Premier Wen states that China should “fine tune” economic policies as early as the 1st Q. He added that economic conditions in the 1st Q deserved attention and that quick action was necessary. Clearly, the Chinese economy is suffering (sounds like materially), the authorities are pretty concerned and are considering a mixture of policy actions (including stimulus measures/monetary easing?), with the announcement of the appropriate policy action imminently. (Source Bloomberg);

The Chinese authorities have told the country’s banks to roll over loans to local Governments, thought to amount to US$1.7tr – essentially China’s version of “kicking the can down the road” policy, which numerous countries have utilised. The obvious problem is that the vast majority of these loans can never be repaid, as the underlying projects are uneconomic. The local Governments are implicitly guaranteed by the Central authorities. Oops. (Source FT);

The Pakistani PM has been charged with contempt of Court for not
pursuing a corruption charge against the President Mr Zardari. There
have been widespread allegations of corruption by Mr Zardari – indeed,
his nickname is “Mr 10%”. However, the current problems reflect
growing tensions between the civilian Government and the military.
Pakistan has, since independence, rarely had a civilian Government
and, if the current issues escalate, may not have one again for some
time;

The Greeks passed the austerity measures in their Parliament necessary
to secure the 2nd bail out – by 199 to 74 votes – not a ringing
endorsement. However, all leaders of the main political parties have
to sign up to the measures – something that is going to be difficult.
All very, very boring stuff and Greece will both default and have to
exit the Euro Zone. The likely next PM, following impending elections,
Mr Antonis Samaras talks about renegotiating the deal following the
elections – yeah really. I think Mr Samaras is in cloud cuckoo land -
does he not understand that the Euro Zone, in particular, is totally
fed up of the Greeks and would love to get shot of them. The German’s
keep talking about the “Greeks needing to do their homework”. Well,
they wont and does that mean that they get to wear the dunce cap.

Greece exiting the Euro Zone – getting more and more convinced that it
is not a major problem (ex an initial knee jerk sell off) for the Euro
Zone;

Portuguese 10 year bond yields are down to around 12.4% – some 20bps
lower. Spanish and Italian bong yields are also lower – Italian by
more. Looks as if Spanish and Italian yields will converge. Will
Spanish yields be higher than Italian – I certainly think that they
should. Spain’s largest unions are calling for a mass protest on the
19th of this month;

Want to buy a cheap Ferrari. Well go to Italy. Early this year, an
Italian friend of mine advised me that Italian tax authorities had
raided a fashionable skiing resort in Italy and had checked out owners
of expensive car, restaurants, luxury shops etc. A week thereafter one
shop reported an increase in sales of 400% – yep that’s 400%. Italian
authorities continue to target owners of expensive cars according to
Bloomberg, who are dumping them asap. May well, go back to London via
Milan or Turin. Joking aside, an increase in tax collection will make
a significant dent – possibly even result in a balanced budget in
Italy. The IMF believe that the “black economy” is about 30% of
Italy’s GDP – who knows – however, its a big number;

Rupert Murdoch is facing additional problems in the UK. A number of
journalists, including the deputy editor, have been arrested as have
people at the Ministry of Defence and the police. Allegations of
widespread phone hacking, combined with paying off the police and
other Government departments continue to surface. The Sun newspaper is
Murdoch’s most profitable and indeed, influential newspaper. The
problem, however, could worsen much further, in particular if its
extends to the US, as the authorities could charge News Court under
the US Foreign Corrupt Practices Act. Bad news for Murdoch, as if this
does indeed happen and News Cort is found in violation of this Act,
his licences for various parts of his US media empire could be
threatened and/or cancelled. This is going to be extremely difficult
for Murdoch and, I for one, would be particularly cautious;

The UK’s Confederation of British Industry (“CBI”) sees signs that the
UK economy is improving and, indeed, they expect GDP to be positive in
the current Q, thereby avoiding a technical recession. Interestingly,
they suggest that the BoE need not increase the size of the QE
programme current Sterling 325bn, following last Thursday’s increase.
It does appear that the UK economy is improving faster than
anticipated, though GDP for the current year is forecast at a lack
luster +0.9%. The BoE has, in the past stated that they would wish any
recovery to become embedded and QE, off the table following this
round, well lets see. Having said that the BoE owns so many gilts -
over 30% when the current programme ends that it might actually be
difficult to buy any more. I suppose they could buy corporate bonds
and or mortgages etc. In any event, its too early and the BoE is one
of the most transparent of Central Banks – they will signal their
intentions nearer the time;

Asian markets are higher, though China closed flat to slightly lower.
European markets are around 1.0% higher. The miners and the A$ are
higher on the likelihood of stimulus in China – hope they climb a bit
more, as I want to add to my shorts. If the Chinese markets dont rally
on the prospect of stimulus measures……..

The Euro is strengthening on the better? Greek news – currently
US$1.3270 – still remain of the view its a great short against the
US$, especially above US$1.33. Gold is at US$1734 and spot Brent at
US$118.50 – really hate oil at these levels.

The beach is beckoning, as are the mojitos.

-Kiron

The giant movie and music corporations – and their water-bearing politicians – pushing draconian copyright laws are hypocrites.

According to TorrentFreak, members of the RIAA, Department of Homeland Security, Sony, Universal and Fox may have illegally downloaded files from BitTorrent.

Lamar Smith – the Congressman sponsoring SOPA – used a pirated photograph on his official campaign website.

TechCrunch reports today:

VEVO, the music portal owned by some of the biggest record labels in the US, had a pirated NFL playoff game playing on screens throughout its ‘PowerStation’ venue.

The incident was immensely hypocritical, given that VEVO is owned in part by Universal Music Group and Sony Music Entertainment (with EMI licensing its content to the service) — the same music labels that have made a habit of attacking consumers over alleged acts of piracy.

***

Imagine what the music industry would say were it on the other side of this. Is there any doubt it would dismiss these explanations and, lawsuits in hand, cry foul over such an overt act of piracy?

Furthermore, this seems no different than an accused pirate explaining that they left their Wifi open, only to have it used by someone else to download content illegally. Which happens to be a defense the RIAA has previously fought vigilantly against, when it sought to make owners of ISP accounts liable for any infringing activity, even if the owner had no knowledge of it. Hypocrisy, indeed.

The movie and music studios also allegedly encouraged people to use file-sharing software for pirating copyrighted material, made hundreds of millions of dollars in the process and are now suing people using the software they pushed.

And the very foundation of the Hollywood movie industry was intellectual property infringement. Specifically, inventor Thomas Edison owned the patents for movie cameras and for several types of movie film. Edison formed the Motion Picture Patents Company (known as the “Edison Trust”) with Kodak and others, and this trust controlled every aspect of movie-making: from cameras to film to distribution.

As Wired notes:

Edison assembled representatives of the nation’s biggest movie companies—Biograph, Vitagraph, American Mutoscope, and seven others—and invited them to sign a monopolistic peace treaty. Since 1891, when the Wizard of Menlo Park filed his first patent on a motion picture camera/film system, his lawyers had launched 23 aggressive infringement suits against other production outfits.

Sometimes Edison won. Sometimes he lost. But the costs of these battles overwhelmed his rivals, and that was the intent.

“The expense of these suits would have financially ruined any inventor who did not have the large resources of Edison,” one of his lawyers boasted, “and it could hardly be expected that he would be able to prosecute simultaneously every infringement as it arose.”

Thus his victims sold their patents, making the Edison movie empire ever larger.

But the old man wanted it all, so he assembled his rivals and proposed that they join his Motion Picture Patents Company. It would function as a holding operation for the participants’ collective patents — sixteen all told, covering projectors, cameras, and film stock. MPPC would issue licenses and collect royalties from movie producers, distributors, and exhibitors.

To top it all off, MPPC convinced the Eastman Kodak company to refuse to sell raw film stock to anyone but Patent Company licensees, a move designed to shut French and German footage out of the country.

“The negotiations were finalized in December,” Gabler notes, and by early January, “the company made its announcement that the old laissez faire of the movie business was being abruptly terminated.”

The Edison trust was based on the East Coast. In order to escape the onerous restrictions of the trust, independent filmmakers fled to Hollywood. Because travel was so much slower back then, Hollywood filmmakers would have plenty of time to close up shop if they got wind that the trust’s enforcers were coming to visit:

If Edison ever sent agents to California, word would usually reach Los Angeles before the agents did, and the filmmakers could escape to nearby Mexico.

In addition, the federal courts in California were also less eager to enforce patent rights.

As Armando Franco writes:

•These actions led several independents to flee to the West Coast. California was remote enough from Edison’s reach that filmmakersthere could pirate his inventions without fear of the law.

•But because patents grant the patent holder a truly “limited” monopoly (just seventeen years at that time), by the time enough federal marshals appeared, the patents had expired. A new industry had been born,in part from the piracy of Edison’s creative property.

And Bullies …

It used to be a widespread practice for music companies to unlawfully bribe radio stations using “payola” to play their songs. Indeed, the practice is still ongoing (at least as of a couple of years ago). See this, this, this and this. Indeed, many have alleged that the music industry is still riddled with organized crime.

It is also well-known in the entertainment industry that movie studios use fraudulent accounting – widely known as “Hollywood Accounting” – to cheat writers, actors and others who are not on the favored list from getting paid. There are many famous examples where writers and actors have been paid little or nothing on films which made billions of dollars. And see this.

And TorrentFreak notes:

The Canberra Wikileaks cables revealed the US Embassy sanctioned a conspiracy by Hollywood studios to target Australian communications company iiNet through the local court-system, with the aim of establishing a binding common-law precedent which would make ISPs responsible for the unauthorised file-sharing of their customers.

Both the location, Australia, and the target, iiNet, were carefully selected. A precedent set in Australia would be influential in countries with comparable legal systems such as Canada, India, New Zealand and Great Britain. Australian telecommunications giant Telstra was judged too large for the purposes of the attack. Owing to its smaller size and more limited resources, iiNet was gauged the perfect candidate.

The involvement of major American studios in the offensive was suppressed. “The case was filed by … the Motion Picture Association of America (MPAA) and its international affiliate, the Motion Picture Association (MPA), but does not want that fact to be broadcasted,” the US Embassy, Canberra wrote. “We will monitor this case … to see whether or not the ‘AFACT vs. the local ISP’ featured attraction spawns a ‘giant American bullies vs. little Aussie battlers’ sequel.”

Whether or not these two industries are actually run by criminal cartels, it is beyond dispute that they are acting like bullies.

What the hell is in the drinking water in Texas? Fist W, then Rick Perry, now this.

-BR

~~~

The Answer We Don’t Want to Know
By John Mauldin
February 11, 2012

~~~

What Is a President to Do?
Thinking About President Gore
Clinton on the Dole
And Then There Was 2012
The Fed Has a Printing Press
The Strategic Investment Conference in Carlsbad, California, May 2-4
Washington DC, Kansas City, and Europe

2012 will be the 11^th time in my short life that I will be able to participate in the choosing of a president of the United States. While it may just be me, it seems like each and every election is cast as the most important election of our time and a defining moment for the American Experiment. The future of the Republic was being weighed in the balance, and only the proper outcome (which would of course be the election of the candidate you supported) would assure its survival. This week we will continue our meditations on the economic choices that confront the world, this time focusing on the US.

We will start with a thought experiment, in which I invite you to think about alternate histories. Just how important are presidents (or leaders in general) to the success or failure of the economy? And then how critical is the coming election this fall? We will assault a few of our most cherished beliefs, both from the left and from the right. If I do not offend you in the first few pages, I invite you to keep reading; I will get to you somewhere.

(Warning: I risk upsetting more people than usual, as this letter is centered on the politics of economics. I will do my dead level best to be even-handed, but there is just no pleasing everyone. So better to write what I think and at least have one person happy. Which is pretty much what I do every week, anyway.)

As I continuously argue, the most important issue facing the US is dealing with its deficit, just as that is the defining issue in much of Europe and will soon be in Japan. [BR: This is a s political, not economic or Fiscal assumption. While we need to deal with the deficit, it is not nearly the issue made out by the far Right -- the US has had bigger deficits, i.e., WW2, and resolved them] The longer we put off the decision, the more difficult the task and the more serious the economic impact. Without action, Italy all too soon becomes another Greece, but with real impact. They realize that and are making the efforts. But would it not have been easier for Italy with about 40% less debt-to-GDP? Perhaps not politically, at that time when they should have been working on it, but in hindsight I bet the politicians now wish they had done more. It seems we accept change only in the face of necessity and see the necessity only in a time of crisis (as one Italian more or less put it, long ago).

So we discuss politics, because the looming debt crisis (and its solution) is at its very core a political creation and must have a political solution. And once the bond market decides to provide its own solution by demanding much higher interest rates, it is too late. That’s game over, and a prolonged recession if not a depression will ensue.

But before we go any farther, and quickly, if you are an accredited investor (or professional investment advisor or broker) in the US, let me invite you to a live discussion/webinar with myself and Tony Fenner-Letto of Winton Capital Management this next Tuesday, February 14, 2012 at 10:00 a.m. Pacific / 1:00 p.m. Eastern. This presentation will be hosted by my partners at Altegris Investments. Winton Capital Management is the largest and arguably the best-known managed futures firm on the planet. We will discuss their strategy for dealing with today’s market environment. I will also share my current thoughts on the global economy and its outlook. Hopefully we can talk about something besides Greece (are you tired of Greece yet?).

You can get an invitation to the webinar by calling your Altegris representative at 800-828-5225. If you have not yet opened a relationship with them, I will have them call you if you register at The Mauldin Circle. A replay will be available to registrants unable to attend. I apologize for limiting this discussion to accredited investors, but we must follow the rules and regulations. I am working on doing a webinar in the near future that will not be restricted. Stay tuned. (In this regard I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)

One further note. At the end of the letter, I will give you information and a link to be able to register for my Strategic Investment Conference, May 2-4. I expect it will sell out, as always, so I would suggest making your reservation promptly.

Now, we start today’s letter in South Africa, as I wonder which continent I will finish it on. In order to be able to hit the send button while on layover in London, we’d better jump in.

What Is a President to Do?

I have long maintained that presidents take too much credit for good economic times and get altogether too much blame for bad ones. That is not to suggest that they can’t make a difference by promoting certain policies over others. Clearly they can. But I think we might find, if we think about what might have been if the “other guy” had been elected, that outcomes would often have been not very different. In fact, it is often not until after a president is gone that we see the results of his policies. Let’s start with recent history and work backwards.

Let me preface this by pointing out that we are dealing with just the economic outcomes of the election of a particular president. I readily admit that other areas, such as Supreme Court nominees, regulations, social policy, and foreign policy would, perhaps, change a great deal. These developments are important, and perhaps more important than mere economic outcomes; but for this letter, let’s just focus on the economic aspects of a particular election.

Thinking About President Gore

In what seems like an eternity, but was only a short time ago, we were learning more about “hanging chads” on punched election ballots in Florida than any of us ever wanted to know. The world marveled as the denizens of the last Superpower fought tooth and nail over whether a ballot counted according to whether the holes were punched correctly. The difference between President Bush and a potential President Gore was in the end just a small number of votes in just one state. It was the closest of elections, with the results literally hanging by a chad. So, it is not at all far-fetched to imagine what would have happened if Al Gore had won the election. How much of an economic difference would there have been? I would suggest, not all that much. [BR: We don't know, but this reeks of excuse making for one of our worst Presidents]

The market had already begun to collapse by the time Bush was inaugurated in January ’01. Could Gore have prevented a recession? The answer is no, because the weakness had already set in. There would still have been 9/11. [BR: Unsupported counter-factual conclusion -- we have insufficient information to conclude that Gore (or anyone else) would have ignored the same warning that Bush so fatefully failed to heed] That had been planned since Clinton’s presidency, when Gore was vice-president. [BR: Oddly implies some blame on Gore as Veep] An Al Gore as president would hardly have deterred bin Laden from his plans.

And the economic aftermath of the event would have been roughly the same. Greenspan and the Fed would have kept lowering rates and kept them low for too long, no matter who resided in the White House. Would Gore have nominated an old-school monetarist as Fed Chair? [BR: Perhaps, we don't know. Someone should ask him, or review his speeches for the 1999-2003 period] Hardly likely. Almost the entire establishment, both Right and Left, the latter of which Gore was a leading figure, were Keynesian to their core. And Greenspan (or Bernanke, or whoever) was not going to allow deflation on his watch, not without a fight, with his main weapon being low rates and easy money.

The regulations that fostered the housing bubble and the subprime crisis were already in place. [BR: I think John means radical deregulations that allowed private bankkers to abdicate lending standards and engage in reckless specualtion] Both parties were in thrall to Fannie Mae and Freddie Mac. [BR: However, disproven as a cause of the crisis, and now a wingnut talking point] Greed was already running rampant on Wall Street. Did I somehow miss loud, insistent calls for a tighter home-lending regulatory environment from the partisan leadership on either side of the aisle? No, there weren’t any. [BR: Ed Gramlich at the Fed and others demanded it -- they were shouted down]

Would consumers have borrowed less on their homes? Was anyone complaining (except those buying?) that housing values were climbing too fast? Indeed, my neighbors in Texas were lamenting our lack of participation in the seemingly nationwide skyrocketing of housing prices. [BR: Yes, some of us were]

Would we have avoided a subprime crisis leading to a credit crisis under Al Gore? [BR: Wrong question -- would a President Gore have effected policy that made it worse? Would he have appointed Harvey "Shred-all-documents-before-subpoena-arrives" Pitt as SEC chairman? Federal preempted of predatory lending laws?] Did the Democrats protest the laws, passed by a Republican Congress, that allowed a few investment banks to massively increase their leverage? [BR: It was a rule exemption passed by the SEC, not congress] Or did they also take the lobby money and vote for the legislation?

The repeal of Glass-Steagall? That happened in 1998 under Clinton, with the full support, yea, the insistent urging, of the Republican leadership. [BR: Actually, it was GOP sponsored legislation passed by a veto proof majority] (Shepherded by a certain Texas senator, who also called Alan Greenspan the “Greatest Central Banker in History.” I still fondly recall Senator Gramm, an economics professor in his prior life, who I think all in all was a very good senator, if just a tad overenthusiastic about Greenspan. [BR: A terribly misguided Senator who not only sponsored the repeal of Glass Steagall but also introduced the Commodity Futures Modernizaton Act of 2000, which exempted all derivatives from any Federal or State oversight or regulations] (Side note: The conference I just spoke at here in South Africa voted overwhelmingly that the devil’s actual surname was Greenspan, from a rather dubious list of choices. Ah, how we fall from Grace. But back to our historical meanderings.)

Yes, we would not have had the Bush tax cuts, which some mathematically challenged individuals think are responsible for the whole deficit crisis. [BR: A little more than half] The tax revenues that were supposedly lost due to the cuts? Tax revenues were actually up just a few years later. [BR: Irrelevant to lost revenue due tot ax cut analysis, as it was driven by population growth and inflation -- hence, a rather misleading statement here] To argue that the Bush tax cuts did not have a stimulative effect on the economy flies in the face of all credible nonpartisan research, which shows tax cuts do indeed provide a positive stimulus effect; so the recovery would have been even weaker without them. [BR: Yes, a trillion dollars combined with ultra low rates stimulated the economy -- but at a cost of blowing out the deficit]

But under Gore we would likely not have had the Bush spending increases (which is what he should be blamed for), as the Republican Congress would likely have continued policies started under Gingrich, which opposed spending wanted by a Democrat president and which resulted in the running of a surplus. It was only when Republicans could get credit for spending increases that they wasted the surplus. But my bet is that (sadly) they would have still figured a way to use up that surplus, post-2000. [BR: Again, we do not know that, to assume so reveals the excuse making for W that makes this column so disappointing]

Would a Gore presidency have reacted any differently to the credit crisis, in ways that mattered? There was initial bipartisan consensus (at least of a majority, although with some noted disagreements) of the need for a stimulus, although later there was serious disagreement as to what that stimulus should be.

Would Gore have launched a war in Afghanistan? To think he would not have is to ignore who Al Gore was. He was (and I assume still is) a very hard-nosed foreign policy and defense hawk, when he was in the Senate and as vice-president. Would he have gone into Iraq? Probably not, but when all the world’s intelligence agencies (even the French!) believed Saddam Hussein had weapons of mass destruction and was close to a nuclear weapon, who can say? [BR: I cannot think of any other serious Presidential candidate of the past 20 years who would have gone into Iraq after 9/11 ]

(I should note that they all believed that because they had tapped Saddam’s communication lines. His top scientists told him they were close, because they were afraid for their lives to tell him they were not. So even Hussein believed he was close to a nuclear device. It was all a colossal failure of the intelligence professionals – even those in Iraq! Without such “evidence,” Hussein might still be in power today. If it was not so profoundly sad, with such a tragic loss of lives, the irony would be just too delicious.) [BR: Nonsense -- As I wrote in March 2003, the intelligence was clear that there were no WMD -- VP Cheney's set up an alt-intelligence unit, because the pros refused to peddle the nonsense he asked for]

So, there would have been less accumulated debt, but not all that much in the grand scheme of things. [BR: It would have been less than half] The increase in debt under Bush just brought forward a few years the end of the Debt Supercycle. Instead of the necessity of dealing with the deficit in 2013, we might have gotten to 2016. But the math of the entitlement programs makes the Day Of Reckoning a future certainty. However, that is not the point.

The point is that the main economic events would have happened under either president. [BR: The key questions: Would a President Gore have responded as poorly as President Bush did? Would we have had a TARP? And a trillion giveaway to the banks?] Would there have been a difference in marginal tax rates? [BR: We simply do not know] Yes, but I do not think tax rates were the cause of the debt crisis, or the subprime crisis. Would Republicans have avoided the temptation to spend under a President Gore? Not if Hastert and DeLay were still in charge of the House, at least if they continued to espouse the same policies. Less deregulation? But the subprime problem was not caused by deregulation. [BR: Hmmm, this Kool-Aid is delicious!]

The economy would have been basically the same under either president, though a case could be made that there would have been less accumulated government debt. Differences? Sure, I can think of many, but not major ones. [BR: Wow, excuse making for the disaster that was the George W. Bush Presidency on an awesome scale, leading to an epic fail].

~~~

BR: You get the idea. This is an exercise in rationalization that suggests terrible decision-making isn’t so bad, because others would have made similarly bad decisions in the office of the President. It suggests judgement doesn’t matter when you are the leader of the free world. I disagree, and believe Bush was the “Costanza President. (If everything I say and think is wrong, than the OPPOSITE must be right.)

Here is the rest of John’s musing, unmolested by my annotations.

~~~

Clinton on the Dole

Now let’s go back to 1996. What if Dole had won? (Remember Bob Dole?) We would be talking about the Dole surpluses, as he would have taken the credit for them. Seriously, can you imagine President Dole giving credit to former President Clinton for the surpluses that had accrued by 1998? Hardly. We were at the end of the bull market and a roaring technology boom. Would Long Term Capital and the 1998 Asian crisis have happened under Dole? I certainly think so. The resident of the White House had no control over those events, and in any event was hardly likely to try and burst a technology and stock-market bubble. What politician runs against higher stock prices?

Let’s push the clock back to 1992. What if Perot had kept his charts to himself? George Bush Senior wins rather handily. What would have changed? The economy was already on the mend when Clinton took office. The technology boom and the resulting bull market would have happened under any president. Deficits would have continued to grow.

Perhaps the defining moment of the decade was not a presidential election but Newt Gingrich becoming Speaker of the House, with a new cadre of troops that actually wanted to cut spending and rein in government. At least until Gingrich was gone and they were in Congress for another decade.

It was precisely the partnership between Gingrich and Clinton that laid the foundation for the surplus. Would that have happened with a Bush I? Hard to really say, but Gingrich was a true believer in smaller government back then, and was regarded as something of an oddity by much of the Republican establishment. He was just as much a firebrand back then as he is today, without some of the problems. In an odd way, if we want to revisit the differences in individuals and their importance to the economy, our economic future depended back then as much or more on Gingrich than the president. With a Republican President Bush, would he have had the same results? Could he have helped engineer surpluses? Would he even have become Speaker? Hard to say.

Without the reprieve of the surpluses we had for a few years, we would have been much closer to the end of the Debt Supercycle than we are today. Who knew we would be nostalgic for the economy fostered by the cooperation of Clinton and Gingrich?

If Bush I had lost in 1988? I can’t think of anything that would have changed in the next four years. The recession was due. Dukakis would have raised taxes, just as Bush did.

Reagan and Carter? There you could argue that Reagan made a difference. But even then, Carter appointed Volcker, and the die was cast under his watch. Volcker started his war against inflation under Carter, not under Reagan. Reagan benefitted that it was early in his presidency that we had the double-dip recession. Did Reagan’s tax reforms help spur growth? Yes, there is little doubt about that. Note that Reagan did not ask Volcker to stay on. Back then, Volcker was not very popular.

But Reagan also had the good fortune to start his presidency at the beginning of a bull market and a technology revolution. Stock market valuations were at historic lows, not because of Reagan but because of Volcker and the double-dip recession he caused. Reagan certainly helped the business climate by lowering taxes on small businesses and reducing the regulatory burden.

I would argue that the main effect of a Reagan presidency was felt after he left. It was his stamp on the economy, whether you liked it or not, that set the tone for the next 20 years.

And Then There Was 2012

So, is the upcoming election a truly defining moment? Will this election change our economic future all that much? Or are things going to more or less unfold the same (in terms of the economy), whether Obama is re-elected or we have a Republican (whoever that may be)?

To get a sense of the answer, we have to go back four years, to a rather heated primary battle between Hillary Clinton and Barack Obama. Republicans were enjoying the spectacle of the two of them beating each other up, questioning each other’s fitness to lead, debating the merits of their experience and their visions of the future. Let’s really alter history and assume Hilary Clinton had won, as most everyone at the beginning of 2012 thought would happen. She goes on to beat McCain and then has to deal with the aftermath of the debt crisis, which would have been in full bloom as she entered office.

What would have been different? Bill Clinton always said they were a team, so let’s assume for a second that she would have been similar to him with her policies. There is certainly nothing in her role as Secretary of State to suggest anything else. Bill Clinton was center-left, not as hard-left as Obama. He was a pragmatist who could tack to the center when it was the thing to do. But he also had his hand in every bit of policy decision. He wanted details on everything. To think Hillary would have not been deeply involved in whatever stimulus there was, and it would not have been similar in size, would not be consistent. The stimulus would have been less of a candy store for Democratic Congressman and more focused. Republicans would still have been deeply critical. Aren’t we always, of a Democratic President, and vice versa? But I imagine there would have been more infrastructure and targeted spending. Both Clintons are policy wonks, to their credit. You might not like their policies, but they do know the detailed ins and outs of what they do, and why. They were at home in DC and they knew the players. President Hillary Clinton would have hit the ground running on a targeted stimulus, and it would have been her stamp and not Nancy Pelosi’s on the bill. But the economic results would have been pretty much the same for the first three years.

The economy would still have been down 8 million jobs. Tax revenues would have fallen in any event. Would the stimulus have been less under McCain? Yes, but it would have still been massive. Hillary would finally have gotten her health-care project, but it would have been different in its scope and reach, I think. And just like Bill, she would have found a way to get bipartisan support. While Obama talked about a new post-partisan era, the last time the parties actually worked together was under a Clinton.

And there would more than likely have been a Republican takeover of the House in 2010, as mid-term elections often do change things up (as in 1994).

So, one way or the other, we would arrive at 2011 and the crisis over raising the debt ceiling.

During that crisis I had the privilege of being at a three-hour-long private dinner with the Speaker of the House, John Boehner. There were about 12 of us at the table. My book Endgame was just out, and I was invited to be the agent provocateur for the evening. I made a short (for me) presentation of the problems confronting the country, particularly the deficit crisis – not much different from what I write here, just maybe a tad more colorful and pointed. There were also a couple of members of the House Republican leadership present, and I wanted to make a few very serious points, as these were the people who would be tasked with coming up with some solutions. I don’t get many chances like that.

About halfway through the dinner, and afer some very sobering and frank conversation, I light-heartedly remarked that, “It’s too bad you had to deal with Harry Reid over the debt ceiling” (as nothing was getting done at the time).

Boehner turned and looked at me and said with some passion, “Harry? [rising voice] Harry? Hell, Harry ain’t the problem. If it was just me and Harry we could sit down tomorrow and get it done.”

The problem, at least from Boehner’s point of view, was they could not get an agreement with Obama. (It would be interesting to get Reid’s version. Note: I will be in DC next Thursday. Just saying.) And later, when they did reach an agreement on a rather modest beginning to a real deficit-reduction package, I am told that when Boehner called to say he had the votes lined up on the deal he thought they had agreed to, at no small expense to his political capital, Obama decided he wanted another $400 billion in taxes. Which was a non-starter. And thus the gridlock.

My bet, in my alternative world history, is that Hillary Clinton would have gotten that deal done. And more. Because the math of not dealing with the deficit is apparent to most of the politicians I have talked to in DC, whether Republican or Democrat. They have different ways to solve the problem, but they know it has to get done. The economic health of the Republic is truly at risk.

But that is not where we are. We do not have a Hillary Clinton as president. There is a very clear divide in Washington DC on the path forward. Whether you blame it on Obama or Republican recalcitrance, the problem is not being dealt with.

This election is ultimately about dealing (or not dealing) with the deficit, and putting the country on a path to a sustainable budget deficit, one that is less than the growth rate of the country. As I have argued elsewhere, and will argue in future letters, that is the paramount issue. Not dealing with the deficit runs the very real risk of the bond market treating us just as it is treating Italy and any other country that gets to the point where its debt is unsustainable. Not this year or the next for the US, but almost certainly before 2016. And once the bond market loses faith in a country, it takes a massive restructuring to restore that confidence. And we can see how that is playing out in Europe.

The next president must have the ability to get a consensus. Let me shock a few of my fellow Republicans and say that I think the deficit is such a deadly disease that it would be better for the country for the Democrats to be in power and forced to deal with the situation than to do nothing. I would not like their solution, and I think it would be harmful, but not as harmful as a second Depression, brought on by not dealing with the deficits and entitlement problems.

As a businessman, I would rather pay higher taxes on profits than to have no profits at all. Just tell me the rules and I will figure out how to adjust. A Depression 2 would mean 20% unemployment (at least) and a real lost decade, with the Boomer generation trying to figure out how to deal with no money and no jobs and being old.

And the choices we would be forced to make? The spending cuts would be far deeper than anyone can now imagine, and the taxes needed far greater. Think what happens when any country has hit that debt limit. Greece is not having fun. And either Italy is going to be unhappy with the longer-term recession it will have, or Germany is going to be unhappy with the ECB backing Italian debt at below-market rates for a long time, which means printing money and a much lower euro. Actually, I think both must happen if the euro is to remain a viable currency. That’s just what happens when you don’t deal with deficits before they become a problem. If Italy is to remain in the euro, there must be a back-door bailout by the ECB, accompanied by Italian austerity (is that an oxymoron?). And don’t forget Spain.

The Fed Has a Printing Press

What would the Fed do in such an event? Does it succumb to the worst fears of the Austrian economic crowd and monetize the debt in an effort to fight deflation and depression? Or does it trash the dollar and make gold bugs happy? Or does it find its inner Bundesbank (Austrian) core and eschew the easier way out?

This is a question to which we do not want the answer. Whether it’s yes or no, the answer is a disaster. Just choose the form of disaster you prefer. To the unemployed, retirees, and the young, it will make little difference. Ask our grandparents (or my father and mother), who lived through the Depression.

And doing nothing will mean that we find the answer to that question. The very answer we want to never know in real life. It makes for interesting speculation now, but living through it will be hell.

Both Obama and whoever the Republican nominee is owe the American people an answer today as to what they will do if given the chance. To blame Congress for doing nothing is not a solution. A generic answer of cutting spending will not do. Allowing the Bush tax cuts to expire gets us less than 20% of the way there. The “rich” do not make enough money, even if you take 60%. We would still be down a half a trillion or more, probably much more, as income vanishes as taxes rise. Funny thing about that: people respond to higher taxes by making less.

What cuts will you actually make if you are Obama? And do not suggest that it can be done by getting rid of waste. Everyone promises to do that, and it doesn’t happen. Not that we shouldn’t try. There is just not all that much there, and certainly not enough to close the gap. Blaming a “do-nothing” Congress is also not enough. What do you want them to do? Not bits and pieces, but what is the whole game plan for dealing with the deficit?

If you are Republican, what programs and spending will you cut? What actual reforms of entitlements will you ask for? And if that’s not enough, what taxes will you raise? On whom? Or will you be willing to stop giving tax deductions for mortgage interest, charities, and (literally) 3000 other tax “incentives.” Actually, if no deductions were allowed for the so-called tax expenditures (or targeted deductions), the budget would come into balance. Those tax deductions are over $1 trillion a year. Of course, everyone thinks their favorite tax deduction is vital to the future of the Republic, and losing them will make a lot of people upset.

Who will the candidates be willing to upset? The country does not need vague policies and ideas, we need specifics. A real budget proposal, with details, just like a family or business in crisis would create. We don’t need someone to tell us what they think we want to hear, but what they will actually do to deal with the most pressing issue of our time.

Will you consider radical tax reform? A VAT instead of an income tax, or reduced income taxes and no Social Security or Medicare tax, if that is the deal on the table? What is your opinion on various types of taxes? A flat tax? At what rate?

Then run on that plan, or set of choices. Make it clear beyond the vague platitudes of politics as usual. This election is that important. Take it to the voters and get a mandate. It is time for a national conversation on debt and the deficit. It will be no secret what I prefer, as I will be writing on that theme in the coming weeks. But it is more important that we come to a consensus than that it be done in any particular way. I will admit to believing it would be better if we do it with less government and the most reasonable tax burden we can settle on. But creating a path to a sound, controllable budget is the important thing, the primary objective. It will not be easy to forge a consensus from our very diverse views, but we must if we want to give our children any hope of a better world than the one we have now.

Actually, that is what is needed throughout the “developed” world. We are running out of easy solutions. In many places there are not solutions, just ugly choices and pain. In the US, we must look around and realize that time is running out. We do have time, but we need to use it wisely.

The Strategic Investment Conference in Carlsbad, California, May 2-4

As I said at the beginning of the letter, we are now ready to take reservations for the 9^th Annual Strategic Investment Conference, May 2-4, which this year will be in Carlsbad, California for the first time, at a venue that will allow us to take a few more attendees but still keep that intimate feeling. I host the conference, along with my partner Jon Sundt and his team at Altegris Investments.

Each year I wonder how we could make the conference any better, but I think we have done it. I must say that I do not think any conference anywhere has the quality speaking line-up that we do. It is the finest collection of top-notch raconteurs posing as economists assembled anywhere. Each speaker is a headliner in their own right, wherever they go. We have nothing but the best each year.

Look at this line-up: Dr. Woody Brock, Mohamed El-Erian, Marc Faber, Niall Ferguson, Jeff Gundlach, David Harding, Dr. Lacy Hunt, Paul McCulley, David McWilliams (from Ireland), David Rosenberg, Jon Sundt, and your humble analyst. Plus the surprise guests. Seriously, where else can you find all that talent under one roof? I design the conference each year to be the one that I would want to attend. And Sundt and team run as smooth and enjoyable a conference as you will find anywhere. You can learn more and register by going to http://meetings.StrategicInvestmentConference.

I should note that the best feature of the conference is the attendees themselves. You will make new friends and meet old ones. And the speakers are very accessible. The price goes up considerably on March 15, so register early. We always sell out, and I get calls asking to get in at the last minute, and have no way to help. Don’t procrastinate. Register now.

Washington DC, Kansas City, and Europe

I am finishing this letter in London, at the Admirals Club, and will soon hop a plane back to Dallas, hoping to catch some shuteye and magically adjust to Texas time en route. I stayed up and wrote, coming from Cape Town, in the hope that this will be a better way to adjust to the time change.

Next Wednesday I go to Washington DC for some quick meetings and then back home the next evening. I will be in Kansas City on Tuesday Feb 21, speaking along with my other US partner, Steve Blumenthal, at the Roth Companies (affiliated with RDA Financial) client conference. If you are in the area and interested in attending, please email Linda@cmgfunds.net. Or you can call CMG at 610-989-9090. (There is limited seating.)

I am then home for a few weeks, working on my next book. I will go to Stockholm on March 20 and then to Geneva for a day for some quick meetings; and then I will weekend in Paris to attend the Global Interdependence Center’s conference on central banking, which starts Monday the 26th. That promises to be a very lively and vigorously debated theme; and a lot of good friends will be there, so there will be a nice spirit of bonhomie for springtime in Paris. I don’t go to many conferences as a participant, but this one is the topic du jour. Think about joining me: http://www.interdependence.org/programs/inaugural-meeting-of-the-global-society-of-fellows/.

Let me say thanks to the wonderful people at Rand Merchant Bank in Cape Town. What hosts, and I must admit to having one of the finest meals I have had anywhere in the world at the Greenhouse Restaurant. And such wonderful dinner companions, with their very savvy senior economist, Rudolph Gouws, and CEO Alan Pullinger making me feel like I was at home. It was a special night and one I will remember.

It really is time to hit the send button, as they are calling my flight. Have a great week, and tell your political friends it is time to step up.

Your wondering what time zone I’m in analyst,

John Mauldin

John@FrontlineThoughts.com

Source: Slides That Rock

So far, the Cassandras’ predictions of global collapse and failure have been proven false. Some of the most notorious bears are now turning bullish and revising their forecasts to the positive. Other “gloom and doom” holdouts are feeling the heat. We think that heat will intensify.

The key to watch is in the credit markets. Credit spreads tell a story of overwhelming liquidity being applied to the financial-system open wounds like a steroidal salve. Such treatment can alleviate interim pain. It is treatment for the symptom; it works for a while. It does not provide a permanent cure.

One can easily track the credit spreads of sovereigns around the world. We have listed both the “good guys” and the “bad guys” on our website, http://www.cumber.com/. We are following a concept first presented to us by Erwan Mahé, who is doing seminal work from his Paris location. We have expanded on his work to include sovereign spreads in Asia and South America as well as those in Europe, both in and out of the eurozone. We update these charts on a weekly basis, due to the continuous demand from clients and readers to view the data: http://www.cumber.com/content/misc/EU_Contagion.pdf.

Why have all the Cassandras been wrong? Because they ignored the power of central banks to cause credit spreads to narrow. The outcome is reflected in market movements and in certain sectors.

Banks are a good example. If you made bets on banks, you won. If you were a detractor of banks, you lost. This holds true in Europe, in the United States, and in many other places in the world. The European Central Bank’s ingenious concept of a three-year, 1% loan via LTRO (long-term refinancing operation) worked. It was successful because it allowed the banks to buy their own debt at a higher yield than 1%, book the difference in yield as income, and mark up the value of their own bonds to par. That process functioned as a mechanical way for there to be an addition to the bank’s capital. The ECB used a creative way to solve a portion of its eurozone and the Europe-wide banking crisis.

We believe that the Fed must take notice of the LTRO. It can give them another arrow in their quiver. It takes the Fed beyond 28 or 84 days into contemplative periods of transitional policy, from the present massive stimulus that is all focused on the short run. The ECB has given the Fed a monetary laboratory in which to watch a longer-term, transitional-workout framework.

We expect the ECB to do another LTRO within the next month. The size is unknown; the impact will be positive. The markets now expect it and are already pricing it in.

Credit spreads are reflecting transition from worldwide recession and double-dip forecasts to gradual and improving economic outlooks around the globe. Data supports this shift in the United States, as well as in other places in the world. It will happen in portions of Europe, but not in Greece. In other European countries we expect to see some gradual improvement.

The world has had enough gloom and doom. Investors have been terrified since the beginning of the crisis in mid-2007, when Bear Stearns said “We have a small problem with a couple billion dollars in a hedge fund; don’t worry, it means nothing.”

We have replaced meltdown of the type we saw after Lehman/AIG with “melt-up” of the type we have been seeing since March 2009. We have shifted from collapsing leverage and failure at the institutional level to central bank intervention of unprecedented size.

The G4 central banks (http://www.cumber.com/content/misc/G4_Charts.pdf) have taken the size of their collective balance sheet from $3.5 trillion to $9 trillion. That number is likely to rise. The G4 have extended duration so that the focus of their policy is not just in the overnight lending rate or in the very short term. Massive liquidity has blunted liquidity squeezes everywhere in the world.

However, the issue of solvency remains. Greece remains insolvent. It must work out its payment schemes or it will default. It will require austerity and hardship. Despite the protests of unionized workers in public squares, there is not enough money to pay on the promises that were made.

Workouts are not easy, whether they are in Greece or Harrisburg, PA. Workouts involve recognition of loss and economic pain. Deferring the workout only makes it worse. Greece and Harrisburg will learn this lesson the hard way. Default is even worse. Ask Argentines who are still recovering from their government’s policies. Ask the citizens of Vallejo, CA, who squandered $10 million in legal fees on a municipal bankruptcy and have lots of unfixed potholes to show for it.

Workouts, however, do not cause total collapse; in fact, they bring out strength. Ask the Scandinavian countries that avoided this financial crisis, having learned from their previous one. Ask Singapore, which has imposed governance standards. If we had Singapore law applied in the US, many in Congress and on Wall Street would be in jail for many years to come.

The biggest threat to financial-market pricing comes from periods of uncertainty, the sequence of ambiguous and conflicting views that alter investor perceptions. Uncertainty is the enemy of market pricing. Once you achieve clarity, markets adjust quickly to the new reality and move on. This will hold true in every city, county, and country. And it will apply to every banking system in the world.

At the present time, our US stock market ETF portfolios remain fully invested. We are concerned about a market correction, which appears underway. It is necessary, since we have moved dramatically higher from the October selling-climax low. The upward move has been at a sustained pace. We expect this to be a correction, not a market peak. We believe the financial sector is still attractive. As it repairs, it will become even more attractive.

We are going through huge transitional times. Never before have we seen coordinated, global central bank activity of this order or magnitude. By the end of this year, the G4 central banks will have expanded their balance sheets approximately threefold during the financial crisis. The negative and inflationary results of this activity may appear in the future. That remains to be seen. For the present, this is a very bullish construction for asset prices and equities in particular.

David R. Kotok, Chairman and Chief Investment Officer

My very clued up friends advise me that there is a wall of money from investors who have missed the recent rally and who are ready to buy on any dip. I have no doubt that they are right and, indeed, even if markets don’t correct shortly, I suspect that these guys will be forced in, especially as we near the end of the 1st Q. However, the market has rallied to a point where, in my humble opinion, risks are beginning to outweigh prospective returns. After all, how much more will markets rally. By 5%, possibly 10%, seems to be the consensus – I’m afraid that’s not enough to interest me, in particular, given the macro/geo political risks. In addition, personally, I hate consensus views, though, I suspect, I’m also beginning to get a bit less confident as to the sustainability of the current rally.

We all know that Greece will default and, quite frankly, I’m going to reduce my coverage of that country significantly – its far too boring and has played out for far too long. In addition, a Greek default, apart from the initial knee jerk sell off (good opportunity to buy the market, I suspect) is, I believe, almost fully priced in and, most likely, good news for the rest of the Euro Zone.

Portugal, well the Euro zone will need to provide additional funding. Furthermore, a conversation between the German Finance Minister and his Portuguese counterpart, caught on an open mike, confirmed that Germany ie the Euro Zone, will provide additional support – it will certainly be necessary and, in my opinion, deserved. The Euro Zone has to be prepared to offer a “carrot”, in addition to the stick (austerity measures). In any event Portugal has to be saved, or the rest of the Euro Zone is kaput.

The Germans, whilst playing hard ball with the Greeks, are sympathetic towards the Portuguese, who are introducing radical structural changes to improve their (previously non existent) competitiveness/lack of growth – unlike the Greeks. In my humble view, contagion threats remain limited following a Greek exit, especially as a result of the ECB’s 3 year LTRO. Indeed, Portuguese bonds continue to rise – the 10 year yield declined further to around 12.85% on Friday (yields were even lower during the day and nearly 600bps off recent highs) – even after the nonsense with the Greeks. I really should have followed my own advice and bought the bonds – Oh well, that’s the problem of being a 1 man shop.

Whilst yields on Portuguese debt are declining, yields on Italian and, in particular, Spanish bonds, rose. Indeed, Spanish bond yields are converging towards Italian yields. No surprise – I remain firmly of the view that Spain is in far worse shape than Italy and, I suspect that the market is (finally) beginning to get it.

Over the next month or so, the market will begin to focus on the upcoming French Presidential elections. The opposition (Socialist) candidate, Monsieur Hollande is in the lead in recent polls. However, don’t write of Sarkozy, my French friends tell me. France is struggling – there is no doubt of that, but a President Hollande is something we don’t need at present, irrespective of your views of Monsieur (“bling bling”) Sarkozy – actually he’s being less “bling bling” these days. However, whilst Hollande’s continues with his rhetoric ie that he will renegotiate the austerity pact etc, etc, we all know that, if elected, he wont be able to. Mrs Merkel is rooting for Sarkozy, which is amusing as the two of them do not get along – its “better the devil you know….. ” principle, as far as Mrs M is concerned.

One of my best friends lambastes me on my views on China. Well, if I’m wrong on my China derivative plays (short the miners, luxury sector, A$ and quite, likely EM’s) I will lose money – my own money, may I add.

As far as I’m concerned, all recent available data (OK, a bit too early to establish an totally informed view), suggests that the Chinese economy will slow by more than expected. Friday’s loan data came in below expectations. Sure the Chinese authorities have the firepower to introduce stimulus measures (likely) and ease, though with oil at around US$118 and food prices not declining by much, indeed if at all, combined with the policy of raising wages, inflation could well rear its ugly head again.

January’s inflation data was impacted by the Chinese New Year and should decline in coming months, but, I for one, am not quite as certain as other analysts that inflation will continue to drop sharply in the 2nd half of the year, especially if oil remains at current levels and food prices remain elevated. Remember that China imposed, in effect, price controls to curb “reported” inflation last year. These measures have resulted in suppliers reducing production – something that cannot be sustained. Indeed, China recently allowed prices of petrol and diesel to rise to deal with shortages created by their price control policy – the 1st time in 10 months. If they allow others to increase prices…….

Basically, my problem with China remains the same. I believe, quite firmly, that any action taken by the Central authorities to correct (much needed) previous imbalances (of which there are many), will have a significant negative impact on the economy, with resultant social consequences. In addition, in my experience, I do not believe that a command economy can grow by the rates that China has, uninterrupted, for an extended period of time.

I remain (ever increasingly) bearish on Japan. A friend of mine reminds me of the dreadful demographics of the country, in addition to the other issues I have raised – he’s totally right – its going to be a massive problem for the Japanese.

My well established/positioned Indian friends, whilst generally sanguine are, however, certainly becoming far more cautious than they have been. I always listen to these guys – they are way, way better than any analyst, I assure you.

The US economy is improving – recent data confirms that. I trust it will continue. I was surprised by the weaker University of Michigan confidence data though, given better employment data and job openings (JOLTS survey).

I’ve found in the past that I (generally) make money on my high conviction calls, though then proceed to fritter some/all of it away due to over trading. That’s something I’ve changed significantly for some time now. I suppose the real issue is that I have no real high conviction play at present – the negative China derivative play comes close, but I accept is not quite there as yet. Having said that, I believe that there will be numerous opportunities in coming months and, as a result, patience is called for.

Having said that, there’s the Roubini/Rosenthal contrarian index !!!!

I’ve had a great YTD, particularly on my over long European financials play – a truly fabulous start for the year. As a result, I suspect, I can afford to be a bit cautious and wait to see how things pan out. In the current economic climate, there will be lots of opportunities and I just do not feel like chasing a rally, which seems pretty long in the tooth to me.

Probably loving being a beach bum here in Goa as well.

Have a great weekend.

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Where Are Households in the Deleveraging Cycle?

The geniuses at the Nuclear Regulatory Commission have given the green light for new nuclear power plants in the U.S. … which don’t include safety upgrades which were demonstrated vital by the Fukushima meltdown.

The Atlanta Journal Constitution notes:

The Nuclear Regulatory Commission on Thursday approved Southern Co.’s plan to build two reactors at Plant Vogtle, south of Augusta — though the decision was not without dissent.

Gregory Jaczko, chairman of the five-member NRC, cast a lone vote against issuing a license for the project. He said he wanted but had not gotten a binding commitment from Southern that it would incorporate changes stemming from last year’s nuclear disaster in Japan.

“Significant safety enhancements have already been recommended as a result of learning the lessons from Fukushima,” Jaczko said, referring to the plant on Japan’s coast that was devastated by an earthquake and tidal wave, “and there is still more work ahead of us. Knowing this, I cannot support issuing these licenses as if Fukushima never happened.”

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The NRC’s 4-1 vote directs the agency staff to prepare the construction and operating license needed to start major work on the two reactors, which are expected to start producing electricity in 2016 and 2017.

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The last new reactors were approved in 1978, the year before a partial meltdown at Three Mile Island in Pennsylvania. After that, increased regulatory scrutiny and skyrocketing costs halted expansion. Plant Vogtle’s two existing nuclear reactors, Units 1 and 2, ran over budget by $8 billion and took 16 years to build.

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The U.S. remains without a long-term plan to store nuclear waste.

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“The U.S. is approving new reactors before the full suite of lessons from Japan has been learned and before new safety regulations that were recommended by a task force established after the meltdown crisis at Fukushima have been implemented,” said Allison Fisher, Outreach Director of Public Citizen’s Energy Program.

How Could This Happen?

As I noted last December:

New US plant designs are very near being licensed by the Nuclear Regulatory Commission without any Fukushima modifications.

Now we know why.

Congressman Markey wrote yesterday:

As part of his ongoing investigation into U.S. nuclear safety since the Fukushima meltdowns, today Rep. Edward J. Markey (D-Mass.) … released a blockbuster new report that details how four Commissioners at the Nuclear Regulatory Commission (NRC) colluded to prevent and then delay the work of the NRC Near-Term Task Force on Fukushima, the entity tasked with making recommendations for improvement to NRC regulations and processes after the Fukushima meltdowns ….

Rep. Markey’s office reviewed thousands of pages of documents, including emails, correspondence, meeting minutes and voting records, and found a concerted effort by Commissioners William Magwood, Kristine Svinicki, William Ostendorff and George Apostolakis to undermine the efforts of the Fukushima Task Force with request for endless additional study in an effort to delay the release and implementation of the task force’s final recommendations. Documents also show open hostility on the part of the four Commissioners toward efforts of NRC Chairman Greg Jaczko to fully and quickly implement the recommendations of the Task Force, despite efforts on the part of the Chairman to keep the other four NRC Commissioners fully informed regarding the Japanese emergency.

“The actions of these four Commissioners since the Fukushima nuclear disaster has caused a regulatory meltdown that has left America’s nuclear fleet and the general public at risk,” said Rep. Markey. “Instead of doing what they have been sworn to do, these four Commissioners have attempted a coup on the Chairman and have abdicated their responsibility to the American public to assure the safety of America’s nuclear industry. I call on these four Commissioners to stop the obstruction, do their jobs and quickly move to fully implement the lessons learned from the Fukushima disaster.”

A copy of the report “Regulatory Meltdown: How Four Nuclear Regulatory Commissioners Conspired to Delay and Weaken Nuclear Reactor Safety in the Wake of Fukushima” can be found HERE.

Major findings in the new report include:

• Four NRC Commissioners attempted to delay and otherwise impede the creation of the NRC Near-Term Task Force on Fukushima;
• Four NRC Commissioners conspired, with each other and with senior NRC staff, to delay the release of and alter the NRC Near-Term Task Force report on Fukushima;
• The other NRC Commissioners attempted to slow down or otherwise impede the adoption of the safety recommendations made by the NRC Near-Term Task Force on Fukushima ….
• The consideration of the Fukushima safety upgrades is not the only safety-related issue that the other NRC Commissioners have opposed.

The Hill’s energy and environment blog reported yesterday:

[The chairman of the Nuclear Regulatory Commission, Gregory Jaczko] believes the commission “has taken an approach that is not as protective of public health and safety as I believe is necessary.”

***

The commission has disagreed in recent months over how to deal with the recommendations of a task force assigned to reevaluate the country’s nuclear safety regulations in light of the disaster at the Fukushima Daiichi plant in Japan.

The report called on the commission to make sweeping improvements to NRC’s “existing patchwork of regulatory requirements and other safety initiatives.”

Jaczko called on the commission to quickly evaluate the report and implement the necessary recommendations. But the commissioners initially resisted Jaczko’s call for swift action.

It turns out the leader of the group of commissioners which Jaczco is fighting was a consultant for Tepco – the company which operates Fukushima.

***

Because Obama’s top adviser and top funders are connected with the nuclear power industry, the White House has also aggressively pushed four new nuclear power plants in the U.S., even though virtually all of the current nuclear reactors in the U.S. are of the same archaic design as those at Fukushima, and this design was not chosen for safety reasons, but because it worked in Navy submarines, and produced plutonium for use in nuclear weapons. And even though the same folks who built and run Fukushima will build and operate the new U.S. facilities.

Note: Nuclear power could be safe, if designed and operated correctly. But neither the nuclear industry or government regulators care about safety.

An investigation, and a multi-billion dollar settlement. That sounds like a lot, until you put it into perspective. Here are the numbers. Roughly half of homeowners with mortgages are underwater, which means they owe more than they own, to the tune of $1 trillion or so. And housing values are still declining so far in this “recovery”, throwing more homes underwater. In terms of an investigation, the Savings and Loan crisis used roughly 1000 FBI investigators to uncover fraud — this task force taking on a crisis forty times more severe will employ 10 FBI agents.

There’s a reason this is so inadequate to the problem at hand. For the last three years, the policy has been to impose a political solution to a math problem. It hasn’t worked. America simply has too much mortgage debt to pay back. Serious economic thinkers across the spectrum, from Democrat Alan Blinder to Republican Martin Feldstein to New York Fed President William Dudley, believe that there is only one solution — writing down the enormous creaking mound of debt. This solution is currently off the table, because writing down these unsustainable debts could cost our fragile banks enormous sums of money and possibly lead to a restructuring of one or more of our major banks. Avoiding this clear policy choice has resulted in our economy falling into a Japan-style “zombie bank” torpor, with debts carried on the books at full value which everyone knows will not be paid back at par.

This crisis of American political economy in the form of excess mortgage debt is preventing a more powerful economic recovery. Three years after Ben Bernanke used the term “green shoots” to describe a recovering economy, job growth hasn’t really revived in any meaningful way. In fact, this is by far the worst recovery we’ve had since the end of World War II. The best way to measure this is not through traditional unemployment indices (which can be gamed), but by asking the question of how many Americans are working as a percentage of the population. In 2007, this was 63 out of 100. Today, it’s a full five percentage points lower. The ratio hasn’t been this bad since the early 1980s recession, and remember, we’re in a recovery. And the labor force participation rate is dropping, which is a long-term bigger crisis. [BR: Much of this is a function of demographics of the aging Baby Boomers; In terms of Job losses, the chart below is far more damning population ratio:

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Calculated Risk
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The housing market’s vicious deflationary cycle demands serious policy action to match the scale of the challenge. Dropping housing values lead to foreclosures, which damage housing values, and so on and so forth. According to Zillow, roughly half of homeowners with a mortgage are effectively underwater, which means they owe more on their mortgage than their house is worth. According to Zillow, 28.6 percent of all single-family homes with mortgages had negative equity in Q3 2011. And according to CoreLogic, “10.7 million, or 22.1 percent, of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2011.” (Correction hat tip Calculated Risk)

So far, the alphabet soup laden set of programs (HAMP, HARP, Hope for Homeowners) put forward by the Bush and then Obama administration have been failures. And this is because, as the Congressional Oversight Panel noted as far back as March of 2009, the single best predictor of default risk is how much equity homeowners have in a home. Many Americans, though considered homeowners, are essentially “renters with debt” (as housing analyst Josh Rosner put it). And Amherst Securities Laurie Goodman noted that with our current housing trajectory, we can expect up to 10 million more defaulted mortgages over the next decade. These foreclosures impacts housing values, reduce consumer purchases, and costs municipalities money.

The proposals on the table to solve this problem aren’t inspiring. The meager mortgage settlement deal cut via furious and dramatic negotiations is unlikely to be meaningful. This settlement is essentially a continuation of previous alphabet soup housing programs, because it would not force banks to fundamentally restructure the trillion dollar underwater mortgage problem. It will generate headlines, but it will fail to address the extent of the problem. State attorneys generals have accepted the settlement for a variety of reasons, one of the most frustrating being that they are substantially under-resourced and this deal moves cash their war. This is not how to make good policy. And the housing market will continue to suffer if our political leaders cannot acknowledge the depth of the problem.

Instead, we need some serious discussion from both the Republican candidates and the Obama administration about how to write down mortgage debt. Some proposals would reduce principal, while giving the banks an equity appreciation stake in the home. Others would deal with the problematic accounting standards which allow banks to overvalue second mortgages, and imply that one or more large banks needs to be restructured by the government. These are worth considering. We think it’s important, regardless of how policy-makers reduce the debt, to force the banking system to appropriately value mortgage debt.

Anything less would simply continue the deflation and uncertainty in the housing market.

Ultimately, we need to look at our banking and housing system and engage in a ruthless yet compassionate evaluation of whether it is working to solve our national needs. Serious thinkers in both parties recognize that it isn’t, and that we should find a way to write down this mortgage debt. Only then will we head down a pathway to a healthier banking system, and begin generating the roughly thirty million jobs that will bring America back to full employment. It’s time that the major presidential candidates, and President Obama himself, be honest with the American public, and openly recognize this as well.