Remember when Nancy Pelosi became Speaker of the House? One of her first remarks was that she intended to trot up to the White House, and use her mommy voice on the President of the United States.

Democrats do have a way of thinking they have parental responsibility for the rest of us. Yesterday, Obama got himself quoted in all the news outlets to the effect that he was outraged over a report from the New York State Comptroller’s office.

That report has it that “Wall Street” (I don’t know exactly which companies that means in this case, because I haven’t read the Comptroller’s report) paid out about $18 billion in bonuses at the end of 2008. Bonuses are usually determined in early to mid November, and hit their recipients’ bank accounts in January. So we’re talking about the incentive compensation that bankers and finance professionals received for their performance in 2008.

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The landline provider in my neighborhood in New York City is Verizon. I’m in the middle of a support incident with Verizon that I’ll describe in a bit of detail, for a couple of reasons. First, because it happens on an infrequent but regular basis. Second, because it vividly illustrates how a government-protected industry deals with its customers.

Why does this matter? Because we’re now talking about taking vast chunks of American industry into that happy zone where they have little to fear from market competition, or even from their shareholders and debtholders. Today, Verizon is in that place. Almost immediately, they’ll be joined by the Detroit automakers, and by America’s largest and most powerful banks. Sometime before Obama’s first term ends, America’s healthcare delivery system will also be there.

I was in the middle of a phone call yesterday morning, when the line went dead. Fair enough, this happens all the time. I live in New York City, where our infrastructure was once the most advanced in the world. And today, we still have exactly the same infrastructure. The central office that handles my phone service is now more than 100 years old. A lot has changed: Ernestine the telephone operator no longer works there, and they’ve painted over the windows.

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Say, has anyone noticed that the stimulus projects which are getting the most negative attention from the press and the public, actually are the ones that orthodox Keynesianism suggests are the best ones to do?

I admit that striking the $600 million for condoms hurts no one but the people in China who would have manufactured the condoms. That one is a good strike, because it’s transparently a giveaway to the pro-abortion lobby.

But spending $21 million to re-sod the National Mall is exactly the kind of make-work that fiscal stimulus is all about. The objective isn’t to create a capital asset that will pay off in increased productivity later on, although that’s often adduced as a bonus. The idea, as someone like Paul Krugman will readily tell you, is simply to reflate the economy by putting money into circulation and causing it to have a little velocity.

If you were to state this case baldly to the people, they’d probably laugh at you. What consumers want to do more than anything in the world at this point in time, is to SAVE A FEW BUCKS. But orthodox economists hate this idea because it creates no velocity, no additional GDP, and thus (according to orthodox theory) no additional employment. What all the smart people are missing is that you can’t work your way out of a depression led by impaired consumer demand unless you increase consumer confidence. A major tax cut is what the people need. And it would have to have radical features to be effective, chief among them a sharp reduction in the payroll tax, not just the income tax as proposed weakly by Congressional Republicans.

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News stories are now rampant that Obama is looking to “compromise” on the fiscal stimulus package. He has no need to do any such thing.

Obama has solid Democratic majorities in both the House and Senate, and can pass his legislation without so much as a single Republican vote. I can guarantee you that the Republicans won’t filibuster the bill in the Senate. We have a reboot of the automaker bailout coming up next month, or in March at the latest, and we need to keep our powder dry for that.

What Obama is showing, rather, is a sincere desire to be perceived as bipartisan. That after all was one of the key rationales on which he sold his presidency, the other two being Hope (”you’ll get rich if I’m elected”) and Change (”have I mentioned that I’m black?”).

To this end, he’s met with Republican lawmakers on several well-publicized occasions. (This leaves me wondering whether he’s met with Democratic lawmakers at all, and why that doesn’t make news. Dog bites man, I guess.) The most substantive thing that’s come out of Obama’s meetings with the opposition, can be summed up in his pithy phrase, “I won.”

Remember that, for the next four years, when Obama tells you that his initiatives are fully bipartisan and supported by people on all sides of the aisle: “I won.”

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Treasury Secretary-designate Tim Geithner was reported to have mentioned yesterday that he believes the Chinese are “manipulating” their currency, presumably downward against the dollar in an attempt to goose their exports.

This issue is going to get a lot of play in the next few months, because China’s mercantilist policy depends on an artificially undervalued currency. Since this causes tremendous imbalances in global capital flows, it’s long been US policy to encourage the Chinese to let their currency appreciate against ours.

And they came a long way, taking renminbi from about 7.5 to the dollar in late 2007, to the recent perceived target of 6.85. (The Chinese don’t let their currency float freely. Rather, the People’s Bank of China sets a narrow range in which it may float on any given day.)

China’s revaluation policy abruptly reversed last July as the global economy began to crumble. But it’s most important here to note Geithner’s use of the word “manipulation.” That’s a very special word, because the Treasury Secretary is required by law to report currency “manipulators” to Congress every six months, and may be required to take action against them.

The Chinese have retaliated swiftly to Geithner’s remarks. They let the yuan decline by 20 basis points overnight. And they caused a lot of minor banking officials to get quoted to the effect that, due to recessionary conditions in China, yuan would be considerably weaker yet, if the authorities weren’t holding it UP rather than down.

Paulson, who has been to China dozens of times and cultivated close relations with the power structure there as SecTreas, would never have allowed this to happen. I don’t know if Geithner and Obama are making a rookie mistake here, or if they’re signaling some misbegotten change in policy, or if they’re saying what they think the Senate wants to hear.

We don’t need a trade war with the people who are going to be lending us trillions of dollars over the next four years or more. If I can figure that out, you’d think The Smartest People In America™ wouldn’t have much trouble either.

One of the most critical problems facing the US economy is the “credit crunch,” which shows up as an extreme reluctance by banks and other financial intermediaries to lend money. Without a normal flow of credit, no sector of the economy can function up to its capacity, and that of course leads to lower output and higher unemployment.

You’ve read a lot about the TARP and a raft of other ad hoc Treasury and Fed programs to stabilize the financial system. In practice, the objective of these historic and unprecedented measures has been to prevent a “meltdown,” which can happen if the failure of a sick institution triggers a cascade of failures in healthier ones.

The way that banks, investment banks, and other institutions avoid a meltdown is to stop extending short term credit to each other. This is rational because in a time of extreme crisis like last March or last September, you literally can’t be sure that any institution won’t fail by morning. So you don’t want to have lent anyone half a billion dollars the night before.

The problem with that, to use Ben Bernanke’s stark phrase, is that it can cause the economy to come to an end. You saw the beginning of that process in late September as the commercial paper and institutional money markets nearly froze.

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As I write, the public debt (sometimes called the national debt) of the US stands at $6.3 trillion, roughly 40% of GDP. (You’ve heard many people say that the debt is actually about $10.6 trillion, but that’s fictional, as I explain below.)

As we know, the question of who will pay off the debt is an interesting and urgent one. Especially now that, through a combination of fiscal stimulus, existing entitlements, declining tax revenues, and new programs like universal healthcare and a “green” economy, the public debt is going to skyrocket in each year of the coming administration.

It seems more likely than not that we’ll be adding between one and two trillion dollars in new debt to the outstanding total in each of the next four years. It took President Bush eight years to add $3 trillion to the public debt. Obama will probably add twice as much debt, in only half as much time.

And as I’ll explain, it’s good and likely that we’ll be adding large amounts of new debt in the years after the next four, as well.

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You don’t need me to tell you what America is gaining today. It’s not easy to escape the sense that we’re gaining something that would make George Washington feel very uncomfortable: a constitutional monarch.

It’s just as important to understand what we’re losing.

With lightning speed and essentially without discussion, we’ve lost one of America’s oldest ideas: a robust confidence that a civic-minded people, when left to pursue happiness according to their own lights, will produce an ordered society, free of tyrannies of every kind.

The very idea of freedom is now under suspicion. For at least a generation, it will be assumed that freedom, especially in the economic sphere, produces adverse results and must be tempered with aggressive regulation. That’s going to be the basic intellectual milieu in which American public policy will be debated and made.

I freely admit that a disciplined commitment to the idea of freedom has waxed and waned at different times in our history. It’s now going into eclipse. I’ll be among those to welcome it back, on a cold day in a January yet to come.

We’re experiencing an economic recession as a result of several global economic imbalances that have been building for years now.

Since sometime in the Clinton Administration, growth in US consumption has been funded by steady increases in the private “balance sheet,” or the net level of indebtedness. During the Bush years, growth was also supported by accomodative monetary policy and fiscal deficits.

Since the early Clinton years, we’ve been running a growing current account deficit with the rest of the world. Countries like China, Japan, and the oil-exporting states run corresponding surpluses. In effect, surplus countries need to import demand from deficit countries.

Over the last three or four years, we’ve allowed this imbalance to become extreme. Yet, continuing, steady increases in private credit formation have made this sustainable. Now, however, the global credit crunch which began in mid-2007 has caused net private indebtedness in the US to fall by something approaching $2 trillion.

That has an automatic, negative impact on our ability to consume, and on economic output overall. That produced a recession with rising unemployment in the US.

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Perhaps the most distinctive and broadly-observable change in the public-policy milieu as we enter 2009, is this: America has a new faith in the power of experts to cure whatever ails us.

It’s a season not only for big ideas (very few of them new) in public policy. It’s also a season in which we’ll try out a lot of them, in the naive hope that society will become a much better place as a result.

Why is this a naive hope? Because the most recent episodes of grand faith in technocracy (the New Deal and the Great Society) produced results that, while sometimes interesting, were always supremely costly. It takes a hubristic government, infatuated with its own capabilities, to spend the kind of dollar amounts that are simply beyond comprehension. The current debate over fiscal stimulus proves that yet again.

The other way for society to innovate, of course, is through private enterprise. This never goes out of style, although government has very effective tools at its disposal for weakening and defunding it. When allowed to work, however, it always produces results that are very interesting and economically very efficient.

We can see this dichotomy yet again in one of the most important items that we’ll all be discussing for the next few years: how to encourage a green/hybrid economy in the US.

With characteristic hubris, the New Technocrats who are coming to power in Washington refer not to encouraging green technology, but indeed of transforming the whole US economy to a green/hybrid one.

What can this mean? To judge from past statements by such as Rahm Emanuel, the objective is for the US to consume one half as much gasoline ten years from now as we do today.

That’s it in a nutshell. We’ll know we have a green/hybrid economy when we stop using gasoline. Let’s unpack this along a few dimensions.

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It’s pretty clear to everyone that the financial industry is not doing what it normally does, which is to extend credit and lend money. Just as clearly, the decline in new credit formation leads to deflation in risk-bearing financial assets, and a sharp contraction in overall economic activity.

Less clear are the implications for policy and for business forecasting.

Businesspeople are simply confused about the future direction, and waiting for signs of a bottom.

But policymakers are seeking to deny reality. They imagine that the financial system is just hitting a bump in the road, and that it’s somehow possible to return to the world of 2006, but with better regulation.

There are two fundamental factors which are reducing the amount of credit being extended by banks and other financial intermediaries: the end of the housing bubble, and the end of highly leveraged financing models. Both effects are permanent rather than cyclical.

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This morning, we’ll get accelerated earnings announcements from Citigroup and Bank of America. They basically have to do this because the whispering and the uncertainty about both enterprises is starting to get really hard to ignore.

And BAC just became the recipient of a government-assistance deal much like what Citi got in December: $20 billion in new preferred equity, and a guarantee of $118 billion in bad assets.

This ad-hoc approach to dealing with bank near-failures has become the new normal. At some point very, very soon, regulators will have to decide how small a bank has to be before it can simply be allowed to go out of business.

You have to figure the answer is something like: “If there’s a bigger bank available that we can merge this piece of garbage into, then we’ll fail it. If there isn’t, we’ll nationalize it.

Very reminiscent of Japan in the early Nineties, what obviously isn’t being considered is to simply let banks fail altogether, under the weight of large clumps of toxic assets. But the way we’re doing this really isn’t that much different, as the equity of “rescued” or “assisted” banks goes more or less to zero.

Of course, it remains to be seen whether the ad hoc-bailout model will result in major transfers of taxpayer wealth to stakeholders of assisted banks (either the debt or the equity). One suspects the answer to this question will not be no.

Clearly, for all the hand-waving over the economic recession, we still haven’t solved the deep and worsening banking crisis that was the trigger for the recession in the first place. There is talk that we need to add more than another trillion dollars’ worth of “assistance” (in effect, new equity) to American banks.

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It’s interesting that tax cuts have taken a central role in the fiscal-stimulus debate.

(We really should be debating whether a massive fiscal stimulus is even the correct approach to the current economic, housing and financial crises. But since conventional wisdom has already hardened around that, forget about it.)

In orthodox Keynesianism (perhaps last seen during the Kennedy Administration), tax cuts were the accepted way of generating demand in economies deemed to be performing below capacity. (Of course, it turns out that giving consumers more money to spend without giving producers an incentive to produce more, generates not stimulus, but rather inflation. Forget about that, too.)

And the other big problem with taxes (as the Keynesians in the Johnson Administration learned, quite to their surprise) is that taxes are easy to cut, but not easy to raise. So they leave something to be desired as an instrument of economic policy.

Nonetheless, Obama’s bold, aggressive experiment in economics (”Borrow Big! Spend Big! Get Happy!”) has included proposals to “cut taxes” by about $300 billion dollars. What does he have in mind?

The cynic in me thinks as follows: For one thing, there really aren’t enough pork-barrel projects on state governors’ wish lists to consume the kind of money he wants to spend. So he needs to fill up the hole with something, and tax cuts are an easy way to do that.

For another thing, Obama’s whole model is to lead by being unthreatening. He’d rather have someone else make the tough decisions and take the political heat, and he figures that tax-cut proposals will work like catnip on Republicans in Congress. And therefore, they’ll have the big fights with the Congressional Democrats that Obama would prefer not to have.

Congressional Republicans should examine carefully what’s being offered here.

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Fed Chairman Bernanke is giving a speech at London’s School of Economics. Here’s the Associated Press’s headline:

“Bernanke: Obama Stimulus Would Lift Economy.”

That’s the spin that the average reader is supposed to take away, if they get nothing else. The AP, like every other mainstream press organization, is so convinced that you’re stoopid, that they try to get away with blatantly biased statements like this.

You have to read Bernanke’s words to get a clearer picture of what Bernanke is saying here. And what he’s really saying matches closely with what I’ve been telling you here for weeks now:

A fiscal stimulus is fine as far as it goes. It will certainly pump up reported GDP statistics for a while, but it doesn’t fix the real issues. We still have major problems in the financial system that must be solved before any kind of sustained economic recovery can take place.

The only thing I hate more than when people lie, is when they get away with it.

Yesterday, Obama asked President Bush to formally request Congress to approve the second $350 billion tranche of the TARP fund. Bush complied, and sent his letter to Congress last night.

This little dance is necessary because Congress split up the $700 billion TARP fund into two halves. The first $350 billion has all been committed or spent now, with the last of it serving as a downpayment on the coming, still-indeterminate Detroit Three bailout.

The two-step process was a fig-leaf added to the original TARP back in October, so that Congress could claim they were overseeing the program in the uniquely tough, objective, fair-minded and knowledgeable way that we’ve come to expect from them. Now that the President has requested the second tranche, Congress has fifteen days in which to grandstand, cluck over how poorly the money has been spent, haul Paulson et al in for a tongue-lashing, and wring their hands over how much the American people hate the idea. Their work of oversight done, they will then approve and release the second tranche.

Partly this is nice for Obama because Congress can have their media circus before he takes office. And partly he can start the 15-day clock now, so the rest of the TARP fund is available sooner.

But Obama made several statements in his remarks that indicate a very big problem we need to be concerned with. He’s rewriting the objectives of the TARP in an evil way. And he’s getting away with it because most people who aren’t finance experts don’t really understand what TARP was intended to achieve in the first place.

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In regard to the virginity-for-sale story recounted below by Paul: this is really nothing but the application of modern technology to a time-honored process that has been part of human culture and anthropology since our ancestors lived in trees. It’s a dowry.

Now, it’s important to understand the extent to which modern society has devalued women. Throughout history, the provision of virginity was accompanied by an immediate earnest-payment, together with a commitment to support the young woman in question for the rest of her life.

But this transaction, if the news reports are to be believed, has so far inspired a high bid of only about $3.7 million. That’s a fraction of the amount needed to support your average young female through a lifelong obsession with clothing, shoes, large houses, personal trainers and expensive travel.

But put aside that the transaction is being performed at an undervaluation. There’s a much more difficult and important question:

Should the monetary value recovered in the transaction be taxed as ordinary income, or as a capital gain?

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On another thread, you asked the question, Is there a published analysis of the net cost to taxpayers of the TARP plan? Here’s a preliminary draft of one.

This comes from two economists at the University of Chicago, and they find a likely net cost (representing a transfer of value from taxpayers to stakeholders of banks) in the range of a few tens of billions of dollars.

They perform an event analysis of the two market days surrounding Paulson’s forced purchase of preferred shares in nine or ten banks (depending on how you count Wachovia) on October 13.

I like their novel use of liquid market prices for credit-default swaps as a proxy for bond values in calculating the “enterprise value” of the affected banks.

But I’m a capital-markets kind of guy, and I’m not as convinced that they can filter enough noise out of two days worth of data at an exceptionally volatile time to support the conclusion. But again, it’s a preliminary draft of the paper, and of course they’re asking the right questions.

Go here to read the latest piece of propaganda for the biggest piece of Keynesian stimulus to be proposed since the New Deal.

I and plenty of others have been telling you for days that this whole idea was a brainless, kneejerk response to a critical economic situation. There’s been no apparent analysis of the underlying assumptions, and utter disregard of the decades of experience and research indicating that Keynesian theory does not provide a perfect blueprint for increasing employment.

Now, Obama’s own economic team has proven this point far better than we in the political opposition can. They’ve produced an analysis, linked above, that is so shoddily constructed and so non-rigorous, that it can only be regarded as a marketing piece targeted at the ignorant, rather than a serious argument.

The authors of the report are Christina Romer, the designated chairperson of Obama’s Council of Economic Advisers, and Jared Bernstein, senior economics adviser to Vice President-elect Biden.

Bernstein isn’t an economist at all, so forget about him. But Romer is a very serious and sophisticated economist indeed. And much of her own published research over many years refutes both the assumptions and the findings of today’s report.

I imagine Christina Romer must be hiding her face in embarrassment today at what her new boss, Barack Obama, has forced her to do. She should be ashamed of herself.

And how should Congressional Republicans react to the stimulus proposal, in the wake of this analysis? Keep reading, and I’ll tell you.

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Historic days lie ahead, and not because the occupant of the Oval Office will soon be of an atypical color.

The United States, throughout its early history, has been the only major trading nation to carefully avoid extensive government involvement in economics and finance. We went for more than 100 years without even a central bank (meaning, an official lender of last resort). And when the need for the Federal Reserve finally became undeniable in the wake of the Panic of 1907, its architects conceived it in secret meetings, and with a quasi-private structure, because they knew even then that Congress would never go for another attempt to establish a “Bank of the United States.”

During the New Deal, the role of the Federal Reserve was expanded to include regulatory control over the US banking system. In 1951, the Fed finally established its full independence from the US Treasury (in the sense that they could refuse to monetize issues of public debt), and entered the modern period of its history.

But in keeping with the American tradition of relatively light control over financial matters, the Fed’s objectives have always been primarily to maintain confidence in the value of the dollar, and to ensure the integrity of the interbank payments system.

They have long held a balance sheet consisting almost entirely of risk-free US Treasury securities. At times, like any lender of last resort, they have made funds available to their correspondent banks, but generally for the shortest possible terms, at relatively high “penalty” interest rates, and requiring collateral of the very highest quality.

In short, the Fed has never been a risk-taking entity. To take risk (and, equivalently, to intermediate credit) has always been the function of the private sector.

Until 2008.

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It’s the season for debating the effects of a historic increase in government spending on the economy.

The proposal on the table from Obama, is to increase government spending by about $775 billion over the next two years. About $300 billion of this would come as tax cuts of various kinds, and the rest as handouts to state and local governments and pork-barrel spending.

Why are we doing all this? Well, to make the economy better, of course. But precisely what does it mean to “make the economy better”?

I told you yesterday that, although the global economy and the global financial system face deep, systemic imbalances that have nothing whatsoever to do with the business cycle, the perception by policymakers and ordinary people is very different. The common view is that our biggest problem is an economic recession. And even more specifically, an increase in unemployment that results from reductions in industrial output, or GDP.

As I said, the whole situation is being oversimplified as a need to change two widely-reported statistics. The objective of the largest proposed increase in government spending for decades is not to do anything long-term positive for the the economy. Rather, it’s to increase reported GDP and to reduce reported unemployment.

So in this context, let’s try to understand the claims that are being made by advocates of increased spending. (I’ll leave for another time the issues of increased national indebtedness, misallocated resources, and increased government control over the economy, since the neo-Keynesians have already told us that we should sweep those effects under the carpet for now.)

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