Relevant and even prescient commentary on news, politics and the economy.

The Republican Leadership Declines ‘Pigou Club’ Membership

Tom Bozzo

John “Don’t Say” Boehner makes (or should make) Greg Mankiw cry:

Mr. Boehner likewise criticized Mr. Obama’s cap-and-trade emissions permits proposal, saying, “Cap-and-trade is code for increasing taxes and killing American jobs, and that’s the last thing we need to do during these troubled economic times.”

As the NYT reports, the Obama budget actually would (mostly) rebate the proceeds of selling the credits via the ‘Making Work Pay’ credit, so Boehner is (mostly) lying about the tax increase part of the proposal. The administration should be concerned that the implicit tax will be passed on for fairness and political reasons, and a conceptually good way to deal with that is to make people approximately whole in a way that doesn’t take away the price signal to reduce carbon emissions.

As for the job-killing business, I’d like to see any other job that Boehner would save in the name of inefficiency; jobs whose existence depends on free carbon emissions are being subsidized by the rest of society. Of course it’s the net job creation or destruction that really matters. Insofar as there’s not much net tax increase, usual arguments regarding incentive distortion of taxes don’t really apply, and the net proceeds would go to low-carbon energy infrastructure and R&D that would be reasonably calculated to have substantial long-range returns, the job-killing claim looks histrionic. But if you don’t have ideas, then I suppose there’s not much to do but try to pound the table.

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Robert Waldmann

In this post, I mentioned something which I have been thinking about. It seems to me that many strategies of financial market participants are based on simultaneously believing that financial markets are efficient and inefficient. If financial markets are efficient, then the way to maximize risk adjusted returns is to buy and hold the market. If one is forced to bear some risk, say I bear the risk that I will get sick, then I might rationally hold another portfollio including health insurance, but I can’t gain by delegating management of my portfolio to someone who doesn’t know anything about my personal unavoidable risks.

Therefore much employment in the financial services sector must be based on the conviction that markets aren’t efficient.

On the other hand, many decisions seem to be made based on the assumption that financial markets are efficient. For example, incentive contracts for traders reward them for short term risk adjusted returns. Outsiders argue that it would be better to reward traders in restricted shares of the firm (which they can’t sell for a fixed period) so that they don’t sacrifice the long term interests of the firm in order to obtain high cash bonuses. Silly outsiders, say the financiers, Samuelson proved decades ago that the optimal trading strategy doesn’t depend on the planning horizon. Indeed he did under the assumption that the objective is the log of end of horizon wealth *and* that financial markets are efficient. The logarithmic assumption can be relaced to any CRRA function so long as assets are geometric brownian motions so returns over all horizons are log normal. The assumption that markets are efficient is absolutely necessary to the result.

But if markets are efficient, the optimal incentive contract for a trader is “Your fired” and, if necessary, “If you are not out of the building in 15 minutes I will call the police.”

A blindingly obvious example, a maybe less obvious example, and some effort to understand how we managed to get to this doubleplusungood blackwhite after the jump.

The example is the case of a speculative bubble which is bound to burst but has a small chance of bursting in any brief interval of time. Let’s say that each period there is a 99% chance that the bubble continues to inflate and returns on the asset are higher than the safe interest rate. In contrast 1% of the time the bubble bursts and returns on the asset are very large and negative so the expected return on the asset is always lower than the safe interest rate. A rational investor would short the asset, although a rational risk averse investor may take a very small short position.

Now let’s assume that there are professional traders who understand all this and investors who don’t.

An investor who rewards traders in cash equal to the greater of performance minus market performance and zero will with probability 99% pay a positive reward after 1 period to a trader who goes long the asset. If the investor fires the trader after 1 period in which the trader underperforms the market, then a rational risk averse trader will always buy more of the risky than its share of the market portfolio. This for two reasons. The return if she goes short has huge variance and the chance of keeping the valuable job is 99 times as high if she goes long. The same result holds If the investor fires the trader after a few underperforming periods in a row.

Hiring a sophisticated trader and writing a short term incentive contract is a worse strategy than buying the market.

Now this is not an obscure example, so why were investors willing to accept short term incentive contracts. Part of it, of course, is that the contracts are really written by managers, but why did people ever buy shares of investment banks ? Didn’t they notice how incentives changes when partners became managers ?

I think the reason is that many people manage to simultaneously believe that markets are efficient and that smart traders can beat the market.

How could such beliefs co-exist ? Well first it is really necessary to believe that the efficient markets hypothesis is a good enough approximation that incentive contracts which would be optimal if it were true are not horribly bad, but not a good enough approximation that the conclusion that all traders are inferior to buying and holding the market. This is not a logical contradiction, but people didn’t even feel the need to write down a model in which both are true and decide if it seemed reasonable.

My guess is that the cognitive dissonance is caused by the desire people have to believe that they are doing well and doing good. The claim that financial markets are inefficient is associated with the idea that speculators hurt non speculators. Speculators are therefore sympathetic to the idea that financial markets are efficient, even though they have to believe that they aren’t perfectly efficient.

More crudely, active investors are restrained by regulations and have a perceived interest in reduced regulation. Therefore they see efficient markets fanatics as political allies and take advice from them on, say, incentive contracts. Thus two groups with diametrically opposite beliefs who both, to put it crudely, vote Republican, imagine that they agree even though they don’t.

Another example of shizzo finance is the use of the Black and Scholes formula to detect miss pricing of options. One of the many assumptions needed for the original formula, and one that has not, to my knowledge, been relaxed, is that the price of the underlying asset is a martingale. This is a reasonable assumption if markets are efficient. The formula can be used to test the efficient markets hypothesis along with a bunch of clearly false auxiliary hypotheses. It can’t be used to find miss pricing under the assumption that financial markets aren’t efficient. This strategy makes sense if one assumes that underlying assets must be efficiently priced but that options might or might not be efficiently priced. That was a bold guess back when options were new. It has become a silly idea now that they aren’t.

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Suspend Mark-to-Market?

reader Sammy guest post

Suspend Mark-to-Market?

Section 132 of the Emergency Economic Stabilization Act of 2008 (“restates the SEC’s authority to suspend the application of FASB 157 if the SEC determines that it is in the public interest and protects investors”), is an important part of the solution to the current financial crisis, and may lessen the need for nationalization or taxpayer support.

FASB 157, which only came into effect on Nov 15, 2007, is the mark-to-market accounting rule that requires financial assets to be adjusted based on their market value – “the price in an orderly transaction between market particpants to sell the asset or transfer the liability….” The intention of FASB is theoretically good – to increase transparency and information for investors, but its practical application has created serious problems.

1) Banks are reluctant to, or can’t, sell impaired assets at a discount as those prices then become the basis for marking down the value of other assets in their portfolio, which directly reduces the Equity portion of the balance sheet, tri ggering all sorts of regulatory and market risk events. This is a major impediment to setting up a Bad Bank.

2) Is the market for impaired mortgage debt “orderly” defined as Any market in which the supply and demand are reasonably equal? I would argue no, as the supply of impaired mortgage debt ($1T?)far outstrips the available pools of capital with an appetite for this debt. Mortgage securities, in particular the more exotic types, are often described “no one knows what the value is.” That is bull; give me, Sammy, the security and I would be able to price it using NPV of future cash flow. The problem is there is so much uncertainty regarding the Probalitity of Default, and the Average Loss per Default that I would assign a very high discount rate to the cash flow, resulting in a low price for the security. So the bank might now sell the asset strictly as a business decision.

It is important to remember that we have recently faced a situation where the major money-center banks would have been (we didn’t have FASB 157) insolvent on a mark-to-market accounting basis (liabilities exceed book value of equity), that is theLatin American Debt crises of the 1980’s. What solved that problem?

Two things are absolutely essential when fixing financial market problems: time and growth. Time to work things out and growth to make working those things out easier. Mark-to-market accounting takes both of these away……Because these accounting rules force banks to write off losses before they even happen, we lose time.

So if we allow the banks not to write down assets, what will this look like?

Banking is a unique industry. Unlike virtually any other industry on earth, banks deal in a product that never goes out of style – money. As long as a bank maintains adequate technology and human capital to compete in the marketplace, long-term profitability is virtually assured, because demand is assured. As long as a bank can generate positive cash flows, and as long as the NPV of these cash flows exceeds the NPV of the losses from the defaulted assets, then the present intrinsic value of that bank’s common equity is positive. A bank can therefore have a very negative net worth and still have a highly positive net present value

So is allowing the banks to operate with negative equity in HTM terms a free lunch? No. Carrying the non-earning toxic assets on their balance sheets will cause US banks to earn a lower return on assets over the next few years; this reduces the NPV of their common equity.

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Social Security has no Unfunded Liability

by Bruce Webb

Not in any real world sense. And before shaking your head in sorrow at the fact that Bruce seemingly has lost it given the numbers in Table IV.B6.—Unfunded OASDI Obligations for 1935 (Program Inception)Through the Infinite Horizon which clearly show a $4.3 trillion dollar gap over the 75 year window and a $13.6 trillion gap over ‘Infinite Horizon’, consider that obviously I know the Table exists, in fact here it is.

Plus its brother which throws a $17.4 trillion and a $15.6 trillion at us. Meaning that depending on how you define it and what time period you chose the Trustees tell us the unfunded obligation runs somewhere between $4.3 trillion and $17.4 trillion (source of the ‘$17.4 trillion backwards transfer). Table IV.B7.—Present Values of OASDI Cost Less Tax Revenue and Unfunded Obligations for Program Participant
Click to enlarge either table.
Given that how can I possibly claim that the ‘Unfunded Liability’ doesn’t exist? Because unless you are the Commissioner of Social Security or one of the Trustees it just doesn’t equate to a real life event. To understand why you would need to follow me under the fold.

The key is to understand that the Commissioner and the Trustees are constrained by current law. While the Trustees tend to talk about events at depletion as being automatic

If no action were taken until the combined trust funds become exhausted in 2041, then the effects of changes would be more concentrated on fewer years and fewer cohorts:

For example, payroll taxes could be raised to finance scheduled benefits fully in every year starting in 2041. In this case, the payroll tax would be increased to 15.94 percent at the point of trust fund exhaustion in 2041 and continue rising to 16.60 percent in 2082.

Similarly, benefits could be reduced to the level that is payable with scheduled tax rates in each year beginning in 2041. Under this scenario, benefits would be reduced 22 percent at the point of trust fund exhaus tion in 2041, with reductions reaching 25 percent in 2082.

in fact they are not, the Commissioner and the Trustees having neither the authority to change the benefit schedule or the FICA rate, that being reserved to Congress. Which one way or another will simply eliminate some or most of the so-called ‘unfunded liability’.

Currently Social Security is faced with certain ‘inflection’ points. One is Shortfall, the date that income excluding interest (i.e. tax) falls behind total cost. Under Intermediate Cost projections that is set at 2017. At that point some of the accrued interest on the Trust Fund which heretofore had simply been ‘funded’ by crediting the TF with Special Treasuries (which are not funded with current year borrowing) instead has to come from the General Fund. Initially the effect is small, the Trust Fund continuing to grow right to the point that all interest has to be funded by current year borrowing. This point which I call ‘Peak’ is projected for 2023. After Peak funding full benefits means redeeming the accumulated Special Treasuries until they are gone. This event is called TF Depletion and under SSA projections is set for 2041. (The CBO uses somewhat different calculations and gets different dates but that is immaterial for the purposes of this discussion).

Now people vary on whether we should see Shortfall or Peak or Depletion as the key date for ‘Crisis’ but come what may under Intermediate Cost assumptions at some point Congress has to act, precisely because the Trustees are constrained by current law. Lets say Congress just decides to procrastinate right to Depletion. At this point they have some choices. They could raise FICA by 3.54% points or they could cut benefits by 22% or they could do some combination or they could do what the Greenspan Commission did and just do enough to kick the problem down the road for another 30 or 40 years. But whatever they do at a stroke they eliminate most to all of the ‘unfunded liability’. Because tax increases serve to fund the liability while benefit cuts serve to eliminate it and there is no third alternative being that the Commissioner has no ability to borrow money.

Seen properly ‘unfunded liability’ is just a fictive artifact stemming from the Trustees having to assume current law. If they are able to pay full benefits they are obligated to do so, to that extent there is a liability. But it is limited, if Congress decides to fund that liability it will be paid, if Congress deliberately decides not to the liability goes away.

It is useful and even crucially important to understand the gap between projected revenue and projected cost at the point of Trust Fund depletion. It is equally useful but not particularly important to examine that gap in some future year. What is not useful is to sum up those amounts and hang them like the Sword of Damocles over our heads. The summed gaps are not legal liabilities because Congress is free to eliminate them. Now some might consider them moral liabilities and potentially the needed changes would lead to some political liabilities for that future Congress, but the notion that every child born in America automatically inherits $150,000 in unfunded debt is hooey. Because before 2041 actions will be taken to either fund that debt or write it off and poof that ‘Unfunded Liability’ vanishes.

On a somewhat different note I would ask you to take a look at Table IV.B7. First it tells us there is a $17.4 trillion dollar gap between future tax revenues and future costs for ‘Current participants’. This is the source of the claim that the problem is do to over generosity to people in the past. This is just not true, examination of the Tables shows that every penny of that $17.4 trillion is ‘owed’ to a subset of retirees projected to be drawing benefits between 2041 and 2108. The Report puts it as follows:

The first line of table IV.B7 shows that the present value of future cost less future taxes over the next 100 years for all current participants equals $17.4 trillion. For this purpose, current participants are defined as individuals who attain age 15 or older in 2008. Subtracting the current value of the trust fund (the accumulated value of past OASDI taxes less cost) gives a closed group (excluding all future participants) unfunded obligation of $15.2 trillion. This value represents the shortfall of lifetime contributions for all past and current participants relative to the lifetime costs associated with their generations. For a fully‑advance‑funded program this value would be equal to zero.

This may be the most political passage in the main body of the Report which by and large is pretty straightforward. Then again the whole notion of ‘Infinite Future Horizon’ wasn’t introduced until the 2003 Report and it is hard to not suspect that the motivation was political. Because the language is carefully crafted to put the blame on ‘past and current participants’ while giving ‘future participants’ a pass, leaving of course Gen-Xers to bath in their sense of being persecuted by Boomers. But in point of fact no Gen-Xer is a ‘future participant’ instead they are all classified as ‘current participants’ and the vast bulk of the projected gap is due to them not being able to fund their own benefits after 2041 and before 2108. A fact that is shown that once you subtract out the excess contributions of ‘past and current participants’ (i.e. the current Trust Fund) the gap drops to $15.2 trillion.

Which brings up a second point. ‘Past participants’ (i.e. dead people) are clearly paid up, those checks already cashed. And those ‘current participants’ who will be dead by 2041 are also paid up. Now those Boomers who will be living for some years after 2041 are on the hook for some portion of the $4.3 trillion of ‘unfunded liability’ over the 2041-2082 but not that much being that the total gap between 2008-2057 is just .94% of payroll and not all of that due to us. Instead most of the gap coming in that third 25 year window Table IV.B4.—Components of Summarized Income Rates and Cost Rates, Calendar Years 2008-82[As a percentage of taxable payroll]. Further lets look at the significance of these numbers:
$2.2 trillion = Trust Fund i.e excess contributions by past and current participants (including all Boomers)
-$4.3 trillion = Gap between tax and cost between 2041 and 2082 less credit for the TF (partially due to Boomers)
-$6.5 trillion = Total gap between tax and cost between 2041 and 2082 for all participants (including some future participants born between 1993 and 2015)

-$17.4 trillion = Total gap between tax and cost between 2041 and 2108 for current participants
-$15.2 trillion = Total gap between tax and cost between 2041 and 2108 less credit for the TF
-$13.6 trillion = Total gap between tax and cost between 2041 and Infinite Future after including the $1.5 trillion surplus from future participants.

So future participants are responsible for a small portion of the $6.5 trillion gap between 2041 and 2082. As are Boomers. But mostly you are talking about Gen-X and leading edge Millenials not paying their way.

Similarly future participants are not at all responsible for that $17.4 gap for current and past participants between 2041 and 2108. Nor are past participants, indeed many of them contributed to the Trust Fund that reduces that gap to $15.2 trillion. And by 2041 Boomers will range from old to dead. Meaning once again we are talking about Gen-X and leading edge Millenials not paying their way.

So when you add it all up almost all of this liability derives from the retirees of 2058-2108 not including any of those born after 1993. The very youngest Boomer will be 94 in 2058. And any of our grandkids born after 1993 will actually be contributing to a long term surplus. Meaning almost all of the problem derives from Gen-Xers and leading Millenials scheduled to get some $14+ trillion or so of extra benefits over contributions.

‘Backwards transfer’ my ass. Instead Boomers not only paid benefits for the Greatest Generation, we are projected to pay almost all of our own benefits and now are asked to take cuts so that Gen-X doesn’t feel aggrieved by adjustments to benefits after around 2029. Whereas if they just got off the couch and grew the economy like Boomers and our parents and grandparents did everybody gets paid in full.

But I guess it is more fun to whine about ‘Selfish Boomers’ than to do the actual arithmetic.

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"Price Revelation" is mysticism.

Robert Waldmann

Felix Salmon has a fascinating article on the Gaussian Copula. Obviously I had noticed that financial market participants had made some mistakes in the recent past, but I had no idea how crazy they had been.

I’d say that one implication of Salmon’s article is that the invention of the CDS was very unfortunate event. Oddly I recall him arguing the opposite position. I don’t see how he can after writing

For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough,


Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li’s formula hadn’t expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system’s foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.


When the price of a credit default swap goes up, that indicates that default risk has risen. Li’s breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market.

Foolish reliance on Li’s model lead to disaster and it was made possible by CDS markets which convinced participants that they had many observations on the probability of default. They were convinced that prices revealed these probabilities because they had an insane mystical faith in the strong form efficient markets hypothesis and a schizophrenic simultaneous belief that they could beat the market.

If the only problem with CDSs is that they supplied those nut cases with the prices which they missused in calculations, that would, I think, be enough to show that the world would have been better off if CDSs had been banned.

I rant more after the jump.

here and there on the web, I typed that I think that high trading volume leads to volatility, that liquid markets are a bad thing and, in particular, that the fact that the market for CDSs has higher trading volume than the market for the underlying bonds is a very bad thing. I forget where someone asks me if I reject the “price revelation” argument in general. I do.

Financial market participants managed to convince themselves that they could beat efficient markets (already a logical contradition) because the market price of a CDS was an accurate enough measure of the probability of defaults that correlations in the changes in the prices of 2 CDSs could be used to estimate the (assumed to be constant) correlation between two (assumed to be normal) latent variables making it possible to estimate the probability that two bonds would both default.

That is they assumed that market prices contained information which no one even claimed to be able to obtain any other way. So how did the information get into the prices. One hypothesis is that the Zeitgeist exists and has rational expectations. I can’t think of another explanation.

Now given what market participants did with a whole lot of prices which changed very often, I think it is a bad thing to give them a whole lot of prices which change often. That is one reason why it would have been better if the CDS had never been invented.

My comment over at “Wired”


I recall a aol instant messenger debate we had about CDSs. You position was that they were useful since the CDS market is more liquid than the underlying bond markets. It seems to me that this article is demolishes your position. Liquid markets generate a huge number of numbers. They are used by traders to price assets and control risk. According to this article such use has recently destroyed the financial system. One of the many many problems is that Li assumed that the CDS market was efficient. This means that without a CDS market, people recognised that they couldn’t calculate the probability of default exactly, but once there were CDS they thought the market price contained that information. Where did it come from ? Why the magic of the strong form efficient markets hypothesis.

If no one can learn something, then it can’t be reflected in the market price. Not a subtle point. To believe that CDS prices are probabilities one has to abandone methodological individualism, that is believe in the rationality of the Zeitgeist or something. I can believe that I don’t know something, but other people do and they trade on markets so the market price will tell me something about their secret information. I can’t believe that no one knows something but it is still equal to the price at which markets populated by the ignorant people trade.

Traders were not only mystical, they were schizophrenic. They assume that markets are efficient and then try to beat the market. If the market is efficient, the best trading strategy is to buy and hold the market. If it is inefficient, then CDS prices are not probabilities. The trading strategies which brought down the system are only rational if some prices but not others are known to be rational. How can anyone have claimed with a straight face to believe such a thing.

The assumption that correlations are constant is another quite separate gross error as is the assumption that the distribution of something is normal, because it would be nice if it was. Both mean that the number “99%” which you type while noting that it is not 100% was not the true probability.

In any case, liquid markets were very damaging, because without them, people could not have made the same mistakes. Price revelation had huge negative social value because beliefs based on the prices were further from the truth than those people would have had without the prices. Traders might have been equally wrong about the expected value, but, if they had known they were ignorant, their subjective probabilities would have been close to true probabilities and we would all be much richer.

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2/3 = 0.92 %

Robert Waldmann

is still trying to learn journalistic arithmetic.
Recently I learned that 500,000 = 0 Now I learn from CNN that I got to restudy fractions or division or something as it seems that “two thirds” is equal to 92%

A new national poll indicates that two-thirds of those who watched President Obama’s address to a joint session of Congress reacted favorably to his speech.

Sixty-eight percent of speech-watchers questioned in a CNN/Opinion Research Corporation survey Tuesday night had a very positive reaction to the president’s address, with 24 percent suggesting they had a somewhat positive response and 8 percent indicating they had a negative reaction.

Now when I was learned percent and fractions 68% + 24% = 92% > 2/3.

I know that it is not ballanced to report the simple fact that 92% of people in the poll had a positive reaction, but better an unballanced fact than a ballanced falsehood.

CNN would have been approximately correct if they were to have written “A new national poll indicates that two-thirds of those who watched President Obama’s address to a joint session of Congress reacted [very] favorably to his speech,” although it would still be unclear to me why the phrase in the question “very positive reaction” should be replaced by something else “reacted very favorably.” I know there is a rule of style that words are not to be repeated, but given the importance of exact wording in polls I think that rule of style demands inaccuracy.

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DOLB’s Punditry on Obama’s speech

by divorced one like Bush

Ok, here are my basic issues with the substance of President Obama’s speech. First, may I remind everyone that as of 11/08 I declared my divorce successful. Has it become my mission accomplish moment?

I heard this:

“And we will expand our commitment to charter schools. but as a father when I say that responsibility for our children’s education must begin at home.”

And thought: 2 tier education system/vouchers, no thank you. Education begins at home when home means one parent has the time to spend at home oppose to both working.

I heard this:

“And we must also begin a conversation on how to do the same for Social Security, while creating tax-free universal savings accounts for all Americans.”

And thought: Are you freak’n kidding me! In this time of financial collapse we’re still going to talk about turning an insurance for the masses against the follies of finance into some form to include finance? The entire reason we want to create jobs is because we have suddenly realized that the vast, vast majority do not earn their money from money. Tax free? Has he not heard of 401K, IRA and all it’s versions, HSA, higher education accounts? Italy?

I heard this:

“Yesterday, I held a fiscal summit where I pledged to cut the deficit in half by the end of my first term in office.”

And thought: Yeah, how’d that work for the last administration who made such a declaration? Did he have to say “in half”? Has his advisors not taught him about the blip during the FDR recovery? Only one way I can think of doing this: Raise taxes where the money is and whack the defense budget in half and I mean take a swipe at all moneys related to security. Are we really $1 trillion dollars worth of paranoid?

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The President’s Speech


Slightly left of center with gracious charm and strength.

Whitehouse press office

Remarks of President Barack Obama — Address to Joint Session of Congress

Remarks of President Barack Obama – As Prepared for Delivery
Address to Joint Session of Congress
Tuesday, February 24th, 2009

Madame Speaker, Mr. Vice President, Members of Congress, and the First Lady of the United States:

I’ve come here tonight not only to address the distinguished men and women in this great chamber, but to speak frankly and directly to the men and women who sent us here.

I know that for many Americans watching right now, the state of our economy is a concern that rises above all others. And rightly so. If you haven’t been personally affected by this recession, you probably know someone who has – a friend; a neighbor; a member of your family. You don’t need to hear another list of statistics to know that our economy is in crisis, because you live it every day. It’s the worry you wake up with and the source of sleepless nights. It’s the job you thought you’d retire from but now have lost; the business you built your dreams upon that’s now hanging by a thread; the college acceptance letter your child had to put back in the envelope. The impact of this recession is real, and it is everywhere.

But while our economy may be weakened and our confidence shaken; though we are living through difficult and uncertain times, tonight I want every American to know this:

We will rebuild, we will recover, and the United States of America will emerge stronger than before.

The weight of this crisis will not determine the destiny of this nation. The answers to our problems don’t lie beyond our reach. They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth. Those qualities that have made America the greatest force of progress and prosperity in human history we still possess in ample measure. What is required now is for this country to pull together, confront boldly the challenges we face, and take responsibility for our future once more.

Now, if we’re honest with ourselves, we’ll admit that for too long, we have not always met these responsibilities – as a government or as a people. I say this not to lay blame or look backwards, but because it is only by understanding how we arrived at this moment that we’ll be able to lift ourselves out of this predicament.

The fact is, our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for. And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before.

In other words, we have lived through an era where too often, short-term gains were prized over long-term prosperity; where we failed to look beyond the next payment, the next quarter, or the next election. A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market. People bought homes they knew they couldn’t afford from banks and lenders who pushed those bad loans anyway. And all the while, critical debates and difficult decisions were put off for some other time on some other day.

Well that day of reckoning has arrived, and the time to take charge of our future is here.

Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity. Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. That is what my economic agenda is designed to do, and that’s what I’d like to talk to you about tonight.

It’s an agenda that begins with jobs.

As soon as I took office, I asked this Congress to send me a recovery plan by President’s Day that would put people back to work and put money in their pockets. Not because I believe in bigger government – I don’t. Not because I’m not mindful of the massive debt we’ve inherited – I am. I called for action because the failure to do so would have cost more jobs and caused more hardships. In fact, a failure to act would have worsened our long-term deficit by assuring weak economic growth for years. That’s why I pushed for quick action. And tonight, I am grateful that this Congress delivered, and pleased to say that the American Recovery and Reinvestment Act is now law.

Over the next two years, this plan will save or create 3.5 million jobs. More than 90% of these jobs will be in the private sector – jobs rebuilding our roads and bridges; constructing wind turbines and solar panels; laying broadband and expanding mass transit.

Because of this plan, there are teachers who can now keep their jobs and educate our kids. Health care professionals can continue caring for our sick. There are 57 police officers who are still on the streets of Minneapolis tonight because this plan prevented the layoffs their department was about to make.

Because of this plan, 95% of the working households in America will receive a tax cut – a tax cut that you will see in your paychecks beginning on April 1st.

Because of this plan, families who are struggling to pay tuition costs will receive a $2,500 tax credit for all four years of college. And Americans who have lost their jobs in this recession will be able to receive extended unemployment benefits and continued health care coverage to help them weather this storm.

I know there are some in this chamber and watching at home who are skeptical of whether this plan will work. I understand that skepticism. Here in Washington, we’ve all seen how quickly good intentions can turn into broken promises and wasteful spending. And with a plan of this scale comes enormous responsibility to get it right.

That is why I have asked Vice President Biden to lead a tough, unprecedented oversight effort – because nobody messes with Joe. I have told each member of my Cabinet as well as mayors and governors across the country that they will be held accountable by me and the American people for every dollar they spend. I have appointed a proven and aggressive Inspector General to ferret out any and all cases of waste and fraud. And we have created a new website called so that every American can find out how and where their money is being spent.

So the recovery plan we passed is the first step in getting our economy back on track. But it is just the first step. Because even if we manage this plan flawlessly, there will be no real recovery unless we clean up the credit crisis that has severely weakened our financial system.

I want to speak plainly and candidly about this issue tonight, because every American should know that it directly affects you and your family’s well-being. You should also know that the money you’ve deposited in banks across the country is safe; your insurance is secure; and you can rely on the continued operation of our financial system. That is not the source of concern.

The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins.

You see, the flow of credit is the lifeblood of our economy. The ability to get a loan is how you finance the purchase of everything from a home to a car to a college education; how stores stock their shelves, farms buy equipment, and businesses make payroll.

But credit has stopped flowing the way it should. Too many bad loans from the housing crisis have made their way onto the books of too many banks. With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.

That is why this administration is moving swiftly and aggressively to break this destructive cycle, restore confidence, and re-start lending.

We will do so in several ways. First, we are creating a new lending fund that represents the largest effort ever to help provide auto loans, college loans, and small business loans to the consumers and entrepreneurs who keep this economy running.

Second, we have launched a housing plan that will help responsible families facing the threat of foreclosure lower their monthly payments and re-finance their mortgages. It’s a plan that won’t help speculators or that neighbor down the street who bought a house he could never hope to afford, but it will help millions of Americans who are struggling with declining home values – Americans who will now be able to take advantage of the lower interest rates that this plan has already helped bring about. In fact, the average family who re-finances today can save nearly $2000 per year on their mortgage.

Third, we will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.

I understand that on any given day, Wall Street may be more comforted by an approach that gives banks bailouts with no strings attached, and that holds nobody accountable for their reckless decisions. But such an approach won’t solve the problem. And our goal is to quicken the day when we re-start lending to the American people and American business and end this crisis once and for all.

I intend to hold these banks fully accountable for the assistance they receive, and this time, they will have to clearly demonstrate how taxpayer dollars result in more lending for the American taxpayer. This time, CEOs won’t be able to use taxpayer money to pad their paychecks or buy fancy drapes or disappear on a private jet. Those days are over.

Still, this plan will require significant resources from the federal government – and yes, probably more than we’ve already set aside. But while the cost of action will be great, I can assure you that the cost of inaction will be far greater, for it could result in an economy that sputters along for not months or years, but perhaps a decade. That would be worse for our deficit, worse for business, worse for you, and worse for the next generation. And I refuse to let that happen.

I understand that when the last administration asked this Congress to provide assistance for struggling banks, Democrats and Republicans alike were infuriated by the mismanagement and results that followed. So were the American taxpayers. So was I.

So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you – I get it.

But I also know that in a time of crisis, we cannot afford to govern out of anger, or yield to the politics of the moment. My job – our job – is to solve the problem. Our job is to govern with a sense of responsibility. I will not spend a single penny for the purpose of rewarding a single Wall Street executive, but I will do whatever it takes to help the small business that can’t pay its workers or the family that has saved and still can’t get a mortgage.

That’s what this is about. It’s not about helping banks – it’s about helping people. Because when credit is available again, that young family can finally buy a new home. And then some company will hire workers to build it. And then those workers will have money to spend, and if they can get a loan too, maybe they’ll finally buy that car, or open their own business. Investors will return to the market, and American families will see their retirement secured once more. Slowly, but surely, confidence will return, and our economy will recover.

So I ask this Congress to join me in doing whatever proves necessary. Because we cannot consign our nation to an open-ended recession. And to ensure that a crisis of this magnitude never happens again, I ask Congress to move quickly on legislation that will finally reform our outdated regulatory system. It is time to put in place tough, new common-sense rules of the road so that our financial market rewards drive and innovation, and punishes short-cuts and abuse.

The recovery plan and the financial stability plan are the immediate steps we’re taking to revive our economy in the short-term. But the only way to fully restore America’s economic strength is to make the long-term investments that will lead to new jobs, new industries, and a renewed ability to compete with the rest of the world. The only way this century will be another American century is if we confront at last the price of our dependence on oil and the high cost of health care; the schools that aren’t preparing our children and the mountain of debt they stand to inherit. That is our responsibility.

In the next few days, I will submit a budget to Congress. So often, we have come to view these documents as simply numbers on a page or laundry lists of programs. I see this document differently. I see it as a vision for America – as a blueprint for our future.

My budget does not attempt to solve every problem or address every issue. It reflects the stark reality of what we’ve inherited – a trillion dollar deficit, a financial crisis, and a costly recession.

Given these realities, everyone in this chamber – Democrats and Republicans – will have to sacrifice some worthy priorities for which there are no dollars. And that includes me.

But that does not mean we can afford to ignore our long-term challenges. I reject the view that says our problems will simply take care of themselves; that says government has no role in laying the foundation for our common prosperity.

For history tells a different story. History reminds us that at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas. In the midst of civil war, we laid railroad tracks from one coast to another that spurred commerce and industry. From the turmoil of the Industrial Revolution came a system of public high schools that prepared our citizens for a new age. In the wake of war and depression, the GI Bill sent a generation to college and created the largest middle-class in history. And a twilight struggle for freedom led to a nation of highways, an American on the moon, and an explosion of technology that still shapes our world.

In each case, government didn’t supplant private enterprise; it catalyzed private enterprise. It created the conditions for thousands of entrepreneurs and new businesses to adapt and to thrive.

We are a nation that has seen promise amid peril, and claimed opportunity from ordeal. Now we must be that nation again. That is why, even as it cuts back on the programs we don’t need, the budget I submit will invest in the three areas that are absolutely critical to our economic future: energy, health care, and education.

It begins with energy.

We know the country that harnesses the power of clean, renewable energy will lead the 21st century. And yet, it is China that has launched the largest effort in history to make their economy energy efficient. We invented solar technology, but we’ve fallen behind countries like Germany and Japan in producing it. New plug-in hybrids roll off our assembly lines, but they will run on batteries made in Korea.

Well I do not accept a future where the jobs and industries of tomorrow take root beyond our borders – and I know you don’t either. It is time for America to lead again.

Thanks to our recovery plan, we will double this nation’s supply of renewable energy in the next three years. We have also made the largest investment in basic research funding in American history – an investment that will spur not only new discoveries in energy, but breakthroughs in medicine, science, and technology.

We will soon lay down thousands of miles of power lines that can carry new energy to cities and towns across this country. And we will put Americans to work making our homes and buildings more efficient so that we can save billions of dollars on our energy bills.

But to truly transform our economy, protect our security, and save our planet from the ravages of climate change, we need to ultimately make clean, renewable energy the profitable kind of energy. So I ask this Congress to send me legislation that places a market-based cap on carbon pollution and drives the production of more renewable energy in America. And to support that innovation, we will invest fifteen billion dollars a year to develop technologies like wind power and solar power; advanced biofuels, clean coal, and more fuel-efficient cars and trucks built right here in America.

As for our auto industry, everyone recognizes that years of bad decision-making and a global recession have pushed our automakers to the brink. We should not, and will not, protect them from their own bad practices. But we are committed to the goal of a re-tooled, re-imagined auto industry that can compete and win. Millions of jobs depend on it. Scores of communities depend on it. And I believe the nation that invented the automobile cannot walk away from it.

None of this will come without cost, nor will it be easy. But this is America. We don’t do what’s easy. We do what is necessary to move this country forward.

For that same reason, we must also address the crushing cost of health care.

This is a cost that now causes a bankruptcy in America every thirty seconds. By the end of the year, it could cause 1.5 million Americans to lose their homes. In the last eight years, premiums have grown four times faster than wages. And in each of these years, one million more Americans have lost their health insurance. It is one of the major reasons why small businesses close their doors and corporations ship jobs overseas. And it’s one of the largest and fastest-growing parts of our budget.

Given these facts, we can no longer afford to put health care reform on hold.

Already, we have done more to advance the cause of health care reform in the last thirty days than we have in the last decade. When it was days old, this Congress passed a law to provide and protect health insurance for eleven million American children whose parents work full-time. Our recovery plan will invest in electronic health records and new technology that will reduce errors, bring down costs, ensure privacy, and save lives. It will launch a new effort to conquer a disease that has touched the life of nearly every American by seeking a cure for cancer in our time. And it makes the largest investment ever in preventive care, because that is one of the best ways to keep our people healthy and our costs under control.

This budget builds on these reforms. It includes an historic commitment to comprehensive health care reform – a down-payment on the principle that we must have quality, affordable health care for every American. It’s a commitment that’s paid for in part by efficiencies in our system that are long overdue. And it’s a step we must take if we hope to bring down our deficit in the years to come.

Now, there will be many different opinions and ideas about how to achieve reform, and that is why I’m bringing together businesses and workers, doctors and health care providers, Democrats and Republicans to begin work on this issue next week.

I suffer no illusions that this will be an easy process. It will be hard. But I also know that nearly a century after Teddy Roosevelt first called for reform, the cost of our health care has weighed down our economy and the conscience of our nation long enough. So let there be no doubt: health care reform cannot wait, it must not wait, and it will not wait another year.

The third challenge we must address is the urgent need to expand the promise of education in America.

In a global economy where the most valuable skill you can sell is your knowledge, a good education is no longer just a pathway to opportunity – it is a pre-requisite.

Right now, three-quarters of the fastest-growing occupations require more than a high school diploma. And yet, just over half of our citizens have that level of education. We have one of the highest high school dropout rates of any industrialized nation. And half of the students who begin college never finish.

This is a prescription for economic decline, because we know the countries that out-teach us today will out-compete us tomorrow. That is why it will be the goal of this administration to ensure that every child has access to a complete and competitive education – from the day they are born to the day they begin a career.

Already, we have made an historic investment in education through the economic recovery plan. We have dramatically expanded early childhood education and will continue to improve its quality, because we know that the most formative learning comes in those first years of life. We have made college affordable for nearly seven million more students. And we have provided the resources necessary to prevent painful cuts and teacher layoffs that would set back our children’s progress.

But we know that our schools don’t just need more resources. They need more reform. That is why this budget creates new incentives for teacher performance; pathways for advancement, and rewards for success. We’ll invest in innovative programs that are already helping schools meet high standards and close achievement gaps. And we will expand our commitment to charter schools.

It is our responsibility as lawmakers and educators to make this system work. But it is the responsibility of every citizen to participate in it. And so tonight, I ask every American to commit to at least one year or more of higher education or career training. This can be community college or a four-year school; vocational training or an apprenticeship. But whatever the training may be, every American will need to get more than a high school diploma. And dropping out of high school is no longer an option. It’s not just quitting on yourself, it’s quitting on your country – and this country needs and values the talents of every American. That is why we will provide the support necessary for you to complete college and meet a new goal: by 2020, America will once again have the highest proportion of college graduates in the world.

I know that the price of tuition is higher than ever, which is why if you are willing to volunteer in your neighborhood or give back to your community or serve your country, we will make sure that you can afford a higher education. And to encourage a renewed spirit of national service for this and future generations, I ask this Congress to send me the bipartisan legislation that bears the name of Senator Orrin Hatch as well as an American who has never stopped asking what he can do for his country – Senator Edward Kennedy.

These education policies will open the doors of opportunity for our children. But it is up to us to ensure they walk through them. In the end, there is no program or policy that can substitute for a mother or father who will attend those parent/teacher conferences, or help with homework after dinner, or turn off the TV, put away the video games, and read to their child. I speak to you not just as a President, but as a father when I say that responsibility for our children’s education must begin at home.

There is, of course, another responsibility we have to our children. And that is the responsibility to ensure that we do not pass on to them a debt they cannot pay. With the deficit we inherited, the cost of the crisis we face, and the long-term challenges we must meet, it has never been more important to ensure that as our economy recovers, we do what it takes to bring this deficit down.

I’m proud that we passed the recovery plan free of earmarks, and I want to pass a budget next year that ensures that each dollar we spend reflects only our most important national priorities.

Yesterday, I held a fiscal summit where I pledged to cut the deficit in half by the end of my first term in office. My administration has also begun to go line by line through the federal budget in order to eliminate wasteful and ineffective programs. As you can imagine, this is a process that will take some time. But we’re starting with the biggest lines. We have already identified two trillion dollars in savings over the next decade.

In this budget, we will end education programs that don’t work and end direct payments to large agribusinesses that don’t need them. We’ll eliminate the no-bid contracts that have wasted billions in Iraq, and reform our defense budget so that we’re not paying for Cold War-era weapons systems we don’t use. We will root out the waste, fraud, and abuse in our Medicare program that doesn’t make our seniors any healthier, and we will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas.

In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2% of Americans. But let me perfectly clear, because I know you’ll hear the same old claims that rolling back these tax breaks means a massive tax increase on the American people: if your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime. In fact, the recovery plan provides a tax cut – that’s right, a tax cut – for 95% of working families. And these checks are on the way.

To preserve our long-term fiscal health, we must also address the growing costs in Medicare and Social Security. Comprehensive health care reform is the best way to strengthen Medicare for years to come. And we must also begin a conversation on how to do the same for Social Security, while creating tax-free universal savings accounts for all Americans.

Finally, because we’re also suffering from a deficit of trust, I am committed to restoring a sense of honesty and accountability to our budget. That is why this budget looks ahead ten years and accounts for spending that was left out under the old rules – and for the first time, that includes the full cost of fighting in Iraq and Afghanistan. For seven years, we have been a nation at war. No longer will we hide its price.

We are now carefully reviewing our policies in both wars, and I will soon announce a way forward in Iraq that leaves Iraq to its people and responsibly ends this war.

And with our friends and allies, we will forge a new and comprehensive strategy for Afghanistan and Pakistan to defeat al Qaeda and combat extremism. Because I will not allow terrorists to plot against the American people from safe havens half a world away.

As we meet here tonight, our men and women in uniform stand watch abroad and more are readying to deploy. To each and every one of them, and to the families who bear the quiet burden of their absence, Americans are united in sending one message: we honor your service, we are inspired by your sacrifice, and you have our unyielding support. To relieve the strain on our forces, my budget increases the number of our soldiers and Marines. And to keep our sacred trust with those who serve, we will raise their pay, and give our veterans the expanded health care and benefits that they have earned.

To overcome extremism, we must also be vigilant in upholding the values our troops defend – because there is no force in the world more powerful than the example of America. That is why I have ordered the closing of the detention center at Guantanamo Bay, and will seek swift and certain justice for captured terrorists – because living our values doesn’t make us weaker, it makes us safer and it makes us stronger. And that is why I can stand here tonight and say without exception or equivocation that the United States of America does not torture.

In words and deeds, we are showing the world that a new era of engagement has begun. For we know that America cannot meet the threats of this century alone, but the world cannot meet them without America. We cannot shun the negotiating table, nor ignore the foes or forces that could do us harm. We are instead called to move forward with the sense of confidence and candor that serious times demand.

To seek progress toward a secure and lasting peace between Israel and her neighbors, we have appointed an envoy to sustain our effort. To meet the challenges of the 21st century – from terrorism to nuclear proliferation; from pandemic disease to cyber threats to crushing poverty – we will strengthen old alliances, forge new ones, and use all elements of our national power.

And to respond to an economic crisis that is global in scope, we are working with the nations of the G-20 to restore confidence in our financial system, avoid the possibility of escalating protectionism, and spur demand for American goods in markets across the globe. For the world depends on us to have a strong economy, just as our economy depends on the strength of the world’s.

As we stand at this crossroads of history, the eyes of all people in all nations are once again upon us – watching to see what we do with this moment; waiting for us to lead.

Those of us gathered here tonight have been called to govern in extraordinary times. It is a tremendous burden, but also a great privilege – one that has been entrusted to few generations of Americans. For in our hands lies the ability to shape our world for good or for ill.

I know that it is easy to lose sight of this truth – to become cynical and doubtful; consumed with the petty and the trivial.

But in my life, I have also learned that hope is found in unlikely places; that inspiration often comes not from those with the most power or celebrity, but from the dreams and aspirations of Americans who are anything but ordinary.

I think about Leonard Abess, the bank president from Miami who reportedly cashed out of his company, took a $60 million bonus, and gave it out to all 399 people who worked for him, plus another 72 who used to work for him. He didn’t tell anyone, but when the local newspaper found out, he simply said, ”I knew some of these people since I was 7 years old. I didn’t feel right getting the money myself.”

I think about Greensburg, Kansas, a town that was completely destroyed by a tornado, but is being rebuilt by its residents as a global example of how clean energy can power an entire community – how it can bring jobs and businesses to a place where piles of bricks and rubble once lay. “The tragedy was terrible,” said one of the men who helped them rebuild. “But the folks here know that it also provided an incredible opportunity.”

And I think about Ty’Sheoma Bethea, the young girl from that school I visited in Dillon, South Carolina – a place where the ceilings leak, the paint peels off the walls, and they have to stop teaching six times a day because the train barrels by their classroom. She has been told that her school is hopeless, but the other day after class she went to the public library and typed up a letter to the people sitting in this room. She even asked her principal for the money to buy a stamp. The letter asks us for help, and says, “We are just students trying to become lawyers, doctors, congressmen like yourself and one day president, so we can make a change to not just the state of South Carolina but also the world. We are not quitters.”

We are not quitters.

These words and these stories tell us something about the spirit of the people who sent us here. They tell us that even in the most trying times, amid the most difficult circumstances, there is a generosity, a resilience, a decency, and a determination that perseveres; a willingness to take responsibility for our future and for posterity.

Their resolve must be our inspiration. Their concerns must be our cause. And we must show them and all our people that we are equal to the task before us.

I know that we haven’t agreed on every issue thus far, and there are surely times in the future when we will part ways. But I also know that every American who is sitting here tonight loves this country and wants it to succeed. That must be the starting point for every debate we have in the coming months, and where we return after those debates are done. That is the foundation on which the American people expect us to build common ground.

And if we do – if we come together and lift this nation from the depths of this crisis; if we put our people back to work and restart the engine of our prosperity; if we confront without fear the challenges of our time and summon that enduring spirit of an America that does not quit, then someday years from now our children can tell their children that this was the time when we performed, in the words that are carved into this very chamber, “something worthy to be remembered.” Thank you, God Bless you, and may God Bless the United States of America.

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Consumer Confidence

By Spencer

The Conference Board Index of Consumer Confidence fell to an all time low of 25 in February– 1985=100.

While many economist debate about the how much of a leading indicator consumer confidence is,
I find it to be a very good concurrent indicator. I use it to model real retail sales and have long felt that consumer confidence captured the wealth effect on consumer behavior.

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