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Religious Liberty & Doing Business: Gays in Indiana

Posted on Monday, March 30, 2015 4 comments

Monday, March 30, 2015

It is amazing how easily a false narrative can be propagated in the age of social media.  The law recently signed in Indiana is one such example.  For those who actually read the law it becomes clear that it is not as it has been reported.  Requiring the state to establish a "compelling governmental interest" when requiring a person to act against their religious beliefs is not an endorsement of discrimination - against homosexuals or anyone else.  Interestingly enough, combating anti-gay discrimination might well be held by Indiana courts to be a "compelling governmental interest."  Were this to be the case, in the constellation of issues surrounding homosexuality, this law doesn't really mean anything at all.

But that's not really what prompted me to sit down and write.  The response to these protests by prominent blogger Matt Walsh - a fellow social conservative - reflects an opportunity to challenge the dominant social conservative narrative on this issue.  The law has, of course, been condemned as sanctioning overt discrimination.  Walsh openly owns the charge - and claims that discrimination is...
...definitely OK. Discrimination is not automatically a bad thing. It isn't inherently evil. It simply means, by definition, that you are making a distinction for or against a person or thing. That’s what it means to discriminate. Synonyms: discern, distinguish, differentiate.
From one social conservative to another... uh... not so fast.

But before I get to the substance of my response, let me pull together some concepts I have written about before in various posts on this blog.  The first, and easily most important, is a general observation from the Parable of the Good Samaritan.  There are two characters in the story where we are invited into the inner world of their intentions and motives: The first is the 'expert in the law' who "rose to test Jesus" and later "[sought] to justify himself."  The second, of course, is the Samaritan who had compassion on the man who had been beaten by the robbers.  In the story and its dialog we learn of his intentions to return and satisfy any outstanding obligations for the man's care.

When we allow the story to be a story, a contrast between these motives and intentions becomes clear.  The expert in the law was motivated inward to his own self-justification, the Samaritan outward in compassion towards his fellow man.  But more to the point still, the expert in the law was: 1) Seeking out a hope of eternal life: He asks Jesus "What must I do to gain eternal life?"; and 2) He was 'right' in his 'argument' in response when Jesus asks (paraphrasing): "You're the lawyer, you tell me!"

The problem was that his being right was not quite up to the hope he was seeking.  Or to put this another way: Jesus wanted him to realize that being right is not always the most important thing.

And this brings us to this matter of businesses denying services to homosexuals otherwise offered to the general public on the basis of religious convictions.  If we actually read the law, it is clear that this is not what it is about.  But in reading Walsh's response, that just might be a distinction without a difference. Don't get me wrong: It bothers me that people are being sued to the point of losing their businesses because they were not willing to make a cake for or take photos at a gay wedding.

The analogy between sexual orientation and race does not hold up to even rudimentary scrutiny.  The difference between a black man and a white man is readily apparent - until we get a cut on, say, our arm.  The blood from both of us will be red.  And when it is put under a microscope, it will look more similar still.  And when examined for DNA...

The deeper you look at race, the more similar we all appear.  Not so with gender and sexuality.  The deeper you look at gender and sexuality, the more different we are.

And so I am not surprised that a fellow social conservative would be uncomfortable making a cake for a gay wedding or taking pictures.  And that discomfort does not arise from a capricious animosity (what the courts call 'animus') toward a group of people who are different. But I have an even more fundamental discomfort with all of this.

It bothers me how shallow and poor our Evangelical leadership is on this issue.

We seem to be driven by this sense that our values are under siege. Of course they are! The entirety of the TaNaK/Old Testament is the story of a Promise under siege, constantly in jeopardy of being thwarted, only to see God intervene in ways big and small.  So to start with, our values being under siege is nothing to be alarmed at.  And it is certainly not worth selling a birthright for a mess of political pottage.

That birthright is a story, singular among all other stories throughout history, of redemption.  And we cannot tell the story if we are being herded into our narrow ideological corners, trained to win an argument, and then carpet bombed with fund raising letters. We will be able to tell this magnificent story once again when we realize that the Parable of the Good Samaritan forces us to decide: Is it more important to make a good argument or to be a good neighbor?

Hopefully for most that is a rhetorical question.  But there is an underlying truth that will help us understand it.  We are familiar with the idea of having been created 'in the image of God'.  We are also familiar with the commandment not to make any 'carved image' of God.  But why?  If we want to know what God is like, why can't we just make a statue for the fireplace mantle?  Why can't we just make an 'image'?

Because He's already done that for us.  Its called your neighbor. And - stop the presses! - your neighbor just might be gay!

Get over it.

Stop arguing - you will not find hope in justifying yourself by winning the argument.  You will not be able to 'discriminate' the image of God out of your gay neighbor by denying them a service otherwise sold to the general public.  Neither will you be able to beat it out of them with an apologetic billy club bought at the local Christian bookstore.  But what you can do - and in which you just might find that hope - is love the image of God into your gay neighbor!

This does not start at the ballot box.  It does not start in that apologetics class the church offers in Sunday School.  It certainly does not start in a state capitol or, of all God-forsaken places, Washington D.C.  It starts in the mirror.  Stand there.  And do not leave until you have at least started to form an idea of what showing the image of God - in you - to your gay neighbor might look like.

Somehow I don't think whether a cake is baked or a photo taken is really going to seem all that important then.

Walsh is partly right: We discriminate every time we judge one thing to be right and another wrong.  I believe in what I call the 'heterosexual complement of nature'.  This inescapably means I believe homosexuality is unnatural - and therefore sinful.  But I also look for that same hope the expert in the law sought in the parable.  And I realize that while I am right - and I can make the arguments as well as anyone - that being right is not the path to that hope.

That path can only be found in the image of God.  He is still working at this story of redemption.  Only now he has passed it to us that we might use our own lives to tell this story by showing His image to others and seeing it in them.

Cakes and photos are mere distractions.

A Strong Opportunity State: The Conservative Answer to Krugman's "Weak Welfare State"

Posted on Monday, March 23, 2015 No comments

Monday, March 23, 2015

In his latest blog post, Paul Krugman asserts that the “not crazy” conservatives are lonely.  He – as he tends to be wont to do – draws a convenient caricature of conservatism – especially conservative monetary policy.  What the caricature does, though, is open up some of the underlying philosophical divides which are anything but ‘crazy’.  We see this in how Krugman views the macro economy through a lens of either a ‘Strong Welfare State’ or ‘Weak Welfare State’:

(Krugman’s View)
Strong Welfare State
Weak Welfare State
Pragmatic Macroeconomics
Democratic Party
Fantasy Macroeconomics
Macroeconomic Populists
Republican Party

First let’s dispense with the $10 vocabulary of the faculty lounge.  Macroeconomics is basically what policies are pursued with respect to the money supply (monetary policy) and how/by whom that money is spent (fiscal policy).  Conservative monetary policy generally calls for a restrained money supply.  Conservative fiscal policy then follows: That money exists first for objectively productive uses in the private sector – also known as the creation of wealth.  It exists only secondly as a tool of the State to accomplish political goals.

I'll add something here that I argue, against conventional conservative rhetoric.  The money supply should not exist at all for the card-counting at the Blackjack table that is speculation.  I write more about that here.

But Krugman’s matrix is actually very helpful because it opens the opportunity to succinctly explain the conservative alternative: The Strong Opportunity State vs. The Weak Opportunity State.

(Conservative View)
Weak Opportunity State
Strong Opportunity State
Other-Centered Macroeconomics
Liberals (center-left)
Conservatives (center-right)
Self-Centered Macroeconomics
Progressives (far-left)
Progressives (far right)

In order to understand this, we do need to enter the world of the faculty lounge for a moment.  But this would be the Philosophy faculty.  We do not, however, need much of their $10 vocabulary.

First Principle

The most significant unit of society is the individual (not the State) in whom reside rights which precede the State, “…among which are Life, Liberty and the pursuit of Happiness.”  For the philosophy student, the difference is immediately recognized as that between John Locke and Thomas Hobbes.  Locke provided Thomas Jefferson with the underlying rationale for much of what we find in the Declaration of Independence.  Hobbes (in his Leviathan) believed the State was sovereign (and thus its people were subjects).  This manifests itself in different ways.  In a monarchy, the sovereign is obviously the monarch and the power of the State is wielded by the palace.  In Progressive Statism/Corporatism, the sovereign is a combination of bureaucracies (sovereign in their own sphere) and favored corporations.  But in ‘Statism’ more broadly the same thing is true of the people – they are subjects rather than citizens.

Second Principle

Progressives are not the same as Liberals (or Conservatives).  Woodrow Wilson (D) and Theodore Roosevelt (R) were both Progressives.  What marks Progressivism as a political philosophy is an overt rejection of the idea that the Constitution is (and should remain) a declaration of ‘negative liberties’ – in other words what government cannot do to you.  Progressives would have it be a declaration of ‘positive liberties’ – what government must do for you.

The Origin and Purpose of Money

These two fundamental principles (the State vs. the Individual & negative liberties vs. positive liberties) then determine how one views money.  It is either first a tool of the State (for professor Krugman – to assuage the “Conscience of a Liberal”) or a utility contrived by the people to facilitate transactions in the economy.  Here is where we have to look to history.

After shooting his wad (the Crown’s wealth) on the First Bishops War, King Charles I wanted to go fight the Second Bishops War (over who got to appoint bishops in Scotland).  But having no more money to pay his soldiers, the king summarily confiscated the gold in the Royal Mint – which belonged to the English merchants, not the Crown – as a forced loan.

He paid it back, but the merchants grew tired of being dragged into these fights.  So they looked to trusted goldsmiths to hold their gold.  They received ‘promissory notes’ from them in return.  Soon those notes began circulating in the economy in place of the gold – it’s a lot easier to carry around a ‘note’, after all. This is the origin of our Federal Reserve Note.  (It also has a lot to do with why we do not have a king.)

The goldsmiths, though, were not immune to temptation.  They noticed that the notes were not coming back for redemption but rather circulating in place of the gold.  So they issued ‘extra’ notes and lent them out at interest.  This is the origin of our ‘fractional reserve’ banking system.  But back then it was a dirty little secret.  Imagine: were this to get out, there would be a run on the gold because no one wants to be behind the guy who gets the last of it.

The Vietnam War and the Great Society in the 1960s was simply a replay of this.  Other countries had dollar reserves.  But we started issuing more of them in the form of credit to the government for “guns and butter.”  Other countries started to question whether $35/oz. of gold actually meant anything since it did not seem possible the Treasury had enough gold to ‘back’ this expansion of the money supply.  (Credit, or loans, is part of the money supply.)  And so – not wanting to be behind the guy who gets the last of the gold – a run on our gold started until Nixon stopped it in 1971.

This produced a number of effects, all of which are tied to this one simple truth Progressives refuse to recognize: Banks are largely owned by shareholders, who demand management return value for their investment.  And banks do this – in fractional reserve banking – by lending out ‘notes’ at interest.  So the more ‘notes’ which are out there (the larger the money supply) the more profits are made.  This is why the money supply cannot be controlled by the banks (as it is today under the Federal Reserve System).

It isn’t that fractional reserve banking is bad.  It isn’t that banks making profits are bad.  It isn’t even that shareholders enjoying those profits as dividends are bad.  It IS that all of these things, together with human nature, conspire to ensure that an unrestrained money supply will lead us to a place where the banks end up legally obligated to lie to us – just like the English goldsmiths of old.  This is where we are today.

Credit vs. Innovation in Economic Growth

It also leads us to a place where credit becomes the main driver of the economy instead of innovation.  In order to understand this, we first have to understand that wealth is created by improving things.  If someone builds a better mousetrap, the profit she makes on its sale are an example of new wealth because she has improved something.  Now she might take out a loan to stand up a factory and hire employees to produce, deliver and sell her better mousetrap.  But economic growth here is about the better mousetrap, not the loan!

But with an unrestrained money supply, credit increasingly replaces innovation as the main driver of economic growth (or contraction).  All one has to do is watch how the stock market reacts in three-digit swings to what may or may not happen with interest rates to see that this is where we have brought ourselves.

The Inexorable Rise of Money in Politics

Lastly, it ends up with ever more money going into politics.  This should not be hard to grasp: The politicians see the banks doing quite well under ‘fiat money’.  They turn to them for two things: 1) to buy Treasury bonds so they can make promises to voters which otherwise could not possibly be kept; and 2) for campaign cash so they can keep making those promises.  And, of course, they are quite happy to allow the money printing to continue.  Far from the Fed being independent of politics, 1971 guaranteed the Fed will never be independent – the best example of such was Chuck Schumer looking over his reading glasses in July 2012 and telling then Chairman Ben Bernanke to “get to work, Mr. Chairman!”  And so now we know who the “one percent” really are: the financial sector and the political sector who have now conspired to be the ‘Crown’ and to confiscate the money supply as a forced loan to keep the politicians in office and the shareholders in line.  The current administration’s recent floating of the idea of mandatory 401(k) investments in Treasuries is nothing if not obvious proof of this.

The Strong Opportunity State & Sound Money

And so the “Strong Opportunity State” for the conservative is 1) a State with a properly restrained money supply so banks make profits by way of sound banking rather than expanding things like derivatives; 2) a State which exists first to secure rights which precede it and belong to its individuals; and 3) a State which remains constrained by a declaration of what it cannot do (the Constitution), doing only those things germane to its enumerated authorities.  These limits ensure the people have a maximum amount of opportunity to innovate and improve things, and to freely exchange the wealth thus created.

The Strong Opportunity State is not a call for everyone to be on their own.  It is not even opposed to a social safety net.  It is a State which believes that civil society is always superior to political society for most of the problems that face us – and for all of the problems which are social in nature (e.g. poverty).  When people are free to create wealth, and when the money which measures that wealth is oriented toward objectively productive uses (wealth creation) instead of politically preferred uses (a political system built on a foundation of debt) and speculation (banks and their derivatives), there is more than enough for civil society to look after the needy.  And those needy then enjoy the dignity of being lifted up by someone who knows their name.

There is only one way to get back to this.  There is only one way to have a truly independent Federal Reserve.  And this is to tie our money to something held by the Treasury in reserve – held on our behalf.  Again, we do not have a monarch who would lay claim to the nation’s money supply.  That is by design, of course.  That design was meant to ensure that our money supply be a utility to allow the efficient exchange of the wealth of the nation – which it used to measure.  Fiat money – the child of Progressive ideas of the State – only means our money supply now measures the public debt instead, the wealth of the few who own that debt, and the ambitions of politicians whose jobs depend on that debt.

Would You Hire Paul Krugman to Babysit Your Kids?

Posted on Friday, March 20, 2015 No comments

Friday, March 20, 2015

[UPDATED 28 SEP 2015 - DOW DOWN ~300 - FLIRTING WITH 16,000 & BELOW]

I am reading Princeton economist Paul Krugman's blog more of late and interacting with some of his posts in comments.  This has taken me to an article he wrote for Slate back in 1998.  It was titled "Baby Sitting the Economy: The baby-sitting co-op that went bust teaches us something that could save the world."

I have linked to it here because it is exactly the kind of everyday, real life example of economics that we need so we can engage in some important discussions.  It just strikes me quite a bit differently than it does Krugman because of dynamics it either does not include or ignores.

But let's digest the story first: The idea is that a group of couples in Washington, D.C. (that should suggest pending doom right out of the gate - just like soundtrack of those Friday the 13th movies) have both a supply and a demand.  The supply is represented by the couples staying at home.  They have kids, so looking after a couple others for a night should not pose a problem.  That means they have a 'supply' (babysitting services).  The couples who want to go out for the night represent 'demand' for the 'supply' - they need a babysitter.

So instead of forking out dollars to a teenager to look after the kids, they issued 'scrip' - basically money for their micro economy.  The 'scrip' was tied to time - each 'dollar' (if we want to call it that) represented an hour of babysitting time.  (I find that quite interesting - this is not 'fiat' money because it is tied to an 'asset' we trade all the time at our place of work.)

This looks like a great idea as long as all of the couples have equal opportunities to go out for the evening, and use up those opportunities at a relatively common and stable pace.  The supply of couples at home and the demand of couples on a date even out.  If, for some reason, some couples did not have the opportunity to go out enough, they would amass reserves of this scrip.  Because that would take the scrip out of circulation, more scrip would have to be printed up to keep this economy afloat.

Then the coop decided to assess 'dues'.  (Can you say 'taxes'?)  This is where Krugman's story is most amazing.  I am constantly astonished at how he misses the reality right in front of him.  From his 1998 post:
Now what happened in the... co-op was that, for complicated reasons involving the collection and use of dues (paid in scrip), the number of coupons in circulation became quite low.
Krugman is an academic economist, so of course the reasons have to be 'complicated'.  And the taxes... er... dues... tended to suck the money... er... scrip... supply away from its intended use.

Who knew?

But putting that aside... Krugman continues...
As a result, most couples were anxious to add to their reserves by baby-sitting, reluctant to run them down by going out. But one couple's decision to go out was another's chance to baby-sit; so it became difficult to earn coupons. Knowing this, couples became even more reluctant to use their reserves except on special occasions, reducing baby-sitting opportunities still further.
In other words, opportunities to 'work' were lost, creating a micro example of unemployment, spiraling into a micro example of a recession - which is exactly what Krugman calls this.

As he goes on, though, the problem becomes clear:
Since most of the co-op's members were lawyers, it was difficult to convince them the problem was monetary. They tried to legislate recovery—passing a rule requiring each couple to go out at least twice a month. But eventually the economists prevailed. More coupons were issued, couples became more willing to go out, opportunities to baby-sit multiplied, and everyone was happy. Eventually, of course, the co-op issued too much scrip, leading to different problems ...
And the story stops here for Krugman... a bit convenient, that.

Let's go back to something Krugman apparently did not even notice.  Each 'dollar' of scrip was worth one hour of babysitting time. Krugman does not tell us whether the lawyers suggested that in 'legislation' - but if all of the couples agreed to that just the same, it was the de facto fixed value of the scrip.  This is not 'fiat' money.  It also helps explain what Krugman conveniently leaves hanging here: Exactly what "different problems" were caused by issuing too much scrip?

Think about this for a moment: If you can just print up more scrip, at some point someone is going to start asking how much scrip is out there (the 'quantity' of the scrip supply).  They are going to think that each day offers maybe four hours for going out (let's say 7-11 pm just because that is what my aging memory tells me how long my parents went out on their Wednesday bowling nights back in the day).  They are going to multiply that maybe by five (one work week) and then by 52 (one working year), figure on the number of years they'll need babysitting services and then compare that number to the number of couples - factoring in those multipliers - in their little micro economy.

If the (academic) economists win out and they issue more scrip without reference to what should be an obvious 'one babysitting hour' mathematical constraint, before long it will become apparent that all of the scrip 'in circulation' could not possibly be redeemed by the couples in the economy.  So what, exactly, is each 'dollar' of scrip worth again?

Now let's add in a 'complicating' factor.  Krugman mentions that the 'collection and use' of the dues was a problem.  Let's say the coop's lawyers decided that each couple needed a permit certifying that they knew first aid in case a child was injured in the inevitable horseplay of trying to pull the wool over the eyes of the babysitter. So part of what the taxes... er.... dues... are used for is hiring a staffer to design, publish, accept and review applications for that permit... and then to issue the permit.

Go tell it on the mountain!  A bureaucracy is born to save us from ourselves!

But there are only so many couples in the economy to support this new bureaucrat... er... staffer.  So the staffer designs the form and process in such a manner as to guarantee that processing a permit takes enough time to keep him employed. Before long other regulations all of a sudden seem necessary so other forms can be designed, published, received and their permits processed and issued.  But these built-in disincentives to productivity eventually outstrip those extra scrip the economists recommended be issued.  Then it gets really interesting...

The lawyers add a direct mail expert to the coop staff to hit up New York bankers with children with a bond issue.  The bond is denominated in babysitting scrip.  The bankers with kids buy the bond (they evidently didn't notice that the scrip supply already badly outstripped the ability of the couples in the economy to redeem them). And so the regulatory regime - how ever did they manage going on a date before all of this? - was kept intact and its people employed by this selling of babysitting scrip bonds.

But maybe they did understand that the scrip supply far outstripped the ability of each 'dollar' of scrip to be redeemed for an hour of babysitting.  They saw things for what they were and realized that holding the bond posed a risk.  So they 'securitized' the babysitting scrip bonds and sold the securities on the 'secondary market' - passing that risk off to unsuspecting investors and merrily collecting fees along the way.

But someone was still at the table keeping count of all of this... those bonds ('public' debt - at least for the couples in the coop) became part of the scrip supply - only making worse the problem of figuring out exactly what each 'dollar' of baby sitting scrip was worth.

Krugman does not really explore for us why the coop collapsed.  Might it have been because its scrip became essentially worthless?  At some point everyone would realize it was not really worth one hour, but maybe only one second.  And what good is that when you want to go out on a date?

I'll finish with a couple more extracts from Krugman's article:
If you think this is a silly story, a waste of your time, shame on you. What the Capitol Hill Baby-Sitting Co-op experienced was a real recession. Its story tells you more about what economic slumps are and why they happen than you will get from reading 500 pages of William Greider and a year's worth of Wall Street Journal editorials. And if you are willing to really wrap your mind around the co-op's story, to play with it and draw out its implications, it will change the way you think about the world.
Yes, indeed.  Let's coffee up and wrap our minds around the story, play with it a little (see above) and draw out its implications.

Yo! Prof! Be careful what you wish for!  We just might do this and it just might change the way we think about money - which is what really matters!

Lastly, Krugman says this:
For example, suppose that the U.S. stock market was to crash, threatening to undermine consumer confidence. Would this inevitably mean a disastrous recession? Think of it this way: When consumer confidence declines, it is as if, for some reason, the typical member of the co-op had become less willing to go out, more anxious to accumulate coupons for a rainy day. This could indeed lead to a slump—but need not if the management were alert and responded by simply issuing more coupons. That is exactly what our head coupon issuer Alan Greenspan did in 1987—and what I believe he would do again. So as I said at the beginning, the story of the baby-sitting co-op helps me to remain calm in the face of crisis.
And so here we are...  I wrote this back on March 20th of this year, and today is September 28th.  As of this writing the Dow is off more than 300 points, continuing the slide begun a couple weeks ago and which has revealed the naked impotence of the Federal Reserve for all to see.  A mining company which turned itself into a financial products company (does anyone remember "GE Financial" or "GMAC" - General Motors' financial arm, from the last financial crisis?) named Glencore is teetering. The 'experts' are saying the following:
...Glencore’s equity value could evaporate against its large debt pile unless commodity prices improve or the company launches a substantial restructuring.
Can you say 'bankruptcy'?

The reason this matters is because Glencore sits at the center of the commodities trading world, which has become nothing but a big blackjack table where Big Data is used count the cards.  Literally trillions of dollars are exposed in 'counterparty risk'.  If this sounds familiar, it should. When people began defaulting on mortgages they could never have paid off, trillions of dollars of 'counterparty risk' was what caused the financial crisis and Great Recession.

Yes, you can be forgiven for thinking: "What the hell?  We did it again?"

Only now, with interest rates at zero, there is nothing left for the Federal Reserve to do except 1) push interest rates into the negative; 2) print more money, effectively monetizing the national debt; and then 3) ban cash as a result of the inevitable flight away from the banks.

When I originally posted this, I asked:
But why, we must ask the good professor, could the stock market crash again?  Again, these things are right in front of Krugman but it seems he refuses to look at them.  Could it be because excessively low interest rates caused the banks to 'reach for yield', buying 'junk bonds' - which are just the corporate version of the sub-prime mortgage?  Could it be the bursting of that bubble of bad debt - inflated by easy money - causes the next crash, eroding consumer confidence? 
Could it be because the Shiller P/E ratio is higher now than before the last crisis?  Could it be that with a historic mean of 16.59 the market is incontrovertibly inflated?  And if so, what inflated the market in stocks (and real estate - see the Case/Shiller Home Price Index for a similar picture of real estate) if not the expansion of the money supply?  Krugman said Greenspan needed to create a housing bubble to replace the NASDAQ (dot com) bubble.  What is this?  The junk bond bubble to replace the housing bubble?  Will the good professor please tell us where this ends?
"Babysitting the Economy" is exactly what Krugman says it is.  But if he were to see what's right in front of him and pursue the related questions - like why the coop needed to assess dues to begin with, and how they then used them - it might lead him past booms and busts and directly to the conclusions which are necessary to make financial crises less frequent and less severe.

"This is Why We Do Statistics..."

Posted on Monday, March 16, 2015 2 comments

Monday, March 16, 2015 we don't have to explain why reality doesn't match our theories...

Business Insider interviewed Paul Krugman on the two 'schools' in economics.  Krugman calls them the 'fresh water' and 'salt water' schools.  Historically, they have been known as the Keynesian school (after John Maynard Keynes) and Austrian school (generally referring to Ludwig von Mises). Another way this divide has been defined is between 'supply side' (Austrian school) and 'demand side' (Keynesian school).

"Ugggh... It's morning and I just started on my coffee!"

Yes, yes, dear reader... I have mine right next to me as well.  But when the 'demand side' school (Krugman and his Keynesian companions) finally run up against the wall that is zero, the consequences are going to be severe.  If you are my age, you might want to think twice before remodeling Junior's room; he might very well need it again (if he isn't back at home already mired in student loan debt).

That student loan debt is a perfect example of the end result of Keynesian economics.  The idea is that by pushing money into the economy, we stimulate demand (thus the term 'stimulus').  It's a nice theory, and Krugman and his Keynesian pals are very fond of observing their theories through their statistical looking glass.* But reality?

Consider: Banks borrow money from the Federal Reserve essentially for free.  Because of the computer, the Treasury does not have to actually print these dollars.  But this expansion of credit is 'money printing' just the same.  The banks then take those free dollars and lend them out at around six percent.  That alone is a really nice deal for the banks.  But it is even better when you consider that these student loans are essentially co-signed by the taxpayer (you and me).  And it gets even better still (for the banks): unlike all other kinds of debt, you cannot escape them in bankruptcy.  If there ever was an 'Exhibit A' for crony capitalism, this is it.

What this does is remove all incentives on the banking side to actually lend responsibly.  Let me draw an analogy to explain:  We recently replaced our 15 year old minivan.  Our credit union pre-approved us for a certain amount and mailed me a 'draft'.  But I could not just make that draft out to myself and deposit it in my bank account.  I had to make it out to the dealer in a certain way.  The dealer then had to call in to the credit union for a code and submit the paperwork proving I took delivery of the vehicle.  Only then could they submit the draft for payment.

Why do this?  Because that car loan can be escaped in a bankruptcy.  We'd lose the car, for sure, but the credit union would lose a significant amount of money to depreciation.  The credit union structures the use of the money like this to ensure it is used for its proper purpose.  At least then they know they have a car to repossess were we to stop making the payments.

Not so with student loans.  The banks are basically throwing money at our kids.  There are no controls to prevent young people from using student loan money for things like rent, utilities and groceries.  And so today our young people are saddled with about $1.2T (no, not million, not billion - TRILLION) of outstanding student loans.  And this inflation of the money supply in higher education - championed by people like Krugman- directly results in tuition inflation.

It is very easy to fault the students.  But remember the golden rule: The guy with the gold makes the rules.  Human nature being what it is, responsible borrowing simply has to begin with responsible lending.  And responsible lending is directly tied to risk.  If there is no risk, there eventually will be no responsibility.  It is all but impossible to imagine how people like Krugman can miss this lesson from not only the last financial crisis, but from every one that has come before it.

But back to the wall that is zero.  Keynesian 'demand-side' economics says that by increasing the money supply (which is partly done by lowering interest rates), demand is stimulated and creates economic growth.  Reality, though (shown by things like income inequality), shows that the resulting increase in demand is primarily 'sunk' into real estate and the stock market.  And so the rich get richer and everyone else's dollars buy them less and less.  Or to be more succinct: Demand-side economics does not deliver on its promises regardless of how things look through the statistical looking glass.*

And when interest rates begin to bump up against the wall that is zero, an interesting dynamic begins to take hold.  This is already being seen in Europe, where the European Central Bank actually charges European banks to hold on to their reserves - those reserves 'earn' negative interest rates.

The logic of this should be quite easy to grasp: What will you do when your bank starts setting negative interest rates in addition to those monthly fees they charge?  You're better off just pulling the money out and sticking it in a safe.  The whole idea of money - and the banking system with it - stops making any sense (except maybe is it is seen through the looking glass*).  If we get to that point, bank on it: Junior will come knocking and need his room back.

The other thing this does - and this is quite a bit more subtle - is introduce the 'deflation' dynamic into lending.  To keep it simple: If rates are at zero, they cannot go down any further for any significant period of time - again, the whole idea of money and banking (and all of the cherished Keynesian economic theories with it) will eventually collapse.  So they have to go up.  Why lend your reserves today at, say, one-two percent when you know those rates have to go up soon?

The 'deflation' dynamic is this: When you think prices are going to go down, you hold on to your money.  That lessens demand, which puts even stronger downward pressure on prices, only strengthening your incentive to hold on to your money, which lessens demand even further, strengthening your incentive to hold on to your money.... and 'round and 'round we go; where we stop, nobody knows.

In lending, interest rates are bench-marked to the 'price' of the 10 year U.S. Treasury Bond.  As that price get higher, the interest rate (or 'yield') gets lower.  Because interest rates are so low right now, bond prices are high.  Why buy a bond (i.e. lend money) at a high price today when you know you will be able to buy that bond at a lower price tomorrow?  You hold on to your money, and 'round and 'round we go...

This is the mathematical reality of the wall that is zero.  Krugman and his Keynesian pals want to prattle along in their dens and classrooms looking at the world through the statistical looking glass* of their theories.  It would actually be funny if the consequences for our kids and grand kids weren't so grave.

* It occurs to me that my younger reader may not get the 'looking glass' reference.  Google 'Alice in Wonderland' for more info...

ISIS, Religion and Terror - And Why I am Not Charlie

Posted on Sunday, March 15, 2015 No comments

Sunday, March 15, 2015

...or not
While we are rightly shocked at the brutality of ISIS, there really isn't anything new here.  Hundreds of years ago David Livingstone traveled through northern Africa and commented on the "other" slavery practiced by the Barbary pirates.  
"To overdraw its evil is a simple impossibility."
The only difference between this and ISIS is digital video and social media.  What only Dr. Livingstone saw is now on the web for all to see.

But in the wake of the massacre of the staff of the French satirical magazine Charlie Hebdo we are getting a very clear contrast of responses to the intersection of religion and violence.

This intersection is nothing new to Europe.  From Constantine's Edict of Toleration Europe became a 'Churchist' society - meaning the Church was the most significant unit of society.  The Crusades then pit that 'Churchist' society against the Islamic Caliphate and produced decades of religious wars.  Within Christianity itself, the corruption engendered by the intersection of politics and religion produced the Reformation, which then produced conflicting religious loyalties - and more decades of religious wars.

The Treaty of Westphalia in 1498 was, for all intents and purposes, written on paper recycled from ashes from some of these wars.  The 'nation-state', with borders commonly recognized by 'international law' as we have come to take for granted, was born.  The important thing to note, however, was how Europe gradually went from being a 'Churchist' society to a 'Statist' society, where the State is now the most significant unit of society.

This is the context in which we must evaluate the comments of Charlie Hebdo's new editor-in-chief, Gérard Biard in the wake of the massacre.  There are some very important clues here: Biard's claim is that the paper does not attack religion unless religion gets involved in politics.
Every time we draw a cartoon of Muhammad, every time we draw a cartoon of the prophets, every time we draw a cartoon of God, we defend the freedom of religion, we declare that God must not be a political or public figure, He must be a private figure.
In light of Europe's history, this all makes sense.  The Enlightenment produced the distinction between public and private that forms Biard's premise here.  This, then, is how Europe views the very idea of being 'secular'.  God, religion and devotion must be private.  Since the State is the most significant unit of society, and the State is secular, society (the individual in the public square) must also be 'secular'.  And it is the State that defines where the boundaries between public and private are with respect to religion.

This view of religious freedom is very different than the one held by America's founding fathers.  And this is why I am not Charlie.

The story of Islam in America is largely the story of a peaceful coexistence.  Along with many other religious minorities, we have lived peaceably among each other while Europe struggles to do the same.  There must be a reason why.

I believe it has to do with exactly what we mean by 'secular'.

Where Europe has gone from being a 'Churchist' society to a 'Statist' society - which it remains - our founding fathers built their ideas on the scaffolding of the tradition in the Reformation that believed one became a Christian by choosing Christianity for themselves - and thus were baptized as adults rather than children.  This necessarily meant that the freedom to make (or not to make) that choice must be a freedom that arises from nature rather than the State and its church.  This, then, is the foundation of the American idea that there are rights - "...among which are life, liberty and the pursuit of happiness," that precede government.  Therefore the first priority of the exercise of political power is the securing of those rights to their proper owner – the individual.

This is why we do not distinguish between public and private in the American idea of religious freedom.  To do so requires that we allow the State to determine the boundaries between public and private.  And that, then, means the freedom of religion is subject to the benevolence of the State rather than ours by nature.

And so when we say we are 'secular', we mean to say we make the maximum amount of room in our public spaces and life for the expression and practice of the religions of our people.  And this is why most of our newspapers did not publish the cartoons.  To expose religious sensibilities and sanctities to public ridicule is to deny our public spaces and life to those religions and their adherents.
This is what Europe does not yet understand.  Biard complains that refusal to run their cartoons undermines freedom:
When they refuse to publish this cartoon ... they blur out democracy, secularism, freedom of religion, and they insult the citizenship.
Voltaire was wrong. It is exactly the opposite.

By not publishing cartoons that defame sanctities, we preserve the essential dignity of our neighbor who practices a religion different from ours.  And that dignity cannot be divided by the State between public and private - where someone in a cubicle somewhere decides for everyone else where the border between public and private is drawn, thus infringing upon both religious freedom and personal dignity.

Europe's ideas worked well for them while everyone shared the same history and customs.  But the news today proves ever more clearly that multiculturalism is the inexorable arc of history.  For freedom to endure, it must be conceived of without boundaries between public and private, and the State must be conceived of in the context of freedoms and rights which precede it.  This means the State must be secular so as to preserve the rights of its people to be devout - in public and in private - and to enjoy the dignity their devotions confer.

This is why I support the decision not to run these cartoons in our papers.  This is why I am not Charlie.

[This first appeared in my column "Politics for the Rest of Us" at Communities Digital News.]

50 Years After Selma: Moral Clarity, Leadership and Our Exceptional Story

Posted on Saturday, March 7, 2015 No comments

Saturday, March 7, 2015

Today brought many back 50 years.  I am not quite that old, but today brought me back about 11 years just the same.  It was in July of 2004 that Senator Barack Obama gave a keynote address at the Democratic National Convention.

Being the child of a quintessential "Reagan Democrat" couple, I have always been interested in those among the Democrats that seemed to hold on to some of the moderate - if not outright conservative - values of the Democratic party during the JFK years.  Ideas like "a rising tide lifts all boats" - which Kennedy used to explain tax cuts - and the strong backbone in the face of Soviet tyranny are all but dead among today's Democrat party.  Names like Zel Miller and Sam Nunn mean something to me, but I doubt there are many Democrats younger than I who remember them.

That is why 11 years ago, listening to Barack Obama's convention speech, I thought "maybe there are some among the younger Democrats who I could support."  There was a lot in that speech that encouraged me.  I was reminded of that this morning listening to President Obama speak at the commemoration of the march in Selma, Alabama.

If there is a subject on which the President speaks most comfortably - and on which he actually leads with confidence - it is the significance of the civil rights movement for our future together.  This is leadership others in the civil rights community have utterly failed at.  Instead of always looking back and nurturing grievances - and building an industry around them - President Obama seems to want to look forward and call us to renew our commitment to interpreting the significance of our national identity of ideas.  I am happy to support him on this.  But I am left wondering...

Why can't this confident leadership extend beyond our borders?  The President made a passing reference to the hopes of the young people of The Ukraine.  If ever there was a setting for that, this speech was it.  But those hopes called for much more than a passing reference which did not even amount to a complete sentence.  The unique, exceptional nature of our identity of ideas seems to really bother the Kremlin.  It should.  Segregating the future based on ethnicity - be that Russian ethnicity or any other - is to pine for the past.  The call to transcend national identities of ethnicity and religion in favor of the ideas of human freedom and rights which precede government is the call to redeem the future from the violence of the past.  The young people of the Ukraine - too free to be intimidated by those too timid to be free - are a herald of this call.

We should join them.  And that requires leadership from our President.  He was spectacularly up to an important moment today.  Is he up the important moments of the next two years?  These will be moments for the moral clarity we heard this morning on our life together among the races.  

President Obama seems to settle on a theme: Not every problem has a military solution.  But when the problem is being prosecuted by military means, credible military options are the sine qua non ("that without which") of credible diplomatic leadership.

I am sure there will be no lack of conservative voices who will mine today's speech for things to criticize.  I have no desire to join that chorus.  President Obama was spectacular this morning.  If only - now freed from having to run a campaign - this could be harbinger of leadership and moral clarity to come.

We can only hope.

The End is Near! (The End of Free Money, That Is)

Posted on Friday, March 6, 2015 No comments

Friday, March 6, 2015

It used to be that a strong jobs report would be welcome news by the stock market.  More people with disposable income would mean more profits to be distributed as dividends per share of stock.  But as the era of supposedly 'free' money comes to an end, we are seeing its real costs.

Today's strong jobs report is being met with the expectation that the Federal Reserve will remove the word "patient" from its guidance with respect to interest rates.  As of this writing the Dow is off a little less than 300 points, or almost two percent.  The past few years have seen these swings become more frequent.  This should be telling us more and more clearly that we do not have a 'free' market.  We have the banker's version of central planning - where the bankers' sentiments (as expressed by the Federal Reserve) are the real market movers rather than the underlying fundamentals of the companies that actually make up the market.

But leaving that complaint aside...

There are two reasons for these swings: The first is where the market is today against its historic mean.  The Shiller Price to Eanings Ratio is at 27.5.  This means that on average, a share of stock in today's market is worth 27.5 times the annual earnings for which that share represents ownership.  The historic mean is 16.59.  Of particular interest is the fact that this measure of market value last peaked on May 1, 2007 at 27.55.  You'll recall that the Fall of 2007 was the beginning of the last financial crisis.  (It will be interesting to see if the market follows its dictum this year: "Sell in May and go away.")

There is simply no way to miss the fact that the market is inflated against its historic mean.  What goes up must come down.  The only question is how fast and how far.

This leads us to the second reason: Back when money wasn't free businesses would have to actually think first before borrowing to make payroll and acquire raw materials.  Prices would have to be set to accomplish two distinct objectives: 1) recover the costs of production; and 2) ensure there was enough left over after paying those costs to keep their people employed, acquire the next batch of raw materials, and pay dividends to shareholders.

But with free money that second part of 'price discovery' can be allowed to slide.  Businesses begin to depend more and more on credit to make payroll and acquire raw materials.  This is the hidden lesson of the last financial crisis, which played out roughly like this:

1) People began to default on their sub-prime mortgages in large numbers.

2) Investors began to realize that the investments which were based on those loan payments were likely worthless and started racing to sell them.

3) When everyone is selling something and no one is buying it - that something becomes, by definition, worthless.

4) The banks who owned these investments now had no idea what their balance sheet actually looked like (since no one knew what these investments were actually worth, if anything at all) and thus started hoarding what money they did have.

5) And businesses who depended on credit from these banks to make payroll and acquire raw materials saw those credit lines dry up overnight.  They thus couldn't make payroll and started laying people off in the millions.

It is this over-dependence on credit, and how it distorts price discovery, that is going to be the real story once money is no longer free.  The businesses that get back to remembering what a truly free market actually looks like are the ones which will survive.  The ones that don't - or likely never knew to start with - will have no idea how to set their prices, the loss of that information having been one of the hidden costs of supposedly 'free' money.

The uncertainty as to how this all flushes out will be the source of the market swings when money is not 'free' anymore.  The question is whether or not we will learn the needed lessons and get back to having a sound dollar that cannot be manipulated by the Bishops of the Temple of the Free Market (otherwise known as the Board of Governors of the Federal Reserve) who have transformed the Temple into a den of thieves.

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