Of Government Debt and Historic Ratings

Apologists for the Obama administration desperately wish to make light of the unprecedented downgrading of the credit rating of U.S. Government debt from the virtually riskless category of AAA to the slightly riskier rank of AA. The apologists, when they cannot divert attention from the issue altogether, rely upon one or both of two arguments: 1) it was all a big mistake, an irrational and inappropriate decision; or 2) the downgrading does not really matter, it does not mean much.

Apology 1) merits this observation. Maybe it was a mistake. The other two major rating agencies so far have not taken a similar step, even while making noise about the possibility. That kind of public and open debate and disagreement is important for this land of free speech, most particularly with regard to opinions on government policies and their consequences.

The question of the ability of the U.S. to continue to service its debt is certainly open for debate. What is not debatable is that we are now in a condition where it is debatable. We have not been in a situation—since the emergence of the United States onto the world stage of major nations—where our ability to service our debt was at all in question. That we are is new, historic, and not disputed. Under the Obama Administration a lot of unthinkable things have suddenly become all too thinkable, from socializing medicine, or backing away from our support for Israel, to the government taking over the banking system. Add to that list of unthinkables the riskiness of U.S. Government debt.

Apology 2) is without merit. The noise from the Obama Administration suggests that it really does matter, a lot. It is important to note that the S&P decision came after the Congress and the Administration very predictably reached agreement on raising the debt ceiling. The issue is not about the debt ceiling. The issue would still exist if there were no debt ceiling. The issue is the natural debt ceiling, the one that comes when the debtor is no longer able to make good on his promises of repayment. The downgrade is advice to all investors anywhere in the world that the safety of U.S. Government debt can no longer be taken for granted. It has moved from being riskless to an investment that carries some risk—you may debate how much, but you can no longer deny that there is some.

Maybe there is great wisdom in that. Maybe all government debt, from any source, should be recognized as carrying risk. There is always political risk. History is replete with evidence that governments lie to their own people and to their investors, so perhaps a Triple-A “riskless” rating should never be given to any government promises. But apart from willingness to pay, to honor debt agreements, the recognition today is that the U.S. government debt is on a trajectory to where the government cannot—to where it will be unable to—honor its debt commitments.

That is not unprecedented. There are several historical examples where governments amassed debts that were too heavy to repay. It has usually led to the downfall of the governments. The Roman emperors tried to manage their uncontrolled spending on cheap popularity by debasing the coinage (a form of inflation) that wrecked the economy and eventually the empire itself. The debts of the English King Charles I led to rebellion that cost him his head in 1649. A similar chain of events brought on the French Revolution. More recently, the Soviet debt crisis of the 1980s set in motion the final events that broke up the USSR. Other sovereign debt crises are unfolding today before our eyes. All that S&P said was that the U.S. Government cannot act like it is immune from joining the sad list without making major changes in spending and borrowing programs.

Which is to say that the S&P decision matters greatly. There will be much debate about how much it matters, but only charlatans or simpletons will maintain that it does not matter at all. Once you have lost your virginity, there is no reclaiming it. It is a watershed to move from perceived risklessness of debt to the recognition of some risk. Risk costs money, as investors have to hedge against the possibility of some degree of non-payment, whether through changes in terms or through repayment in debased (inflated) currency.

Already investors are starting to move some of their money out of government debt—now exposed to greater market risk—into bank deposits where even with interest rates artificially depressed by the Federal Reserve the principal is not exposed to changes in market values. More significantly, an important anchor of certainty in our economy—the assumption of absolute security of U.S. Government debt—has been pulled up, rougher going for any ships that have to navigate an economy already turbulent with uncertainties.

In the early days of the Obama presidency the media and the President himself were eager to point out how this or that development was history-making, that this or that initiative was historic. Downgrading the credit rating of the debt of the U.S. Government is certainly historic. Let us hope that President Obama does not make any more history.

Of the Love of Christ and the Law of Restoration

When Jesus Christ visited His people in the ancient Americas after His resurrection in Jerusalem He taught them lessons that He had preached to the Jews in ancient Judea. The pre-Columbian American record of Christ’s teachings proves that the Sermon on the Mount and other words of Christ in the Bible are not mere inventions of the Savior’s followers. Separate witnesses to the same message, with an ocean in between them, demonstrate the consistency of Christ’s words and the veracity of the record.

One of those important teachings involves our attitude toward others. In the Americas He taught, as He did to the Jews,

Verily, verily, I say unto you, Judge not, that ye be not judged. For with what judgment ye judge, ye shall be judged; and with what measure ye mete, it shall be measured to you again. And why beholdest thou the mote that is in thy brother’s eye, but considerest not the beam that is in thine own eye? Or how wilt thou say to thy brother: Let me pull the mote out of thine eye—and behold, a beam is in thine own eye? Thou hypocrite, first cast the beam out of thine own eye; and then shalt thou see clearly to cast the mote out of thy brother’s eye. (3 Nephi 14:1-5)

In short, fallible as we are, we are little qualified to judge the faults of others, and doing so puts us in danger of being similarly subjected to imperfect standards. If we prefer patience and tolerance applied to us, then we should practice them when considering others.

Now, let us add to this discussion another important virtue. In modern times, when Jesus Christ restored His Church on the earth He listed the virtues needed to do His work:

Remember faith, virtue, knowledge, temperance, patience, brotherly kindness, godliness, charity, humility, diligence. (Doctrine and Covenants 4:6)

I would particularly draw attention to the virtue of “brotherly kindness”. I would ask, what is the difference between being nice and being kind? I would suggest that being nice is related to manners and politeness, an important but perhaps shallow virtue. I have experienced people who are very nice and polite but who are rather unkind. I have, similarly, known people who were rather rough in their manners and outspoken and direct in their language but who were deeply kind and caring. In this context, I consider kindness related to charity and love. I think that is what is meant by “brotherly kindness” in the scripture. I prefer kind people to nice people, if I had to choose.

Next we turn to a greater and more important virtue, the most important of all. Here is how the ancient American prophet Mormon described charity (again, similar to the definition revealed an ocean away by the Apostle Paul):

And charity suffereth long, and is kind [notice again the connection between kindness and charity], and envieth not, and is not puffed up, seeketh not her own, is not easily provoked, thinketh no evil, and rejoiceth not in iniquity but rejoiceth in the truth, beareth all things, believeth all things, hopeth all things, endureth all things. Wherefore, my beloved brethren, if ye have not charity, ye are nothing, for charity never faileth. Wherefore, cleave unto charity, which is the greatest of all, for all things must fail—But charity is the pure love of Christ, and it endureth forever; and whoso is found possessed of it at the last day, it shall be well with him. (Moroni 7:45-47)

While this is an ideal, it is clear that God does not intend it to be an unreachable ideal. Through the atonement of Jesus Christ charity has been placed within the reach of all of us, and God intends all of us to obtain that supreme virtue.

When the Prophet Joseph Smith was being treated with anything but kindness, in the depth of a dank prison pit in a Missouri winter, the Lord revealed to him how to treat others. The Lord instructed the Prophet, and us, to engage with others “by long-suffering, by gentleness and meekness, and by love unfeigned; by kindness, and pure knowledge, which shall greatly enlarge the soul without hypocrisy, and without guile. . .” The Lord further instructed us to “be full of charity towards all men,” and as we did so, the Lord promised, “The Holy Ghost shall be thy constant companion” (Doctrine and Covenants 121:41, 42, 45, 46).

Thus we see that it is through the atonement of Jesus Christ that we have access to the presence and influence of the Holy Ghost, which influence changes our hearts and fills us with charity, the greatest of all. It is with that changed attitude that God wants us to interact with our fellowmen here and in the eternities.

This may all still seem a bit theoretical. The ancient American prophet Alma explained a very simple and practical approach, one that I have found confirmed over and over again.

For that which ye do send out shall return unto you again, and be restored. . . (Alma 41:15)

Alma called this the law of restoration and explained that, as we show mercy, justice, and goodness toward others, the same will return unto us. The more we try to give away love, the more that love grows within us. As we practice the love of Christ, we will develop the love of Christ as a personal virtue, a practical approach to something that means everything.

Of Families and Everlasting Reunions

Some family traditions are seemingly untraceable; we do not know where or how they got started. We just do them as part of the warp and woof that weave the family together. But there are some of which we know where and when they began, because we began them. In a few days we will start a new tradition in our family that promises to help unite our family forever, because it is intended to remind us that families go on and on through the generations and that the members of the family are connected to the family eternally.

We will gather all members of the family in what is projected to be a biennial reunion. We envision a combination of daily living and recreation, punctuated by family devotionals. The devotionals are intended as a unified worship of the Father of us all upon whose power we rely to make these family relations everlasting.

Inconstancy is one of the constants of mortality. Plans are made and changed or forgotten. Pledges are given and revoked. Promises are made and broken. People are born, mature, grow old, die, and fade from the memory of the living. All earthly things seem to fail and fade.

Yet many wish and hope for the sweetest experiences and relations of life to continue unceasingly. God, the Father of us all, has promised that they can. They are found most bountifully within the family. How in this world of all things temporary and changing do we find the power to make things everlasting and unchanging?

We can only find it by drawing the power and influence of the eternal world into this one. God Himself has to do it. Because our Father in Heaven wants us to bring our families into heaven, He has established heavenly places on earth where heavenly promises can be made by mortals, made eternal by the participation of God in the promise-making and His help in the promise-keeping.

These holy places are the holy Temples of God, built under God’s direction, dedicated by His authority, sanctified by His presence. Inside these holy Temples heaven takes up residence on earth.

Imperfect man and woman can enter into these Temples, there join hands under the authority of God, and make solemn promises that can unite them as a family that may last forever. The promises may last forever, because God is a party to the promises. By those who hold heavenly power and authority to act in His name our Heavenly Father wraps binding cords of eternity around the hearts of the participants. As the mortal husband and wife remain true to God He keeps them united and through the atonement of Jesus Christ overcomes their mortal imperfections. This blessed association is available today to all who will.

Heavenly connections thus made and honored reach through the generations, tying grandparents, parents, and children together, on and on throughout the past and future. As each new child is born, he or she is connected to the family, and as each family member passes beyond this life the connections remain unbroken.

And we do not have to wait to celebrate this family union. We will remember and celebrate it this week, and for every day to come. Our Father intended it that way.

Of People and Government

One hundred-fifty years ago William Tecumseh Sherman was engaged in the early efforts to put down the rebellion in the southern slave states. He had the idea that it would require several hundred thousand troops. The savvy people of the day seriously thought that Sherman was crazy. After the war and more than a million soldiers later Sherman had another insightful comment:

My opinion is, the country is doctored to death, and if President and Congress would go to sleep like Rip Van Winkle, the country would go on under natural influences, and recover far faster than under their joint and several treatment.
(William T. Sherman, letter to General Ulysses S. Grant, February 14, 1868, in William Tecumseh Sherman, Memoirs of William T. Sherman, p.922)

We need more Shermans today. No one knew better than Sherman what government could do militarily. He also knew its limitations and understood that military competence does not transfer to economic competence.

The federal government, having caused the recent economic turmoil and the resultant recession by an elaborate and pervasive system of guaranties and subsidies, then precipitating a financial panic with massive intervention programs that drove investors out of the markets, quickly followed up with new laws to take over the healthcare and financial systems, simultaneous with uncontrolled spending. The government has tried all that it can do—and far more than it should do. The government’s quack medicine recurrently and unpredictably applied, like in the 1930s, is making sure that private initiative has little chance for recovery.

This highlights the fundamental question: do you or do you not trust people. This is not a new question. It is as old as government, which is practically as old as time. The evidence of the ages is clear: trusting people is the only economic system that works.

The reason is not complicated. Government economic programs are run by men and women making decisions about things that they do not fully understand, applying their own incentives to other people’s money, property, and talents. As smart as these men and women might be—and they are neither smarter nor dumber than the rest of the population—they are not smart enough to know enough to run an economy of over 300 million individuals making billions of economic decisions every day. No mortal is, and until the Second Coming of Christ government remains in the hands of the mortals.

Fortunately, if you trust the people you do not need to make their choices for them. Leave them alone, and they will know best how to invest their money, how to create new jobs, how to invent new products, how to be more efficient, and they will do it in the best ways that they know how, because their own money, resources, and reputations are on the line. Those who are best at these many tasks will succeed the most.

Because government has different incentives and does not work that way, the founders of the United States adopted a government whose founding document begins with the words, “We the People”. Today we have a changing system of government, increasingly based upon the idea of, “You the People”, and it is not working very well. That formula never has.

Of Depressions and Government Rescues

The government is running out of things to do. I am referring to the economy and with reference to improving the economy. A successful government program to recover from the financial crisis and recession that the government caused is turning out to be much harder than presidential candidate Barack Obama promised.

All prolonged recessions and depressions are caused by governments. The recent financial crisis occurred, first, because the elaborate house of cards of government promises and guarantees that dominated the mortgage and housing markets was flattened by a puff of the wind of reality. With government reinforcement and in fact much prodding, builders were encouraged to build more houses bigger and faster than people could use them, realtors were rewarded for selling them, mortgage brokers were drawn to get mortgages for people who could not afford them, and investors were lured into thinking that there was no risk in pumping their money into funding these mortgages. Reality eventually took over, as it always does.

All of this would have caused a major recession, but former Treasury Secretary Hank Paulson ensured that the recession would turn into a full blown financial panic. Nearly every Sunday in the fall of 2008 Paulson was on national camera, little hiding his deer-in-the-headlights expression, announcing the latest desperate and ill-conceived Federal financial rescue program. Remember that the disastrous $700 billion Troubled Asset Relief Program (that was not used to purchase assets after all) was Paulson’s idea. The markets were spooked by it. Markets tanked when Congress defeated it and tanked again when Congress passed it about a week later (sweetened with enough pork to buy needed votes). Investors went on strike.

President Obama has been unsuccessful, coming up on three years, in ending the strike. In fact, each time investors have shown some interest in coming back some new government plan or program has renewed enough uncertainty to drive investors back to the sidelines. For example, in early 2009 bank stocks were starting to recover until the Administration decided to impose stress tests to see how banks would fair if the Obama recovery plan failed. Investors returned to their seats to watch, and even the regulators’ findings that the banks could weather continued recession did not bring more than a tepid response from bank investors. The Obama Administration’s plan to restructure the entire banking and financial system—realized in the Dodd-Frank Act—has served to warn investors against taking new investment risks until they could see how it would all play out. It now seems clear that the financial crisis has been replaced by a regulatory crisis, with the regulators already falling way behind the mandates of the last Congress to write hundreds of new rules and no bank able to make any business plans extending much beyond a few months.

The housing markets remain at depression levels. New Dodd-Frank rules are making it much harder for families to get, lenders to offer, and investors to fund new mortgages for new houses. Is an economic recovery even conceivable with housing and mortgage markets mired in depression?

Our government has tried pulling its other levers. The United States has never, ever, witnessed the amount of government spending intended to stimulate the economy artificially. The Federal Reserve has expanded the money supply by trillions of dollars. Most of that Federal Reserve money has gone into funding government deficits, driving down the value of the dollar, and stimulating the prices of gold, silver, oil, and other commodities. The government takeover of the healthcare system, it was argued, was the only way to control medical costs that were said to be harming the economy.

Of course, there are more government actions waiting in the wings. The Administration wants to raise taxes dramatically, especially on investors and businesses—the energy business, the banking industry, investment firms, anyone who uses carbon (one of the elements necessary to life and essential to breathing), “rich” people, and small businesses that would be caught in the definition of “rich people.”

And yet the economy remains in the doldrums. Nothing seems to work. It conjures up memories of the Great Depression, that economic recession that Franklin Roosevelt was eager to take over. Through the whole decade of the 1930s FDR tried one thing after another to restore economic recovery, but nothing worked. Instead, FDR helped weaken world faith in representative government, greatly encouraging the willingness of desperate people to embrace the desperate measures of the dictators in Italy, Germany, Japan, and the Soviet Union who gave us World War II.

The Obama Administration has tried everything that government can do. Why not now try getting government out of the way and letting the people solve this one as they always have? Investors still have plenty of money ready to invest, if they were only confident that the rules would not change and that their investments would not be taxed away. Businessmen would be eager to hire new employees if they only knew how much the employees would cost and that some new government program would not impose new costs and burdens on their business. Banks would love to lend to businesses and provide mortgages if the regulators would stop changing the rules and discouraging banks from making loans to anyone other than to the government.

Maybe there is the worry that government will not get credit for the recovery if there is no new government program to point to, no government guarantee to praise, no stimulus spending to trumpet. Maybe that would be O.K. But I would be ready to vote for the government leaders who removed the obstructions to investment, lowered tax rates, lifted regulatory burdens, and dispelled the clouds of regulations and barriers to growth that are gathering on the horizon.

Of Mountebanks and the Second Coming of Christ

I have been wanting to write this for months, but I have been reluctant. I have been wanting to write this ever since I heard the bizarre claim on the radio by false prophets that they knew the exact date of the second coming of Christ. I have been reluctant, because I did not want to help draw attention to these con artists and inadvertently stimulate the curiosity of an unwary reader that could bring him within their grasp. We are close enough, now, to the day when their deception will be revealed, so the chance of there being further victims is small.

Today is May 20, 2011, and I am still here. I will still be here tomorrow, the date that the diabolical deceivers have given out as the day that Jesus Christ would return to the earth in glory. These mockers of the Savior are correct that tomorrow will fulfill prophecy, for as it comes and goes they will have demonstrated the fulfillment of Christ’s warning given to His disciples shortly before His crucifixion. As the Savior sat on the Mount of Olives, overlooking the Temple, Christ prophesied of His return to the earth in the latter days. Jesus warned,

Then if any man shall say unto you, Lo, here is Christ, or there; believe it not. . . . if they shall say unto you, Behold, he is in the desert; go not forth: behold, he is in the secret chambers; believe it not. (Matthew 24:23, 26)

The Savior then explained, that when He returns to the earth, no one will need to tell you, for all will see and know. It will be just as obvious and apparent as the sunrise:

For as the lightning cometh out of the east, and shineth even unto the west; so shall also the coming of the Son of man be. . . .
And then shall appear the sign of the Son of man in heaven: and then shall all the tribes of the earth mourn, and they shall see the Son of man coming in the clouds of heaven with power and great glory. (Matthew 24:27, 30)

Tomorrow will be the end of just one more in a long line of frauds. Unholy mountebanks, avaricious men and women in pursuit of power, wealth, sport, or personal aggrandizement, have played and will continue to play upon the emotions and fancies of those who mix their longing—and lack of patience—for the return of the Savior with a spiritual gullibility, unilluminated by an allegiance to the guidance of Christ and His prophets. These sheep, unwilling to rely upon the Savior’s promises on His own timetable and in His own ways, line up to be unmercifully shorn.

For us and for them it could be otherwise. Jesus Christ Himself gave an ironclad safeguard against these deceivers, a foolproof test that has protected believers for almost 2,000 years. If anyone tells you the day or time when the Savior will return, do not believe him:

But of that day and hour knoweth no man, no, not the angels of heaven, but my Father only. (Matthew 24:36)

I consider it unwise to lay claims to more knowledge than the angels or to follow any mortal who makes such claims.

So tomorrow will come, and tomorrow will go. I will be here, and you will be here, but the leaders of the latest unholy fraud will likely be gone, long gone, probably along with much of the funds of their followers. But do not look for them in heaven; I recommend seeking them in some more earthly paradise, with swaying palm trees and drinks served with little umbrellas.

Of the Dodd-Frank Act and Preparing for the Next Crisis

Last year Congress passed and President Obama signed into law the Dodd-Frank Act. As advertised, the Dodd-Frank Act was to restructure the entire financial system of the nation to ensure that we do not have another melt down of the economy, at least not one related to the financial system. With that promise, the Dodd-Frank Act set in motion an extensive program of federal government control of the banking and investment industries. Ever after, financial firms would be more responsible to bureaucracies in Washington than they would be to their own customers, but everything financial would be “safer.”

The Dodd-Frank Act is failing. In fact, judged by the most demanding measures possible, those set out by its framers in the Administration, it is an abject failure. And it is getting worse, not better, and it is making financial things worse, not better. A repeat of the troubles of 2007 through 2009 is becoming more likely rather than more remote.

A few days following enactment of Dodd-Frank, Treasury Secretary Timothy Geithner gave a speech at New York University’s Stern School of business in which he outlined six principles that would guide implementation of the new law. It is altogether fitting and proper that we should judge the success of the implementation by those six principles. Secretary Geithner challenged us to do so. He said, “You should hold us accountable for honoring them.” In a few days it will be ten months since President Obama signed the law in a formal White House ceremony. Let us examine progress of the last ten months by the standard of the six principles.

Principle One: Speed, moving as quickly as possible to bring clarity to the new rules of finance. The Dodd-Frank Act mandated an unprecedented program of new regulations that are so numerous and complex that describing them defies hyperbole. Estimates range between 250 and 500 new regulations to be promulgated. One of Washington’s prestigious financial law firms, Davis-Polk, noted by way of illustration that one of the agencies tasked with writing new regulations, the Commodity Futures Trading Commission (CFTC), normally has at most four regulations that it is working on at a time. At the end of December the CFTC had 31 regulations under work.

But starting regulations is not completing them. The Davis-Polk study noted that the law required 26 regulations to be completed in April 2011, but not a single deadline was met. Some 40 Dodd-Frank regulations are now behind schedule. That is not to criticize the regulators, who are cutting as many corners as possible to meet the deadlines. It illustrates how impossible it is to implement Dodd-Frank as mandated.

Principle Two: Full transparency and disclosure, with the regulatory agencies consulting broadly as they write new rules. Compliance with this principle is even worse than the speed test. In fact, in a vain effort to meet the unrealistic deadlines of the Dodd-Frank Act, regulators are shortening comment periods, consulting with each other as little as possible, and in general trusting to their own hasty judgment far too much. One agency head remarked to a banker group that the agency leadership did not need to have long discussions with the public; they have been thinking about the issues and already know what they want to do.

Principle Three: Avoid layering of new rules on top of old, outdated ones, eliminating rules that do not work, and wherever possible streamlining and simplifying. Barbara Rehm, a financial reporter with the independent trade newspaper American Banker, recently observed, “None of the numerous people interviewed could name a single rule that has been repealed or simplified.”

Principle Four: Avoid risking killing freedom of innovation, striving to achieve a careful balance, safeguarding freedom and competition. Since enactment of the Dodd-Frank Act there has been no innovation in the financial services industry, as businessmen do not know what they will be allowed to do and what will be banned once the Act is implemented. Actually, it is worse. The best minds in financial firms have been focused on how to meet the needs of the regulators rather than on how to meet the needs of their customers, and the only competition is among the regulators over who can be “tougher” on the financial industry.

Principle Five: Make sure that we have a more level playing field, both between banks and non-banks as well as with regard to America’s foreign competitors. In this category the talk and promises are extensive and good. So far there are no results. In fact, foreign regulators are quietly backing away from copying the regulatory excesses of the Dodd-Frank Act, positioning American firms to surrender the global financial leadership that they have built up over the last 100 years.

Principle Six: Actually, Secretary Geithner provided a bonus, squeezing two parts into this last standard. Part One: Have more order and coordination in the regulatory process so that regulatory agencies are working together, not against each other. Coordination among the regulators is haphazard at best, with plenty of agency competition in evidence. The new Orwellian Bureau of Consumer Financial Protection has not even been set up, and the other regulators are already competing with it to show who can be more punitive on financial firms in the name of helping their customers. Even the States are joining in, with various state attorneys general pressuring banks to cough up $20 billion to some kind of fund to be used by officers of the Obama Administration to help the fortunate troubled homeowners of their choice.

Principle Six, Part Two: Conduct a careful assessment of costs and benefits of the burdens involved with the regulations. Cost/benefit analyses have been cursory at best but more often non-existent. The inspector general of the CFTC recently chastised his agency for ignoring meaningful inquiry into the cost of its proposed regulations. Ten Republican legislators, troubled by this neglect, sent a letter to all the financial regulators asking for their cost/benefit analyses. There has been no reply.

Ten months into the implementation process, how must we judge the Dodd-Frank Act? Holding Secretary Geithner and the Obama Administration to their own standards, it is hard to avoid a conclusion of complete failure. This is no surprise to those of us who criticized the whole premise of the Dodd-Frank Act, that the government failures that brought on the financial crisis could be resolved by increasing the role of government. So far government is failing in the regulatory implementation crisis created by the Dodd-Frank Act. Do not look to government to be ready to respond to the next financial crisis when that arrives, especially if the confusion of the Dodd-Frank Act helps to hasten that day.