Ruminations, April 11, 2010

Makingsausage

Former German Chancellor Otto von Bismarck(1815-1898) said that laws are like sausages;it is better not to see them being made. During his presidential campaign, BarackObama, in effect, that he would make sausage in public. In fact,he said that he would “broadcasthealth care negotiations on C-SPAN, so that the American people can see whatthe choices are.” What Bismarckhad in mind was that negotiations between political parties would be kept inprivate and the public would not be privy to the internal negotiations and onlysee the finished product.

Although Obama and the Democrats did not useC-Span, they made enough of the process on health care public to disenchant thevoters. Instead of working with Republicans in private on the health care bill,the Democrats chose to manipulate the cost figures, purchase votes andcastigate critics in public. So mishandled was the creation of the law that bya margin of 53 percent to 37 percent, voters now trust Republicans on healthcare more than Democrats (Rasmussen poll of likely voters, April 3). Incomparison, six months ago the public had thought that the Democrats were moretrustworthy on health care by a margin of 48 percent to 37 percent (GallopPoll, October 2009).

In terms of foreign policy, Bismarckunited the German Empire and maintained peace (when he wanted to) through anumber of secret agreements and treaties (especially with Russian and theAustro-Hungarian empires that had conflicting interests).

Obama’s foreign policy is just the opposite;it plays out in public. For example:

• Obama publicly took the step of criticizing Israel’s construction of dwelling units in East Jerusalem and Obama’s action then provided the Palestinians with the pretext for breaking off negotiations. Obama’s subsequent acrimonious meeting with Israeli Prime Minister Bibi Netanyahu ended with the sides further apart.
• Obama’s relationship with Afghan President Hamid Karzai has deteriorated to open political scolding and charges of Karzai’s ineptness and inability to deal with corruption. Karzai countered with a bad joke stating that if the United States continued to treat him as a vassal he would join the Taliban; Obama didn’t get the joke.

Of course, one can hope that Obama has indeedbeen conducting effective secretive foreign policy while allowing or evenpromoting the public battles for effect. If that is the case, one further hopesthat Obama has taken into consideration the negative reaction that these publicconfrontations have on the American public as well as foreign leaders.

When evaluating Obama’s propensities to makesausage in public, one has to wonder whether he has thought through theimplications of his actions. Maybe he has and everything is playing out just ashe had hoped but it seems doubtful. There are too many skeptics that think hispolicies are not kosher.

Re-inflatingthe bubble

One of the keys to the economic downturn wasthe housing sector of the economy. The increasing demand for housing, theavailability of mortgages and low interest rate and the securitization ofmortgages virtually ran the entire economy. Housing ran (or had significancein) the mortgage market, the household appliance industry, the constructionindustry, suburban malls, and highway construction. It was in fact a housingbubble that carried the economy for years until it burst. So how do we fix it?

There are three main approaches. Theapproaches are the economic fix and the political fix and a compromise.

From a purely market-oriented economicperspective, we should let the markets alone and the markets will right theeconomy and the housing sector. There should be no government policies thatpromote, facilitate or hinder home ownership. This approach says that thequasi-government agencies Fannie Mae, Freddie Mac and Ginny Mae shoulddisappear. The result of basing future policy on a purely economic model wouldbe the end of the de facto subsidized housing market and an economicrestructuring of every sector that is dependent on housing would, in the longterm, provide the basis for a solid economy but in the short term would makethe years 2008-2010 seem like a walk in the park.

A political fix would be to try to re-inflatethe housing bubble; bring back the conditions of the early years of the 21^stcentury. To that effect, the Federal Reserve Bank has been buyingmortgage-backed securities ($1.25 trillion) that have been guaranteed by thequasi-government agencies to help drive mortgage interest rates lower and spura housing recovery. And lower mortgage interest rates coupled with a tax creditof up to $8,000 for first-time home buyers would once again make housing aninvestment vehicle.

Do we really want to re-inflate the bubble?Well, no, but do we really want to drive the economy further down perhaps into,an economic collapse. That’s not so hot either.

Theideal solution would be to re-inflate the bubble a little bit and then begin tomove toward a sound economic model. To that end, Fed Chairman Ben Bernankeannounced that he was considering gradually selling some of the mortgage-backedsecurities that the Fed had acquired. President Obama proposed a tax changethat would reduce the amount of mortgage tax deduction. Treasury SecretaryTimothy Geithner and Representative Barney Frank (D, MA), Chairman of the HouseFinancial Services Committee, announced that Fannie Mae and Freddie Mac wouldbe restructured and will not exist in the same form in the near future.

Thismeans the Obama Administration is taking steps to rectify the situation. Ofcourse, the devil is in the details and in their implementation. Any new planwill cause disruption and will create enemies both philosophical and political.We can only hope that whatever course the Administration steers will beeffective.

Let’s pretend

KurtVonnegut in his novel Mother Nighttells the story of Howard Campbell, a fictional American in pre-World War IIBerlin. When war breaks out, Campbell decides tostay in Berlinbecause he has his work (as a playwright) and the love of his life – his Germanwife.

As thewar begins, Campbelltakes a job as a radio personality spewing Nazi propaganda with a good dose ofanti-Semitism. Early on, Campbell is contacted byan American spy who asks Campbellto help the American effort by inserting phrases or coughs in his broadcastthat will in fact be coded signals to the allies. Campbellagrees and does this throughout the war.

As theend of the war comes, his wife dies. Campbellmeets with his wife’s father who confesses that he never liked Campbelland thought him a spy. Then he tells Campbellthat even if Campbellwere a spy, the harm he caused Nazi Germany was more than offset by theeffectiveness of his propaganda broadcasts.

Afterthe war Campbell is spirited out of Germanyby an American agent and lives in the UnitedStates for some years before he is recognized byIsraeli Nazi-hunters. Campbellends up in an Israeli prison sentenced to death for his Nazi role. Whileawaiting execution, he is visited by his American World War II contact whoprovides Campbell with an official letterexplaining that Campbellwas an American agent in the War and his work was vital to the allies: ineffect, it’s a “get out of jail free” card. All Campbellneed do is to present the letter to the Israeli officials.

In theend, Campbelldestroys the letter and dies. As he explains his rationale, he had pretended tobe a Nazi and “we are what we pretend to be.”

“We arewhat we pretend to be.” There seems to be a lot of truth in that statement.What if we all picked a tolerant, thoughtful role model? Suppose we picked amodel that abhorred invective and respected others’ points of view. If wepretended to be that model real hard, we might even become everything that wepretended to be. It’s worth a try.

Quote without comment

William McAdoo, Secretary of the Treasury1913-1918: "It is impossible to defeat an ignorant man in argument."