Fareed Zakaria wrote in the March 8^th Newsweek, “Defusing the Debt Crisis.”  I addressed one of his ideas yesterday in the post, “End the Market Distorting Subsidies.”

Another idea of Fareed’s  I support is to get realistic on the entitlements.  Regardless of many promises made decades ago, and many were more assumed that made, we simply cannot afford to give generous entitlements to voters who do not need them.  It seems inevitable that Social Security and Medicare will be means tested. Otherwise the share of these bills will drive the taxes on the young so high they will refuse to pay them.

What Social Security is doing with participants is little different than what Bernie Madoff did with his investors; he paid off current withdrawals with other people’s money. But the irresponsible management of Social Security does not hide the fact that these entitlements are killing us.  We must do what we need to do and take the medicine.

At the same time we should encourage the young to save more and younger to relieve further dependency by giving more generous deductions and credits for their own retirement savings. New accounts should be segregated and the Madoff type fraud should cease.

The retirement age must be raised, gradually but substantially, and the benefits must be means tested. It will be a bitter pill for many, but it is inevitable.

I am constantly amazed at how sitting political leaders and naive citizens think that the government can create jobs. If the government could create jobs why would we ever tolerate any unemployment?  Either the leaders are economically ignorant or liars.

If you only read one economics book I recommend ‘Economic in One Lesson’ by Henry Hazlitt. Hazlitt was not an economist, but a reporter and he wrote this book in 1946.  This passage explains why the government is incapable of creating jobs without sacrificing at least the same number of jobs from the private sector.

This is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment that otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge cost $10 million the taxpayers will lose $10 million. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken away from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of that project. More bridge builders; few automobile workers, television technicians, clothing workers, farmers.

This sounds so logical and obvious that I fail to understand why anyone would swallow the government promises to create jobs.

We clearly need financial reform. Yet Obama’s reckless, populist, anti-business pronouncements only serve to harden the prevailing attitude that business growth and job generation is just too risky.

Financial reform should be thoroughly vetted and discussed in the appropriate House and Senate committees.  Piecemeal pronouncements only add to the uncertainty that is killing this economy. The 550 point drop in the Dow last week following his pronouncement should be of concern, although it is never totally clear what moves the market.

The objective is not just to reduce risk, but to isolate it.  We want to protect critical banking and credit functions from the raw speculation.  Yet it is hard to return to the days before the Glass-Stegall bill, separating banking and investment activities, was overturned under Clinton.

There is no substitute for better regulations.  Higher capital requirements  to reduce leverage and better control of private contracts and derivatives that increase leverage and systemic risk are likely to come.

But let them come after the careful deliberation and consideration of the necessary functions our financial system provides.  Reckless announcements from the president in the critically weak economy we still face is destructive and counterproductive.

Also note in the Wall Street Journal The Fed and the Crisis: a Reply to Ben Bernanke

If one can not take responsibility for a mistake, one risks repeating it.

While banks are returning TARP money, some having taken it under duress, Fannie Mae continues to lose money and receive more bailout. In return for such dismal performance executives are getting pay raises and bonuses.

It is a growing contention that Fannie played a disproportionately large role in a once in a century compilation of bad policies, hubris and incompetence.  Fannie Mae was exempt from SEC, FDIC, and FED scrutiny, and was subject to Congressional oversight that refused to acknowledge their systemic role on the financial catastrophe.

The Wall Street Journal noted  in “The Biggest Losers” that while other banks are turning around Fannie Mae and Team Obama is just digging a much deeper hole.

Excerpts:

All of which would seem to make the CEOs of Fannie and Freddie the world’s most overpaid bureaucrats. A release from the Federal Housing Finance Agency that also fell in the Christmas Eve forest reports that, after presiding over a combined $24 billion in losses last quarter, Fannie CEO Michael Williams and Freddie boss Ed Haldeman are getting substantial raises. Each is now eligible for up to $6 million annually.

Freddie also has one of the world’s highest-paid human resources executives. Paul George’s total compensation can run up to $2.7 million. It must require a rare set of skills to spot executives capable of losing billions of dollars.

Where is Treasury’s pay czar when we actually need him? You guessed it, Fannie and Freddie are exempt from the rules applied to the TARP banks. The government gave away the game that these firms are no longer in the business of making profits when it announced that the CEOs will be paid entirely in cash, though it is discouraging that practice at other big banks. Who would want stock in the Department of Housing and Urban Development?

Meanwhile, these biggest of Beltway losers continue to be missing from the debate over financial reform. The Treasury still hasn’t offered its long-promised proposals even as it presses reform on banks that played a far smaller role in the financial mania and panic.

During the 1970’s the sudden and enormous wealth of the Arab World as a result of the oil cartel OPEC, made everyone think they would rule the world. Raising oil prices as a result of the US aid to Israel during the 1973 Yom Kippur War (disproving the myth that we only fight for oil), the oil shieks were reported on lavish shopping sprees at Harrods’s in Great Britain handing out 100 dollar bills as tips.

In the 1980’s the Japanese were in the ascent. They bought the Pebble Beach Golf Club, and management consultants tried to copy the Japanese miracle as Japanese cars spelled disaster to the Detroit auto industry.

In the 1990’s the Japanese bubble burst and they have yet to recover.  We refer to their lame policies to reignite their economy as the lost decade. The 1990’s was the American decade. The dot.com boom, the internet industry, billion dollar hotels in Las Vegas, stunning victory in Desert Storm, and a budget surplus showcased American economic strength.

The first decade of the millennia was the Chinese decade. They discovered capitalism, hosted the Olympics, began to develop a middle class, and began an industrial growth that fueled a boom in commodity prices. But the Chinese economic growth was fed from the top down, not from the bottom up the way an enduring capitalist economy develops. While we saw our banks crash as a result of revaluing inflated assets, such market adjustments are prevented in China and their banking system in more vulnerable than their government allows to show.

Who will dominate the new decade?  India.

India’s capitalism is more bottom up.  British rule has left in place institutions of property rights and law that are essential to developing capitalism.  Like China, India has cultural shackles to grow out of, but they may be more ready for capitalistic growth than the northern neighbor.

My best performing stock of 2009 was Tata Motors, the GM of India (the old non government owned GM); up over 230%. (Suntrust was the second best.)

We are entering India’s decade.

Obama is now pressuring the banks to make loans to stimulate the economy.  Yet again we have the government creating a crisis and then blaming the private sector.

The banks are in the business if making loans. They should not be encouraged to make reckless loans; that is what fomented the crisis to begin with.  Fannie Mae and government pressure to extend housing loans to unqualified buyers was the core cause of the melt down.

Businesses are not growing and expanding because they cannot get loans, but because they cannot make money.  Part of this is because of gross over building in the construction market, largely as a result of misguided Federal policy. Largely it is because of the uncertainty from the pending Union Card Check Bill, Cap and Trade, and the pending health care reform.

Tax increases, the expiration of the Bush tax cuts, threatened increases in the estate tax, and higher capital gains taxes are all major job killers.  None of this is the fault of the banks.

The destruction in home values which was a common source of collateral for many small business loans,  is a result of government policy.

Businesses do not borrow unless they perceive the risk environment to be favorable.  Every step to take more of the profits makes the incentive to take a risk and create a job less favorable.  If the president wants to know why unemployment is still high and business growth is so slow he doesn’t need a meeting with the banking industry, he needs a mirror.

from National Review- “the Good and Bad of It” by Larry Kudlow

“According to Chris Edwards at Cato, there are now 383,000 federal workers earning six-figure salaries, and 22,000 earning salaries over $170,000; the number of civil servants making $100,000 or more has jumped over 46 percent since the start of the recession; and the average federal-worker’s pay and benefits is $120,000, double the comparable $60,000 package in the private sector. Edwards also reports that Recovery Act funding has created 407,000 government-contract jobs.”