The Republicans have been doing a lot of teeth gnashing and hair rending over the purported effects of deficit spending.  They finger Obama’s health reform legislation as evidence numero uno.

So here’s a chart about the deficits created by health care reform vs. those created by the Bush tax cuts, our wars of liberating the near middle and middle east and the Medicare pharmaceutical expansion .  Using the CBO numbers.  From Menzie Chinn ‘s blog econobrowser.  And this chart doesn’t explain how the Republican’s expansion of Medicare drug coverage, and prices, passed without even a cursory nod to paying for it all.  It does show the deficit created, however.

Here is a graph to put things in perspective.

Figure 2: Impact on budget balance, in billions of FY2010$, for EGTRRA; for JGTRRA; for Patient Protection and Affordable Care Act; and cumulative budget authorization for operations in Iraq through FY2010, in billions of FY2010$, deflated using CPI. Source: CBO, Budget and Economic Outlook: An Update (August. 2001), Table 1-4; CBO, Budget and Economic Outlook: An Update (August 2003), Table 1-8 (revenue implications only); and CBO, “H.R. 4872, Reconciliation Act of 2010: Estimate of direct spending and revenue effects for the amendment in the nature of a substitute released on March 18, 2010,” (March 18, 2010), Table 1; and Iraq costs from A. Belasco, The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11, Congressional Research Services (Sep 09), Table 3: budget authorization for DoD, State, and VA Medical; for CPI, historical from FREDII, and forecasts/projections from CBO (January 2010)

CNBC’s Maria Bartiromo had a very interesting interview lineup yesterday including Treasury Secretary Timothy Geithner, SEC Chairwoman Mary Schapiro, FDIC Chairwoman Sheila Bair, and Elizabeth Warren, Chair of the Congressional Oversight Panel for the federal TARP program (troubled asset relief program).

The top two takeaways:  The administration isn’t going to break up the bank holding companies, and the administration is working on plans to overhaul Fannie Mae, Freddie Mac and even the Federal Home Administration. 

There’s been a lot of pressure, both from the left and the right, to break up the too big to fail (TBTF) banks.  But Secy. Geithner made it clear that the administration is going to stick to its proposals of stricter capital standards, stronger oversight and developing an estimated $50 billion bailout warchest (paid for by the banks themselves) that will be used to fund a bankruptcy type wind down of any part of the largest banks that fails.

Geithner said the regulations are aimed at making the largest banks financially stronger while allowing the government to set up what he described as “a firewall” around any part of these banks that fails.

What comes after that may have best been described by Bair, head of  the FDIC and probably the person with the most experience in shutting down failed banks.  Bair essentially described the process used by FDIC.  You separate the good assets from the bad, bundle the good ones and sell them off–usually to another bank.  The bad assets are also worked off, over time, and sold for what they can fetch.

Both Bair and Geithner made it clear that bank investors in the failed banks, or portions of a holding company containing bank units, will no longer be protected as was done in the recent bailouts.  The same will be true for large financial but non bank institutions such as credit units within large manufacturing companies.  An example of these would be GMAC, or GE Credit–or an insurance company such as AIG that  decide to form financial product units.

As for credit default swaps, both Geithner and Schapiro said reform will put sunlight on who holds what swaps, and in what amounts, so that regulators won’t be caught off guard not knowing how much leverage is being used.

In terms of the recommendation for a Consumer Financial Products Agency, Warren said one problem now is that there are seven different regulatory agencies that have responsibility for consumer protection, in one form or another, and they haven’t been able to protect consumers from abusive sales practices and unfair contracts.  Putting these employees at one agency, Warren said,  will “concentrate them on one clear mission.”  Such an agency will be “strong, viable and can get the job done,” Warren said.

Warren, a Harvard Law professor who has long championed stronger consumer protection regulation, has been publicly mentioned as a possible chairman for this yet to be formed agency, but she declined to respond when asked if she’d take the job.  What she wasn’t asked by Bartiromo, unfortunately, was whether such an agency could be effective while housed with the Federal Reserve, one of the seven regulators that is supposed to protect consumers now.  Early betting is that the agency will be under the Federal Reserve, an organization whose membership is made up of banks.  And banks don’t like the idea of even having such an agency.

The Freddie, Fannie and FHA reform was not described in any real detail.  But Geithner made it clear there would be major changes proposed by the administration.  The Secretary repeated his assurance that current investors will be protected, but the implication is that reform may change that in some way.

Right now Fannie and Freddie are the biggest recipients of government support–more than $1.5 trillion–in one way or another.  Called GSE’s or government sponsored enterprises, they are hybrids that are investor owned, but charged with a public mission.  In this case a mission to make home mortgages as affordable as possible.

They are two of the least popular organizations in Washington DC because they’ve garnered almost as much taxpayer support between them as all the too big to fail banks combined.   At this point, no one has proposed how the government can safely extricate itself from the relationship.

Warren was the clearest in her opinion of the two.  “I don’t like the public/private” concept, she said, adding that “It’s time to pull the plug.”

So it’s pretty much “middle of the road,” for the Obama administration right now.  They want more effective regulation that will prohibit a repeat of the 2008-09 financial collapse, but they are apparently willing to maintain the concentrated TBTF business model many believe is the root cause of the collapse.

Politically, this will be very interesting.  Will financial regulatory reform turn out to be a bi-partisan effort in contrast to the partisan, and often ugly health care debate?

Probably, if for no other reason that big banks are the bad boys in the minds of most Americans.  Neither party wants to be seen as a lackey for TBTF banks.  But there will be disagreements.  A likely one is that Republicans seem to be positioning themselves as supporters of eliminating the TBTF business model entirely and returning to some form of Glass Steagall where Investment Banks and Commercial Banks were kept separate. 

If this turns out to be a popular position, and it could be considering that both the Democact left wing (Obama’s base support) and the Republican right wing want the banks dismembered, then the administration may have to re-design their proposal radically.  Or at least convince the public that their proposals essentially do effectively separate investment banks and commercial banks, even if they are under the same corporate holding company structure.  That might be a very tough sell, if for no other reason that doing so is a complicated process that most people may not at all understand.

TBTF banks may be the only group more unpopular than Congress.  Kicking this group is an almost no lose position.

The second issue may involve the consumer protection idea.  Here, the Democrats may have the upper hand because it is strongly favored by them.  The progressive wing will want a separate, independent agency, not beholden to anyone who actually produces and sells financial products.  Republicans on the other hand aren’t likely to take on the entire banking industry.  They’ll smack TBTF banks forever, but banks of all sizes depend upon mortgage and credit products–the very core of what this new agency will investigate–and that is probably simply a too populist message for even a Tea Bagger Republican party.

And it is probably a too populist one for Obama too.  He’ll do the agency, but probably cave in on it being truly independent.   Which, from Beezer’s perspective, is too bad.  Obama needs to show his foundation that he too, is progressive.

One facet of understanding markets, and economies, is to understand how much cash is sloshing around “out there.”

During the low interest rate Greenspan era after the 2000 recession, corporation profits and cash holdings built up to historic levels.  So did the cash holdings of the wealthiest cohort of Americans.

Cash has to go somewhere, particularly if interest rates are low.  As we know now, a good portion of the cash went into housing and into financial innovation securities like credit default swaps.  And into the stock market.

The bubble built and burst far beyond the housing market itself because the housing bubble was mirrored on Wall Street by the swap market bubble.  The second bubble was the one that cratered the financial industry throughout Europe and the US primarily.

The underlying problem is that investors can’t find enough productive investments.  In an ideal world there would be industries and innovations sufficient to handle the money created from corporate profits.  In an ideal world these types of investment opportunities would create new jobs and income growth.  But the private markets haven’t been able to create, net, any new jobs for the past 10 years. 

And so the cash horde is building up again.  Right now the cash sitting on corporate balance sheets is about 12% of total assets.  That’s more than double the historic average.  Outside of corporations, the amount of cash sitting in money market funds is also at historic highs.

Yet this is happening while unemployment rises to 10% (16% in the US if you count the people who quit looking for jobs or are otherwise underemployed), more than 5$ trillion in US private wealth disappears and sovereign nations build up deficits as their revenues shrink.

So why is there a lack of productive investment opportunities–the kind of opportunities where money goes into new jobs, new machines and life enhancing innovations?

Because right now all the real opportunities, the really big ones, need government help.  And in the Democratic, developed countries governments haven’t done a very good job of identifying the right policies and the right government funding to get things kick started.

So what might these really big opportunities be?

• Energy.  Everyone knows that, inevitably, fossil fuel energy is going to become more and more expensive.  It won’t go straight up, of course.  Nothing does that.  But the fundamentals, and the trends in pricing, are as clear as the nose on your face.  Governments should adopt a multi-faceted set of policies that together would spur innovation and development in alternative energy.  Natural gas and nuclear might be good energy sources to “bridge”  into the era of truly clean and sustainable energy.  They would buy private markets time and security for risk taking–particularly if the government put subsidy floors under the new industries allowing them to attract private investment.  The so-called “green revolution” would take off with the right policies and subsidies.  And the promise of job and income growth would take off at the same time.
• Transportation.  You now hear that the automobile industry is going to eventually disappear.  Possibly.  But more likely it will evolve into an industry where more and more efficient cars are designed and built.  In 10 years I wouldn’t be surprised if there are very few gas stations.  There may be stations where you can “charge” your car.  But the days of selling gas may be the real industry that won’t survive.  On the flip side are trains.  That industry is likely to grow because it will have to–particularly in the area of commodity transportation.  Governments who adopt policies encouraging expansion of rail infrastructure will not only create private jobs and income growth, but will make other industries more competitive by controlling transportation costs.
• Agriculture.  This is another broad area where growth may come because it has to.  And it’s an excellent example of displaying the power of government subsidies.  Unfortunately, the subsidies were to the wrong companies.  The US subsidizes corn to the tune of $4 billion annually.  It’s been a stunning success in some regards.  We’ve basically become a corn dependent nation.  The corn is artificially cheap which means our beef and chicken, even farm raised fish, are cheaper than they would otherwise be.  Unfortunately, the food that’s cheaply produced isn’t very healthy.  And non corn food prices have gone up sharply.  So we’ve lost our food diversity too.  What if we changed our policy and started subsidizing the production of healthy foods?  What if we subsidized an increase in food diversity instead of one that concentrates fewer and fewer jobs into fewer and fewer corporations that make money on corn and corn derivative production?  Such policies would not only make us more healthy (thus reducing obesity and diabetes for starters) but would save the nation billions of dollars in medical costs.   Plus, there would be more farms and thus more farm employees and farm equipment.

These are just three major areas where productive investment opportunities will arise with the right government policies and subsidies.  They are huge areas offering the potential to create millions of jobs and billions in profit and income.

Repairing poor policies comes along with this package.  For every new subsidy aimed at the right target, there are other subsidies that should be stopped.  The corn subsidy is one striking example of what should be eliminated.

Financial regulation reform is another example.  Under the current regulatory regime, the policy is that we will always bail out “too big to fail” bank holding companies.  This is a huge subsidy, without question.  And it cost the nation dearly.  In the trillions of dollars.  If these banks can’t compete without this subsidy, then we need a new banking system from the ground up.  Done properly, financial reform will greatly improve the stability of our financial system, and that, all by itself, will give the overall economy a boost.

Health care reform is much like financial reform.  The policy has been to subsidize health insurance companies, to support medical professional wages overall, and to protect drug and medical device innovation.  The health reform package just passed is a step in the right direction.  But it has deep flaws that won’t do much to withdraw the subsidies of the previous policies.  To the degree that it is improved and thus reins in out-of-control price hikes all along the health care chain, the new policies will ”save” tax dollars that could be re-directed towards more growth oriented industries.

Better international trade policies are needed, as well.  Our laissez faire approach to international trade, similar to our laissez faire approach to financial regulation, has kept a lid on domestic job and income growth.  If our policies are able to protect domestic industry and labor’s income,  they will also support domestic demand for product.  And robust demand is a good force for job and income growth. 

The health care reform effort and the financial regulation reform effort represent only one kind of policy change:  The one trying to repair damage caused by poor policies.

What we also need is the development of policies aimed at spurring private investment directly into specific areas such as those mentioned before.  Targeted, coordinated government efforts at creating sustainable improvement in our economy.  If we can manage to implement these types of aggressive, forward looking, policies the nation will prosper.

It’s going to be very interesting to watch the Republicans as financial regulatory reform winds its way through Congress.  How they are going to undermine reform without it being noticed will be no mean trick.

But given the financial payoff to their campaign coffers if they succeed, the Republicans are going to do their best to render toothless any reform legislation.

Anyway, the biggest banks are just getting bigger.  Controlling them at this point is going to be very, very difficult–even with Republican support. 

This from an article in the New Republic.

“The president is absolutely correct that our priority should be to limit the size of our largest banks and to reduce substantially the risks that can be taken by any financial entity that is backed, implicitly or explicitly, by the federal government. As a result of the crisis and various government rescue efforts, the largest six banks in our economy now have total assets in excess of 63 percent of GDP (based on the latest available data). This is a significant increase from even 2006, when the same banks’ assets were around 55 percent of GDP, and a complete transformation compared with the situation in the United States just 15 years ago, when the six largest banks had combined assets of only around 17 percent of GDP. If the status quo persists, we are set up for another round of the boom-bailout-bust cycle that the head of financial stability at the Bank of England now terms a “doom loop.””

This from the most recent Gallup poll.  So not too surprisingly, based on the misinformation Republicans spew, their constant claim that the American population hates health care reform legislation is wrong as well. 

What is true is that Republicans really hate the reform.  Just as they will try to undermine financial regulation reform.  Or environmental protection.  Or any reform that is aimed at protecting the public from the predations of large trans-national corporations.  Profits uber alles, is their single mantra.

Sooner or later, the public is going to wise up to this libertarian charade.  One can only hope it is sooner.

PRINCETON, NJ — Nearly half of Americans give a thumbs-up to Congress’ passage of a healthcare reform bill last weekend, with 49% calling it “a good thing.” Republicans and Democrats have polar opposite reactions, with independents evenly split.

The findings, from a March 22 USA Today/Gallup poll conducted one day after the bill received a majority of votes in the U.S. House of Representatives, represent immediate reactions to the vote.

Americans’ emotional responses to the bill’s passage are more positive than negative — with 50% enthusiastic or pleased versus 42% angry or disappointed — and are similar to their general reactions.

Although much of the public debate over healthcare reform has been heated, barely a third of rank-and-file citizens express either enthusiasm (15%) or anger (19%) about the bill’s passage. However, only Democrats show greater enthusiasm than anger. Independents are twice as likely to be angry as enthusiastic, and Republicans 10 times as likely.

Possibly one of the most important activities of the Obama administration is the White House garden growing under the watchful eyes of First Lady Michelle Obama.

We’ve written several posts on Industrial Agriculture’s demolition of our once healthy diets.  With the help of government subsidies, Industrial Ag is quickly turning the United States into a nation of fat, sick citizens.  Even the President is not immune from Industrial Ag.  Although healthier than most Americans his age,  the President was found to have too much “bad” cholesterol in his system and needs to eat a more balanced diet.

But the President is neck deep trying to reform other industries, including health care, Wall Street and energy.  To say nothing of fighting the deepest recession since the Great Depression of the 1930s.  His plate is more than full of unhealthy things (pun intended).

Which leaves the other Obama adult in the White House. 

First Ladies can become terrific activists if they have the desire to do so.  Hillary Clinton, as First Lady, spearheaded the effort to reform health care in the early 1990s.  That effort failed, but now as Secretary of State she celebrated the passage of health care reform legislation alongside the President.

Like Hillary Clinton, Michelle Obama possesses the requisite skills for exerting powerful influence.  She’s a Princeton and Harvard law school graduate.  She met the President when, as an associate at the Chicago branch of law firm Sidney Austin, she was assigned to be his adviser when the President interned there.

No doubt the First Lady is still advising the man she first advised when he was a young intern in Chicago.  Today the President, and the nation as a whole, could use some advice when it comes to eating healthy food. 

In brief, Michelle Obama could publicize the nation’s need to reform it’s food industry.  She could have an enormously positive impact by doing so.

She could start by drawing attention to that garden.  Imagine a nice television piece on the garden where the First Lady happens to point out the healthy foods.  She could then note the differences between organically grown food versus conventional food produced by Industrial Ag.  Maybe then she could ask why America subsidizes Industrial Ag food as opposed to organic food.  A reasonable inquiry.

You know, just to get the conversation going.  And one can only guess at the viewership dynamics presented by such a news story.  My guess it would include a large number of women.  And a large number of women being brought up to snuff about the food being pumped onto their kitchen tables by Industrial Ag would be, let’s say, instructive.  Would it not?

It’s a very short distance, in truth, between America’s kitchen pantry and Industrial Ag.  By cleaning up the White House pantry and using the garden as symbol, First Lady Michelle Obama would be doing the nation a huge favor.