The Great Credit Conundrum
By Robert Romano
As originally published at RealClearMarkets.com.
The Federal Reserve shocked markets on Aug. 1 when it decided to do nothing. Do nothing new, that is. Particularly, no QE3 ? i.e. a third round of quantitative easing, or printing money to purchase U.S. treasuries and other securities.
Markets immediately started tanking, and continued, through Aug. 2 before finally recovering on Aug. 3. Traders apparently wanted another temporary sugar high from the nation's central bank and didn't get it.
Oh well, not that it matters all that much.
As if the Fed taking on another $500 billion or so of federal government debt would have magically turned the economy around any more so than the previous $860 billion of such purchases since Aug. 2007 has.
To print, or not to print?
Even some more conservative pundits were distraught, such as Bloomberg View columnist Caroline Baum, usually a hawk on monetary policy, who advocated for the Fed to "consider more outright purchases of treasuries... Yes, print money. There, I said it."
Baum wrote she is "thinking differently" about monetary policy, but has not reached any conclusions yet. What promoted her new, potential outlook was a recent book by Robert Hetzel, senior economist and research adviser at the Richmond Fed, entitled, "The Great Recession: Market Failure or Policy Failure?"
In it, Hetzel takes the view that monetary policy ? even with the Fed's gross expansion of its balance sheet from $869 billion in 2007 to $2.8 trillion today, more than tripling it in just a few short years ? is too tight, and has "simply accommodated the increased demand for bank excess reserves."
To be certain, deposits held by Federal Reserve banks on behalf of financial institutions have exploded from $13.4 billion in 2007 to more than $1.5 trillion today. Therefore, it is hard to argue with Hetzel's conclusion that most of QE1 and QE2 is just sitting in a vault.
Probably the reason for that is as a hedge against any new losses that pop up in the wake of the financial crisis, which as Europe is discovering, may just be clearing its throat. Leaving that aside, if one views current policy as being too tight, one opens the door for more credit expansion.
But how much money-printing would be necessary to restore economic growth seen in the past 60 years?
Doubling down
Previously, Americans for Limited Government President Bill Wilson has examined the relationship between credit expansion in the U.S. and the growth of the Gross Domestic Product (GDP) since World War II in a piece entitled, "Can the economy grow without debt?"
In it, Wilson observes that the relationship between debt and economic growth between 1945 and 1970 was relatively stable. Throughout that period, credit outstanding nationwide hovered between 140 to 167 percent of GDP.
Get full story here.
Maine's shot across Obamacare's bow
By John Vinci
As originally published at ObamacareWatcher.org.
The state of Maine on Aug. 1, 2012, sent a shot across the bow of Obamacare in the form of a letter to Secretary of Health and Human Services (HHS), Kathleen Sebelius.[1] The letter requests a reduction to Maine's Medicaid eligibility threshold by Sept. 1, 2012 and threatens to sue if the Obama Administration does not agree to the changes. The letter, written by Maine Governor Paul LePage asserts Maine's right not to be coerced by the federal government?a right confirmed by the Supreme Court's Obamacare decision, NFIB v. Sebelius, not quite two months ago.
Gov. LePage hopes the proposed changes, expected to save Maine nearly $20 million, will help solve Maine's fiscal woes.[2]
But a provision of Obamacare, called the "maintenance of effort" (MOE) requirement, bans states from lowering their Medicaid eligibility threshold until they establish a state health exchange. [3] Just like the Medicaid expansion requirement declared unconstitutional by a vote of seven to two justices at the Supreme Court, States that violate the MOE requirement risk losing all Medicaid funding.[4]
The Wall Street Journal reported that "within hours" of the Supreme Court's decision in NFIB v. Sebelius, Maine's Attorney General's office was studying what effect the case might have on Obamacare's MOE requirement. After studying the issue, the state's Attorney General, William Schneider, says he's convinced that Maine's challenge to Obamacare is "on solid legal ground."[5]
"The state of Maine is taking the right step in boldly challenging the Obama Administration's threat to cut off all federal Medicaid funding due to the state's decision to lower their Medicaid liabilities," said Bill Wilson, president of Americans for Limited Government (ALG).
Early reports of Maine's requested change claimed that HHS[6] and the Congressional Research Service (CRS)[7] disagree with Maine. But HHS and CRS did not then have the benefit of seeing Maine's legal analysis. In a July 11, 2012, letter to Health and Human Services (HHS), Gov. LePage told HHS Secretary, Kathleen Sebelius, that he believed she would "reserve judgment until the law and facts are fully-presented."[8]
Now that Maine has presented the "law and the facts" we know that it has two arguments.
First, Maine argues that Obamacare's MOE requirement is "part and parcel" of its Medicaid expansion provision and thus was struck along with that provision.
Get full story here.
Commentary: Big Government's battle with Chick-fil-A has unintended consequences
Video by Frank McCaffrey
Get permalink here.
Tea Party scores another win in Texas
By Duane Miller
Conservatives selected a candidate for senator in Texas this week. What are called "grassroots-conservatives" celebrated the election. Ted Cruz, a political unknown one year ago, defeated Lt. Governor David Dewhurst, handily. Dewhurst represented the Republican establishment. He was an office-holder, had name recognition, endorsements of the expected GOP names, and much more money. It is said that Dewhurst spent more than $20 million of his own money on his campaign.
Both men called themselves "conservative." And, compared to Democrats, both are. The difference is that Cruz is representative of a movement in America that is fed up with the Go-Along-to-Get-Along compromise-and-defend politics of the Republican Party over the past several years.
Voters turned out in record numbers in Texas for a runoff election held in July. The totally unheard of voting participation resulted in Cruz winning by double digits. Money and connections lost to a grass-roots activist base of voters. Called a "Tea Party Tidal Wave" by some pundits, the victory by Cruz should be an alarm bell for Speaker Boehner and the rest of the Republicans currently holding office or desiring election to office.
Ted Cruz was not the only beneficiary in runoff elections. "Grassroots Conservatives" won in other Texas races as well as in other states. In Atlanta, Georgia, a penny increase in the sales tax to fund transportation projects was a major priority for the sitting Republican governor. It was defeated by 26 points. True conservatives are angry with wimpy leadership and rising taxes. The message that is being clearly sent to the establishment republicans is, "represent our interests or get tossed."
Conservatives Have Had It With Do-Nothing Leadership
For decades, the Republicans were the minority party in both the House and Senate. The Democrats ran everything and the minority party had very little influence. About the only way a Republican could get his name in the paper was to do something completely outrageous or co-sponsor a Democrat bill.
Then came 1994 and the "Contract With America" that brought Republicans a majority in Congress and an opportunity to lead. The "Contract" election was the first stirring of conservative sentiment, but traditional media vilified the Republicans, called them, "Obstructionists," the Republicans did nothing to fight back, and, at the next election the Democrats gained 9 seats in the House. Conservatives were taught to be seen-and-not-heard, their opinions are irrelevant, and that Republicans must behave.
Conservatives choked back their anger, even with "compassionate conservatism," but then Barack Obama was elected and "hope and change" came to the White House. This President has been the most polarizing in our lifetime. His disregard for the Constitution and the legislative process; his disdain for the family unit and for the values embraced by most Americans (who comprise the real "mainstream"); his spending policies that will bankrupt this nation sooner rather than later; all have worked to breathe life into what was believed to be a dead body....the Conservative American voter.
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