Posted by Shyam Moondra
The political and business landscape is changing fast here in the United States and around the world. At home, Republicans won big in the recent mid-term elections and President Obama's second-term is no longer a shoe-in. In Europe, the era of socialism and welfare state is crumbling in the face of economic reality. The peace in the Middle East is as elusive as ever with no light at the end of tunnel. A snippet of what's happening in the U.S. and elsewhere follows.
What lies ahead for Obama?
In the mid-term elections held earlier this month, the Democratic Party lost the control of the House and lost several seats in the Senate while still barely keeping control of that body. Below are the reasons for the Democrat's resounding defeat at the polls:
· President Obama's stimulus efforts failed to create new jobs in time for the elections. The people often cast their votes based on how secured they feel about their finances at the time of the election. With the unemployment rate hovering around 10%, the voters were in no mood to give the Democrats a second chance. The people were also unhappy about their tax dollars being used to bailout the banks that caused the financial crisis in the first place. Even though the bailout was orchestrated by the Republican President Bush and his Treasury Secretary Paulson, the voters nevertheless directed their anger at the Party in control.
· Obama's leftist liberal tendencies cost him the votes of the Independents and conservative Democrats. As an example, Obama's health care initiative was initially predicated on reducing the costs but he gave in to the liberal wing of the Democratic Party that turned the initiative into providing subsidized health care for those who couldn't afford it with a huge price tag of $1 trillion over ten years.
· Obama lost focus. At a time of high unemployment, Obama should have taken a page from President Clinton's strategy ("it's economy, stupid") and focused exclusively on economy. However, he unnecessarily raised the temperature by getting involved in divisive issues such as gays in the military and climate change that could have been deferred to his second-term.
· Obama failed to communicate effectively. While he demonstrated that he is very intellectual, he lacked the political deftness of President Clinton. In spite of his victories on the health care bill and financial reform bill, he didn't quite achieve his original visions on both of those issues. He utterly failed to reign in the liberal wing of the Democratic Party that led to the expensive health care bill and strong consumer advocacy policies that made Obama look like anti-business. Obama could have done a better job in communicating what he wanted and then showing steely resolve in dealing with the liberals in his Party.
· The candidate Obama promised bi-partisanship in Washington, D.C., if elected, but he got almost zero Republican votes in the Congress for most of his initiatives. During the presidential campaign, the people bought Obama's assertion that he could change the culture of the capital and work across the isle to solve people's problems. The voters were genuinely disappointed that Obama's slogan "yes, we can" turned out to be just that, a political sound bite.
Now that the Republicans control the House and the Democrats barely control the Senate, it would be much more difficult for Obama to get things done. However, if he showed some leadership and political skill, he could forge a coalition of moderate and conservative Democrats, Independents, and moderate Republicans to pursue an agenda that is slightly on the right of the center, just as Clinton did. Obama must stop chasing liberal Democrats, if he wants to have a shot at being re-elected in 2012. We have had divided government in the past and yet Presidents were able to forge workable arrangements with the opposition parties and move the country forward. President Reagan worked very effectively with his nemesis, the late Tip O'Neill, then the Democratic Speaker of the House. They achieved big things in the area of reducing the size of the government and reducing taxes. President Clinton was able to work with Republican Trent Lott, the Republican Senate Majority Leader, and achieved welfare reforms and turned budget deficit into surplus. The real question now is if Obama has the necessary political and social skills, in the mode of Reagan and Clinton, to create jobs and reduce budget deficit.
What lies ahead for Republicans – the Party of "No"?
The Congressional Republicans should, by no means, consider their victories in the mid-term elections as a mandate by the voters to change the direction of the country. Many people voted for Republicans not because they liked Republicans any better but they just needed to punish Democrats for the slow economic recovery and high unemployment. If things do not improve in the next two years, the voters would throw the Republican "bums" out just as readily in 2012. As a victor, the Republicans now have the responsibility to deliver and, therefore, they can no longer rely on their strategy of "just say no." The people expect the Republicans to work hard in finding common ground with Obama. It's no longer possible to pursue policies strictly based on ideologies; the people expect the Republicans and Democrats to find pragmatic solutions to move the country forward. The following is a laundry list of what they could accomplish by working together and compromising on key issues:
· Extend the Bush income tax cuts for everyone for one year and then let those cuts expire for the rich. Even billionaire Warren Buffet feels that the rich people pay too little in taxes. It's an inconvenient fact – with the budget deficit running so high, the nation simply cannot afford to give tax cuts to the rich.
· Reform the corporate tax laws – when a rich company like Google pays only 2% in taxes or Goldman Sachs pays only 10% in taxes, clearly, there is something very wrong. We need to close the corporate tax loop-holes and make all corporations pay their fair share of taxes, commensurate with the benefits these companies are getting from the government in the form of defense and security, law and order, global trade, etc.
· Allow temporary accelerated depreciation on new capital investments, provide payroll tax holiday for new hires, and offer special incentives for expansion of manufacturing within the U.S.
· Ban Congressional wasteful spending in the form of earmarks.
· Revisit the health care bill to put on hold certain provisions that would increase the costs for the employers; there is absolutely no support for repealing the law as some Republicans are arguing. As a long-term goal, the Congress needs to take out "greed" and "profit" from the equation, if we are serious about bringing down the health care cost.
· Revisit the financial reform bill and put on hold some of its provisions so as not to precipitously increase the costs for some of the financial institutions.
· The Deficit Reduction Commission has come up with many interesting recommendations that should be debated, in a pragmatic and non-ideological manner, to put our financial house in order. If we fail to bring down the deficit and debt, we will see higher interest rates, slower growth, high unemployment, and loss of competitive edge by the American companies in global trade.
· The U.S. needs to upgrade the crumbling infrastructure for future growth and to remain competitive on the world stage. Many Americans would be open to paying a special gasoline tax for a specified period to fund this endeavor.
FED, the Bubble Maker
In the early 2000's, low interest rates and expansive monetary policy of the Federal Reserve Board created the dot-com bubble that propelled the NASDAQ index to a record high of 5,132. Today, it stands at half that level. During the mid-2000's, continued easy money under FED Chairman Alan Greenspan caused the housing bubble that led to the soaring real estate prices and new innovative financial products such as mortgage-securities that we know now were disastrous. In 2008, when that bubble bursted, the stock market crashed by more than 50%, real estate prices tumbled by more than 30%, and big name institutions such as Lehman Brothers, Bear-Stearns, and Merrill-Lynch, and scores of large banks got in deep financial trouble. The government was forced to spend $780 billion of taxpayers' money to bailout the financial sector. Now, Ben Bernanke, the current FED Chairman, is creating yet another commodity bubble by keeping interest rates close to zero and printing money at an unprecedented rate as part of his QE-2 program. He says the biggest threat right now is deflation, which could lead us into a long period of sluggish growth with unacceptably high levels of unemployment, just as what happened in Japan during the 1990's. So Bernanke is printing new money, and lots of it, to buy government securities in the open market with the hope that investors will use that money to create inflation. A daring and inherently risky strategy! What if inflation gets out of control? The FED will then be forced to apply sudden brakes that will bring about a recession. The FED may end up with high inflation and high unemployment, defying the so-called Phillips Curve (historic inverse relationship between inflation and unemployment). It seems as if the FED is pre-disposed to perpetually creating bubbles and dealing with the aftermath by throwing taxpayers' good money after the bad.
Insider Trading and Market Manipulation
The SEC and FBI are aggressively going after several hedge funds (and investment banks that own hedge funds) and mutual funds for insider trading and market manipulation involving the so-called expert-networks and collusion between traders and research analysts. It's a well-known fact that in the last ten years, with the advent of computerized trading algorithms, the big players are resorting to gambling as opposed to investing based on the fundamentals. Many small investors feel that the markets are rigged and big players make money at their expense. As a result, small investors are staying away from the stock market and putting their money in the safe treasury securities or less risky bonds (thereby creating a "bond bubble"). Big investors rely on computers to make trading decisions by combining short selling, options trading, and high-frequency/high-volume trading that often lead to inexplicable price movements and flash crashes like the one that happened in May of this year. Unless, new regulations are adopted, it would be impossible to go back to the way trading was done, say, ten years ago when long-term fundamentals were paramount in stock selections. In recent years, investors seem to have redefined what are insider trading and market manipulation and their argument is that everybody is doing it. One simple way to reduce speculative trading is to require that investors hold the securities they buy for at least three business days. In addition, imposing a high income tax rate, of the order of 50%, on the short-term capital gains will induce investors to start thinking about the long-term fundamentals. We also need tougher penalties for those who engage in market manipulation and insider trading, including mandatory jail terms for the CEOs of the companies whose traders and research analysts engage in unlawful activities.
End of Socialism in Europe
The industrial revolution made Europe the most advanced and affluent continent on the face of this earth. The success bred complacency that led to 35-hour work weeks, early retirements at the age of 60, liberal vacations not for weeks but months, free health care, subsidized education, generous retirement benefits, etc. When economy stopped keeping pace with the increasing costs of benefits, the European life, as we knew it, started to crumble under the pressures brought about by one of the worst financial crises ever. Severe budget cuts in Greece, the U.K., and France led to riots on the streets. The process of belt tightening has just begun and it will be years of cuts and adjustments before the European economic house is put in order. The era of socialism is over and a period of renewed focus on smaller governments, lower taxes, and pro-business policies is afoot. For the next decade, it is the Asia-Pacific region (not Europe) that would drive the world's economic and geo-political agenda.
Hasta la vista to Two-state Solution
Israel continues to build Jewish settlements in the occupied territories, making peace in the Middle East as elusive as ever. If Israel is able to grab more land and then be showered with billions of dollars in financial and military aid by the United States, not to forget new fighter planes, why should Israel make peace with the Palestinians? By building Jewish settlements over the Palestinian land, however, they are unwittingly mixing up the two populations in a way that will eventually make a two-state solution unviable. By then, they will be left with an impossible choice between granting Palestinians the right to vote in Israeli elections or instituting apartheid thereby losing moral standing in the eyes of the world. Once, at a Congressional hearing, exasperated James Baker, then the Secretary of State under President George H. W. Bush, read aloud the WH telephone number at which Israelis could call if they ever wanted to have a peace agreement with Palestinians. Since then, the occupants of the WH have changed but the telephone number remains the same and the WH is still waiting for that call to arrive.
"Namaste"
President Barrack Obama and First Lady Michelle Obama recently visited India on a 3-day state visit that was full of pageantry and substantive policy discussions including trade deals worth $20 billion that would save or create 50,000 jobs here in the United States. The visit was a huge success, considering the overwhelmingly positive reaction of the population and the press there. Both United States and India are the largest full-fledged democracies with individual rights, free press, and independent judiciary. They both represent secular societies where all the people enjoy the same rights regardless of their religion. India, with a rapidly growing economy and a huge middle class population, represent an important market for the American goods and services. Given increasing military power and aggressive posturing of China with regard to the border disputes with most of its neighbors, including India, a close economic and military relationship between India and the United States has become strategically important to both the countries. Obama's visit cemented the deepening relationship between the two countries that actually began during the Clinton presidency and moved up a notch by President George W. Bush. The Indo-American relationship could prove to be the defining alliance in the modern history with far reaching economic and military implications for the Asia-Pacific region. Obama was correct to publicly announce that the United States would work towards making India, the largest democracy in the world, as a permanent member of the United Nations Security Council. During the visit, Michelle Obama's dance moves with the children at a school in Mumbai won the hearts of the Indians. She always seems to find a way to be one of the best American goodwill ambassadors of recent times.
