time ago, too. And if you persist in objecting because the lessons to be derived from the Harding depression are unthinkably at odds with the lessons so familiarly mined from the Hoover and Roosevelt depression, I reply that Harding's approach worked. The price mechanism is truer and enterprise hardier than the promoters of radical 21st-century intervention seem prepared to acknowledge.
In notable contrast to the Harding method, today's policies seem not to be working. We legislate and regulate and intervene, but still the patient languishes. It's a worldwide failure of the institutions of money and credit. I see in the papers that Banca Monte dei Paschi di Siena is in the toils of a debt crisis. For the first time in over 500 years, the foundation that controls this ancient Italian institution may be forced to sell shares. We've all heard of hundred-year floods. We seem to be in a kind of 500-year debt flood.
Many now call for more regulation—more such institutions as the Treasury's brand-new Office of Financial Research, for instance. In the March 8 Financial Times, the columnist Gillian Tett appealed for more resources for the overwhelmed regulators. Inundated with information, she lamented, they can't keep up with the institutions they are supposed to be safeguarding. To me, the trouble is not that the regulators are ignorant. It's rather that the owners and managers are unaccountable.
Once upon a time—specifically, between the National Banking Act of 1863 and the Banking Act of 1935—the impairment or bankruptcy of a nationally chartered bank triggered a capital call. Not on the taxpayers, but on the stockholders. It was their bank, after all. Individual accountability in banking was the rule in the advanced economies. Hartley Withers, the editor of The Economist in the early 20th century, shook his head at the micromanagement of American banks by the Office of the Comptroller of the Currency—25% of their deposits had to be kept in cash, i.e., gold or money lawfully convertible into gold. The rules held. Yet New York had panics, London had none. Adjured Withers: "Good banking is produced not by good laws but by good bankers."
Well said, Withers! And what makes a good banker is more than skill. It is also the fear of God, or, more specifically, accountability for the solvency of the institution that he or she owns or manages. To stay out of trouble, the general partners of Brown Brothers Harriman, Wall Street's oldest surviving general partnership, need no regulatory pep talk. Each partner is liable for the debts of the firm to the full extent of his or her net worth. My colleague Paul Isaac, who is with me today—he doubles as my food and beverage taster— has an intriguing suggestion for instilling the credit culture more deeply in our semi-socialized banking institutions.
We can't turn limited liability corporations into general partnerships. Nor could we easily reinstate the so-called double liability law on bank stockholders. But what we could and should do, Paul urges, is to claw back that portion of the compensation paid out by a failed bank in excess of 10 times the average wage in manufacturing for the seven full calendar years before the ruined bank hit the wall. Such a clawback would not be subject to averaging or offset one year to the next. And it would be payable in cash.
The idea, Paul explains, is twofold. First, to remove the government from the business of determining what is, or is not, risky—really, the government doesn't know. Second, to increase the personal risk of failure for senior management, but stopping short of the sword of Damocles of unlimited personal liability. If bankers are venal, why not harness that venality in the public interest? For the better part of 100 years, and especially in the past five, we have socialized the risks of high finance. All too often, the bankers who take risks don't themselves bear them. By all means, let the capitalists keep the upside. But let them bear their full share of the downside.
In March 2009, the Financial Times published a letter to the editor concerning the then novel subject of QE. "I can now understand the term 'quantitative easing,' wrote Gerald B. Hill of Stourbridge, West Midlands, "but . . . realize I can no longer understand the meaning of the word 'money.'"
There isn't time, in these brief remarks, to persuade you of the necessity of a return to the classical gold standard. I would need another 10 minutes, at least. But I anticipate some skepticism. Very well then, consider this fact: On March 27, 1973, not quite 39 years ago, the forerunner to today's G-20 solemnly agreed that the special drawing right, a.k.a. SDR, "will become the principal reserve asset and the role of gold and reserve currencies will be reduced." That was the establishment— i.e., you—talking. If a worldwide accord on the efficacy of the SDR is possible, all things are possible, including a return to the least imperfect international monetary standard that has ever worked.
Notice, I do not say the perfect monetary system or best monetary system ever dreamt up by a theoretical economist. The classical gold standard, 1879-1914, "with all its anomalies and exceptions . . . 'worked.'" The quoted words I draw from a book entitled, "The Rules of the Game: Reform and Evolution in the International Monetary System," by Kenneth W. Dam, a law professor and former provost of the University of Chicago. Dam's was a grudging admiration, a little like that of the New York Fed's own Arthur Bloomfield, whose 1959 monograph, "Monetary Policy under the International Gold Standard," was published by yourselves. No, Bloomfield points out, as does Dam, the classical gold standard was not quite automatic. But it was synchronous, it was self-correcting and it did deliver both national solvency and, over the long run, uncanny price stability. The banks were solvent, too, even the central banks, which, as Bloomfield noted, monetized no government debt.
The visible hallmark of the classical gold standard was, of course, gold—to every currency holder was given the option of exchanging metal for paper, or paper for metal, at a fixed, statutory rate. Exchange rates were fixed, and I mean fixed. "It is quite remarkable," Dam writes, "that from 1879 to 1914, in a period considerably longer than from 1945 to the demise of Bretton Woods in 1971, there were no changes of parities between the United States, Britain, France, Germany—not to speak of a number of smaller European countries." The fruits of this fixedness were many and sweet. Among them, again to quote Dam, "a flow of private foreign investment on a scale the world had never seen, and, relative to other economic aggregates, was never to see again."
Incidentally, the source of my purchased copy of "Rules of the Game" was the library of the Federal Reserve Bank of Atlanta. Apparently, President Lockhart isn't preparing, as I am—as, may I suggest, as you should be—for the coming of classical gold standard, Part II. By way of preparation, I commend to you a new book by my friend Lew Lehrman, "The True Gold Standard: A Monetary Reform Plan without Official Reserve Currencies: How We Get from Here to There."
It's a little rich, my extolling gold to an institution that sits on 216 million troy ounces of the stuff. Valued at $42.222 per ounce, the hoard in your basement is worth $9.1 billion. Incidentally, the official price was quoted in SDRs, $35 to the ounce—now there's a quixotic choice for you. In 2008, when your in-house publication, "The Key to the Gold Vault," was published, the market value was $194 billion. Today, the market value is $359 billion, which is encouraging only if you personally happen to be long gold bullion. Otherwise, it strikes me as a pretty severe condemnation of modern central banking.
And what would I do if, following the inauguration of Ron Paul, I were sitting in the chairman's office? I would do what I could to begin the normalization of interest rates. I would invite the Wall Street Journal's Jon Hilsenrath to lunch to let him know that the Fed is now well over its deflation phobia and has put aside its Atlas complex. "It's capitalism for us, Jon," I would say. Next I would call President Dudley. "Bill," I would say, pleasantly, "we're not exactly leading from the front in the regulatory drive to reduce the ratio of assets to equity at the big American financial institutions. Do you have to be leveraged 89:1?" Finally, I would redirect the efforts of the brainiacs at the Federal Reserve Board research division. "Ladies and gentlemen," I would say, "enough with 'Bayesian Analysis of Stochastic Volatility Models with Levy Jumps: Application to Risk Analysis.' How much better it would please me if you wrote to the subject, 'Command and Control No More: A Gold Standard for the 21st Century.'" Finally, my pièce de résistance, I would commission, staff and ceremonially open the Fed's first Office of Unintended Consequences.
Let me thank you once more for the honor that your invitation does me. Concerning little Grant's and the big Fed, I will quote in parting the opening sentences of an editorial that appeared in a provincial Irish newspaper in the fateful year 1914. It read: "We give this solemn warning to Kaiser Wilhelm: The Skibbereen Eagle has its eye on you."
A Gold Standard?
The Casey Research Conference I am speaking at this weekend is a hotbed of gold bugs who, like Jim Grant, argue forcefully for a return to the gold standard. And given the chaos and insistent inflation over time that the Federal Reserve and fiat currency have produced, it is hard to argue that the current system is one that should be encouraged. And I don't!
But neither do I have a starry-eyed yearning for the chaos of the gold-standard period. There was a reason that hard-money men like Glass helped formed the Federal Reserve. But the Federal Reserve did not do all that well in the aftermath of 1929, and I think we shall look back in 20 years and not be all that pleased with our own current version.
I think I tend to agree more with Irving Fisher, arguably the greatest economist of the last century, who, writing in the late '30s, after observing the Great Depression and the actions of the Federal Reserve, noted that the best and only way to deal with a credit bubble was to prevent it from happening. Once they develop, there is no easy, painless way back. "Good banking is produced not by good laws but by good bankers."
Carlsbad, Tulsa, Chicago, and Atlanta
Tonight I am in Fort Lauderdale with many old friends at the Casey Research Summit. David Galland runs a first-class conference with an A-list group of speakers and wonderful attendees, many of whom have been coming for years. Tonight I had the pleasure of slipping off with David and his business partner Olivier Garret, Doug Casey, Rick Rule, and Porter Stansberry. Porter made a very interesting prediction about $40 oil today, and there was a lively conversation about Peak Oil. I finish this letter basking in the aftermath of friendship, great conversation, and good food. I must admit that the travel does sometimes get a little hard, but days like today are a great pleasure and worth the effort.
Tuesday night I was in DC and had dinner with Jonathan Golub, chief US market strategist at UBS. Jonathan can tell some great stories and has a very deep knowledge of the markets. We were on a panel together the next morning at the IMCA conference, along with Dave Kelly (chief market strategist at JP Morgan), who exudes a natural, good-natured Irish charm to accompany with his uber-bullish views.
I will also be with Steve in Philadelphia on June 4-5 for his CMG Advisor Forum. More on that to come.
I get home Sunday evening in order to get ready for my own annual conference, this year in Carlsbad, California and, as always, co-hosted by my long-standing partners Altegris Investments. I think this is our 9th annual Strategic Investment Conference (where has the time gone?). When we started doing the conferences, my intention was to create a conference that I would want to attend. Each year I walk away wondering how we can possibly have a better conference the next year, but each year we seem to do so. We went to a new venue this year to hold a larger group, but even so had to turn away hundreds of people. Next year we are going to an even larger facility, as both Jon Sundt (founder and CEO of Altegris) and I hate having to limit attendance.
This conference is shaping up to be our best ever. Which is saying a lot. Dr. Niall Ferguson, Marc Faber, Mohamed El-Erian, David Rosenberg, Dr. Lacy Hunt, David McWilliams, Dr. Woody Brock, Jeff Gundlach, David Harding, Jon Sundt, Barry Habib, and your humble analyst, plus a few other special guests here and there. And the best part is the attendees. So many friends who have been coming for so many years, from all over the world. It will be lots of fun.
Then I leave early the next morning to get to Tulsa to watch my daughter Abbi graduate from college (ORU), and then on Sunday it's up to Chicago to speak at the International CFA conference on Monday morning. Some whirlwind meetings for Bloomberg, and then I am home for a few weeks! Hopefully in time to see the Mavericks play Oklahoma City in the first round of the NBA playoffs. Somehow it seems wrong saying "Oklahoma City" and "NBA playoffs" in the same breath, but they have had a great year and so far seem to have our number. But it is time for our "old men" to step it up.
And speaking of time, it is time to hit the send button. It is late and I have to get up to listen to Jim Rickards and Harry Dent speak and then moderate their debate on inflation vs. deflation. I will be a good moderator, as when I am asked whether I believe in inflation or deflation, I simply answer "Yes." The rest of the answer is just niggling details.
Your wondering if this letter means I don't get invited to Jackson Hole again analyst,
Copyright 2012 John Mauldin. All Rights Reserved.
The Trayvon Martin shooting has provided the left with fodder to call for legislation restricting gun ownership. Although the steady killing of urban youth by other urban youth gets ignored, probably because no racial differences exist between those parties, and the shootings by One Goh in Oakland got relatively little attention, the airwaves have been burning up over the Martin shooting. This, of course was before the media found out the shooter is an Hispanic. When I saw his photo, I actually thought he was black. It is no surprise that Jesse Jackson, Al Sharpton and the usual suspects have been pushing for gun restrictions, they should know better. They should know that gun control laws were enacted throughout the south to limit the ownership of guns to blacks. Martin Luther King, Jr. applied for a gun permit in Alabama and was turned down. They should also remember that Chief Justice Roger Taney who wrote the majority decision in the Dred Scott case said the following:
"If citizenship would give to persons of the negro race, who were recognized as citizens in any one State of the Union, the right to enter every other state whenever they pleased, singly or in companies, without pass or passport, and without obstruction, to sojourn there as long as they pleased, to go where they pleased at every hour of the day or night without molestation, unless they committed some violation of the law for which a white man would be punished, citizenship would give them the full liberty of speech in public and in private upon all subjects upon which its own citizens might speak to hold public meetings upon political affairs, and to keep and carry arms wherever they went. And all this would be done in the face of the subject race of the same color, both free and slaves, inevitably producing discontent and insubordination among them, and endangering the peace and safety of the State."
Gun ownership provided blacks protection, especially in the deep south during a time when whites knew that if they killed a black person, they would likely never spend a day in jail. My grandfather in Gray, Georgia on at least two occasions sheltered black men in his house who had been threatened with bodily harm by whites for some perceived inappropriate behavior toward white women. My grandfather gathered other black men with guns and stayed on alert for the Klan. After emotions cooled, the two black men moved to nearby Macon. I always marveled that my grandfather encouraged his fellow blacks to vote and was generally well regarded and respected by whites. My grandfather not only was a gun owner, he also carried – as did my father. To my knowledge neither of them ever used the guns against another human, but neither would brook a threat to themselves or to their families.In their tradition, I have always owned handguns, rifles and shotguns. When I lived in DC all those years, I violated the law having handguns in my home and in my vehicles. I welcomed moving to Tennessee where you did not even need a permit to own a gun for home protection. So Jesse Jackson and his ilk do blacks a disservice by pressing for gun control. Many residents of Chicago, DC and other cities live in fear in their own homes. All should own guns. The bad guys who shoot each other and do drive-bys will have their guns. Where once, blacks had to protect themselves from “law biding” whites, today they mainly have to protect themselves from hooligans of all races. George Zimmerman may well be law biding and well intentioned or he may enjoy shooting people. We have laws and courts that will judge him. Regardless, George Zimmerman should have no impact on the ability of people to bear arms.
Now for full disclosure: After I wrote this I was sent the following article written by Ann Coulter who says essentially the same thing.
I have long been appalled by the lack of education that occurs in our public schools. I was fortunate to have been born at a time when discipline was allowed in the schools, when memorization was mandatory and when the basics were drilled into the students. Today we have college students who have never had to write an essay after their freshman year, who do not read, who cannot do math (they use calculators), who do not know geography (they go to mapquest), who know nothing of our governmental structure and who know nothing about economics. These students in an earlier time would be classified as illiterate. This is a product of my generation coming to power. Growing up in the hippie age, competition was viewed as a bad thing so even losers started getting trophies, students were not challenged because we did not want to damage their esteem. Of course there was no effect on the top 10 percent or the bottom 10 percent. But the middle 80 percent became condemned to mediocrity because without being constantly challenged and motivated, they simply resigned themselves to not bettering their lot. To turn this around one needs to start back at the beginning - kindergarten. The key is making certain that every child who enters the first grade can read. Kids who have to catchup when they get to the first grade never do even though the statistics show that they learn at the same rate as those who can read by the end of the third grade. However the statistics on being able to read by the third grade are abysmal (see www.education-consumers.org). Some of this poor performance is directly attributable to schools of education who produce teachers from poor students who cannot teach (see http://www.education-consumers.org/Teacher%20prep%202011%20reading%20.pdf). Part of the solution would to make funding of these colleges dependent upon the results engendered by their graduates. However, the immediate question is how to address the issue of poor reading kids now. The answer is direct instruction (see http://vimeo.com/5293093). Of course because it challenges the status quo, direct instruction is resisted by many teachers, most principals and virtually all school superintendents and colleges of education even though it works (see http://www.education-consumers.org/ELGIN%20FIRST%20YEAR%20RESULTS.pdf). The kids do not have an advocate and the dumbing down of our children should be a national scandal. Alternatives like charter schools have met stiff resistance from the education establishment, the teachers unions with their allies in the democratic party have blocked vouchers and most parents cannot home school. So since we have condemned our children to the public schools, the question is how do we force our schools to educate our children?
When the senate voted 52-46 in March not to eliminate duplicative government programs, they sent us all a message. If a paltry $10 billion in costs could not be eliminated then all of us should give up hope that the runaway budget can be brought under control. Enter the 20 percent solution that I suggested in this space on February 13, 2010. Recall, this was a suggestion that federal spending be limited to 20 percent of the previous year’s GDP. I had made that suggestion on local radio and tv. On one of those radio shows, I shared time with senator Bob Corker. Well a year later Corker introduced legislation along with Claire McCaskill to limit federal spending to 20 percent of GDP. I guess I would have appreciated some recognition by Corker but the good senator chose not to. But I am used to making suggestions and having others take the credit for them. I am more interested in getting things done than in receiving credit. Well Mitt Romney has just demonstrated that he cannot do math. He embraced the 20 percent solution recently in a speech and when questioned afterwards, reiterated his support for it. On the other hand he has also embraced the Ryan budget. But the math for the two is very different. Romney said that he would cap federal expenditures at 20 percent of GDP by 2016. The math says that this would translate to a cut in projected expenditures of $500 billion. However, Romney said he would leave defense at 4 percent of GDP and would not touch Social Security or Medicare which would mean spreading the decrease in spending over the rest of the government - a cut in 25% of everything else. While all the pundits on the left have then said that this would mean a cut in this program or that program that would be crippling, that is nonsense. What it would mean is that the congress would finally do its job of deciding what and where to cut given a finite rather than an unlimited budget. But what about the Ryan budget that has been called draconian? Well that budget calls for cuts of “only” $333 billion by 2016. So Romney is actually to the right of Ryan! Lastly, I really do hope that Romney is serious about my 20 percent solution. If he gets elected, remember that because of his background in hedge funds, he is the most qualified candidate to get the budget under control. Let’s hope that he is and that he institutes the Harold Black solution.
We live during a time when what makes news is invariably trivial. The current flap is unique because it involves something said by a democrat. Hillary Rosen who is supposed to be a PR advisor said that Mitt Romney’s wife “never worked a day in her life.” If a republican had uttered those words about a prominent democrat’s wife there would be calls from the left about firing that person. However, no such thing has been reported in the media. Obama would have then called the aggrieved democrat and offered sympathy. Again, no call from the president to Mrs. Romney. This underscores something fundamental about this president that has not been said: that he is not a compassionate person. A call from Obama would make his appear as gracious as his predecessor and would have been a boon in this election year to his image. But his president is neither compassionate nor gracious.
However, while the news explodes on this issue as well as last month’s dustup over Rush Limbaugh comment’s regarding a Georgetown law student’s comments that her friends can afford to go to Georgetown law but cannot afford birth control pills and therefore want someone else to pay for them, a truly important issue somehow missed being reported. Last month, the senate rejected a bill to eliminate duplicate government programs by a vote of 52-46. This vote actually showed that there is no hope for the budget to be brought under control given the composition of the senate. A GAO study was used as the basis of the vote. The cost savings would have been a trivial $10 billion which is what the government spends in two days. And yet the vote was to deny even that amount of savings. What happened to concern over the deficit being a major issue in this country? Why didn’t the republican candidates all rant and rave about this? It is noteworthy that everyone gets worked up over statements that have absolutely no importance and yet ignore such an important vote. So what is needed is for the republicans to get to 60 votes in the next senate along with the presidency. This may not mean 60 republican senators since Claire McCaskill who is in a tough re-election race has been trying to pass herself off as a fiscal conservative (more on that later) and West Virginia’s Joe Manchin would likely favor fiscal restraint.
The president cannot run on his record so instead he just gave a campaign speech before a college audience in Florida endorsing an increased tax on millionaires. He argued that this was “fair”. Huh? Is it fair to ask the group that pays the largest chunk of taxes to pay more? Regardless, no one asked what impact would this have on the economy. First, an increase in taxes is not expected to impact very much on the deficit. The tax would only bring in $4 billion which is what is spent by the feds in one day. And as we all know, every estimate of increased tax revenues from increased taxes is always overstated. No one has asked the president, what would be the impact of the increased taxes on job creation? Or what would be the impact on the fallen value of the dollar? How does the increase have any affect on anything that really matters? The answer is it doesn’t. It is only a calculation that voters are more interested in punishing the wealthy than in creating prosperity. Instead of spreading the wealth this is spreading the misery. By the way, the one percent that Obama dislikes so is not the $250,000+ crowd but rather those making $345,000+. The inclusion of those under $345,000 is just another attempt to grab as many resources from as many people as the feds can get their hands on. Finally, why would anyone who earns more than $250,000 give the democrats a single penny?
Baseball is my favorite sport so its interesting to see the current dustup over Ozzie Guillen’s comments regarding Fidel Castro overshadow the start of the season. Guillen is reported to have said that he “loves” Fidel Castro and admired him to have stayed in power when powerful forces were aligned against him. Guillen at least did not claim to be misquoted but did say that his statement was taken out of context. Naturally the older Cuban-Americans in Miami have expressed outrage and an advocacy group has threatened to boycott the team until Guillen is fired. This is interesting because up until this year it looked as though the team was being boycotted by the same fans, despite winning two world series. I heard some commentators remark that Ozzie is from Venezuela and Venezuelans were different from Cubans. Excuse me? You mean that Marlin management thought that all Hispanics were alike? Maybe it would have made more sense for them to have linked Venezuela with Hugo Chavez who is a fan of Castro. Regardless, if the Marlins had thought a Cuban-American manager was more desirable than one from Venezuela, then they would have not fired Fredi Gonzalez – the current manager of the Atlanta Braves – who managed the Marlins from 2007-2010 and who was born in Havana.
We are now hearing from one party that increased domestic supplies of oil will not affect prices while increased supplies of foreign oil will affect prices. This is because while the president and his party have been arguing against increased domestic production, other members of his party, notably Chuck Schumer has said that increased supplies by the Saudis have decreased prices. So who taught these people economics? As I have said before, politicians always try to repeal the laws of supply and demand. They always fail. We have heard time and time again that even if we started to exploit domestic supplies, that it would be years before the oil came on line. Both Jimmy Carter and Bill Clinton made that argument. If we had started drilling and fracking then, that oil would now be in use. Anyway, if Obama had approved the Keystone pipeline, futures prices would have fallen already. I personally have never understood this opposition to domestic oil. Oh sure, I know the irrational environmentalists who yearn for a simpler, poorer more bucolic existence. But spare me. I do not yearn for the good old days. I yearn for plentiful supplies of oil and gas. And with that, much lower prices of gasoline and energy.
Harold A. Black is professor emeritus in the Department of Finance, University of Tennessee, Knoxville having retired after 24 years of service. He has served on the faculties of American University, Howard University, the University of North Carolina - Chapel Hill and the University of Florida. His government service includes the Office of the Comptroller of the Currency and as a Board Member of the National Credit Union Administration. He also has served on the boards of directors Home Savings of America and its parent company, H. F. Ahmanson & Co., Irwindale, California prior to its merger with Washington Mutual Savings Bank, on the board of New Century Financial Corporation, Irvine, California, then the nation’s largest real estate investment trust and as director and later chairman of the Nashville Branch of the Federal Reserve Bank of Atlanta. He writes an occasional article for the Knoxville News-Sentinel at http://www.knoxnews.com/staff/dr-harold-black/. His web page is haroldablackphd.com