classical economics
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Remember November 1938

REMEMBER NOVEMBER, 1938
Democrats Lost 81 House Seats
By Wayne Jett © March 12, 2010
    Herbert Hoover did two big, bad things as U. S. president. He signed the Smoot-Hawley Tariffs Act which wrecked global trade, and he signed the Revenue Act of 1932 which quadrupled income tax rates for most Americans effective January 1, 1932. Voters drummed Hoover out of office in November, 1932, and sent Franklin Roosevelt to the White House to fix those two bad things.
    Roosevelt did the opposite. He torpedoed his own delegation at the July 1933 conference to reduce tariffs and stabilize currencies, and he raised taxes every year his first six years as president. In federal elections of 1938, Democrats lost 81 seats in the House, eight Senate seats and 13 governorships.
    Roosevelt did other bad things, too, but you see the relevance of 1938 to elections of 2010. The middle class revolt of 2009-2010 may equal or exceed the political upheaval of 72 years ago.
    As in 1932, the American electorate correctly concluded in 2008 U. S. economic policy was on the wrong track. The evidence was soaring unemployment, rising deficits, crashing financial markets and $4/gal. gasoline and diesel fuel. They elected Barack Obama president to fix those problems.
    But again, as in 1932, the electorate erred in diagnosing the influences behind their serious maladies. The interests which pressed Hoover and Roosevelt to act as they did also pressed George W. Bush in 2006 to put Henry Paulson into cabinet as Treasury secretary. Now the same dominant elite control Barack Obama’s administration.
    Obama, as Roosevelt did, is making matters worse intentionally. Unemployment is much higher, federal deficits are quadrupled, states and cities teeter near bankruptcy, and Obama does nothing to deter financial fraud.
Senator Kaufman’s Floor Speech
    On Thursday morning, March 11, Senator Edward Kaufman (D-DE) gave the most important speech on financial reform this year on the Senate floor. Kaufman politely called administration and leadership legislative proposals “incremental reform,” when really they are no better than maintaining the status quo or making matters worse. But he proceeded to address what must be done to prevent worse economic calamity ahead.
    First, Kaufman notes the burden of proof is on those who oppose fundamental reforms of conditions which produced the financial devastation of 2008 and 2009. Here is what he says ought to be done: (1) restore Glass-Steagall, meaning split investment banking from commercial banking, so insured deposits will not be risked in securities underwriting and investing; (2) break apart the mega-banks so they are no longer too big to manage or too big to fail; (3) regulate financing facilities available to the shadow banking sector, which includes investment banks and hedge funds; (4) regulate derivatives trading by imposing robust collateral and margin requirements, without wholesale exemptions; (5) ban conflicts of interest such as selling mortgage backed securities to clients while buying credit default swaps betting those MBS will default; and (6) enhanced private remedies against persons (auditors, accountants, bankers and other professionals) who aid or abet violations of federal securities laws.
    Kaufman concedes his proposals are not entirely comprehensive, and they are not. He does not mention the utter failure of the Securities & Exchange Commission to protect investors from securities fraud, although he does refer to the need for Congress to impose “hard lines, not regulatory discretion.” The SEC and the Commodities Futures Trading Commission have abused statutory discretion to open loopholes the size of barn doors for manipulative, fraudulent trading practices. This discretion must be replaced by hard regulatory lines drawn by Congress if fraud is to be detected, punished and prevented.
European Influence for Good?!
    Just this week, the prime minister of Greece and the European Union pressed President Obama and Treasury secretary Tim Geithner to ban sale of CDS to any party which does not own the covered debt. Obama and Geithner stiff-armed the Europeans, with Geithner accusing them of “protectionism” in banning sale of CDS in Europe. But then, almost coincident with Kaufman’s senate speech, SEC chairwoman Mary Schapiro announced new support for effective regulation of CDS and other derivatives. Schapiro’s remarks likely reflect a political decision by the administration to toss the CDS regulatory issue to Congress where Wall Street does so well in getting its way. There the blame for doing nothing is easily diffused in many directions.
    After all, nothing takes legislative precedence over health care reform. Job creation was supposed to take precedence, but clearly does not. Neither does financial reform. Supposedly no one understands the Obama/Pelosi/Reid “irrational” insistence on cramming nationalization of the health care industry through Congress despite overwhelming popular opposition. Their dogged persistence seeks a fundamental elitist objective: population growth control. Political careers are subordinate to that aim. A “win for Obama” is beside the point. Obama is entirely willing – even eager – to move on to his post-presidency phase. If he provides the dominant elite control of middle class health care, his rewards will be great.
    Speaker Nancy Pelosi and Senate majority leader Harry Reid have the same outlook as Obama. Loss of majority status in both houses of Congress is as nothing compared to achieving control of health care for Americans. This outlook applies to gaining control of energy use through cap-and-trade legislation. If the electorate punishes this elitist conduct as it did in November, 1938, voters would do well to select replacements with middle class values.
Lehman Bankruptcy Examiner Report
    An examiner appointed by the Lehman bankruptcy court filed a 2200-page report which implicates Lehman executives in deceptive financing and accounting practices. The New York Fed and its erstwhile president Geithner likewise appear in bad light, both in permitting those practices and in allowing Lehman to design its own stress test so it could pass. Calls for Geithner’s resignation have emerged again, but his exit likely would not change Wall Street’s influence over policy. Meanwhile, a Democratic and an Independent senator are seeking co-signators of a long letter to President Obama asking him to appoint a Fed governor friendly to the middle class.
     That won't be nearly enough. Ask Harry Markopolos, the financial analyst who tried to persuade the SEC to stop Bernard Madoff's fraud. His new book No One Would Listen tells of measures he took to protect himself and his family in case his name was leaked to Madoff. No, the war against the middle class is not beanbag.
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