The Wisdom of Ben Franklin

This article is a continuation of the themes which I raised on Tuesday, following Obama’s compromise with Republicans on the extension of the Bush tax cuts for all Americans. I considered this compromise the worst of all possible worlds, and consider the willingness of our government to run a record $1.5 trillion deficit in 2011 to be a harbinger of catastrophic consequences down the road. Obama claims that he would be neglecting the middle class and those whose unemployment benefits are running out, by not agreeing to the compromise with the Republicans. At the same time, it seems as if Obama is selling out. One reader writes in with this comment:


“You are much too kind to Obama….He definitely would have wanted massive deficit spending regardless of the circumstances.”


Obama is not one who wants to preside over the pain which needs to occur if this country is going to work its way through the collapse in our nation’s inflated asset values. The economic expansion over the last 15 years was in part, built upon equity extraction from an over-inflated housing market. While I understand the need to slow down the pace in which under-water home-owners get kicked out of their homes, it is another thing to let the lingering shadow supply of 7 million homes to just fester. Reading remittance reports of sub-prime housing deals, where 30 to 40% of the deal might be chronically delinquent, shows that actual foreclosures are going through at a pace of 2-3% a year. This is symptomatic of the current mess with the legalities as to how housing foreclosures are being processed, but it also has to do with countless government initiatives to allow delinquent home-owners to stay in homes they cannot afford, and in many instances, they never should have been allowed to buy with easy credit.


A couple of readers identified Ben Franklin and Alexis de Tocqueville with having written this quote:


“the American republic will endure until the Congress discovers it can bribe the public with the public’s money.” 


Of course, Alexis de Tocqueville wrote his book, Democracy in America, in 1835, so that makes Ben Franklin the original source. Nonetheless, both seem to be attributed with this piece of wisdom, and for my part, it feels as if Obama and the Republicans are going to test the efficacy of this premise. 


A reader writes in with this comment:


“Rick,I completely agree with your analysis about the wasted opportunity to rebuild with the borrowed funds we had. The crisis gave Obama and Congress the cover to change the way we educate our kids, the infrastructure of the nation, and the way we collect taxes. In the rush to appear as if they were doing something, he and congress squandered the best opportunity to fix many of the core problems of our system.”


Another reader writes in that Obama has wasted a once in a 100 year opportunity to implement changes which will serve our country for the next 100 years. To that, I say that these opportunities come about every 80 years, as the book, the Fourth Turning, by William Strauss and Neil Howe chronicle. My basic thought at this point in time is that Obama is just part of the path in which the US’s financial system implodes. On the back-end of a collapse, whoever is President then, will have another chance to make lasting changes in the fabric of our country. Unfortunately, we will have to endure a very rough stretch before the stage is set for our society to accept the sacrifices which will be needed to embark on a brave and bolder future.


In response to Tuesday’s blog, and the compromise tax proposal, another reader writes in with this comment:


“Just look at the Bond chart. (Look at the) ugly increase in interest rates and decline in the value of 10 year treasuries. How far will this go? Remember that Clueless Ben said on 60 minutes that the purpose of QE was to LOWER interest rates! Huh? It has caused them to rise at the long end. How could he not have figured this out? Unless his goal was to cause assets to rise in value? Now that Obama is channeling Reagan (for whom he has genuine admiration–after all, Reagan could do what Obama cannot–smile and charm people), in tax matters Fox can fire half its commentators. Arianna Huffington will die of liberal disappointment. Amazing what has happened since the Nov 4 elections: upheaval, reversal of fortune, inversion of values.”


This reader covers lots of ground, so let me get to a couple of his points. For starters, he is right about the bond market, as the attached graph of 10 year yields attests to. The concept of QE was floated in late August, see first violet line on the attached graph, and since then interest rates more or less hung around the lows of the recent move. When QE was announced in early November (yellow line), 10 year interest rates shot up, in part because the Fed also announced that the distribution of maturities they were going to purchase, with only a very small amount of those being in the 10-30 year bucket. The market is correctly anticipating one of the Fed’s announced objectives of increasing inflation to 2%, from 1% currently. Finally, on the news of the tax compromise, (green line), rates rose by 30 basis points over the last 3 days, as the markets digest the idea that the treasury will be selling an additional $450 billion of debt over the next 12 months. So yes, this reader makes a spot-on comment that interest rates are actually rising as the market digests the Fed’s QE2.


The reader is also correct that the Fed wants asset values to rise, and when Fed members talk about the affects of lowering interest rates, they all seem to universally acknowledge that lower rates encourages money to go into other assets, which in turn creates a positive wealth effect. In turn, this should help add to economic growth, although Ben did not make that point during his 60 minutes interview.

Lastly, the reader’s comments about there being an inversion of values is very poignant, and perhaps is reflective of the fact that the politicians are just doing what is expedient, and not what they believe in. The Republicanmantra has been to cut spending and reduce the deficit, but they are equally culpable with increasing the deficit with Tuesday’s compromise, so to me, this decision is equally discrediting of them.


And lastly, I want to present a medley of quotes from Ben Franklin, which a reader sent in, with comments, which underscores the problem with the latest tax compromise:


Ben Franklin: “But, ah, think what you do when you run in debt: you give another power over your liberty”


Reader’s comment: “and we think that we control our destiny, since we can print $’s”.


Ben Franklin: “In free governments, the rulers are the servants, and the people their superiors and sovereigns”


Reader’s comment: “The government is not “free” if it has been bought with campaign contributions.”


Ben Franklin: “When the people find that they can vote themselves money, that will herald the end of the republic. Sell not liberty to purchase power”.


Reader’s comment: “Did “the people” really vote for money? Or is that just what our elected officials chose to hear?”


Ben Franklin: “I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it.”


Obama is making it very easy to be poor, and non-productive in our society. That does not make the Republicans any better either, but for different reasons. I will leave it right there.