Tony Blair is a Great Man
I can’t say I was entirely stunned, because I have always held British Prime Minister Tony Blair in high esteem, especially after his support of our country after 9/11, and another incredible speech he delivered to Congress praising the relationship between our countries.
But in reading this excerpt from his memoir, A Journey: My Political Life, I was taken aback by how forcefully, articulately, respectfully and utterly politely he dismantles President Obama’s misguided policy response to the financial crisis and great recession.
Personally, I have never felt a greater sense of frustration or indeed a greater urge to leadership since leaving Downing Street. I enjoy my new life much more than my old one, and find in it huge purpose. I am fighting for my world view, but in a different manner from that of being in conventional office.
I have tried to gain a bigger and deeper understanding of the world. China is no longer such a mystery, though that is only a relative sentiment. The Middle East is endlessly fascinating and frightening. I see the economy from a broader and different perspective in business. In my two major charitable areas—Africa and faith—I find complete spiritual as well as political satisfaction.
I’m living life full tilt, but I find my old world in a state of despair and feel both shocked and galvanized by this. Perhaps that is because I am removed from it and so think I see it more clearly. (This could be an illusion.) Perhaps it is because some of the bouleversement is directed at precisely what I represented in office: liberal economic policies, market reforms in welfare and public services, and engagement and intervention abroad.
To summarize: I profoundly disagree with the statist, so-called Keynesian response to the economic crisis; I believe we should be projecting strength and determination abroad, not weakness or uncertainty; I think now is the moment for more government reform, not less; and I am convinced we have a huge opportunity for engagement with the new emerging and emerged powers in the world, particularly China, if we approach that task with confidence, not fear.
In short, we have become too apologetic, too feeble, too inhibited, too imbued with doubt and too lacking in mission. Our way of life, our values, the things that made us great, remain not simply as a testament to us as nations but as harbingers of human progress. They are not relics of a once powerful politics; they are the living spirit of the optimistic view of human history. All we need to do is to understand that they have to be reapplied to changing circumstances, not relinquished as redundant.
THE FINANCIAL CRISIS
First, “the market” did not fail. One part of one sector did. The way sub-prime debt was securitized, spliced and diced and sold on with no real appreciation of underlying risk or value was wrong, irresponsible and immensely damaging. Some of the rewards, the huge payouts for shuffling around securities, the bonuses, are not just presentationally awful; they can’t be justified and, at worst, have helped create a propensity to “do the deal” whatever the long-term merits for short-term gain, in a way that significantly contributed to the crisis. All this is correct and should be acted on. However, such practice should not define or represent the whole of the banking sector, let alone the whole financial sector, let alone “the market.”
Second, government also failed. Regulations failed. Politicians failed. Monetary policy failed. Debt became way too cheap. But that wasn’t a conspiracy of the banks; it was a consequence of the apparently benign confluence of loose money policy and low inflation. The responsibility for the crisis should be shared, not borne by the market alone or even by the banks alone.
Third, the failure was one of understanding. We didn’t spot it. You can argue we should have, but we didn’t. Furthermore—and this is vital for where we go now on regulation—it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.
Fourth, financial innovation is not bad per se. Actually, very often it is good: it increases liquidity and boosts economic activity. The danger lies in innovation that has consequences we don’t understand, and effects which we therefore can’t track.
Fifth, when a crisis occurs—and I suspect this may be true of any significant economic crisis today—its consequences are magnified beyond any comparison with days of old by the supremely interconnected and interdependent nature of the modern global economy. It impacts in its own right; and then the impact is multiplied through that elusive but profoundly powerful force called “confidence.”
The role of government is to stabilize and then get out of the way as quickly as is economically sensible. Ultimately the recovery will be led not by governments but by industry, business and the creativity, ingenuity and enterprise of people. If the measures you take in responding to the crisis diminish their incentives, curb their entrepreneurship, make them feel unsure about the climate in which they are working, the recovery becomes uncertain.
This is even true of the financial sector, however heretical it sounds to say it. Of course there should be a regulatory overhaul, but most of all there should be systems of national and global supervision that enable us to understand this new financial world and to track it, so that we can intervene where the risk of systemic failure demands it. What there should not be is a wholesale attempt to predict every potential crisis and construct rigid rules in advance to prevent it. That way we risk flattening our financial system, squeezing the innovation out of it, trying to return it to the world of yesteryear, which is neither sensible nor economically productive. One result will be that as the banks do less, the state will have to do more. At present, we have gone from irresponsible lending to the other extreme whereby even worthy businesses and customers are refused credit. Indifference to risk should not be and need not be replaced by aversion to risk.
This book just went to the top of my “To Read” list.
Photo Credit: TIME
Why California Can’t Raise Taxes to Balance the Budget
Because the yellow line’s salaries are paid by the red line’s taxes.
Illustration Credit: SacBee via Both Sides of the Table
Spending Our Way to Prosperity
Apparently the United States is trying to “go it alone” and isn’t listening to its allies in the G-20 who want to cut public debt rather than try and spend their way to prosperity. It’s unilateralism like this that is going to be the death of us. (Don’t worry, the tongue is firmly in cheek!)
The Wall Street Journal featured an opinion piece a couple of days ago, and reviewed the last several years of Keynesian economic theory in practice.
Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a "timely, targeted and temporary" spending program of $150 billion was urgently needed to boost consumer "demand." Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.
The cash did produce a statistical blip in GDP growth in mid-2008, but it didn’t stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama’s adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%.
Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%. Yesterday, the Bureau of Economic Analysis once again reduced the GDP estimate for first quarter growth, this time to 2.7%, while economic indicators in the second quarter have been mediocre. As the nearby table shows, this is a far cry from the snappy recovery that typically follows a steep recession, most recently in 1983-84 after the Reagan tax cuts.
The response at the White House and among Congressional leaders has been . . . Stimulus III. While talking about the need for "fiscal discipline" some time in the future, President Obama wants more spending today to again boost "demand." Thirty months after Mr. Summers won his first victory, we are back at the same policy stand.
The difference this time is that the Keynesian political consensus is cracking up. In Europe, the bond vigilantes have pulled the credit cards of Greece, Portugal and Spain, with Britain and Italy in their sights. Policy makers are now making a 180-degree turn from their own stimulus blowouts to cut spending and raise taxes. The austerity budget offered this month by the new British government is typical of Europe’s new consensus.
To put it another way, Germany’s Angela Merkel has won the bet she made in early 2009 by keeping her country’s stimulus far more modest. We suspect Mr. Obama will find a political stonewall this weekend in Toronto when he pleads with his fellow leaders to join him again for a spending spree.
Meanwhile, in Congress, even many Democrats are revolting against Stimulus III. The original White House package of jobless benefits and aid to the states had to be watered down several times, and the latest version failed again in the Senate late this week. (See below.) Mr. Obama is having his credit card pulled too—not by the bond markets, but by a voting public that sees the troubles in Europe and is telling pollsters that it doesn’t want a Grecian bath.
Government spending has yet to create prosperity. The question is, are we learning anything from this?
Congress on Responsibility
I was at the gym this morning and CNN was on. While public flogging was abolished in Britain in 1948, that didn’t stop Congress from summoning the CEO of British Petroleum for its version of the ritual.
As I’ll write more about tomorrow, I’m surprised, saddened and angered by the tragedy in the Gulf Coast. It’s affecting people’s lives in ways we can barely comprehend. The effects will be with us for a long time.
I know that congressional hearings serve as a deterrent for other companies or government agencies that have a responsibility to safeguard the public trust – avoiding a public flogging is a great incentive to perform your duties with care.
Still, am I the only person who hits mute on CNN because I already know how this will go? Each congressman will drone on for what seems like hours, reading their prepared statement. The CEO of BP will express profound apologies for the corners that were cut, while professing ignorance that any of it was happening until he saw it on TV. Then the legislators will huff and puff and demand he resign.
Yes, this process is sure to stop the oil from flowing.
I’ve got to tell you, the notion of Congress offering its perspective on responsibility gave me something to laugh about.
While these legislators lecture BP on the failure of its blowout preventer, they themselves built a blowout preventer for the federal budget so full of loopholes, nobody even noticed when it exploded. And today, poisonous deficits are spewing out of the federal budget in volumes that no one thought possible just a few years ago.
Those effects will be with us, our kids and our grandkids for a very long time as well.
We need deep and profound change in our government. Here’s hoping November brings some new perspective to Washington DC.
Photo Credit: CNN
Governor Chris Christie: Honest and Refreshing
I just love watching normal, common sense leaders interact with reporters. Governor Chris Christie of New Jersey is proposing a package of reforms to cut spending and bring jobs back to their state. Their legislature, as might be expected, is balking at changing “business as usual.”
Watch him take apart a reporter who asked him if his “confrontational tone” was going to hurt the chances of getting his reforms through the legislature. Hilarious.
(Feed, e-mail and mobile readers: embedded video above.)
California hasn’t hit bottom yet
There are some folks who still view this past year’s dramatic state budget deficits and the resulting spending cuts as a one-year road bump. I view it quite differently: as a dramatic reset in the size of our economy, and thus, in the size of our tax revenues and the amount of government we can afford.
Yet we’re not even to the point of being able to know what level we are resetting to – California’s revenues are still shrinking. April’s tax receipts were $3.6 billion behind projections, bringing our deficit to $20.2 billion by April 30.
This will push Sierra College and many other local governments back into budget cutting mode later this year. My view is, let’s get it over with and get the budget aligned with revenues sooner rather than later. If we take too long to make the tough decisions, we could easily draw reserves down so low that 2012-13 cuts will have to be far deeper, since we won’t have any margin for error.
The good news is, the broader economy two years ago and the state budget now is a great crystal ball for what will happen to local government in 6 months. The bad news is, it’s not a very pretty story.
“We are on the same fiscal path”
Greece is a country with powerful public employee unions and they have been engaged in unsustainable fiscal practices for years now, borrowing the money they need to cover their excessive spending on pensions, salaries and the like.
Now, the investors who loaned that money to Greece, believing it to be a very safe investment (what first world country defaults on its debt?) are watching those same public employee unions riot in the streets, demanding what is not rightfully theirs.
It got so out of hand, these rioters set fire to a bank building, killing three bank employees.
There are two questions on the minds of global investors who are funding all of this unsustainable government spending with their loans: will the governments cut their spending and repay the debt, or will they capitulate to rioters and simply default?
That’s what caused the markets to end up down 348 points today. We’ll see what happens tomorrow morning.
Mohamed El-Erian is the CEO of Pimco, the world’s largest bond fund with over a trillion dollars in assets under management, and told CNBC that we would be foolish to consider this a European problem.
“We’ve seen a crisis start in a country—Greece—become regional, impact the whole of the Euro zone and is on the verge of truly going global…we should take this very seriously.
“We are on the same fiscal path. We are not Greece. We have more time. But what the Greek crisis tells you is debt and deficits matter. The structure of your deficits matter and the US doesn’t have much flexibility.
“Don’t underestimate how quickly this can happen. There are structural headwinds out there and we better get our act together before those structural headwinds become overwhelming.”
You can watch his entire interview below:
(Mobile, feed and e-mail readers: embedded video above.)
62% of Americans: Stimulus Didn’t Create Jobs
Many people didn’t think that the $787 billion dollar stimulus package was a good idea when it was pushed through in a highly partisan fashion in early 2009.
President Obama promised that if we passed the bill and spent all that money, unemployment would drop to about 7.5% at this point. Instead, the jobs haven’t materialized and unemployment rates are frozen at 9.7%. Worse, many people have given up looking so real unemployment is likely a bit higher than that.
Right now, even with the new jobs we have seen in the last month or two, we’re on track to end 2010 nearly five million jobs short of where President Obama promised we’d be if we passed this legislation and spent $787 billion dollars.
And according to the Pew Research Center, the American people are well aware of this. Nearly two thirds of Americans – 62% to be exact – believe that the stimulus hasn’t helped to create jobs.
Instead, we have deficits as far as the eye can see, along with rapidly climbing taxes that are shackling the economy to the ground.
The economy is in the process of recovering, and unemployment will eventually come down – it’s inevitable in an economic system as resilient as the United States. But I think we just learned yet again that you cannot spend your way to prosperity.
Hopefully we remember that next time.
Whether it’s Big Business or Big Government, Stifling Competition is Bad
There are far too many examples these days of the big trying to stamp out the small through the use of government regulation.
Whether it’s UPS lobbyists inserting language into transportation bills to try to make life harder for FedEx, or lobbyists who manage to make buying their company’s product a requirement by federal law, there are untold examples of stifling innovation and competition through government regulation.
The same applies to big government, as well.
The latest effort is here in California, where the public education lobby is trying to stamp out their chief source of competition, charter schools, by passing a hard cap on the number of charter schools that can be opened. The bill is AB 1982, and it will be heard in the Education Committee next week – you can make your voice heard on this issue by clicking here.
Never mind that charter schools provide parents with alternative choices for educating their kids. Never mind that many public schools are now performing much better, spurred on by the innovative ideas and competition that charter schools have delivered. Never mind the unsightly scene of government trying to stifle its own competition through the force of government.
At Sierra College, we have plenty of competition: not just four year schools, but also trade and technical schools like Heald and ITT. We provide superior value and higher quality education. Competition has driven us to be better and to develop innovative career and technical programs (a good example is the only Mechatronics training program west of the Mississippi river).
Public education is at its best when it has to compete. Stifling competition and innovation is wrong, whether it’s at the hand of big business or big government.
Congress Running Things it Doesn’t Understand
I started to open this post with “if the founding fathers could see Congress today, I’m not sure they’d give them responsibility for interstate commerce or not” but perhaps that’s a little too snarky. In any case, “Congress shall make no law” is looking like the best phrase in the whole Constitution these days.
The new “financial regulatory reform” bill making its way through Congress has several provisions that would be seriously devastating to the job creating engine that is the startup world.
I’m convinced that some of the congressional representatives supporting these new regulations fully understand them and are ideologically opposed to the creation of wealth that we’ve seen in Silicon Valley over the last thirty years. Others just have no clue that in their efforts to “protect” people, they could kill – or at least seriously hinder – one of the greatest job creation machines this country has ever had.
