Open Letter To Obama

Dear Senator Obama. The US economy is in the worst economic crisis in decades, arguably since the great depression. Housing is collapsing, state budgets are in shambles, unemployment is soaring, and the US dollar is sinking.

Things are going to get even worse when the commercial real estate bust picks up steam. We have seen six bank failures already this year. There are 90 more banks on the problem list. Many of them will fail.

Meanwhile, Treasury Secretary Paulson and President Bush are both stressing "The U.S. economy is fundamentally strong, diverse and resilient." Indeed, Paulson speaks of the "strong dollar policy" at every opportunity.

The vast majority of citizens in the United States know that the above statements by President Bush and Paulson are lies.

What we really need is for politicians to face the public and state the truth.

The Truth Is Easy To See

• The US can no longer afford to be the world's policeman.
• Congress has been spending beyond its means.
• Deficit spending is cheapening the US dollar.
  
• Cutbacks and sacrifices have to be made.

Interest On The National Debt Is $377 Billion

The national debt as of July 17, 2008 is $9.5 Trillion dollars. Interest for the first nine months of Fiscal Year 2008 as noted in Interest Expense on the Debt Outstanding is $377 billion!

Paulson talks about the "strong fundamentals" of the US dollar. Our entire "Strong Dollar Policy" consists of nothing more than Paulson yapping about the strong dollar. It is an international disgrace. It is sad the Treasury Secretary does not understand that the two biggest factors affecting the US dollar are interest rates differentials and deficit financing.

Our Feds Fund Rate is 2.00% in comparison to 5.00% in the UK and 4.25% in the EU. In regards to the budget deficit, China and Japan have been financing our out of control spending.

Some fundamentals! If Paulson believes what he says, he is not qualified to be Treasury Secretary.

US Banking System Is Unsound

Senator Obama our banking system is unsound. I presented the case in You Know The Banking System Is Unsound When....

I ask you to take the time to read that post. In it, I presented 25 reasons our system is unsound. Here is reason number 25.

25. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

What cannot be paid back will be defaulted on. If you did not know it before, you do now. The entire US banking system is insolvent.

The problem is not bank regulation or lack thereof. The problem is fractional reserve lending accompanied by runaway spending in Congress.

Congress Must Be Held Accountable

Congress must be held accountable for deficit spending. Clearly the Republican plan of reducing taxes, foolishly wasting hundreds of billions in Iraq, and praying for an economic miracle did not work.

Phil Gramm, senator McCain's economic advisor, said we were in a "mental recession". You rightfully blasted him for it, stating "He didn't say this but I guess what he meant was that it's a figment of your imagination, these high gas prices."

Economically, you are calling for another $50 billion dollar spending stimulus. If that fails (which it will) do you want another one, and another one after that? Where does it stop? I am all in favor of returning $50 billion to the taxpayers. I just want to know how we are going to pay for it.

Senator Obama how do you propose we pay for that?

The 100 Year's War

Senator Obama, the entire nation knows we went to war under false pretenses, if not blatant lies. Yet Senator McCain is willing to keep us in Iraq for a hundred more years if necessary. Unfortunately, you have not found the courage to commit to a timetable to pull all of our troops out of Iraq. Senator, the nation is sick of this war. ALL of our troops need to come home. Every one of them.

It is time for someone to stand up and say "This war was a mistake. We are pulling out. And here is the time table in which we are going to do it."

Since that person is not going to be McCain, it better be you.

Everyone I speak to is now unsure of your commitment to get us out of Iraq. Leaving 1/2 or 1/3 of our troops in Iraq is a miserable compromise. Iraq belongs to the Iraqis. Those who fear moral consequences of an exit should look at the moral and economic consequences of keeping our troops in harm's way for another 100 years.

The biggest mistake we can now make in Iraq is prolonging the big mistake we already made.

Horrendous Ethanol Policies

Senator Obama, you support ethanol tariffs and subsidies. These policies are nothing short of an economic disaster. Congress passed a 54 cent tariff on ethanol imports. That tariff is increasing the price of gasoline at the pump.

Is that tariff creating any jobs here? Of course not. Government mandated solutions never work. The US Ethanol Industry Is In Distress. There are "16 Ethanol Plants Filing For Bankruptcy. Many More Will Come." If that is not bad enough, the corn subsidy is uneconomically diverting corn production to ethanol production. This in turn is causing food prices to rise.

So much for government mandated "solutions".

Why We Are In This Mess

Senator Obama, the root cause of this mess is uncontrolled Congressional spending, government sponsorship of GSEs and rating agencies, fractional reserve lending, and the Fed.

The Fed attempting to stave off the last recession slashed interest rates to 1% to bail out their banking buddies in deep trouble over dotcom loans as well as loans to emerging markets. Congress compounded the problem by spending like complete fools. And the Bush Administration with help from Congress was willing to waste billions of dollars we did not have in that hellhole called Iraq.

Finally, SEC sponsorship of the rating agencies led to insane AAA ratings on all sorts of subprime and Alt-A mortgage debt that Wall Street could package and sell to unsuspecting suckers like state pension plans.

Biggest Party Wall Street Ever Had

Paulson called this "The strongest global economy he has ever seen". The reality is throwing money around created "The biggest party Wall Street has ever had". This was an unfounded boom based on low interest rates and cheap credit. Millions of people, sucked in the vortex of this artificial boom, are now being foreclosed on.

And instead of fixing the fundamental problem (The Fed, runaway Congressional spending, governments sponsorship of the GSEs, and government sponsorship of the big 3 rating agencies), you along with most of congress are looking towards more regulation as the solution.

Senator Obama, The Fed IS the problem. Congress IS the problem. Bernanke IS the problem. Fractional Reserve Lending IS the problem. If you do not see the light, YOU are the problem.

The Problem Cannot Be The Solution

If runaway government spending is part of the problem (and it is clear that it is), then it should be equally clear that runaway government spending is NOT the solution. If government sponsorship of the GSE was part of the problem (and it was) then even bigger government sponsorship of the GSEs is not the solution.

The plain fact of the matter is that home prices are still too high. They need to come down. Artificial attempts to force home prices up will drag this economic mess out for a decade longer, just as happened in Japan.

It was a sad day last week when Bernanke said "It's important for Fannie Mae and Freddie Mac bonds and stocks to rise so they can keep raising capital and aid the mortgage market."

With that we lost every semblance of the free market we had left. We now have government sponsorship if not outright nationalization of GSEs.

Senator Obama, do you even remember the Mission Statement of Fannie Mae?

We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Fannie Mae exists to expand affordable housing. Clearly Fannie Mae has failed its core mission. All government sponsored corporations fail their mission. The very nature of promoting housing makes prices go up, until the final blowoff top which we are now on the backside of, having reached Peak Credit.

The US has partied too long and too hard at the federal level, the state level, the corporate level, and the personal level. The cure for a hangover is most emphatically not more booze. The cure for a credit crisis is not more "free money", from either Congress or the Fed.

The Fed Uncertainty Principle

Sadly, we are moving in the wrong direction as predicted by the Fed Uncertainty Principle.

Uncertainty Principle Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Uncertainty Principle Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Uncertainty Principle Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Uncertainty Principle Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

The Cure

The only cure for an artificial boom is time and price, in conjunction with sound economic policies.

Senator Obama, you have a chance to make history. Assuming you are elected, you will have the opportunity to do something no President has done for decades: Stand before the American people and tell the plain hard truth.

• The US can no longer afford to be the world's policeman.
• Congress has been spending beyond its means.
• Deficit spending is cheapening the US dollar.
  
• Cutbacks and sacrifices have to be made.

People will understand as long as they are being leveled with.

A New Economic Advisor

Before you can lead the way, you need a new economic advisor, preferably one as Vice President.

One thing is certain: Giving away $50 billion dollars on top of the $150 billion in stimulus Congress already gave away is not going to solve any problems.

If printing money and handing it out solved economic problems, Zimbabwe would be the most economically powerful nation in the world.

Why is it the same solution "free money" is tried over and over and over, when it never works?

The Nation Needs Healing

This war torn, economically tortured country needs heeling. To meet that goal we can no longer afford the same bitter partisanship in Congress that we have seen for what seems like forever.

McCain is unable and unwilling to heal the nation. His willingness to spend another 10 years in Iraq, wasting trillions more dollars at a time the nation is sick of this war, is proof enough.

Senator Obama, you are clearly able to heal the nation, but are you willing? If you can just see fit to have the courage to reach across the aisle you can electrify the nation, re-energize the country based on sound economic free market principles, and minimize the partisan bickering in Congress.

Senator Obama, I ask you to nominate Ron Paul as your Vice President, embrace sound economic policies, and return this country to greatness. If you have the courage to do so, the upcoming election will be the biggest surprise blowout in history. On the other hand, if you stick to policies of giving away "free money" this nation will be in ruins four years from now.

Senator Obama I ask you, "What's it gonna be?"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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