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The Lighthouse is the weekly email newsletter of the Independent Institute.
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Volume 12, Issue 5: February 1, 2010

  1. Obama and the Banks
  2. Obama and Defense Pork
  3. Obama and Jobs
  4. Will Fed Mismanagement Further Weaken the Economy?
  5. This Week in The Beacon

1) Obama and the Banks

President Obama’s populist jabs at big banks, one theme of last Wednesday’s State of the Union address, were unwarranted and misplaced, according to Independent Institute Senior Fellow Alvaro Vargas Llosa. Obama’s proposed tax on non-deposit bank liabilities punishes banks for borrowing too much money—whereas a proximate cause of the real-estate bubble was that the banks were lending money too freely. Also, Obama proposes to create a super regulatory agency to break up banks deemed “too big to fail”—whereas a simpler, more effective policy would be simply to let insolvent banks fail.

Obama’s proposal to prohibit financial institutions from trading their own money is also unnecessary: “The truth is that proprietary trading had little to do with the credit bubble, which mostly involved the customers’ money,” Vargas Llosa writes in his latest column. Worse, the Obama administration has avoided serious discussion of a root cause of the credit bubble: the Federal Reserve’s easy money policies.

“The Fed is now repeating that grave error with more cheap money—it has pumped $2 trillion in loans of various kinds, not to mention the trillions in guarantees,” continues Vargas Llosa. Obama’s populist rhetoric ignores this and creates a false impression about how best to move forward. Concludes Vargas Llosa: “No asset is more toxic than a politician’s tongue. President Obama ought to remember this before his next speech on banking.­”

“The Toxic Tongue,” by Alvaro Vargas Llosa (1/27/10) Spanish Translation

Liberty for Latin America: How to Undo Five Hundred Years of State Oppression, by Alvaro Vargas Llosa

Lessons from the Poor: The Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa

The Che Guevara Myth and the Future of Liberty, by Alvaro Vargas Llosa

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2) Obama and Defense Pork

President Obama’s proposed three-year spending freeze—another feature of his State of the Union speech—would cover only a small portion of discretionary spending. He declared defense and homeland security off limits, given the military campaigns in Iraq and Afghanistan, but this is a non sequitur. “Defense spending could be reduced even if the two war efforts are sustained,” writes Independent Institute Senior Fellow Ivan Eland in his latest op-ed.

Eland names several costly defense projects that could be cut without harming national security. The Navy, he says, could scrap its CVN-79 aircraft carrier, littoral combat ships, LPD-26-class amphibious vessels, DDG-100 Zumwalt-class destroyers, and SSN-774 Virginia-class submarines. The Air Force could halt production of its C-17 aircraft and delay production of the F-35 Lightning II Joint Strike Fighter. The Marines could cancel the MV-22 Osprey aircraft—it’s not much better than existing helicopters. Withdrawing U.S. troops from Muslim lands, Eland continues, would enable the armed forces to reduce their costly payroll.

“Finally, there are loads of pork in the foreign aid and homeland security budgets that could be extracted,” Eland writes. “At most (and even this is a stretch), Obama’s proposed limited spending freeze will result in a savings of only 3 percent of the ballooning budget deficits in the next 10 years. To avoid his predecessor’s reputation of ‘spending like a drunken sailor,’ Obama must include massive entitlements and discretionary security spending in his budget cutting for it to be serious.”

“Why Freeze Spending on Only Part of the Budget?” by Ivan Eland (1/27/10) Spanish Translation

Recarving Rushmore: Ranking the Presidents on Peace, Prosperity, and Liberty, by Ivan Eland

Partitioning for Peace: An Exit Strategy for Iraq, by Ivan Eland

The Empire Has No Clothes: U.S. Foreign Policy Exposed, by Ivan Eland

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3) Obama and Jobs

President Obama was not the only charismatic and visionary leader to give a news-making speech last Wednesday: that day Apple Computer’s Steve Jobs announced the release of the iPad.  Independent Institute Adjunct Fellow Art Carden contrasted the two events to demonstrate the fundamental difference between politics and commerce.

Apple, representing commerce, offers new products to customers on a take-it-or-leave it basis, and although customers will not always be thrilled by its products, they can generally count on continuing improvements from firms that compete in the marketplace. No one would mistake Apple’s type of offer for the promises of a president’s State of the Union speech, however. The key difference isn’t so much in the product or service offered, but rather in the process by which it is implemented.

“The crucial difference between the two is that economic means—production and exchange—are positive sum, meaning that trade creates wealth,” writes Carden. “In contrast, political means—expropriation and redistribution—are zero-sum at best and, since political action itself requires resources, the political means to wealth are often negative sum.” Carden concludes by expressing the difference in more concrete terms: “Barack Obama, the orator and politician, talks about hope and change. Steve Jobs, the innovator and capitalist, delivers it.”

“Battle of the Speeches,” by Art Carden (Forbes.com, 1/28/10)

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4) Will Fed Mismanagement Further Weaken the Economy?

The U.S. Senate’s re-confirmation of Ben Bernanke as Federal Reserve Chairman reveals that many policymakers are still in denial about the central bank’s role in inflating—and then popping—the real-estate bubble and thereby sparking the financial meltdown that led to the current recession.

A consummate bureaucrat, Bernanke denies that Fed monetary policies had anything to do with causing the boom and bust, and he supports transforming his agency into a super-regulator that would monitor alleged risks to the stability of the entire financial system. Yet ironically, the greatest source of systemic risk to that system is the Federal Reserve itself, according to Independent Institute Senior Fellow William F. Shughart II.

Monetary mismanagement caused our current economic woes, just as it sparked the Great Depression. “Monetary policy may be enigmatic to most Americans, including policymakers,” writes Shughart in the Washington Times. “But it would not be far off the mark to interpret the Fed’s actions on Mr. Bernanke’s watch as being designed to enrich Wall Street, including the cradle of treasury secretaries, Goldman Sachs.” Shughart concludes with a vote of no confidence in Bernanke’s ability of avert cycles of boom and bust: “Mr. Bernanke has demonstrated his inability to do that job.”

“Bernanke Agonistes,” by William F. Shughart II (The Washington Times, 1/27/10)

Video: Robert Higgs on Federal Reserve Transparency (Fox News “Freedom Watch w/Judge Napolitano,” 12/1/09)

Money and the Nation State, edited by Kevin Dowd and Richard H. Timberlake, Jr.

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5) This Week in The Beacon

Visit the Independent Institute’s Spanish-language blog, El Independent. Below are the past week’s offerings from our English-language blog, The Beacon.

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