The Truth About Japanese Stimulus
Fiscal pump-priming can work to revive the economy.
RICHARD KATZ
In one of his most famous quotes, John Maynard Keynes declared that even the most practical of men "are usually the slaves of some defunct economist." So, too, in Tokyo, the "practical men" of the ruling Liberal Democratic Party and Ministry of Finance are still stuck in the defunct debates of the 1990s, where one side calls any stimulus financially irresponsible and the other side uses the call for fiscal stimulus as an excuse for wasteful "bridges to nowhere."
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David KleinWith Japan entering a recession that threatens to rival 1997-98, this is not the time for ideological blinders. Even institutions and people normally resistant to fiscal stimulus, from the International Monetary Fund to Ronald Reagan's chief economist, Martin Feldstein, now agree this is the time for fiscal stimulus, including a hike in spending, by all major countries.
The need is even greater in Japan than in the U.S., because its export-dependent economy could end up suffering a worse slump and a more tepid recovery. After months of a slow slide, the Japanese economy seemed to jump off a cliff in November. The value of Japan's inflation-adjusted exports fell a record 19% from the prior year. Manufacturing output fell 13% over the same period. Many economists believe that GDP fell by an annualized rate of 8% in October-December, the worst quarterly decline since at least 1955, when comparable statistics begin.
Policy makers have been slow to respond because they're still hostage to several bad ideas. Let's look at some of the myths guiding Tokyo's policy makers and the contrasting realities.
Myth 1: Prime Minister Taro Aso is applying budget-busting fiscal stimulus including a return to public works. Since September, two successive prime ministers have offered two small stimulus plans. The second package, just passed by the Lower House of the Diet on January 13, provides for an actual increase in deficit spending of a mere 1% of GDP. That's a drop in the bucket compared to Japan's downturn. Worse yet, the proposed fiscal 2009 budget -- to begin on April 1 -- provides no new stimulus. Talk of an increase in spending by 6.5% is misleading because it compares fiscal year 2009 to the initial budget for fiscal year 2008. The final budget for fiscal 2008, including the two supplementary budgets, is actually a bit higher than proposed spending in fiscal 2009.
Moreover, the majority of the new spending is simply higher social security spending, in large part because the government is upping its share of the basic pension from one-third to half. There is no increase in the cash given to the elderly. As for public works, they are being increased only slightly after years of cuts that brought them from 8% of GDP in 1999 to only 3.5% in 2008. The fiscal 2009 increase in spending on public works is a negligible 0.06% of GDP.
Myth 2: The 1990s proved that fiscal stimulus is useless in Japan. Japan did apply a great deal of fiscal stimulus during the 1990s, but in a terrible stop-and-go fashion that sapped its strength. When Tokyo stepped on the fiscal gas, growth improved. When it took its foot off the pedal or, worse yet, applied the brakes -- as in 1997 -- the economy fell back. Equally important, it's hard for fiscal and monetary stimulus to have their normal potency when the financial system is broken. Today, with Japan's banking system in better shape, correctly applied fiscal and monetary stimulus should have more impact.
There is also no reason that fiscal stimulus has to mean a return to old-style "bridges to nowhere." Effective measures can range from tax cuts, to helping local and prefectural governments avoid budget cuts, to more unemployment compensation for the irregular workers who now constitute one-third of the labor force, to urban infrastructure.
Myth 3: Japanese people won't spend any tax cut or government handout because they are either too anxious to spend or already have everything they want. The greatest barrier to consumer spending is lack of income. Even though total real compensation of all workers in Japan put together is only 2% above the level of 1997, spending is up 12% from 1997. People spent more by saving less. If they had more money, they'd spend even more.
If tax cuts had no impact, then spending would track total private income and government efforts would make no difference. In reality, the data show the opposite: Spending tracks disposable income. Total inflation-adjusted private sector income for all households was actually 2% lower in March 2007 than a decade earlier. However, due to a series of tax cuts and hikes in transfers that overcame the 1997 tax hike, real disposable income rose nearly 6% and spending rose nearly 10%. Spending rose more than disposable income because households cut their savings rate to 3% from 11%. If the fiscal skeptics were right, the savings rate should have stayed the same or even gone up.
The most effective way to put money into people's hands to get the biggest bang for the buck -- whether it should be a one-shot cash handout, a temporary cut in the consumption or income tax or expanded unemployment benefits -- is debatable. The main point remains: If people have more money, they will spend most of it. It would also help if the government would stop talking about raising the consumption tax; it should just postpone the issue until after a solid recovery is underway.
Myth 4: Japan cannot afford fiscal stimulus because of its huge government debt. True, Japan's net government debt has now reached an all-time high of 90% of GDP. No other Group of Seven nation, except for Italy, is even close. Yet, exactly the same argument was made on behalf of disastrous tax hikes back in 1997 when Japan's net debt was only 35% of GDP, lower than any G7 nation except for Germany. The key thing is not the level of debt, but the level of debt service. In fiscal year 2009, Japan's interest payments will be less than 2% of GDP. That's a substantially lower level than the 3% of GDP that prevailed in the mid-1980s, and courtesy of today's lower interest rates. Since rates are expected to remain low for quite some time, Japan has plenty of breathing space to apply fiscal stimulus.
The time for half-measures is over. Given that Japan faces its greatest recession since the late 1990s, doing too much too soon is far better than doing too little too late. Japan has plenty of unmet needs in urban infrastructure and in people's day-to-day struggles to make ends meet that could be helped with well-fashioned tax cuts and spending measures. The right kind of fiscal stimulus could help both short-term demand and long-term economic vibrancy.
Mr. Katz is editor of the semi-weekly Oriental Economist Alert.
Mugging Bank of America
Mugging Bank of America
No good financial deed goes unpunished.
So much for being a good corporate citizen. Bank of America CEO Ken Lewis earned kudos last year for stepping into the breach when the mortgage market and Wall Street cratered. BofA's purchase of Countrywide Financial and its September agreement to buy Merrill Lynch offered a welcome dose of optimism and private capital amid the panic.
In December, Mr. Lewis realized that he had been too optimistic. And when he considered breaking off the Merrill engagement, Washington arranged a shotgun wedding. After BofA shareholders approved the Merrill purchase on December 5, Mr. Lewis saw Merrill's assets plunge in value and began to explore a way out. At least he wanted a better price given the erosion in Merrill's real estate and corporate portfolio.
Mr. Lewis's effort to protect his common shareholders was vetoed by his most important shareholder, the feds. In October the U.S. Treasury had insisted on investing $15 billion in his bank. Come December, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke told him that Merrill had to be saved, and that BofA had to be the savior. Mr. Lewis said yesterday that the government was "firmly of the view" that canceling or delaying the Merrill deal might result in "serious systemic harm."
In other words, the feds believe that the way to calm financial markets is to force the nation's largest, and a heretofore healthy, bank to swallow toxic assets it didn't want. In return, yesterday the Treasury agreed to invest $20 billion in BofA, for which the government will receive preferred shares paying 8%. Treasury, the FDIC and the Fed will also partially insure $118 billion in troubled assets -- mostly Merrill's. In return for this downside protection, BofA will have to render unto Caesar another $4 billion of preferred stock plus warrants.
These preferreds will also pay 8%, but private shareholders are not so fortunate. The agreement limits quarterly common stock dividends to a penny a share. The Charlotte bank will also have to accept new executive compensation limits. And the bank will need to submit for government approval a plan to modify troubled mortgages.
Mr. Lewis doesn't seem thrilled that the government has a larger piece of his business. When asked yesterday when the bank might escape federal ownership, he replied, "I wish I knew," and then added, "clearly as soon as possible." Bank of America investors, who've taken a beating since the Journal reported on Merrill's latest troubles and the government "rescue," would surely agree. BofA shares fell 14% yesterday. If the feds really want to attract private capital to the banking system, this isn't the way to do it.
The Bernie Madoff Morality Tale
The Bernie Madoff Morality Tale
Andy KesslerFrom ''schlub'' to ''macher'' to ''goniff.''
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Why, Bernie, why?
By all accounts, Bernard Madoff had a successful trading business and was a hitter on Wall Street. Bernard L. Madoff Investment Securities was one of the top three market makers in Nasdaq stocks, had over 600 brokerage clients and claimed to often contribute 10% of New York Stock Exchange trading volume, usually after the 4 p.m. market close.
So why, inquiring minds want to know, did he perpetrate the largest fraud ever on Wall Street, some $50 billion? He had it made, so why risk it?
Well, for starters, if you leave the Tri-State area, very few people know what a market maker is. At the Palm Beach Country Club or the Boca Rio, the preserved specimens at cocktail parties know about cement or paper plants; their brokers at Merrill (or maybe Goldman) are their only ties to Wall Street.
"And what do you do?"
"I'm the third-largest market maker of …"
"Oh, my drink is empty."
Madoff was just another schlub ("worthless oaf" for you Yiddish-challenged) from New York with money. Get in line. Schlubs are a dime a dozen in the Sunshine State, contributors of hanging chads and everything.
The Madoff Ponzi
The Madoff Ponzi
So Madoff got the brilliant idea to start a money management business on the side. He didn't charge any fees, explaining that he would just make money trading stocks on the securities side of the business. Merrill Lynch
And the gerries fell for it. Now, all of a sudden, Madoff is a macher (a big shot, a mover). The ability to make someone money moves you to the top of the cocktail-party list. Madoff didn't advertise; he kept it exclusive, adding to its mystery and allure. And he didn't swing for the fences, he "produced" tortoise-like (steady) returns: 13.72% one year, 9.82% another. Goldilocks-esque. Not too hot or cold, just right.
It became known as the "Jewish T bill." Never mind that his option split strike conversion strategy was completely bogus. As everyone on Wall Street should know, you can limit the downside or enhance the upside, but not both--and certainly not for free. There are too many market makers--hey, like Madoff Securities--who will clip you for trading fees and risk premiums for a strategy like this to ever work. It's like putting $10 on red and on black at a roulette table. You win every time, except when 0 or 00 come up, which they do once every 19 spins.
But still, that doesn't explain the fraud.
OK, Madoff has left us some hints as to why. The first clue is that there isn't $50 billion sitting in some numbered Swiss bank account. In fact, it probably isn't a $50 billion fraud. There seem to be lots of problems with Madoff and numbers. The only facts we know are the claims of $17 billion in assets in his money management business, according to his filings with the Securities and Exchange Commission.
The market is down 40%, so perhaps there should be $11 billion left. Some of his customers, mainly hedge fund-of-funds and European banks, would use 3:1 leverage to magnify Madoff's "steady" returns, hence the $50 billion claim. If you're going to go down, you might as well go big and get something named after you. Why should Ponzi keep hogging the limelight?
So as far as we know, he didn't steal the $50 billion/$11 billion--he probably just lost it. He might have built a trading powerhouse, but he was god-awful as an investor. It happens all the time (Bear Stearns, Lehman Brothers
My guess is that this is what went down. Even though Madoff Securities was on the leading edge of automated trading, the business itself was becoming less and less lucrative. Everyone had the same computers. Spreads, the difference between the bid price and the ask price that became Wall Street trading profits, began shrinking. And the move to list stocks in penny increments instead of eighths (12.5 cents) whacked trading desks all over Wall Street.
So you make it up in volume. Beyond cocktail parties, Madoff really created the money management business to feed himself trades. But his strategy was garbage. He absolutely bombed as a money manager, but he desperately needed the assets under management to feed his trading operations, so he started to make the numbers up. As is usually the case, most don't set out to be crooks, but Madoff became one when his talents proved lacking. There is your "why."
It's not new. This was the Enron story: They lost tons in water ventures and Indian power plants, so concocted fraudulent entities to cover up their losses. Same for Sam Israel and his Bayou hedge fund. And even (without the fraud) the Citigroup/Wall Street story, too. They tried to be investors to make up the difference of their bread-and-butter business deteriorating and were awful at it, so they levered up in off-balance-sheet vehicles.
Who knows when the fraud started? As early as December of 1990, he was taking money from the Fairfield Sentry fund of funds. The bull market resumed in January of 1991 as Operation Desert Storm commenced. Madoff showed up years, as did most money managers. But 1994 was rough. So were 1996, 1997 and 1998, yet he did have double-digit years.
Since 2001 and 2002 were ugly, and Madoff showed "only" single-digit returns this decade, so my sense is that money kept flowing in and flowing in. The Tremont fund of funds and Nomura and European banks--my partner and I were out raising a hedge fund and couldn't raise a tarnished nickel from these groups. And we tried.
Public begging is humiliating. But funds of funds and banks were steering money into the Madoff machine. (Ah, schadenfreude delayed.) But it went beyond these so-called professionals or even the country club set; lots of great charities fell for his fudged numbers.
As in any classic Ponzi scheme, you pay old investors who redeem with new money. Sounds like not too many wanted out, until 2008. Now, $7 billion in redemption requests since the Credit Crisis began meant Madoff has made a complete circle, from schlub to macher to goniff (a crook, swindler or cheat).
Let that be a lesson. Learn a few jokes to tell at the club. Impressing the highball crowd with your investing prowess is a losing strategy.
Andy Kessler is a former hedge fund manager turned author. Kessler, who writes a daily blog, most recently wrote How We Got Here: A Slightly Irreverent History of Technology and Markets(HarperCollins, 2005) and The End of Medicine: How Silicon Valley (and Naked Mice) Will Reboot Your
The Coming Creativity Boom
The real source of all growth is human ingenuity and entrepreneurship, which often thrive in the worst of times--and are always surprising.
Knowledge is about the past; entrepreneurship is about the future. In a crisis the world of expertise pulls the global economy ever deeper into the past, where accountant-economists ruminate on the labyrinthine statistics of leviathan trade gaps, tides of debt and deficits, political bailouts and rebates, regulatory clamps and controls, all propping up the past in the name of progress.
The crucial conflict in every economy, however, goes on. It is not between rich and poor, Main Street and Wall Street, or even government and the private sector. It is between the established system and the new forms of wealth rising up to displace it--all the entrenched knowledge of the past and the insurrections of futuristic enterprise and invention.
The real source of all growth is human creativity and entrepreneurship, which always comes as a surprise to us, especially in the worst of times, as Rich Karlgaard notes. No amount of knowledge about the present can predict the specific profile and provenance of innovation. From the pits of the crash of 2000, when the Internet and the dot.com siege were famously dismissed as a barren "bubble," came Google and MySpace to rise up and take all the chips and establish a new Internet economy. If creativity was not unexpected, governments could plan it and socialism would work. But creativity is intrinsically surprising and the source of all real profit and growth.
Because the U.S. remains the world's largest economy and still leads the world in business and technological creativity, the current crisis is mostly confined to boondoggles of finance. It will pass rapidly and evolve into a new boom. Emerging is a parallel unregulated financial system based on entrepreneurial creativity and invention.
At the heart of this multitrillion-dollar engine of growth are 741 venture capital firms that traffic in creativity as a business. These firms command $257 billion under management and have launched companies generating $2 trillion-plus in revenues. Complementing the venturers are some 10,000 hedge funds and private equity players, with upwards of $2 trillion under management. Like everything else, the hedge funds are down this year. But collectively losing 12%, they have succeeded in preserving the bulk of their capital. More important, these funds represent a vast laboratory of capitalist ferment and experimentation beyond the heavy hand of politics. (Full disclosure: I run several hedge funds and have financial interests in two companies discussed below--Seldon Technologies and iCrete.)
At some 0.2% of U.S. GDP, the amount of venture capital is tiny compared with the oceans of debt and money commanded by other institutions. But venture funds are fertile and catalytic. Data gathered and tracked by Thomson Financial shows that the revenues of companies created by the venture industry generated 17.6% of U.S. GDP in 2006. For every venture dollar invested between 1970 and 2001, venture-backed companies produced $7.90 in U.S. revenue in 2006.
Let's acknowledge the risk and the losses, too. The year of the crash saw a massive $100 billion in outlays to innovative companies. Following this unsustainable peak was a fast slide to around $45 billion in 2001 and to $20 billion in 2002 and slightly lower in 2003. Since 2003 outlays have been rising every year, and they reached close to $30 billion in 2007, decisively higher than any year until the 1999 boom. Although an industry of surprises makes many mistakes, scores of the firms supported during the boom are maturing, and a number are ready to go public. With 86 initial offerings, bringing in a total of over $10 billion, venture-backed companies in 2007 achieved record median valuations of $346 million and average valuations of $623 million.
The key to huge growth in technology is structural change. Emerging today are companies exploiting four large intersecting developments under way in the U.S.: "cloud computing," graphics processing, nanotech engineering and energy-saving construction materials.
Long governing the computer industry has been Moore's Law, the projection of the Intel founder that chip densities and thus computer efficiencies would double roughly every two years. Industry pioneer C. Gordon Bell has offered a corollary of that law: Every ten years, with computing power rising a hundredfold, a radically new computer architecture is born. That architecture is now coming into place.
The new structure is called "cloud computing," and it represents the dispersal of computing resources across the Internet into new data centers. Google has reportedly built several dozen data centers for "the cloud" across the globe, and Microsoft recently announced that it would be building 27 new data centers with an average size of 500,000 square feet. Often regarded as a new centralization of computing, the new architecture in fact unleashes huge new efficiencies and opportunities on the edges of the network, impelling vast new tides of traffic across it. The rule for the new architecture is that hardware softens on the edge and software hardens at the core.
At the core of the network, the basic technology is hard: crystalline fiber optics in worldwide webs of glass and light. Most of the global fiber network was laid in the late 1990s before the telecom crash by scores of innovative but ultimately bankrupt companies such as Global Crossing and Flag Telecom. The huge challenge today is adapting Moore's Law electronics to the gigaspeed hardware of the existing fiber optics global web.
This means a set of new computer architectures feeding an ever expanding set of technologies for software "virtualization." New companies such as VMWare (now part of EMC) of Palo Alto, Calif. and Xsigo Systems of San Jose are spearheading this move. Amazon is the leader in exploiting it. Separating the function of the system from the hardware that embodies it, virtualization turns the Internet into a general purpose computing system, with huge gains in versatility, speed and efficiency.
This vast expansion of the scale of computing across the network, however, renders Moore's Law doublings inadequate to meet the need for speed. A key answer is the movement of optical technologies to chips themselves by such companies as Luxtera, a venture startup in Carlsbad, Calif., technologies based on Caltech advances that link fiber directly to chips. Azul Systems of Mountain View is pioneering a combination of Java-based parallel processing with virtualization software to produce multitrillion-bit-per-second performance in data centers.
A further development, even more unexpected, is the advance of graphics-processor devices optimized for real-time PCs and game machines from Nintendo, Sony and Microsoft. Two companies have been playing leapfrog in graphics processors for more than a decade--ATI, now owned by Advanced Micro Devices, and Nvidia, last year's FORBES Company of the Year. In press conferences and at trade shows from New York City to Shanghai, AMD is showing off integrated computer graphics, virtual world and 3-D special effects capabilities from a young entrepreneur named Jules Urbach. (I helped him raise funds for one of his companies.)
Even more fundamental is the emergence of nanotech, referring to technologies measured in the range of billionths of meters. Inspired by an inadvertently misleading speech by Richard Feynman in 1959, where he envisaged bypassing chemistry to manipulate atoms directly at nanoscale, nanotech for the last half-century has yielded an increasing pitch of hype bearing relatively little fruit. Notable have been improvements in wrinkle-proof clothes, more-resilient golf clubs and more-efficient ways of painting cars, but meeting disappointment has been the idea of transforming electronics and medical care.
This year nanotech is breaking out. The most spectacular invention in nanotech has been the carbon nanotube, famously researched by Richard Smalley and his group at Rice University in the early 1990s. With hundreds of times the strength of steel and conductivity of copper, nanotubes offered amazing properties but no obvious function. At first they struck the industry as a promising new way to make what it was already making: transistors for chips.
Now it turns out that the best application of nanotubes is as a radically superior way to make filters for fluids and gases. Seldon Technologies of Windsor, Vt. has invented ways to tune carbon nanotubes for fast removal of all impurities from water, including viruses and metal toxins, without use of power, chemicals or ultraviolet light. One product is a large nanomesh straw that allows a soldier or a hiker to suck superpure water out of a fetid puddle. Usable in Third World or emergency situations far from the power grid, Seldon's water filters yield water clean enough that the company is testing it for use in plasma injectable into the body.
Regardless of views on global warming, the need for new energy and building materials is urgent and undeniable, and although most attention focuses on transportation, some 40% of greenhouse gas emissions in the U.S. comes from buildings. Gary Winnick, who led Global Crossing during its glory years before it crashed and burned, has launched a new company called iCrete that addresses one of the world's most polluting industries, building construction. Relying on a radically new and cheaper way to make concrete, iCrete drastically reduces the amount of cement and associated emissions in new buildings. Ten times as cost effective as existing concrete, it is enabling a revival of architectural innovation in skyscrapers, such as noted architect Frank Gehry's Beekman Tower in Manhattan. Even as it is used in some applications as a cheaper, stronger, lighter and safer replacement for steel, iCrete technology is being used in the foundation of the Freedom Tower on the site of the old World Trade Center.
Amid the surprising creations of entrepreneurs around the globe, all these technologies depend upon a vibrant and free U.S. economy without oppressive regulations or taxation. Creativity is the ultimate source of all forms of power and freedom.
George Gilder is an author, venture capitalist and founding fellow of the Discovery Institute, a conservative public policy think tank in Seattle.
A Dark Year for Ethical Bioethics in 2009
Each year at this time, I predict the coming year’s happenings in the field of bioethics. Such prognostications do not require a crystal ball. It is merely a matter of being informed about current controversies, sniffing the air to see which way the wind seems to be blowing, connecting some dots, and making educated guesses about how things will turn out.
Alas, the bioethical events of 2009 are all too easy to foresee. While the recent election results were not determined by bioethical issues - the economic meltdown swept all other considerations aside - it amounted to a cultural earthquake nonetheless because the people now in power have views that are inimical to the sanctity and equality of human life.
Biotechnology
The Bush Embryonic Stem Cell Funding Policy is Toast: Let’s start with the obvious: One of the first acts of President Obama will be to dismantle the Bush ESCR federal funding restrictions. This will allow all embryonic stem cell lines already in existence - and those that will be manufactured from "leftover embryos" during the Obama presidency - to qualify for federal funding.
The Amount of Federal Funding of Human ESCR Will Remain Roughly the Same: The real gripe "the scientists" had with the former Bush policy was not the amount of financial support - the NIH gave about $160 million in human ESCR grants during the Bush years. Rather, it was Bush’s implied message that it is wrong morally to use human embryos as instrumentalities and their having to segregate work on Bush-approved and unapproved cell lines. Those “problems” are now kaput, but given the economy and the current technological problems in the field, don’t look for the amount of money the Feds put into ESCR, to rise substantially, if at all, in 2009.
New Federal Law Will Explicitly Legalize Therapeutic Cloning: Nearly everyone claims to want to outlaw human cloning. But some proposed bans are actually phony. This has been the approach taken by Senators Diane Feinstein (D-CA) and Orin Hatch (R-UT), who co-authored a bill to legalize human SCNT for research purposes (sometimes called “therapeutic cloning”), but prohibit implantation of the cloned embryo into a womb for the purpose of initiating a pregnancy (sometimes called “reproductive cloning”). Such an explicit legalization - pretending to be a ban - is likely to pass the Senate this year, although it might stall in the House. If it gets through Congress it is a sure bet to be signed into law by President Obama.
The Federal Government Will Not Fund Human Cloning in 2009: Feinstein/Hatch is the necessary precursor to federal funding of human SCNT. While that will still be the plan, don’t expect the agenda to get that far in 2009.
Assisted Suicide
There were two big news stories about assisted suicide in 2008 - Washington voters legalized Oregon-style assisted suicide by ballot initiative (I-1000), and a Montana trial judge declared a constitutional right for the terminally ill to "die with dignity." These events will materially impact the future of the field.
Washington Assisted Suicide Will Quickly Seem Routine: As with Oregon, Compassion and Choices will facilitate most assisted suicides in Washington, allowing the group substantial control over what the media reports about the issue. With most reporters in the tank for the agenda anyway, we will soon be told that assisted suicide is completely under control in Washington. Any abuses or problems that come to light in WA, will, as in Oregon, be ignored by state authorities and go mostly unreported by the media.
The Montana Supreme Court will Create a Constitutional Right to Assisted Suicide: Too many judges believe that they, rather than the people or legislators, should decide major social controversies. In this spirit, look for the Montana Supreme Court to agree with the trial judge that there is a state constitutional right to assisted suicide.
At Least One State Legislature Will Vote to Legalize Assisted Suicide: Look for Hawaii, California, and/or Vermont to legalize assisted suicide through the legislative process. Whether these proposals become law will depend on whether the governors of the affected states have the courage to veto the bills. I predict that at least one governor will sign such a bill, establishing another landmark for assisted suicide. That event will open the floodgates in 2010.
Miscellaneous
There are many other issues in bioethics that will make the news headlines in 2009:
Abortion: The Freedom of Choice Act (FOCA) - which would erase all state laws limiting abortion - will be fought tooth and tong by the pro life movement. It will not pass in 2009. However, abortions will be eligible for federal funding by the end of the year.
Conscience Clauses: One of the great bioethical battles in the coming years will be whether medical professionals who do not wish to be complicit in life-ending activities such as abortion or assisted suicide will be driven out of health care. The Bush Administration passed a regulation at the end of his term protecting such dissenting health care workers from being discriminated against in employment for harkening to the call of conscience. Look for this rule to be overturned by the Obama Administration, or overturned by legislation. Thereafter, the drive to exclude health care professionals who wish to abide by the terms of the Hippocratic Oath will pick up steam.
Human Exceptionalism: Timing is uncertain, but look for the European Court of Human Rights to declare that chimpanzees are legal persons in Europe, perhaps this year, but almost certainly by the end of 2010. Spain will formally pass the Great Ape Project making great apes part of the "community of equals" with people. Nepal will follow Ecuador in granting "rights" to nature.
Futile Care: Texas will not rescind its law legalizing medical futility in 2009. At least one lawsuit will make the news in which a family fights a hospital in court to continue wanted life-sustaining treatment that the hospital wishes to end.
Biological Colonialism: Alas, despite legal attempts to restrict the exploitation of the world’s destitute for their body parts, biological colonialism (such as buying organs), will increase in 2009.
Expect the Unexpected: The field of bioethics is moving so fast and growing so exponentially, that the biggest bioethics story of the year may be one that hasn’t yet appeared on the horizon - as the surprising breakthrough in induced pluripotent stem cells (iPSCs) were in 2007.
It’s going to be a dark year in 2009. In such an atmosphere, it is more important than ever to defend the sanctity/equality of human life. The CBC is dedicated to this struggle and promises to do its utmost to maintain morality and decency in the world of bioethics in the coming year.
Saturday, January 17, 2009
Human Events Quizzes Bernanke at London School of Economics
Federal Reserve Chairman Ben Bernanke flew into London to meet with Governor Mervyn King, his counterpart at the Bank of England, and Prime Minister Gordon Brown at #10 Downing Street on Tuesday. He then went on to deliver the annual Joseph Charles Stamp Memorial Lecture entitled “The Crisis and the Policy Response” to our current global financial system meltdown.
Human Events was there to cover the event -- and to quiz Dr. Bernanke in the Q&A session on his Keynesian approach to the systemic money problem. The world’s media covered the event live, including the BBC, CNBC, Fox News, CNN, and Bloomberg. For a clip of our Q&A, see: CNBC Video.
OK. So here’s the problem. Keynesian solutions just don’t work. Throwing money from helicopters (or more likely C-17’s today) might just pull us out of the Great Depression II, but as we stretch the rubber band, eventually the block of deadweight banking system credit will finally spring to life and violently overshoot way before future Fed and Treasury Secretaries can reel in the excess money.
The result? Massive inflation from 2010 onwards. 25-30% would not be surprising through the teens.
Yikes! (That’s a techno-speak economist term for holy s***, it’s that bad…)
So if you think gold is high at $850 today, wait until it reaches $3,000 a troy ounce. Ditto commodities (especially agriculture).
Jim Rogers has been warning about this probability for the past year. He’s been riding the commodity prices all the way down in the process -- and he’s still positive about their future. I, for one, wouldn’t easily bet against the co-founder (along with George Soros) of the Quantum Fund.
At the London School of Economics, former home (1931-1950) of Austrian-school founder and Nobel Prize winner Fredrich von Hayek, Dr. Bernanke went on to point out all the Keynesian goodies he has in his “toolkit” which the Fed is using to overcome the crisis.
Chairman Bernanke acknowledges that the bottom line problem -- which began with the funny-money mortgages politically made to underqualified borrowers -- has seqway’d into a full-blown global loss of trust by just about everyone, consumers and bankers alike, in the present financial system. Or, in FedSpeak: “Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels…Heightened systemic risks, falling asset values and tightening credit have in turn taken a heavy toll on business and consumer confidence and participated a sharp slowing in global economic activity. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial”.
Of course, the unspoken statement is that the reason that the people don’t trust the present fractional banking system -- and are hording their precious cash -- is that the entire system is a house of cards, or more like the game of chairs where the last person standing when the music stops doesn’t have a chair to sit on. And nobody wants to be that last person standing when the music stops.
Bernanke goes on to observe, chillingly: “the global economy will recover, but the timing and strength of the recovery are highly uncertain”. That’s telling it like it is.
The Fed’s toolkit -- which has been newly invented over the past 18 months -- has three groups. They “all make use of the asset side of the Federal Reserve’s balance sheet”. This means, they consist of creating more money out of thin air.
“The first set of tools, which are closely tied to the central bank’s traditional role as the lender of last resort, involve the provision of short-term liquidity”. It’s important to note that the reason the central bank is known as the “lender of last resort” is that when it collapses, the entire edifice falls and a new system must be built to replace the old.
In these cases, the political system often falls as well. Whether a free-market-oriented democracy or a socialist-oriented totalitarian system springs up to replace the former ruin depends on the people -- both the average citizen and the elite.
The question is, what kind of new system will arise from the Federal Reserve ashes? Another Keynesian Ponzi-scheme or a solid hard-money-based Austrian-school bank? The reason, of course, that Austrians like gold is it can’t easily be counterfeited by the government. It’s quite a “barbaric metal”. In the people’s hands, it can’t easily be controlled by the bureaucrats. Darn.
It may just be possible, however, that Bernanke and colleagues can begin to move the Federal Reserve away from a fiat-based money system. You don’t really think there’s money in the banks to cover all your deposits, do you? And what do you mean by money, anyway: “legal tender IOU notes”?
Bernanke knows this all too well. And if he can get us through this Keynesian-induced hell with just one more dose of Keynesian money printing, then maybe he’ll have the time somewhere in the future to move the system back to a gold-standard dollar. Hmmm…
The tools in the first set are: 1) cutting fed funds and “discount window” interest rates, 2) increasing the length of the overnight “discount window” from 24 hours to 90 days, 3) the new “Term Auction Facility” which lends more money to the banks for “good” assets, 4) the new “Term Securities Lending Facility” which allows certain stock brokers to borrow money from the Fed for “less-liquid collateral”, and 5) the “Primary Dealer Credit Facility”, yet another bail-out loan facility for otherwise bankrupt stock brokers.
In addition to the above “short term” loan programs to US banks and stock brokers, the Fed has printed up more US dollars to convert into foreign currency using “bilateral currency swap agreements with 14 foreign central banks”. Why? Because the world has run out of dollars to spend in paying its bills! No problem, we’ll print up some more dollars for you too. Happy to oblige!
The second set of policy tools “involve the provision of liquidity directly to borrowers and investors in key credit markets”. They are: 1) money printed up to purchase commercial paper, 2) money printed up to purchase money-market funds, and 3) a Fed-Treasury joint money printing program to buy up AAA-rated student loans, auto loans, credit card loans, and SBA loans.
Finally, the third set of new “policy tools” includes creating more money to buy up longer-term securities including $600 billion in Government-Sponsored Enterprises (GSE’s like Freddie Mac and Fannie Mae) and GSE-backed securities. The home mortgage market “dropped significantly on the announcement of this program”. The message: don’t bet against the Fed’s ability to print mountains of dollars -- at least in the short term.
The result of all this newly-created money is that the Fed’s own balance sheet -- which took 90 years to reach the first $800 billion -- is now well on the way to $3 trillion, and that’s all money created out of thin air.
Consequently over the next 6 months, look for the Fed to bail out ever more failing financial institutions -- starting with another multi-billion-dollar kick to the near-bankrupt Bank of America. This second round of funny money will be followed by a third and perhaps more, until we’ll all be swimming in a sea of dollar bills. As the recession bites deeper, the velocity of money -- how fast we spend it -- slows precipitously, and huge doses of more raw money are perceived by the money controllers as the only way to pull us out of this government-created mess.
What else can they do? The Austrian economist Murray Rothbard revealed the simple answer in his History of Money and Banking. Politicians everywhere need to read it immediately.
Professor Bernanke is a genuinely likeable person with a good sense of humor and a deep knowledge of how the financial world really works. He was warmly received by the LSE students and faculty in London.
Unfortunately, he is also the head of the biggest fiat-banking scheme ever devised by mankind. And he knows it. (Thank you John Pierpont Morgan for your Jekyll Island creation.)
The tell is that his voice waivers when he is saying something that he hopes will come true but is unsure of. Listen to his speeches yourself and you’ll hear what I mean immediately. It’s the giveaway of a basically honest and decent man. Bernanke still needs to fully master the “FedSpeak” of his predecessor, Alan Greenspan.
Alan could easily tell the House Banking Committee about how the Fed was fully in control - and there was nothing to worry about. And they believed it. Yet he was a protégé of Ayn Rand and the author of a marvellous essay on the need for gold-backed central banking in his youth. Years before he too became the head of the Fed.
I truly hope that Chairman Bernanke can pull it all off just one more time. Like a junky hooked on ever-increasing doses of the good stuff, I need just a little more money, please. The withdrawal is too painful and I don’t want to hurt that much. I promise to go straight and reform in the future. Trust me. In fact, trust all of us. We’re all in this together.
Mr. Easton teaches University economics and is passionate about technology and entrepreneurship. He is rosy about the long-term future: �The glass isn�t half full, it�s overflowing!�
A carrot for our rookie president
“The next four years are going to determine what it looks like 25 years from now because we either get this right internationally or we’re in trouble,” he said, citing the Korean peninsula and Pakistan as potential hot-spots.
A long line is forming to test the rookie president-to-be as soon as he takes the oath. Many of the usual suspects have staked out their places in the queue, from such diverse locations as Moscow, Caracas, Kabul and elsewhere. But one of the first in line will be a man from Pyongyang.
The identity of the man (it’s very unlikely to be a woman, given that the country is a patriarchy) from North Korea that Obama will have to deal with is not clear, as most reports out of the country Dear Leader has ruled with an iron fist are that he has suffered a serious illness, but it will likely be a member of the Kim family, a member of the North Korean National Defense Council or a high-ranking member of the Communist Party from the politburo. But the face and name doesn’t matter as much much as what the man from Pyongyang will do. He will surely put the young American president to a stern test.
Much has been said of the carrot and stick policy the United States has pursued with North Korea. If the goal of that policy has been to deny the rogue nation nuclear weapons, then it has been a failure.
In Beijing after meeting with a North Korean delegation, the director of the Center for International Policy’s Asia program, Selig Harrison, talked to reporters. Even though CIP is a decidedly left-leaning institution, there is some useful information to be gleaned from what the NorKors told him.
Foreign Minister Pak Ui Chun assured Harrison that the North wants better relations with what is soon to be an Obama administration. Pak and his diplomats want energy assistance and help in reviving North Korea’s disaster of an agriculture sector. But North Korea always says it wants improved relations with the U.S., and it’s no state secret that its failed communist system cannot feed its people or provide even the most basic services such as electricity and home heating. Something else the North Koreans had to say is far more interesting:
Harrison said officials told him the North has “weaponized” 67.8 pounds of plutonium that it declared earlier as part of disarmament talks. He said when he asked what that meant, “the answer I got was, ‘It means warheads.”‘
The officials gave no details, Harrison said. But he said that much plutonium would produce four to five weapons.
Republicans and Democrats will argue until judgement day over the relative success of the two-party talks favored by the Clinton administration and the six-party discussions preferred by the Bush White House. But neither approach has prevented the NorKors from acquiring those warheads or pursuing a program to develop launch vehicles to carry them. Both administrations gave North Korea the store, but neither wound up with anything to show for it. Now it’s Barack Obama’s turn. With so many Clintonistas on his foreign policy team, from Hillary herself on down, it doesn’t look promising to the security-minded.
The truth is, Korth Korea is pretty good at the carrot and stick game itself. It has been waving a nuclear carrot in Uncle Sam’s face for sixteen years, always leading the Americans to hope that if we only give them what they want, whether it is food, nuclear power plants or just the status that two-party direct negotiations would confer on the NorKors, they would be only too happy to give up their nuclear weapons. Somewhere along the line, Ronald Reagan’s wise warning to trust but verify went under the bus.
the problem goes far beyond those four or five warheads. North Korea has long been known to be a key supplier of missile technology to Iran, and there’s nothing that is preventing the NorKors for sharing what they have learned in building their small stockpile of nuclear warheads with the mullahs also. And there is nothing preventing the mullahs from passing along that knowledge to any Islamofascist group they deem worthy of their benevolence.
Meanwhile, the North continues to face southward and rattle its sabres. Just hours ago, AFP reported:
North Korea said Saturday it may keep its nuclear weapons and threatened confrontation with South Korea, staking out a tough position three days before US President-elect Barack Obama takes office.
Pyongyang’s foreign ministry said it would retain its atomic weaponry as long as it feels under nuclear threat from Washington.
Hours later, its military called for an “all-out confrontational posture” against South Korea, prompting Seoul to order its armed forces on alert along the land and sea border.
“Even if the DPRK (North Korea)-US diplomatic relations become normalised, our status as a nuclear-armed state will never change as long as the US nuclear threat to us remains, even to the slightest degree,” the foreign ministry said.
A ministry spokesman, quoted by official media, said it was a “miscalculation” for the US to consider normalised ties — as envisaged under a 2007 disarmament pact — a reward for the communist state abandoning nuclear weapons.
“What we earnestly desire is not the normalisation of DPRK-US ties but the strengthening of nuclear deterrence in every possible way,” the spokesman added.
Hillary Clinton had said just last Tuesday that the Obama administration would pursue a “very aggressive effort” against North Korea’s alleged atomic weapons proliferation. The next U.S. Secretary of State voiced support for the six-party talks, but she also hinted that bilateral contacts were also a possibility.
But that’s the problem. No matter how many people are sitting at the negotiating table, the NorKors have always done whatever they darn well pleased, and anyone who hopes for change from them is being woefully naive. Sometimes, when all else including the carrot and stick have failed, the sledgehammer may be the only tool for the job. But it comes at a very high price. If need be, will the Obama administration be willing to pay it? This is just one of the questions the North Koreans will try to answer when they put our nation’s 44th president to the test.
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