CBO Director’s Blog: Annual Summer Update — Forbes: Retarding Recovery — Ben Bernanke: The Man Most Likely to Destroy American Capitalism — Dismantle Bernanke’s ‘Happy Conspiracy’ … now!
The revised estimates project that the economy will contract by 2.8 percent this year, more than twice what the White House predicted earlier this year.
“The alarm bells on our nation’s fiscal condition have now become a siren”
“If anyone had any doubts that this burden on future generations is unsustainable, they’re gone — spending, borrowing and debt are out of control.”
Senate Minority Leader Mitch McConnell
The Budget & Economic Outlook: An Update
Today CBO issued its annual summer update of the budget and economic outlook. CBO estimates that the federal budget deficit for 2009 will total $1.6 trillion, which, at 11.2 percent of gross domestic product (GDP), will be the highest since World War II.
That deficit figure results from a combination of weak revenues and elevated spending associated with the economic downturn and financial turmoil. The deficit has been boosted by various federal policies implemented in response, including the stimulus legislation and aid for the financial, housing, and automotive sectors.
CBO estimates that, as the economy recovers, if current laws and policies remained in place, the deficit would shrink but remain above $500 billion per year, or more than 3 percent of GDP, throughout the 2010–2019 period. As a result, debt held by the public would continue to grow as a percentage of GDP during that time.
That debt, which was as low as 33 percent of GDP in 2001, would reach an estimated 54 percent of GDP this year and grow to 68 percent of GDP by 2019.
Those projections generally follow the rules, originally established in law, that have traditionally governed baseline projections. However, some of the resulting assumptions may underestimate potential deficits. Because they presume no changes in current tax laws, the projections incorporate increases in revenues that would result from the expiration of tax reductions enacted earlier in this decade and provisions that have kept the alternative minimum tax (AMT) from affecting many more taxpayers.
They also assume that future annual appropriations grow each year at the rate of inflation. Those assumptions result in projected revenues that, as a percentage of GDP, would be high by historical standards, and projected discretionary spending that, relative to GDP, would be low by historical standards. Many other outcomes are possible. If, for example, those tax reductions were continued, the parameters of the AMT were indexed for inflation, and future annual appropriations were to remain at their 2009 share of GDP, the deficit in 2019 would reach 8.5 percent of GDP, by CBO’s estimates.
Since it last issued baseline projections in March, CBO has reduced its estimate of the deficit for 2009 by $80 billion. Both outlays and revenues are now expected to be lower in the current year than previously estimated, by $165 billion and $85 billion, respectively. A large drop (of $203 billion) in the estimated subsidy cost of the Troubled Asset Relief Program (TARP) dominates the change in projected outlays for 2009; other changes (mostly in revenues) offset much of that decrease.
Although various indicators suggest that the recession may have ended or is likely to end within the next few months, CBO’s economic forecast anticipates a relatively slow and tentative recovery. A number of forces, including global economic weakness, continued strains in financial markets, and households’ desire to rebuild their savings, are expected to restrain economic growth for the next few years.
Specifically, CBO estimates positive economic growth during the second half of calendar year 2009, at an annual rate of 1.6 percent, following declines at an annual rate of 6.4 percent in the first quarter and 1.0 percent in the second quarter. In CBO’s forecast, real GDP grows by 2.8 percent between the fourth quarter of 2009 and the fourth quarter of 2010, by 3.8 percent in 2011, and by an average of 4.5 percent in 2012 and 2013.
With the economy functioning well below its potential level, inflation is projected to remain very low; the consumer price index for all urban consumers, with food and energy prices excluded, is expected to increase by 1.6 percent this year, by 1.1 percent in 2010, and by 1.0 percent in 2011 (as measured by the change in the index from the fourth quarter of one year to the fourth quarter of the next year).
Beyond the 10-year budget window, the nation will face further significant fiscal challenges posed by rising health care costs and the aging of the population. Continued large deficits and the resulting increases in federal debt would, over time, reduce economic growth.
Putting the nation on a sustainable fiscal course will require some combination of lower spending and higher revenues than the amounts now projected.
One would have to go back to the 1930s or perhaps the 1970s to find an Administration as hostile to economic innovation and growth as this one is. Franklin Roosevelt clearly thought that the age of great industrial advancement was over and that it was Washington’s task to increasingly regulate business while bashing the “selfishness” of “economic royalists” who were running American enterprises. After all, they had caused the Great Depression, hadn’t they? The 1970s, especially during Jimmy Carter’s presidency, were also antagonistic to commercial risk-taking. Inflation ran rampant, and the capital gains tax was raised to a maximum of almost 50%.
Washington is in a similar mood today (see Current Events, p. 17). One expression of this obtuseness-cum- animosity is a proposal from the Treasury Department to crush venture capital firms with burdensome new regulations as part of the Obama Administration’s grand scheme to reform our higgledy-piggledy financial regulatory system.
Even though most venture capital outfits are relatively small and rarely, if ever, use debt, the Treasury wants to apply a bewildering array of rules similar to those for investment advisors and banks. Thus, instead of focusing on funding the next potential Apple , Microsoft or Oracle, VCs will have to devote considerable time and resources to filling out disclosure and compliance forms. Treasury Chief Timothy Geithner’s lame excuse is that since reform should cover the entire financial industry, leaving out venture capitalists would be a form of discrimination. Alas, there’s more at work here than pigheaded logic.
This Administration truly believes that the private sector is a destructive, unguided missile that needs the constant and close supervision of Washington politicians. Without it we’d be subject to more disasters like the current financial crisis. In other words, Washington doesn’t like the idea of venture capitalism because VCs and the entrepreneurs they fund create and do things without anyone’s permission. Before anybody can invest in anything, Washington, in effect, would like investors to have to go through the equivalent of an environmental impact statement: Entrepreneurs, executives and investors cannot be left to their own devices.
Thus, the capital gains tax will be increased next year by at least one-third, and the personal tax on dividends will probably be doubled. The Administration will do nothing to mitigate the toxicity of the Sarbanes-Oxley Act, which was created in haste in 2002 to prevent corporate fraud and excesses. One harmful side effect of Sarbox is that it disproportionately hurts small businesses by burdening them with relatively huge accounting compliance costs and is therefore a barrier to smallish companies going public.
The Obama Administration’s weak-dollar policy, inherited from the Bush Administration, also inhibits productive, robust risk-taking. It’s no coincidence that when Ronald Reagan and Paul Volcker ended the Great Inflation of 1968–82 venture capital exploded, and Silicon Valley took off like a rocket. The U.S., and then the global economy, began an extraordinary quarter- century of expansion and breathtaking innovation.
But the Obama-ites think the prosperity of 1982–2007 is suspect and that they must keep business entrepreneurial impulses firmly in check. Thus the howls from VCs and entrepreneurs are music to Washington’s ears. Filling out forms will sidetrack venture capitalists. Even if they pick a winner, they’ll have difficulty launching an IPO to cash out and redeploy their capital. Successful risk-taking will be punished with higher investment taxes.
Not a pretty picture, is it?
Ben Bernanke: The Man Most Likely to Destroy American Capitalism
Paul Farrell riffs off of a recent piece by William Greider in Nations magazine, and goes after Ben Bernanke in a brutal and precise manner reminiscent of a drone attack. I’m not 100% in agreement with these two, but they make enough solid points that those points should be considered.
When reading it [below], keep in mind that Farrell and Greider, while understanding what the Fed is up to, don’t really want to abolish the concept of a central bank. They want to “democratise” the Fed or create a new type of central bank that is more responsive “to the people.”
They don’t seem to get that it is any central fiat money creating force that will always be the focus of evildoers who want to control it. The only real solution is to end the Fed and return to a 100% gold backed currency, since gold can’t be printed at will.
6 reasons more power for the Fed will destroy capitalism and democracy
By Paul B. Farrell, MarketWatch
ARROYO GRANDE, Calif. (MarketWatch) — At last week’s annual Jackson Hole meeting of Fed execs, Boss Ben Bernanke’s braggadocio about saving the world from another Great Depression had the feel of an egomaniacal dictator trying to cement his legacy in history.
Any good behaviorist would tell you Bernanke’s got some dangerous biases isolating him from reality (remember two years ago when he was denying the meltdown). His brash claims and radical, secretive policies present a grave danger to American capitalism and democracy.
In fact, Bernanke now appears to be America’s (and the world’s) most dangerous man, far more dangerous than Hank Paulson and the “Goldman Conspiracy” ever was. He’s now acting like the supreme dictator of that larger conspiracy Jack Bogle called the “Happy Conspiracy” in “The Battle for the Soul of Capitalism: How the Financial System Undermined Social Ideals, Damaged Trust in the Markets, Robbed Investors of Trillions — And What to Do About It.”
This indictment of Bernanke as a dictator leading Wall Street’s “Happy Conspiracy” became clear after reading “Dismantling the Temple,” William Greider’s brilliant essay in The Nation magazine. Greider is the author of “Secrets of the Temple: How the Federal Reserve Runs the Country.” Greider’s essay is an absolute must-read for anyone interested in the future of capitalism, the decline of democracy, the next mega-meltdown, and the real “Great Depression 2” … from which Bernanke cannot save us.
Why worry? Because the danger really is imminent. The same clueless Congress that did nothing when Paulson and the Goldman Conspiracy nearly bankrupted America is now about to give Bernanke’s out-of-control “Happy Conspiracy” even more power, and another bigger chance to destroy our capitalism.
Here is a summary of Greider’s history about how the Fed is sabotaging America:
- The Fed was created by Congress in 1913, “independent” from “the rest of government, aloof from regular politics and with one powerful exception: the bankers.” However, the destructive ideologies of Greenspan and Reaganomics prove how the Fed is manipulated by and dangerously dependent on politicians.
- The Fed is “the black hole of our democracy — the crucial contradiction.” And the recent credit crisis blew “the Fed’s cover.” Voters and taxpayers have no “voice in these most important public policies” because the Fed “operated in secrecy.”
- “The past year, the Fed has flooded the streets with money, distributing trillions of dollars to banks, financial markets and commercial interests. … People and politicians are shocked … confused … angered.”
- Where did the Fed get those trillions? They “printed it, out of thin air. That is what central banks do. Who told the Fed governors they could do this? Nobody, really — not Congress or the president.” The Fed “does not submit its budgets to Congress for authorization and appropriation. It raises its own money, sets its own priorities,” keeps Congress and the American people in the dark.
- Wall Street bankers own the Fed, it’s their private club. They “collaborate closely on Fed policy. Banks are the ‘shareholders’ who ostensibly own the 12 regional Federal Reserve banks. Bankers sit on the boards of directors, proposing interest-rate changes for Fed governors,” serve on a “special advisory council that meets privately with governors to critique monetary policy and management of the economy.” The Fed’s a legal conspiracy making bankers very, very “happy.”
- Congress is now “demanding greater transparency.” Bernanke says “no,” an audit would amount to “a takeover of monetary policy by the Congress.” What a dictator. Greider quotes the Constitution: “The Congress shall have the power to coin money [and] regulate the value thereof.” He adds that the Constitution “does not grant the president or the Treasury secretary this power. Nor does it envision a secretive central bank” acting as a megaphone for a president’s political ideology.
- Bernanke’s powers go far beyond anything Paulson demanded last year. And he’s now fighting a turf war because the “Happy Conspiracy” needs secrecy: no audits, no supervision, no transparency, no oversight, and zero accountability to taxpayers. Why? That way they can steal from the American people at will.
- Greider’s big warning: Recently Obama made a monumental mistake when he “proposed to make the central bank the supercop to guard against ‘systemic risk’ and set its own regulations. Obama’s proposal gives the central bank even greater power” but does “not propose any changes in the Fed’s privileged status.”
Giving the Fed more power to self-regulate in secrecy is a guaranteed set-up for a bigger mega-meltdown around 2013, the Fed’s centennial anniversary. Now is “a good time to dismantle the temple” warns Greider. “Democratize the Fed. Or tear it down. Create something new in its place that’s accountable to the public.”
Here are his “six reasons why granting the Fed even more power is a really bad idea:”
1. More power rewards failure, creating ‘moral hazard’
Get it? Under Greenspan and now Bernanke the Fed has been a dismal failure: “Like the largest banks that have been bailed out, the Fed was a co-author of the destruction,” says Greider. “During the past 25 years, it failed to protect the country against reckless banking and finance adventures,” blinded by the politics of Greenspan and Reaganomics. “The Fed did not see this disaster coming … did nothing to warn people.” Or they did see it and let it happen, blinded by Wall Street’s greed.
2. Fed policies will continue destabilizing U.S. and global economies
Under Greenspan and Bernanke the Fed has dangerously destabilized the American economy and global credit, stock and currency markets. Greider warns: “Its extreme swings in monetary policy, combined with utter disregard for timely regulatory enforcement, steadily shifted economic rewards away from the real economy of production, work and wages and toward the financial realm, where profits and incomes were wildly inflated by false valuations” as “the Fed tilted in favor of capital over labor.”
3. The Fed’s not objective, cannot investigate its own systemic flaws
Wall Street owns the Fed and has a monstrous conflict of interest. Greider’s example: “The Fed served as midwife to Citigroup, the failed conglomerate now on government life support. … Now the Fed keeps Citigroup alive with a $300 billion loan guarantee,” protecting “the banking behemoths that it promoted, if only to cover its own mistakes.”
4. The Fed cannot be trusted to protect taxpayers against Wall Street
Rich Wall Street executives manage the Federal Reserve System. Only a fool (or a clueless Congress) will ever trust the Fed to protect taxpayers. The Fed needs independent oversight. Congress needs to take back its constitutional responsibility.
5. More Fed power means more companies want ‘too big to fail’ status
If Congress continues neglecting its constitutional responsibilities and gives Bernanke supreme dictatorial powers over the “Happy Conspiracy,” Greider says “a new superclass of 40 or 50 financial giants will emerge as the born-again ‘money trust’ that citizens railed against 100 years ago. But this time, it will be armed with a permanent line of credit from Washington. The Fed, having restored and consolidated the battered Wall Street club will doubtless also shield” companies like GE “against failure.”
6. The Fed will be a rich-man’s club dominating everything from the top
The Fed will “dominate everything from the top down” if Bernanke is anointed absolute dictator over the “Happy Conspiracy.” Obama’s misguided proposal will “foster even greater concentration of financial power.”
Every “large company left out of the protected class will want to join by growing larger and acquiring the banking elements needed to qualify.” And “most enterprises in banking and commerce will compete with the big boys at greater disadvantage, vulnerable to predatory power plays the Fed has implicitly blessed.”
If Congress is stupid enough to abdicate its constitutional powers to the Fed, God help America’s democracy. And for capitalism, this will go down as the biggest blunder of Obama’s presidency, worse that Clinton’s dismantling of the Glass-Steagall Act.
And yet, Greider hints that the worst-case-scenario may be inevitable: “The obstacles to democratizing the Fed are obviously formidable. Tampering with the temple is politically taboo. But this crisis has demonstrated that the present arrangement no longer works for the public interest. The society of 1913 no longer exists.”
Still, America “has a rare opportunity to reconstitute the Federal Reserve as a normal government agency, shorn of the bankers’ preferential trappings and the fallacious claim to ‘independent’ status as well as the claustrophobic demand for secrecy.”
But unfortunately, “many in Congress will be afraid to take on the temple and reluctant to violate the taboo surrounding the Fed. It will probably require popular rebellion.” Why? Because Congress (like the Fed) dances to the bidding of Wall Street and its lobbyists who donate megabucks to their campaigns. So don’t expect reform until the next crisis, a mega-meltdown around 2013, the centennial anniversary of the Fed.
Till then, you’re on notice that the man most likely to destroy American capitalism is Ben Bernanke and his “Happy Conspiracy” of Wall Street bankers that own our Federal Reserve Banks.
Related Previous Posts:
Boston Globe: Frank focused on reshaping US finance
ABN: What Would Be Involved in an Audit of the Federal Reserve? – Part Four
Politics Daily: The Skyrocketing Deficit: How Scared Should We Be?
Market Watch: Early withdrawal: The Fed is now quietly taking money out of the system
NY Post: BAM’S $2 TRILLION FRIDAY SURPRISE
Wash Post: Obama Holes Up on Golf Course
The Hill Blog: Senator warns of hyperinflation rivaling the 1980s
Fox News: Obama Budget Aims to Cut Deficit in Half by End of Term, Feb, 21, 2009
The Provocateur: The Financial Crisis White Paper, March 6, 2009
The Nation: Dismantling the Temple
CNBC Slideshow: Biggest Holders of US Government Debt
CNBC Slideshow: Slideshow: A History of US Government Spending