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The Economy: An Autopsy By: FrontPage Magazine
FrontPageMagazine.com | Friday, December 19, 2008

The following panel was held on November 14 at Restoration Weekend 2008, the annual gathering hosted by the David Horowitz Freedom Center. -- The Editors.

Laurie Dhue:
I must admit that I have a little bit of a hangover about hearing about the economy, as people claim, "Oh, God, the country is going to collapse, and what are we going to do"? It's a little exhausting, but I'm hoping today that our panel will be able to help shed some light with four very different perspectives. And I'm so honored to be up here with such a distinguished panel of gentlemen.

So it's quite obvious that the number one issue in the election was the economy, and 60 percent of the voters said that it was the economy. And that is three times the number of people who said the economy was the number one issue back in 2004.

Obama was able to capitalize on this widespread discontent that had been growing in the last year; you can call it a panic. McCain wasn’t able to capitalize on it, and it seemed that there was this perfect storm of things that came together that made it easier for Obama to win.

The auto industry is collapsing. They're asking for a big bailout.

The Democrats are conceding that there would be massive Republican opposition to this, so it doesn't look like that's going to be happening. But if the Big Three collapsed you're talking about a loss of 3 million jobs, adding to the already rising jobless rate. Economists are saying there are going to be cuts coming in December and the first part of next year, so the jobless rates are up.

You've got the mortgage crisis, the credit crisis, the manufacturing job crisis, and the economies around the world are in decline, from Brazil, to Russia, to Germany, which declared that it is officially in a recession. We're seeing this all over the world, and all of these things provided an opportunity for Obama.

Now, obviously, he's got his work cut-out for him. I wouldn't want to have his job. I wouldn't want to be in his position. He's really got a lot of hard work to do, and he faces an enormous amount of pressure to get his economic team in place and get his policies in place way before January 2nd.

I think it'll be interesting to see who he chooses as Treasury Secretary. Lots of names being bandied about there, from Larry Summers, to John Corzine. Larry Summers would – well, laugh, if you will, but these are people who are on the list, as well as Paul Volcker, who is 81, but 81 is the new 71, so maybe he wouldn't be such a bad choice!

Jamie Dimon’s name is being bandied about. Michael Bloomberg. We'll see! But I think that, well, I know there are a lot of people who live in New York who aren't too happy with Michael Bloomberg right now.

Obama says the first thing he will do is pass the stimulus plan, and that's if this lame duck session coming up does not pass one, which hopefully it will. It's probably going to have to be a big one, and maybe our panel can touch on that.

Former Reagan economist, Martin Feldstein, who advised McCain, has endorsed the stimulus of up to $300 billion. It sounds like a lot of money, but the last one, $168 billion didn't work, so I think that these numbers, at least economists are saying it's going to have to be a big number.

And, my last remarks, before I get to the panel, we've seen Hank Paulson come out, still very worried about the systemic failure in our economy, saying that the worsening economy is the reason for the change in plans. That the government is no longer going to use the bailout money to buy-out bad mortgages.

One last interesting statistic, more than half of the voters in this election oppose a $700 billion bailout. Only one in five approved of how Bush handled it. And as Mike Pence pointed out this morning, in the breakfast session, it was a reckless policy.

So, with that, I would like to introduce our first speaker, David Malpass, who was the Chief Global Economist at Bear Stearns for 15 years. Between 1984 and 1993 he held a series of economic appointments in the Reagan and Bush-41 administration, serving in both the Treasury Department and the State Department. He now runs an economic research and consulting firm, called Encima Global.

And here's what one VIP said of David last night, quote, "He is rarely a prophet of doom." Now, I don't know if that's going to be the case this morning, but, David, let me start by asking you a quick question. Were you heartened by Paulson's comments? In which, it seemed to me, if you'll pardon the analogy, like he was able to turn the ship around or he was turning the ship before it hit the iceberg – what do you make of his comments, leading into what you'd like to say?

David Malpass: Thank you, Laurie. I think Paulson's comments represented the nadir of the Bush Treasury, and so you had a situation where they had said that the world was going to end if they didn't create a facility to buy up toxic assets.

And it was the full, say, capitulation of that idea. And so I think in that regard it was good to see the full washout of those previous ideas, and it sets the landscape for us to think about where we can go forward.

We've already heard this morning several highly controversial ideas. We heard Governor Pawlenty talk about the need for a balanced budget at the federal level, which I think is a non-starter; it's not a good political platform for Republicans to grow with.

You were mentioning Marty Feldstein, his advocacy of a big fiscal stimulus package, and remember he is viewed as a core conservative within the Republican Party, has advocated a weak dollar all these years.

Okay, so I have a strong view about where we were. A sharp recession may lead to a sharp recovery. And I think Obama is in a very favorable position to look good as he goes into next year. Unlike when George Bush came in in 2001, the country was in a recession, a Clinton recession, and he simply wouldn't call it a Clinton recession, so all the way through 9/11 they were of the view that maybe we weren't in a recession. We now date it back to March of 2001, and it was clear it was started by the Clinton policies. We never had that benefit, but Obama won't make that mistake, so he's going to call it the "Bush recession." Everybody is going to remember it as a sharp recession.

This is the Lehman bankruptcy on 9/15. This is what the stock – the red circle is the date of the Lehman bankruptcy, so we were in a bear market but nothing like what happened in the days following.

This is cash at domestically chartered banks, so on the day of the Lehman bankruptcy banks stopped making any loans. So we saw this morning October retail sales were out and were the worst on record in terms of a month-over-month decline.

But remember what – does that mean that the country is in disastrous condition? I think not. It means that the Lehman bankruptcy had a disastrous impact on October retail sales. So, I'm arguing that it's a narrower reading of what's gone wrong.

Here's what happened to high yield spreads. People were already panicked about it, where the red circle is. That was a really bad spread, but then look what happened in the days that followed the Lehman.

So looking back a little farther, the origins of the crisis were super low Fed Fund's rate. Greenspan's free lunch. Remember what happened in 2003-06? An absurdly wrong monetary policy supported by the Bush Administration.

Then mortgage mistakes, loose limbing standards, investment bank leverage, lots of mistakes there, and then the weak dollar, which caused high gold and oil, high inflation, and a wealth transfer to foreigners. So we have a massively wrong economic policy beginning in 2003 with the exception of the Bush tax cut.

So now how did we get this abrupt crash that we're in right now? It was the weak dollar through July of 2008. Remember, oil just peaked in July, and so that's causing problems. Treasury had this odd catch 22 that shareholders, equity holders, meaning the risk takers in the country, had to be totally wiped out in order for there to be any response from the government.

There was also the harmful interplay between the CDS market and the bond raters, and this is a pernicious thing. It was all in the newspapers yesterday. I think they're going to make progress on this area by creating a clearing house.

There were high mortgage rates, which is an ongoing problem. Freddie Mac reported earnings negative $25 billion of earnings. Remember, they're now part of the government, so every one is tittering and saying, "Well, maybe they need to have higher mortgage rates because they need to make money."

When do you ever think about the net income of the Agriculture Department, or the book value? Freddie Mac and Fannie Mae are now part of the U.S. government, so they could be lowering mortgage rates substantially, and I think they'll need to do that to stabilize the housing market.

And then, finally, the straw that broke the camel's back, the Lehman bankruptcy.

I think we already have in place the basis for recovery. Lehman's impact on the short-term markets has been fixed, so that it has been fixed by massive Washington expansion, so the Fed guaranteed credit markets of all sorts and flavors.

We've had also additional monitoring and fiscal stimulus. The natural tendency of the U.S. is to grow.

So, remember, the whole world, calculated yesterday that we were looking for Depression-like conditions going forward, which I don't think is correct, at all. And then we have the chance of effective government actions.

Some key U.S. variables are these government actions – harmful – they could do something tomorrow on this CDS market, and they might. They could stop the higher top marginal rates. So if Obama came out tomorrow and said, "This is not the time to be raising the top marginal rate." What would equities do and what would people's outlook do? It would improve a lot.

We could see someone stand-up to the cap and trade system and just flatten it, because it's one of the dumbest ideas out there, or we could see Washington take action to lower the mortgage rate. Meaning if the Treasury Department tomorrow asked Fannie and Freddie to lower mortgage rates by a full percent, they could do it. There's no obstacle to doing that. We just haven't seen the treasury want to do that.

I want to ask the rhetorical question, are these the right policies? I thought it might be useful for us just to remember what Republicans did under the name of conservatism. We had compassionate conservatism. We phased in the 2001 tax cut, plus issuing rebate checks. So right from the get-go it was massive violation of conservative economic principles.

We had a weak Treasury. Remember, the three Treasury Secretaries, O'Neill, Snow, and Paulson. And then we had, with the exception of a good tax cut in 2003, though they made it temporary, which proved disastrous. They ramped up spending, added the prescription drug benefit, built a Millennium Challenge Corporation – we haven't heard too much about that, because it doesn't do anything useful, but its got buildings in Washington, employees, a whole staff, and it will have a dark future, I'm afraid.

Bush called the unfunded Social Security system bankrupt, so Bush touched the third rail, and then blew it badly by telling people that it was bankrupt, which the Democrats responded by saying, "Vote Democratic and we'll save it," which is what they're doing. Bush could have called it "unfunded," which no one really wants to leave standing.

There was no push to make the '03, and so now we're on page two, and I don't want to read them all to you but each of these was a major disaster for Conservative economic policies.

To protect the national security they added, they kept adding oil to the strategic petroleum reserve, even as oil prices went to $140. So what I've done here is laid out some policy choices, and the idea here is as Conservatives we have to choose, and we're being presented constantly with diametrically opposed choices left over from the Bush Administration.

Do we want a market based dollar responding to economic fundamentals? That's the current Republican view, or do we want a strong and stable dollar regardless of economic fundamentals? I think that's the right economic policy.

Do we want to work to balance projected budget deficits? If you're somebody who says, "I'm for balanced budget," what you're talking about is the government raising taxes in order to supposedly balance a projected future deficit that nobody knows will be or should we be seeking lower taxes, less spending, without regard to how the bureaucracy scores it.

I won't go through all of these, but the next to the bottom one is important – shore up Social Security trust fund with a bipartisan fix: Are you in favor of that, or would you rather see us do something radical, like exempting the first $40,000 of earnings from Social Security so we could lift that Social Security tax from new employees?

And, finally, and this is not one I know the answer to: Do we want to seek to re-privatize Fannie and Freddie, these gaping holes within the U.S. budget, or do we want to give-up and try to restrain the massive Government Mortgage Department that has been created under conservative principles in the Bush Administration?

Our campuses matter on this because economic education is misguided almost from the get-go, but we also have to, as a Party, make some decisions. And we can see the Bush Administration came in under the name of a Republican Administration and then proceeded to do, I showed you, two long pages of radically bad ideas over an eight-year period.

Laurie Dhue: Our next speaker is Ben Horowitz, who co founded Opsware Inc., and he has been its President and CEO since 1999. Last year he sold Opsware to Hewlett-Packard for a cool $1.6 billion. For the past year he's been in charge of HP's Business Technology Optimization Division. Ben was a Senior Executive at Netscape Communications, and briefly served as a Vice President at AOL.

Ben, I was looking at the news about Wal-Mart, their earnings for the third quarter rose 10 percent. The downturn is obviously increasing Wal-Mart's clout. We know why people are shopping at Wal-Mart: they've got to shop at Wal-Mart.

I'm wondering if we ran the country the way Wal-Mart is being run, would we be in this mess? And I realize that that's just a simplistic, funny kind of question, but why are we here? If we were as efficient as Wal-Mart, would we be here?

Ben Horowitz:  Yes, that is a funny question, and certainly Wal-Mart has probably taken it away from Neiman Marcus, so I think overall retail is a pretty tough place to be right now.

I think that when you look at how Wal-Mart is run, and they're certainly incredibly efficient and have a I would say a responsible balance sheet, they distinguish themselves quite a bit from how we've been running the government, where we've been neither efficient and have had quite an irresponsible view of the balance sheet and leverage, in particular. I think that's definitely true, and we'd certainly be better off if we had been more conservative. Interestingly, I think David makes a great point that it was the unconservative policies of the Bush Administration that contributed a great deal to that.

Now, having said that, government spending was probably not the thing that drove the crisis, much more so, it looks much more like a classic creative destruction kind of crisis, which typically the mistakes that are made in those are loose monetary policy and lack of effective roles around leverage. And so if you look at, gee, how did we get here, I think it's much more around those areas and the stance that we took and our view of the kinds of risks that were appropriate.

And I think that if you look at Fannie Mae and Freddie Mac probably the thing that was most unforgivable about what they did is they took incredible risks with our money. Which as a taxpayer and the thing I was always arguing with my father about was, that's the worst kind of wealth redistribution: redistributing taxpayer money to Fannie Mae and Freddie Mac, so that they can take huge risks in order to really get huge bonuses for the executives, backstopped by taxpayer money.

Laurie Dhue:  Our next Panelist is Robert Zubrin, who is an American Aerospace Engineer and Author. He is Founder and President of the Mars Society, as well as President of Pioneer Astronautic Switches and Aerospace Research and Development Company.

No, we're not going to be talking about the economy on Mars, because Dr. Zubrin has also written a series of books. Most recently, one entitled, "Energy Victory, Winning the War on Terror by Breaking Free of Oil."

Robert and I had a little chat, and we were talking about the wild ride that we've seen with oil, and he was pointing out to me that in the '90s it was $11 a barrel. We probably never dreamed it'd be at $55. Now, $55 is looking pretty good, isn't it? It was in the '50s and it surged to the high of $147 this summer, which I think David mentioned. Now, we're at $50, give or take.

What does all this have to do with what's going on in the economy?

Robert Zubrin: Well, I think it has a great deal to do with what's going on in the economy. This year, depending upon where oil prices go during the final weeks of the year, Americans are going to pay something like $900 billion for oil.

In 1999, we paid $80 billion for oil. In 2003, we paid $200 billion for oil. So, between 2003 and this year the amount that Americans have paid for oil went up by $700 billion.

Now, to give you an idea of what that means, we pay the IRS $2.5 trillion a year, so this is like a 30 percent tax increase, except instead of the money going to Uncle Sam, it goes to Uncle Saud and Uncle Hugo. And it has devastating affects on the economy.

Just to put it in proportion, between 2003 and this year the amount that Americans paid for new houses went down by $160 billion. So the amount that we paid out for oil was more than four times as much as the amount that went out of the new housing market.

This is a big enough tax to collapse the new housing market and also resale of existing house market, as well. It's 16 times as much as the amount, the $50 billion that went out of the new car market between 2003 and 2008. This is a big enough tax on the economy to collapse the housing market, and thus the mortgage market, and thus create the financial crisis that we just saw. And, as well, as the car market, and thus the industrial economy, and so forth.

Now, I have to take issue with one thing that David said, although I found many things he said quite instructive. But one thing I disagree with is this, is I don't think this is caused by a weak dollar, at all. I mean although that caused a little bit of it.

The price of oil was $11 a barrel in 1999. And for it to shoot up a factor of 13 to $140 this year, is not due to a weak dollar or inflation. Inflation was quite moderate over this period.

There's something else involved, and it's called OPEC. The OPEC has been constricting world oil production, actually since 1973. If you look at world oil production between 1973 and today, if you look at non-OPEC oil production over that period, it doubles. From about 22 million barrels a day in 1973, to the mid 40s today, and you'd expect to see that because the world economy has doubled over the same period in size.

But if you look at OPEC oil production, it was 30 million barrels a day in 1973 and it's 30 million barrels a day today. Now, they've had wild short-term ups and downs as they turned the taps on and off to try to manipulate the market in short-term maneuvers. But overall they are producing the same amount of oil today as they produced a third of a century ago, despite the fact that the market has doubled, despite the fact that they're sitting on top of 80 percent of the world's oil reserves, including all the easiest to drill stuff.

So what OPEC is like is like a cruel dog owner who puts a collar nice and snug around the neck of a puppy and leaves it sit there while the dog grows, so the collar gets tighter and tighter and tighter until it chokes the dog potentially to death.

Now, somebody says, "Oh, the reason why the oil price shot-up was because of the economic growth in China and India." Now, it's true there's been economic growth in China and India, and that's a contributing factor.

But we had more economic growth between 1945 and 1973 by far, and the world economic growth rate was in the order of 6 percent in that period. And the price of oil was absolutely flat adjusted for inflation, between 1947 and 1972.

And the reason is because it was under the control of the seven sisters, the oil companies, and their policy was to expand production to meet world demand. But in '73, basically, controls switched to OPEC, and their policy has been to constrict production in order to force prices high. And this has had devastating affects on the world economy.

Now the price has retreated a bit because of the recession. It's like the dog, the collar got so tight it couldn't eat, so it lost a little weight, and now the collar appears to be a little looser. But if it tries to grow again, if it starts eating again, look out! We’ve got to break this collar if we're going to have a prosperous future.

This money is the primary engine for financing the growth of Jihadi movements internationally, and one can go on at that at length, but I think most people in this audience know about that.

They have an even more dangerous weapon. This year OPEC is going to clear $1.5 trillion in net export profits. Now, the entire worth of the U.S. Fortune 500 is $18 trillion. So if they were to replicate their current rate of accumulation this year, within six years they'd have enough money to get majority control of the entire Fortune 500. If the price of oil stays in the $50s it'll take somewhat longer.

But still this is incredible. I mean just imagine this. Here's a piece of counterfactual history for you to contemplate. Imagine if counter to real history that Hitler was already in power in 1929. Now, that was not true, he didn't take power until '33, but let's just say for the sake of imagination that the Nazis were already in power in 1929.

And let's also imagine contrary to actual history that Nazi Germany was a power with a lot of, hundreds of billions of dollars of spare cash that they could throw around anyway they wanted, which was also not true, they did not have this kind of money. But let's say that they had, and then the U.S. stock market crashes in 1929, and they're in position to come in and buy-up corporate America at ten cents on the dollar: what would history have looked like?

Now, fortunately, in 1929 when we stumbled there was no one in position to come in and buy us up, but this time there is. And that makes a huge difference. There's a big difference if you're running and out jogging and you stumble and you hurt your knee and sprain your ankle, it's not a big deal. But if you're running from someone with a knife and that happens, that's a real problem! We have to break this power.

Now, I've written a book, "Energy Victory," which outlines this at length. In brief, what the policy needs to be is to break the core of OPEC power by creating fuel choice internationally, break the vertical monopoly that oil has on the world fuel supply.

And the U.S. Congress could actually do this with a stroke of a pen, simply by passing a law requiring that all new cars sold in the United States, not made in the United States, sold in the United States – this has to affect foreign cars, too, for this to work – to be fully flex fuel; that is, able to run equally well on gasoline, ethanol, or methanol.

Now, this technology exists. You've got 3 percent of cars sold in the U.S. this year will have this feature. Iit only adds $100 to the cost of a car. But we have to make it the American standard, that this other car here, it's got to give the consumer fuel choice.

If you did that, within three years you'd have 50 million cars in the USA capable of running on alternate fuels and more importantly hundreds of millions more worldwide, because the foreign car makers would be forced to switch their lines over to conform to it.

And under those conditions, pumps would rapidly appear because there'd be a market for the alternate fuels, and gasoline would be forced to compete at the pump against both ethanol and methanol, not just in Iowa, but in Argentina, India, Kenya, Japan, France, Poland, and everywhere.

And this would not only crash the price of oil to under $50 a barrel, it would keep it there regardless of economic growth because they'd be dependent. And, by the way, let me add here, the key here is the methanol, because methanol can be made from coal, which the world and especially the United States and its allies have in huge resources. And it can also be made from any kind of biomass without exception, not just food grains, like corn, but from crop residues, forestry residue, swamp plants, jungle plants, etc.

It could also be made from natural gas, or recycled trash. And, in fact, in China right now they are creating methanol flex fuel cars, and they're making methanol, largely from coal at fify cents a gallon, selling it for one dollar a gallon.

Thisis the right way to go. Now, if we did this, if we create fuel choice internationally, you will pin in OPEC, you'll fence them in, and right now there is no competitive constraint on the price of oil. The only constraint that there has been is the economic collapse which they themselves caused. But if we try to recover, that collar will tighten around our necks again.

So this is the way to break their power; this is the way to create competitive markets and fuels; and this is a way to create an open future. You see, the problem with oil ultimately is that it's a natural resource. It's not something that you make; it's something that you find.

And most of it is to be found in tyrannies which is, by the way, not coincidental because economies based on natural resources tend to engender tyrannies because they don't need to develop human potential. They don't need human creativity because their wealth is not created; it's found.

A world economy running on oil is going to be a world in which the key resource is under the control of people who are hostile to freedom and which the key resource becomes increasingly expensive, and their power is increasingly enhanced as a result.

A world economy that is running on fuels that are created, which is what alcohol fuels are, they are products of agriculture and industry and technological skill. It's a world in which countries which maximize their creativity and thus need education and freedom have the balance. And it's a world where these fuel resources become increasingly cheap because they are products of technological advancement which continues to advance.

So this is the program that I'm advocating. Now, this is a program that will not only break OPEC, it will not only cut this collar, it will be tremendously beneficial for the United States and many other parts of the world.

A lot of people sometimes say to me, "Well, if you did this, the market you create for ethanol would be much bigger than the American farmer could possibly grow to meet." That's good! That means we could give Third World farmers all the business they could possibly handle and drop our tariff barriers against Latin American ethanol. Same thing with Europe vis-à-vis Africa, and Japan vis-à-vis South Asia. So you're talking about creating huge markets, not just for advanced sector farmers, but for farmers worldwide. And what it means is instead of selling off our corporations and banks to Saudi princes, we could be selling tractors to Africa. Thus creating industrial growth here and in Europe and in Japan. While lifting the standards of living of the world, creating an open future.

And I think this is the kind of program we have to have, and this is the kind of vision that the Republican Party has got to have!

Laurie Dhue: Our next Panelist is Dennis Keegan. He is currently Chairman and CIO of the Auspex Group, which is a hedge fund that focuses on trading on macroeconomic themes. Mr. Keegan is the author of the recently published book with a title we can all appreciate, "Reality Check, The Unreported Good News About America."

Dennis, the crux of your book is that America's best days are not behind her. Have you changed your mind, at all, in the last couple of months since the book was published, or are you confident, still confident that our economy is poised for a resurgence?

Dennis Keegan: America is still the greatest country in the world.

So where are we now, and where are we going? Right now, the world expects only fear and disaster, as David Malpass talked about. The fundamentals of the U.S. cycle-on-cycle remains strong, and the government will do too much. Current market expectation, which I don't think David addressed directly, are that we had negative growth last quarter, negative growth this quarter of about 4 percent seems to be the average expectation, and probably negative 2 percent for the quarter following.

That is much worse a recession than we've had in a long time, and the fear levels reflecting that concept are very high. One way that the market measures fear is something called the "VIX Index," which has to do with the measure of expected volatility or price movement on the Standard & Poor's futures. As a comparison, in the last few weeks that traded at a level of 90 percent. Since then it has moderated to 65 percent. This 65 percent, to give you some feeling of measure, is more than 50 percent higher than that Index was right after 9/11, when it was at 40 percent. A 65 percent number for that indicates that the market is willing to pay a premium to insure themselves, expecting in the next three months the market was going to move more than 30 percent. That's a pretty high level of fear.

In fact, we've forgotten what a normal recession is like. 2001 was the most shallow recession on record. In '82 and '91 we had back-to-back negative growth quarters, with other weak quarters around it.

Those recessions, in '82 and '91, we forget because that was a long time ago, but I was around, I believe David was, as well. And in both those periods of time the U.S. government ran a budget deficit of about 8 percent of GDP.

At current level of the U.S. total gross domestic product, that means that just on that standard we're going to have a budget deficit next year of over $1 trillion, and that's not including the TARP Program, because that's borrowing money to buy an asset, it's discounted in terms of the net deficit.

And in my book “Reality Check,” I point out that there is unreported good news, and that really is at the underlying strength, resilience, and adaptability of the American economy. We have real long-term issues, some of which David referred to, with our healthcare, Social Security. I discussed how they got in the sub prime mess to some degree in the book. But our underlying strengths in this economy give us the ability more so than the other developed countries to manage a way through these problems.

As one measure, we have the last seven years we have averaged unemployment rate below 5.5 percent. During that period, the low in European unemployment was 7.2 percent. In addition, we've consistently run very high gains in productivity. We have been more than 50 percent higher in productivity gains than in Europe, and even in the last two recessions we never had negative growth in productivity. That means the U.S. is consistently becoming more competitive and more efficient at producing goods.

Core inflation has stayed below 2.5 percent. With the recent drop in energy prices and food prices, you're going to get a headline inflation in the near future of 0 percent. The fundamental moderation in inflation will also give the government more room to maneuver.

I also want to point out despite tax cuts and running two wars, and the very negative and unnecessary budget deficit we have, the U.S. deficit on its budget has been lower than it was in the '70s, '80s, and '90s through 2007. That will give the government room to run a proactive change in policy.

Another measure of that if you look at major countries in Europe, their net debt to GDP is about 55 percent of their total GDP. Japan, it's 88 percent of GDP, that's the total size of their debt versus the size of their economy, and the U.S. we're about 43 percent. So we have room to manage our way through this.

So what has the government done? And this is not a complete list, this is just selected and does not include what governments outside the U.S. have done. The U.S. has dropped interest rates 400 basis points, 80 percent. They provided unlimited swap lines to foreign central banks to get down international cost of dollars. They financed the take over Bear Stearns by JPMorgan. The Fed is buying commercial paper. The Treasury has taken over AIG, Fannie Mae, and Freddie Mac.

We have passed a $700 billion program, call it TARP, call it bailout, whatever you want, we've put $700 billion in the Treasury's hands and say, "Just please spend it." Right? And that's about as far as the definition has gotten. Not surprisingly, I've never known the government not to spend money, given the opportunity.

But major institutions have failed. Fannie Mae is gone. Freddie Mac is gone, Washington Mutual is gone. Wachovia, Bear Stearns, Lehman, and a broad variety of other banks, too.

So far globally, financial institutions have either sold securities or written down securities to take losses of $920 billion. That was yesterday's number, it might be higher today – in fact, I'm sure it is. In that time those financial institutions have raised $826 billion of capital. Of that $826 billion only $110 billion has come out of the TARP or bailout program, the rest has come from the market.

So the fact is that very little of the TARP has actually been spent, so in fact it has very little impact on the market dynamic. In fact, with normal lags most of the stimulus in the Fed actions, and Foreign Central Bank actions, and what the Treasury is doing have not yet impacted the economy.

The auto industry will be next. One way or the other, inside of bankruptcy or out, it'll be forced to restructure. A lot of pain has been absorbed. But this massive global stimulus has yet to really start impacting.

The fact that we dropped the Fed fund's rate has not lowered mortgage rates, as David referred to. And if mortgage rates were to drop 100 basis points from where they are today, the drop in housing prices has already dropped the affordability of housing, which in 2006, 2007 the affordability index was at 100, which is a very low number. It's moved up, the affordability is at 130 which is a major improvement. Between 130 and 140, usually housing does well.

If you drop interest rates on mortgages by 100 basis points you'd be at a 150 or 160 affordability index, the cheapest housing has ever been to the consumer. But it doesn't help you if you can't finance the mortgage.

In addition, we talk about oil prices. If oil prices were to stay at $45 a barrel for a year, which I think given the weakness in the global economy is not unlikely, that will put an extra $350 billion in the consumer's pocket which is 2 percent of GDP.

We are at record levels of bearish opinion in the stock market. The average hedge fund has been short for the last four months, but it's still losing money. Cash and money market funds, cash and mutual funds compared to the total value of equity markets are at record levels. Even equity managers, the pundits you see on TV, are recommending bonds over equities. We've gotten to record bearishness. Remember, employment and demand data are lagging indicators. Leading indicators are market prices, money supply, and interest rates.

So I believe that the markets have been priced for extreme levels of bad news. I think that the huge opportunity up side for most asset price is not the down side, and it doesn't mean I'm calling a bottom tomorrow. To say that market prices could go down 20 percent does not take much, but in the long term valuations are very high, bearishness is very high, and traditionally these are great times to be an investor.

All right, so I ended on the good news!

Laurie Dhue: And last, but certainly not least, is Stephen Moore.

He's an Economist and a Policy Analyst who founded and served as president of the Club for Growth from '99 to 2004. He is currently a member of the Wall Street Journal Editorial Board, and he frequently opines in the op-ed section, and we all know what "opines" means, because of O'Reilly, right? He's also Contributing Editor for National Review, and you may recall that he was the Senior Economist of the Joint Economic Committee under Dick Armey of Texas, where he was the architect of Richard Armey’s flat tax proposal, and we all probably remember back from 1995.

So, Stephen, if we are in the worst crisis since the Depression, which you can either agree with or disagree with, did the Fed really have any other choice but to come in and give massive amounts of money to sustain whatever is left of this economy?

Stephen Moore: Boy, that's a tough one. Laurie, it's great to be here. This is a lot different from last week when I had to do the Bill Maher show, and I was on with Oliver Stone, Maxine Waters, and Alec Baldwin. That, folks, was me against those three, and that's the Left's idea of a balanced panel! We do need the Fairness Doctrine in America, I think….

Let's see, I have a new book out that is called, "The End of Prosperity," that I wrote with Arthur Laffer, and I hope that you all will get it and read it. I think it's an important kind of history of the last 40 years and what led into the crisis that we're in today. And what I'm going to do is just spend 10 minutes going over the kind of highlights of that book.
Basically what this is showing is the stock market over the last 50 years, from 1960 to 2007. I don't have 2008, obviously, if I had 2008 on there, those values have dropped a lot. But the quick story here is the top line, is S&P 500, the bottom line is the S&P 500 adjusted for inflation. The point there is that from 1967 to 1982 the real value of stocks fell by 68 percent. This was the worst bear market that America has ever seen since the great Depression.

Why did that happen? Because that was the period of the four stooges in the American Presidency. It was Lyndon Johnson, Richard Nixon, Gerry Ford, and Jimmy Carter. From an economic standpoint it just doesn't get a lot worse than that.

Those were the Presidents who gave us wage and price controls. Nixon was the President who took us off the gold standard. I always say Nixon was impeached for all the wrong reasons. You had Jimmy Carter comes in, the worst President in the last 50 years, does the windfall profits taxes, more price controls, and you can see the market just evaporates.

And then the important point is this inflection point that happens when the clouds disperse and the sun comes out, and God gives America Ronald Reagan. And when that happens? The last 25 years has been the greatest period in prosperity in the history of mankind. No nation has ever seen anything like what we've seen from 1982 through 2007.

To put this very simply, more wealth was created in the last 25 years than in the previous 200 years. In 1981 the net worth of all American assets when Ronald Reagan entered office, according to the Federal Reserve, was $16 trillion, $1-6 trillion. Last year the net worth of the country was $56 trillion. We added $40 trillion in net wealth. Again, nothing ever, anytime, anyplace, has been seen like this.

In the mid '80s, you can see the 1987 stock market crash, we roared right through that. After one year, you can see at the end of the 1990s you can see when the technology bubble burst, we got through that. So the point of this is you can get through this if we get the policies right.

So why did we see this inflection point? In the 1970s you can see we were a net, we were exporting more capital than we were importing. The big story of the U.S. economy over the last 25 years is that we've just sucked in capital from the rest of the world. We sucked in a net $5 trillion of capital over this period.

The income tax rate from 70 percent, to 50 percent, to 28 percent under Reagan. It went up a little bit under Bush and Clinton. It went back down under George Bush.  But the most important thing to realize here is the top tax rate went from 70 percent to 35 percent; it was cut in half, which means that the after-tax rate of return on investment went from 30 cents on the dollar to 65 cents on the dollar.

Look at what happens to the tax share paid by the richest 1 percent, it is not true that the rich have been getting away with paying no taxes. In fact in 1980 when the highest income tax rate was 70 percent, the richest 1 percent paid 19 percent of all income taxes.

Today, as all of you know if you read the Wall Street Journal editorial page, the richest 1 percent pay 40 percent of the income tax. So this shows that lower tax rates actually can create more taxes from the rich, not less.

And, by the way, I'll make a bet with anybody in this room that if Barack Obama raises the top tax rates the share of taxes paid by the rich will actually fall; it won't rise.

This is an amazing statistic: that all Americans with an income below the medium today pay 3 percent of the income tax, which means all Americans with an income above the medium pay 97 percent of the income taxes.

One of the things that Barack Obama, you all heard him say over and over again that he's going to cut taxes for 95 percent of Americans. That's a hard thing to do. I didn't graduate first in my class at Harvard, but I don't understand how you can cut taxes for 95 percent of the people, when 40 percent of the people don't pay any income tax.

What Barack Obama has done very effectively has he's redefined a welfare check, where the government will send a check to people as a tax cut.

Incidentally, as just an aside, I've been pouring through the exit polling data. If you had to pull out one statistic that indicates why John McCain lost and Obama won, more Americans who went to the polls on November 4, 2008, thought it was more likely they were going to get a tax cut under Barack Obama than John McCain. Barack Obama stole the tax cut issue from the Republicans.

You know, the other thing that goes on, the two things that powered this growth, what I'm trying to say is the lower tax rates that Reagan put into effect caused the boom. The other thing that caused the boom was the reduction in inflation.

And you can see here that inflation goes through the roof in the 1970s when Nixon takes the U.S. off the gold standard, and inflation hit – how many of you remember 20 percent mortgage interest rates in the late '70s?

So you can see here that the inflation rate hit 14.5 percent. The joke back then was that if you found a dollar on the ground, you'd pick it up to see if there was anything of value underneath it, because the dollar just plunged so much in value!

And the important point is what Reagan and Volcker did. We cut the inflation rate from 14.5 percent to 13 percent in 18 months, and then you can see there that you had this virtuous cycle of inflation being in that 2 percent to 4 percent range.

By the way, Bill Clinton and Robert Rubin, I'd give them a lot of credit, too; they believed in a strong dollar and that's the reason I think we had a lot of growth in that period.

Interest rates have fallen dramatically over this period, and that's the premium from driving down inflation under Reagan, Volcker, Clinton and Greenspan.

This idea that the middle class has declined, and all the gains have gone to the rich is one of the great myths about the American economy. Over the last 40 years in real terms, just to put this very simply, the average income for a family in 1967 was $40,000, today the average income for a middle class family is $60,000, that's a 50 percent increase in purchasing power for families in 40 years. This has been a wealth boom.

How long does it take for these new technologies to reach the homes of average American? We've democratized technology which has been a boom to low income and middle class families.

It took 70 years from the time the first telephone was installed into a home before it was actually reaching the average home. It took 50 years for electricity. It took 30 years for radio. It took 20 years for TV.

Look at these modern things, like internet, 10 years, iPods, 4 years. I give a lot of talks to young people, and they're always complaining about how bad things are in America. And so I say to them, "You kids think things are so terrible in America," these are the folks who voted for Obama, I say, "how many of you have a cell phone?" They all raise their hand. "How many of you have internet?" They all raise their hand. "How many have an iPod?" Half of them are listening to their iPod while I'm giving my talk. You know, they all have this stuff, and they don't even get the joke! They don't even get what I'm talking about. They think living without these things is like living in a prehistoric age.

You want to have fun, I watched this movie, remember the movie, "Wall Street," with Michael Douglas, one of my favorite ones, "greed is good." Anyways, there's a great scene in that movie where Michael Douglas picks up the cell phone, it's like a brick with little antennas coming out of it. Anybody want to take a guess at how much a cell phone cost in 1987? $4,600, $4,600 for a cell phone. They damn near give them away for free now.

If you want to know the reason why Republicans lost, this is it. This is a disgrace, folks, and I think most of us in this room are Republicans, look at what happened under George Bush and the Republicans. Look at what happens to the domestic budget under George Bush and the Republicans, and this is such a disgrace.

Usually when you're in a time of war, which I would say that we are, we're fighting a war against terrorism, you spend less money on domestic spending. Bush and the Republicans spent more on both.

I don't know what Barack Obama is talking about when he says there's a government investment deficit. I mean all we've been doing is spending money. And you can see these agencies go up three, four, five, six, seven times the rate of inflation.

Folks, this is the crux of the problem that we face, and Republicans have to get back to being the Party of small Government or they're going to be in the wilderness for a long, long time.

If we let the Bush tax cuts expire we are in for the biggest tax time bomb in history. We are going to see taxes go higher than they've ever been in American history, and we can't afford that.

The rest of the world saw what happened in the United States over the last 25 years. They saw that the U.S. became an incredible economic super power by cutting tax rates, by keeping inflation down, by being anti-regulation and a pro free trade country. They wanted to be more like us.

And so Reaganomics, which is in so much disrepute in the United States, folks, it's happening everywhere in the world, it is the most amazing phenomenon. Now, if you look at what's happening in China, India, Germany, Spain, Italy, in France, Sweden – Sweden, which is the most socialistic country in the world. I mean they are the home of the social welfare state. Last week Sweden cut their corporate income tax rate to 25 percent, 10 percentage points less than the United States' corporate tax rate.

Remember when Steve Forbes ran on the flat tax in 1996? He was ahead of his time. Look at what's happening in east Europe, you've got now 25 countries with flat taxes.

What's the point I'm making? I'll end with this point. Every industrialized country in the world is cutting tax rates right now. There is only one country in the world where the politicians are talking about raising tax rates. And what country is that? The United States.

And the basic point I'm trying to make here, is that the rest of the world is cutting their rates to be more competitive, and we're raising them – folks, that story doesn't have a happy ending. Thank you.

Question and Answer Session

David Horowitz: I want to ask my son, you can appreciate the free enterprise system more than most people, and you're in the high tax bracket that Obama has targeted. I want you to explain to this audience why looking at John McCain and Barack Obama on the economy, you chose Obama?

Ben Horowitz: Yes, well, that's an excellent question. So there are a few things. I think that the biggest reason why I supported Obama on the economy was just his demonstration of a much better articulation and understanding of the economy than McCain displayed throughout the campaign.

When you look at policy, a lot of things get said and to get elected, there are all kinds of constituents on both sides that are a little bit more on the nutty side. So you have to take that with who are the economic advisors, what is the kind of overall message that's going to make.

I think that with Obama what gave me confidence was that his economic advisors were Paul Volcker, who was a good Fed Chairman, in my opinion. Warren Buffet, who I think is generally an excellent guy. I don't actually agree with as much of his economic policies, but I think that he, in terms of understanding the economy is very good.

On the other end you had McCain's economic team, which was Carly Fiorini, who most of us in Silicon Valley know as probably the worst CEO in technology history. You've got Phil Gramm, who I think made a huge, huge mistake in advocating the non-regulation of CDS or the complete just ignoring it, which has caused a lot of bad side effects.

So on those you say, "Well, how are they going to govern"? That gave me more confidence in Obama, in general. I'm certainly anti-taxes or anti-higher taxes. I don't think they help, and I think that point is exactly right. I think that the increase that he proposed, and I think that he's likely to get to given his economic team, is likely to be not that damaging. So that combination is what led me to that conclusion.

David Horowitz: But can you point to one economic policy change that Obama wants to make that is pro-growth?

Ben Horowitz: Yes, well, I think that one of the things that he did propose is that for small growth companies to eliminate capital gains on very high growth new companies. So I think that that is extremely progressive. And I should caveat by saying it's extremely good for me personally, though maybe not good for everybody.

Unidentified Speaker: Shouldn't we cut the capital gains tax for everybody?

Ben Horowitz: Well, I think that he probably purposefully left it very ill-defined, and I agree that there certainly is a lot of danger in there somewhere.

Unidentified Audience Member: For Mr. Zubrin. I understand that there's some legal or regulatory barriers to co-liquefaction and gasification, and since you spoke of making methane out of coal can you speak to that and tell me what those barriers are?

Robert Zubrin: Well, I'm not aware of barriers per se, other than the usual assortment of barriers to creating a new industrial facility of any kind, which can be quite substantial. Now, there is certainly resistance among a significant section of the Democratic Party, and some Republicans, to making fuels from coal because it does not answer the [mail] in terms of their concern over global warming.

But, while it would take me too far afield to discuss global warming adequately here, suffice it to say that if it is a problem, it's a long-term problem. And whereas the economic dream due to the unconstrained price of oil is an immediate problem, and poor countries cannot deal with, poor societies cannot deal with environmental issues, whether they are real ones, such as conventional pollution, or disputable ones, such as global warming.

And so that in my view if you want to be able to address any environmental issues competently, the first thing you've got to do is take care of your economy. I favor absolutely allowing methanol to be made from coal, but my primary solution here, to be clear, is not actually picking the fuel or picking its source.

My primary idea is to create fuel choice, to open the market. To fuels that can be made from non-petroleum resources in a big way, and these include methanol, as well as ethanol. The cars flex fuel from ethanol will also be flex fuel for ethanol as a matter of course.

And this has two primary affects. One is by giving into the consumer fuel of choice you constrain the price of oil, because you create a command of market. The other thing is by opening the fuel market, you create the opportunity for participation in producing fuel for the world, not just to those who happen to have petroleum, but to those who have coal, to those who have biomass resources, to those who have natural gas, to those who have trash, which is everyone.

And so, see, the problem I have with “drill here, drill now,” is not that I oppose drilling here and drilling now. I'm for it. But why just open up the world fuel market to additional petroleum that we might be able to produce? Why not open up the world fuel market to all kinds of fuels that both we and others can produce? And that is the way to drown OPEC.

Unidentified Speaker: The Left's energy policy is basically that we're going to get all our energy from wind and solar power, and, folks, that is the biggest fantasy in the history of mankind.

We've spent $20 billion at the Federal level on research on solar and wind power. Anybody want to take a guess on how much of our electricity today we get from wind and solar? Less than 1 percent.

Now, let's say that Barack Obama has a fabulously successful policy, and we spend another $20 billion and we quadruple the amount of energy that we get from wind and solar power? Now, we're at, let's say, 5 percent. Where in the world are we going to get the other 95 percent?

The other point I would make is this, anybody who thinks that wind and solar power are green sources of energy, I've got some news for you, folks. How many of you live in New York? How many of you people live or work in Manhattan?

If you wanted to provide enough amazing statistics, if you want to provide enough electricity to keep Manhattan lit-up at night and you wanted to do that through wind power, you would have to pave-over the entire State of Connecticut with wind farms.

Now, how is that good for the environment, right? I mean if you wanted to provide enough electricity for Phoenix, Arizona, which is in the desert and you wanted to do it through solar power, you'd have to have 100 square miles of solar paneling to do that, just for Phoenix.

So this idea that we're going to get all these jobs from green power, and I actually think that the agenda here of the Left is they don't like capitalism, they don't like growth, and they don't like prosperity. And if you don't like all three of those things, what better way to stop it than to take away our sources of power.

Unidentified Audience Member:  My question is specifically to Stephen and David and Dennis. It says that generals lose wars because they're fighting the last battle. And there are two narratives that are developing now out of the sub prime/financial crisis.

The Left’s narrative is that it was under regulation. The Right’s narrative is that unintended bad affects from well intended government policies, perhaps like stopping redlining or having community investment acts has gotten us to a lot of this moral hazard and the problem.

So I'd love the three of you to sort of comment and help us, arm us with the arguments on our side of the aisle. Thank you.

David Malpass:  Well, I think rather than calling it "under regulation," we have to say that it was bad regulation. And so the one area that was probably under regulated was CDS, but in the other areas, mortgages, the leverage of investment banks, and so on, it was just poorly done regulation at tremendous cost. So there's a huge number of regulators, they just didn't get it done.

And then a final point is you've got to put monetary policy into this. If not for a 1 percent interest rate, which was pulled out of thin air. So how did we, as a country, come upon a 1 percent interest rate in 2003? We were in a giant boom. It became a global boom. And we insisted on a 1 percent rate. And there were lots of people supporting it, and they blindly said, "Lower rates are better, what's the problem"?

So we've got to have some thorough examination of how the Fed could get so far off base. My view is that we have to change monetary policy to seek a strong and stable dollar, and that would have then disclosed the problem in '03. As Greenspan was pumping out Greenspan dollars around the world, the dollar was crashing in value, so it was a very loud signal of a mistake in monetary policy.

But half the Republican Party doesn't agree with that point of view, so we have to get the Republican Party united, that this monetary policy is critical, and we can't keep having the dollar go through these wild gyrations.

Stephen Moore: I agree exactly with what David just said – just look at what happened to the gold price from 2001 to 2007. Anybody know what the gold price was when George Bush entered office? $300. Remember when it went over a thousand? What was that, about a year ago?

Well, when you have a gold price go from $300 to a thousand, folks, that's a sign of an inflationary monetary policy in a currency that's losing its value. There's a story in The Washington Post, an amazing story about the sub prime lending crisis. It spoke volumes about what happened.

There was a – during the period, when you were talking about, David, when we had 1 percent interest rates, there was a couple that went into a Countrywide in northern Virginia. They were McDonalds workers. They each earned $8 an hour. They walked out of the Countrywide with a $600,000 mortgage. Now, folks, I mean what were the chances that they would ever pay that mortgage back?

So I believe that it was a failure of our monetary system. There was certainly greed on Wall Street, no question about it. People, it was an irrational exuberance, but if we had kept those interest rates higher, and any of you who read the Wall Street Journal editorial page, which I hope you all do, you know we've been sounding this alarm for five or six years, that monetary policy was way too loose.

Dennis Keegan:  Can I simplify it and say banks have been stupid. Banks are stupid, and banks will be stupid. The only thing worse than that is probably government.
And the fact of the matter we want them to be stupid, because why else would you be in that business, right? You take very narrow margins for huge risks.

 I just wanted to say, but some want that to happen because they do (inaudible) the system, but also like the GSEs, like Fannie Mae and Freddie Mac, they were created by the system to do that. The system wanted them to do it, and they did it. Fannie Mae and Freddie Mac were oppressed by people, like Barney Frank, to push CRA. They were oppressed – one of the things you don't know is in 2004 is that Fannie Mae changed the rules. It used to be that if you went bankrupt in the last four years, you could not get a mortgage via Fannie Mae. They changed it for 12 months, so if you – you could get a mortgage in 2004, fail to pay it, go bankrupt, and get a new mortgage in 2005. So the Government wanted them to do it, they did it, and they're willing to do it, so that's where we are.

David Malpass:  I have to pile on here on banks. Remember why there's such a threat. They have a government guarantee through FDIC that they've now expanded drastically, and they are too big to fail. So they've got a unique position within the economy. So it's a very real risk going forward, as banks are being made an even more central part of the Government outreach.

So as we think about where Republicans want to go over the next eight years, it's critical how this is responded to, that banks are a big problem and they're getting bigger really fast in terms of that problem.

Pat Cadell:  I'm sorry. I spoke earlier, so I really have no right to ask questions. About 20 people asked me why I'm not a Republican? Mr. Moore, you've reminded me why I'm not a Republican.

I just want to ask one question, which is where is the discussion of the bipartisan corruption that is created both in Fannie Mae and Freddie Mac, on Wall Street, and the Republican Party and the Democratic Party that allows capitalism to become an institution where those who fail are rewarded with sumptuous billions of dollars? Now, where is discussion about that?

Unidentified Speaker: I really believe that John McCain could have won this election if he had come out against the bailout and called it the "Bush/Obama Bailout." I really sincerely believe that, and I couldn't agree more with this gentleman.

I mean the Republicans lost their soul. When Republicans ran around the country, Jeff, for the last three months calling Barack Obama a socialist, how could we call Barack Obama a socialist after what we've done? We've socialized the banks, we've socialized the biggest insurance company in the world, the commercial banks, Fannie Mae and Freddie Mac. So that argument just didn't hold steam.

I would say that we need to basically establish a policy that says no more bailouts, we're done with bailout policy, no more bailouts to UAW, the big three, the airline industries. I mean they are just lining up right now.

One last point on your point, which is really important, the question about Fannie Mae and Freddie Mac that's been puzzling everyone is why didn't the watchdog bark? Why did no one in Washington say anything about what was happening with Fannie Mae and Freddie Mac?

And the answer is exactly what you just said, everybody in Washington was on the take from Fannie Mae and Freddie Mac. The politicians were on the take, the think tanks were on the take, when I did that show with Maxine Waters I said to her, "You know, Maxine, you keep saying we need to re-regulate these markets. For the last six years every time we had a hearing on Fannie Mae and Freddie Mac, you rushed to the rescue. You said that they're not broke, don't fix them."

And so I said to her on TV , "You took $25,000 of PAC contributions from Fannie Mae and Freddie Mac." And I said, "Congresswoman, they just had a $200 billion bailout, don't you think you should give that money back to the taxpayers"?

And she lied on TV, she said, "I never took a penny of it." She took $25,000. One policy we should have as conservatives is demand that every single politician who took a penny of Fannie Mae and Freddie Mac [PAC] money gives that money back.

Pat Cadell:  I agree. I think people should go to jail for what happened!

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