The Greater Depression?

In an October, 2008 online article at the site for a South Carolina news station, USC economist Dr. Bill Hauk states, “There are enough similarities [between the current economic crisis and the Great Depression] to say there’s definitely something wrong here. We definitely do need to be concerned. I think the comparisons to the Great Depression are certainly premature and hopefully unneeded.”

I agree with him to a point. The current situation is exactly that…current. We are living through a huge historical event that others in the future will analyze and judge. It’s too early to look at the situation clearly, yet that is our nature, isn’t it?

As a teacher of history I’m anxious to get my facts NOW, so when little John or Jane asks why did my dad lose his job, how did this all happen, or why does my mom yells at the television and throws things every time Obama’s face shows up on the screen I can give a proper answer.

Yet, we must realize the situation is still fluid, and we certainly don’t know the whole story regarding how all of the dominos have fallen or in some cases been pushed. While I want to agree with Dr. Hauk and state I don’t think today’s situation is greater than the problems our nation experienced in the 1930s especially listening to some of the folks including my parents who lived through the events I honestly have to say I don’t know…because this historical chapter is still in play.

Dr. Krassimir Petrov, a professor of Macroeconomics, International Finance, and Economics at the American University in Bulgaria, wrote a great article at The Market Oracle in November, 2008. He states, “At its core, environment of the 1990s, and the response of the Fed to the tech-telecom bust has created an economic environment that has encouraged the repetition of the very same mistakes that led to the Great Depression.”

Dr. Petrov then lists several obvious parallels to the current crisis that include:

*Asset Bubbles…first in the stock market during the 1990s, then in real estate during the 2000s, pretty much mirroring the stock and real estate market bubbles of the 1920s.

*Securitization…Although not in the very “ultra-modernistic” form and shape of the 2000s, with slicing and dicing of pools and tranches of seniority, it was widely recognized in the 1930s that securitization during the 20s drove the domino effect in the U.S. financial system during the Great Depression.

*Excessive Leverage…It was very clear back then that the root of the problem was not deleveraging per se, but the excessive leverage that took place prior to the deleveraging process. “Investment Pools” were then instrumental in both the securitization and excessive leverage, just like the Hedge Funds of today.

*Corrupt Gatekeepers…accounting firms aided and abetted the Environs and Worldcoms and in the current crisis we are seeing the same thing (see the most recent report from ABC's Brian Ross) and following the Depression the SEC was created due to the corruptness in the 1920s.

*Financial Engineering…We are led to believe that financial engineering is a rather recent phenomenon that flourished during the New Age Finance Era of the last 15 years, yet financial engineering was prevalent in the 1920s with very clear goals: (1) to evade restrictive regulations, (2) to increase leverage, and (3) to remove liabilities from the books, all too familiar to all of us today.

*Lagging Regulations…Understandably, regulations should have forseen today’s financial problems and should have been introduced before the crisis.

*Market Ideology…Laissez-Faire reigns, but we need to remember the money markets are not really free

*Non-Transparency…Originally, lack of transparency was designed to fool the markets; ironically, modern-day financial executives have gotten to the point of fooling themselves.

But then Dr. Petrov takes a turn and states the current mess will be judged greater than the Great Depression. I wonder what moniker history will finally give this time period….the Great, Great Depression? The Greater Depression?

Here are Dr. Petrov’s six reasons why this period will be judged greater:

*Overvalued real estate…The real estate market has been driven by a number of innovations in real estate finance

*Total U.S. credit – Credit makes leverage…the more credit in the market, the more leveraged it is

*Explosion of Derivatives…Warren Buffet has linked derivatives to ‘financial weapons of mass destruction.’ Derivatives, as well as ‘Value at Risk” (VaR), has skyrocketed in recent years with the potential to destabilize the financial system for decades…The unwinding of these derivatives could only be compared with a nuclear explosion in the financial system.

*Dow-Gold ratio…[This] ratio represents the most important ratio between the relative pieces of financial assets and real assets…When leverage in the financial system increases significantly, so does the ratio. When leverage increases, so does the ratio. A high ratio is interpreted as an imbalance between financial and real assets – financial assets are grossly overvalued, while real assets are grossly undervalued. It implies a correction eventually will be necessary – either through deflation, deleveraging and a collapsing stock market, or through inflation, which implies stagnant market for many years and steadily rising prices of real assets, commodities, and gold, usually associated with stagnant economy and typically resulting in stagflation. Deflation occurred during the 1930s while stagflation occurred during the 1970s.

*Global Bubbles…It is impossible to make direct comparison with the 1920s, but today the global economy is rife with bubbles. Back then in the 1920s, the U.S. had its stock and real estate bubbles, while the European communities were struggling to rebuild from the devastations of WWI that ended in 1919.

*Collapsing Bretton Woods II …The global monetary system was on a quasi-gold standard during the 1920s….While the media describes the problem as one of illiquidity and confidence, a more serious analysis indicates that boom-time credit has been employed unproductively and so losses must be incurred. In other words, scare capital has been misallocated, poorly invested, and effectively wasted. No amount of money or fiscal policy can fix the errors of the past, just like no modern treatment can quickly restore to health a drug addict debilitated from a decade-long drug abuse.

If Dr. Petrov is correct even harder times are coming. Harder times regarding life choices and harder times in trying to figure out how to teach this mess because for every economist like Dr. Petrovthat argues we are entering a period worse than the Great Depression there are just as many stating we are just in a slump and no comparison can be made.

For me….for now...the jury is still out.

Eating Up the Bread of Our Children

Most dictionaries define pork as a government project or appropriation that yields jobs or benefits to a specific locale and patronage opportunities to its political representative.

A great article over at Harper's Magazine advises “pork-barreling as a legislative epithet is a pre—Civil War coinage that referred to the custom of handing out salt pork to slaves, who would crowd around the barrels that held it, and indeed, members of Congress have raided the federal treasury for home-district boondoggles ever since the earliest days of the republic.” John Ferejohn’s book, Pork Barrel Politics: Rivers and Harbors Legislation, 1947-1968 confirms this explanation.

To qualify specifically as pork legislation must meet seven criteria per the Citizens Against Government Waste and the Congressional Porkbusters Coalition. They are:

*the legislation must be requested by only one chamber of Congress;
*cannot be specifically authorized;
*cannot be competitively awarded;
*has not been requested by the President
*greatly exceeds the President’s budget request or the previous year’s funding;
*serves only a local or special interest.

The earliest form of pork barrel spending would be the Bonus Bill of 1817. It was introduced by John C. Calhoun and it involved highway construction linking the East and South with the western frontier. Part of the controversy was the source of the funds….an earnings bonus from the Second Bank of the United States. The proposed bill was eventually vetoed by President James Madison.

Calhoun actually justified his pork-barrel spending as many Congressmen do today. He used the Constitution to bolster his argument citing Article 1, Section 9, Clause 7 which Calhoun argued actually gives Congress the power to spend by stating, “No money shall be drawn from the Treasury but by consequence of Appropriations made by Law.”

Years later President Grover Cleveland would also use the Constitution to support his nickname as the “king of the veto” because he rejected hundreds of congressional spending bills during his two terms. He continually stated he could find no support in the Constitution for the appropriations.

Over at the site for Citizens Against Government Waste they have a well-documented discussion regarding the history of pork-barrel spending. I’ve included some of it here:

Washington insiders have espoused this “power of the purse” to validate Congress’s mushrooming appetite for pork. Sen. Larry Craig (R-Idaho) and Rep. Mike Simpson (R-Idaho) have argued eliminating earmarks would equate to an unconstitutional delegation of spending discretion to the executive branch. Sen. Harry Reid (D-Nev.) said that earmarking has been going on “since we were a country.” A spokeswoman for lobbying from Cassidy and Associates said, “Earmarking has been going on since the time of George Washington.”

The First Congress rejected a bill to loan money to a glass manufacturer after several members challenged the constitutionality of the proposal. In a debate during the Second Congress over a bill to pay a bounty to New England cod fishermen, Rep. Hugh Williamson of South Carolina argued that it was unconstitutional to gratify one part of the Union by oppressing the other…destroy this barrier,-and it is not a few fishermen that will enter, but all manner of persons; people of every trade and occupation may enter in at the breach, until they have eaten up the bread of our children.

Thomas Jefferson made a similar prediction in a letter to James Madison dated March 6, 1796, challenging Madison’s proposition for improvements to roads used in a system of national mail delivery. Jefferson wrote:

Have you considered all the consequences of your proposition respecting post roads? I view it as a source of boundless patronage to the executive, jobbing to members of Congress and their friends, and a bottomless abyss of public money. You will begin by only appropriating the surplus of the post office revenues; but the other revenues will soon be called into their aid, and it will be a scene of eternal scramble among the members, who can get the most money wasted in their State; and they will always get most who are meanest.”

Madison, the Father of the Constitution, actually vetoed the public works bill stating the clause “to provide for the common defense and general welfare” did not grant Congress additional powers not enumerated in Article 1, Section 8.

It would be hard to imagine a more convoluted, inaccurate, and self-serving interpretation of the Constitution and U.S. history. The Founding Fathers deemed that Congress could only spend money in pursuant to those powers specifically enumerated in the Constitution. The 10th Amendment leaves all other responsibilities to the states.

…and like many things dealing with the U.S. Constitution the debate regarding what constitutes appropriate appropriations will continue.

The Bailout Bill: 13 Examples of Pork

A three-page bill becomes 450…..ten dollar words, more compound sentences, extra commas, a list of definitions…..What caused the bill to grow, and grow, and grow?????

Specifically....pork.

With enough thrust pigs have no problem flying.

I’ve been hanging on to that statement for awhile now….just looking for the right place for it, I guess.

Well, with the thrust of of a few million here and a few million there the bailout bill has become the largest pig I’ve ever seen, and it has been thrust upon the backs of John and Jane Q. Taxpayer.

Here are 13 examples of pork Congress has thrust down our throats:

1. Let’s start with section 305 of the bill titled “Modifications of Energy Efficient Appliance Credit.” This is the part of the bailout where manufacturers of energy-efficient appliances will qualify up to $250 in federal tax credits for each machine they produce over the next three years. You and I will be paying over $322 million for this serving of pork over the next 10 years.

2. Are you a rum drinker? Thanks to the bailout bill Puerto Rico and the Virgin Islands will receive an extension on tax rebates they already receive on rum duties (taxes).

3. Hollywood has nothing to fear….the bill includes two separate tax breaks for film companies that produce movies in the United States…..$500 million in tax breaks.

4. U.S. Representative Don Young (R-Alaska) voted against the bailout at first. I wonder...what could have changed his mind? Could it be the fact that the bill now signed into law contains six pages of earmarks to benefit Alaskan fishermen who were victims of the 1989 Exxon Valdez disaster for a whopping total of $239 million?

5. Check around the exterior of your workplace tomorrow. Look for all of those bike racks that surely must be there. Our esteemed legislators approved a $10 million credit to help employers defray the cost of storing the bicycles of their employees who commute to work.

6. NASCAR fans have nothing to dread. The bailout bill creates a seven-year cost recovery period for construction of a motorsports racetrack. The IRS wanted to increase the depreciation period from seven to fifteen years cutting the trackowner’s depreciation in half. You and I will pay $100 million to help out the trackowners.

7. Texas, Nevada, Florida, Washington, and Wyoming apparently are very concerned about citizens in their states who do not pay state income taxes. Now they will be able to deduct the amount of sales tax they pay over a year from their federal income tax for two additional years.

Let me get this straight….the citizens aren’t paying state income tax AND they get to deduct sales tax they have paid on their Federal return?

8. This one makes me feel all warm and fuzzy…..$148 million for the extension and modification of duty suspension on wool products, wool research fund and wool duty refunds. Ok, change warm and fuzzy to itchy.

9. American Samoa will benefit from provisions costing you and I $33 million that are meant to help economic development.

10. Around pages 262 and 263 of the bill you can locate the following language….”certain wooden arrows designed for use by children”. Basically the bill exempts arrows from an excise tax of 39 cents. Huh? Are large amounts of American children using arrows?!?!

11. $3.5 billion (yes, billion with a “B”) has been set aside to force health insurance companies to cover mental illness.

12. Section 324 of the bailout bill extends an existing program through December, 2009 regarding the contribution of books to public schools and the tax credit that goes along with it.

13. Finally, Section 201 involves cellulosic biofuel and the tax deduction that goes along with owning a facility that produces it.

Would you like a little sauce with your pork?

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